-----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, SOHyQyTdLy6gB34l82lnHJ2iA0gSKJHa6JgxcjBabxbSyAYxE0LYHORBfcQOn7cV FZvj3ucsiQryS3zzKvbUXg== 0000927016-97-000832.txt : 19970321 0000927016-97-000832.hdr.sgml : 19970321 ACCESSION NUMBER: 0000927016-97-000832 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06522 FILM NUMBER: 97559656 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-K405 1 FORM 10-K405 FORM 10-K SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO __________ Commission file number: 1-6522 BANK OF BOSTON CORPORATION (Exact name of Registrant as specified in its charter) MASSACHUSETTS 04-2471221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (6l7) 434-2200 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: ----------------------------------------------- Title of each class - ---------------- Common Stock, par value $1.50 per share Preferred Stock Purchase Rights Adjustable Rate Cumulative Preferred Stock, Series A (liquidation preference $50 per share) Adjustable Rate Cumulative Preferred Stock, Series B (liquidation preference $50 per share) Adjustable Rate Cumulative Preferred Stock, Series C (liquidation preference $100 per share) Depositary Shares, each representing one-tenth of a share of 8.60% Cumulative Preferred Stock, Series E (liquidation preference $25 per Depositary Share) Depositary Shares, each representing one-tenth of a share of 7 7/8% Cumulative Preferred Stock, Series F (liquidation preference $25 per Depositary Share) NAME OF EACH EXCHANGE ON WHICH REGISTERED: ------------------------------------- Each class is registered on the New York Stock Exchange and the Boston Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of shares of common Number of shares of common stock held by non-affiliates of Registrant stock outstanding as of as of March 1, 1997 March 1, 1997 ------------------- ------------- $11,566,085,355 154,257,660 DOCUMENTS INCORPORATED BY REFERENCE: - ---------------------- 1. Pertinent extracts from Registrant's 1996 Annual Report to Stockholders (Parts I, II and IV). 2. Pertinent extracts from Registrant's Proxy Statement in connection with the Registrant's 1997 Annual Meeting of Stockholders (Part III). INDEX
Name of Item Page - ------------ ---- PART I Item 1. Business............................................ 3 Statistical Disclosure by Bank Holding Companies....................................... 12 Item 2. Properties.......................................... 18 Item 3. Legal Proceedings................................... 18 Item 3A. Executive Officers of the Corporation............... 20 Item 4. Submission of Matters to a Vote of Security Holders............................................ 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 22 Item 6. Selected Financial Data.......................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 22 Item 8. Financial Statements and Supplementary Data...... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 23 PART III Item 10. Directors and Executive Officers of the Registrant 23 Item 11. Executive Compensation............................ 23 Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 23 Item 13. Certain Relationships and Related Transactions.... 23 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 24 SIGNATURES Signatures......................................... II-1
-2- PART I ITEM 1. BUSINESS. THE CORPORATION Bank of Boston Corporation (the "Corporation") is a registered bank holding company, organized in 1970 under Massachusetts law with both national and international operations. The Corporation, through its subsidiaries and, in certain cases, joint ventures, is engaged in providing a wide variety of personal, corporate and global banking services to individuals, corporate and institutional customers, governments and other financial institutions. The Corporation, together with its subsidiaries, operates a network of 650 offices across the U.S. and more than 100 offices in 24 countries in Latin America, Europe, Asia and Africa. As of December 31, 1996, approximately 76% of the Corporation's total loan volume consisted of domestic loans and leases, with the balance international. As of December 31, 1996, the Corporation's subsidiaries employed, in the aggregate, 21,990 full-time equivalent employees in their domestic and foreign operations. The Corporation's principal subsidiary is The First National Bank of Boston ("FNBB"), a national banking association with its headquarters in Massachusetts. Other major banking subsidiaries of the Corporation are BayBank, N.A. ("BBNA"), Bank of Boston Connecticut ("BKB Connecticut"), Rhode Island Hospital Trust National Bank ("Hospital Trust") and BayBank NH, N.A. ("BBNH"). The executive office of the Corporation and the head office of FNBB are located at 100 Federal Street, Boston, Massachusetts 02110 (Telephone (617) 434-2200). ACQUISITION OF BAYBANKS, INC. On December 12, 1995, the Corporation and BayBanks, Inc. ("BayBanks") entered into an Agreement and Plan of Merger providing for the merger of a wholly owned subsidiary of the Corporation with and into BayBanks (the " Merger"), with BayBanks becoming a wholly owned subsidiary of the Corporation. The Merger was consummated on July 29, 1996, and was accounted for as a pooling of interests. Under the terms of the Merger, approximately 43.6 million shares of the Corporation's common stock, par value $1.50 per share, were exchanged for all of the outstanding shares of BayBanks' common stock, par value $2.00 per share. The combination of the two Boston-based institutions created a consumer and corporate banking entity with over $60 billion in assets and over $40 billion in deposits. In connection with the Merger, and specifically to address competitive issues raised by the United States Department of Justice and the Massachusetts Attorney General relative to the transaction, the Corporation sold 20 branches of the combined entity, having aggregate deposits of approximately $700 million and loans of approximately $500 million, in the fourth quarter of 1996. In order to facilitate the establishment of a new brand identity for the combined Bank of Boston and BayBanks organizations, the Corporation will be seeking approval from stockholders at its 1997 Annual Meeting to change the name of the Corporation to "BankBoston Corporation." In addition, by the middle of 1997, the Corporation intends to merge BBNA into FNBB, with the combined bank being called "BankBoston, N.A.," and to make the "BankBoston" name a single brand for the advertising and marketing of all of the Corporation's branches, products and operations both domestically and internationally. -3- BUSINESS OF THE CORPORATION During the latter half of 1996, the Corporation announced certain organizational and managerial changes, including the creation of a Policy Council. The Policy Council, the senior decision-making group of the Corporation, consists of 14 members, including Chief Executive Officer Charles K. Gifford, Chairman William M. Crozier, Jr., President and Chief Operating Officer Henrique de Campos Meirelles, Vice Chairman, Chief Financial Officer and Treasurer William J. Shea, Vice Chairman, Corporate Banking, Paul F. Hogan and Executive Vice President, Chief of Staff, Susannah M. Swihart (who serves as Chair of the corporate-wide Marketing Committee). The remaining members of the Policy Council include six executives who manage the Corporation's other key line businesses and the Chairs of the corporate-wide Risk Management and Human Resources Committees. In addition to the Risk Management and Human Resources Committees, the Policy Council oversees the Technology Policy Committee, the Asset, Liability and Capital Committee and the Marketing Committee. The Corporation was previously managed by a Corporate Working Committee, which consisted of the members of the Chairman's Office and a group of executives in charge of core business units and corporate-wide support areas. The Corporation's principal revenue-producing areas are grouped into the following major business lines: Corporate Banking, Regional Consumer and Small Business, Latin America, Global Asset Management and Other Global. For a discussion of the operating results and other key financial measures of these five business lines for 1996 and 1995, as well as discussions of the Corporation's business activities, including its lending activities, its cross- border outstandings and the management of its off-balance-sheet exposure, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 22 through 43 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which discussions are incorporated herein by reference. Activities in which the Corporation and its subsidiaries are presently engaged or which they may undertake in the future are subject to certain statutory and regulatory restrictions. Banks and bank holding companies are extensively regulated under both federal and state law. There are various legal limitations upon the extent to which bank subsidiaries of the Corporation can finance or otherwise supply funds to the Corporation or certain of its affiliates. See "Supervision and Regulation." For financial information on the Corporation's revenue, net income and assets attributable to its domestic and international operations, see "Segment Information" which appears in Note 26 to the Financial Statements and "Cross- Border Outstandings" and "Emerging Markets Countries," which appear on pages 35 through 37 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which information is hereby incorporated by reference. -4- COMPETITION AND INDUSTRY CONSOLIDATION The Corporation's subsidiaries compete with other major financial institutions, including commercial banks, investment banks, mutual savings banks, savings and loan associations, credit unions, consumer finance companies and other nonbank institutions, such as insurance companies, major retailers, brokerage firms, and investment companies in New England, throughout the United States, and internationally. Principal methods of competing effectively in the financial services industry are to improve customer service through the quality and range of services available, to improve efficiencies and to price services competitively. One outgrowth of the competitive environment discussed above has been significant consolidation within the financial services industry both on a national and regional level. The Corporation engages on an ongoing basis in reviewing and discussing strategic initiatives focused on leveraging its core competencies over attractive markets, including the expansion of its global banking businesses, increasing the capital markets activities of its corporate banking business, the divestiture of non-core business units and the formation of strategic alliances. Consistent with this strategy, in 1996 and early 1997, the Corporation engaged in the following transactions in addition to the completion of the BayBanks acquisition: During the first half of 1996, the Corporation completed a transaction with two equity investment firms and Barnett Banks, Inc. ("Barnett") to form an independent mortgage company, HomeSide, Inc. ("HomeSide"), to which the Corporation and Barnett sold their mortgage banking subsidiaries, BancBoston Mortgage Corporation ("BBMC") and Barnett Mortgage Company, respectively. The Corporation, Barnett and the two equity investment firms each held an approximate one-third interest in HomeSide, which, as a result of an initial public offering in January, 1997, was reduced to approximately 27 percent. In June of 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 at the time of the acquisition. In connection with this acquisition, the Corporation exchanged 4.6 million shares of its common stock, with a value of approximately $229 million, for all of the outstanding common stock of Bancorp. The transaction was accounted for as a purchase. During the third quarter of 1996, the Corporation completed its acquisition of GBFC, Inc. ("GBFC"), a specialty finance company affiliated with Gordon Brothers Finance Company, a Boston-based firm offering a variety of restructuring services to the retail industry. GBFC, the largest asset-based lender in the country exclusively devoted to meeting the financing needs of retailers, has originated and agented over $300 million in loans for middle-market retailers throughout North America. In the first quarter of 1997, FNBB formed a pension company joint venture in Mexico with American International Group, Inc. and The Bank of Nova Scotia. This entity, named "Previnter," was established in response to legislation recently adopted in Mexico privatizing that country's social security system. As previously announced, in February, 1997, the Corporation terminated an agreement to sell its consumer finance subsidiary, Fidelity Acceptance Corporation ("FAC"), to a third party. The Corporation is continuing its strategic review of this -5- business and its other national consumer lending businesses (Ganis Credit Corporation and the national credit card portfolio). The Corporation intends to continue to explore strategic opportunities as they arise in order to expand its businesses in its selected markets and improve service to its customers. In 1994, federal legislation was enacted which permits certain interstate banking transactions. It is anticipated that this legislation may facilitate consolidation within financial institutions that currently have separate operations in two or more states and within the financial services industry in general. See "Supervision and Regulation" for a discussion of the impact of this legislation upon the Corporation and its subsidiaries. SUPERVISION AND REGULATION The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies in the states and countries where the Corporation and its subsidiaries operate. The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are often intended by the regulators primarily for the protection of depositors or are aimed at carrying out broad public policy goals, rather than for the protection of security holders. Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Corporation and its subsidiaries are subject are discussed below along with certain regulatory matters concerning the Corporation and its bank subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Corporation and its subsidiaries. THE CORPORATION The Corporation, as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and is regulated under the provisions of the BHCA. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Under the BHCA, the Corporation is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing or controlling banks or furnishing services to, or acquiring premises for, its affiliated banks. The Corporation may, however, engage in and own voting shares of companies engaging in certain activities determined by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or to managing or controlling banks "as to be a proper incident thereto." The location of such "nonbank" subsidiaries of the Corporation is not restricted geographically under the BHCA. The Corporation is required by the BHCA to file with the Federal Reserve Board periodic reports and such additional reports as the Federal Reserve Board may require. The -6- Federal Reserve Bank of Boston performs periodic examinations of the Corporation and certain of its subsidiaries. Since the Corporation is also a bank holding company under the laws of Massachusetts, the Commissioner of Banks for The Commonwealth of Massachusetts has authority to require certain reports from the Corporation from time to time and to examine the Corporation and each of its subsidiaries other than national banking associations. Prior approval of the Massachusetts Board of Bank Incorporation also may be required before the Corporation may acquire any additional commercial banks located in Massachusetts. Acquisitions by the Corporation of non-Massachusetts banks or bank holding companies may be subject to the prior approval by both the Massachusetts and the applicable state or federal banking regulators. Massachusetts has an interstate bank acquisition law which permits banking organizations outside Massachusetts to acquire Massachusetts banking organizations if the state law of the acquirer permits acquisitions of banking organizations in that state by Massachusetts-based banking organizations. In addition, in August, 1996, legislation was passed in Massachusetts providing for an early opt-in to the federal interstate banking legislation enacted in 1994. See "Legislation" below with respect to federal interstate banking legislation. Massachusetts has a business combinations law which provides that if any acquirer buys 5% or more of a target company's stock without the prior approval of the target company's board of directors, it generally may not (i) complete the acquisition through a merger, (ii) pledge or sell any assets of the target company, or (iii) engage in other self-dealing transactions with the target company for a period of three years. The prior board approval requirement does not apply if the acquirer buys at least 90% of the target company's outstanding stock in the transaction in which it crosses the 5% threshold or if the acquirer, after crossing the threshold, obtains the approval of the target company's board of directors and two-thirds of the target company's stock held by persons other than the acquirer. This legislation automatically applies to Massachusetts corporations, including the Corporation, which did not elect to "opt out" of the statute. Massachusetts law also provides for classified boards of directors for most public companies incorporated in Massachusetts, unless the company elected to "opt out" of the law. As a result of this law, the Corporation's Board of Directors is divided into three classes of Directors and the three-year terms of the classes are staggered. Other Massachusetts legislation exists which is intended to provide limited anti-takeover protection to certain Massachusetts corporations by preventing an acquirer of certain percentages of such corporation's stock from obtaining voting rights in such stock unless the corporation's other stockholders authorize such voting rights. The legislation automatically applies to certain Massachusetts corporations which have not elected to "opt out" of the statute. The Corporation, by vote of its Board of Directors, has "opted out" of the statute's coverage. In June 1990, the Board of Directors of the Corporation adopted a stockholder rights agreement (the "Rights Agreement") providing for a dividend of one preferred stock purchase right for each outstanding share of common stock of the Corporation (the "Rights"). Under certain circumstances, the Rights would enable stockholders to purchase common stock of the Corporation or of an acquiring Corporation at a substantial discount. The dividend was distributed on July 12, 1990 to stockholders of record on that date. Holders of shares of the Corporation's common stock issued subsequent to that date receive the Rights with their shares. The Rights trade automatically with shares of the Corporation's common stock and become exercisable only under certain circumstances. -7- The purpose of the Rights Agreement is to encourage potential acquirers to negotiate with the Corporation's Board of Directors prior to attempting a takeover and to provide the Board with leverage in negotiating on behalf of all stockholders the terms of any proposed takeover. The Rights may have certain anti-takeover effects. The Rights should not interfere, however, with any merger or other business combination approved by the Board of Directors. The Rights Agreement was amended in December, 1995 to exclude the BayBanks merger agreement, the stock option agreement granted by the Corporation to BayBanks in connection with the merger agreement, and all transactions contemplated thereby, from the scope of the Rights Agreement. For a further discussion of the Corporation's Rights Agreement, see the description of the Rights set forth in the Corporation's registration statement on Form 8-A relating to the Rights (including the Rights Agreement, dated as of June 28, 1990, between the Corporation and FNBB, as Rights Agent, which is attached as an exhibit to the Form 8-A) and the amendment thereto, which are incorporated herein by reference. THE CORPORATION'S BANK SUBSIDIARIES GENERAL The Corporation's bank subsidiaries that are national banks are subject to the supervision of, and are regularly examined by, the Office of the Comptroller of the Currency (the "OCC"). BKB Connecticut, the Corporation's state-chartered bank subsidiary, is subject to the supervision of, and is regularly examined by, the Federal Deposit Insurance Corporation (the "FDIC") and the Connecticut Banking Commissioner. The domestic deposits of the Corporation's subsidiary banks are insured (to the extent allowed by law) by the Bank Insurance Fund of the FDIC (the "BIF") and, accordingly, those banks are subject to the regulations of the FDIC. As members of the Federal Reserve System, the Corporation's nationally-chartered banks are also subject to regulation by the Federal Reserve Board. BBNA, BKB Connecticut and Hospital Trust, as members of the Federal Home Loan Bank of Boston, are also subject to the regulations of the Federal Housing Finance Board. FIRREA Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled bank or (ii) any assistance provided by the FDIC to a commonly controlled bank in danger of default. The term "default" is defined as the appointment of a conservator or receiver for such bank and "in danger of default" as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In addition, FIRREA broadened the enforcement powers of the federal banking agencies, including the power to impose fines and penalties over all financial institutions. Further, under FIRREA the failure to meet capital guidelines could subject a financial institution to a variety of regulatory actions, including the termination of deposit insurance by the FDIC. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") also provided for expanded regulation of financial institutions. Under FDICIA, banks are placed in one of five capital categories, ranging from "well-capitalized" to "critically undercapitalized," for -8- which the federal banking agencies have established specific capital ratio levels. Pursuant to the agencies' regulations, an institution is considered "well capitalized" if it has a total risk-based capital ratio of at least 10%, a tier 1 risk-based capital ratio of at least 6%, a leverage capital ratio of at least 5% and is not subject to a cease and desist order, formal agreement, capital directive, or prompt corrective action directive that requires it to achieve or maintain a higher level of capital. At December 31, 1996, all of the Corporation's banking subsidiaries met the requirements of the "well capitalized" category. The capital categories of the Corporation's bank subsidiaries are determined solely for purposes of applying FDICIA's provisions, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's bank subsidiaries. OTHER REGULATORY RESTRICTIONS The FDIC's deposit insurance assessments are based on a risk-based system. The risk-based system places a bank in one of nine risk categories, principally on the basis of its capital level and an evaluation of the bank's risk to the BIF, and bases premiums on the probability of loss to the FDIC with respect to each individual bank. During 1996, the assessment premiums for the BIF risk- based system ranged from $0 to $.27 per $100 of insured deposits. The Corporation's domestic subsidiary banks and the subsidiaries of such banks are subject to a large number of other regulatory restrictions, including certain restrictions upon: (i) any extensions of credit by such banks to, from or for the benefit of the Corporation and the Corporation's nonbank affiliates (collectively with the Corporation, the "Affiliates"), (ii) the purchase of assets or services from or the sale of assets or the provision of services to Affiliates, (iii) the issuance of a guarantee, acceptance or letter of credit on behalf of or for the benefit of Affiliates, (iv) the purchase of securities of which an Affiliate is a principal underwriter during the existence of the underwriting and (v) investments in stock or other securities issued by Affiliates or acceptance thereof as collateral for an extension of credit. The Corporation and all of its subsidiaries, including FNBB, are also subject to certain restrictions with respect to engaging in the issue, flotation, underwriting, public sale or distribution of certain types of securities. The Federal Reserve Board permits subsidiaries of bank holding companies to underwrite and deal in securities consistent with the provisions of Section 20 of the Glass-Steagall Act of 1933. In the first quarter of 1997, following approval by the Federal Reserve Board, BancBoston Securities Inc. ("BSI"), a wholly owned subsidiary of the Corporation, commenced operations under Section 20. BSI will offer corporate financing options and investments, including underwriting and dealing in high-yield public debt securities. In addition, under both the BHCA and regulations which have been issued by the Federal Reserve Board, the Corporation and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of any property or the furnishing of any service. In operations in other countries, the Corporation and FNBB are also subject to restrictions imposed by the laws and banking authorities of such countries. The Corporation's bank subsidiaries are also required to maintain cash reserves against deposits and are subject to restrictions, among others, upon (i) the nature and amount of loans which they may make to a borrower; (ii) the nature and amount of securities in which they may invest; (iii) the amount which may be invested in bank premises; (iv) the geographic location of their branches; and (v) the nature and extent to which they can borrow money. -9- DIVIDENDS The payment of dividends by the Corporation is determined by its Board of Directors based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors, including applicable government regulations and policies and the amount of dividends payable to the Corporation by its subsidiaries. In 1996, the aggregate dividends declared by the Corporation on its common and preferred stock were approximately $284 million. For the first quarter of 1996, a dividend of $.37 per share was declared and paid on the Corporation's common stock. In each of the last three quarters of 1996 and in the first quarter of 1997, the Corporation declared and paid a dividend on its common stock of $.44 per share. The Corporation is a legal entity separate and distinct from its subsidiary banks and its other nonbank subsidiaries. The Corporation's revenues (on a parent company only basis) result primarily from interest and dividends paid to the Corporation by its subsidiaries. The right of the Corporation, and consequently the right of creditors and stockholders of the Corporation, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries), except to the extent that claims of the Corporation in its capacity as a creditor may be recognized. It is the policy of the OCC and the Federal Reserve Board that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if after paying such dividends the bank or bank holding company would remain adequately capitalized. Federal banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. In addition, it is the position of the Federal Reserve Board that a bank holding company is expected to act as a source of financial strength to its subsidiary banks. Various federal and state laws, regulations and policies limit the ability of the Corporation's subsidiaries to pay dividends to the Corporation. Federal banking law requires the approval of the OCC if the aggregate total of the dividends declared by any of the Corporation's national bank subsidiaries in any calendar year will exceed the bank's net profits, as defined by applicable regulation, for that year combined with retained net profits for the preceding two years. Also, state law requires the approval of state bank regulatory authorities if the dividends declared by state banks exceed similar prescribed limits. In 1996, an aggregate of approximately $560 million of dividends were declared and paid by the Corporation's subsidiaries. The payment of any future dividends by the Corporation's subsidiaries will be determined based on a number of factors, including the subsidiary's liquidity, asset quality profile, capital adequacy and recent earnings history. Information concerning the Corporation and its bank subsidiaries with respect to dividends is set forth in Note 15 to the Financial Statements in the Corporation's 1996 Annual Report to Stockholders which is included in Exhibit 13 hereto and which discussion is incorporated herein by reference. See the related discussions set forth below in "Capital" and "Legislation." CAPITAL Information concerning the Corporation and its bank subsidiaries with respect to capital is set forth in Note 14 to the Financial Statements and under "Capital Management," which appears on page 42 of the Corporation's 1996 Annual Report to Stockholders, which pages are -10- included in Exhibit 13 hereto and which information is incorporated herein by reference. See also "Legislation" below and "Dividends" above. LEGISLATION In addition to extensive existing government regulation, laws and regulations in the states and countries where the Corporation and its subsidiaries do business can change in unpredictable ways, often with significant effects on the way in which financial institutions may conduct business. The enactment of banking legislation such as FIRREA and FDICIA has affected the banking industry by, among other things, broadening the powers of the federal banking agencies in a number of areas. Other legislation which has been enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and non-banking institutions, including insurance companies, brokerage firms, mutual funds, investment banks and major retailers. In 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Act") was enacted. The Interstate Act's provisions, among other things: (i) permit bank holding companies to acquire control of banks in any state beginning September 28, 1995, subject to (a) specified maximum national and state deposit concentration limits; (b) any applicable state law provisions requiring that the acquired bank has to have been in existence for a specified period of up to 5 years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by banks in different states, including branching through bank mergers, beginning June 1, 1997, subject to the provisions noted in (i) and to any state laws that opt in as of an earlier date or opt out of the provision entirely; (iii) authorize states to enact legislation permitting interstate de novo branching; and (iv) provide for certain additional limitations on foreign bank activities. The full impact of the Interstate Act will not be completely known until the enactment and implementation by the various federal banking agencies of the underlying regulations and actions required by the Act. However, it is anticipated that the Interstate Act may facilitate consolidation within financial institutions that currently have separate operations in two or more states and within the financial services industry. Additional laws and regulations are considered from time to time that could affect the business of the Corporation, including a number of significant legislative proposals which, if adopted, would result in a fundamental restructuring of the financial services industry. The effect of any such legislation on the business of the Corporation and its subsidiaries cannot be accurately predicted. See also "Supervision and Regulation -- the Corporation" above. GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS In 1996, the U.S. economy remained on a path of steady growth and moderate inflation. Despite the longevity of the current expansion now about to enter its seventh year, there is little evidence of the kinds of imbalances and excesses which typically threaten ongoing economic growth. The New England economy fully participated in the 1996 expansion. Though the region has yet to fully regain all of the jobs lost in the last recession, at year-end New England's unemployment rate stood at 4.4 per cent, almost a full percentage point below the nation's jobless rate. The Corporation's earnings and business are also affected by the policies of various government and regulatory authorities in New England and throughout the United States, as well as foreign governments and international agencies, including, in the United States, the Federal Reserve Board. Important functions of the Federal Reserve Board, in addition to those -11- enumerated under "Supervision and Regulation" above, are to regulate the supply of money and of bank credit, to deal with general economic conditions within the United States and to be responsive to international economic conditions. From time to time, the Federal Reserve Board and the central banks of foreign countries have taken specific steps to effect changes in the value of the United States dollar in foreign currency markets as well as to control domestic inflation and to control the country's money supply. The instruments of monetary policy employed by the Federal Reserve Board for these purposes (including interest rates and the level of cash reserves banks are required to maintain against deposits) influence, in various ways, the interest rates paid on interest bearing liabilities and the interest received on earning assets, as well as the overall level of bank loans, investments and deposits. Inflation has generally had a minimal impact on the Corporation because substantially all of its assets and liabilities are of a monetary nature and a large portion of its operations are based in the United States, where inflation has been low. Prospective domestic and international economic and political conditions and the policies of the Federal Reserve Board and the Central Banks of Argentina and Brazil, as well as other domestic and international regulatory authorities, may affect the future business and earnings of the Corporation. The Corporation continues to monitor the economic situation in those countries in which the Corporation has local operations or cross-border exposure, particularly in Argentina and Brazil. Additional information with respect to the countries where the Corporation has local operations or cross- border exposure is included in "Cross-Border Outstandings" and "Emerging Markets Countries" on pages 35 through 37 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which discussions are incorporated herein by reference. This section should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" contained in the Corporation's 1996 Annual Report to Stockholders on pages 22 through 43, which pages are included in Exhibit 13 hereto and which discussion is incorporated herein by reference. STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The information set forth below is being provided in accordance with Industry Guide 3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such information reflects the Corporation's acquisition of BayBanks for all periods presented, as described in Note 2 to the Financial Statements in the Corporation's 1996 Annual Report to Stockholders. AVERAGE BALANCES AND INTEREST RATES The information required by this item is presented on pages 44 through 46 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. CHANGE IN NET INTEREST REVENUE-VOLUME AND RATE ANALYSIS: 1996 COMPARED WITH 1995, AND 1995 COMPARED WITH 1994 The information required by this item is presented on page 47 of the Corporation's 1996 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. -12- SECURITIES The following table sets forth the carrying values of securities held to maturity on the dates indicated:
December 31 1996 1995 1994 (In millions) U.S. Treasury $ 3 $ 4 $ 2,146 U.S. government agencies and corporations - mortgage-backed securities 535 523 1,449 States and political subdivisions 6 5 201 Foreign debt securities 11 11 123 Other debt securities 200 Other equity securities 125 117 119 ----- ----- ----- $ 680 $ 660 $ 4,238 ===== ===== =====
The following table sets forth the carrying values of securities available for sale on the dates indicated:
December 31 1996 1995 1994 (In millions) U.S. Treasury $ 1,675 $ 2,591 $ 1,487 U.S. government agencies and corporations - mortgage-backed securities 3,801 3,037 766 States and political subdivisions 173 248 9 Foreign debt securities 1,133 685 384 Other debt securities 256 334 142 Marketable equity securities 217 222 144 Other equity securities 549 465 330 ----- ----- ----- $ 7,804 $ 7,582 $ 3,262 ===== ===== =====
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, 1996, excluding equity securities. Certain securities, such as mortgage-backed securities, may not become due at a single maturity date. Such securities have been classified within the category that 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 $ 551 6.5% $ 1,000 6.3% $ 124 6.1% $ 1,675 6.3% U.S. government agencies and corporations - mortgage-backed securities 75 7.6 1,248 6.3 882 6.6 $ 1,596 6.5% 3,801 6.5 States and political subdivisions 57 4.0 57 5.2 57 5.5 2 8.2 173 4.9 Foreign debt securities 639 16.1 272 12.8 161 15.4 61 9.7 1,133 14.9 Other debt securities 18 9.7 30 13.2 208 9.1 . 256 9.6 ----- ----- ----- ----- ----- Total carrying value $ 1,340 11.1% $ 2,607 7.0% $ 1,432 7.9% $ 1,659 6.7% $ 7,038 7.9% ===== ===== ===== ===== =====
-13-
After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years Total Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate HELD TO MATURITY (Dollars in millions) U.S. Treasury $ 3 5.0% $ 3 5.0% U.S. government agencies and corporations - mortgage-backed securities $ 110 6.5% $ 237 7.0% $ 188 6.5% 535 6.7 States and political subdivisions 6 3.1 6 3.1 Foreign debt securities 2 7.8 4 7.9 4 7.1 1 7.8 11 7.5 ----- ----- ----- ----- ----- Total carrying value $ 11 4.6% $ 114 6.5% $ 241 7.0% $ 189 6.5% $ 555 6.7% ===== ===== ===== ===== =====
LOANS AND LEASES A portion of the information required by this item is presented on page 30 of the Corporation's 1996 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table presents the maturities and interest rate sensitivity, based on original contractual terms, of the Corporation's loans at December 31, 1996, exclusive of domestic office loans secured by 1-4 family residential properties, domestic office loans to individuals and lease financing:
After One But Within Within After December 31, 1996 One Year Five Five Total (In millions) Years Years Commercial, industrial and financial $ 4,947 $ 5,687 $ 2,528 $13,162 Real estate Construction 183 93 8 284 Other 1,687 1,419 134 3,240 Overseas offices 8,611 822 178 9,611 ------ ----- ----- ------- $ 15,428 $ 8,021 $ 2,848 $26,297 ------ ----- ----- ------- Loans with predetermined interest rates $ 4,705 $ 2,050 $ 491 $ 7,246 Loans with floating interest rates 10,723 5,971 2,357 19,051 ------ ----- ----- ------- $ 15,428 $ 8,021 $ 2,848 $26,297 ====== ===== ===== =======
The Corporation does not have an automatic renewal policy for maturing loans. Rather, loans are renewed at the maturity date only at the request of those customers who are deemed to be creditworthy by the Corporation. Additionally, the Corporation reviews such requests in substantially the same manner as applications by new customers for extensions of credit. The maturity dates and interest terms of renewed loans are based, in part, upon the needs of the individual customer and the Corporation's credit review and evaluation of current and future economic conditions. Since these factors have varied considerably, and will most likely continue to do so, the Corporation believes it is impracticable to estimate the amount of loans in the portfolio which may be renewed in the future. -14- NONACCRUAL LOANS AND LEASES The majority of the information required by this item is presented on pages 32 and 33 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. 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 1996 1995 1994 1993 1992 (In millions) Loans and leases over ninety days past $ 41 $ 56 $ 49 $ 59 $ 98 due and on accrual status.............. ===== ===== ===== ===== =====
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 Statement of Financial Accounting Standards 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 1996 1995 1994 1993 1992 (In millions) Renegotiated loans . $ 8 $ 33 $ 82 $ 243 $ 413 ===== ===== ===== ===== =====
CROSS-BORDER OUTSTANDINGS The information required by this item is presented on pages 35 through 37 and 40 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. RESERVE FOR CREDIT LOSSES: ALLOCATION OF RESERVE FOR CREDIT LOSSES AND ANALYSIS OF RESERVE FOR CREDIT LOSSES The majority of the information required by this item is presented on pages 33 and 34 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. 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 on page 30 of the Corporation's 1996 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. -15-
DECEMBER 31 1996 1995 1994 1993 1992 (Dollars in millions) Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total UNITED STATES Commercial, industrial and financial. $230 26.0% $221 24.8% $284 34.3% $290 30.8% $ 340 30.4% Commercial real estate, including construction....................... 83 9.4 158 17.8 194 23.5 300 31.9 394 35.3 Consumer related loans Secured by 1-4 family residential properties................. 13 1.5 36 4.0 34 4.1 47 5.0 49 4.4 Other.................................. 193 21.9 131 14.7 104 12.6 97 10.3 89 8.0 Lease financing......................... 16 1.8 22 2.5 21 2.5 18 1.9 4 .4 ---- ----- ---- ----- ---- ----- ---- ----- ------ ----- 535 60.6 568 63.8 637 77.0 752 79.9 876 78.5 INTERNATIONAL........................... 217 24.6 171 19.2 99 12.0 89 9.5 121 10.8 ---- ----- ---- ----- ---- ----- ---- ----- ------ ----- 752 85.2 739 83.0 736 89.0 841 89.4 997 89.3 UNALLOCATED............................. 131 14.8 151 17.0 91 11.0 100 10.6 119 10.7 ---- ----- ---- ----- ---- ----- ---- ----- ------ ----- $883 100.0% $890 100.0% $827 100.0% $941 100.0% $1,116 100.0% ==== ===== ==== ===== ==== ===== ==== ===== ====== =====
The above allocation reflects provisions for credit losses for International operations for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 of $84 million, $60 million, $25 million, $26 million and $12 million, respectively. International reserve transfers (to)from unallocated reserves and Domestic operations were $0, $67 million, $4 million, $0 and $19 million, respectively, for the same periods. DEPOSITS A portion of the information required by this item is presented on pages 44 through 46 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. The aggregate amount of deposits by foreign depositors in domestic offices averaged $1,412 million in 1996, $1,131 million in 1995 and $863 million in 1994. 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, 1996:
Certificates Time of Deposit Deposits Total (In millions) Maturing within three months $ 1,890 $ 18 $ 1,908 After three but within six months 245 17 262 After six but within twelve months 632 18 650 After twelve months 304 84 388 ----- --- ----- $ 3,071 $ 137 $ 3,208 ===== === =====
The majority of foreign office deposits are in denominations of $100,000 or more. RETURN ON EQUITY AND ASSETS The information required by this item is presented on page 21 of the Corporation's 1996 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. -16- SHORT-TERM BORROWINGS The following table summarizes the Corporation's short-term borrowings for the three years ended December 31, 1996:
Maximum Average Average Weighted Amount Amount Interest Balance Average Outstanding Outstanding Rate (Dollars in millions) At end of Interest During the During the During the Category of Aggregate Short-Term Period Rate (1) Period Period Period Borrowings For the Year Ended December 31, 1996 Federal funds purchased (2) $ 527 5.21% $ 2,523 $ 1,348 5.35% Term federal funds purchased (2) 1,442 5.51 2,140 1,413 7.35 Securities sold under agreements to repurchase (3) 2,034 5.06 2,236 1,848 5.28 Demand notes issued to the U.S. Treasury (4) 704 6.01 1,183 390 5.37 All other (5) 3,801 10.93 3,801 2,372 12.65 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 (4) 361 4.85 1,051 406 5.75 All other (5) 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 (4) 395 4.63 1,060 329 4.34 All other (5) 2,734 18.44 3,807 2,895 17.36
________________________________________________________________________________ (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 1996, 1995 and 1994 related to Brazilian operations of FNBB for which various Brazilian government securities served as collateral. (4) Demand notes issued to the U.S. Treasury represent depository liabilities that are not subject to reserve requirements and bear interest at one-quarter of one percent below the weekly average federal funds effective interest rate as published by the Federal Reserve Board. (5) The majority of other short-term borrowings represent short-term bank notes issued by FNBB and secured and unsecured obligations of the Corporation's overseas branches and subsidiaries. -17- ITEM 2. PROPERTIES. The head offices of the Corporation and FNBB are located in a 37-story building at 100 Federal Street, Boston, Massachusetts. In 1996, FNBB leased approximately 90% of the building's approximately 1.3 million square feet. FNBB's data processing and record keeping operations are located at Columbia Park in Boston. The Columbia Park facility, comprising approximately 425,000 square feet, and the land on which it is situated are owned by FNBB. In Waltham, Massachusetts the Corporation owns a facility housing 189,000 square feet of administrative space and 117,000 square feet of operations space. In addition, FNBB leases operations facilities in Dedham and Canton, Massachusetts, which comprise approximately 180,000 square feet and 105,000 square feet, respectively. The headquarters for FNBB's operations in Argentina are located in a 12-story historic landmark building in the center of Buenos Aires. The building consists of approximately 256,000 square feet and is owned by FNBB. The headquarters for FNBB's operations in Brazil are in three interconnected buildings in the center of Sao Paulo. FNBB owns a total of 119,000 square feet in the three buildings and leases another 102,000 square feet. In addition, FNBB owns a 10-story, 99,000 square foot building in Sao Paulo where it has consolidated part of its Brazilian operations. Hospital Trust owns a 30-story building and a building adjacent thereto at One Hospital Trust Plaza, Providence, Rhode Island. Hospital Trust occupies approximately 40% of the complex's approximately 546,000 square feet. In addition, Hospital Trust maintains an operations center in East Providence, Rhode Island that also serves as the primary backup for FNBB's Columbia Park facility. The East Providence operations center, which consists of approximately 141,000 square feet, is owned by Hospital Trust. BKB Connecticut's headquarters are in Hartford, Connecticut, where it has offices at 31 Pratt Street and 100 Pearl Street. BKB Connecticut owns and occupies approximately 50,000 square feet at the Pratt Street location, and owns an undivided one-half interest in the Pearl Street location where it currently occupies approximately 54,000 square feet. BKB Connecticut also maintains regional offices in Connecticut, the largest of which is in Waterbury and comprises approximately 157,000 square feet of owned space in three interconnected buildings. None of these properties is subject to any material encumbrance. The Corporation's subsidiaries also own or lease numerous other premises used in their domestic and foreign operations. ITEM 3. LEGAL PROCEEDINGS. The Corporation and its subsidiaries in 1996 were or currently are parties to a number of legal proceedings that have arisen in connection with the normal course of business activities of the Corporation, FNBB and the Corporation's other subsidiaries, including the following matters: Society Class Action. As previously reported, in 1990 a class action complaint was filed in U.S. District Court for the District of Connecticut against Society for Savings Bancorp, Inc. ("Society"), two of its then senior officers and one former officer. The complaint, as subsequently amended, alleges that Society's financial reports for fiscal years 1988, 1989, and the first half of 1990 contained material misstatements or omissions concerning its real estate -18- loan portfolio and other matters, in violation of Connecticut common law and of Sections 10(b) and 20 of the Exchange Act. The action was brought by a Society shareholder, individually and as a class action on behalf of purchasers of Society's stock from January 19, 1989 through November 30, 1990 and seeks damages in an unspecified amount. Society and the defendant officers have denied the allegations of the amended complaint and on July 14, 1995 filed a motion for summary judgment. On December 11, 1996, a hearing was held on the motion, but the court has not yet rendered a decision. Lender Liability Litigation. The Corporation's subsidiaries, in the normal course of their business in collecting outstanding obligations, are named as defendants in complaints or counterclaims filed in various jurisdictions by borrowers or others who allege that lending practices by such subsidiaries have damaged the borrowers or others. Such claims, commonly referred to as lender liability claims, frequently request not only relief from repayment of the debt obligation, but also recovery of actual, consequential, and punitive damages. Fidelity Acceptance Corporation Litigation. Fidelity Acceptance Corporation ("FAC"), an indirect subsidiary of the Corporation that is engaged in consumer lending, and/or certain of FAC's subsidiaries (collectively referred to as FAC), are defendants in class action and other lawsuits brought in various states by FAC borrowers. These lawsuits, which include claims for punitive damages, often for large dollar amounts, challenge various of FAC's lending and insurance practices, including, among others, the placing of collateral protection insurance, calculating the amount of credit life insurance, and the determination of applicable interest rates. Management, after reviewing all actions and proceedings pending against the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's results of operations or financial condition. -19- ITEM 3A. EXECUTIVE OFFICERS OF THE CORPORATION. Information with respect to the executive officers of the Corporation, as of March 1, 1997, is set forth below. Executive Officers are generally elected annually by the Board of Directors and hold office until the following year and until their successors are chosen and qualified, unless they sooner resign, retire, die or are removed. Except where otherwise noted, the positions listed for the officers are for both the Corporation and FNBB.
EXECUTIVE OFFICER ----------------- NAME AGE CURRENT POSITION SINCE - --------------------------- --- --------------------------- ----------------- Charles K. Gifford 54 Chief Executive Officer of 1987 the Corporation and Chairman and Chief Executive Officer of FNBB William M. Crozier, Jr. 64 Chairman of the Board of 1996 the Corporation and Senior Chairman of FNBB Henrique de Campos Meirelles 51 President and Chief 1994 Operating Officer William J. Shea 49 Vice Chairman, Chief 1993 Financial Officer and Treasurer of the Corporation and Vice Chairman and Chief Financial Officer of FNBB Paul F. Hogan 52 Vice Chairman, Corporate 1993 Banking Susannah M. Swihart 41 Executive Vice President, 1993 Chief of Staff Guilliaem Aertsen IV 49 Executive Vice President, 1993 Global Asset Management Melville E. Blake III 42 Executive Director, 1993 Strategic Planning Robert L. Champion, Jr. 52 Executive Director, 1993 Corporate Administrative Services Carlos Craide 49 Regional Manager, Brazil 1996 Helen G. Drinan 49 Executive Vice President, 1993 Human Resources Thomas J. Hollister 42 Executive Vice President, 1993 Consumer and Small Business Banking Ali Inanilan 52 Executive Director, Finance 1996 Ira A. Jackson 48 Executive Vice President, 1987 External Affairs Robert T. Jefferson 49 Comptroller 1993 John A. Kahwaty 46 Executive Director, 1996 Investor Relations Lindsey C. Lawrence 59 Executive Vice President, 1996 Consumer Marketing and Technology Banking Michael R. Lezenski 49 Executive Director, 1993 Technology and System Services Mark A. MacLennan 43 Executive Vice President, 1993 Global Financial Services Peter J. Manning 58 Executive Vice President, 1990 Mergers and Acquisitions John L. Mastromarino 43 Executive Vice President, 1995 Risk Management Kathleen M. McGillycuddy 47 Executive Director, Global 1996 Treasury Joanne E. Nuzzo 54 Executive Director, 1994 Banking Operations Richard A. Remis 42 Executive Vice President, New 1993 England Corporate Banking Manuel R. Sacerdote 54 Regional Manager, Southern 1994 Cone (Argentina, Uruguay, Chile) Gary A. Spiess 56 General Counsel and Clerk 1987 of the Corporation and General Counsel, Secretary & Cashier of FNBB Bradford H. Warner 45 Executive Vice President, 1989 Global Capital Markets
-20- All of the foregoing individuals have been officers of the Corporation or one of its subsidiaries for the past five years, except for Messrs. Crozier, Blake, Craide and Inanilan, Ms. Lawrence and Messrs. Mastromarino and Shea. Prior to joining the Corporation in July, 1996, Mr. Crozier had served as Chairman of the Board and Chief Executive Officer of BayBanks since 1974. Mr. Blake joined the Corporation in 1992 and prior to that time had been Vice President of the MAC Group/Gemini Consulting since 1988. Mr. Craide came to the Corporation in October, 1996 from Citibank, N.A., where he had served for several years as head of Corporate Banking and Bank Products in Brazil. Mr. Inanilan joined the Corporation in 1993 from Coopers & Lybrand, where he had served as a partner since 1986. Prior to assuming her current position with the Corporation, Ms. Lawrence was employed by BayBank Systems, Inc., a BayBanks subsidiary, as President and Chief Operating Officer from 1988 to 1994 and as President and Chief Executive Officer from 1994 to September, 1996. Mr. Mastromarino came to the Corporation in 1995 from the OCC, where he had served as Examiner-in-Charge of the OCC's London office from 1993 to 1995, and prior to that time had been the OCC's Examiner-in-Charge at the Corporation since 1988. Mr. Shea joined the Corporation in 1993 from Coopers & Lybrand, where he had served as a partner since 1983 and as Vice Chairman since 1991. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. -21- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this Item is presented on pages 20, 21 and 48 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA. The "Consolidated Selected Financial Data" of the Corporation for the six years ended December 31, 1996 appears on pages 20 and 21 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information in response to this Item is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 22 through 43 of the Corporation's 1996 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by this Item are included on the pages of the Corporation's 1996 Annual Report to Stockholders indicated below, which pages are included in Exhibit 13 hereto, and such statements and data are hereby incorporated by reference.
PAGE OF 1996 ANNUAL REPORT TO STOCKHOLDERS Summary of Quarterly Consolidated Financial Information and Common Stock Data.................................. 48 Report of Independent Accountants.......................... 50 Bank of Boston Corporation: Consolidated Balance Sheet as of December 31, 1996 and 1995............................................... 51 Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994................. 52 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994... 53 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994................. 54 Notes to Financial Statements.............................. 55 through 80
-22- In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The standard specifies the computation, presentation and disclosure requirements for earnings per share, and will simplify the computation required by existing guidelines. The standard is effective for financial statements issued for periods ending after December 15, 1997, and must be applied prospectively. The Corporation does not expect that, upon adoption, this standard will have a material effect on its calculation of earnings per share. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning the Executive Officers of the Corporation which responds to this Item is contained in the response to Item 3A contained in Part I of this Report and is hereby incorporated by reference herein. The information that responds to this Item with respect to Directors is contained under the heading "Election of Directors" in the Corporation's definitive proxy statement for its 1997 Annual Meeting of Stockholders (the "Proxy Statement"). Information with respect to compliance by the Corporation's directors and executive officers with Section 16(a) of the Exchange Act is contained under the heading "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement. The foregoing information from the Proxy Statement is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required in response to this Item is contained under the heading "Compensation of Executive Officers" in the Proxy Statement. The foregoing information from the Proxy Statement, with the exception of the section entitled "Compensation Committee Report on Executive Compensation," is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required in response to this Item is contained under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement. The foregoing information from the Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required in response to this Item is contained under the heading "Indirect Interest of Directors and Executive Officers in Certain Transactions" in the Proxy Statement. The foregoing information from the Proxy Statement is hereby incorporated by reference. -23- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) The financial statements required in response to this Item are listed in response to Item 8 of this Report and are incorporated herein by reference. (a)(2) Financial statement schedules have been omitted because the information is either not required, not applicable, or is included in the financial statements or notes thereto. (a)(3) Exhibits 3(a) - Restated Articles of Organization of the Corporation, as amended through April 26, 1996, incorporated herein by reference to Exhibit 3 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (File No. 1-6522). 3(b) - By-Laws of the Corporation, as amended through October 24, 1996, incorporated herein by reference to Exhibit 3(b) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-6522). 4(a) - Fiscal and Paying Agency Agreement dated as of February 10, 1986 defining rights of holders of the Corporation's Subordinated Floating Rate Notes Due 2001, incorporated herein by reference to Exhibit 4(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1985 (File No. 1-6522). 4(b) - Fiscal and Paying Agency Agreement dated as of August 26, 1986 defining rights of holders of the Corporation's Floating Rate Subordinated Equity Commitment Notes Due 1998 incorporated herein by reference to Exhibit 4(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1986 (File No. 1-6522). 4(c) - Indenture dated as of June 15, 1987 defining the rights of holders of the Corporation's 9 1/2% Subordinated Equity Contract Notes due 1997, incorporated herein by reference to Exhibit 4(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 1-6522). -24- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 4(d) - Subordinated Indenture dated as of June 15, 1992, as amended by the First Supplemental Indenture dated as of June 24, 1993, and forms of notes defining rights of the holders of the Corporation's 6 7/8% Subordinated Notes due 2003, the 6 5/8% Subordinated Notes due 2005, and the 6 5/8% Subordinated Notes due 2004, incorporated herein by reference to Exhibit 4(d) to the Corporation's Registration Statement on Form S-3 (Registration Numbers 33-48418 and 33-52571), Exhibits 4(e) and 4(f) to the Corporation's Current Report on Form 8-K dated June 24, 1993, Exhibit 4 to the Corporation's Current Report on Form 8-K dated November 15, 1993, and Exhibit 4 to the Corporation's Current Report on Form 8-K dated January 5, 1994 (File No. 1- 6522). 4(e) - Senior Indenture dated as of June 15, 1992, and forms of notes defining rights of the holders of the Corporation's Senior Floating Rate Medium-Term Notes Due Nine Months or More from the Date of Issue, incorporated herein by reference to Exhibit 4(c) to the Corporation's Registration Statement on Form S-3 (Registration Numbers 33-48418 and 33-52571), Exhibit 4 to the Corporation's Current Report on Form 8-K dated June 15, 1994 and Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated December 16, 1994 (File No. 1-6522). 4(f) - Rights Agreement, dated as of June 28, 1990, between the Corporation and FNBB, as Rights Agent, and the description of the Rights, incorporated herein by reference to the Corporation's registration statement on Form 8-A relating to the Rights and to Exhibit 1 of such registration statement (File No. 1-6522). 4(g) - Amendment, dated December 12, 1995, to the Corporation's Rights Agreement, incorporated herein by reference to Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated July 25, 1996 (File No. 1-6522). 4(h) - Deposit Agreement, dated August 13, 1992 between the Corporation and FNBB, as Depositary, relating to the Corporation's Depositary Shares, each representing a one-tenth interest in the Corporation's 8.60% Cumulative Preferred Stock, Series E, incorporated herein by reference to Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated August 13, 1992 (File No. 1-6522). 4(i) - Deposit Agreement, dated as of June 30, 1993 between the Corporation and FNBB, as Depositary, relating to the Corporation's Depositary Shares, each representing a one-tenth interest in the Corporation's 7 7/8% Cumulative Preferred Stock, Series F, incorporated herein by reference to Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated June 24, 1993 (File No. 1-6522). -25- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 4(j) - Indenture dated as of November 26, 1996 defining the rights of holders of the Corporation's 8.25% Series A Junior Subordinated Deferrable Interest Debentures due 2026 and its 8.25% Series B Junior Subordinated Deferrable Interest Debentures due 2026, incorporated herein by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). 4(k) - Form of Certificate for the Corporation's 8.25% Series B Junior Subordinated Deferrable Interest Debentures due 2026, incorporated herein by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-4 (Registration Number 333- 19083). 4(l) - Certificate of Trust of BankBoston Capital Trust I dated as of November 20, 1996, incorporated herein by reference to Exhibit 4.3 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). 4(m) - Declaration of Trust of BankBoston Capital Trust I dated as of November 20, 1996, incorporated herein by reference to Exhibit 4.4 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). 4(n) - Amended and Restated Declaration of Trust of BankBoston Capital Trust I dated as of November 26, 1996, incorporated herein by reference to Exhibit 4.5 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). 4(o) - Form of Certificate for the 8.25% Series B Capital Securities of BankBoston Capital Trust I, incorporated herein by reference to Exhibit 4.5 to the Corporation's Registration Statement on Form S- 4 (Registration Number 333-19083). 4(p) - Form of Guarantee Agreement in respect of the 8.25% Series B Capital Securities of BankBoston Capital Trust I, incorporated herein by reference to Exhibit 4.7 to the Corporation's Registration Statement on Form S-4 (Registration Number 333- 19083). 4(q) - Registration Rights Agreement dated as of November 26, 1996, relating to the 8.25% Series A Capital Securities of BankBoston Capital Trust I, incorporated herein by reference to Exhibit 4.8 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). -26- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 4(r) - Indenture dated as of December 10, 1996 defining the rights of holders of the Corporation's 7 3/4% Series A Junior Subordinated Deferrable Interest Debentures due 2026 and its 7 3/4% Series B Junior Subordinated Deferrable Interest Debentures due 2026, incorporated herein by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(s) - Form of Certificate for the Corporation's 7 3/4% Series B Junior Subordinated Deferrable Interest Debentures due 2026, incorporated herein by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(t) - Certificate of Trust of BankBoston Capital Trust II dated as of December 3, 1996, incorporated herein by reference to Exhibit 4.3 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(u) - Declaration of Trust of BankBoston Capital Trust II dated as of December 3, 1996, incorporated herein by reference to Exhibit 4.4 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(v) - Amended and Restated Declaration of Trust of BankBoston Capital Trust II dated as of December 10, 1996, incorporated herein by reference to Exhibit 4.5 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(w) - Form of Certificate for the 7 3/4% Series B Capital Securities of BankBoston Capital Trust II, incorporated herein by reference to Exhibit 4.5 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(x) - Form of Guarantee Agreement in respect of the 7 3/4% Series B Capital Securities of BankBoston Capital Trust II, incorporated herein by reference to Exhibit 4.7 to the Corporation's Registration Statement on Form S-4 (Registration Number 333- 19111). 4(y) - Registration Rights Agreement dated as of December 10, 1996, relating to the 7 3/4% Series A Capital Securities of BankBoston Capital Trust II, incorporated herein by reference to Exhibit 4.8 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). -27- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 10(a) - Bank of Boston Corporation 1982 Stock Option Plan, as amended, effective February 13, 1995, incorporated herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(b) - Bank of Boston Corporation 1986 Stock Option Plan, as amended, effective February 13, 1995, incorporated herein by reference to Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(c) - Bank of Boston Corporation and its Subsidiaries Performance Recognition Opportunity Plan, as amended effective June 23, 1994, incorporated herein by reference to Exhibit 10(c) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(d) - Bank of Boston Corporation Executive Deferred Compensation Plan, as amended, effective June 23, 1994, incorporated herein by reference to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1- 6522).* 10(e) - The First National Bank of Boston Bonus Supplemental Employee Retirement Plan, as amended, through June 23, 1994, incorporated herein by reference to Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(f) - Description of the Corporation's Supplemental Life Insurance Plan, incorporated herein by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988 (File No. 1-6522).* 10(g) - The First National Bank of Boston Excess Benefit Supplemental Employee Retirement Plan, as amended, effective June 23, 1994, incorporated herein by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(h) - Bank of Boston Corporation 1991 Long-Term Stock Incentive Plan, as amended, effective February 13, 1995, incorporated herein by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1- 6522).* ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -28- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 10(i) - Bank of Boston Corporation Relocation Policy, as amended through October, 1990, incorporated herein by reference to Exhibit 10(j) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 1-6522).* 10(j) - Description of the Corporation's Supplemental Long-Term Disability Plan effective as of February 10, 1994, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-6522).* 10(k) - Bank of Boston Corporation's Director Stock Award Plan effective as of January 1, 1995, incorporated herein by reference to Exhibit 10(m) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(l) - Form of Severance Agreement for certain officers, incorporated herein by reference to Exhibit 10(a) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 1-6522).* 10(m) - Form of Severance Agreement for certain officers, incorporated herein by reference to Exhibit 10(b) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 1-6522).* 10(n) - Bank of Boston Corporation Directors Deferred Compensation Plan effective March 28, 1991, incorporated herein by reference to Exhibit 10(q) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(o) - The First National Bank of Boston Directors Deferred Compensation Plan effective March 28, 1991, incorporated herein by reference to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1- 6522).* 10(p) - Bank of Boston Corporation 1996 Long-Term Incentive Plan effective as of January 1, 1997, incorporated herein by reference to Exhibit G to the Joint Proxy Statement-Prospectus included in the Corporation's Registration Statement on Form S-4 (Registration No. 333-01761).* ------------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -29- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 10(q) - 1978 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended, incorporated herein by reference to Exhibit 10.1 to BayBanks' Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-959).* 10(r) - Amendment dated October 27, 1994 to 1978 Stock Option Plan for Key Employees of BayBanks, Inc. and Affiliates, incorporated herein by reference to Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(s) - 1988 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended, incorporated herein by reference to Exhibit 10.2 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(t) - BayBanks, Inc., Incentive Compensation Plan, as amended, incorporated herein by reference to Exhibit 10.5 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(u) - BayBanks Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 19.6 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 (File No. 0-959).* 10(v) - First Amendment dated February 26, 1992, to BayBanks Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.8 to BayBanks' Annual Report on Form 10- K for the year ended December 31, 1991 (File No. 0-959).* 10(w) - Second Amendment dated July 19, 1994 to BayBanks Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.2 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 0-959).* 10(x) - Third Amendment dated October 27, 1994 to BayBanks Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.8 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* ------------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -30- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 10(y) - Fourth Amendment dated December 10, 1996 to BayBanks Supplemental Executive Retirement Plan.* 10(z) - Fifth Amendment dated November 27, 1996 to BayBanks Supplemental Executive Retirement Plan.* 10(aa) - BayBanks Profit Sharing Excess Benefit Plan, incorporated herein by reference to Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No. 0-959).* 10(bb) - First Amendment to BayBanks Profit Sharing Excess Benefit Plan, incorporated herein by reference to Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 0-959).* 10(cc) - BayBanks Deferred Payment Plans Trust Agreement, incorporated herein by reference to Exhibit 19 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File No. 0- 959).* 10(dd) - First Amendment dated October 27, 1994 to BayBanks Deferred Payment Plans Trust Agreement, incorporated herein by reference to Exhibit 10.10 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(ee) - Employment Agreement dated as of December 12, 1995 by and among the Corporation, BayBanks, Inc., and William M. Crozier, Jr., incorporated herein by reference to Exhibit 99(d) to the Corporation's Registration Statement on Form S-4 (Registration No. 333-01761).* 10(ff) - Lease dated as of September 1, 1991 between The First National Bank of Boston and Equitable Federal Street Realty Company Limited Partnership, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 1-6522). 10(gg) - Amendment of Lease dated as of July 2, 1993 between The First National Bank of Boston and Equitable Federal Street Realty Company Limited Partnership. ------------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -31- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 10(hh) - Amendment of Lease dated as of March 31, 1994 between The First National Bank of Boston and Equitable Federal Street Realty Company Limited Partnership. 10(ii) - Amendment of Lease dated as of April 1, 1994 between The First National Bank of Boston and Equitable Federal Street Realty Company Limited Partnership. 10(jj) - Amendment of Lease dated as of March 31, 1996 between The First National Bank of Boston and Equitable Federal Street Realty Company Limited Partnership. 10(kk) - Amendment of Lease dated as of October 1, 1996 between The First National Bank of Boston and Equitable Federal Street Realty Company Limited Partnership. 11 - Computation of earnings per common share. 12(a) - Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits). 12(b) - Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits). 12(c) - Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (excluding interest on deposits). 12(d) - Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (including interest on deposits). 13 - Pages 20 through 48 and 50 through 80 of the Corporation's 1996 Annual Report to Stockholders. 21 - List of subsidiaries of Bank of Boston Corporation. 23 - Consent of Independent Accountants. 24 - Power of attorney of certain officers and directors (included on pages II-1 through II-2). -32- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(3) Exhibits (cont'd) 27 - Financial Data Schedule 99 - Notice of Annual Meeting and Proxy Statement for the Annual Meeting of the Corporation's Stockholders to be held April 24, 1997, incorporated herein by reference to the Corporation's filing under Regulation 14A of the Exchange Act. (File No. 1-6522). (b) During the fourth quarter of 1996, the Corporation filed one Current Report on Form 8-K. The current report, dated October 17, 1996, contained information pursuant to items 5 and 7 of Form 8-K. The Corporation also filed a Current Report on Form 8-K dated January 16, 1997, which contained information pursuant to items 5 and 7 of Form 8-K. -33- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, and the Commonwealth of Massachusetts, on the 19th day of March, 1997. BANK OF BOSTON CORPORATION By /s/ CHARLES K. GIFFORD ----------------------------- (Charles K. Gifford) (Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates listed below. By so signing, each of the undersigned, in his or her capacity as a director or officer, or both, as the case may be, of the Corporation, does hereby appoint Charles K. Gifford, William M. Crozier, Jr., Henrique de Campos Meirelles, William J. Shea, Kathleen M. McGillycuddy, Robert T. Jefferson and Gary A. Spiess, and each of them severally, or if more than one acts, a majority of them, his or her true and lawful attorneys or attorney to execute in his or her name, place and stead, in his or her capacity as a director or officer or both, as the case may be, of the Corporation, any and all amendments to said report and all instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises as fully and to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and approving the acts of said attorneys and each of them.
SIGNATURE TITLE DATE ----------- ----- ------ /s/ CHARLES K. GIFFORD Chief Executive Officer and - -------------------------------- Director (Chief Executive March 19, 1997 (Charles K. Gifford) Officer) /s/ WILLIAM M. CROZIER, JR. Chairman of the Board March 19, 1997 - -------------------------------- and Director (William M. Crozier, Jr.) /s/ HENRIQUE DE CAMPOS MEIRELLES President and Chief Operating - -------------------------------- Officer and Director March 19, 1997 (Henrique de Campos Meirelles) /s/ WILLIAM J. SHEA Vice Chairman, Chief Financial - -------------------------------- Officer and Treasurer (Chief (William J. Shea) Financial Officer) March 19, 1997 /s/ ROBERT T. JEFFERSON - -------------------------------- Comptroller(Chief Accounting March 19, 1997 (Robert T. Jefferson) Officer)
II-1 SIGNATURE TITLE DATE --------- ----- ---- /s/ WAYNE A. BUDD Director March 19, 1997 - ------------------------- (Wayne A. Budd) /s/ JOHN A. CERVIERI JR. Director March 19, 1997 - ------------------------- (John A. Cervieri Jr.) /s/ WILLIAM F. CONNELL Director March 19, 1997 - ------------------------- (William F. Connell) /s/ GARY L. COUNTRYMAN Director March 19, 1997 - ------------------------- (Gary L. Countryman) /s/ ALICE F. EMERSON Director March 19, 1997 - ------------------------- (Alice F. Emerson) /s/ THOMAS J. MAY Director March 19, 1997 - ------------------------- (Thomas J. May) /s/ DONALD F. MCHENRY Director March 19, 1997 - ------------------------- (Donald F. McHenry) /s/ PAUL C. O'BRIEN Director March 19, 1997 - ------------------------- (Paul C. O'Brien) /s/ THOMAS R. PIPER Director March 19, 1997 - ------------------------- (Thomas R. Piper) /s/ JOHN W. ROWE Director March 19, 1997 - ------------------------- (John W. Rowe) /s/ RICHARD A. SMITH Director March 19, 1997 - ------------------------- (Richard A. Smith) /s/ GLENN P. STREHLE Director March 19, 1997 - ------------------------- (Glenn P. Strehle) /s/ WILLIAM C. VAN FAASEN Director March 19, 1997 - ------------------------- (William C. Van Faasen) /s/ THOMAS B. WHEELER Director March 19, 1997 - ------------------------- (Thomas B. Wheeler) /s/ ALFRED M. ZEIEN Director March 19, 1997 - ------------------------- (Alfred M. Zeien) II-2 EX-10.Y 2 FOURTH AMENDMENT TO THE EXECUTIVE RETIREMENT PLAN EXHIBIT 10(y) BAYBANKS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOURTH AMENDMENT The BayBanks Supplemental Executive Retirement Plan, as heretofore amended, is hereby further amended effective as of July 1, 1996, as follows: 1. The parenthetical phrase in the second sentence of the second paragraph of Section 6.2(b) is amended in its entirety to read as follows: "(determined under Section 4.1 but without applying the subsection 4.1(a)(iii) offset for the participant's Retirement Plan accrued benefit)". 2. The Plan is amended by adding the following new Schedule A: "SCHEDULE A Special Retirement Benefits under the Early Retirement Window Program A.1 Applicability of this Schedule. This Schedule A provides ------------------------------ enhanced benefits for persons who are participants in this Plan who retire during a limited time period. The enhanced benefits (which are specified in Section A.3) are available only to participants who meet the requirements specified in Section A.2. A participant who does not meet the requirements specified in Section A.2 will not be eligible for the enhanced benefits provided under this Schedule A. A participant who elects to participate in the Early Retirement Window Program will receive the benefits payable under this Schedule A in lieu of benefits payable to such participant under the provisions of Article 4. A.2 Eligibility. ----------- (a) Each participant who meets each of the following requirements of this subsection (a) and who is not excluded from eligibility under subsection (b) below will receive the enhanced benefits specified in Section A.3: (i) Except as provided in subsection (c) below, as of July 1, 1996 and as of his date of retirement under this Schedule A, the participant is an active participant in the Plan. For purposes of the preceding sentence, an individual is not considered an active participant in the Plan as required if he retired or otherwise terminated employment before July 1, 1996, unless such individual had been rehired (as such term of "rehired" is defined by the regular personnel policies and practices of the Employer) prior to, and was again an active participant in the Plan on, July 1, 1996. (ii) As of July 1, 1996, the participant is at least age 52 and has at least 10 years of service. (iii) The participant files a signed Early Retirement Window Program election form with the Human Resources Department electing to participate in the Early Retirement Window Program, and such election form is filed no earlier than July 1, 1996 and no later than August 15, 1996 (or, if later, no later than the date that is six weeks after the date Early Retirement Window Program descriptive materials and a related personal estimate of benefits are sent by the Human Resources Department to the participant). (iv) The participant retires from active employment on the date specified below that is applicable to him: (A) Except as provided in subsection (B) below, all participants in the Early Retirement Window Program must retire from active employment on October 1, 1996. (B) Notwithstanding subsection (A) above, if a participant's continued services after October 1, 1996, are required for reasons of business necessity in order to complete the transition activities of the participant's business line related to the merger of BayBanks, Inc. with a subsidiary of Bank of Boston Corporation, a participant's retirement date may be extended by the head of the participant's business line to a date when such participant's transition duties are completed. Any such extended retirement date must be specified in writing by the head of the participant's business line in a notice filed with both the affected participant and the Human Resources Department, which notice also summarizes the business necessity requiring the extension. (b) Notwithstanding subsection (a) above, (i) participants in this plan who are assigned after the merger to the combined entity's Asset Management business unit (including Private Banking and Trust) are not eligible to participate in the Early Retirement Window Program, and (ii) any employee who has a written individual employment agreement with his Employer (or with any affiliate thereof) that provides for severance or termination pay for such employee is not eligible to participate in the Early Retirement Window Program. (c) Notwithstanding subsection (a)(i), any participant who retired or terminated employment on or after May 1, 1996 and before October 1, 1996, and who met the requirements of subsection (a) at his date of termination of employment (based on his actual age and number of years of service as of his actual date of termination without any additions to his age or years of service hereunder), will nevertheless receive the enhanced benefits provided under Section A.3, with such enhanced benefits (including monthly payments under Section A.3(b)) beginning effective October 1, 1996 (if payable in the form of a monthly annuity). In addition, each such participant will be given an opportunity to elect a lump sum payment of his enhanced benefit amount in accordance with Section A.3(c); provided that, if a participant electing a lump sum has received payments from the Plan before payment of such lump sum amount, the lump sum amount will be reduced to reflect the actuarial value of the payments already received (using the actuarial factors specified in Section A.3(c). If such a person dies before October 1, 1996, his surviving spouse's benefits (if applicable) will be determined under Section A.4(a)(i). 2 A.3 Early Retirement Window Program Special Benefits. ------------------------------------------------ (a) Each eligible participant who meets the requirements of Section A.2 will have his Plan benefits calculated under the following rules: (i) His benefit amount under Section 4.1 of the Plan will be determined as if such participant had three years of benefit service in addition to his number of years of benefit service as of his date of retirement under the Early Retirement Window Program. However, the maximum number of years of benefit service counted under Section 4.1 will not be changed by this Schedule A. (ii) For purposes of determining a participant's benefit under Section 4.1, a participant's final average annual earnings will be the higher of (A) his current annual rate of salary in effect on his retirement date plus his Incentive Compensation Plan eligibility percentage for 1996; or (B) his final average annual earnings under Section 4.6(b). (iii) For purposes of determining under any applicable provision of the plan the reduction (if any) in a participant's monthly benefit amount resulting from the commencement of payments before any specific age, the participant will be deemed to have three additional years of service and three additional years of age beyond his actual number of years of service and age as of his date of retirement under the Early Retirement Window Program. (iv) For purposes of determining a participant's benefit amount under Section 4. 1, in the case of a participant who retires under the Early Retirement Window Program during 1997, the participant's primary Social Security benefit will be computed as if the participant had retired in calendar year 1996 and as if the participant had the additional years of service and years of age provided for under subsection (iii) above. (b) Social Security Bridge Benefit. For purposes of determining the ------------------------------ reduction in benefits under this plan to reflect benefits payable under the Retirement Plan, the Social Security Bridge Benefit payable under Section H.3(b) of the Retirement Plan will be disregarded. (c) Form of Payment. In addition to the forms of payment of his --------------- retirement benefit available to a participant under the other provisions of this plan, if a participant is eligible to and elects to receive his Retirement Plan benefit in the form of a lump sum payment, his benefit under this plan also will be paid in the form of a lump sum payment that is actuarially equivalent in value to the participant's enhanced benefit amount calculated under the provisions of subsection (a) above. For purposes of determining such actuarially equivalent lump sum payment, the actuarial assumptions specified in Section H.3(c) of the Retirement Plan will be used (in lieu of the actuarial assumptions that would normally be used in converting benefit amounts from one form of payment to another). A.4 Special Rules. ------------- (a) Death. If a participant who is eligible for and has elected to ----- participate in the Early Retirement Window Program dies, the following rules will apply to determine any death benefits: 3 (i) if the participant dies before October 1, 1996, any death benefits will be determined under the applicable provisions of this plan (other than this Schedule A), and such death benefits (if any) will not reflect any enhanced benefits under this Schedule A; (ii) if the participant dies on or after October 1, 1996, any death benefits will be determined under the applicable provisions of this plan, but calculated using the enhancements of Section A.3(a). (b) Disability. If a participant who is eligible for and has elected ---------- to participate in the Early Retirement Window Program incurs a covered disability (as defined in Section 5. 1), the following rules apply: if the participant incurs a covered disability before the retirement date applicable to the participant under Section A.2(a)(iv), such participant may reject his election to participate in the Early Retirement Window Program, in which case his benefits under this plan will be determined in accordance with the provisions of Article 4 and the other applicable provisions of the plan (other than this Schedule A), or he may decide not to reject his election to participate in the Early Retirement Window Program, in which case he will be deemed to retire on the date such participant incurred such covered disability and he will receive the enhanced benefits provided under this Schedule A in accordance with its terms. (c) Social Security Adjustment Option. If an eligible participant who --------------------------------- has elected to participate in the Early Retirement Window Program elects the Social Security adjustment option form of payment under Section 6.2(c) of the Retirement Plan, the calculation of monthly benefit payments under this Plan before and after the participant reaches age 62 will reflect the Social Security bridge benefits payable to such participant under Section H.3(b) of the Retirement Plan." THE BAYBANKS CORPORATE COMPENSATION COMMITTEE By: /s/ ILENE BEAL -------------------- Ilene Beal, pursuant to authority delegated by the BayBanks Corporate Compensation Committee Dated: December 10, 1996 BayBanks, Inc. consents to the foregoing amendment. BAYBANKS, INC. By: /s/ ILENE BEAL -------------------- Ilene Beal Dated: December 10, 1996 4 EX-10.Z 3 FIFTH AMENDMENT TO THE EXECUTIVE RETIREMENT PLAN EXHIBIT 10(z) BAYBANKS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Fifth Amendment --------------- The BayBanks Supplemental Executive Retirement Plan is hereby amended effective as of January 1, 1996, as follows: 1. The introductory paragraph of subsection 4.1(e)(i) (preceding subsections (A), (B) and (C)) is amended in its entirety to read as follows: "(i) If a participant is terminated under circumstances that entitle him to benefits under the BayBanks Severance Benefits Plan (this reference and any other reference herein to the BayBanks Severance Benefits Plan will be deemed to include reference to any other contract or agreement, plan, arrangement or personnel policy or practice that provides severance benefits, separation pay or the like to a participant upon termination of employment or constructive discharge, which contract or agreement, plan, arrangement or personnel policy or practice replaces the BayBanks Severance Benefits Plan for such participant), then: 2. Subsection 4.1(e)(i)(A) is amended by deleting the words "BayBanks, Inc. Severance Benefits Plan", and by inserting in their place the words "BayBanks Severance Benefits Plan". THE CORPORATE COMPENSATION COMMITTEE OF BAYBANKS, INC. By: /s/ ILENE BEAL (Authorized Signatory) -------------------------------------- Dated: November 27, 1996 --------------------- BayBanks, Inc. hereby consents to the foregoing Fifth Amendment. BAYBANKS, INC. By: /s/ ILENE BEAL --------------------- Dated: November 27, 1996 --------------------- EX-10.GG 4 AMENDMENT OF LEASE DATED JULY 2, 1993 EXHIBIT 10(gg) AMENDMENT OF LEASE ------------------ THIS AMENDMENT OF LEASE (this "Amendment") effective as of the 2nd day of July, 1993 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership, having an address at 75 State Street, Boston, Massachusetts 02109 ("Landlord") and THE FIRST NATIONAL BANK OF BOSTON, a national banking association duly organized and existing under the laws of The United States of America having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date of September 1, 1991 (the "Lease"), covering certain premises at 100 Federal Street, Boston, Massachusetts (the "Building"). The parties desire to add the entire 28th and 35th Floors of the Building to the Premises under the Lease and to amend the Lease in certain other respects, all as hereinafter set forth. Capitalized terms not defined herein shall have the same meaning ascribed to them in the Lease. WITNESSETH: ---------- NOW, THEREFORE, the parties hereby agree as follows: A. Additional 28th Floor Premises ------------------------------ 1. Effective on the "28th Floor Commencement Date" (defined herein), there shall be added to the Premises under the Lease the portion of the 28th Floor of the Building shown as the "Additional 28th Floor Premises" on Exhibit A --------- hereto (the "Additional 28th Floor Premises"). The Additional 28th Floor Premises consists of approximately 14,392 rentable square feet of space. All terms and provisions of the Lease (as amended hereby) shall be applicable to the Additional 28th Floor Premises, including, without limitation, Tenant's obligation to make Operating Expense and Imposition payments with respect to the Additional 28th Floor Premises in accordance with Section 2 of Article III of the Lease, except: (i) the term for the Additional 28th Floor Premises shall be the period commencing on the 28th Floor Commencement Date and ending on the last day of the month in which the tenth (10th) anniversary of the 28th Floor Commencement Date shall occur (the "Additional 28th Floor Premises Term"); (ii) Tenant shall have no right to extend the term of the Lease with respect to the Additional 28th Floor Premises beyond the Additional 28th Floor Premises Term; (iii) the Additional 28th Floor Premises shall not be considered to be part of either Space A or Space B; and (iv) the Base Rent and the Tenant Improvement Allowance for the Additional 28th Floor Premises shall be as set forth in Sections 2 and 3 hereof. 2. Commencing on the 28th Floor Commencement Date, Tenant shall pay Base Rent for the Additional 28th Floor Premises at the rate of $418,375.44 per annum (i.e., $29.07 per s.f. of the Additional 28th Floor Premises) during the entire Additional 28th Floor Premises Term. 3. Landlord shall provide Tenant with an improvement allowance for the Additional 28th Floor Premises in the amount of $633,248 (i.e., $44.00 per s.f. of the Additional 28th Floor Premises). Such allowance shall be subject to the provisions regarding the Tenant Improvement Allowance set forth in Section 3 of Article XVI of the Lease. B. Relocated 28th Floor Space -------------------------- 4. Upon the 28th Floor Commencement Date, the portion of Floor B1 of the Building shown on Exhibit B hereto as the "Deleted Floor B1 Space" (the --------- "Deleted Floor B1 Space"), consisting of approximately 13,082 rentable square feet of space, shall cease to be part of the Premises under the Lease, and there shall be added to the Premises under the Lease the portion of the 28th Floor of the Building shown as the "Relocated 28th Floor Space" on Exhibit A attached --------- hereto (the "Relocated 28th Floor Space"). The Relocated 28th Floor Space consists of approximately 13,082 rentable square feet. The Deleted Floor B1 Space shall be delivered to Landlord on the 28th Floor Commencement Date in "as is" condition. Tenant hereby consents to the use of the Deleted Floor B1 Space as a fitness center. 5. All terms and provisions of the Lease (as amended hereby) shall be applicable to the Relocated 28th Floor Space, including, without limitation, Tenant's obligation to make Operating Expense and Imposition payments with respect to the Relocated 28th Floor Space in accordance with Section 2 of Article III of the Lease, except as modified by the following Sections of this Amendment. The Relocated 28th Floor Space shall be included in Space B under the Lease, and the term therefor shall expire on the same date (i.e., August 31, 2009) scheduled for Areas of the Premises included in Space B. 6. Commencing on the 28th Floor Commencement Date, Schedule R to the Lease is hereby amended by adding the following thereto: Relocated 28th Floor Space Rent Per S.F. - -------------------------- ------------- From 28th Floor Commencement Date through Year 4: $26.50 Year 5 and Year 6: $28.50 Year 7: $35.00 Year 8: $36.50 Year 9: $38.00 Year 10: $39.50 Year 11: $41.00 Year 12: $42.50 Year 13: $44.00 Year 14: $45.50 Year 15: $47.00 Year 16: $48.50 Year 17: $50.00 Year 18: $51.50 TI per S.F.: $47.50 Note: Year 1 is 9/1/91-8/31/92 Year 2 is 9/1/92-8/31/93 etc. -2- 7. Landlord shall provide Tenant with a Tenant Improvement Allowance for the Relocated 28th Floor Space in the amount specified in Schedule R as amended hereby. Such allowance shall be subject to the provisions regarding the Tenant Improvement Allowance set forth in Section 3 of Article XVI of the Lease. 8. Except for those items included in Schedule COND (the "Schedule COND 28th Floor Exceptions") which (a) require information or input from Tenant as to Tenant's choice of design, location of installation, type or amount of materials, or decisions by Tenant regarding removal of existing improvements, or (b) which cannot be installed until after Tenant has completed its design plans for the space on the 28th Floor or provided Landlord with the necessary access to complete the same, or (c) which are normally performed during the course of Tenant's construction, Landlord shall perform the work in the Additional 28th Floor Premises and the Relocated 28th Floor Premises necessary to bring such Premises into the condition required by Schedule COND to the Lease (such work minus the Schedule COND 28th Floor Exceptions shall be referred to collectively hereinafter as "Landlord's 28th Floor Work"). Landlord shall make reasonable efforts to substantially complete Landlord's 28th Floor Work prior to September 30, 1993. Landlord shall promptly complete the Schedule COND 28th Floor Exceptions in the normal course in conjunction with Tenant's construction of its improvements but only after Tenant has completed and presented to Landlord Tenant's design plans for the space on the 28th Floor. 9. The "28th Floor Commencement Date" shall be January 15, 1994. If on or before September 30, 1993, Landlord (i) shall not have substantially completed "Landlord's 28th Floor Work" or (ii) shall not have delivered possession of the 28th Floor to Tenant for the purpose of completing Tenant's work (such possession to be concurrent with possession by Landlord to permit it to complete the Schedule COND 28th Floor Exceptions), Landlord shall have no liability therefor and this Amendment of Lease shall continue in full force and effect, except that, in such event and notwithstanding anything to the contrary contained in this Amendment, for all purposes under this Amendment the term "28th Floor Commencement Date" shall mean January 15, 1994 plus the number of days between September 30, 1993 and the later of (i) the date Landlord's 28th Floor Work shall be substantially complete and (ii) the date that Landlord shall have so delivered possession of the 28th Floor to Tenant for the purpose of completing Tenant's work. 10. Notwithstanding anything to the contrary contained in this Amendment, Tenant may enter the premises on the 28th Floor of the Building prior to the 28th Floor Commencement Date to perform Tenant's improvements therein including during the times that Landlord is performing work therein (so long as Tenant gives reasonable prior notice to Landlord), provided that (i) Tenant does not interfere with Landlord's work, and (ii) such entry and any work performed by Tenant therein shall -3- be subject to the terms and conditions of the Lease, including, without limitation, the provisions of the Lease regarding Tenant's insurance obligations and Tenant's construction set forth in Section 11 of Article XII and Section 6 of Article V thereof, respectively. C. 35th Floor Premises. -------------------- 11. Effective on the "35th Floor Commencement Date" (defined herein) there shall be added to the Premises under the Lease the entire 35th Floor of the Building shown as the "35th Floor Premises" on Exhibit C hereto (the "35th --------- Floor Premises"). The 35th Floor Premises consists of approximately 28,147 rentable square feet of space. All terms and provisions of the Lease (as amended hereby) shall be applicable to the 35th Floor Premises, including, without limitation, Tenant's obligation to make Operating Expense and Imposition payments with respect to the 35th Floor Premises in accordance with Section 2 of Article III of the Lease, except: (i) the term for the 35th Floor Premises shall be the period commencing on the 35th Floor Commencement Date and ending on October 31, 2005 (the "35th Floor Premises Term"); (ii) Tenant shall have no right to extend the term of the Lease with respect to the 35th Floor Premises beyond the 35th Floor Premises Term; (iii) the 35th Floor Premises shall not be considered to be part of either Space A or Space B; and (iv) the Base Rent and the Tenant Improvement Allowance for the 35th Floor Premises shall be as set forth in Sections 12 and 13 hereof. 12. Tenant shall pay Base Rent for the 35th Floor Premises at the rate of $900,704 per annum (i.e., $32.00 per square foot of the 35th Floor Premises) during the entire 35th Floor Premises Term. Notwithstanding the foregoing sentence, Tenant shall not be obligated to pay Operating Expense and Imposition payments or Base Rent for the 35th Floor Premises for the period (the "35th Floor Free Rent Period") commencing on the 35th Floor Commencement Date and ending on March 31, 1994, provided, however, if on or before October 15, 1993, Landlord (i) shall not have substantially completed "Landlord's 35th Floor Work" (defined herein) or (ii) shall not have delivered possession of the 35th Floor Premises to Tenant for the purpose of completing Tenant's work (such possession to be concurrent with possession by Landlord to permit it to complete the Schedule COND 35th Floor Exceptions), the 35th Floor Free Rent Period shall be extended by the number of days between October 15, 1993 and the later of (i) the date Landlord's 35th Floor Work shall be substantially complete and (ii) the date that Landlord shall have so delivered possession of the 35th Floor Premises to Tenant for the purpose of completing Tenant's work. 13. Landlord shall provide Tenant with an improvement allowance for the 35th Floor Premises in the amount of $1,238,468 (i.e., $44.00 per square foot of the 35th Floor Premises). Such allowance shall be subject to the provisions regarding the Tenant Improvement Allowance set forth in Section 3 of Article XVI of the Lease. 14. Except for those items included in Schedule COND (the "Schedule COND 35th Floor Exceptions") which (a) require information or input from Tenant as to Tenant's choice of design, location of installation, type or amount of materials, or decisions by Tenant regarding removal of existing improvements, or (b) which cannot be -4- installed until Tenant has completed its design plans for the the 35th Floor Premises or provided Landlord with the necessary access to complete the same, or (c) which are normally performed during the course of Tenant's construction, Landlord shall perform the work in the 35th Floor Premises necessary to bring such premises into the condition required by Schedule COND to the Lease (such work minus the Schedule COND 35th Floor Exceptions shall be referred to collectively hereinafter as "Landlord's 35th Floor Work"). Landlord shall make reasonable efforts to substantially complete the Landlord's 35th Floor Work prior to September 30, 1993. Landlord shall promptly complete the Schedule COND 35th Floor Exceptions in the normal course in conjunction with Tenant's construction of its improvements but only after Tenant has completed and presented to Landlord Tenant's design plans for the 35th Floor Premises. 15. The "35th Floor Commencement Date" shall be the later of (a) the date Landlord shall have substantially completed the Landlord's 35th Floor Work and shall have delivered possession of the 35th Floor Premises to Tenant for the purpose of completing Tenant's work (such possession to be concurrent with possession by Landlord to permit it to complete the Schedule COND 35th Floor Exceptions) and (b) the earlier of (i) November 1, 1993 or (ii) the date that Tenant shall occupy all or any portion of the 35th Floor Premises for Tenant's intended use, it being understood that so long as Landlord has completed Landlord's 35th Floor Work and the Schedule COND 35th Floor Exceptions, Tenant, at Tenant's option, may occupy the 35th Floor Premises for Tenant's intended use prior to November 1, 1993. Notwithstanding anything to the contrary contained in this Amendment, Tenant may enter the 35th Floor Premises prior to the 35th Floor Commencement Date to perform Tenant's improvements therein, including during the times that Landlord is performing work therein (so long as Tenant gives Landlord reasonable prior notice), provided that (i) Tenant does not interfere with Landlord's work, and (ii) such entry and any work performed by Tenant therein shall be subject to the terms and conditions of the Lease, including, without limitation, the provisions of the Lease regarding Tenant's insurance obligations and Tenant's construction set forth in Section 11 of Article XII and Section 6 of Article V thereof, respectively. 16. Notwithstanding any term or provision of the preceding Sections of this Amendment of Lease to the contrary, Landlord's and Tenant's rights and obligations with respect to the Additional 28th Floor Premises, the Relocated 28th Floor Space, and the Deleted Floor B1 Space are expressly conditioned upon and subject to the execution and delivery of a lease for the Deleted Floor B1 Space between Landlord and Fitcorp Health Care Centers, Inc. (or an affiliate)("Fitcorp") on or before September 30, 1993 for use as a fitness center, it being understood that (i) if a lease for the Deleted Floor B1 Space with Fitcorp shall not be so executed and delivered on or before September 30, 1993, Landlord shall have no liability therefor and, except as provided in Section 18 hereof, Sections 1 through 10 of this Amendment of Lease shall be null and void, of no force or effect, and without recourse to the parties hereto, and (ii) in any event, the provisions of this Amendment of Lease (i.e., Sections 11, 12, 13, 14 and 15) relating to the 35th Floor Premises shall remain in full force and effect. Landlord shall promptly notify Tenant in the event that either (i) a lease for the Deleted Floor B1 Space -5- with Fitcorp is not executed and delivered by September 30, 1993 or (ii) negotiations with Fitcorp for the Deleted Floor B1 Space are terminated sooner than September 30, 1993. 17. Tenant represents and warrants to Landlord that Tenant has dealt with no broker, finder or other person claiming to be entitled to a commission in connection with this Amendment of Lease other than U.S. Equities Realty, Inc., the compensation of which shall be paid by Tenant. Landlord represents to Tenant that it has dealt with no broker, finder or other person claiming to be entitled to a commission in connection with this Lease other than U.S. Equities Realty, Inc. 18. Notwithstanding any terms or provisions of this Lease to the contrary, including, without limitation, Section 16 hereof, if requested by notice from Tenant given prior to August 31, 1993, Landlord shall deliver to Tenant the entire 28th Floor (i.e., the Additional 28th Floor Premises and the Relocated 28th Floor Space) (collectively, the "28th Floor Option Space") for leasing by Tenant on the same terms and provisions (except Section 16) applicable hereunder to the Additional 28th Floor Premises, except that: (i) the Base Rent for the 28th Floor Option Space shall be $798,669.18 per annum (i.e., $29.07 per s.f. of the 28th Floor Option Space); (ii) in lieu of the allowance set forth in Section 3 of this Amendment of Lease, Landlord shall provide Tenant with a Tenant Improvement Allowance in the amount of $1,208,856 (i.e., $44.00 per s.f. of the 28th Floor Option Space) and (iii) the Deleted Floor B1 Space shall continue to be part of the Premises under the Lease. Such allowance shall be subject to the provisions regarding the Tenant Improvement Allowance set forth in Section 3 of Article XVI of the Lease. If, however, (i) Tenant so exercises its option to lease the 28th Floor Option Space and (ii) a lease for the Deleted Floor B1 Space is executed and delivered with Fitcorp on or before September 30, 1993, (x) all terms and provisions of this Amendment of Lease (except for Section 16 and the prior provisions of this Section 18) applicable to Relocated 28th Floor Space and the Additional 28th Floor Premises shall apply to Tenant's leasing of space on the 28th Floor of the Building just as if (a) Tenant had not exercised its option to lease the 28th Floor Option Space and (b) Tenant were separately leasing the Additional 28th Floor Premises and the Relocated 28th Floor Space in accordance with such terms and provisions, and (y) all terms and provisions of this Amendment of lease applicable to the Deleted Floor B1 Space shall remain in full force and effect. 20. Upon request, each of Landlord and Tenant shall execute and deliver an amendment to the Notice of Lease previously executed in connection with the Lease in order to reflect Tenant's leasing of additional space in the Building under this Amendment of Lease. 21. Except as only expressly amended hereby, the Lease shall continue in full force and effect. WITNESS the execution hereof as an instrument under seal as of the date first above written. -6- LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP By: 100 Federal Street Realty Corporation, its General Partner By: /s/ CLARENCE T. HARWOOD ------------------------- Its President TENANT: THE FIRST NATIONAL BANK OF BOSTON By: /s/ ROBERT L. CHAMPION ------------------------ Its Director, Corporate Administrative Services Hereunto duly authorized -7- Exhibit A --------- [Floor plan showing relocated 28th Floor space and -------------------------------------------------- additional 28th floor premises] ------------------------------ Exhibit B --------- [Floor plan showing deleted Floor B-1 space] Exhibit C --------- [Floor plan showing 35th Floor premises] ---------------------------------------- EX-10.HH 5 AMENDMENT OF LEASE DATED MARCH 31, 1994 EXHIBIT 10(hh) AMENDMENT OF LEASE ------------------ THIS AMENDMENT OF LEASE effective as of March 31, 1994 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership having an address at 75 State Street, Boston, Massachusetts 02109 ("Landlord"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association duly organized and existing under the laws of the United States of America having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date as of September 1, 1991 (the "Original Lease") covering certain premises at 100 Federal Street, Boston, Massachusetts, as amended by a letter agreement dated February 5, 1992 and by an Amendment of Lease dated July 1, 1993 (as so amended, the Original Lease shall be referred to hereinafter as the "Lease"). The parties desire to amend the Lease in certain respects all as hereinafter set forth. Capitalized terms not defined herein shall have the meaning ascribed to them in the Lease. W I T N E S S E T H ------------------- Now therefore, Landlord and Tenant hereby agree that the Lease is hereby amended as follows: A. The Lease is hereby amended by adding the following Articles XXI and XXII thereto: ARTICLE XXI ----------- THE CAFETERIA ------------- 1. Schedule P is hereby amended by adding a new classification of Space entitled Space C, consisting of the area on Floor 1B of the Building presently used as a cafeteria and shown on Schedule C hereto. The term of the Lease for Space C shall be ten (10) years commencing on September 1, 1993 and expiring on August 31, 2003. Space C is leased "as is". Without limitation, Landlord has no obligation to bring Space C into the condition required by Schedule COND or into compliance with the Americans With Disabilities Act (except that Landlord shall bring the employee restrooms in Space C into compliance with such Act, if required) or to provide any Tenant Improvement Allowance. Except as provided in the preceding sentence, Tenant shall be responsible for compliance with all legal requirements applicable to Space C, including the Americans With Disabilities Act. Space C is not a part of Space A or Space B during such ten-year term. However, Tenant shall have the option to extend the term of the Lease for Space C for a period which will end with the expiration of the initial term of the Lease for Space B. Tenant shall exercise such option of extension by notice to Landlord given not later than the last to occur of (i) August 31, 2002 or (ii) the expiration of thirty (30) days following notice from Landlord to Tenant, given not sooner than July 1, 2002, that Tenant's option of extension has not been exercised by Tenant. However, in any event, the term of the Lease for Space C shall expire on the day scheduled therefor, viz., August 31, 2003, without extension if such option to extend shall not have been exercised prior to such day even if Landlord shall not have given Tenant such notice. If Tenant shall exercise such option to extend, then Space C shall become a part of Space B for purposes of establishing the duration of the term of the Lease for Space C and the rights of Tenant to extend the term of the Lease for Space C. 2. Tenant agrees, with reference to Space C (the "Cafeteria") and its operations, as follows: a) Promptly after the execution hereof, to carry out a program (the "Program") of capital improvements, including improvements to the kitchen facilities of the Cafeteria, as may be required, in Tenant's judgment, to up-grade the existing Cafeteria to first-class quality and modern condition. The Program shall be subject to Landlord's approval on the same basis, and subject to the same qualifications, as are applicable to alterations, additions and improvements to the Premises as provided in Section 6 of Article V, except that (x) the reference in the cited Section to "readapt[ation of] the Premises to normal office use" shall not be applicable, nor shall the reference to Schedule COND be applicable, (y) Landlord's rights of approval shall not extend to interior decor and layout (which shall not affect structure or building systems), except at the points where Space C is entered from Common Areas of the Building and any other areas which are visible from such Common Areas, and (z) "$500,000" appearing in the second paragraph of such Section 6 shall be deemed amended to "$100,000." Tenant has represented to Landlord that, in carrying out the Program, it is Tenant's intention that there shall be expended approximately SEVEN HUNDRED THOUSAND and 00/100 DOLLARS ($700,000.00). However, Tenant shall not be in breach of such representation so long as the aggregate expenditure in the modernization Program is in the order of magnitude of $700,000.00, the $700,000.00 figure not being intended as a minimum. b) Tenant agrees that the Cafeteria shall be operated in a first-class fashion and in accordance with Schedule REST to the Lease. To that end, Tenant agrees that, if the Cafeteria is operated by a food service management company and not by Tenant, such company shall be obligated in the instrument effecting the legal arrangement between such company and Tenant so to operate the Cafeteria and such instrument shall explicitly provide that a failure on the part of such company to meet such standards shall entitle Tenant to terminate further employment, or the license or subtenancy, of such company, as the case may be, for the operation of the Cafeteria. Tenant agrees to use all reasonable efforts to enforce the food service management company's undertaking relative to standards of operation. -2- Tenant has advised Landlord that Tenant has engaged Sodexho ("Sodexho"), to operate the Cafeteria and has provided Landlord with a copy of that part of Tenant's contract with Sodexho relating to the Cafeteria. If Tenant shall at any time propose to make an arrangement with some other food service operation, the identity of the operator thereof shall be subject to the prior approval of Landlord, such approval not unreasonably to be withheld. To facilitate the approval process, Tenant may submit to Landlord a list of proposed operators (together with information describing such operators and their other operations) for Landlord's approval in advance of the selection of a specific operator, and Landlord shall give or expressly deny such approval to those operators on such list within ten (10) business days after such list and information are presented to Landlord. The failure of Landlord to disapprove any operator on such list shall constitute approval thereof. Tenant may, thereafter, select any operator of the Cafeteria from such list which shall not have been disapproved without further approval by Landlord. Any dispute relative to the acceptability of a proposed food service management company or any one or more of such companies in a list thereof presented by Tenant shall be resolved by arbitration pursuant to Schedule ARB. The form of legal arrangement into which Tenant enters with any food service management company, i.e., whether by way of sublease, license, management contract or other formulation shall be at Tenant's discretion but the substance of such arrangement shall be subject to the approval of Landlord which Landlord agrees not unreasonably to withhold. Landlord's approval of any such proposed substitute food management company and the arrangement with reference thereto shall be given or explicitly denied not later than ten (10) business days after notice of the identity or identities of food service management companies (together with information describing such companies and their other operations) is given to Landlord and, in respect of the legal arrangement Tenant proposes to enter into, not later than ten (10) business days after delivery to Landlord of a true and correct copy of the instrument effecting the legal arrangement to the extent that such instrument relates to the Cafeteria (to the exclusion of any part of such instrument solely relating to other locations occupied by Tenant). The failure by Landlord to disapprove any proposed food service management company or the legal arrangement embodied in the instrument delivered to Landlord shall constitute approval thereof. Landlord's right of approval of the legal arrangement shall relate solely to the provisions of the relevant instrument intended to assure operation of the Cafeteria at least to the standards required hereby and by Schedule REST, and to the term of the arrangement between Tenant and such food service management company, to assure Landlord that no claim against Landlord or the Premises might arise upon the expiration or termination of this Lease, and Landlord shall have no right of disapproval in respect of any other aspect thereof. The instrument effecting the legal arrangement with the food service management company shall require such food service management company to maintain books and records appropriate to the computation of that part of Cafeteria Rent payable under paragraph b) of Section 3 below and to make such books and records for any lease year during which such -3- management company is operating Space C available to Tenant for inspection and audit by Landlord during the thirty-six (36) calendar month period following such lease year. 3. Tenant agrees to pay Landlord an annual rate of rent (the "Cafeteria Rent") for the Cafeteria space as follows: a) an amount equal to the Operating Expenses and Impositions of and for the Building per square foot of floor area for each twelve (12) calendar month period of the term of the Lease for Space C multiplied by twenty-nine thousand five hundred thirty-eight (29,538), which Landlord and Tenant agree is the number of square feet of rentable floor area in Space C. For any partial year, the annual rate of rent shall be prorated according to the number of days in such partial year Space C is under lease from Landlord to Tenant. Inasmuch as Operating Expenses are calculated on a calendar year basis, Operating Expenses which are payable by Tenant for any partial calendar year shall be based on a proration of Operating Expenses for the calendar year in which such partial calendar year falls. Impositions shall be payable according to that part of the term of this Lease for Space C which corresponds to the then current fiscal tax period, i.e., the period over which Impositions are payable; and Payment of that part of Cafeteria Rent on account of Operating Expenses shall be made monthly, in advance, concurrently with monthly installments on account of Base Rent. Each such monthly installment shall be based on the last computation of actual Operating Expenses, utilizing the same methodology of payment set forth in the grammatical paragraph beginning on Page 12 of this Lease as executed prior to any amendment thereof and ending on the top of Page 13 thereof for payments by Tenant on account of Operating Expenses, with an adjustment after the determination of actual Operating Expenses for any period during the term of this Lease for the Cafeteria space. Payment of Cafeteria Rent on account of Impositions shall be made concurrently with payments to be made on account of Impositions for other space leased to Tenant under this Lease, all as provided in Article X of this Lease; and b) the amount, if any, representing fifty percent (50%) of the net income received by Tenant for each calendar year during the term of this Lease for Space C, determined as follows. "Net income" means the amount by which payments to Tenant paid by the operator of the Cafeteria on account of the operation of the Cafeteria exceeds the sum of the following items: -- i) a sum equal to SEVENTY-FIVE THOUSAND and 00/100 DOLLARS ($75,000.00), representing an agreed upon allowance for Tenant's overhead in the operation of the Cafeteria, -4- ii) Cafeteria Rent payable for such calendar year, and iii) a sum on account of Tenant's Capital Cost, as hereinafter defined. The amount allocable to Tenant's Capital Cost for any calendar year shall be the total of: -- A) the annual amortization amount determined by dividing (i) the dollar amount of each capital expenditure for the Cafeteria made by Tenant prior to or during such calendar year by (ii) the number of years, expressed in terms of whole and fractional numbers, remaining in the initial or then extended term, as the case may be, at the time such capital item was first placed in service (the "Annual Amortization Amount"), and B) an annual interest amount (adjusted for partial years) equal to the product achieved by multiplying (i) each capital expenditure which is the subject of the computation in clause A) above minus the cumulated Annual Amortization Amounts theretofore recovered by deductions from net income by (ii) a percentage equal to the Base Rate plus two percent (2%). The purpose of making this computation is to take into account Tenant's cost of funds in making capital expenditures. If Tenant is operating the Cafeteria itself, then for the purpose of this Section 3, net income means, for each calendar year, the amount by which net income from such operation computed in accordance with generally accepted accounting principles determined before the payment of fifty percent (50%) of net income to Landlord and without any allowance for depreciation or amortization or for Tenant's general overhead exceeds the sum of (x) SEVENTY- FIVE THOUSAND and 00/100 DOLLARS ($75,000.00), representing an agreed upon dollar figure for Tenant's general overhead, and (y) the amount allocable to Tenant's Capital Cost for such calendar year computed as set forth in clause iii) above. Appropriate adjustments to any calculation called for by this Section 3 shall be made where any period of operation of the Cafeteria by Tenant is not for a full calendar year or is less than a full calendar year and for any period during which there is a total cessation of Cafeteria operations. For example, if the services of a food management company are terminated in the middle of a calendar year and Cafeteria operations are suspended for some period of time, the computation of net income shall be made for the "short" calendar year, and the deductions from net income for Tenant's general overhead and allocable Tenant's Capital Cost shall be proportionately adjusted. Not later than the later to occur of ninety (90) days following the end of each such calendar year and thirty (30) days following notice from Landlord to Tenant of the Operating Expenses and Impositions for such calendar year, Tenant shall compute the amount of rent, if any, remaining to be paid for such calendar year and, concurrently therewith, pay the same to Landlord. Tenant shall maintain appropriate records for the computation of net income from the Cafeteria and shall, on Landlord's reasonable request from time to time, make available to Landlord Tenant's records in support of Tenant's computation of net income during -5- the thirty-six (36) calendar month period following the expiration of a calendar year for which such request is made. 4. If Tenant shall exercise Tenant's option to extend the term of the Lease for Space C following the initial ten (10) year term thereof or following the expiration of the original term of the Lease for Space B, the annual rate of rent payable by Tenant to Landlord on account of Space C shall be the amount payable under Section 3 of this Article, Section 3 of Article III having no application to Space C. 5. Tenant shall have no obligation continuously to operate a Cafeteria in Space C but, in all events, Tenant shall be obligated to make payment of the annual rate of rent specified in paragraph a) of Section 3 above. If Tenant shall elect to cease operating Space C as a Cafeteria (except for temporary cessations thereof), Landlord shall have the right to recapture Space C by giving notice to Tenant of Landlord's desire so to do no later than six (6) months following Tenant's notice of Tenant's intention to cease operation of Space C as a Cafeteria. A cessation of operations which is not temporary in nature but where Tenant shall have failed to give notice to Landlord of Tenant's election to cease such operation shall be treated as a notice of such intention given as of such cessation. Any such recapture shall be effective as of the later of the date of which Tenant notifies Landlord that Tenant's intends to cease operation of Space C as a Cafeteria or the date of such notice from Landlord to Tenant. If Landlord elects so to recapture Space C, this Lease shall terminate as to Space C as of the effective date of recapture with the same force and effect as if this Lease, only as to Space C, had expired as of such effective recapture date, and Landlord shall have the right to use Space C for any use permitted under Article IV of this Lease, subject to all of the provisions of such Article. Likewise, if Landlord shall not so elect to recapture Space C, Tenant shall have the right to put Space C to such use as may be consistent with a first-class office building in the financial district of Boston. 6. If Landlord shall not have exercised Landlord's right of recapture thereof, Tenant shall have the right to sublet Space C with the prior consent of Landlord, such consent not unreasonably to be withheld. If any subletting for a use other than as a cafeteria shall occur, in lieu of the portion of the Cafeteria Rent described in Section 3 b) of this Article, the profit ("CS Profit") shall be divided between Landlord and Tenant on a 50%/50% basis. "CS Profit" is hereby defined to mean the amount by which rental received by Tenant from such subletting exceeds the leasing cost (the "Cafeteria Subleasing Cost") thereof. "Cafeteria Subleasing Cost" is hereby defined to mean Leasing Cost, as defined in Section 1 of Article VIII of this Lease, except the reference to Base Rent and additional rent referred to therein shall be treated as referring to Cafeteria Rent. Further, the last two grammatical paragraphs on Page 36 of this Lease, as originally executed prior to any amendment thereof, shall govern any obligation of Tenant to pay a share of profit to Landlord. A subletting by a Successor or Affiliate (except to a Successor or Affiliate) shall be subject to the provisions of this Section. The provisions of Section 1 (other than clause (g) and (i)) and the second sentence of Section 2 of said Article VIII shall have no application to Space C. The second sentence of clause (i) of Section 1 of said Article VIII, with respect to Space C only, shall be deemed to read: "Any governmental use, including, without limitation, an office of the Internal Revenue Service, Post Office or a United States employment office, shall be prohibited". -6- 7. If any such subletting shall occur, Landlord shall have the right to recapture Space C upon the expiration of the term of such subletting, as it may have been extended according to the terms of the sublease therefor, or earlier termination of each such sublease by giving notice to Tenant of Landlord's desire so to do no later than sixty (60) days following notice from Tenant (given not more than one (1) year prior to the expiration or earlier termination of such subletting) of the date of such expiration or earlier termination. Such recapture shall be on the terms and conditions provided above. ARTICLE XXII ------------ THE CAFE -------- 1. Schedule P is hereby further amended by adding another classification of Space entitled Space S, consisting of approximately the area on the Lobby Floor of the Building formerly occupied by First Shop and the space on the loading dock level currently known as the Captain's office, all of which area is shown on Schedule CAFE, to be used by Tenant as a cafe, serving food, beer and wine (but beer and wine shall not be served until after 5:00 P.M. of Monday through Friday of the week; beer and wine may be sold at any lawful time on Saturday and Sunday) and non-alcoholic beverages for consumption on the premises and on a take-out basis. When weather permits, Tenant shall also have the right to use outside areas adjoining Space S and shown on Schedule CAFE, as a cafe and for no other purpose. During such use, such outside areas shall be treated as a part of Space S for all purposes, except for the computation of minimum rent. If Tenant or the operator of Space S shall sell alcoholic beverages therein, (a) Tenant or such operator shall obtain and maintain, for the benefit and protection of and naming as insureds Landlord, Landlord's managing agent, Tenant and such operator, liquor liability insurance in form and amount reasonably satisfactory to Landlord, and (b) Tenant or such operator shall be responsible for obtaining all permits and approvals required to so sell alcoholic beverages. The term of the Lease for Space S shall commence on the Commencement Date (hereinafter defined) and expire on August 31, 2003. The commencement date for Space S shall be the first to occur of (x) the date when Tenant shall open for business in Space S and (y) the expiration of ninety (90) days following the date when Landlord delivers to Tenant possession of Space S free of any other occupant and in the condition in which Space S is required to be put by Landlord pursuant to Schedule TFI annexed hereto (except for those items in Schedule TFI which will be performed during or after Tenant's construction). However, the Commencement Date shall not occur, in any event, before substantial completion by Landlord of the Congress Street Lobby and Plaza renovation work which is required by the terms of the Lease. Space S is leased "as is", without any obligation on the part of Landlord to bring Space S into the condition required by Schedule COND, but subject to Landlord's obligations specified in Schedule TFI annexed hereto. No Tenant Improvement Allowance shall be payable by Landlord except as provided in Schedule TFI. Space S is not a part of Space A or Space B during such term expiring on August 31, 2003. -7- If at the time Tenant is and intends to continue operating Space S as a Cafe (and Tenant's exercise of the option hereinafter described shall constitute a representation that, at the time of such exercise, Tenant intends so to continue such use of Space S), Tenant shall have the option to extend the term of this Lease for Space S for a period which will end with the expiration of the initial term of the Lease for Space B. Tenant shall exercise such option of extension by notice to Landlord given not later than the last to occur of (i) August 31, 2002 or (ii) the expiration of thirty (30) days following notice from Landlord to Tenant, given not sooner than July 1, 2002, that Tenant's option of extension has not been exercised by Tenant. However, in any event, the term of the Lease for Space S shall expire on the day scheduled therefor, viz., August 31, 2003, without extension if such option to extend shall not have been exercised prior to such day even if Landlord shall not have given Tenant such notice. If Tenant shall exercise such option to extend, then Space S shall become a part of Space B for purposes of establishing the duration of the term of the Lease for Space S and the right of Tenant to extend the term of the Lease for Space S. Such rights of extension may be exercised only if at the time of such exercise Tenant is, and intends to continue, operating Space S as a Cafe (and Tenant's exercise of such rights of extension shall constitute a representation that, at the time of such exercise, Tenant intends so to continue such use of Space S). 2. With reference to Space S, Tenant agrees as follows: a) plans for the interior decor of Space S, and incidental decorative items proposed to be used on the Plaza which will be operated from time to time as a part of Space S, shall be submitted to Robert Brannen of Jung/Brannen Associates, Inc. for his approval and Tenant agrees to follow only those plans for such decor and incidental decorative features approved by Mr. Brannen or, if he is unavailable, by another individual associated with Jung/Brannen Associates, Inc. In other respects (i.e., other than interior decor), Tenant shall comply with the requirements of Section 6 of Article V of this Lease (even if the cost thereof shall be less than $500,000, but not if the cost thereof shall be less than $50,000); and b) the Cafe shall be operated in a first-class fashion suitable to and compatible with a first-class office building in the financial district of Boston. All of the terms and provisions of Section 2 b) of Article XXI shall be applicable to the Cafe, mutatis mutandis. ------- -------- Tenant has advised Landlord that Tenant presently intends to retain Sodexho to operate the Cafe for the account of Tenant, and Landlord hereby specifically approves Sodexho as an operator for the Cafe. If the engagement of Sodexho shall expire or is terminated, the applicable provisions of Section 2 b) of Article XXI shall govern the substitution of another food service management company, mutatis ------- mutandis. -------- -8- 3. Tenant shall have no obligation continuously to operate a Cafe in Space S but, in all events, Tenant shall be obligated to make payment of the annual rate of rent specified in Section 4 a) below. If no Cafe is being operated in Space S, no payment on account of percentage rent shall be a part of the annual rate of rent payable by Tenant. However, if, during the term of this Lease as to Space S, Tenant shall elect to cease operating Space S as a Cafe (other than a cessation of operations which is temporary in nature), Landlord shall have the right to recapture Space S by giving notice to Tenant of Landlord's desire so to do no later than twelve (12) months (except that, after the first five (5) Lease Years of the term of this Lease for Space S, the notice period shall be six (6) months rather than twelve (12) months) following Tenant's notice of Tenant's intention to cease operation in Space S as a Cafe. A cessation of operations which is not temporary in nature but where Tenant shall have failed to give notice to Landlord of Tenant's election to cease such operations shall be treated as a notice of such intention given as of such cessation. Any such recapture shall be effective as of the later of the date as of which Tenant notifies Landlord that Tenant intends to cease operation of Space S as a Cafe or the date of such notice from Landlord to Tenant. If Landlord elects so to recapture Space S, this Lease shall terminate as to Space S as of the effective date of recapture with the same force and effect as if this Lease as to Space S had expired as of such effective recapture date, and Landlord shall have the right use Space S for any use which may be consistent with the street floor of a first-class office building in the financial district of Boston, subject, however, to the provisions contained in Section 1 of Article IV of this Lease. Likewise, if Landlord shall not so elect to recapture Space S, Tenant shall have the right to put Space S to such use as may be consistent with the street floor of a first-class office building in the financial district of Boston, which use shall have been approved by Landlord, such approval not to be unreasonably withheld. 4. Tenant agrees to pay to Landlord an annual rent ("Cafe Rent") for Space S of the greater of: a) a minimum annual rent ("Minimum Annual Cafe Rent") at the rate of FIFTY-FOUR THOUSAND NINE HUNDRED NINETY and 00/100 DOLLARS ($54,990.00), representing $30.00 multiplied by 1,833, the number of square feet of rentable area in Space S, exclusive of 398 square feet of adjacent storage space, which is not to be included in the computation of annual rent, plus the amount, if any, by which experienced Operating Expenses and experienced Impositions for each calendar year (or partial calendar year) of the term of this Lease for Space S exceeds, respectively, the Cafe Operating Expenses Stop and the Cafe Impositions Expense Stop (the "Escalations"). The "Cafe Operating Expenses Stop" means experienced Operating Expenses per square foot as computed in accordance with Section 2 of Article III of this Lease for calendar year 1994. The "Cafe Impositions Stop" means Impositions (as defined in Article X of this Lease) experienced during tax fiscal year 1993 on the same per square foot basis. Both Stops shall be computed on a square foot basis, and the appropriate -9- computations made by reference to the number of square feet of rentable area for which minimum annual rent for the Cafe is charged; and b) the sum of the Minimum Annual Cafe Rent and the Escalations specified in paragraph a) above and a percentage rent equal to the amount, if any, by which eight percent (8%) of gross sales from Space S and the outdoor area exceeds Minimum Annual Cafe Rent and the Escalations payable for each calendar year (or partial calendar year) of the term of the Lease for Space S. The term "gross sales" means the total dollar amount of sales, for cash or on credit, of all sales of food, beverages, merchandise and service at, in, on or from Space S and the outdoor area but not including any sums collected and paid out by Tenant for any sales or retail tax imposed by governmental authority or gratuities collected by Tenant and paid out to employees. Payments on account of Minimum Annual Cafe Rent shall be made in monthly installments, in advance, on the first day of each calendar month during the term of the Lease for Space S equal to FOUR THOUSAND FIVE HUNDRED EIGHTY-TWO and 50/100 DOLLARS ($4,582.50), and a proportionate amount thereof for any fractional month during the term plus one-twelfth (1/12th) of amounts, if any, payable on account of Operating Expenses and Impositions Escalations, as reasonably estimated by Landlord for the relevant period. Landlord shall certify to Tenant the experienced Operating Expenses and experienced Impositions, each on a square foot basis, for each calendar year. Upon the later to occur of ninety (90) days following the end of each calendar year of the term of this Lease for Space S and thirty (30) days following notice from Landlord to Tenant of such experienced Operating Expenses and experienced Impositions, respectively, Tenant shall certify to Landlord the dollar amount of gross sales from Space S and the outdoor area for such calendar year and shall compute the amount of rent, if any, remaining to be paid for the relevant calendar year and, concurrently therewith, pay the same to Landlord or Landlord shall thereupon refund any overpayment of Escalations to Tenant. Tenant shall maintain appropriate records of gross sales from Space S and the outdoor area throughout the term of this Lease for Space S and shall, on Landlord's reasonable request from time to time, make available to Landlord Tenant's records in support of Tenant's certificate of gross sales during the thirty-six (36) calendar month period following the expiration of the calendar year for which such request is made. 5. If Tenant shall exercise Tenant's option to extend the term of this Lease for Space S following the initial ten (10) year term thereof or following the expiration of the original term of this Lease for Space B, the annual rate of rent payable by Tenant to Landlord on account of Space S shall be the amount payable under Section 4 of this Article, Section 3 of Article III having no application to Space S. 6. If Landlord shall not have exercised Landlord's right of recapture thereof upon Tenant discontinuance of a Cafe in Space S, Tenant shall have the right to sublet Space S with the prior consent of Landlord, such consent not unreasonably to be withheld. If any subletting shall occur, the profit ("Cafe Subletting Profit") shall be divided between Landlord and Tenant on a 50%/50% basis. "Cafe Subletting Profit" is hereby defined to mean the amount by which rental received by Tenant from such subletting exceeds the leasing cost (the "Cafe Subleasing -10- Cost") thereof. "Cafe Subleasing Cost" is hereby defined to mean Leasing Cost, as defined in Section 1 of Article VIII of this Lease, except the reference to Base Rent and additional rent referred to therein shall be treated as referring to Cafe Rent. Further, the last two grammatical paragraphs on Page 36 of this Lease, as originally executed prior to any amendment thereof, shall govern any obligation of Tenant to pay a share of profit to Landlord. A subletting by a Successor or Affiliate (except to a Successor or Affiliate) shall be subject to the foregoing provisions of this Section 6. The provisions of Section 1 (other than clauses (g) and (i)) and the second sentence of Section 2 of said Article VIII shall have no application to Space S. The second sentence of clause (i) of Section 1 of said Article VIII, with respect to Space S only, shall be deemed to read: "Any governmental use, including, without limitation, an office of the Internal Revenue Service, Post Office or a United States employment office, shall be prohibited." 7. If Tenant shall sublet Space S pursuant to Section 6 above, Landlord shall have the right to recapture Space S upon the expiration of the term of such sublease (as it may be extended pursuant to the provisions of such sublease) or earlier termination of each such sublease by giving notice to Tenant of Landlord's desire so to do no later than sixty (60) days following notice from Tenant (given not more than one (1) year prior to the expiration or earlier termination of such subletting) of the date of such expiration or earlier termination. Such recapture shall be on the terms and conditions provided above. B. The Schedules attached hereto and referred to in Articles XXI and XXII added to the Lease by this Amendment are hereby added to the Lease. C. Tenant agrees with Landlord that the operation of a sundries shop on Floor 1B of the Building is a permitted use of space on that Floor. D. Except only as expressly amended hereby, the Lease shall continue in full force and effect. WITNESS the execution hereof as an instrument under seal as of the date first above written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP By: 100 FEDERAL STREET REALTY CORPORATION, Its General Partner By: /s/ CLARENCE T. HARWOOD ------------------------- Its President -11- TENANT: THE FIRST NATIONAL BANK OF BOSTON By: /s/ THEODORE M. EDSON ----------------------- Its Director, Facilities 36697 -12- SCHEDULE TFI ------------ Improvements to Lobby Cafe Area ------------------------------- Landlord and Tenant have agreed that the division of responsibility for the lobby cafe area will be as follows: 1. Landlord will provide, at its sole cost, all the requirements of Schedule COND, as appropriate, and the following: a. An exterior door to the plaza in the location specified on Schedule DOOR which complies with the Americans with Disabilities Act. b. Final connections to building utility systems of Tenant installed equipment at the perimeter of the space. 2. Tenant will be responsible for the following: a. Design and layout of the space, which will be subject to Landlord's approval, which will not be unreasonably withheld or delayed. Failure of Landlord to approve or disapprove Tenant's plans within 30 days of submission shall constitute Landlord's approval. b. The procurement and delivery of all trade fixtures to the site. c. Location of trade fixtures within the site, all prepared for Landlord's final connection to building systems at the perimeter of the space. 3. Landlord will pay to Tenant, as a Tenant Improvement Allowance for the work required in Space S to prepare the same for its intended use, not exceeding the sum of $137,475. Such Allowance shall be subject to the terms and condition of Section 3 of Article XVI. EX-10.II 6 AMENDMENT OF LEASE DATED APRIL 1, 1994 EXHIBIT 10(ii) AMENDMENT OF LEASE ------------------ THIS AMENDMENT OF LEASE (this "Amendment") effective as of the 1st day of April, 1994 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership, having an address at 75 State Street, Boston, Massachusetts 02109 ("Landlord"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association duly organized and existing under the laws of The United States of America having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date of September 1, 1991 (the "Original Lease"), covering certain premises at 100 Federal Street, Boston, Massachusetts (the "Building"), as amended by a Letter Agreement dated February 5, 1992, an Amendment of Lease dated July 2, 1993 and an Amendment of Lease dated as of March 31, 1994 (as so amended, the Original Lease shall be referred to hereinafter as the "Lease"). The parties desire to add certain floors of the Building to the Premises under the Lease and to amend the Lease in certain other respects, all as hereinafter set forth. Capitalized terms not defined herein shall have the meaning ascribed to them in the Lease. WITNESSETH: ---------- NOW, THEREFORE, the parties hereby agree as follows: 1. Effective as of the date hereof, the Areas shown on Schedule P-1 attached hereto (collectively, "Space D") are hereby added to the Premises under the Lease. Space D shall be treated as a "Space" for all purposes of the Lease. All terms and provisions of the Lease (as amended hereby) shall be applicable to Space D, including, without limitation, Tenant's obligation to make Operating Expense and Imposition payments with respect to Space D in accordance with Section 2 of Article III of the Lease, except: (i) the term of the Lease for Space D shall commence as of the date hereof and shall expire on December 31, 2008 (the "Space D Initial Term"); (ii) Space D shall not be considered to be part of either Space A or Space B; (iii) the Base Rent and the Tenant Improvement Allowance for Space D shall be as set forth in Sections 2 and 3 hereof; (iv) Tenant's right to extend the term of the Lease with respect to Space D shall be as set forth in Section 4 hereof; and (v) the Operating Expenses Stop for Space D shall be $8.00 per square foot and the Impositions Stop for Space D shall be $6.00 per square foot. 2. Tenant shall pay Base Rent for the Areas included in Space D at the annual rates specified in Schedule R-1 for such Areas, including the adjustments in such rates noted in Schedule R-1 for different time periods during the Space D Initial Term. 3. Landlord shall provide Tenant with a Tenant Improvement Allowance for the Areas included in Space D in amounts not exceeding the amounts specified in Schedule R-1. Such Tenant Improvement Allowance shall be subject to the provisions regarding the Tenant Improvement Allowance set forth in Section 3 of Article XVI of the Lease, provided, however, that in no event shall Landlord be obligated to pay any portion of the Tenant Improvement Allowance for any portion of any Space if such payment would result in the total unexpended Tenant Improvement Allowance for all Spaces to be less than the portion of the Tenant Improvement Allowance applicable to the Areas in Space D for which Base Rent shall not have become payable under Schedule R-1. 4. In addition to its options to extend the term of the Lease for other Spaces, Tenant shall have the successive options to extend the term of the Lease (with respect to Space D only) for two (2) successive five (5) year periods from and after December 31, 2008, which options shall be otherwise subject to the same terms and conditions that are applicable to the options for Space A and Space B under Section 3 of Article II of the Original Lease. With respect to each floor included in Space D, "$48.50 per square foot per annum" appearing in clause (a) of the third paragraph of Section 3 of Article III of the Original Lease shall be deemed to read "the annual rate of Base Rent per square foot for such floor in effect during year 2008 according to Schedule R-1". 5. Landlord shall perform the work to the Areas included in Space D necessary to bring such Premises into the condition required by Schedule COND to the Lease. Landlord's work under this Section 5 shall be accomplished in a timely manner in phases on a floor-by-floor basis on a schedule to be determined in consultation with, and as reasonably approved by, Tenant. Each floor in Space D in which Landlord shall perform work under this Section 5 shall remain part of the Premises during such work, and during such work all of Tenant's obligations under the Lease with respect to each such floor shall remain in full force and effect, including any obligation to pay rent and additional rent therefor. 6. In order to defray certain of Landlord's costs incurred in constructing improvements to the main lobby of the Building and the Building plaza, Tenant shall pay on the first day of each month, in addition to Tenant's monthly payments on account of Base Rent, Operating Expenses and Impositions, an additional monthly amount of rent equal to the monthly payment required to pay in full, on a direct reduction basis over an amortization period equal to the length of the "Repayment Period" (defined herein), an amount equal to Tenant's Share (hereinafter defined) of the amount, if any, by which the "project cost" (hereinafter defined) shall exceed $10,000,000, with interest at a rate equal to the sum of one percent (1%) plus Tenant's Base Rate in effect on the date the first portion of such excess shall have been expended by Landlord, in equal monthly installments of principal and interest commencing on January 1, 1995 and continuing through the expiration of the Space D Initial Term (the "Repayment Period"). As used herein, "Tenant's Share" shall mean, with respect to the first $700,000 of such excess, 50% and, with respect to the balance of such excess, the share required to be paid by Tenant under the second paragraph of Section 2 of Article XVI of the Lease. For the purpose hereof and for the purpose of Section 2 of Article XVI of the Lease, "project cost" shall mean the sum of the fees and expenses of the design architect and the consulting architect, engineering, project supervision and similar soft costs (but expressly excluding costs of money), cost of permits and other associated reasonable out-of-pocket costs and the "hard" costs payable to the approved contractor for the work to be done pursuant to -2- Schedule RENOV of the Lease, but exclusive of the cost of any related asbestos abatement, installation of sprinkler and life safety systems and modifications required by the Americans with Disabilities Act. The payment obligations of Tenant under the second paragraph of Section 2 of such Article XVI of the Lease shall be deemed modified by this Section 6. 7. The provisions of Section 3 of Article XVI which require Landlord to make available to Tenant up to 168,000 square feet of temporary substitute space in the Building shall cease to be of any further force or effect as of the date hereof, subject to the following paragraph. Solely for the purpose of the provisions of Section 3 of Article XVI which require Landlord to reimburse Tenant for certain of Tenant's expenses in temporarily relocating personnel to the Swing Space, each of Floors 20, 21, 22 and 23 shall be deemed to be Swing Space until such time as Tenant shall construct improvements in such Floor (other than minor temporary improvements for temporary occupancy). 8. Commencing on the date hereof, Tenant shall pay Base Rent for Floor 15 at the annual rate set forth in Schedule R of the Original Lease for Floor 15, including the adjustments in such rate noted in Schedule R for the different time periods during the lease term for Floor 15. Landlord acknowledges that Tenant owes no Base Rent for Floor 15 for any period prior to April 1, 1994. 9. Tenant shall have no obligation to pay Base Rent for any of Floors 31, 32 and 34 for the period commencing on April 1, 1994 and ending on the day before the date Base Rent for such floor shall commence as provided in Schedule R-1 hereto. Promptly after the execution of this Amendment of Lease, Landlord and Tenant shall account to each other with respect to Base Rent for Floors 15, 31, 32 and 34, and Tenant shall pay any net amount due to Landlord or Landlord shall refund any net amount due to Tenant. 10. Section 5 of Article XIV of the Lease is hereby amended by deleting the chart appearing at the end of the second paragraph thereof (which sets forth Space, Date of Availability and Option) and inserting the following in place thereof: Space Date of Availability - ----- -------------------- 26th and 27th floors On or about May 31, 2000 if the current tenant of such space shall not exercise any option to extend the term of its lease; or -3- On or about May 31, 2005 if the current tenant of such space shall extend the term of its lease for one five year period but not for a second five year period; or On or about May 31, 2010 if the current tenant of such space shall exercise its options to extend the term of its lease for two periods of five years. 30th floor On or about June 1, 1996 if the current tenant of such space shall not exercise its option to extend the term of its lease. On or about June 1, 2001 if the current tenant of such space shall exercise its option to extend the term of its lease. 37th floor On or about November 1, 2003 if the current tenant of such space shall not exercise its option to extend the term of its lease; or On or about November 1, 2008 if the current tenant of such space shall exercise its option to extend the term of its lease. Section 5 of Article XIV of the Lease is hereby further amended as follows: (a) By deleting the words "eighteen (18) months" appearing in the second sentence of the third paragraph thereof and inserting "twelve (12) months" in place thereof. (b) By deleting the words "twelve months" appearing in the third sentence of the third paragraph thereof and inserting "eleven (11) months" in place thereof. (c) By deleting the second sentence of the fourth paragraph thereof and inserting the following in place thereof: "The time period is thirty days after such notice from Landlord." (d) By deleting the words "Option 1 space" and "sixty (60) days" appearing in the fifth paragraph thereof and inserting in place thereof the words "such space" and "thirty (30) days", respectively. (e) By deleting the words "sixty (60) days" appearing in the sixth paragraph thereof and inserting "thirty (30) days" in place thereof. 11. Article XIII of the Lease is hereby amended as follows: -4- (a) In the first paragraph of Section 2, the words "either Space A or Space B" are hereby deleted and the words "any of Space A, Space B or Space D" substituted therefor. (b) In Clause (b) of Section 2, (i) the words "either or both Space A or Space B (whichever or both shall have been affected by such casualty)" are hereby deleted and the words "any one or more or all of Space A, Space B or Space D (whichever one or more or all shall have been affected by such casualty)" substituted therefor and (ii) the words "for Space A or Space B (whichever or both shall have been affected by such casualty)" are hereby deleted and the words "for Space A, Space B or Space D (whichever one or more or all shall have been affected by such casualty)" substituted therefor. (c) In Section 3, (i) the words "whether Space A or Space B (or both)" are hereby deleted and the words "whether Space A, Space B or Space D (or any one or more or all thereof)" substituted therefor and (ii) the words "either Space A or Space B" are hereby deleted and the words "any of Space A, Space B or Space D" substituted therefor. 12. During the period from the date hereof through December 31, 2000, the restriction on rental and offering rates for sublettings by Tenant provided in Article VIII of the Lease shall not be applicable to a total of any three floors in Space D designated by Tenant. With respect to the remainder of Space D (other than the three floors referred to in the preceding sentence) during the period ending on December 31, 2000 and with respect to all of Space D thereafter, the restriction on rental and offering rates for sublettings by Tenant provided in Article VIII of the Lease shall not be applicable to Space D when Landlord has no competing space (in terms of size) available in the Building. 13. Tenant represents and warrants to Landlord that Tenant has dealt with no broker, finder or other person claiming to be entitled to a commission in connection with this Amendment of Lease other than U.S. Equities Realty, Inc., the compensation of which shall be paid by Tenant. Landlord represents to Tenant that it has dealt with no broker, finder or other person claiming to be entitled to a commission in connection with this Lease other than U.S. Equities Realty, Inc. 14. Upon request, each of Landlord and Tenant shall execute and deliver an amendment to the Notice of Lease previously executed in connection with the Lease in order to reflect Tenant's leasing of additional space in the Building under this Amendment of Lease. 15. Except as only expressly amended hereby, the Lease shall continue in full force and effect. -5- WITNESS the execution hereof as an instrument under seal as of the date first above written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP By: 100 Federal Street Realty Corporation, its General Partner By: /s/ CLARENCE T. HARWOOD ------------------------- Its President TENANT: THE FIRST NATIONAL BANK OF BOSTON By: /s/ THEODORE M. EDSON ----------------------- Its Director, Facilities Hereunto duly authorized -6- Schedule P-1 ------------ Areas Included in Space D, Term and Rights of Extension With Reference to Each Area ----------------------------------------
Rentable Period of Options Term of Each Floor Sq. Footage Term to Extend Option - ----- ----------- ---- --------- ------ 20 27,002 4/1/1994-12/31/2008 2 5 Years 21 27,002 4/1/1994-12/31/2008 2 5 Years 22 27,002 4/1/1994-12/31/2008 2 5 Years 23 27,002 4/1/1994-12/31/2008 2 5 Years 31 28,147 4/1/1994-12/31/2008 2 5 Years 32 28,147 4/1/1994-12/31/2008 2 5 Years 34 28,147 4/1/1994-12/31/2008 2 5 Years
EX-10.JJ 7 AMENDMENT OF LEASE DATED MARCH 31, 1996 EXHIBIT 10(jj) AMENDMENT OF LEASE ------------------ This AMENDMENT OF LEASE (this "Amendment") made as of March 31, 1996 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership, having an address at 75 State Street, Suite 2450, Boston, Massachusetts 02109 ("Landlord"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association duly organized and existing under the laws of the United States of America, having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date as of September 1, 1991 (the "Original Lease") covering certain premises at 100 Federal Street, Boston, Massachusetts, as amended to date (as so amended, the Original Lease shall be referred to hereinafter as the "Lease"). The parties desire to amend the Lease in certain respects as hereinafter set forth. Capitalized terms not defined herein shall have the same meaning ascribed to them in the Lease. WITNESSETH: ---------- NOW, THEREFORE, Landlord and Tenant hereby agree to amend the Lease as follows: 1. Effective as of July 1, 1996, there shall be added to the Premises under the Lease the portion of space located on Floor 5M of the Building shown as the "Additional 5M Premises" on the plan attached hereto as Exhibit A (the --------- "Additional 5M Premises"). The Additional 5M Premises consists of approximately 1,827 rentable square feet of space. 2. Except as expressly provided herein, all terms and provisions of the Lease that are applicable to the existing space located on Floor 5M of the Building that is leased by Tenant under the Lease (the "Existing 5M Premises") shall be applicable to the Additional 5M Premises, except that the Additional 5M Premises shall be leased to Tenant "as is", it being understood that Landlord shall have no obligation to bring the Additional 5M Premises into the condition required by Schedule COND or into compliance with the Americans With Disabilities Act or to provide any allowance for the Additional 5M Premises. 3. Without limiting the generality of Section 2 of this Amendment of Lease, commencing on April 1, 1996: (a) the Additional 5M Premises shall be part of Space B under the Lease; (b) Tenant shall pay Base Rent for the Additional 5M Premises at the same times and at the same per square foot annual rates as are specified for the Existing 5M Premises in Schedule R annexed to the Original Lease, as such per square foot annual rates shall be adjusted from time to time during the term of the Lease pursuant to such Schedule R; and (c) Tenant shall make payments on account of Impositions and Operating Expenses escalations for the Additional 5M Premises at the same times that such payments are due, and in the same manner that such payments are calculated, for the Existing 5M Premises. 4. Except as only expressly amended hereby, the Lease shall continue in full force and effect as heretofore. WITNESS the execution hereof as an instrument under seal as of the date first above written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership By: 100 Federal Street Realty Corporation, its general partner By: /S/ STEPHEN M. WOLF ------------------------- Its: Investment Officer TENANT: THE FIRST NATIONAL BANK OF BOSTON By: /s/ THEODORE M. EDSON ------------------------- Its: Director, Facilities 220662 -2- Exhibit A --------- [Plan Showing Additional 5M Premises] -3- EX-10.KK 8 AMENDMENT OF LEASE DATED OCTOBER 1, 1996 EXHIBIT 10(kk) AMENDMENT OF LEASE ------------------ THIS AMENDMENT OF LEASE made as of October 1, 1996 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership, having an address at One Boston Place, Suite 2020, Boston, Massachusetts 02108 ("Landlord"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association duly organized and existing under the laws of the United States of America, having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date as of September 1, 1991, as amended (the "Lease"), covering certain premises at 100 Federal Street, Boston, Massachusetts. The parties desire to amend the Lease in certain respects as hereinafter set forth. Capitalized terms not defined herein shall have the meaning ascribed to them in the Lease. WITNESSETH: ---------- NOW, THEREFORE, Landlord and Tenant hereby amend the Lease as follows: 1. Effective as of October 1, 1996 or such later date as the current occupant shall vacate such space (the "Commencement Date for the 850 SF 5M Premises"), there shall be added to the Premises under the Lease the space located on Floor 5M of the Building shown as the "850 SF 5M Premises" on the plan attached hereto as Exhibit A (the "850 SF 5M Premises"). The 850 SF 5M --------- Premises consists of approximately 850 rentable square feet. 2. Except as expressly provided herein, all terms and provisions of the Lease that are applicable to the existing space located on Floor 5M of the Building leased by Tenant under the Lease (the "Existing 5M Premises") shall be applicable to the 850 SF 5M Premises, except that the 850 SF 5M Premises shall be leased to Tenant "as is", it being understood that Landlord shall have no obligation to bring the 850 SF 5M Premises into the condition required by Schedule COND or into compliance with the Americans With Disabilities Act or to provide any allowance for the 850 SF 5M Premises. 3. Without limiting the generality of Section 2 of this Amendment of Lease, commencing on the Commencement Date for the 850 SF 5M Premises: (a) the 850 SF 5M Premises shall be part of Space B under the Lease; (b) Tenant shall pay Base Rent for the 850 SF 5M Premises at the rates set forth in Section 4 hereof; and (c) Tenant shall make payments on account of Impositions and Operating Expenses escalations for the 850 SF 5M Premises at the same times that such payments are due, and in the same manner that such payments are calculated, for the Existing 5M Premises. 4. The annual Base Rent for the 850 SF 5M Premises shall be as follows: Commencement Date for the 850 SF 5M Premises to August 31, 1998: $10.00 per rentable square foot September 1, 1998 to August 31, 2001: $12.00 per rentable square foot September 1, 2001 to August 31, 2006: $16.00 per rentable square foot September 1, 2006 to August 31, 2009: $18.00 per rentable square foot If Tenant shall exercise any option to extend the term of the 850 SF 5M Premises, the Base Rent therefor shall be the same per square foot annual rate as shall be applicable to the existing 5M Premises from time to time. 5. Except as only expressly amended hereby, the Lease shall continue in full force and effect as heretofore. WITNESS the execution hereof as an instrument under seal as of the date first above written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership By: 100 Federal Street Realty Corporation, its general partner By: /s/ JOHN C. SCHOSER ------------------------- Its: Investment Officer -2- TENANT: THE FIRST NATIONAL BANK OF BOSTON By: /s/ THEODORE M. EDSON --------------------------- Its: Director, Facilities -3- Exhibit A --------- [Lease plan showing 850 square feet of space on Floor 5M at 100 Federal Street] -4- EX-11 9 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 ----------- BANK OF BOSTON CORPORATION Computation of Per Share Earnings
EARNINGS (in millions) Years Ended December 31 1996 1995 1994 ------- ------- ------- 1. Net income $ 650 $ 678 $ 542 2. Less: Preferred dividends 37 37 37 -------- -------- -------- 3. Net income applicable to primary earnings per common share $ 613 $ 641 $ 505 4. Add: Interest expense on convertible debentures, net of tax 4 -------- -------- -------- 5. Net income applicable to fully diluted earnings per common share $ 613 $ 641 $ 509 ======== ======== ======== SHARES (in thousands) ------ 6. Weighted average number of common shares outstanding 153,529 153,856 148,913 7. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 2,583 2,027 674 8. Incremental shares from assumed conversion of debentures at date of issuance 885 4,029 -------- -------- -------- 9. Adjusted number of common shares 156,112 156,768 153,616 ======== ======== ======== PER SHARE CALCULATION --------------------- 10. Primary net income per common share $ 3.99 $ 4.17 $ 3.39 (Item 3 / Item 6); see note below 11. Fully diluted net income per common share (Item 5 / Item 9); see note below $ 3.93 $ 4.09 $ 3.31
Note - Income per common share before extraordinary item, net of tax, on both a primary and fully diluted basis for the year ended December 31, 1994 is computed by adding to the numerator the extraordinary loss from early extinguishment of debt of $7 million. EX-12.A 10 COMPUTATION OF CORPORATION'S CONSOLIDATED RATIO EXHIBIT 12(a) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the five years ended December 31, 1996 were as follows:
Years Ended December 31, ------------------------------------------------ (Dollars in millions) 1996 1995 1994 1993 1992 ----- ----- ----- ----- ---- Net income $ 650 $ 678 $ 542 $ 367 $338 Extraordinary items, net of tax 7 (73) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 483 529 422 262 190 ------ ------ ------ ------ --- Pretax earnings 1,133 1,207 971 605 455 ----- ----- ----- ----- --- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 40 38 35 36 37 Interest on borrowed funds 873 1,079 1,038 384 352 ----- ----- ----- ----- ---- Total fixed 913 1,117 1,073 420 389 charges ----- ----- ----- ----- ---- Earnings (for ratio calculation) $2,046 $2,324 $2,044 $1,025 $844 ====== ====== ====== ====== ==== Total fixed charges $ 913 $1,117 $1,073 $ 420 $389 ====== ====== ====== ====== ==== Ratio of earnings to fixed charges 2.24 2.08 1.90 2.44 2.17 ====== ====== ====== ====== ====
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income (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. EX-12.B 11 COMPUTATION OF CORPORATION'S CONSOLIDATED RATIO EXHIBIT 12(B) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the five years ended December 31, 1996 were as follows:
Years Ended December 31, ----------------------------------------------- (Dollars in millions) 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Net income $ 650 $ 678 $ 542 $ 367 $ 338 Extraordinary items, net of tax 7 (73) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 483 529 422 262 190 ----- ----- ----- ----- ----- Pretax earnings 1,133 1,207 971 605 455 ----- ----- ----- ----- ----- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 40 38 35 36 37 Interest on borrowed funds 873 1,079 1,038 384 352 Interest on deposits 1,680 1,791 1,301 1,177 1,640 ----- ----- ----- ----- ----- Total fixed charges 2,593 2,908 2,374 1,597 2,029 ----- ----- ----- ----- ----- Earnings (for ratio calculation) $3,726 $4,115 $3,345 $2,202 $2,484 ===== ===== ===== ===== ===== Total fixed charges $2,593 $2,908 $2,374 $1,597 $2,029 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.44 1.42 1.41 1.38 1.22 ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income 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. EX-12.C 12 COMPUTATION OF CORPORATION'S CONSOLIDATED RATIO EXHIBIT 12(C) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Excluding Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (excluding interest on deposits) for the five years ended December 31, 1996 were as follows:
Years Ended December 31, ----------------------------------------------- (Dollars in millions) 1996 1995 1994 1993 1992 ----- ------ ----- ------ ---- Net income $ 650 $ 678 $ 542 $ 367 $ 338 Extraordinary items, net of tax 7 (73) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 483 529 422 262 190 ----- ----- ----- ----- ---- Pretax earnings $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ===== ===== ===== ===== ==== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 873 1,079 1,038 384 352 ----- ----- ----- ----- ---- Total fixed charges 913 1,117 1,073 420 389 Preferred stock dividend requirements 65 68 67 61 33 ----- ----- ----- ----- ---- Total combined fixed charges and preferred stock dividend requirements $ 978 $ 1,185 $ 1,140 $ 481 $ 422 ===== ===== ===== ===== ==== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 2,046 $ 2,324 $ 2,044 $ 1,025 $ 844 ===== ===== ===== ===== ==== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 2.09 1.96 1.79 2.13 2.00 ===== ===== ===== ===== ====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income 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. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. EX-12.D 13 COMPUTATION OF CORPORATION'S CONSOLIDATED RATIO EXHIBIT 12(D) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Including Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (including interest on deposits) for the five years ended December 31, 1996 were as follows:
Years Ended December 31, (Dollars in millions) ----------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Net income $ 650 $ 678 $ 542 $ 367 $ 338 Extraordinary items, net of tax 7 (73) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 483 529 422 262 190 ----- ----- ----- ----- ----- Pretax earnings $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 873 1,079 1,038 384 352 Interest on deposits 1,680 1,791 1,301 1,177 1,640 ----- ----- ----- ----- ----- Total fixed charges 2,593 2,908 2,374 1,597 2,029 Preferred stock dividend requirements 65 68 67 61 33 ----- ----- ----- ----- ----- Total combined fixed charges and preferred stock dividend requirements $ 2,658 $ 2,976 $ 2,441 $ 1,658 $ 2,062 ===== ===== ===== ===== ===== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 3,726 $ 4,115 $ 3,345 $ 2,202 $ 2,484 ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.40 1.38 1.37 1.33 1.20 ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income 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. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. EX-13 14 BANK OF BOSTON 1996 ANNUAL REPORT Exhibit 13 BANK OF BOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1996 1995 1994 1993 1992 1991 (dollars in millions, except per share amounts) - -------------------------------------------------------------------------------- INCOME STATEMENT DATA(1) Interest income.............. $ 4,893 $ 5,119 $ 4,376 $ 3,330 $ 3,664 $ 4,100 Interest expense............. 2,553 2,870 2,339 1,561 1,992 2,588 ------- ------- ------- ------- ------- ------- Net interest revenue....... 2,340 2,249 2,037 1,769 1,672 1,512 Provision for credit losses.. 231 275 154 107 288 684 ------- ------- ------- ------- ------- ------- Net interest revenue after provision for credit losses.................... 2,109 1,974 1,883 1,662 1,384 828 Noninterest income........... 1,344 1,309 1,035 945 1,020 974 Noninterest expense(2)....... 2,320 2,076 1,947 2,002 1,949 1,964 ------- ------- ------- ------- ------- ------- Income (Loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles.................. 1,133 1,207 971 605 455 (162) Provision for (Benefit from) income taxes........ 483 529 422 262 190 (51) ------- ------- ------- ------- ------- ------- Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles.... 650 678 549 343 265 (111) Extraordinary items Gains (Losses) from early extinguishment of debt, net of tax..................... (7) 8 Recognition of prior year tax benefit carryforwards.. 73 Cumulative effect of changes in accounting principles, net of tax(3)............... 24 ------- ------- ------- ------- ------- ------- Net income (loss).......... $ 650 $ 678 $ 542 $ 367 $ 338 $ (103) ======= ======= ======= ======= ======= ======= Net income (loss) applicable to common stock..................... $ 613 $ 641 $ 505 $ 332 $ 318 $ (116) ======= ======= ======= ======= ======= ======= Per common share Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles Primary.................... $ 3.99 $ 4.17 $ 3.44 $ 2.09 $ 1.77 $ (.95) Fully diluted.............. 3.93 4.09 3.36 2.05 1.73 (.95) Net income (loss) Primary.................... 3.99 4.17 3.39 2.26 2.30 (.89) Fully diluted.............. 3.93 4.09 3.31 2.21 2.24 (.89) Cash dividends declared(4).. 1.69 1.28 .93 .40 .10 .10 Average number of common shares (in thousands) Primary..................... 153,529 153,856 148,913 147,033 138,444 129,978 Fully diluted............... 156,112 156,768 153,616 152,067 144,044 130,313 - --------------------------------------------------------------------------------
(1) Consolidated selected financial data for each of the five years in the pe- riod ended December 31, 1995 have been restated to reflect the Corpora- tion's acquisition of BayBanks, Inc. (BayBanks), which was completed in July 1996 and accounted for as a pooling of interests. (2) Includes, in 1996, $180 million of charges primarily composed of employee severance and property related costs recorded in connection with the acqui- sition of BayBanks. Includes, in 1995, $28 million of charges mainly re- lated to exiting, reorganizing and downsizing certain business and corpo- rate staff units. Includes, in 1994, costs of $21 million recorded in con- nection with the Corporation's acquisitions of BankWorcester Corporation and Pioneer Financial, A Co-operative Bank; and includes, in 1993, acquisi- tion-related costs and reorganization charges of $85 million recorded pri- marily in connection with the Corporation's acquisitions of Society for Savings Bancorp, Inc. (Society) and Multibank Financial Corp., as well as estimated costs of downsizing and reconfiguring certain of the Corpora- tion's business and corporate units. Also includes, in 1991, reorganization charges of $54 million, composed of $7 million in connection with a Society reorganization plan and $47 million in connection with the Corporation's plans for the consolidation and downsizing of various domestic and interna- tional 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. (4) Amounts represent the historical cash dividends of the Corporation. 20 BANK OF BOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1996 1995 1994 1993 1992 1991 (dollars in millions, except per share amounts) - --------------------------------------------------------------------------------- SELECTED RATIOS(1) Return on average assets................... 1.09% 1.22% 1.01% .76% .73% (.22)% Return on average common equity(5)................ 14.47 16.86 15.50 11.39 12.86 (5.20) Common dividend payout ratio(6)................. 40.4 28.1 24.9 14.4 3.4 NM Common equity to total assets................... 7.1 7.1 6.2 6.1 5.9 4.6 Average total stockholders' equity to average total assets..... 8.0 7.7 7.1 7.1 6.0 5.1 Risk-based capital ratios Tier 1................. 9.2 8.5 7.7 7.7 7.4 5.5 Total.................. 13.6 12.8 12.7 12.4 11.8 9.7 Leverage ratio........... 8.2 7.4 6.7 6.9 6.6 4.8 Net credit losses to average loans and lease financing................ .57 .51 .81 .87 1.38 1.99 Reserve for credit losses to loans and lease financing................ 2.15 2.29 2.19 2.70 3.57 3.98 Reserve for credit losses to nonaccrual loans and lease financing.......... 219.6 238.9 197.0 142.2 116.3 72.8 Nonaccrual loans and OREO as a percent of related asset categories......... 1.1 1.1 1.5 2.5 4.2 7.1 Market value/book value.. 222.4 171.2 112.2 108.9 134.4 67.7 BALANCE SHEET DATA AT DECEMBER 31(1) Loans and lease financing................ $41,061 $38,870 $37,708 $34,819 $31,240 $31,764 Reserve for credit losses................... (883) (890) (827) (941) (1,116) (1,264) Total assets............. 62,306 59,423 55,411 50,711 47,222 47,837 Deposits................. 42,831 41,064 40,249 38,316 38,097 38,064 Funds borrowed........... 9,158 9,503 7,211 5,487 3,092 4,762 Notes payable............ 2,821 2,189 2,219 2,023 1,736 1,469 Stockholders' equity..... 4,934 4,702 3,931 3,615 3,198 2,420 Common shares outstanding (in thousands)........... 153,173 155,296 148,343 147,036 145,379 130,265 Common stockholders of record(7)................ 27,672 27,662 27,505 28,233 30,163 32,965 Number of employees...... 21,990 23,710 24,009 24,215 24,986 24,283 Per common share Book value.............. $ 28.89 $ 27.01 $ 23.07 $ 21.13 $ 18.98 $ 16.98 Market value............ 64 1/4 46 1/4 25 7/8 23 25 1/2 11 1/2 AVERAGE BALANCE SHEET DATA(1) Loans and lease financing................ $40,589 $38,283 $36,017 $32,565 $31,568 $33,001 Securities............... 8,122 7,463 6,473 5,631 6,272 6,347 Other earning assets..... 4,699 3,821 5,027 4,684 3,818 3,974 ------- ------- ------- ------- ------- ------- Total earning assets... 53,410 49,567 47,517 42,880 41,658 43,322 ------- ------- ------- ------- ------- ------- Cash and due from banks.. 2,610 2,591 2,708 2,419 2,200 2,039 Other assets............. 3,503 3,586 3,164 2,638 2,432 2,229 ------- ------- ------- ------- ------- ------- Total average assets... $59,523 $55,744 $53,389 $47,937 $46,290 $47,590 ======= ======= ======= ======= ======= ======= Deposits................. $41,603 $38,406 $37,919 $37,163 $37,643 $38,534 Funds borrowed........... 8,751 9,132 8,018 4,500 3,633 3,910 Other liabilities........ 1,759 1,760 1,563 1,087 1,000 1,101 Notes payable(8)......... 2,666 2,142 2,123 1,797 1,252 1,607 Stockholders' equity..... 4,744 4,304 3,766 3,390 2,762 2,438 ------- ------- ------- ------- ------- ------- Total average liabilities and stockholders' equity... $59,523 $55,744 $53,389 $47,937 $46,290 $47,590 ======= ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------------
(5) For purposes of this ratio, preferred stock dividends have been deducted from net income. (6) Ratios prior to 1996 are based on the historical cash dividends and net in- come 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. (8) Average for 1996 includes guaranteed preferred beneficial interest in the Corporation's junior subordinated debt. NM--Not meaningful. 21 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 acquisition was accounted for as a pooling of interests and, accordingly, the information included in this re- port presents the combined results of the Corporation and BayBanks as if the Corporation and BayBanks had operated as a combined entity for all periods pre- sented. The Corporation is a registered bank holding company which, together with its subsidiaries, operates a network of 650 offices across the U.S. and more than 100 offices in 24 countries in Latin America, Europe, Asia and Africa. The Cor- poration'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 and BayBank NH, N.A. ACQUISITIONS, DIVESTITURES AND STRATEGIC ALLIANCES The Corporation continues to take strategic initiatives focused on leveraging its core competencies over attractive markets, and continues to explore, on an ongoing basis, acquisition, divestiture and joint venture opportunities, as well as analyze each of its businesses in the context of competitive advan- tages, industry dynamics and growth potential. As previously announced, the Corporation recently terminated an agreement to sell Fidelity Acceptance Corpo- ration (FAC) to a third party. The Corporation is continuing its strategic re- view of this business and its other national consumer lending businesses (Ganis Credit Corporation and the national credit card portfolio). These businesses have aggregate loans of approximately $3 billion. ACQUISITIONS BayBanks was acquired 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. The combination of the two Boston-based institutions created a consumer and corporate banking entity with over $60 billion in assets and $40 billion in deposits. In connection with the Corporation's acquisition of BayBanks, and specifically to address competitive issues raised by the United States Department of Justice and the Massachusetts Attorney General relative to the transaction, the Corpo- ration sold 20 branches of the combined entity, having aggregate deposits of approximately $700 million and loans of approximately $500 million, in the fourth quarter of 1996, resulting in a pre-tax gain of approximately $47 mil- lion, or $27 million after-tax. On June 28, 1996, the Corporation completed its acquisition of The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank, a Massa- chusetts chartered savings bank with approximately $1.3 billion in deposits. The Corporation exchanged 4.6 million shares of its common stock, with a value of approximately $229 million, for all of the outstanding common stock of Bancorp. The Corporation purchased an equivalent amount of shares in the open market for this transaction. The transaction 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. DIVESTITURES AND STRATEGIC ALLIANCES In the first half of 1996, the Corporation completed a transaction with two eq- uity investment firms and Barnett Banks, Inc. (Barnett) to form an independent mortgage company, HomeSide, Inc. (HomeSide), to which the Corporation and Bar- nett sold their mortgage banking subsidiaries, BancBoston Mortgage Corporation (BBMC) and Barnett Mortgage Company, respectively. The Corporation, Barnett and the two equity investment firms each held an approximate one-third interest in HomeSide, which, as a result of an initial public offering in January 1997, was reduced to approximately 27 percent. The Corporation recognized a pre-tax gain of $106 million ($67 million after-tax) relating to this transaction, which was offset by a pre-tax loss of $111 million ($70 million after-tax) related to mortgage prepayment risk management activities (see the "Noninterest Income" section). In October 1995, the Corporation sold its Corporate Trust business, resulting in a pre-tax gain of $20 million, or $12 million after-tax. 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 busi- nesses into a single entity that is 50 percent owned by each party. In the first quarter of 1995, the Corporation completed the sales of its Ver- mont and Maine banking subsidiaries, Bank of Vermont (Vermont) and Casco North- ern Bank, N.A. (Casco), resulting in a pre-tax gain of approximately $75 mil- lion, or $30 million after-tax. Vermont and Casco combined had loans of approx- imately $1.2 billion and deposits of approximately $1.3 billion at December 31, 1994. Additional information with regard to certain of these transactions is included in Note 2 to the Financial Statements. 22 RESULTS OF OPERATIONS The following is a discussion and analysis of the Corporation's consolidated results of operations. In order to understand this section in context, it should be read in conjunction with the Consolidated Financial Statements in- cluded elsewhere in this report. OVERVIEW The Corporation's net income for 1996 was $650 million, compared to $678 mil- lion for 1995. Net income per common share was $3.99 on a primary basis and $3.93 on a fully diluted basis in 1996, compared with $4.17 on a primary basis and $4.09 on a fully diluted basis in 1995. In connection with its acquisition of BayBanks, the Corporation recorded restructuring and merger-related costs of $180 million ($117 million after-tax). See the "Noninterest Expense" section and Note 19 to the Financial Statements for further discussion of restructuring and merger-related costs. Excluding the effects of the above third quarter re- structuring and merger-related costs, as well as other charges related to the BayBanks acquisition and items related to the sale of the mortgage banking sub- sidiary, 1996 net income was $773 million, or $4.71 per common share on a fully diluted basis, reflecting 14 percent and 15 percent increases, respectively, from 1995. The Corporation expects to achieve total annualized cost savings of $230 mil- lion in connection with the integration of BayBanks. The complex and lengthy process of integration is well underway and the major systems and branch con- versions are expected to be completed by the middle of 1997, with the full re- alization of these savings expected to be achieved in 1998. The $180 million third quarter 1996 restructuring and merger-related charge described above does not include costs related to the conversion of systems and various other inte- gration related activities. These costs will be recorded in the future as they are incurred during the conversion and integration process. In addition, the Corporation is evaluating the Regional Consumer business in order to enhance its profitability and value to stockholders. In this regard, the Corporation may take various actions to achieve its goals, which could include a further restructuring of certain components of the business. The Corporation's expectations with respect to potential cost savings are for- ward-looking statements. Many factors could affect the Corporation's future fi- nancial performance and cause actual cost savings to differ materially from estimated amounts. These factors, some of which are beyond the control of the Corporation, include, but are not limited to, the regulatory environment, re- gional and national economic conditions, inflation, competition, changes in in- tegration plans, interest rate fluctuations and unanticipated changes in busi- ness conditions. Therefore, the ultimate level of such expected cost savings and the period within which such cost savings may be realized or achieved can- not be predicted with certainty. NET INTEREST REVENUE This discussion of net interest revenue should be read in conjunction with Av- erage Balances and Interest Rates and Change in Net Interest Revenue -- Volume and Rate Analysis, presented elsewhere in this report. Table 1 presents a sum- mary of net interest revenue, related average earning assets and net interest margin. For this review of net interest revenue, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been ad- justed to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35 percent, plus applicable state and local taxes, net of related federal tax benefits. TABLE 1 -- NET INTEREST REVENUE, AVERAGE EARNING ASSETS AND NET INTEREST MARGIN
Years Ended December 31 (dollars in millions) U.S. International Consolidated - ------------------------------------------------------------------------------ Net interest revenue (fully taxable equivalent basis) 1996..................................... $ 1,826 $ 534 $ 2,360 1995..................................... 1,825 446 2,271 1994..................................... 1,704 348 2,052 Average earning assets 1996..................................... $40,211 $13,199 $53,410 1995..................................... 38,688 10,879 49,567 1994..................................... 37,711 9,806 47,517 Net interest margin 1996..................................... 4.54% 4.05% 4.42% 1995..................................... 4.72% 4.10% 4.58% 1994..................................... 4.52% 3.54% 4.32%
1996 COMPARED WITH 1995 The improvement in consolidated net interest revenue of $89 million was primar- ily driven by an increase in average earning assets. The decrease in consoli- dated net interest margin of 16 basis points was due to overall narrower spreads. Net interest margin remained flat throughout 1996, with a slight in- crease to 4.47 percent in the fourth quarter of 1996, and decreased throughout 1995 to 4.50 percent in the fourth quarter of 1995. Domestic net interest revenue was relatively unchanged from 1995 to 1996. Aver- age earning assets increased by $1.5 billion, including a $1.1 billion increase in average loan and lease volume. Contributing to the loan volume increase was a higher level of consumer-related loans, reflecting growth in the credit card, home equity and installment loan portfolios, with such growth partially offset by lower domestic commercial real estate loans and residential mortgages. The impact of these volume increases on net interest revenue was offset by an 18 basis point decline in net interest margin, reflecting narrower spreads. Nar- rower spreads resulted from the full year effect of a new higher-rate savings product introduced in the second quarter of 1995, low introductory credit card rates and a change in the mix of average earning assets. Information with re- spect to the Corporation's management of interest rate risk is discussed in the "Asset and Liability Management" section. International net interest revenue increased $88 million primarily due to in- creases in average earning assets, reflecting increases in the Corporation's operations in Latin America, mainly Argentina and Brazil. The increases in av- erage earning assets included increases of $650 million and $450 million in av- erage loans and leases from 1995 in Brazil and Argentina, respectively, and in- creases in other average earning assets of $470 million and $400 million, re- spectively, in these countries. The effect of the higher level of average earn- ing assets was partially offset by a 5 basis point decline in net interest mar- gin reflecting narrower spreads, primarily in Argentina as a result of less volatile markets as the economy rebounded from the effects of the 1995 Mexican crisis. 23 The Corporation expects continued pressure on margin in the future. Future lev- els 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 conditions in the countries where the Corporation does business; and other factors such as the Corporation's strategic initiatives. NONINTEREST INCOME The composition of noninterest income is presented in Table 2. TABLE 2 -- NONINTEREST INCOME
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- Financial service fees Deposit and ATM-related fees............................ $ 238 $ 231 $ 236 Letter of credit and acceptance fees.................... 68 72 63 Syndication and agent fees.............................. 58 38 30 Other loan-related fees................................. 38 34 31 Net mortgage servicing fees............................. (82) 172 63 Other financial service fees............................ 154 148 141 ------ ------ ------ Total financial service fees........................... 474 695 564 Mutual fund fees......................................... 94 67 35 Personal trust fees...................................... 131 112 114 Other trust and agency fees.............................. 21 61 73 Trading profits and commissions.......................... 76 25 18 Securities portfolio gains, net.......................... 23 9 14 Net equity and mezzanine profits......................... 209 110 30 Net foreign exchange trading profits..................... 54 60 44 Gain on sale of mortgage servicing....................... 13 10 11 Other income............................................. 96 65 105 Gain on sales of businesses.............................. 153 95 27 ------ ------ ------ Total.................................................. $1,344 $1,309 $1,035 ====== ====== ======
1996 COMPARED WITH 1995 The decrease in financial service fees compared with 1995 reflected a $254 mil- lion decline in net mortgage servicing fees. This resulted, in part, from $111 million of pre-tax losses ($70 million after-tax) from risk management activi- ties, net of decreased mortgage servicing amortization, recorded during the first quarter of 1996 by BBMC. These losses resulted from the change in market value of contracts used to manage prepayment risk in the mortgage servicing portfolio which, in turn, protected the economic value of BBMC pending the com- pletion of its sale to HomeSide. The value of mortgage servicing rights is af- fected by the expected level of prepayments made by mortgage holders as a re- sult of changes in mortgage rates. The value of the contracts purchased to man- age this risk fluctuated inversely with the value of the mortgage servicing as- sets. Due to the sharp increase in long-term interest rates during the first quarter of 1996, the value of these contracts declined. Concurrently, the value of the mortgage servicing assets and the amount of gain recognized by the Cor- poration on the disposition of BBMC increased. As a result, the losses from risk management activities were substantially offset by the pre-tax gain of $106 million ($67 million after-tax) realized on the sale of BBMC, which is in- cluded in gain on sales of businesses. The decline in net mortgage servicing fees also reflected the absence of $67 million of gains on contracts used to manage prepayment risk in the mortgage servicing portfolio in 1995, as well as a reduction arising from the sale of BBMC in 1996. Excluding net mortgage servicing fees, financial service fees increased $33 million compared with 1995. The increase was primarily due to increases in syn- dication and agent fees, reflecting a higher volume of transactions generated by the Corporation's Syndications business. Net equity and mezzanine profits generated by the Private Equity Investing business increased significantly compared with the prior year period due to a higher level of gains realized on dispositions of investments, primarily as a result of a seasoning of the portfolio and favorable market conditions. The portfolio has been steadily increasing and has grown over $200 million during 1996 to a cost basis in excess of $700 million at December 31. In addition, the portfolio is diversified as to industry, geography and asset class. The level of net profits from the Private Equity Investing business is influenced by mar- ket and economic conditions and, as such, fluctuates from period to period. Therefore, there can be no assurance as to the level of future equity and mez- zanine profits. Mutual fund fees increased primarily due to higher fees from the Corporation's Brazilian mutual fund business, reflecting growth in these funds to $3.7 billion at December 31, 1996 from $2.5 billion at December 31, 1995. The decline in other trust and agency fees reflected the Corporation's sale of its Corporate Trust business and the joint venture of its Stock Trans- fer business in the fourth quarter of 1995. Compared to the prior year period, trading profits and commissions increased, mainly due to increases from the Corporation's emerging markets business and its Brazilian operations, which in- cluded trading international debt securities and local Brazilian equity securi- ties. The increase in other income was due, in part, to increased equity earn- ings related to the Corporation's mortgage banking, shareholder services and Argentine pension fund joint ventures. Gain on sales of businesses in 1996 reflected a pre-tax gain of $106 million on the sale of BBMC as discussed above, and a pre-tax gain of $47 million result- ing from the sale of 20 branches in connection with the Corporation's acquisi- tion of BayBanks. In 1995, the Corporation sold Vermont and Casco for a pre-tax gain of $75 million, and its Corporate Trust business for a pre-tax gain of $20 million. 24 NONINTEREST EXPENSE The composition of noninterest expense is presented in Table 3. TABLE 3 -- NONINTEREST EXPENSE
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- Employee costs............................................ $1,178 $1,146 $1,046 Occupancy and equipment................................... 341 324 310 Advertising and public relations.......................... 108 87 64 Communications............................................ 101 90 82 Professional fees......................................... 56 65 71 Amortization of goodwill and other intangibles............ 34 28 18 FDIC insurance premiums................................... 39 73 Other..................................................... 313 260 224 ------ ------ ------ Noninterest expense before acquisition, divestiture and restructuring expense and OREO........................... 2,131 2,039 1,888 Acquisition, divestiture and restructuring expense........ 180 28 21 OREO...................................................... 9 9 38 ------ ------ ------ Total.................................................... $2,320 $2,076 $1,947 ====== ====== ======
1996 COMPARED WITH 1995 The growth in noninterest expense before restructuring and merger-related costs and other real estate owned (OREO) costs reflected ongoing expansion and in- vestment spending in several of the Corporation's growth businesses, mainly Latin America, Global Capital Markets and Consumer Banking. The increases in noninterest expense were partially offset by cost savings related to the inte- gration of BayBanks, the elimination of FDIC insurance premiums in 1996, which amounted to $39 million in 1995, and the absence of operating expenses associ- ated with disposed businesses, including BBMC, the Corporate Trust business and the Stock Transfer business. Employee costs increased by $32 million compared with 1995. The increase in em- ployee costs mainly included merit increases, higher levels of incentive com- pensation related to improved business performance and costs related to the hiring of sales and trading professionals in all of the Global Capital Markets businesses, including the start-up of a high-yield debt unit, and the effects of the June 1996 acquisition of Bancorp. Total staff levels decreased by about 7 percent, or 1,700, from December 31, 1995, principally due to the business dispositions noted above and the BayBanks integration. See Note 2 to the Finan- cial Statements for further discussion of this transaction. The $17 million increase in occupancy and equipment primarily related to branch expansion, mainly in Latin America. Advertising and public relations expenses increased $21 million due to direct marketing and promotional campaigns relat- ing to credit card, home equity and other products in Consumer Banking. The $11 million increase in communications expense resulted from expansion in Regional Consumer and Latin America. The $53 million increase in other expenses is due, in part, to increases in travel expenses and software costs, which were primar- ily related to the maintenance of the Corporation's banking systems, including money and wire transfer and electronic banking. In the third quarter of 1996, the Corporation recorded restructuring and merg- er-related costs of $180 million in connection with its acquisition of BayBanks. The charges included severance costs, primarily related to separation programs and employee assistance costs, related to the elimination of approxi- mately 2,000 positions; facility costs and other restructuring and merger-re- lated costs, including consolidations of branch and back office operations, re- sulting in lease termination costs and writedowns of bank owned property and equipment; and professional fees and other costs of effecting the merger; as well as systems and other conversion costs which were incurred at the time of the merger. The $180 million third quarter 1996 restructuring and merger-related charge de- scribed above does not include costs related to the conversion of systems and various other integration related activities. These costs will be recorded in the future as they are incurred during the conversion and integration process. In addition, the Corporation is evaluating the Regional Consumer business in order to enhance its profitability and value to stockholders. In this regard, the Corporation may take various actions to achieve its goals, which could in- clude a further restructuring of certain components of the business. In the fourth quarter of 1995, the Corporation recorded $28 million of restruc- turing charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. Included in these charges were expenses re- lated to reorganizations of the European business, including the closing of the Luxembourg operations; Corporate Banking; certain Asia/Pacific operations, and various other units. See Note 19 to the Financial Statements for further discussion of acquisition, divestiture and restructuring expense. PROVISION FOR CREDIT LOSSES The provision for credit losses was $231 million in 1996, compared with $275 million in 1995. The 1995 provision for credit losses included special provi- sions of $75 million, reflecting the effect of economic events on Latin Ameri- can economies in the early part of 1995, and industry trends in consumer cred- it, combined with the growth in the Corporation's Latin American lending and domestic consumer lending portfolios throughout 1995. See Note 7 to the Finan- cial Statements for further discussion of the provision for credit losses. The provision for credit losses in each year reflects management's assessment of the adequacy of the reserve for credit losses, considering the current risk characteristics of the loan portfolio and economic conditions. The amount of future provisions will be a function of the regular quarterly review of the re- serve for credit losses, based upon management's assessment of risk at the time, and, as such, there can be no assurance as to the level of future provi- sions. PROVISION FOR INCOME TAXES The 1996 income tax provision was $483 million, compared with $529 million for 1995. Included in the 1996 provision is a tax benefit of $63 million related to the $180 million of restructuring and merger-related costs recorded in connec- tion with the acquisition of BayBanks. The low level of tax benefit associated with the charge reflects the effect of certain non-tax deductible costs associ- ated with the acquisition. The 1995 provision for income taxes 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. 25 Excluding the impact of restructuring and merger-related costs and the gains on the sales of the banking subsidiaries, the Corporation's effective tax rate was 42 percent in 1996 compared with 43 percent in 1995. The reduction in the Cor- poration's effective tax rate from 1995 is due to the effect of changes in Mas- sachusetts tax law in mid-1995 which permitted apportionment of a bank's tax- able income and reduced the state income tax rate for banks from 12.5 percent to 10.5 percent, to be phased in over five years. The Corporation expects that the changes in the Massachusetts tax law will continue to have a favorable im- pact on its effective tax rate. LINE OF BUSINESS RESULTS The Corporation is managed through its Policy Council, which is the senior de- cision making group of the institution. The Policy Council is comprised of 14 members including the Chairman, Chief Executive Officer, Chief Operating Offi- cer and Chief Financial Officer. The remaining members of the Policy Council include seven executives who manage certain key businesses, the Corporation's Chief of Staff, and the chairs of the corporate-wide Risk Management and Human Resources committees. Management has grouped its principal revenue producing areas into the following major business lines: Corporate Banking, Regional Consumer and Small Business, Latin America, Global Asset Management and Other Global. The operating results and other key financial measures of these five business lines for 1996 and 1995 are presented below. Information related to the Corporation's remaining busi- nesses, various central functions and other corporate items has been aggregated and is included below in "Other Businesses and Corporate." This includes the national consumer businesses, which are currently being strategically evalu- ated. Information shown for 1995 is presented on a basis consistent with 1996 and, as such, has been restated for changes in the Corporation's organization and management reporting methodologies. The line of business information shown below mainly reflects assignments and allocations of items made within the Corporation's internal management report- ing process. Descriptions of individual items are as follows: . Most balance sheet, revenue and expense items are derived from the internal management reporting system where they are specifically attributable to in- dividual businesses. . Net interest revenue is allocated to the business lines using a funds transfer pricing process, which incorporates a matched funding concept, with the residual assigned to Global Treasury. . Various techniques are employed to allocate certain costs associated with corporate support areas, including the use of unit costs and service vol- umes. . The provision for credit losses is allocated to each business line primar- ily based upon the risk characteristics of various credit portfolios and resulting "expected loss" content in the loan portfolio as determined under the Corporation's risk adjusted return on capital (RAROC) methodology. Ex- pected loss is a function of the likelihood that a borrower will default and, given a default, the amount of value that will be lost. This method is different than the method used to determine the Corporation's consolidated provision for credit losses. The difference between the sum of the provi- sions for each business line and the corporate total is allocated to the businesses on a pro-rata basis. . The effective tax rate applied to each business line reflects the consoli- dated tax rate, excluding certain corporate items. . The return on equity shown for each business line is based upon the Corpo- ration's RAROC methodology. The amount of common equity allocated to each business line is based on an evaluation of the various risks associated with the business, including credit, market, country and operational risk. The difference between the aggregate capital allocated under this methodol- ogy and capital totaling 7 percent of consolidated assets is allocated to the business lines on a pro-rata basis. Capital in excess of 7 percent of consolidated assets is included in "Other Businesses and Corporate". Selected financial information for the Corporation's lines of business for 1996 and 1995 is presented in Table 4. TABLE 4 -- LINE OF BUSINESS SELECTED FINANCIAL INFORMATION
Corporate Regional Consumer Global Asset Banking and Small Business Latin America Management Other Global Years Ended December 31 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 (dollars in millions) - ----------------------------------------------------------------------------------------------------------------- Operating revenues....... $ 1,138 $ 987 $ 1,186 $ 1,141 $ 745 $ 591 $ 259 $ 251 $ 122 $ 117 Operating expenses....... 477 399 833 757 463 395 184 195 77 77 ------- ------- --------- --------- ------- ------ ------ ------ ------ ------ Operating income......... 661 588 353 384 282 196 75 56 45 40 Acquisition, divestiture and restructuring expense........ Credit costs (provision and OREO).......... 80 118 28 33 31 31 2 2 5 7 ------- ------- --------- --------- ------- ------ ------ ------ ------ ------ Pre-tax income.. 581 470 325 351 251 165 73 54 40 33 Taxes........... 247 206 139 154 106 72 31 24 17 14 ------- ------- --------- --------- ------- ------ ------ ------ ------ ------ Net income (loss)......... $ 334 $ 264 $ 186 $ 197 $ 145 $ 93 $ 42 $ 30 $ 23 $ 19 ======= ======= ========= ========= ======= ====== ====== ====== ====== ====== Average assets.. $21,283 $20,271 $ 7,743 $ 6,854 $10,417 $8,901 $1,195 $1,211 $2,890 $2,657 Average deposits....... $ 3,426 $ 3,316 $ 24,147 $ 22,311 $ 4,234 $3,527 $2,532 $2,612 $3,435 $2,891 Return on average common equity......... 20% 18% 21% 25% 19% 13% 28% 22% 12% 10% - ----------------------------------------------------------------------------------------------------------------- Other Businesses and Corporate Total Years Ended December 31 1996 1995 1996 1995 (dollars in millions) - ----------------------------------------------------------------------------------------------------------------- Operating revenues....... $ 254 $ 493 $ 3,704 $ 3,580 Operating expenses....... 97 216 2,131 2,039 --------- -------- -------- -------- Operating income......... 157 277 1,573 1,541 Acquisition, divestiture and restructuring expense........ 180 28 180 28 Credit costs (provision and OREO).......... 94 93 240 284 --------- -------- -------- -------- Pre-tax income.. (117) 156 1,153 1,229 Taxes........... (37) 81 503 551 --------- -------- -------- -------- Net income (loss)......... $ (80) $ 75 $ 650 $ 678 ========= ======== ======== ======== Average assets.. $ 15,995 $ 15,850 $59,523 $55,744 Average deposits....... $ 3,829 $ 3,749 $41,603 $38,406 Return on average common equity......... NM NM 14% 17% - -----------------------------------------------------------------------------------------------------------------
NM--Not meaningful. 26 CORPORATE BANKING Corporate Banking includes the Corporation's national and regional commercial lending, Global Capital Markets, Cash Management and Private Equity Investing businesses. The national and regional commercial lending businesses manage a $17 billion portfolio of loans and leases spread over a variety of lending units which in- clude Media and Communications, High Technology, Transportation, Environmental Services, Real Estate, New England Corporate Banking, Large Corporate, Asset Based Finance, Diversified Finance, Multinational, Financial Institutions and Leasing. Working closely with the Global Capital Markets area, these commercial lending businesses seek to partner with their clients by delivering relation- ship-driven financial solutions through traditional lending products, cash man- agement products, trade services, other noncredit services, and sophisticated corporate finance and risk management capabilities. Within Global Capital Mar- kets, clients have access to domestic and cross-border syndication, private placement, asset securitization and strategic advisory services. These services are offered through the Corporate Finance, Syndications, Emerging Markets Sales, Trading & Research (EMSTR), and High Yield Sales, Trading & Research (HYSTR) areas. In addition, the Corporation received approval to open a Section 20 subsidiary in the first quarter of 1997, which will provide customers with debt underwriting services. The Private Equity Investing business operates from offices in the United States, London, South America and Hong Kong. It invests in early stage compa- nies and other special situations with the expectation of exiting investments within a four to six year timeframe. The portfolio, with a cost basis of over $700 million at December 31, 1996, is diversified as to asset class, risk and industry. Gains are realized from multiple exit channels including initial pub- lic offerings, recapitalizations and financial and strategic buyouts. Net income from Corporate Banking grew $70 million from 1995. Revenue growth came primarily from higher equity and mezzanine gains recorded by Private Eq- uity Investing coupled with higher levels of income from various segments of the Global Capital Markets business, including syndication fees, advisory fees and trading account profits. In addition, credit costs declined due, in part, to improvement in the risk characteristics of the portfolio. The improvements in revenue and credit costs more than offset an increase in expenses which re- sulted mainly from investment spending in the Global Capital Markets area. Dur- ing 1996, investments were made to expand the EMSTR and HYSTR businesses, in- cluding costs associated with the Section 20 subsidiary's infrastructure. REGIONAL CONSUMER AND SMALL BUSINESS Regional Consumer and Small Business provides a distribution network that serves over 1.8 million households and over 100,000 small businesses through approximately 550 branches spanning Massachusetts, Rhode Island, Connecticut and New Hampshire. With over $24 billion of deposits, the business functions as a major funding source for the Corporation's domestic operations. Over three- quarters of the branches are located in Massachusetts, where the Corporation is ranked number one in deposit market share. Presently, the branches in Massachu- setts are operating under two labels, BayBanks and Bank of Boston. It is ex- pected that the underlying systems of the two banks will be merged by the mid- dle of 1997 and all locations will begin operating under the common brand name of BankBoston. As a by-product of this integration process, 65 branches will be closed by the middle of 1997. In addition to offering consumers traditional branch banking and deposit prod- ucts, the Corporation also provides its customers with a wide variety of other products and services: . Over 1,500 ATM machines provide customers with 24 hour access to their ac- counts. . Included in the approximately 550 branches are 73 in-store branches, which provide convenient banking services to customers where they shop. . In excess of 200,000 customers have availed themselves of home banking serv- ices through the use of their personal computers. . Complete telephone banking services are provided through two state of the art call centers in Massachusetts and Rhode Island that handle 28 million calls annually. Regional Consumer and Small Business also manages a $6 billion loan portfolio, of which $5 billion are consumer loans and $1 billion are small business loans. A variety of loan products including home equity, residential mortgage, educa- tion, automobile and other installment loans are offered to consumers in the region. Through the small business banking area, the Corporation services com- mercial customers with annual revenues of up to $10 million and is ranked as the top Small Business Administration lender in Massachusetts. Net income from Regional Consumer and Small Business declined $11 million from 1995 as an increase in expenses was partially offset by higher revenue and lower credit costs. Expense growth was due, in part, to increases from continu- ing investments in new technology, the acquisition of Bancorp and marketing campaigns related to various consumer banking products. These expense increases more than offset cost savings from the initial stages of the BayBanks integra- tion. The increase in revenue from 1995 reflected higher levels of average earning assets and retail deposits, partially offset by higher deposit costs. LATIN AMERICA The Latin America line of business operates through a network of approximately 100 offices. Individual businesses include Brazil, Southern Cone (Argentina, Chile and Uruguay) and Northern Latin America (Panama, Colombia, Mexico and Pe- ru). The Corporation's largest foreign operations are located in Argentina and Bra- zil. The Corporation has operated in Argentina since 1917, has a network of 44 branches and is one of the largest foreign banks in the country. The Corpora- tion's Argentine operations offer a wide array of products within the corpo- rate, middle market, treasury and retail businesses. Products and services of- fered include commercial and investment banking, credit cards, residential mortgages, automobile loans, mutual funds, brokerage, custody and portfolio management. The Argentine operations also participate in an Argentine pension joint venture, which was formed in response to the country's privatization of the pension system, and has approximately $550 million of assets under manage- ment and market share of approximately 10 percent. 27 The Corporation has operated in Brazil since 1946, has a network of 32 branches and is one of the largest foreign banks in the country. The principal busi- nesses of the Corporation's Brazilian operations include corporate lending, trade financing, treasury and fee-based activities, with particular emphasis on mutual funds, custody and credit cards. The Corporation's mutual funds under management in Brazil amounted to $3.7 billion at December 31, 1996, compared with $2.5 billion at December 31, 1995, making it the ninth largest mutual fund manager in Brazil. Also, the Corporation increased its presence in Brazil's global capital market activities, as evidenced by a $2 billion increase in cus- tody volumes, which were $5 billion at December 31, 1996, compared with $3 bil- lion at December 31, 1995. The Corporation's Latin American business was expanded through the establish- ment of a new operation in Peru in 1996 and recent participations in pension companies in Mexico and Uruguay. Net income from Latin America increased $52 million, or 56 percent, from 1995. This improvement was mainly due to higher levels of average earning assets, in- cluding loans, and growth in noninterest income, all primarily occurring in Ar- gentina and Brazil. The increased noninterest income was largely the result of higher trading account profits and mutual fund fees in Brazil coupled with higher revenues from the Argentine pension, retail and treasury businesses. These revenue improvements were partially offset by an increase in expenses re- lated to the cost of expanding the Argentine and Brazilian operations. For additional information on Argentina and Brazil, see the "Cross-Border Outstandings" and "Emerging Markets Countries" sections. GLOBAL ASSET MANAGEMENT Global Asset Management, which has over $20 billion of assets under management, maintains 20 domestic offices in southern New England, New York and Florida, as well as an office in the Bahamas. The group provides products and services, both domestically and internationally, to high net worth individuals, profes- sional firms and small businesses, including asset management, trust and estate planning, personal tax planning, loans and deposits. Included in assets under management are approximately $6 billion of 1784 Funds, a family of 16 no load mutual funds advised by FNBB. Global Asset Management is also overseeing the start-up of an insurance business, as the Corporation recently received ap- proval to begin selling insurance in Massachusetts. Net income from Global Asset Management grew $12 million from 1995. Revenue in- creased mainly as a result of higher levels of personal trust fees and mutual fund fees, which reflected an increase in assets under management, while the decline in expenses was due, in part, to a streamlining of the international operations, including the closing of the Luxembourg office. OTHER GLOBAL Other Global consists of the Corporation's operations in Europe and Asia/Pacific, which include offices in the United Kingdom, France, Germany, In- dia, Japan, South Korea, China, Taiwan, Hong Kong, Singapore, Indonesia and the Philippines. The existence of this network is integral to providing needed service to multinational corporations with whom the Corporation has a world- wide client relationship. Operating in London since 1922, activities in the United Kingdom include offer- ing local or multicurrency credit facilities and other commercial services to indigenous United Kingdom companies and British subsidiaries of multinational corporations. The London office also provides certain consumer banking servic- es, including mortgage loans and deposits. The Corporation has operated in France and Germany since 1972 and provides an array of commercial services to local and multinational companies, including lending facilities, treasury prod- ucts and trade financing services. Since opening its first representative office in Tokyo in 1969, the Corporation has been an active corporate lender and provider of trade services to the Asia/Pacific region. Customer segments served by the Asia/Pacific operations include local corporations, global correspondent banks and non-Asian multina- tional corporations. Targeted services offered to these clients include trade finance, foreign exchange, deposit and lending products, and capital markets services. Net income from Other Global improved slightly from 1995, reflecting an in- crease in revenue. This growth was primarily due to higher securities gains in Europe, partially offset by a lower level of foreign exchange profits in Asia/Pacific. OTHER BUSINESSES AND CORPORATE Included within Other Businesses and Corporate are the results from Global Treasury, which is responsible for asset and liability risk management; the na- tional consumer businesses (FAC, Ganis Credit Corporation, and the Credit Card business), which are currently under strategic review; the Mortgage Banking and Stock Transfer businesses, which, during 1996 and 1995, respectively, were transferred to joint ventures; and certain corporate income and expense items of a nonrecurring nature, such as charges related to the BayBanks acquisition, items related to the sale of the mortgage banking subsidiary, business reorga- nization costs and costs relating to the valuation or disposition of certain assets. The high level of assets associated with this group mainly relates to securities and other types of earning assets which are the responsibility of Global Treasury, as well as the national consumer loan portfolios. 28 FINANCIAL CONDITION RISK MANAGEMENT The Corporation's management of risk inherent in its businesses is essential in understanding and assessing its financial performance and in creating long-term value. The Corporation's primary risk factors are credit risk, liquidity risk and market risk, which includes interest rate risk and foreign currency ex- change rate risk. Credit risk is the risk of loss from a counterparty's failure or inability to meet the payment or performance terms of any contract with the Corporation. Liquidity risk is the risk of loss from the Corporation's inabil- ity to meet its obligations when they come due, without incurring unacceptable costs. Market risk is the risk of loss related to adverse changes in market prices, such as interest rates and foreign exchange rates. The Corporation has a risk management process for the identification, measurement, monitoring and control of these risk exposures. A discussion of these risk areas is included throughout the discussion of the Corporation's financial condition below. CREDIT RISK MANAGEMENT The Corporation's risk management process includes the management of all forms of credit risk, including balance sheet and off-balance-sheet exposures. The Credit Policy Committee (CPC), on a corporate-wide basis, establishes all credit policies for the Corporation, approves underwriting standards and con- centration limits, and grants credit approval authorities. An independent credit function monitors compliance by individual units with the Corporation's credit policies, works to ensure that credit due diligence and credit adminis- tration meet acceptable standards, and is responsible for the effectiveness of the loan review process. The credit function includes a staff of credit offi- cers, reporting directly to the Senior Credit Officer (SCO). These credit offi- cers are assigned to work with the various business units to ensure the integ- rity of the credit process. Business unit management has the primary responsi- bility to evaluate credit risk, ensure that each individual credit exposure is appropriately risk rated, and monitor and manage credit risks within policy and portfolio guidelines. In addition, a credit information unit provides reports on credit exposures on a corporate-wide basis. A risk review unit, which re- ports independently of both the business and credit units, audits the integrity of risk ratings and the adequacy of the credit process for all units of the Corporation. Through monthly meetings with the business unit heads and the frequent review of credit quality information, senior management in Boston oversees the world- wide credit activities, both corporate and consumer, of the Corporation. The level of management needed to approve credit exposures varies according to the size and level of risk of the credit. Corporate credits that meet specified size and risk rating thresholds must be approved by the Senior Credit Commit- tee, which is chaired by the SCO and is composed of senior credit officers and senior business unit managers on a rotating basis. Portfolio limits and under- writing standards are established by the CPC for both consumer and commercial credit exposures with common risk characteristics, such as industry or product type. An important aspect of the Corporation's portfolio management process is the management of large, individual credits, which are governed by relationship limits that are set according to risk rating. The CPC has also established tar- get risk rating profiles for the Corporation, and sets country limits on cross- border exposures to borrowers and counterparties domiciled in other countries. All limits are reviewed regularly and adjusted based on the CPC's assessment of relevant conditions. The Syndications unit is integral to portfolio management by enhancing the li- quidity of the wholesale loan portfolio. Syndications is responsible for ar- ranging participations in loans where the Corporation is the lead bank. This unit maintains contact with other institutional lenders and investors in bank structured loans, maintains information on credit structure and pricing by risk category, evaluates the market liquidity of facilities, and syndicates Corpora- tion-agented facilities to attain desired hold levels. The Corporation employs a corporate-wide process to review individual credits and identify emerging problems. Credits that deteriorate into certain defined risk categories are managed by a separate loan review unit composed of profes- sional asset recovery specialists who establish detailed asset management plans designed to mitigate risk of credit loss to the Corporation. The Corporation continually seeks to improve its credit culture to better bal- ance associated risks with its goal of optimizing value to its stockholders and customers. While sound credit policies assist the Corporation in managing expo- sure to credit risks, they do not insulate the Corporation from losses. 29 LOANS AND LEASES Table 5 shows a breakdown of the portfolio for the last five years. TABLE 5 -- LOANS AND LEASE FINANCING PORTFOLIO
December 31 1996 1995 1994 1993 1992 (dollars in millions) BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent - -------------------------------------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial........... $13,162 32.0% $12,809 33.0% $13,122 34.8% $13,199 37.9% $11,680 37.4% Commercial real estate Construction........... 284 .7 386 1.0 391 1.0 675 1.9 911 2.9 Other.................. 3,240 7.9 3,393 8.7 4,065 10.8 4,003 11.5 4,169 13.3 Consumer-related loans Secured by 1-4 family residential properties............. 6,062 14.8 6,697 17.2 7,079 18.8 5,969 17.1 5,368 17.2 Other.................. 6,898 16.8 5,554 14.3 4,559 12.1 3,524 10.1 3,037 9.7 Lease financing......... 1,816 4.4 1,564 4.0 1,482 3.9 1,367 3.9 1,322 4.2 Unearned income......... (287) (.7) (240) (.6) (239) (.6) (228) (.7) (231) (.7) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 31,175 75.9 30,163 77.6 30,459 80.8 28,509 81.7 26,256 84.0 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- INTERNATIONAL Commercial and industrial.............. 6,946 16.9 6,422 16.5 5,161 13.6 4,650 13.4 3,646 11.7 Banks and other financial institutions.. 866 2.1 796 2.1 749 2.0 690 2.0 430 1.4 Governments and official institutions............ 79 .2 82 .2 33 .1 22 .1 54 .2 Lease financing......... 368 .9 285 .7 329 .9 265 .8 218 .7 All other............... 1,720 4.2 1,159 3.0 1,053 2.8 791 2.3 721 2.3 Unearned income......... (93) (.2) (37) (.1) (76) (.2) (108) (.3) (85) (.3) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 9,886 24.1 8,707 22.4 7,249 19.2 6,310 18.3 4,984 16.0 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans and lease financing............... $41,061 100.0% $38,870 100.0% $37,708 100.0% $34,819 100.0% $31,240 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== - --------------------------------------------------------------------------------------------------------------
Total loans and lease financing increased approximately $2.2 billion from De- cember 31, 1995, reflecting an increase in domestic loans of $1 billion and an increase of $1.2 billion in international loans. The increase in domestic loans from December 31, 1995 reflected a $700 million increase in consumer-related loans, a $350 million increase in commercial, industrial and financial loans and a $250 million increase in lease financing, partially offset by a $250 mil- lion decrease in commercial real estate loans. The increase in consumer-related loans reflected a $900 million increase in credit card loans as a result of the expansion of the business during 1996 and a $400 million increase in other con- sumer loans, primarily from Ganis Credit Corporation, offset by a $600 million decrease in residential mortgages. The decrease in residential mortgages re- flected, in part, the sale of loans as part of the Corporation's sale of 20 branches during 1996, as well as other mortgage loan sales in connection with the Corporation's management of its balance sheet. The increases in commercial, industrial and financial loans resulted from increases in various loan portfo- lios, including Specialized Industries, New England Corporate Banking and Di- versified Finance. Loan levels are also affected by the timing of syndication activity. Future loan and lease financing levels could be impacted by the Cor- poration's strategic initiatives noted in the "Acquisitions, Divestitures and Strategic Alliances" section. International loans increased to $9.9 billion at December 31, 1996, from $8.7 billion at December 31, 1995. The loan growth included a $525 million increase in commercial and industrial loans and a $560 million increase in other loans, which includes residential mortgages and other consumer loans. This growth has primarily occurred in Latin America, particularly in the loan portfolios of Ar- gentina and Brazil. Total loans in these two countries have grown approximately $1 billion since December 31, 1995. A further discussion of the Argentine and Brazilian operations is included in the "Cross-Border Outstandings" and "Emerg- ing Markets Countries" sections. 30 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 1996 was dispersed among approximately 30 states. TABLE 6 -- DOMESTIC COMMERCIAL REAL ESTATE LOANS
Other December 31 New Other (in millions) MA CT England States Total - -------------------------------------------------------------------------------- 1996.......................................... $1,885 $282 $309 $1,048 $3,524 1995.......................................... $2,220 $318 $351 $ 890 $3,779 1994.......................................... $2,380 $427 $651 $ 998 $4,456
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 se- cured by real estate that is owner-occupied and where the underlying business credit, rather than the property, is viewed as the principal source of repay- ment. Overall, the level of commercial real estate loans decreased during 1996, due to decreased commercial real estate loan originations. HLTS Included in commercial, industrial and financial loans are loans made by many of the Corporation's lending businesses to finance transactions involving leveraged buyouts, acquisitions, and recapitalizations. These loans are desig- nated as highly leveraged transactions (HLTs) if, by the nature of the loan terms and the profile of the customer, the transaction qualifies for this clas- sification under the current bank regulatory definition of HLTs. Additionally, the HLT definition encompasses other more traditional credit arrangements, where a high degree of leverage would be expected, such as asset-based lending and lending to the communications industry, particularly cable, where equity is traditionally low and cash flow is the predominant factor in assessing repay- ment ability. Table 7 summarizes the Corporation's HLT portfolio for the last three years. TABLE 7 -- HIGHLY LEVERAGED TRANSACTION PORTFOLIO
December 31 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------------------------- Total loans.............................................. $1,319 $1,342 $1,272 Number of companies...................................... 116 101 84 Average loan size........................................ $ 11 $ 13 $ 15 Unused lending commitments............................... $ 677 $ 639 $ 653 Nonaccrual loans......................................... $ 1 Net credit losses (recoveries) for year.................. $ (4) $ 6 Equity and mezzanine investments......................... $ 187 $ 144 $ 105
The Corporation's HLT portfolio is spread among a variety of industries. At De- cember 31, 1996, the largest segments of the HLT portfolio by industry were as follows: media and communications -- $358 million to 23 customers; food, bever- age and tobacco -- $154 million to 18 customers; petroleum, chemicals, rubber and plastics -- $146 million to 12 customers, and transportation -- $77 million to 7 customers. Yields on HLT loans are generally higher than on most other commercial loans. Typically, interest rates on new HLTs range from 2 percent to 3 percent over the London Interbank Bank Offered Rate (LIBOR) and fees charged range from .38 percent to .75 percent of the principal amount committed. The Corporation has historically been involved in transactions that meet the regu- latory definition of HLTs, and it expects to continue to agent and participate in such transactions in the future. 31 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 1996 1995 1994 1993 1992 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........... $ 82 .6% $ 88 .7% $130 1.0% $168 1.3% $ 285 2.4% Commercial real estate Construction........... 6 2.1 25 6.5 13 3.3 32 4.7 89 9.8 Other.................. 67 2.1 103 3.0 133 3.3 277 6.9 416 10.0 Consumer-related loans Secured by 1-4 family residential properties............. 80 1.3 56 .8 53 .7 75 1.3 73 1.4 Other.................. 61 .9 35 .6 26 .6 12 .3 31 1.0 ---- ---- ---- ---- ------ 296 1.0 307 1.0 355 1.2 564 2.0 894 3.4 ---- ---- ---- ---- ------ INTERNATIONAL Commercial and industrial.............. 74 1.1 34 .5 17 .3 63 1.4 55 1.4 Banks and other financial institutions.. 1 .1 1 .2 Governments and official institutions............ 3 13.6 4 7.4 All other............... 32 1.9 32 2.8 47 4.5 31 4.0 6 .8 ---- ---- ---- ---- ------ 106 1.1 66 .8 65 .9 97 1.5 66 1.3 ---- ---- ---- ---- ------ Total nonaccrual loans and leases.............. 402 1.0 373 1.0 420 1.1 661 1.9 960 3.1 OREO.................... 50 69 143 222 366 ---- ---- ---- ---- ------ Total................... $452 $442 $563 $883 $1,326 ==== ==== ==== ==== ====== - --------------------------------------------------------------------------------------------------------------
Total nonaccrual loans and leases and OREO increased $10 million to $452 mil- lion at December 31, 1996, from $442 million at December 31, 1995. The increase from December 31, 1995 reflects the placement of one large international loan on nonaccrual status in the third quarter of 1996, as well as increases in do- mestic consumer-related nonaccrual loans, primarily driven by the credit card and residential mortgage portfolios. The increases were partially offset by de- creases in the domestic commercial loan portfolio as well as the domestic com- mercial real estate loan and OREO portfolios. In addition, the Corporation holds in available for sale securities approxi- mately $50 million of commercial paper of the international customer noted above, on which earnings are not being recognized. Any loss on this investment will be dependent upon the outcome of the customer's restructuring plan and other negotiations. The level of nonaccrual loans and leases and OREO is influenced by the economic environment, interest rates and other internal and external factors. As such, no assurance can be given as to future levels of nonaccrual loans and leases and OREO. The management of, and the accounting policy for, the Corporation's nonaccrual loans and leases and OREO is discussed above in the "Credit Risk Management" section and in Note 1 to the Financial Statements. 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) 1996 1995 1994 - ------------------------------------------------------------------------------ Balance, January 1.......................................... $442 $563 $883 Assets of entities acquired................................. 8 20 Assets of entities sold..................................... (27) Additions................................................... 618 554 684 Sales, restructurings, payments and other decreases......... (304) (396) (520) Transfers to ADP............................................ (252) Net credit losses and valuation adjustments, excluding writedowns associated with transfers to ADP................. (304) (260) (252) ---- ---- ---- Balance, December 31........................................ $452 $442 $563 ==== ==== ==== Ending balance as a percentage of related assets............ 1.1% 1.1% 1.5%
32 During 1994, the Corporation transferred certain of its lower quality real es- tate exposures, including a portion which was on nonaccrual status, to an ac- celerated disposition portfolio (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 at the date of transfer. As of December 31, 1996 the Corporation had disposed of all ADP exposures. See Note 7 to the Financial Statements for further discussion. RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses consider- ing evaluations of individual credits and concentrations of credit risks, net losses charged to the reserve, changes in quality of the credit portfolio, lev- els 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 credit risk of off-balance-sheet exposures is managed as part of the overall extension of credit to individual customers and is considered in assessing the overall adequacy of the reserve for credit losses. The amount of the reserve for credit losses associated with off-balance-sheet exposures is not significant. The amount of the reserve for credit losses is reviewed by management quarterly. Refer to Notes 7 and 22 to the Financial Statements for further discussion of the reserve for credit losses and credit risk related to off-balance-sheet contracts. The reserve for credit losses at December 31, 1996 was $883 million, or 2.15 percent of outstanding loans and leases, compared with $890 million, or 2.29 percent, at December 31, 1995. The reserve for credit losses was 220 percent of nonaccrual loans and leases at December 31, 1996, compared with 239 percent at December 31, 1995. The Corporation recorded special provisions for credit losses totaling $75 million during 1995 reflecting management's intent to strengthen further the Corporation's loan loss reserve. (See the "Provision for Credit Losses" section for further discussion.) The future level of the reserve for credit losses will continue to be a function of management's evaluation of the Corporation's credit exposures existing at the time. Therefore, no assur- ance can be given regarding the future level of the reserve. 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) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------- Balance, January 1................ $ 890 $ 827 $ 941 $ 1,116 $ 1,264 Provision......................... 231 275 154 107 288 Reserves of entities acquired..... 3 16 25 Reserves of entities sold......... (11) (32) Credit losses, excluding those related to ADP................... (310) (282) (260) (353) (553) Recoveries........................ 80 86 86 71 117 ------- ------- ------- ------- ------- Net credit losses before credit losses related to ADP............ (230) (196) (174) (282) (436) Credit losses related to ADP...... (119) ------- ------- ------- ------- ------- Balance, December 31.............. $ 883 $ 890 $ 827 $ 941 $ 1,116 ======= ======= ======= ======= ======= Loans and lease financing at December 31...................... $41,061 $38,870 $37,708 $34,819 $31,240 Average loans and lease financing........................ $40,589 $38,283 $36,017 $32,565 $31,568 Reserve for credit losses to total loans and leases at December 31.. 2.15% 2.29% 2.19% 2.70% 3.57% Reserve for credit losses to nonaccrual loans and leases at December 31...................... 220% 239% 197% 142% 116% Reserve for credit losses to nonaccrual and renegotiated loans and leases at December 31...................... 215% 219% 165% 104% 81% Net credit losses to average loans and lease financing.............. .57% .51% .81% .87% 1.38% Net credit losses to provision for credit losses.................... 99.57% 71.27% 190.26% 263.55% 151.39% Total recoveries to total credit losses........................... 25.81% 30.50% 22.69% 20.11% 21.16% - --------------------------------------------------------------------------------
33 As detailed in Table 11, net credit losses were $230 million in 1996, compared with $196 million in 1995. In 1996, the Corporation experienced higher domestic credit losses, principally driven by increases in net credit losses in the con- sumer loan portfolio, mainly the FAC and credit card portfolios, which ac- counted for approximately 85 percent of the increase in the consumer net credit losses. These increases were partially offset by lower net credit losses in the commercial real estate and commercial and industrial portfolios. International net credit losses decreased from the 1995 period reflecting decreased losses in the Argentine consumer portfolio. TABLE 11 -- NET CREDIT LOSSES
Years Ended December 31 1996 1995 1994 1993 1992 (in millions) - ------------------------------------------------------------------------------- DOMESTIC CREDIT LOSSES Commercial, industrial and financial........ $ (21) $ (47) $ (38) $ (80) $(162) Commercial real estate Construction............................... (6) (7) (10) (19) (63) Other...................................... (39) (49) (62) (79) (154) Consumer-related loans Secured by 1-4 family residential properties................................. (25) (26) (22) (33) (37) Other...................................... (167) (94) (80) (76) (82) ----- ----- ----- ----- ----- (258) (223) (212) (287) (498) INTERNATIONAL CREDIT LOSSES................. (52) (59) (48) (66) (55) ----- ----- ----- ----- ----- Credit losses, excluding those related to ADP........................................ (310) (282) (260) (353) (553) DOMESTIC RECOVERIES Commercial, industrial and financial........ 13 17 22 26 38 Commercial real estate Construction............................... 5 1 4 3 4 Other...................................... 9 20 14 7 4 Consumer-related loans Secured by 1-4 family residential properties................................. 7 5 4 6 4 Other...................................... 31 28 24 23 25 ----- ----- ----- ----- ----- 65 71 68 65 75 INTERNATIONAL RECOVERIES.................... 15 15 18 6 42 ----- ----- ----- ----- ----- Total recoveries........................... 80 86 86 71 117 ----- ----- ----- ----- ----- Net credit losses, before credit losses related to ADP............................. (230) (196) (174) (282) (436) Credit losses related to ADP................ (119) ----- ----- ----- ----- ----- Total net credit losses.................... $(230) $(196) $(293) $(282) $(436) ===== ===== ===== ===== ===== - -------------------------------------------------------------------------------
The Corporation's ability and willingness to extend new credit is a function of a variety of factors, including competition for customers' business; an analy- sis of a loan's potential profitability and risk profile, and economic condi- tions 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, 1996 level in accor- dance with strategic or credit management decisions made by the Corporation, such as the acquisition or divestiture of companies or portfolios. Given these factors, the rate of change in the size and mix of the Corporation's loan port- folios experienced during the past few years may not be indicative of the fu- ture. The above factors may also affect the levels of nonaccrual loans, net credit losses and the reserve for credit losses. Further information on the Corporation's loan and lease financing portfolio can be found in Note 6 to the Financial Statements. 34 CROSS-BORDER OUTSTANDINGS At December 31, 1996 and December 31, 1995, total cross-border outstandings represented 14 percent of consolidated total assets, compared with 12 percent at December 31, 1994. In accordance with bank regulatory rules, cross-border outstandings are: . Amounts payable to the Corporation in U.S. dollars or other non-local cur- rencies. . Amounts payable to the Corporation in local currency but funded with U.S. dollars or other non-local currencies. Included in these outstandings are deposits in other banks, resale agreements, trading securities, securities available for sale, securities held to maturity, loans and lease financing, amounts due from customers on acceptances and ac- crued interest receivable. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers are unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. The Corporation manages its cross-border outstandings using country exposure limits as discussed in the "Credit Risk Management" section. Excluded from cross-border outstandings for a given country are: . Local currency assets funded with U.S. dollars or other non-local currency where the providers of funds agree that, in the event their claims cannot be repaid in the designated currency due to currency exchange restrictions in a given country, they may either accept payment in local currency or wait to receive the non-local currency until such time as it becomes avail- able in the local market. At December 31, 1996, such outstandings related to emerging markets countries totaled $2.3 billion, compared with $1.7 bil- lion at December 31, 1995 and $.9 billion at December 31, 1994. . Local currency outstandings funded with local currency. . U.S. dollar or other non-local currency outstandings reallocated as a re- sult of external guarantees or cash collateral. . U.S. dollar or other non-local currency outstandings reallocated as a re- sult of insurance contracts, issued primarily by U.S. government agencies. Table 12 details by country the Corporation's approximate cross-border outstandings that individually amounted to 1 percent or more of its consoli- dated total assets at December 31, 1996, 1995 and 1994. TABLE 12 -- SIGNIFICANT CROSS-BORDER OUTSTANDINGS
Percentage Of (dollars in millions) Public Banks Other Total Total Assets Commitments(2) - -------------------------------------------------------------------------------- December 31, 1996(1) Argentina............... $605 $ 60 $2,165 $2,830 4.5% $ 55 Brazil.................. 305 30 585 920 1.5 40 Chile................... 60 265 385 710 1.1 30 December 31, 1995(1) Argentina............... $465 $ 50 $1,710 $2,225 3.7% $ 45 Brazil.................. 25 20 980 1,025 1.8 35 United Kingdom.......... 100 570 670 1.2 130 Chile................... 150 125 365 640 1.1 15 December 31, 1994(1) Argentina............... $305 $ 40 $1,525 $1,870 3.4% $ 95 Brazil.................. 5 795 800 1.5 30 United Kingdom.......... 5 595 600 1.1 115 - --------------------------------------------------------------------------------
(1) Cross-border outstandings in countries which totaled between .75% and 1% of consolidated total assets at December 31, 1996, 1995 and 1994 were approxi- mately as follows: 1996 -- United Kingdom, $575 million; 1995 -- None; 1994 -- Chile, $495 million. (2) Included within commitments are letters of credit, guarantees and the undisbursed portions of loan commitments. 35 In accordance with the regulatory definition of cross-border outstandings, ap- proximately $1.8 billion of Argendollar outstandings are included in the cross- border total for Argentina at December 31, 1996, compared with approximately $1.3 billion at December 31, 1995 and $1 billion at December 31, 1994. These are outstandings payable to the Corporation in U.S. dollars which are funded entirely by dollars borrowed within Argentina. EMERGING MARKETS COUNTRIES At December 31, 1996, approximately $5.8 billion of the Corporation's cross- border outstandings were to emerging markets countries, of which approximately 75 percent were loans. These cross-border outstandings were mainly composed of short-term trade credits, non-trade-related loans and leases not subject to country debt rescheduling agreements, government securities, capital invest- ments in branches and subsidiaries and trading positions managed by the Corpo- ration's EMSTR business. As shown in Table 13, at December 31, 1996, approximately $5.5 billion, or 95 percent, of the cross-border outstandings to emerging markets countries were to countries where the Corporation maintains branch networks and/or subsidiaries. TABLE 13 -- CROSS-BORDER OUTSTANDINGS
December 31 1996 1995 (in millions) - -------------------------------------------------------------------------------- Argentina......................................................... $2,830 $2,225 Brazil............................................................ 920 1,025 Chile............................................................. 710 640 Mexico............................................................ 405 210 Uruguay........................................................... 250 225 Colombia.......................................................... 200 235 Panama............................................................ 110 5 Peru.............................................................. 65 Other............................................................. 55 40 ------ ------ $5,545 $4,605 ====== ======
Table 14 shows changes in Argentine and Brazilian cross-border outstandings from December 31, 1995. TABLE 14 -- CHANGES IN ARGENTINE AND BRAZILIAN CROSS-BORDER OUTSTANDINGS
(in millions) Argentina Brazil - ------------------------------------------------------------------------------ Cross-border outstandings at December 31, 1995.............. $2,225 $1,025 Change in non-trade-related loans and leases not subject to country debt rescheduling................................... 330 (370) Net change in trade-related cross-border outstandings, primarily short-term........................................ 10 235 Net change in investment and trading securities............. 260 (10) Net change in placements.................................... 10 25 Other....................................................... (5) 15 ------ ------ Cross-border outstandings at December 31, 1996.............. $2,830 $ 920 ====== ====== - ------------------------------------------------------------------------------
ARGENTINA During 1996, the Argentine financial markets continued the improvement evi- denced in the last half of 1995. Annual interest rates declined to approxi- mately 6 percent at December 31, 1996, while inflation for the year was negli- gible. The exchange rate continued unchanged from 1995 as the government con- tinues its policy of maintaining an exchange rate of one Argentine peso to one U.S. dollar. In addition, the Argentine government implemented measures in- tended to further stabilize liquidity in the financial markets by increasing local reserve requirements of financial institutions and by obtaining committed international liquidity back-up facilities. The Corporation's Argentine assets amounted to approximately $4.8 billion at December 31, 1996, compared with approximately $3.9 billion at December 31, 1995. Included in these assets are cross-border outstandings, including Argendollar outstandings, of $2.8 billion and $2.2 billion at December 31, 1996 and 1995, respectively. Loans increased by approximately $700 million to $3.4 billion at December 31, 1996. This increase was primarily due to higher levels of corporate and consumer loans. The Corporation's Argentine securities portfo- lio is utilized for both asset and liability management and trading purposes. At December 31, 1996, the securities portfolio, which included available for sale and trading account securities, amounted to $621 million, compared with $486 million at December 31, 1995. The increase was attributable to higher lev-els of both local and international Argentine debt securities reflecting, in part, a repositioning of the portfolio in response to changing conditions in the Argentine financial markets. The Corporation's nonaccrual Argentine loans were $85 million at December 31, 1996, compared with $52 million at December 31, 1995. The increase of $33 mil- lion was due to the placement of one large loan on nonaccrual status, partially offset by declines in other nonaccrual loans. Net credit losses were $20 mil- lion in 1996 and $33 million in 1995. The decline in net credit losses of $13 million from 1995 was due to lower consumer loan charge-offs. For a further discussion of the Corporation's nonaccrual loans and net credit losses, see the "Nonaccrual Loans and Leases and OREO" and "Reserve for Credit Losses" sec- tions. For additional information on Argentina, see the "Line of Business--Latin Amer- ica" section. 36 BRAZIL During 1996, Brazil's annual inflation rate declined to approximately 10 per- cent, compared with 23 percent for 1995, while rates on short-term interbank deposits averaged approximately 27 percent for the year. The government maintains a floating band exchange rate policy to preserve the value of the Brazilian reais relative to the U.S. dollar. At December 31, 1996, the exchange rate was 1.04 reais to one U.S. dollar, compared with .97 reais to one U.S. dollar at December 31, 1995. The Corporation's Brazilian assets amounted to approximately $5 billion at De- cember 31, 1996, compared with approximately $4.5 billion at December 31, 1995. Included in these assets are cross-border outstandings of $.9 billion and $1 billion at December 31, 1996 and 1995, respectively. The increase in total as- sets was mainly due to a higher level of loans, which amounted to approximately $2.7 billion at December 31, 1996, compared with approximately $2.2 billion at December 31, 1995. The increase in loans was primarily the result of trade-re- lated outstandings. The Corporation's nonaccrual Brazilian loans were $14 million at December 31, 1996, compared with $8 million at December 31, 1995. Net credit losses were $14 million in 1996 and $6 million in 1995. For further discussion of the Corpora- tion's nonaccrual loans and net credit losses, see the "Nonaccrual Loans and Leases and OREO" and "Reserve for Credit Losses" sections. The securities portfolio consists of trading assets and available for sale se- curities and amounted to approximately $565 million at December 31, 1996. The level of this portfolio has not changed significantly from December 31, 1995; however, the Corporation has experienced a change in the mix of its securities portfolio, with an increase in the available for sale securities component. This increase was due, in part, to the management of reais and U.S. dollar bal- ance sheet positions and to the longer maturities of Brazilian government secu- rities held in this portfolio. For additional information on Brazil, see the "Line of Business--Latin America" section. The Corporation's Argentine and Brazilian operations maintained currency posi- tions both at December 31, 1996 and throughout the year. For further discussion of currency positions, see the "Currency Positions" section. It is expected that the economic situation in Latin America, including the ef- fect of world financial markets on these economies, will continue to evolve. The Corporation has not experienced any collection problems as a result of cur- rency restrictions or foreign exchange liquidity problems on its current port- folio of cross-border outstandings to emerging markets countries. However, if the actions implemented by Latin American governments do not remain effective over time, particularly with regard to liquidity, the Corporation's operations could experience adverse effects, including stress on local liquidity, deterio- ration of credit quality, a decline in the value of its securities portfolio and declines in loan and deposit levels. The Corporation will continue to moni- tor the economies of Latin American and other emerging markets countries in which it has local operations, cross-border outstandings or, where applicable, currency positions. Each emerging markets country is at a different stage of development with a unique set of economic fundamentals; therefore, it is not possible to predict what developments will occur and what impact these develop- ments will ultimately have on the economies of these countries or on the Corpo- ration's financial statements. LIQUIDITY RISK MANAGEMENT Liquidity is defined as the ability to meet known near-term and projected long- term funding commitments, while supporting selective business expansion in ac- cordance with the Corporation's strategic plan. The Corporation manages liquid- ity risk according to policy set, and oversight provided, by the Asset, Liabil- ity and Capital Committee (ALCCO), to ensure its ability to meet present and future funding needs in domestic and overseas markets. U.S. dollar liquidity management is centralized in Boston, with overseas operations managing their local currency liquidity requirements. The Corporation's U.S. dollar liquidity is monitored on a daily basis and is reviewed monthly by ALCCO. It is also re- viewed monthly by the Board of Directors (the Board). Available liquidity sources are measured against anticipated needs of the Corporation as a whole, the parent company and each of the subsidiary banks. Alternative funding strat- egies are reviewed, updated and implemented by ALCCO as considered necessary. 37 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 15 presents the levels of the Corporation's liquid assets as of each of the last three year-ends. TABLE 15 -- LIQUID ASSETS
December 31 1996 1995 1994 (in billions) - -------------------------------------------------------------------------------- Liquid assets.................................................... $7.3 $7.4 $4.8
Deposits are the principal source of the Corporation's funding. Table 16 in- cludes information related to the Corporation's funding sources for the last three years. TABLE 16 -- FUNDING SOURCES
December 31 1996 1995 1994 (dollars in billions) - ------------------------------------------------------------------------------- DOMESTIC Interest bearing deposits................................... $24.7 $24.4 $23.6 Noninterest bearing deposits................................ 8.3 7.1 7.0 ----- ----- ----- Total deposits.............................................. 33.0 31.5 30.6 Funds borrowed.............................................. 7.8 8.4 6.1 Notes payable(1)............................................ 2.7 1.8 2.0 ----- ----- ----- $43.5 $41.7 $38.7 ===== ===== ===== INTERNATIONAL Interest bearing deposits................................... $ 9.0 $ 9.0 $ 9.1 Noninterest bearing deposits................................ .8 .6 .6 ----- ----- ----- Total deposits.............................................. 9.8 9.6 9.7 Funds borrowed.............................................. 1.4 1.1 1.1 Notes payable............................................... .6 .4 .2 ----- ----- ----- $11.8 $11.1 $11.0 ===== ===== ===== CONSOLIDATED Interest bearing deposits................................... $33.7 $33.4 $32.7 Noninterest bearing deposits................................ 9.1 7.7 7.6 ----- ----- ----- Total deposits.............................................. 42.8 41.1 40.3 Funds borrowed.............................................. 9.2 9.5 7.2 Notes payable(1)............................................ 3.3 2.2 2.2 ----- ----- ----- $55.3 $52.8 $49.7 ===== ===== ===== Deposits as a percentage of
Loans........................................................... 104% 106% 107% Total assets.................................................... 69% 69% 73% - --------------------------------------------------------------------------------
(1) At December 31, 1996, includes $.5 billion of Trust Securities (defined be- low). Consolidated deposits increased approximately $1.7 billion compared with 1995, of which $1.5 billion related to increases in domestic deposits, primarily de- mand deposit accounts, which were at an uncharacteristically high level at De- cember 31, 1996. Domestic funds borrowed decreased approximately $600 million from December 31, 1995, mainly as a result of decreased borrowings under FNBB's medium-term bank note program and decreased federal funds purchased, partially offset by increased securities sold under agreements to repurchase. Notes payable increased from 1995 primarily due to aggregate issuances of $400 million of senior debt by the Corporation, $200 million of subordinated debt by FNBB, $500 million of Trust Securities (defined below), and $320 million of Brazilian debt. These issuances were offset by maturities of $100 million of senior debt and $140 million of Brazilian debt in 1996. The Corporation has an effective shelf registration statement with a remaining availability of $1 bil- lion at January 31, 1997, which can be used for the issuance of equity or debt securities. In 1996, the Corporation established two business trusts, with the exclusive purpose of each being the issuance of capital securities, which represent preferred beneficial interests in the trusts. The Corporation is the owner of all the beneficial interests of the trusts represented by common securities. In the fourth quarter of 1996, each trust issued $250 million of such capital securities (the Trust Securities) and invested the proceeds in junior subordinated debentures issued by the Corporation. The Corporation has unconditionally guaranteed the Trust Securities, which are presented in the Corporation's consolidated balance sheet as guaranteed preferred beneficial interest in Corporation's junior subordinated debt. Additional information on the Corporation's notes payable and the Trust Securi- ties can be found in Notes 10 and 11 to the Financial Statements. 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, 1996 adequate to meet current obligations, support expectations for future changes in asset and liability levels and carry on normal operations. 38 MARKET RISK MANAGEMENT Market risk is defined as the risk of loss related to adverse changes in market prices, such as interest rates and foreign currency exchange rates, of finan- cial instruments. Market risk is managed within policies and limits established by ALCCO and the Board. Risk limits are allocated by ALCCO to the Corporation's market risk-taking activities, considering the results of the risk modeling process as well as other internal and external factors. In addition, market risk policies and limits are reviewed at least annually by ALCCO, or more often if warranted by current market, economic or business conditions. The objective of the Corporation's market risk management process is to manage and control the effects of changes in market prices on the Corporation's opera- tions and financial condition. Management seeks to limit the volatility of earnings and protect economic value, while ensuring that risks from adverse movements in market prices are in compliance with the above-mentioned limits. This objective is achieved through the development and implementation of market risk management strategies, including various balance sheet actions and the use of securities and derivatives and foreign exchange contracts. TRADING ACTIVITIES The Corporation's trading activities primarily involve providing risk management services to its customers including interest rate derivatives and foreign exchange contracts. Interest rate derivatives include interest rate swaps and interest rate options, futures and forwards. Foreign exchange activities include trading spot, forward and option contracts in major foreign currencies. Additional information with respect to the Corporation's trading derivatives, including accounting policies, is provided in Notes 1 and 22 to the Financial Statements. In addition, the Corporation takes proprietary positions in domestic and emerging markets fixed income securities and local currency debt and equity securities. These proprietary trading positions are designed to generate gains from movements in the prices of securities of emerging markets public and private sector issues, and from positions which benefit from inefficiencies among various securities issued by the same country. Domestic fixed income trading activities primarily include trading U.S. Treasury and government agency securities. The risk positions taken by the Corporation in these financial instruments are subject to ALCCO approved limits. The Corporation manages the market risk re- lated to its trading portfolios using a Value-at-Risk (VAR) methodology. VAR is defined as the statistical estimate of the potential loss amount that the Cor- poration could incur from an adverse movement in market prices, given a speci- fied confidence level, over a defined time horizon. This methodology allows for the measurement of the risk of potential loss across different products and portfolios. The VAR calculations include the effects of both interest rate and foreign exchange rate risks. At December 31, 1996, the aggregate VAR limit for the Corporation's trading portfolios was approximately $50 million and the ag- gregate VAR exposure was approximately $15 million. In addition, the Corporation employs other market risk management tools in or- der to obtain a comprehensive profile of market risk. These risk management tools include stress testing, which simulates severe changes in market rates, tenor limits, concentration limits, stop loss limits and notional limits. ASSET AND LIABILITY MANAGEMENT The Corporation's U.S. dollar denominated assets and liabilities are primarily exposed to interest rate risk, which can be defined as the exposure of the Cor- poration's net income or financial condition to adverse movements in interest rates. At December 31, 1996, U.S. dollar denominated assets represented approx- imately 80 percent of the Corporation's balance sheet. The Corporation's U.S. dollar denominated positions are evaluated and managed centrally through the Global Treasury group, utilizing several modeling methodologies. The two prin- cipal methodologies used are market value sensitivity and net interest revenue at risk. The results of these models are reviewed monthly with ALCCO and at least quarterly with the Board. MARKET VALUE SENSITIVITY is defined as the potential change in market value, or the economic value, of the institution resulting from changes in interest rates. Market value sensitivity is determined by calculating the effect on the Corporation's existing assets, liabilities and off-balance-sheet positions given an immediate rise or fall in interest rates (rate shock). NET INTEREST REVENUE AT RISK is defined as the exposure of the Corporation's net interest revenue over the next twelve months to an adverse movement in in- terest rates. Net interest revenue at risk is modeled based on both an interest rate shock scenario and one that allows for a gradual change in interest rates over a period of time. The simulated net interest revenue under these scenarios is used to evaluate how differences in asset, liability and off-balance-sheet repricing structures will be reflected in the next twelve months' results of operations. The rate risk models consider such variables as: . repricing characteristics of assets and liabilities; . rate change differentials, such as federal funds rates versus savings ac- count rates; . maturity effects; . rate barrier effects, such as caps and floors, on assets and liabilities; and . prepayment volatility on various fixed rate assets such as residential mortgages. Both of these models are designed to isolate the effects of market changes in interest rates on the Corporation's existing positions, and they exclude other factors such as competitive pricing considerations, future changes in the asset and liability mix and other management actions, and, therefore, are not by themselves measures of future levels of net interest revenue. 39 These two methodologies provide different but complementary measures of the level of interest rate risk; the longer-term view is modeled through market value sensitivity, while the shorter-term view is evaluated through net inter- est revenue at risk over the next twelve months. Under current ALCCO direc- tives, market value sensitivity cannot exceed 3 percent of total risk-based capital and net interest revenue at risk cannot exceed 2 percent of net inter- est revenue over the next twelve-month period. Table 17 illustrates the year-end and average positions for market value sensi- tivity and net interest revenue at risk. TABLE 17 -- MARKET VALUE SENSITIVITY AND NET INTEREST REVENUE AT RISK POSITIONS
1996 1995(1) (dollars in millions) YEAR-END AVERAGE Year-end Average - -------------------------------------------------------------------------------- Market value sensitivity(2)................... $121 $141 $87 $48 Percent of risk-based capital................. 1.8% 2.4% 1.6% .9% - -------------------------------------------------------------------------------- Net interest revenue at risk(3)............... $ 30 $ 24 $24 $16 Percent of net interest revenue............... 1.3% 1.2% 1.4% 1.0% - --------------------------------------------------------------------------------
(1) December 31, 1995 amounts have not been restated for the acquisition of BayBanks. Restatement was impractical due to use of different interest rate risk modeling techniques by BayBanks. (2) Based on a 100 basis point adverse interest rate shock. (3) Based on the greater of a 100 basis point adverse interest rate shock or a 200 basis point adverse change in interest rates over the next twelve-month period. At December 31, 1996 and December 31, 1995, the adverse position was based on a 200 basis point decline in interest rates over the next twelve-month period. At December 31, 1996 and December 31, 1995, the Corporation's adverse market value sensitivity was to rising interest rates. The increase in the exposure was due to an increase in fixed rate assets, mainly securities, and the termi- nation of $8.2 billion of a series of interest rate futures contracts during the first quarter of 1996 that were linked to the Corporation's short-term floating rate wholesale funding. The impact of these actions was partially off- set by the issuance of long-term debt. In contrast to market value sensitivity, the Corporation's net interest revenue at risk at December 31, 1996 and December 31, 1995 was to declining interest rates over the next twelve months. As a result, net interest revenue would be adversely affected by a decline in interest rates. The December 31, 1996 posi- tion was not significantly different from the prior year. The level of exposure maintained by the Corporation is a function of the market environment and may change from period to period based on interest rate and other economic expectations. As noted above, the market value sensitivity and net interest revenue at risk models are complementary in nature. The Corpora- tion's exposure to rising interest rates under the longer-term view, and to de- clining interest rates under the shorter-term view, is managed simultaneously in compliance with ALCCO directives. The interest rate exposure for each model is dependent on the balance sheet mix and the terms and pricing of balance sheet and off-balance-sheet items at a specific point in time. Although changes in balance sheet mix and other management actions affect each model different- ly, the modeling results indicate that interest rate risk is managed within ALCCO limits. ALCCO determines its interest rate risk management strategy by considering the impact of changes in interest rates on each model, and, hence, the short- and long-term effects on the Corporation. NON-U.S. DOLLAR DENOMINATED INTEREST RATE RISK MANAGEMENT Non-U.S. dollar denominated interest rate risk is managed by the Corporation's overseas units, with oversight by the Global Treasury group. ALCCO establishes overall limits for its non-U.S. dollar denominated interest rate risk using a combination of market value risk analysis and cumulative gap limits for each country in which the Corporation has local market interest rate risk. Gap is the difference between the amount of assets and liabilities that mature or are repriced during a given period of time. A "positive" gap results when more as- sets than liabilities mature or are repriced within a given time period. Con- versely, a "negative" gap results when there are more liabilities than assets maturing or being repriced during a given time period. Limits are updated at least annually for current market conditions, considering business and economic conditions in the country at a particular point in time. The overseas units report compliance with these limits on a regular basis. At December 31, 1996, approximately 90 percent of the total overseas limits is al- located to Argentina and Brazil, and was approximately one-third of total do- mestic limits. CURRENCY POSITIONS When deemed appropriate, the Corporation will structure its balance sheet to take positions in the currencies of emerging markets and other countries where it operates. This usually occurs when the Corporation believes that it can max- imize its spread from interest operations by funding local currency assets with U.S. dollars rather than using local currency liabilities or by funding U.S. dollar assets with local currency liabilities. Whenever these positions are taken, they are subject to limits established by ALCCO and are subject to regu- lar review. Table 18 presents the Corporation's more significant currency posi- tions for 1996 and 1995. These positions represent local currency assets funded by U.S. dollars. TABLE 18 -- SIGNIFICANT CURRENCY POSITIONS IN EMERGING MARKETS AND OTHER COUNTRIES
1996 1995 (in millions) YEAR-END AVERAGE Year-end Average - -------------------------------------------------------------------------------- Argentina..................................... $174 $ 98 $ 82 $50 Brazil........................................ 140 87 132 11 Chile......................................... 84 32 7 11 South Korea................................... 50 73 82 86
These positions expose the Corporation to losses should the local currencies weaken against the U.S. dollar at a rate greater than the spread of the local currency interest rate over the U.S. dollar interest rate; such losses could be significant if a major unanticipated devaluation occurs. To date, however, these positions have been liquid in nature and management has been able to close and re-open these positions as necessary. Derivatives used by the Corporation's international operations as part of their asset and liability management process are included in Tables 19 and 20. For additional information related to the Corporation's international operations, see the "Cross-Border Outstandings" and "Emerging Markets Countries" sections. 40 DERIVATIVE FINANCIAL INSTRUMENTS Derivatives provide the Corporation with significant flexibility in managing its interest rate risk and foreign exchange exposures, enabling it to manage risk efficiently and respond quickly to changing market conditions while mini- mizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related derivative instruments, primarily interest rate swaps and futures, as part of its asset and liability management practices. All derivative activities are managed on a comprehensive basis, are included in the overall net interest revenue and market value at risk measures and limits de- scribed above, and are subject to credit standards similar to those for balance sheet exposures. Table 19 summarizes the remaining maturity of interest rate derivative finan- cial instruments entered into for asset and liability management purposes as of December 31, 1996. The level and term of such contracts may be modified as nec- essary, in response to balance sheet changes and other management actions, within ALCCO directives for market value sensitivity and net interest revenue at risk. TABLE 19 -- REMAINING MATURITY OF INTEREST RATE DERIVATIVES
Remaining Maturity 1996 1995 (dollars in millions) 1997 1998 1999 2000 2001 2002+ TOTAL Total - ----------------------------------------------------------------------------------- INTEREST RATE SWAPS Domestic Receive fixed rate swaps(1) Notional amount........ $ 326 $ 60 $100 $340 $300 $1,700 $ 2,826 $ 2,463 Weighted average receive rate.......... 7.30% 5.60% 6.40% 5.50% 6.10% 6.46% 6.38% 6.36% Weighted average pay rate.................. 5.52% 5.80% 5.75% 5.63% 5.50% 5.72% 5.67% 5.87% Pay fixed rate swaps(1) Notional amount........ $ 4 $ 24 $ 35 $ 12 $ 8 $ 83 $ 315 Weighted average receive rate.......... 6.28% 5.90% 5.61% 6.56% 5.74% 5.88% 6.25% Weighted average pay rate.................. 7.36% 9.11% 7.06% 7.08% 6.48% 7.61% 6.91% Basis swaps(2) Notional amount........ $ 75 $ 50 $ 50 $ 293 $ 468 $ 1,599 Weighted average receive rate.......... 5.54% 5.50% 5.81% 6.07% 5.90% 5.97% Weighted average pay rate.................. 5.58% 5.59% 5.56% 5.68% 5.64% 5.86% Total Domestic Interest Rate Swaps Notional Amount........ $ 405 $134 $100 $425 $312 $2,001 $ 3,377 $ 4,377 Weighted average receive rate(3)....... 6.96% 5.62% 6.40% 5.55% 6.11% 6.40% 6.31% 6.21% Weighted average pay rate(3)............... 5.55% 6.30% 5.75% 5.74% 5.56% 5.72% 5.71% 5.94% Total International Interest Rate Swaps Notional Amount(4)..... $3,598 $ 3,598 $ 1,475 OTHER DERIVATIVE PRODUCTS Futures and forwards(5)............ $3,382 $ 3,382 $12,558 Interest rate options(6) Purchased.............. $ 3,968 Written or sold........ $ 360 ------ ---- ---- ---- ---- ------ ------- ------- Total Consolidated Notional Amount........ $7,385 $134 $100 $425 $312 $2,001 $10,357 $22,738 ====== ==== ==== ==== ==== ====== ======= ======= - -----------------------------------------------------------------------------------
(1) Of the receive fixed rate swaps, approximately $1.4 billion are linked to floating rate loans, and the remainder principally to fixed rate notes pay- able. Of the swaps linked to notes payable, approximately $1 billion are scheduled to mature in 2002 and thereafter. The majority of pay fixed rate swaps are linked to available for sale securities. (2) Basis swaps represent swaps where both the pay rate and receive rate are floating rates. All of the basis swaps are linked to floating rate mort- gages and bank notes. (3) The majority of the Corporation's interest rate swaps accrue at LIBOR. In arriving at the variable weighted average receive and pay rates, LIBOR rates in effect as of December 31, 1996 have been implicitly assumed to re- main constant throughout the terms of the swaps. Future changes in LIBOR rates would affect the variable rate information disclosed. (4) The majority of the international portfolio is comprised of swaps entered into by the Corporation's Brazilian operations with a weighted average ma- turity of less than 120 days. These swaps typically include the exchange of floating rate indices that are limited to the Brazilian market. (5) At December 31, 1996, represent contracts entered into by the Corporation's Brazilian operations in the local market and are linked to short-term in- terest bearing assets and liabilities. At December 31, 1995, the majority of the futures were linked to domestic short-term liabilities and were ex- change-traded instruments. The reference instruments for futures at Decem- ber 31, 1995 comprise the major types available, such as Eurodollar depos- its and U.S. Treasury notes. During the first quarter of 1996, the Corpora- tion terminated a series of futures contracts, which accounts for the ma- jority of the decline from 1995. (6) At December 31, 1995, primarily included interest rate options used to man- age prepayment risk related to the Corporation's mortgage servicing portfo- lio. 41 Table 20 summarizes the fair value and unrecognized gains (losses) of deriva- tives used for asset and liability management purposes. Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. The decline in fair value of $175 million compared with 1995 was due to an increase in long- term interest rates during 1996, which primarily impacted the receive fixed in- terest rate swap portfolio, and resulted in a decline in its fair value, as well as the absence of interest rate options used to manage the prepayment risk related to the Corporation's mortgage servicing portfolio. TABLE 20 -- FAIR VALUE AND UNRECOGNIZED GAINS (LOSSES)
December 31 1996 1995 FAIR VALUE(1) UNRECOGNIZED Fair Value(1) Unrecognized (in millions) NOTIONAL ASSET LIABILITY GAIN (LOSS)(2) Notional Asset Liability Gain (Loss)(2) - -------------------------------------------------------------------------------------------------------- Interest rate contracts Interest rate swaps.... $ 6,975 $25 $40 $(11) $ 5,852 $ 93 $ 8 $102 Futures and forwards... 3,382 (45) 12,558 10 (89) Interest rate options(3)............. 4,328 119 34 2 ------- --- --- ---- ------- ---- --- ---- $10,357 $25 $40 $(56) $22,738 $212 $52 $ 15 ======= === === ==== ======= ==== === ==== - --------------------------------------------------------------------------------------------------------
(1) In certain cases, instruments such as futures are subject to daily cash settlements; therefore, the fair value of these instruments is zero. (2) Unrecognized gain or loss is based upon fair values and represents the amount of gain or loss that has not been recognized in the income statement at the balance sheet date. This includes amounts related to contracts that have been terminated. (3) At December 31, 1995, primarily included interest rate options used to man- age prepayment risk related to the Corporation's mortgage servicing portfo- lio. The Corporation's utilization of derivative instruments is modified from time to time in response to changing market conditions, as well as changes in the characteristics and mix of the Corporation's related assets and liabilities. In this respect, during 1996, the Corporation terminated $8.2 billion notional amount of interest rate futures contracts. The futures contracts were part of a series of three-month contracts that were linked to the Corporation's continu- ing need for short-term wholesale funding. Included in unrecognized gains (losses) at December 31, 1996 were deferred gains of $16 million and deferred losses of $33 million related to terminated contracts that are being amortized to net interest revenue over weighted average periods of 26 months and 13 months, respectively. At December 31, 1995, unrecognized gains of $32 million and unrecognized losses of $2 million related to terminated contracts were be- ing amortized to net interest revenue over weighted average periods of 32 months and 23 months, respectively. The Corporation routinely reviews its asset and liability derivative positions to determine that such instruments continue to function as effective risk management tools. See Note 22 to the Financial Statements for additional information on derivative financial instruments. CAPITAL MANAGEMENT At December 31, 1996, the Corporation had $4.9 billion in stockholders' equity, compared with $4.7 billion at December 31, 1995. The Corporation's quarterly dividend was increased 20 percent, from $.37 per share in the first quarter of 1996 to $.44 per share in each of the last three quarters of 1996 and the first quarter of 1997. The level of dividends paid on the Corporation's common stock is determined by the Board based on the Corpora- tion'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. The Corporation has a capital planning process to ensure that appropriate regu- latory capital levels and ratios are maintained. ALCCO is responsible for ap- proving all major balance sheet initiatives and managing regulatory capital levels for the Corporation and its bank subsidiaries. The Global Treasury group develops the capital plan in accordance with the Corporation's strategic objec- tives and reports, on a monthly basis, to ALCCO, regarding the current and pro forma regulatory capital positions of the Corporation and each of its principal bank subsidiaries. As of December 31, 1996, the Corporation and its bank sub- sidiaries met all capital adequacy requirements to which they are subject. Table 21 presents the Corporation's regulatory capital position and related ra- tios as of the last two year-ends. TABLE 21 -- REGULATORY CAPITAL POSITION
December 31 1996 1995 - -------------------------------------------------------------------------------- Risk-based capital ratios Tier 1 capital ratio (Tier 1 capital/total risk-adjusted assets)... 9.2% 8.5% Total capital ratio (Total capital/total risk-adjusted assets)..... 13.6% 12.8% Leverage ratio (Tier 1 capital/adjusted total average assets)....... 8.2% 7.4%
Compared with the prior year-end, the improvement in the Corporation's regula- tory capital ratios at December 31, 1996 reflected the impact of current year earnings, net of common and preferred dividends, and the issuance of the Trust Securities which are more fully discussed in the "Liquidity Risk Management" section. See Note 14 to the Financial Statements for additional information on the Cor- poration's regulatory capital. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board (the FASB) issued SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extin- guishments of Liabilities." This standard is based on a financial-components approach under which an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred as a result of a transfer of fi- nancial assets, and derecognizes financial assets when control has been surren- dered, and derecognizes liabilities when extinguished. This standard is effec- tive for transfers and servicing of financial assets and extinguishments of li- abilities occurring after December 31, 1996 (except for certain provisions de- ferred for one year by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"), and must be applied prospectively. The Corporation does not expect that, upon adoption, this standard will have a ma- terial effect on its consolidated financial statements. 42 1995 COMPARED WITH 1994 NET INTEREST REVENUE Domestic net interest revenue increased $121 million to $1,825 million, result- ing from both a higher level of earning assets and wider spreads. Average earn- ing assets increased $977 million, reflecting a $1.1 billion increase in aver- age loan and lease volume, partially offset by a decrease in other earning as- sets. Contributing to the loan volume increase was a higher level of consumer- related loans, reflecting growth of the national consumer finance portfolio, the full-year effects of the 1994 acquisitions of Pioneer Financial, A Co-oper- ative Bank (Pioneer) and BankWorcester Corporation (BankWorcester), and the 1995 acquisitions of Ganis Credit Corporation and BayBank FSB. These increases were primarily offset by the 1995 sales of Vermont and Casco, as well as a lower level of residential mortgage loans. The wider domestic spreads mainly reflected growth in earning asset yields, which outpaced increases in rates paid on interest bearing liabilities during 1995. The widening of spreads was also mainly responsible for the domestic net interest margin increasing by 20 basis points compared with 1994. The increase in international net interest revenue of $98 million to $446 mil- lion was attributable to an increase in average earning assets and wider spreads, with the latter mainly responsible for the increase in net interest margin of 56 basis points. Wider spreads primarily resulted from a shift in the average earning asset mix to higher-yielding assets, as well as asset and lia- bility positioning to benefit from prevailing interest rates. An increase in Argentine average loan and lease volume of over $600 million from 1994 also contributed to the increase in average earning assets. NONINTEREST INCOME The $131 million increase in financial service fees to $695 million primarily reflected improvements in net mortgage servicing fees, loan-related fees, and other financial service fees. Net mortgage servicing fees increased $109 mil- lion compared with 1994, reflecting $67 million of gains (net of increased ser- vicing amortization) recognized by the Corporation from the increase in market value of contracts used to manage prepayment risk in the mortgage servicing portfolio; with the remainder of the increase reflecting the overall growth of the average servicing portfolio. The improvement in syndication and agent fees of $8 million reflected the Corporation's increased emphasis on its Capital Markets business. Deposit fees declined due to the 1995 sales of Vermont and Casco. Net equity and mezzanine profits increased $80 million from 1994 due to a higher level of sales activity in 1995. Mutual fund fees improved $32 million from the 1994 level of $35 million, primarily due to higher fees from the Bra- zilian mutual fund business. The decrease in other trust and agency fees was due to the Corporation's sale of its Corporate Trust business and joint venture of its Stock Transfer business in the fourth quarter of 1995. The $16 million increase in net foreign exchange trading profits from 1994 reflected higher profits from the trading of spot and forward contracts in major foreign curren- cies. Trading profits and commissions increased $7 million from 1994 due to a higher level of profits from international securities trading during the second half of 1995. Offsetting these improvements was a decrease in other income of $40 million, primarily due to a loss of $17 million on the transfer of approxi- mately $1.3 billion of low-yielding residential mortgages to the held for sale account, of which a substantial portion were sold by December 31, 1995, and $17 million of valuation-related charges associated with certain investments and other assets. NONINTEREST EXPENSE Excluding acquisition, divestiture and restructuring expense and OREO costs, noninterest expense increased $151 million, reflecting expansion in the Corpo- ration's Latin American, Personal Banking and Capital Markets businesses. The $100 million increase in employee costs mainly included higher merit increases and higher levels of incentive compensation. Occupancy and equipment expenses increased $14 million from 1994 due to higher expenses from international oper- ations, mainly Latin America, the Corporation's acquisitions and increased rental expense related to branch openings. The decrease in FDIC premiums of $34 million reflected a reduction in the FDIC assessment rate effective in June 1995. Other expense increases included an increase of $23 million in advertis- ing and public relations related to new product introductions and the Corpora- tion's expansion into the domestic credit card business, and increases in com- munications, travel and software related expenses. The decline in OREO costs of $29 million from 1994 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 related to exiting, reorganizing and downsizing certain businesses and corporate staff units, including the reorganization of the European business and certain Asia/Pacific operations. During 1994, in connection with its acqui- sition of BankWorcester and Pioneer, the Corporation recorded acquisition-re- lated costs of $21 million. Additional information on these items is included in Note 19 to the Financial Statements. 43 BANK OF BOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1996 - ------------------------------------------------------------------------------ Average Average Balance Interest(1) Rate ASSETS Interest bearing deposits in other banks U.S. ..................................... $ 192 $ 12 5.96% International............................. 1,136 91 8.01 ---------- --------- Total.................................... 1,328 103 7.71 ---------- --------- -------- Federal funds sold and resale agreements U.S. ..................................... 474 25 5.24 International............................. 1,203 178 14.78 ---------- --------- Total.................................... 1,677 203 12.08 ---------- --------- -------- Trading securities U.S. ..................................... 552 31 5.76 International............................. 870 124 14.30 ---------- --------- Total.................................... 1,422 155 10.99 ---------- --------- -------- Loans held for sale U.S. ..................................... 260 18 6.88 International............................. 12 1 6.12 ---------- --------- Total.................................... 272 19 6.84 ---------- --------- -------- Securities U.S. Available for sale(2).................... 6,577 423 6.48 Held to maturity......................... 684 42 6.15 International Available for sale(2).................... 832 114 14.13 Held to maturity......................... 29 5 16.53 ---------- --------- Total.................................... 8,122 584 7.19 ---------- --------- -------- Loans and lease financing U.S. ..................................... 31,472 2,714 8.62 International............................. 9,117 1,135 12.44 ---------- --------- Total(3)................................. 40,589 3,849 9.48 ---------- --------- -------- Total earning assets....................... 53,410 4,913 9.20 --------- -------- Nonearning assets.......................... 6,113 ---------- Total assets(4).......................... $ 59,523 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits......................... $ 14,918 $ 401 2.69% Time deposits............................ 10,310 581 5.64 International Banks in foreign countries............... 2,883 163 5.64 Other foreign savings and time........... 6,380 535 8.37 ---------- --------- Total.................................... 34,491 1,680 4.87 ---------- --------- -------- Federal funds purchased and repurchase agreements U.S. ..................................... 4,500 259 5.77 International............................. 109 14 12.80 ---------- --------- Total.................................... 4,609 273 5.93 ---------- --------- -------- Other funds borrowed U.S. ..................................... 3,140 186 5.92 International............................. 1,002 220 21.91 ---------- --------- Total.................................... 4,142 406 9.79 ---------- --------- -------- Notes payable U.S.(5)................................... 2,119 140 6.59 International............................. 547 54 9.99 ---------- --------- Total.................................... 2,666 194 7.29 ---------- --------- -------- Total interest bearing liabilities......... 45,908 2,553 5.56 --------- -------- Demand deposits -- U.S..................... 6,635 Demand deposits -- International........... 477 Other noninterest bearing liabilities...... 1,759 Stockholders' equity....................... 4,744 ---------- Total liabilities and stockholders' equity(4)................................ $ 59,523 ========== NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. ..................................... $ 40,211 $ 1,826 4.54% International............................. 13,199 534 4.05% ---------- --------- Total.................................... $ 53,410 $ 2,360 4.42% ========== ========= - ------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securi- ties' average amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $52 million. (4) As of December 31, 1996, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respec- tively, amounted to 25%. (5) Amounts include guaranteed preferred beneficial interest in the Corpora- tion's junior subordinated debt. 44 BANK OF BOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1995 - ------------------------------------------------------------------------------ Average Average Balance Interest(1) 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 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 securi- ties' average 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, respec- tively, amounted to 22%. 45 BANK OF BOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1994 - ------------------------------------------------------------------------------- Average Average Balance Interest(1) 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 securi- ties' average 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, respec- tively, amounted to 21%. 46 BANK OF BOSTON CORPORATION CHANGE IN NET INTEREST REVENUE -- 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 1996 com- pared with 1995, and 1995 compared with 1994. The change due to the volume/rate variance has been allocated to volume. For 1996 compared with 1995, the change because of the difference in the number of days in the periods has been allo- cated to rate.
1996 Compared with 1995 1995 Compared with 1994 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in (in millions) Volume Rate Net Change Volume Rate Net Change - ------------------------------------------------------------------------------------------------ EARNING ASSETS Interest bearing depos- its in other banks U.S.................... $ (3) $ (3) $ 4 $ 4 $ 8 International.......... 4 $ (119) (115) 42 55 97 ----- -------- (118) 105 ----- -------- Federal funds sold and resale agreements U.S.................... (3) (4) (7) (52) 26 (26) International.......... 82 (175) (93) (253) (23) (276) ----- -------- (100) (302) ----- -------- Trading securities U.S.................... 16 16 5 1 6 International.......... 38 (85) (47) 58 8 66 ----- -------- (31) 72 ----- -------- Loans held for sale U.S.................... (13) (13) (19) 5 (14) International.......... 1 1 ----- -------- (12) (14) ----- -------- Securities U.S.................... 25 (1) 24 62 52 114 International.......... 32 7 39 11 5 16 ----- -------- 63 130 ----- -------- Loans and lease financ- ing U.S.................... 95 (82) 13 97 303 400 International.......... 150 (193) (43) 173 186 359 ----- -------- (30) 759 ----- -------- Interest income......... 352 (580) (228) 213 537 750 ----- -------- INTEREST BEARING LIABIL- ITIES Deposits U.S. savings........... 15 4 19 (20) 95 75 U.S. time.............. 57 4 61 37 100 137 International.......... 91 (282) (191) 97 181 278 ----- -------- (111) 490 ----- -------- Federal funds purchased and repurchase agree- ments U.S.................... 10 12 22 3 66 69 International.......... (10) (21) (31) (3) (17) (20) ----- -------- (9) 49 ----- -------- Other funds borrowed U.S.................... (35) (15) (50) 85 31 116 International.......... 24 (207) (183) (130) (20) (150) ----- -------- (233) (34) ----- -------- Notes payable U.S.................... 13 (8) 5 (5) 21 16 International.......... 33 (2) 31 9 1 10 ----- -------- 36 26 ----- -------- Interest expense........ 184 (501) (317) 119 412 531 ----- -------- Net interest revenue.... $ 89 $ 219 ===== ========
47 BANK OF BOSTON CORPORATION SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA
1996 FOURTH THIRD SECOND FIRST (dollars in millions, except per share amounts) QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------- INCOME STATEMENT DATA(1) Interest income.......... $ 1,250 $ 1,199 $ 1,202 $ 1,240 Interest expense......... 639 608 631 674 ------- ------- ------- ------- Net interest revenue.... 611 591 571 566 Provision for credit losses................... 60 57 57 57 ------- ------- ------- ------- Net interest revenue after provision for credit losses........... 551 534 514 509 Noninterest income....... 340 337 383 285 Noninterest expense...... 548 713 532 527 ------- ------- ------- ------- Income before income taxes.................... 343 158 365 267 Provision for income taxes.................... 141 78 151 112 ------- ------- ------- ------- Net income............... $ 202 $ 80 $ 214 $ 155 ======= ======= ======= ======= AVERAGE BALANCE SHEET DATA(1) Loans and lease financing................ $41,835 $41,223 $40,114 $39,179 Securities............... 8,029 8,249 8,065 8,143 Other earning assets..... 4,955 4,452 4,538 4,850 ------- ------- ------- ------- Total earning assets.... 54,819 53,924 52,717 52,172 Cash and due from banks.. 2,750 2,447 2,534 2,710 Other assets............. 3,487 3,678 3,130 3,705 ------- ------- ------- ------- Total average assets.... $61,056 $60,049 $58,381 $58,587 ======= ======= ======= ======= Deposits................. $42,031 $42,617 $41,118 $40,632 Funds borrowed........... 9,357 8,301 8,282 9,061 Other liabilities........ 1,860 1,698 1,709 1,767 Notes payable............ 2,983 2,674 2,584 2,421 Stockholders' equity..... 4,825 4,759 4,688 4,706 ------- ------- ------- ------- Total average liabilities and stockholders' equity.... $61,056 $60,049 $58,381 $58,587 ======= ======= ======= ======= PER COMMON SHARE(1) Net income Primary................. $ 1.26 $ .46 $ 1.33 $ .94 Fully diluted........... 1.24 .45 1.32 .93 Cash dividends declared.. .44 .44 .44 .37 Market value High.................... 70 57 7/8 51 1/2 50 Low..................... 58 50 1/8 46 41 5/8 AVERAGE NUMBER OF COMMON SHARES(1) (in thousands) Primary................. 152,975 153,103 153,650 154,988 Fully diluted........... 155,157 155,183 155,183 156,844 - -------------------------------------------------------------------------------------------- 1995 Fourth Third Second First (dollars in millions, except per share amounts) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------- INCOME STATEMENT DATA(1) Interest income.......... $ 1,279 $ 1,320 $ 1,297 $ 1,223 Interest expense......... 706 750 740 674 ---------- ---------- ---------- ---------- Net interest revenue.... 573 570 557 549 Provision for credit losses................... 81 51 46 97 ---------- ---------- ---------- ---------- Net interest revenue after provision for credit losses........... 492 519 511 452 Noninterest income....... 367 305 292 345 Noninterest expense...... 545 518 512 501 ---------- ---------- ---------- ---------- Income before income taxes.................... 314 306 291 296 Provision for income taxes.................... 134 131 123 141 ---------- ---------- ---------- ---------- Net income............... $ 180 $ 175 $ 168 $ 155 ========== ========== ========== ========== AVERAGE BALANCE SHEET DATA(1) Loans and lease financing................ $39,357 $39,033 $37,811 $36,894 Securities............... 7,823 7,468 7,335 7,218 Other earning assets..... 4,115 3,764 3,681 3,723 ---------- ---------- ---------- ---------- Total earning assets.... 51,295 50,265 48,827 47,835 Cash and due from banks.. 2,649 2,546 2,581 2,588 Other assets............. 3,857 3,901 3,453 3,134 ---------- ---------- ---------- ---------- Total average assets.... $57,801 $56,712 $54,861 $53,557 ========== ========== ========== ========== Deposits................. $39,903 $38,766 $37,582 $37,342 Funds borrowed........... 9,355 9,620 9,128 8,407 Other liabilities........ 1,806 1,790 1,818 1,618 Notes payable............ 2,159 2,115 2,112 2,183 Stockholders' equity..... 4,578 4,421 4,221 4,007 ---------- ---------- ---------- ---------- Total average liabilities and stockholders' equity.... $57,801 $56,712 $54,861 $53,557 ========== ========== ========== ========== PER COMMON SHARE(1) Net income Primary................. $ 1.09 $ 1.06 $ 1.03 $ .98 Fully diluted........... 1.08 1.05 1.02 .95 Cash dividends declared.. .37 .37 .27 .27 Market value High.................... 49 3/8 47 5/8 38 1/4 30 3/8 Low..................... 43 5/8 36 3/4 29 3/8 25 5/8 AVERAGE NUMBER OF COMMON SHARES(1) (in thousands) Primary................. 156,140 155,660 153,877 149,654 Fully diluted........... 157,959 157,598 155,529 154,262 - --------------------------------------------------------------------------------------------
(1) Quarterly consolidated financial information and common stock data for each of the quarters in the periods ended December 31, 1996 and 1995 have been restated, except for cash dividends declared, to reflect the Corporation's acquisition of BayBanks, which was completed in July 1996 and accounted for as a pooling of interests. 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. 48 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- The Board of Directors and Stockholders Bank of Boston Corporation: We have audited the accompanying consolidated balance sheets of Bank of Boston Corporation and Subsidiaries as of December 31, 1996 and 1995, 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, 1996. These financial statements are the responsibility of the Corporation's manage- ment. 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 stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting 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 pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, 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, 1996 and 1995, and the consoli- dated results of their operations and cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles. The consolidated financial statements of BayBanks, Inc., as of December 31, 1995 and for the years ended December 31, 1995 and 1994, prior to the restate- ment for the 1996 pooling of interests, included in the 1995 and 1994 restated consolidated financial statements were audited by other auditors whose reports expressed unqualified opinions on those financial statements. We audited the combination of the accompanying consolidated balance sheet as of December 31, 1995, and the consolidated statements of income, changes in stockholders' eq- uity and cash flows for the years ended December 31, 1995 and 1994, after re- statement for the 1996 pooling of interests; in our opinion, such consolidated financial statements have been properly combined on the basis described in Note 2 to the financial statements. Boston, Massachusetts /s/ Coopers & Lybrand L.L.P. January 16, 1997 50 BANK OF BOSTON CORPORATION CONSOLIDATED BALANCE SHEET
December 31 1996 1995 (dollars in millions, except per share amounts) - ---------------------------------------------------------------------------------- ASSETS Cash and due from banks........................................ $ 4,273 $ 3,561 Interest bearing deposits in other banks....................... 1,634 1,356 Federal funds sold and securities purchased under agreements to resell........................................................ 1,857 1,548 Trading securities............................................. 1,238 1,159 Mortgages held for sale........................................ 910 Securities Available for sale............................................ 7,804 7,582 Held to maturity (fair value of $675 in 1996 and $667 in 1995)........................................................ 680 660 Loans and lease financing (net of unearned income of $380 in 1996 and $277 in 1995)........................................ 41,061 38,870 Reserve for credit losses...................................... (883) (890) ------- ------- Net loans and lease financing................................. 40,178 37,980 Premises and equipment, net.................................... 894 832 Due from customers on acceptances.............................. 438 360 Accrued interest receivable.................................... 546 554 Other assets................................................... 2,764 2,921 ------- ------- Total Assets................................................... $62,306 $59,423 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing.......................................... $ 8,340 $ 7,127 Interest bearing............................................. 24,709 24,392 Overseas offices Noninterest bearing.......................................... 751 552 Interest bearing............................................. 9,031 8,993 ------- ------- Total deposits............................................... 42,831 41,064 Funds borrowed................................................. 9,158 9,503 Acceptances outstanding........................................ 448 360 Accrued expenses and other liabilities......................... 1,614 1,605 Notes payable.................................................. 2,821 2,189 Guaranteed preferred beneficial interest in Corporation's ju- nior subordinated debt........................................ 500 ------- ------- Total liabilities.............................................. 57,372 54,721 ------- ------- 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 $1.50 in 1996 and $2.25 in 1995 Authorized shares -- 300,000,000 in 1996 and 200,000,000 in 1995 Issued shares -- 153,172,672 in 1996 and 155,785,611 in 1995 Outstanding shares -- 153,172,672 in 1996 and 155,296,203 in 1995........................................................ 230 350 Surplus....................................................... 1,202 1,240 Retained earnings............................................. 2,925 2,548 Net unrealized gain on securities available for sale, net of tax.......................................................... 76 82 Treasury stock, at cost (489,408 shares in 1995).............. (22) Cumulative translation adjustments, net of tax................ (7) (4) ------- ------- Total stockholders' equity..................................... 4,934 4,702 ------- ------- Total Liabilities and Stockholders' Equity..................... $62,306 $59,423 ======= ======= - ----------------------------------------------------------------------------------
The Accompanying Notes Are an Integral Part of These Financial Statements. 51 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31 1996 1995 1994 (dollars in millions, except per share amounts) - --------------------------------------------------------------------------------- INTEREST INCOME Loans and lease financing, including fees........... $ 3,844 $ 3,876 $ 3,117 Securities.......................................... 569 503 380 Trading securities.................................. 155 186 114 Mortgages held for sale............................. 19 31 43 Federal funds sold and securities purchased under agreements to resell................................ 203 303 605 Deposits in other banks............................. 103 220 117 -------- -------- -------- Total interest income.............................. 4,893 5,119 4,376 -------- -------- -------- INTEREST EXPENSE Deposits of domestic offices........................ 944 879 673 Deposits of overseas offices........................ 736 912 628 Funds borrowed...................................... 679 921 906 Notes payable....................................... 194 158 132 -------- -------- -------- Total interest expense............................. 2,553 2,870 2,339 -------- -------- -------- Net interest revenue............................... 2,340 2,249 2,037 Provision for credit losses......................... 231 275 154 -------- -------- -------- Net interest revenue after provision for credit losses............................................. 2,109 1,974 1,883 -------- -------- -------- NONINTEREST INCOME Financial service fees.............................. 474 695 564 Trust and agency fees............................... 246 240 222 Trading profits and commissions..................... 76 25 18 Net securities gains................................ 23 9 14 Other income........................................ 525 340 217 -------- -------- -------- Total noninterest income........................... 1,344 1,309 1,035 -------- -------- -------- NONINTEREST EXPENSE Salaries............................................ 983 947 860 Employee benefits................................... 195 199 186 Occupancy expense................................... 203 191 184 Equipment expense................................... 138 133 126 Acquisition, divestiture and restructuring expense.. 180 28 21 Other expense....................................... 621 578 570 -------- -------- -------- Total noninterest expense.......................... 2,320 2,076 1,947 -------- -------- -------- Income before income taxes and extraordinary item... 1,133 1,207 971 Provision for income taxes.......................... 483 529 422 -------- -------- -------- Income before extraordinary item.................... 650 678 549 Extraordinary loss from early extinguishment of debt, net of tax.................................... (7) -------- -------- -------- NET INCOME.......................................... $ 650 $ 678 $ 542 ======== ======== ======== NET INCOME APPLICABLE TO COMMON STOCK............... $ 613 $ 641 $ 505 ======== ======== ======== PER COMMON SHARE Income before extraordinary item Primary............................................ $ 3.99 $ 4.17 $ 3.44 Fully diluted...................................... 3.93 4.09 3.36 Net income Primary............................................ 3.99 4.17 3.39 Fully diluted...................................... 3.93 4.09 3.31 Cash dividends declared............................. 1.69 1.28 .93 AVERAGE NUMBER OF COMMON SHARES (in thousands) Primary............................................ 153,529 153,856 148,913 Fully diluted...................................... 156,112 156,768 153,616 - ---------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. 52 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31 1996 1995 1994 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------------------------------------ PREFERRED STOCK Balance, January 1................................................................. $ 508 $ 508 $ 508 ------ ------ ------ Balance, December 31............................................................... 508 508 508 ------ ------ ------ COMMON STOCK Balance, January 1................................................................. 350 336 331 Change in par value................................................................ (118) Common stock issued Dividend reinvestment and common stock purchase plan -- 326,277 shares in 1996, 861,235 shares in 1995 and 1,103,539 shares in 1994.............................. 1 2 2 Exercise of stock options, net of surrendered shares -- 771,353 shares in 1996, 905,653 shares in 1995 and 612,492 shares in 1994................................ 3 2 2 Conversion of subordinated debentures -- 3,477,792 shares in 1995................. 8 Business combinations, net of treasury stock retired -- (3,733,533) shares in 1996 and 1,071,987 shares in 1995..................................................... (6) 2 Restricted stock grants, net of forfeitures -- (1,672) shares in 1996, 43,062 shares in 1995 and 487,323 shares in 1994........................................ 1 ------ ------ ------ Balance, December 31............................................................... 230 350 336 ------ ------ ------ SURPLUS Balance, January 1................................................................. 1,240 1,069 1,023 Change in par value................................................................ 118 Dividend reinvestment and common stock purchase plan............................... 18 33 25 Exercise of stock options.......................................................... (31) 16 8 Conversion of subordinated debentures.............................................. 71 Business combinations, net of treasury stock retired............................... (178) 38 Restricted stock................................................................... 9 7 9 Other, principally employee benefit plans.......................................... 26 6 4 ------ ------ ------ Balance, December 31............................................................... 1,202 1,240 1,069 ------ ------ ------ RETAINED EARNINGS Balance, January 1................................................................. 2,548 2,091 1,718 Net income......................................................................... 650 678 542 Restricted stock................................................................... 5 (2) (6) Payment on ESOP loan............................................................... 6 2 3 Cash dividends declared Preferred stock................................................................... (37) (37) (37) Common stock -- $1.69 per share in 1996, $1.28 per share in 1995 and $.93 per share in 1994.................................................................... (247) (184) (129) ------ ------ ------ Balance, December 31............................................................... 2,925 2,548 2,091 ------ ------ ------ NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE Balance, January 1................................................................. 82 (40) 43 Change in net unrealized gain (loss) on securities available for sale, net of tax.. (6) 122 (83) ------ ------ ------ Balance, December 31............................................................... 76 82 (40) ------ ------ ------ TREASURY STOCK Balance, January 1................................................................. (22) (27) Purchases of treasury stock -- 10,220,789 shares in 1996, 1,594,016 shares in 1995 and 1,110,640 shares in 1994...................................................... (490) (53) (29) Treasury stock reissued Dividend reinvestment and common stock purchase plan -- 491,586 shares in 1996 and 331,782 shares in 1995........................................................... 23 9 Exercise of stock options -- 1,352,081 shares in 1996, 147,370 shares in 1995 and 70,292 shares in 1994............................................................ 52 4 2 Conversion of subordinated debentures -- 530,475 shares in 1995................... 15 Business combinations -- 8,499,441 shares in 1996 and 773,621 shares in 1995...... 420 21 Restricted stock grants -- 223,515 shares in 1996 and 255,520 shares in 1995...... 10 6 Other, principally employee benefit plans -- 143,574 shares in 1996 and 106,188 shares in 1995................................................................... 7 3 ------ ------ ------ Balance, December 31............................................................... (22) (27) ------ ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1................................................................. (4) (6) (8) Change in translation adjustments, net of tax...................................... (3) 2 2 ------ ------ ------ Balance, December 31............................................................... (7) (4) (6) ------ ------ ------ Total Stockholders' Equity, December 31............................................ $4,934 $4,702 $3,931 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------
The Accompanying Notes Are an Integral Part of These Financial Statements. 53 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................... $ 650 $ 678 $ 542 Reconciliation of net income to net cash provided from (used for) operating activities Extraordinary loss from early extinguishment of debt, net of tax.................................. 7 Provision for credit losses....................... 231 275 154 Depreciation and amortization..................... 150 239 202 Provision for deferred taxes...................... 2 39 79 Net gains on sales of securities available for sale and other assets............................. (368) (210) (115) Change in trading securities, net of transfers.... (356) (588) (284) Change in mortgages held for sale................. 269 (722) 1,286 Net change in interest receivables and payables... 72 (66) (180) Other, net........................................ (122) 163 33 ------- ------- ------- Net cash provided from (used for) operating activities....................................... 528 (192) 1,724 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) interest bearing deposits in other banks............................ (278) 203 (453) Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell............................................. (309) (225) 673 Purchases of securities held to maturity........... (76) (2,531) (3,353) Maturities of securities held to maturity.......... 55 2,994 1,999 Purchases of securities available for sale......... (9,624) (4,382) (4,541) Sales of securities available for sale............. 5,827 2,101 3,051 Maturities of securities available for sale........ 4,288 1,439 591 Loans and lease financing originated by nonbank entities........................................... (21,543) (7,107) (2,773) Loans and lease financing collected by nonbank entities........................................... 20,314 5,632 2,814 Proceeds from sales of loan portfolios by bank subsidiaries....................................... 1,270 1,575 210 Net cash used for lending activities of bank subsidiaries....................................... (2,724) (1,493) (3,353) Lease financing originated by bank entities........ (5) (11) (24) Lease financing collected by bank entities......... 19 59 24 Proceeds from sales of other real estate owned..... 45 84 113 Expenditures for premises and equipment............ (237) (246) (215) Proceeds from sales of business units, premises and equipment.......................................... 264 169 161 Other, net......................................... (72) (604) (380) ------- ------- ------- Net cash used for investing activities........... (2,786) (2,343) (5,456) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from deposits.................... 1,767 815 1,963 Net cash provided from funds borrowed.............. 768 2,292 1,724 Net proceeds from issuance of notes payable........ 921 220 698 Repayments/repurchases of notes payable............ (289) (155) (502) Net proceeds from issuance of guaranteed preferred beneficial interest in Corporation's junior subordinated debt.................................. 500 Net proceeds from issuance of common stock......... 92 70 40 Purchases of treasury stock........................ (490) (53) (29) Dividends paid..................................... (284) (221) (166) ------- ------- ------- Net cash provided from financing activities...... 2,985 2,968 3,728 ------- ------- ------- Effect of foreign currency translation on cash..... (15) (18) (22) ------- ------- ------- Net change in cash and due from banks.............. 712 415 (26) Cash and due from banks at January 1............... 3,561 3,146 3,172 ------- ------- ------- Cash and due from banks at December 31............. $ 4,273 $ 3,561 $ 3,146 ======= ======= ======= - -------------------------------------------------------------------------------
The Accompanying Notes Are an Integral Part of These Financial Statements. 54 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial reporting and accounting policies of Bank of Boston Corporation (the Corporation) conform to generally accepted accounting principles. Prior period financial statements have been restated to give retroactive effect to the acquisition of BayBanks, Inc. (BayBanks), completed on July 29, 1996, which was accounted for as a pooling of interests. See Note 2 for additional informa- tion regarding the acquisition. In addition, certain prior period amounts have been reclassified to conform with current financial statement presentation. The preparation of financial statements in conformity with generally accepted ac- counting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following is a summary of the significant accounting policies. BASIS OF PRESENTATION The consolidated financial statements include the Corporation and its majority owned subsidiaries, including its major banking subsidiaries: The First Na- tional Bank of Boston (FNBB), BayBank, N.A., Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank 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 func- tional currency is designated for each foreign unit, generally the currency of the primary economic environment in which it operates. Where the functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end exchange rates, while income and expenses are trans- lated using average rates for the period. The resulting translation adjustments and any related hedge gains and losses are recorded, net of tax, as a separate component of stockholders' equity. For foreign units 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 liabili- ties, 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 transla- tion adjustments and related hedge gains and losses for these units are re- corded in current period income. The Corporation hedges a portion of its exposure to translation gains and losses in overseas branches and foreign subsidiaries through the purchase of foreign exchange rate contracts and through investments in fixed assets and se- curities. TRADING SECURITIES Trading securities comprise securities purchased in connection with the Corpo- ration'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 bor- rowed. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY Securities are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All debt and equity securi- ties that are not purchased in connection with the Corporation's trading activ- ities are classified as either securities held to maturity or securities avail- able for sale. Securities held to maturity are debt securities that the Corpo- ration has the positive intent and ability to hold to maturity. These securi- ties are reported at cost, adjusted for amortization of premium and accretion of discount. Securities available for sale are debt securities that the Corpo- ration may not hold to maturity, as well as equity securities. These securities include debt securities that are purchased in connection with the Corporation's asset/liability risk management strategy and that may be sold in response to changes in interest rates and other related factors; securities held in connec- tion with the Corporation's Private Equity Investing business; and other secu- rities 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 se- curities 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 re- spect to 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 derivative contracts in connection with its trading activities, including providing these products to its customers, and as part of its interest rate risk management strategy, with the derivatives included in the trading portfolio or the asset and liability management portfolio. Such derivatives include interest rate futures and for- wards, interest rate swaps and interest rate options. 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. Derivatives included in the asset and liability management portfolio are linked to the related assets and/or liabilities, with income or loss on derivatives recognized on the same basis as that used for the linked assets or liabilities. If the related assets are carried at fair value or the 55 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) lower of cost or fair value, the fair values of the derivatives are combined with the fair values of the assets and are recognized in income using the same method of accounting as that used for the linked assets. If the assets or lia- bilities are carried at cost, the derivatives are either accounted for on the accrual basis, with income or expense accrued over the life of the agreements as an adjustment to the yield of the related assets or liabilities, or marked to fair value, with any gain or loss deferred and amortized over the period be- ing 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 agree- ments 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 pe- riod 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. Prior to the sale of its mortgage banking subsidiary in the first half of 1996, which is more fully discussed in Note 2, the Corporation included in its asset and liability management portfolio interest rate options used to manage prepay- ment risk, and thus the value of the mortgage servicing portfolio, resulting from a decline in interest rates. While the Corporation utilized these con- tracts as part of a risk management strategy, the composition of the option portfolio was not structured for economic reasons to provide a sufficient ex- pectation that the change in its value, resulting from changes in interest rates, would substantially offset the change in the value of the mortgage ser- vicing rights to which it was linked. As a result, these contracts were 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 trad- ing 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 un- earned 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 accor- dance 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 rec- ognized to yield a level rate of return on the net investment in the leases. The Corporation generally places loans and leases on nonaccrual status when any portion of the principal or interest is 90 days past due or, in the case of certain consumer loans, 120 days past due, unless the loan or lease is well se- cured 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 demon- strated that such credit exposures are well secured, fully performing and insu- lated from the weakness surrounding the nonaccrual credit to which they relate. When loans or leases are placed on nonaccrual status, the related interest re- ceivable is reversed against interest income of the current period. Interest payments received on nonaccrual loans and leases are applied as a reduction of the principal balance when concern exists as to the ultimate collection of principal; otherwise, such payments are recognized as interest income. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the ultimate collectibility of principal or interest. RESERVE FOR CREDIT LOSSES AND PROVISION FOR CREDIT LOSSES The reserve for credit losses is available for future charge-offs of 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 deter- mined, 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 fac- tors. 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 ac- counted 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 56 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) original contractual terms. The Corporation uses the same criteria in placing a loan on nonaccrual status. Accordingly, for purposes of applying these stan- dards, 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, on the present value of expected future cash flows, using the interest rate in ef- fect 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 over- all reserve for credit losses. The Corporation recognizes interest income on impaired loans consistent with its nonaccrual policy. PREMISES AND EQUIPMENT Premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the estimated life of the improvement or the term of the lease. OTHER REAL ESTATE OWNED Other real estate owned (OREO), which is included in other assets, includes properties on which the Corporation has foreclosed and taken title. OREO is re- ported 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 re- corded in noninterest expense. INCOME TAXES The Corporation accounts for income taxes in accordance with SFAS No. 109, "Ac- counting for Income Taxes." Current tax liabilities or assets are recognized, through charges or credits to the current tax provision, for the estimated taxes payable or refundable for the current year. Net deferred tax liabilities or assets are recognized, through charges or credits to the deferred tax provi- sion, for the estimated future tax effects, based on enacted tax rates, attrib- utable to temporary differences and tax benefit carryforwards. Deferred tax li- abilities are recognized for temporary differences that will result in amounts taxable in the future, and deferred tax assets are recognized for temporary differences and tax benefit carryforwards that will result in amounts deduct- ible or creditable in the future. The effect of enacted changes in tax law, in- cluding changes in tax rates, on these deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A deferred tax valuation reserve is established if it is more likely than not that all or a portion of the Corporation's deferred tax assets will not be realized. Changes in the deferred tax valuation reserve are recognized through charges or credits to the deferred tax provision. For financial reporting purposes, in- vestment tax credits received in connection with lease financing are recognized as lease income over the investment life of the related asset. PER SHARE CALCULATIONS 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 convertible debentures. As described in Note 10, the Corporation's convertible debentures were con- verted to common stock in March 1995. 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 convertible debentures. The ef- fect of stock options and convertible debentures is excluded from the computa- tion of fully diluted net income per common share in periods in which their ef- fect would be anti-dilutive. Cash dividends declared per common share for all periods presented in the ac- companying consolidated statement of income represent the historical cash divi- dends of the Corporation. 2. MERGERS, ACQUISITIONS, JOINT VENTURES AND DIVESTITURES In July 1996, the Corporation completed its acquisition of BayBanks. The Corpo- ration issued 43.6 million shares of its common stock in exchange for substan- tially all of the outstanding shares of BayBanks common stock by exchanging 2.2 shares of its common stock for each outstanding BayBanks share. The acquisition was accounted for as a pooling of interests and, accordingly, the historical book values of the assets and liabilities of BayBanks, as reported on its bal- ance sheet, were carried over onto the Corporation's consolidated balance sheet, and no goodwill or other intangible assets were created. The acquisition is reflected in the accompanying consolidated financial statements as though the Corporation and BayBanks had operated as a combined entity for all periods presented. In connection with the acquisition, the Corporation recorded re- structuring and merger-related costs of $180 million ($117 million after-tax). These costs are more fully discussed in Note 19. In connection with the ap- proval of the transaction by regulatory authorities, during the fourth quarter of 1996, the Corporation sold 20 branches of the resulting combined entity, comprising a total of approximately $500 million in loans and $700 million in deposits, at a pre-tax gain of approximately $47 million ($27 million after- tax). 57 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the results of operations of the Corporation and BayBanks for the six months ended June 30, 1996. These results are included in the results of operations for the year ended December 31, 1996, presented in the accompanying consolidated statement of income.
Six Months Ended June 30, 1996 (in millions) Corporation BayBanks Combined - ------------------------------------------------------------------------------- Net interest revenue............................. $872 $265 $1,137 Noninterest income............................... $550 $118 $ 668 Net income....................................... $295 $ 74 $ 369
The following tables set forth reconciliations of revenue and net income previ- ously reported by the Corporation with the combined amounts presented in the accompanying consolidated statements of income for the years ended December 31, 1995 and 1994.
Year Ended December 31, 1995 (in millions) Corporation BayBanks Combined - -------------------------------------------------------------------------------- Net interest revenue.............................. $1,741 $508 $2,249 Noninterest income................................ $1,091 $218 $1,309 Net income........................................ $ 541 $137 $ 678
Year Ended December 31, 1994 (in millions) Corporation BayBanks Combined - -------------------------------------------------------------------------------- Net interest revenue.............................. $1,572 $465 $2,037 Noninterest income................................ $ 828 $207 $1,035 Net income........................................ $ 435 $107 $ 542
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 $1.3 billion in deposits. The Corporation exchanged 4.6 million shares of its common stock, with a value of approximately $229 mil- lion, for all of the outstanding common stock of Bancorp. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Bancorp were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the transaction is being amortized over a ten- year period. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. Pro forma results of opera- tions including Bancorp for the years ended December 31, 1996 and 1995 are not presented, since the results would not have been significantly different in re- lation to the Corporation's results of operations. During the first six months of 1996, the Corporation completed a transaction with two equity investment firms and Barnett Banks, Inc. (Barnett), in which its mortgage banking subsidiary, BancBoston Mortgage Corporation (BBMC), and Barnett's mortgage subsidiary were sold to a newly formed independent mortgage company, HomeSide, Inc. (HomeSide). As a result of this transaction, the Corpo- ration realized a gain of $106 million, or $67 million after-tax, and held a one-third interest in HomeSide. Under the sale agreement, the Corporation agreed to maintain a risk management program designed to protect the enterprise value of BBMC through the date of the sale. The above-mentioned gain was offset in 1996 by $111 million of losses, or $70 million after-tax, net of decreased servicing amortization, from the change in market value of the contracts used to manage the prepayment risk in the mortgage servicing portfolio and the eco- nomic value of BBMC pending the completion of the sale to HomeSide. In December 1995, BayBanks completed its acquisition of Cornerstone Financial Corporation (Cornerstone), parent company of Cornerstone Bank of Derry, New Hampshire, with total assets of $143 million. BayBanks paid Cornerstone stock- holders $18 million in cash. 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. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. 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 busi- ness, resulting in a pre-tax gain of $20 million, or $12 million after-tax. In July 1995, BayBanks 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. BayBanks paid NFS stockholders $97 million, comprising $58 mil- lion 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 acqui- sition has been included in the accompanying consolidated financial statements since the acquisition date. In February 1995, the Corporation completed its acquisition of Ganis Credit Corporation (Ganis), a privately-held consumer finance company with headquar- ters in Newport Beach, California. The Corporation exchanged 773,621 shares of its common stock, with a value of approximately $22 million, for all of the outstanding common stock of Ganis. In January 1996 and 1997, the Corporation issued to Ganis stockholders 153,741 and 107,794 shares, respectively, of its common stock, with a value in each case of approximately $7 million, as a re- sult of the achievement by Ganis of certain performance goals. 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 consolidated fi- nancial statements since the acquisition date. 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 re- sulted in a combined pre-tax gain of approximately $75 million, or $30 million after-tax. 58 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, cash and due from banks are con- sidered to be cash equivalents. Foreign currency cash flows are converted to U.S. dollars using average rates for the period. During 1996, 1995 and 1994, the Corporation paid interest of approximately $2.5 billion, $2.8 billion and $2.4 billion, respectively. The Corporation paid income taxes of approximately $401 million in 1996, $565 million in 1995 and $237 million in 1994. During 1996, 1995 and 1994, the Corporation transferred approximately $42 million, $49 million and $105 million, respectively, to OREO from loans. Loans made to fa- cilitate sales of OREO properties were not significant in 1996, $6 million in 1995 and $10 million in 1994. Non-cash transactions in 1995 included $94 mil- lion from the issuance of common stock in connection with the Corporation's re- demption of its convertible subordinated debentures due 2011, more fully de- scribed in Note 10, and the transfer of $3.3 billion of securities held to ma- turity to securities available for sale in response to the issuance, in Novem- ber 1995, of "A Guide to Implementation of Statement 115 on Accounting for Cer- tain Investments in Debt and Equity Securities," by the Financial Accounting Standards Board, which allowed the Corporation to reassess the appropriateness of the classification of securities held at that time. During 1994, the Corpo- ration transferred a total of $378 million of lower quality real estate expo- sures to an accelerated disposition portfolio. This transfer is more fully de- scribed in Note 7. 4. RESERVE REQUIREMENTS, RESTRICTED DEPOSITS AND PLEDGED ASSETS At December 31, 1996 and 1995, cash and due from banks included $1 billion and $1.2 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 $2 million and $37 million at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, securities, loans and other assets with a book value of $3.7 billion and $4.4 billion, respectively, were pledged to collateralize repurchase agreements, public deposits and other items. 5. SECURITIES A summary comparison of securities available for sale by type is as follows:
GROSS GROSS December 31, 1996 UNREALIZED UNREALIZED CARRYING (in millions) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------ U.S. Treasury........................... $1,669 $ 12 $ 6 $1,675 U.S. government agencies and corporations -- mortgage-backed securities............................. 3,789 31 19 3,801 States and political subdivisions....... 172 1 173 Foreign debt securities................. 1,095 48 10 1,133 Other debt securities................... 250 7 1 256 Marketable equity securities............ 156 62 1 217 Other equity securities................. 549 549 ------ ---- --- ------ $7,680 $161 $37 $7,804 ====== ==== === ====== 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 ====== ==== === ======
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 $152 million and $76 million at December 31, 1996 and 1995, respective- ly. Further information with respect to the fair value of these securities is included in Note 28. 59 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary comparison of securities held to maturity by type is as follows:
GROSS GROSS December 31, 1996 AMORTIZED UNREALIZED UNREALIZED FAIR (in millions) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------ U.S. Treasury........................... $ 3 $ 3 U.S. government agencies and corporations -- mortgage-backed securities.............................. 535 $ 2 $ 7 530 States and political subdivisions....... 6 6 Foreign debt securities................. 11 11 Other equity securities................. 125 125 ---- --- --- ---- $680 $ 2 $ 7 $675 ==== === === ====
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 ==== === === ====
Other equity securities included in securities held to maturity represent secu- rities, 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. A summary comparison of debt securities available for sale by contractual matu- rity is as follows:
December 31 1996 1995 FAIR Fair (in millions) COST VALUE Cost Value - ------------------------------------------------------------------------------- Within one year.................................... $1,345 $1,340 $1,844 $1,844 After one but within five years.................... 2,565 2,607 2,472 2,518 After five but within ten years.................... 1,412 1,432 1,165 1,190 After ten years.................................... 1,653 1,659 1,330 1,343 ------ ------ ------ ------ $6,975 $7,038 $6,811 $6,895 ====== ====== ====== ======
A summary comparison of debt securities held to maturity by contractual matu- rity is as follows:
December 31 1996 1995 AMORTIZED FAIR Amortized Fair (in millions) COST VALUE Cost Value - -------------------------------------------------------------------------------- Within one year................................. $ 11 $ 11 $ 11 $ 11 After one but within five years................. 114 113 115 115 After five but within ten years................. 241 241 200 208 After ten years................................. 189 185 217 216 ---- ---- ---- ---- $555 $550 $543 $550 ==== ==== ==== ====
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. In 1996, the Corporation realized gross gains of $44 million and gross losses of $21 million from the sale of securities available for sale. Total proceeds from such securities sales amounted to $4.7 billion. In 1995, the Corporation realized gross gains of $11 million and gross losses of $2 million from the sale of securities available for sale. Total proceeds from such securities sales in 1995 amounted to $1.4 billion. In 1994, the Corporation realized gross gains of $23 million and gross losses of $9 million from the sale of securities available for sale. Total proceeds from such securities sales in 1994 amounted to $2.5 billion. The above amounts exclude equity and mezzanine profits, which are included in other income. 60 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. LOANS AND LEASE FINANCING
December 31 1996 1995 (in millions) - -------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial.......................... $13,162 $12,809 Commercial real estate Construction................................................. 284 386 Other........................................................ 3,240 3,393 Consumer-related loans Residential mortgages........................................ 3,184 4,141 Home equity loans............................................ 2,878 2,556 Credit card.................................................. 1,395 495 Other........................................................ 5,503 5,059 Lease financing............................................... 1,816 1,564 Unearned income............................................... (287) (240) ------- ------- 31,175 30,163 ------- ------- INTERNATIONAL Commercial and industrial..................................... 6,946 6,422 Banks and other financial institutions........................ 866 796 Governments and official institutions......................... 79 82 Lease financing............................................... 368 285 All other..................................................... 1,720 1,159 Unearned income............................................... (93) (37) ------- ------- 9,886 8,707 ------- ------- $41,061 $38,870 ======= =======
7. RESERVE FOR CREDIT LOSSES An analysis of changes in the reserve for credit losses follows:
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------ Balance, January 1....................................... $ 890 $ 827 $ 941 Reserves of entities acquired............................ 3 16 25 Reserves of entities sold................................ (11) (32) Provision................................................ 231 275 154 Credit losses............................................ (310) (282) (260) Recoveries............................................... 80 86 86 ----- ----- ----- Net credit losses....................................... (230) (196) (174) Credit losses related to exposures transferred to accelerated disposition portfolio....................... (119) ----- ----- ----- Balance, December 31..................................... $ 883 $ 890 $ 827 ===== ===== =====
The portion of the reserve for credit losses related to off-balance-sheet expo- sures is not material. At December 31, 1996, impaired loans in accordance with SFAS Nos. 114 and 118 totaled $260 million, of which loans totaling $38 million required no valuation reserve and loans totaling $222 million required a valuation reserve of $65 million. For the year ended December 31, 1996, average impaired loans were ap- proximately $277 million. At December 31, 1995, impaired loans 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 years ended De- cember 31, 1996 and 1995 was not material. During 1994, in order to expedite the disposition of problem real estate expo- sures 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 an accelerated disposition portfolio. 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 has disposed of all of these exposures with minimal additional gains and losses on disposition. 8.OTHER ASSETS
December 31 1996 1995 (in millions) - ------------------------------------------------------------------------------- Accounts receivable.............................................. $ 457 $ 405 Goodwill and other intangibles................................... 403 352 Investments in limited partnerships.............................. 400 183 Equity investments in affiliates................................. 281 149 Prepaid pension cost............................................. 160 187 OREO............................................................. 50 70 Mortgage servicing assets........................................ 553 All other........................................................ 1,013 1,022 ------ ------ $2,764 $2,921 ====== ======
9.FUNDS BORROWED
December 31 1996 1995 (in millions) - ------------------------------------------------------------------------------- Federal funds purchased.......................................... $ 527 $1,869 Term federal funds purchased..................................... 1,442 870 Securities sold under agreements to repurchase................... 2,034 1,688 Short-term bank notes............................................ 1,507 1,190 Medium-term bank notes........................................... 396 1,871 Demand notes issued to the U.S. Treasury......................... 704 361 All other........................................................ 2,548 1,654 ------ ------ $9,158 $9,503 ====== ======
Medium-term bank notes included borrowings with maturities of greater than one year of $115 million at December 31, 1996. All other funds borrowed included borrowings with maturities of greater than one year of $535 million at December 31, 1996 and $333 million at December 31, 1995. At December 31, 1996 and 1995, the Corporation had availability under various borrowing arrangements of $1.5 billion and $1.4 billion, respectively. The Corporation had no significant com- pensating balance arrangements at December 31, 1996 and 1995. 61 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10.NOTES PAYABLE
By Remaining Maturity at December 31 DUE LESS THAN DUE DUE 1996 1995 (in millions) 1 YEAR 1-5 YEARS 6-10 YEARS TOTAL Total - -------------------------------------------------------------------------------- PARENT COMPANY Senior notes....................... $275 $125 $ 400 $ 100 Subordinated notes................. 129 293 $ 748 1,170 1,169 ---- ---- ------ ------ ------ Subtotal.......................... 404 418 748 1,570 1,269 SUBSIDIARIES Senior notes....................... 343 81 216 640 458 Subordinated notes................. 13 598 611 462 ---- ---- ------ ------ ------ Subtotal.......................... 343 94 814 1,251 920 ---- ---- ------ ------ ------ $747 $512 $1,562 $2,821 $2,189 ==== ==== ====== ====== ======
Notes payable are unsecured obligations of the Corporation or its subsidiaries. Certain of the indentures under which these notes were issued prohibit the Cor- poration from making any payment or other distribution in the stock of FNBB un- less FNBB unconditionally guarantees payment of principal and interest on the notes. The distribution shown above by remaining maturity is based on contrac- tual maturity. Notes payable at December 31, 1996 and 1995 include fixed rate notes of $1,962 million and $1,659 million, respectively, and variable rate notes of $859 mil- lion and $530 million, respectively. Fixed rate notes outstanding at December 31, 1996 mature at various dates through 2006 at interest rates ranging from 5.90% to 10.50%. The consolidated weighted average interest rates on fixed rate notes at December 31, 1996 and 1995 were 7.69% and 7.78%, respectively. The Corporation has entered into interest rate swap agreements that have effectively converted a portion of its fixed rate obligations to floating rate obligations. At December 31, 1996, such interest rates ranged from 5.50% to 5.89%. Variable rate notes outstanding, with interest rates ranging from 5.53% to 9.25% at December 31, 1996, mature at various dates through 2004. The con- solidated weighted average interest rates on variable rate notes at December 31, 1996 and 1995 were 6.46% and 6.68%, respectively. During 1996, the Corporation issued $400 million in senior floating and fixed rate medium-term notes, due in 1997 through 1999, and FNBB issued $200 million of 7 3/8% subordinated notes, due 2006. In addition, $320 million of medium- term notes were issued by a Brazilian subsidiary of FNBB, and $140 million of such notes matured. Also in 1996, the Corporation's $100 million floating rate senior notes, issued in 1994, matured. During 1995, the Corporation called for redemption its 7 3/4% convertible sub- ordinated 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, result- ing in the issuance by the Corporation of approximately 4,008,000 shares of its common stock. Primary earnings per share for the year ended December 31, 1995 would have been $4.15 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 ac- crued 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 penal- ty. The loss on these early extinguishments of debt amounted to $7 million, net of tax, or $.05 per common share on both a primary and fully diluted basis, and is presented as an extraordinary item in the accompanying consolidated state- ment of income. Notes payable maturing during the next five years amount to $747 million in 1997, $181 million in 1998, $75 million in 1999, zero in 2000 and $256 million in 2001. 11. GUARANTEED PREFERRED BENEFICIAL INTEREST IN CORPORATION'S JUNIOR SUBORDINATED DEBT In 1996, BankBoston Capital Trust I and BankBoston Capital Trust II (the Trusts) were formed for the exclusive purpose of issuing capital securities (Trust Securities) and investing the proceeds from the sale of the Trust Secu- rities in junior subordinated debentures issued by the Corporation. The Corpo- ration is the owner of all the beneficial interests of the Trusts represented by common securities, and has unconditionally guaranteed all of the Trusts' ob- ligations under the Trust Securities. In November and December 1996, a total of $500 million of Trust Securities were issued, consisting of $250 million of 8 1/4% Trust Securities issued by BankBoston Capital Trust I and $250 million of 7 3/4% Trust Securities issued by BankBoston Capital Trust II. Both issues of Trust Securities have a liquidation preference of $1,000 per Trust Security and are scheduled to mature on December 15, 2026. Distributions on these securities are payable semiannually on June 15 and December 15, commencing June 15, 1997; such distributions can be deferred at the option of the Corporation for up to five years. The Trust Securities can be prepaid in whole or in part on or after December 15, 2006 at a redemption premium, that declines to 100% of liquidation preference at December 15, 2016. Distributions on the securities are included in interest expense. 62 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12.PREFERRED STOCK A summary of the Corporation's Adjustable Rate Cumulative Preferred Stock (Ad- justable Rate Preferred Stock) issued and outstanding is as follows:
Series A Series B Series C - ------------------------------------------------------------------------------- Outstanding at December 31, 1996 and 1995 Shares.......................................... 1,044,843 1,574,315 774,783 Amount (in millions)............................ $ 52 $ 79 $ 77 Dividend rates At December 31, 1996........................... 6.00% 6.00% 5.50% Minimum........................................ 6.00% 6.00% 5.50% Maximum........................................ 13.00% 13.00% 12.50% Dividends per share 1996........................................... $ 3.00 $ 3.00 $ 5.50 1995........................................... $ 3.06 $ 3.01 $ 5.50 1994........................................... $ 3.02 $ 3.02 $ 5.51 Liquidation preference per share................ $ 50 $ 50 $ 100
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, 1996 and 1995 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 deposi- tary shares, with each depositary share representing a one-tenth interest in a share of the respective preferred stock, and entitles the holder to a propor- tional interest in all rights and preferences of a share of Fixed Rate Pre- ferred 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). 13.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. In 1995, the plan was amended to exclude the transactions contemplated in the BayBanks acquisition. 14.CAPITAL ADEQUACY A summary of the Corporation's regulatory capital position and related ratios follows:
Well Capitalized December 31 1996 1995 Minimum (dollars in millions) - -------------------------------------------------------------------------------- Risk-based capital ratios Tier 1 capital ratio............................. 9.2% 8.5% 6.0% Total capital ratio.............................. 13.6% 12.8% 10.0% Tier 1 leverage ratio............................. 8.2% 7.4% 5.0% Tier 1 capital.................................... $ 4,954 $ 4,275 Tier 2 capital.................................... $ 2,337 $ 2,165 Total capital..................................... $ 7,291 $ 6,440 Total risk-adjusted assets........................ $53,583 $50,382 Adjusted total average assets..................... $60,537 $57,507
The Corporation is subject to quantitative regulatory capital adequacy require- ments which take into account the differing risk profiles of banking organiza- tions by assigning risk weights to both assets and the credit equivalent amounts of off-balance-sheet exposures. The Corporation and each of its bank subsidiaries are required to maintain minimum ratios of Tier 1 and total capi- tal to total risk-adjusted assets, and of Tier 1 leverage capital to adjusted total average assets. Tier 1 capital includes common stockholders' equity and qualifying preferred stock (including the Trust Securities described in Note 11); total capital includes Tier 1 capital and, subject to certain limitations, limited-life preferred stock, mandatory convertible securities, subordinated debt and a portion of the reserve for credit losses. 63 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Under the regulatory framework for prompt corrective action established by The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the Corporation and each of its bank subsidiaries must meet specific guidelines that involve quantitative measures of the Corporation's and each of its bank subsidiaries' assets, liabilities and certain off-balance-sheet exposures as calculated under regulatory accounting practices. The Corporation's and each of its bank subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 1996, each of the Corporation's bank subsidi- aries satisfied the requirements of the well capitalized category under the regulatory framework for prompt corrective action. The capital categories of each of the Corporation's bank subsidiaries are determined solely for purposes of applying FDICIA's provisions, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's bank subsidiaries. 15.DIVIDENDS AND LOAN RESTRICTIONS Bank regulations require the approval of bank regulatory authorities if the dividends declared by a bank subsidiary exceed certain prescribed limits. For 1997, aggregate dividend declarations by the Corporation's bank subsidiaries without prior regulatory approval are limited to approximately $551 million of their undistributed earnings at December 31, 1996, plus an additional amount equal to their net profits, as defined, for 1997 up to the date of any dividend declaration. However, for any dividend declaration, the Corporation's subsidi- aries, 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 that 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 ap- proximately $480 million at December 31, 1996, and would be subject to specific collateral requirements. Based on the foregoing limitations, an aggregate of approximately $3.9 billion of the Parent Company's investment in bank subsidiaries of $5 billion, which includes bank holding companies and their subsidiaries, was restricted from transfer to the Parent Company at December 31, 1996. 16.OTHER INCOME
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- Net equity and mezzanine profits................................ $209 $110 $ 30 Gain on sale of mortgage banking subsidiary..................... 106 Net foreign exchange trading profits............................ 54 60 44 Gain on sale of branches/banking subsidiaries................... 47 75 Equity in undistributed earnings of affiliates.................. 35 18 1 Gains from sales of mortgage servicing rights................... 13 10 11 All other....................................................... 61 67 131 ---- ---- ---- $525 $340 $217 ==== ==== ====
64 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 17.EMPLOYEE BENEFITS The Corporation maintains qualified non-contributory defined benefit pension plans (the Plans) covering substantially all domestic employees. The Corpora- tion funds the Plans in compliance with the requirements of the Employee Re- tirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended. The principal plan, which covers most domestic employees other than BayBanks employees, 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, years of service and a specified rate of interest. Benefits accrued prior to 1989 under the principal plan 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. On January 1, 1997, BayBanks' pension plan was merged into the Corporation's principal plan. Employee benefits expense (income) for the Plans included the following:
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- Service cost (benefits earned during the period)............... $ 26 $ 22 $ 25 Interest cost on projected benefit obligation............... 34 32 29 Return on plan assets Actual.......................... (111) (161) 5 Actuarial deferral of gains (losses)........................ 54 110 (59) Amortization Unrecognized net asset.......... (6) (6) (6) Unrecognized prior service cost............................ 3 2 2 Other, net...................... 3 2 1 --- --- --- Net pension expense (income)..... $ 3 $ 1 $ (3) ===== ===== ===== - ------------------------------------------------------------------------------- The following table sets forth the funded status of the Plans: December 31 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------------------------- Projected benefit obligation Vested benefits................. $ 372 $368 $282 Nonvested benefits.............. 32 35 33 ----- ---- ---- Accumulated benefit obligation... 404 403 315 Effect of projected future compensation levels.............. 75 79 77 ----- ---- ---- Projected benefit obligation..... $ 479 $482 $392 ===== ==== ==== Plan assets at fair value (primarily listed stocks and fixed income securities)......... $ 752 $688 $552 ===== ==== ==== Plan assets in excess of projected benefit obligation..... $ 273 $206 $160 Unrecognized net (gain) loss..... (114) (15) 37 Unrecognized prior service cost.. 13 14 13 Unrecognized net asset........... (12) (18) (23) ----- ---- ---- Prepaid pension cost............. $ 160 $187 $187 ===== ==== ==== Assumptions used in actuarial calculations are as follows: Weighted average discount rate at December 31.................. 7.75% 7.25% 8.25% to 8.5% Rate of increase in future compensation levels at December 31.............................. 4.5% 4.45% to 4.5% 4.5% to 5.25% Account balance interest rate at December 31..................... 6.0% 6.0% 6.5% Expected long-term rate of return on assets for the years ended December 31............... 9.0% TO 10.0% 9.0% 9.0% to 9.5% - -------------------------------------------------------------------------------
65 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Corporation also maintains nonqualified deferred compensation and retire- ment plans for certain executives. At December 31, 1996 and 1995, $26 million and $25 million, respectively, were included in accrued expenses and other lia- bilities for these plans. Charges to operations related to these plans were $5 million in 1996 and $4 million for each of 1995 and 1994. These nonqualified plans are unfunded and payments to plan participants are made by the Corpora- tion, except that certain nonqualified benefits are paid from a trust that was funded by BayBanks in 1996. The fair value of assets in the trust was $16 mil- lion at December 31, 1996. The Corporation provides certain health and life insurance benefits for retired employees. Most domestic employees of the Corporation, except BayBanks employ- ees, currently receive credits of up to $10,000 based on years of service, which are used to purchase postretirement health care coverage through the Cor- poration. Life insurance coverage is dependent on years of service at retire- ment. BayBanks employees retiring on or 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 do not receive the Medicare supplement and pay the full cost of life insurance and medical insurance premiums at the Corporation's rates. Pursuant to SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," these postretirement benefits are recognized over the service lives of the employees. Commencing January 1, 1997, all BayBanks employees will be covered under the principal benefit plans of the Corporation, including postretirement health and life insurance benefits. The components of postretirement benefits expense were as follows:
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------ Service cost (benefits earned during the period).......................... $ 1 $ 1 $ 1 Interest cost on projected benefit obligation........................... 4 5 5 Amortization Unrecognized transition obligation... 4 4 5 Unrecognized net gain................ (1) (1) ---- ---- ---- Net postretirement benefits expense... $ 8 $ 9 $ 11 ==== ==== ==== - ------------------------------------------------------------------------------ The following table sets forth the status of the Corporation's accumulated postretirement benefit obligation: December 31 1996 1995 1994 (dollars in millions) - ------------------------------------------------------------------------------ Accumulated benefit obligation Retirees............................. $ 44 $ 51 $ 53 Active employees -- eligible to retire.............................. 10 6 7 Active employees -- not eligible to retire.............................. 9 9 9 ---- ---- ---- Accumulated postretirement benefit obligation........................... 63 66 69 Unrecognized net gain................. 24 17 16 Unrecognized transition obligation.... (58) (62) (76) ---- ---- ---- Postretirement benefit liability...... $ 29 $ 21 $ 9 ==== ==== ==== Assumptions used in actuarial calculations are as follows: Weighted average discount rate at December 31......................... 7.75% 7.25% 8.25% to 8.5% Rate of increase in future compensation levels at December 31......................... 4.5% 4.5% 4.5% Medical cost trend rate.............. 7% 8% 11% DECLINING TO declining to declining to 5% IN THE 5% in the 5% in the YEAR 1999 year 1999 year 2001 Effect of 1% increase in medical cost trend rate on Accumulated postretirement benefit obligation.......................... 3.6% 5.8% 5.9% Postretirement benefits expense...... 2.9% 4.9% 4.9% - ------------------------------------------------------------------------------
66 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In 1996, in connection with the acquisition of BayBanks, certain enhanced re- tirement benefits were offered to individuals meeting certain eligibility requirements as part of an early retirement program. Charges to op- erations resulting from qualified pension plan enhancements were $26 million; such charges resulting from enhancements to postretirement benefits were $4 million. In 1995, the Corporation recognized curtailment losses of $8 million in connection with its pension and postretirement plans, primarily as a result of the sale of BBMC to HomeSide. These 1996 and 1995 charges are included in acquisition, divestiture and restructuring expense, which is more fully de- scribed in Note 19. BayBanks employees who met certain service requirements were eligible to par- ticipate in an employee stock ownership plan (the ESOP). In 1990, the ESOP bor- rowed $19 million from a third party to purchase 1,760,000 shares of BayBanks common stock. This loan, unconditionally guaranteed by BayBanks, bore interest equal to LIBOR plus .35% and was paid in eight installments ending December 19, 1996. At December 31, 1996, all shares have been allocated to ESOP participants and participant share balances as of that date were transferred to the Corpora- tion's thrift incentive plan in 1997. During 1996, ESOP expense of $1 million, net of dividends, included an accrual to cover the loan payment made on Decem- ber 19, 1996. The dividends used to service the ESOP debt, which were paid on shares held by the ESOP, were $2 million in each of 1996 and 1995, and $1 mil- lion in 1994. The Corporation maintains a thrift incentive plan covering the majority of do- mestic employees other than BayBanks employees. Under this plan, employer con- tributions are made based on a percentage of employee contributions. BayBanks maintained a profit sharing and savings plan which provided for employer con- tributions based on specified earnings thresholds, offset by certain amounts allocated to participants in the ESOP. Amounts charged to operations for the thrift incentive and profit sharing plans were $11 million, $10 million and $12 million in the years ended December 31, 1996, 1995 and 1994, respectively. On January 1, 1997, BayBanks' profit sharing and savings plan was merged into the Corporation's thrift incentive plan. 18.STOCK OPTIONS AND AWARDS The Corporation's principal stock incentive plans (the Plans) include the 1996 Long-Term Incentive Plan (the 1996 Plan), the 1991 Long-Term Stock Incentive Plan (the 1991 Plan), the 1986 and 1982 Stock Option Plans (the 1986 and 1982 Plans) and the 1978 and 1988 BayBanks Stock Option Plans (the 1978 and 1988 Plans). Shares of common stock issued under these plans may be authorized but unissued shares, treasury shares or shares purchased in the open market. The 1996 Plan provides for the grant of stock options, restricted stock, stock ap- preciation rights (SARs) and other awards to key employees. As of December 31, 1996, no additional grants may be made under the 1991 or earlier Plans. No grants had been made under the 1996 Plan as of December 31, 1996. A total of 7,037,381 shares of common stock were reserved for issuance under the Plans at December 31, 1996, including 3,454,150 shares available for future grants under the 1996 Plan. 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 anni- versary of the grant date. Option grants made in 1996 under the 1991 Plan gen- erally are exercisable in equal installments on the first and second anniver- sary dates of the grant. Outstanding options granted under the 1988, 1986, 1982 and 1978 Plans are fully vested. All options expire not later than 10 years af- ter the date of grant. The 1986 Plan provided for the granting of rights to re- ceive tax offset payments with respect to nonqualified stock options, which are intended to compensate the participant for the difference in tax treatment of incentive stock options and nonqualified stock options. At December 31, 1996, tax offset payments with respect to 11,925 options, granted in 1987, were out- standing. Compensation expense for tax offset payments for the years ended De- cember 31, 1996 and 1995 was $.4 million and $1 million, respectively. There were 11,200 SARs, at a grant price of $28.63, outstanding at December 31, 1996. Compensation expense associated with SARs was $.3 million for the year ended December 31, 1996 and $.4 million for the year ended December 31, 1995. The following is a summary of the changes in options outstanding under the Plans:
1996 1995 1994 Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - -------------------------------------------------------------------------------------------------------- Options outstanding, January 1............... 4,764,182 $22.31 4,744,473 $19.53 4,803,706 $14.39 Granted ($17.48 to $63.75 per share)....... 1,354,409 $44.91 1,294,174 $28.84 927,489 $25.52 Exercised ($5.63 to $48.38 per share)....... (2,507,037) $20.97 (1,250,716) $18.42 (804,623) $14.11 Canceled................ (28,323) $42.90 (23,749) $27.01 (182,099) $20.68 ---------- ---------- --------- Options outstanding, December 31 ($6.25 to $63.75 per share)....... 3,583,231 $31.64 4,764,182 $22.31 4,744,473 $19.53 ========== ========== ========= Options exercisable, December 31............. 2,460,481 $25.62 3,871,117 $23.13 3,687,929 $19.22 ========== ========== ========= - --------------------------------------------------------------------------------------------------------
67 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of outstanding and exercisable options under the Plans at December 31, 1996:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Average Weighted Range of Number Remaining Average Number Remaining Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Contractual Life Exercise Price - ---------------------------------------------------------------------------------------------------------------- $6.25 to $20.00 per share.................. 580,212 4.2 years $14.85 580,212 4.2 years $14.85 $20.00 to $35.00 per share.................. 1,637,621 6.7 years $26.37 1,637,621 6.7 years $26.37 $35.00 to $50.00 per share.................. 1,224,970 9.0 years $43.89 214,300 8.9 years $44.37 $50.00 to $63.75 per share.................. 140,428 9.4 years $55.56 28,348 9.8 years $60.49 - ----------------------------------------------------------------------------------------------------------------
Under terms of the Corporation's restricted stock awards, employees are gener- ally required to continue employment with the Corporation for a stated period after the award in order to become fully vested in the shares awarded. Perfor- mance-based restricted stock has also been awarded, which vests if the market price of the Corporation's common stock reaches certain stated levels within specified periods, or in some cases, vests after a specified period regardless of stock price levels. During 1996, the common stock price levels for vesting of 163,432 shares of performance restricted stock were reached and the shares were released from restriction. During 1995, the common stock price levels for vesting of 180,200 shares of performance restricted stock were reached, and the shares were released from restriction. Restricted stock is recorded at the fair market value of the common stock on the date of award or, if solely a performance-based award, the value required for vesting. At the date of award, unearned compensation of the same amount is recorded as a reduction of retained earnings and is amortized as compensation expense over the estimated vesting period. The following is a summary of the activity in restricted stock:
1996 1995 1994 WEIGHTED Weighted Weighted AVERAGE Average Average SHARES PRICE Shares Price Shares Price - ------------------------------------------------------------------------------------- Share balance, January 1...................... 1,008,125 $22.88 1,205,859 $21.94 908,559 $14.19 Awards................. 249,430 $52.45 316,570 $29.44 528,600 $31.72 Forfeitures............ (27,887) $20.81 (17,988) $24.97 (41,277) $17.30 Released from forfeiture restrictions.......... (776,023) $26.79 (496,316) $24.70 (190,023) $11.48 --------- --------- --------- Share balance, December 31..................... 453,645 $31.53 1,008,125 $22.88 1,205,859 $21.94 ========= ========= ========= (in millions) Unearned compensation at December 31 (a reduction of retained earnings)..... $ 8 $ 13 $ 17 Compensation expense.... $ 17 $ 13 $ 6 - -------------------------------------------------------------------------------------
68 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of outstanding restricted stock at December 31, 1996:
Weighted Average Range of Restricted Shares Weighted Average Price at Market Value of Common Stock at Outstanding at Remaining Time of Time of Grant December 31, 1996 Contractual Life Grant - ------------------------------------------------------------------------------ $20.00 to $35.00 per share........ 373,427 2.2 years $26.68 $43.00 to $60.00 per share........ 80,218 3.2 years $54.12
In addition to options granted under the Plans described above, the Corporation granted 2,152,000 stock options on October 1, 1996 to substantially all employ- ees world-wide at an exercise price of $58.00 per option, the fair value of the Corporation's common stock on the grant date. The number of options granted to an employee was based on the employee's salary on the grant date, subject to a minimum of 100 options for a full-time employee and 50 options for a part-time employee. Based on the price of the Corporation's common stock having reached specified levels as of February 13, 1997, these options will become exercisable on October 1, 1997. Unexercised options will expire on October 1, 2002. Effective January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by the new standard, the Corpora- tion elected not to adopt the recognition provisions of the standard and to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock options and awards. Had compensation expense for the Corporation's stock options and awards been determined in accordance with SFAS No. 123, the Corporation's net income, primary and fully diluted earnings per share would have been as fol- lows:
Years Ended December 31 1996 1995 - ----------------------------------------------------------------------------- Net income applicable to common stock (in millions) As reported..................................................... $ 613 $ 641 Pro forma....................................................... $ 612 $ 637 Primary earnings per share As reported..................................................... $3.99 $4.17 Pro forma....................................................... $3.98 $4.13 Fully diluted earnings per share As reported..................................................... $3.93 $4.09 Pro forma....................................................... $3.90 $4.05
Solely for purposes of providing the pro forma disclosures required by SFAS No. 123, the fair value of each option grant was estimated on the date of grant us- ing the Black-Scholes option-pricing model, with the following weighted average assumptions used for grants of options and restricted stock in 1996 (other than the world-wide option grant) and 1995, respectively: dividend yield -- 3.2 per- cent and 4.2 percent; volatility -- 26 percent and 35 percent; risk free inter- est rates -- 5.3 percent and 7.5 percent; and expected option lives -- 4 years. Assumptions for the world-wide option grant for 1996 were: dividend yield --3.0 percent; volatility -- 23 percent; risk free interest rate -- 6.2 percent; and expected option life -- 3 years. Due to the inclusion of only 1995 and 1996 stock option and restricted stock awards, the effects of applying SFAS No. 123 in 1996 and 1995 may not be repre- sentative of the pro forma impact in future years. 69 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 19. ACQUISITION, DIVESTITURE AND RESTRUCTURING EXPENSE During 1996, the Corporation recorded $180 million of restructuring and merger- related costs in connection with its acquisition of BayBanks. Included in these costs were employee severance and property related costs; professional fees and other costs of effecting the acquisition; and systems and other conversion costs incurred during the period. Significant components of the costs were as follows:
Year Ended December 31 1996 (in millions) - -------------------------------------------------------------------------------- Personnel costs............................................................ $ 81 Facility costs............................................................. 50 Other costs................................................................ 49 ---- Total..................................................................... $180 ====
Personnel costs were related primarily to the Corporation's plan to eliminate approximately 2,000 executive, managerial and staff positions through attri- tion, enhanced retirement plans and terminations. These costs included sever- ance and retirement plan costs as well as employee assistance costs for sepa- rated employees. As of December 31, 1996, approximately 700 employees have ei- ther been terminated or have left the Corporation through enhanced retirement plans. Facility costs were related to branch and back office consolidations, and included lease termination costs and writedowns of bank owned properties and other facility related costs. Other costs principally consisted of transac- tion related costs, such as professional fees and stock registration costs, as well as systems costs and other costs of effecting the acquisition. Cash out- lays in 1996 amounted to $54 million, including $17 million of termination ben- efits and $37 million of transaction, facility and systems and other conversion costs. The remaining reserves and other liabilities of $126 million at December 31, 1996 include expected cash outlays of $94 million and expected noncash costs of $32 million. Cash outlays are expected to occur throughout the inte- gration process. During 1995, the Corporation recorded $28 million of charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. Included in these charges were costs related to reorganizations of the Corporation's European and certain Asia/Pacific operations. The charges in- cluded $16 million, composed of estimated costs of employee reduction of ap- proximately 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 and SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of De- fined Benefit Pension Plans and for Termination Benefits." The curtailment losses resulted from the sale of BBMC, which removed mortgage banking employees from the Corporation's pension and postretirement plans. Cash outlays during 1996 of $10 million consisted primarily of severance costs. Substantially all of the remaining reserve of $5 million at December 31, 1996 is expected to be utilized in 1997. During 1994, in connection with its acquisitions of BankWorcester Corporation (BankWorcester) and Pioneer Financial, A Co-operative Bank (Pioneer), the Cor- poration recorded acquisition-related costs of $21 million. Significant compo- nents of the costs included $10 million for estimated costs of employee reduc- tion 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 re- placing customers' checkbooks, automatic teller machine cards and other deposit documents. During 1994 and 1995, the Corporation charged costs totaling $12 million and $9 million, respectively, to the BankWorcester and Pioneer re- serves. 20.OTHER EXPENSE
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- Advertising..................................................... $108 $ 87 $ 64 Communications.................................................. 101 90 82 Software costs.................................................. 35 27 23 Amortization of goodwill and other intangibles.................. 34 28 18 Legal fees...................................................... 29 30 31 Consulting and other professional fees.......................... 27 35 40 FDIC insurance premiums......................................... 39 73 All other....................................................... 287 242 239 ---- ---- ---- $621 $578 $570 ==== ==== ====
70 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 21.INCOME TAXES The components of the provision for income taxes were as follows:
Years Ended December 31 1996 1995 1994 (in millions) - -------------------------------------------------------------------------------- CURRENT TAX PROVISION Federal....................................................... $219 $297 $135 Foreign Based on income.............................................. 130 91 48 Withheld on interest and dividends........................... 36 22 15 State and local............................................... 96 80 145 ---- ---- ---- 481 490 343 ---- ---- ---- DEFERRED TAX PROVISION (BENEFIT) Federal....................................................... (4) (1) 121 State and local............................................... 6 40 (42) ---- ---- ---- 2 39 79 ---- ---- ---- Income tax provision before extraordinary item................ 483 529 422 INCOME TAXES APPLICABLE TO EXTRAORDINARY ITEM Loss from early extinguishment of debt........................ (4) ---- ---- ---- $483 $529 $418 ==== ==== ====
Excluded from the above table are tax effects related to certain items that were recorded directly in stockholders' equity, including foreign currency translation, market value adjustments related to securities available for sale, stock options and restricted stock. Net tax effects recorded directly in stock- holders' equity amounted to a $40 million benefit in 1996, a $74 million charge in 1995 and a $62 million benefit in 1994. The income tax provision included tax provisions related to securities gains of $10 million in 1996, $3 million in 1995 and $6 million in 1994. The following table reconciles the expected federal tax provision before ex- traordinary item, based on the federal statutory tax rate of 35%, to the actual consolidated tax provision before extraordinary item for the periods presented:
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------ Expected tax provision applicable to income before extraordinary item.......................................... $397 $423 $340 Effect of State and local income taxes, net of federal tax benefit... 66 81 67 Tax-exempt income.......................................... (6) (8) (5) Non-creditable foreign taxes............................... 15 11 9 Non-deductible goodwill from sale of subsidiaries.......... 11 Other, net................................................. 11 11 11 ---- ---- ---- Actual tax provision before extraordinary item.............. $483 $529 $422 ==== ==== ====
The components of the net deferred tax liability were as follows:
December 31 1996 1995 (in millions) - ------------------------------------------------------------------------------- DEFERRED TAX ASSETS Reserve for credit losses........................................ $ 354 $ 358 Foreign operations............................................... 86 63 Interest on nonaccrual loans..................................... 40 45 Mortgage servicing rights........................................ 39 Other............................................................ 145 92 ----- ----- Deferred tax assets............................................. 625 597 ----- ----- DEFERRED TAX LIABILITIES Leasing operations............................................... (505) (493) Pension obligations.............................................. (69) (71) Unrealized gain on securities available for sale................. (49) (55) Other............................................................ (46) (57) ----- ----- Deferred tax liabilities........................................ (669) (676) ----- ----- Net deferred tax liability....................................... $ (44) $ (79) ===== =====
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 in- come. 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 impact on the Corporation's 1995 effective tax rate, since reductions 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, 1996 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 $755 million in 1996, $978 million in 1995 and $782 million in 1994. Foreign pre-tax income, defined as income generated from oper- ations that are located outside the United States, was $378 million in 1996, $229 million in 1995 and $178 million in 1994. 71 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 22. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments represent various degrees and types of risk to the Corporation, including credit, interest rate, foreign exchange rate, implied volatility rate and liquidity risk. INTEREST RATE DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS In the normal course of its business, the Corporation enters into a variety of interest rate derivatives and foreign exchange contracts as part of its trading activities, which primarily focus on providing these products to customers, and in its interest rate and currency risk management strategy. These products in- volve, to varying degrees, credit risk and market risk. Credit risk is the pos- sibility that a loss may occur if a counterparty to a transaction fails to per- form according to the terms of the contract. Market risk is the adverse effect of a change in interest rates, currency rates or implied volatility rates on the value of a financial instrument. The notional amount of interest rate de- rivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk as they tend to greatly overstate the true economic risks of these contracts. The Corporation controls credit risk arising from interest rate derivatives and foreign exchange contracts using credit procedures similar to those used for traditional lending activities. The Corporation believes that fair value, which approximates the cost to replace the contract at the current market rates should the counterparty default prior to settlement date, is generally repre- sentative 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 associ- ated 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 and is measured using a value-at-risk methodology. Interest rate derivatives utilized by the Corporation include futures and for- wards, interest rate swaps and interest rate options. Futures and forward con- tracts generally are contracts for the delayed delivery of securities or money market instruments in which the buyer agrees to purchase, and the seller agrees to deliver, a specific instrument at a predetermined date for a specific price. Market risks on both types of agreements stem from market movements in the un- derlying securities' values, interest rates or implied volatility rates. Credit risk stems from the ability of the counterparties to meet the terms of the con- tracts. The Corporation's counterparty risk for futures is limited, as the ma- jority 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 re- ceive cash, purchase, sell or enter into a financial instrument at a specified price within a specified period of time. Options include interest rate caps and floors, which are types of interest rate protection instruments involving the potential payment between seller and buyer of an interest differential. In ad- dition, other types of option products provide the holder with the right to en- ter into interest rate swap, cap and floor agreements with the writer. The pri- mary risks associated with interest rate 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 trans- actions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contracts. 72 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the Corporation's notional amounts and fair val- ues of interest rate derivatives and foreign exchange contracts included in its trading and asset and liability management (ALM) portfolios.
TRADING PORTFOLIO(1) ALM PORTFOLIO(1) --------------------------------- -------------------------------------------- December 31, 1996 NOTIONAL FAIR VALUE(2)(3)(4) NOTIONAL FAIR VALUE(2)(3) UNRECOGNIZED (in millions) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS)(5) - ------------------------------------------------------------------------------------------------------------- Interest rate contracts Futures and forwards... $47,927 $ 65 $ 64 $ 3,382 $(45) Interest rate swaps.... 9,332 58 54 6,975 $25 $ 40 (11) Interest rate options Purchased............. 6,471 14 Written or sold....... 4,593 13 ------- ---------- ---------- ------- -------- ------- ---- Total interest rate con- tracts.................. $68,323 $ 137 $ 131 $10,357 $25 $ 40 $(56) ======= ========== ========== ======= ======== ======= ==== Foreign exchange con- tracts Spot and forward con- tracts................. $20,224 $ 313 $ 348 $ 1,755 $11 $ 9 $ 2 Options purchased...... 2,529 42 Options written or sold................... 2,434 37 ------- ---------- ---------- ------- -------- ------- ---- Total foreign exchange contracts............... $25,187 $ 355 $ 385 $ 1,755 $11 $ 9 $ 2 ======= ========== ========== ======= ======== ======= ==== - ------------------------------------------------------------------------------------------------------------- Trading Portfolio(1) ALM Portfolio(1) --------------------------------- -------------------------------------------- December 31, 1995 Notional Fair Value (2)(3)(4) Notional Fair Value (2)(3) Unrecognized (in millions) Amount Asset Liability Amount Asset Liability Gain (Loss)(5) - ------------------------------------------------------------------------------------------------------------- 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 con- tracts.................. $47,387 $ 100 $ 89 $22,738 $ 212 $ 52 $ 15 ======= ========== ========== ======= ======== ======= ==== Foreign exchange con- tracts Spot and forward con- tracts................. $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) ======= ========== ========== ======= ======== ======= ==== - -------------------------------------------------------------------------------------------------------------
(1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be ex- changed in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in other assets or other liabilities, as applicable. The majority of deriva- tives 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 con- tracts is represented by the fair value of contracts reported in the "As- set" column. (4) The average asset and liability fair value amounts for interest rate con- tracts included in the trading portfolio for the years ended December 31, 1996 and 1995 were approximately $130 million and $129 million, respective- ly, and $99 million and $67 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were approximately $224 million and $229 million, respec- tively, for the year ended December 31, 1996, and $313 million and $313 million, respectively, for the year ended December 31, 1995. (5) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, that has not been recognized in the income statement at the balance sheet date. This includes amounts related to contracts that have been terminated. Such amounts are recognized as an adjustment of yield over the period being managed. At December 31, 1996, there were $16 million of unrecognized gains and $33 million of unrecognized losses related to termi- nated contracts that are being amortized to net interest revenue over weighted average periods of 26 months and 13 months, respectively. At De- cember 31, 1995, there were $32 million of unrecognized gains and $2 mil- lion of unrecognized losses related to terminated contracts that were being amortized to net interest revenue over weighted average periods of 32 months and 23 months, respectively. Net trading gains or losses from interest rate derivatives are recorded in trading account profits and commissions. The Corporation's interest rate deriv- ative trading activities primarily include providing risk management products to its customers. Derivatives are also used to manage risk in other trading portfolios, such as emerging markets securities. The results of these deriva- tive activities are combined with the results of the respective trading portfo- lio to determine the overall performance of the trading business and, as such, are not included in the results of derivative trading activities. Net trading gains from interest rate derivative trading were $4 million for the year ended December 31, 1996 and $7 million for each of the years ended December 31, 1995 and 1994. Net trading gains from foreign exchange contracts are recorded in other income. Net trading gains from foreign exchange activities, which include foreign ex- change spot, forward and options contracts, for the years ended December 31, 1996, 1995 and 1994 were $54 million, $60 million and $44 million, respective- ly. 73 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) CREDIT-RELATED FINANCIAL INSTRUMENTS A commitment to extend credit is a legally binding agreement to lend to a cus- tomer in the future that generally expires within a specified period of time. The extension of a commitment, which is subject to the Corporation's credit re- view and approval policies, gives rise to credit exposure when certain borrow- ing 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 Corpora- tion's credit evaluation. Such collateral varies but may include securities, receivables, inventory, fixed assets, personal property and real estate. The obligation to lend generally may be voided if the customer's financial condi- tion deteriorates or if the customer fails to meet certain covenants. Commit- ments to extend credit do not reflect the actual demand on liquidity that the Corporation will be subjected to in the future, since historical experience with loan commitments indicates that a large portion generally expire without being drawn upon. Standby letters of credit and foreign office guarantees are commitments that are primarily issued to third parties to guarantee obligations of the Corpora- tion's customers. Standby letters of credit may be issued as credit enhance- ments for corporate customers' commercial paper, bond issuances by municipali- ties or other debt obligations, and to guarantee other financial performance of a customer. The Corporation has current exposure only to the extent that a cus- tomer may default on the underlying transaction. The risks involved in the is- suance 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 ob- tain various types of collateral, if deemed necessary, based upon the Corpora- tion's credit evaluation. The following table summarizes the Corporation's credit-related financial in- struments:
December 31 1996 1995 (in millions) - ------------------------------------------------------------------------------ Fee-based or otherwise legally binding commitments to extend credit(1).................................................... $26,742 $23,503 Standby letters of credit, foreign office guarantees and similar instruments(2)..................................... . $ 2,508 $ 2,315 Commercial letters of credit.................................. $ 1,582 $ 1,399 - ------------------------------------------------------------------------------
(1) Net of participations conveyed to others of $17 million in 1996 and $233 million in 1995. (2) Net of participations conveyed to others of $814 million in 1996 and $720 million in 1995. 23.CONCENTRATIONS OF CREDIT RISK Credit risk associated with concentrations can arise when changes in economic, industry or geographic factors affect groups of counterparties with similar 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. Ap- proximately 50% of the Corporation's business activity in 1996 and 1995 was with customers located within New England. Information with respect to the Cor- poration's overseas business activities and its geographic concentrations is included in Note 26. The Corporation's commitments to lend against, and loans collateralized by, domestic commercial real estate properties were approxi- mately $5 billion in both 1996 and 1995, of which 70% in 1996 and 80% in 1995 related to properties in New England. Also, combined domestic credit exposure from consumer lending and credits secured by 1-4 family residential properties totaled $17 billion in 1996 and $16 billion in 1995. There were no other sig- nificant concentrations of credit risk. 24.LEASE COMMITMENTS Rental expense for leases of real estate and equipment is summarized below:
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- Rental expense.................................................. $132 $125 $118 Less sublease rental income..................................... 13 11 13 ---- ---- ---- Net rental expense.............................................. $119 $114 $105 ==== ==== ====
The Corporation has obligations under noncancelable operating leases for real estate and equipment that include renewal options and escalation clauses. The Corporation's minimum future rentals under its leases, exclusive of executory costs and net of sublease rental income, for the years 1997 through 2001 are $103 million, $89 million, $78 million, $71 million and $63 million, respec- tively, and $400 million for 2002 and later. Capital leases, the minimum rent- als of which are included in the preceding amounts, are not significant. 25.CONTINGENCIES The Corporation and its subsidiaries are defendants in a number of legal pro- ceedings arising in the normal course of business, including claims that bor- rowers or others have been damaged as a result of the lending practices of the Corporation's subsidiaries. Management, after reviewing all actions and pro- ceedings pending against or involving the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's financial state- ments. 26.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 in- curred those revenues or expenses, and certain corporate overhead expenses, which are allocated to business units, have not been allocated to the interna- tional segment for this presentation. This geographic segment information does not consider other factors, such as method of funding (i.e., local vs. non-lo- cal currency) or location of any cash collateral or guarantees. 74 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) As a result of the inter-relationships that exist within the Corporation's world-wide network, allocations of certain income and expense items are neces- sarily 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 utiliz- ing internal methodologies. The information presented is based on reporting as- sumptions in place at December 31, 1996.
Income Years Ended December 31 Total Total Before Net Period End (in millions) Revenue(1) Expense(1) Taxes(2) Income(3) Total Assets - -------------------------------------------------------------------------------- 1996 International Latin America............ $ 776 $ 535 $ 241 $138 $13,023 Europe................... 103 40 63 37 1,626 Asia/Pacific............. 59 45 14 8 1,216 All other regions........ 2 (2) 4 2 100 ------ ------ ------ ---- ------- Total International..... 940 618 322 185 15,965 Domestic.................. 2,744 1,933 811 465 46,341 ------ ------ ------ ---- ------- Total................... $3,684 $2,551 $1,133 $650 $62,306 ====== ====== ====== ==== ======= 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 $55,411 ====== ====== ====== ==== ======= - --------------------------------------------------------------------------------
(1) Total revenue includes net interest revenue and noninterest income. Total expense includes the provision for credit losses and noninterest expense. (2) 1994 amounts exclude extraordinary loss from early extinguishment of debt. (3) 1994 amounts include a $7 million extraordinary loss, net of tax, from early extinguishment of debt that, for purposes of this analysis, has been allocated to domestic. 75 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 27. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS The following is a condensed balance sheet of the Corporation (Parent Company only):
December 31 1996 1995 (in millions) - ------------------------------------------------------------------------------- ASSETS Cash and short-term investments in bank subsidiary............... $ 723 $ 119 Advances to subsidiaries Bank subsidiaries............................................... 1 19 Nonbank subsidiaries............................................ 718 437 Subordinated notes receivable from bank subsidiary............... 332 580 Investments in subsidiaries Bank subsidiaries............................................... 4,949 4,635 Nonbank subsidiaries............................................ 219 161 Other assets..................................................... 115 47 ------ ------ Total Assets................................................... $7,057 $5,998 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable.................................................... $1,570 $1,269 Other liabilities................................................ 38 27 Junior subordinated debt payable to subsidiary trusts............ 515 ------ ------ Total liabilities............................................... 2,123 1,296 ------ ------ Total stockholders' equity...................................... 4,934 4,702 ------ ------ Total Liabilities and Stockholders' Equity.......................................... $7,057 $5,998 ====== ======
The following is a condensed statement of income of the Corporation (Parent Company only):
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------ OPERATING INCOME Dividends from subsidiaries Bank subsidiaries(1)........................................ $537 $391 $125 Nonbank subsidiaries........................................ 23 15 30 Interest from subsidiaries Bank subsidiaries........................................... 50 59 46 Nonbank subsidiaries........................................ 41 25 9 Noninterest income........................................... 9 ---- ---- ---- Total operating income...................................... 651 499 210 ---- ---- ---- OPERATING EXPENSE Interest expense............................................. 95 92 79 Other expense, net........................................... 14 6 5 ---- ---- ---- Total operating expense.................................... 109 98 84 ---- ---- ---- Income before income taxes and equity in undistributed net income of subsidiaries...................................... 542 401 126 Provision for (Benefit from) income taxes.................... (6) 2 (11) ---- ---- ---- Income before equity in undistributed net income of subsidiaries................................................ 548 399 137 Equity in undistributed net income of subsidiaries........... 102 279 405 ---- ---- ---- Net Income................................................... $650 $678 $542 ==== ==== ==== - ------------------------------------------------------------------------------
(1) Dividends in 1995 included $205 million from a subsidiary bank holding com- pany in connection with the sale of Casco. 76 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a condensed statement of cash flows of the Corporation (Parent Company only):
Years Ended December 31 1996 1995 1994 (in millions) - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $650 $678 $542 Reconciliation of net income to net cash provided from operating activities Equity in undistributed net income of subsidiaries......... (102) (279) (405) Gain on sale of subsidiary................................. (8) Other, net................................................. (52) 1 (13) ---- ---- ---- Net cash provided from operating activities............... 496 392 124 ---- ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) short-term investments in banking subsidiary.......................................... (600) 86 1 Net cash provided from (used for) advances to subsidiaries.. (263) (203) 37 Investments in subsidiaries................................. (16) (12) (39) Proceeds from sale of subsidiary............................ 92 Purchase of subordinated note receivable from bank subsidiary.................................................. (180) Repayment of subordinated note receivable by bank subsidiary.................................................. 250 ---- ---- ---- Net cash used for investing activities.................... (629) (37) (181) ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES Repayments/repurchases of notes payable..................... (100) (150) (189) Net proceeds from issuance of notes payable................. 400 400 Net proceeds from issuance of junior subordinated debentures.................................................. 515 Net proceeds from issuance of common stock.................. 92 70 40 Purchases of treasury stock................................. (490) (53) (29) Dividends paid.............................................. (284) (221) (166) ---- ---- ---- Net cash provided from (used for) financing activities.... 133 (354) 56 ---- ---- ---- Net change in cash and due from banks....................... 1 (1) Cash and due from banks at January 1........................ 1 1 ---- ---- ---- Cash and due from banks at December 31...................... $ 1 $ 1 $ ==== ==== ==== Interest payments made...................................... $ 95 $ 90 $ 73 Income tax payments made (refunds received)................. $ 6 $ 5 $ (8) - -------------------------------------------------------------------------------
77 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 28. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107 requires that the Corporation disclose estimated fair values for certain of its financial instruments. Financial instruments include such items as loans, deposits, securities, interest rate and foreign exchange rate con- tracts, swaps and other instruments as defined by the standard. Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and rele- vant available market information. Fair value information is intended to repre- sent an estimate of an amount at which a financial instrument could be ex- changed in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading mar- kets for a significant portion of the Corporation's financial instruments, the Corporation may not be able to settle its financial instruments immediately; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the Cor- poration's financial instruments, such as loans and deposits, are held to matu- rity and are realized or paid according to the contractual agreement with the customer. Where available, quoted market prices are used to estimate fair values. Howev- er, due to the nature of the Corporation's financial instruments, in many in- stances quoted market prices are not available. Accordingly, the Corporation has estimated fair values based on other valuation techniques, such as dis- counting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible income tax ramifications or estimated transac- tion costs. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial in- struments will change. Disclosure of fair values is not required for certain items such as lease fi- nancing, investments accounted for under the equity method of accounting, obli- gations for pension and other postretirement benefits, premises and equipment, OREO, prepaid expenses, purchased mortgage servicing rights, core deposit in- tangibles and other customer relationships, other intangible assets and income tax assets and liabilities. Accordingly, the aggregate fair value amounts pre- sented do not purport to represent, and should not be considered representative of, the underlying "market" or franchise value of the Corporation. Because the standard permits many alternative calculation techniques and be- cause numerous assumptions have been used to estimate the Corporation's fair values, reasonable comparisons of the Corporation's fair value information with that of other financial institutions cannot necessarily be made. The methods and assumptions used to estimate the fair values of each class of financial instrument are as follows: CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS IN OTHER BANKS, FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, 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 invest- ments made in connection with the Corporation's Private Equity Investing busi- ness 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 mar- ket sources. The fair value of accruing home equity loans is estimated using comparable market information adjusted for credit and other relevant character- istics. The fair value of all other accruing loans is estimated by discounting cash flows, using interest rates that consider the credit and interest rate risks inherent in the loans, and current economic and lending conditions. The fair value of nonaccrual loans is primarily estimated by discounting manage- ment's estimate of future cash flows using a rate commensurate with the risks involved. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS The carrying amount of accrued in- terest receivable approximates its fair value. Financial instruments classified as other assets subject to the disclosure requirements of the standard consist principally of accounts receivable and investments in limited partnerships. The carrying amounts of short-term receivables are considered to approximate their fair value. For longer-term receivables, fair value is estimated by discounting expected future cash flows using a discount rate commensurate with the risks involved. Estimates of fair value of investments in limited partnerships are based upon management's review of the investee's financial results, condition and prospects. 78 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, by definition, equal to their carrying amounts. The car- rying 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 ac- crued expenses and other liabilities subject to the disclosure requirements of the standard consist principally of short-term liabilities; the carrying amounts approximate their fair values. NOTES PAYABLE The fair value of long-term borrowings is estimated using second- ary market prices and does not include the fair values of related interest rate swap agreements, which are presented separately. GUARANTEED PREFERRED BENEFICIAL INTEREST IN CORPORATION'S JUNIOR SUBORDINATED DEBT The fair value is estimated using secondary market prices. 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 mar- ket information adjusted for credit and other relevant characteristics using pricing models, including option models. OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS The fair value of commitments to ex- tend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the com- mitted 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. 79 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the estimated fair values of the Corporation's financial instruments:
December 31 1996 1995 ESTIMATED Estimated CARRYING FAIR Carrying Fair (in millions) AMOUNT VALUE Amount Value - ------------------------------------------------------------------------------- ASSETS Cash and due from banks................. $4,273 $4,273 $3,561 $3,561 Interest bearing deposits in other banks................................... 1,634 1,634 1,356 1,356 Federal funds sold and securities purchased under agreements to resell.... 1,857 1,857 1,548 1,548 Trading securities...................... 1,238 1,238 1,159 1,159 Mortgages held for sale................. 910 919 Securities(1) Available for sale..................... 7,804 7,956 7,582 7,658 Held to maturity....................... 680 675 660 667 Loans................................... 38,877 37,176 Reserve for credit losses(2)............ (883) (890) ------ ------ 37,994 39,062 36,286 37,415 Due from customers on acceptances....... 438 438 360 360 Accrued interest receivable............. 546 546 554 554 Financial instruments included in other assets.................................. 860 916 611 700 LIABILITIES Deposits................................ 42,831 42,916 41,064 41,117 Funds borrowed.......................... 9,158 9,158 9,503 9,503 Acceptances outstanding................. 448 448 360 360 Financial instruments included in accrued expenses and other liabilities.. 630 630 537 537 Notes payable........................... 2,821 2,828 2,189 2,255 Guaranteed preferred beneficial interest in Corporation's junior subordinated debt.................................... 500 497 INTEREST RATE CONTRACTS(3) Trading Asset.................................. 137 100 Liability.............................. (131) (89) Asset and liability management Asset.................................. 25 212 Liability.............................. (40) (52) FOREIGN EXCHANGE CONTRACTS(3) Trading Asset.................................. 355 185 Liability.............................. (385) (183) Asset and liability management Asset.................................. 11 3 Liability.............................. (9) (5) OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS Fee based or otherwise legally binding commitments to extend credit............ (65) (59) Standby and commercial letters of credit, foreign office guarantees and similar instruments..................... (12) (32) - -------------------------------------------------------------------------------
(1) Securities include investments made in connection with the Corporation's Private Equity Investing business that do not trade on established ex- changes, and for which no markets exist. At December 31, 1996 and 1995, these investments were classified as securities available for sale, and their estimated fair values exceeded the related carrying amounts by $152 million and $76 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 al- location of the reserve to other instruments such as leases, commitments to extend credit, standby letters of credit and interest rate contracts. Ac- cordingly, a separate determination of the reserve allocable to loans has not been made. (3) Additional information with respect to interest rate and foreign exchange contracts can be found in Note 22 to the Financial Statements. The Corpora- tion's accounting policy related to such instruments is discussed in Note 1 to the Financial Statements. 80 EX-21 15 LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries of Bank of Boston Corporation There is no parent company of Bank of Boston Corporation (the "Corporation"). The First National Bank of Boston (the "FNBB"), all of whose voting securities (except for directors' qualifying shares) are owned directly or indirectly by the Corporation, is the principal subsidiary of the Corporation. Other major banking subsidiaries of the Corporation are BayBank, N.A., Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank and BayBank NH, N.A. A number of entities which are owned wholly or in part, either directly or indirectly, by the Corporation are not listed below. However, their assets if considered in the aggregate as a single subsidiary would not constitute a significant subsidiary of the Corporation. JURISDICTION NAME OF SUBSIDIARY OF ORGANIZATION The First National Bank of Boston US BancBoston Financial Company MA BancBoston Insurance Agency, Inc. MA Bank of Boston International US Edge Act Corp. Boston Overseas Financial Corp. US Edge Act Corp. Boston World Holding Corporation MA Boston Brazil Holding Corporation MA Boston Administracao E Empre Endimentos LTDA Brazil BancBoston Leasing, Inc. MA BancBoston Aircraft Leasing, Inc. MA BancBoston Leasing Services, Inc. MA BancBoston Services, Inc. MA Boston EquiServe, L.P.(3) MA BancBoston Ventures Inc. MA Ganis Credit Corporation DE GBFC, Inc. DE Multibank Leasing Corporation MA Matthews Street Real Estate Investment Trust, Inc. MA 1784 Investor Services, Inc. MA West Broadway Security Corp. MA BancBoston Capital Inc. MA BancBoston Holdings, Inc. MA Rhode Island Hospital Trust National Bank US Bank of Boston Connecticut CT Bank of Boston Florida, N.A. US Bank of Boston (Maine), N.A. US Bullfinch Indemnity Company, LTD VT Thor Credit Corp. DE RIHT Life Insurance Co. AZ Bank of Boston Connecticut CT BancBoston Capital Inc. MA Fidelity Acceptance Corporation MN BancBoston Leasing Investments Inc. MA BancBoston Trust Company of New York NY BancBoston Investments Inc. MA BancBoston Real Estate Capital Corporation MA BancBoston Securities Inc. MA BayBanks, Inc. MA Boston International Holdings Corporation MA Boston Bancorp (The) MA Boston Bancorp Securities, Inc. MA Boston Overseas Holding Corporation MA FSC Corp MA _________________________________________________________________ (1) Except as noted, each such business organization is directly or indirectly owned by the Corporation. (2) FNBB and certain other subsidiaries own a number of subsidiaries which hold real property acquired in connection with certain loan workout situations. If considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. (3) Boston EquiServe, L.P. is 50% owned by Boston Financial Data Services, which is a joint venture owned by State Street Bank and DST, Inc. EX-23 16 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS To The Board of Directors Bank of Boston Corporation We consent to the incorporation by reference, in the registration statements of Bank of Boston Corporation on Forms S-3 (Registration Nos. 33-52571 and 333- 13697), Forms S-4 (333-19083 and 333-19111), and Forms S-8 (Registration Nos. 33-1899, 33-11186, 33-64462, 33-66012, 333-00297, 333-07329, 333-09041, 333- 12851 and 333-18999) of our report dated January 16, 1997 on our audits of the consolidated financial statements of Bank of Boston Corporation and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, included in the Corporation's 1996 Annual Report to Stockholders and in Exhibit 13 to the Corporation's 1996 Annual Report on Form 10-K. The consolidated financial statements of BayBanks, Inc., as of December 31, 1995 and for the years ended December 31, 1995 and 1994, prior to the restatement for the 1996 pooling of interests, included in the 1995 and 1994 restated consolidated financial statements were audited by other auditors whose reports expressed unqualified opinions on those financial statements. We audited the combination of the accompanying consolidated balance sheet as of December 31, 1995, and the consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 1995 and 1994, after restatement for the 1996 pooling of interests; in our opinion, such consolidated financial statements have been properly combined on the basis described in Note 2 to the financial statements. /S/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 19, 1997 EX-27 17 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 4,273 1,634 1,857 1,238 7,804 680 675 41,061 (883) 62,306 42,831 8,508 1,614 3,321 0 508 230 4,196 62,306 3,844 569 480 4,893 1,680 2,553 2,340 231 23 621 1,133 650 0 0 650 3.99 3.93 4.42 402 41 8 0 890 (310) 80 883 535 217 131 Includes guaranteed preferred beneficial interest in the Corporation's junior subordinated debt.
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