-----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, WIYdJ8f2F/JvaQg/TQYT/7+QNvyXMEBqZg5ssAJzbpFODH+cTWvPGAQHA410Ytuc t6Q86Dass7vX4VQCGw0kbg== 0000927016-97-002340.txt : 19970815 0000927016-97-002340.hdr.sgml : 19970815 ACCESSION NUMBER: 0000927016-97-002340 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-42653 FILM NUMBER: 97662340 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-6522 BANKBOSTON CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2471221 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 100 FEDERAL STREET, 02110 BOSTON, MASSACHUSETTS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 434-2200 FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT: NOT APPLICABLE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 31, 1997: Common Stock, $1.50 par value 145,689,850 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BANKBOSTON CORPORATION TABLE OF CONTENTS
PAGE ---- CONSOLIDATED SELECTED FINANCIAL DATA...................................... 3 PART I FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 4 Financial Statements BankBoston Corporation and Subsidiaries Consolidated Balance Sheet.......................................... 21 Consolidated Statement of Income.................................... 23 Consolidated Statement of Changes in Stockholders' Equity........... 24 Consolidated Statement of Cash Flows................................ 25 Notes to Financial Statements........................................ 26 PART II OTHER INFORMATION Exhibits and Reports on Form 8-K..................................... 37 SIGNATURES................................................................ 38 LIST OF TABLES Consolidated Average Balance Sheet--Nine Quarters....................... 30 Consolidated Statement of Income--Nine Quarters......................... 31 Average Balances and Interest Rates--Quarter............................ 32 Average Balances and Interest Rates--Six Months......................... 34 Change in Net Interest Revenue--Volume and Rate Analysis................ 36
2 BANKBOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 ------- ------- QUARTERS ENDED JUNE 30 INCOME STATEMENT DATA(1) Net interest revenue.......................................... $ 616 $ 571 Provision for credit losses................................... 60 57 Noninterest income............................................ 377 383 Noninterest expense........................................... 578 532 Net income.................................................... 212 214 Per common share Primary..................................................... 1.37 1.33 Fully diluted............................................... 1.35 1.32 Market value per common share High........................................................ 76 7/8 51 1/2 Low......................................................... 63 5/8 46 SIX MONTHS ENDED JUNE 30 INCOME STATEMENT DATA(1) Net interest revenue.......................................... $ 1,236 $ 1,137 Provision for credit losses................................... 120 114 Noninterest income............................................ 707 668 Noninterest expense........................................... 1,122 1,059 Net income.................................................... 419 369 Per common share Primary..................................................... 2.66 2.27 Fully diluted............................................... 2.62 2.24 Market value per common share High........................................................ 78 3/4 51 1/2 Low......................................................... 63 5/8 41 5/8 AT JUNE 30 BALANCE SHEET DATA(1) Loans and lease financing..................................... $42,313 $40,653 Total assets.................................................. 66,138 62,387 Deposits...................................................... 42,978 43,494 Total stockholders' equity.................................... 4,674 4,962 Book value per common share................................... 28.32 28.42 Regulatory capital ratios Risk-based capital ratios Tier 1.................................................... 8.8% 8.6% Total..................................................... 12.8 12.7 Leverage ratio.............................................. 7.8 7.8
- -------- (1) Financial data for 1996 has been restated to give retroactive effect to the acquisition of BayBanks, Inc., which was completed in July 1996 and accounted for as a pooling of interests. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS GENERAL All prior period information included in this report has been restated to give effect to BankBoston Corporation's (the Corporation's) acquisition of BayBanks, Inc. (BayBanks), which was completed in July 1996 and accounted for as a pooling of interests. The following discussion contains statements relating to future results of the Corporation that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive products and pricing pressures, customer bankruptcies, inflation, acquisitions and integrations of acquired businesses, as well as other risks and uncertainties. The Corporation's net income for the quarter ended June 30, 1997 was $212 million, compared to $214 million for the same period in 1996. Net income per common share was $1.37 on a primary basis and $1.35 on a fully diluted basis in the second quarter of 1997, compared with $1.33 on a primary basis and $1.32 on a fully diluted basis in 1996. The second quarter of 1996 included a gain of $46 million ($28 million after-tax) from the completion of the second phase of the sale of the Corporation's mortgage banking subsidiary. Excluding this gain, as well as acquisition-related charges from the accelerated vesting of BayBanks' restricted stock, second quarter 1996 net income was $188 million or $1.15 per share on a fully diluted basis. Net income for the first six months of 1997 was $419 million, compared to $369 million for the first six months of 1996. Net income per common share was $2.66 on a primary basis and $2.62 on a fully diluted basis for the first six months of 1997, compared to $2.27 on a primary basis and $2.24 on a fully diluted basis for the first six months of 1996. In May 1997, the Corporation entered into an agreement to acquire Pacific National Corporation, located on the island of Nantucket, Massachusetts, in exchange for shares of the Corporation's common stock, valued at approximately $24 million. The acquisition is subject to approval by bank regulators and the stockholders of Pacific National Corporation and, if approved, is expected to close in the fourth quarter of 1997. At June 30, 1997, Pacific National Corporation had loans of approximately $95 million, primarily residential and commercial real estate loans, and deposits of approximately $95 million. In connection with the ongoing evaluation of its national consumer businesses, in June 1997, the Corporation announced an agreement to sell its consumer finance subsidiary, Fidelity Acceptance Corporation (FAC), and completed the sale of Ganis Credit Corporation (Ganis). The Corporation had previously sold $950 million of Ganis loans in the first quarter of 1997. The sale of FAC, which had aggregate loans of approximately $1 billion at June 30, 1997, is subject to regulatory approvals and, if approved, is expected to close in the latter half of 1997. In addition, the Corporation is in the process of strategically reviewing its national credit card portfolio which had aggregate loans of approximately $1 billion at June 30, 1997. In July 1997, a program to open approximately 70 new branches in Argentina within the next 12 months was announced. The Corporation expects to incur costs during this period related to the opening of the new branches, which primarily include employee costs and occupancy and equipment costs. As of June 30, 1997, an insignificant amount of expenses had been incurred in relation to this branch expansion program. To achieve its goals of enhancing customer service, profitability and value to stockholders, the Corporation continues to take strategic initiatives focused on leveraging its core competencies in attractive markets, and to explore, on an ongoing basis, acquisition, divestiture and joint venture opportunities, as well as to analyze each of its businesses in the context of competitive advantages, industry dynamics and growth potential. This effort could encompass expanding, contracting or restructuring certain components of the Corporation's business. 4 In this connection, the Corporation will review its New England regional consumer businesses, seeking to build upon its successful integration of the BayBanks franchise. The goals of this effort are to improve its customer product offerings and delivery channels as well as to enhance the efficiencies of its systems, operations and other support functions in this important market sector. The results of this review cannot be predicted at this time. NET INTEREST REVENUE--(FULLY TAXABLE EQUIVALENT BASIS) This discussion of net interest revenue should be read in conjunction with Average Balances and Interest Rates and Change in Net Interest Revenue--Volume and Rate Analysis, presented elsewhere in this report. For this review of net interest revenue, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been adjusted to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35 percent, plus applicable state and local taxes, net of related federal tax benefits. The following table presents a summary of net interest revenue, on a fully taxable equivalent basis, and related average loans and lease financing and average earning asset balances and net interest margin for United States and International operations.
1997 1996 CHANGE QUARTERS ENDED JUNE 30 ------- ------- ------ (DOLLARS IN MILLIONS) United States operations Net interest revenue............................... $ 478 $ 444 $ 34 Average loans and lease financing.................. 31,735 31,258 477 Average earning assets............................. 41,890 39,985 1,905 Net interest margin................................ 4.58% 4.47% .11% International operations Net interest revenue............................... $ 142 $ 132 $ 10 Average loans and lease financing.................. 10,377 8,856 1,521 Average earning assets............................. 14,944 12,732 2,212 Net interest margin................................ 3.83% 4.18% (.35)% Consolidated Net interest revenue............................... $ 620 $ 576 $ 44 Average loans and lease financing.................. 42,112 40,114 1,998 Average earning assets............................. 56,834 52,717 4,117 Net interest margin................................ 4.38% 4.40% (.02)% 1997 1996 CHANGE SIX MONTHS ENDED JUNE 30 ------- ------- ------ (DOLLARS IN MILLIONS) United States operations Net interest revenue............................... $ 947 $ 891 $ 56 Average loans and lease financing.................. 31,734 30,844 890 Average earning assets............................. 41,920 39,847 2,073 Net interest margin................................ 4.56% 4.50% .06% International operations Net interest revenue............................... $ 298 $ 256 $ 42 Average loans and lease financing.................. 10,189 8,802 1,387 Average earning assets............................. 14,818 12,597 2,221 Net interest margin................................ 4.06% 4.09% (.03)% Consolidated Net interest revenue............................... $ 1,245 $ 1,147 $ 98 Average loans and lease financing.................. 41,923 39,646 2,277 Average earning assets............................. 56,738 52,444 4,294 Net interest margin................................ 4.43% 4.40% 0.03%
5 The increase in consolidated net interest revenue of $44 million and $98 million in the quarterly and six-month comparisons, respectively, was primarily due to an increase in average earning assets. Consolidated net interest margin was relatively flat in both comparisons with the increase in domestic net interest margin offset by a decrease in international net interest margin. Domestic net interest revenue increased $34 million in the quarterly comparison and $56 million in the six-month comparison. The increases in net interest revenue in both comparisons were primarily due to an increase in average available for sale and trading account securities, an increase in average loan volume and an increase in net interest margin. Average available for sale and trading account securities increased $1.4 billion in the quarterly comparison and $1.2 billion in the six-month comparison. The increase in average loans included increases in commercial and industrial loans of $1.6 billion in the quarterly comparison and $1.2 billion in the six- month comparison and increases in credit card loans of $374 million and $570 million in the same periods, respectively. These increases were partially offset by decreases in residential real estate loans of $1.1 billion in both the quarterly and six-month comparisons due to the sale of residential loans, including loans sold in connection with the sale of 20 branches in the fourth quarter of 1996. In addition, other consumer loans in the quarterly comparison decreased, reflecting the sale of Ganis loans in the first quarter of 1997. Domestic net interest margin increased 11 basis points and 6 basis points in the quarterly and six-month comparisons, respectively. The increases were due to the improvement in credit card spreads, resulting from the expiration of introductory promotional rates, and the sale of low yielding residential mortgages during the latter part of 1996 and the first part of 1997. The increases were partially offset by a higher level of other lower yielding assets, mainly trading and available for sale securities, compared with the 1996 periods. Information with respect to the Corporation's management of interest rate risk is discussed in the "Market Risk Management" section. International net interest revenue increased $10 million in the quarterly comparison and $42 million in the six-month comparison due to increases in average earning assets, partially offset by a decrease in net interest margin in both comparisons. The increases in average earning assets reflected increases in the Corporation's operations in Latin America, mainly in Brazil and Argentina, and were primarily the result of increases in average loans and leases in these countries. The decrease in net interest margin of 35 basis points in the quarterly comparison was primarily driven by decreased spreads in Argentina, reflecting competitive pricing pressures and further stabilization of the Argentine economy. Net interest margin in the six-month comparison was relatively unchanged, with the impact of the competitive pricing pressures in Argentina offset by increased dividends from equity investments in the first quarter of 1997. Compared to the first quarter of 1997, consolidated net interest revenue decreased $5 million and consolidated net interest margin decreased 9 basis points. The decrease in net interest revenue was primarily due to a decrease in International net interest revenue, reflecting lower net interest margin and a lower level of dividends from equity investments. The impact of these items on International net interest revenue was partially offset by an increase in average earning assets, mainly average loans in Brazil and Argentina. The Corporation expects continued pressure on margin in the future. Future levels of net interest revenue and margin will be affected by competitive pricing pressure on retail deposits, retail and commercial loans, and other products; the mix and volume of assets and liabilities; the 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, including the pending sale of FAC discussed above. FAC contributed 26 basis points to net interest margin in the second quarter and first six months of 1997. PROVISION FOR CREDIT LOSSES The provision for credit losses was $60 million in the second quarter of 1997, compared with $57 million in the second quarter of 1996. In the first six months of 1997, the provision for credit losses was $120 million, compared to $114 million in the first six months of 1996. The provision for credit losses in each period reflects management's assessment of the adequacy of the reserve for credit losses, considering the current risk 6 characteristics of the loan portfolio and economic conditions. The amount of future provisions will be a function of the regular quarterly review of the reserve for credit losses, the adequacy of which will be based upon management's assessment of risk at the time. As such, there can be no assurance as to the level of future provisions. See the "Reserve for Credit Losses" section for discussion of the reserve for credit losses and net credit losses. NONINTEREST INCOME The following table presents the components of noninterest income.
SECOND QUARTER SIX MONTHS ---------------- ----------------- 1997 1996 CHANGE 1997 1996 CHANGE ---- ---- ------ ---- ---- ------ (IN MILLIONS) Financial service fees Deposit and ATM-related fees............. $ 62 $ 61 $ 1 $120 $123 $ (3) Letter of credit and acceptance fees..... 18 16 2 34 33 1 Syndication and agent fees............... 23 13 10 38 22 16 Other loan-related fees.................. 9 8 1 18 19 (1) Net mortgage servicing fees.............. 4 (4) (85) 85 Other financial service fees............. 44 33 11 83 75 8 ---- ---- ---- ---- ---- ----- Total financial service fees........... 156 135 21 293 187 106 Mutual fund fees........................... 27 23 4 52 44 8 Personal trust fees........................ 36 33 3 70 65 5 Other trust and agency fees................ 6 6 13 10 3 Trading profits and commissions............ 28 25 3 47 38 9 Securities portfolio gains, net............ 32 3 29 41 17 24 Net equity and mezzanine profits........... 55 77 (22) 92 114 (22) Net foreign exchange trading profits....... 20 12 8 39 24 15 Other income............................... 17 23 (6) 57 63 (6) Net gain from decrease in joint venture in- terest.................................... 3 3 Gain on sale of business................... 46 (46) 106 (106) ---- ---- ---- ---- ---- ----- Total.................................. $377 $383 $ (6) $707 $668 $ 39 ==== ==== ==== ==== ==== =====
Excluding net mortgage servicing fees, financial service fees increased $25 million in the quarterly comparison and $21 million in the six-month comparison. The increases in both comparisons were primarily due to an increase in syndication and agent fees, reflecting a higher volume of transactions generated by the Corporation's Corporate Finance business, and an increase in other financial service fees, which included increases in emerging markets underwriting fees and advisory fees related to the Capital Markets business. Net losses from mortgage servicing in the first half of 1996 included $111 million of losses from risk management activities, net of decreased servicing amortization. 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 the Corporation's mortgage banking subsidiary pending the completion of its sale to HomeSide, Inc. (HomeSide). 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 Corporation on the disposition of the mortgage banking subsidiary increased. As a result, the losses from risk management activities were substantially offset by the pre-tax gain of $106 million realized on the sale of the mortgage banking subsidiary, which is included in gain on sale of business. Mutual fund fees increased in the quarterly and six-month comparisons primarily due to higher fees from the Corporation's Brazilian and Argentine mutual fund businesses, reflecting growth in these funds. Assets under 7 management at June 30, 1997 increased $1.1 billion in Brazil and $600 million in Argentina from June 30, 1996. The increase in securities portfolio gains in the quarterly and six-month comparisons was due to the sale of certain securities in the Argentine available for sale portfolio in the second quarter of 1997 for a gain of approximately $20 million. The decrease in net equity and mezzanine profits in both comparisons was due to an unusually high level of gains in the second quarter of 1996. The level of profits from the equity and mezzanine business is influenced by market and economic conditions and, as such, there can be no assurance as to the future level of profits from this business. The increase in net foreign exchange trading profits in the quarterly and six-month comparisons was due to an increased volume of business coupled with favorable market conditions in the first half of 1997. The net gain from decrease in joint venture interest reflects a $5 million gain relating to HomeSide's initial public offering in January 1997, offset by a $2 million loss from the early extinguishment of HomeSide outstanding debt, which was extinguished with the proceeds of the offering. This initial public offering resulted in a reduction of the Corporation's one-third interest in HomeSide to approximately 26 percent. Gain on sale of business in the first six months of 1996 reflected pre-tax gains of $106 million on the sale of the Corporation's mortgage banking subsidiary discussed above, of which $46 million is included in the second quarter. NONINTEREST EXPENSE The following table presents the components of noninterest expense.
SECOND QUARTER SIX MONTHS ---------------- -------------------- 1997 1996 CHANGE 1997 1996 CHANGE ---- ---- ------ ------ ------ ------ (IN MILLIONS) Employee costs.......................... $312 $293 $19 $ 622 $ 586 $36 Occupancy and equipment................. 88 84 4 174 169 5 Professional fees....................... 12 14 (2) 24 27 (3) Advertising and public relations........ 27 31 (4) 49 58 (9) Communications.......................... 28 25 3 54 50 4 Amortization of goodwill and other in- tangibles.............................. 7 5 2 15 11 4 Other................................... 102 79 23 181 155 26 ---- ---- --- ------ ------ --- Noninterest expense before OREO....... 576 531 45 1,119 1,056 63 OREO.................................... 2 1 1 3 3 ---- ---- --- ------ ------ --- Total................................. $578 $532 $46 $1,122 $1,059 $63 ==== ==== === ====== ====== ===
The increase in noninterest expense before other real estate owned (OREO) costs in the quarterly and six-month comparisons was due, in part, to costs incurred in the 1997 periods related to the integration of BayBanks. A major phase of the BayBanks integration, including major systems and branch conversions, was completed in the second quarter of 1997. Approximately $19 million of costs from these conversions and various other integration related activities are included in the second quarter of 1997. The increase in employee costs was due to higher merit increases, higher levels of incentive compensation related to improved business performance, costs related to the hiring of sales and trading professionals in the Global Capital Markets businesses, and expansion in Brazil and Argentina. These increases were partially offset by reduced employee costs, reflecting reduced employee staff levels, primarily resulting from the integration of BayBanks. The quarterly and six-month noninterest expense comparisons also included lower advertising and public relations costs due to a temporary decline in promotional campaigns during the integration of BayBanks and the rollout of new products; costs incurred in the second quarter of 1997 related to the centralization of regional support and processing functions in the Corporation's Asian operations; and costs incurred in the 1997 periods 8 related to updating the Corporation's computer application systems in preparation for the year 2000. The Corporation expects to continue to incur costs to modify computer application systems for the year 2000; however, at present, it does not anticipate that material incremental costs will be incurred in any single period. PROVISION FOR INCOME TAXES The second quarter 1997 provision for income taxes was $143 million, compared to $151 million for the second quarter of 1996. The provision for income taxes in the first half of 1997 was $282 million, compared to $263 million in the first half of 1996. The Corporation's effective tax rate was 40 percent in the second quarter and the first six months of 1997. The effective tax rate was 41 percent and 42 percent, respectively, in the second quarter of 1996 and the first six months of 1996. The reduction in the Corporation's effective tax rate in the quarterly and six-month comparisons was primarily due to reductions in the rates of state tax to which the Corporation's operations were subject. FINANCIAL CONDITION CONSOLIDATED BALANCE SHEET At June 30, 1997, the Corporation's total assets were $66.1 billion, compared with $62.3 billion at December 31, 1996. The $3.8 billion increase in total assets included a $1.3 billion increase in loans and leases, a $1.2 billion increase in available for sale securities, as well as increases in interest bearing bank deposits and securities purchased under agreements to resell. In addition, trading account securities increased $450 million as a result of the continued growth of the Corporation's trading businesses. The increase in assets was principally funded with federal funds purchased, securities sold under agreements to repurchase and other funds borrowed, mainly demand notes and short-term bank notes. Notes payable decreased $125 million from December 31, 1996, mainly due to the maturities of $275 million of the Corporation's senior medium-term notes and $235 million of Brazilian notes payable, partially offset by the issuance of $200 million of the Corporation's senior medium-term notes and $185 million of Brazilian notes payable. In addition, during the second quarter of 1997, a wholly-owned trust of the Corporation issued $250 million of capital securities and invested the proceeds in junior subordinated debentures issued by the Corporation. See Note 6 to the Financial Statements for further discussion. In the first quarter of 1997, the Board approved a 12 million share common stock repurchase program. The Corporation purchased 7.5 million shares in the first six months of 1997 and has continued this repurchase program in the third quarter of 1997. In July of 1997, the Board declared a quarterly common stock dividend of $.51 per share, payable on August 29, 1997, to stockholders of record on August 4, 1997. The level of dividends paid on the Corporation's common stock will continue to be determined by the Board based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors deemed relevant. In addition, in July 1997, the Corporation announced its intention to redeem all 920,000 issued and outstanding shares of Series E Preferred Stock (equivalent to 9,200,000 depositary shares) on September 15, 1997. The Series E Preferred Stock has an aggregate liquidation preference of $230 million. The Corporation's Tier 1 and total capital ratios were 8.8 percent and 12.8 percent, respectively, at June 30, 1997, compared with 9.2 percent and 13.6 percent, respectively, at December 31, 1996. The Corporation's leverage ratio at June 30, 1997 was 7.8 percent compared with 8.2 percent at December 31, 1996. The decrease in the Tier 1, total capital and leverage ratios was primarily due to the above mentioned repurchase of 7.5 million shares of common stock in the first six months of 1997. The Corporation has a capital planning process to ensure that appropriate regulatory capital levels and ratios are maintained. As of June 30, 1997, the Corporation and its bank subsidiaries met all capital adequacy requirements to which they are subject. 9 CREDIT PROFILE A discussion of the Corporation's credit risk management policies is included on page 29 of its 1996 Annual Report to Stockholders, which is incorporated by reference into its 1996 Annual Report on Form 10-K. The segments of the lending portfolio are as follows:
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 1997 1997 1996 1996 1996 ------- -------- ------- -------- ------- (IN MILLIONS) United States Operations Commercial, industrial and fi- nancial........................ $14,527 $14,203 $13,162 $13,828 $12,915 Commercial real estate Construction.................. 314 265 284 323 410 Other......................... 3,398 3,129 3,240 3,228 3,326 Consumer-related loans Residential mortgages......... 3,016 3,067 3,184 4,156 4,133 Home equity loans............. 2,924 2,908 2,878 2,842 2,775 Credit card................... 1,488 1,404 1,395 1,320 1,223 Other......................... 4,739 4,708 5,503 5,349 5,218 Lease financing................. 1,780 1,766 1,816 1,778 1,627 Unearned income................. (277) (275) (287) (272) (245) ------- ------- ------- ------- ------- 31,909 31,175 31,175 32,552 31,382 ------- ------- ------- ------- ------- International Operations Loans and lease financing, net of unearned income............. 10,404 9,844 9,886 9,501 9,271 ------- ------- ------- ------- ------- Total loans and lease financ- ing.......................... $42,313 $41,019 $41,061 $42,053 $40,653 ======= ======= ======= ======= =======
Total loans and lease financing increased $1.3 billion from December 31, 1996, reflecting a $1.4 billion increase in commercial, industrial and financial loans, an $800 million decrease in consumer-related loans, a $200 million increase in commercial real estate loans and a $500 million increase in international loans. The increases in commercial, industrial and financial loans resulted from increases in various loan portfolios, including New England Corporate Banking, Specialized Industries and Diversified Finance. Loan levels are also affected by the timing of syndication activity. The decrease in consumer-related loans was primarily due to the sale of $950 million of Ganis loans in the first quarter of 1997. The increase in international loans was primarily due to increases in commercial and industrial loans and consumer loans in Brazil and Argentina. The Corporation has entered into an agreement to sell FAC, with the transaction expected to close in the latter half of 1997. FAC's loans amounted to approximately $1 billion and are included in other consumer-related loans. At June 30, 1997 approximately 61 percent of domestic commercial real estate loans was to borrowers domiciled in New England, compared with approximately 70 percent at December 31, 1996. The portion of domestic commercial real estate loans located outside of New England was dispersed among 32 and 30 states at June 30, 1997 and December 31, 1996, respectively. The Corporation's total loan portfolio at June 30, 1997 and December 31, 1996 included $1.4 billion and $1.3 billion of highly leveraged transaction (HLT) loans to 113 and 116 customers, respectively. The average HLT loan size at June 30, 1997 and December 31, 1996 was $12 million and $11 million, respectively. The amount of unused commitments for HLTs at June 30, 1997 was $723 million, compared with $677 million at December 31, 1996. The amount of unused commitments does not necessarily represent the actual future funding requirements of the Corporation, since a portion can be syndicated or assigned to others or may expire without being drawn upon. At June 30, 1997 and December 31, 1996, there were no nonaccrual HLT loans. In addition, there were no credit losses from HLT loans in the second quarter of 1997. 10 A discussion of the Corporation's real estate and HLT lending activities and policies, and the effect of these activities on results of operations, is included on page 31 of its 1996 Annual Report to Stockholders, which is incorporated by reference into its 1996 Annual Report on Form 10-K. NONACCRUAL LOANS AND OREO The details of consolidated nonaccrual loans and OREO are as follows:
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 1997 1997 1996 1996 1996 ------- -------- ------- -------- ------- (DOLLARS IN MILLIONS) United States Commercial, industrial and finan- cial............................. $ 39 $ 72 $ 82 $114 $140 Commercial real estate Construction.................... 3 4 6 9 10 Other........................... 48 47 67 84 86 Consumer-related loans Residential mortgages........... 56 65 57 60 45 Home equity loans............... 26 25 23 22 20 Credit card..................... 22 23 17 5 2 Other........................... 44 41 44 44 38 ---- ---- ---- ---- ---- 238 277 296 338 341 International....................... 113 119 106 106 57 ---- ---- ---- ---- ---- Total nonaccrual loans.......... 351 396 402 444 398 OREO................................ 47 49 50 52 62 ---- ---- ---- ---- ---- Total........................... $398 $445 $452 $496 $460 ==== ==== ==== ==== ==== Nonaccrual loans and OREO as a percent of related asset categories......................... .9% 1.1% 1.1% 1.2% 1.1%
Total nonaccrual loans and OREO at June 30, 1997 decreased $54 million from December 31, 1996, and $47 million from March 31, 1997. The decrease from December 31, 1996 reflects decreases in commercial and industrial nonaccrual loans, as well as commercial real estate nonaccrual loans. The $43 million decrease in the commercial and industrial nonaccrual loans was driven by decreases in the Diversified Finance and New England Corporate Banking portfolios. The decreases in these portfolios were also responsible for the decrease in nonaccrual loans from March 31, 1997. Included in the Corporation's nonaccrual loan balance is a loan to a large international customer. In addition, the Corporation holds in available for sale securities approximately $50 million of commercial paper of this same customer, on which earnings are not being recognized. The customer's restructuring plan is currently being negotiated and the amount of any additional charge-off on the loan or loss, if any, on the investment will be dependent upon the outcome of these 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. 11 RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses considering evaluations of individual credits and concentrations of credit risks, net losses charged to the reserve, changes in quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in size and character of the credit risks and other pertinent factors. The credit risk of off-balance-sheet exposures is managed as part of the overall extension of credit to individual customers and is considered in assessing the overall adequacy of the reserve for credit losses. The amount of the reserve for credit losses associated with off- balance-sheet exposures is not significant. The amount of the reserve for credit losses is reviewed by management quarterly. The reserve for credit losses at June 30, 1997 was $845 million, or 2.00 percent of outstanding loans and leases, compared with $883 million, or 2.15 percent, at December 31, 1996. The reserve for credit losses was 240 percent of nonaccrual loans and leases at June 30, 1997, compared with 220 percent at December 31, 1996. 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 assurance can be given regarding the future level of the reserve. Net credit losses were as follows:
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 1997 1997 1996 1996 1996 QUARTERS ENDED ------- -------- ------- -------- ------- (IN MILLIONS) United States operations Commercial, industrial and finan- cial.............................. $ 5 $18 $ 3 $ 2 Commercial real estate............. (3) 16 $ 1 3 Consumer-related loans Residential mortgages............ 1 2 2 3 Home equity loans................ 1 2 3 1 Credit card...................... 24 19 13 7 4 Other............................ 34 35 26 35 25 --- --- --- --- --- 61 75 63 45 38 International operations............. 18 4 12 10 10 --- --- --- --- --- Total............................ $79 $79 $75 $55 $48 === === === === ===
Net credit losses were $79 million in the second quarter of 1997, compared with $48 million in the second quarter of 1996 and $79 million in the first quarter of 1997. The increase of $31 million compared to the second quarter of 1996 was principally driven by increases in net credit losses in the consumer loan portfolios, mainly the credit card portfolio, as well as FAC and other consumer lending portfolios. In addition, international net credit losses increased primarily due to the charge-off of a portion of the previously mentioned large international credit in the second quarter of 1997. The June 30, 1997 to March 31, 1997 comparison included a decrease of $13 million in commercial, industrial and financial net credit losses due to a loss on one large credit in the first quarter of 1997, offset by the increase in international credit losses. The industry-wide trend toward higher consumer debt levels and stagnant real wage growth, combined with higher current levels of personal bankruptcy filings, has led to higher charge-offs in the consumer portfolios, especially in the credit card portfolio. The Corporation expects continued pressure on consumer charge-offs in the future, however it anticipates that the pending sale of FAC will positively impact future levels of credit losses. Net credit losses from FAC were approximately $21 million in the second quarter of 1997 and $44 million in the first half of 1997. As previously mentioned, the Corporation is performing a strategic review of its national credit card portfolio. Due to the uncertainty of the outcome of this review, the level of the Corporation's charge-offs from this portfolio could increase or decrease from prior periods. 12 CROSS-BORDER OUTSTANDINGS In accordance with bank regulatory rules, cross-border outstandings are amounts payable to the Corporation by residents of foreign countries regardless of the currency in which the claim is denominated, excluding the following. . Local country claims that are funded by local country obligations payable only in the country where issued. In the first quarter of 1997, the Corporation adopted the new country exposure reporting rules issued by the Federal Financial Institutions Examination Council. One of the changes resulting from the new rules is the exclusion from cross-border outstandings of local country claims funded by obligations of the local country, regardless of the currency in which the claim or obligation is denominated. The most significant impact of this change on the Corporation's cross-border outstandings was the exclusion of Argendollar outstandings. Argendollars are outstandings payable to the Corporation in U.S. dollars in Argentina which are funded entirely by dollars borrowed within Argentina. . Local country assets funded with U.S. dollars or other non-local currency where the providers of funds agree that, in the event their claims cannot be repaid in the designated currency due to currency exchange restrictions in a given country, they may either accept payment in local currency or wait to receive the non-local currency until such time as it becomes available in the local market. At June 30, 1997, such outstandings related to emerging markets countries totaled $2.5 billion, compared with $2.3 billion at December 31, 1996. . Claims reallocated as a result of external guarantees or cash collateral. . Claims reallocated as a result of insurance contracts, issued primarily by U.S. government agencies. Cross-border outstandings include deposits in other banks, resale agreements, trading securities, securities available for sale, securities held to maturity, loans and lease financing, amounts due from customers on acceptances and accrued interest receivable. The following summarizes cross-border outstandings in countries which individually amounted to 1.0 percent or more of consolidated total assets at June 30, 1997 and December 31, 1996. Certain amounts at December 31, 1996 have been restated and reflect the above-mentioned changes in the country exposure reporting rules.
PERCENTAGE OF PUBLIC BANKS OTHER TOTAL TOTAL ASSETS COMMITMENTS(1) ------ ----- ----- ------ ------------- -------------- (DOLLARS IN MILLIONS) June 30, 1997(2) Argentina............. $775 $120 $675 $1,570 2.4% $ 15 Brazil................ 405 30 480 915 1.4 100 Chile................. 155 240 420 815 1.2 25 December 31, 1996(2) Argentina(3).......... $605 $ 15 $945 $1,565 2.5% $55 Brazil................ 305 30 585 920 1.5 40 Chile................. 60 265 385 710 1.1 30
- -------- (1) Included within commitments are letters of credit, guarantees and the undisbursed portions of loan commitments. (2) There were no cross-border outstandings in countries which totaled between .75% and 1% of consolidated total assets at June 30, 1997 and December 31, 1996. (3) Amounts have been restated for comparative purposes to exclude Argendollar outstandings of approximately $1.3 billion. 13 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. A discussion of the Corporation's credit risk management policies is included on page 29 of its 1996 Annual Report to Stockholders, which is incorporated by reference into its 1996 Annual Report on Form 10-K. EMERGING MARKETS COUNTRIES At June 30, 1997 and December 31, 1996, approximately $4.7 billion of the Corporation's cross-border outstandings were to emerging markets countries. These cross-border outstandings, of which approximately 79 percent were loans at June 30, 1997, were mainly composed of short-term trade credits, non-trade- related loans and leases not subject to country debt rescheduling agreements, government securities, capital investments in branches and subsidiaries, and trading positions managed by the Corporation's Emerging Markets Sales, Trading & Research business. Most cross-border outstandings to emerging markets countries were to countries in which the Corporation maintains branch networks and/or subsidiaries. ARGENTINA AND BRAZIL The Corporation's Argentine assets amounted to approximately $5.1 billion at June 30, 1997 and $4.8 billion at December 31, 1996. Included in these assets are cross-border outstandings of $1.5 billion at June 30, 1997 and $1.6 billion at December 31, 1996. Loans were $3.6 billion at June 30, 1997, compared to $3.4 million at December 31, 1996. The Corporation's Argentine securities portfolio, which consists of trading assets and available for sale securities, amounted to $652 million at June 30, 1997 and $621 million at December 31, 1996. The Corporation's nonaccrual Argentine loans were $91 million and $85 million at June 30, 1997 and December 31, 1996, respectively. Net credit losses were $13 million in the second quarter of 1997, compared to $4 million in the second quarter of 1996 and $4 million in the first quarter of 1997. The increase in credit losses in the second quarter of 1997 compared to the second quarter of 1996 was due to the loss on the previously mentioned large international credit in the second quarter of 1997. The Corporation's Brazilian assets amounted to approximately $6.2 billion at June 30, 1997, compared with approximately $5.0 billion at December 31, 1996. Included in total assets are cross-border outstandings of $800 million at June 30, 1997 and $900 million at December 31, 1996. The increase in total assets was primarily due to an increase of $1.1 billion in resale agreements and deposits in other banks. Loans were $2.9 billion at June 30, 1997, compared to $2.7 billion at December 31, 1996. The Corporation's Brazilian securities portfolio, consisting of trading assets and available for sale securities, was $646 million at June 30, 1997 and $565 million at December 31, 1996. The Corporation's nonaccrual Brazilian loans were $18 million at June 30, 1997, compared with $14 million at December 31, 1996. Net credit losses were $4 million in the second quarter of both 1997 and 1996 and $1 million in the first quarter of 1997. The Corporation's Argentine and Brazilian operations maintained currency positions both at June 30, 1997 and December 31, 1996. For further discussion of currency positions, see the "Market Risk Management" section. It is expected that the economic situation in Latin America, including the effect of world financial markets on these economies, will continue to evolve. The Corporation has not experienced any collection problems as a result of currency restrictions or foreign exchange liquidity problems on its current portfolio of cross-border 14 outstandings to emerging markets countries. However, if the actions implemented by Latin American governments do not remain effective over time, the Corporation's operations could experience adverse effects, including stress on local liquidity, deterioration of credit quality, a decline in the value of its securities portfolio and declines in loan and deposit levels. Each emerging markets country is at a different stage of development with a unique set of economic fundamentals; therefore, it is not possible to predict what developments will occur and what impact these developments will ultimately have on the economies of these countries or on the Corporation's financial statements. LIQUIDITY RISK MANAGEMENT The Corporation's liquid assets, which consist primarily of interest bearing deposits in other banks, federal funds sold and resale agreements, money market loans and unencumbered U.S. Treasury and government agency securities, were $8.4 billion at June 30, 1997, compared with $7.3 billion at December 31, 1996. Also, the Corporation has access to additional funding through the public markets. Management considers overall liquidity at June 30, 1997 to be adequate to meet current obligations, to support expectations for future changes in asset and liability levels and to carry on normal operations. For additional information related to the Corporation's liquidity management, see pages 37 and 38 of the Corporation's 1996 Annual Report to Stockholders, which is incorporated by reference into its 1996 Annual Report on Form 10-K. 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 financial instruments. Market risk is managed within policies and limits established by the Asset, Liability and Capital Committee (ALCCO) and the Board of Directors (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. The Corporation's trading activities primarily involve providing risk management services to its customers, including interest rate derivatives and foreign exchange contracts. In addition, the Corporation takes proprietary positions in domestic and emerging markets fixed income securities and local currency debt and equity securities. The risk positions taken by the Corporation in these financial instruments are subject to ALCCO approved limits. The Corporation manages the market risk related 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 Corporation could incur from an adverse movement in market prices, given a specified confidence level and a defined holding period. The VAR calculations include the effects of both interest rate and foreign exchange rate risks. The calculations do not take into account the potential diversification benefits of the different positions in each of the trading portfolios. The aggregate VAR limit for the Corporation's trading portfolios was approximately $50 million, and the aggregate VAR exposure was approximately $15 million at both June 30, 1997 and December 31, 1996. The majority of the Corporation's assets and liabilities are exposed to interest rate risk. The interest rate risk for U.S. dollar denominated assets and liabilities, which represents a significant portion of the Corporation's consolidated balance sheet at June 30, 1997, is evaluated and managed centrally through the Global Treasury group, utilizing several modeling methodologies. The two principal methodologies used are market value sensitivity and net interest revenue at risk. The results of these models are reviewed monthly with ALCCO and at least quarterly with the Board. Market value sensitivity is defined as the potential change in market value, or the economic value, of the institution resulting from changes in interest rates. Net interest revenue at risk is defined as the exposure of the Corporation's net interest revenue over the next twelve months to an adverse movement in interest rates. Both of these methodologies are designed to isolate the effects of market changes in interest rates on the Corporation's 15 existing positions, and they exclude other factors such as competitive pricing considerations, future changes in the asset and liability mix and other possible management actions. Therefore, they are not by themselves measures of future levels of net interest revenue. These two methodologies provide different but complementary measures of the level of interest rate risk; the longer-term view is modeled through market value sensitivity, while the shorter-term view is evaluated through net interest revenue at risk over the next twelve months. Under current ALCCO directives, market value sensitivity cannot exceed 3 percent of total risk- based capital and net interest revenue at risk cannot exceed 2 percent of net interest revenue over the next twelve-month period. The following table shows the Corporation's market value sensitivity and net interest revenue at risk positions at June 30, 1997 and December 31, 1996.
JUNE 30, 1997 DECEMBER 31, 1996 --------------------- --------------------- QUARTERLY QUARTERLY QUARTER-END AVERAGE QUARTER-END AVERAGE ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) Market value sensitivity (1)(2).... $173 $180 $162 $162 % of risk-based capital........... 2.5% 2.5% 2.4% 2.4% Net interest revenue at risk (3)... $ 17 $ 22 $ 30 $ 29 % of net interest revenue......... .7% .9% 1.3% 1.2%
- -------- (1) Based on a 100 basis point adverse interest rate shock. (2) December 31, 1996 amounts have been restated for comparability. (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 June 30, 1997 and December 31, 1996 the adverse position was based on a 200 basis point decline in interest rates over the next twelve- month period. At June 30, 1997 and December 31, 1996, the Corporation's adverse market value sensitivity was to rising interest rates. The increase in the adverse position since December 31, 1996 was primarily due to a net increase in fixed rate assets, mainly available for sale securities. The Corporation's net interest revenue at risk over the next twelve months was to declining interest rates at June 30, 1997 and December 31, 1996. The Corporation considers the level of its net interest revenue at risk to be a relatively neutral position. 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. Limits are updated at least annually for current market conditions, considering business and economic conditions in the country at a particular point in time. At June 30, 1997, approximately 85 percent of the total overseas limit was allocated to Argentina and Brazil, which, in turn, represented approximately one-third of total domestic limits. During the second quarter of 1997, the Corporation continued to structure its balance sheet to take positions in the currencies of emerging markets and other countries where it operates. These positions are taken when the Corporation believes that it can maximize its spread from interest operations by funding local currency assets with U.S. dollars rather than using local currency liabilities or by funding U.S. dollar assets with local currency liabilities. The average currency positions, which represent local currency assets funded by U.S. dollars, for Argentina, Brazil, Chile and South Korea during the second quarter of 1997 were $115 million, $145 million, $51 million and $49 million, respectively. This compares with average currency positions for these same countries during the fourth quarter of 1996 of $107 million, $100 million, $52 million and $49 million, respectively. Whenever these positions are taken, they are subject to limits established by ALCCO and are subject to regular review. To date, these positions have been liquid in nature and management has been able to close and re-open these positions as necessary. 16 The level of U.S. dollar and non-U.S. dollar exposure maintained by the Corporation is a function of the market environment and may change from period to period based on interest rate and other economic expectations. Additional information with respect to the Corporation's management of market risk is included on pages 39 and 40 of the Corporation's 1996 Annual Report to Stockholders which is incorporated by reference in its 1996 Annual Report on Form 10-K. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives provide the Corporation with significant flexibility in managing its interest rate risk and foreign exchange exposures, enabling it to manage risk efficiently and respond quickly to changing market conditions while minimizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related derivative instruments, primarily interest rate swaps and futures, as part of its asset and liability management practices. Derivatives not used for asset and liability management are included in the derivatives trading portfolio and relate to providing risk management products to the Corporation's customers. All derivative activities are managed on a comprehensive basis, are included in the overall market risk measures and limits described above, and are subject to credit standards similar to those for balance sheet exposures. 17 The following table summarizes the notional amounts and fair values of interest rate derivatives and foreign exchange contracts included in the Corporation's trading and asset and liability management (ALM) portfolios.
JUNE 30, 1997 ---------------------------------------------------------------------------------- TRADING PORTFOLIO (1) ALM PORTFOLIO (1) --------------------------------- ----------------------------------------------- FAIR VALUE (2)(3)(4) FAIR VALUE (2)(3) NOTIONAL -------------------- NOTIONAL ----------------- UNRECOGNIZED (5) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS) -------- ---------- ------------ -------- -------- ---------- ---------------- (IN MILLIONS) Interest rate contracts Futures and forwards.. $53,201 $ 46 $ 42 $ 4,650 $(28) Interest rate swaps... 11,412 58 87 9,755 $ 45 $ 57 (21) Interest rate options Purchased........... 24,415 32 1,000 2 1 Written or sold..... 10,514 31 ------- ---------- ---------- ------- -------- -------- ---- Total interest rate con- tracts................. $99,542 $ 136 $ 160 $15,405 $ 47 $ 57 $(48) ======= ========== ========== ======= ======== ======== ==== Foreign exchange con- tracts Spot and forward con- tracts............... $28,693 $ 316 $ 604 $ 1,720 $ 12 $ 10 $ 2 Options purchased..... 6,567 101 Options written or sold................. 6,160 99 ------- ---------- ---------- ------- -------- -------- ---- Total foreign exchange contracts.............. $41,420 $ 417 $ 703 $ 1,720 $ 12 $ 10 $ 2 ======= ========== ========== ======= ======== ======== ==== DECEMBER 31, 1996 ---------------------------------------------------------------------------------- TRADING PORTFOLIO (1) ALM PORTFOLIO (1) --------------------------------- ----------------------------------------------- FAIR VALUE (2)(3)(4) FAIR VALUE (2)(3) NOTIONAL -------------------- NOTIONAL ----------------- UNRECOGNIZED (5) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS) -------- ---------- ------------ -------- -------- ---------- ---------------- (IN MILLIONS) 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 ======= ========== ========== ======= ======== ======== ====
- -------- (1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in other assets or other liabilities, as applicable. The majority of derivatives that are part of the ALM portfolio are accounted for on the accrual basis, and not carried at fair value. In certain cases, contracts, such as futures, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) The credit exposure of interest rate derivatives and foreign exchange contracts is represented by the fair value of contracts reported in the "Asset" column. (4) The average asset and liability fair value amounts for interest rate contracts included in the trading portfolio for the quarters ended June 30, 1997 and December 31, 1996 were approximately $142 million and $151 18 million, respectively, and $137 million and $129 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were approximately $371 million and $516 million, respectively, for the quarter ended June 30, 1997, and $283 million and $295 million, respectively, for the quarter ended December 31, 1996. (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 June 30, 1997, there were $11 million of unrecognized gains and $17 million of unrecognized losses related to terminated contracts that are being amortized to net interest revenue over weighted average periods of 20 months and 7 months, respectively. At December 31, 1996, there were $16 million of unrecognized gains and $33 million of unrecognized losses related to terminated contracts that were being amortized to net interest revenue over weighted average periods of 26 months and 13 months, respectively. Net trading gains or losses from interest rate derivatives are recorded in trading account profits and commissions. The Corporation's interest rate derivative 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 derivative activities are combined with the results of the respective trading portfolio to determine the overall performance of the trading business and, as such, are not included in the results of derivative trading activities. Net trading gains from interest rate derivative trading for the quarter and six months ended June 30, 1997 were $4 million and $9 million, respectively, and for the quarter and six months ended June 30, 1996 were $1 million and $3 million, respectively. Net trading gains from foreign exchange contracts are recorded in other income. Net trading gains from foreign exchange activities, which include foreign exchange spot, forward and options contracts, for the quarter and six months ended June 30, 1997 were $20 million and $39 million, respectively, and for the quarter and six months ended June, 30, 1996 were $12 million and $24 million, respectively. The notional amount of interest rate derivative contracts and foreign exchange contracts included in the trading portfolio increased approximately $31 billion and $16 billion, respectively, from December 31, 1996. The increases were due to a higher level of customer demand and growth of the derivative trading business. 19 The following table summarizes the remaining maturity of interest rate derivative financial instruments entered into for asset and liability management purposes as of June 30, 1997.
REMAINING MATURITY -------------------------------------------------------------- JUNE 30 DECEMBER 31 1997 1996 1997 1998 1999 2000 2001 2002+ TOTAL TOTAL ------- ---- ---- ---- ---- ------ ------- ----------- (DOLLARS IN MILLIONS) INTEREST RATE SWAPS Domestic Receive fixed rate swaps (1) Notional amount........ $ 441 $430 $130 $440 $300 $1,800 $ 3,541 $ 2,826 Weighted average re- ceive rate............ 6.98% 6.11% 6.44% 5.71% 6.10% 6.47% 6.36% 6.38% Weighted average pay rate.................. 5.82% 5.80% 5.93% 5.84% 5.81% 5.74% 5.78% 5.67% Pay fixed rate swaps (1) Notional amount........ $ 15 $ 287 $ 302 $ 83 Weighted average re- ceive rate............ 5.84% 5.98% 5.97% 5.88% Weighted average pay rate.................. 9.36% 6.36% 6.50% 7.61% Basis swaps (2) Notional amount........ $ 50 $110 $ 50 $ 210 $ 468 Weighted average re- ceive rate............ 5.82% 5.79% 6.03% 5.85% 5.90% Weighted average pay rate.................. 5.39% 5.82% 5.78% 5.71% 5.64% Total Domestic Interest Rate Swaps Notional amount........ $ 441 $495 $240 $490 $300 $2,087 $ 4,053 $ 3,377 Weighted average re- ceive rate (3)........ 6.98% 6.08% 6.14% 5.74% 6.10% 6.40% 6.31% 6.31% Weighted average pay rate (3).............. 5.82% 5.87% 5.88% 5.83% 5.81% 5.82% 5.83% 5.71% Total International Interest Rate Swaps Notional Amount (4)(6)................. $ 5,685 $ 17 $ 5,702 $ 3,598 OTHER DERIVATIVE PRODUCTS Futures and forwards (5)(6)................. $ 4,650 $ 4,650 $ 3,382 Interest rate options purchased (7).......... $500 $500 $ 1,000 ------- ---- ---- ---- ---- ------ ------- ------- Total Consolidated Notional Amount........ $10,776 $995 $740 $507 $300 $2,087 $15,405 $10,357 ======= ==== ==== ==== ==== ====== ======= =======
- -------- (1) Approximately $1.6 billion of the receive fixed rate swaps are linked to floating rate loans, and the remaining $1.9 billion to fixed rate notes payable. Of the swaps linked to notes payable, approximately $1 billion are scheduled to mature in 2002 and thereafter. The majority of the 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. Most of the basis swaps are linked to 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 June 30, 1997 have been implicitly assumed to remain constant throughout the terms of the swaps. Future changes in LIBOR rates would affect the variable rate information disclosed. (4) The majority of the international portfolio is comprised of swaps entered into by the Corporation's Brazilian operations with a weighted average maturity of less than 1 year. These swaps typically include the exchange of floating rate indices that are limited to the Brazilian market. (5) Represent contracts entered into by the Corporation's Brazilian operations in the local market which are linked to short-term interest bearing assets and liabilities. (6) The increase from December 31, 1996 was due to the increased use of swap and futures and forward contracts to hedge balance sheet positions. (7) Represents LIBOR floors that are linked to fixed interest rate deposits. The Corporation routinely reviews its asset and liability derivative positions to determine whether such instruments continue to function as effective risk management tools. The 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. Additional information on the Corporation's derivative products, including accounting policies, is included on pages 41 and 42 of, and in Notes 1 and 22 to the Financial Statements, in the Corporation's 1996 Annual Report to Stockholders, which is incorporated by reference in its 1996 Annual Report on Form 10-K. 20 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30 DECEMBER 31 1997 1996 -------- ----------- ASSETS Cash and due from banks................................... $ 4,485 $ 4,273 Interest bearing deposits in other banks.................. 1,835 1,634 Federal funds sold and securities purchased under agreements to resell..................................... 2,235 1,857 Trading securities........................................ 1,688 1,238 Securities Available for sale...................................... 8,969 7,804 Held to maturity (fair value of $630 in 1997 and $675 in 1996).................................................. 636 680 Loans and lease financing United States operations................................ 31,909 31,175 International operations................................ 10,404 9,886 -------- -------- Total loans and lease financing (net of unearned income of $368 in 1997 and $380 in 1996)..................... 42,313 41,061 Reserve for credit losses................................. (845) (883) -------- -------- Net loans and lease financing........................... 41,468 40,178 Premises and equipment, net............................... 963 894 Due from customers on acceptances......................... 486 438 Accrued interest receivable............................... 544 546 Other assets.............................................. 2,829 2,764 -------- -------- TOTAL ASSETS.............................................. $ 66,138 $ 62,306 ======== ========
The accompanying notes are an integral part of these financial statements. 21 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS) (CONTINUED)
JUNE 30 DECEMBER 31 1997 1996 -------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing................................... $ 7,702 $ 8,340 Interest bearing...................................... 24,423 24,709 Overseas offices Noninterest bearing................................... 984 751 Interest bearing...................................... 9,869 9,031 -------- -------- Total deposits...................................... 42,978 42,831 Funds borrowed Federal funds purchased................................ 1,834 527 Term federal funds purchased........................... 1,652 1,442 Securities sold under agreements to repurchase......... 2,421 2,034 Other funds borrowed................................... 6,470 5,155 Acceptances outstanding................................. 490 448 Accrued expenses and other liabilities.................. 2,176 1,614 Notes payable........................................... 2,696 2,821 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures........... 747 500 -------- -------- TOTAL LIABILITIES....................................... 61,464 57,372 -------- -------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares--10,000,000 Issued and outstanding shares--4,593,941.............. 508 508 Common stock, par value $1.50 Authorized shares--300,000,000 Issued shares--154,187,493 in 1997 and 153,172,672 in 1996 Outstanding shares--147,110,689 in 1997 and 153,172,672 in 1996.................................. 231 230 Surplus................................................. 1,244 1,202 Retained earnings....................................... 3,168 2,925 Net unrealized gain on securities available for sale, net of tax............................................. 54 76 Cumulative translation adjustments, net of tax.......... (10) (7) Treasury stock, at cost (7,076,804 shares in 1997)...... (521) -------- -------- TOTAL STOCKHOLDERS' EQUITY.............................. 4,674 4,934 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $ 66,138 $ 62,306 ======== ========
The accompanying notes are an integral part of the financial statements. 22 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------- ----------------- 1997 1996 1997 1996 ------- ------- -------- -------- INTEREST INCOME Loans and lease financing, including fees.. $ 1,001 $ 937 $ 1,975 $ 1,915 Securities................................. 163 139 333 277 Trading securities......................... 28 52 56 93 Mortgages held for sale.................... 1 18 Federal funds sold and securities purchased under agreements to resell................ 53 45 121 88 Deposits in other banks.................... 36 28 71 52 ------- ------- -------- -------- Total interest income.................... 1,281 1,202 2,556 2,443 ------- ------- -------- -------- INTEREST EXPENSE Deposits of domestic offices............... 233 228 462 461 Deposits of overseas offices............... 172 198 343 385 Funds borrowed............................. 199 159 392 370 Notes payable.............................. 61 46 123 90 ------- ------- -------- -------- Total interest expense................... 665 631 1,320 1,306 ------- ------- -------- -------- NET INTEREST REVENUE......................... 616 571 1,236 1,137 Provision for credit losses................ 60 57 120 114 ------- ------- -------- -------- Net interest revenue after provision for credit losses............................. 556 514 1,116 1,023 ------- ------- -------- -------- NONINTEREST INCOME Financial service fees..................... 156 135 293 187 Trust and agency fees...................... 69 62 135 119 Trading profits and commissions............ 28 25 47 38 Net securities gains....................... 32 4 41 17 Other income............................... 92 157 191 307 ------- ------- -------- -------- Total noninterest income................. 377 383 707 668 ------- ------- -------- -------- NONINTEREST EXPENSE Salaries................................... 260 244 518 485 Employee benefits.......................... 52 49 104 101 Occupancy expense.......................... 52 50 103 101 Equipment expense.......................... 36 34 71 68 Other expense.............................. 178 155 326 304 ------- ------- -------- -------- Total noninterest expense................ 578 532 1,122 1,059 ------- ------- -------- -------- Income before income taxes................... 355 365 701 632 Provision for income taxes................... 143 151 282 263 ------- ------- -------- -------- NET INCOME................................... $ 212 $ 214 $ 419 $ 369 ======= ======= ======== ======== NET INCOME APPLICABLE TO COMMON STOCK........ $ 203 $ 205 $ 400 $ 350 ======= ======= ======== ======== PER COMMON SHARE Net income Primary.................................... $ 1.37 $ 1.33 $ 2.66 $ 2.27 Fully diluted.............................. $ 1.35 $ 1.32 $ 2.62 $ 2.24 Dividends declared........................... $ .51 $ .44 $ .95 $ .81 AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS) Primary.................................... 147,910 153,650 150,650 154,318 Fully diluted.............................. 149,787 155,183 152,691 156,018
The accompanying notes are an integral part of these financial statements. 23 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS)
1997 1996 SIX MONTHS ENDED JUNE 30 ------ ------ PREFERRED STOCK Balance, January 1............................................ $ 508 $ 508 ------ ------ Balance, June 30.............................................. 508 508 ------ ------ COMMON STOCK Balance, January 1............................................ 230 350 Change in par value........................................... (118) Common stock issued Exercise of stock options.................................... 1 2 Business combination......................................... 1 ------ ------ Balance, June 30.............................................. 231 235 ------ ------ SURPLUS Balance, January 1............................................ 1,202 1,240 Change in par value........................................... 118 Dividend reinvestment and common stock purchase plan.......... 5 Exercise of stock options..................................... (8) (26) Additional purchase price for prior business combination...... 7 Restricted stock grants....................................... 19 3 Business combination.......................................... 47 Other, principally employee benefit plans..................... 19 7 ------ ------ Balance, June 30.............................................. 1,244 1,389 ------ ------ RETAINED EARNINGS Balance, January 1............................................ 2,925 2,548 Net income.................................................... 419 369 Restricted stock grants....................................... (14) (4) Payment on ESOP loan.......................................... 3 Cash dividends declared Preferred stock.............................................. (19) (19) Common stock................................................. (143) (112) ------ ------ Balance, June 30.............................................. 3,168 2,785 ------ ------ NET UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE Balance, January 1............................................ 76 82 Change in net unrealized gain on securities available for sale, net of tax............................................. (22) (31) ------ ------ Balance, June 30.............................................. 54 51 ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1............................................ (7) (4) Change in translation adjustments, net of tax................. (3) (2) ------ ------ Balance, June 30.............................................. (10) (6) ------ ------ TREASURY STOCK Balance, January 1............................................ (22) Purchases of treasury stock................................... (552) (255) Treasury stock reissued Dividend reinvestment and common stock purchase plan......... 6 23 Exercise of stock options.................................... 24 51 Additional purchase price for prior business combination..... 7 Restricted stock grants...................................... 1 10 Business combination......................................... 181 Other, principally employee benefit plans.................... 5 ------ ------ Balance, June 30.............................................. (521) ------ ------ TOTAL STOCKHOLDERS' EQUITY, JUNE 30........................... $4,674 $4,962 ====== ======
The accompanying notes are an integral part of these financial statements. 24 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
1997 1996 SIX MONTHS ENDED JUNE 30 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 419 $ 369 Reconciliation of net income to net cash provided from (used for) operating activities Provision for credit losses................................ 120 114 Depreciation and amortization.............................. 79 70 Provision for deferred taxes............................... 44 62 Net gains on sales of securities and other assets.......... (127) (229) Change in trading securities............................... (450) (572) Net change in mortgages held for sale...................... 241 Net change in interest receivables and payables............ (38) (11) Other, net................................................. 527 (85) -------- ------- Net cash provided from (used for) operating activities..... 574 (41) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) interest bearing deposits in other banks............................................. (201) 164 Net cash used for federal funds sold and securities purchased under agreements to resell....................... (378) (968) Securities available for sale Sales...................................................... 2,711 1,615 Maturities................................................. 1,161 2,308 Purchases.................................................. (5,114) (4,760) Securities held to maturity Maturities................................................. 73 29 Purchases.................................................. (29) (51) Loans and lease financing originated by nonbank entities.... (16,023) (7,327) Loans and lease financing collected by nonbank entities..... 15,472 6,414 Proceeds from sales of loan portfolios by bank subsidiaries............................................... 1,295 Net cash used for lending and lease activities of bank subsidiaries............................................... (2,188) (977) Proceeds from sales of other real estate owned.............. 12 19 Expenditures for premises and equipment..................... (152) (113) Proceeds from sales of business units, premises and equipment.................................................. 21 186 Other, net.................................................. 165 (19) -------- ------- Net cash used for investing activities..................... (3,175) (3,480) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from deposits............................. 147 2,334 Net cash provided from funds borrowed....................... 3,219 829 Net repayments of notes payable............................. (510) (172) Net proceeds from issuance of notes payable................. 385 615 Net proceeds from issuance of guaranteed preferred beneficial interests in Corporation's junior subordinated debentures................................................. 247 Net proceeds from issuance of common stock.................. 42 54 Purchases of treasury stock................................. (552) (255) Dividends paid.............................................. (162) (131) -------- ------- Net cash provided from financing activities................ 2,816 3,274 -------- ------- Effect of foreign currency translation on cash.............. (3) (7) -------- ------- NET CHANGE IN CASH AND DUE FROM BANKS....................... 212 (254) CASH AND DUE FROM BANKS AT JANUARY 1........................ 4,273 3,561 -------- ------- CASH AND DUE FROM BANKS AT JUNE 30.......................... $ 4,485 $ 3,307 ======== ======= Interest payments made...................................... $ 1,361 $ 1,313 Income tax payments made.................................... $ 284 $ 205
The accompanying notes are an integral part of these financial statements. 25 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS 1. The accompanying interim consolidated financial statements of BankBoston Corporation (the Corporation) are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information contained herein have been made. Prior period financial statements have been restated to give retroactive effect to the acquisition of BayBanks, Inc. (BayBanks) completed in July 1996, which was accounted for as a pooling of interests. Certain amounts reported in prior periods have been reclassified for comparative purposes. This information should be read in conjunction with the Corporation's 1996 Annual Report on Form 10-K. 2. ACQUISITIONS AND DIVESTITURES In May 1997, the Corporation entered into an agreement to acquire Pacific National Corporation (Pacific), the holding company of Pacific National Bank of Nantucket, in exchange for approximately $24 million of the Corporation's common stock. The transaction, which will be accounted for as a purchase, is subject to approval by bank regulators and Pacific's stockholders and, if approved, is expected to close in the fourth quarter of 1997. In June 1997, the Corporation announced an agreement to sell its consumer finance subsidiary, Fidelity Acceptance Corporation. Under the terms of the agreement, the Corporation expects to receive total proceeds of approximately $340 million, resulting in an after-tax gain of approximately $40 million. The transaction is expected to close in the second half of 1997, subject to regulatory approval. 3. SECURITIES A summary comparison of securities available for sale by type is as follows:
JUNE 30, 1997 DECEMBER 31, 1996 --------------- ------------------- CARRYING CARRYING COST VALUE COST VALUE ------ -------- -------- ---------- (IN MILLIONS) U.S. Treasury........... $1,400 $1,397 $1,669 $1,675 U.S. government agencies and corporations-- mortgage-backed securities............. 5,022 5,029 3,789 3,801 States and political subdivisions........... 140 141 172 173 Foreign debt securities............. 1,259 1,278 1,095 1,133 Other debt securities... 404 405 250 256 Marketable equity securities............. 171 229 156 217 Other equity securities............. 490 490 549 549 ------ ------ -------- -------- $8,886 $8,969 $7,680 $7,804 ====== ====== ======== ========
Other equity securities included in securities available for sale are not traded on established exchanges and are carried at cost. 26 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SECURITIES (CONTINUED) A summary comparison of securities held to maturity by type is as follows:
JUNE 30, 1997 DECEMBER 31, 1996 -------------------- -------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- (IN MILLIONS) U.S. Treasury........................ $ 5 $ 5 $ 3 $ 3 U.S. government agencies and corporations-- mortgage-backed securities.......... 523 517 535 530 States and political subdivisions.... 4 4 6 6 Other debt securities................ 1 1 Foreign debt securities.............. 11 11 11 11 Other equity securities.............. 92 92 125 125 ---- ---- ---- ---- $636 $630 $680 $675 ==== ==== ==== ====
Other equity securities included in securities held to maturity represent securities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. 4. LOANS AND LEASE FINANCING The following are the details of loan and lease financing balances:
JUNE 30 DECEMBER 31 1997 1996 ------- ----------- (IN MILLIONS) United States operations Commercial, industrial and financial...................... $14,527 $13,162 Commercial real estate Construction............................................. 314 284 Other.................................................... 3,398 3,240 Consumer-related loans Residential mortgages.................................... 3,016 3,184 Home equity loans........................................ 2,924 2,878 Credit card loans........................................ 1,488 1,395 Other.................................................... 4,739 5,503 Lease financing........................................... 1,780 1,816 Unearned income........................................... (277) (287) ------- ------- 31,909 31,175 ------- ------- International operations Loans and lease financing................................. 10,495 9,979 Unearned income........................................... (91) (93) ------- ------- 10,404 9,886 ------- ------- $42,313 $41,061 ======= =======
27 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. RESERVE FOR CREDIT LOSSES An analysis of the reserve for credit losses is as follows:
QUARTERS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------- ------------------ 1997 1996 1997 1996 ------- ------- -------- -------- (IN MILLIONS) BALANCE, BEGINNING OF PERIOD............... $ 864 $884 $ 883 $ 890 Provision.................................. 60 57 120 114 Reserves of entities sold.................. (11) Reserve of acquired bank................... 2 2 Domestic credit losses Commercial, industrial and financial..... (7) (5) (27) (13) Commercial real estate................... (3) (7) (4) (20) Consumer-related loans Residential mortgages.................. (1) (4) (4) (9) Credit card loans...................... (25) (6) (45) (8) Home equity loans...................... (2) (1) (5) (5) Other.................................. (44) (31) (87) (61) International credit losses................ (24) (13) (31) (23) ------- ------ -------- -------- Total credit losses.................... (106) (67) (203) (139) ------- ------ -------- -------- Domestic recoveries Commercial, industrial and financial..... 2 3 4 8 Commercial real estate................... 6 4 7 6 Consumer-related loans Residential mortgages.................. 1 1 3 2 Credit card loans...................... 1 2 2 1 Home equity loans...................... 1 1 1 Other.................................. 10 6 18 13 International recoveries................... 6 3 10 8 ------- ------ -------- -------- Total recoveries....................... 27 19 45 39 ------- ------ -------- -------- Net credit losses.......................... (79) (48) (158) (100) ------- ------ -------- -------- BALANCE, END OF PERIOD..................... $ 845 $ 895 $ 845 $ 895 ======= ====== ======== ========
At June 30, 1997, loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," totaled $189 million, of which $32 million related to loans with no valuation reserve and $157 million related to loans with a valuation reserve of $31 million. At June 30, 1996, impaired loans totaled $300 million, of which $93 million related to loans with no valuation reserve and $207 million related to loans with a valuation reserve of $53 million. For the quarters ended June 30, 1997 and 1996, average impaired loans were approximately $213 million and $280 million, respectively. For the six months ended June 30, 1997 and 1996, average impaired loans were approximately $229 million and $266 million, respectively. Interest recognized on impaired loans during these periods was not material. 28 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEBENTURES In 1996, BankBoston Capital Trust I and BankBoston Capital Trust II, and in June 1997, BankBoston Capital Trust III (collectively, the Trusts), were formed by the Corporation for the exclusive purpose of issuing capital securities (Trust Securities) and investing the proceeds from the sale of such Trust Securities in junior subordinated debentures issued by the Corporation. 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, pay distributions semiannually beginning on June 15, 1997 and are scheduled to mature on December 15, 2026. In addition, in June 1997, $250 million of floating rate Trust Securities were issued by BankBoston Capital Trust III. These Trust Securities have a liquidation preference of $1,000 per Trust Security, pay distributions semiannually beginning on September 15, 1997 at LIBOR plus .75% and are scheduled to mature on June 15, 2027. At June 30, 1997, the interest rate on the floating rate Trust Securities was 6 5/16%. The sole assets of the Trusts are their respective subordinated debentures, which bear interest at rates equal to the rates on the Trust Securities. The Corporation is the owner of all the beneficial interests of the Trusts represented by common securities, and has fully and unconditionally guaranteed all of the Trusts' obligations under the Trust Securities. 7. CONTINGENCIES The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the normal course of business. Management, after reviewing all actions and proceedings pending against or involving the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's financial condition or results of operations. 8. RESTRUCTURING AND MERGER-RELATED COSTS 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-related severance and property-related costs; professional fees and other costs of effecting the acquisition; and systems and other costs incurred during the period. During the first six months of 1997, cash outlays charged against the related reserves amounted to $55 million. These cash outlays primarily consisted of early retirement benefits and payments to terminated employees. Approximately 900 employees were either terminated or left the Corporation through enhanced retirement programs during the first half of 1997. The remaining reserves of $42 million at June 30, 1997 consist primarily of expected cash outlays related to severance and property-related costs, which are expected to occur throughout the remainder of the integration process. 29 CONSOLIDATED BALANCE SHEET AVERAGES BY QUARTER LAST NINE QUARTERS
1995 1996 1997 ----------------------- ------------------------------- --------------- 2 3 4 1 2 3 4 1 2 ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN MILLIONS) ASSETS Interest bearing deposits in other banks.................. $ 1,310 $ 1,332 $ 1,454 $ 1,338 $ 1,313 $ 1,256 $ 1,405 $ 1,961 $ 1,748 Federal funds sold and securities purchased under agreements to resell................. 1,294 1,004 972 1,416 1,532 1,708 2,047 2,189 1,896 Trading securities...... 815 922 929 1,136 1,624 1,467 1,459 1,498 1,590 Loans held for sale..... 262 506 760 960 69 21 44 Securities.............. 7,335 7,468 7,823 8,143 8,065 8,249 8,029 9,261 9,488 Loans and lease financing.............. 37,811 39,033 39,357 39,179 40,114 41,223 41,835 41,732 42,112 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets... 48,827 50,265 51,295 52,172 52,717 53,924 54,819 56,641 56,834 Other assets............ 6,034 6,447 6,506 6,415 5,664 6,125 6,237 6,583 7,112 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL ASSETS........... $54,861 $56,712 $57,801 $58,587 $58,381 $60,049 $61,056 $63,224 $63,946 ======= ======= ======= ======= ======= ======= ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing.... $ 6,091 $ 6,285 $ 6,509 $ 6,586 $ 6,420 $ 6,694 $ 6,837 $ 6,951 $ 7,229 Interest bearing....... 23,108 24,190 24,700 24,849 24,931 26,003 25,121 24,622 24,657 Overseas offices Noninterest bearing.... 416 501 492 499 465 491 455 599 626 Interest bearing....... 7,967 7,790 8,202 8,698 9,302 9,429 9,618 9,727 9,734 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total deposits......... 37,582 38,766 39,903 40,632 41,118 42,617 42,031 41,899 42,246 Federal funds purchased and repurchase agreements............. 4,696 3,959 4,672 3,959 4,561 4,739 5,167 5,923 5,776 Other funds borrowed.... 4,432 5,661 4,683 5,102 3,721 3,562 4,190 4,943 5,690 Notes payable........... 2,112 2,115 2,159 2,421 2,584 2,674 2,983 3,316 3,351 Other liabilities....... 1,818 1,790 1,806 1,767 1,709 1,698 1,860 2,191 2,216 Stockholders' equity.... 4,221 4,421 4,578 4,706 4,688 4,759 4,825 4,952 4,667 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $54,861 $56,712 $57,801 $58,587 $58,381 $60,049 $61,056 $63,224 $63,946 ======= ======= ======= ======= ======= ======= ======= ======= =======
30 CONSOLIDATED STATEMENT OF INCOME BY QUARTER--TAXABLE EQUIVALENT BASIS LAST NINE QUARTERS
1995 1996 1997 -------------------- --------------------------- ------------- 2 3 4 1 2 3 4 1 2 ------ ------ ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NET INTEREST REVENUE $557.3 $569.6 $572.9 $565.5 $571.5 $591.4 $611.2 $620.0 $615.9 Taxable equivalent adjustment............. 4.9 4.4 8.4 5.5 4.7 5.0 5.2 5.0 4.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total net interest revenue................ 562.2 574.0 581.3 571.0 576.2 596.4 616.4 625.0 620.4 Provision for credit losses................. 46.5 51.0 81.0 56.9 57.1 57.0 60.0 60.0 60.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net interest revenue after provision for credit losses.......... 515.7 523.0 500.3 514.1 519.1 539.4 556.4 565.0 560.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST INCOME Financial service fees.. 155.9 162.2 230.6 51.6 135.3 140.4 146.6 137.5 155.7 Trust and agency fees... 63.0 64.4 54.8 57.4 61.9 61.6 65.0 66.0 69.4 Trading profits and commissions............ 6.8 7.2 9.1 12.9 25.0 20.7 17.2 19.3 27.9 Net securities gains.... .2 .8 1.9 13.4 3.4 7.1 (.8) 8.8 31.9 Other income............ 65.8 71.2 71.3 149.9 157.3 106.7 111.5 98.1 91.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest in- come.................. 291.7 305.8 367.7 285.2 382.9 336.5 339.5 329.7 376.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST EXPENSE Salaries................ 230.7 245.9 243.2 240.8 243.9 244.2 254.5 257.7 260.2 Employee benefits....... 51.0 52.2 45.8 52.2 49.0 49.1 44.4 52.7 51.3 Occupancy expense....... 46.8 48.3 48.6 51.1 49.7 51.1 50.6 50.8 52.1 Equipment expense....... 33.6 33.5 33.8 34.3 33.9 34.2 36.2 35.6 35.8 Acquisition, divestiture and restructuring expense................ 28.2 180.0 Other expense........... 149.7 138.0 146.1 148.5 155.7 153.8 162.2 147.4 178.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest ex- pense................. 511.8 517.9 545.7 526.9 532.2 712.4 547.9 544.2 577.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes.................. 295.6 310.9 322.3 272.4 369.8 163.5 348.0 350.5 359.3 Provision for income taxes.................. 123.0 132.0 133.6 112.0 151.3 78.5 141.3 138.7 142.8 Taxable equivalent adjustment............. 4.9 4.4 8.4 5.5 4.7 5.0 5.2 5.0 4.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ 127.9 136.4 142.0 117.5 156.0 83.5 146.5 143.7 147.3 ------ ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME.............. $167.7 $174.5 $180.3 $154.9 $213.8 $ 80.0 $201.5 $206.8 $212.0 ====== ====== ====== ====== ====== ====== ====== ====== ====== PER COMMON SHARE Net Income Primary................ $ 1.03 $ 1.06 $ 1.09 $ .94 $ 1.33 $ .46 $ 1.26 $ 1.29 $ 1.37 Fully diluted.......... 1.02 1.05 1.08 .93 1.32 .45 1.24 1.27 1.35 Cash dividends declared............... .27 .37 .37 .37 .44 .44 .44 .44 .51
31 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED JUNE 30, 1997 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S............................................... $ 212 $ 3 5.84% International..................................... 1,536 33 8.69 ------- ------ Total............................................. 1,748 36 8.35 ------- ------ ----- Federal Funds Sold and Resale Agreements U.S............................................... 666 9 5.46 International..................................... 1,230 44 14.31 ------- ------ Total............................................. 1,896 53 11.21 ------- ------ ----- Trading Securities U.S............................................... 939 15 6.41 International..................................... 651 13 7.89 ------- ------ Total............................................. 1,590 28 7.02 ------- ------ ----- Securities U.S. Available for sale(2)............................. 7,680 122 6.47 Held to maturity.................................. 658 11 6.45 International Available for sale(2)............................. 1,150 34 12.04 ------- ------ Total............................................. 9,488 167 7.09 ------- ------ ----- Loans and Leases (Net of Unearned Income) U.S............................................... 31,735 710 8.97 International..................................... 10,377 291 11.24 ------- ------ Total loans and lease financing(3)................ 42,112 1,001 9.53 ------- ------ ----- Earning assets..................................... 56,834 1,285 9.07 ------ ----- Nonearning assets.................................. 7,112 ------- Total Assets..................................... $63,946 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits.................................. $14,864 $ 100 2.71% Time deposits..................................... 9,793 136 5.55 International..................................... 9,734 169 6.98 ------- ------ Total............................................. 34,391 405 4.73 ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S............................................... 5,618 84 5.96 International..................................... 158 3 8.56 ------- ------ Total............................................. 5,776 87 6.03 ------- ------ ----- Other Funds Borrowed U.S............................................... 4,237 64 6.04 International..................................... 1,453 48 13.31 ------- ------ Total............................................. 5,690 112 7.90 ------- ------ ----- Notes Payable U.S.(4)........................................... 2,817 49 6.90 International..................................... 534 12 9.16 ------- ------ Total............................................. 3,351 61 7.26 ------- ------ ----- Total interest bearing liabilities................. 49,208 665 5.42 ------ ----- Demand deposits U.S................................ 7,229 Demand deposits International...................... 626 Other noninterest bearing liabilities.............. 2,216 Total stockholders' equity......................... 4,667 ------- Total Liabilities and Stockholders' Equity....... $63,946 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S............................................... $41,890 $ 478 4.58% International..................................... 14,944 142 3.83% ------- ------ Total............................................. $56,834 $ 620 4.38% ======= ======
- -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. (4) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 32 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED JUNE 30, 1996 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ASSETS ------- ----------- ------- (DOLLARS IN MILLIONS) Interest Bearing Deposits with Other Banks U.S............................................... $ 226 $ 4 6.30% International..................................... 1,087 24 8.95 ------- ------ Total............................................. 1,313 28 8.49 ------- ------ ----- Federal Funds Sold and Resale Agreements U.S............................................... 534 7 5.18 International..................................... 998 38 15.31 ------- ------ Total............................................. 1,532 45 11.78 ------- ------ ----- Trading Securities U.S............................................... 557 7 5.18 International..................................... 1,067 45 16.97 ------- ------ Total............................................. 1,624 52 12.93 ------- ------ ----- Loans Held for Sale U.S............................................... 57 1 5.10 International..................................... 12 5.83 ------- ------ Total............................................. 69 1 5.23 ------- ------ ----- Securities U.S. Available for sale(2)............................. 6,662 106 6.43 Held to maturity.................................. 691 10 6.10 International Available for sale(2)............................. 696 26 14.99 Held to maturity.................................. 16 1 19.80 ------- ------ Total............................................. 8,065 143 7.13 ------- ------ ----- Loans and Leases (Net of Unearned Income) U.S............................................... 31,258 661 8.52 International..................................... 8,856 277 12.56 ------- ------ Total loans and lease financing(3)................ 40,114 938 9.41 ------- ------ ----- Earning assets..................................... 52,717 1,207 9.21 ------ ----- Nonearning assets.................................. 5,664 ------- Total Assets..................................... $58,381 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits.................................. $14,707 $ 98 2.68% Time deposits..................................... 10,224 142 5.60 International..................................... 9,302 186 8.03 ------- ------ Total............................................. 34,233 426 5.00 ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S............................................... 4,450 62 5.63 International..................................... 111 5 16.89 ------- ------ Total............................................. 4,561 67 5.91 ------- ------ ----- Other Funds Borrowed U.S............................................... 2,935 43 5.82 International..................................... 786 49 25.19 ------- ------ Total............................................. 3,721 92 9.91 ------- ------ ----- Notes Payable U.S............................................... 2,023 32 6.47 International..................................... 561 14 9.99 ------- ------ Total............................................. 2,584 46 7.23 ------- ------ ----- Total interest bearing liabilities................. 45,099 631 5.63 ------ ----- Demand deposits U.S................................ 6,420 Demand deposits International...................... 465 Other noninterest bearing liabilities.............. 1,709 Total stockholders' equity......................... 4,688 ------- Total Liabilities and Stockholders' Equity....... $58,381 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S............................................... $39,985 $ 444 4.47% International..................................... 12,732 132 4.18% ------- ------ Total............................................. $52,717 $ 576 4.40% ======= ======
- -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 33 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
SIX MONTHS ENDED JUNE 30, 1997 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S............................................... $ 435 $ 12 5.71% International..................................... 1,419 59 8.29 ------- ------ Total............................................. 1,854 71 7.69 ------- ------ ----- Federal Funds Sold and Resale Agreements U.S............................................... 673 18 5.25 International..................................... 1,369 103 15.19 ------- ------ Total............................................. 2,042 121 11.91 ------- ------ ----- Trading Securities U.S............................................... 900 27 6.09 International..................................... 644 29 9.02 ------- ------ Total............................................. 1,544 56 7.31 ------- ------ ----- Securities U.S. Available for sale(2)............................. 7,503 238 6.47 Held to maturity.................................. 675 21 6.23 International Available for sale(2)............................. 1,197 82 14.20 ------- ------ Total............................................. 9,375 341 7.35 ------- ------ ----- Loans and Leases (Net of Unearned Income) U.S............................................... 31,734 1,399 8.89 International..................................... 10,189 577 11.42 ------- ------ Total loans and lease financing(3)................ 41,923 1,976 9.50 ------- ------ ----- Earning assets..................................... 56,738 2,565 9.12 ------ ----- Nonearning assets.................................. 6,842 ------- Total Assets..................................... $63,580 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits.................................. $14,816 $ 199 2.70% Time deposits..................................... 9,824 270 5.54 International..................................... 9,730 336 6.99 ------- ------ Total............................................. 34,370 805 4.73 ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S............................................... 5,725 167 5.84 International..................................... 124 6 10.21 ------- ------ Total............................................. 5,849 173 5.94 ------- ------ ----- Other Funds Borrowed U.S............................................... 3,922 116 6.00 International..................................... 1,397 103 14.83 ------- ------ Total............................................. 5,319 219 8.32 ------- ------ ----- Notes Payable U.S.(4)........................................... 2,743 94 6.91 International..................................... 590 29 9.80 ------- ------ Total............................................. 3,333 123 7.42 ------- ------ ----- Total interest bearing liabilities................. 48,871 1,320 5.45 ------ ----- Demand deposits U.S................................ 7,090 Demand deposits International...................... 613 Other noninterest bearing liabilities.............. 2,204 Total Stockholders' Equity......................... 4,802 ------- Total Liabilities and Stockholders' Equity....... $63,580 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S............................................... $41,920 $ 947 4.56% International..................................... 14,818 298 4.06% ------- ------ Total............................................. $56,738 $1,245 4.43% ======= ======
- -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. (4) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 34 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
SIX MONTHS ENDED JUNE 30, 1996 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S............................................... $ 225 $ 7 6.05% International..................................... 1,100 45 8.26 ------- ------ Total............................................. 1,325 52 7.88 ------- ------ ----- Federal Funds Sold and Resale Agreements U.S............................................... 445 12 5.23 International..................................... 1,029 76 14.97 ------- ------ Total............................................. 1,474 88 12.03 ------- ------ ----- Trading Securities U.S............................................... 464 12 5.36 International..................................... 916 81 17.73 ------- ------ Total............................................. 1,380 93 13.57 ------- ------ ----- Loans Held for Sale U.S............................................... 489 17 6.96 International..................................... 25 1 6.07 ------- ------ Total............................................. 514 18 6.91 ------- ------ ----- Securities U.S. Available for sale(2)............................. 6,697 213 6.43 Held to maturity.................................. 683 21 6.08 International Available for sale(2)............................. 670 46 13.94 Held to maturity.................................. 55 4 15.89 ------- ------ Total............................................. 8,105 284 7.05 ------- ------ ----- Loans and Leases (Net of Unearned Income) U.S............................................... 30,844 1,321 8.61 International..................................... 8,802 597 13.64 ------- ------ Total loans and lease financing(3)................ 39,646 1,918 9.73 ------- ------ ----- Earning assets..................................... 52,444 2,453 9.41 ------ ----- Nonearning assets.................................. 6,041 ------- Total Assets..................................... $58,485 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits.................................. $14,906 $ 198 2.68% Time deposits..................................... 9,983 281 5.66 International..................................... 9,000 367 8.19 ------- ------ Total............................................. 33,889 846 5.02 ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S............................................... 4,156 118 5.69 International..................................... 105 7 13.75 ------- ------ Total............................................. 4,261 125 5.89 ------- ------ ----- Other Funds Borrowed U.S............................................... 3,484 106 6.07 International..................................... 928 139 30.25 ------- ------ Total............................................. 4,412 245 11.16 ------- ------ ----- Notes Payable U.S............................................... 1,989 65 6.54 International..................................... 513 25 9.95 ------- ------ Total............................................. 2,502 90 7.24 ------- ------ ----- Total interest bearing liabilities................. 45,064 1,306 5.83 ------ ----- Demand deposits U.S................................ 6,504 Demand deposits International...................... 482 Other noninterest bearing liabilities.............. 1,737 Total Stockholders' Equity......................... 4,698 ------- Total Liabilities and Stockholders' Equity....... $58,485 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S............................................... $39,847 $ 891 4.50% International..................................... 12,597 256 4.09% ------- ------ Total............................................. $52,444 $1,147 4.40% ======= ======
- -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 35 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. The change due to the volume/rate variance has been allocated to volume, and the change because of the difference in the number of days in the periods has been allocated to rate. SECOND QUARTER 1997 COMPARED WITH SECOND QUARTER 1996
INCREASE (DECREASE) DUE TO CHANGE IN ---------------------- VOLUME RATE NET CHANGE ---------- ---------- ---------- (IN MILLIONS) Interest income Loans and lease financing U.S. ....................................... $ 11 $ 38 $ 49 International............................... 42 (28) 14 ---- 63 ---- Other earning assets U.S. ....................................... 22 3 25 International............................... 19 (29) (10) ---- 15 ---- Total interest income......................... 93 (15) 78 Total interest expense........................ 48 (14) 34 ---- Net interest revenue.......................... $ 44 ====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
INCREASE (DECREASE) DUE TO CHANGE IN ---------------------- VOLUME RATE NET CHANGE ---------- ---------- ---------- (IN MILLIONS) Interest income Loans and lease financing U.S. ....................................... $ 39 $ 39 $ 78 International............................... 79 (99) (20) ---- 58 ---- Other earning assets U.S. ....................................... 35 (1) 34 International............................... 51 (31) 20 ---- 54 ---- Total interest income......................... 194 (82) 112 Total interest expense........................ 100 (86) 14 ---- Net interest revenue.......................... $ 98 ====
36 PART II--OTHER INFORMATION EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 11 --Computation of Earnings Per 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 Fixed Charges and Preferred Stock Dividend Requirements (excluding interest on deposits). 12(d) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements (including interest on deposits). 27 --Financial Data Schedule.
(b) Current Reports on Form 8-K. During the second quarter of 1997, the Corporation filed one Current Report on Form 8-K, dated April 17, 1997, which contained information pursuant to Items 5 and 7 of Form 8-K. The Corporation also filed a Current Report on Form 8-K, dated July 17, 1997, which contained information pursuant to Items 5 and 7 of Form 8-K. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. BankBoston Corporation /s/ Charles K. Gifford _____________________________________ Charles K. Gifford Chief Executive Officer /s/ Susannah M. Swihart _____________________________________ Susannah M. Swihart Executive Vice President, Chief Financial Officer and Treasurer Date: August 13, 1997 38 EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 BANKBOSTON CORPORATION Computation of Earnings Per Common Share
Quarters Ended Six Months Ended June 30 June 30 EARNINGS (in millions) 1997 1996 1997 1996 -------- ---- ---- ---- ---- 1. Net income $ 212 $ 214 $ 419 $ 369 2. Less: preferred dividends 9 9 19 19 ------- ------- ------- ------- 3. Net income applicable to primary and fully diluted earnings per common share $ 203 $ 205 $ 400 $ 350 ======= ======= ======= ======= SHARES (in thousands) ------ 4. Weighted average number of common shares outstanding 147,910 153,650 150,650 154,318 5. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 1,877 1,533 2,041 1,700 ------- ------- ------- ------- 7. Adjusted number of common shares 149,787 155,183 152,691 156,018 ======= ======= ======= ======= PER SHARE CALCULATION --------------------- 8. Primary net income per common share $ 1.37 $ 1.33 $ 2.66 $ 2.27 (Item 3 divided by Item 4) 9. Fully diluted net income per common share $ 1.35 $ 1.32 $ 2.62 $ 2.24 (Item 3 divided by Item 7)
EX-12.A 3 RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST EXHIBIT 12(A) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the six months ended June 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Six Months Ended June 30, Years Ended December 31, ----------------- ---------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- ----- ---- Net income $ 419 $ 369 $ 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 282 263 483 529 422 262 190 ----- ----- ----- ----- ----- ----- ---- Pretax earnings $ 701 $ 632 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ===== ===== ===== ===== ===== ===== ==== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 20 $ 20 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 515 460 873 1,079 1,038 384 352 ----- ----- ----- ----- ----- ----- ---- Total fixed charges $ 535 $ 480 $ 913 $ 1,117 $ 1,073 $ 420 $ 389 ===== ===== ===== ===== ===== ===== ==== Earnings (for ratio calculation) $ 1,236 $ 1,112 $ 2,046 $ 2,324 $ 2,044 $ 1,025 $ 844 ===== ===== ===== ===== ===== ===== ==== Total fixed charges $ 535 $ 480 $ 913 $ 1,117 $ 1,073 $ 420 $ 389 ===== ===== ===== ===== ===== ===== ==== Ratio of earnings to fixed charges 2.31 2.32 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 4 RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST EXHIBIT 12(B) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the six months ended June 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Six Months Ended June 30, Years Ended December 31, ---------------- ---------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- ----- ----- Net income $ 419 $ 369 $ 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 282 263 483 529 422 262 190 ----- ----- ----- ----- ----- ----- ----- Pretax earnings $ 701 $ 632 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ===== ===== ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 20 $ 20 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 515 460 873 1,079 1,038 384 352 Interest on deposits 805 846 1,680 1,791 1,301 1,177 1,640 ----- ----- ----- ----- ----- ----- ----- Total fixed charges $ 1,340 $ 1,326 $ 2,593 $ 2,908 $ 2,374 $ 1,597 $ 2,029 ===== ===== ===== ===== ===== ===== ===== Earnings (for ratio calculation) $ 2,041 $ 1,958 $ 3,726 $ 4,115 $ 3,345 $ 2,202 $ 2,484 ===== ===== ===== ===== ===== ===== ===== Total fixed charges $ 1,340 $ 1,326 $ 2,593 $ 2,908 $ 2,374 $ 1,597 $ 2,029 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.52 1.48 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 5 RATIO OF EARNINGS TO FIXED CHARGES & PREFFERED STOCK EXCLUDING INTEREST EXHIBIT 12(C) BANKBOSTON 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 six months ended June 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Six Months Ended June 30, Years Ended December 31, ------------------- -------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- ----- ---- Net income $ 419 $ 369 $ 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 282 263 483 529 422 262 190 ----- ----- ----- ----- ----- ----- ---- Pretax earnings $ 701 $ 632 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ===== ===== ===== ===== ===== ===== ==== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 20 $ 20 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 515 460 873 1,079 1,038 384 352 ----- ----- ----- ----- ----- ----- ---- Total fixed charges 535 480 913 1,117 1,073 420 389 Preferred stock dividend requirements 31 32 65 68 67 61 33 ----- ----- ----- ----- ----- ----- ---- Total combined fixed charges and preferred stock dividend requirements $ 566 $ 512 $ 978 $ 1,185 $ 1,140 $ 481 $ 422 ===== ===== ===== ===== ===== ===== ==== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 1,236 $ 1,112 $ 2,046 $ 2,324 $ 2,044 $ 1,025 $ 844 ===== ===== ===== ===== ===== ===== ==== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 2.18 2.17 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 6 RATIO OF EARNINGS TO FIXED CHARGES & PREFERRED STOCK INCLUDING INTEREST EXHIBIT 12(D) BANKBOSTON 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 six months ended June 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Six Months Ended June 30, Years Ended December 31, --------------- --------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- ----- ----- Net income $ 419 $ 369 $ 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 282 263 483 529 422 262 190 ----- ----- ----- ----- ----- ----- ----- Pretax earnings $ 701 $ 632 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ===== ===== ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 20 $ 20 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 515 460 873 1,079 1,038 384 352 Interest on deposits 805 846 1,680 1,791 1,301 1,177 1,640 ----- ----- ----- ----- ----- ----- ----- Total fixed charges 1,340 1,326 2,593 2,908 2,374 1,597 2,029 Preferred stock dividend requirements 31 32 65 68 67 61 33 ----- ----- ----- ----- ----- ----- ----- Total combined fixed charges and preferred stock dividend requirements $ 1,371 $ 1,358 $ 2,658 $ 2,976 $ 2,441 $ 1,658 $ 2,062 ===== ===== ===== ===== ===== ===== ===== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 2,041 $ 1,958 $ 3,726 $ 4,115 $ 3,345 $ 2,202 $ 2,484 ===== ===== ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.49 1.44 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-27 7 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JUN-30-1997 4,485 1,835 2,235 1,688 8,969 636 630 42,313 (845) 66,138 42,978 11,570 2,176 3,443 0 508 231 3,935 66,138 1,975 333 248 2,556 805 1,320 1,236 120 41 326 701 419 0 0 419 2.66 2.62 4.43 351 56 0 0 883 (203) 45 845 554 176 115 INCLUDES GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR SUBORDINATED DEBENTURES.
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