-----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, Ha6TcFV23jB1Rj+rxh7fkM1HcIDcjE8HnaSE+sIkJwXQt6DU6hnZfYH6BwdYKebQ Vx4NV5GC5CNTZjYYAkprBw== 0000927016-97-003137.txt : 19971117 0000927016-97-003137.hdr.sgml : 19971117 ACCESSION NUMBER: 0000927016-97-003137 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 002-42653 FILM NUMBER: 97719856 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 31, 1997: Common Stock, $1.50 par value 145,277,534 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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.......................................... 25 Consolidated Statement of Income.................................... 27 Consolidated Statement of Changes in Stockholders' Equity........... 28 Consolidated Statement of Cash Flows................................ 29 Notes to Financial Statements........................................ 30 PART II OTHER INFORMATION Exhibits and Reports on Form 8-K..................................... 42 SIGNATURES................................................................ 43 LIST OF TABLES Consolidated Average Balance Sheet--Nine Quarters....................... 35 Consolidated Statement of Income--Nine Quarters......................... 36 Average Balances and Interest Rates--Quarter............................ 37 Average Balances and Interest Rates--Nine Months........................ 39 Change in Net Interest Revenue--Volume and Rate Analysis................ 41
2 BANKBOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 ------- ------- QUARTERS ENDED SEPTEMBER 30 INCOME STATEMENT DATA Net interest revenue.......................................... $ 571 $ 591 Provision for credit losses................................... 40 57 Noninterest income............................................ 448 337 Noninterest expense(1)........................................ 601 713 Net income(1)................................................. 226 80 Per common share Primary(1).................................................. 1.49 .46 Fully diluted(1)............................................ 1.47 .45 Market value per common share High........................................................ 91 3/4 57 7/8 Low......................................................... 73 1/8 50 1/8 NINE MONTHS ENDED SEPTEMBER 30 INCOME STATEMENT DATA Net interest revenue.......................................... $ 1,807 $ 1,728 Provision for credit losses................................... 160 171 Noninterest income............................................ 1,155 1,005 Noninterest expense(1)........................................ 1,723 1,772 Net income(1)................................................. 645 449 Per common share Primary(1).................................................. 4.15 2.74 Fully diluted(1)............................................ 4.07 2.69 Market value per common share High........................................................ 91 3/4 57 7/8 Low......................................................... 63 5/8 41 5/8 AT SEPTEMBER 30 BALANCE SHEET DATA Loans and lease financing..................................... $42,461 $42,053 Total assets.................................................. 68,230 61,963 Deposits...................................................... 44,655 43,328 Total stockholders' equity.................................... 4,382 4,754 Book value per common share................................... 28.40 27.81 Regulatory capital ratios Risk-based capital ratios Tier 1.................................................... 7.8% 8.3% Total..................................................... 11.7 12.7 Leverage ratio.............................................. 7.2 7.2
- -------- (1) Reflects, in 1996, $180 million ($117 million after-tax, or $.76 per share on a primary and fully diluted basis) of restructuring and merger-related charges, recorded in connection with the Corporation's acquisition of BayBanks, Inc., completed in the third quarter of 1996. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS GENERAL The Corporation may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance, and assumptions relating thereto. The Corporation may include forward-looking statements in its filings with the Securities and Exchange Commission (including this Form 10-Q), in its reports to stockholders, in other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. The following factors, among others, could cause actual results to differ materially from any forward-looking statements: technological changes, including the timely development by the Corporation of technology enhancements for its products and operating systems; the effects of competition by other financial services organizations; legislative or regulatory developments, including changes in laws concerning taxes, banking, securities and insurance; changes in fiscal, monetary and tax policies of the United States, foreign governments and international agencies; political or social developments; the possibility of foreign exchange controls in countries in which the Corporation conducts business; general economic conditions, both domestic and international, including inflation, interest rates, market and monetary fluctuations and the state of the securities and capital markets, including changes in market perception; the demand for credit; currency fluctuations; and acquisitions and integrations of acquired businesses. When relying on forward-looking statements to make decisions with respect to the Corporation, investors and others are cautioned to consider these and other uncertainties and events, whether or not the statements are described as forward-looking. The Corporation's net income for the quarter ended September 30, 1997 was $226 million, compared to $80 million for the same period in 1996. Net income per common share was $1.49 on a primary basis and $1.47 on a fully diluted basis in the third quarter of 1997, compared with $.46 on a primary basis and $.45 on a fully diluted basis in the third quarter of 1996. The third quarter of 1996 included restructuring and merger-related charges of $180 million ($117 million after-tax) in connection with the Corporation's acquisition of BayBanks, Inc. (BayBanks). Excluding the effects of the restructuring and merger-related charges, net income for the third quarter of 1996 was $197 million, or $1.21 per share on a fully diluted basis. Net income for the first nine months of 1997 was $645 million, compared to $449 million for the first nine months of 1996. Net income per common share was $4.15 on a primary basis and $4.07 on a fully diluted basis for the first nine months of 1997, compared to $2.74 on a primary basis and $2.69 on a fully diluted basis for the first nine months of 1996. Excluding the effects of the restructuring and merger-related charges, net income for the first nine months of 1996 was $566 million, or $3.44 per share on a fully diluted basis. During the third quarter of 1997, the Corporation sold its consumer finance subsidiary, Fidelity Acceptance Corporation (FAC), resulting in a pre-tax gain of $68 million ($40 million after-tax). In addition, in September 1997, the Corporation entered into an agreement with Bank of Montreal and its Chicago- based U.S. subsidiary, Harris Trust and Savings Bank, and First Annapolis Consulting, Inc. to form a new national credit card venture. Under the terms of the agreement, the Corporation will contribute its national credit card portfolio of approximately $1.2 billion in receivables in exchange for 19% of the common stock and $50 million of preferred stock of the new company and $5 million in cash. The Corporation will retain its regional credit card portfolio. 4 The transaction, which is subject to regulatory approval, is targeted to close in the fourth quarter of 1997. These two transactions, along with the sale of Ganis Credit Corporation in the first half of 1997, will result in the Corporation's exit from the national consumer business. In October 1997, the Corporation announced an agreement to sell its 26 percent ownership interest in HomeSide, Inc. (HomeSide), an independent mortgage banking company, to National Australia Bank Ltd. The sale, which is subject to regulatory and shareholder approval, is in connection with an agreement for National Australia Bank Ltd. to acquire 100 percent ownership of HomeSide. The transaction, which is expected to close in the first quarter of 1998, will result in a pre-tax gain of approximately $170 million. During the third quarter of 1997, the Corporation announced its intention to expand its retail distribution capacity in Argentina and to strengthen its presence in that country by opening approximately 70 new branches in the interior provinces of Argentina by May 1998. Also, in September 1997, the Corporation entered into an agreement to acquire Deutsche Bank Argentina S.A., a subsidiary of Deutsche Bank A.G., for approximately $250 million in cash. Deutsche Bank Argentina S.A. has 48 branches in Buenos Aires and approximately $1.1 billion of loans and $1.3 billion of deposits. The Corporation expects to consolidate some overlapping Deutsche Bank branches with existing or planned branch locations. The transaction, which is subject to regulatory approval, is expected to close in the first quarter of 1998. In October 1997, the Corporation completed its acquisition of Pacific National Corporation, located on the island of Nantucket, Massachusetts, in exchange for approximately 279,000 shares of the Corporation's common stock, valued at approximately $22 million. At September 30, 1997, Pacific National Corporation, the parent of Pacific National Bank of Nantucket, had loans of approximately $98 million, primarily residential and commercial real estate loans, and deposits of approximately $108 million. See Note 2 to the Financial Statements for further discussion of certain acquisitions and divestitures. 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. In this regard, in October 1997, the Corporation announced a new initiative to redesign the way it does business, examining existing processes and activities with the goal of enhancing efficiency and of transforming and improving its customers' experience with the Corporation. This initiative will primarily focus on process-intensive businesses in the U.S., including, among others, the New England Regional consumer businesses, with the internal analysis and design phase expected to be completed in approximately nine months. The results of this process cannot be predicted at this time. During the past several weeks, world financial markets have experienced a high level of volatility, following the initial crisis in certain Asian markets. This has had a negative impact on the world-wide financial markets for other emerging markets countries, including those in Brazil and Argentina where the Corporation operates, as well as on the Corporation's emerging markets sales and trading business. As a result, during October 1997, the Corporation experienced losses on its combined securities and foreign exchange trading portfolios of approximately $20 million. These losses have been partially offset by improvements in net interest revenue and fee income which have been positively impacted by these same events. The ultimate impact of these market uncertainties on the Corporation cannot be predicted at this time, and will be dependent upon future events, including the level of volatility in various markets, the duration of these unsettled market conditions and the state of the underlying economies in the affected countries. Management continues to monitor these markets closely and manage its portfolios in order to maximize its future results, all within the parameters of established risk management processes. 5 In November the Brazilian government announced a series of economic measures designed to protect the value of its currency. These measures, which among other things, include raising taxes, increasing short-term interest rates and decreasing the government work force, are designed to control trade and budget deficits and could result in an economic slowdown in the country. While management currently does not anticipate that these measures will have a material impact on the Corporation, due to the current volatility in the Brazilian economic markets, there can be no certainty as to the ultimate consequences of these measures. Also, market concerns have been expressed about the stability of Korean financial markets and the Korean economy. The Corporation operates a branch in Korea and is a 17 percent owner of Korea Merchant Banking Corporation, which operates in Korean and other financial markets. The effect of instability in Korean markets cannot be predicted at this time. For additional information on these exposures, see the "Cross-Border Outstandings" and "Emerging Markets Countries" sections below. 6 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 SEPTEMBER 30 ------- ------- ------ (DOLLARS IN MILLIONS) United States operations Net interest revenue................................. $ 420 $ 459 $ (39) Average loans and lease financing.................... 31,317 31,961 (644) Average earning assets............................... 41,521 40,477 1,044 Net interest margin.................................. 4.01% 4.51% (.50)% International operations Net interest revenue................................. $ 157 $ 137 $ 20 Average loans and lease financing.................... 11,112 9,262 1,850 Average earning assets............................... 16,248 13,447 2,801 Net interest margin.................................. 3.83% 4.07% (.24)% Consolidated Net interest revenue................................. $ 577 $ 596 $ (19) Average loans and lease financing.................... 42,429 41,223 1,206 Average earning assets............................... 57,769 53,924 3,845 Net interest margin.................................. 3.96% 4.40% (.44)% 1997 1996 CHANGE NINE MONTHS ENDED SEPTEMBER 30 ------- ------- ------ (DOLLARS IN MILLIONS) United States operations Net interest revenue................................. $ 1,367 $ 1,349 $ 18 Average loans and lease financing.................... 31,597 31,220 377 Average earning assets............................... 41,789 40,061 1,728 Net interest margin.................................. 4.37% 4.50% (.13)% International operations Net interest revenue................................. $ 455 $ 394 $ 61 Average loans and lease financing.................... 10,496 8,956 1,540 Average earning assets............................... 15,296 12,880 2,416 Net interest margin.................................. 3.98% 4.08% (.10)% Consolidated Net interest revenue................................. $ 1,822 $ 1,743 $ 79 Average loans and lease financing.................... 42,093 40,176 1,917 Average earning assets............................... 57,085 52,941 4,144 Net interest margin.................................. 4.27% 4.40% (.13)%
On a consolidated basis net interest revenue decreased $19 million in the quarterly comparison and increased $79 million in the nine-month comparison. Net interest margin decreased 44 basis points in the quarterly comparison and 13 basis points in the nine-month comparison. Excluding the impact of the FAC sale, average earning assets grew by approximately $5 billion from the third quarter of 1996. 7 Domestic net interest revenue decreased $39 million in the quarterly comparison and increased $18 million in the nine-month comparison. Net interest margin declined 50 basis points in the quarterly comparison and 13 basis points in the nine-month comparison. The quarterly decline in net interest revenue and margin was mainly attributable to the third quarter 1997 sale of FAC, which engaged in high-margin sub-prime consumer lending. In the nine-month comparison, the increase in net interest revenue was primarily driven by a $1.7 billion increase in average earning assets. Increases of $1.3 billion in C&I loans, $.9 billion in the securities available for sale portfolio, and $.5 billion in the trading portfolio, partially offset by a $1.2 billion decline in consumer loans, accounted for most of the growth in average earning assets. The 13 basis point decline in the nine-month comparison of net interest margin was also primarily driven by the sale of FAC. International net interest revenue increased $20 million in the quarterly comparison and $61 million in the nine-month comparison. Net interest margin decreased 24 basis points in the quarterly comparison and 10 basis points in the nine-month comparison. The quarterly and nine-month increases in net interest revenue were primarily driven by increases in average earning assets. The increases in average earning assets for both the quarterly and nine-month periods primarily reflect increases in the Corporation's Latin American loans and leases portfolio, mainly in Argentina and Brazil. The quarterly and nine- month comparative declines in net interest margin were primarily driven by decreased spreads in Argentina, reflecting competitive pricing pressures in that market. Compared to the second quarter of 1997, consolidated net interest revenue declined $43 million, while net interest margin declined 42 basis points. The decline in both net interest revenue and margin was primarily driven by the aforementioned sale of FAC, as well as lower levels of loan fees and interest recoveries. Excluding the impact of the FAC sale, average earning assets grew approximately $2 billion from the second quarter. 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, 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. PROVISION FOR CREDIT LOSSES The provision for credit losses was $40 million in the third quarter of 1997, compared with $57 million in the third quarter of 1996. In the first nine months of 1997, the provision for credit losses was $160 million, compared to $171 million in the first nine 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 characteristics of the loan portfolio and economic conditions. It also reflects the actions taken by the Corporation to exit the national consumer business. 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. 8 NONINTEREST INCOME The following table presents the components of noninterest income.
THIRD QUARTER NINE MONTHS ---------------- --------------------- 1997 1996 CHANGE 1997 1996 CHANGE ---- ---- ------ ------ ------ ------ (IN MILLIONS) Financial service fees Deposit and ATM-related fees......... $ 69 $ 61 $ 8 $ 189 $ 180 $ 9 Letter of credit and acceptance fees................................ 19 18 1 53 51 2 Syndication and agent fees........... 22 14 8 60 36 24 Other loan-related fees.............. 11 9 2 29 28 1 Net mortgage servicing fees.......... 3 (3) (82) 82 Other financial service fees......... 47 35 12 131 114 17 ---- ---- ---- ------ ------ ---- Total financial service fees....... 168 140 28 462 327 135 Mutual fund fees....................... 29 24 5 81 69 12 Personal trust fees.................... 37 32 5 107 97 10 Other trust and agency fees............ 7 6 1 20 15 5 Trading profits and commissions........ 20 21 (1) 67 59 8 Securities portfolio gains, net........ 11 7 4 52 24 28 Net equity and mezzanine profits....... 61 51 10 153 165 (12) Net foreign exchange trading profits... 18 13 5 57 37 20 Other income........................... 29 30 (1) 85 93 (8) Gain on sale of mortgage servicing..... 13 (13) 13 (13) Net gain from decrease in joint venture interest.............................. 3 3 Gain on sale of businesses............. 68 68 68 106 (38) ---- ---- ---- ------ ------ ---- Total.............................. $448 $337 $111 $1,155 $1,005 $150 ==== ==== ==== ====== ====== ====
Excluding net mortgage servicing fees, financial service fees increased $31 million in the quarterly comparison and $53 million in the nine-month comparison. The increase in both comparisons was primarily due to an increase in deposit and electronic banking fees due to a higher volume of accounts and an increase in the volume of non-customer ATM transactions; 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 nine months 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. 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 businesses. As discussed in the "General" section above, the Corporation has announced an agreement to sell its ownership interest in HomeSide. Mutual fund fees increased in the quarterly and nine-month comparisons primarily due to higher fees from the Corporation's Brazilian and Argentine mutual fund businesses, reflecting growth in these funds. Assets under management at September 30, 1997 increased $1.3 billion in Brazil and $900 million in Argentina from September 30, 1996. Personal trust fees increased in the quarterly and nine-month comparisons due to an increase in domestic assets under management. The increase in securities portfolio gains in both the quarterly and nine- 9 month comparisons was due to the sale of certain securities in the Argentine available for sale portfolio, including gains of approximately $20 million recognized in the second quarter of 1997. The increase in net equity and mezzanine profits in the quarterly comparison is due to continued strong performance by the Corporation's Private Equity Investing business. The decline in the nine-month comparison was due to an unusually high level of gains in the second quarter of 1996. The increase in net foreign exchange trading profits in the quarterly and nine-month comparisons was due to an increased volume in this segment of the Global Capital Markets business. The level of profits from the equity and mezzanine business as well as the Corporation's trading businesses is influenced by market and economic conditions and, as such, there can be no assurance as to the future level of profits from these businesses. See the discussion of recent market events in the "General" section above. 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's 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 businesses in the first nine months of 1996 reflected pre-tax gains of $106 million on the sale of the Corporation's mortgage banking subsidiary discussed above. The gain on sale of businesses in the third quarter and first nine months of 1997 reflects the pre-tax gain on the sale of FAC. Other income decreased in both the quarterly and nine-month comparisons. Included in this category is the $11 million loss on interest rate futures contracts that had been used to hedge the funding of FAC, partially offset by increases in the equity earnings from unconsolidated subsidiaries and higher gains from sales of loans. NONINTEREST EXPENSE The following table presents the components of noninterest expense.
THIRD QUARTER NINE MONTHS ---------------- -------------------- 1997 1996 CHANGE 1997 1996 CHANGE ---- ---- ------ ------ ------ ------ (IN MILLIONS) Employee costs........................... $318 $293 $ 25 $ 939 $ 879 $ 60 Occupancy and equipment.................. 86 85 1 260 254 6 Professional fees........................ 14 15 (1) 38 42 (4) Advertising and public relations......... 25 26 (1) 73 84 (11) Communications........................... 29 24 5 83 74 9 Amortization of goodwill................. 6 7 (1) 21 17 4 Other.................................... 122 78 44 305 235 70 ---- ---- ----- ------ ------ ----- Noninterest expense before restructuring and merger-related costs and OREO costs........................ 600 528 72 1,719 1,585 134 Restructuring and merger-related costs... 180 (180) 180 (180) OREO..................................... 1 5 (4) 4 7 (3) ---- ---- ----- ------ ------ ----- Total.................................. $601 $713 $(112) $1,723 $1,772 $ (49) ==== ==== ===== ====== ====== =====
The increase in noninterest expense before restructuring and merger-related costs and other real estate owned (OREO) costs of $72 million in the quarterly comparison and $134 million in the nine-month comparison was due, in part, to costs incurred in the 1997 periods related to the integration of BayBanks. The third quarter of 1997 includes approximately $38 million of additional conversion costs associated with the regional consumer business. These costs include integrating teller, ATM and other back-office systems; additional part time and temporary help related to the integration; and the planned closing of additional branches. It also includes costs for the extension of the new products set to the Connecticut operations in conjunction with the merger of Bank of Boston Connecticut into BankBoston, N.A., which occurred in October 1997. 10 The increase in the quarterly and nine-month comparisons also included higher employee costs 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, including the new Section 20 subsidiary, and expansion in Brazil and Argentina. These increases were partially offset by reduced employee costs, reflecting reduced staff levels, primarily resulting from the integration of BayBanks and the disposition of the national consumer businesses previously noted. The quarterly and nine-month noninterest expense comparisons also included higher investment spending in Brazil and Argentina, including branch expansion, increased telecommunications costs, and costs incurred, in 1997, 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. Advertising and public relations fees related to the promotion of the new BankBoston brand decreased domestically but were slightly offset by increases in Latin America. The restructuring and merger-related costs of $180 million in the third quarter of 1996 were in connection with the acquisition of BayBanks, and included severance costs, facility and branch consolidation costs, and other restructuring and merger-related costs. See Note 8 to the Financial Statements for further discussion. PROVISION FOR INCOME TAXES The third quarter 1997 provision for income taxes was $152 million, compared to $78 million for the third quarter of 1996. Included in the 1996 provision is a tax benefit of $63 million related to the $180 million restructuring and merger-related charges recorded in connection with the acquisition of BayBanks. The low level of tax benefit associated with the charge reflected the effect of certain non tax deductible costs associated with the acquisition. The provision for income taxes in the first nine months of 1997 was $434 million, compared to $341 million in the first nine months of 1996. The Corporation's effective tax rate was 40 percent in the third quarter and first nine months of 1997. Excluding the effects of the restructuring and merger-related charges, the Corporation's effective tax rate was 42 percent in both the third quarter and first nine months of 1996. The reduction in the Corporation's effective tax rate in the quarterly and nine-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 September 30, 1997, the Corporation's total assets were $68.2 billion, compared with $62.3 billion at December 31, 1996. The $5.9 billion increase in total assets included a $1.4 billion increase in loans and leases, a $1.6 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 $625 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 $40 million from December 31, 1996, mainly due to the maturities of $275 million of the Corporation's senior medium-term notes, $130 million of subordinated debt and $470 million of Brazilian notes payable, along with the elimination of $80 million of FAC's notes payable resulting from the sale of that entity, partially offset by the issuance of $450 million of the Corporation's senior medium-term notes, $200 million of subordinated debt issued by BankBoston, N.A. and $265 million of Brazilian notes payable. In addition, during the second quarter of 1997, a wholly-owned subsidiary 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. 11 In the first quarter of 1997, the Board approved a 12 million share common stock repurchase program. The Corporation purchased 2.8 million shares in the third quarter of 1997 and 10.3 million shares in the first nine months of 1997, at a cost of $232 million and $784 million, respectively. In September 1997, the Corporation redeemed all of the outstanding shares of its Series E Preferred Stock at its aggregate liquidation preference of $230 million. In October 1997, the Board declared a quarterly common stock dividend of $.51 per share, payable on November 28, 1997 to stockholders of record on November 3, 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. The Corporation's Tier 1 and total capital ratios were 7.8 percent and 11.7 percent, respectively, at September 30, 1997, compared with 9.2 percent and 13.6 percent, respectively, at December 31, 1996. The Corporation's leverage ratio at September 30, 1997 was 7.2 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 10.3 million shares of common stock in the first nine months of 1997, as well as asset growth. The Corporation has a capital planning process that is designed to maintain appropriate regulatory capital levels and ratios. As of September 30, 1997, the Corporation and its bank subsidiaries met all capital adequacy requirements to which they are subject. 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:
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 1997 1997 1997 1996 1996 -------- ------- -------- ------- -------- (IN MILLIONS) United States Operations Commercial, industrial and fi- nancial........................ $15,062 $14,527 $14,203 $13,162 $13,828 Commercial real estate Construction.................. 317 314 265 284 323 Other......................... 3,845 3,398 3,129 3,240 3,228 Consumer-related loans Residential mortgages......... 2,720 3,016 3,067 3,184 4,156 Home equity loans............. 2,952 2,924 2,908 2,878 2,842 Credit card................... 1,596 1,488 1,404 1,395 1,320 Other......................... 3,118 4,739 4,708 5,503 5,349 Lease financing................. 1,880 1,780 1,766 1,816 1,778 Unearned income................. (293) (277) (275) (287) (272) ------- ------- ------- ------- ------- 31,197 31,909 31,175 31,175 32,552 ------- ------- ------- ------- ------- International Operations Loans and lease financing, net of unearned income............. 11,264 10,404 9,844 9,886 9,501 ------- ------- ------- ------- ------- Total loans and lease financ- ing.......................... $42,461 $42,313 $41,019 $41,061 $42,053 ======= ======= ======= ======= =======
Total loans and lease financing increased $1.4 billion from December 31, 1996, reflecting a $1.9 billion increase in commercial, industrial and financial loans, a $638 million increase in commercial real estate loans, a 12 $1.4 billion increase in international loans and a $2.6 billion decrease in consumer-related 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 increase in international loans was primarily due to increases in commercial and industrial loans and consumer loans in Brazil and Argentina. The decrease in consumer-related loans was primarily due to the sale of $950 million of Ganis loans in the first quarter of 1997 and $1.1 billion of FAC loans in the third quarter of 1997. At September 30, 1997, approximately 51 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 30 states at both September 30, 1997 and December 31, 1996. The decline in this percentage is due to increased lending outside the New England region, combined with the sale of New England domiciled loans in the first quarter of 1997. Many of these loans are bridge financings or will be syndicated; therefore, this decline may be temporary. The Corporation's total loan portfolio at September 30, 1997 and December 31, 1996 included $1.5 billion and $1.3 billion of highly leveraged transaction (HLT) loans to 121 and 116 customers, respectively. The average HLT loan size at September 30, 1997 and December 31, 1996 was $12 million and $11 million, respectively. The amount of unused commitments for HLTs at September 30, 1997 was $1 billion, 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 September 30, 1997 and December 31, 1996, there were no nonaccrual HLT loans. In addition, there were no credit losses from HLT loans in the first nine months of 1997. 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:
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 1997 1997 1997 1996 1996 -------- ------- -------- ------- -------- (DOLLARS IN MILLIONS) United States Commercial, industrial and finan- cial............................ $ 68 $ 39 $ 72 $ 82 $114 Commercial real estate Construction................... 4 3 4 6 9 Other.......................... 44 48 47 67 84 Consumer-related loans Residential mortgages.......... 51 56 65 57 60 Home equity.................... 26 26 25 23 22 Credit card.................... 22 22 23 17 5 Other.......................... 23 44 41 44 44 ---- ---- ---- ---- ---- 238 238 277 296 338 International...................... 99 113 119 106 106 ---- ---- ---- ---- ---- Total nonaccrual loans......... 337 351 396 402 444 OREO............................... 50 47 49 50 52 ---- ---- ---- ---- ---- Total.......................... $387 $398 $445 $452 $496 ==== ==== ==== ==== ==== Nonaccrual loans and OREO as a percent of related asset categories........................ .9% .9% 1.1% 1.1% 1.2%
13 Total nonaccrual loans and OREO at September 30, 1997 decreased $65 million from December 31, 1996, and $11 million from June 30, 1997. The decrease from December 31, 1996 reflects decreases in commercial and industrial nonaccrual loans and commercial real estate nonaccrual loans, as well as other consumer- related loans, the latter due to the sale of FAC. The $29 million increase in the commercial, industrial and financial nonaccrual loans from June 30, 1997 was the result of one large retail loan being placed on nonaccrual in the third quarter. 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 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. 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 September 30, 1997 was $729 million, or 1.72 percent of outstanding loans and leases, compared with $883 million, or 2.15 percent, at December 31, 1996. The reserve for credit losses was 216 percent of nonaccrual loans and leases at September 30, 1997, compared with 220 percent at December 31, 1996. The decrease in the reserve reflects the Corporation's actions to exit the national consumer business. 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:
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 1997 1997 1997 1996 1996 QUARTERS ENDED -------- ------- -------- ------- -------- (IN MILLIONS) United States operations Commercial, industrial and finan- cial............................. $ 2 $ 5 $18 $ 3 Commercial real estate............ (2) (3) 16 $ 1 Consumer-related loans Residential mortgages........... 1 1 2 2 Home equity..................... 2 1 2 3 Credit card..................... 24 24 19 13 7 Other........................... 12 34 35 26 35 --- --- --- --- --- 39 61 75 63 45 International operations............ 22 18 4 12 10 --- --- --- --- --- Total........................... $61 $79 $79 $75 $55 === === === === ===
Net credit losses were $61 million in the third quarter of 1997, compared with $55 million in the third quarter of 1996 and $79 million in the second quarter of 1997. The increase of $6 million compared to the third 14 quarter of 1996 was principally driven by increases in net credit losses in the credit card portfolio. 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 third quarter of 1997. These increases were partially offset by decreases in other consumer-related net credit losses resulting from the sale of FAC in the third quarter of 1997. The September 30, 1997 to June 30, 1997 comparison was impacted by a decrease of $22 million in other consumer-related net credit losses due to the sale of FAC. 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, although it anticipates that this pressure will be mitigated by the exiting of the Corporation's national consumer business, which includes the above-noted sale of FAC and decision to contribute the national credit card portfolio to a new venture. Net credit losses from FAC were approximately $21 million in the second quarter of 1997 and $44 million in the first half of 1997. Net credit losses from the national credit card portfolio were approximately $19 million in the third quarter of 1997, compared with $17 million in the second quarter of 1997 and $2 million in the third quarter of 1996. 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 September 30, 1997, such outstandings related to emerging markets countries totaled $3.0 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. 15 The following summarizes cross-border outstandings in countries which individually amounted to 1.0 percent or more of consolidated total assets at September 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) September 30, 1997(2) Argentina............. $840 $110 $730 $1,680 2.5% $125 Brazil................ 645 110 500 1,255 1.8 165 Chile................. 120 240 345 705 1.0 15 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) At September 30, 1997, the only country in which outstandings totaled between .75% and 1% of consolidated total assets was Korea with $520 million. At December 31, 1996, there were no countries in which cross- border outstandings totaled between .75% and 1% of consolidated total assets. (3) Amounts have been restated for comparative purposes to exclude Argendollar outstandings of approximately $1.3 billion. 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 September 30, 1997 and December 31, 1996, approximately $5.1 billion of the Corporation's cross-border outstandings were to emerging markets countries. These cross-border outstandings, of which approximately 80 percent were loans at September 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. See the discussion of recent market events in the "General " section above. ARGENTINA AND BRAZIL The Corporation's Argentine assets amounted to approximately $5.8 billion at September 30, 1997 and $4.8 billion at December 31, 1996. Included in these assets are cross-border outstandings of $1.7 billion at September 30, 1997 and $1.6 billion at December 31, 1996. Loans were $4.1 billion at September 30, 1997, compared to $3.4 billion at December 31, 1996. The Corporation's Argentine securities portfolio, which consists of trading assets and available for sale securities, amounted to $739 million at September 30, 1997 and $621 million at December 31, 1996. 16 The Corporation's nonaccrual Argentine loans were $83 million and $85 million at September 30, 1997 and December 31, 1996, respectively. Net credit losses were $14 million in the third quarter of 1997, compared to $5 million in the third quarter of 1996 and $13 million in the second quarter of 1997. The increase in credit losses in the third quarter of 1997 compared to the third quarter of 1996 was due to the loss on the previously mentioned large international credit in the third quarter of 1997. The Corporation's Brazilian assets amounted to approximately $6.6 billion at September 30, 1997, compared to approximately $5.0 billion at December 31, 1996. Included in these balances are approximately $2 billion and $.9 billion of liquid overnight resale agreements at September 30, 1997 and December 31, 1996, respectively. Also, included in total assets are cross-border outstandings of $1.3 billion at September 30, 1997 and $900 million at December 31, 1996. Loans were $3.0 billion at September 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 $615 million at September 30, 1997 and $565 million at December 31, 1996. The Corporation's nonaccrual Brazilian loans were $11 million at September 30, 1997, compared with $14 million at December 31, 1996. Net credit losses were $4 million in the third quarters of 1997 and 1996, as well as the second quarter of 1997. The Corporation's Argentine and Brazilian operations maintained currency positions both at September 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 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 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 $10.2 billion at September 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 September 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. 17 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 $55 million, and the aggregate VAR exposure was approximately $25 million at September 30, 1997 and $15 million at 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 September 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 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 for U.S. dollar denominated assets and liabilities at September 30, 1997 and December 31, 1996.
SEPTEMBER 30, 1997 DECEMBER 31, 1996 --------------------- --------------------- QUARTERLY QUARTERLY QUARTER-END AVERAGE QUARTER-END AVERAGE ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) Market value sensitivity(1)(2)..... $170 $177 $162 $162 % of risk-based capital........... 2.4% 2.5% 2.4% 2.4% Net interest revenue at risk(3).... $ 29 $ 23 $ 30 $ 29 % of net interest revenue......... 1.2% .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 September 30, 1997 the adverse position was based on a 100 basis point rise in interest rates and at December 31, 1996 the adverse position was based on a 200 basis point decline in interest rates over the next twelve-month period. 18 At September 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 rising interest rates at September 30, 1997 and to declining interest rates at 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 September 30, 1997, approximately 83 percent of the total overseas limit was allocated to Argentina and Brazil. The limit allocated to Argentina and Brazil represented approximately one-third of total domestic limits. During the third 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 third quarter of 1997 were $41 million, $120 million, $37 million and $15 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. 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. 19 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.
SEPTEMBER 30, 1997 ----------------------------------------------------------------- TRADING PORTFOLIO(1) ALM PORTFOLIO(1) ------------------------ ---------------------------------------- FAIR FAIR VALUE(2)(3)(4) VALUE(2)(3) NOTIONAL --------------- NOTIONAL --------------- UNRECOGNIZED(5) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS) -------- ----- --------- -------- ----- --------- --------------- (IN MILLIONS) Interest rate contracts Futures and forwards.. $45,293 $ 40 $ 46 $ 7,328 $(11) Interest rate swaps... 13,567 89 131 12,021 $55 $30 9 Interest Rate Options Purchased........... 26,032 30 1,646 2 2 Written or sold..... 13,972 35 150 ------- ---- ---- ------- --- --- ---- Total interest rate con- tracts................. $98,864 $159 $212 $21,145 $57 $30 ======= ==== ==== ======= === === ==== Foreign Exchange Con- tracts Spot and forward con- tracts............... $34,061 $389 $366 $ 1,988 $14 $ 5 $ 9 Options purchased..... 5,611 96 Options written or sold................. 6,348 90 ------- ---- ---- ------- --- --- ---- Total Foreign Exchange contracts.............. $46,020 $485 $456 $ 1,988 $14 $ 5 $ 9 ======= ==== ==== ======= === === ==== DECEMBER 31, 1996 ----------------------------------------------------------------- TRADING PORTFOLIO(1) ALM PORTFOLIO(1) ------------------------ ---------------------------------------- FAIR FAIR VALUE(2)(3)(4) 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. 20 (4) The average asset and liability fair value amounts for interest rate contracts included in the trading portfolio for the quarters ended September 30, 1997 and December 31, 1996 were approximately $148 million and $186 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 $451 million and $580 million, respectively, for the quarter ended September 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 September 30, 1997, there were $9 million of unrecognized gains and $1 million of unrecognized losses related to terminated contracts that are being amortized to net interest revenue over weighted average periods of 17 months and 29 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. The decrease in unrecognized losses is due to terminated interest rate futures contracts that had been used to hedge the funding of FAC, on which accelerated amortization occurred during the third quarter of 1997. 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 nine months ended September 30, 1997 were $3 million and $12 million, respectively, and for the quarter and nine months ended September 30, 1996 were $1 million and $8 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 nine months ended September 30, 1997 were $18 million and $57 million, respectively, and for the quarter and nine months ended September, 30, 1996 were $13 million and $37 million, respectively. The notional amount of interest rate derivative contracts and foreign exchange contracts included in the trading portfolio increased approximately $31 billion and $21 billion, respectively, from December 31, 1996. The increases were due to a higher level of customer demand and growth of the derivative trading business. 21 The following table summarizes the remaining maturity of interest rate derivative financial instruments entered into for asset and liability management purposes as of September 30, 1997.
REMAINING MATURITY ----------------------------------------------------------------------- SEPTEMBER 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........ $ 272 $ 930 $ 130 $495 $350 $2,111 $ 4,288 $ 2,826 Weighted average receive rate.......... 5.98% 6.08% 6.44% 5.77% 6.16% 6.51% 6.27% 6.38% Weighted average pay rate.................. 5.75% 5.74% 5.92% 5.76% 5.71% 5.81% 5.78% 5.67% Pay fixed rate swaps(1) Notional amount........ $ 117 $ 289 $ 406 $ 83 Weighted average receive rate.......... 4.70% 5.66% 5.38% 5.88% Weighted average pay rate.................. 7.12% 5.66% 6.08% 7.61% Basis swaps(2) Notional amount........ $ 50 $ 410 $ 50 $ 510 $ 468 Weighted average receive rate.......... 5.78% 8.50% 6.03% 7.99% 5.90% Weighted average pay rate.................. 8.50% 7.58% 5.78% 7.49% 5.64% Total Domestic Interest Rate Swaps Notional amount........ $ 272 $1,097 $ 540 $545 $350 $2,400 $ 5,204 $ 3,377 Weighted average receive rate(3)....... 5.98% 5.92% 8.00% 5.80% 6.16% 6.40% 6.37% 6.31% Weighted average pay rate(3)............... 5.75% 6.02% 7.18% 5.76% 5.71% 5.79% 5.97% 5.71% Total International In- terest Rate Swaps Notional amount(4)(6).. $ 6,800 $ 17 $ 6,817 $ 3,598 OTHER DERIVATIVE PROD- UCTS Futures and for- wards(5)(6)............ $ 7,328 $ 7,328 $ 3,382 Interest rate options purchased(7)........... $ 500 $ 500 $ 1,000 International interest options purchased...... $ 646 $ 646 Interest rate options sold................... $ 100 $ 100 Interest rate caps sold................... $ 50 $ 50 ------- ------ ------ ---- ---- ------ ------- ------- Total Consolidated Notional Amount........ $15,046 $1,697 $1,040 $612 $350 $2,400 $21,145 $10,357 ======= ====== ====== ==== ==== ====== ======= =======
- -------- (1) Approximately $2.1 billion of the receive fixed rate swaps are linked to floating rate loans, and the remaining $2.2 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 September 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. 22 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, 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. 23 [THIS PAGE INTENTIONALLY LEFT BLANK] 24 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30 DECEMBER 31 1997 1996 ------------ ----------- ASSETS Cash and due from banks................................ $ 3,444 $ 4,273 Interest bearing deposits in other banks............... 1,991 1,634 Federal funds sold and securities purchased under agreements to resell.................................. 3,047 1,857 Trading securities..................................... 1,863 1,238 Securities Available for sale................................... 9,425 7,804 Held to maturity (fair value of $655 in 1997 and $675 in 1996)............................................ 654 680 Loans and lease financing United States Operations............................. 31,197 31,175 International Operations............................. 11,264 9,886 ------- ------- Total loans and lease financing (net of unearned income of $361 in 1997 and $380 in 1996).......... 42,461 41,061 Reserve for credit losses.............................. (729) (883) ------- ------- Net loans and lease financing........................ 41,732 40,178 Premises and equipment, net............................ 1,001 894 Due from customers on acceptances...................... 450 438 Accrued interest receivable............................ 540 546 Other assets........................................... 4,083 2,764 ------- ------- TOTAL ASSETS........................................... $68,230 $62,306 ======= =======
The accompanying notes are an integral part of these financial statements. 25 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS) (CONTINUED)
SEPTEMBER 30 DECEMBER 31 1997 1996 ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing................................ $ 7,445 $ 8,340 Interest bearing................................... 24,251 24,709 Overseas offices Noninterest bearing................................ 1,032 751 Interest bearing................................... 11,927 9,031 ------- ------- Total deposits................................... 44,655 42,831 Funds borrowed Federal funds purchased............................. 1,246 527 Term federal funds purchased........................ 1,883 1,442 Securities sold under agreements to repurchase...... 2,347 2,034 Other funds borrowed................................ 7,109 5,155 Acceptances outstanding.............................. 458 448 Accrued expenses and other liabilities............... 2,622 1,614 Notes payable........................................ 2,781 2,821 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures........ 747 500 ------- ------- TOTAL LIABILITIES.................................... 63,848 57,372 ------- ------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares--10,000,000 Issued and outstanding shares--3,673,941........... 278 508 Common stock, par value $1.50 Authorized shares--300,000,000 Issued shares--154,053,021 in 1997 and 153,172,672 in 1996 Outstanding shares--144,534,999 in 1997 and 153,172,672 in 1996............................... 231 230 Surplus.............................................. 1,228 1,202 Retained earnings.................................... 3,312 2,925 Net unrealized gain on securities available for sale, net of tax.......................................... 68 76 Cumulative translation adjustments, net of tax....... (10) (7) Treasury stock, at cost (9,518,022 shares in 1997)... (725) ------- ------- TOTAL STOCKHOLDERS' EQUITY........................... 4,382 4,934 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $68,230 $62,306 ======= =======
The accompanying notes are an integral part of the financial statements. 26 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------- ----------------- 1997 1996 1997 1996 ------- ------- -------- -------- INTEREST INCOME Loans and lease financing, including fees.. $ 973 $ 944 $ 2,948 $ 2,860 Securities................................. 169 146 502 423 Trading securities......................... 30 36 86 129 Mortgages held for sale.................... 18 Federal funds sold and securities purchased under agreements to resell................ 60 50 181 138 Deposits in other banks.................... 35 23 106 74 ------- ------- -------- -------- Total interest income.................... 1,267 1,199 3,823 3,642 ------- ------- -------- -------- INTEREST EXPENSE Deposits of domestic offices............... 238 242 701 704 Deposits of overseas offices............... 190 173 532 558 Funds borrowed............................. 207 143 599 513 Notes payable.............................. 61 50 184 139 ------- ------- -------- -------- Total interest expense................... 696 608 2,016 1,914 ------- ------- -------- -------- NET INTEREST REVENUE......................... 571 591 1,807 1,728 Provision for credit losses................ 40 57 160 171 ------- ------- -------- -------- Net interest revenue after provision for credit losses............................. 531 534 1,647 1,557 ------- ------- -------- -------- NONINTEREST INCOME Financial service fees..................... 168 140 462 327 Trust and agency fees...................... 73 62 208 181 Trading profits and commissions............ 20 21 67 59 Net securities gains....................... 11 7 52 24 Other income............................... 176 107 366 414 ------- ------- -------- -------- Total noninterest income................. 448 337 1,155 1,005 ------- ------- -------- -------- NONINTEREST EXPENSE Salaries................................... 264 244 781 729 Employee benefits.......................... 54 49 158 150 Occupancy expense.......................... 50 51 152 152 Equipment expense.......................... 36 34 108 102 Restructuring and merger-related costs..... 180 180 Other expense.............................. 197 155 524 459 ------- ------- -------- -------- Total noninterest expense................ 601 713 1,723 1,772 ------- ------- -------- -------- Income before income taxes................... 378 158 1,079 790 Provision for income taxes................... 152 78 434 341 ------- ------- -------- -------- NET INCOME................................... $ 226 $ 80 $ 645 $ 449 ======= ======= ======== ======== NET INCOME APPLICABLE TO COMMON STOCK........ $ 217 $ 71 $ 617 $ 421 ======= ======= ======== ======== PER COMMON SHARE Net income Primary.................................... $ 1.49 $ .46 $ 4.15 $ 2.74 Fully diluted.............................. $ 1.47 $ .45 $ 4.07 $ 2.69 Dividends declared........................... $ .51 $ .44 $ 1.46 $ 1.25 AVERAGE NUMBER OF COMMON SHARES (IN THOU- SANDS) Primary.................................... 145,383 153,103 148,875 153,715 Fully diluted.............................. 147,842 155,183 151,574 156,300
The accompanying notes are an integral part of these financial statements. 27 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS)
1997 1996 NINE MONTHS ENDED SEPTEMBER 30 ------ ------ PREFERRED STOCK Balance, January 1.............................................. $ 508 $ 508 Redemption of Series E.......................................... (230) ------ ------ Balance, September 30........................................... 278 508 ------ ------ COMMON STOCK Balance, January 1.............................................. 230 350 Change in par value............................................. (118) Common stock issued Exercise of stock options...................................... 1 3 Business combinations, net of treasury stock retired........... (6) ------ ------ Balance, September 30........................................... 231 229 ------ ------ SURPLUS Balance, January 1.............................................. 1,202 1,240 Change in par value............................................. 118 Dividend reinvestment and common stock purchase plan............ 5 13 Exercise of stock options....................................... (29) (25) Restricted stock grants, net of forfeitures..................... 18 12 Business combinations, net of treasury stock retired............ 7 (178) Other, principally employee benefit plans....................... 25 1 ------ ------ Balance, September 30........................................... 1,228 1,181 ------ ------ RETAINED EARNINGS Balance, January 1.............................................. 2,925 2,548 Net income...................................................... 645 449 Restricted stock grants, net of forfeitures..................... (12) (3) Payment on ESOP loan............................................ 3 Cash dividends declared Preferred stock................................................ (28) (28) Common stock................................................... (218) (180) ------ ------ Balance, September 30........................................... 3,312 2,789 ------ ------ 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..................................................... (8) (29) ------ ------ Balance, September 30........................................... 68 53 ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1.............................................. (7) (4) Change in translation adjustments, net of tax................... (3) (2) ------ ------ Balance, September 30........................................... (10) (6) ------ ------ TREASURY STOCK Balance, January 1.............................................. (22) Purchases of treasury stock..................................... (784) (490) Treasury stock reissued Dividend reinvestment and common stock purchase plan........... 11 23 Exercise of stock options...................................... 45 52 Restricted stock grants........................................ 1 10 Business combinations.......................................... 420 Other, principally employee benefit plans...................... 2 7 ------ ------ Balance, September 30........................................... (725) ------ ------ TOTAL STOCKHOLDERS' EQUITY, SEPTEMBER 30........................ $4,382 $4,754 ====== ======
The accompanying notes are an integral part of these financial statements. 28 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
1997 1996 NINE MONTHS ENDED SEPTEMBER 30 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................... $ 645 $ 449 Reconciliation of net income to net cash provided from (used for) operating activities Provision for credit losses................................. 160 171 Depreciation and amortization............................... 118 111 Provision for deferred taxes................................ 64 17 Net gains on sales of securities and other assets........... (267) (292) Change in trading securities................................ (625) (666) Net change in mortgages held for sale....................... 235 Net change in interest receivables and payables............. 23 Other, net.................................................. (477) (229) ------- ------- Net cash used for operating activities..................... (382) (181) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) interest bearing deposits in other banks.............................................. (357) 105 Net cash used for federal funds sold and securities purchased under agreements to resell.................................. (1,190) (132) Securities available for sale Sales....................................................... 4,758 3,340 Maturities.................................................. 2,126 3,649 Purchases................................................... (8,476) (6,459) Securities held to maturity Maturities.................................................. 92 37 Purchases................................................... (66) (67) Net cash used for lending and lease activities of nonbank entities.................................................... (270) (1,260) Proceeds from sales of loan portfolios by bank subsidiaries.. 1,295 142 Net cash used for lending and lease activities of bank subsidiaries................................................ (2,513) (2,167) Proceeds from sales of other real estate owned............... 20 32 Expenditures for premises and equipment...................... (233) (171) Proceeds from sales of business units, premises and equipment................................................... 94 203 Other, net................................................... 21 (24) ------- ------- Net cash used for investing activities..................... (4,699) (2,772) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from deposits.............................. 1,824 2,264 Net cash provided from funds borrowed........................ 3,427 859 Net repayments of notes payable.............................. (955) (256) Net proceeds from issuance of notes payable.................. 915 913 Net proceeds from issuance of guaranteed preferred beneficial interests in Corporation's junior subordinated debentures... 247 Net proceeds from issuance of common stock................... 58 74 Redemption of preferred stock................................ (230) Purchases of treasury stock.................................. (784) (490) Dividends paid............................................... (246) (208) ------- ------- Net cash provided from financing activities................ 4,256 3,156 ------- ------- Effect of foreign currency translation on cash............... (4) (9) ------- ------- NET CHANGE IN CASH AND DUE FROM BANKS........................ (829) 194 CASH AND DUE FROM BANKS AT JANUARY 1......................... 4,273 3,561 ------- ------- CASH AND DUE FROM BANKS AT SEPTEMBER 30...................... $ 3,444 $ 3,755 ======= ======= Interest payments made....................................... $ 2,021 $ 1,926 Income tax payments made..................................... $ 324 $ 343
The accompanying notes are an integral part of these financial statements. 29 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. 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 October 1997, the Corporation completed its acquisition of Pacific National Corporation (Pacific), the holding company of Pacific National Bank of Nantucket, in exchange for approximately $22 million of the Corporation's common stock. The acquisition, which was accounted for as a purchase, will be included in the Corporation's consolidated financial statements from the acquisition date. During the third quarter of 1997, the Corporation completed the sale of its consumer finance subsidiary, Fidelity Acceptance Corporation. Under the terms of the agreement, the Corporation received total proceeds of approximately $340 million, and realized a pre-tax gain of approximately $68 million, or $40 million after-tax. In the third quarter of 1997, the Corporation announced an agreement to form a new national credit card venture. The Corporation will contribute its national credit card portfolio in exchange for cash and a minority interest in the new company. The transaction, which is subject to regulatory approval, is targeted for completion in the fourth quarter of 1997. In addition, in the third quarter of 1997, the Corporation announced an agreement to acquire Deutsche Bank Argentina S.A. (Deutsche Bank), a unit of Deutsche Bank AG, for approximately $250 million in cash. The acquisition of Deutsche Bank, a full service bank with approximately $1.1 billion in loans and $1.3 billion in deposits, is subject to approvals by the Central Bank of Argentina and the Federal Reserve Bank, and is expected to be completed in the first quarter of 1998. The acquisition will exclude Deutsche Bank's pension funds, insurance and investment banking businesses. Finally, in October 1997, the Corporation announced an agreement to sell its minority interest in HomeSide, Inc. (HomeSide). The sale of HomeSide, an independent mortgage banking company formed in 1996 in connection with the Corporation's sale of its mortgage banking subsidiary, is subject to regulatory and shareholder approvals, and is expected to be completed in the first quarter of 1998. 3. SECURITIES A summary comparison of securities available for sale by type is as follows:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ---------------------------------------- CARRYING CARRYING COST VALUE COST VALUE --------- ------------------- ---------- (IN MILLIONS) U.S. Treasury.......................... $ 1,173 $ 1,177 $ 1,669 $ 1,675 U.S. government agencies and corporations-- mortgage-backed securities............ 5,538 5,584 3,789 3,801 States and political subdivisions...... 94 94 172 173 Foreign debt securities................ 1,310 1,330 1,095 1,133 Other debt securities.................. 601 604 250 256 Marketable equity securities........... 145 182 156 217 Other equity securities................ 454 454 549 549 --------- --------- -------- -------- $ 9,315 $ 9,425 $ 7,680 $ 7,804 ========= ========= ======== ========
Other equity securities included in securities available for sale are not traded on established exchanges and are carried at cost. 30 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SECURITIES (CONTINUED) A summary comparison of securities held to maturity by type is as follows:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 -------------------- -------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- (IN MILLIONS) U.S. Treasury........................ $ 7 $ 7 $ 3 $ 3 U.S. government agencies and corporations-- mortgage-backed securities.......... 543 544 535 530 States and political subdivisions.... 6 6 Other debt securities................ 1 1 Foreign debt securities.............. 11 11 11 11 Other equity securities.............. 92 92 125 125 ---- ---- ---- ---- $654 $655 $680 $675 ==== ==== ==== ====
Other equity securities included in securities held to maturity represent securities, such as Federal Reserve Bank and Federal Homeloan 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:
SEPTEMBER 30 DECEMBER 31 1997 1996 ------------ ----------- (IN MILLIONS) United States Operations Commercial, industrial and financial.................. $15,062 $13,162 Commercial real estate Construction......................................... 317 284 Other................................................ 3,845 3,240 Consumer-related loans Residential mortgages................................ 2,720 3,184 Home equity.......................................... 2,952 2,878 Credit card.......................................... 1,596 1,395 Other................................................ 3,118 5,503 Lease financing....................................... 1,880 1,816 Unearned income....................................... (293) (287) ------- ------- 31,197 31,175 ------- ------- International Operations Loans and lease financing............................. 11,332 9,979 Unearned income....................................... (68) (93) ------- ------- 11,264 9,886 ------- ------- $42,461 $41,061 ======= =======
31 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------- ------------------ 1997 1996 1997 1996 ------- ------- -------- -------- (IN MILLIONS) BALANCE, BEGINNING OF PERIOD.............. $ 845 $ 895 $ 883 $ 890 Provision................................. 40 57 160 171 Reserves of entities sold................. (95) (95) (11) Reserve of acquired bank.................. 2 Domestic credit losses Commercial, industrial and financial.... (4) (3) (31) (16) Commercial real estate.................. (2) (3) (6) (23) Consumer-related loans Residential mortgages................. (1) (2) (5) (12) Credit card........................... (26) (7) (71) (16) Home equity........................... (3) (2) (8) (6) Other................................. (18) (42) (105) (103) International credit losses............... (26) (14) (57) (36) ------- ------- -------- -------- Total credit losses................... (80) (73) (283) (212) ------- ------- -------- -------- Domestic recoveries Commercial, industrial and financial.... 2 3 6 11 Commercial real estate.................. 4 2 11 8 Consumer-related loans Residential mortgages................. 3 3 Credit card........................... 2 4 2 Home equity........................... 1 2 2 2 Other................................. 6 7 24 20 International recoveries.................. 4 4 14 11 ------- ------- -------- -------- Total recoveries...................... 19 18 64 57 ------- ------- -------- -------- Net credit losses......................... (61) (55) (219) (155) ------- ------- -------- -------- BALANCE, END OF PERIOD.................... $ 729 $ 897 $ 729 $ 897 ======= ======= ======== ========
At September 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 $200 million, of which $32 million related to loans with no valuation reserve and $168 million related to loans with a valuation reserve of $72 million. At September 30, 1996, impaired loans totaled $320 million, of which $53 million related to loans with no valuation reserve and $267 million related to loans with a valuation reserve of $72 million. For the quarters ended September 30, 1997 and 1996, average impaired loans were approximately $201 million and $293 million, respectively. For the nine months ended September 30, 1997 and 1996, average impaired loans were approximately $220 million and $275 million, respectively. Interest recognized on impaired loans during these periods was not material. 32 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 the fourth quarter of 1996, $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 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 quarterly at LIBOR plus .75% and are scheduled to mature on June 15, 2027. At September 30, 1997, the interest on the floating rate Trust Securities was 6 15/32%. 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 the third quarter of 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 nine months of 1997, cash outlays charged against the related reserves amounted to $65 million. These cash outlays primarily consisted of early retirement benefits and payments to terminated employees. Approximately 1,300 employees were either terminated or left the Corporation through enhanced retirement programs during the first nine months of 1997. The remaining reserves of $32 million at September 30, 1997 consist primarily of expected cash outlays related to severance and property-related costs. 33 [THIS PAGE INTENTIONALLY LEFT BLANK] 34 CONSOLIDATED BALANCE SHEET AVERAGES BY QUARTER LAST NINE QUARTERS
1995 1996 1997 --------------- ------------------------------- ----------------------- 3 4 1 2 3 4 1 2 3 ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN MILLIONS) ASSETS Interest bearing deposits in other banks.................. $ 1,332 $ 1,454 $ 1,338 $ 1,313 $ 1,256 $ 1,405 $ 1,961 $ 1,748 $ 1,737 Federal funds sold and securities purchased under agreements to resell................. 1,004 972 1,416 1,532 1,708 2,047 2,189 1,896 2,018 Trading securities...... 922 929 1,136 1,624 1,467 1,459 1,498 1,590 1,924 Loans held for sale..... 506 760 960 69 21 44 Securities.............. 7,468 7,823 8,143 8,065 8,249 8,029 9,261 9,488 9,661 Loans and lease financing.............. 39,033 39,357 39,179 40,114 41,223 41,835 41,732 42,112 42,429 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets... 50,265 51,295 52,172 52,717 53,924 54,819 56,641 56,834 57,769 Other assets............ 6,447 6,506 6,415 5,664 6,125 6,237 6,583 7,112 7,935 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL ASSETS........... $56,712 $57,801 $58,587 $58,381 $60,049 $61,056 $63,224 $63,946 $65,704 ======= ======= ======= ======= ======= ======= ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Domestic offices: Noninterest bearing.... $ 6,285 $ 6,509 $ 6,586 $ 6,420 $ 6,694 $ 6,837 $ 6,951 $ 7,229 $ 7,182 Interest bearing....... 24,190 24,700 24,849 24,931 26,003 25,121 24,622 24,657 24,713 Overseas offices: Noninterest bearing.... 501 492 499 465 491 455 599 626 709 Interest bearing....... 7,790 8,202 8,698 9,302 9,429 9,618 9,727 9,734 10,385 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total deposits......... 38,766 39,903 40,632 41,118 42,617 42,031 41,899 42,246 42,989 Federal funds purchased and repurchase agreements............. 3,959 4,672 3,959 4,561 4,739 5,167 5,923 5,776 6,047 Other funds borrowed.... 5,661 4,683 5,102 3,721 3,562 4,190 4,943 5,690 6,320 Notes payable........... 2,115 2,159 2,421 2,584 2,674 2,983 3,316 3,351 3,336 Other liabilities....... 1,790 1,806 1,767 1,709 1,698 1,860 2,191 2,216 2,464 Stockholders' equity.... 4,421 4,578 4,706 4,688 4,759 4,825 4,952 4,667 4,548 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $56,712 $57,801 $58,587 $58,381 $60,049 $61,056 $63,224 $63,946 $65,704 ======= ======= ======= ======= ======= ======= ======= ======= =======
35 CONSOLIDATED STATEMENT OF INCOME BY QUARTER--TAXABLE EQUIVALENT BASIS LAST NINE QUARTERS
1995 1996 1997 ------------- --------------------------- -------------------- 3 4 1 2 3 4 1 2 3 ------ ------ ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NET INTEREST REVENUE $569.6 $572.9 $565.5 $571.5 $591.4 $611.2 $620.0 $615.9 $571.1 Taxable equivalent ad- justment............... 4.4 8.4 5.5 4.7 5.0 5.2 5.0 4.5 5.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total net interest reve- nue.................... 574.0 581.3 571.0 576.2 596.4 616.4 625.0 620.4 576.5 Provision for credit losses................. 51.0 81.0 56.9 57.1 57.0 60.0 60.0 60.0 40.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net interest revenue after provision for credit losses.......... 523.0 500.3 514.1 519.1 539.4 556.4 565.0 560.4 536.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST INCOME Financial service fees.. 162.2 230.6 51.6 135.3 140.4 146.6 137.5 155.7 168.4 Trust and agency fees... 64.4 54.8 57.4 61.9 61.6 65.0 66.0 69.4 72.8 Trading profits and com- missions............... 7.2 9.1 12.9 25.0 20.7 17.2 19.3 27.9 19.9 Net securities gains.... .8 1.9 13.4 3.4 7.1 (.8) 8.8 31.9 11.3 Other income............ 71.2 71.3 149.9 157.3 106.7 111.5 98.1 91.9 175.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest income................ 305.8 367.7 285.2 382.9 336.5 339.5 329.7 376.8 448.2 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST EXPENSE Salaries................ 245.9 243.2 240.8 239.9 244.2 254.5 257.7 260.2 263.8 Employee benefits....... 52.2 45.8 52.2 49.0 49.1 44.4 52.7 51.3 54.0 Occupancy expense....... 48.3 48.6 51.1 49.7 51.1 50.6 50.8 52.1 49.6 Equipment expense....... 33.5 33.8 34.3 33.9 34.2 36.2 35.6 35.8 36.1 Acquisition, divestiture and restructuring expense................ 28.2 180.0 Other expense........... 138.0 146.1 148.5 159.7 153.8 162.2 147.4 178.5 197.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest expense............... 517.9 545.7 526.9 532.2 712.4 547.9 544.2 577.9 601.3 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes.................. 310.9 322.3 272.4 369.8 163.5 348.0 350.5 359.3 383.4 Provision for income taxes.................. 132.0 133.6 112.0 151.3 78.5 141.3 138.7 142.8 152.3 Taxable equivalent ad- justment............... 4.4 8.4 5.5 4.7 5.0 5.2 5.0 4.5 5.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ 136.4 142.0 117.5 156.0 83.5 146.5 143.7 147.3 157.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME.............. $174.5 $180.3 $154.9 $213.8 $ 80.0 $201.5 $206.8 $212.0 $225.7 ====== ====== ====== ====== ====== ====== ====== ====== ====== PER COMMON SHARE Net Income: Primary................ $ 1.06 $ 1.09 $ .94 $ 1.33 $ .46 $ 1.26 $ 1.29 $ 1.37 $ 1.49 Fully diluted.......... 1.05 1.08 .93 1.32 .45 1.24 1.27 1.35 1.47 Cash dividends de- clared................. .37 .37 .37 .44 .44 .44 .44 .51 .51
36 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED SEPTEMBER 30, 1997 ----------------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ----------- ------------- --------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S..................................... $ 220 $ 4 6.84% International........................... 1,517 31 8.17 ----------- ---------- Total................................... 1,737 35 8.00 ----------- ---------- --------- Federal Funds Sold and Resale Agreements U.S..................................... 476 7 5.77 International........................... 1,542 53 13.68 ----------- ---------- Total................................... 2,018 60 11.81 ----------- ---------- --------- Trading Securities U.S..................................... 1,124 18 6.22 International........................... 800 12 6.10 ----------- ---------- Total................................... 1,924 30 6.17 ----------- ---------- --------- Securities U.S. Available for sale(2)................... 7,742 128 6.61 Held to maturity........................ 642 10 6.28 International Available for sale(2)................... 1,277 36 11.33 ----------- ---------- Total................................... 9,661 174 7.11 ----------- ---------- --------- Loans and Lease Financing (Net of Un- earned Income) U.S..................................... 31,317 659 8.35 International........................... 11,112 315 11.25 ----------- ---------- Total loans and lease financing(3)...... 42,429 974 9.11 ----------- ---------- --------- Earning assets........................... 57,769 1,273 8.74 ---------- --------- Nonearning assets........................ 7,935 ----------- Total Assets........................... $ 65,704 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits........................ $ 14,673 $ 101 2.71% Time deposits........................... 10,040 143 5.65 International........................... 10,385 184 7.03 ----------- ---------- Total................................... 35,098 428 4.83 ----------- ---------- --------- Federal Funds Purchased and Repurchase Agreements U.S..................................... 5,819 84 5.76 International........................... 228 5 8.17 ----------- ---------- Total................................... 6,047 89 5.85 ----------- ---------- --------- Other Funds Borrowed U.S..................................... 4,669 70 5.96 International........................... 1,651 48 11.51 ----------- ---------- Total................................... 6,320 118 7.41 ----------- ---------- --------- Notes Payable U.S.(4)................................. 2,945 51 6.95 International........................... 391 10 9.85 ----------- ---------- Total................................... 3,336 61 7.29 ----------- ---------- --------- Total interest bearing liabilities....... 50,801 696 5.43 ---------- --------- Demand deposits U.S...................... 7,182 Demand deposits International............ 709 Other noninterest bearing liabilities.... 2,464 Total Stockholders' Equity............... 4,548 ----------- Total Liabilities and Stockholders' Eq- uity.................................. $ 65,704 =========== NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S..................................... $ 41,521 $ 420 4.01% International........................... 16,248 157 3.83% ----------- ---------- Total................................... $ 57,769 $ 577 3.96% =========== ==========
- -------- (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. 37 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED SEPTEMBER 30, 1996 ----------------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ----------- ------------- --------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S..................................... $ 173 $ 2 4.99% International........................... 1,083 21 7.44 ----------- ---------- Total................................... 1,256 23 7.10 ----------- ---------- --------- Federal Funds Sold and Resale Agreements U.S..................................... 480 7 5.52 International........................... 1,228 43 13.98 ----------- ---------- Total................................... 1,708 50 11.60 ----------- ---------- --------- Trading Securities U.S..................................... 470 7 6.13 International........................... 997 29 11.67 ----------- ---------- Total................................... 1,467 36 9.89 ----------- ---------- --------- Mortgages Held for Sale U.S..................................... 21 8.74 ----------- --------- Securities U.S. Available for sale(2)................... 6,686 109 6.51 Held to maturity........................ 686 10 6.06 International Available for sale(2)................... 871 30 14.11 Held to maturity........................ 6 1 31.12 ----------- ---------- Total................................... 8,249 150 7.23 ----------- ---------- --------- Loans and Lease Financing (Net of Un- earned Income) U.S..................................... 31,961 687 8.55 International........................... 9,262 258 11.08 ----------- ---------- Total loans and lease financing(3)...... 41,223 945 9.12 ----------- ---------- --------- Earning assets........................... 53,924 1,204 8.89 ---------- --------- Nonearning assets........................ 6,125 ----------- Total Assets........................... $ 60,049 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits........................ $ 15,001 $ 102 2.70% Time deposits........................... 11,002 153 5.55 International........................... 9,429 160 6.76 ----------- ---------- Total................................... 35,432 415 4.67 ----------- ---------- --------- Federal Funds Purchased and Repurchase Agreements U.S..................................... 4,643 68 5.85 International........................... 96 3 11.07 ----------- ---------- Total................................... 4,739 71 5.95 ----------- ---------- --------- Other Funds Borrowed U.S..................................... 2,580 37 5.74 International........................... 982 35 14.22 ----------- ---------- Total................................... 3,562 72 8.08 ----------- ---------- --------- Notes Payable U.S..................................... 2,087 35 6.55 International........................... 587 15 10.14 ----------- ---------- Total................................... 2,674 50 7.34 ----------- ---------- --------- Total interest bearing liabilities....... 46,407 608 5.21 ---------- --------- Demand deposits U.S...................... 6,694 Demand deposits International............ 491 Other noninterest bearing liabilities.... 1,698 Total Stockholders' Equity............... 4,759 ----------- Total Liabilities and Stockholders' Eq- uity.................................. $ 60,049 =========== NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S..................................... $ 40,477 $ 459 4.51% International........................... 13,447 137 4.07% ----------- ---------- Total................................... $ 53,924 $ 596 4.40% =========== ==========
- -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 38 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
NINE MONTHS ENDED SEPTEMBER 30, 1997 ----------------------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------------- -------------- ----------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S................................ $ 363 $ 16 5.94% International...................... 1,452 90 8.25 ------------- ------------ Total.............................. 1,815 106 7.79 ------------- ------------ ----------- Federal Funds Sold and Resale Agree- ments U.S................................ 607 25 5.39 International...................... 1,427 156 14.64 ------------- ------------ Total.............................. 2,034 181 11.88 ------------- ------------ ----------- Trading Securities U.S................................ 975 45 6.14 International...................... 697 41 7.89 ------------- ------------ Total.............................. 1,672 86 6.87 ------------- ------------ ----------- Securities U.S. Available for sale(2).............. 7,584 367 6.51 Held to maturity................... 663 31 6.25 International Available for sale(2).............. 1,224 117 13.19 ------------- ------------ Total.............................. 9,471 515 7.27 ------------- ------------ ----------- Loans and Lease Financing (Net of Unearned Income) U.S................................ 31,597 2,058 8.71 International...................... 10,496 892 11.36 ------------- ------------ Total loans and lease financ- ing(3)............................ 42,093 2,950 9.37 ------------- ------------ ----------- Earning assets...................... 57,085 3,838 8.99 ------------ ----------- Nonearning assets................... 7,207 ------------- Total Assets...................... $ 64,292 ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits................... $ 14,768 $ 299 2.70% Time deposits...................... 9,897 413 5.57 International...................... 9,951 521 7.01 ------------- ------------ Total.............................. 34,616 1,233 4.76 ------------- ------------ ----------- Federal Funds Purchased and Repur- chase Agreements U.S................................ 5,757 251 5.82 International...................... 159 11 9.22 ------------- ------------ Total.............................. 5,916 262 5.91 ------------- ------------ ----------- Other Funds Borrowed U.S................................ 4,173 187 5.98 International...................... 1,483 150 13.58 ------------- ------------ Total.............................. 5,656 337 7.98 ------------- ------------ ----------- Notes Payable U.S.(4)............................ 2,811 146 6.92 International...................... 523 38 9.81 ------------- ------------ Total.............................. 3,334 184 7.37 ------------- ------------ ----------- Total interest bearing liabilities.. 49,522 2,016 5.44 ------------ ----------- Demand deposits U.S................. 7,121 Demand deposits International....... 645 Other noninterest bearing liabili- ties............................... 2,291 Total Stockholders' Equity.......... 4,713 ------------- Total Liabilities and Stockhold- ers' Equity...................... $ 64,292 ============= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S................................ $ 41,789 $ 1,367 4.37% International...................... 15,296 455 3.98% ------------- ------------ Total.............................. $ 57,085 $ 1,822 4.27% ============= ============
- -------- (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. 39 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
NINE MONTHS ENDED SEPTEMBER 30, 1996 ----------------------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------------- -------------- ----------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S................................ $ 211 $ 9 5.67% International...................... 1,091 65 8.01 ------------- ------------ Total.............................. 1,302 74 7.63 ------------- ------------ ----------- Federal Funds Sold and Resale Agree- ments U.S................................ 456 18 5.33 International...................... 1,096 120 14.60 ------------- ------------ Total.............................. 1,552 138 11.87 ------------- ------------ ----------- Trading Securities U.S................................ 466 20 5.62 International...................... 943 110 15.58 ------------- ------------ Total.............................. 1,409 130 12.29 ------------- ------------ ----------- Mortgages Held for Sale U.S................................ 332 17 7.00 International...................... 17 1 6.11 ------------- ------------ Total.............................. 349 18 6.96 ------------- ------------ ----------- Securities U.S. Available for sale(2).............. 6,692 321 6.42 Held to maturity................... 684 31 6.08 International Available for sale(2).............. 738 77 13.89 Held to maturity................... 39 5 16.60 ------------- ------------ Total.............................. 8,153 434 6.98 ------------- ------------ ----------- Loans and Lease Financing (Net of Unearned Income) U.S................................ 31,220 2,008 8.59 International...................... 8,956 855 12.75 ------------- ------------ Total loans and lease financ- ing(3)............................ 40,176 2,863 9.52 ------------- ------------ ----------- Earning assets...................... 52,941 3,657 9.23 ------------ ----------- Nonearning assets................... 6,069 ------------- Total Assets...................... $ 59,010 ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits................... $ 14,938 $ 300 2.69% Time deposits...................... 10,325 435 5.62 International...................... 9,145 527 7.69 ------------- ------------ Total.............................. 34,408 1,262 4.90 ------------- ------------ ----------- Federal Funds Purchased and Repur- chase Agreements U.S................................ 4,319 186 5.75 International...................... 102 10 12.90 ------------- ------------ Total.............................. 4,421 196 5.91 ------------- ------------ ----------- Other Funds Borrowed U.S................................ 3,180 142 5.98 International...................... 946 175 24.66 ------------- ------------ Total.............................. 4,126 317 10.26 ------------- ------------ ----------- Notes Payable U.S................................ 2,022 99 6.55 International...................... 538 40 10.02 ------------- ------------ Total.............................. 2,560 139 7.28 ------------- ------------ ----------- Total interest bearing liabilities.. 45,515 1,914 5.62 ------------ ----------- Demand deposits U.S................. 6,567 Demand deposits International....... 485 Other noninterest bearing liabili- ties............................... 1,725 Total Stockholders' Equity.......... 4,718 ------------- Total Liabilities and Stockhold- ers' Equity...................... $ 59,010 ============= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S................................ $ 40,061 $ 1,349 4.50% International...................... 12,880 394 4.08% ------------- ------------ Total.............................. $ 52,941 $ 1,743 4.40% ============= ============
- -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 40 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. THIRD QUARTER 1997 COMPARED WITH THIRD QUARTER 1996
INCREASE (DECREASE) DUE TO CHANGE IN ----------- VOLUME RATE NET CHANGE ------ ---- ---------- (IN MILLIONS) Interest income Loans and lease financing U.S. ................................................ $(14) $(14) $(28) International........................................ 53 4 57 ---- 29 ---- Other earning assets U.S. ................................................ 28 4 32 International........................................ 24 (16) 8 ---- 40 ---- Total interest income.................................. 89 (20) 69 Total interest expense................................. 48 40 88 ---- Net interest revenue................................... $(19) ====
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1996
INCREASE (DECREASE) DUE TO CHANGE IN ----------- VOLUME RATE NET CHANGE ------ ---- ---------- (IN MILLIONS) Interest income Loans and lease financing U.S. ................................................. $ 25 $ 25 $ 50 International......................................... 131 (94) 37 ---- 87 ---- Other earning assets U.S. ................................................. 64 4 68 International......................................... 73 (47) 26 ---- 94 ---- Total interest income................................... 279 (98) 181 Total interest expense.................................. 146 (44) 102 ---- Net interest revenue.................................... $ 79 ====
41 PART II--OTHER INFORMATION EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 11 --Computation of Earnings Per Common Share. 12(a) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits). 12(b) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits). 12(c) --Computation of the Corporation's Consolidated Ratio of Earnings to 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 third quarter of 1997, the Corporation filed one Current Report on Form 8-K, dated July 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 October 16, 1997, which contained information pursuant to Items 5 and 7 of Form 8-K. 42 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: November 14, 1997 43 EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 BANKBOSTON CORPORATION Computation of Earnings Per Common Share
Quarters Ended Nine Months Ended September 30 September 30 ------------------ ------------------ EARNINGS (in millions) 1997 1996 1997 1996 - -------- ---------- ---------- ---------- ---------- 1. Net income $ 226 $ 80 $ 645 $ 449 2. Less: preferred dividends 9 9 27 28 -------- -------- -------- -------- 3. Net income applicable to primary and fully diluted earnings per common share $ 217 $ 71 $ 618 $ 421 ======== ======== ======== ======== SHARES (in thousands) ------ 4. Weighted average number of common shares outstanding 145,383 153,103 148,875 153,715 5. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 2,459 2,080 2,699 2,585 -------- -------- -------- -------- 7. Adjusted number of common shares 147,842 155,183 151,574 156,300 ======== ======== ======== ======== PER SHARE CALCULATION --------------------- 8. Primary net income per common share (item 3 divided by Item 4) $ 1.49 $ .46 $ 4.15 $ 2.74 9. Primary net income per common share (item 3 divided by Item 7) $ 1.47 $ .45 $ 4.07 $ 2.69
EX-12.A 3 COMPUTATION OF CONSOL. RATIO 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 nine months ended September 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Nine Months Ended September 30, Years Ended December 31, ------------------- ---------------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- Net income $ 645 $ 449 $ 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 434 341 483 529 422 262 190 -------- -------- -------- -------- -------- -------- -------- Pretax earnings $ 1,079 $ 790 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ======== ======== ======== ======== ======== ======== ======== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 29 $ 30 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 783 652 873 1,079 1,038 384 352 -------- -------- -------- -------- -------- -------- -------- Total fixed charges $ 812 $ 682 $ 913 $ 1,117 $ 1,073 $ 420 $ 389 ======== ======== ======== ======== ======== ======== ======== Earnings (for ratio calculation) $ 1,891 $ 1,472 $ 2,046 $ 2,324 $ 2,044 $ 1,025 $ 844 ======== ======== ======== ======== ======== ======== ======== Total fixed charges $ 812 $ 682 $ 913 $ 1,117 $ 1,073 $ 420 $ 389 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.33 2.16 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 COMPUTATION OF CONSOL. RATIO 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 nine months ended September 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Nine Months Ended September 30, Years Ended December 31, ------------------- ---------------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- Net income $ 645 $ 449 $ 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 434 341 483 529 422 262 190 -------- -------- -------- -------- -------- -------- -------- Pretax earnings $ 1,079 $ 790 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ======== ======== ======== ======== ======== ======== ======== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 29 $ 30 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 783 652 873 1,079 1,038 384 352 Interest on deposits 1,233 1,262 1,680 1,791 1,301 1,177 1,640 -------- -------- -------- -------- -------- -------- -------- Total fixed charges $ 2,045 $ 1,944 $ 2,593 $ 2,908 $ 2,374 $ 1,597 $ 2,029 ======== ======== ======== ======== ======== ======== ======== Earnings (for ratio calculation) $ 3,124 $ 2,734 $ 3,726 $ 4,115 $ 3,345 $ 2,202 $ 2,484 ======== ======== ======== ======== ======== ======== ======== Total fixed charges $ 2,045 $ 1,944 $ 2,593 $ 2,908 $ 2,374 $ 1,597 $ 2,029 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.53 1.41 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 COMP. OF CONSOL. RATIO OF COMBINED CHARGES EXCLUD. 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 nine months ended September 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Nine Months Ended September 30, Years Ended December 31, ------------------- ---------------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- Net income $ 645 $ 449 $ 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 434 341 483 529 422 262 190 -------- -------- -------- -------- -------- -------- -------- Pretax earnings $ 1,079 $ 790 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ======== ======== ======== ======== ======== ======== ======== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 29 $ 30 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 783 652 873 1,079 1,038 384 352 -------- -------- -------- -------- -------- -------- -------- Total fixed charges $ 812 $ 682 $ 913 $ 1,117 $ 1,073 $ 420 $ 389 ======== ======== ======== ======== ======== ======== ======== Preferred stock dividend requirements 46 49 65 68 67 61 33 -------- -------- -------- -------- -------- -------- -------- Total combined fixed charges and preferred stock dividend requirements $ 858 $ 731 $ 978 $ 1,185 $ 1,140 $ 481 $ 422 ======== ======== ======== ======== ======== ======== ======== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 1,891 $ 1,472 $ 2,046 $ 2,324 $ 2,044 $ 1,025 $ 844 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 2.20 2.01 2.09 1.96 1.79 2.13 2.00 ======== ======== ======== ======== ======== ======== ========
For purposes of computing the consolidated ratio of earnings to 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 COMP. OF CONSOL. RATIO OF COMBINED CHARGES INCLUD. 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 nine months ended September 30, 1997 and 1996 and for the five years ended December 31, 1996 were as follows:
Nine Months Ended September 30, Years Ended December 31, ------------------- ---------------------------------------------------- (Dollars in millions) 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- Net income $ 645 $ 449 $ 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 434 341 483 529 422 262 190 -------- -------- -------- -------- -------- -------- -------- Pretax earnings $ 1,079 $ 790 $ 1,133 $ 1,207 $ 971 $ 605 $ 455 ======== ======== ======== ======== ======== ======== ======== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 29 $ 30 $ 40 $ 38 $ 35 $ 36 $ 37 Interest on borrowed funds 783 652 873 1,079 1,038 384 352 Interest on deposits 1,233 1,262 1,680 1,791 1,301 1,177 1,640 -------- -------- -------- -------- -------- -------- -------- Total fixed charges $ 2,045 $ 1,944 $ 2,593 $ 2,908 $ 2,374 $ 1,597 $ 2,029 ======== ======== ======== ======== ======== ======== ======== Preferred stock dividend requirements 46 49 65 68 67 61 33 -------- -------- -------- -------- -------- -------- -------- Total combined fixed charges and preferred stock dividend requirements $ 2,091 $ 1,993 $ 2,658 $ 2,976 $ 2,441 $ 1,658 $ 2,062 ======== ======== ======== ======== ======== ======== ======== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 3,124 $ 2,734 $ 3,726 $ 4,115 $ 3,345 $ 2,202 $ 2,484 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.49 1.37 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 SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 3,444 1,991 3,047 1,863 9,425 654 655 42,461 (729) 68,230 44,655 10,988 2,622 3,528 0 278 231 3,873 68,230 2,948 502 373 3,823 1,233 2,016 1,807 160 52 524 1,079 645 0 0 645 4.15 4.07 4.27 337 42 0 0 883 (283) 64 729 402 150 177 Includes guaranteed preferred beneficial interests in the Corporation's junior subordinated debentures.
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