-----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, FNQEeTtil+RZt3+V7TeTKCvL1zo3B7RjRRmdjpOON3dgLktb5WQp7XKePM98sz6+ RE2TU/EvFLspgzSA8o3fOA== 0000927016-98-001012.txt : 19980319 0000927016-98-001012.hdr.sgml : 19980319 ACCESSION NUMBER: 0000927016-98-001012 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-42653 FILM NUMBER: 98567883 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-K405 1 FORM 10-K 405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 incorporation or organization) Identification No.) 100 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (6l7) 434-2200 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: ----------------------------------------------------------- Title of each class - ------------------- Common Stock, par value $1.50 per share Preferred Stock Purchase Rights Adjustable Rate Cumulative Preferred Stock, Series A (liquidation preference $50 per share) Adjustable Rate Cumulative Preferred Stock, Series B (liquidation preference $50 per share) Adjustable Rate Cumulative Preferred Stock, Series C (liquidation preference $100 per share) Depositary Shares, each representing one-tenth of a share of 7 7/8% Cumulative Preferred Stock, Series F (liquidation preference $25 per Depositary Share) NAME OF EACH EXCHANGE ON WHICH REGISTERED: ------------------------------------------ Each class is registered on the New York Stock Exchange and the Boston Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ----------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (/S/ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of shares of common Number of shares of common stock held by non-affiliates of Registrant stock outstanding as of as of March 10, 1998 March 10, 1998 -------------------- -------------- $15,316,292,539 146,558,505 DOCUMENTS INCORPORATED BY REFERENCE: - ---------------------- 1. Pertinent extracts from Registrant's 1997 Annual Report to Stockholders (Parts I, II and IV). 2. Pertinent extracts from Registrant's Proxy Statement in connection with the Registrant's 1998 Annual Meeting of Stockholders (Part III). INDEX
Name of Item Page - ------------ ---- PART I Item 1. Business............................................ 3 Statistical Disclosure by Bank Holding Companies.. 12 Item 2. Properties.......................................... 18 Item 3. Legal Proceedings................................... 19 Item 3A. Executive Officers of the Corporation............... 20 Item 4. Submission of Matters to a Vote of Security Holders. 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 21 Item 6. Selected Financial Data............................. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 21 Item 8. Financial Statements and Supplementary Data......... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 22 PART III Item 10. Directors and Executive Officers of the Registrant.. 22 Item 11. Executive Compensation.............................. 23 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 23 Item 13. Certain Relationships and Related Transactions...... 23 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 23 SIGNATURES Signatures.......................................... II-1
-2- PART I ITEM 1. BUSINESS. - ------------------ THE CORPORATION BankBoston Corporation (the "Corporation") is a registered bank holding company, organized in 1970 under Massachusetts law with both national and international operations. The Corporation, through its subsidiaries and, in certain cases, joint ventures, offers a full range of banking services to consumers, small businesses and corporate customers in southern New England, delivers sophisticated financial solutions to mid-size and large corporations nationally and internationally, and provides full-service banking in leading Latin American markets. As of December 31, 1997, approximately 72% of the Corporation's total loan volume consisted of domestic loans and leases, and the balance was overseas. As of December 31, 1997, the Corporation's subsidiaries employed, in the aggregate, approximately 21,500 full-time equivalent employees in their domestic and foreign operations. The Corporation's principal subsidiary is BankBoston, N.A. (the "Bank"), a national banking association with its headquarters in Massachusetts. The Bank maintains branches in Massachusetts, Connecticut and New Hampshire and, through its subsidiaries, operates a network of offices across the United States and more than 100 offices in 23 countries in Latin America, Asia, Europe and Africa. The other major banking subsidiary of the Corporation is Rhode Island Hospital Trust National Bank ("Hospital Trust"). During 1997, certain former banking subsidiaries of the Corporation, BayBank, N.A., Bank of Boston Connecticut and BayBank NH, N.A., were merged into the Bank. In addition, the Bank has filed an application with the Office of the Comptroller of the Currency (the "OCC") to merge Hospital Trust into the Bank. The Bank expects to consummate that merger in the second quarter of 1998. The executive office of the Corporation and the head office of the Bank are located at 100 Federal Street, Boston, Massachusetts 02110 (Telephone (617) 434-2200). BUSINESS OF THE CORPORATION The Corporation is managed through its Policy Council, which is the senior decision-making group of the Corporation. The Policy Council consists of 11 members, including Chairman and Chief Executive Officer Charles K. Gifford, President and Chief Operating Officer Henrique de Campos Meirelles, Chief Financial Officer and Treasurer Susannah M. Swihart and Vice Chairman, Corporate Banking, Paul F. Hogan. The remaining members of the Policy Council include five executives who manage certain key businesses and the chairs of the corporate-wide Risk Management and Human Resources Committees. In addition to the Risk Management and Human Resources Committees, the Policy Council oversees the Technology Policy Committee, the Asset, Liability and Capital Committee and the Marketing Committee. The Corporation's principal revenue-producing areas are grouped into the following major business lines: Corporate Banking and Global Capital Markets, Regional Consumer and Small Business, Argentina, Brazil and the Global Private Bank. For a discussion of the operating results and other key financial measures of these five business lines for 1997 and 1996, as well as discussions of the Corporation's business activities, including its lending activities, its cross- border outstandings and the management of its off-balance-sheet exposure, -3- see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 29 through 54 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which discussions are incorporated herein by reference. Activities in which the Corporation and its subsidiaries are presently engaged or which they may undertake in the future are subject to certain statutory and regulatory restrictions. Banks and bank holding companies are extensively regulated under both federal and state law. There are various legal limitations upon the extent to which bank subsidiaries of the Corporation can finance or otherwise supply funds to the Corporation or certain of its affiliates. See "Supervision and Regulation." For financial information on the Corporation's revenue, net income and assets attributable to its domestic and international operations, see "Segment Information," which appears in Note 27 to the Financial Statements, "Line of Business Results," which appears on pages 34 through 36, and "Cross-Border Outstandings" and "Emerging Markets Countries," which appear on pages 43 through 46, of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which information is hereby incorporated by reference. COMPETITION AND INDUSTRY CONSOLIDATION The Corporation's subsidiaries compete with other major financial institutions, including commercial banks, investment banks, mutual savings banks, savings and loan associations, credit unions, consumer finance companies and other nonbank institutions, such as insurance companies, major retailers, brokerage firms, and investment companies in New England, throughout the United States, and internationally. The principal methods of competing effectively in the financial services industry include improving customer service through the quality and range of services available, improving efficiencies and pricing services competitively. One outgrowth of the competitive environment discussed above has been significant consolidation within the financial services industry both on a national and regional level. The Corporation engages on an ongoing basis in reviewing and discussing strategic initiatives focused on leveraging its core competencies over attractive markets, including the expansion of its global banking businesses, increasing the capital markets activities of its corporate banking business, the divestiture of non-core business units and the formation of strategic alliances. Consistent with this strategy, in 1997 and early 1998, the Corporation engaged in the following transactions and other strategic initiatives: Acquisitions and Business Expansions During 1997, the Corporation announced its intention to expand its retail distribution capacity in Argentina and to strengthen its presence in that country. In connection with this expansion program, the Corporation opened 17 branches in Argentina during 1997 and expects to open approximately 50 additional branches during 1998. In addition, in January of 1998, the Corporation completed its acquisition of Deutsche Bank Argentina S.A. ("Deutsche Argentina"), a subsidiary of Deutsche Bank A.G., for approximately $255 million in cash. In connection with this transaction, the Corporation acquired approximately $1.3 billion of loans and $1.5 billion of deposits. -4- The Corporation is also expanding its retail distribution capacity in Brazil. In connection with this expansion program, the Corporation opened 10 branches in Brazil during 1997 and expects to open 32 additional branches during 1998. During 1997, the Corporation continued to expand its Global Capital Markets business, including the hiring of additional sales and trading professionals, the opening of BancBoston Securities Inc. ("BSI"), the Corporation's Section 20 subsidiary, and the formation of a high yield securities unit. As part of this expansion effort, in early 1998, the Corporation realigned its operations in Asia to focus on capital markets, including debt underwriting and trading, foreign exchange and derivatives, as well as on trade services. In October of 1997, the Corporation completed its acquisition of Pacific National Corporation ("Pacific"), the holding company of Pacific National Bank of Nantucket, 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. Pacific had loans of $98 million, primarily residential and commercial real estate loans, and deposits of $108 million at the time of acquisition. Divestitures and Strategic Alliances During 1997, the Corporation sold its two national consumer lending subsidiaries, Fidelity Acceptance Corporation ("FAC") and Ganis Credit Corporation ("Ganis"). The Corporation sold FAC in the third quarter of 1997, resulting in a pre-tax gain of $68 million. In March of 1997, the Corporation sold approximately $950 million of Ganis loans for a pre-tax gain of $7.5 million and completed the sale of Ganis in June of 1997. In January of 1998, the Corporation completed its 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 credit card venture. Under the terms of the agreement, the Corporation contributed its national credit card portfolio of approximately $1.2 billion in receivables in exchange for cash, at par. The Corporation also received 19 percent of the common stock and $50 million of the preferred stock of the new company and an additional $5 million in cash. The Corporation retained its regional credit card portfolio of approximately $500 million in receivables. In February of 1998, the Corporation completed the sale of its 26% ownership interest in HomeSide, Inc., an independent mortgage banking company. The transaction will result in a pre-tax gain of approximately $165 million. In September of 1997, the Corporation announced its intention to exit its indirect auto loan business. As of December 31, 1997, the Corporation's indirect loan portfolio was approximately $1.3 billion. Other Initiatives In October of 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 improving customer service. This initiative will focus on process-intensive businesses in the U.S. including, among others, the New England regional consumer business. The Corporation expects to complete the internal analysis and design phase in mid-1998. -5- In January of 1998, the Corporation announced its plan to restructure its European operations by centralizing its operations in London. In connection with this restructuring plan, the Corporation anticipates closing its offices in Paris and Frankfurt during 1998. The Corporation intends to continue to explore strategic opportunities as they arise in order to expand its businesses in its selected markets, divest non-strategic businesses and improve service to its customers. Federal legislation was enacted in 1994 which permits certain interstate banking transactions. This legislation has facilitated, and is expected to continue to facilitate, consolidation within financial institutions that have separate operations in two or more states and within the financial services industry in general. See "Supervision and Regulation" for a discussion of the impact of this legislation upon the Corporation and its subsidiaries. SUPERVISION AND REGULATION The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies in the states and countries where the Corporation and its subsidiaries operate. The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are often intended by the regulators primarily for the protection of depositors or are aimed at carrying out broad public policy goals, rather than for the protection of security holders. Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Corporation and its subsidiaries are subject are discussed below along with certain regulatory matters concerning the Corporation and its bank subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Corporation and its subsidiaries. THE CORPORATION The Corporation, as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and is regulated under the provisions of the BHCA. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Under the BHCA, the Corporation is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing or controlling banks or furnishing services to, or acquiring premises for, its affiliated banks. The Corporation may, however, engage in and own voting shares of companies engaging in certain activities determined by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or to managing or controlling banks "as to be a proper incident thereto." The location of such "nonbank" subsidiaries of the Corporation is not restricted geographically under -6- the BHCA. The Corporation is required by the BHCA to file with the Federal Reserve Board periodic reports and such additional reports as the Federal Reserve Board may require. The Federal Reserve Bank of Boston performs periodic examinations of the Corporation and certain of its subsidiaries. Since the Corporation is also a bank holding company under the laws of Massachusetts, the Commissioner of Banks for The Commonwealth of Massachusetts has authority to require certain reports from the Corporation from time to time and to examine the Corporation and each of its subsidiaries other than national banking associations. Prior approval of the Massachusetts Board of Bank Incorporation also may be required before the Corporation may engage in certain acquisitions or other business expansions. Acquisitions by the Corporation of non-Massachusetts banks or bank holding companies may be subject to the prior approval by both the Massachusetts and the applicable state, federal or international banking regulators. Massachusetts has an interstate bank acquisition law which permits banking organizations outside Massachusetts to acquire Massachusetts banking organizations if the state law of the acquirer permits acquisitions of banking organizations in that state by Massachusetts- based banking organizations. In addition, federal interstate banking legislation permits bank holding companies to acquire banks in any state and authorizes interstate mergers by banks in any state. See "Legislation" below with respect to federal interstate banking legislation. Massachusetts has a business combinations law which provides that if any acquirer buys 5% or more of a target company's stock without the prior approval of the target company's board of directors, it generally may not (i) complete the acquisition through a merger, (ii) pledge or sell any assets of the target company, or (iii) engage in other self-dealing transactions with the target company for a period of three years. The prior board approval requirement does not apply if the acquirer buys at least 90% of the target company's outstanding stock in the transaction in which it crosses the 5% threshold or if the acquirer, after crossing the threshold, obtains the approval of the target company's board of directors and two-thirds of the target company's stock held by persons other than the acquirer. This legislation automatically applies to Massachusetts corporations, including the Corporation, which did not elect to "opt out" of the statute. Massachusetts law also provides for classified boards of directors for most public companies incorporated in Massachusetts, unless the company elected to "opt out" of the law. As a result of this law, the Corporation's Board of Directors is divided into three classes of Directors and the three-year terms of the classes are staggered. Other Massachusetts legislation exists which is intended to provide limited anti-takeover protection to certain Massachusetts corporations by preventing an acquirer of certain percentages of such corporation's stock from obtaining voting rights in such stock unless the corporation's other stockholders authorize such voting rights. The legislation automatically applies to certain Massachusetts corporations which have not elected to "opt out" of the statute. The Corporation, by vote of its Board of Directors, has "opted out" of the statute's coverage. In 1990, the Board of Directors of the Corporation adopted a stockholder rights agreement (the "Rights Agreement") providing for a dividend of one preferred stock purchase right for each outstanding share of common stock of the Corporation (the "Rights"). Under certain circumstances, the Rights would enable stockholders to purchase common stock of the Corporation or of an acquiring Corporation at a substantial discount. The dividend was distributed on July 12, 1990 to stockholders of record on that date. Holders of shares of the Corporation's common stock issued subsequent to that date receive the Rights with their shares. The Rights trade automatically with shares of the Corporation's common stock and become exercisable only under certain circumstances. -7- The purpose of the Rights Agreement is to encourage potential acquirers to negotiate with the Corporation's Board of Directors prior to attempting a takeover and to provide the Board with leverage in negotiating on behalf of all stockholders the terms of any proposed takeover. The Rights may have certain anti-takeover effects. The Rights should not interfere, however, with any merger or other business combination approved by the Board of Directors. For a further discussion of the Corporation's Rights Agreement, see the description of the Rights set forth in the Corporation's registration statement on Form 8-A relating to the Rights (including the Rights Agreement, dated as of June 28, 1990, between the Corporation and the Bank, as Rights Agent, which is attached as an exhibit to the Form 8-A) and the amendment thereto, which are incorporated herein by reference. THE CORPORATION'S BANK SUBSIDIARIES GENERAL The Corporation's bank subsidiaries are national banks subject to the supervision of, and regularly examined by, the OCC. The domestic deposits of the Corporation's subsidiary banks are insured (to the extent allowed by law) by the Bank Insurance Fund of the FDIC (the "BIF") and, accordingly, those banks are subject to the regulations of the FDIC. As members of the Federal Reserve System, the Corporation's bank subsidiaries are also subject to regulation by the Federal Reserve Board. Hospital Trust, as a member of the Federal Home Loan Bank of Boston, is also subject to the regulations of the Federal Housing Finance Board. FIRREA Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled bank or (ii) any assistance provided by the FDIC to a commonly controlled bank in danger of default. The term "default" is defined as the appointment of a conservator or receiver for such bank and "in danger of default" as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In addition, FIRREA broadened the enforcement powers of the federal banking agencies, including the power to impose fines and penalties over all financial institutions. Further, under FIRREA the failure to meet capital guidelines could subject a financial institution to a variety of regulatory actions, including the termination of deposit insurance by the FDIC. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") also provided for expanded regulation of financial institutions. Under FDICIA, banks are placed in one of five capital categories, ranging from "well-capitalized" to "critically undercapitalized," for which the federal banking agencies have established specific capital ratio levels. Pursuant to the agencies' regulations, an institution is considered "well capitalized" if it has a total risk-based capital ratio of at least 10%, a tier 1 risk-based capital ratio of at least 6%, a leverage capital ratio of at least 5% and is not subject to a cease and desist order, formal agreement, capital directive, or prompt corrective action directive that requires it to achieve or maintain a higher level of capital. At December 31, 1997, all of the Corporation's banking subsidiaries met the requirements of the "well capitalized" category. The capital categories of the Corporation's bank subsidiaries are determined solely for purposes of applying FDICIA's provisions, and such -8- capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's bank subsidiaries. OTHER REGULATORY RESTRICTIONS The FDIC's deposit insurance assessments are based on a risk-based system. The risk-based system places a bank in one of nine risk categories, principally on the basis of its capital level and an evaluation of the bank's risk to the BIF, and bases premiums on the probability of loss to the FDIC with respect to each individual bank. During 1997, the assessment premiums for the BIF risk-based system ranged from $0 to $.27 per $100 of insured deposits. The Corporation's domestic subsidiary banks and the subsidiaries of such banks are subject to a large number of other regulatory restrictions, including certain restrictions upon: (i) any extensions of credit by such banks to, from or for the benefit of the Corporation and the Corporation's nonbank affiliates (collectively with the Corporation, the "Affiliates"), (ii) the purchase of assets or services from or the sale of assets or the provision of services to Affiliates, (iii) the issuance of a guarantee, acceptance or letter of credit on behalf of or for the benefit of Affiliates, (iv) the purchase of securities of which an Affiliate is a principal underwriter during the existence of the underwriting and (v) investments in stock or other securities issued by Affiliates or acceptance thereof as collateral for an extension of credit. The Corporation and all of its subsidiaries, including the Bank, are also subject to certain restrictions with respect to engaging in the issue, flotation, underwriting, public sale or distribution of certain types of securities. The Federal Reserve Board permits subsidiaries of bank holding companies to underwrite and deal in securities consistent with the provisions of Section 20 of the Glass-Steagall Act of 1933. In the first quarter of 1997, following approval by the Federal Reserve Board, BSI commenced operations under Section 20. BSI offers corporate financing services and investments, including underwriting and dealing in debt securities, loan syndications, private placements, and financial advisory and other investment banking services. In addition, under both the BHCA and regulations which have been issued by the Federal Reserve Board, the Corporation and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of any property or the furnishing of any service. In operations in other countries, the Corporation and the Bank are also subject to restrictions imposed by the laws and banking authorities of such countries. The Corporation's bank subsidiaries are also required to maintain cash reserves against deposits and are subject to limitations, among others, upon (i) the nature and amount of loans which they may make to a borrower; (ii) the nature and amount of securities in which they may invest; (iii) the amount which may be invested in bank premises; (iv) the geographic location of their branches; and (v) the nature and extent to which they can borrow money. DIVIDENDS The payment of dividends by the Corporation is determined by its Board of Directors based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors, including applicable government regulations and policies and the amount of dividends payable to the Corporation by its subsidiaries. In 1997, the aggregate dividends declared by the Corporation on its common and preferred stock were approximately $322 million. For the first quarter of 1997, a dividend of $.44 per share was declared and paid on the Corporation's common stock. In each of the last three quarters of 1997, the Corporation declared and paid a dividend on its common stock of $.51 per -9- share. In the first quarter of 1998, the Corporation declared and paid a dividend on its common stock of $.58 per share. The Corporation is a legal entity separate and distinct from its subsidiary banks and its other nonbank subsidiaries. The Corporation's revenues (on a parent company only basis) result primarily from interest and dividends paid to the Corporation by its subsidiaries. The right of the Corporation, and consequently the right of creditors and stockholders of the Corporation, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries), except to the extent that claims of the Corporation in its capacity as a creditor may be recognized. It is the policy of the OCC and the Federal Reserve Board that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if after paying such dividends the bank or bank holding company would remain adequately capitalized. Federal banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. In addition, it is the position of the Federal Reserve Board that a bank holding company is expected to act as a source of financial strength to its subsidiary banks. Various laws, regulations and policies limit the ability of the Corporation's subsidiaries to pay dividends to the Corporation. Federal banking law requires the approval of the OCC if the aggregate total of the dividends declared by any of the Corporation's national bank subsidiaries in any calendar year will exceed the bank's net profits, as defined by applicable regulation, for that year combined with retained net profits for the preceding two years. In 1997, the Corporation's subsidiaries declared and paid to the Corporation an aggregate of approximately $1.1 billion of dividends. The payment of any future dividends by the Corporation's subsidiaries will be determined based on a number of factors, including the subsidiary's liquidity, asset quality profile, capital adequacy and recent earnings history. Information concerning the Corporation and its bank subsidiaries with respect to dividends is set forth in Note 15 to the Financial Statements in the Corporation's 1997 Annual Report to Stockholders which is included in Exhibit 13 hereto and which discussion is incorporated herein by reference. See the related discussions set forth below in "Capital" and "Legislation." CAPITAL Information concerning the Corporation and its bank subsidiaries with respect to capital is set forth in Note 14 to the Financial Statements and under "Capital Management," which appears on page 53 of the Corporation's 1997 Annual Report to Stockholders, which page is included in Exhibit 13 hereto and which information is incorporated herein by reference. See also "Legislation" below and "Dividends" above. LEGISLATION In addition to extensive existing government regulation, laws and regulations in the states and countries where the Corporation and its subsidiaries do business can change in unpredictable ways, often with significant effects on the way in which financial institutions may conduct business. The enactment of banking legislation such as FIRREA and FDICIA has affected the banking industry by, among other things, broadening the powers of the federal banking agencies in a number of areas. Subsequent banking legislation, such as the Riegle Community Development and Regulatory Improvement Act of 1994 and the Economic Growth and Regulatory Paperwork Reduction Act of 1996, have eased some of the regulatory burdens imposed on banks and bank holding companies, including certain FDICIA requirements, and are intended to make the bank regulatory system more efficient. Other legislation which has been -10- enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and non-banking institutions, including insurance companies, brokerage firms, mutual funds, investment banks and major retailers. In 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Act") was enacted. The Interstate Act's provisions, among other things: (i) permit bank holding companies to acquire control of banks in any state, subject to (a) specified maximum national and state deposit concentration limits; (b) any applicable state law provisions requiring that the acquired bank has to have been in existence for a specified period of up to 5 years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by banks in different states, including branching through bank mergers, subject to the provisions noted in (i) and to any state laws that opt in as of an earlier date or opt out of the provision entirely; (iii) authorize states to enact legislation permitting interstate de novo branching; and (iv) provide for certain additional limitations on foreign bank activities. The Interstate Act has facilitated, and is expected to continue to facilitate, consolidation within financial institutions that have separate operations in two or more states and within the financial services industry. Additional laws and regulations are considered from time to time that could affect the business of the Corporation, including a number of significant legislative proposals which, if adopted, would result in a fundamental restructuring of the financial services industry. The effect of any such legislation on the business of the Corporation and its subsidiaries cannot be accurately predicted. See also "Supervision and Regulation -- The Corporation" above. GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS In 1997, the U.S. economy performed exceptionally well. It grew by nearly four percent, created about 2.8 million new jobs, generated the first substantial gains in real income in 15 years and posted strong corporate earnings, pushing the U.S. equity market to record levels. As the economy enters its eighth consecutive year of expansion, 1998 should see continued growth, but at a more moderate and restrained pace. Economic contraction and currency devaluations in much of Asia are expected to dampen growth by producing a sharp deterioration in the U.S. trade position. At the same time, however, weakened currencies and surplus capacity in Asia should exert significant further downward pressure on domestic U.S. inflation. The Corporation's earnings and business are also affected by the policies of various government and regulatory authorities in New England and throughout the United States, as well as foreign governments and international agencies, including, in the United States, the Federal Reserve Board. Important functions of the Federal Reserve Board, in addition to those enumerated under "Supervision and Regulation" above, are to regulate the supply of money and of bank credit, to deal with general economic conditions within the United States and to be responsive to international economic conditions. From time to time, the Federal Reserve Board and the central banks of foreign countries have taken specific steps to effect changes in the value of the United States dollar in foreign currency markets, as well as to control domestic inflation and to control the country's money supply. The instruments of monetary policy employed by the Federal Reserve Board for these purposes (including interest rates and the level of cash reserves banks are required to maintain against deposits) influence, in various ways, the interest rates paid on interest bearing liabilities and the interest received on earning assets, as well as the overall level of bank loans, investments and deposits. Inflation has generally had a minimal impact on the Corporation because substantially all of its assets and -11- liabilities are of a monetary nature and a large portion of its operations are based in the United States, where inflation has been low. Prospective domestic and international economic and political conditions and the policies of the Federal Reserve Board and the Central Banks of Argentina and Brazil, as well as other domestic and international regulatory authorities, may affect the future business and earnings of the Corporation. The Corporation continues to monitor the economic situation in those countries in which the Corporation has local operations or cross-border exposure, particularly in Latin America and Asia. Additional information with respect to the countries where the Corporation has local operations or cross- border exposure is included in "Cross-Border Outstandings" and "Emerging Markets Countries" on pages 43 through 46 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which discussions are incorporated herein by reference. This section should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" contained in the Corporation's 1997 Annual Report to Stockholders on pages 29 through 54, which pages are included in Exhibit 13 hereto and which discussion is incorporated herein by reference. STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The information set forth below is being provided in accordance with Industry Guide 3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). AVERAGE BALANCES AND INTEREST RATES The information required by this item is presented on pages 55 through 57 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. CHANGE IN NET INTEREST REVENUE-VOLUME AND RATE ANALYSIS: 1997 COMPARED WITH 1996, AND 1996 COMPARED WITH 1995 The information required by this item is presented on page 58 of the Corporation's 1997 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. SECURITIES The following table sets forth the carrying values of securities held to maturity on the dates indicated:
December 31 1997 1996 1995 (In millions) U.S. Treasury $ 6 $ 3 $ 4 U.S. government agencies and corporations - mortgage-backed securities 538 535 523 States and political subdivisions 6 5 Foreign debt securities 11 11 11 Other equity securities 81 125 117 ------ - ---- ------ $ 636 $ 680 $ 660 ====== ====== ======
-12- The following table sets forth the carrying values of securities available for sale on the dates indicated:
December 31 1997 1996 1995 (In millions) U.S. Treasury $ 943 $ 1,675 $ 2,591 U.S. government agencies and corporations - mortgage-backed securities 5,860 3,801 3,037 States and political subdivisions 54 173 248 Foreign debt securities 1,375 1,133 685 Other debt securities 877 256 334 Marketable equity securities 216 217 222 Other equity securities 522 549 465 ------- ------- ------- $ 9,847 $ 7,804 $ 7,582 ======= ======= =======
The following tables set forth the relative maturities and weighted average interest rates of securities available for sale and held to maturity at December 31, 1997, excluding equity securities. Certain securities, such as mortgage- backed securities, may not become due at a single maturity date. Such securities have been classified within the category that represents the due dates for the majority of the instrument. Rates for states and political subdivisions are stated on a fully taxable equivalent basis assuming a 35% federal income tax rate, adjusted for applicable state and local income taxes net of related federal tax benefit.
After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years Total Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate AVAILABLE FOR SALE (Dollars in millions) U.S. TREASURY $ 111 5.7% $ 569 6.4% $ 128 5.8% $ 135 6.9% $ 943 6.3% U.S. GOVERNMENT AGENCIES AND CORPORATIONS - MORTGAGE-BACKED SECURITIES 247 5.3 744 6.4 1,248 6.4 3,621 6.7 5,860 6.5 STATES AND POLITICAL SUBDIVISIONS 48 3.6 6 5.0 54 3.8 FOREIGN DEBT SECURITIES 815 6.5 277 8.8 38 7.5 245 7.9 1,375 7.2 OTHER DEBT SECURITIES 3 8.7 433 7.9 437 6.9 4 7.7 877 7.4 ------- ------- ------- ------- ------- TOTAL CARRYING VALUE $ 1,224 6.1% $ 2,029 7.0% $ 1,851 6.5% $ 4,005 6.8% $ 9,109 6.7% ======= ======= ======= ======= =======
After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years Total Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate HELD TO MATURITY (Dollars in millions) U.S. TREASURY $ 6 5.0% $ 6 5.0% U.S. GOVERNMENT AGENCIES AND CORPORATIONS - MORTGAGE-BACKED SECURITIES $ 120 6.7% $ 237 7.0% $ 181 6.7% 538 6.8 FOREIGN DEBT SECURITIES 2 8.0 4 7.4 5 7.2 11 7.4 --- ----- ----- ----- ----- TOTAL CARRYING VALUE $ 8 5.7% $ 124 6.7% $ 242 7.0% $ 181 6.7% $ 555 6.8% === ===== ===== ===== =====
-13- LOANS AND LEASES A portion of the information required by this item is presented on page 38 of the Corporation's 1997 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table presents the maturities and interest rate sensitivity, based on original contractual terms, of the Corporation's loans at December 31, 1997, exclusive of domestic office loans secured by 1-4 family residential properties, domestic office loans to individuals and lease financing:
After One But Within Within After December 31, 1997 One Year Five Five Total (In millions) Years Years Commercial, industrial and financial $ 5,541 $ 7,056 $ 2,671 $ 15,268 Real estate Construction 164 96 11 271 Other 1,133 2,667 411 4,211 Overseas offices 10,211 1,528 377 12,116 -------- -------- ------- -------- $ 17,049 $ 11,347 $ 3,470 $ 31,866 -------- -------- ------- -------- Loans with predetermined interest rates $ 6,336 $ 2,400 $ 773 $ 9,509 Loans with floating interest rates 10,713 8,947 2,697 22,357 -------- -------- ------- --------- $ 17,049 $ 11,347 $ 3,470 $ 31,866 ======== ======== ======= =========
The Corporation does not have an automatic renewal policy for maturing loans. Rather, loans are renewed at the maturity date only at the request of those customers who are deemed to be creditworthy by the Corporation. Additionally, the Corporation reviews such requests in substantially the same manner as applications by new customers for extensions of credit. The maturity dates and interest terms of renewed loans are based, in part, upon the needs of the individual customer and the Corporation's credit review and evaluation of current and future economic conditions. Since these factors have varied considerably, and will most likely continue to do so, the Corporation believes it is impracticable to estimate the amount of loans in the portfolio which may be renewed in the future. NONACCRUAL LOANS AND LEASES The majority of the information required by this item is presented on page 40 of the Corporation's 1997 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. The following table presents a five-year analysis of the Corporation's loans and leases that were over ninety days past due and remained on accrual status:
December 31 1997 1996 1995 1994 1993 (In millions) Loans and leases over ninety days past due and on accrual status................. $ 31 $ 41 $ 56 $ 49 $ 59 ===== ===== ===== ===== =====
-14- RENEGOTIATED LOANS Loans are renegotiated when the Corporation determines that it will ultimately receive greater economic value by revising the terms than through foreclosure, liquidation or bankruptcy. Candidates for renegotiation must meet specific guidelines and undergo extensive due diligence reviews. Once a renegotiation takes place, the loan is subject to the accounting and disclosure rules prescribed by Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings," as amended by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure." Renegotiated loans at the end of each of the last five years were as follows:
December 31 1997 1996 1995 1994 1993 (In millions) Renegotiated loans.......................................... $ 0.3 $ 8 $ 33 $ 82 $ 243 ===== ===== ===== ===== =====
CROSS-BORDER OUTSTANDINGS The information required by this item is presented on pages 43 through 46 and 50 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. RESERVE FOR CREDIT LOSSES: ALLOCATION OF RESERVE FOR CREDIT LOSSES AND ANALYSIS OF RESERVE FOR CREDIT LOSSES The majority of the information required by this item is presented on pages 41 and 42 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. ALLOCATION OF RESERVE FOR CREDIT LOSSES Generally, the Corporation does not allocate its reserve for credit losses to specific loan and lease categories, because management views the reserve as being available for all categories of prospective loss. However, to be responsive to the Securities and Exchange Commission's Guides for Statistical Disclosures by Bank Holding Companies, the Corporation has allocated its year- end reserve for possible credit losses to the major loan and lease categories. The allocations result from giving consideration to management's evaluation of risk in the portfolios, current economic conditions, recent years' loss experience and levels of nonaccrual loans and leases. The following table presents the allocation of the reserve for credit losses by loan and lease financing category, with the excess between the total reserve and the amounts specifically allocated to each loan category identified as ''unallocated.'' The unallocated reserve is part of the general reserve of the Corporation and, as such, is available for both Domestic and International credit losses. The percentage of loans outstanding in each category to total loans is presented on page 38 of the Corporation's 1997 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. -15-
DECEMBER 31 1997 1996 1995 1994 1993 (Dollars in millions) Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total UNITED STATES Commercial, industrial and financial.. $228 32.0% $230 26.0% $221 24.8% $284 34.3% $290 30.8% Commercial real estate, including construction........................ 35 4.9 83 9.4 158 17.8 194 23.5 300 31.9 Consumer related loans Secured by 1-4 family residential properties............. 9 1.3 13 1.5 36 4.0 34 4.1 47 5.0 Other............................... 99 13.9 193 21.9 131 14.7 104 12.6 97 10.3 Lease financing....................... 10 1.4 16 1.8 22 2.5 21 2.5 18 1.9 ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- 381 53.5 535 60.6 568 63.8 637 77.0 752 79.9 INTERNATIONAL......................... 189 26.6 217 24.6 171 19.2 99 12.0 89 9.5 ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- 570 80.1 752 85.2 739 83.0 736 89.0 841 89.4 UNALLOCATED........................... 142 19.9 131 14.8 151 17.0 91 11.0 100 10.6 ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- $712 100.0% $883 100.0% $890 100.0% $827 100.0% $941 100.0% ==== ===== ==== ===== ==== ===== ==== ===== ==== =====
The above allocation reflects provisions for credit losses for International operations for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 of $61 million, $47 million, $60 million, $25 million and $26 million, respectively. International reserve transfers (to)from unallocated reserves and Domestic operations were $(38) million, $36 million, $67 million, $4 million and $0, respectively, for the same periods. DEPOSITS A portion of the information required by this item is presented on pages 55 through 57 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. The aggregate amount of deposits by foreign depositors in domestic offices averaged $1,580 million in 1997, $1,412 million in 1996 and $1,131 million in 1995. The following table presents the maturities of time certificates of deposit and other time deposits issued by domestic offices in denominations of $100,000 or more, at December 31, 1997:
Certificates Time of Deposit Deposits Total (In millions) Maturing within three months $ 1,762 $ 54 $ 1,816 After three but within six months 599 24 623 After six but within twelve months 486 34 520 After twelve months 303 59 362 ------- ------ ------- $ 3,150 $ 171 $ 3,321 ======= ====== =======
The majority of foreign office deposits are in denominations of $100,000 or more. RETURN ON EQUITY AND ASSETS The information required by this item is presented on page 28 of the Corporation's 1997 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. -16- Short-Term Borrowings The following table summarizes the Corporation's short-term borrowings for each of the three years ended December 31, 1997, 1996 and 1995:
Maximum Average Average Weighted Amount Amount Interest Balance Average Outstanding Outstanding Rate (Dollars in millions) At end of Interest During the During the During the Category of Aggregate Short-Term Borrowings Period Rate (1) Period Period Period For the Year Ended December 31, 1997 Federal funds purchased (2) $ 1,003 6.07% $ 2,184 $ 1,782 5.40% Term federal funds purchased (2) 2,530 5.78 2,530 1,834 6.91 Securities sold under agreements to repurchase (3) 1,789 5.25 2,872 2,401 5.31 Demand notes issued to the U.S. Treasury (4) 1,495 533 5.39 All other (5) 6,090 7.59 6,233 5,000 8.52 For the Year Ended December 31, 1996 Federal funds purchased (2) $ 527 5.21% $ 2,523 $ 1,348 5.35% Term federal funds purchased (2) 1,442 5.51 2,140 1,413 7.35 Securities sold under agreements to repurchase (3) 2,034 5.06 2,236 1,848 5.28 Demand notes issued to the U.S. Treasury (4) 704 6.01 1,183 390 5.37 All other (5) 3,801 10.93 3,801 2,372 12.65 For the Year Ended December 31, 1995 Federal funds purchased (2) $ 1,869 5.25% $ 1,920 $ 1,119 5.86% Term federal funds purchased (2) 870 5.80 2,058 1,409 5.16 Securities sold under agreements to repurchase (3) 1,688 6.24 2,935 1,983 7.31 Demand notes issued to the U.S. Treasury (4) 361 4.85 1,051 406 5.75 All other (5) 2,511 13.37 3,724 3,006 17.31
________________________________________________________________________________ (1) The weighted average interest rates at year-end are not necessarily indicative of the Corporation's normal borrowing rates, since interest rates for certain categories of borrowings are subject to short-term fluctuations. (2) Federal funds purchased are overnight transactions while term federal funds purchased have maturities in excess of one day. A large portion of federal funds purchased arise because of money market activity in federal funds for regional correspondent banks. (3) The majority of securities sold under agreements to repurchase are by domestic offices, mature within one year and are collateralized by U.S. Treasury and U.S. government agencies and corporations securities. (4) Demand notes issued to the U.S. Treasury represent depository liabilities that are not subject to reserve requirements and bear interest at one-quarter of one percent below the weekly average federal funds effective interest rate as published by the Federal Reserve Board. (5) The majority of other short-term borrowings represent short-term and medium- term bank notes issued by the Bank and secured and unsecured obligations of the Corporation's overseas branches and subsidiaries. -17- ITEM 2. PROPERTIES. - -------------------- The head offices of the Corporation and the Bank are located in a 37-story building at 100 Federal Street, Boston, Massachusetts. In 1997, the Bank leased approximately 92% of the building's approximately 1.3 million square feet. The Bank 's data processing and record keeping operations are located at Columbia Park in Boston. The Columbia Park facility, comprising approximately 425,000 square feet, and the land on which it is situated are owned by the Bank. In Waltham, Massachusetts, the Corporation owns two interconnected facilities housing 306,000 square feet of administrative space. In addition, the Bank leases operations facilities in Dedham and Canton, Massachusetts, which comprise approximately 202,000 square feet and 82,000 square feet, respectively. The headquarters for the Bank's Connecticut operations are located at 100 Pearl Street in Hartford. The Bank owns an undivided one-half interest in the Pearl Street location where it currently occupies approximately 68,000 square feet. The Bank also maintains regional offices in Connecticut, the largest of which is in Waterbury and comprises approximately 157,000 square feet of owned space in three interconnected buildings. The Bank's Connecticut operations and data processing facility is located in 80,000 square feet of leased space located in Windsor. The headquarters for the Bank's operations in Argentina are located in a 12-story historic landmark building in the center of Buenos Aires. The building consists of approximately 256,000 square feet and is owned by the Bank. In August of 1997, the Bank entered into a contract for a new headquarters building of approximately 500,000 square feet, located about ten blocks from the existing headquarters. The total project costs, including the land, building and furnishings, are estimated at $99.5 million. Construction is scheduled to start at the end of the first quarter of 1998 and to be completed in the second quarter of 2000. The headquarters for the Bank's operations in Brazil are in three interconnected buildings in the center of Sao Paulo. The Bank owns a total of 126,000 square feet in the three buildings and leases another 141,000 square feet. In addition, the Bank owns a 10-story, 111,000 square foot building in Sao Paulo where it has consolidated part of its Brazilian operations. Hospital Trust owns a 30-story building and a building adjacent thereto at One Hospital Trust Plaza, Providence, Rhode Island. Hospital Trust occupies approximately 56% of the complex's approximately 626,000 square feet. In addition, Hospital Trust maintains an operations center in East Providence, Rhode Island that also serves as the primary backup for the Bank's Columbia Park facility. The East Providence operations center, which consists of approximately 141,000 square feet, is owned by Hospital Trust. None of these properties is subject to any material encumbrance. The Corporation's subsidiaries also own or lease numerous other premises used in their domestic and foreign operations. -18- ITEM 3. LEGAL PROCEEDINGS. - -------------------------- The Corporation and its subsidiaries in 1997 were or currently are parties to a number of legal proceedings that have arisen in connection with the normal course of business activities of the Corporation, the Bank and the Corporation's other subsidiaries, including the following matters: Society Class Action. As previously reported, in 1990 a class action -------------------- complaint was filed in U.S. District Court for the District of Connecticut against Society for Savings Bancorp, Inc. ("Society"), two of its then senior officers and one former officer. The complaint, as subsequently amended, alleges that Society's financial reports for fiscal years 1988, 1989, and the first half of 1990 contained material misstatements or omissions concerning its real estate loan portfolio and other matters, in violation of Connecticut common law and of Sections 10(b) and 20 of the Exchange Act. The action was brought by a Society shareholder, individually and as a class action on behalf of purchasers of Society's stock from January 19, 1989 through November 30, 1990 and seeks damages in an unspecified amount. Society and the defendant officers have denied the allegations of the amended complaint and on July 14, 1995 filed a motion for summary judgment. That motion was denied in January 1997 and discovery has therefore resumed. Lender Liability Litigation. The Corporation's subsidiaries, in the normal --------------------------- course of their business in collecting outstanding obligations, are named as defendants in complaints or counterclaims filed in various jurisdictions by borrowers or others who allege that lending practices by such subsidiaries have damaged the borrowers or others. Such claims, commonly referred to as lender liability claims, frequently request not only relief from repayment of the debt obligation, but also recovery of actual, consequential, and punitive damages. Fidelity Acceptance Corporation Litigation. As noted above, in the third ------------------------------------------ quarter of 1997, the Corporation sold FAC, its consumer lending subsidiary. At the time of the sale, FAC and/or certain of FAC's subsidiaries (collectively referred to as FAC), were defendants in class action and other lawsuits brought in various states by FAC borrowers. These lawsuits, which include claims for punitive damages, often for large dollar amounts, challenge various of FAC's lending and insurance practices, including, among others, the placing of collateral protection insurance, calculating the amount of credit life insurance, and the determination of applicable interest rates. Pursuant to the terms of the sale of FAC, the Corporation has indemnified the buyer for various liabilities, including certain losses arising from such litigation pending at the time of the sale and for certain claims that may arise out of the operation of FAC prior to the sale. Management, after reviewing all actions and proceedings pending against the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's results of operations or financial condition. -19- ITEM 3A. EXECUTIVE OFFICERS OF THE CORPORATION. - ------------------------------------------------ Information with respect to the executive officers of the Corporation, as of March 1, 1998, is set forth below. Executive Officers are generally elected annually by the Board of Directors and hold office until the following year and until their successors are chosen and qualified, unless they sooner resign, retire, die or are removed. Except where otherwise noted, the positions listed for the officers are for both the Corporation and the Bank.
Executive Officer ----------------- Name Age Current Position Since - ----------------------------- --- -------------------------------------------------------------- ----------------- Charles K. Gifford 55 Chairman and Chief Executive Officer 1987 Henrique de Campos Meirelles 52 President and Chief Operating Officer 1994 Susannah M. Swihart 42 Chief Financial Officer and Treasurer of the Corporation and 1993 Chief Financial Officer of the Bank Paul F. Hogan 53 Vice Chairman, Corporate Banking 1993 Guilliaem Aertsen IV 50 Executive Vice President, Global Private Bank 1993 Melville E. Blake III 43 Executive Director, Strategic Planning 1993 Geraldo J. Carbone 41 Regional Manager, Brazil July 1997 Robert L. Champion, Jr. 53 Executive Director, Corporate Administrative Services 1993 Helen G. Drinan 50 Executive Vice President, Human Resources 1993 Karen B. Green 52 Executive Director, Marketing September 1997 Thomas J. Hollister 43 Executive Vice President, Consumer & Small Business Banking 1993 Ira A. Jackson 49 Executive Vice President, External Affairs 1987 Robert T. Jefferson 50 Comptroller 1993 John A. Kahwaty 47 Executive Director, Investor Relations 1996 Lindsey C. Lawrence 60 Executive Vice President, Global Consumer Banking 1996 Michael R. Lezenski 50 Executive Director, Technology and System Services 1993 Peter J. Manning 59 Executive Vice President, Mergers & Acquisitions 1990 John L. Mastromarino 44 Executive Vice President, Risk Management 1995 John D. McCarthy 47 Executive Director, Banking Operations September 1997 Kathleen M. McGillycuddy 48 Executive Director, Global Treasury & Investments 1996 Manuel R. Sacerdote 55 Regional Manager, Southern Cone (Argentina, Uruguay, Chile) 1994 Erich Schumann 48 Executive Director, Finance April 1997 Gary A. Spiess 57 General Counsel & Clerk of the Corporation and General Counsel, 1987 Secretary & Cashier of the Bank Bradford H. Warner 46 Executive Vice President, Global Capital Markets 1989
-20- All of the foregoing individuals have been officers of the Corporation or one of its subsidiaries for the past five years, except for Mss. Green and Lawrence and Mr. Mastromarino. Ms. Green joined the Corporation in 1996 and prior to that time had been Director of Consumer Marketing of BayBanks in 1996, Director of Marketing of BayBanks from 1995 to 1996 and Director of N.Y. Retail Marketing of Citibank from 1993 to 1995. Prior to assuming her current position with the Corporation, Ms. Lawrence was employed by BayBank Systems, Inc., a BayBanks subsidiary, as President and Chief Operating Officer from 1988 to 1994 and as President and Chief Executive Officer from 1994 to 1996. Mr. Mastromarino came to the Corporation in 1995 from the OCC, where he had served as Examiner-in-Charge of the OCC's London office from 1993 to 1995, and as the OCC's Examiner-in-Charge at the Corporation from 1988 to 1993. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------------------------------------------------------------------------------ The information required by this Item is presented on pages 27, 28 and 59 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA. - -------------------------------- The "Consolidated Selected Financial Data" of the Corporation for the six years ended December 31, 1997 appears on pages 27 and 28 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS. - ------------- The information in response to this Item is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 29 through 54 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. Recent Development. The Corporation has identified and is investigating the circumstances surrounding a series of loans to related borrowers made by an officer in its international private banking office in New York. These loans, which aggregate approximately $70 million, have been placed on nonaccrual pending the outcome of the investigation and an assessment of the collectibility of the loans. While the investigation is still at a preliminary stage, the Corporation anticipates a sizable charge-off against these loans. The Corporation is vigorously pursuing collection of these loans and to the extent losses are incurred, the Corporation intends to pursue claims under its fidelity bond. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------- The information required by this Item is presented on pages 48 through 50 of the Corporation's 1997 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- The financial statements and supplementary data required by this Item are included on the pages of the Corporation's 1997 Annual Report to Stockholders indicated below, which -21- pages are included in Exhibit 13 hereto, and such statements and data are hereby incorporated by reference.
PAGE OF 1997 ANNUAL Report to Stockholders Summary of Quarterly Consolidated Financial Information and Common Stock Data................................. 59 Report of Independent Accountants.......................... 61 BankBoston Corporation: Consolidated Balance Sheet as of December 31, 1997 and 1996.............................................. 62 Consolidated Statement of Income for the years ended December 31, 1997, 1996 and 1995................ 63 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.. 64 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995................ 65 Notes to Financial Statements.............................. 66 through 93
In February of 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This standard revises current disclosure requirements for employers' pensions and other retiree benefits, eliminates certain disclosures which are no longer useful and, to the extent practicable, standardizes disclosure for retiree benefits. This standard is effective for financial statements issued for periods ending after December 15, 1998, and will have no impact on the Corporation's consolidated financial condition or results of operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE. - -------------------- Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ Information concerning the Executive Officers of the Corporation which responds to this Item is contained in the response to Item 3A contained in Part I of this Report and is hereby incorporated by reference herein. The information that responds to this Item with respect to Directors is contained under the heading "Election of Directors" in the Corporation's definitive proxy statement for its 1998 Annual Meeting of Stockholders (the "Proxy Statement"). Information with respect to compliance by the Corporation's directors and executive officers with Section 16(a) of the Exchange Act is contained under the heading "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement. The foregoing information from the Proxy Statement is hereby incorporated by reference. -22- ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------- The information required in response to this Item is contained under the heading "Compensation of Executive Officers" in the Proxy Statement. The foregoing information from the Proxy Statement, with the exception of the section entitled "Compensation Committee Report on Executive Compensation," is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------ The information required in response to this Item is contained under the headings "Election of Directors," "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement. The foregoing information from the Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information required in response to this Item is contained under the heading "Interests of Directors and Executive Officers in Certain Transactions" in the Proxy Statement. The foregoing information from the Proxy Statement is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(1) The financial statements required in response to this Item are listed in response to Item 8 of this Report and are incorporated herein by reference. (a)(2) Financial statement schedules have been omitted because the information is either not required, not applicable, or is included in the financial statements or notes thereto. (a)(3) Exhibits 3(a) - Restated Articles of Organization of the Corporation, as amended through April 25, 1997, incorporated herein by reference to Exhibit 3 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and Exhibit 3(b) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (File No. 1-6522). 3(b) - By-Laws of the Corporation, as amended through January 1, 1998. 4(a) - Fiscal and Paying Agency Agreement, dated as of February 10, 1986, defining rights of holders of the Corporation's Subordinated Floating Rate Notes Due 2001, incorporated herein by reference to Exhibit 4(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1985 (File No. 1-6522). -23- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(3) Exhibits (cont'd) 4(b) - Fiscal and Paying Agency Agreement, dated as of August 26, 1986, defining rights of holders of the Corporation's Floating Rate Subordinated Equity Commitment Notes Due 1998 incorporated herein by reference to Exhibit 4(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1986 (File No. 1-6522). 4(c) - Subordinated Indenture, dated as of June 15, 1992, as amended by the First Supplemental Indenture dated as of June 24, 1993, and forms of notes defining rights of the holders of the Corporation's 6 7/8% Subordinated Notes due 2003, the 6 5/8% Subordinated Notes due 2005, the 6 5/8% Subordinated Notes due 2004, and the Subordinated Medium-Term Notes Due Nine Months or More from Date of Issue, incorporated herein by reference to Exhibit 4(d) to the Corporation's Registration Statement on Form S-3 (Registration Number 33-48418), Exhibits 4(e) and 4(f) to the Corporation's Current Report on Form 8-K dated June 24, 1993, Exhibit 4 to the Corporation's Current Report on Form 8-K dated November 15, 1993, Exhibit 4 to the Corporation's Current Report on Form 8-K dated January 5, 1994, and Exhibits 4(c) and 4(d) to the Corporation's Current Report on Form 8-K dated November 25, 1997 (File No. 1-6522). 4(d) - Senior Indenture, dated as of June 15, 1992, and forms of notes defining rights of the holders of the Corporation's Senior Medium-Term Notes Due Nine Months or More from the Date of Issue, incorporated herein by reference to Exhibit 4(c) to the Corporation's Registration Statement on Form S-3 (Registration Number 33-48418), Exhibit 4 to the Corporation's Current Report on Form 8-K dated June 15, 1994, Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated December 16, 1994 (File No. 1-6522), and Exhibits 4(a) and 4(b) to the Corporation's Current Report on Form 8-K dated November 25, 1997 (File No. 1-6522). 4(e) - Deposit Agreement, dated as of June 30, 1993, between the Corporation and the Bank, as Depositary, relating to the Corporation's Depositary Shares, each representing a one-tenth interest in the Corporation's 7 7/8% Cumulative Preferred Stock, Series F, incorporated herein by reference to Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated June 24, 1993 (File No. 1-6522). 4(f) - Indenture, dated as of November 26, 1996, and form of note defining rights of the holders of the Corporation's 8.25% Series A Junior Subordinated Deferrable Interest Debentures due 2026 and its 8.25% Series B Junior Subordinated Deferrable Interest Debentures due 2026, incorporated herein by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). -24- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(3) Exhibits (cont'd) 4(g) - Certificate of Trust of BankBoston Capital Trust I, dated as of November 20, 1996, incorporated herein by reference to Exhibit 4.3 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). 4(h) - Amended and Restated Declaration of Trust of BankBoston Capital Trust I, dated as of November 26, 1996, and form of certificate defining rights of the holders of its 8.25% Series A Capital Securities and its 8.25% Series B Capital Securities, incorporated herein by reference to Exhibit 4.5 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). 4(i) - Form of Guarantee Agreement in respect of the 8.25% Series A Capital Securities and the 8.25% Series B Capital Securities of BankBoston Capital Trust I, incorporated herein by reference to Exhibit 4.7 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19083). 4(j) - Indenture, dated as of December 10, 1996, and form of note defining rights of the holders of the Corporation's 7 3/4% Series B Junior Subordinated Deferrable Interest Debentures due 2026, incorporated herein by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(k) - Certificate of Trust of BankBoston Capital Trust II dated as of December 3, 1996, incorporated herein by reference to Exhibit 4.3 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(l) - Amended and Restated Declaration of Trust of BankBoston Capital Trust II, dated as of December 10, 1996, and form of certificate defining rights of the holders of its 7 3/4% Series B Capital Securities, incorporated herein by reference to Exhibit 4.5 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(m) - Form of Guarantee Agreement in respect of the 7 3/4% Series B Capital Securities of BankBoston Capital Trust II, incorporated herein by reference to Exhibit 4.7 to the Corporation's Registration Statement on Form S-4 (Registration Number 333-19111). 4(n) - Indenture, dated as of June 4, 1997, and form of note defining rights of the holders of the Corporation's Floating Rate Junior Subordinated Deferrable Interest Debentures due 2027, incorporated herein by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-3 (Registration Number 333-27229). 4(o) - Certificate of Trust of BankBoston Capital Trust III, dated as of May 14, 1997, incorporated herein by reference to Exhibit 4.3 to the Corporation's Registration Statement on Form S-3 (Registration Number 333-27229). -25- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(3) Exhibits (cont'd) 4(p) - Amended and Restated Declaration of Trust of BankBoston Capital Trust III, dated as of June 4, 1997, and form of certificate defining rights of the holders of its Floating Rate Capital Securities, incorporated herein by reference to Exhibit 4.5 to the Corporation's Registration Statement on Form S-3 (Registration Number 333-27229). 4(q) - Form of Guarantee Agreement in respect of the Floating Rate Capital Securities of BankBoston Capital Trust III, incorporated herein by reference to Exhibit 4.7 to the Corporation's Registration Statement on Form S-3 (Registration Number 333-27229). 4(r) - Rights Agreement, as amended through December 12, 1995, between the Corporation and the Bank, as Rights Agent, and the description of the Rights, incorporated herein by reference to the Corporation's registration statement on Form 8-A relating to the Rights, Exhibit 1 to such registration statement and Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated July 25, 1996 (File No. 1-6522). 10(a) - BankBoston Corporation 1982 Stock Option Plan, as amended through October 23, 1997.* 10(b) - BankBoston Corporation 1986 Stock Option Plan, as amended through October 23, 1997.* 10(c) - BankBoston Corporation 1991 Long-Term Stock Incentive Plan, as amended through October 23, 1997.* 10(d) - BankBoston Corporation 1996 Long-Term Incentive Plan, effective as of January 1, 1997, incorporated herein by reference to Exhibit G to the Joint Proxy Statement-Prospectus included in the Corporation's Registration Statement on Form S-4 (Registration No. 333-01761).* 10(e) - BankBoston Corporation and its Subsidiaries Performance Recognition Opportunity Plan, as amended effective June 23, 1994, incorporated herein by reference to Exhibit 10(c) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(f) - BankBoston Corporation Executive Deferred Compensation Plan, as amended, effective June 23, 1994, incorporated herein by reference to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -26- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(3) Exhibits (cont'd) 10(g) - BankBoston, N.A. Bonus Supplemental Employee Retirement Plan, as amended through June 23, 1994, incorporated herein by reference to Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(h) - Description of the Corporation's Supplemental Life Insurance Plan, incorporated herein by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988 (File No. 1-6522).* 10(i) - BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan, as amended, effective June 23, 1994, incorporated herein by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(j) - BankBoston Corporation Relocation Policy, as amended through October, 1990, incorporated herein by reference to Exhibit 10(j) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 1-6522).* 10(k) - Description of the Corporation's Supplemental Long-Term Disability Plan, effective as of February 10, 1994, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-6522).* 10(l) - BankBoston Corporation's Director Stock Award Plan, as amended effective as of January 1, 1995, incorporated herein by reference to Exhibit 10(m) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(m) - Form of Severance Agreement for the Chairman, President and Vice Chairman.* 10(n) - Form of Severance Agreement for certain other officers.* 10(o) - BankBoston Corporation Directors Deferred Compensation Plan, effective March 28, 1991, incorporated herein by reference to Exhibit 10(q) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -27- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(3) Exhibits (cont'd) 10(p) - BankBoston, N.A. Directors Deferred Compensation Plan, effective March 28, 1991, incorporated herein by reference to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(q) - BankBoston Corporation 1997 Stock Option Plan for Non-Employee Directors, effective as of April 1, 1997.* 10(r) - Description of the Corporation's Director Retirement Benefits Exchange Program.* 10(s) - 1978 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended through October 27, 1994, incorporated herein by reference to Exhibit 10.1 to BayBanks' Annual Report on Form 10-K for the year ended December 31, 1991 and Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(t) - 1988 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended, incorporated herein by reference to Exhibit 10.2 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(u) - Amendment, dated as of October 23, 1997, to 1988 Stock Option Plan for Key Employees of BayBanks, Inc. and Affiliates.* 10(v) - BayBanks, Inc., Incentive Compensation Plan, as amended, incorporated herein by reference to Exhibit 10.5 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(w) - BayBanks Supplemental Executive Retirement Plan, as amended through November 27, 1996, incorporated herein by reference to Exhibit 19.6 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, Exhibit 10.8 to BayBanks' Annual Report on Form 10-K for the year ended December 31, 1991, Exhibit 10.2 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and Exhibit 10.8 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959) and to Exhibits 10(y) and 10(z) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-6522).* - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -28- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(3) Exhibits (cont'd) 10(x) - BayBanks Profit Sharing Excess Benefit Plan, as amended, incorporated herein by reference to Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 and Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 0-959).* 10(y) - BayBanks Deferred Payment Plans Trust Agreement, as amended through October 27, 1994, incorporated herein by reference to Exhibit 19 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 and Exhibit 10.10 to BayBanks' Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-959).* 10(z) - Employment Agreement, dated as of December 12, 1995, by and among the Corporation, BayBanks, Inc., and William M. Crozier, Jr., incorporated herein by reference to Exhibit 99(d) to the Corporation's Registration Statement on Form S-4 (Registration No. 333-01761).* 10(aa) - Consulting Agreement, dated as of December 30, 1997, between the Corporation and William M. Crozier, Jr.* 10(bb) - Letter Agreement, dated as of August 15, 1997, between the Corporation and Henrique de Campos Meirelles.* 10(cc) - Lease, as amended through October 1, 1996, between BankBoston, N.A. and Equitable Federal Street Realty Company Limited Partnership, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991 and to Exhibits 10(gg), 10(hh), 10(ii), 10(jj) and 10(kk) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-6522). 10(dd) - Amendment of Lease, dated as of March 28, 1997, between BankBoston, N.A. and Equitable Federal Street Realty Company Limited Partnership. 10(ee) - Amendment of Lease, dated as of June 23, 1997, between BankBoston, N.A. and Equitable Federal Street Realty Company Limited Partnership. 10(ff) - Amendment of Lease, dated as of August 1, 1997, between BankBoston, N.A. and Equitable Federal Street Realty Company Limited Partnership. 10(gg) - Amendment of Lease, dated as of October 1, 1997, between BankBoston, N.A. and Equitable Federal Street Realty Company Limited Partnership. - ------------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -29- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - --------------------------------------------------------------------------- (a)(3) Exhibits (cont'd) 12(a) - Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits). 12(b) - Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits). 12(c) - Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (excluding interest on deposits). 12(d) - Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (including interest on deposits). 13 - Pages 27 through 59 and 61 through 93 of the Corporation's 1997 Annual Report to Stockholders. 21 - List of subsidiaries of BankBoston Corporation. 23 - Consent of Independent Accountants. 24 - Power of attorney of certain officers and directors (included on pages II-1 through II-2). 27 - Financial Data Schedule 99 - Notice of Annual Meeting and Proxy Statement for the Annual Meeting of the Corporation's Stockholders to be held April 23, 1998, incorporated herein by reference to the Corporation's filing under Regulation 14A of the Exchange Act (File No. 1-6522). (b) During the fourth quarter of 1997, the Corporation filed two Current Reports on Form 8-K. The current reports, dated October 16, 1997 and November 25, 1997, each contained information pursuant to items 5 and 7 of Form 8-K. The Corporation also filed a Current Report on Form 8-K dated January 15, 1998, which contained information pursuant to items 5 and 7 of Form 8-K. -30- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, and the Commonwealth of Massachusetts, on the 17th day of March, 1998. BANKBOSTON CORPORATION By: /s/ CHARLES K. GIFFORD -------------------------------------- (Charles K. Gifford) (Chairman and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates listed below. By so signing, each of the undersigned, in his or her capacity as a director or officer, or both, as the case may be, of the Corporation, does hereby appoint Charles K. Gifford, Henrique de Campos Meirelles, Susannah M. Swihart, Kathleen M. McGillycuddy, Robert T. Jefferson and Gary A. Spiess, and each of them severally, or if more than one acts, a majority of them, his or her true and lawful attorneys or attorney to execute in his or her name, place and stead, in his or her capacity as a director or officer or both, as the case may be, of the Corporation, any and all amendments to said report and all instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises as fully and to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and approving the acts of said attorneys and each of them.
SIGNATURE TITLE DATE - -------------------------------------------- ---------------------------- --------------------- Chairman and Chief /s/ CHARLES K. GIFFORD Executive Officer and - -------------------------------------------- Director March 17, 1998 (Charles K. Gifford) (Chief Executive Officer) President and Chief /s/ HENRIQUE DE CAMPOS MEIRELLES Operating Officer and March 17, 1998 - -------------------------------------------- Director (Henrique de Campos Meirelles) Chief Financial Officer and /s/ SUSANNAH M. SWIHART Treasurer - -------------------------------------------- (Chief Financial Officer) March 17, 1998 (Susannah M. Swihart) /s/ ROBERT T. JEFFERSON Comptroller March 17, 1998 - -------------------------------------------- (Chief Accounting Officer) (Robert T. Jefferson)
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SIGNATURE TITLE DATE - -------------------------------------------- ---------------------------- --------------------- /s/ WAYNE A. BUDD Director March 17, 1998 - -------------------------------------------- (Wayne A. Budd) /s/ JOHN A. CERVIERI JR. Director March 17, 1998 - -------------------------------------------- (John A. Cervieri Jr.) /s/ WILLIAM F. CONNELL Director March 17, 1998 - -------------------------------------------- (William F. Connell) /s/ GARY L. COUNTRYMAN Director March 17, 1998 - -------------------------------------------- Gary L. Countryman /s/ WILLIAM M. CROZIER, JR. Director March 17, 1998 - -------------------------------------------- (William M. Crozier, Jr.) /s/ ALICE F. EMERSON Director March 17, 1998 - -------------------------------------------- (Alice F. Emerson) /s/ THOMAS J. MAY Director March 17, 1998 - -------------------------------------------- (Thomas J. May) /s/ DONALD F. MCHENRY Director March 17, 1998 - -------------------------------------------- (Donald F. McHenry) /s/ PAUL C. O'BRIEN Director March 17, 1998 - -------------------------------------------- (Paul C. O'Brien) /s/ THOMAS R. PIPER Director March 17, 1998 - -------------------------------------------- (Thomas R. Piper) /s/ FRANCENE S. RODGERS Director March 17, 1998 - -------------------------------------------- (Francene S. Rodgers) /s/ JOHN W. ROWE Director March 17, 1998 - -------------------------------------------- (John W. Rowe) /s/ GLENN P. STREHLE Director March 17, 1998 - -------------------------------------------- (Glenn P. Strehle) /s/ WILLIAM C. VAN FAASEN Director March 17, 1998 - -------------------------------------------- (William C. Van Faasen) /s/ THOMAS B. WHEELER Director March 17, 1998 - -------------------------------------------- (Thomas B. Wheeler) /s/ ALFRED M. ZEIEN Director March 17, 1998 - -------------------------------------------- (Alfred M. Zeien)
II-2 EX-3.(B) 2 BY-LAWS OF THE CORPORATION EXHIBIT 3(b) ------------ [Logo of BANKBOSTON (TM)] BANKBOSTON CORPORATION ----------------- BY-LAWS ----------------- REVISED TO JANUARY 1, 1998 BY-LAWS OF BANKBOSTON CORPORATION ----------------- TABLE OF CONTENTS ARTICLE I MEETINGS OF THE STOCKHOLDERS
PAGE ---- SECTION 1. Place of Meeting; Adjournment......................... 1 SECTION 2. Annual Meeting........................................ 1 SECTION 3. Special Meetings...................................... 1 SECTION 4. Notices of Meetings................................... 1 SECTION 5. Quorum................................................ 3 SECTION 6. Organization.......................................... 3 SECTION 7. Voting by Stockholders; Proxies....................... 3 SECTION 8. Inspectors............................................ 4 SECTION 9. Action without Meeting................................ 4 ARTICLE II BOARD OF DIRECTORS SECTION 1. General Powers; Issue of Stock........................ 5 SECTION 2. Number, Qualification, Election and Term of Office............................................ 5 SECTION 3. Nominations for Director.............................. 5 SECTION 4. Quorum and Manner of Acting........................... 6 SECTION 5. First Meeting......................................... 7 SECTION 6. Regular Meetings...................................... 7 SECTION 7. Special Meetings...................................... 7 SECTION 8. Notices of Meetings................................... 7 SECTION 9. Organization of Meetings.............................. 8 SECTION 10. Order of Business..................................... 8 SECTION 11. Action by Directors without a Meeting................. 8 SECTION 12. Resignation........................................... 8 SECTION 13. Removal............................................... 8
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PAGE ---- SECTION 14. Vacancies............................................ 8 SECTION 15. Fees and Expenses of Directors....................... 9 SECTION 16. Validity of Acts of Directors........................ 9 SECTION 17. Transactions with the Corporation.................... 9 ARTICLE III COMMITTEES SECTION 1. Executive Committee.................................. 9 SECTION 2. Audit Committee...................................... 11 SECTION 3. Compensation Committee............................... 11 SECTION 4. Board Governance and Nominating Committee............ 12 SECTION 5. Community Investment Committee....................... 13 SECTION 6. Other Committees..................................... 13 SECTION 7. Changes in Committee Membership; Filling of Vacancies............................................ 13 SECTION 8. Records of Committee Action and Board of Directors' Approval.............................. 13 SECTION 9. Committee Proceedings................................ 14 SECTION 10. Action of Committees without a Meeting............... 14 SECTION 11. General Authority of Committees...................... 14 ARTICLE IV OFFICERS SECTION 1. Titles and Qualifications............................ 14 SECTION 2. Appointment and Terms of Office...................... 15 SECTION 3. Duties; Fidelity Bond................................ 15 SECTION 4. The Chairman of the Board and Chief Executive Officer 15 SECTION 5 The President and Chief Operating Officer............ 15 SECTION 6. The Vice Chairmen.................................... 15 SECTION 7. The Executive Officers............................... 15 SECTION 8. The Treasurer........................................ 16 SECTION 9. The Comptroller...................................... 16 SECTION 10. The Clerk and the Secretary of the Board of Directors................................... 16 SECTION 11. The General Auditor.................................. 16 SECTION 12. The Vice Presidents.................................. 16 SECTION 13. The Assistant Treasurers and Assistant Clerks.................................... 17 SECTION 14. Resignation.......................................... 17 SECTION 15. Vacancies............................................ 17
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PAGE ---- SECTION 16. Compensation of Officers, Employees and Other Agents........................................ 17 SECTION 17. Designated Officer................................... 17 ARTICLE V STOCK SECTION 1. Stock Certificates................................... 17 SECTION 2. Transfer of Stock.................................... 18 SECTION 3. Transfer Agent and Registrar; Regulations.......................................... 18 SECTION 4. Lost, Mutilated or Destroyed Certificates............ 18 SECTION 5. Record Date for Determination of Stockholders' Rights; Close of Transfer Books...................... 18 SECTION 6. Dividends............................................ 19 SECTION 7. Control Share Acquisitions........................... 19 ARTICLE VI GENERAL PROVISIONS SECTION 1. Offices.............................................. 19 SECTION 2. Seal................................................. 20 SECTION 3. Fiscal Year.......................................... 20 SECTION 4. Execution of Instruments............................. 20 SECTION 5. Voting of Securities................................. 20 SECTION 6. Powers of Attorney................................... 20 SECTION 7. Issue of Debt Securities and Other Obligations.................................... 21 SECTION 8. Corporate Records.................................... 21 SECTION 9. Indemnification of Directors, Officers and Others.......................................... 21 ARTICLE VII AMENDMENTS SECTION 1. General.............................................. 24
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PAGE ---- ARTICLE VIII EMERGENCY BY-LAWS SECTION 1. Effective Period......................................... 24 SECTION 2. Meetings of the Board of Directors....................... 24 SECTION 3. Emergency Location of Head Office........................ 24 SECTION 4. Preservation of Continuity of Management................. 24 SECTION 5. Immunity................................................. 24 SECTION 6. Amendment of Emergency By-Laws........................... 25
CERTIFICATE OF TRUE COPY I, the undersigned, ______________________________, hereby certify that I am the duly appointed Assistant Clerk of the Board of Directors of BANKBOSTON CORPORATION. and in that capacity have access to its corporate documents and records and have authority to certify to such documents and records, and I do hereby certify that the within document is a complete and correct copy of the By-Laws of said bank as they are in effect on this date. The table of contents is not a part of the By-Laws but is included therein as a matter of convenience. IN WITNESS WHEREOF, I have hereunto set my hand and affixed hereto the seal of BANKBOSTON CORPORATION this _____ day of ___________________________. _________________________________________ Assistant Clerk of the Board of Directors BANKBOSTON CORPORATION ---------- BY-LAWS ---------- ARTICLE I MEETINGS OF THE STOCKHOLDERS SECTION 1. Place of Meeting; Adjournment. Meetings of the stockholders may be held at the main office of the corporation in the City of Boston, County of Suffolk, Commonwealth of Massachusetts, or at such places within or without the Commonwealth of Massachusetts as may be specified in the notices of such meetings; provided, that, when any meeting is convened, the presiding officer, if directed by the Board of Directors, may adjourn the meeting for a period of time not to exceed 30 days if (a) no quorum is present for the transaction of business or (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders (i) to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders or (ii) otherwise to exercise effectively their voting rights. The presiding officer in such event shall announce the adjournment and date, time and place of reconvening and shall cause notice thereof to be posted at the place of meeting designated in the notice which was sent to the stockholders, and if such date is more than 10 days after the original date of the meeting the Clerk shall give notice thereof in the manner provided in Section 4 of this Article I. SECTION 2. Annual Meeting. The annual meeting of stockholders of the corporation for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date and at such time as shall be determined by the Board of Directors each year, which date and time may subsequently be changed at any time, including the year any such determination occurs. SECTION 3. Special Meetings. Except as provided in the Articles of Organization with respect to the ability of holders of preferred stock to call a special meeting in certain circumstances, special meetings of the stockholders may be called by the Chairman of the Board, the President or by a majority of the directors, and shall be called by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer upon the written application of stockholders who hold one hundred percent in interest of the capital stock of the corporation entitled to be voted at the proposed meeting. Such request shall state the purpose or purposes of the proposed meeting and may designate the place, date and hour of such meeting; provided, however, that no such request shall designate a date not a full business day or an hour not within normal business hours as the date or hour of such meeting. As used in these By-Laws, the expression business day means a day other than a day which, at a particular place, is a public holiday or a day other than a day on which banking institutions at such place are allowed or required, by law or otherwise, to remain closed. SECTION 4. Notices of Meetings. A printed notice of the place, date and hour and stating the purposes of each meeting of the stockholders shall be given by the Clerk (or other person -2- authorized by law or these By-Laws) at least l0 days before the date fixed for the meeting to each stockholder entitled to vote at such meeting, and to each other stockholder who, under the Articles of Organization or these By-Laws, is entitled to such notice, by leaving such notice with him or her at his or her residence or usual place of business, or by mailing such notice by mail, postage prepaid and addressed to such stockholder at his or her address as it appears in the records of the corporation. Such further notice shall be given by publication or otherwise, as may be required by law or as may be ordered by the Board of Directors. No notice need be given to any stockholder if such stockholder, or his or her authorized attorney, waives such notice by a writing executed before or after the meeting and filed with the records of the meeting or by his or her presence, in person or by proxy, at the meeting. It shall be the duty of every stockholder to furnish to the Clerk of the corporation or to the transfer agent, if any, of the class of stock owned by such stockholder, his or her post office address and to notify the Clerk or the transfer agent of any change therein. No business may be transacted at a meeting of the stockholders except that (a) specified in the notice thereof given by or at the direction of the Board of Directors or in a supplemental notice given by or at the direction of the Board of Directors and otherwise in compliance with the provisions hereof, (b) brought before the meeting by or at the direction of the Board of Directors or the presiding officer or (c) properly brought before the meeting by or on behalf of any stockholder who shall have been a stockholder of record at the time of giving of notice by such stockholder provided for in this paragraph and who shall continue to be entitled at the time of such meeting to vote thereat and who complies with the notice procedures set forth in this paragraph with respect to any business sought to be brought before the meeting by or on behalf of such stockholder other than the election of directors and with the notice provisions set forth in Section 3 of Article II with respect to the election of directors. In addition to any other applicable requirements, for business to be properly brought before a meeting by or on behalf of a stockholder (other than a stockholder proposal included in the corporation's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), the stockholder must have given timely notice thereof in writing to the Clerk of the corporation. In order to be timely given, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation (a) not less than 75 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation or (b) in the case of a special meeting or in the event that the annual meeting is called for a date (including any change in a date determined by the Board pursuant to Section 2 of this Article I) more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so received not later than the close of business on the 20th day following the day on which notice of the date of such meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. Such stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and record address of the stockholder proposing such business, (c) the class and number of shares of capital stock of the corporation held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice by the stockholder and (d) all other information which would be required to be included in a proxy statement or other filings required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Regulation 14A under the Exchange Act (the "Proxy Rules"). In the event the proposed business to be brought before the meeting by or on -3- behalf of a stockholder relates or refers to a proposal or transaction involving the stockholder or a third party which, if it were to have been consummated at the time of the meeting, would have required of such stockholder or third party or any of the affiliates of either of them any prior notification to, filing with, or any orders or other action by, any governmental authority, then any such notice to the Clerk shall be accompanied by appropriate evidence of the making of all such notifications or filings and the issuance of all such orders and the taking of all such actions by all such governmental authorities. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section 4; provided, however, that nothing in this Section 4 shall be deemed to preclude discussion by any stockholder of any business properly brought before such meeting. The presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and that business shall be disregarded. SECTION 5. Quorum. At all meetings of the stockholders, the holders of record of a majority in interest of all stock issued, outstanding and entitled to vote thereat, or, if two or more classes of stock are issued, outstanding and entitled to vote as separate classes, a majority in interest of each class, present in person or represented by proxy, shall constitute a quorum requisite for the transaction of business, except as otherwise provided by law, by the Articles of Organization or by these By-Laws. Stock of the corporation owned directly or indirectly by the corporation, if any, other than shares of stock held in a fiduciary capacity shall not be deemed outstanding for this purpose. If a quorum is not present or represented at any meeting of the stockholders, the stockholders present or represented and entitled to vote thereat, present in person or represented by proxy, by a majority vote, shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until the requisite amount of voting stock shall be present or represented. At any adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as first convened had there been a quorum. The stockholders present at a duly organized meeting may continue to transact business until adjournment notwithstanding the withdrawal of one or more stockholders or their proxy or proxies so as to leave less than a quorum present or represented. SECTION 6. Organization. At every meeting of the stockholders, the Chairman of the Board or the President, or in the absence of such officers, a person chosen by majority vote of the stockholders entitled to vote thereat, present in person or represented by proxy, shall act as chairman; and the Clerk, or in his or her absence, any Assistant Clerk, or in the absence of all such officers, any person present appointed by the chairman shall act as secretary of the meeting. The secretary of the meeting need not be sworn. SECTION 7. Voting by Stockholders; Proxies. Except as otherwise provided by law or the Articles of Organization, at all meetings of stockholders each stockholder shall have one vote for each share of stock entitled to vote and registered in his or her name. Any stockholder may vote in person or by proxy dated not more than six months prior to the meeting and filed with the secretary of the meeting. Every proxy shall be in writing, executed by a stockholder or his or her authorized attorney-in-fact, and dated. A proxy need not be sealed, witnessed or acknowledged. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of -4- them unless at or prior to exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. No proxy shall be valid after the final adjournment of the meeting. The attendance at any meeting of a stockholder who has therefore given a proxy shall not have the effect of revoking the same unless the stockholder so attending shall, in writing, so notify the secretary of the meeting at any time prior to the voting of the proxy. The corporation shall not, directly, or indirectly, vote any of its own stock other than shares of stock held in a fiduciary capacity. Any shares disqualified from being voted shall not be counted in determining the proportion of or the number of shares or votes required to pass or to vote upon or to consent or assent to any matter. Prior to each meeting of stockholders, the Clerk shall make or cause to be made a full, true and complete list, in alphabetical order, of stockholders entitled to notice of and to vote at the meeting showing the number of shares of each class having voting rights held of record by each. When a determination of stockholders entitled to vote at any meeting has been made as provided by law, such determination shall apply to any adjournment of such meeting, except when the determination has been made by the closing of the transfer books and the stated period has expired. At all meetings of stockholders, all questions, except as otherwise expressly provided by law or the Articles of Organization or these By-Laws, shall be determined by a majority vote of the stockholders entitled to vote thereon who are present in person or represented by proxy, or, if two or more classes of stock are entitled to vote as separate classes, a majority vote of the stockholders of each class, present in person or represented by proxy. Except as otherwise expressly provided by law, the Articles of Organization or these By-Laws, at all meetings of stockholders the voting shall be by show of hands or voice vote, but any qualified voter may demand a stock vote, by shares of stock, upon any question, whereupon such stock vote shall be taken by ballot, each of which shall state the name of the stockholder voting and the number of shares voted by him or her, and, if such ballot be cast by a proxy, it shall also state the name of the proxy. All elections shall be decided by plurality vote. SECTION 8. Inspectors. At each meeting of the stockholders, the polls shall be opened and closed by the proxies and ballots shall be received and taken in charge by and all questions touching on the qualifications of voters and the validity of proxies and the acceptance and rejection of votes shall be decided by two inspectors. Such inspectors shall be appointed by the Board of Directors before or at the meeting, or, if no such appointment shall have been made, then by the presiding officer at the meeting. If for any reason any inspector previously appointed shall fail to attend or refuse or be unable to serve, an inspector in place of the one so failing to attend or refusing or unable to serve shall be appointed, either by the Board of Directors or by the presiding officer at the meeting. No director or candidate for the office of director shall be appointed an inspector. The inspectors shall file with the Clerk or other secretary of the meeting a certificate setting forth the results of each vote taken by ballot at the meeting. SECTION 9. Action without Meeting. Any action which may be taken by stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action by a writing filed with the records of the meetings of stockholders. Any such consent shall be treated for all purposes as a vote at a meeting and may be described as such in any certificate or other -5- document filed with or furnished to any public official, governmental agency or other person having dealings with the corporation. ARTICLE II BOARD OF DIRECTORS SECTION 1. General Powers; Issue of Stock. The property and business of the corporation shall be managed by the Board of Directors which may exercise all powers of the corporation except such powers as are by law or by the Articles of Organization or by these By-Laws conferred upon or reserved to the stockholders. The Board of Directors and the Executive Committee shall have power to issue and sell or otherwise dispose of such shares of the corporation's authorized but unissued capital stock to such persons and at such times and for such consideration and upon such terms as it shall determine from time to time. SECTION 2. Number, Qualification, Election and Term of Office. The Board of Directors shall be composed of not less than three nor more than thirty-five directors. Within the limits specified, the number of directors shall be determined from time to time by vote of a majority of the entire Board; provided, however, that no decrease in the number of directors constituting the entire Board of Directors made pursuant to this Section 2 shall shorten the term of any incumbent director. The Board of Directors shall be divided into three classes, as nearly equal in number as possible. The Directors need not be stockholders. To be nominated to serve or to serve as a director, an individual must be eligible to serve as a director both at the time the Board of Directors votes to nominate such individual or receives notice in accordance with Section 3 of this Article of a stockholder's intent to nominate such individual and at the time of such election, and the stockholder making such nomination (and any party on whose behalf or in concert with whom such stockholder is acting) must be qualified at the time of making such nomination to have such individual serve as the nominee of such stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) if such individual is elected. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting held in the third year following the year of their election and until their successors are duly elected and qualified or until their earlier resignation, death or removal; provided, that in the event of failure to hold such an annual meeting or to hold such election at such meeting, the election of directors may be held at any special meeting of the stockholders called for that purpose. Directors, except those appointed by the Board of Directors to fill vacancies, shall be elected by a plurality vote of the stockholders, voting by ballot either in person or by proxy. As used in these By-Laws, the expression "entire Board" means the number of directors in office at a particular time. SECTION 3. Nominations for Director. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors, except as provided in the Articles of Organization with respect to nominations by holders of preferred stock in certain circumstances. Nominations of persons for election to the Board of Directors at the annual meeting may be made at the annual meeting of stockholders (a) by the Board of Directors or at the direction of the Board of Directors by any nominating committee or person appointed by the Board or (b) by any stockholder of record at the time of giving of notice provided for in this Section 3 and who shall continue to be entitled at the time of the meeting to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3 rather than the notice procedures with respect to other business set forth in Section 4 of Article I. Nominations by -6- stockholders shall be made only after timely notice by such stockholder in writing to the Clerk of the corporation. In order to be timely given, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 75 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation; provided, however, that in the event that the meeting is called for a date, including any change in a date determined by the Board pursuant to Section 2 of Article I, more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so received not later than the close of business on the 20th day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever first occurs. Such stockholder's notice to the Clerk shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation, if any, which are beneficially owned by the person, (iv) any other information regarding the nominee as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules, and (v) the consent of each nominee to serve as a director of the corporation if so elected; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice, (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a representation that the stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) is qualified at the time of giving such notice to have such individual serve as the nominee of such stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) if such individual is elected, accompanied by copies of any notification or filings with, or orders or other actions by, any governmental authority which are required in order for such stockholder (and any party on whose behalf such stockholder is acting) to be so qualified, (v) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder and (vi) such other information regarding such stockholder as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth herein. The presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 4. Quorum and Manner of Acting. One-third of the directors in office (but in no event fewer than two) shall constitute a quorum for the transaction of business at any meeting and, except as otherwise provided by law or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Directors shall be deemed present at a meeting when present in person or by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. In the absence of a quorum, a majority of the directors -7- present, or if only two directors are present, either director, or the sole director present, may adjourn any meeting to a day certain or from time to time until a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted if the meeting had been held when originally called. A director may not vote or otherwise act by proxy. SECTION 5. First Meeting. The Board of Directors elected at any annual meeting of stockholders shall meet at the Head Office of BankBoston, N.A. in the City of Boston and Commonwealth of Massachusetts, or at such other location as the Board may determine, promptly after the final adjournment of such meeting or as soon as practicable (but not more than 30 days) thereafter for purposes of organization, the election of officers for the succeeding year and the transaction of other business. No notice of such meeting need be given. SECTION 6. Regular Meetings. Except for the first meeting of the Board of Directors to be held immediately following the annual election of directors, regular meetings of the Board of Directors shall be held on the fourth Thursday in each month, except the month in which the annual election of directors is held, at one o'clock in the afternoon in the directors' room at the Head Office BankBoston, N.A. in the City of Boston, or at such other time or at such other place, or both, as shall be designated in the notice of meeting given to the directors as provided in these By-Laws. If the day designated for a regular meeting of the Board of Directors would not be a business day (as defined in Section 3 of Article I of these By-Laws) at the place where the meeting is to be held, then the meeting shall be held on such other business day as the Board of Directors may have previously designated, or if no such day shall have been designated, the meeting shall be held on the first business day at such place preceding the date originally designated for such meeting. Any regular meeting of the Board of Directors may be dispensed with by an appropriate vote passed by the Board of Directors at any prior meeting. SECTION 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Clerk at the written request of three or more directors. Special meetings of the Board of Directors may be held at such place and time as may be designated in the call of the meeting. SECTION 8. Notices of Meetings. Notice of the time and place of each regular or special meeting of the Board of Directors shall be given to each director at least 48 hours before such meeting if delivered personally or sent by mail or at least 24 hours before such meeting if given by telephone, telex, telegraph or other electronic means. Notice by mail shall be deemed to be given when deposited in the post office or a letter box in postage-paid sealed wrappers or when transmitted by telegraph or telex, and addressed separately to each director at his or her address appearing on the records of the corporation. Notices of meetings of the Board of Directors need not include a statement of the business to be transacted thereat unless required by law or these By-Laws. No notice of any adjourned meeting of the Board of Directors need be given other than by announcement at the session of the meeting which is being adjourned. Failure to give any such notice of any meeting, or any irregularity in the notice thereof, shall not invalidate any proceedings taken thereat if a quorum is present and if all absent directors, either before or after the meeting, shall sign a waiver of notice or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the minutes of the meetings to which they relate. -8- SECTION 9. Organization of Meetings. At each meeting of the Board of Directors, the Chairman of the Board or the President, or, in their absence, an officer designated by the Chairman of the Board, or in the absence of all such officers, a director chosen by a majority of the directors present shall act as chairman. The Clerk, or, in his or her absence, any person appointed by the chairman, shall act as secretary of the meeting and keep minutes of the proceedings. The secretary of the meeting need not be sworn. SECTION 10. Order of Business. At all meetings of the Board of Directors, business shall be transacted in the order determined by the chairman of the meeting, subject to approval of the directors present thereat. SECTION 11. Action by Directors without a Meeting. Unless otherwise restricted by the Articles of Organization or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or of such committee. Any such consent shall be treated for all purposes as a vote duly adopted by the Board of Directors or such committee at a meeting and may be described as such in any certificate or other document filed with or furnished to any public official, governmental agency or other person having dealings with the corporation. SECTION 12. Resignation. Any director may resign at any time by giving written notice of his or her resignation to the Chairman of the Board or the President or the Clerk. Such resignation shall take effect upon its receipt or at any later date specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 13. Removal. A director may be removed by the affirmative vote of a majority of the shares outstanding and entitled to vote in the election of directors only for cause. A director may be removed for cause only after reasonable notice and opportunity to be heard before the stockholders. For such time as the corporation is subject to paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws, "cause" with respect to the removal of any director by the stockholders shall mean only (a) conviction of a felony, (b) declaration of unsound mind by order of court, (c) gross dereliction of duty, (d) commission of an action involving moral turpitude, or (e) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the corporation. If at any time the corporation shall no longer be subject to paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws, (a) a director may be removed from office with or without cause by the vote of the holders of a majority of the shares entitled to vote in the election of directors and may be removed from office with cause by vote of a majority of the directors then in office, and (b) a director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him or her. SECTION 14. Vacancies. The Board of Directors may act notwithstanding a vacancy or vacancies in its membership; but if the office of any director shall become vacant by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a director or otherwise, such vacancy or vacancies shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum. Any director -9- elected in accordance with this Section 14 shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until his or her successor shall have been elected and qualified or until his or her earlier resignation, death or removal. SECTION 15. Fees and Expenses of Directors. Each director who is not an officer or employee of the corporation or any of its affiliates may be paid such fees for his or her services and for attendance at meetings of the Board of Directors or of any committee thereof as the Board of Directors may determine from time to time to be appropriate. Such fees may be payable currently or on a deferred basis. In addition, each such director shall be entitled to reimbursement for reasonable expenses incurred by him or her in order to attend meetings of the Board of Directors and committees thereof or otherwise in connection with the performance of his or her duties as a director. SECTION 16. Validity of Acts of Directors. All action taken by any meeting of the Board of Directors or of a committee of the directors or by any person acting as a director shall, notwithstanding that it shall afterwards be discovered that there was some defect in the election or appointment or continuance in office of any such director or person acting as a director, or that they or any of them were disqualified, or had vacated office, or were not entitled to vote in relation to the matter acted upon, be as valid as if such person had been duly elected or appointed, had continued in office and was qualified to be a director and entitled to vote on such matter. SECTION 17. Transactions with the Corporation. No contract or other transaction between the corporation and one or more of its directors or between the corporation or any other corporation, partnership, voluntary association, trust or other organization of which any of its directors is a director or officer or in which he or she has any financial interest shall be void or voidable for this reason or because any such director is present at or participates in the meeting of the Board of Directors or of the committee thereof which authorizes the contract or transactions or because his or her vote is counted for such purpose (a) if the material facts as to the contract or transaction and as to his or her relationship or interest are disclosed to the Board of Directors or such committee and the Board of Directors or such committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of disinterested directors even though the disinterested directors be less than a quorum or (b) if the material facts as to the contract or transaction and as to his or her relationship or interest are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of the shareholders or (c) if the contract or transaction is fair and reasonable as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, such committee or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee thereof which authorizes the contract or transaction. ARTICLE III COMMITTEES SECTION 1. Executive Committee. There shall be an Executive Committee composed of the Chairman of the Board, the President and such number of other directors as the Board of Directors may appoint from time to time by resolution passed by the vote of a majority of the entire Board. The Board of Directors may also, from time to time, by similar resolution, appoint one or more alternate members of the Executive Committee who may attend and act in the place of any absent -10- or disqualified member or members of the Executive Committee at any meeting thereof. Subject to the provisions of Section 6 of this Article III, the term of office of any appointed member or alternate member of the Executive Committee shall expire on the date specified in the resolution of appointment or any earlier date on which he or she ceases to be a director. Any director who has served as a member or alternate member of the Executive Committee shall be eligible for reappointment to a new term of office. During the intervals between meetings of the Board of Directors, the Executive Committee, unless expressly provided otherwise by law or these By- Laws, shall have and may exercise all the authority of the Board of Directors, except that it shall not be entitled to (i) change the principal office of the corporation; (ii) amend or repeal these By-Laws or to adopt new by-laws; (iii) elect officers required by law to be elected by the stockholders or directors or to fill vacancies in any such offices; (iv) change the number of the Board of Directors or to fill vacancies in the Board of Directors; (v) remove officers or directors from office; (vi) fix the remuneration of any director for serving on the Board of Directors or any Committee thereof or for services to the corporation in any other capacity; (vii) authorize the payment of any dividend or distribution to stockholders; (viii) authorize the reacquisition for value of stock of the corporation; or (ix) authorize a merger of a subsidiary entity into the corporation. In addition to its other duties, the Executive Committee shall establish the quarterly provision and reserve for credit losses, make recommendations concerning dividends and shall be available to the Chairman of the Board, at his discretion, to discuss strategic opportunities. The action taken by the Executive Committee at each meeting shall be reported to the Board of Directors and shall be subject to alteration or repeal by the latter, provided that no alteration or repeal by the Board of Directors of action taken by the Executive Committee shall prejudice the rights or acts of any third person. The Executive Committee shall hold meetings at such times and places and upon such notice as it may from time to time determine. Other meetings of the Executive Committee may be called at any time by the Chairman of the Board or the President or by any two members of the Executive Committee or by the Secretary of the Board of Directors at the written request of the person or persons entitled to call such a meeting. -11- SECTION 2. Audit Committee. There shall be an Audit Committee composed of such number of directors (not less than three) as the Board of Directors, by resolution passed by the vote of a majority of the entire Board may appoint, none of whom shall be an employee of the corporation. The duties of the Audit Committee shall be (a) to recommend to the Board of Directors for approval by the stockholders the appointment of a firm of independent public accountants ("the Auditors") to audit the accounts of the corporation and such of its subsidiaries as the Committee may recommend for the financial year in respect of which such appointment is made; (b) to make, or cause to be made by the Auditors, such examinations or audits of the affairs and operations of the corporation or of any one or more of its subsidiaries, of such scope, with such objects, and at such times or intervals as the Committee may determine in its discretion or as may be ordered by the Board of Directors or the Executive Committee; (c) to submit to the Board of Directors as soon as may be convenient following the conclusion of each examination or audit made by or at the direction of the Committee, a written report relative thereto; (d) to oversee the activities of the General Auditor and his or her staff. The Committee shall also be responsible for conducting periodic performance evaluations and establishing the compensation of the General Auditor; and (e) to review matters associated with internal control and the management of risk. A notation with respect to each report made to the Board of Directors by the Audit Committee and of the action taken thereon by the Board of Directors shall be made in the minutes of the latter. SECTION 3. Compensation Committee. There shall be a Compensation Committee composed of such number of directors as the Board of Directors, by resolution passed by vote of a majority of the entire Board, may appoint, none of whom shall be an employee of the corporation or any subsidiary. The duties of the Compensation Committee shall be (a) to review and approve the corporation's overall executive compensation policy and strategy; (b) to review and approve (and in the case of the Chairman of the Board and the President and other employee Directors, review and recommend that the Board of Directors approve) the total compensation for Executive Officers and such other senior executives of the corporation as the Committee shall determine from time to time; (c) to review and approve the design of and material changes to the benefit plans, incentive plans and arrangements established for Executive Officers and other senior executives of the corporation as the Committee shall determine from time to time; -12- (d) to review and recommend that the Board of Directors approve all stock option and stock incentive plans for employees of the corporation and its subsidiaries; (e) to execute as it sees fit from time to time the powers and to discharge the duties vested in it from time to time by the terms of any pension or other benefit plan or arrangement affecting employees of the corporation and its subsidiaries; (f) to review diversity representation at the senior and mid-management level; (g) to conduct an annual evaluation of the Chairman of the Board; (h) to review succession and development plans, candidate selection and major organizational changes affecting Executive Officers and such other senior executives of the corporation and its subsidiaries as the Committee shall determine from time to time; and (i) to perform such functions as may be assigned to it from time to time by the Board of Directors. SECTION 4. Board Governance and Nominating Committee. There shall be a Board Governance and Nominating Committee composed of such number of directors (no more than two of which may be an Executive Officer) as the Board of Directors, by resolution passed by vote of a majority of the entire Board, may appoint. The Chairman of the Board shall serve as a member of the Committee. The duties of this Committee shall be (a) to review the size and composition of the Board of Directors and the tenure of directors; (b) to recommend criteria for qualifications for Board membership, such as experience, affiliations, and personal characteristics; (c) to review the qualifications of individual nominees for director as recommended by the Chairman of the Board or by a stockholder and to make recommendations to the Board of Directors; (d) to review the composition of the committees as recommended by the Chairman of the Board; (e) to review the compensation and benefits of non-employee Directors and to make recommendations to the Board of Directors; and (f) to evaluate the effectiveness of the Board of Directors; (g) to evaluate the responsibilities and effectiveness of Board Committees and to make recommendations to the Board with respect thereto; (h) to perform such other functions as may be assigned to it from time to time by the Board of Directors. -13- SECTION 5. Community Investment Committee. The Board of Directors may from time to time appoint a Community Investment Committee composed of not less than three nor more than five directors. The duties of the Committee shall be from time to time to review and evaluate the policies established by the corporation's subsidiary banks relating to the discharge by the subsidiary banks of their responsibilities under the Community Reinvestment Act of 1977, as amended (Section 2901 et seq. of Title 12 of the United States Code) and regulations thereunder, or any other applicable Federal or state law or regulations thereunder relating to substantially the same subject as the Community Reinvestment Act of 1977, as amended, and oversee the implementation of such policies by the corporation's subsidiary banks and make reports to the Board of Directors from time to time of its findings and recommendations. SECTION 6. Other Committees. The Board of Directors may, from time to time, by resolution passed by the vote of a majority of the entire Board, constitute such other standing or special committees as it deems desirable and may dissolve any such committee by like resolution at its pleasure. Each such committee shall have such authority and perform such duties not inconsistent with law and these By-Laws as may be assigned to it by the Board of Directors. Vacancies in any such committee shall be filled by resolution passed by the vote of a majority of the entire Board. No such committee shall be granted or shall exercise any authority which shall have been delegated to another committee by these By-Laws or by resolution of the Board of Directors or which, in the absence of such delegation, could not be exercised by the Executive Committee. SECTION 7. Changes in Committee Membership; Filling of Vacancies. The Board of Directors by resolution passed by a vote of the majority of the entire Board may at any time or from time to time (a) increase or reduce the number of members of any committee, within any applicable limits imposed by these By-Laws, (b) remove any member from any committee, (c) appoint a director to fill a vacancy in, or to be an additional member of, any committee, and (d) discharge any committee except a standing committee established pursuant to this Article III. SECTION 8. Records of Committee Action and Board of Directors' Approval. Each committee appointed by the Board of Directors shall keep a record of its acts and proceedings which shall be open for inspection at any time by any director. Such record shall be submitted to the Board of Directors at such time or times as may be required by these By-Laws or as may be requested by the Board of Directors. Failure to submit such record, or failure of the Board of Directors to approve any action indicated therein shall not invalidate any action otherwise lawful, to the extent that it has been carried out by the corporation prior to the time the record of such action was, or should have been, submitted to the Board of Directors as herein provided. The action of the Board of Directors at any meeting with respect to action taken by any standing committee shall be recorded in the minutes of the meeting. -14- SECTION 9. Committee Proceedings. In the absence of specific provisions in these By-Laws or regulations imposed by the Board of Directors, a committee may meet and adjourn and otherwise regulate its meetings as it thinks fit. A committee may appoint a chairman of its meetings if none has been appointed by the Board of Directors or is designated elsewhere in this Article III. If no such chairman has been appointed, or if at any meeting the chairman is not present within five minutes after the time appointed for the holding of the meeting, the members present may choose one of their number to be chairman of the meeting. A quorum for the transaction of business at any meeting of a committee shall be a majority of the fixed number of members thereof for the time being (whether or not any seat is vacant) unless a different rule shall have been adopted by a resolution passed by the vote of a majority of the Board of Directors. A resolution passed by the vote of a majority of the members present at the time of voting if a quorum is present shall be the act of the committee. In the case of an equality of votes the Chairman shall have a second or casting vote. A committee cannot sub-delegate any of its powers or duties within its membership or to any other person or persons unless authorized to do so by the Board of Directors or these By-Laws. Committee members cannot vote by proxy. SECTION 10. Action of Committees without a Meeting. Any action required or permitted to be taken by a committee of the Board of Directors may be taken without a meeting if all members of the committee consent thereto in writing either before or after the action is taken and the writing or writings evidencing such consent are filed with the minutes of proceedings of such committee. For all purposes of these By-Laws, any such consent shall constitute a resolution duly passed by such committee. SECTION 11. General Authority of Committees. Any committee appointed by the Board of Directors pursuant to this Article III shall be at liberty (a) to meet and confer with employees of the corporation and its subsidiaries on all matters relating to the work of the committee which fall within the purview of such employees and to be informed by any of them as to the policies, practices, and controls of the division or department of the corporation or of the subsidiary of the corporation to which he or she is assigned; and (b) to examine all reports which are relevant to the work of the committee (i) made by the corporation or any of its subsidiaries to regulatory authorities and (ii) of examinations of the corporation or any of its subsidiaries made by regulatory authorities. ARTICLE IV OFFICERS SECTION 1. Titles and Qualifications. The officers of the corporation shall be a Chairman of the Board, a President, a Treasurer, a Comptroller, a Clerk, a General Auditor, one or more Vice Presidents of any rank and such other officers including one or more Vice Chairmen as may be appointed from time to time in accordance with these By-Laws. Except as otherwise provided by law, the duties of any two officers may be discharged by the same person, but the President shall not serve at the same time as Treasurer, Comptroller, or Clerk. The Chairman of the Board, and the President must be directors. -15- SECTION 2. Appointment and Terms of Office. The Chairman of the Board, the President, any Vice Chairman, any Executive Vice President, the Treasurer, the Comptroller, the Clerk and the General Auditor shall be chosen by a majority vote of the entire Board at the first meeting of the Board of Directors following each annual meeting of stockholders (or special meeting of stockholders in lieu of such annual meeting) or by the Board of Directors from time to time and each shall serve at the pleasure of the Board unless he or she sooner resigns, retires, dies, is removed or becomes disqualified. Other officers may be appointed from time to time by the Board of Directors, the Chairman of the Board, the President, any Vice Chairman, any Executive Vice President or any other Executive Officer. Each other officer shall have such title, exercise such power and perform such duties and hold office for such term as shall be determined by the Board or the appointing officer as the case may be. SECTION 3. Duties; Fidelity Bond. The duties and authority of each officer of the corporation, other than as set forth in these By-Laws, shall be prescribed and may be varied from time to time by the Board of Directors, or the Chairman of the Board, or the President, as the case may be. The Board of Directors shall provide for such bond and fidelity insurance covering the officers of the corporation and for the faithful and honest discharge of their duties as the Board may determine. Such bonds or insurance may be in individual, schedule or blanket form and the premiums therefor shall be paid by the corporation. SECTION 4. The Chairman of the Board and Chief Executive Officer. The Chairman of the Board shall be the Chief Executive Officer of the corporation and shall have the general control and management of the business and affairs of the corporation. When present, he or she shall preside at all meetings of the Board of Directors and of stockholders. He or she shall have such powers and duties as usually are incident to the Office of Chief Executive Officer and shall perform such other duties as may be imposed on him or her by law, the Articles of Organization and these By-Laws, or as may be assigned to him or her by the Board of Directors. SECTION 5. The President and Chief Operating Officer. The President shall be the Chief Operating Officer of the corporation and shall have the day to day responsibility for the control and management of its operations of the corporation. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors and the stockholders. The President shall be subject to the direction of the Board of Directors and of the Chairman of the Board under whose direct supervision he or she shall be. The President shall perform such duties as may be imposed on him or her by law, the Articles of Organization and these By-Laws or as may be assigned to him or her by the Board of Directors or the Chairman of the Board. He or she shall have such powers and duties as are usually incident to the Office of President and Chief Operating Officer. SECTION 6. The Vice Chairmen. Each Vice Chairman shall perform the duties imposed upon him or her by these By-Laws or assigned to him or her by the Board of Directors, Chairman of the Board or the President. The Vice Chairmen shall be senior in rank to the Vice Presidents of any rank. Section 7. The Executive Officers. The Chairman of the Board, the President, any Vice Chairman, any Executive Vice President, the Clerk, and such other Executive Officers as may be so designated from time to time by the Board of Directors shall be the Executive Officers of the corporation. -16- SECTION 8. The Treasurer. The Treasurer shall have custody and control over all funds and securities of the corporation, maintain full and adequate accounts of all moneys received and paid by him or her on account of the corporation and, subject to the control of the Board of Directors shall discharge all duties incident to the office of Treasurer. The Treasurer shall have authority, in connection with the normal business of the corporation, to sign or endorse negotiable instruments, contracts, leases and other documents. The Treasurer shall render an account of his or her transactions to the Board of Directors whenever and as often as may be requested. SECTION 9. The Comptroller. The Comptroller shall be the chief accounting officer of the corporation. He or she shall establish accounting policy for the corporation, maintain complete and accurate books and records concerning its financial transactions, prepare its financial statements and, subject to the control of the Board of Directors, discharge all duties incident to the office of the Comptroller. The Comptroller shall have authority, in connection with the normal business of the corporation, to sign or endorse negotiable instruments, contracts, leases and other documents. SECTION 10. The Clerk and the Secretary of the Board of Directors. The Clerk shall be the principal recording officer of the corporation. He or she shall be the Secretary of the Board of Directors and of the Executive Committee and of the Audit Committee. He or she shall attend and keep minutes of all proceedings at meetings of the stockholders, the Board of Directors, the Executive Committee and of each committee appointed by the Board of Directors which shall not have appointed any other person to serve as its secretary. The Clerk shall have charge of the corporate seal, minute books of the corporation and of such other corporate records, books and papers as the Board of Directors or the Executive Committee may order to be kept in his or her custody or under his or her control. The Clerk shall have authority to affix the seal of the corporation to all instruments executed under seal and to attest thereto. As required by law, these By-Laws or the Board of Directors, the Clerk shall give or cause to be given notice to the stockholders of each annual and special meeting and to the directors of each regular and special meeting of the Board of Directors except the first meeting after their election in each year; and the Clerk shall perform such other duties as may be imposed upon him or her by law, these By-Laws, the Board of Directors, the Audit Committee or the Chairman of the Board, under whose direct supervision he or she shall be. The Clerk shall be a resident of the Commonwealth of Massachusetts unless a resident agent has been appointed by the corporation pursuant to law to accept service of process. SECTION 11. The General Auditor. The General Auditor shall direct the internal audit activities of the corporation and shall provide the Audit Committee with objective and timely information to aid in measuring and evaluating the operations of the corporation. In the conduct of this responsibility, the General Auditor shall perform such duties as may be imposed upon him or her by these By-Laws, the Board of Directors and the Audit Committee. To assure the professional independence of the General Auditor, he or she shall report directly and solely to the Audit Committee. For purposes of internal administration, the General Auditor shall report to a senior officer of the corporation other than the Chairman of the Board or the President. SECTION 12. The Vice Presidents. Each Vice President of whatever rank shall perform the duties imposed upon him or her by these By-Laws or assigned to him or her by the Board of Directors, the Chairman of the Board or the President. The Executive Vice President shall be senior in rank to all other Vice Presidents including Senior Vice Presidents. -17- SECTION 13. The Assistant Treasurers and Assistant Clerks. Each Assistant Treasurer shall perform such duties as may be assigned to him or her by the Board of Directors, the Chairman of the Board, the President or the Treasurer. Each Assistant Clerk shall perform such duties as may be assigned to him or her by the Board of Directors, the President or the Clerk, and shall have the authority to affix the seal of the corporation to all instruments executed under seal and to attest thereto. SECTION 14. Resignation. Any officer may resign at any time by giving written notice to the Chairman of the Board, the President or the Clerk. The resignation of any officer shall take effect upon its receipt or on any later date specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be required to make it effective. SECTION 15. Vacancies. Any vacancy occurring in the offices of the Chairman of the Board, the President, the Treasurer, the Comptroller, the Clerk and the General Auditor shall be promptly filled by the Board of Directors. Any vacancy occurring in the offices of Vice Chairmen, Executive Vice Presidents, or other Executive Officers not specifically referred to in the preceding sentence may be filled by the Board of Directors. Except for those offices to be filled by the Board of Directors, the Chairman of the Board or the President may fill any vacancy occurring in any office by reason of death, resignation, retirement or other cause and may, in his or her discretion, leave offices unfilled for such period as he or she may determine. SECTION 16. Compensation of Officers, Employees and Other Agents. The Board of Directors shall have power to fix, and to vary from time to time, the compensation of all officers, employees and other agents of the corporation for their services as such. SECTION 17. Designated Officer. The term designated officer of the corporation, whenever it appears in a resolution or vote of the Board of Directors of the corporation shall refer to any one of the Chairman of the Board, the President, any Vice Chairman, any Executive Officer, the Treasurer, an Assistant Treasurer, the Comptroller, any Vice President of whatever rank, the Clerk, an Assistant Clerk, the Secretary of the Board of Directors, the General Counsel and the General Auditor unless the resolution or vote of the Board of Directors otherwise provides. ARTICLE V STOCK SECTION 1. Stock Certificates. Each stockholder shall be entitled to a certificate or certificates of stock of the corporation in such form as the Board of Directors may from time to time prescribe. Each certificate shall be numbered and entered in the books of the corporation as it is issued, shall state the holder's name and the number and the class and the designation of the series, if any, of his or her shares, shall be signed by the Chairman of the Board, the President or a Vice President of any rank and by the Treasurer or an Assistant Treasurer and may, but need not, be sealed with the seal of the corporation. If any stock certificate is signed by a transfer agent, or by a registrar, other than a director, officer or employee of the corporation, the signatures of the officers of the corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed on any certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the corporation and delivered with the same effect as if he or she were such officer at the time of issue. Every certificate of stock which is subject to any restriction on transfer pursuant to the Articles of Organization, these By-Laws or any -18- agreement to which the corporation is a party, or which is issued while the corporation is authorized to issue more than one class or series of stock, shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back the full text of the restriction or the preferences, voting powers, qualifications and special or relative rights of each class or series or, alternatively, a statement of the existence of such restriction and such preferences, powers, qualifications and rights and a statement that the corporation will furnish a copy of the restriction and such preferences, powers, qualifications and rights to the holder of such certificate upon written request and without charge. SECTION 2. Transfer of Stock. Subject to any applicable transfer restrictions at the time in force, shares of stock of the corporation shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives. Such transfer shall be effected by delivery of the old certificate, together with a duly executed assignment and power to transfer endorsed thereon or attached thereto and with such proof of the authenticity of the signature and such proof of authority to make the transfer as the corporation or its agents may reasonably require, to the person in charge of the stock and transfer books and ledgers or to such other person as the Board of Directors may designate, who shall thereupon cancel the old certificate and issue a new certificate. The corporation may treat the holder of record of any share or shares of stock as the owner of such stock, and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, or otherwise, save as expressly provided by law. SECTION 3. Transfer Agent and Registrar; Regulations. The corporation shall, if and whenever the Board of Directors shall so determine, maintain one or more transfer offices or agencies, each in charge of a transfer agent designated by the Board of Directors at which the shares of the capital stock of the corporation shall be transferable, and also one or more registry offices, each in charge of a registrar designated by the Board of Directors, where such shares of stock shall be registered, and no certificate for shares of the capital stock of the corporation in respect of which a registrar and transfer agent shall have been designated, shall be valid unless countersigned by such transfer agent and registered by such registrar. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. SECTION 4. Lost, Mutilated or Destroyed Certificates. No certificate for shares of stock of the corporation shall be issued in place of any certificate alleged to have been lost, mutilated or destroyed, except upon production of such evidence of the loss, mutilation or destruction and upon indemnification of the corporation and its agents to such extent and in such manner as the Board of Directors may prescribe and as permitted by law. SECTION 5. Record Date for Determination of Stockholders' Rights; Close of Transfer Books. The Board of Directors may fix in advance a date, not exceeding 60 days preceding the date of any meeting of stockholders, or the date fixed for the payment of any dividend, or the making of any other distribution to stockholders, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend or distribution, or receive any such allotment of rights, or as the last day on which stockholders may effectively exercise rights in respect of any such change or conversion or exchange of capital stock, or as the -19- last day on which they may effectively express such consent or dissent, and in such case only stockholders of record on the date so fixed shall be so entitled, notwithstanding any transfer of stock on the books of the corporation after the date fixed as aforesaid. In lieu of fixing such a record date or last day, the Board of Directors may close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed: (i) The record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the date next preceding the day on which notice is given. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. SECTION 6. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Articles of Organization, may be declared by the Board of Directors at any regular or special meeting, payable in cash, in property, or in shares of the capital stock, subject to the limitations, if any, imposed by law or the Articles of Organization. Before payment of any dividends, there may be set aside out of any funds of the corporation available for dividends, such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve. SECTION 7. Control Share Acquisitions. Until such time as this Section 7 shall be repealed or these By-Laws shall be amended to provide otherwise, in each case in accordance with Article VII of these By-Laws, the provisions of Chapter 110D of the Massachusetts General Laws shall not apply to "control share acquisitions" of the corporation within the meaning of said Chapter 110D. ARTICLE VI GENERAL PROVISIONS SECTION 1. Offices. The principal office of the corporation shall be in the City of Boston, County of Suffolk, Commonwealth of Massachusetts. The corporation may also have offices at such other place or places within or without the Commonwealth of Massachusetts as the Board of Directors may from time to time determine. -20- SECTION 2. Seal. The seal of the corporation shall be in the following form: When authorized by the Board of Directors and to the extent permitted by law and these By-Laws, a facsimile of the corporate seal may be affixed or reproduced. SECTION 3. Fiscal Year. The fiscal year of the corporation shall be coincident with the calendar year unless another fiscal year shall have been fixed by the Board of Directors. SECTION 4. Execution of Instruments. All contracts, conveyances, promises or orders for the payment of money or other obligations authorized by the Board of Directors to be executed or endorsed by an officer of the corporation in its behalf shall be executed or endorsed by any one of the Chairman of the Board, the President, any Vice Chairman, any Vice President of whatever rank, the Treasurer and the Clerk, except as the Board of Directors may generally or in particular cases otherwise determine and except that checks drawn on any dividend and special accounts may bear the facsimile signature, affixed thereto by a mechanical device, of such officer or agent as the Board of Directors shall authorize, and except also that bonds, notes, debentures or other evidences of indebtedness authenticated by a manual signature on behalf of a trustee or an authenticating agent appointed by the Board of Directors may bear such facsimile signature or signatures of such officer or officers of the corporation as the Board of Directors shall authorize. SECTION 5. Voting of Securities. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President, each Vice Chairman, the Treasurer, each Executive Officer, each Vice President of any rank, the Clerk and each Assistant Clerk, each acting alone, shall have authority on behalf of the corporation (a) to attend and act and vote in person for the corporation and as its duly appointed agent and attorney-in-fact at any meeting of the holders of securities or creditors of any person (as hereinafter defined) any securities of whom are owned or held with power to vote by the corporation or any indebtedness of whom is owed to the corporation, (b) to appoint, by an instrument in writing, a proxy or several proxies to attend and act and vote for the corporation at any such meeting and (c) to execute and deliver in the name and on behalf of the corporation any consent or waiver by the corporation as a security holder or creditor of any such person. As used in this Section, the word "person" includes a natural person, a corporation, a company, a partnership, a voluntary association, a proprietorship, a trust, an estate, a government (national, state, regional or local) or a department or agency thereof, and any other form of legal entity however designated and wherever formed or existing. Each officer named in this Section and each person designated by any such officer as a proxy for this corporation shall have and may exercise at any such meeting any and all rights and powers incident to the ownership of such securities or indebtedness which an owner would have if personally present. SECTION 6. Powers of Attorney. The Chairman of the Board, the President, each Vice Chairman, any Executive Vice President, any Executive Officer, or the Clerk may from time to time and at any time by power of attorney appoint any person (as defined in Section 6 of this -21- Article VI) or persons to be the attorney or attorneys of the corporation for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board of Directors) and for such period and subject to such conditions as the officer making such appointment may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with such attorney or attorneys as the officer making such appointment may think it and may also authorize any such attorney to appoint a substitute or substitutes and to delegate all or any of the powers, authorities and discretions vested in any such attorney or attorneys, except such power of substitution (without prejudice to the power of such attorney or attorneys to exercise concurrently any of the powers delegated and to revoke or vary any such appointment). The Chairman of the Board, the President, each Vice Chairman, any Executive Vice President, any Executive Officer, or the Clerk may at any time revoke any power of attorney executed by any of those officers currently or formerly in office, provided that no such revocation shall invalidate any act performed by the attorney or attorneys (or any substitute or substitutes appointed thereunder) in the exercise of the powers conferred thereby between the revocation thereof and the time such revocation becomes known to the attorney or attorneys, or to any such substitute or substitutes, and any such power of attorney shall at all times be conclusively binding on the corporation and its successors in favor of third parties who have not received notice of the revocation thereof. SECTION 7. Issue of Debt Securities and Other Obligations. The Board of Directors shall have the power to authorize and cause to be executed and issued bonds, notes, debentures, warrants, guaranties or other obligations of the corporation, secured or not secured, upon such terms, in such manner and upon such conditions as may be fixed or approved by vote of the Board of Directors or of the Executive Committee prior to the issue thereof. SECTION 8. Corporate Records. The original, or attested copies, of the Articles of Organization, By-Laws and records of all meetings of incorporators and stockholders, and stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in the Commonwealth of Massachusetts at the principal office of the corporation, or at an office of its Clerk, its resident agent or its transfer agent. Such copies and records need not all be kept in the same office. They shall be available at all reasonable times for inspection by any stockholder for any proper purpose. They shall not be available for inspection to secure a list of stockholders or other information for the purpose of selling such list or information or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the corporation. SECTION 9. Indemnification of Directors, Officers and Others. (a) The corporation shall, to the extent legally permissible, indemnify each of the directors and officers of the corporation against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by such director or officer in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which such director or officer may be involved or with which such director or officer may be threatened, while in office or thereafter, by reason of such director or officer being or having been such a director or officer of the corporation or by reason of such director or officer serving or having served at the request of the corporation as a director, officer or trustee of a wholly-owned subsidiary of the corporation or having served in any capacity with respect to any employee benefit plan maintained by the corporation or any wholly-owned subsidiary of the corporation, except with respect to any matter as to which such director or officer shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the -22- best interest of the corporation or of such subsidiary or, to the extent that such matter relates to service with respect to any such employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such indemnification shall be ordered by a court or unless such compromise shall be approved as in the best interest of the corporation, after notice that it involves such indemnification: (i) by a disinterested majority of the directors of the corporation then in office; or (ii) by a majority of the disinterested directors of the corporation then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such director or officer appears to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation; or (iii) by the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested director or officer. Expenses, including counsel fees, reasonably incurred by any director or officer of the corporation in connection with the defense or disposition of any such action, suit or other proceeding shall be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such director or officer to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this paragraph (a). If in an action, suit or proceeding brought by or in the right of the corporation, a director of the corporation is held not liable for monetary damages, whether because that director is relieved of personal liability under the provisions of Article 6 of the Articles of Organization of the corporation or otherwise, that director shall be deemed to have met the standard of conduct set forth above and to be entitled to indemnification for expenses reasonably incurred in the defense of such action, suit or proceeding. (b) The corporation shall, to the extent legally permissible, indemnify each person who serves at the request of the corporation as a director of any wholly-owned subsidiary of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary, and the Board of Directors of the corporation may, to the extent legally permissible, indemnify any person who serves as a trustee, employee or agent of the corporation or who serves at the request of the corporation as an officer, trustee, employee or agent of any wholly-owned subsidiary of the corporation, against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by such person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which such person may be involved or with which such person may be threatened, while in office or thereafter, by reason of such person being or having been a trustee, employee or agent of the corporation or a director, officer, trustee, employee or agent of such subsidiary or having acted in any such capacity with respect to any such employee benefit plan, except with respect to any matter as to which such person shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation or of such subsidiary or, to the extent that such matter relates to service with respect to any such employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan. Expenses, including counsel fees, reasonably incurred by any person who serves at the request of the corporation as a director of a wholly-owned subsidiary of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary in connection with the defense or disposition of any such action, suit or other proceeding shall, and if incurred by a person who serves as a trustee, employee or agent of the corporation or who serves at the request of the corporation as an officer, trustee, employee or agent of a wholly-owned subsidiary of the corporation may, in each -23- case to the extent legally permissible, be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such person to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this Section. Except as hereinafter provided in this paragraph (b), indemnification of persons who serve as a trustee, employee or agent of the corporation or who serve at the request of the corporation as an officer, trustee, employee or agent of a wholly-owned subsidiary of the corporation under this paragraph (b) shall be made by the corporation only as authorized by the Board of Directors of the corporation in each specific case. To the extent that any person who serves at the request of the corporation as an officer or trustee of any wholly-owned subsidiary of the corporation has been wholly successful in the defense of any action, suit or proceeding referred to above in this paragraph (b) or of any claim or issue therein, such person shall, without further authorization of the Board of Directors of the corporation, be indemnified by the corporation as herein above provided upon presentation to the Board of Directors of the corporation of a claim for indemnification and evidence reasonably satisfactory to the Board of Directors of the corporation of such wholly successful defense. As used in this paragraph (b) the term "wholly successful" means that the action, suit or proceeding or the claim or issue has been finally terminated without a finding of liability or guilt against the person seeking indemnification and the time for taking an appeal or other court or administrative action therein has expired or, in the case of a threatened proceeding, a reasonable period of time, determined by independent legal counsel selected by the Board of Directors of the corporation, has elapsed since the threat was made without the proceeding having been instituted and, in either case, without any payment or promise having been made to induce a settlement or compromise. (c) As used in this Section, the terms "director", "officer", "trustee", "employee" and "agent" include the relevant individual's heirs, executors and administrators, an "interested" director or officer is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending, and a "wholly-owned subsidiary" means any corporation, business trust, partnership or other business entity of which the corporation owns directly or through one or more wholly-owned subsidiaries all of the outstanding capital stock or other shares of beneficial interest (other than directors' qualifying shares) entitled to vote generally. All directors, officers, trustees, employees and agents of wholly-owned subsidiaries of the corporation and persons who serve in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary shall be deemed to serve or to have served in such capacity at the request of the corporation. The indemnification by the corporation provided for in this Section 9 shall not be exclusive of or affect any other rights to which any director, officer, trustee, employee, agent or pension plan fiduciary or other person may be entitled. Nothing contained in this Section shall either limit the power of the corporation to indemnify corporate personnel other than directors and officers or affect any rights to indemnification by the corporation to which corporate personnel other than directors, officers, trustees, employees and agents of the corporation and persons who serve at the request of the corporation as directors, officers, trustees, employees or agents of wholly-owned subsidiaries of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary may be entitled by contract or otherwise under law. -24- ARTICLE VII AMENDMENTS SECTION 1. General. These By-Laws may be amended, added to or repealed in whole or in part (a) by vote of the stockholders at a meeting where the substance of the proposed amendment is stated in the notice of the meeting, or (b) by vote of a majority of the entire Board, except that no amendment may be made by the Board of Directors on matters reserved to the stockholders by law or the Articles of Organization or which changes the provisions of these By-Laws relating to the removal of directors or to the requirements for amendment of these By-Laws. Notice of any amendment, addition or repeal of any By-Law by the directors stating the substance of such action shall be given to all stockholders entitled to vote on amending the By-Laws not later than the time when notice is given of the meeting of stockholders next following such action by the Board of Directors. Any By-Law adopted by the directors may be amended or repealed by the stockholders. ARTICLE VIII EMERGENCY BY-LAWS SECTION 1. Effective Period. The emergency By-Laws set forth in this Article VIII shall be effective only during the continuance of a national emergency proclaimed by the President of the United States of America or by other governmental authority following an attack on the United States of America or another catastrophic event as a result of which a regular quorum of the Board of Directors or of the Executive Committee cannot readily be convened. During any such emergency, the provisions of this Article VIII shall supersede any different provisions contained in the preceding Articles of these By-Laws. SECTION 2. Meetings of the Board of Directors. During any such emergency, a meeting of the Board of Directors may be called by any director or officer who deems it necessary. The meeting shall be held at such time or place as the person calling the meeting may specify in giving notice thereof. Such notice may be given in writing or orally and by such means of communication (including announcement by radio) as in the judgment of the person giving the same are then feasible to reach as many of the directors as it is reasonably possible to reach under the prevailing circumstances. Two directors shall constitute a quorum for the transaction of business at any such meeting. SECTION 3. Emergency Location of Head Office. With effect during any such emergency, the Board of Directors may change the location of the Head Office of the corporation or designate one or more alternative locations or authorize one or more officers to do so. SECTION 4. Preservation of Continuity of Management. In order to preserve continuity of management of the corporation during any such emergency, the Board of Directors may provide and from time to time change lines of succession in management in the event that during such emergency any or all of the officers shall die or be missing or for any reason be rendered incapable of discharging his or her or their respective duties. SECTION 5. Immunity. No director, officer or employee of the corporation acting in accordance with these emergency By-Laws shall be liable for any act or omission except willful misconduct. -25- SECTION 6. Amendment of Emergency By-Laws. The provisions of this Article VIII can be amended or repealed during any emergency by resolution of the directors or the shareholders but no such amendment or repeal shall prejudice any rights or immunities acquired by any director, officer or employee under Section 5 of this Article VIII in respect of action taken or omitted by him or her prior to such amendment or repeal. Any such amendment may make such further or different provisions as may be deemed to be practical and necessary to deal with the circumstances of the emergency. EX-10.(A) 3 BANKBOSTON CORP. 1982 STOCK OPTION PLAN EXHIBIT 10(a) Effective January 1, 1984 As amended through October 23, 1997 BANKBOSTON CORPORATION 1982 Stock Option Plan 1. Purpose. ------- The purpose of the 1982 Stock Option Plan is to enable BankBoston Corporation to provide a special incentive to a limited number of senior executives of the Corporation, the Bank and its other Subsidiaries who are in a position to have a significant effect upon the Corporation's business and earnings. In order to accomplish this purpose, the Plan authorizes the grant or award to such senior executives (i) of options to purchase Common Stock, (ii) of contingent cash units, as described in Section 6 and Section 10, or (iii) of both such options and such contingent cash units. Increased ownership of Common Stock will provide such senior executives with an additional incentive to take into account the long-term interests of the Corporation. 2. Definitions. ----------- As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1. "Bank" means BankBoston, N.A., a national banking association. 2.2. "Board of Directors" means the Board of Directors of the Corporation. 2.3. "Code" means the Internal Revenue Code of 1954, as amended from time to time, or any successor statute. 2.4. "Committee" means the Compensation Committee of the Board of Directors. 2.5. "Common Stock" means the Common Stock of the Corporation. 2.6. "Corporation" means BankBoston Corporation, a corporation established under the laws of the Commonwealth of Massachusetts. 2.7. "Earnings Per Share" means Plan Net Income computed on a fully diluted earnings per share basis. -2- 2.8. "Earnings Per Share Target" shall mean the goal (whether expressed as a fixed amount, a percentage, a formula or otherwise) adopted by the Board of Directors, as described in the Guidelines, for the total of the Earnings Per Share for the three consecutive fiscal years beginning with the fiscal year in which a Unit is awarded. 2.9. "Fair Market Value", in the case of a share of Common Stock on a particular day, means the closing price of the Common Stock for that day as reported in the "NYSE-Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event "NYSE-Composite Transactions" cease to be reported, the Committee shall adopt some other appropriate method for determining such Fair Market Value. 2.10. "Guidelines" means the General Guidelines for interpreting and administering this Plan as approved from time to time by the Committee and adopted by the Board of Directors. 2.11. "Incentive Stock Option" means a stock option which satisfies the requirements of section 422A of the Code. 2.12. "Participant" means an individual holding a stock option or stock options granted to him under the Plan. 2.13. "Performance-Based Exception" means the performance-based exception from the deductibility limits set forth in Section 162(m) of the Code and the regulations thereunder. 2.14. "Plan" means the 1982 Stock Option Plan set forth herein. 2.15. "Plan Net Income" means the consolidated annual income after taxes of the Corporation for the fiscal year determined by the Committee, in its sole discretion, to reflect the operating results of the Corporation and its subsidiaries for such fiscal year giving consideration to the appropriate treatment for this purpose of unusual or non-recurring items of income or expense. 2.16. "Retirement" means termination of employment with the Corporation or any Subsidiary if such termination of employment constitutes normal retirement, early retirement, disability retirement or other retirement as provided for at the time of such termination of employment under the applicable -3- retirement program then maintained by the Corporation or any Subsidiary, provided that the Participant does not continue in the employment of the Corporation or any Subsidiary. 2.17. "Return on Equity," when used in reference to the Corporation, means Plan Net Income for a given fiscal year divided by the average stockholders' equity of the Corporation for that fiscal year, as determined by the Committee for such fiscal year to be appropriate to carry out the purpose of the Plan. 2.18. "Subsidiary" or "Subsidiaries" means a corporation or corporations in which the Corporation owns, directly or indirectly, stock possessing 50 percent or more of the total combined voting power of all classes of stock or over which the Corporation has effective voting control. 2.19. "Unit" means a contingent cash unit as described in Section 6 and Section 10. 3. Administration. -------------- 3.1. The Plan shall be administered by the Committee. The members of the Committee shall not include any person who is at the time he exercises discretion in administering the Plan (or has been at any time within one year prior thereto) eligible to participate in the Plan or in any other plan of the Corporation or any of its affiliates entitling participants therein to acquire stock, stock options or stock appreciation rights of the Corporation or any of its affiliates (as defined for purposes of Rule 16b-3 issued by the Securities and Exchange Commission). 3.2. Subject to the provisions set forth herein, the Committee shall have full authority to determine the provisions of options and Units to be granted or awarded under the Plan, to interpret the terms of the Plan and of options and Units granted or awarded under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. 3.3. Notwithstanding Section 3.2 and subject to the provisions set forth herein, the Board of Directors shall approve or ratify options granted under the Plan to any executive officer who is also a director of the Corporation and the Units awarded in connection therewith. 3.4. The decision of the Committee on any matter as to which it is given authority under subsection 3.2 above shall be final and binding on all persons concerned. -4- 3.5. Nothing in the Plan shall be deemed to give any officer or employee, or his legal representatives or assigns, any right to participate in the Plan, except to such extent, if any, as the Committee may have determined or approved pursuant to the provisions of the Plan. 4. Shares Subject to the Plan. -------------------------- 4.1. The maximum number of shares of Common Stock which may be delivered upon the exercise of options granted under the Plan shall be 567,000, subject to adjustment in accordance with the provisions of Section 11. 4.2. If any option granted under the Plan terminates without having been exercised in full (including an option which terminates by agreement between the Corporation and the Participant), the number of shares of Common Stock as to which such option has not been exercised prior to termination shall be available for future grants within the limits set forth in subsection 4.1. 4.3. Shares of Common Stock delivered upon the exercise of options shall consist of shares of authorized and unissued Common Stock, except that the Board of Directors may from time to time in its discretion determine in any case that the shares to be so delivered shall consist of shares of authorized and issued Common Stock reacquired by the Corporation and held in its Treasury. No fractional shares of Common Stock shall be delivered upon the exercise of an option. 5. Eligibility for Options. ----------------------- Employees eligible to receive options under the Plan shall be those senior executives of the Corporation, the Bank and the Corporation's other Subsidiaries who, in the opinion of the Committee, have senior-level management responsibilities and are in a position to have a significant effect upon the Corporation's business and consolidated earnings. -5- 6. Units Awarded under the Plan. ---------------------------- In connection with the grant of options under the Plan, the Committee may, in accordance with procedures established by it, make awards to Participants of Units entitling such Participants to receive certain cash payments upon the maturity of such Units, as described in Section 10. 7. Eligibility for Units. --------------------- Employees eligible to receive Units under the Plan shall be limited to those employees who are eligible to receive options. 8. Grant or Award of Options and Units. ----------------------------------- 8.1. From time to time while the Plan is in effect the Committee may, in its absolute discretion, select from among the persons eligible to receive options (including persons to whom options or Units were previously granted or awarded) those persons to whom options or Units are to be granted or awarded. It is contemplated that, in general, options and Units will be granted or awarded every two years, but the Committee may in its discretion determine that because of special circumstances options and Units are to be granted or awarded, at any time fixed by the Committee, to one or more persons eligible to receive options under the Plan. 8.2. The Committee shall, in its absolute discretion, determine the number of shares of Common Stock to be subject to each option granted under the Plan and the number of Units to be awarded to each eligible executive. 8.3. In determining the number of shares of Common Stock to be subject to any option granted to any person under the Plan, the Committee may, in its absolute discretion, take into account the desire of such person to receive (i) an option on a lesser number of shares than tentatively decided on by the Committee and (ii) a number of Units based on the reduction in the number of shares to be subject to the option. The terms, limits and procedures related to such adjustments shall be set forth in the Guidelines. 8.4. No option or Unit may be granted under the Plan after December 23, 1991, but options theretofore granted may extend beyond that date and Units theretofore awarded may mature after that date. -6- 9. Provisions of Options. --------------------- 9.1 Incentive Stock Options or Other Options. Options granted under the ---------------------------------------- Plan may be either Incentive Stock Options or options which do not qualify as Incentive Stock Options, as the Committee shall determine at the time of each grant of options hereunder. It is contemplated that the options granted under the Plan will to the extent possible, but subject to the discretion of the Committee, qualify as Incentive Stock Options. 9.2. Stock Option Certificates or Agreements. Options granted under the --------------------------------------- Plan shall be evidenced by certificates or agreements in such form as the Committee shall from time to time approve. Such certificates or agreements shall comply with the terms and conditions of the Plan and may contain such other provisions not inconsistent with the terms and conditions of the Plan as the Committee shall deem advisable. In the case of options intended to qualify as Incentive Stock Options, the certificates or agreements shall contain such provisions relating to exercise and other matters as are required of Incentive Stock Options under the Code. 9.3. Terms and Conditions. All options granted under the Plan shall be -------------------- subject to the following terms and conditions to the extent applicable and to such other terms and conditions not inconsistent therewith as the Committee shall determine. 9.3.1. Option Price. The option price per share of Common Stock, with ------------ respect to each option, shall not be less than the Fair Market Value per share at the time the option is granted. 9.3.2. Number of Shares of Common Stock Subject to Incentive Stock ----------------------------------------------------------- Options. In the case of an option intended to qualify as an Incentive ------- Stock Option, the aggregate Fair Market Value (determined as of the time the option is granted) of the stock with respect to which Incentive Stock Options granted after December 31, 1986 are exercisable for the first time by the Participant during any calendar year (under all plans of the Participant's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. The provisions of this Section 9.3.2 shall be construed and applied in accordance with Section 422A (b)(7) of the Code and the regulations, if any, promulgated thereunder. -7- 9.3.3. Period of Options. An option shall be exercisable during such ----------------- period of time as the Committee may specify (subject to subsection 9.4 below), but not after the expiration of ten years from the date the option is granted. 9.3.4. Exercise of Options. ------------------- 9.3.4.1. Each option shall be made exercisable at such time or times as the Committee shall determine, but in all events, subject to the provisions of Section 9.3.2. It is contemplated that the Committee will normally provide that the right to exercise an option will accrue immediately with respect to 25 percent of the number of shares of Common Stock subject to the option and that the right to exercise the option with respect to the balance of the shares subject thereto will accrue in substantially equal installments on the first three anniversaries of the date of grant. However, the Committee may in any case provide that the option will be exercisable immediately with respect to all the shares of Common Stock subject to the option or that the right to exercise the option will accrue in different installments and at different times from those set forth above, if, in the opinion of the Committee, such provisions are appropriate taking into account the age of the Participant and other relevant circumstances. In the case of an option made exercisable in installments, the Committee may later determine to accelerate the time at which one or more of such installments may be exercised. 9.3.4.2. In the case of an option, granted prior to December 31, 1986, intended to qualify as an Incentive Stock Option, the option shall not be exercisable while there is outstanding (within the meaning of section 422A(c)(7) of the Code, as in effect prior to the Tax Reform Act of 1986) any Incentive Stock Option which was granted before the granting of such option to the Participant to purchase stock in his employer corporation (whether the Corporation or any Subsidiary) or in a corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations (the words "parent or subsidiary corporation of the employer -8- corporation, or in a predecessor corporation of any such corporations" are meant to have the meaning of such words as used in Section 422A(b)(7) of the Code). 9.3.4.3. Any exercise of an option shall be in writing signed by the proper person and delivered or mailed to the Secretary of the Committee, accompanied by the option certificate or agreement and payment in full for the number of shares in respect of which the option is exercised. 9.3.4.4. In the event an option is exercised by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, the Corporation shall be under no obligation to deliver stock thereunder unless and until the Corporation is satisfied that the person or persons exercising the option is or are the duly appointed executor or administrator of the deceased Participant or the person or persons to whom the option has been transferred by the Participant's will or by the applicable laws of descent and distribution. 9.3.5. Payment for and Delivery of Stock. The shares of stock --------------------------------- purchased on any exercise of an option granted hereunder shall be paid for in full in cash or, if permitted by the Committee, in shares of unrestricted Common Stock at the time of such exercise. A Participant shall have the rights of a shareholder only as to stock actually issued to him. 9.3.6. Listing of Stock, Withholding and Other Legal Requirements. The ---------------------------------------------------------- Corporation shall not be obligated to deliver any stock until all federal and state laws and regulations which the Corporation may deem applicable have been complied with, nor, in the event the outstanding Common Stock is at the time listed upon any stock exchange, until the stock to be delivered has been listed or authorized to be added to the list upon official notice of issuance to such exchange. Without limiting the generality of the foregoing, the Committee shall require, on such terms as it deems necessary, that the Participant pay to the Corporation, or make other satisfactory provision for the payment of, any federal, state or local taxes required by law to be withheld in respect of the exercise of any option. In the Committee's discretion, a Participant may elect to satisfy all or -9- a portion of his or her federal, state and local tax withholding requirements or liability, up to the amount calculated by applying the Participant's maximum marginal tax rate, by having shares of Common Stock withheld from the shares otherwise issuable upon the exercise of an option, or by delivering to the Corporation previously owned shares of Common Stock, valued at their Fair Market Value on the date that withholding taxes are determined. In addition, if the shares of stock subject to any option have not been registered in accordance with the Securities Act of 1933, as amended, the Corporation may require the person or persons who wishes or wish to exercise such option to make such representation or agreement with respect to the sale of stock acquired on exercise of the option as will be sufficient, in the opinion of the Corporation's General Counsel, to avoid violation of said Act. 9.3.7. Non-transferability of Options. Subject to the provisions of ------------------------------ this Section, (a) no option shall be transferable otherwise than by will, by the laws of descent and distribution, or by operation of a "qualified domestic relations order," as that term is defined in the Code, and (b) during the lifetime of the Participant to whom an option has been granted, rights under the option may be exercised only by the Participant, the Participant's guardian or legal representative, or by the assignee of the option under a "qualified domestic relations order." Notwithstanding the foregoing, the Committee may provide for greater transferability in the case of any option, including, without limitation, transfer to one or more members of the Participant's family or to a partnership or trust established for the benefit of one or more members of the Participant's family. In no event shall Incentive Stock Options awarded under the Plan be transferable other than as permitted under the rules prescribed in the Code for incentive stock options. An option that is intended to be exempt under Rule 16b-3 under the Exchange Act or any successor rule, or that is intended to qualify for the Performance-Based Exception, shall be transferable only to the extent consistent with such exemption or qualification. 9.3.8. Death. If a Participant dies at a time when he is entitled to ----- exercise an option (including death during the three-year period under subsection 9.3.9 or the three-month period -10- under subsection 9.3.10(a), then at any time or times within three years after his death such option may be exercised, as to all or any of the shares which the Participant was entitled to purchase thereunder immediately prior to his death, by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such option shall expire at the end of such three-year period. In no event, however, may any option granted under the Plan be exercised after the expiration of ten years from the date the option was granted. 9.3.9. Retirement. In the event of a Participant's Retirement at a ---------- time when he is entitled to exercise an option, then at any time or times within three years after his Retirement he may exercise such option as to all or any of the shares which he was entitled to purchase thereunder immediately prior to his Retirement, and except as so exercised such option shall expire at the end of such three-year period, subject, however, to the provisions of subsection 9.3.8. In no event, however, may any option granted under the Plan be exercised after the expiration of ten years from the date the option was granted. 9.3.10. Termination of Employment. If the employment of a Participant ------------------------- terminates for any reason other than his death or his Retirement, all options held by the Participant shall thereupon expire subject to the following provisions: (a) If such termination of employment occurs by the voluntary act of the Participant, then at any time or times within three months after such termination of employment (but not after the expiration of ten years from the date the option was granted), the Participant may exercise such option as to all or any of the shares which he was entitled to purchase thereunder immediately prior to such termination of employment, and except as so exercised such option shall expire at the end of such period of three months, subject, however, to the provisions of subsection 9.3.8; and (b) If such termination of employment does not occur by the voluntary act of the Participant, such option may be exercised following such termination of employment -11- only to the extent, if any, approved by the Committee. If the Committee so decides, an option may provide that a leave of absence granted by the Corporation or a Subsidiary is not a termination of employment for the purpose of this subsection 9.3.10, and, in the absence of such a provision, the Committee may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. 9.4. Authority of the Committee. The Committee shall have the authority, -------------------------- either generally or in particular instances, to waive compliance by a Participant with any obligation to be performed by him under an option and to waive any condition or provision of an option, except that the Committee may not (i) increase the total number of shares covered by the option (except in accordance with Section 11), (ii) reduce the option price per share (except in accordance with Section 11) or (iii) extend the term of the option to more than ten years, subject, however, to the provisions of Section 13. 10. Provisions of Units. ------------------- 10.1. Amount Payable. Each Unit shall be deemed to have an initial value -------------- equal to the Fair Market Value of a share of Common Stock at the time the Unit is awarded. As soon as practicable after the maturity (as described below) of a Unit, the eligible executive to whom the Unit was awarded shall be entitled to receive an amount of money equal to the applicable percentage, as described in subsection 10.2, multiplied by the initial value of the Unit. Units shall mature at the end of the second fiscal year of the Corporation following the fiscal year in which they are awarded. 10.2. Applicable Percentage. The percentage to be applied to the initial --------------------- value of a Unit in computing the amount payable upon maturity thereof may vary from 0 to 150 percent and shall be determined from a matrix table recommended by the Chairman and President, approved by the Committee and adopted by the Board of Directors. Such matrix shall be made a part of the Guidelines, as in effect at the time of the award of such Unit. Such percentage shall depend upon the following factors: 10.2.1. The relationship between (i) the average Return on Equity of the Corporation for the three years commencing with the fiscal year of the Corporation in which the Unit is awarded and ending with the fiscal year of the Corporation in which the Unit matures and (ii) the median -12- of the average returns on equity for such three years for a representative group of large commercial banks or bank holding companies selected from time to time by the Committee and adopted by the Board of Directors (a list of which shall be a part of the Guidelines); and 10.2.2. The extent to which the Earnings Per Share of the Corporation for the three years set forth in subsection 10.2.1 achieves the Earnings Per Share Target previously fixed by the Board of Directors. The Committee shall deliver to each Participant to whom Units are awarded a copy of the matrix table applicable to such award and shall notify such Participant of the Earnings Per Share target referred to in subsection 10.2.2. above. 10.3. Nontransferability of Units. No Units may be transferred by the --------------------------- Participant otherwise than by will or the laws of descent and distribution. 10.4. Death or Other Termination of Employment. If the employment of a ---------------------------------------- Participant terminates for any reason, whether by death, Retirement or otherwise, all Units held by the Participant shall thereupon terminate unless the Committee otherwise determines. The Committee may in its discretion determine that some or all of the Units so held shall continue in effect as if the Participant's employment had not terminated and that on maturity of such Units all or a portion of the amount payable in respect of such Units under subsection 10.1 shall be paid to the Participant or in the event of his death to his estate or other beneficiary. 11. Changes in Stock. ---------------- In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock which becomes effective after the adoption of the Plan by the Board of Directors, the Committee shall make appropriate adjustments in (i) the number and kind of shares of stock on which options may thereafter be granted hereunder, (ii) the number and kind of shares of stock remaining subject to each option outstanding at the time of such change and (iii) the option price. The Committee's determination shall be binding on all persons concerned. Subject to any required action by the stockholders, if the Corporation shall be the surviving corporation in any merger or consolidation -13- (other than a merger or consolidation in which the Corporation survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any option granted hereunder shall pertain and apply to the securities which a holder of the number of shares of stock of the Corporation then subject to the option would have been entitled to receive, but a dissolution or liquidation of the Corporation or a merger or consolidation in which the Corporation is not the surviving corporation or in which a majority of its outstanding shares are so converted or exchanged shall cause every option hereunder to terminate; provided that if any such dissolution, liquidation, merger or consolidation is contemplated, the Corporation shall either arrange for any corporation succeeding to the business and assets of the Corporation to issue to the Participants replacement options on such corporation's stock which will to the extent possible preserve the value of the outstanding options or shall make the outstanding options fully exercisable, subject to the provisions Section 9.3.2, at least 20 days before the effective date of any such dissolution, liquidation, merger or consolidation. The existence of the Plan shall not prevent any such change or other transaction and no Participant thereunder shall have any right except as herein expressly set forth. 12. Employment Rights. ----------------- Neither the adoption of the Plan nor any grant of options or award of Units confers upon any employee of the Corporation or a Subsidiary any right to continued employment with the Corporation or a Subsidiary, as the case may be, nor does it interfere in any way with the rights of the Corporation or a Subsidiary to terminate the employment of any of its employees at any time. 13. Discontinuance, Cancellation, Amendment and Termination. ------------------------------------------------------- The Committee may at any time discontinue granting options or awarding units under the Plan and, with the consent of the Participant, may at any time cancel an existing option in whole or in part and grant another option to the Participant for such number of shares as the Committee specifies. The Board of Directors may at any time or times amend the Plan for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law or may at any time terminate the Plan as to any further grants of options, provided that -14- no such amendment shall (a) increase the maximum number of shares available under the Plan except as provided in Section 11, (b) decrease the minimum option price of options thereafter to be granted to less than the Fair Market Value at the time the options are granted, or (c) increase the time limits for granting or exercising options thereafter to be granted. The Committee may make non- material amendments to the Plan. 14. Effective Date. -------------- The Plan shall become effective upon its adoption by the Board of Directors, and options may be granted under the Plan from and after the date of such adoption; provided, however, that if prior to December 23, 1982 the stockholders of the Corporation have not approved the Plan, the Plan shall terminate and all options theretofore granted and Units theretofore awarded shall terminate and cease to be of any force or effect. EX-10.(B) 4 BANKBOSTON CORP. 1986 STOCK OPTION PLAN EXHIBIT 10(b) BANKBOSTON CORPORATION 1986 Stock Option Plan (As amended through October 23, 1997) 1. Purpose. ------- The purpose of the 1986 Stock Option Plan is to enable BankBoston Corporation to provide a special incentive to a limited number of key officers of the Corporation, the Bank and its other Subsidiaries who are in a position to have a significant effect upon the Corporation's business and earnings. In order to accomplish this purpose, the Plan authorizes the grant to such officers of options to purchase Common Stock and, in the case of the grant of Nonstatutory Stock Options (as hereinafter defined), the provision of cash payments as described in Section 6 and Section 10. Increased ownership of Common Stock will provide such key officers with an incentive to further the long-term interests of the Corporation. 2. Definitions. ----------- As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1. "Bank" means BankBoston, N.A., a national banking association. 2.2. "Board of Directors" means the Board of Directors of the Corporation. 2.3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.4. "Committee" means the Compensation Committee of the Board of Directors. 2.5. "Common Stock" means the Common Stock of the Corporation. 2.6. "Corporation" means BankBoston Corporation, a corporation established under the laws of the Commonwealth of Massachusetts. 2.7. "Fair Market Value", in the case of a share of Common Stock on a particular day, means the closing price of the Common Stock for that day as reported in the "NYSE-Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event "NYSE-Composite Transactions" cease to be reported, the Committee shall adopt some other appropriate method for determining such Fair Market Value. 2.8. "Guidelines" means the General Guidelines for interpreting and administering this Plan as approved from time to time by the Committee and adopted by the Board of Directors. 2.9. "Incentive Stock Option" means a stock option which satisfies the requirements of section 422A(b) of the Code. 2.10. "Nonstatutory Stock Option" means a stock option which does not qualify as an Incentive Stock Option. 2.11. "Participant" means an individual holding a stock option or stock options granted to him under the Plan. 2.12. "Performance-Based Exception" means the performance-based exception from the deductibility limits set forth in Section 162(m) of the Code and the regulations thereunder. 2.13. "Plan" means the 1986 Stock Option Plan set forth herein. 2.14. "Retirement" means termination of employment with the Corporation or any Subsidiary if such termination of employment constitutes normal retirement, early retirement, disability retirement or other retirement as provided for at the time of such termination of employment under the applicable retirement program then maintained by the Corporation or any Subsidiary, provided that the Participant does not continue in the employment of the Corporation or any Subsidiary. 2.15. "Subsidiary" means a corporation or other entity in which the Corporation owns, directly or indirectly or has the power to vote or cause to be voted, stock or other ownership interests representing more than 50 percent or of the total combined voting power. 2.16. "Tax Offset Payment" means a payment provided under Section 6 and Section 10 of this Plan in respect of the exercise of a Nonstatutory Stock Option. -2- 3. Administration. -------------- 3.1. The Plan shall be administered by the Committee. The members of the Committee shall not include any person who is at the time he exercises discretion in administering the Plan (or has been at any time within one year prior thereto) eligible to participate in the Plan or in any other plan of the Corporation or any of its affiliates entitling participants therein to acquire stock, stock options or stock appreciation rights of the Corporation or any of its affiliates (as defined for purposes of Rule 16b-3 issued by the Securities and Exchange Commission). 3.2. Subject to the provisions set forth herein, the Committee shall have full authority to determine the provisions of options granted under the Plan and the amount of Tax Offset Payments made in connection therewith, to interpret the terms of the Plan and of options granted under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. 3.3. Notwithstanding Section 3.2 and subject to the provisions set forth herein, the Board of Directors shall approve or ratify options granted under the Plan to any executive officer who is also a director of the Corporation and the amount of Tax Offset Payments made in connection therewith. 3.4. The decision of the Committee on any matter as to it is given authority under subsections 3.2 above shall be final and binding on all persons concerned. 3.5. Nothing in the Plan shall be deemed to give any officer or employee, or his legal representatives or assigns, any right to participate in the Plan, except to such extent, if any, as the Committee may have determined or approved pursuant to the provisions of the Plan. -3- 4. Shares Subject to the Plan. -------------------------- 4.1. The maximum number of shares of Common Stock which may be delivered upon the exercise of options granted under the Plan shall be 600,000, subject to adjustment in accordance with the provisions of Section 11. 4.2. If any option granted under the Plan terminates without having been exercised in full (including an option which terminates by agreement between the Corporation and the Participant), the number of shares of Common Stock as to which such option has not been exercised prior to termination shall be available for future grants within the limits set forth in subsection 4.1. 4.3. Shares of Common Stock delivered upon the exercise of options shall consist of shares of authorized and unissued Common Stock, except that the Board of Directors may from time to time in its discretion determine in any case that the shares to be so delivered shall consist of shares of authorized and issued Common Stock reacquired by the Corporation and held in its Treasury. No fractional shares of Common Stock shall be delivered upon the exercise of an option. 5. Eligibility for Options. ----------------------- Employees eligible to receive options under the Plan shall be those officers of the Corporation, the Bank and the Corporation's other Subsidiaries who, in the opinion of the Committee, are in a position to have a significant effect upon the Corporation's business and consolidated earnings. 6. Tax Offset Payments. ------------------- In the case of a Nonstatutory Stock Option, the Committee may, in accordance with procedures established by it, provide for payment in cash, in connection with the exercise of the option, of an amount measured by reference to the difference between the option exercise price and the Fair Market Value of the Common Stock subject to the option determined at the time of exercise, as more fully described in Section 10. -4- 7. Eligibility of Tax Offset Payments. ---------------------------------- Eligibility to receive Tax Offset Payments under the Plan shall be limited to (i) officers to whom Nonstatutory Stock Options are or have been granted under this Plan and (ii) the person or persons entitled to exercise such options after the death of such officers. 8. Grant of Options and Associated Tax Offset Payments. --------------------------------------------------- 8.1. From time to time while the Plan is in effect the Committee may, in its absolute discretion, select from among the persons eligible to receive options (including persons to whom options were previously granted) those persons to whom options are to be granted. It is contemplated that, in general, options will be granted not more than once in a calendar year and that, in general, provisions for Tax Offset Payments in respect of the exercise of Nonstatutory Stock Options if made at all, will be made at the time such options are granted. However, the Committee may, in its discretion, determine that because of special circumstances options or rights of Tax Offset Payments are to be granted, at any time fixed by the Committee, to one or more persons eligible to receive options or Tax Offset Payments under the Plan. 8.2. The Committee shall, in its absolute discretion, determine the number of shares of Common Stock to be subject to each option granted by it under the Plan and, subject to the limitations of subsection 10.1, the calculation to be made under Section 10 in determining the amount of any Tax Offset Payment made under the Plan. 8.3. No option may be granted under the Plan after January 23, 1996, but options theretofore granted may extend beyond that date. No right to a Tax Offset Payment may be granted later than the date on which the option to which the Tax Offset Payment pertains is exercised. The right to a Tax Offset Payment shall expire upon the expiration or forfeiture of the related option. 9. Provisions of Options. --------------------- 9.1 Incentive Stock Options or Nonstatutory Stock Options. Options ----------------------------------------------------- granted under the Plan may be either Incentive Stock Options or Nonstatutory Stock Options, as the Committee shall determine at the time of each grant of options hereunder. It is contemplated that the options granted under the Plan -5- will to the extent possible, but subject to the discretion of the Committee, qualify as Incentive Stock Options. 9.2. Stock Option Certificates or Agreements. Options granted under the --------------------------------------- Plan shall be evidenced by certificates or agreements in such form as the Committee shall from time to time approve. Such certificates or agreements shall comply with the terms and conditions of the Plan and may contain such other provisions not inconsistent with the terms and conditions of the Plan as the Committee shall deem advisable. In the case of options intended to qualify as Incentive Stock Options, the certificates or agreements shall contain such provisions relating to exercise and other matters as are required of Incentive Stock Options under the Code. Where provision is made for a Tax Offset Payment upon exercise of an option, the option certificate or agreement shall also contain such provisions pertaining to such Tax Offset Payment, not inconsistent with the terms and conditions of the Plan, as the Committee shall deem advisable. 9.3. Terms and Conditions. All options granted under the Plan shall be -------------------- subject to the following terms and conditions to the extent applicable and to such other terms and conditions not inconsistent therewith as the Committee shall determine. 9.3.1. Option Price. The option price per share of Common Stock, with ------------ respect to each option, shall not be less than the Fair Market Value per share at the time the option is granted. 9.3.2. Number of Shares of Common Stock Subject to Incentive Stock ----------------------------------------------------------- Options. In the case of an option intended to qualify as an Incentive Stock Option, the aggregate Fair Market Value (determined as of the time the option is granted) of the stock with respect to which Incentive Stock Options granted after December 31, 1986 are exercisable for the first time by the Participant during any calendar year (under all plans of the Participant's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. The provisions of this Section 9.3.2 shall be construed and applied in accordance with Section 422A (b)(7) of the Code and the regulations, if any, promulgated thereunder. -6- 9.3.3. Period of Options. An option shall be exercisable during such ----------------- period of time as the Committee may specify (subject to subsection 9.4 below), but not after the expiration of ten years from the date the option is granted. 9.3.4. Exercise of Options. ------------------- 9.3.4.1. Each option shall be made exercisable at such time or times as the Committee shall determine, but in all events, subject to the provisions of Section 9.3.2. It is contemplated that the Committee will normally provide that the right to exercise an option will accrue immediately with respect to 25 percent of the number of shares of Common Stock subject to the option and that the right to exercise the option with respect to the balance of the shares subject thereto will accrue in substantially equal installments on the first three anniversaries of the date of grant. However, the Committee may in any case provide that the option will be exercisable immediately with respect to all the shares of Common Stock subject to the option or that the right to exercise the option will accrue in different installments and at different times from those set forth above, if, in the opinion of the Committee, such provisions are appropriate taking into account the age of the Participant and other relevant circumstances. In the case of an option made exercisable in installments, the Committee may later determine to accelerate the time at which one or more of such installments may be exercised. 9.3.4.2. Notwithstanding the provisions of paragraph 9.3.4.1, if any person is entitled to receive a Tax Offset Payment in connection with the exercise of a Nonstatutory Stock Option, the option shall not be exercisable prior to the expiration of six months from the date on which the right to such Tax Offset Payment was granted. 9.3.4.3. Any exercise of an option shall be in writing signed by the proper person and delivered or mailed to the Secretary of the Committee, accompanied by the option certificate or agreement and payment in full for the number of shares in respect of which the option is exercised. -7- 9.3.4.4. In the event an option is exercised by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, the Corporation shall be under no obligation to deliver stock thereunder or make any Tax Offset Payment in respect thereof unless and until the Corporation is satisfied that the person or persons exercising the option is or are the duly appointed executor or administrator of the deceased Participant or the person or persons to whom the option has been transferred by the Participant's will or by the applicable laws of descent and distribution. 9.3.5. Payment for and Delivery of Stock. The shares of stock --------------------------------- purchased on any exercise of an option granted hereunder shall be paid for in full in cash or, if permitted by the Committee, in shares of unencumbered Common Stock at the time of such exercise. A Participant shall have the rights of a shareholder only as to stock actually issued to him. 9.3.6. Listing of Stock, Withholding and Other Legal Requirements. ---------------------------------------------------------- The Corporation shall not be obligated to deliver any stock until all federal and state laws and regulations which the Corporation may deem applicable have been complied with, nor, in the event the outstanding Common Stock is at the time listed upon any stock exchange, until the stock to be delivered has been listed or authorized to be added to the list upon official notice of issuance to such exchange. Without limiting the generality of the foregoing, the Committee shall require, on such terms as it deems necessary, that the Participant pay to the Corporation, or make other satisfactory provision for the payment of, any federal, state or local taxes required by law to be withheld in respect of the exercise of any option or the receipt of any Tax Offset Payment. In the Committee's discretion, a Participant may elect to satisfy all or a portion of his or her federal, state and local tax withholding requirements or liability, up to the amount calculated by applying the Participant's maximum marginal tax rate, by having shares of Common Stock withheld from the shares otherwise issuable upon the exercise of an option, or by delivering to the Corporation -8- previously owned shares of Common Stock, valued at their Fair Market Value on the date that withholding taxes are determined. In addition, if the shares of stock subject to any option have not been registered in accordance with the Securities Act of 1933, as amended, the Corporation may require the person or persons who wishes or wish to exercise such option to make such representation or agreement with respect to the sale of stock acquired on exercise of the option as will be sufficient, in the opinion of the Corporation's General Counsel, to avoid violation of said Act. 9.3.7. Non-transferability of Options. Subject to the provisions of ------------------------------ this Section, (a) no option shall be transferable otherwise than by will, by the laws of descent and distribution, or by operation of a "qualified domestic relations order," as that term is defined in the Code, and (b) during the lifetime of the Participant to whom an option has been granted, rights under the option may be exercised only by the Participant, the Participant's guardian or legal representative, or by the assignee of the option under a "qualified domestic relations order." Notwithstanding the foregoing, the Committee may provide for greater transferability in the case of any option, including, without limitation, transfer to one or more members of the Participant's family or to a partnership or trust established for the benefit of one or more members of the Participant's family. In no event shall Incentive Stock Options awarded under the Plan be transferable other than as permitted under the rules prescribed in the Code for incentive stock options. An option that is intended to be exempt under Rule 16b-3 under the Exchange Act or any successor rule, or that is intended to qualify for the Performance-Based Exception, shall be transferable only to the extent consistent with such exemption or qualification. 9.3.8. Death During Employment. If a Participant dies during ----------------------- employment after attaining age 62 and at a time when he is entitled to exercise an option, then at any time or times within three years after death (or such greater or lesser period after death as may be specified in the certificate or agreement evidencing the option) such option may be exercised in part or in full as to all of the shares subject to the option, subject to the provisions of Section 9.3.2. If a -9- Participant dies during employment prior to attaining age 62 and at a time when he is entitled to exercise an option, then at any time or times within one year after death (or such greater or lesser period after death as may be specified in the certificate or agreement evidencing the option) such option may be exercised, but only as to any or all of those shares which the Participant was entitled to purchase immediately prior to his death. In either case, options exercisable after death may be exercised by the executor or administrator of the deceased Participant or by the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, and except as so exercised shall expire at the end of the specified post-death exercise period. In no event, however, may any option granted under the Plan be exercised after the expiration of ten years from the date the option was granted or, if the option exercise period established at time of grant was less than ten years, then after the expiration of such shorter period. 9.3.9. Retirement. In the event of a Participant's Retirement at a ---------- time when he is entitled to exercise an option, then at any time or times within the period determined under (a) or (b) below, whichever is applicable, such option may be exercised as follows: (a) In the case of Retirement after attaining age 62, then within three years after Retirement (or such greater or lesser period after Retirement as may be specified in the certificate or agreement evidencing the option) the Participant may exercise such option in full or in part as to all of the shares subject to the option, subject to the provisions of Section 9.3.2. If the Participant dies within this three-year (or other specified) post-retirement exercise period, his option may be exercised, by his executor or administrator or the person or persons to whom the option is transferred by the laws of descent and distribution, to the same extent as if the deceased Participant had survived, during a period equal to the greater of one year from the date of his death or the remainder of such three-year or other specified post-Retirement exercise period. -10- (b) In the case of Retirement prior to attaining age 62, then within six months after Retirement (or such greater or lesser period after Retirement as may be specified in the certificate or agreement evidencing the option) the Participant may exercise such option only as to those shares which he was entitled to purchase immediately prior to his Retirement. If the Participant dies within this six-month (or other specified) post-Retirement exercise period, his option may be exercised by his executor or administrator or the person or persons to whom the option is transferred by the laws of descent and distribution, to the same extent as if the deceased Participant had survived, during the greater of one year from the date of his death or, if a post-Retirement exercise period greater than one year was specified in the option certificate or agreement, the remainder of such longer period. Except as exercised within the applicable period described above, each option shall expire at the end of such period. In no event, however, may any option granted under the Plan be exercised after the expiration of ten years from the date the option was granted or, if the option exercise period established at time of grant was less than ten years, then after the expiration of such shorter period. 9.3.10. Other Termination of Employment. If the employment of a ------------------------------- Participant terminates for any reason other than his death or Retirement, all options held by the Participant shall thereupon expire subject to the following provisions: (a) If termination of employment occurs by the voluntary act of the Participant, then at any time or times within three months after such termination of employment (but not after the expiration of ten years from the date the option was granted or, if the option exercise period established at time of grant was less than ten years, then after the expiration of such shorter period), the Participant may exercise such option as to all or any of the shares which he was entitled to purchase thereunder immediately prior to such termination of employment, and except as so exercised such option shall expire at the end of such period of three months; and -11- (b) If termination of employment does not occur by the voluntary act of the Participant, such option may be exercised following such termination of employment only to the extent, if any, approved by the Committee. If the Committee so decides, an option may provide that a leave of absence granted by the Corporation or a Subsidiary is not a termination of employment for the purpose of this subsection 9.3.10, and in the absence of such a provision the Committee may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. 9.4. Authority of the Committee. The Committee shall have the -------------------------- authority, either generally or in particular instances, to waive compliance by a Participant with any obligation to be performed by him under an option and to waive any condition or provision of an option, except that the Committee may not (i) increase the total number of shares covered by the option (except in accordance with Section 11), (ii) reduce the option price per share (except in accordance with Section 11) or (iii) extend the term of the option to more than ten years, subject, however, to the provisions of Section 13. 10. Terms and Conditions of Tax Offset Payments. ------------------------------------------- 10.1. Amount Payable. Each person entitled to a Tax Offset Payment shall -------------- receive, at the time specified in subsection 10.2 below, an amount of money equal to a percentage (up to the lesser of 150 percent or the applicable percentage as hereinafter defined), determined by the Committee at the time the right of the Tax Offset Payment is granted, of the taxable amount realized in connection with the exercise of the option to which the Tax Offset Payment pertains. For purposes of the preceding sentence, the taxable amount realized upon the exercise of an option shall be the excess of (a) over (b), where little (b) is the aggregate price paid in cash on exercise of the option, and (a) is the adjusted aggregate Fair Market Value of the shares of Common Stock received upon exercise of the option, such adjusted aggregate Fair Market Value to be determined as follows: the number of shares received upon exercise shall first be reduced by a number equal to the number of shares of unencumbered Common Stock (if any) paid as part of the option exercise price, and the net number so arrived at shall then be multiplied by the Fair Market -12- Value of a share of Common Stock measured as of the date of exercise of the option to which the Tax Offset Payment pertains. For purposes of this Section, the applicable percentage shall be that percentage which, when applied against the taxable spread realized in connection with the exercise of the option (the "option spread"), provides an amount, after reduction for federal income taxes applicable in respect of such amount, equal to the federal income tax due with respect to the option spread, in each case assuming that the amount or spread subject to tax is taxed as the regular maximum marginal rate applicable to individuals under the Code as in effect for the year in which the income in respect of the option exercise is realized. 10.2. Time of Payment. Payment of the amount described under subsection --------------- 10.1 subsection 10.1 shall be made on, or as soon as practicable following, the date of exercise of the option to which the Tax Offset Payment pertains. 10.3. Nontransferability. The right to receive a Tax Offset Payment may ------------------ not be transferred apart from the option to which it pertains. 11. Changes in Stock. ---------------- In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock which becomes effective after the adoption of the Plan by the Board of Directors, the Committee shall make appropriate adjustments in (i) the number and kind of shares of stock or securities on which options may thereafter be granted hereunder, (ii) the number and kind of shares of stock or securities remaining subject to each option outstanding at the time of such change and (iii) the option price. The Committee's determination shall be binding on all persons concerned. Subject to any required action by the stockholders, if the Corporation shall be the surviving corporation in any merger or consolidation (other than a merger or consolidation in which the Corporation survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any option granted hereunder shall pertain and apply to the securities which a holder of the number of shares of stock of the Corporation then subject to the option would have been entitled to receive, but a dissolution or liquidation of the -13- Corporation or a merger or consolidation in which the Corporation is not the surviving corporation or in which a majority of its outstanding shares are so converted or exchanged shall cause every option hereunder to terminate; provided that if any such dissolution, liquidation, merger or consolidation is contemplated, the Corporation shall either arrange for any corporation succeeding to the business and assets of the Corporation to issue to the Participants replacement options on such corporation's stock which will to the extent possible preserve the value of the outstanding options or shall make the outstanding options fully exercisable, subject to the provisions of Section 9.3.2, at least 20 days before the effective date of any such dissolution, liquidation or consolidation. The existence of the Plan shall not prevent any such change or other transaction and no Participant thereunder shall have any right except as herein expressly set forth. 12. Employment Rights. ----------------- Neither the adoption of the Plan nor any grant of options or rights in respect of Tax Offset Payments confers upon any employee of the Corporation or a Subsidiary any right to continued employment with the Corporation or a Subsidiary, as the case may be, nor does it interfere in any way with the rights of the Corporation or a Subsidiary to terminate the employment of any of its employees at any time. 13. Discontinuance, Cancellation, Amendment and Termination. ------------------------------------------------------- The Committee may at any time discontinue granting options or providing for Tax Offset Payments under the Plan and, with the consent of the Participant, may at any time cancel an existing option in whole or in part and grant another option to the Participant for such number of shares as the Committee specifies. The Board of Directors may at any time or times amend the Plan for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law or may at any time terminate the Plan as to any further grants of options, provided that no such amendment shall (a) increase the maximum number of shares available under the Plan except as provided in Section 11, (b) decrease the minimum option price of options thereafter to be granted to less than the Fair Market Value at the time the options are granted, or (c) increase the time limits for granting or exercising options thereafter to be granted. The Committee may make non-material amendments to the Plan. -14- 14. Effective Date. -------------- The Plan shall become effective upon its adoption by the Board of Directors, and options may be granted under the Plan from and after the date of such adoption; provided, however, that if prior to January 23, 1987 the stockholders of the Corporation have not approved the Plan, the Plan shall terminate and all options and rights to Tax Offset Payments theretofore granted shall terminate and cease to be of any force or effect. -15- EX-10.(C) 5 BANKBOSTON CORP. 1991 STOCK INCENTIVE PLAN EXHIBIT 10(c) BANKBOSTON CORPORATION 1991 Long-Term Stock Incentive Plan (As amended through October 23, 1997) 1. Purpose. ------- The BankBoston Corporation 1991 Long-Term Stock Incentive Plan (the "Plan") has been adopted to encourage and create significant ownership of the Common Stock of the Corporation by key officers and employees of the Corporation and its Affiliates. Additional purposes of the Plan include providing a meaningful incentive to Participants to make substantial contributions to the Corporation's future success, enhancing the Corporation's ability to attract and retain persons who will make such contributions, and ensuring that the Corporation has competitive compensation opportunities for such key officers and employees. By meeting these objectives, the Plan is intended to benefit the interests of the stockholders of the Corporation. 2. Definitions. ----------- As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1. "Affiliate" means any business entity that is directly or indirectly controlled by the Corporation or any entity in which the Corporation has a significant equity interest, as determined by the Committee. 2.2. "Award" means any Option, Stock Appreciation Right or Restricted Stock granted under the Plan. 2.3. "Board of Directors" means the Board of Directors of the Corporation, except that, whenever action is to be taken under the Plan with respect to a Reporting Person, "Board of Directors" shall mean only such directors who are disinterested persons within the meaning of Rule 16b-3 under the Exchange Act or any successor rule. -2- 2.4. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.5. "Committee" means the Compensation Committee of the Board of Directors. "Committee," whenever action is to be taken under the Plan with respect to a Reporting Person, shall mean only such members who are disinterested persons within the meaning of Rule 16b-3 under the Exchange Act or any successor rule. To the extent that the Committee delegates its power to make Awards as permitted by Section 4.1, all references in the Plan to the Committee's authority to make Awards and determinations with respect thereto shall be deemed to include the Committee's delegate or delegates. 2.6. "Common Stock" or "Stock" means the Common Stock of the Corporation. 2.7. "Corporation" means BankBoston Corporation, a corporation established under the laws of the Commonwealth of Massachusetts. 2.8. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner determined by the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 2.9. "Disability" means a physical or mental condition of such a nature that it would qualify a Participant for benefits under the long-term disability insurance plan of BankBoston, N.A. or any successor plan. 2.10. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. 2.11. "Fair Market Value," in the case of a share of Common Stock on a particular day, means the closing price of the Common Stock for that day as reported in the "NYSE-Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event "NYSE-Composite Transactions" cease to be reported, the Committee shall adopt some other appropriate method for determining Fair Market Value. -3- 2.12. "Incentive Stock Option" means an Option which is intended to satisfy the requirements of Section 422(b) of the Code or any successor provision. 2.13. "Nonstatutory Stock Option" means an Option which is not intended to qualify as an Incentive Stock Option. 2.14. "Option" means an Incentive Stock Option or a Nonstatutory Stock Option. 2.15. "Participant" means an individual selected by the Committee to receive an Award under the Plan. 2.16. "Performance-Based Exception" means the performance-based exception from the deductibility limits set forth in Section 162(m) of the Code and the regulations thereunder. 2.17. "Reporting Person" means a person required to file reports under Section 16(a) of the Exchange Act or any successor statute. 2.18. "Restricted Stock" means shares of Common Stock awarded to a Participant, subject to such forfeiture provisions or restrictions on transfer, if any, as may be established by the Committee. 2.19. "Retirement" means termination of employment with the Corporation or any Affiliate if such termination of employment constitutes normal retirement, early retirement, disability retirement or other retirement as provided for at the time of such termination of employment under the applicable retirement program then maintained by the Corporation or the Affiliate, provided that the Participant does not continue in the employment of the Corporation or any Affiliate and provided further that such termination does not constitute a Termination for Cause. 2.20. "Stock Appreciation Right" or "SAR" means a right to receive the excess, if any, of the Fair Market Value of a share of Common Stock on the date the Stock Appreciation Right is exercised over the grant price of the SAR. 2.21. "Termination for Cause" means the termination of a Participant's employment due to any act which, in the discretion of the Committee, is deemed inimical to the best interests of the Corporation or any Affiliate, including, but not limited to: (i) willful and gross misconduct in respect of the Participant's duties for the Corporation or the Affiliate, (ii) conviction of a felony or perpetration of a common law fraud, (iii) willful failure to comply with applicable laws or regulations with respect to the execution of -4- the Corporation's or the Affiliate's businesses or (iv) theft, fraud, embezzlement, dishonesty or other conduct which has resulted or is likely to result in material economic or other damage to the Corporation or any Affiliate. 3. Effective Date and Term. ----------------------- The Plan shall become effective upon its approval by the Corporation's stockholders, and Awards may be granted under the Plan from and after the date of such approval. No Awards may be made under the Plan after December 31, 1996, but Awards theretofore granted may extend beyond that date. 4. Administration. -------------- 4.1. The Plan shall be administered by the Committee. Subject to the provisions set forth herein, the Committee shall have full authority to determine the provisions of Awards, to interpret the terms of the Plan and of Awards made under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers who are also directors of the Corporation the power to make Awards to Participants who are not Reporting Persons at the time of such Awards and all determinations under the Plan with respect thereto, provided that the Committee shall fix the maximum amount of Awards for such Participants as a group. 4.2. Notwithstanding Section 4.1 and subject to the provisions set forth herein, the Board of Directors shall approve or ratify Awards made under the Plan to any executive officer who is also a director of the Corporation. 4.3. The decision of the Committee on any matter as to it is given authority under Section 4.1 above shall be final and binding on all persons concerned. 5. Shares Subject to the Plan. -------------------------- 5.1. The maximum number of shares of Common Stock that will be available for issuance under the Plan shall be 7,447,749, subject to adjustment in accordance with the provisions of Section 5.3. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. -5- 5.2. If any Award in respect of shares of Common Stock expires or is terminated unexercised or is forfeited for any reason or settled in a manner that results in fewer shares outstanding than were initially awarded, including without limitation the surrender of shares as full or partial payment for the Award or any tax obligation thereon, the shares subject to such Award or so surrendered, as the case may be, to the extent of such expiration, termination, forfeiture or decrease, shall remain available for issuance under the Plan. 5.3. In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock or any other transaction (including, without limitation, an extraordinary cash dividend) which, in the determination of the Committee, affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under the Plan, then the Committee shall equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards, and (iii) the Option or grant price with respect to any of the foregoing, provided that the number of shares subject to any Award shall always be a whole number. In the event of any merger, consolidation, dissolution or liquidation of the Corporation, the Committee, in its sole discretion, may, as to any outstanding Awards, make such substitution or adjustment in the aggregate number of shares reserved for issuance under the Plan and in the number and purchase price (if any) of shares subject to such Awards as it may determine, make outstanding Awards fully exercisable, or amend or terminate such Awards upon such terms and conditions as it shall provide (which, in the case of the termination of the vested portion of any Award, shall require payment or other consideration which the Committee deems equitable in the circumstances). 6. Eligibility for Awards. ---------------------- Any officer or employee of the Corporation or its Affiliates who, in the opinion of the Committee, is in a position to have a significant effect upon the Corporation's business and consolidated earnings, shall be eligible to receive an Award under the Plan. -6- 7. Grant of Awards. --------------- 7.1. From time to time while the Plan is in effect, the Committee may, in its absolute discretion, select from among the persons eligible to receive Awards (including persons to whom Awards were previously granted) those persons to whom Awards are to be granted. 7.2. The Committee shall, in its absolute discretion, determine the number of shares of Common Stock or SARs to be subject to each Award made by it under the Plan. 8. Options. ------- 8.1. Incentive Stock Options or Nonstatutory Stock Options. Options granted ----------------------------------------------------- under the Plan may be either Incentive Stock Options or Nonstatutory Stock Options, as the Committee shall determine at the time of each grant of Options hereunder. The terms and conditions of Incentive Stock Options shall be subject to and comply with Section 422(b) of the Code or any successor provision, and any regulations thereunder. 8.2. Option Price. The Option price per share of Common Stock, with respect ------------ to each Option, shall not be less than the Fair Market Value per share at the time the Option is granted. 8.3. Period of Options. An Option shall be exercisable during such period ----------------- of time as the Committee may specify, subject, in the case of Incentive Stock Options, to any limitation required by the Code. It is contemplated that the Committee will normally provide that an Option shall not be exercisable after the expiration of ten years from the date the Option is granted. 8.4. Exercise of Options. Each Option shall be made exercisable at such ------------------- time or times as the Committee shall determine. It is contemplated that the Committee will normally provide that the right to exercise an Option will accrue immediately with respect to 50 percent of the number of shares of Common Stock subject to the Option and that the right to exercise the Option with respect to the balance of the shares subject thereto will accrue on the first anniversary of the date of grant. However, the Committee may, in its discretion, in any case provide that the Option will be exercisable immediately with respect to all the shares of Common Stock subject to the Option or that the right to exercise the Option will accrue in different installments and at different times from those set forth above. In the case of an Option made exercisable in installments, the Committee may later determine to accelerate the time at which one or more of such installments may be exercised. The Committee may impose such -7- conditions with respect to the exercise of Options, including conditions relating to applicable federal or state tax or securities laws, as it considers necessary or advisable. 8.5. Payment for and Delivery of Stock. The shares of Stock purchased on --------------------------------- any exercise of an Option granted hereunder shall be paid for in full in cash at the time of such exercise or, to the extent permitted by the Committee, by delivery of shares of Common Stock, valued at their Fair Market Value on the date of delivery, or such other lawful consideration as the Committee may determine. The Committee may provide for the automatic award of an Option upon the delivery of shares to the Corporation in payment of another Option for up to the number of shares delivered to the Corporation in payment of such other Option. 8.6 Termination of Employment. ------------------------- 8.6.1. Death during Employment. If a Participant dies during employment ----------------------- after attaining age 62 and at a time when he is entitled to exercise an Option, then at any time or times within three years after death (or such greater or lesser period after death as may be specified in the documentation evidencing the Option) such Option may be exercised in part or in full as to all of the shares subject to the Option. If a Participant dies during employment prior to attaining age 62 and at a time when he is entitled to exercise an Option, then at any time or times within one year after death (or such greater or lesser period after death as may be specified in the documentation evidencing the Option) such Option may be exercised, but only as to any or all of those shares which the Participant was entitled to purchase immediately prior to his death. In either case, Options exercisable after death may be exercised by the Participant's Designated Beneficiary, and except as so exercised shall expire at the end of the specified post-death exercise period. In no event, however, may any Option granted under the Plan be exercised after the expiration of the Option exercise period established at the time of grant. 8.6.2. Retirement or Disability. In the event of a Participant's ------------------------ Retirement or Disability at a time when he is entitled to exercise an Option, then at any time or times within the period determined under (a) or (b) below, whichever is applicable, such Option may be exercised as follows: (a) In the case of Retirement or Disability after attaining age 62, then within three years after Retirement or Disability (or such greater or lesser period after Retirement or Disability as may -8- be specified in the documentation evidencing the Option) the Participant may exercise such Option in full or in part as to all of the shares subject to the Option. If the Participant dies within this three-year (or other specified) post-Retirement or post-Disability exercise period, his Option may be exercised by his Designated Beneficiary, to the same extent as if the deceased Participant had survived, during a period equal to the greater of one year from the date of his death or the remainder of such three-year or other specified post-Retirement or post-Disability exercise period. (b) In the case of Retirement or Disability prior to attaining age 62, then within one year after Retirement or Disability (or such greater or lesser period after Retirement or Disability as may be specified in the documentation evidencing the Option) the Participant may exercise such Option only as to those shares which he was entitled to purchase immediately prior to his Retirement or Disability. If the Participant dies within this one-year (or other specified) post-Retirement or post-Disability exercise period, his Option may be exercised by his Designated Beneficiary, to the same extent as if the deceased Participant had survived, during the greater of one year from the date of his death or, if a post-Retirement or post-Disability exercise period greater than one year was specified in the Option documentation, the remainder of such longer period. Except as exercised within the applicable period described above, each Option shall expire at the end of such period. In no event, however, may any Option granted under the Plan be exercised after the expiration of the Option exercise period established at the time of grant. 8.6.3. Other Termination of Employment. If the employment of a ------------------------------- Participant terminates for any reason other than his death, Retirement or Disability, all Options held by the Participant may be exercised following such termination of employment only to the extent, if any, approved by the Committee and, except to such extent, shall expire upon such termination. If the Committee so decides, an Option may provide that a leave of absence granted by the Corporation or an Affiliate is not a termination of employment for the purpose of this subsection 8.6.3, and in the absence of such a provision the Committee may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. -9- 9. Stock Appreciation Rights. ------------------------- 9.1. Grant Forms of SARs. Subject to the provisions of the Plan, the ------------------- Committee may award SARs related to an Option (at or after the award of the Option, subject to the provisions of Section 3), or alone and unrelated to an Option. 9.2. Grant Price. The Committee shall establish the grant price of an SAR ----------- at the time the SAR is granted, which price shall not be less than the Fair Market Value of the Common Stock at the time of grant. 9.3. Payment of SARs. SARs may be payable in cash, shares of Common Stock --------------- or a combination of the two, as provided by the Committee. Shares issued on the settlement of the exercise of SARs shall be valued at their Fair Market Value on the date of exercise. 9.4. Termination of Employment. The Committee shall determine the effect on ------------------------- an SAR of the death, Retirement, Disability or other termination of employment of a Participant and the extent to which, and the period during which, the Participant or the Participant's legal representative, guardian or Designated Beneficiary may receive payment of such an SAR. 10. Restricted Stock. ---------------- 10.1. Restrictions on Shares. Subject to the provisions of the Plan, the ---------------------- Committee may award shares of Restricted Stock, alone or in combination with other Awards under the Plan. Such shares may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Committee, during the period, if any, that such shares are subject to forfeiture or, to the extent provided in Section 10.2, during a period after such shares are delivered to the Participant free of any risk of forfeiture. 10.2. Lapse of Restrictions. Except as provided in this Section 10.2 or --------------------- in Section 10.4 below, shares of Restricted Stock granted as of any date shall be subject to the forfeiture restrictions described in Section 10.5 and shall become free of such restrictions in the following installments: one-third on the third anniversary of the date of grant, an additional one-third on the fourth anniversary of the date of grant, and the remaining one-third on the fifth anniversary of the date of grant. Notwithstanding the lapse of forfeiture restrictions as of any anniversary of the date of grant, 50% of the shares freed of such restrictions as of such date may not be sold, assigned, transferred, pledged or otherwise encumbered, -10- except as permitted by the Committee, until the earliest of (i) ten years after the date of grant, (ii) the date on which the Participant attains age 55 or (iii) the date of the Participant's death or Disability. Notwithstanding the provisions of Section 10.1 or this Section 10.2, the Committee may, in its discretion, award shares of Restricted Stock having different terms from those set forth above, including, without limitation, shares which are nonforfeitable or freely transferable upon grant and shares having restrictions which lapse upon the attainment of specified performance goals or targets, as determined by the Committee. 10.3. Participants' Rights in Restricted Stock. Shares of Restricted ---------------------------------------- Stock shall be evidenced in such manner as the Committee may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and, except as otherwise determined by the Committee, shall be delivered to the Participant upon the lapse of forfeiture restrictions with respect to such shares. Except as otherwise provided by the Committee, during the period that shares of Restricted Stock are subject to forfeiture and after such shares are delivered to the Participant free of any risk of forfeiture, dividends with respect to any such shares shall be paid to, and voting rights with respect to any such shares shall be vested in, the Participant. The Committee may provide that the payment of any dividends payable with respect to shares of Restricted Stock that are subject to forfeiture may be deferred by the Participant, with or without interest. -11- 10.4. Death, Retirement or Disability; Other Terminations of Restrictions. -------------------------------------------------------------------- 10.4.1. Death. Except as otherwise provided by the Committee, if a ----- Participant dies, then any shares of Restricted Stock awarded pursuant to the Plan that have not been forfeited shall be delivered to the Participant's Designated Beneficiary free of any restrictions (other than restrictions that may be required under federal or state securities laws). 10.4.2. Retirement or Disability. Except as otherwise provided by ------------------------ the Committee, in the event of a Participant's Retirement or Disability, then any shares of Restricted Stock awarded pursuant to the Plan that have not been forfeited shall be delivered to the Participant free of any restrictions (other than restrictions that may be required under federal or state securities laws). 10.4.3. Other Terminations of Restrictions. In addition to the ---------------------------------- provisions for the termination of restrictions set forth in subsections 10.4.1 and 10.4.2, the Committee may terminate or modify restrictions on Restricted Stock at any time to the extent it so determines. 10.5. Forfeiture of Awards. If a Participant terminates employment for -------------------- any reason other than one of the reasons specified in subsections 10.4.1 or 10.4.2, then any shares of Restricted Stock which are then subject to forfeiture shall thereupon automatically be forfeited to the Corporation. For purposes of this Section 10.5, a Participant shall not be considered to have terminated employment if he is employed, by the Corporation or any Affiliate or if he is on a leave of absence from the Corporation or any Affiliate under circumstances which the Committee determines should not result in forfeiture under the Plan. 10.6. Consideration for Restricted Stock. Shares of Restricted Stock ---------------------------------- shall be issued for no cash consideration or such minimum consideration as may be required under applicable law. 11. General Provisions Applicable to Awards. --------------------------------------- 11.1. Non-transferability of Awards. Subject to the provisions of this ----------------------------- Section, (a) no Award under the Plan shall be transferable otherwise than by will, by the laws of descent and distribution, or by operation of a "qualified domestic relations order," as that term is defined in the Code, and (b) during the lifetime of the Participant to whom an Award has been granted, rights under the Award may be exercised only by the Participant, the Participant's guardian or legal representative, or by the assignee of the Award under a "qualified domestic relations order." Notwithstanding the foregoing, the Committee may provide -12- for greater transferability in the case of any Award, including, without limitation, transfer to one or more members of the Participant's family or to a partnership or trust established for the benefit of one or more members of the Participant's family. In no event shall Incentive Stock Options awarded under the Plan be transferable other than as permitted under the rules prescribed in the Code for incentive stock options. An Award that is intended to be exempt under Rule 16b-3 under the Exchange Act or any successor rule, or that is intended to qualify for the Performance-Based Exception, shall be transferable only to the extent consistent with such exemption or qualification. Nothing in this Section shall be construed as restricting the transfer of shares of Common Stock that have become free of other transfer restrictions under the Plan or that were awarded free of any such restrictions. 11.2. Documentation of Awards. Each Award under the Plan shall be ----------------------- evidenced by a writing delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or comply with applicable tax and regulatory laws and accounting principles. The Committee need not require the execution of any instrument or acknowledgement of notice of a Grant under the Plan, in which case the acceptance of such an Award by the respective Participant will constitute agreement to the terms and conditions of the Award. 11.3. Committee Discretion. Each type of Award may be made alone, in --------------------- addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee at the time of award or at any time thereafter. 11.4. Tax Withholding. The Committee shall require, on such terms as it --------------- deems necessary, that the Participant pay to the Corporation, or make other satisfactory provision for payment of, any federal, state or local taxes required by law to be withheld in respect of Awards under the Plan. In the Committee's discretion, a Participant may elect to satisfy all or a portion of his or her federal, state and local tax withholding requirements or liability, up to the amount calculated by applying the Participant's maximum marginal tax rate, by having shares of Common Stock withheld from the shares otherwise issuable in -13- connection with the event creating the tax obligation, or by delivering to the Corporation previously owned shares of Common Stock, valued at their Fair Market Value on the date that withholding taxes are determined. The Corporation and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. 11.5. Foreign Nationals. Awards may be made to Participants who are ----------------- foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or comply with applicable laws. Notwithstanding the provisions of this Section 11.5, Awards to any such individuals who are Reporting Persons shall be made in accordance with the other provisions of the Plan, except as otherwise permitted by Rule 16b-3 under the Exchange Act or any successor rule. 11.6. Amendment of Award. The Committee may amend, modify, terminate or ------------------ waive any condition or provision of any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonstatutory Stock Option; provided, however, that the Committee may not (except in accordance with Section 5.3) increase the number of shares subject to any outstanding Award or decrease the Option or award price of the Award. The Participant's consent to any such action shall be required unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 12. Miscellaneous. ------------- 12.1. No Right to Employment. No person shall have any claim or right to ---------------------- be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment. The Corporation and its Affiliates expressly reserve the right at any time to terminate the employment of a Participant free from any liability or claim under the Plan, except as may be expressly provided in the applicable Award. 12.2. No Rights as Stockholder. Subject to the provisions of the ------------------------ applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the holder thereof. A Participant to whom -14- Common Stock is awarded shall be considered the holder of the stock at the time of the Award except as otherwise provided in the applicable Award. 12.3. No Fractional Shares. No fractional shares of Common Stock shall be -------------------- issued under the Plan, and cash shall be paid in lieu of any fractional shares in settlement of Awards granted under the Plan. 12.4. Unfunded Plan. The Plan shall be unfunded, shall not create (or be ------------- construed to create) a trust or a separate fund or funds, and shall not establish any fiduciary relationship between the Corporation and any Participant or other person. 12.5. Successors and Assigns. The Plan shall be binding on all successors ---------------------- and assigns of the Participant, including without limitation the Participant's Designated Beneficiary or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 12.6. Amendment of Plan. The Board of Directors may amend, suspend or ----------------- terminate the Plan or any portion thereof at any time. The Committee may make non-material amendments to the Plan. 12.7. Governing Law. The provisions of the Plan shall be governed by and ------------- interpreted in accordance with the laws of the Commonwealth of Massachusetts. EX-10.(M) 6 FORM OF SEVERANCE AGREEMENT W/ CHAIRMAN EXHIBIT 10(m) AGREEMENT --------- THIS AGREEMENT dated as of August 5, 1994, is made by and between BankBoston Corporation, a Massachusetts corporation (the "Company"), and ___________ (the "Executive"). WHEREAS the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel; and WHEREAS the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties with the Company and/or the Bank, as the case may be, without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other valuable consideration, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this ------------- Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof and ----------------- shall continue in effect through August 31, 1997, provided that commencing on September 1, 1996 and each September 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than May 31 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such September 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than three (3) years beyond the last day of the month in 2 which such Change in Control occurred. Notwithstanding the foregoing provisions of this Section 2, this Agreement shall terminate, unless earlier terminated in accordance with this Agreement, (i) one (1) year after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee, upon recommendation of the Company's chief executive officer, has voted to terminate this Agreement or (ii) if earlier, immediately after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee has determined that the Executive's level of responsibility (other than reporting responsibility) has substantially changed from the Executive's current level of responsibility, in either case only if the notification occurs prior to a Potential Change in Control that results in a Change in Control. By way of illustration, if there were a change in the nature of the Executive's responsibilities (e.g., from technology to human resources) but the only change in the level of the Executive's responsibilities were a change in reporting responsibilities, these changes alone would not provide grounds for the Compensation Committee determination referred to in clause (ii) above. 3 3. Company's Covenants Summarized. In order to induce the Executive to ------------------------------ remain in the employ of the Company or the Bank and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive's employment with the Company or the Bank is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company or the Bank following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company or the Bank. 4. Executive's Covenants. The Executive agrees that, subject to the terms --------------------- and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will 4 remain in the employ of the Company or the Bank until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control in applying the definition of Good Reason), by reason of death or Retirement, or (iv) the termination by the Company or the Bank of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. ------------------------------------------ 5.1 Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive becomes eligible for benefits at least equal to those to which the Executive would have been entitled under the long- term disability 5 insurance plan of the Company in effect immediately prior to the Change in Control. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay or make available to the Executive any rights, compensation and benefits which are vested in the Executive or which the Executive has or is otherwise entitled to receive under any plan or program of the Company (including without limitation any retirement plan or any welfare plan providing post-retirement benefits) to the Executive as such rights, compensation or benefits become due. Such rights, compensation and benefits shall be determined under, and paid or made available in accordance 6 with, the Company's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. 6. Severance Payments. ------------------ 6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company or the Bank for Cause, (ii) by reason of death or Retirement, or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if the Executive's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or if the Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason) if the circum- 7 stance or event which constitutes Good Reason occurs at the direction of such Person. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefits otherwise payable to the Executive under any then existing broad- based employee severance plan, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in Control and (ii) the higher of the average of the annual amounts paid to, or approved for, the Executive pursuant to the Performance Recognition Opportunity Plan, or any successor plan, with respect to the three (3) years (or the number of years employed, if less) immediately preceding (a) the occurrence of the event or circumstance upon which the Notice of Termination is based or (b) the Change in Control. (B) In lieu of any further life, disability, accident and health insurance benefits 8 otherwise due to the Executive, the Company shall pay to the Executive a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Executive is eligible to receive such benefits immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason), for a period of three (3) years commencing on the Date of Termination. (C) The Executive shall continue to accrue service credit (for all purposes, including without limitation benefit accrual) under the Pension Plan, Thrift Plan, the Bonus SERP, the Excess SERP or any successor plans thereto, at the compensation level equal to the amount determined in accordance with Section 6.1(A) hereof for a period of three (3) years. 6.2 Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the 9 Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would be subject (in whole or part) to the Excise Tax, then the Severance Payments shall be reduced to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax (after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement) if (A) the net amount of such Total Payments, as so reduced (and after deduction of the net amount of federal, state and local income tax on such reduced Total Payments), is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after deduction of the net amount of federal, state and local income tax on such Total Payments) over (ii) the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total 10 Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive objects to 11 the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the Executive receiving the greater of clauses (A) and (B) of this Section. 6.3 The payments provided for in Section 6.1 hereof shall be made not later than the fifth day following the Date of Termination; however, if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined by the Executive, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company 12 (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in seeking to obtain or enforce any benefit or right provided by this Agreement, in accordance with Section 14 hereof (including without limitation fees and expenses incurred in seeking to secure the Executive's rights provided by Section 14 hereof). Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.1 Notice of Termination. After a Change in Control and during the term of --------------------- this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and 13 shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any ------------------- purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination (which, in the case of a termination by the Company or the Bank, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen 14 (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following --------------------------- a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Executive as a participant in all com- 15 pensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. If the Executive's employment by the Company or the Bank ------------- is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in Section 6 or Section 7.4 hereof shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or the Bank, or otherwise. 9. Successors; Binding Agreement. ----------------------------- 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by 16 purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all 17 such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: BankBoston Corporation 100 Federal Street Boston, MA 02110 Attention: Director, Human Resources Copy to: General Counsel To the Executive: ----------------- ----------------- ----------------- 18 11. Miscellaneous. No provision of this Agreement may be modified, waived or ------------- discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. Except as expressly provided herein, no waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts, and this Agreement shall be an instrument under seal. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the 19 Executive has agreed. The obligations of the Company and the Executive under Sections 6, 7, 8 and 14 hereof shall survive the expiration of the term of this Agreement. 12. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, ------------ each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. All claims by the Executive for ----------------------------------- benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. 20 Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Executive shall, however, be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall ----------- have the meanings indicated below: (A) "Bank" shall mean the Company's subsidiary, BankBoston, N.A., or if applicable, any other direct or indirect subsidiary of the Company by which the Executive is then employed during the term of this Agreement. (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Bonus SERP" shall mean BankBoston, N.A. Bonus Supplemental Employee Retirement Plan. (E) "Cause" for termination by the Company or the Bank of the Executive's employment, after any Change in Control, shall mean (i) the willful and continued failure by the Executive to substantially perform the 21 Executive's duties with the Company or the Bank (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in gross misconduct which is demonstrably and materially injurious to the Company or any of its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. (F) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) There is an acquisition of control of the Company as defined in Section 22 2(a)(2) of the Bank Holding Company Act of 1956, or any similar successor provision, as in effect at the time of the acquisition; or (II) Continuing Directors constitute two-thirds (2/3) or less of the membership of the Board, whether as the result of a proxy contest or for any other reason or reasons; or (III) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; or (IV) There is a change in control of the Company of a nature that would be required to be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule or form under the Exchange Act, as in effect at the time of the change, whether or not the Company is then subject to such reporting requirement, including without limitation any merger or consolidation of the Company with any other corporation, other than (i) 23 a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) forty-five percent (45%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of the Company or such surviving or parent entity outstand ing immediately after such merger or consolidation and which would result in those persons who are Continuing Directors immediately prior to such merger or consolidation constituting more than two-thirds (2/3) of the membership of the Board or the board of such surviving or parent entity immediately after, or subsequently at any time as contemplated by or as a result of, such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquired twenty-five percent (25%) or more of the 24 combined voting power of the Company's then outstanding securities; or (V) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (G) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (H) "Company" shall mean BankBoston Corporation and (except in determining, under Section 15(F) hereof, whether or not any Change in Control of the Company has occurred in connection with such succession) any successor to its business and/or assets which assumes or agrees to perform this Agreement, by operation of law or otherwise. Payments or benefits from the Company shall include those from the Bank. (I) "Compensation Committee" shall mean the Compensation and Nominating Committee of the Board. (J) "Continuing Director" shall mean any director (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is a successor of a director de- 25 scribed in clause (i), if such successor (and any intervening successor) shall have been recommended or elected to succeed a Continuing Director by a majority of the then Continuing Directors. (K) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. (L) "Excess SERP" shall mean BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company or the Bank, or failures by the Company or the Bank to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof or, in the case of paragraph (III) below, such act is not objected to in writing by the Executive within four (4) months after notification by 26 the Company to the Executive of the Company's or the Bank's intention to take the action contemplated by such paragraph (III): (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or the Bank or a meaningful alteration, adverse to the Executive, in the nature or status of the Executive's responsibilities (other than reporting responsibilities) from those in effect immediately prior to the Change in Control; (II) a reduction by the Company or the Bank in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company or the Bank, as the case may be, and all senior executives of any Person in control of the Company; (III) the Company's or the Bank's requiring the Executive to be based anywhere 27 other than the Boston Metropolitan Area (or, if different, the metropolitan area in which the Company's or the Bank's principal executive offices are located immediately prior to the Change in Control) except for required travel on the Company or Bank business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within fourteen (14) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including without limitation the Company's stock award, incentive compensation and bonus plans, unless an equitable arrangement (embodied in an 28 ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of 29 paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (P) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (Q) "Pension Plan" shall mean the Retirement Plan of BankBoston, N.A. and Certain Affiliated Companies. 30 (R) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to a registered offering of such securities in accordance with an agreement with the Company, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (S) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to 31 consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities (entitled to vote generally for the election of directors); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (T) "Retirement" shall be deemed the reason for the termination of the Executive's employment if the Executive voluntarily retires and receives benefits under the Pension Plan or other applicable retirement plan then maintained by the Company and in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with the Executive's consent with respect to the Executive. (U) "Severance Payments" shall mean those payments described in Section 6.1 hereof. 32 (V) "Thrift Plan" shall mean the Thrift-Incentive Plan of BankBoston, N.A. and Certain Affiliated Companies. (W) "Total Payments" shall mean those payments described in Section 6.2 hereof. BANKBOSTON CORPORATION By: __________________________ Name: Helen G. Drinan Title: Executive Vice President, Human Resources __________________________ 33 EX-10.(N) 7 FORM OF SEVERANCE AGREEMENT W/ OFFICERS EXHIBIT 10(n) ------------- AGREEMENT --------- THIS AGREEMENT dated as of August 5, 1994, is made by and between BankBoston Corporation, a Massachusetts corporation (the "Company"), and _____________ (the "Executive"). WHEREAS the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel; and WHEREAS the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties with the Company and/or the Bank, as the case may be, without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other valuable consideration, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this ------------- Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof and ----------------- shall continue in effect through August 31, 1997, provided that commencing on September 1, 1996 and each September 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than May 31 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such September 1. If a Change in Control shall have occurred during the term of this Agreement, however, this Agreement shall continue in effect for a period of not less than two (2) years beyond the last day of the month in 2 which such Change in Control occurred. Notwithstanding the foregoing provisions of this Section 2, this Agreement shall terminate, unless earlier terminated in accordance with this Agreement, (i) one (1) year after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee, upon recommendation of the Company's chief executive officer, has voted to terminate this Agreement or (ii) if earlier, immediately after the Executive is notified in accordance with Section 10 hereof that the Compensation Committee has determined that the Executive's level of responsibility (other than reporting responsibility) has substantially changed from the Executive's current level of responsibility, in either case only if the notification occurs prior to a Potential Change in Control that results in a Change in Control. By way of illustration, if there were a change in the nature of the Executive's responsibilities (e.g., from technology to human resources) but the only change in the level of the Executive's responsibilities were a change in reporting responsibilities, these changes alone would not provide grounds for the Compensation Committee determination referred to in clause (ii) above. 3 3. Company's Covenants Summarized. In order to induce the Executive to ------------------------------ remain in the employ of the Company or the Bank and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive's employment with the Company or the Bank is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company or the Bank following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment, and except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company or the Bank. 4. Executive's Covenants. The Executive agrees that, subject to the terms --------------------- and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will 4 remain in the employ of the Company or the Bank until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control in applying the definition of Good Reason), by reason of death or Retirement, or (iv) the termination by the Company or the Bank of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. ------------------------------------------ 5.1 Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive becomes eligible for benefits at least equal to those to which the Executive would have been entitled under the long- term disability 5 insurance plan of the Company in effect immediately prior to the Change in Control. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay or make available to the Executive any rights, compensation and benefits which are vested in the Executive or which the Executive has or is otherwise entitled to receive under any plan or program of the Company (including without limitation any retirement plan or any welfare plan providing post-retirement benefits) to the Executive as such rights, compensation or benefits become due. Such rights, compensation and benefits shall be determined under, and paid or made available in accordance 6 with, the Company's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. 6. Severance Payments. ------------------ 6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company or the Bank for Cause, (ii) by reason of death or Retirement, or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if the Executive's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or if the Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason) if the circum- 7 stance or event which constitutes Good Reason occurs at the direction of such Person. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefits otherwise payable to the Executive under any then existing broad-based employee severance plan, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two (2) times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in Control and (ii) the higher of the average of the annual amounts paid to, or approved for, the Executive pursuant to the Performance Recognition Opportunity Plan, or any successor plan, with respect to the three (3) years (or the number of years employed, if less) immediately preceding (a) the occur rence of the event or circumstance upon which the Notice of Termination is based or (b) the Change in Control. (B) In lieu of any further life, disability, accident and health insurance benefits 8 otherwise due to the Executive, the Company shall pay to the Executive a lump sum amount, in cash, equal to the cost to the Company (as determined by the Company in good faith with reference to its most recent actual experience) of providing such benefits, to the extent that the Executive is eligible to receive such benefits immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason), for a period of two (2) years commencing on the Date of Termination. (C) The Executive shall continue to accrue service credit (for all purposes, including without limitation benefit accrual) under the Pension Plan, Thrift Plan, the Bonus SERP, the Excess SERP or any successor plans thereto, at the compensation level equal to the amount determined in accordance with Section 6.1(A) hereof for a period of two (2) years. 6.2 Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the 9 Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would be subject (in whole or part) to the Excise Tax, then the Severance Payments shall be reduced to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax (after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement) if (A) the net amount of such Total Payments, as so reduced (and after deduction of the net amount of federal, state and local income tax on such reduced Total Payments), is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after deduction of the net amount of federal, state and local income tax on such Total Payments) over (ii) the amount of Excise Tax to which the Executive would be subject in respect of such Total Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total 10 Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive objects to 11 the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the Executive receiving the greater of clauses (A) and (B) of this Section. 6.3 The payments provided for in Section 6.1 hereof shall be made not later than the fifth day following the Date of Termination; however, if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined by the Executive, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company 12 (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in seeking to obtain or enforce any benefit or right provided by this Agreement, in accordance with Section 14 hereof (including without limitation fees and expenses incurred in seeking to secure the Executive's rights provided by Section 14 hereof). Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.1 Notice of Termination. After a Change in Control and during the term of --------------------- this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and 13 shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination", with respect to any ------------------- purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean the date specified in the Notice of Termination (which, in the case of a termination by the Company or the Bank, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen 14 (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any ------------------------------ Notice of Termination is given or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction provided that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs --------------------------- following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including without limitation salary) and continue the Executive as a participant in all com- 15 pensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. If the Executive's employment by the Company or the ------------- Bank is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in Section 6 or Section 7.4 hereof shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or the Bank, or otherwise. 9. Successors; Binding Agreement. ----------------------------- 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by 16 purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all 17 such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: BankBoston Corporation 100 Federal Street Boston, MA 02110 Attention: Director, Human Resources Copy to: General Counsel To the Executive: ----------------- ----------------- ----------------- 18 11. Miscellaneous. No provision of this Agreement may be modified, waived or ------------- discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. Except as expressly provided herein, no waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts, and this Agreement shall be an instrument under seal. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the 19 Executive has agreed. The obligations of the Company and the Executive under Sections 6, 7, 8 and 14 hereof shall survive the expiration of the term of this Agreement. 12. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, ------------ each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. All claims by the Executive for ----------------------------------- benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. 20 Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Executive shall, however, be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall ----------- have the meanings indicated below: (A) "Bank" shall mean the Company's subsidiary, BankBoston, N.A., or if applicable, any other direct or indirect subsidiary of the Company by which the Executive is then employed during the term of this Agreement. (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Bonus SERP" shall mean BankBoston, N.A. Bonus Supplemental Employee Retirement Plan. (E) "Cause" for termination by the Company or the Bank of the Executive's employment, after any Change in Control, shall mean (i) the willful and continued failure by the Executive to substantially perform the 21 Executive's duties with the Company or the Bank (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in gross misconduct which is demonstrably and materially injurious to the Company or any of its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. (F) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) There is an acquisition of control of the Company as defined in Section 22 2(a)(2) of the Bank Holding Company Act of 1956, or any similar successor provision, as in effect at the time of the acquisition; or (II) Continuing Directors constitute two-thirds (2/3) or less of the membership of the Board, whether as the result of a proxy contest or for any other reason or reasons; or (III) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; or (IV) There is a change in control of the Company of a nature that would be required to be reported in response to item 1(a) of Current Report on Form 8-K or item 6(e) of Schedule 14A of Regulation 14A or any similar item, schedule or form under the Exchange Act, as in effect at the time of the change, whether or not the Company is then subject to such reporting requirement, including without limitation any merger or consolidation of the Company with any other corporation, other than (i) 23 a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) forty-five percent (45%) or more of the combined voting power of the voting securities (entitled to vote generally for the election of directors) of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation and which would result in those persons who are Continuing Directors immediately prior to such merger or consolidation constituting more than two-thirds (2/3) of the membership of the Board or the board of such surviving or parent entity immediately after, or subsequently at any time as contemplated by or as a result of, such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquired twenty- five percent (25%) or more of the 24 combined voting power of the Company's then outstanding securities; or (V) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (G) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (H) "Company" shall mean BankBoston Corporation and (except in determining, under Section 15(F) hereof, whether or not any Change in Control of the Company has occurred in connection with such succession) any successor to its business and/or assets which assumes or agrees to perform this Agreement, by operation of law or otherwise. Payments or benefits from the Company shall include those from the Bank. (I) "Compensation Committee" shall mean the Compensation and Nominating Committee of the Board. (J) "Continuing Director" shall mean any director (i) who has continuously been a member of the Board since not later than the date of a Potential Change in Control or (ii) who is a successor of a director de- 25 scribed in clause (i), if such successor (and any intervening successor) shall have been recommended or elected to succeed a Continuing Director by a majority of the then Continuing Directors. (K) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. (L) "Excess SERP" shall mean BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company or the Bank, or failures by the Company or the Bank to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof or, in the case of paragraph (III) below, such act is not objected to in writing by the Executive within four (4) months after notification by 26 the Company to the Executive of the Company's or the Bank's intention to take the action contemplated by such paragraph (III): (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or the Bank or a meaningful alteration, adverse to the Executive, in the nature or status of the Executive's responsibilities (other than reporting responsibilities) from those in effect immediately prior to the Change in Control; (II) a reduction by the Company or the Bank in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company or the Bank, as the case may be, and all senior executives of any Person in control of the Company; (III) the Company's or the Bank's requiring the Executive to be based anywhere 27 other than the Boston Metropolitan Area (or, if different, the metropolitan area in which the Company's or the Bank's principal executive offices are located immediately prior to the Change in Control) except for required travel on the Company or Bank business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within fourteen (14) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including without limitation the Company's stock award, incentive compensation and bonus plans, unless an equitable arrangement (embodied in an 28 ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of 29 paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (P) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (Q) "Pension Plan" shall mean the Retirement Plan of BankBoston, N.A. and Certain Affiliated Companies. 30 (R) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to a registered offering of such securities in accordance with an agreement with the Company, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (S) "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to 31 consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities (entitled to vote generally for the election of directors); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (T) "Retirement" shall be deemed the reason for the termination of the Executive's employment if the Executive voluntarily retires and receives benefits under the Pension Plan or other applicable retirement plan then maintained by the Company and in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with the Executive's consent with respect to the Executive. (U) "Severance Payments" shall mean those payments described in Section 6.1 hereof. 32 (V) "Thrift Plan" shall mean the Thrift-Incentive Plan of BankBoston, N.A. and Certain Affiliated Companies. (W) "Total Payments" shall mean those payments described in Section 6.2 hereof. BANKBOSTON CORPORATION By: __________________________ Name: Helen G. Drinan Title: Executive Vice President, Human Resources __________________________ 33 EX-10.(Q) 8 BANKBOSTON 1997 STOCK OPTION PLAN EXHIBIT 10(q) BANKBOSTON CORPORATION 1997 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. PURPOSE The purpose of this 1997 Stock Option Plan for Non-Employee Directors (the "Plan") is to advance the interests of BankBoston Corporation (the "Corporation") by increasing the proprietary interest in the Corporation of non- employee members of the Corporation's Board of Directors by providing a portion of their compensation in options to acquire shares ("Shares") of the Corporation's common stock ("Common Stock"). 2. ADMINISTRATION The Plan shall be administered by the Board Governance and Nominating Committee (the "Committee") of the Board of Directors (the "Board") of the Corporation or by a delegate of the Committee. The Committee, acting itself or through its delegate, shall have authority, not inconsistent with the express provisions of the Plan, (a) to administer the issuance of options granted in accordance with the formula set forth in this Plan to such directors as are eligible to receive options; (b) to prescribe the form or forms of instruments evidencing options and any other instruments required under the Plan and to change such forms from time to time; (c) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (d) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Committee or its delegate shall be conclusive and shall bind all parties. 3. EFFECTIVE DATE OF PLAN The Plan shall become effective as of April 1, 1997. 4. SHARES SUBJECT TO THE PLAN (a) Number of Shares. The maximum number of Shares that may be delivered upon the exercise of options granted under the Plan shall be 100,000. If any option granted under the Plan terminates without having been exercised in full, the number of Shares as to which such option was not exercised shall be available for future grants within the foregoing limit. (b) Shares to be Delivered. Shares delivered upon the exercise of options granted under the Plan shall be previously issued Shares acquired by the Corporation and held in its treasury or, if the Committee so decides in its sole discretion, authorized but unissued Shares. No fractional Shares shall be delivered under the Plan. (c) Changes in Stock; Restructuring, etc. In the event of a stock dividend, stock split or combination of Shares, the number and kind of shares of stock or securities of the Corporation subject to options then outstanding or subsequently granted under the Plan, the maximum number of shares or securities that may be delivered under the Plan, the exercise price, and other relevant provisions shall be appropriately adjusted by the Committee. In the event of any other recapitalization, reorganization, extraordinary dividend or distribution or restructuring transaction affecting the Common Stock, the number of Shares issuable under the Plan shall be subject to such adjustment as the Committee may deem appropriate, and the number of Shares issuable pursuant to any option theretofore granted and/or the option price per share of such option shall be subject to such adjustment as the Committee may deem appropriate with a view toward preserving the value of such option. 5. ELIGIBILITY FOR OPTIONS Directors eligible to receive options pursuant to a grant described in paragraph 6(a) hereof shall be those directors who are not employees of the Corporation or of any affiliate of the Corporation as of the date of such grant ("Non-Employee Directors"). 6. TERMS AND CONDITIONS OF OPTIONS (a) Number of Options. Each Non-Employee Director as of April 1, 1997 will be granted an option covering 1,000 Shares as of such date, and each Non-Employee Director newly elected at the Corporation's 1997 Annual Stockholders' Meeting will be granted an option covering 1,000 Shares immediately following such meeting. Thereafter, immediately following the Corporation's Annual Stockholders' Meeting each year the Plan is in effect (beginning with the Annual Stockholders' Meeting held in 1998), each Non-Employee Director continuing in office and each Non-Employee Director newly elected at such meeting shall be awarded an option covering 1,000 Shares. (b) Exercise Price. The exercise price of each option shall be 100% of the Fair Market Value per Share at the time the option is granted. In no event, however, shall the option price be less, in the case of an original issue of authorized Common Stock, than par value per share. For purposes of the Plan, "Fair Market Value," in the case of a Share on a particular day, means the closing price of a Share of Common Stock on that day as reported in the "NYSE- Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or, if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event the "NYSE- Composite Transactions" cease to be reported, the Committee shall adopt some other appropriate method for determining Fair Market Value. (c) Duration of Options. No option shall be exercisable after the expiration of ten years from the date the option is granted (the "Final Exercise Date"). -2- (d) Exercise of Options. (1) Each option shall be immediately exercisable upon grant to the full extent of all Shares covered thereby. (2) Any exercise of an option shall be in writing, signed by the proper person and delivered or mailed to the Corporation, accompanied by (i) any documentation required by the Committee and (ii) payment in full for the number of Shares for which the option is exercised. (3) If an option is exercised by the executor or administrator of a deceased director, or by the person or persons to whom the option has been transferred by the director's will or the applicable laws of descent and distribution, the Corporation shall be under no obligation to deliver Shares pursuant to such exercise until the Corporation is satisfied as to the authority of the person or persons exercising the option. (e) Payment for and Delivery of Shares. Shares purchased under the Plan shall be paid for as follows: (i) by personal check or other instrument or means acceptable to the Committee (in accordance with guidelines established for this purpose), (ii) through the delivery of Shares which have been held for at least six months and which have a Fair Market Value as of the exercise date equal to the exercise price, (iii) to the extent provided by the Committee, by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Corporation sufficient funds to pay the exercise price or (iv) by any combination of the permissible forms of payment. An option holder shall not have the rights of a stockholder with regard to awards under the Plan except as to Common Stock actually received by him or her under the Plan. The Corporation shall not be obligated to deliver any Shares (1) until, in the opinion of the Corporation's counsel, all applicable federal, state and foreign laws and regulations have been complied with, and (2) until all other legal matters in connection with the issuance and delivery of such Shares have been approved by the Corporation's counsel. The Corporation may require, as a condition to exercise of the option, such representations or agreements as counsel for the Corporation may consider appropriate to avoid violation of the Securities Act of 1933, as amended, and may require that the certificates evidencing such Shares bear an appropriate legend restricting transfer. (f) Surrender of Shares. Upon the exercise of an option, an option holder may elect to deliver to the Corporation, in exchange for cash payment of the Fair Market Value thereof by the Corporation, a number of Shares which have been held for at least six months and which have a Fair Market Value of up to 50% of the difference between the aggregate Fair Market Value of the Shares of Common Stock received upon exercise of such option over the aggregate exercise price for such option. For purposes of this -3- subparagraph, Fair Market Value shall be determined as of the date of the exercise of such option and the delivery of Shares to the Corporation. (g) Nontransferability of Options. Except as provided in the following sentence, no option may be transferred other than by will or by the laws of descent and distribution, and during a director's lifetime an option may be exercised only by him or her. Notwithstanding the foregoing, the Committee may provide for greater transferability of options granted under the Plan, including, without limitation, transfer to one or more members of the director's family or to a partnership or trust established for the benefit of one or more members of the director's family. (h) Death, Retirement or Disability of a Director. Upon the death, retirement from the Board, or disability (as determined by the Committee) of any director granted options under this Plan, all options held by the director on the date of such event may be exercised by such director or by his or her executor or administrator, or by the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, at any time prior to the first anniversary of such event. Upon such one-year anniversary, such options shall terminate to the extent not previously exercised. In no event shall any option referred to in this paragraph 6(h) be exercisable beyond its Final Exercise Date, if earlier. For purposes of the Plan, retirement from the Board means the termination by a director of his or her directorship after having attained age 60 and having served as a director of the Corporation continuously for at least 60 months, provided that such termination shall not constitute retirement from the Board if done to accommodate membership, or continuing membership, on the board of directors of a corporation not affiliated with the Corporation. (i) Other Termination of Status of Director. If a director's service with the Corporation terminates for any reason other than death, retirement or disability as specified in paragraph 6(h), all options held by the director on the date of termination shall continue to be exercisable for a period of 30 days (but not beyond their Final Exercise Date if earlier). After completion of that 30-day period, such options shall terminate to the extent not previously exercised. (j) Mergers, etc. In the event of any merger, consolidation, dissolution or liquidation of the Corporation, the Committee, in its sole discretion, may, as to any outstanding Options, make such substitution or adjustment in the aggregate number of Shares reserved for issuance under the Plan and in the number and exercise price of Shares subject to such Options as it may determine, or amend or terminate such Options upon such terms and conditions as it shall provide (which, in the case of the termination of an Option, shall require payment or other consideration which the Committee deems equitable in the circumstances). 7. TERMINATION AND AMENDMENT The Board may at any time terminate the Plan as to any further grants of options. The Board may at any time or times amend the Plan for any purpose which may at the -4- time be permitted by law. The Committee may make non-material amendments to the Plan. No amendment shall be effective with respect to an option holder without such option holder's consent if such amendment would materially and adversely affect the rights of the option holder. -5- EX-10.(R) 9 DESCRIPTION OF CORP. DIRECTOR RETIREMENT EXHIBIT 10(r) ------------- DIRECTOR RETIREMENT BENEFITS EXCHANGE PROGRAM -- SPECIFICATIONS . Formula, including how value of accrued benefit is calculated and which stock price will be used. EACH DIRECTOR WHO ELECTS TO EXCHANGE HIS OR HER ACCRUED DIRECTORS' RETIREMENT PLAN BENEFIT FOR RESTRICTED OR DEFERRED SHARES OF BKBC COMMON STOCK WILL RECEIVE A NUMBER OF SHARES OR UNITS, ROUNDED TO THE NEAREST WHOLE SHARE OR UNIT, DETERMINED BY MULTIPLYING $17,500 (THE ANNUAL CASH RETAINER IN EFFECT ON JANUARY 1, 1997) BY THE DIRECTOR'S YEARS OF BOARD SERVICE THROUGH MARCH 31, 1997 (INCLUDING ANY FRACTION OF A YEAR), AND THEN DIVIDING THE PRODUCT BY THE CLOSING PRICE OF A SHARE OF BKBC COMMON STOCK ON MARCH 31, 1997. . Timing of when accruals under current plan will cease. MARCH 31, 1997. . Timing of election to exchange (one-time or more frequent?). ONE TIME. . What is the issuance date for the restricted and deferred stock? BOTH RESTRICTED AND DEFERRED SHARES WILL BE ISSUED ON JULY 31, 1997. . Nature of restrictions on restricted shares; when will restrictions lapse? RESTRICTED SHARES MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED UNTIL THE LATER OF WHEN THE DIRECTOR LEAVES THE BOARD OR ATTAINS AGE 60. THE RESTRICTED SHARES (AS WELL AS ANY DIVIDENDS ACCRUED PRIOR TO THE DIRECTOR'S HAVING SERVED FOR 60 CONSECUTIVE MONTHS) WILL BE FORFEITED TO THE CORPORATION IF THE DIRECTOR LEAVES THE BOARD BEFORE HAVING SERVED FOR 60 CONSECUTIVE MONTHS, OR IF THE DIRECTOR LEAVES IN ORDER TO SERVE ON THE BOARD OF AN INSTITUTION NOT AFFILIATED WITH THE CORPORATION. . Nature of restrictions on deferred shares; when will payout occur? DEFERRED SHARES (INCLUDING REINVESTED DIVIDEND EQUIVALENTS) WILL BE DISTRIBUTED TO EACH DIRECTOR ANNUALLY OVER A PERIOD EQUAL TO THE NUMBER OF MONTHS THE DIRECTOR HAS SERVED ON THE BOARD THROUGH MARCH 31, 1997, BEGINNING AT THE LATER OF WHEN THE DIRECTOR LEAVES THE BOARD OR ATTAINS AGE 60, PROVIDED THAT THE DIRECTOR HAS SERVED FOR 60 CONSECUTIVE MONTHS. THE DEFERRED SHARES (INCLUDING REINVESTED DIVIDEND EQUIVALENTS) WILL BE FORFEITED IF THE DIRECTOR RESIGNS FROM THE BOARD BEFORE HAVING SERVED FOR 60 CONSECUTIVE MONTHS, OR IF THE DIRECTOR LEAVES IN ORDER TO SERVE ON THE BOARD OF AN INSTITUTION NOT AFFILIATED WITH THE CORPORATION. . For restricted shares, how will dividends be paid? DIVIDENDS WILL BE PAID ONCE THE DIRECTOR HAS SERVED FOR 60 CONSECUTIVE MONTHS. FOR A DIRECTOR WITH LESS THAT 60 CONSECUTIVE MONTHS OF SERVICE, DIVIDENDS WILL ACCRUE AND WILL BE PAID IN A LUMP SUM ONCE THE DIRECTOR HAS SERVED FOR 60 CONSECUTIVE MONTHS. . For deferred shares, how will dividend equivalents be calculated? AS OF EACH DATE THAT A DIVIDEND IS PAID ON BKBC COMMON STOCK, THE CORPORATION WILL CREDIT TO EACH DIRECTOR'S DEFERRAL ACCOUNT A NUMBER OF SHARES DETERMINED BY MULTIPLYING THE TOTAL NUMBER OF SHARES CREDITED TO SUCH ACCOUNT AS OF THE DIVIDEND RECORD DATE BY THE PER SHARE DIVIDEND AMOUNT, AND THEN DIVIDING THE PRODUCT BY THE CLOSING PRICE OF A SHARE OF BKBC COMMON STOCK ON THE DIVIDEND PAYMENT DATE. (SEE DIRECTOR STOCK AWARD PLAN, SECTION 8.3) - 2 - . What happens in the case of the director's death? FOR RESTRICTED SHARES, UPON A DIRECTOR'S DEATH, THE SHARES WILL BE DELIVERED TO THE DIRECTOR'S ESTATE FREE OF ANY RESTRICTIONS. FOR DEFERRED SHARES, ANY SHARES THAT HAVE NOT YET BEEN DISTRIBUTED TO THE DIRECTOR WILL BE DISTRIBUTED TO THE DIRECTOR'S SURVIVING SPOUSE OVER THE REMAINDER OF THE PAYOUT PERIOD. IF THE DIRECTOR IS NOT SURVIVED BY A SPOUSE OR IF THE SURVIVING SPOUSE DIES DURING THE PAYOUT PERIOD, ANY REMAINING DEFERRED SHARES WILL BE DISTRIBUTED IN A LUMP SUM TO THE ESTATE OF THE LAST TO DIE OF THE DIRECTOR AND HIS OR HER SPOUSE. . Change of control provisions. UNLESS OTHERWISE PROVIDED BY THE BOARD GOVERNANCE AND NOMINATING COMMITTEE, UPON A DIRECTOR'S CEASING TO BE A DIRECTOR FOLLOWING A CHANGE OF CONTROL, ALL RESTRICTIONS WILL LAPSE AND BOTH RESTRICTED AND DEFERRED SHARES WILL BE PAID OUT. EX-10.(U) 10 AMEND. 1988 STOCK OPTION PLAN EXHIBIT 10(u) ------------- AMENDMENT TO THE 1988 STOCK OPTION PLAN FOR KEY EMPLOYEES OF BAYBANKS, INC. AND AFFILIATES The 1988 Stock Option Plan for Key Employees of BayBanks, Inc. and Affiliates is hereby amended as follows, effective as of October 23, 1997: 1. Section 6.1(d) of the Plan is hereby amended to read in its entirety as follows: (d) Transferability. Subject to the provisions of this Section, (a) no --------------- option shall be transferable otherwise than by will, by the laws of descent and distribution, or by operation of a "qualified domestic relations order," as that term is defined in the Internal Revenue Code, and (b) during the lifetime of the Optionee, rights under the option may be exercised only by the Optionee, the Optionee's guardian or legal representative, or by the assignee of the option under a "qualified domestic relations order." Notwithstanding the foregoing, the Committee may provide for greater transferability in the case of any option, including, without limitation, transfer to one or more members of the Optionee's family or to a partnership or trust established for the benefit of one or more members of the Optionee's family. An option that is intended to be exempt under Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or any successor rule, or that is intended to qualify for the performance-based exception from the deductibility limits set forth in Section 162(m) of the Internal Revenue Code and the regulations thereunder, shall be transferable only to the extent consistent with such exemption or qualification. 2. Section 6.2 of the Plan is hereby amended to read in its entirety as follows: 6.2 Incentive Stock Options ----------------------- Option Agreements with respect to Incentive Stock Options shall contain in substance the same terms and conditions as those with respect to Non-qualified Stock Options, except that no Incentive Stock Option awarded under the Plan shall be transferable other than as permitted under the rules prescribed in the Internal Revenue Code for Incentive Stock Options. 3. Section 13 of the Plan is hereby amended by adding the following sentence at the end of such section: The Committee may make non-material amendments to the Plan. EX-10.(AA) 11 CONSULTING AGREEMENT W/ WILLIAM M. CROZIER EXHIBIT 10(aa) -------------- CONSULTING AGREEMENT -------------------- AGREEMENT by and between BankBoston Corporation, a Massachusetts corporation ("BankBoston" or the "Company") and William M. Crozier, Jr. (the "Consultant" or the "Executive"), dated as of the 30th day of December, 1997. The Board of Directors of BankBoston (the "Board"), has determined that it is in the best interests of BankBoston and its shareholders to assure that the Company will have the Consultant's expertise available to it after the Consultant's retirement as Chairman of the Board of Directors of the Company on December 31, 1997 in a manner that did not constitute a termination by the Consultant for Good Reason under the Employment Agreement (as defined below). Therefore, in order to accomplish these objectives, the Board of Directors of BankBoston has caused BankBoston to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Effective Date. The "Effective Date" shall mean January 1, 1998. -------------- 2. Consulting Period. The Company agrees to employ the services of ----------------- the Consultant, and the Consultant hereby agrees to provide consulting services to the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on December 31, 1998 (the "Consulting Period"). The Consultant agrees that he shall not be paid for his services as a director of the Company during the Consulting Period. 3. Terms of Service. (a) Position and Duties. During the Consulting ---------------- ------------------- Period, the Consultant shall be available to consult with the Company on matters of overall strategy and policy for up to 40 hours per month at such times as are mutually convenient for the Company and the Consultant. (b) Remuneration. (i) Monthly Fee. During the Consulting Period, ------------ ----------- the Consultant shall receive a monthly fee, payable in advance, equal to $66,666.67 plus an amount equal to one-twelfth of the annual bonus the Consultant is to receive with respect to calendar year 1997 (the "Monthly Fee"). As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Retirement Plans. For purposes of all retirement plans in which ---------------- the Consultant participated prior to the Effective Date, the Consultant shall be deemed to have retired on December 31, 1997 and shall be entitled to receive benefits immediately. For purposes of determining the Consultant's benefits under such plans, including, without limitation, the BayBank's Supplemental Executive Retirement Plan, the Consultant shall be deemed to have been employed by the Company and its affiliates until the end of the Consulting Period and his 1 benefits shall be based on his compensation that includes the Monthly Fee payable during the Consulting Period. To the extent any benefits payable by reason of the preceding sentence cannot be provided under the qualified retirement plans of the Company and its affiliates they shall be provided under the nonqualified retirement plans of the Company and its affiliates. (iii) Welfare Benefit Plans. During the Consulting Period, the --------------------- Consultant and/or the Consultant's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent and on the same basis provided to the Consultant as an employee immediately prior to the Consulting Period, it being understood that to the extent the Consultant cannot be continued under the terms of any such plan the Company shall provide for equivalent coverage or benefits. Upon termination of the Consulting Period, the Consultant shall be provided the Company's retiree health benefits provided to its senior executives in respect of the Consultant's services as an executive prior to the Consulting Period but taking into account the Consulting Period for purposes of determining the Consultant's level of participation in such retiree health benefits. In determining the Consultant's level of participation in such retiree health benefits, the Consultant's service with BayBanks shall be deemed to be service with the Company for all purposes. (iv) Stock Incentives. The Company acknowledges that for purposes of ---------------- the Nonqualified Stock Option and Performance Restricted Stock Agreement (the "Stock Agreement") between the Company and the Consultant dated as of January 23, 1997, the Consultant shall be treated as commencing "Retirement" on January 1, 1998 for purposes of Section 6 and Section 14 of the Stock Agreement. (v) Expenses. During the Consulting Period, the Consultant shall be -------- entitled to receive prompt reimbursement for all reasonable expenses incurred by the Consultant in accordance with the Company's policies. (vi) Fringe Benefits. During the Consulting Period, the Consultant --------------- shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, to the extent provided to the Consultant immediately prior to the Effective Date. (vii) Office and Support Staff. During the Consulting Period, the ------------------------ Consultant shall be provided with an office and secretarial assistance in the Boston, Massachusetts Metropolitan Area. 4. Termination of Consulting. (a) Death or Disability. The ------------------------- ------------------- Consultant's consulting services shall terminate automatically upon the Consultant's death during the Consulting Period. If the Company determines in good faith that the Disability of the Consultant has occurred during the Consulting Period (pursuant to the definition of Disability set forth 2 below), it may give to the Consultant written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Consultant's consulting services. In such event, the Consultant's consulting services with the Company shall terminate effective on the 30th day after receipt of such notice by the Consultant (the "Disability Effective Date"). For purposes of this Agreement, "Disability" shall mean incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Consultant or the Consultant's legal representative. (b) Company Termination. The Company may terminate the Consultant's ------------------- consulting services during the Consulting Period for any reason. (c) Notice of Termination. Any termination by the Company shall be --------------------- communicated by Notice of Termination to the Consultant given in accordance with Section 12(b) of this Agreement. (d) Date of Termination. "Date of Termination" means (i) if the ------------------- Consultant's consulting services are terminated by the Company, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be and (ii) if the Consultant's consulting services are terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Consultant or the Disability Effective Date, as the case may be. 5. Obligations of the Company upon Termination. If, during the ------------------------------------------- Consulting Period, the Company shall terminate the Consultant's services whether for Disability or otherwise or the Consultant's services shall be terminated by reason of death: (i) the Company shall pay to the Consultant or his estate, as the case may be, in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. any unpaid annual salary and annual bonus in respect of calendar year 1997 required to be paid to the Consultant pursuant to the Employment Agreement between the Company, BayBanks, Inc. and the Consultant dated as of December 12, 1995 (the "Employment Agreement"); and B. the amount equal to the product of (1) the number of months (including fractions thereof) from the Date of Termination until December 31, 1998 (the "Continuation Period") and (2) the Monthly Fee; and (ii) for the Continuation Period, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Consultant and/or the Consultant's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(iii) of this Agreement if the Consultant's services had not been terminated or, if 3 more favorable to the Consultant, as in effect generally at any time thereafter. For purposes of determining eligibility (but not the time of commencement of benefits) of the Consultant for retiree benefits pursuant to such plans, practices, programs and policies, the Consultant shall be considered to have been an employee throughout the Continuation Period and to have retired on the last day of such period and such benefits shall commence immediately after the Continuation Period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Consultant any other amounts or benefits required to be paid or provided or which the Consultant is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). 6. Non-exclusivity of Rights. Amounts that are vested benefits or ------------------------- that the Consultant is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. Full Settlement. The Company's obligation to make the payments --------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Consultant or others. In no event shall the Consultant be obligated to seek other employment or self-employment or take any other action by way of mitigation of the amounts payable to the Consultant under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Consultant obtains other employment or self-employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses that the Consultant may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Consultant or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Consultant about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 8. Certain Additional Payments by the Company. ------------------------------------------ (a) While it is the intention of the parties that none of the payments hereunder constitute "parachute payments" within the meaning of Section 280G of the Code, anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Consultant (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 4 of the Code or any interest or penalties are incurred by the Consultant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Consultant shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Consultant of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Consultant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Consultant is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Consultant such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Consultant and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand LLC or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Consultant (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Consultant within 15 business days of the receipt of notice from the Consultant that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the Company or its successors, the Consultant shall appoint another nationally recognized accounting firm reasonably acceptable to the Company to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Consultant within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Consultant. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Consultant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Consultant. (c) The Consultant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Consultant is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. 5 The Consultant shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Consultant in writing prior to the expiration of such period that it desires to contest such claim, the Consultant shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Consultant harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Consultant to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Consultant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Consultant to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Consultant, on an interest-free basis and shall indemnify and hold the Consultant harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Consultant with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Consultant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6 (d) If, after the receipt by the Consultant of an amount advanced by the Company pursuant to Section 8(c), the Consultant becomes entitled to receive any refund with respect to such claim, the Consultant shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Consultant of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Consultant shall not be entitled to any refund with respect to such claim and the Company does not notify the Consultant in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. Confidential Information. (a) The Consultant shall hold in a ------------------------ fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Consultant during the Consultant's employment by the Company or any of its affiliated companies or during the Consulting Period and which shall not be or become public knowledge (other than by acts by the Consultant or representatives of the Consultant in violation of this Agreement). After termination of the Consultant's employment with the Company and of the Consulting Period, the Consultant shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Consultant under this Agreement. (b) In the event of a breach or threatened breach of this Section 9, the Consultant agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach. (c) Any termination of the Consultant's services or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. Successors. (a) This Agreement is personal to the Consultant and ---------- without the prior written consent of the Company shall not be assignable by the Consultant otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Consultant's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same 7 manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Noncompetition. Until December 31, 1998, the Consultant will not -------------- own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director or otherwise with, any business which is in competition with the retail banking business conducted by the Company or any of its affiliates in any geographic area where such business is being conducted during such period. Ownership, for personal investment purposes only, of not to exceed 5% of the voting stock of any publicly held corporation shall not constitute a violation hereof. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Consultant under this Agreement. The Consultant acknowledges that a violation on his part of any of the covenants contained in this Section 11 hereof would cause immeasurable and irreparable damage to the Company. Accordingly, the Consultant agrees that the Company shall be entitled to injunctive relief in any court of competent jurisdiction for any actual or threatened violation of any such covenant in addition to any other remedies it may have. The Consultant agrees that in the event that any arbitrator or court of competent jurisdiction shall finally hold that any provision of this Section 11 is void or constitutes an unreasonable restriction against the Consultant, the provisions of this Section 11 shall not be rendered void but shall apply to such extent as such arbitrator or court may determine constitutes a reasonable restriction under the circumstances. 12. Miscellaneous. (a) This Agreement shall be governed by and ------------- construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Consultant: -------------------- 41 Ridge Hill Farm Road Wellesley, MA 02181 8 If to BankBoston: ---------------- 100 Federal Street Boston, Massachusetts 02110 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Consultant's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Consultant or the Company may have hereunder, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Consultant and the Company acknowledge that prior to the Effective Date, the Consultant's employment shall be governed by the Employment Agreement. From and after the Effective Date this Agreement shall supersede the Employment Agreement. 9 IN WITNESS WHEREOF, the Consultant has hereunto set the Consultant's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ WILLIAM M. CROZIER, JR. ----------------------------- William M. Crozier, Jr. BANKBOSTON CORPORATION By /s/ GARY A. SPIESS -------------------------------- Gary A. Spiess, General Counsel 10 EX-10.(BB) 12 LETTER AGREE. W/ HENRIQUE DE CAMPOS MEIRELLES EXHIBIT 10(bb) Dated as of August 15, 1997 Mr. Henrique de Campos Meirelles President and Chief Operating Officer BankBoston Corporation 100 Federal Street Boston, Massachusetts 02110 Re: Purchase of Residence at [ ], Massachusetts ("Property") Dear Henrique: This letter confirms the terms by which BankBoston Corporation (BKB) will provide you mortgage financing and reimbursement of housing costs in connection with the purchase of your residence. Terms of Mortgage Loan - ---------------------- The principal terms of our note and mortgage to you are: 1. BKB will loan you an amount, not to exceed $3,700,000, that equals the price at which BKB purchased the Property, the cost of improvements to the real estate that BKB has made to date, and the amount of improvements to the real estate that you make while the loan is outstanding. 2. The loan is due and payable on August 15, 2011, except as provided below (which date, howsoever determined, is the maturity date). 3. Except as provided below, the loan will be interest-free. 4. Interest will be payable on and after the date that you cease to perform substantial services for BKB or its affiliates. You will not be responsible for interest for any prior period. You will be treated as performing substantial services as long as you are a full-time employee. In case of your death or permanent disability (as defined in the 1996 Long Term Incentive Plan), you will be deemed for purposes of this paragraph to be performing substantial services for six months from the date of death or permanent disability. 5. Your obligation to repay the principal amount of the loan and charges thereon shall never exceed the Settlement Amount. 6. If your employment terminates (other than for cause) more than three years after the date of this letter or at any time by reason of death, disability or change of control, the Settlement Amount will be the lesser of a) the outstanding principal balance on the maturity date plus accrued interest and other charges relating to the loan, if any, or b) the fair market value of the house on the maturity date less actual and ordinary costs that would be associated with the sale of the Property. The maturity date shall be one year from (i) the date of your death or (ii) the date your employment terminates, including by reason of disability or change in control, but not later than August 15, 2011. If you wish to repay the loan after the first three years, and you are still performing substantial services, you will pay the Settlement Amount as provided by this paragraph. 7. If your employment terminates within three years of the date of this letter for reasons other than cause, death, disability or change of control, i) you will be responsible for interest accrued from the date interest commences to accrue as provided in paragraph 4 and ii) the Settlement Amount will be the lesser of a) the outstanding principal balance on the maturity date plus other charges relating to the loan or b)the fair market value of the house on the maturity date less actual and ordinary costs that would be associated with the sale of the Property. The maturity date shall be six months from the date your employment terminates. If you wish to repay the loan during the first three years, and you are still performing substantial services, you will pay the Settlement Amount as provided by this paragraph. 8. If your employment terminates at any time for cause, i) you will be responsible for interest accrued from the date interest commences to accrue as provided in paragraph 4 and ii) the Settlement Amount will be the fair market value of the property. The maturity date will be the date your employment terminates for cause. 9. The fair market value of the Property shall be determined by sale, including foreclosure sale or offer to deed in lieu thereof (less actual and ordinary costs associated with the sale of the Property), or appraisal as follows: If you intend to sell the Property prior to satisfaction of the loan, you must notify BKB in writing prior to listing the Property with a broker or otherwise offering it to the public. Within 45 days of receiving this notice, BKB may, but shall not be obligated to, submit a written offer specifying the price and other terms of purchase. Within 15 days of receipt, you must accept or reject BKB's offer which at that time will lapse if not accepted. If BKB declines to offer to purchase the Property or if you decline BKB's offer, you may then list the Property for sale to the public. BKB may submit further offers at any time which you may consider. If BKB has made an offer, before you accept an offer from a third party less than the price BKB initially offered and less than the outstanding balance of the note, you must permit BKB to submit an offer within three days of your notifying BKB and permit BKB to purchase the Property at a price not less than the price offered by the third party assuming all other terms are comparable. In the event you cease performing substantial services and wish to retain ownership of the Property or if you wish to repay the loan, the fair market value for purposes of determining the Settlement Amount shall be determined by a qualified appraiser selected by the American Arbitration Association (Boston Office). The appraiser's determination shall be final. You must advise BKB of your intention to retain ownership of the Property or to repay the loan not less than 60 days from the earlier of the maturity date or the date you intend to repay the loan. In the event of a sale, the sale price shall control over the appraisal value provided the sale occurs prior to the maturity date of the loan (or after the maturity date if the sale is a foreclosure sale.) 10. If at any time on or after the maturity date you offer to deed the Property to BKB or its designee, such offer and your cooperation in completing it as requested by BKB shall conclusively establish your having satisfied any Settlement Amount that then may be due. Operating Expenses of House - --------------------------- BKB will bear all costs of operating, repairing and maintaining the house (including real estate taxes and assessments) except for household help (and related payroll taxes and benefits), insurance, and utilities (including water and sewer charges). BKB will either pay all costs directly or will reimburse you for these based on a procedure that we will establish. -2- Furnishings - ----------- BKB will purchase all furniture and improvements that are not part of the real estate and provide these furnishings to you. The total cost of these furnishings will be based on a budget that we will mutually approve. BKB will determine the annual value of providing these furnishings for income tax and proxy reporting. You will have the option to purchase the furnishings (other than those that BKB wishes to retain) at their appraised fair market value at the time you repay the loan or at the time that you sell the Property to a buyer other than BKB. Tax Protection - -------------- To the extent that the value of cost of owning and operating the house, the value of furnishings provided, the excess of the loan principal over Settlement Amount at the time the loan is repaid or the amount of any interest or other charges imputed on the loan must be included in income for federal and/or state income tax purposes, BKB will provide a "tax protection" payment on this income. The tax protection payment shall equal the total increase in tax that results from including the above amounts in taxable income plus a "gross-up" to reflect the fact that this tax reimbursement must be included in income. If you agree with the terms of this letter, please sign both copies and return one copy to me. This letter will thereupon be a Massachusetts instrument under seal and will be maintained in the books and records of BKB. Very truly yours, BankBoston Corporation By: /s/ HELEN G. DRINAN ------------------------- Helen G. Drinan Agreed and accepted as of the date set forth above: /s/ HENRIQUE DE CAMPOS MEIRELLES - -------------------------------- Henrique de Campos Meirelles -3- EX-10.(DD) 13 AMEND. OF LEASE W/ EQUITABLE FEDERAL REALTY (3/28) EXHIBIT 10(dd) AMENDMENT OF LEASE ------------------ This AMENDMENT OF LEASE (this "Amendment") made as of March 28, 1997 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership, having an address at One Boston Place, Suite 2020, Boston, Massachusetts 02108 ("Landlord"), and THE FIRST NATIONAL BANK OF BOSTON, a national banking association duly organized and existing under the laws of the United States of America, having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date as of September 1, 1991 (the "Original Lease") covering certain premises at 100 Federal Street, Boston, Massachusetts, as amended to date (as so amended, the Original Lease shall be referred to hereinafter as the "Lease"). The parties desire to amend the Lease in certain respects as hereinafter set forth. Terms not defined herein shall have the meaning ascribed to them in the Lease. WITNESSETH: ---------- NOW, THEREFORE, Landlord and Tenant hereby agree to amend the Lease as follows: 1. Effective as of April 1, 1997, there shall be added to the Premises under the Lease the portion of the space located on Floor 30 of the Building shown as the "10,907 s.f. Floor 30 Premises" on the plan attached hereto as Exhibit A (the "10,907 s.f. Floor 30 Premises"). The 10,907 s.f. Floor 30 - --------- Premises consists of approximately 10,907 rentable square feet of space. 2. Except as expressly provided herein, all terms and provisions of the Lease shall be applicable to the 10,907 s.f. Floor 30 Premises, except that: (a) The 10,907 s.f. Floor 30 Premises shall be leased to Tenant "as is", it being understood that Landlord shall have no obligation to bring the 10,907 s.f. Floor 30 Premises into the condition required by Schedule COND or into compliance with the Americans With Disabilities Act. (b) The 10,907 s.f. Floor 30 Premises shall be part of Space D under the Lease. (c) The term of the Lease for the 10,907 s.f. Floor 30 Premises shall expire on December 31, 2008. Tenant shall have two options to extend the term for the 10,907 s.f. Floor 30 Premises (as part of Space D) as provided in Section 4 of the Amendment of the Lease effective as of April 1, 1994 (the "Space D Amendment"). (d) No Base Rent shall be payable for the 10,907 s.f. Floor 30 Premises for the period April 1, 1997 through May 14, 1998. (e) Commencing on May 15, 1998, Base Rent shall be payable at the following annual rates (per square foot): May 15, 1998 to December 31, 1998: $32.88 Calendar year 1999: $33.88 Calendar year 2000: $34.88 Calendar year 2001: $35.88 Calendar year 2002: $36.88 Calendar year 2003: $37.88 Calendar year 2004: $38.88 Calendar year 2005: $39.88 Calendar year 2006: $40.88 Calendar year 2007: $41.88 Calendar year 2008: $42.88 (f) The Tenant Improvement Allowance (under Section 3 of Article XVI of the Lease) for the 10,907 s.f. Floor 30 Premises shall be $47.50 per square foot. Section 5 of the Space D Amendment shall not be applicable to the 10,907 s.f. Floor 30 Premises. (g) The Operating Expenses Stop for the 10,907 s.f. Floor 30 Premises shall be the Operating Expenses for 1997 stated on a per square foot basis. (h) The Impositions Stop for the 10,907 s.f. Floor 30 Premises shall be the Impositions for the fiscal year ending June 30, 1997 stated on a per square foot basis. (i) Landlord's maintenance obligations under Article V of the Lease shall include repair and maintenance of the special heating, ventilating and air conditioning systems serving the 10,907 s.f. Floor 30 Premises as of the date of this Amendment. 3. Except as only expressly amended hereby, the Lease shall continue in full force and effect as heretofore. -2- WITNESS the execution hereof as an instrument under seal as of the date first above written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership By: 100 Federal Street Realty Corporation, its general partner By: /s/ JOHN SCHOSER ---------------------------------- Its: Investment Officer TENANT: THE FIRST NATIONAL BANK OF BOSTON By: /s/ THEODORE M. EDSON ---------------------------------- Its: Director of Global Facilities -3- Exhibit A --------- [Plan Showing 10,907 s.f. Floor 30 Premises] EX-10.(EE) 14 AMEND. OF LEASE W/ EQUITABLE FEDERAL REALTY (6/23) EXHIBIT 10(ee) AMENDMENT OF LEASE ------------------ THIS AMENDMENT OF LEASE effective as of June 23, 1997 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership having an address at One Boston Place, Boston, Massachusetts 02108 ("Landlord"), and BANKBOSTON, N.A. (formerly named The First National Bank of Boston), a national banking association organized and existing under the laws of the United States of America having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date of September 1, 1991, as amended, of certain premises at 100 Federal Street, Boston, Massachusetts (the "Lease"). Section 2 of Article XVI of the Lease requires Landlord to perform certain work to the Building entrance area, the exterior plaza, the elevator cabs and associated signage (the work required thereby is herein referred to as the "Lobby/Plaza Work"), the cost of the Lobby/Plaza Work to be shared by Landlord and Tenant in the manner provided in the Lease, including Section 6 of an Amendment of Lease effective as of April 1, 1994. Landlord and Tenant desire to memorialize their further agreements with respect thereto. Capitalized terms not defined herein shall have the meaning ascribed to them in the Lease. W I T N E S S E T H ------------------- NOW, THEREFORE, Landlord and Tenant hereby agree as follows: 1. Exhibits A, B and C attached hereto and made a part hereof include all work requested by Tenant to be included in the Lobby/Plaza Work and represents Landlord's good faith estimate of the project costs for completion of said work. 2. Tenant's Share of the Lobby/Plaza Work as defined in the Amendment of Lease effective as of April 1, 1994 shall be modified to be the sum of (a) fifty percent (50%) of the first $700,000 of excess in project costs over $10,000,000, and (b) one hundred percent (100%) of the next $400,000 of excess in project costs and (c) fifty percent (50%) of the remaining excess in project costs (other than Tenant's "Wish List Items" for which Tenant's Share shall be Seventy-Five Percent (75%)). Tenant's Wish List Items include security desk (less $75,000 which shall be included in the above formula), elevator controls, security devices, plaza clock, kiosk, flag markers, BankBoston pediment logos, escalator thresholds and spandrel glass. Through June 30, 1997, the total project costs will be $10,940,046.64 3. Landlord agrees that Tenant's Share of the Lobby/Plaza Work will not exceed $1,642,616.32, subject to increase in the event the Lobby/Plaza Work shall be modified to include additional and/or more expensive construction. 4. As each item of additional Lobby/Plaza Work shall be substantially completed, beginning on the first day of the following month and continuing through December 31, 2008, Tenant shall pay, in addition to Tenant's monthly payments on account of Base Rent, Operating Expenses and Impositions, additional rent on account of such item of Lobby/Plaza Work in an amount determined as provided in Section 5 hereof. 5. The additional rent payable by Tenant under Section 4 hereof shall be determined separately for each item of Lobby/Plaza Work substantially completed. The cost of each item shall be the project cost attributable to such item (as "project cost" is defined in Section 6 of the Amendment of Lease effective as of April 1, 1994). Tenant shall pay additional monthly rent on account of each such item in an amount equal to the monthly payment required to pay in full, on a direct reduction basis over an amortization period commencing on the date as of which Tenant shall be first required to pay additional rent on account of such item and ending on December 31, 2008, Tenant's Share of the cost of such item, with interest at a rate equal to the sum of one percent (1%) plus Tenant's Base Rate in effect as of the date such item shall have been substantially completed by Landlord, in equal monthly installments of principal and interest over such period. 6. On or before July 1, 1997, Tenant shall pay to Landlord a lump sum payment of $90,457.19 as additional rent, such amount representing all sums due to date from Tenant to Landlord on account of the Lobby/Plaza Work substantially completed on or before June 30, 1997. 7. Effective July 1, 1997, the rent payable by Tenant under the Lease shall be increased by $8,650.07 per month for the period July 1, 1997 through December 31, 2008, such amount representing the monthly additional rent to be paid by Tenant on account of the Lobby/Plaza Work substantially completed on or before June 30, 1997. Thereafter, the monthly rent payable shall be increased in accordance with Section 4 and 5 above on account of each item of Lobby/Plaza work substantially completed on or after July 1, 1997. 8. All additional rent to be paid under this Amendment shall be payable on the first day of each month for the period ending December 31, 2008, notwithstanding that the term of a portion of the Premises under the Lease may expire prior to such date. 9. Except only as expressly amended hereby, the Lease shall continue in full force and effect. -2- WITNESS the execution of an instrument under seal as of the date first above written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP By Its General Partner 100 FEDERAL STREET REALTY CORPORATION By: JOHN SCHOSER --------------- Its: Investment Officer TENANT: BANKBOSTON, N.A. By: THEODORE M. EDSON -------------------- Its: Director of Global Facilities -3- EX-10.(FF) 15 AMEND. OF LEASE W/ EQUITABLE FEDERAL REALTY (8/01) EXHIBIT 10(ff) -------------- AMENDMENT OF LEASE ------------------ This AMENDMENT OF LEASE (this "Amendment") made as of August 1, 1997 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership having an address at One Boston Place, Suite 2020, Boston, Massachusetts 02108 ("Landlord"), and BANKBOSTON, N.A. (formerly named The First National Bank of Boston), a national banking association duly organized and existing under the laws of the United States of America having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date as of September 1, 1991 covering certain premises at 100 Federal Street, Boston, Massachusetts, as amended to date (as so amended, the "Lease"). The parties desire to amend the Lease in certain respects as hereinafter set forth. Capitalized terms not defined herein shall have the same meaning ascribed to them in the Lease. WITNESSETH: ---------- NOW, THEREFORE, Landlord and Tenant hereby agree to amend the Lease as follows: 1. Effective as of August 1, 1997, there shall be added to the Premises under the Lease the portion of space located on Floor 5M of the Building shown as Areas E, K, L and G on the plan attached hereto as Exhibit A (the "5M --------- Storage Space"). The 5M Storage Space consists of approximately 8,456 rentable square feet of space. 2. Except as expressly provided herein, all terms and provisions of the Lease applicable to the existing space located on Floor 5M of the Building leased by Tenant under the Lease (the "Existing 5M Premises") shall be applicable to the 5M Storage Space, except that the 5M Storage Space shall be leased to Tenant "as is", it being understood that Landlord shall have no obligation to bring the 5M Storage Space into the condition required by Schedule COND or into compliance with the Americans With Disabilities Act or to provide any allowance for the 5M Storage Space. 3. Without limiting the generality of Section 2 of this Amendment of Lease, commencing on August 1, 1997: (a) the 5M Storage Space shall be part of Space B under the Lease; (b) Tenant shall pay Base Rent for the 5M Storage Space at the same times that such payments are due for the Existing 5M Premises and at the following per rentable square foot rates for the applicable periods: (i) August 1, 1997 through and including August 31, 1998: $10.00 per rentable square foot, (ii) September 1, 1998 through and including August 31, 2001: $12.00 per rentable square foot, (iii) September 1, 2001 through and including August 31, 2006: $16.00 per rentable square foot, and (iv) September 1, 2006 through and including August 31, 2009: $18.00 per rentable square foot; (c) Tenant shall make payments on account of Impositions and Operating Expenses for the 5M Storage Space in the manner provided in Section 2 of Article III of the Lease. 4. Except as only expressly amended hereby, the Lease shall continue in full force and effect as heretofore. WITNESS the execution hereof as an instrument under seal as of the date first above-written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership By: 100 Federal Street Realty Corporation, its general partner By: JOHN SCHOSER ------------------------------- Its: Investment Officer TENANT: BANKBOSTON, N.A. By: DONALD C. WEBSTER ------------------- Its: Director of Corporate Facilities Manager -3- Exhibit A --------- [Plan Showing Storage Space] EX-10.(GG) 16 AMEND. OF LEASE W/ EQUITABLE FEDERAL REALTY (10/1) EXHIBIT 10(gg) -------------- AMENDMENT OF LEASE ------------------ This AMENDMENT OF LEASE (this "Amendment") made as of October 1, 1997 between EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership having an address at One Boston Place, Suite 2020, Boston, Massachusetts 02108 ("Landlord"), and BANKBOSTON, N.A. (formerly named The First National Bank of Boston), a national banking association duly organized and existing under the laws of the United States of America having its principal place of business at 100 Federal Street, Boston, Massachusetts 02110 ("Tenant"). BACKGROUND ---------- Landlord and Tenant are Landlord and Tenant, respectively, under an Indenture of Lease having an effective date as of September 1, 1991 covering certain premises at 100 Federal Street, Boston, Massachusetts, as amended to date (as so amended, the "Lease"). The parties desire to amend the Lease in certain respects as hereinafter set forth. Capitalized terms not defined herein shall have the same meaning ascribed to them in the Lease. WITNESSETH: ---------- NOW, THEREFORE, Landlord and Tenant hereby agree to amend the Lease as follows: 1. Effective as of October 1, 1997, there shall be added to the Premises under the Lease the space located on Floor 1B of the Building shown as Area B on the plan attached hereto as Exhibit A (the "Additional 1B Space"). The --------- Additional 1B Space consists of approximately 1,309 rentable square feet of space. 2. Except as expressly provided herein, all terms and provisions of the Lease applicable to the existing space located on Floor 1B of the Building leased by Tenant under the Lease (the "Existing 1B Premises") shall be applicable to the Additional 1B Space, except that the Additional 1B Space shall be leased to Tenant "as is", it being understood that Landlord shall have no obligation to bring the Additional 1B Space into the condition required by Schedule COND or into compliance with the Americans With Disabilities Act or to provide any allowance for the Additional 1B Space. 3. Without limiting the generality of Section 2 of this Amendment of Lease, commencing on October 1, 1997: (a) the Additional 1B Space shall be part of Space B under the Lease; (b) Tenant shall pay Base Rent for the Additional 1B Space at the same times that such payments are due for the Existing 1B Premises and at the following per rentable square foot rates for the applicable periods: (i) October 1, 1997 through and including August 31, 1998: $10.00 per rentable square foot, (ii) September 1, 1998 through and including August 31, 2001: $12.00 per rentable square foot, (iii) September 1, 2001 through and including August 31, 2006: $16.00 per rentable square foot, and (iv) September 1, 2006 through and including August 31, 2009: $18.00 per rentable square foot; (c) Tenant shall make payments on account of Impositions and Operating Expenses for the Additional 1B Space in the manner provided in Section 2 of Article III of the Lease. 4. Except as only expressly amended hereby, the Lease shall continue in full force and effect as heretofore. WITNESS the execution hereof as an instrument under seal as of the date first above-written. LANDLORD: EQUITABLE FEDERAL STREET REALTY COMPANY LIMITED PARTNERSHIP, a Massachusetts limited partnership By: 100 Federal Street Realty Corporation,its general partner By: /s/ JOHN SCHOSER -------------------------------- Its: Investment Officer TENANT: BANKBOSTON, N.A. By: /s/ DONALD C. WEBSTER -------------------------------- Its: Director of Corporate Facilities Management -3- Exhibit A --------- [Plan Showing Additional 1B Space] EX-12.(A) 17 COMPUTATION OF CORP. RATIO OF EARNINGS EXHIBIT 12(a) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the five years ended December 31, 1997 were as follows:
Years Ended December 31, ---------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 1994 1993 ----- ----- ----- ----- ------ Net income $ 879 $ 650 $ 678 $ 542 $ 367 Extraordinary items, net of tax 7 Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 589 483 529 422 262 ----- ----- ----- ----- ----- Pretax earnings 1,468 1,133 1,207 971 605 ----- ----- ----- ----- ----- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 39 40 38 35 36 Interest on borrowed funds 1,050 873 1,079 1,038 384 ----- ----- ----- ----- ----- Total fixed charges 1,089 913 1,117 1,073 420 ----- ----- ----- ----- ----- Earnings (for ratio calculation) $ 2,557 $ 2,046 $ 2,324 $ 2,044 $ 1,025 ===== ===== ===== ===== ===== Total fixed charges $ 1,089 $ 913 $ 1,117 $ 1,073 $ 420 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 2.35 2.24 2.08 1.90 2.44 ===== ===== ===== ===== =====
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) 18 COMPUTATION OF CORP. RATIO OF EARNINGS EXHIBIT 12(b) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the five years ended December 31, 1997 were as follows:
Years Ended December 31, ---------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 1994 1993 ----- ----- ----- ----- ------ Net income $ 879 $ 650 $ 678 $ 542 $ 367 Extraordinary items, net of tax 7 Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 589 483 529 422 262 ----- ----- ----- ----- ----- Pretax earnings 1,468 1,133 1,207 971 605 ----- ----- ----- ----- ----- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 39 40 38 35 36 Interest on borrowed funds 1,050 873 1,079 1,038 384 Interest on deposits 1,685 1,680 1,791 1,301 1,177 ----- ----- ----- ----- ----- Total fixed charges 2,774 2,593 2,908 2,374 1,597 ----- ----- ----- ----- ----- Earnings (for ratio calculation) $ 4,242 $ 3,726 $ 4,115 $ 3,345 $ 2,202 ===== ===== ===== ===== ===== Total fixed charges $ 2,774 $ 2,593 $ 2,908 $ 2,374 $ 1,597 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.53 1.44 1.42 1.41 1.38 ===== ===== ===== ===== =====
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) 19 COMPUTATION OF CORP. RATIO OF EARNINGS 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 five years ended December 31, 1997 were as follows:
Years Ended December 31, -------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Net income $ 879 $ 650 $ 678 $ 542 $ 367 Extraordinary items, net of tax 7 Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 589 483 529 422 262 ----- ----- ----- ----- ----- Pretax earnings 1,468 1,133 1,207 971 605 ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 39 40 38 35 36 Interest on borrowed funds 1,050 873 1,079 1,038 384 ----- ----- ----- ----- ----- Total fixed charges 1,089 913 1,117 1,073 420 Preferred stock dividend requirements 53 65 68 67 61 ----- ----- ----- ----- ----- Total combined fixed charges and preferred stock dividend requirements $ 1,142 $ 978 $ 1,185 $ 1,140 $ 481 ===== ===== ===== ===== ===== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 2,557 $ 2,046 $ 2,324 $ 2,044 $ 1,025 ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 2.24 2.09 1.96 1.79 2.13 ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. EX-12.(D) 20 COMPUTATION OF CORP. RATIO OF EARNINGS 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 five years ended December 31, 1997 were as follows:
Years Ended December 31, --------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Net income $ 879 $ 650 $ 678 $ 542 $ 367 Extraordinary items, net of tax 7 Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense 589 483 529 422 262 ----- ----- ----- ----- ----- Pretax earnings 1,468 1,133 1,207 971 605 ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 39 40 38 35 36 Interest on borrowed funds 1050 873 1,079 1,038 384 Interest on deposits 1,685 1,680 1,791 1,301 1,177 ----- ----- ----- ----- ----- Total fixed charges 2,774 2,593 2,908 2,374 1,597 Preferred stock dividend requirements 53 65 68 67 61 ----- ----- ----- ----- ----- Total combined fixed charges and preferred stock dividend requirements $ 2,827 $ 2,658 $ 2,976 $ 2,441 $ 1,658 ===== ===== ===== ===== ===== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 4,242 $ 3,726 $ 4,115 $ 3,345 $ 2,202 ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.50 1.40 1.38 1.37 1.33 ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. EX-13 21 1997 ANNUAL REPORT PAGES EXHIBIT 13 BANKBOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1997 1996 1995 1994 1993 1992 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Interest income................. $ 5,164 $ 4,893 $ 5,119 $ 4,376 $ 3,330 $ 3,664 Interest expense................ 2,735 2,553 2,870 2,339 1,561 1,992 ------- ------- ------- ------- ------- ------- Net interest revenue.......... 2,429 2,340 2,249 2,037 1,769 1,672 Provision for credit losses..... 200 231 275 154 107 288 ------- ------- ------- ------- ------- ------- Net interest revenue after provision for credit losses.. 2,229 2,109 1,974 1,883 1,662 1,384 Noninterest income.............. 1,563 1,344 1,309 1,035 945 1,020 Noninterest expense(1).......... 2,324 2,320 2,076 1,947 2,002 1,949 ------- ------- ------- ------- ------- ------- Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles.......... 1,468 1,133 1,207 971 605 455 Provision for income taxes.... 589 483 529 422 262 190 ------- ------- ------- ------- ------- ------- Income before extraordinary items and cumulative effect of changes in accounting principles..................... 879 650 678 549 343 265 Extraordinary items Loss from early extinguishment of debt, net of tax........... (7) Recognition of prior year tax benefit carryforwards......... 73 Cumulative effect of changes in accounting principles, net of tax(2)......................... 24 ------- ------- ------- ------- ------- ------- Net income.................... $ 879 $ 650 $ 678 $ 542 $ 367 $ 338 ======= ======= ======= ======= ======= ======= Net income applicable to common stock................. $ 848 $ 613 $ 641 $ 505 $ 332 $ 318 ======= ======= ======= ======= ======= ======= Per common share Income before extraordinary items and cumulative effect of changes in accounting principles Basic......................... $ 5.73 $ 3.99 $ 4.17 $ 3.44 $ 2.09 $ 1.77 Diluted....................... 5.65 3.93 4.09 3.36 2.05 1.73 Net income Basic......................... 5.73 3.99 4.17 3.39 2.26 2.30 Diluted....................... 5.65 3.93 4.09 3.31 2.21 2.24 Cash dividends declared........ 1.97 1.69 1.28 .93 .40 .10 Average number of common shares (in thousands) Basic.......................... 147,959 153,529 153,856 148,913 147,033 138,444 Diluted........................ 150,040 156,112 156,768 153,616 152,067 144,044 - -------------------------------------------------------------------------------------------------
(1) Includes: in 1996, $180 million of charges primarily composed of employee severance and property-related costs recorded in connection with the Corpo- ration's acquisition of BayBanks, Inc.; in 1995, $28 million of charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units; in 1994, costs of $21 million recorded in connection with the Corporation's acquisitions of BankWorcester Corporation and Pio- neer Financial, A Co-operative Bank; and, in 1993, acquisition-related costs and reorganization charges of $85 million recorded primarily in con- nection with the Corporation's acquisitions of Society for Savings Bancorp, Inc. and Multibank Financial Corp., as well as estimated costs of downsiz- ing and reconfiguring certain of the Corporation's business and corporate units. (2) Includes a cumulative benefit of $77 million resulting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and a cumulative charge of $53 million, net of tax, relating to a change in accounting principles pertaining to the valuation of purchased mortgage servicing rights. 27 BANKBOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1997 1996 1995 1994 1993 1992 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on average assets.. 1.35% 1.09% 1.22% 1.01% .76% .73% Return on average common equity(1)................. 20.05 14.47 16.86 15.50 11.39 12.86 Common dividend payout ratio..................... 34.3 40.4 28.1 24.9 14.4 3.4 Common equity to total assets.................... 6.3 7.1 7.1 6.2 6.1 5.9 Average total stockholders' equity to average total assets...... 7.2 8.0 7.7 7.1 7.1 6.0 Risk-based capital ratios Tier 1.................. 8.0 9.2 8.5 7.7 7.7 7.4 Total................... 12.1 13.6 12.8 12.7 12.4 11.8 Leverage ratio............ 7.4 8.2 7.4 6.7 6.9 6.6 Net credit losses to average loans and lease financing................. .66 .57 .51 .81 .87 1.38 Reserve for credit losses to loans and lease financing................. 1.62 2.15 2.29 2.19 2.70 3.57 Reserve for credit losses to nonaccrual loans and lease financing........... 222.2 219.6 238.9 197.0 142.2 116.3 Nonaccrual loans and OREO as a percent of related asset categories.......... .8 1.1 1.1 1.5 2.5 4.2 Market value/book value... 316.0 222.4 171.2 112.2 108.9 134.4 BALANCE SHEET DATA AT DECEMBER 31 Loans and lease financing................. $ 43,980 $41,061 $38,870 $37,708 $34,819 $31,240 Reserve for credit losses.................... (712) (883) (890) (827) (941) (1,116) Total assets.............. 69,268 62,306 59,423 55,411 50,711 47,222 Deposits.................. 45,761 42,831 41,064 40,249 38,316 38,097 Funds borrowed............ 11,723 9,158 9,503 7,211 5,487 3,092 Notes payable............. 2,941 2,821 2,189 2,219 2,023 1,736 Stockholders' equity...... 4,610 4,934 4,702 3,931 3,615 3,198 Common shares outstanding (in thousands)............ 145,707 153,173 155,296 148,343 147,036 145,379 Common stockholders of record(2)................. 26,522 27,672 27,662 27,505 28,233 30,163 Number of employees....... 21,495 21,990 23,710 24,009 24,215 24,986 Per common share Book value............... $ 29.73 $ 28.89 $ 27.01 $ 23.07 $ 21.13 $ 18.98 Market value............. 93 15/16 64 1/4 46 1/4 25 7/8 23 25 1/2 AVERAGE BALANCE SHEET DATA Loans and lease financing................. $ 42,383 $40,589 $38,283 $36,017 $32,565 $31,568 Securities................ 9,741 8,122 7,463 6,473 5,631 6,272 Other earning assets...... 5,584 4,699 3,821 5,027 4,684 3,818 -------- ------- ------- ------- ------- ------- Total earning assets.... 57,708 53,410 49,567 47,517 42,880 41,658 -------- ------- ------- ------- ------- ------- Cash and due from banks... 3,069 2,610 2,591 2,708 2,419 2,200 Other assets.............. 4,486 3,503 3,586 3,164 2,638 2,432 -------- ------- ------- ------- ------- ------- Total average assets.... $ 65,263 $59,523 $55,744 $53,389 $47,937 $46,290 ======== ======= ======= ======= ======= ======= Deposits.................. $ 42,853 $41,603 $38,406 $37,919 $37,163 $37,643 Funds borrowed............ 11,864 8,751 9,132 8,018 4,500 3,633 Other liabilities......... 2,497 1,759 1,760 1,563 1,087 1,000 Notes payable(3).......... 3,382 2,666 2,142 2,123 1,797 1,252 Stockholders' equity...... 4,667 4,744 4,304 3,766 3,390 2,762 -------- ------- ------- ------- ------- ------- Total average liabilities and stockholders' equity.... $ 65,263 $59,523 $55,744 $53,389 $47,937 $46,290 ======== ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------
(1) For purposes of this ratio, preferred stock dividends have been deducted from net income. (2) The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. (3) Averages for 1997 and 1996 include guaranteed preferred beneficial inter- ests in Corporation's junior subordinated debentures. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- BankBoston Corporation (the Corporation) is a registered bank holding company which, together with its subsidiaries, operates through a network of offices across the U.S. and has more than 100 offices in 23 countries in Latin America, Asia, Europe and Africa. The Corporation's major banking subsidiaries are BankBoston, N.A. (the Bank) and Rhode Island Hospital Trust National Bank. The Corporation may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Secu- rities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future opera- tions, estimates of future economic performance, and assumptions relating thereto. The Corporation may include forward-looking statements in its filings with the Securities and Exchange Commission, in its reports to stockholders, including this Annual Report, in other written materials, and in statements made by se- nior management to analysts, rating agencies, institutional investors, repre- sentatives of the media and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projec- tions 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 devel- opment by the Corporation of technology enhancements for its products and oper- ating systems; the effects of competition by other financial services organiza- tions; legislative or regulatory developments, including changes in laws con- cerning 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 eco- nomic conditions, both domestic and international, including inflation, inter- est 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; tight labor markets; and acquisitions and integrations of acquired businesses. When relying on forward-looking statements to make de- cisions with respect to the Corporation, investors and others are cautioned to consider these and other uncertainties and events, whether or not the state- ments are described as forward-looking. STRATEGIC INITIATIVES The Corporation continues to undertake strategic initiatives focused on leveraging its core competencies over attractive markets, and continues to ex- plore, on an ongoing basis, acquisition, divestiture and joint venture opportu- nities, as well as analyze each of its businesses in the context of competitive advantages, industry dynamics and growth potential. ACQUISITIONS AND BUSINESS EXPANSIONS During 1997, the Corporation announced its intention to expand its retail dis- tribution capacity in Argentina and to strengthen its presence in that country. In connection with this expansion program, the Corporation opened seventeen branches in Argentina during 1997, and expects to open approximately 50 more branches during 1998. In addition, in January 1998, the Corporation completed its acquisition of Deutsche Bank Argentina S.A. (Deutsche Argentina), a subsid- iary of Deutsche Bank A.G., for approximately $255 million in cash. In connec- tion with this transaction, the Corporation acquired approximately $1.3 billion of loans and $1.5 billion of deposits. The Corporation expects to consolidate some overlapping Deutsche Argentina branches with existing or planned branch locations. The Corporation is also expanding its retail distribution capacity in Brazil. In connection with this expansion program, the Corporation opened ten branches during 1997, and expects to open 32 more branches during 1998. During 1997, the Corporation continued to expand its Global Capital Markets business. This expansion included the hiring of additional sales and trading professionals, the opening of BancBoston Securities Inc. (BSI), the Corpora- tion's Section 20 subsidiary, and the formation of a high yield securities unit. As part of this expansion effort, in early 1998, the Corporation rea- ligned its operations in Asia to focus on capital markets, including debt un- derwriting and trading, foreign exchange and derivatives, as well as on trade services. In October 1997, the Corporation completed its acquisition of Pacific National Corporation, the parent of Pacific National Bank of Nantucket, 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. Pacific National Corporation had loans of $98 million, primarily residential and commercial real estate loans, and deposits of $108 million at the time of acquisition. In July 1996, the Corporation completed its acquisition of BayBanks, Inc. (BayBanks) in a tax-free exchange of stock, whereby the Corporation exchanged 2.2 shares of its common stock for each outstanding share of BayBanks common stock. In connection with regulatory approval for its acquisition of BayBanks, the Corporation, in the fourth quarter of 1996, sold 20 branches of the com- bined entity, having aggregate deposits of approximately $700 million and loans of approximately $500 million, resulting in a pre-tax gain of approximately $47 million. In June 1996, the Corporation completed its acquisition of The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank, a Massachusetts chartered savings bank with approximately $1.3 billion in deposits. The Corpo- ration exchanged 4.6 million shares of its common stock, with a value of ap- proximately $229 million, for all of the outstanding common stock of Bancorp. The Corporation purchased an equivalent amount of shares in the open market for this transaction. 29 DIVESTITURES AND STRATEGIC ALLIANCES The Corporation implemented its previously announced strategic initiative to downsize its national consumer lending business as follows: . During 1997, the Corporation sold its two national consumer lending subsid- iaries, Fidelity Acceptance Corporation (FAC) and Ganis Credit Corporation (Ganis). The Corporation sold FAC during the third quarter of 1997, result- ing in a pre-tax gain of $68 million. In March 1997, the Corporation sold approximately $950 million of Ganis loans for a pre-tax gain of $7.5 mil- lion, and completed the sale of Ganis in June 1997. . In January 1998, the Corporation consummated its 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 national credit card venture. Under the terms of the agreement, which was announced in September 1997, the Corporation contributed its national credit card portfolio of ap- proximately $1.2 billion in receivables in exchange for cash, at par. The Corporation also received 19 percent of the common stock and $50 million of preferred stock of the new company and an additional $5 million in cash. The Corporation has retained its regional credit card portfolio of approxi- mately $500 million in receivables. In February 1998, the Corporation sold its 26 percent ownership interest in HomeSide, Inc. (HomeSide) to National Australia Bank Ltd. The sale was in con- nection with National Australia Bank Ltd.'s acquisition of 100 percent of HomeSide. The transaction will result in a pre-tax gain of approximately $165 million. HomeSide was formed in the first half of 1996, when the Corporation joined with two equity investment firms and Barnett Banks, Inc. (Barnett) to form this independent mortgage company, to which the Corporation and Barnett sold their mortgage banking subsidiaries, BancBoston Mortgage Corporation and Barnett Mortgage Company, respectively. The Corporation, Barnett and the two equity investment firms each initially held an approximate one-third interest in HomeSide. The Corporation recognized a pre-tax gain of $106 million relat- ing to this transaction, which was offset by a pre-tax loss of $111 million related to mortgage prepayment risk management activities (see the "Noninter- est Income" section). In January 1997, as a result of HomeSide's initial pub- lic offering, the Corporation's one-third interest was reduced to 26 percent for a net pre-tax gain of $3 million. In September 1997, the Corporation announced its intention to exit its indi- rect auto loan business. At December 31, 1997, the indirect loan portfolio amounted to approximately $1.3 billion. OTHER 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 proc- ess-intensive businesses in the U.S., including, among others, the New England regional consumer business. The internal analysis and design phase is expected to be completed in mid-1998. In January 1998, the Corporation announced its plan to restructure its Euro- pean operations by centralizing its operations in London. This restructuring plan anticipates closing the Corporation's offices in Paris and Frankfurt dur- ing 1998. Additional information with regard to certain of these transactions is in- cluded in Note 2 to the Financial Statements. 30 RESULTS OF OPERATIONS The following is a discussion and analysis of the Corporation's consolidated results of operations. In order to understand this section in context, it should be read in conjunction with the Consolidated Financial Statements in- cluded elsewhere in this report. OVERVIEW The Corporation's net income for 1997 was $879 million, compared with $650 mil- lion for 1996. Basic net income per common share was $5.73 and diluted net in- come per common share was $5.65 in 1997, compared with $3.99 and $3.93, respec- tively, in 1996. In 1996, the Corporation recorded restructuring and merger-re- lated costs of $180 million ($117 million after-tax) in connection with its ac- quisition of BayBanks. See the "Noninterest Expense" section and Note 19 to the Financial Statements for a further discussion of restructuring and merger-re- lated costs. Excluding the effects of these restructuring and merger-related costs, as well as other charges related to the BayBanks acquisition and items related to the sale of the Corporation's mortgage banking subsidiary, 1996 net income was $773 million, or $4.71 per common share on a diluted basis. The Cor- poration's 1997 net income and net income per common share on a diluted basis increased 14 percent and 20 percent, respectively, from the 1996 levels, ex- cluding the above mentioned items. NET INTEREST REVENUE This discussion of net interest revenue should be read in conjunction with Av- erage Balances and Interest Rates and Change in Net Interest Revenue -- Volume and Rate Analysis, presented elsewhere in this report. Table 1 presents a sum- mary of net interest revenue, related average earning assets and net interest margin. For this review of net interest revenue, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been ad- justed to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35 percent, plus applicable state and local taxes, net of related federal tax benefits. TABLE 1 -- NET INTEREST REVENUE, AVERAGE EARNING ASSETS AND NET INTEREST MARGIN
Years Ended December 31 (dollars in millions) U.S. International Consolidated - ------------------------------------------------------------------------------ Net interest revenue (fully taxable equivalent basis) 1997..................................... $ 1,822 $ 631 $ 2,453 1996..................................... 1,826 534 2,360 1995..................................... 1,825 446 2,271 Average earning assets 1997..................................... $41,849 $15,859 $57,708 1996..................................... 40,211 13,199 53,410 1995..................................... 38,688 10,879 49,567 Net interest margin 1997..................................... 4.36% 3.98% 4.25% 1996..................................... 4.54 4.05 4.42 1995..................................... 4.72 4.10 4.58
1997 COMPARED WITH 1996 The improvement in consolidated net interest revenue of $93 million was primar- ily driven by an increase in average earning assets, while the decrease in con- solidated net interest margin of 17 basis points was primarily due to the sale of FAC. Domestic net interest revenue decreased from 1996 to 1997 due to a decrease in net interest margin of 18 basis points, partially offset by an increase in av- erage earning assets of $1.6 billion. The decrease in net interest margin was primarily due to the sale of FAC in 1997. The increase in trading and available for sale securities, due to growth in the Global Capital Markets business and risk management activities, was mainly responsible for the increase in average earning assets. Information with respect to the Corporation's management of in- terest rate risk is discussed in the "Asset and Liability Management" section. Average loans and lease volume was relatively unchanged from 1996. The $1.6 billion increase in commercial, industrial and financial loans and commercial real estate loans was offset by a $1.7 billion decrease in consumer-related loans, including lower residential mortgages and lower FAC and Ganis loans. As noted above, the Corporation sold FAC and Ganis during 1997. International net interest revenue rose $97 million due to increases in average earning assets, reflecting increases in average loans and leases of $1.7 bil- lion, primarily commercial and industrial loans, and a $1 billion increase in other average earning assets, mainly available for sale securities, due from banks and securities purchased under agreements to resell. These increases pri- marily occurred in the Corporation's operations in Latin America, mainly Argen- tina and Brazil. The effect of the higher level of average earning assets was partially offset by a 7 basis point decline in net interest margin, reflecting narrower spreads, primarily in Argentina, partially offset by wider spreads in Brazil as a result of an increase in Brazilian interest rates. The Corporation expects continued pressure on margin in the future. Future lev- els of net interest revenue and margin will be affected by competitive pricing pressure on retail deposits, loans and other products; the mix and volume of assets and liabilities; the current interest rate environment; the economic and political conditions in the countries where the Corporation does business; and other factors, such as the Corporation's strategic initiatives. 31 NONINTEREST INCOME The composition of noninterest income is presented in Table 2. TABLE 2 -- NONINTEREST INCOME
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------- Financial service fees Deposit and ATM-related fees............................ $ 259 $ 238 $ 231 Letter of credit and acceptance fees.................... 73 68 72 Syndication and agent fees.............................. 95 58 38 Other loan-related fees................................. 39 38 34 Net mortgage servicing fees............................. (82) 172 Other financial service fees............................ 189 154 148 ------ ------ ------ Total financial service fees........................... 655 474 695 Mutual fund fees......................................... 111 94 67 Personal trust fees...................................... 145 131 112 Other trust and agency fees.............................. 27 21 61 Trading profits and commissions.......................... 58 76 25 Securities portfolio gains, net.......................... 80 23 9 Net equity and mezzanine profits......................... 221 209 110 Net foreign exchange trading profits..................... 88 54 60 Gains on sales of mortgage servicing..................... 13 10 Gains on sales of businesses............................. 68 153 95 Other income............................................. 110 96 65 ------ ------ ------ Total.................................................. $1,563 $1,344 $1,309 ====== ====== ======
1997 COMPARED WITH 1996 Excluding net mortgage servicing fees, financial service fees increased $99 million compared with 1996. The improvement was due to an increase in syndica- tion and agent fees, reflecting a higher volume of transactions generated by the Corporation's loan syndications business; an increase in deposit and ATM- related fees due to repricing of certain domestic products; and an increase in other financial service fees resulting from increased underwriting and finan- cial advisory fees in the Corporation's Global Capital Markets business. Net mortgage servicing fees in 1996 included $111 million of pre-tax losses from risk management activities, net of decreased mortgage servicing amortiza- tion. These losses resulted from the decline in market value of contracts used to manage prepayment risk in the mortgage servicing portfolio which, in turn, protected the economic value of the Corporation's mortgage banking subsidiary pending the completion of its sale to HomeSide. Concurrently, the market value of the mortgage servicing assets increased, resulting in a pre-tax gain of $106 million upon the sale of the mortgage banking subsidiary, which substantially offset the losses from risk management activities. The pre-tax gain is included in gains on sales of businesses. As discussed in the "Strategic Initiatives" section above, in February 1998, the Corporation sold its interest in HomeSide, and will record a pre-tax gain of approximately $165 million. Mutual fund fees increased $17 million, primarily due to higher fees from the Corporation's Argentine mutual fund business, reflecting growth in these funds of approximately $700 million during 1997, to $1.2 billion at December 31, 1997. The $14 million increase in 1997 in personal trust fees was due to an in- crease in domestic assets under management. Compared with 1996, trading profits and commissions decreased $18 million, mainly due to losses incurred in the Corporation's trading securities portfo- lios, primarily in the emerging markets and high yield securities businesses, in the fourth quarter of 1997. The decrease was partially offset by trading gains in other trading portfolios, primarily in the derivatives trading busi- ness. The $57 million increase in net securities portfolio gains in 1997 mainly reflected net gains related to securities sales in the emerging markets busi- ness in the fourth quarter of 1997, and the sale of certain securities in the Argentine available for sale portfolio. Net foreign exchange trading profits increased $34 million in 1997, due to growth of this business and favorable market conditions during the year, particularly in the fourth quarter. The trading and securities portfolio activities were affected by the Asian economic crisis. See the "Emerging Markets Countries" section for a further discussion of recent market events in Asia. The levels of profits from the Corporation's trading businesses and other capital markets businesses are also influenced by market and economic conditions and, as such, there can be no assurance as to the future levels of profits from these businesses. Net equity and mezzanine profits increased $12 million over 1996, reflecting continued gains in the Private Equity Investing business. The level of these profits is also affected by market and economic conditions. Gains on sales of businesses in 1997 is composed of a $68 million pre-tax gain from the sale of FAC, and, in 1996, a $106 million pre-tax gain from the sale of the Corporation's mortgage banking subsidiary discussed above and a $47 mil- lion pre-tax gain from the sale of branches. See the "Strategic Initiatives" section for a further discussion of these transactions. The $14 million increase in other noninterest income included higher gains on sales of loans, partially offset by an $11 million loss, recognized in connec- tion with the sale of FAC, on interest rate futures contracts that had been used to hedge the funding of this subsidiary. 32 NONINTEREST EXPENSE The composition of noninterest expense is presented in Table 3. TABLE 3 -- NONINTEREST EXPENSE
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------- Employee costs............................................ $1,279 $1,178 $1,146 Occupancy and equipment................................... 350 341 324 Advertising and public relations.......................... 107 108 87 Communications............................................ 112 101 90 Professional fees......................................... 61 56 65 Amortization of goodwill and other intangibles............ 37 34 28 Other..................................................... 374 313 299 ------ ------ ------ Noninterest expense before acquisition, divestiture, and restructuring expense and OREO........................... 2,320 2,131 2,039 Acquisition, divestiture and restructuring expense........ 180 28 OREO...................................................... 4 9 9 ------ ------ ------ Total.................................................... $2,324 $2,320 $2,076 ====== ====== ======
1997 COMPARED WITH 1996 Noninterest expense before acquisition, divestiture and restructuring expense and other real estate owned (OREO) increased $189 million compared with the prior year. The increase was primarily driven by investment spending in Argen- tina and Brazil, including the opening of seventeen new branches in Argentina and ten new branches in Brazil; the continued growth of the Corporation's Global Capital Markets businesses, including the hiring of additional sales and trading professionals, the opening of BSI and the formation of a high yield se- curities unit; and increased incentive compensation related to improved busi- ness performance, and higher merit increases. In addition, during 1997, the Corporation incurred additional conversion costs associated with the regional consumer business, costs related to the unveiling of the new BankBoston brand in Latin America, and costs in connection with its Year 2000 project. See the "Risk Management" section for a discussion of the Corporation's Year 2000 project. These costs are the principal components of the increase in other noninterest expense. The additional conversion costs in- cluded integrating teller, ATM and other back-office systems; additional part- time and temporary help related to the integration; and costs related to the planned closing of additional branches. Also included are costs associated with the extension of the new products set to the Corporation's Connecticut opera- tions in conjunction with the merger of Bank of Boston Connecticut into the Bank, which occurred in October 1997. The increase in noninterest expense before acquisition, divestiture and re- structuring expense and OREO was offset, in part, by lower operating expenses of FAC and Ganis, due to their disposition during 1997, and cost savings re- lated to the integration of BayBanks. In the third quarter of 1996, the Corporation recorded restructuring and merg- er-related costs of $180 million in connection with its acquisition of BayBanks. The charges included severance costs, facility costs, including con- solidations of branch and back office operations, and professional fees and other costs of effecting the merger. Also included are systems and other con- version costs which were incurred at the time of the merger. See Note 19 to the Financial Statements for a further discussion of acquisition, divestiture and restructuring expense. PROVISION FOR CREDIT LOSSES The provision for credit losses was $200 million in 1997, compared with $231 million in 1996. See the "Reserve for Credit Losses" section and Note 7 to the Financial Statements for a further discussion of the provision for credit loss- es. The provision for credit losses reflects management's assessment of the ad- equacy of the reserve for credit losses, considering the current risk charac- teristics of the loan portfolio and economic conditions. It also reflected the actions taken by the Corporation to exit its national consumer lending busi- ness, a business that generated significant chargeoffs. The amount of future provisions will be a function of the regular quarterly review of the reserve for credit losses, based upon management's assessment of risk at the time, and, as such, there can be no assurance as to the level of future provisions. PROVISION FOR INCOME TAXES The 1997 income tax provision was $589 million, compared with $483 million for 1996. Included in the 1996 provision is a tax benefit of $63 million related to the $180 million of restructuring and merger-related costs recorded in connec- tion with the acquisition of BayBanks. The low level of tax benefit associated with the charge reflects the effect of certain non-tax deductible costs associ- ated with the acquisition. The Corporation's effective tax rate was 40 percent in 1997, compared with 42 percent in 1996, excluding the impact of restructuring and merger-related costs. The reduction in the Corporation's effective tax rate from 1996 was pri- marily due to reductions in the rates of state tax to which the Corporation's operations were subject. 33 LINE OF BUSINESS RESULTS The Corporation is managed through its Policy Council, which is the senior de- cision making group of the institution. The Policy Council is comprised of eleven members, including the Chairman and Chief Executive Officer, the Presi- dent and Chief Operating Officer and the Chief Financial Officer. The remaining members of the Policy Council include six executives who manage certain key businesses, and the chairs of the corporate-wide Risk Management and Human Re- sources committees. Management has grouped its principal revenue producing areas into the following major business lines: Corporate Banking and Global Capital Markets, Regional Consumer and Small Business, Argentina, Brazil, and the Global Private Bank. The operating results and other key financial measures of these five business lines for 1997 and 1996 are presented below. Information related to the Corpo- ration's remaining businesses, various central functions and other corporate items has been aggregated and is included below in "Other Businesses and Corpo- rate." This includes the Global Treasury group; the national consumer business- es, including FAC and Ganis, which were sold in 1997, and the national credit card portfolio, which was contributed to a newly formed venture in the first quarter of 1998; and other international businesses and joint ventures. Infor- mation shown for 1996 is presented on a basis consistent with 1997 and, as such, has been restated for changes in the Corporation's organization and in- ternal management reporting methodologies. The line of business information shown below reflects assignments and alloca- tions of items made within the Corporation's internal management reporting process. Descriptions of individual items are as follows: . Most balance sheet, revenue and expense items are derived from the internal management reporting system, where they are specifically attributable to individual businesses. . Net interest revenue is allocated to the business lines using a funds transfer pricing process, which incorporates a matched funding concept, with the residual assigned to the Global Treasury group. . Various techniques are employed to allocate certain costs associated with corporate support areas, including the use of unit costs and service vol- umes. . The provision for credit losses is allocated to each line of business based on "expected loss" as determined under the Corporation's risk adjusted re- turn on equity (RAROE) methodology, which is an estimate of the average loss rate that individual credit portfolios will experience over their life cycle, based on the Corporation's historical experiences and various market data. This method is different than the method used to determine the Corpo- ration's consolidated provision for credit losses, which is based on an evaluation of the adequacy of the reserve for credit losses, considering the risk characteristics in the credit portfolio at a point in time. Since the "expected loss" methodology, which averages peaks and valleys of the credit cycle, is intended to be a longer term view of credit costs for a business, it would be expected to result in a lower allocation in the worst periods of a credit cycle and higher allocations in the best periods of a credit cycle. The difference between the sum of the expected loss for each line of business and the Corporation's provision is included in "Other Businesses and Corporate." . The effective tax rate applied to each business line reflects the Corpora- tion's consolidated effective tax rate, excluding, in 1996, certain corpo- rate items. . The return on equity shown for each line of business is based upon the Cor- poration's RAROE methodology. The amount of common equity allocated to each business line is based on 1) an evaluation of the various risks associated with the business, including credit, market, country and operational risk, and 2) the amount necessary to support other investments, such as fixed as- sets, goodwill and joint ventures. The difference between the aggregate capital allocated under this methodology and total consolidated common eq- uity is allocated to the business lines on a pro-rata basis. Selected financial information for the Corporation's lines of business for 1997 and 1996 is presented in Table 4. The financial information is presented on a fully taxable equivalent basis. TABLE 4 -- LINE OF BUSINESS SELECTED FINANCIAL INFORMATION
Corporate Banking and Global Regional Consumer Global Capital Markets and Small Business Argentina Brazil Private Bank Years Ended December 31 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 (dollars in millions) - -------------------------------------------------------------------------------------------------------------------- Operating revenues....... $ 1,372 $ 1,197 $ 1,132 $ 1,135 $ 357 $ 303 $ 406 $ 324 $ 264 $ 246 Operating expenses....... 599 512 819 825 226 180 273 206 176 176 --------- --------- --------- --------- ------ ------ ------ ------ ------ ------ Operating income......... 773 685 313 310 131 123 133 118 88 70 Acquisition, divestiture and restructuring expense........ Credit costs (provision and OREO).......... 101 110 35 38 22 20 18 14 2 1 --------- --------- --------- --------- ------ ------ ------ ------ ------ ------ Pre-tax income.. 672 575 278 272 109 103 115 104 86 69 Taxes........... 276 244 114 115 45 44 47 44 35 29 --------- --------- --------- --------- ------ ------ ------ ------ ------ ------ Net income...... $ 396 $ 331 $ 164 $ 157 $ 64 $ 59 $ 68 $ 60 $ 51 $ 40 ========= ========= ========= ========= ====== ====== ====== ====== ====== ====== Average assets.. $ 26,797 $ 23,106 $ 7,402 $ 7,332 $5,044 $4,136 $5,418 $4,570 $1,353 $1,185 Average deposits....... $ 6,061 $ 6,195 $ 24,193 $ 24,099 $2,576 $2,160 $1,437 $1,060 $2,677 $2,532 Return on average common equity......... 22% 19% 18% 17% 24% 19% 24% 24% 37% 26% - -------------------------------------------------------------------------------------------------------------------- Other Businesses and Corporate Total Years Ended December 31 1997 1996 1997 1996 (dollars in millions) - -------------------------------------------------------------------------------------------------------------------- Operating revenues....... $ 485 $ 499 $ 4,016 $ 3,704 Operating expenses....... 227 232 2,320 2,131 -------- -------- -------- -------- Operating income......... 258 267 1,696 1,573 Acquisition, divestiture and restructuring expense........ 180 180 Credit costs (provision and OREO).......... 26 57 204 240 -------- -------- -------- -------- Pre-tax income.. 232 30 1,492 1,153 Taxes........... 96 27 613 503 -------- -------- -------- -------- Net income...... $ 136 $ 3 $ 879 $ 650 ======== ======== ======== ======== Average assets.. $ 19,249 $ 19,194 $65,263 $59,523 Average deposits....... $ 5,909 $ 5,557 $42,853 $41,603 Return on average common equity......... 20% 14% - --------------------------------------------------------------------------------------------------------------------
34 CORPORATE BANKING AND GLOBAL CAPITAL MARKETS Corporate Banking includes the Corporation's Relationship Bank, the Investment Bank, and the Private Equity Investing business. Global Capital Markets in- cludes the Emerging Markets Sales, Trading & Research (EMSTR) and High Yield Securities Group (HYSG) businesses, as well as various other trading business- es, such as foreign exchange and derivatives. The national and regional Relationship Bank manages a $21 billion portfolio of loans and leases spread over a variety of lending units, which include Media and Communications, High Technology, Transportation, Environmental Services, Real Estate, New England Corporate Banking, Large Corporate, Asset Based Fi- nance, Diversified Finance, Multinational, Financial Institutions and Leasing. These lending units seek to establish relationships with customers and deliver relationship-driven financial solutions through traditional credit products, cash management, and trade services. The creation and organization of the Cor- poration's Investment Banking function is in response to marketplace competi- tion, and reflects the convergence of investment and commercial banking. The Corporation is building this capability around its powerful loan syndications business. Investment bankers will partner with line officers in delivering ad- visory services and capital markets solutions to appropriate customers. This action builds upon existing strong corporate relationships developed and main- tained by our relationship manager organization. The Global Capital Markets area is a vital link between issuing and investing clients. Working closely with the commercial lending, loan syndications, and investment banking functions, business customers have access to domestic and cross-border loan syndication, private placement, asset securitization, under- writing and strategic advisory services. In addition, Global Capital Markets provides a full array of capital markets products to its customers, including risk management products, such as derivatives and foreign exchange contracts. In early 1997, the Corporation opened BSI to provide customers with access to domestic bond underwriting, and, in conjunction with this opening, formed HYSG. In addition, the Corporation provides underwriting services to international markets through its EMSTR area. The Private Equity Investing business operates from offices in the United States, Europe, Latin America and Asia. It invests in early stage companies and other special situations with the expectation of realizing returns on these in- vestments within a four- to six-year timeframe. The portfolio, with a cost ba- sis of approximately $1 billion at December 31, 1997, is diversified as to as- set class, risk and industry. Gains are realized from multiple exit channels including initial public offerings, recapitalizations and financial and strate- gic buyouts. Net income from Corporate Banking and Global Capital Markets increased $65 mil- lion from 1996. The 15 percent improvement in revenue was primarily driven by an increase in net interest revenue, reflecting an increase of approximately $1.6 billion in commercial loans, and an increase in noninterest income, re- flecting growth in loan syndication, advisory and underwriting fees, higher net securities portfolio gains from the EMSTR business, and higher net foreign ex- change trading profits. These increases were offset, in part, by lower trading account profits, which were affected by losses experienced in the fourth quar- ter of 1997 as a result of the Asian economic crisis. See the "Emerging Markets Countries" section for a further discussion of the Asian crisis. Higher equity and mezzanine profits and gains from sales of loans also contributed to the revenue growth. The increase in operating expenses was primarily due to the Corporation's continued expansion of its Corporate and Global Capital Markets businesses, including the opening of BSI and the formation of a high yield se- curities unit, and increased incentive compensation related to improved busi- ness performance. REGIONAL CONSUMER AND SMALL BUSINESS Regional Consumer and Small Business serves the deposit, credit and investment needs of approximately two million households and approximately 120,000 small businesses through 468 branches, including traditional and in-store branches and mall locations, spanning Massachusetts, Rhode Island, Connecticut and New Hampshire. With over $24 billion of deposits, the business also functions as a major funding source for the Corporation's domestic operations. Approximately three-quarters of the branches are located in Massachusetts, where the Corpora- tion is ranked first in deposit market share. In addition to offering traditional branch banking, the Corporation also pro- vides its customers an expanding array of 24-hour banking choices: . Approximately 1,500 ATMs provide customers with 24 hour access to their ac- counts. . Approximately 260,000 customers have availed themselves of home banking services through the use of their personal computers. . Complete telephone banking services are provided through two state-of-the- art call centers in Massachusetts and Rhode Island that handle 40 million calls annually. . Included in the 468 branches are 68 in-store branches and fifteen regional mall locations, which provide convenient banking services to customers where they shop. Regional Consumer and Small Business manages a $6 billion loan portfolio, of which $5 billion is consumer loans and $1 billion is small business loans. A variety of loan products, including home equity, residential mortgage, automo- bile, education, credit card and other installment loans are offered to consum- ers in the region. Through the small business banking area, the Corporation of- fers complete banking and related services to commercial customers with annual revenues of up to $10 million, and is ranked as the top Small Business Adminis- tration lender in Massachusetts. Net income from Regional Consumer and Small Business increased $7 million from 1996, due to lower expenses and credit costs, partially offset by lower reve- nues. The decrease in operating expenses was due to cost savings related to the BayBanks integration, partially offset by incremental costs incurred to execute the merger, as well as additional costs to improve electronic delivery systems and to expand the Corporation's in-store branch network. The decrease in oper- ating revenues was largely due to a refocusing of the mortgage origination business, as well as the sale and closure of branches in connection with the BayBanks acquisition. ARGENTINA The Corporation has operated in Argentina since 1917, and is one of the largest banks in the country. The Corporation's Argentine operations offer a wide array of products within the large corporate, special industries, middle market and retail businesses. Products and services offered include commercial and invest- ment banking, credit cards, residential mortgages, automobile loans, mutual funds, brokerage, custody and portfolio management. During 1997, the Corporation announced its intention to expand its retail dis- tribution capacity in Argentina and to strengthen its presence 35 in that country. In connection with this expansion program, the Corporation opened seventeen new branches in Argentina during 1997, and expects to open ap- proximately 50 additional branches during 1998. In addition, in January 1998, the Corporation completed its acquisition of Deutsche Argentina and acquired approximately $1.3 billion of loans and $1.5 billion of deposits. See the "Strategic Initiatives" section for additional information regarding this ac- quisition. The expansion program and the Deutsche Argentina acquisition are ex- pected to result in the Corporation's Argentine branch network expanding from 43 in mid-1997 to approximately 140 by mid-1998. Net income from Argentina increased $5 million, or 8 percent, from 1996. The improvement in operating revenues was due to higher levels of net interest rev- enue, reflecting an increase in average earning assets, mainly loans, and higher levels of noninterest income. The increase in noninterest income in- cluded higher securities gains from the sale of certain securities in the Ar- gentine available for sale portfolio. Mutual fund fees increased as a result of mutual funds under management increasing approximately $700 million from Decem- ber 31, 1996. These revenue improvements were partially offset by an increase in expenses, including costs related to expanding the Argentine operations. For additional information on Argentina, see the "Cross-Border Outstandings" and "Emerging Markets Countries" sections. BRAZIL The Corporation has operated in Brazil since 1947 and is one of the largest foreign banks in the country. The principal businesses of the Corporation's Brazilian operations include corporate lending, trade financing, treasury and fee-based activities, with particular emphasis on mutual funds, custody and credit cards. The Corporation's mutual funds under management in Brazil amounted to approximately $4.9 billion at December 31, 1997, compared with $3.7 billion at December 31, 1996, making it the seventh largest mutual fund manager in Brazil and one of the largest banking participants in this business. Also, the Corporation continued to increase its presence in Brazil's global capital markets activities. In addition, custody volumes increased by $1.4 billion, to $6.4 billion at December 31, 1997, compared with $5 billion at December 31, 1996. The Corporation plans to expand its retail distribution capacity in Bra- zil. In connection with this expansion program, the Corporation opened ten new branches during 1997, and expects to open an additional 32 branches during 1998, thereby creating a 66 branch network. Net income from Brazil increased $8 million, or 13 percent, from 1996. This im- provement was mainly due to higher levels of net interest revenue, reflecting an increase in average earning assets, including loans; wider spreads in Brazil as a result of an increase in Brazilian interest rates, particularly in the fourth quarter of 1997; and growth in noninterest income. The increase in Bra- zilian interest rates was the result of government intervention to protect the Brazilian currency in response to the Asian economic crisis. See the "Emerging Markets Countries" section for a further discussion of the Asian economic cri- sis. The increase in noninterest income was largely the result of higher finan- cial service fees, including letter of credit and acceptance fees, investment banking and advisory fees. These revenue improvements were partially offset by an increase in expenses, including those related to the cost of expanding the Brazilian operations. For additional information on Brazil, see the "Cross-Border Outstandings" and "Emerging Markets Countries" sections. GLOBAL PRIVATE BANK The Global Private Bank, which has over $23 billion of assets under management and maintains fourteen domestic offices in southern New England, New York and Florida, as well as an office in the Bahamas, serves 10,000 primary clients and 25,000 trust beneficiaries. The U.S. Private Bank and International Private Bank provide wealth management services to a significant multi-generational client base, with a specialized focus on the needs of principals and executives of small to mid-sized compa- nies, as well as others with substantial illiquid assets. Asset management, trust, tax and estate planning, insurance, lending and deposit services are de- livered using comprehensive solutions, which address the combined business, personal and retirement needs of wealthy clients. The Institutional Advisors group provides customized, niche services for mid- sized companies, foundations, endowments, municipalities and governmental agen- cies, including investment management for employee benefit plans, liquid funds management, custody, trustee services and administration, as well as a multi- fund-family proprietary 401(k) product. The Global Private Bank, with its three core business units, is strategically aligned to leverage the Corporation's strength in Argentina, Brazil, Corporate Banking and Global Capital Markets, and Regional Consumer and Small Business. Net income from the Global Private Bank increased $11 million from 1996. Oper- ating revenues improved mainly as a result of higher levels of personal trust and mutual fund fees, which reflected an increase in assets under management of approximately $4.3 billion during 1997. Expenses remained flat from 1996, pri- marily due to the positive effect of BayBanks synergies. OTHER BUSINESSES AND CORPORATE Included in Other Businesses and Corporate are the following items: . Global Treasury, which is primarily responsible for asset and liability risk management. See the "Asset and Liability Management" section for a further discussion of asset and liability risk management. In addition, Global Trea- sury manages approximately $8 billion of Boston 1784 Funds, a family of six- teen no-load mutual funds. The high level of assets in Other Businesses and Corporate mainly relates to securities portfolios maintained by Global Trea- sury and used to manage the Corporation's interest rate risk exposure. . The National Consumer business, including FAC and Ganis, which were sold during 1997, and the national credit card business, which was contributed to a newly formed venture in January 1998. . Other International businesses, including the Corporation's operations in Latin America, other than Argentina and Brazil, and Asia/Pacific. . Joint ventures, including the Argentine and Mexican pension joint ventures, the stock transfer joint venture and the mortgage banking business (which was sold in the first quarter of 1998). . Certain corporate income and expense items of a nonrecurring nature, such as charges related to the BayBanks acquisition, items related to the sale of FAC and the mortgage banking subsidiary, as well as branch sales, business reorganization costs and costs relating to the valuation or disposition of certain assets. . The difference between the sum of the provisions for credit losses for each line of business and the Corporation's provision, resulting from the method- ology differences described above. 36 FINANCIAL CONDITION RISK MANAGEMENT The Corporation's management of the risk inherent in its businesses is essen- tial in understanding and assessing its financial performance and in creating long-term value. Three of the Corporation's primary risk factors are credit risk, liquidity risk and market risk, which includes interest rate risk and foreign exchange rate risk. Credit risk is the risk of loss from a counterparty's failure or inability to meet the payment or performance terms of any contract with the Corporation. Liquidity risk is the risk of loss from the Corporation's inability to meet its obligations when they come due, without in- curring unacceptable costs. Market risk is the risk of loss related to adverse changes in market prices, such as interest rates and foreign exchange rates. The Corporation has a risk management process for the identification, measure- ment, monitoring and control of these and other risk exposures, such as trans- action, compliance, strategic, reputation, and transfer risks. A transitory risk that impacts the primary risk factors discussed above is the Corporation's exposure to the Year 2000 issue, which stems from the use of a two-digit format to define the year in certain of the Corporation's date-sensi- tive application systems rather than the use of a four-digit format. As a re- sult, the Corporation's date-sensitive software programs could recognize a date using "00" as the year 1900 rather than the year 2000. This could result in ma- jor systems or process failures or the generation of erroneous data, which would lead to disruptions in the Corporation's business operations. The Corporation has made an assessment of its own systems relative to the Year 2000 issue, including an analysis of system code changes required for both in- ternal and vendor supplied applications. In addition, the Corporation has an action plan in place as well as resources dedicated to the modification proc- ess, and expects work to be completed in 1999, including application design, development and testing. Due to the significant interdependencies of businesses, governmental agencies and other entities with which the Corporation does business, the Corporation has initiated programs to educate vendors and customers regarding the Year 2000 issue and to assess their action plans and their potential effect on the Corpo- ration. This includes discussions regarding this issue by relationship managers with their customers, and the completion of questionnaires relative to the cus- tomers' ability to convert their systems. The results of these efforts will be incorporated into the Corporation's risk management processes, including cus- tomer risk ratings and credit action plans. The Corporation expects that it will successfully complete its Year 2000 action plan in a timely and effective manner, and that its programs will result in the effective management of these risks. However, there can be no assurance that conversion failures will not occur, and that such failures will not have an ad- verse impact on the Corporation's results of operations and financial condi- tion. In addition, the Corporation's programs with its vendors and customers are subject to more uncertainty because they are beyond the direct control of the Corporation. The Corporation has incurred, and expects to continue to incur, costs to modify its computer application systems for the Year 2000 and costs to carry out other programs to mitigate the risk associated with the Year 2000 issue. The Corpora- tion expects that the total cost of managing its Year 2000 risk, including costs already incurred, will be between $50 million and $75 million. However, at present it does not anticipate that material incremental costs will be in- curred in any single period, as most of the costs incurred will result from a reallocation of the Corporation's current technology resources. CREDIT RISK MANAGEMENT The Corporation's risk management process includes the management of all forms of credit risk, including balance sheet and off-balance-sheet exposures. The Credit Policy Committee (CPC), on a corporate-wide basis, establishes all credit policies for the Corporation, approves underwriting standards and con- centration limits, and grants credit approval authorities. An independent credit function monitors compliance by individual units with the Corporation's credit policies, works to ensure that credit due diligence and credit adminis- tration meet acceptable standards, and is responsible for the effectiveness of the loan review process. The credit function includes a staff of credit offi- cers, reporting directly to the Chief Credit Officer (CCO). These credit offi- cers are assigned to work with the various business units to ensure the integ- rity of the credit process. Business unit management has the primary responsi- bility to evaluate credit risk, ensure that each individual credit exposure is appropriately risk rated, and monitor and manage credit risks within policy and portfolio guidelines. In addition, a credit information unit provides reports on credit exposures on a corporate-wide basis. A risk review unit, which re- ports independently of both the business and credit units, audits the integrity of risk ratings and the adequacy of the credit process for all units of the Corporation. Through monthly meetings with the business unit heads and the frequent review of credit quality information, senior management in Boston oversees the world- wide credit activities, both corporate and consumer, of the Corporation. The level of management needed to approve credit exposures varies according to the size and level of risk of the credit. Corporate credits that meet specified size and risk rating thresholds must be approved by the Senior Credit Commit- tee, which is chaired by the CCO and is composed of senior credit officers and senior business unit managers on a rotating basis. Portfolio limits and under- writing standards are established by the CPC for both consumer and commercial credit exposures with common risk characteristics, such as industry or product type. An important aspect of the Corporation's portfolio management process is the management of large, individual credits, which are governed by relationship limits that are set according to risk rating. The CPC has also established tar- get risk rating profiles for the Corporation. All limits are reviewed regularly and adjusted based on the CPC's assessment of relevant conditions. In addition, the Country Exposure Committee, also chaired by the CCO, sets country limits on cross-border exposures to borrowers and counterparties domiciled in other coun- tries. The Corporation's loan syndications unit is integral to portfolio management by enhancing the liquidity of the wholesale loan portfolio. Syndications is re- sponsible for arranging participations in loans where the Corporation is the lead bank. This unit maintains contact with other institutional lenders and in- vestors in bank structured loans, maintains information on credit structure and pricing by risk category, evaluates the market liquidity of facilities, and syndicates Corporation- agented facilities to attain desired hold levels. The Corporation employs a corporate-wide process to review individual credits and identify emerging problems. Credits that deteriorate into certain defined risk categories are managed by a separate loan review unit composed of profes- sional asset recovery specialists who establish detailed asset management plans designed to mitigate risk of credit loss to the Corporation. 37 The Corporation continually seeks to improve its credit culture to better bal- ance associated risks with its goal of optimizing value to its stockholders and customers. While sound credit policies assist the Corporation in managing expo- sure to credit risks, they do not insulate the Corporation from losses. LOANS AND LEASE FINANCING Table 5 shows a breakdown of the portfolio for the last five years. TABLE 5 -- LOANS AND LEASE FINANCING PORTFOLIO
December 31 1997 1996 1995 1994 1993 (dollars in millions) BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent - -------------------------------------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial........... $15,268 34.7% $13,162 32.0% $12,809 33.0% $13,122 34.8% $13,199 37.9% Commercial real estate Construction........... 271 .6 284 .7 386 1.0 391 1.0 675 1.9 Other.................. 4,211 9.6 3,240 7.9 3,393 8.7 4,065 10.8 4,003 11.5 Consumer-related Secured by 1-4 family residential properties............. 5,393 12.3 6,062 14.8 6,697 17.2 7,079 18.8 5,969 17.1 Other.................. 4,712 10.7 6,898 16.8 5,554 14.3 4,559 12.1 3,524 10.1 Lease financing......... 1,938 4.4 1,816 4.4 1,564 4.0 1,482 3.9 1,367 3.9 Unearned income......... (302) (.7) (287) (.7) (240) (.6) (239) (.6) (228) (.7) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 31,491 71.6 31,175 75.9 30,163 77.6 30,459 80.8 28,509 81.7 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- INTERNATIONAL Commercial and industrial.............. 8,826 20.1 6,946 16.9 6,422 16.5 5,161 13.6 4,650 13.4 Banks and other financial institutions.. 860 2.0 866 2.1 796 2.1 749 2.0 690 2.0 Governments and official institutions............ 95 .2 79 .2 82 .2 33 .1 22 .1 Consumer-related Residential mortgages.. 947 2.2 699 1.7 526 1.4 454 1.2 232 .7 Other.................. 1,010 2.3 606 1.5 470 1.2 410 1.1 318 .9 Lease financing......... 452 1.0 368 .9 285 .7 329 .9 265 .8 All other............... 378 .8 415 1.0 163 .4 189 .5 241 .7 Unearned income......... (79) (.2) (93) (.2) (37) (.1) (76) (.2) (108) (.3) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 12,489 28.4 9,886 24.1 8,707 22.4 7,249 19.2 6,310 18.3 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans and lease financing............... $43,980 100.0% $41,061 100.0% $38,870 100.0% $37,708 100.0% $34,819 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== - --------------------------------------------------------------------------------------------------------------
Total loans and lease financing increased approximately $2.9 billion from De- cember 31, 1996, reflecting an increase in domestic loans of $316 million and an increase of $2.6 billion in international loans. The increase in domestic loans from December 31, 1996 reflected a $2.1 billion increase in commercial, industrial and financial loans, and a $971 million increase in other commercial real estate loans, partially offset by a $2.8 billion decrease in consumer-re- lated loans. The increases in commercial, industrial and financial loans re- sulted from increases in various loan portfolios, including Asset Based Finance and Diversified Finance. The increase in commercial real estate loans reflected increased lending to real estate investment trusts. Loan levels are also af- fected by the timing of loan syndication activity. Consumer-related loans de- creased due to the sales of FAC and Ganis during 1997, as well as a $615 mil- lion decrease in residential mortgages, offset, in part, by a $360 million in- crease in credit card loans. As noted above, in January 1998, the Corporation consummated its agreement with Bank of Montreal and its Chicago-based U.S. subsidiary, Harris Trust and Sav- ings Bank, and First Annapolis Consulting, Inc. to form a new national credit card venture, to which the Corporation contributed its national credit card portfolio of approximately $1.2 billion. At December 31, 1997, national credit card loans represented approximately 12 percent of domestic consumer-related loans. The increase in international loans included a $1.9 billion increase in commer- cial and industrial loans and a $650 million increase in consumer-related loans. This growth has occurred in Latin America, particularly in the loan portfolios of Argentina and Brazil. Total loans in these two countries have grown approximately $1.6 billion since December 31, 1996. Commercial loans in- creased approximately $800 million and $200 million in Argentina and Brazil, respectively, and consumer loans increased approximately $500 million and $100 million, respectively. A further discussion of the Corporation's Argentine and Brazilian operations is included in the "Line of Business Results," "Cross-Bor- der Outstandings" and "Emerging Markets Countries" sections. 38 DOMESTIC COMMERCIAL REAL ESTATE LOANS Table 6 details domestic commercial real estate loans by geographic location as of the last three year ends. The portion attributable to other states at the end of 1997 was dispersed among approximately 30 states. TABLE 6 -- DOMESTIC COMMERCIAL REAL ESTATE LOANS
Other December 31 New Other (in millions) MA CT England States Total - -------------------------------------------------------------------------------- 1997.......................................... $1,508 $260 $279 $2,435 $4,482 1996.......................................... $1,885 $282 $309 $1,048 $3,524 1995.......................................... $2,220 $318 $351 $ 890 $3,779
A significant portion of the commercial real estate portfolio is composed of loans from which ultimate payment to the Corporation is expected to come from the sale, operation or refinancing of the underlying property. The decline in loans in Massachusetts was the result of loan sales in the first quarter of 1997. The increase in loans in other states reflected growth in the real estate investment trust portfolio of approximately $1.1 billion, approximately half of which is expected to be sold through the Corporation's loan syndications unit. HIGHLY LEVERAGED TRANSACTIONS Included in commercial, industrial and financial loans are loans made by many of the Corporation's lending businesses to finance transactions involving leveraged buyouts, acquisitions, and recapitalizations. These loans are desig- nated as highly leveraged transactions (HLTs) if, by the nature of the loan terms and the profile of the customer, the transaction qualifies for this clas- sification under the current bank regulatory definition of HLTs. Additionally, the HLT definition encompasses other more traditional credit arrangements, where a high degree of leverage would be expected, such as asset-based lending and lending to the communications industry, particularly cable, where equity is traditionally low and cash flow is the predominant factor in assessing repay- ment ability. Table 7 summarizes the Corporation's HLT portfolio for the last three years. TABLE 7 -- HIGHLY LEVERAGED TRANSACTIONS PORTFOLIO
December 31 1997 1996 1995 (dollars in millions) - ------------------------------------------------------------------------------- Total loans.............................................. $1,551 $1,319 $1,342 Number of companies...................................... 129 116 101 Average loan size........................................ $ 12 $ 11 $ 13 Unused lending commitments............................... $1,191 $ 677 $ 639 Net credit recoveries for year........................... $ (4) Equity and mezzanine investments......................... $ 235 $ 187 $ 144
The Corporation's HLT portfolio is spread among a variety of industries. At De- cember 31, 1997, the largest segments of the HLT portfolio by industry were as follows: media and communications -- $401 million to 24 customers; food, bever- age and tobacco -- $146 million to 12 customers; petroleum, chemicals, rubber and plastics -- $115 million to 8 customers; and transportation -- $94 million to 7 customers. Yields on HLT loans are generally higher than on most other commercial loans. Typically, interest rates on new HLTs range from 2.3 percent to 4 percent over the London Interbank Offered Rate (LIBOR) and fees charged range from .38 percent to .50 percent of the principal amount committed. The amount of unused commitments does not necessarily represent the actual future funding requirements of the Corporation, since a portion can be syndicated or assigned to others or may expire without being drawn. The Corporation has his- torically been involved in transactions that meet the regulatory definition of HLTs, and it expects to continue to agent and participate in such transactions in the future. 39 NONACCRUAL LOANS AND LEASES AND OREO Table 8 summarizes nonaccrual loans and leases by type and as a percentage of the related consolidated loan category. TABLE 8 -- NONACCRUAL LOANS AND LEASES AND OREO
December 31 1997 1996 1995 1994 1993 PERCENT Percent Percent Percent Percent OF LOAN of Loan of Loan of Loan of Loan (dollars in millions) BALANCE CATEGORY Balance Category Balance Category Balance Category Balance Category - -------------------------------------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial........... $ 59 .4% $ 82 .6% $ 88 .7% $130 1.0% $168 1.3% Commercial real estate Construction........... 3 1.1 6 2.1 25 6.5 13 3.3 32 4.7 Other.................. 40 .9 67 2.1 103 3.0 133 3.3 277 6.9 Consumer-related Secured by 1-4 family residential properties............. 64 1.2 80 1.3 56 .8 53 .7 75 1.3 Other.................. 46 1.0 61 .9 35 .6 26 .6 12 .3 ---- ---- ---- ---- ---- 212 .7 296 1.0 307 1.0 355 1.2 564 2.0 ---- ---- ---- ---- ---- INTERNATIONAL Commercial and industrial.............. 64 .7 74 1.1 34 .5 17 .3 63 1.4 Banks and other financial institutions.. 1 .1 Governments and official institutions............ 3 13.6 Consumer-related Residential mortgages.. 28 3.0 22 3.1 20 3.8 11 2.4 3 1.3 Other.................. 16 1.6 10 1.7 11 2.3 6 1.5 6 1.9 All other............... 1 .6 30 15.9 22 9.1 ---- ---- ---- ---- ---- 108 .9 106 1.1 66 .8 65 .9 97 1.5 ---- ---- ---- ---- ---- Total nonaccrual loans and leases.............. 320 .7 402 1.0 373 1.0 420 1.1 661 1.9 OREO.................... 36 50 69 143 222 ---- ---- ---- ---- ---- Total................... $356 $452 $442 $563 $883 ==== ==== ==== ==== ==== - --------------------------------------------------------------------------------------------------------------
Total nonaccrual loans and leases and OREO decreased $96 million from December 31, 1996, reflecting an $84 million decrease in domestic nonaccrual loans, a $14 million decrease in OREO and a $2 million increase in international nonaccrual loans. The decrease in domestic commercial, industrial and financial nonaccrual loans reflects decreases in various portfolios, including Diversi- fied Finance, New England Corporate Banking and Asset Based Finance. Domestic consumer-related nonaccrual loans decreased mainly due to the sale of FAC in the third quarter of 1997, as well as decreases in residential mortgage and home equity nonaccrual loans, offset, in part, by increases in credit card nonaccrual loans. In January 1998, the Corporation contributed its national credit card portfolio of approximately $1.2 billion to a newly formed national credit card venture. At December 31, 1997, total national credit card nonaccrual loans were approximately $20 million. In addition, the Corporation holds in available for sale securities approxi- mately $50 million of commercial paper of an international customer, on which earnings are not being recognized. The current level of nonaccrual loans and leases and OREO, which as a percent of related assets is historically low for the Corporation, is due, in part, to the current strong economic environment. The future level will be influenced by the economic environment, interest rates and other internal and external fac- tors existing at that time, including the effect, if any, of developments in various emerging markets countries, including those in Asia. As such, no assur- ance can be given as to future levels of nonaccrual loans and leases and OREO. The management of, and the accounting policy for, the Corporation's nonaccrual loans and leases and OREO is discussed above in the "Credit Risk Management" section and in Note 1 to the Financial Statements, respectively. Table 9 summarizes the changes in nonaccrual loans and leases and OREO that have occurred during the last three years. TABLE 9 -- CHANGES IN NONACCRUAL LOANS AND LEASES AND OREO
(dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Balance, January 1......................................... $ 452 $ 442 $ 563 Assets of entities acquired................................ 8 Assets of entities sold.................................... (27) (27) Additions.................................................. 527 618 554 Sales, restructurings, payments and other decreases........ (225) (304) (396) Credit losses and valuation adjustments.................... (371) (304) (260) ----- ----- ----- Balance, December 31....................................... $ 356 $ 452 $ 442 ===== ===== ===== Ending balance as a percentage of related assets........... 0.8% 1.1% 1.1%
40 RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses by as- sessing a number of factors, including evaluations of individual credits and concentrations of credit risks, net losses charged to the reserve, changes in quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in the size and character of the credit risks and other pertinent factors. The credit risk of off-balance- sheet exposures is managed as part of the overall extension of credit to indi- vidual customers and is considered in assessing the overall adequacy of the re- serve for credit losses. The amount of the reserve for credit losses associated with off-balance-sheet exposures is not significant. The amount of the reserve for credit losses is reviewed by management quarterly. Refer to Notes 7 and 23 to the Financial Statements for a further discussion of the reserve for credit losses and credit risk related to off-balance-sheet contracts. Table 10 presents a five-year analysis of the Corporation's reserve for credit losses and related ratios. TABLE 10 -- RESERVE FOR CREDIT LOSSES AND RELATED RATIOS
(dollars in millions) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Balance, January 1................ $ 883 $ 890 $ 827 $ 941 $ 1,116 Provision......................... 200 231 275 154 107 Reserves of entities acquired..... 3 3 16 25 Reserves of entities sold......... (95) (11) (32) Credit losses(1).................. (366) (310) (282) (379) (353) Recoveries........................ 87 80 86 86 71 ------- ------- ------- ------- ------- Net credit losses................. (279) (230) (196) (293) (282) ------- ------- ------- ------- ------- Balance, December 31.............. $ 712 $ 883 $ 890 $ 827 $ 941 ======= ======= ======= ======= ======= Loans and lease financing at December 31...................... $43,980 $41,061 $38,870 $37,708 $34,819 Average loans and lease financing........................ $42,383 $40,589 $38,283 $36,017 $32,565 Reserve for credit losses to total loans and leases at December 31.. 1.62% 2.15% 2.29% 2.19% 2.70% Reserve for credit losses to nonaccrual loans and leases at December 31...................... 222% 220% 239% 197% 142% Reserve for credit losses to nonaccrual and renegotiated loans and leases at December 31........ 222% 215% 219% 165% 104% Net credit losses to average loans and lease financing.............. .66% .57% .51% .81% .87% Net credit losses to provision for credit losses.................... 139.50% 99.57% 71.27% 190.26% 263.55% Total recoveries to total credit losses........................... 23.77% 25.81% 30.50% 22.69% 20.11% - --------------------------------------------------------------------------------
(1) For 1994, includes $119 million related to transferring certain lower qual- ity real estate exposures to an accelerated disposition portfolio (ADP). The reserve for credit losses at December 31, 1997 was $712 million, or 1.62 percent of outstanding loans and leases, compared with $883 million, or 2.15 percent, at December 31, 1996. The reserve for credit losses was 222 percent of nonaccrual loans and leases at December 31, 1997, compared with 220 percent at December 31, 1996. The decrease in the reserve reflects the Corporation's ac- tions taken to exit the national consumer lending 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, includ- ing the future impact that recent events in Asia may have on its credit portfo- lios, both in Asia and other areas of the world, particularly Latin America; the potential impact that the Year 2000 issue could have on the Corporation's credit portfolios; as well as general economic conditions. While, no assurance can be given regarding the future level of the reserve, the above factors could result in an increased level of reserve in the future. 41 Table 11 summarizes net credit losses by type for the last five years. TABLE 11 -- NET CREDIT LOSSES
Years Ended December 31 1997 1996 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- DOMESTIC CREDIT LOSSES Commercial, industrial and financial........ $ (42) $ (21) $ (47) $ (38) $ (80) Commercial real estate Construction............................... (6) (7) (10) (19) Other...................................... (8) (39) (49) (62) (79) Consumer-related Secured by 1-4 family residential properties................................. (18) (25) (26) (22) (33) Other...................................... (222) (167) (94) (80) (76) ----- ----- ----- ----- ----- (290) (258) (223) (212) (287) INTERNATIONAL CREDIT LOSSES Commercial.................................. (38) (20) (24) (28) (53) Consumer.................................... (38) (32) (35) (20) (13) ----- ----- ----- ----- ----- Credit losses, excluding those related to ADP........................................ (366) (310) (282) (260) (353) DOMESTIC RECOVERIES Commercial, industrial and financial........ 9 13 17 22 26 Commercial real estate Construction............................... 5 1 4 3 Other...................................... 13 9 20 14 7 Consumer-related Secured by 1-4 family residential properties................................. 6 7 5 4 6 Other...................................... 34 31 28 24 23 ----- ----- ----- ----- ----- 62 65 71 68 65 INTERNATIONAL RECOVERIES Commercial.................................. 12 4 7 13 4 Consumer.................................... 13 11 8 5 2 ----- ----- ----- ----- ----- Total recoveries........................... 87 80 86 86 71 ----- ----- ----- ----- ----- Net credit losses, before credit losses related to ADP............................. (279) (230) (196) (174) (282) Credit losses related to ADP................ (119) ----- ----- ----- ----- ----- Total net credit losses.................... $(279) $(230) $(196) $(293) $(282) ===== ===== ===== ===== ===== - -------------------------------------------------------------------------------
Net credit losses were $279 million in 1997, compared with $230 million in 1996. In 1997, the Corporation experienced higher domestic credit losses, prin- cipally driven by increases in net credit losses in the consumer loan portfo- lio, mainly the credit card portfolio, partially offset by the impact of the sale of FAC. FAC's net credit losses were $44 million in 1997 and $77 million in 1996. The increase in commercial, industrial and financial net credit losses was more than offset by lower net credit losses in the commercial real estate portfolio. The amount of domestic commercial chargeoffs is at a low level, and is not expected to be sustainable over time. International net credit losses increased from the 1996 period, reflecting increased losses due to one large commercial credit in the international loan portfolio. In January 1998, the Corporation contributed its national credit card portfolio to a newly formed national credit card venture. Net credit losses in the na- tional credit card portfolio for the years ended December 31, 1997 and 1996 were approximately $75 million and $11 million, respectively. The Corporation's ability and willingness to extend new credit is a function of a variety of factors, including competition for customers' business; an analy- sis of a loan's potential profitability and risk profile; and economic condi- tions in New England, other parts of the United States and other countries where the Corporation does business. In addition, certain segments of the loan portfolio may increase or decrease from the December 31, 1997 level in accor- dance with strategic or credit management decisions made by the Corporation, such as the acquisition or divestiture of companies or portfolios. Given these factors, the rate of change in the size and mix of the Corporation's loan port- folios experienced during the past few years may not be indicative of the fu- ture. The above factors may also affect the levels of nonaccrual loans, net credit losses and the reserve for credit losses. Further information on the Corporation's loan and lease financing portfolio can be found in Note 6 to the Financial Statements. 42 CROSS-BORDER OUTSTANDINGS In accordance with bank regulatory rules, cross-border outstandings are amounts payable to the Corporation by residents of foreign countries regardless of the currency in which the claim is denominated and local country claims in excess of local country obligations. Excluded from cross-border outstandings are the following: . Local country claims that are funded by local country obligations payable only in the country where issued. In the first quarter of 1997, the Corpo- ration adopted the new country exposure reporting rules issued by the Fed- eral Financial Institutions Examination Council. One of the changes result- ing 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 Argendollars. Argendollars are outstandings payable to the Corporation in U.S. dollars in Argentina which are funded entirely by dollars borrowed within Argentina. . Local country claims funded by non-local country obligations (typically 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 December 31, 1997, such outstandings related to emerging markets countries totaled $2.8 billion, compared with $2.3 billion at December 31, 1996. . Claims reallocated as a result of external guarantees, cash collateral, or insurance contracts issued primarily by U.S. government agencies. Cross-border outstandings include deposits in other banks, resale agreements, trading securities, securities available for sale, securities held to maturity, loans and lease financing, amounts due from customers on acceptances, accrued interest receivable and revaluation gains on trading derivatives. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers are unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. The Corporation manages its cross-border outstandings using country exposure limits as discussed in the "Credit Risk Management" section. Table 12 details by country the Corporation's approximate cross-border outstandings that individually amounted to 1 percent or more of its consoli- dated total assets at December 31, 1997, 1996 and 1995. Certain amounts at De- cember 31, 1996 and 1995 have been restated to reflect the above-mentioned changes in the country exposure reporting rules. TABLE 12 -- SIGNIFICANT CROSS-BORDER OUTSTANDINGS
Percentage of (dollars in millions) Public Banks Other Total Total Assets Commitments(1) - -------------------------------------------------------------------------------- December 31, 1997(2) Argentina............... $ 740 $ 5 $1,035 $1,780 2.6% $ 15 Brazil.................. 415 120 785 1,320 1.9 130 Chile................... 130 225 350 705 1.0 20 December 31, 1996(2) Argentina(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 December 31, 1995(2) Argentina(3)............ $ 465 $ 50 $ 410 $ 925 1.6% $ 45 Brazil.................. 25 20 980 1,025 1.8 35 United Kingdom.......... 100 570 670 1.2 130 Chile................... 150 125 365 640 1.1 15 - --------------------------------------------------------------------------------
(1) Included within commitments are letters of credit, guarantees and the undisbursed portions of loan commitments. (2) There were no cross-border outstandings in countries which totaled between .75% and 1% of consolidated total assets at December 31, 1997, 1996 and 1995. (3) Amounts have been restated for comparative purposes to exclude Argendollar outstandings of approximately $1.3 billion at both December 31, 1996 and 1995. 43 EMERGING MARKETS COUNTRIES At December 31, 1997, approximately $6.5 billion of the Corporation's cross- border outstandings were to emerging markets countries, primarily in Latin America. These cross-border outstandings, of which approximately 83 percent were loans, were mainly composed of short-term trade credits, non-trade-related loans and leases, government securities, capital investments in branches and subsidiaries and trading positions managed by the Corporation's EMSTR business. LATIN AMERICA As shown in Table 13, at December 31, 1997, approximately $5.2 billion, or 80 percent, of the cross-border outstandings to emerging markets countries were to countries in Latin America. The Corporation maintains branch networks and/or subsidiaries in each of the individual countries named. TABLE 13 -- CROSS-BORDER OUTSTANDINGS TO LATIN AMERICA
December 31 1997 1996 (in millions) - -------------------------------------------------------------------------------- Argentina......................................................... $1,780 $1,565 Brazil............................................................ 1,320 920 Chile............................................................. 705 710 Mexico............................................................ 435 405 Colombia.......................................................... 255 200 Uruguay........................................................... 200 250 Peru.............................................................. 190 65 Panama............................................................ 190 110 Other............................................................. 170 130 ------ ------ $5,245 $4,355 ====== ======
During the fourth quarter of 1997, the Asian economic crisis created increased volatility in the Latin American financial markets, particularly in Brazil. Certain Latin American financial markets experienced a sharp increase in inter- est rates and a drop in the local and international stock and bond markets. The Brazilian government implemented a series of measures to insure that its local currency remained within its exchange rate band. As a result of the conditions in the financial markets, the Corporation's Brazilian unit implemented a number of measures in response to the economic events, which resulted in increased revenues from higher interest spreads. These events also affected the Corpora- tion's Argentine unit's available for sale securities portfolio, which declined in value at the beginning of the fourth quarter, but has since partially recov- ered. The following provides additional information related to the Corporation's Ar- gentine and Brazilian operations. Table 14 shows changes in Argentine and Brazilian cross-border outstandings from December 31, 1996. TABLE 14 -- CHANGES IN ARGENTINE AND BRAZILIAN CROSS-BORDER OUTSTANDINGS
(in millions) Argentina Brazil - ------------------------------------------------------------------------------ Cross-border outstandings at December 31, 1996.............. $ 1,565 $ 920 Change in non-trade-related loans and leases................ 470 195 Net change in trade-related cross-border outstandings, pri- marily short-term........................................... 85 140 Net change in investment and trading securities............. (330) 90 Net change in placements.................................... (10) (25) ------- ------ Cross-border outstandings at December 31, 1997.............. $ 1,780 $1,320 ======= ======
44 The Corporation's Argentine assets amounted to approximately $6.6 billion at December 31, 1997, compared with approximately $4.8 billion at December 31, 1996. Included in these assets are cross-border outstandings of $1.8 billion and $1.6 billion at December 31, 1997 and 1996, respectively. Loans increased approximately $1.3 billion to $4.7 billion at December 31, 1997, reflecting an $800 million increase in commercial loans and a $500 million increase in con- sumer loans. At December 31, 1997, the Corporation's Argentine securities port- folio, which included trading and available for sale securities, amounted to $801 million, compared with $621 million at December 31, 1996. The Corporation's nonaccrual Argentine loans were $91 million at December 31, 1997, compared with $85 million at December 31, 1996. Net credit losses were $39 million in 1997 and $20 million in 1996. The increase in net credit losses of $19 million from 1996 was due to a chargeoff of one large commercial credit. The Corporation's Brazilian assets amounted to approximately $6.2 billion at December 31, 1997, compared with approximately $5 billion at December 31, 1996. Included in these assets are cross-border outstandings of $1.3 billion and $.9 billion at December 31, 1997 and 1996, respectively. The increase in total as- sets was primarily due to a $730 million increase in resale agreements and de- posits in other banks. Loans amounted to approximately $3 billion at December 31, 1997, compared with approximately $2.7 billion at December 31, 1996. The Corporation's Brazilian securities portfolio, consisting of trading and avail- able for sale securities, was approximately $950 million at December 31, 1997 and $565 million at December 31, 1996. The Corporation's nonaccrual Brazilian loans were $12 million at December 31, 1997, compared with $14 million at December 31, 1996. Net credit losses were $12 million in 1997 and $14 million in 1996. For further discussion of the Corporation's nonaccrual loans and net credit losses, see the "Nonaccrual Loans and Leases and OREO" and "Reserve for Credit Losses" sections. For additional information on Argentina and Brazil, see the "Line of Business Results" section. The Corporation's Argentine and Brazilian operations maintained currency posi- tions both at December 31, 1997 and throughout the year. For further discussion of currency positions, see the "Asset and Liability Management" section. It is expected that the economic situation in Latin America, including the ef- fect of world financial markets on these economies, will continue to evolve and be influenced by economic developments in other areas of the world, including Asia. In addition, the individual economies in Latin American can be influenced by events in other Latin American countries. The Corporation has not experi- enced any collection problems as a result of currency restrictions or foreign exchange liquidity problems on its current portfolio of cross-border outstandings to Latin America. However, if the actions implemented by Latin American governments do not remain effective over time, the Corporation's oper- ations could experience adverse effects, including deterioration of credit quality, a decline in the value of its trading and available for sale securi- ties portfolios and declines in loan and deposit levels. Each of these coun- tries is at a different stage of development with a unique set of economic fun- damentals; therefore, it is not possible to predict what developments will oc- cur and what impact these developments will ultimately have on the economies of these countries or on the Corporation's financial condition and results of op- erations. 45 ASIA In 1997, the Corporation's business in Asia consisted primarily of trade serv- ices, foreign exchange trading and servicing corporate customers. In early 1998, the Corporation announced that its strategic focus in Asia will be on capital markets, including debt underwriting and trading, foreign exchange and derivatives. The Corporation will also target activities in trade services, trade finance and cash management. Credit related services will be to support these capital markets and trade activities. During the fourth quarter of 1997 and continuing into the first quarter of 1998, certain Asian countries experienced an economic and financial crisis, in- cluding major devaluations of currencies, erosion of investor confidence and overcapacity across various industries. These events led to financial and cor- porate sector bankruptcies, which resulted in a high level of volatility in world financial markets. The International Monetary Fund (IMF) has established reform programs with Indonesia and Thailand, and agreed in principle on a pro- gram with South Korea, to improve economic efficiency, competitiveness and financial stability. Table 15 presents a summary of the Corporation's cross-border outstandings in Asia as of December 31, 1997. The Corporation has representative offices, branches and/or subsidiaries, in each of the countries listed, except Thailand, as well as in Singapore and India. TABLE 15 -- CROSS-BORDER OUTSTANDINGS TO ASIA
December 31, 1997 CROSS-BORDER (in millions) OUTSTANDINGS(1) COMMITMENTS(2) - -------------------------------------------------------------------------------- South Korea(3)............................... $ 515 $ 35 Indonesia.................................... 200 15 Japan(4)..................................... 150 China........................................ 145 35 Thailand..................................... 90 5 Taiwan(4).................................... 50 5 Philippines.................................. 45 10 Other........................................ 25 10 ------ ---- $1,220 $115 ====== ==== - --------------------------------------------------------------------------------
(1) Cross-border outstandings primarily consisted of loans and leases, deposits in other banks, due from customers on acceptances and derivatives. (2) Included within commitments are letters of credit, guarantees and the undisbursed portions of loan commitments. (3) Includes the Corporation's 17.5% ownership interest in Korean Merchant Banking Corporation. (4) Outstandings for Japan and Taiwan are not included in total emerging mar- kets countries outstandings. The Corporation has implemented exposure reduction and contingency plans in certain Asian countries, particularly South Korea and Indonesia. At December 31, 1997, the Corporation's South Korean exposure was primarily to major corpo- rate entities in the country and certain top-tier local banks. Subsequent run- off has eliminated substantially all of the bank outstandings. None of the Cor- poration's cross-border outstandings were subject to the recently announced debt rescheduling accord reached between South Korea and its international creditors. In Indonesia, specific action plans and risk assessments for each customer are being updated or established. While the Corporation is assessing its customers' ability to meet their obligations in this volatile environment, all customer credit lines have been frozen and any rollovers of maturing trade obligations are being reviewed on a case by case basis. Approximately half of the Corpora- tion's exposure consists of short-term trade credits to major exporting corpo- rate groups. The remaining exposure is to financial institutions, and is in a collection mode until a turnaround is evident. In Thailand, which is currently meeting IMF targets, the Corporation's exposure is to major banks. The exposure is limited to short-term trade finance and for- eign exchange lines. To date, the Corporation has not experienced any significant nonaccrual loans or chargeoffs in Asia. However, as discussed in the "Line of Business Results" and "Latin America" sections, the Asian situation has caused market volatility in Argentina and Brazil. The ultimate impact of the Asian crisis on the Corporation's financial condi- tion and results of operations cannot be predicted at this time, and will be dependent on future events, including the success of the established IMF pro- grams, the level of volatility in the various markets, the duration of these unsettled market conditions and the state of the underlying economies in the affected countries. Nevertheless, it is currently anticipated that these condi- tions will result in the Corporation experiencing an increase in nonaccrual loans and chargeoffs in its Asian portfolios. These conditions could also im- pact the Corporation's operations in other countries, particularly in Argenti- na, Brazil and other Latin American countries, as well as the financial results of the Corporation's domestic commercial businesses. Management will continue to monitor these markets closely and manage its portfolio in order to maximize its future results, all within the parameters of the Corporation's established risk management processes. 46 LIQUIDITY RISK MANAGEMENT Liquidity is defined as the ability to meet known near-term and projected long- term funding commitments, while supporting selective business expansion in ac- cordance with the Corporation's strategic plan. The Corporation manages liquid- ity risk according to policy set, and oversight provided, by the Asset, Liabil- ity and Capital Committee (ALCCO), to ensure its ability to meet present and future funding needs in domestic and overseas markets. U.S. dollar liquidity management is centralized in Boston, with overseas operations managing their local currency liquidity requirements. The Corporation's U.S. dollar liquidity is monitored on a daily basis, and is reviewed monthly by ALCCO and at least quarterly by the Board of Directors (the Board). Available liquidity sources are measured against anticipated needs of the Corporation as a whole, the par- ent company and each of the subsidiary banks. Alternative funding strategies are reviewed, updated and implemented by ALCCO as considered necessary. The Corporation's liquid assets consist primarily of interest bearing deposits in other banks, federal funds sold and resale agreements, money market loans, and unencumbered U.S. Treasury and U.S. government agency securities. Table 16 presents the level of the Corporation's liquid assets at each of the last three year ends. TABLE 16 -- LIQUID ASSETS
December 31 1997 1996 1995 (in billions) - -------------------------------------------------------------------------------- Liquid assets.................................................... $9.5 $7.3 $7.4
Deposits are the principal source of the Corporation's funding. Table 17 in- cludes information related to the Corporation's funding sources for the last three years. TABLE 17 -- FUNDING SOURCES
December 31 1997 1996 1995 (dollars in billions) - -------------------------------------------------------------------------------- DOMESTIC Interest bearing deposits................................. $25.1 $24.7 $24.4 Noninterest bearing deposits.............................. 8.5 8.3 7.1 ----- ----- ----- Total deposits............................................ 33.6 33.0 31.5 Funds borrowed............................................ 10.1 7.8 8.4 Notes payable(1).......................................... 3.4 2.7 1.8 ----- ----- ----- $47.1 $43.5 $41.7 ===== ===== ===== INTERNATIONAL Interest bearing deposits................................. $11.1 $ 9.0 $ 9.0 Noninterest bearing deposits.............................. 1.1 .8 .6 ----- ----- ----- Total deposits............................................ 12.2 9.8 9.6 Funds borrowed............................................ 1.6 1.4 1.1 Notes payable............................................. .3 .6 .4 ----- ----- ----- $14.1 $11.8 $11.1 ===== ===== ===== CONSOLIDATED Interest bearing deposits................................. $36.2 $33.7 $33.4 Noninterest bearing deposits.............................. 9.6 9.1 7.7 ----- ----- ----- Total deposits............................................ 45.8 42.8 41.1 Funds borrowed............................................ 11.7 9.2 9.5 Notes payable(1).......................................... 3.7 3.3 2.2 ----- ----- ----- $61.2 $55.3 $52.8 ===== ===== ===== Deposits as a percentage of Loans..................................................... 104% 104% 106% Total assets.............................................. 66% 69% 69% - --------------------------------------------------------------------------------
(1) At December 31, 1997 and 1996, includes $.8 billion and $.5 billion, re- spectively, of Trust Securities (defined below). 47 Consolidated deposits increased approximately $3 billion compared with 1996, mainly due to increases in international deposits. The $2.4 billion increase in international deposits included deposit growth in Argentina and Brazil. Domes- tic funds borrowed increased approximately $2.3 billion from December 31, 1996, mainly as a result of increased borrowings under the Bank's bank note program and increased federal funds purchased, partially offset by decreased securities sold under agreements to repurchase. In addition, at December 31, 1997, the Corporation had availability under various borrowing arrangements of $1.3 bil- lion. Consolidated notes payable increased from 1996, primarily due to aggregate is- suances of $450 million of senior medium-term debt by the Corporation, $400 million of subordinated debt by the Bank, $250 million of Trust Securities (de- fined below) and $405 million of Brazilian medium-term debt. These issuances were offset by maturities of $275 million of senior medium-term debt, $129 mil- lion of subordinated debt and $670 million of Brazilian medium-term debt, as well as the elimination of $80 million of FAC notes payable resulting from the sale of that entity. The Corporation has an effective shelf registration state- ment with a current availability of $1.5 billion, which can be used for the is- suance of equity or debt securities, including medium-term notes. In June 1997, the Corporation established BankBoston Capital Trust III, and in 1996 established BankBoston Capital Trust I and BankBoston Capital Trust II. The exclusive purpose of each trust is the issuance of capital securities (Trust Securities), representing preferred beneficial interests in the trusts, the common securities of which are owned by the Corporation. In the second quarter of 1997 and the fourth quarter of 1996, $250 million and $500 million, respectively, of such Trust Securities were issued and the proceeds were in- vested in junior subordinated debentures issued by the Corporation. The Corpo- ration has unconditionally guaranteed the Trust Securities, which are presented in the Corporation's consolidated balance sheet as guaranteed preferred benefi- cial interests in the Corporation's junior subordinated debentures. Additional information on the Corporation's notes payable and the Trust Securi- ties can be found in Notes 10 and 11 to the Financial Statements. Based upon the Corporation's liquid asset level and its ability to access the public markets for additional funding when necessary, management considers overall liquidity at December 31, 1997 adequate to meet current obligations, support expectations for future changes in asset and liability levels and carry on normal operations. MARKET RISK MANAGEMENT Market risk is defined as the risk of loss related to adverse changes in market prices, such as interest rates and foreign exchange rates, of financial instru- ments. The Corporation's market risk management process includes the management of all forms of market risk, including balance sheet and off-balance-sheet ex- posures. Market risk is managed within policies and limits established by ALCCO and the Market Risk Committee (MRC) and approved by the Board. Market risk pol- icies and limits are reviewed at least annually, or more often if warranted by current market, economic or business conditions. ALCCO issues overall strategic directives to specify the extent to which Board-approved risk limits are uti- lized, based on the Corporation's willingness to accept market risk. The MRC, which is chaired by the Senior Market Risk Officer (SMRO), is responsible for allocating the overall market risk limits set by ALCCO to the Corporation's market risk-taking activities, considering the results of the risk modeling process as well as other internal and external factors. The Corporation's independent market risk function monitors compliance, by in- dividual business unit, with the Corporation's market risk policies. The market risk function includes a staff of market risk officers reporting directly to the SMRO. These market risk officers are assigned to work with various business units to ensure the integrity of the market risk management process. Business unit management is primarily responsible for evaluating market risk, ensuring that actual exposures are appropriately measured, and monitoring and managing market risks within approved policies and limits. Through monthly meetings, se- nior management oversees the world-wide market risk trading activities of the Corporation. The objective of the Corporation's market risk management process is to manage and control the effects of changes in market prices and interest and foreign exchange rates on the Corporation's results of operations and financial condi- tion. Management seeks to limit the volatility of earnings and protect economic value, while ensuring that risks from adverse movements in market prices are managed in compliance with the above-mentioned limits. In addition, the Corpo- ration continually seeks to improve its risk management culture to better bal- ance associated risks with its goal of optimizing value to its stockholders and customers. This objective is achieved through the development and implementa- tion of market risk management strategies, including various balance sheet ac- tions and the use of securities and derivatives and foreign exchange contracts. While sound market risk policies, methodologies, strategies and infrastructure assist the Corporation in managing its exposure to market risks, they do not insulate the Corporation from losses. 48 TRADING ACTIVITIES The Corporation's trading activities involve providing risk management and cap- ital markets products and services to its customers, including interest rate derivatives and foreign exchange contracts and debt underwriting and distribu- tion. Interest rate derivatives include interest rate swaps and interest rate options, futures and forwards. Foreign exchange activities include trading spot, forward and option contracts, primarily in major foreign currencies. Ad- ditional information with respect to the Corporation's trading derivatives, in- cluding accounting policies, is provided in Notes 1 and 23 to the Financial Statements. In addition, the Corporation takes proprietary trading positions, including high yield and emerging markets fixed income securities and local currency debt and equity securities. These proprietary trading positions are designed to gen- erate gains from short-term movements in the prices of securities of emerging markets public and private sector issues, and from positions which benefit from inefficiencies among various securities issued by the same country. Domestic fixed income trading activities primarily include trading U.S. Treasury and government agency securities. The risk positions taken by the Corporation in these financial instruments are subject to ALCCO and MRC approved limits. The Corporation manages the market risk related to its trading portfolios on a daily basis 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. The Corporation uses a 99% confidence level, which means that the Cor- poration would not expect to exceed the potential loss amount as calculated by VAR more than once out of every 100 trading days. The VAR methodology requires a number of key assumptions including confidence level for losses, number of days of price history and the treatment of risks outside the VAR methodology, including event risk and liquidity risk. The VAR calculations include the ef- fects of both interest rate and foreign exchange rate risks. The VAR associated with the Corporation's foreign exchange trading activities is not significant. The calculations do not take into account the potential diversification bene- fits of the different positions across trading portfolios. At December 31, 1997, the aggregate VAR limit for the Corporation's trading portfolios was ap- proximately $40 million and the aggregate VAR exposure was approximately $35 million. The aggregate average VAR exposure for 1997 was approximately $20 mil- lion. In addition to VAR, the Corporation employs other market risk management tools in order to obtain a comprehensive profile of market risk. These risk manage- ment tools include stress testing, which simulates severe changes in market rates, tenor limits, concentration limits, stop loss limits and notional lim- its. The Asian economic crisis has negatively impacted world-wide financial markets, including those for several emerging markets countries in which the Corporation operates, including Brazil and Argentina, as well as the Corporation's EMSTR business. During the early part of the fourth quarter of 1997, the Corporation experienced $20 million of net trading losses as a result of this volatility; however, these losses were offset by trading and securities gains in the latter half of the quarter. ASSET AND LIABILITY MANAGEMENT U.S. DOLLAR DENOMINATED INTEREST RATE RISK MANAGEMENT The Corporation's U.S. dollar denominated assets and liabilities are exposed to interest rate risk, which can be defined as the exposure of the Corporation's net income or financial condition to adverse movements in interest rates. At December 31, 1997, U.S. dollar denominated assets comprised the majority of the Corporation's balance sheet. The Corporation's U.S. dollar denominated posi- tions are evaluated and managed centrally through the Global Treasury group, utilizing several modeling methodologies. The two principal methodologies used are market value sensitivity and net interest revenue at risk. The results of these models are reviewed monthly with ALCCO and at least quarterly with the Board. MARKET VALUE SENSITIVITY is defined as the potential change in market value, or the economic value, of the Corporation resulting from changes in interest rates. Market value sensitivity is determined by calculating the effect on the Corporation's existing assets, liabilities and off-balance-sheet positions of an immediate rise or fall in interest rates (rate shock). NET INTEREST REVENUE AT RISK is defined as the exposure of the Corporation's net interest revenue over the next twelve months to an adverse movement in in- terest rates. Net interest revenue at risk is modeled based on both an interest rate shock scenario and one that allows for a gradual change in interest rates over a period of time. The simulated net interest revenue under these scenarios is used to evaluate how differences in asset, liability and off-balance-sheet repricing structures will be reflected in the next twelve months' results of operations. The rate risk models consider such variables as: . repricing characteristics of assets and liabilities; . rate change differentials, such as federal funds rates versus savings ac- count rates; . maturity effects; . rate barrier effects, such as caps and floors, on assets and liabilities; and . prepayment volatility on various fixed rate assets, such as residential mortgages. Both of these models are designed to isolate the effects of market changes in interest rates on the Corporation's existing positions, and they exclude other factors such as competitive pricing considerations, future changes in the asset and liability mix and other management actions, and, therefore, are not by themselves measures of future levels of net interest revenue. These two methodologies provide different but complementary measures of the level of interest rate risk; the longer-term view is modeled through market value sensitivity, while the shorter-term view is evaluated through net inter- est revenue at risk over the next twelve months. Under current ALCCO direc- tives, market value sensitivity cannot exceed 3 percent of total risk-based capital and net interest revenue at risk over the next twelve-month period can- not exceed 2 percent of net interest revenue. 49 Table 18 illustrates the year-end and average positions for market value sensi- tivity and net interest revenue at risk. TABLE 18 -- MARKET VALUE SENSITIVITY AND NET INTEREST REVENUE AT RISK POSITIONS -- U.S. DOLLAR DENOMINATED POSITIONS
1997 1996 (dollars in millions) YEAR-END AVERAGE Year-end Average - ----------------------------------------------------------------------------------- Market value sensitivity(1)(2)......................$190 $182 $162 $144 Percent of risk-based capital.................... 2.7% 2.6% 2.4% 2.5% - ----------------------------------------------------------------------------------- Net interest revenue at risk(3).....................$ 16 $ 26 $ 30 $ 24 Percent of net interest revenue.................. .7% 1.1% 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 December 31, 1997, the adverse position was based on a 100 basis point upward interest rate shock and at December 31, 1996, the adverse po- sition was based on a 200 basis point decline in interest rates over the next twelve-month period. At December 31, 1997 and 1996, the Corporation's market value sensitivity was negatively biased to rising interest rates. The increase in the exposure was due to an increase in fixed rate assets, mainly available for sale securities, partially offset by the sales of FAC and Ganis, which resulted in a decrease in fixed rate loans. The Corporation's net interest revenue at risk over the next twelve months was negatively biased to rising interest rates at December 31, 1997, and to declining interest rates at December 31, 1996. However, the Corpo- ration considers the level of its net interest revenue at risk to be a rela- tively neutral position at the end of each period. The level of exposure maintained by the Corporation is a function of the market environment and may change from period to period based on interest rate and other economic expectations. As noted above, the market value sensitivity and net interest revenue at risk models are complementary in nature. The Corpora- tion's exposure to interest rates is managed in compliance with ALCCO direc- tives. ALCCO determines its interest rate risk management strategy by consider- ing the impact of changes in interest rates on each model, and, hence, the short- and long-term effects on the Corporation. NON-U.S. DOLLAR DENOMINATED RISK MANAGEMENT INTEREST RATE RISK MANAGEMENT Non-U.S. dollar denominated interest rate risk is managed by the Corporation's overseas units, with oversight by the Global Treasury group. ALCCO establishes overall limits for its non-U.S. dollar denominated interest rate risk using a combination of market value risk analysis and cumulative gap limits for each country in which the Corporation has local market interest rate risk. Gap is the difference between the amount of assets and liabilities that mature or are repriced during a given period of time. A "positive" gap results when more as- sets than liabilities mature or are repriced within a given time period. Con- versely, a "negative" gap results when there are more liabilities than assets maturing or being repriced during a given time period. Limits are updated at least annually for current market conditions, considering business and economic conditions in the country at a particular point in time. The overseas units re- port as to compliance with these limits on a regular basis. CURRENCY POSITIONS When deemed appropriate, the Corporation will structure its balance sheet to take positions in the currencies of emerging markets and other countries where it operates. This usually occurs when the Corporation believes that it can max- imize its spread from interest operations by funding local currency assets with U.S. dollars rather than using local currency liabilities or by funding U.S. dollar assets with local currency liabilities. Whenever these positions are taken, they are subject to limits established by ALCCO and are subject to regu- lar review. Table 19 presents the Corporation's more significant currency posi- tions for 1997 and 1996. These positions represent local currency assets funded by U.S. dollars. TABLE 19 -- SIGNIFICANT CURRENCY POSITIONS
1997 1996 (in millions) YEAR-END AVERAGE Year-end Average - -------------------------------------------------------------------------------- Argentina..................................... $368 $116 $174 $98 Brazil........................................ 132 113 140 87 Chile......................................... 36 84 32 South Korea................................... 28 50 73
These positions expose the Corporation to losses should the local currencies weaken against the U.S. dollar at a rate greater than the spread of the local currency interest rate over the U.S. dollar interest rate; such losses could be significant if a major unanticipated devaluation occurs. To date, however, these positions have been liquid in nature and management has been able to close and re-open these positions as necessary. The estimated VAR exposure for the overseas units' non-U.S. dollar denominated interest rate risk and currency positions at December 31, 1997 was not signifi- cant. For additional information related to the Corporation's international opera- tions, see the "Line of Business Results," "Cross-Border Outstandings" and "Emerging Markets Countries" sections. 50 DERIVATIVE FINANCIAL INSTRUMENTS Derivatives provide the Corporation with significant flexibility in managing its interest rate risk and foreign exchange exposures, enabling it to manage risk efficiently and respond quickly to changing market conditions while mini- mizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related derivative instruments, primarily interest rate swaps and futures, as part of its asset and liability management practices. Table 20 summarizes the remaining maturity of interest rate derivative finan- cial instruments entered into for asset and liability management purposes as of December 31, 1997. The level and term of such contracts may be modified as nec- essary, in response to balance sheet changes and other management actions, within ALCCO directives for market value sensitivity and net interest revenue at risk. TABLE 20 -- REMAINING MATURITY OF INTEREST RATE DERIVATIVES
Remaining Maturity 1997 1996 (dollars in millions) 1998 1999 2000 2001 2002 2003+ TOTAL Total - ------------------------------------------------------------------------------------- INTEREST RATE SWAPS Domestic Receive fixed rate swaps(1) Notional amount........ $ 1,323 $ 170 $495 $350 $170 $2,191 $ 4,699 $ 2,826 Weighted average receive rate.......... 6.05% 6.37% 5.77% 6.16% 6.60% 6.47% 6.26% 6.38% Weighted average pay rate.................. 5.78% 5.84% 5.89% 5.71% 5.85% 5.88% 5.84% 5.67% Pay fixed rate swaps(1) Notional amount........ $ 95 $ 249 $ 344 $ 83 Weighted average receive rate.......... 5.81% 5.86% 5.85% 5.88% Weighted average pay rate.................. 6.82% 5.73% 6.03% 7.61% Basis swaps(2) Notional amount........ $ 265 $ 410 $ 50 $ 725 $ 468 Weighted average receive rate.......... 6.31% 8.50% 6.06% 7.53% 5.90% Weighted average pay rate.................. 6.32% 5.78% 5.81% 5.98% 5.64% Total Domestic Interest Rate Swaps Notional amount........ $ 1,683 $ 580 $545 $350 $170 $2,440 $ 5,768 $ 3,377 Weighted average receive rate(3)....... 6.08% 7.88% 5.80% 6.16% 6.60% 6.41% 6.39% 6.31% Weighted average pay rate(3)............... 5.92% 5.80% 5.88% 5.71% 5.85% 5.86% 5.87% 5.71% Total International Interest Rate Swaps Notional Amount(4)..... $ 5,378 $ 16 $ 5,394 $ 3,598 OTHER DERIVATIVE PRODUCTS Futures and forwards(5)............ $ 3,947 $ 3,947 $ 3,382 Interest rate options purchased(6)........... $ 500 $2,265 $ 2,765 ------- ------ ---- ---- ---- ------ ------- ------- Total Consolidated Notional Amount........ $11,508 $2,845 $561 $350 $170 $2,440 $17,874 $10,357 ======= ====== ==== ==== ==== ====== ======= ======= - -------------------------------------------------------------------------------------
(1) Of the receive fixed rate swaps, approximately $2.2 billion are linked to floating rate loans, and the remainder principally to fixed rate notes pay- able. Of the swaps linked to notes payable, approximately $1.1 billion are scheduled to mature in 2003 and thereafter. The majority of pay fixed rate swaps are linked to available for sale securities. (2) Basis swaps represent swaps where both the pay rate and receive rate are floating rates. All of the basis swaps are linked to bank notes and float- ing rate loans. (3) The majority of the Corporation's interest rate swaps accrue at LIBOR. In arriving at the variable weighted average receive and pay rates, LIBOR rates in effect as of December 31, 1997 have been implicitly assumed to re- main constant throughout the terms of the swaps. Future changes in LIBOR rates would affect the variable rate information disclosed. (4) At December 31, 1997 and 1996, the majority of the international portfolio is comprised of swaps entered into by the Corporation's Brazilian opera- tions. These swaps typically include the exchange of floating rate indices that are limited to the Brazilian market. (5) At December 31, 1997 and 1996, represent contracts entered into by the Cor- poration's Brazilian operations in the local market which are linked to short-term interest bearing assets and liabilities. (6) At December 31, 1997, includes equity contracts entered into by the Corpo- ration's Argentine operations. These contracts are linked to Argentine de- posit products, where the holder receives payment based on changes in the prices of underlying Argentine securities. 51 Table 21 summarizes the fair value and unrecognized gains (losses) of deriva- tives used for asset and liability management purposes. Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. The increase in fair value of $170 million compared with 1996 was due to lower domestic long- term interest rates during 1997, which resulted in an increase in the fair value of the domestic receive fixed interest rate swap portfolio. In addition, the fair value of the international swap portfolio, which primarily consisted of swaps entered into by the Corporation's Brazilian operations, increased due to higher Brazilian interest rates in 1997 due, in part, to the Asian crisis. TABLE 21 -- FAIR VALUE AND UNRECOGNIZED GAINS (LOSSES)
December 31 1997 1996 FAIR VALUE(1) UNRECOGNIZED Fair Value(1) Unrecognized (in millions) NOTIONAL ASSET LIABILITY GAIN (LOSS)(2) Notional Asset Liability Gain (Loss)(2) - -------------------------------------------------------------------------------------------------------- Interest rate contracts Interest rate swaps.... $11,162 $132 $11 $ 96 $ 6,975 $25 $40 $(11) Futures and forwards... 3,947 21 11 3,382 (45) Interest rate options purchased.............. 2,765 13 2 ------- ---- --- ---- ------- --- --- ---- $17,874 $166 $11 $109 $10,357 $25 $40 $(56) ======= ==== === ==== ======= === === ==== - --------------------------------------------------------------------------------------------------------
(1) In certain cases, instruments such as futures are subject to daily cash settlements; therefore, the fair value of these instruments is zero. (2) Unrecognized gain or loss is based upon fair values and represents the amount of gain or loss that has not been recognized in the income statement at the balance sheet date. This includes amounts related to contracts that have been terminated. The Corporation's utilization of derivative instruments is modified from time to time in response to changing market conditions, as well as changes in the characteristics and mix of the Corporation's related assets and liabilities. Included in unrecognized gains (losses) at December 31, 1997 were deferred gains of $7 million related to terminated contracts that are being amortized to net interest revenue over a weighted average period of fourteen months. At De- cember 31, 1996, unrecognized gains of $16 million and unrecognized losses of $33 million related to terminated contracts were being amortized to net interest revenue over weighted average periods of 26 months and thirteen months, respec- tively. The Corporation routinely reviews its asset and liability derivative positions to determine that such instruments continue to function as effective risk management tools. See Note 23 to the Financial Statements for additional information on derivative financial instruments. 52 CAPITAL MANAGEMENT At December 31, 1997, the Corporation had $4.6 billion in stockholders' equity, compared with $4.9 billion at December 31, 1996. In the first quarter of 1997, the Board approved a 12 million share common stock repurchase program. The Cor- poration purchased 10.3 million shares during 1997, at a cost of $784 million. 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. The Corporation's quarterly dividend was $.44 per share in the first quarter of 1997 and $.51 per share in each of the last three quarters of 1997. In the first quarter of 1998, the quarterly dividend was increased 14 percent, to $.58 per share. The level of dividends paid on the Corporation's common stock is de- termined by the Board based on the Corporation's liquidity, asset quality pro- file, capital adequacy and recent earnings history, as well as economic condi- tions and other factors deemed relevant by the Board, including the amount of dividends paid to the Corporation by its subsidiaries. The Corporation has a capital planning process to determine the appropriate level of capital required to support its various businesses and to ensure that the Corporation maintains this level of capital. Included in the determination of appropriate capital levels are the various capital requirements established by the Corporation's principle regulatory agencies. The Global Treasury group is responsible for developing capital plans for the Corporation and each of its banking subsidiaries that support the Corporation's strategic objectives. These plans, which are regularly reviewed and approved by ALCCO, include current and pro-forma capital positions that are measured using various capital ratios, in- cluding tangible common equity and common equity, as well as three regulatory capital ratios: Tier 1, total and Tier 1 leverage. At December 31, 1997, the Corporation and its bank subsidiaries met all regulatory capital adequacy re- quirements to which they are subject. Table 22 presents the Corporation's capital ratios as of the last two year ends. TABLE 22 -- CAPITAL POSITION
December 31 1997 1996 - ------------------------------------------------------------------------------ Tangible common equity ratio (common equity minus intangibles/total assets minus intangibles)...................... 5.8% 6.5% Common equity ratio (common equity/total assets) ................. 6.3% 7.1% Regulatory capital ratios Tier 1 capital ratio (Tier 1 capital/total risk-adjusted assets)........................................... 8.0% 9.2% Total capital ratio (total capital/total risk-adjusted assets)........................................... 12.1% 13.6% Tier 1 leverage ratio (Tier 1 capital/adjusted total average assets)......................................................... 7.4% 8.2%
Compared with the prior year end, the decrease in the Corporation's capital ra- tios at December 31, 1997 reflected growth in the Corporation's assets, mainly loans and leases and available for sale securities, as well as a decrease in stockholders' equity resulting from the repurchase of common stock and the re- demption of Series E Preferred Stock, discussed above. See Note 14 to the Financial Statements for additional information on the Cor- poration's regulatory capital. RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS In December 1996, the Financial Accounting Standards Board (the FASB) issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This standard deferred for one year the effective date of certain provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," relating to secured borrowings, repurchase agreements and securities lending. SFAS No. 127 is ef- fective for certain transactions occurring after December 31, 1997, and must be applied prospectively. The Corporation does not expect that adoption of this standard will have a material impact on its consolidated financial condition or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This standard requires that comprehensive income and its components be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income, as well as cer- tain items that are recorded directly in stockholders' equity, such as foreign currency translation and unrealized gains and losses on securities available for sale. This standard is effective for years beginning after December 15, 1997, and will have no impact on the Corporation's financial condition or re- sults of operations. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires disclosure of fi- nancial and descriptive information about an entity's reportable operating seg- ments. Segments are defined by the standard as components of an entity that en- gage in business activities that generate revenues and expenses, and for which separate financial information is available that is reviewed regularly by se- nior management to evaluate performance and allocate resources. Such financial information should be reported on the basis that is used internally for senior management review. This standard is effective for financial statements for pe- riods beginning after December 15, 1997, with restatement of comparative infor- mation for prior periods. This standard will change the method under which the Corporation reports its segment information, which information will be more consistent with the Corporation's Line of Business information. Effective January 1, 1998, the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation amended their risk-based capital standards to require the Corporation to measure and hold capital to cover its exposure to market risk in its trading account and foreign exchange positions. The amendment requires the Corporation to measure its exposure to market risk using a VAR methodology given certain assumptions. The amendment also requires the Corporation to backtest the daily net trading gains and losses for the last 250 business days, beginning one year after amendment adoption, by comparing the daily results to the corresponding VAR measure. The Corporation has adopted this amendment as of January 1, 1998 and does not expect that the impact on its risk-based capital ratios will be mate- rial. 53 1996 COMPARED WITH 1995 NET INTEREST REVENUE Domestic net interest revenue was relatively unchanged from 1995 to 1996. Aver- age earning assets increased $1.5 billion, including a $1.1 billion increase in average loan and lease volume. Contributing to the average loan volume increase was a higher level of consumer-related loans, reflecting growth in the credit card, home equity and installment loan portfolios, with such growth partially offset by lower domestic commercial real estate loans and residential mort- gages. The 18 basis point decrease in net interest margin was due to narrower spreads, resulting from the full year effect of a new higher rate savings prod- uct introduced in the second quarter of 1995, low introductory credit card rates and a change in the mix of average earning assets. The increase in international net interest revenue of $88 million was attribut- able to increases in average earning assets reflecting increases in the Corpo- ration's operations in Latin America, mainly Argentina and Brazil. The in- creases in average earning assets included increases of $650 million and $450 million in average loans and leases from 1995 in Brazil and Argentina, respec- tively, and increases in other average earning assets of $470 million and $400 million, respectively, in these countries. Net interest margin decreased 5 ba- sis points reflecting narrower spreads, primarily in Argentina as a result of less volatile markets as the economy rebounded from the effects of the 1995 Mexican economic crisis. NONINTEREST INCOME The $221 million decrease in financial service fees primarily reflected a $254 million decline in net mortgage servicing fees. This resulted, in part, from $111 million of pre-tax losses from risk management activities, net of de- creased mortgage servicing amortization, recorded in the first quarter of 1996. These losses resulted from the change in market value of contracts used to man- age prepayment risk in the mortgage servicing portfolio which, in turn, pro- tected the economic value of the mortgage banking subsidiary pending the com- pletion of its sale to HomeSide. 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 gains on sales of businesses. The decline in net mortgage servicing fees also reflected the ab- sence of $67 million of pre-tax gains on contracts used to manage prepayment risk in the mortgage servicing portfolio in 1995, as well as a reduction aris- ing from the sale of the mortgage banking subsidiary in 1996. Excluding net mortgage servicing fees, financial service fees increased $33 million compared with 1995, primarily due to increases in syndication and agent fees, reflecting a higher volume of transactions generated by the Corporation's loan syndica- tions business. Net equity and mezzanine profits increased $99 million from 1995 due to a higher level of gains realized on dispositions of investments. The portfolio amounted to over $700 million at December 31, 1996 and is diversified as to in- dustry, geography and asset class. Mutual fund fees improved $27 million from the 1995 level, primarily due to higher fees from the Brazilian mutual fund business. The decrease in other trust and agency fees was due to the Corpora- tion's sale of its Corporate Trust business and the contribution of its Stock Transfer business to a joint venture in the fourth quarter of 1995. The $51 million increase in trading profits and commissions was mainly due to increases in the Corporation's emerging markets business and its Brazilian operations. The $31 million increase in other income was due, in part, to increased equity earnings related to the Corporation's mortgage banking, shareholder services and Argentine pension fund joint ventures. Gains on sales of businesses in 1996 reflected a pre-tax gain of $106 million on the sale of the Corporation's mortgage banking subsidiary, as discussed above, and a pre-tax gain of $47 million resulting from the sale of 20 branches in connection with the Corporation's acquisition of BayBanks. In 1995, the Cor- poration sold its Vermont and Maine bank subsidiaries for a pre-tax gain of $75 million, and its Corporate Trust business for a pre-tax gain of $20 million. NONINTEREST EXPENSE Excluding acquisition, divestiture and restructuring expense and OREO, nonin- terest expense increased $92 million, reflecting ongoing expansion and invest- ment spending in the Corporation's Latin American, Global Capital Markets and Consumer Banking businesses. This increase was partially offset by cost savings resulting from the integration of BayBanks, the substantial elimination of FDIC insurance premiums in 1996, and the absence of operating expenses associated with disposed businesses, including the mortgage banking subsidiary, the Corpo- rate Trust business and the Stock Transfer business. The $32 million increase in employee costs mainly included higher merit in- creases, higher levels of incentive compensation, costs related to the hiring of sales and trading professionals in the Global Capital Markets businesses and the effects of the June 1996 acquisition of Bancorp. Occupancy and equipment expenses increased $17 million due to branch expansion, mainly in Latin Ameri- ca. The $21 million increase in advertising and public relations was due to di- rect marketing and promotional campaigns relating to credit card, home equity and other products in Consumer Banking. Communications expense increased $11 million as a result of expansion in Regional Consumer and Latin America. The $53 million increase in other expense included increases in travel expenses and software costs, which were primarily related to the maintenance of the Corpora- tion's banking systems, including money and wire transfer and electronic bank- ing. In the third quarter of 1996, the Corporation recorded restructuring and merg- er-related costs of $180 million in connection with its acquisition of BayBanks. The charges included severance costs, primarily related to the Corpo- ration's plans to eliminate approximately 2,000 positions; property-related and other merger-related costs, including lease termination costs and writedowns of bank owned property; and professional fees and other costs of effecting the merger; as well as systems and other conversion costs which were incurred at the time of the merger. The restructuring and merger-related charge does not include costs related to the conversion of systems and other integration re- lated activities. These costs were recorded as they were incurred during the integration process. During the fourth quarter of 1995, the Corporation recorded $28 million of charges related to exiting, reorganizing and downsizing certain businesses and corporate staff units, including the reorganization of the European business and certain Asia/Pacific operations. 54 BANKBOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
Year Ended December 31, (dollars in millions) 1997 - ------------------------------------------------------------------------------- Average Average Balance Interest(1) Rate ASSETS Interest bearing deposits in other banks U.S............................................... $ 319 $ 18 5.78% International..................................... 1,462 126 8.61 ------- ------ Total............................................ 1,781 144 8.11 ------- ------ ----- Federal funds sold and resale agreements U.S............................................... 635 35 5.43 International..................................... 1,471 215 14.65 ------- ------ Total............................................ 2,106 250 11.87 ------- ------ ----- Trading securities U.S............................................... 969 60 6.19 International..................................... 728 51 7.08 ------- ------ Total............................................ 1,697 111 6.57 ------- ------ ----- Securities U.S. Available for sale(2)............................ 7,766 518 6.74 Held to maturity................................. 658 42 6.34 International Available for sale(2)............................ 1,317 159 12.27 ------- ------ Total............................................ 9,741 719 7.38 ------- ------ ----- Loans and lease financing U.S............................................... 31,502 2,716 8.62 International..................................... 10,881 1,248 11.46 ------- ------ Total(3)......................................... 42,383 3,964 9.35 ------- ------ ----- Total earning assets............................... 57,708 5,188 8.99 ------ ----- Nonearning assets.................................. 7,555 ------- Total assets(4).................................. $65,263 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits................................. $14,690 $ 397 2.70% Time deposits.................................... 10,014 560 5.59 International Banks in foreign countries....................... 2,200 131 5.97 Other foreign savings and time................... 8,018 597 7.44 ------- ------ Total............................................ 34,922 1,685 4.82 ------- ------ ----- Federal funds purchased and repurchase agreements U.S............................................... 5,842 333 5.71 International..................................... 175 17 9.46 ------- ------ Total............................................ 6,017 350 5.82 ------- ------ ----- Other funds borrowed U.S............................................... 4,365 262 6.01 International..................................... 1,482 193 13.02 ------- ------ Total............................................ 5,847 455 7.78 ------- ------ ----- Notes payable U.S.(5)........................................... 2,909 201 6.91 International..................................... 473 44 9.37 ------- ------ Total............................................ 3,382 245 7.25 ------- ------ ----- Total interest bearing liabilities................. 50,168 2,735 5.45 ------ ----- Demand deposits -- U.S............................ 7,226 Demand deposits -- International................... 705 Other noninterest bearing liabilities.............. 2,497 Stockholders' equity............................... 4,667 ------- Total liabilities and stockholders' equity(4).... $65,263 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S............................................... $41,849 $1,822 4.36% International..................................... 15,859 631 3.98% ------- ------ Total............................................ $57,708 $2,453 4.25% ======= ====== - -------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securi- ties' average amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $55 million. (4) As of December 31, 1997, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respec- tively, amounted to 27%. (5) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 55 BANKBOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1996 - ----------------------------------------------------------------------------- Average Average Balance Interest(1) Rate ASSETS Interest bearing deposits in other banks U.S. .......................................... $ 192 $ 12 5.96% International.................................. 1,136 91 8.01 ------- ------ Total......................................... 1,328 103 7.71 ------- ------ ----- Federal funds sold and resale agreements U.S. .......................................... 474 25 5.24 International.................................. 1,203 178 14.78 ------- ------ Total......................................... 1,677 203 12.08 ------- ------ ----- Trading securities U.S. .......................................... 552 31 5.76 International.................................. 870 124 14.30 ------- ------ Total......................................... 1,422 155 10.99 ------- ------ ----- Loans held for sale U.S. .......................................... 260 18 6.88 International.................................. 12 1 6.12 ------- ------ Total......................................... 272 19 6.84 ------- ------ ----- Securities U.S. Available for sale(2)......................... 6,577 423 6.48 Held to maturity.............................. 684 42 6.15 International Available for sale(2)......................... 832 114 14.13 Held to maturity.............................. 29 5 16.53 ------- ------ Total......................................... 8,122 584 7.19 ------- ------ ----- Loans and lease financing U.S. .......................................... 31,472 2,714 8.62 International.................................. 9,117 1,135 12.44 ------- ------ Total(3)...................................... 40,589 3,849 9.48 ------- ------ ----- Total earning assets............................ 53,410 4,913 9.20 ------ ----- Nonearning assets............................... 6,113 ------- Total assets(4)............................... $59,523 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits.............................. $14,918 $ 401 2.69% Time deposits................................. 10,310 581 5.64 International Banks in foreign countries.................... 2,883 163 5.64 Other foreign savings and time................ 6,380 535 8.37 ------- ------ Total......................................... 34,491 1,680 4.87 ------- ------ ----- Federal funds purchased and repurchase agreements U.S. .......................................... 4,500 259 5.77 International.................................. 109 14 12.80 ------- ------ Total......................................... 4,609 273 5.93 ------- ------ ----- Other funds borrowed U.S. .......................................... 3,140 186 5.92 International.................................. 1,002 220 21.91 ------- ------ Total......................................... 4,142 406 9.79 ------- ------ ----- Notes payable U.S.(5)........................................ 2,119 140 6.59 International.................................. 547 54 9.99 ------- ------ Total......................................... 2,666 194 7.29 ------- ------ ----- Total interest bearing liabilities.............. 45,908 2,553 5.56 ------ ----- Demand deposits -- U.S.......................... 6,635 Demand deposits -- International................ 477 Other noninterest bearing liabilities........... 1,759 Stockholders' equity............................ 4,744 ------- Total liabilities and stockholders' equity(4)..................................... $59,523 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. .......................................... $40,211 $1,826 4.54% International.................................. 13,199 534 4.05% ------- ------ Total......................................... $53,410 $2,360 4.42% ======= ====== - -----------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securi- ties' average amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $52 million. (4) As of December 31, 1996, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respectively, amounted to 25%. (5) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 56 BANKBOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1995 - ------------------------------------------------------------------------------ Average Average Balance Interest(1) Rate ASSETS Interest bearing deposits in other banks U.S....................................... $ 253 $ 15 5.98% International............................. 1,087 206 18.91 ---------- --------- Total.................................... 1,340 221 16.48 ---------- --------- -------- Federal funds sold and resale agreements U.S....................................... 537 32 5.89 International............................. 649 271 41.77 ---------- --------- Total.................................... 1,186 303 25.51 ---------- --------- -------- Trading securities U.S....................................... 245 15 5.85 International............................. 602 171 28.45 ---------- --------- Total.................................... 847 186 21.91 ---------- --------- -------- Loans held for sale U.S.(2)................................... 448 31 6.98 ---------- --------- -------- Securities U.S. Available for sale(3).................... 3,002 211 7.07 Held to maturity......................... 3,836 230 5.99 International Available for sale(3).................... 422 64 13.36 Held to maturity......................... 203 16 7.66 ---------- --------- Total.................................... 7,463 521 6.98 ---------- --------- -------- Loans and lease financing U.S....................................... 30,367 2,701 8.90 International............................. 7,916 1,178 14.88 ---------- --------- Total(4)................................. 38,283 3,879 10.13 ---------- --------- -------- Total earning assets....................... 49,567 5,141 10.37 --------- -------- Nonearning assets.......................... 6,177 ---------- Total assets(5).......................... $ 55,744 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits......................... $ 14,359 $ 382 2.66% Time deposits............................ 9,288 520 5.60 International Banks in foreign countries............... 2,257 145 6.42 Other foreign savings and time........... 5,804 744 12.82 ---------- --------- Total.................................... 31,708 1,791 5.65 ---------- --------- -------- Federal funds purchased and repurchase agreements U.S....................................... 4,322 237 5.48 International............................. 189 45 23.60 ---------- --------- Total.................................... 4,511 282 6.24 ---------- --------- -------- Other funds borrowed U.S....................................... 3,730 236 6.34 International............................. 891 403 45.16 ---------- --------- Total.................................... 4,621 639 13.83 ---------- --------- -------- Notes payable U.S....................................... 1,932 135 7.02 International............................. 210 23 10.87 ---------- --------- Total.................................... 2,142 158 7.40 ---------- --------- -------- Total interest bearing liabilities......... 42,982 2,870 6.68 --------- -------- Demand deposits -- U.S..................... 6,242 Demand deposits -- International........... 456 Other noninterest bearing liabilities...... 1,760 Stockholders' equity....................... 4,304 ---------- Total liabilities and stockholders' equity(5)............................... $ 55,744 ========== NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S....................................... $ 38,688 $ 1,825 4.72% International............................. 10,879 446 4.10% ---------- --------- Total.................................... $ 49,567 $ 2,271 4.58% ========== ========= - ------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Average rates for securities available for sale are based on the securi- ties' average amortized cost. (4) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $62 million. (5) As of December 31, 1995, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respec- tively, amounted to 22%. 57 BANKBOSTON CORPORATION CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS The following table presents, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes for 1997 com- pared with 1996, and 1996 compared with 1995. The change due to the volume/rate variance has been allocated to volume and the change due to the difference in the number of days in the periods has been allocated to rate.
1997 Compared with 1996 1996 Compared with 1995 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in (in millions) Volume Rate Net Change Volume Rate Net Change - ----------------------------------------------------------------------------------------------- EARNING ASSETS Interest bearing deposits in other banks U.S. .................. $ 6 $ 6 $ (3) $ (3) International.......... 28 $ 7 35 4 $ (119) (115) ---- ----- 41 (118) ---- ----- Federal funds sold and resale agreements U.S. .................. 9 1 10 (3) (4) (7) International.......... 39 (2) 37 82 (175) (93) ---- ----- 47 (100) ---- ----- Trading securities U.S. .................. 26 3 29 16 16 International.......... (10) (63) (73) 38 (85) (47) ---- ----- (44) (31) ---- ----- Loans held for sale U.S. .................. (18) (18) (13) (13) International.......... (1) (1) 1 1 ---- ----- (19) (12) ---- ----- Securities U.S. .................. 77 18 95 25 (1) 24 International.......... 53 (13) 40 32 7 39 ---- ----- 135 63 ---- ----- Loans and lease financing U.S. .................. 3 (1) 2 95 (82) 13 International.......... 202 (89) 113 150 (193) (43) ---- ----- 115 (30) ---- ----- Interest income......... 386 (111) 275 352 (580) (228) ---- ----- INTEREST BEARING LIABIL- ITIES Deposits U.S. savings........... (6) 2 (4) 15 4 19 U.S. time.............. (16) (5) (21) 57 4 61 International.......... 68 (38) 30 91 (282) (191) ---- ----- 5 (111) ---- ----- Federal funds purchased and repurchase agreements U.S. .................. 77 (3) 74 10 12 22 International.......... 6 (3) 3 (10) (21) (31) ---- ----- 77 (9) ---- ----- Other funds borrowed U.S. .................. 73 3 76 (35) (15) (50) International.......... 62 (89) (27) 24 (207) (183) ---- ----- 49 (233) ---- ----- Notes payable U.S. .................. 54 7 61 13 (8) 5 International.......... (7) (3) (10) 33 (2) 31 ---- ----- 51 36 ---- ----- Interest expense........ 203 (21) 182 184 (501) (317) ---- ----- Net interest revenue.... $ 93 $ 89 ==== =====
58 BANKBOSTON CORPORATION SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA
1997 1996 (dollars in millions, FOURTH THIRD SECOND FIRST Fourth Third Second First except per share amounts) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Interest income.......... $ 1,342 $ 1,267 $ 1,281 $ 1,275 $ 1,250 $ 1,199 $ 1,202 $ 1,240 Interest expense......... 720 696 665 655 639 608 631 674 ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue.... 622 571 616 620 611 591 571 566 Provision for credit losses.................. 40 40 60 60 60 57 57 57 ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue after provision for credit losses ......... 582 531 556 560 551 534 514 509 Noninterest income....... 408 448 377 330 340 337 383 285 Noninterest expense...... 600 601 578 544 548 713 532 527 ------- ------- ------- ------- ------- ------- ------- ------- Income before income tax- es...................... 390 378 355 346 343 158 365 267 Provision for income tax- es...................... 155 152 143 139 141 78 151 112 ------- ------- ------- ------- ------- ------- ------- ------- Net income............... $ 235 $ 226 $ 212 $ 207 $ 202 $ 80 $ 214 $ 155 ======= ======= ======= ======= ======= ======= ======= ======= AVERAGE BALANCE SHEET DATA Loans and lease financ- ing..................... $43,242 $42,429 $42,112 $41,732 $41,835 $41,223 $40,114 $39,179 Securities............... 10,538 9,661 9,488 9,261 8,029 8,249 8,065 8,143 Other earning assets..... 5,774 5,679 5,234 5,648 4,955 4,452 4,538 4,850 ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets.... 59,554 57,769 56,834 56,641 54,819 53,924 52,717 52,172 Cash and due from banks.. 3,398 3,194 2,976 2,698 2,750 2,447 2,534 2,710 Other assets............. 5,140 4,741 4,136 3,885 3,487 3,678 3,130 3,705 ------- ------- ------- ------- ------- ------- ------- ------- Total average assets.... $68,092 $65,704 $63,946 $63,224 $61,056 $60,049 $58,381 $58,587 ======= ======= ======= ======= ======= ======= ======= ======= Deposits................. $44,252 $42,989 $42,246 $41,899 $42,031 $42,617 $41,118 $40,632 Funds borrowed........... 12,730 12,367 11,466 10,866 9,357 8,301 8,282 9,061 Other liabilities........ 3,106 2,464 2,216 2,191 1,860 1,698 1,709 1,767 Notes payable............ 3,524 3,336 3,351 3,316 2,983 2,674 2,584 2,421 Stockholders' equity..... 4,480 4,548 4,667 4,952 4,825 4,759 4,688 4,706 ------- ------- ------- ------- ------- ------- ------- ------- Total average liabilities and stockholders' equity... $68,092 $65,704 $63,946 $63,224 $61,056 $60,049 $58,381 $58,587 ======= ======= ======= ======= ======= ======= ======= ======= PER COMMON SHARE Net income Basic................... $ 1.59 $ 1.49 $ 1.37 $ 1.29 $ 1.26 $ .46 $ 1.33 $ .94 Diluted................. 1.56 1.47 1.35 1.27 1.24 .45 1.32 .93 Cash dividends declared.. .51 .51 .51 .44 .44 .44 .44 .37 Market value High.................... 97 11/16 91 3/4 76 7/8 78 3/4 70 57 7/8 51 1/2 50 Low..................... 77 1/16 73 1/8 63 5/8 63 7/8 58 50 1/8 46 41 5/8 AVERAGE NUMBER OF COMMON SHARES (in thousands) Basic................... 145,241 145,383 147,910 153,421 152,975 153,103 153,650 154,988 Diluted................. 147,309 147,842 149,787 155,592 155,157 155,183 155,183 156,844 - -----------------------------------------------------------------------------------------------------------------
The common stock of the Corporation, which is the only class of its securities entitled to vote at the Annual Meeting of Stockholders, is listed and traded on the New York and Boston stock exchanges. 59 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- The Board of Directors and Stockholders BankBoston Corporation: We have audited the accompanying consolidated balance sheets of BankBoston Cor- poration and Subsidiaries as of December 31, 1997 and 1996 and the related con- solidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BankBoston Corpo- ration and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and cash flows for each of the years in the three year period ended December 31, 1997 in conformity with generally accepted ac- counting principles. The consolidated financial statements of BayBanks, Inc., for the year ended De- cember 31, 1995, prior to the restatement for the 1996 pooling of interests, included in the 1995 restated consolidated financial statements were audited by other auditors whose reports expressed unqualified opinions on those financial statements. We audited the combination of the accompanying consolidated state- ments of income, changes in stockholders' equity and cash flows for the year ended December 31, 1995, after restatement for the 1996 pooling of interests; in our opinion, such consolidated financial statements have been properly com- bined on the basis described in Note 2 to the financial statements. Boston, Massachusetts January 15, 1998 /s/ Coopers & Lybrand L.L.P. 61 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET
December 31 1997 1996 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------- ASSETS Cash and due from banks...................................... $ 4,006 $ 4,273 Interest bearing deposits in other banks..................... 1,592 1,634 Federal funds sold and securities purchased under agreements to resell.................................................... 2,017 1,857 Trading securities........................................... 1,833 1,238 Securities Available for sale.......................................... 9,847 7,804 Held to maturity (fair value of $639 in 1997 and $675 in 1996)....................................................... 636 680 Loans and lease financing (net of unearned income of $381 in 1997 and $380 in 1996)....................................... 43,980 41,061 Reserve for credit losses.................................... (712) (883) ------- ------- Net loans and lease financing............................... 43,268 40,178 Premises and equipment, net.................................. 1,042 894 Due from customers on acceptances............................ 462 438 Accrued interest receivable.................................. 552 546 Other assets................................................. 4,013 2,764 ------- ------- Total Assets................................................. $69,268 $62,306 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing........................................ $ 8,507 $ 8,340 Interest bearing........................................... 25,104 24,709 Overseas offices Noninterest bearing........................................ 1,085 751 Interest bearing........................................... 11,065 9,031 ------- ------- Total deposits............................................ 45,761 42,831 Funds borrowed............................................... 11,723 9,158 Acceptances outstanding...................................... 460 448 Accrued expenses and other liabilities....................... 3,026 1,614 Notes payable................................................ 2,941 2,821 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures............................... 747 500 ------- ------- Total liabilities............................................ 64,658 57,372 ------- ------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares -- 10,000,000 Issued shares -- 3,673,941 in 1997 and 4,593,941 in 1996.... 278 508 Common stock, par value $1.50 Authorized shares -- 300,000,000 Issued shares -- 154,002,254 in 1997 and 153,172,672 in 1996 Outstanding shares -- 145,706,594 in 1997 and 153,172,672 in 1996........................................................ 231 230 Surplus..................................................... 1,219 1,202 Retained earnings........................................... 3,472 2,925 Net unrealized gain on securities available for sale, net of tax......................................................... 53 76 Treasury stock, at cost (8,295,660 shares in 1997).......... (632) Cumulative translation adjustments, net of tax.............. (11) (7) ------- ------- Total stockholders' equity................................... 4,610 4,934 ------- ------- Total Liabilities and Stockholders' Equity................... $69,268 $62,306 ======= ======= - -------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. 62 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31 1997 1996 1995 (dollars in millions, except per share amounts) - --------------------------------------------------------------------------------- INTEREST INCOME Loans and lease financing, including fees............... $ 3,954 $ 3,844 $ 3,876 Securities.............................................. 698 569 503 Trading securities...................................... 111 155 186 Mortgages held for sale................................. 19 31 Federal funds sold and securities purchased under agree- ments to resell........................................ 257 203 303 Deposits in other banks................................. 144 103 220 ------- ------- ------- Total interest income.................................. 5,164 4,893 5,119 ------- ------- ------- INTEREST EXPENSE Deposits of domestic offices............................ 940 944 879 Deposits of overseas offices............................ 745 736 912 Funds borrowed.......................................... 805 679 921 Notes payable........................................... 245 194 158 ------- ------- ------- Total interest expense................................. 2,735 2,553 2,870 ------- ------- ------- Net interest revenue................................... 2,429 2,340 2,249 Provision for credit losses............................. 200 231 275 ------- ------- ------- Net interest revenue after provision for credit loss- es.................................................... 2,229 2,109 1,974 ------- ------- ------- NONINTEREST INCOME Financial service fees.................................. 655 474 695 Trust and agency fees................................... 283 246 240 Trading profits and commissions......................... 58 76 25 Net securities gains.................................... 80 23 9 Other income............................................ 487 525 340 ------- ------- ------- Total noninterest income............................... 1,563 1,344 1,309 ------- ------- ------- NONINTEREST EXPENSE Salaries................................................ 1,065 983 947 Employee benefits....................................... 214 195 199 Occupancy expense....................................... 204 203 191 Equipment expense....................................... 146 138 133 Acquisition, divestiture and restructuring expense...... 180 28 Other expense........................................... 695 621 578 ------- ------- ------- Total noninterest expense.............................. 2,324 2,320 2,076 ------- ------- ------- Income before income taxes.............................. 1,468 1,133 1,207 Provision for income taxes.............................. 589 483 529 ------- ------- ------- NET INCOME.............................................. $ 879 $ 650 $ 678 ======= ======= ======= NET INCOME APPLICABLE TO COMMON STOCK................... $ 848 $ 613 $ 641 ======= ======= ======= PER COMMON SHARE Net income Basic.................................................. $ 5.73 $ 3.99 $ 4.17 Diluted................................................ 5.65 3.93 4.09 Cash dividends declared................................. 1.97 1.69 1.28 AVERAGE NUMBER OF COMMON SHARES (in thousands) Basic.................................................. 147,959 153,529 153,856 Diluted................................................ 150,040 156,112 156,768 - ---------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. 63 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31 1997 1996 1995 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------------------------------------ PREFERRED STOCK Balance, January 1................................................................. $ 508 $ 508 $ 508 Redemption of Series E............................................................. (230) ------ ------ ------ Balance, December 31............................................................... 278 508 508 ------ ------ ------ COMMON STOCK Balance, January 1................................................................. 230 350 336 Change in par value................................................................ (118) Common stock issued Dividend reinvestment and common stock purchase plan -- 60,559 shares in 1997, 326,277 shares in 1996 and 861,235 shares in 1995................................. 1 2 Exercise of stock options, net of surrendered shares -- 422,830 shares in 1997, 771,353 shares in 1996 and 905,653 shares in 1995................................. 1 3 2 Conversion of subordinated debentures -- 3,477,792 shares in 1995................. 8 Business combinations, net of treasury stock retired -- 107,794 shares in 1997, (3,733,533) shares in 1996 and 1,071,987 shares in 1995........................... (6) 2 Restricted stock grants, net of forfeitures -- 237,332 shares in 1997, (1,672) shares in 1996 and 43,062 shares in 1995.......................................... ------ ------ ------ Balance, December 31............................................................... 231 230 350 ------ ------ ------ SURPLUS Balance, January 1................................................................. 1,202 1,240 1,069 Change in par value................................................................ 118 Dividend reinvestment and common stock purchase plan............................... 6 18 33 Exercise of stock options.......................................................... (53) (31) 16 Conversion of subordinated debentures.............................................. 71 Business combinations, net of treasury stock retired............................... 8 (178) 38 Restricted stock................................................................... 17 9 7 Other, principally employee benefit plans.......................................... 39 26 6 ------ ------ ------ Balance, December 31............................................................... 1,219 1,202 1,240 ------ ------ ------ RETAINED EARNINGS Balance, January 1................................................................. 2,925 2,548 2,091 Net income......................................................................... 879 650 678 Restricted stock................................................................... (10) 5 (2) Payment on Employee Stock Ownership Plan loan...................................... 6 2 Cash dividends declared Preferred stock................................................................... (31) (37) (37) Common stock -- $1.97 per share in 1997, $1.69 per share in 1996 and $1.28 per share in 1995..................................................................... (291) (247) (184) ------ ------ ------ Balance, December 31............................................................... 3,472 2,925 2,548 ------ ------ ------ NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE Balance, January 1................................................................. 76 82 (40) Change in net unrealized gain (loss) on securities available for sale, net of tax.. (23) (6) 122 ------ ------ ------ Balance, December 31............................................................... 53 76 82 ------ ------ ------ TREASURY STOCK Balance, January 1................................................................. (22) (27) Purchases of treasury stock -- 10,300,000 shares in 1997, 10,220,789 shares in 1996 and 1,594,016 shares in 1995....................................................... (784) (490) (53) Treasury stock reissued Dividend reinvestment and common stock purchase plan -- 208,911 shares in 1997, 491,586 shares in 1996 and 331,782 shares in 1995................................. 16 23 9 Exercise of stock options -- 1,496,816 shares in 1997, 1,352,081 shares in 1996 and 147,370 shares in 1995........................................................ 113 52 4 Conversion of subordinated debentures -- 530,475 shares in 1995................... 15 Business combinations -- 278,576 shares in 1997, 8,499,441 shares in 1996 and 773,621 shares in 1995............................................................ 21 420 21 Restricted stock grants -- 8,987 shares in 1997, 223,515 shares in 1996 and 255,520 shares in 1995............................................................ 1 10 6 Other, principally employee benefit plans -- 11,050 shares in 1997, 143,574 shares in 1996 and 106,188 shares in 1995................................................ 1 7 3 ------ ------ ------ Balance, December 31............................................................... (632) (22) ------ ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1................................................................. (7) (4) (6) Change in translation adjustments, net of tax...................................... (4) (3) 2 ------ ------ ------ Balance, December 31............................................................... (11) (7) (4) ------ ------ ------ Total Stockholders' Equity, December 31............................................ $4,610 $4,934 $4,702 ====== ====== ====== - ------------------------------------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. 64 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31 1997 1996 1995 (in millions) - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................... $ 879 $ 650 $ 678 Reconciliation of net income to net cash provided from (used for) operating activities Provision for credit losses....................... 200 231 275 Depreciation and amortization..................... 157 150 239 Provision for deferred taxes...................... 255 2 39 Net gains on sales of securities available for sale and other assets............................ (361) (368) (210) Change in trading securities...................... (595) (356) (588) Change in mortgages held for sale................. 269 (722) Net change in interest receivables and payables... 63 72 (66) Other, net........................................ (209) (122) 163 -------- ------- ------- Net cash provided from (used for) operating ac- tivities........................................ 389 528 (192) -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) interest bearing deposits in other banks........................... 42 (278) 203 Net cash used for federal funds sold and securities purchased under agreements to resell.............. (160) (309) (225) Securities available for sale Sales............................................. 5,359 5,827 2,101 Maturities........................................ 2,902 4,288 1,439 Purchases......................................... (10,295) (9,624) (4,382) Securities held to maturity Maturities........................................ 120 55 2,994 Purchases......................................... (82) (76) (2,531) Net cash used for lending and lease activities of nonbank entities.................................. (418) (1,229) (1,475) Proceeds from sales of loan portfolios by bank sub- sidiaries......................................... 1,295 1,270 1,575 Net cash used for lending and lease activities of bank subsidiaries................................. (3,979) (2,710) (1,445) Proceeds from sales of other real estate owned..... 50 45 84 Expenditures for premises and equipment............ (324) (237) (246) Proceeds from sales of business units, premises and equipment......................................... 110 264 169 Other, net......................................... 107 (72) (604) -------- ------- ------- Net cash used for investing activities........... (5,273) (2,786) (2,343) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from deposits.................... 2,930 1,767 815 Net cash provided from funds borrowed.............. 2,565 768 2,292 Net proceeds from issuance of notes payable........ 1,275 921 220 Repayments/repurchases of notes payable............ (1,155) (289) (155) Net proceeds from issuance of guaranteed preferred beneficial interests in Corporation's junior subordinated debentures........................... 247 500 Net proceeds from issuance of common stock......... 108 92 70 Redemption of preferred stock...................... (230) Purchases of treasury stock........................ (784) (490) (53) Dividends paid..................................... (322) (284) (221) -------- ------- ------- Net cash provided from financing activities...... 4,634 2,985 2,968 -------- ------- ------- Effect of foreign currency translation on cash..... ( 17) (15) (18) -------- ------- ------- Net change in cash and due from banks.............. (267) 712 415 Cash and due from banks at January 1............... 4,273 3,561 3,146 -------- ------- ------- Cash and due from banks at December 31............. $ 4,006 $ 4,273 $ 3,561 ======== ======= ======= - --------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements. 65 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial reporting and accounting policies of BankBoston Corporation (the Corporation) conform to generally accepted accounting principles. Certain prior period amounts have been reclassified to conform with current financial state- ment presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following is a summary of the significant accounting policies. BASIS OF PRESENTATION The consolidated financial statements include the Corporation and its majority owned subsidiaries, including its major banking subsidiaries, BankBoston, N.A. (the Bank) and Rhode Island Hospital Trust National Bank. All material intercompany accounts and transactions have been eliminated in consolidation. Investments in 20% to 50%-owned companies are accounted for using the equity method. The equity interest in their earnings is included in other income. The excess of cost over the assigned value of the net assets of companies acquired, or goodwill, is included in other assets and is amortized on a straight-line basis, generally over periods ranging from ten to twenty-five years. FOREIGN CURRENCY TRANSLATION The Corporation translates the financial statements of its foreign operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Under the provisions of SFAS No. 52, a func- tional currency is designated for each foreign unit, generally the currency of the primary economic environment in which it operates. Where the functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end exchange rates, while income and expenses are trans- lated using average rates for the period. The resulting translation adjustments and any related hedge gains and losses are recorded, net of tax, as a separate component of stockholders' equity. For foreign units for which the functional currency is the U.S. dollar, includ- ing units that operate in a hyperinflationary environment, the financial state- ments are translated into U.S. dollars using period-end exchange rates for mon- etary assets and liabilities, exchange rates in effect on the date of acquisi- tion for premises and equipment (and related depreciation), and the average ex- change rate during the period for income and expenses. The resulting transla- tion adjustments and related hedge gains and losses for these units are re- corded in current period income. The Corporation hedges a portion of its exposure to translation gains and losses in overseas branches and foreign subsidiaries through the purchase of foreign exchange rate contracts and through investments in fixed assets and se- curities. TRADING ACTIVITIES Trading activities include securities held in anticipation of short-term market movements and for resale to customers. The Corporation values trading securi- ties at fair value and records gains and losses, both realized and unrealized, in trading profits and commissions, a component of noninterest income. Obliga- tions to deliver securities not yet purchased are carried at fair value in funds borrowed. Trading activities also include derivative and foreign exchange products. De- rivative trading positions are carried at fair value, with realized and unrealized gains and losses recorded in trading profits and commissions. Deriv- ative trading positions primarily include interest rate futures and forwards, interest rate swaps and interest rate options. Foreign exchange trading posi- tions are valued at prevailing market rates on a present value basis, and the resulting realized and unrealized gains and losses are recorded in net foreign exchange trading profits, a component of other income. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY Securities are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All debt and equity securi- ties that are not purchased in connection with the Corporation's trading activ- ities are classified as either securities held to maturity or securities avail- able for sale. Securities held to maturity are debt securities that the Corpo- ration has the positive intent and ability to hold to maturity. These securi- ties are reported at cost, adjusted for amortization of premium and accretion of discount. Securities available for sale are debt securities that the Corpo- ration may not hold to maturity, as well as equity securities. These securities include debt securities that are purchased in connection with the Corporation's asset and liability risk management activities and that may be sold in response to changes in interest rates and other related factors; securities held in con- nection with the Corporation's Private Equity Investing and Capital Markets businesses; and other securities that are intended to be held for indefinite periods of time, but which may not be held to maturity. Within the available for sale category, equity securities that have a readily determinable fair value and debt securities are reported at fair value, with unrealized gains and losses recorded, net of tax, as a separate component of stockholders' equity. Equity securities that do not have a readily determinable fair value are re- ported at cost. If a security available for sale or held to maturity has expe- rienced a decline in value that is deemed other than temporary, it is written down to its estimated fair value through a charge to current period income. Re- alized gains and losses with respect to securities, which are generally com- puted on a specific identified cost basis, are included in net securities gains, except for gains and losses with respect to equity and mezzanine securi- ties, which are included in other income. 66 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DERIVATIVES USED IN ASSET AND LIABILITY MANAGEMENT ACTIVITIES As part of the Corporation's asset and liability management (ALM) activities, derivative products, including interest rate swaps, futures, forwards and op- tion contracts (including interest rate caps and floors), are used to hedge ex- posures or modify the interest rate characteristics of related balance sheet instruments. In order for a derivative to be included in the ALM portfolio, there must be a high correlation between the derivative contract and the item being hedged, both at inception and throughout the hedge period. Derivatives included in the ALM portfolio are linked to specific assets or lia- bilities or groups of similar assets or liabilities. Income or loss on the de- rivatives is recognized on the same basis as that used for the linked assets or liabilities. If the related assets are carried at fair value or the lower of cost or fair value, the fair values of the derivatives are combined with the fair values of the assets and are recognized in income using the same method of accounting as that used for the linked assets. If the assets or liabilities are carried at cost, the derivatives are either accounted for on the accrual basis, with income or expense accrued over the life of the agreements as an adjustment to the yield of the related assets or liabilities, or marked to fair value, with any gain or loss deferred and amortized over the period being managed as an adjustment to the yield of the related assets or liabilities. In this con- nection, interest rate swaps, caps and floors are accounted for on the accrual basis and interest rate futures, forwards and other option agreements are marked to fair value, with gains and losses deferred and amortized over the pe- riod being managed. The Corporation does not utilize written options as part of its interest rate risk management strategy unless they are included as part of an overall option strategy that effectively creates a net purchased option po- sition. If a contract is terminated, any remaining unrecognized gain or loss is deferred and amortized as an adjustment to the yield of the related assets or liabilities over the remainder of the period that is being managed. If the linked assets or liabilities are disposed of prior to the end of the period be- ing managed, the related derivatives are marked to fair value, with any result- ing gain or loss recognized in current period income as an adjustment to the gain or loss on the disposal of the related assets or liabilities. The Corporation also enters into foreign exchange contracts to hedge a portion of its own foreign exchange exposure, including foreign currency translation. (See "Foreign Currency Translation" above.) Such contracts are revalued at the spot rate, with any forward premium or discount recognized over the life of the contract in net interest revenue. LOANS AND LEASE FINANCING Loans are reported at their principal outstanding, net of charge-offs and un- earned income, if any. Interest income on loans is accrued as earned. Unearned income on loans and leases is recognized on a basis approximating a level rate of return over the term of the loan. Loan origination fees and costs are ac- counted for in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," which requires the deferral of these fees and costs and sub- sequent amortization to income over the life of the related credit or facility. Fees that adjust the yield on the underlying credit are included in interest income on loans and lease financing. Fees for credit-related services are in- cluded in financial service fees, a component of noninterest income. Lease financing receivables, including leveraged leases, are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income, including unamortized investment credits. Leveraged leases are reported net of nonrecourse debt. Unearned income is rec- ognized to yield a level rate of return on the net investment in the leases. The Corporation generally places loans and leases on nonaccrual status when any portion of the principal or interest is 90 days past due or, in the case of certain consumer loans, 120 days past due, unless the loan or lease is well se- cured and in the process of collection, or earlier, when concern exists as to the ultimate collectibility of principal or interest. Whenever a loan or lease is placed on nonaccrual status, all other credit exposures to the same borrower are also placed on nonaccrual status, except when it can be clearly demon- strated that such credit exposures are well secured, fully performing and insu- lated from the weakness surrounding the nonaccrual credit to which they relate. When loans or leases are placed on nonaccrual status, the related interest re- ceivable is reversed against interest income of the current period. Interest payments received on nonaccrual loans and leases are applied as a reduction of the principal balance when concern exists as to the ultimate collection of principal; otherwise, such payments are recognized as interest income. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the ultimate collectibility of principal or interest. 67 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) RESERVE FOR CREDIT LOSSES AND PROVISION FOR CREDIT LOSSES The reserve for credit losses is available for future charge-offs of existing extensions of credit. The reserve is increased by the provision for credit losses and by recoveries of items previously charged off, and is decreased as credits are charged off. A charge-off occurs once a probability of loss has been determined, with consideration given to such factors as the customer's fi- nancial condition, underlying collateral and guarantees. The provision for credit losses is based upon management's estimate of the amount necessary to maintain the reserve at an adequate level, considering evaluations of individual credits and concentrations of credit risk, net losses charged to the reserve, changes in the quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in the size and character of the credit risks and other perti- nent factors. Impaired loans are accounted for in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure." Loans are classified and accounted for as impaired loans when it is probable that the Corporation will be unable to collect all principal and interest due on the loan in accordance with the original contractual terms. The Corporation uses the same criteria in placing a loan on nonaccrual status. Accordingly, im- paired loans are defined as all nonaccrual loans, exclusive of residential mortgage loans, consumer loans and leases. Impaired loans are valued based on the fair value of the related collateral in the case of commercial real estate loans and, for all other impaired loans, on the present value of expected fu- ture cash flows, using the interest rate in effect at the time the loan was placed on nonaccrual status. A loan's observable market value may be used as an alternate valuation technique. Impairment exists when the recorded investment in a loan exceeds the value of the loan measured using the above-mentioned val- uation techniques. Such impairment is recognized as a valuation reserve, which is included as a part of the Corporation's overall reserve for credit losses. The Corporation recognizes interest income on impaired loans consistent with its nonaccrual policy. PREMISES AND EQUIPMENT Premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the estimated life of the improvement or the term of the lease. OTHER REAL ESTATE OWNED Other real estate owned (OREO), which is included in other assets, includes properties on which the Corporation has foreclosed and taken title. OREO is re- ported at the lower of the carrying value of the loan or the fair value of the property obtained, less estimated selling costs. The excess, if any, of the loan over the fair value of the property at the time of transfer from loans to OREO is charged to the reserve for credit losses. Subsequent declines in the fair value of the property and net operating results of the property are re- corded in noninterest expense. INCOME TAXES The Corporation accounts for income taxes in accordance with SFAS No. 109, "Ac- counting for Income Taxes." Current tax liabilities or assets are recognized, through charges or credits to the current tax provision, for the estimated taxes payable or refundable for the current year. Net deferred tax liabilities or assets are recognized, through charges or credits to the deferred tax provi- sion, for the estimated future tax effects, based on enacted tax rates, attrib- utable to temporary differences and tax benefit carryforwards. Deferred tax li- abilities are recognized for temporary differences that will result in amounts taxable in the future, and deferred tax assets are recognized for temporary differences and tax benefit carryforwards that will result in amounts deduct- ible or creditable in the future. The effect of enacted changes in tax law, in- cluding changes in tax rates, on these deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A deferred tax valuation reserve is established if it is more likely than not that all or a portion of the Corporation's deferred tax assets will not be realized. Changes in the deferred tax valuation reserve are recognized through charges or credits to the deferred tax provision. For financial reporting purposes, in- vestment tax credits received in connection with lease financing are recognized as lease income over the investment life of the related asset. PER SHARE CALCULATIONS Effective December 31, 1997, the Corporation adopted SFAS No. 128, "Earnings per Share." In accordance with this new standard, basic net income per common share is computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares outstanding for each pe- riod presented. For the computation of diluted net income per common share, net income is reduced by preferred stock dividends, and such adjusted net income is divided by the aggregate of the weighted average number of common shares out- standing for each period and the shares representing the dilutive effect of stock options outstanding. The effect of stock options is excluded from the computation of diluted net income per common share in periods in which the ef- fect would be anti-dilutive. See Note 22 for additional disclosures related to this new standard. 68 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. MERGERS, ACQUISITIONS, JOINT VENTURES AND DIVESTITURES In October 1997, the Corporation completed its acquisition of Pacific National Corporation (Pacific), the holding company of Pacific National Bank of Nantuck- et, located on the island of Nantucket, Massachusetts. The Corporation ex- changed approximately 279,000 shares of its common stock, valued at approxi- mately $22 million, for all of the outstanding common stock of Pacific. At the time of acquisition, Pacific had loans of $98 million and deposits of $108 mil- lion. The acquisition was accounted for as a purchase and accordingly, the as- sets and liabilities of Pacific were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the acquisition is being amor- tized over a fifteen-year period. The acquisition has been included in the ac- companying consolidated financial statements since the acquisition date. In September 1997, the Corporation completed the sale of Fidelity Acceptance Corporation (FAC), a consumer finance subsidiary with assets of $1.1 billion. The sale resulted in a gain of approximately $68 million. The Corporation also incurred a loss of $11 million in connection with interest rate futures con- tracts that had been used to hedge the funding of FAC. In September 1997, the Corporation announced a credit card joint venture agree- ment, under which it will contribute its $1.2 billion national credit card portfolio in exchange for cash and a minority interest in the new company. The transaction will be completed in the first quarter of 1998. In September 1997, the Corporation announced an agreement to acquire Deutsche Bank Argentina, S.A. (Deutsche Argentina), a subsidiary of Deutsche Bank A.G., for approximately $255 million in cash. The acquisition of Deutsche Argentina, a full service bank with approximately $1.3 billion of loans and $1.5 billion of deposits, will be accounted for as a purchase. The transaction will be com- pleted in the first quarter of 1998. In October 1997, the Corporation announced an agreement to sell its minority interest in HomeSide, Inc. (HomeSide). The sale of the interest in HomeSide, an independent mortgage banking company formed in 1996 in connection with the Cor- poration's sale of its mortgage banking subsidiary discussed below, will be completed in the first quarter of 1998, and will result in a gain of approxi- mately $165 million. HomeSide was created during the first six months of 1996, when the Corporation completed a transaction with two equity investment firms and Barnett Banks, Inc. (Barnett), in which its mortgage banking subsidiary, BancBoston Mortgage Corporation (BBMC), and Barnett's mortgage subsidiary were sold to HomeSide, a newly formed independent mortgage company. As a result of this transaction, the Corporation realized a gain of $106 million, and held a one-third interest in HomeSide. Under the sale agreement, the Corporation agreed to maintain a risk management program designed to protect the enterprise value of BBMC through the date of the sale. The above-mentioned gain was offset in 1996 by $111 million of losses, net of decreased servicing amortization, from the change in market value of the contracts used to manage the prepayment risk in the mortgage ser- vicing portfolio and the economic value of BBMC pending the completion of the sale to HomeSide. In July 1996, the Corporation completed its acquisition of BayBanks, Inc. (BayBanks). The Corporation issued 43.6 million shares of its common stock in exchange for substantially all of the outstanding shares of BayBanks common stock by exchanging 2.2 shares of its common stock for each outstanding BayBanks share. The acquisition was accounted for as a pooling of interests and, accordingly, the historical book values of the assets and liabilities of BayBanks were carried over onto the Corporation's consolidated balance sheet, and no goodwill or other intangible assets were created. The acquisition is re- flected in the accompanying consolidated financial statements as though the Corporation and BayBanks had operated as a combined entity for all periods pre- sented. In connection with the acquisition, the Corporation recorded restruc- turing and merger-related costs of $180 million. These costs are more fully discussed in Note 19. In connection with regulatory approval of the transac- tion, during the fourth quarter of 1996, the Corporation sold 20 branches of the resulting combined entity, comprising a total of approximately $500 million of loans and $700 million of deposits, at a gain of approximately $47 million. In June 1996, the Corporation completed its acquisition of The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank, a Massachusetts chartered savings bank with $1.3 billion of deposits. The Corporation exchanged 4.6 million shares of its common stock, with a value of approximately $229 mil- lion, for all of the outstanding common stock of Bancorp. The acquisition, which was accounted for as a purchase, has been included in the accompanying consolidated financial statements since the acquisition date. Goodwill result- ing from the transaction is being amortized over a ten-year period. In January 1995, the Corporation completed the sales of two of its affiliate banks, Bank of Vermont and Casco Northern Bank, N.A. The sales resulted in a combined gain of approximately $75 million. 69 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3.STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, cash and due from banks are con- sidered to be cash equivalents. Foreign currency cash flows are converted to U.S. dollars using average rates for the period. During 1997, 1996 and 1995, the Corporation paid interest of approximately $2.7 billion, $2.5 billion and $2.8 billion, respectively. The Corporation paid income taxes of approximately $358 million in 1997, $401 million in 1996 and $565 million in 1995. During 1997, 1996 and 1995, the Corporation transferred approximately $21 million, $42 million and $49 million, respectively, to OREO from loans. Loans made to facil- itate sales of OREO properties were not significant in 1997, 1996 or 1995. Non- cash transactions in 1995 included $94 million from the issuance of common stock in connection with the Corporation's redemption of its convertible subor- dinated debentures due 2011, and the transfer of $3.3 billion of securities held to maturity to securities available for sale in response to the issuance, in November 1995, of "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," by the Financial Ac- counting Standards Board (the FASB), which allowed the Corporation to reassess the appropriateness of the classification of securities held at that time. 4. RESERVE REQUIREMENTS, RESTRICTED DEPOSITS AND PLEDGED ASSETS At December 31, 1997 and 1996, cash and due from banks included $1.5 billion and $1 billion, respectively, to satisfy the reserve requirements of the Fed- eral Reserve System and various foreign central banks. Interest bearing depos- its in other banks held to satisfy foreign central bank reserve requirements totaled $3 million and $2 million at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, securities, loans and other assets with a book value of $3.5 billion and $3.7 billion, respectively, were pledged to collateralize repurchase agreements, public deposits and other items. 5. SECURITIES A summary comparison of securities available for sale by type is as follows:
GROSS GROSS December 31, 1997 UNREALIZED UNREALIZED CARRYING (in millions) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------ U.S. Treasury........................... $ 936 $ 7 $ 943 U.S. government agencies and corporations --mortgage-backed securities............................. 5,798 65 $ 3 5,860 States and political subdivisions....... 54 54 Foreign debt securities................. 1,391 8 24 1,375 Other debt securities................... 872 5 877 Marketable equity securities............ 187 35 6 216 Other equity securities................. 522 522 ------ ---- --- ------ $9,760 $120 $33 $9,847 ====== ==== === ====== Gross Gross December 31, 1996 Unrealized Unrealized Carrying (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. Treasury........................... $1,669 $ 12 $ 6 $1,675 U.S. government agencies and corporations --mortgage-backed securities............................. 3,789 31 19 3,801 States and political subdivisions....... 172 1 173 Foreign debt securities................. 1,095 48 10 1,133 Other debt securities................... 250 7 1 256 Marketable equity securities............ 156 62 1 217 Other equity securities................. 549 549 ------ ---- --- ------ $7,680 $161 $37 $7,804 ====== ==== === ======
Other equity securities included in securities available for sale are not traded on established exchanges and are carried at cost. However, in accordance with SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," fair values were estimated for these securities. These fair values exceeded cost by $154 million and $152 million at December 31, 1997 and 1996, respec- tively. Further information with respect to the fair value of these securities is included in Note 29. 70 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary comparison of securities held to maturity by type is as follows:
GROSS GROSS December 31, 1997 AMORTIZED UNREALIZED UNREALIZED FAIR (in millions) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------ U.S. Treasury........................... $ 6 $ 6 U.S. government agencies and corporations --mortgage-backed securities............................. 538 $4 $1 541 Foreign debt securities................. 11 11 Other equity securities................. 81 81 ---- --- --- ---- $636 $4 $1 $639 ==== === === ==== Gross Gross December 31, 1996 Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. Treasury........................... $ 3 $ 3 U.S. government agencies and corporations --mortgage-backed securities............................. 535 $2 $7 530 States and political subdivisions....... 6 6 Foreign debt securities................. 11 11 Other equity securities................. 125 125 ---- --- --- ---- $680 $2 $7 $675 ==== === === ====
Other equity securities included in securities held to maturity represent secu- rities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. A summary comparison of debt securities available for sale by contractual matu- rity is as follows:
December 31 1997 1996 FAIR Fair (in millions) COST VALUE Cost Value - ------------------------------------------------------------------------------- Within one year.................................... $1,219 $1,224 $1,345 $1,340 After one but within five years.................... 2,030 2,029 2,565 2,607 After five but within ten years.................... 1,787 1,851 1,412 1,432 After ten years.................................... 4,015 4,005 1,653 1,659 ------ ------ ------ ------ $9,051 $9,109 $6,975 $7,038 ====== ====== ====== ======
A summary comparison of debt securities held to maturity by contractual matu- rity is as follows:
December 31 1997 1996 AMORTIZED FAIR Amortized Fair (in millions) COST VALUE Cost Value - -------------------------------------------------------------------------------- Within one year................................. $ 8 $ 8 $ 11 $ 11 After one but within five years................. 124 124 114 113 After five but within ten years................. 242 246 241 241 After ten years................................. 181 180 189 185 ---- ---- ---- ---- $555 $558 $555 $550 ==== ==== ==== ====
Certain securities, such as mortgage-backed securities, may not become due at a single maturity date. Such securities have been classified within the category that encompasses the due dates for the majority of the instrument. In 1997, the Corporation realized gross gains of $98 million and gross losses of $18 million from the sale of securities available for sale. Total proceeds from such securities sales in 1997 amounted to $5 billion. In 1996, the Corpo- ration realized gross gains of $44 million and gross losses of $21 million from the sale of securities available for sale. Total proceeds from such securities sales in 1996 amounted to $4.7 billion. In 1995, the Corporation realized gross gains of $11 million and gross losses of $2 million from the sale of securities available for sale. Total proceeds from such securities sales in 1995 amounted to $1.4 billion. The above amounts exclude equity and mezzanine profits, which are included in other income. 71 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6.LOANS AND LEASE FINANCING
December 31 1997 1996 (in millions) - -------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial.......................... $15,268 $13,162 Commercial real estate Construction................................................. 271 284 Other........................................................ 4,211 3,240 Consumer-related Residential mortgages........................................ 2,570 3,184 Home equity.................................................. 2,823 2,878 Credit card.................................................. 1,756 1,395 Other........................................................ 2,956 5,503 Lease financing............................................... 1,938 1,816 Unearned income............................................... (302) (287) ------- ------- 31,491 31,175 ------- ------- INTERNATIONAL Commercial and industrial..................................... 8,826 6,946 Banks and other financial institutions........................ 860 866 Governments and official institutions......................... 95 79 Consumer-related Residential mortgages........................................ 947 699 Credit card.................................................. 182 145 Other........................................................ 828 461 Lease financing............................................... 452 368 All other..................................................... 378 415 Unearned income............................................... (79) (93) ------- ------- 12,489 9,886 ------- ------- $43,980 $41,061 ======= =======
7.RESERVE FOR CREDIT LOSSES An analysis of changes in the reserve for credit losses follows:
Years Ended December 31 1997 1996 1995 (in millions) - -------------------------------------------------------------------------------- Balance, January 1............................................ $883 $890 $827 Reserves of entities acquired................................. 3 3 16 Reserves of entities sold..................................... (95) (11) (32) Provision..................................................... 200 231 275 Credit losses................................................. (366) (310) (282) Recoveries.................................................... 87 80 86 ---- ---- ---- Net credit losses............................................ (279) (230) (196) ---- ---- ---- Balance, December 31.......................................... $712 $883 $890 ==== ==== ====
The portion of the reserve for credit losses associated with off-balance-sheet exposures is not material. At December 31, 1997, impaired loans totaled $166 million, of which loans to- taling $34 million required no valuation reserve and loans totaling $132 mil- lion required a valuation reserve of $40 million. For the year ended December 31, 1997, average impaired loans were approximately $184 million. At December 31, 1996, impaired loans totaled $260 million, of which loans totaling $38 mil- lion required no valuation reserve and loans totaling $222 million required a valuation reserve of $65 million. For the year ended December 31, 1996, average impaired loans were approximately $277 million. Interest recognized on impaired loans during the years ended December 31, 1997, 1996 and 1995 was not material. 8.OTHER ASSETS
December 31 1997 1996 (in millions) - ------------------------------------------------------------------------------- Accounts receivable.............................................. $ 530 $ 457 Investments in limited partnerships.............................. 488 400 Bank-owned life insurance........................................ 400 Goodwill and other intangibles................................... 329 403 Equity investments in affiliates................................. 275 281 Prepaid pension cost............................................. 180 160 OREO............................................................. 36 50 All other........................................................ 1,775 1,013 ------ ------ $4,013 $2,764 ====== ======
72 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9.FUNDS BORROWED
December 31 1997 1996 (in millions) - ------------------------------------------------------------------------------- Federal funds purchased......................................... $ 1,003 $ 527 Term federal funds purchased.................................... 2,530 1,442 Securities sold under agreements to repurchase.................. 1,789 2,034 Short-term bank notes........................................... 2,679 1,507 Medium-term bank notes.......................................... 1,633 396 Demand notes issued to the U.S. Treasury........................ 704 All other....................................................... 2,089 2,548 ------- ------ $11,723 $9,158 ======= ======
Medium-term bank notes included borrowings with maturities of greater than one year of $150 million at December 31, 1997 and $115 million at December 31, 1996. All other funds borrowed included borrowings with maturities of greater than one year of $161 million at December 31, 1997 and $535 million at December 31, 1996. At December 31, 1997 and 1996, the Corporation had availability under various borrowing arrangements of $1.3 billion and $1.8 billion, respectively. The Corporation had no significant compensating balance arrangements at Decem- ber 31, 1997 and 1996. 10.NOTES PAYABLE
By Remaining Maturity at December 31 DUE LESS THAN DUE DUE 1997 1996 (in millions) 1 YEAR 1-5 YEARS 6-10 YEARS TOTAL Total - -------------------------------------------------------------------------------- PARENT COMPANY Senior notes...................... $250 $325 $ 575 $ 400 Subordinated notes................ 107 186 $ 748 1,041 1,170 ---- ---- ------ ------ ------ Subtotal......................... 357 511 748 1,616 1,570 SUBSIDIARIES Senior notes...................... 70 36 212 318 640 Subordinated notes................ 12 199 796 1,007 611 ---- ---- ------ ------ ------ Subtotal......................... 82 235 1,008 1,325 1,251 ---- ---- ------ ------ ------ $439 $746 $1,756 $2,941 $2,821 ==== ==== ====== ====== ======
Notes payable are unsecured obligations of the Corporation or its subsidiaries. Certain of the indentures under which these notes were issued prohibit the Cor- poration from making any payment or other distribution in the stock of the Bank unless the Bank unconditionally guarantees payment of principal and interest on the notes. The distribution shown above by remaining maturity is based on con- tractual maturity. Notes payable at December 31, 1997 and 1996 include fixed rate notes of $1,943 million and $1,962 million, respectively, and variable rate notes of $998 mil- lion and $859 million, respectively. Fixed rate notes outstanding at December 31, 1997 mature at various dates through 2007 at interest rates ranging from 6.29% to 15.13%. The consolidated weighted average interest rates on fixed rate notes at December 31, 1997 and 1996 were 7.38% and 7.69%, respectively. The Corporation has entered into interest rate swap agreements that have effec- tively converted a portion of its fixed rate obligations to floating rate obli- gations. At December 31, 1997, such interest rates ranged from 5.59% to 5.88%. Variable rate notes outstanding, with interest rates ranging from 5.74% to 9.53% at December 31, 1997, mature at various dates through 2004. The consoli- dated weighted average interest rates on variable rate notes at December 31, 1997 and 1996 were 6.48% and 6.46%, respectively. During 1997, the Corporation issued $450 million of senior floating and fixed rate medium-term notes, due in 1998 through 2002, and $275 million of previ- ously issued medium-term notes matured. During 1997, the Bank issued $200 mil- lion of 7.0% subordinated notes and $200 million of 6 1/2% subordinated notes, each due in 2007. In addition, $405 million of senior floating and fixed rate medium-term notes were issued by a Brazilian subsidiary of the Bank, and $670 million of previously issued medium-term notes matured. Also in 1997, $129 mil- lion of the Corporation's fixed rate subordinated notes matured. Notes payable maturing during the next five years amount to $439 million in 1998, $115 million in 1999, $138 million in 2000, $186 in 2001 and $307 million in 2002. 73 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. 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 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 Cap- ital 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, can be prepaid at the option of the Trusts, in whole or in part, on or after December 15, 2006, 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 Capi- tal Trust III. These Trust Securities have a liquidation preference of $1,000 per Trust Security, pay distributions quarterly at LIBOR plus .75%, can be pre- paid at the option of the Trust, in whole or in part, on or after June 15, 2007, and are scheduled to mature on June 15, 2027. At December 31, 1997, the interest rate on the floating rate Trust Securities was 6 11/16%. The Corpora- tion has fully, irrevocably and unconditionally guaranteed all of the Trusts' obligations under the Trust Securities. The Corporation owns all of the common securities of the Trusts, the sole as- sets of which are their respective subordinated debentures. The principal amount of subordinated debentures held by each Trust equals the aggregate liq- uidation amount of its Trust Securities and its common securities (see Note 28 for the aggregate principal amount of subordinated debentures currently out- standing). The subordinated debentures bear interest at the same rate, and will mature on the same date, as the corresponding Trust Securities. 12.PREFERRED STOCK A summary of the Corporation's Adjustable Rate Cumulative Preferred Stock (Ad- justable Rate Preferred Stock) issued and outstanding is as follows:
Series A Series B Series C - ------------------------------------------------------------------------------- Outstanding at December 31, 1997 and 1996 Shares.......................................... 1,044,843 1,574,315 774,783 Amount (in millions)............................ $ 52 $ 79 $ 77 Dividend rates At December 31, 1997........................... 6.00% 6.00% 5.50% Minimum........................................ 6.00% 6.00% 5.50% Maximum........................................ 13.00% 13.00% 12.50% Dividends per share 1997........................................... $ 3.00 $ 3.01 $ 5.50 1996........................................... $ 3.00 $ 3.00 $ 5.50 1995........................................... $ 3.06 $ 3.01 $ 5.50 Liquidation preference per share................ $ 50 $ 50 $ 100
A summary of the Corporation's Fixed Rate Cumulative Preferred Stock Series F issued and outstanding is as follows: - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 and 1996 Shares................................................................. 280,000 Amount (in millions)................................................... $ 70 Dividend rate.......................................................... 7.88% Dividends per share.................................................... $ 19.69 Liquidation preference per share....................................... $ 250
The Fixed Rate Cumulative Preferred Stock Series F (Series F Preferred Stock) is held by stockholders in the form of depositary shares, with each depositary share representing a one-tenth interest in a share of Series F Preferred Stock, and entitles the holder to a proportional interest in all rights and prefer- ences of a share of Series F Preferred Stock, including dividend, voting, re- demption and liquidation rights. The Corporation had Fixed Rate Cumulative Preferred Stock Series E issued and outstanding at December 31, 1996, composed of 920,000 shares (9,200,000 deposi- tary shares) at a liquidation preference of $250 per share ($25 per depositary share), with a dividend rate of 8.60%, or $21.50 per share. In September 1997, the Corporation redeemed the Series E Preferred Stock at its aggregate liquida- tion preference totaling $230 million. Dividends on all series of preferred stock are cumulative and, when declared, are payable quarterly. The dividend rates for the Adjustable Rate Preferred Stock are determined according to a formula based upon the highest of three in- terest rate benchmarks. Neither the Adjustable Rate Preferred Stock nor the Se- ries F Preferred Stock have preemptive or general voting rights. The preferred stock is redeemable, in whole or in part, at the option of the Corporation as follows: Series A and B Preferred Stock are redeemable at $50 per share and Se- ries C Preferred Stock is redeemable at $100 per share. The Series F Preferred Stock is redeemable on and after July 15, 1998, at $250 per share ($25 per de- positary share). 74 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 13.STOCKHOLDER RIGHTS PLAN In 1990, the Board of Directors of the Corporation adopted a stockholder rights plan. The plan provides for the distribution of one preferred stock purchase right for each outstanding share of common stock of the Corporation. Each right entitles the holder, following the occurrence of certain events, to purchase a unit, consisting of one-thousandth of a share of Junior Participating Preferred Stock, Series D, at a purchase price of $50 per unit, subject to adjustment. The rights will not be exercisable or transferable apart from the common stock except under certain circumstances in which a person or group of affiliated persons acquires, or commences a tender offer to acquire, 15% or more of the Corporation's common stock. Rights held by such an acquiring person or persons may thereafter become void. Under certain circumstances, a right may become a right to purchase common stock or assets of the Corporation or common stock of an acquiring corporation at a substantial discount. Under certain circumstanc- es, the Corporation may redeem the rights at $.01 per right. The rights will expire in July 2000 unless earlier redeemed or exchanged by the Corporation. 14.CAPITAL ADEQUACY A summary of the Corporation's regulatory capital position and related ratios follows:
Well December 31 1997 1996 Capitalized (dollars in millions) Minimum - -------------------------------------------------------------------------------- Risk-based capital ratios Tier 1 capital ratio............................. 8.0% 9.2% 6.0% Total capital ratio.............................. 12.1% 13.6% 10.0% Tier 1 leverage ratio............................. 7.4% 8.2% 5.0% Tier 1 capital.................................... $ 4,971 $ 4,954 Tier 2 capital.................................... $ 2,548 $ 2,337 Total capital..................................... $ 7,519 $ 7,291 Total risk-adjusted assets........................ $62,216 $53,583 Adjusted total average assets..................... $67,661 $60,537
The Corporation is subject to quantitative regulatory capital adequacy require- ments which take into account the differing risk profiles of banking organiza- tions by assigning risk weights to both assets and the credit equivalent amounts of off-balance-sheet exposures. The Corporation and each of its bank subsidiaries are required to maintain minimum ratios of Tier 1 and total capi- tal to total risk-adjusted assets, and of Tier 1 leverage capital to adjusted total average assets. Tier 1 capital includes common stockholders' equity and qualifying preferred stock (including the Trust Securities described in Note 11). Total capital includes Tier 1 capital and, subject to certain limitations, limited-life preferred stock, mandatory convertible securities, subordinated debt and the reserve for credit losses. Under the regulatory framework for prompt corrective action established by The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the Corporation and each of its bank subsidiaries must meet specific guidelines that involve quantitative measures of the Corporation's and each of its bank subsidiaries' assets, liabilities and certain off-balance-sheet exposures as calculated under regulatory accounting practices. The Corporation's and each of its bank subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 1997, each of the Corporation's bank subsidi- aries satisfied the requirements of the "well capitalized" category under the regulatory framework for prompt corrective action. The capital categories of each of the Corporation's bank subsidiaries are determined solely for purposes of applying FDICIA's provisions, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's bank subsidiaries. 15.DIVIDENDS AND LOAN RESTRICTIONS Bank regulations require the approval of bank regulatory authorities if the dividends declared by a bank subsidiary exceed certain prescribed limits. For 1998, aggregate dividend declarations by the Corporation's bank subsidiaries without prior regulatory approval are limited to their net profits, as defined, for 1998 up to the date of any dividend declaration. However, for any dividend declaration, the Corporation's subsidiaries, as well as the Corporation itself, must consider additional factors such as the amount of current period net in- come, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends that the bank subsidiaries could declare. In addition, bank regulators have the author- ity to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. Each bank subsidiary is also prohibited by the bank regulatory authorities from granting loans and advances to the Parent Company that exceed certain limits. Assuming declaration of the maximum amount of dividends under the regulations described above, any loans and advances would be limited to an aggregate of ap- proximately $511 million at December 31, 1997, and would be subject to specific collateral requirements. Based on the foregoing limitations, an aggregate of approximately $4.4 billion of the Parent Company's investment in bank subsidiaries of $4.9 billion, which includes bank holding companies and their subsidiaries, was restricted from transfer to the Parent Company at December 31, 1997. 16.OTHER INCOME
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------- Net equity and mezzanine profits................................ $221 $209 $110 Net foreign exchange trading profits............................ 88 54 60 Gains on sales of branches/subsidiaries......................... 68 153 75 Equity in undistributed earnings of affiliates.................. 33 35 18 Gains from sales of mortgage servicing rights................... 13 10 All other....................................................... 77 61 67 ---- ---- ---- $487 $525 $340 ==== ==== ====
75 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 17.EMPLOYEE BENEFITS The Corporation maintains qualified non-contributory defined benefit pension plans (the Plans) covering substantially all domestic employees. The Corpora- tion funds the Plans in compliance with the requirements of the Employee Re- tirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended. The principal plan, which covers most domestic employees, is an account balance defined benefit plan in which each eligible employee has an account to which amounts are allocated based on level of pay, years of service and a specified rate of interest. Plans other than the principal plan have benefit provisions based on length of service and qualifying compensation in the final years of employment. On January 1, 1997, BayBanks' pension plan was merged into the principal plan. Employee benefits expense (income) for the Plans included the following:
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------ Service cost (benefits earned during the period).................................. $ 20 $ 26 $ 22 Interest cost on projected benefit obli- gation................................... 37 34 32 Return on plan assets Actual.................................. (147) (111) (161) Actuarial deferral of gains............. 87 54 110 Amortization Unrecognized net asset.................. (5) (6) (6) Unrecognized prior service cost......... 3 2 Other, net.............................. 3 2 ----- ----- ----- Net pension expense (income)............. $ (8) $ 3 $ 1 ===== ===== ===== - ------------------------------------------------------------------------------ The following table sets forth the funded status of the Plans: December 31 1997 1996 1995 (dollars in millions) - ------------------------------------------------------------------------------ Projected benefit obligation Vested benefits......................... $ 437 $ 372 $ 368 Nonvested benefits...................... 24 32 35 ----- ----- ---- Accumulated benefit obligation........... 461 404 403 Effect of projected future compensation levels................................... 79 75 79 ----- ----- ----- Projected benefit obligation............. $ 540 $ 479 $ 482 ===== ===== ===== Plan assets at fair value (primarily listed stocks and fixed income securities).............................. $ 832 $ 752 $ 688 ===== ===== ===== Plan assets in excess of projected benefit obligation....................... $ 292 $ 273 $ 206 Unrecognized net gain.................... (103) (114) (15) Unrecognized prior service cost.......... (3) 13 14 Unrecognized net asset................... (6) (12) (18) ----- ----- ----- Prepaid pension cost..................... $ 180 $ 160 $ 187 ===== ===== ===== Assumptions used in actuarial calculations are as follows: Weighted average discount rate at December 31............................. 7.25% 7.75% 7.25% Rate of increase in future compensation levels at December 31................... 4.5% 4.5% 4.45% to 4.5% Account balance interest rate at December 31............................. 6.0% 6.0% 6.0% Expected long-term rate of return on assets for the years ended December 31.. 9.0% 9.0% to 10.0% 9.0% - ------------------------------------------------------------------------------
76 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Corporation also maintains unfunded nonqualified defined benefit plans for certain executives. At December 31, 1997, 1996 and 1995, $43 million, $26 mil- lion and $25 million, respectively, was included in accrued expenses and lia- bilities for these plans. Charges to operations related to the plans were $5 million in each of 1997 and 1996 and $4 million in 1995. Benefit payments under these unfunded plans are made by the Corporation, except that certain nonquali- fied benefits are paid from a grantor trust funded by BayBanks in 1996. The fair value of the trust assets was $17 million and $16 million at December 31, 1997 and 1996, respectively. The Corporation provides certain health and life insurance benefits for retired employees. Most domestic employees of the Corporation currently receive credits of up to $10,000 based on years of service, which are used to purchase postretirement health care coverage through the Corporation. Life insurance coverage is dependent on years of service at retirement. BayBanks employees who retired prior to 1997 generally pay the full cost of postretirement life insur- ance and medical insurance premiums at the Corporation's rates. Pursuant to SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," these postretirement benefits are recognized over the service lives of the employees. The components of postretirement benefits expense were as follows:
Years Ended December 31 1997 1996 1995 (in millions) - -------------------------------------------------------------------------------- Service cost (benefits earned during the period)......................... $ 1 $ 1 $ 1 Interest cost on projected benefit obligation.......................... 5 4 5 Amortization Unrecognized transition obligation.. 4 4 4 Unrecognized net gain............... (2) (1) (1) ---- ---- ---- Net postretirement benefits expense.. $ 8 $ 8 $ 9 ==== ==== ==== - -------------------------------------------------------------------------------- The following table sets forth the funded status of the Corporation's accumu- lated postretirement benefit obligation: December 31 1997 1996 1995 (dollars in millions) - -------------------------------------------------------------------------------- Accumulated benefit obligation Retirees............................ $ 45 $ 44 $ 51 Active employees -- eligible to re- tire............................... 4 10 6 Active employees -- not eligible to retire............................. 19 9 9 ---- ---- ---- Accumulated postretirement benefit obligation.......................... 68 63 66 Unrecognized prior service cost...... (4) Unrecognized net gain................ 22 24 17 Unrecognized transition obligation... (55) (58) (62) ---- ---- ---- Postretirement benefit liability..... $ 31 $ 29 $ 21 ==== ==== ==== Assumptions used in actuarial calcu- lations are as follows: Weighted average discount rate at December 31........................ 7.25% 7.75% 7.25% Rate of increase in future compensa- tion levels at December 31......... 4.5% 4.5% 4.5% Medical cost trend rate............. 6% 7% 8% DECLINING TO declining to declining to 5% IN THE 5% in the 5% in the YEAR 1999 year 1999 year 1999 Effect of 1% increase in medical cost trend rate on Accumulated postretirement benefit obligation......................... 2.8% 3.6% 5.8% Postretirement benefits expense..... 2.2% 2.9% 4.9% - --------------------------------------------------------------------------------
77 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In 1996, in connection with the acquisition of BayBanks, certain enhanced re- tirement benefits were offered to individuals meeting certain eligibility re- quirements as part of an early retirement program. Charges to operations in 1996 resulting from pension plan enhancements were $26 million; such charges resulting from enhancements to postretirement benefits were $4 million. In 1995, the Corporation recognized curtailment losses of $8 million in connection with its pension and postretirement plans, primarily as a result of the sale of BBMC to HomeSide. These 1996 and 1995 charges were included in acquisition, di- vestiture and restructuring expense, which is more fully described in Note 19. The Corporation maintains a defined contribution thrift incentive plan covering the majority of domestic employees. Under this plan, employer contributions are made based on a percentage of employee contributions. Prior to 1997, BayBanks had a profit sharing and savings plan which was associated with an employee stock ownership plan (ESOP). Benefits under the BayBanks plans were based on BayBanks' financial performance. The savings and profit sharing plan was merged into, and participant balances in the ESOP were transferred to, the Corpora- tion's thrift incentive plan on January 1, 1997. Amounts charged to operations for these plans were $19 million, $11 million and $10 million in 1997, 1996 and 1995, respectively. 18.STOCK OPTIONS AND AWARDS The Corporation's principal stock incentive plans (the Plans) include the 1997 Stock Option Plan for Non-Employee Directors (the Director Plan), the 1996 Long-Term Incentive Plan (the 1996 Plan), the 1991 Long-Term Stock Incentive Plan (the 1991 Plan), the 1986 and 1982 Stock Option Plans and the 1978 and 1988 BayBanks Stock Option Plans. Shares of common stock issued under these plans may be authorized but unissued shares, treasury shares or shares pur- chased in the open market. The 1996 Plan provides for the grant of stock op- tions, restricted stock, stock appreciation rights (SARs) and other awards to key employees. Since December 31, 1996, no additional grants may be made under the 1991 or earlier Plans. A total of 5,586,878 shares of common stock were re- served for issuance under the Plans at December 31, 1997, including 2,136,515 shares available for future grants. Options are granted at prices which are not less than the fair market value of the common stock on the date of grant. Options granted under the 1996 Plan (and options granted in 1996 under the 1991 Plan) generally are exercisable in equal installments on the first and second anniversary dates of the grant. Outstand- ing options granted under the Director Plan, the 1991 Plan (prior to 1996) and earlier Plans are fully vested. All options expire not later than 10 years af- ter the date of grant. There were 11,200 SARs at a grant price of $28.63 out- standing at December 31, 1997. Compensation expense associated with SARs was $.3 million in each of 1997 and 1996 and $.4 million in 1995. The following is a summary of the changes in options outstanding under the Plans:
1997 1996 1995 WEIGHTED Weighted Weighted AVERAGE Average Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price - ---------------------------------------------------------------------------------------------------------- Options outstanding, January 1............... 3,583,231 $31.64 4,764,182 $22.31 4,744,473 $19.53 Granted ($28.41 to $96.25 per share)....... 1,503,519 $71.23 1,354,409 $44.91 1,294,174 $28.84 Exercised ($6.01 to $75.00 per share)....... (1,533,484) $29.59 (2,507,037) $20.97 (1,250,716) $18.42 Canceled................ (102,903) $61.23 (28,323) $42.90 (23,749) $27.01 ---------- ---------- ---------- Options outstanding, De- cember 31 ($6.25 to $96.25 per share)....... 3,450,363 $48.92 3,583,231 $31.64 4,764,182 $22.31 ========== ========== ========== Options exercisable, De- cember 31............... 1,537,392 $31.07 2,460,481 $25.62 3,871,117 $23.13 ========== ========== ========== - ----------------------------------------------------------------------------------------------------------
78 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of outstanding and exercisable options under the Plans at December 31, 1997:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Average Weighted Range of Number Remaining Average Number Remaining Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Contractual Life Exercise Price - ---------------------------------------------------------------------------------------------------------------- $6.25 to $30.00 per share................... 1,096,969 4.9 years $22.90 1,096,969 4.9 years $22.90 $30.01 to $60.00 per share................... 914,463 8.1 years $44.98 361,388 8.1 years $45.34 $60.01 to $80.00 per share................... 1,328,724 9.1 years $69.84 40,245 9.2 years $70.72 $80.01 to $96.25 per share................... 110,207 9.7 years $88.16 38,790 9.7 years $88.34 - ----------------------------------------------------------------------------------------------------------------
Under terms of the Corporation's restricted stock awards, employees are gener- ally required to continue employment with the Corporation for a stated period after the award in order to become fully vested in the shares awarded. Perfor- mance-based restricted stock, for which vesting is contingent or accelerates upon the price of the Corporation's common stock reaching certain stated lev- els, has also been awarded. Restricted stock is recorded at the fair market value of the common stock on the date of award or, if solely a performance-based award, the value required for vesting. At the date of award, unearned compensation of the same amount is recorded as a reduction of retained earnings and is amortized as compensation expense over the estimated vesting period. The following is a summary of the activity in restricted stock and the weighted average price at the time of grant:
1997 1996 1995 WEIGHTED Weighted Weighted AVERAGE Average Average SHARES PRICE Shares Price Shares Price - ------------------------------------------------------------------------------------ Share balance, January 1....................... 453,645 $31.53 1,008,125 $22.88 1,205,859 $21.94 Awards................. 297,680 $69.81 249,430 $52.45 316,570 $29.44 Forfeitures............ (32,879) $48.40 (27,887) $20.81 (17,988) $24.97 Released from forfeiture restrictions........... (188,251) $28.20 (776,023) $26.79 (496,316) $24.70 -------- --------- --------- Share balance, December 31...................... 530,195 $49.98 453,645 $31.53 1,008,125 $22.88 ======== ========= ========= (in millions) Unearned compensation at December 31 (a reduction of retained earnings)............... $ 16 $ 8 $ 13 Compensation expense.... $ 13 $ 17 $ 13 - ------------------------------------------------------------------------------------
79 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of outstanding restricted stock at December 31, 1997:
Weighted Range of Average Market Value of Restricted Shares Weighted Average Price at Common Stock at Outstanding at Remaining Time of Time of Grant December 31, 1997 Contractual Life Grant - -------------------------------------------------------------------------------- $25.50 to $60.00 per share.......... 250,265 1.7 years $27.79 $60.01 to $80.00 per share.......... 277,430 2.6 years $69.66 $80.01 to $91.19 per share.......... 2,500 7.9 years $87.24
In addition to options granted under the Plans described above, the Corporation granted 2,152,000 stock options on October 1, 1996 to substantially all employ- ees world-wide at an exercise price of $58.00 per option, the fair value of the Corporation's common stock on the grant date. The number of options granted to an employee was based on the employee's salary on the grant date, subject to a minimum of 100 options for a full-time employee and 50 options for a part-time employee. Based on the price of the Corporation's common stock having reached specified levels as of February 13, 1997, these options became exercisable on October 1, 1997. Unexercised options will expire on October 1, 2002. In 1997, 766,519 options were exercised and 272,275 options were cancelled. As of Decem- ber 31, 1997, 1,113,206 options were outstanding and exercisable. Effective January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by that standard, the Corporation elected not to adopt the fair value accounting provisions of the standard and to continue to apply the provisions of Accounting Principles Board (APB) Opin- ion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock options and awards. Had compensation expense for the Corporation's stock options and awards been determined in accordance with the fair value accounting provisions of SFAS No. 123, the Corporation's net income, basic and diluted earnings per share would have been as follows:
Years Ended December 31 1997 1996 1995 - ----------------------------------------------------------------------------- Net income applicable to common stock (in millions) As reported............................................... $ 848 $ 613 $ 641 Pro forma................................................. $ 836 $ 612 $ 637 Basic earnings per share As reported............................................... $5.73 $3.99 $4.17 Pro forma................................................. $5.65 $3.98 $4.13 Diluted earnings per share As reported............................................... $5.65 $3.93 $4.09 Pro forma................................................. $5.56 $3.90 $4.05
Solely for purposes of providing the disclosures required by SFAS No. 123, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assump- tions used for grants of options and restricted stock:
Years Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Dividend yield............................................... 2.7% 3.2% 4.2% Volatility................................................... 24% 26% 35% Risk-free interest rate...................................... 5.3% 5.3% 7.5% Expected option life in years................................ 4 4 4
The estimated weighted average grant date fair values per share of stock op- tions granted (other than the world-wide option grant) and restricted stock granted were as follows:
Years Ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------- Stock options............................................. $14.68 $ 9.40 $ 7.80 Restricted stock.......................................... $53.20 $30.80 $24.20
Assumptions for the 1996 world-wide option grant were: dividend yield -- 3.0 percent; volatility -- 23 percent; risk-free interest rate --6.2 percent; and expected option life -- 3 years. The weighted average grant date fair value for the world-wide option grant was $10.50 per share. Due to the inclusion of only 1995, 1996 and 1997 stock option and restricted stock awards, the effects of applying SFAS No. 123 in 1997, 1996 and 1995 may not be representative of the pro forma impact in future years. 80 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 19. ACQUISITION, DIVESTITURE AND RESTRUCTURING EXPENSE During 1996, the Corporation recorded $180 million of restructuring and merger- related costs in connection with its acquisition of BayBanks. Included in these costs were employee severance and property-related costs; professional fees and other costs of effecting the acquisition; and systems and other conversion costs incurred during the period. Employee severance costs were related primarily to the Corporation's plan to eliminate approximately 2,000 executive, managerial and staff positions through attrition, enhanced retirement plans and terminations. These costs included severance and retirement plan costs as well as employee assistance costs for separated employees. As of December 31, 1997, approximately 1,960 employees had either been terminated or had left the Corporation through enhanced retirement plans. Property-related costs were related to branch and back office consolida- tions, and included lease termination costs and writedowns of bank owned prop- erties and other facility-related costs. Professional fees and other costs principally consisted of transaction-related costs, such as legal and account- ing fees and stock registration costs, as well as systems costs and other costs of effecting the acquisition. Cash outlays in 1997 amounted to $74 million, in- cluding $59 million of termination benefits and $15 million of facility-related and other costs. Cash outlays in 1996 amounted to $54 million, including $17 million of termination benefits and $37 million of transaction, facility and systems and other conversion costs. The remaining reserves of $34 million at December 31, 1997 consisted primarily of expected cash outlays related to em- ployee severance and property-related costs. During 1995, the Corporation recorded $28 million of charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. These charges were composed of estimated costs of employee reduction, equipment writeoffs and exiting certain lease obligations. In addition, the charges included $8 million of benefit plan curtailment losses that resulted from the sale of BBMC, which removed mortgage banking employees from the Corpo- ration's pension and postretirement plans. Cash outlays of $3 million and $10 million in 1997 and 1996, respectively, consisted primarily of employee sever- ance costs. The remaining reserves of $4 million at December 31, 1997 consisted primarily of expected cash outlays related to employee severance and property- related costs. 20.OTHER EXPENSE
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------- Communications.................................................. $112 $101 $90 Advertising and public relations................................ 107 108 87 Professional fees............................................... 61 56 65 Software costs.................................................. 44 35 27 Amortization of goodwill and other intangibles.................. 37 34 28 All other....................................................... 334 287 281 ---- ---- ---- $695 $621 $578 ==== ==== ====
21.INCOME TAXES The components of the provision for income taxes were as follows:
Years Ended December 31 1997 1996 1995 (in millions) - -------------------------------------------------------------------------------- CURRENT TAX PROVISION Federal........................................................ $164 $219 $297 Foreign Based on income............................................... 67 130 91 Withheld on interest and dividends............................ 38 36 22 State and local................................................ 65 96 80 ---- ---- ---- 334 481 490 ---- ---- ---- DEFERRED TAX PROVISION Federal........................................................ 225 (4) (1) State and local................................................ 30 6 40 ---- ---- ---- 255 2 39 ---- ---- ---- $589 $483 $529 ==== ==== ====
Excluded from the above table are tax effects related to certain items that were recorded directly in stockholders' equity, including foreign currency translation, market value adjustments related to securities available for sale, stock options and restricted stock. Net tax effects recorded directly in stock- holders' equity amounted to a $53 million 81 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) benefit in 1997, a $40 million benefit in 1996 and a $74 million charge in 1995. The income tax provision included tax provisions related to securities gains of $31 million in 1997, $10 million in 1996 and $3 million in 1995. The following table reconciles the expected federal tax provision, based on the federal statutory tax rate of 35%, to the actual consolidated tax provision for the periods presented:
Years Ended December 31 1997 1996 1995 (in millions) - -------------------------------------------------------------------------------- Expected tax provision applicable to income................... $514 $397 $423 Effect of State and local income taxes, net of federal tax benefit..... 62 66 81 Non-creditable foreign taxes................................. 21 15 11 Tax-exempt income............................................ (4) (6) (8) Non-deductible goodwill from sale of subsidiaries............ 11 Other, net................................................... (4) 11 11 ---- ---- ---- Actual tax provision.......................................... $589 $483 $529 ==== ==== ====
The components of the net deferred tax liability were as follows:
December 31 1997 1996 (in millions) - ------------------------------------------------------------------------------- DEFERRED TAX ASSETS Reserve for credit losses......................................... $ 280 $354 Interest on nonaccrual loans...................................... 48 40 Foreign operations................................................ 86 Other............................................................. 131 145 ----- ---- Deferred tax assets.............................................. 459 625 ----- ---- DEFERRED TAX LIABILITIES Leasing operations................................................ (553) (505) Pension obligations............................................... (71) (69) Unrealized gain on securities available for sale.................. (35) (49) Foreign operations................................................ (17) Other............................................................. (53) (46) ----- ---- Deferred tax liabilities......................................... (729) (669) ----- ---- Net deferred tax liability........................................ $(270) $(44) ===== ====
During 1995, The Commonwealth of Massachusetts passed a law which reduced the state income tax rate for financial institutions from 12.5% to 10.5%, to be phased in over five years, and permitted apportionment of a bank's taxable in- come. Additionally, in 1995, the Corporation reached a favorable settlement of an outstanding Massachusetts tax matter relating to income earned on certain securities. These items did not have a significant impact on the Corporation's 1995 effective tax rate, because reductions in the current tax provision from the tax law changes and the settlement were offset by the required reduction in the Bank's net deferred tax assets resulting from the tax law changes. It is expected that the Corporation's deferred tax assets at December 31, 1997 will be realized from the reversal of existing deferred tax liabilities and from the recognition of future taxable income, without relying on tax planning strategies that the Corporation might not ordinarily follow. Domestic pre-tax income was $999 million in 1997, $755 million in 1996 and $978 million in 1995. Foreign pre-tax income, defined as income generated from oper- ations that are located outside the United States, was $469 million in 1997, $378 million in 1996 and $229 million in 1995. 82 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 22.EARNINGS PER SHARE Effective December 31, 1997, the Corporation adopted SFAS No. 128. Under the new standard, primary and fully diluted earnings per share were replaced with basic and diluted earnings per share, and several provisions of APB Opinion No. 15, "Earnings per Share," which was replaced by the new standard, were elimi- nated, in an effort to simplify the calculations and conform such calculations to methods used internationally. The new standard did not change the Corpora- tion's earnings per share reported for prior periods. A summary of the Corporation's calculation of earnings per share is as follows:
Years Ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------- (in millions) Net income.......................................... $ 879 $ 650 $ 678 Less: preferred dividends........................... 31 37 37 -------- -------- -------- Net income applicable to common stock............... $ 848 $ 613 $ 641 ======== ======== ======== (in thousands) Weighted average number of common shares outstanding used in calculation of basic earnings per share........................... 147,959 153,529 153,856 Incremental shares from the assumed exercise of dilutive stock options as of the beginning of the period............................................. 2,081 2,583 2,912 -------- -------- -------- Weighted average number of common shares outstanding used in calculation of diluted earnings per share......................... 150,040 156,112 156,768 ======== ======== ======== - -------------------------------------------------------------------------------- Earnings per share Basic.............................................. $ 5.73 $ 3.99 $ 4.17 ======== ======== ======== Diluted............................................ $ 5.65 $ 3.93 $ 4.09 ======== ======== ======== - --------------------------------------------------------------------------------
83 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 23. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments represent various degrees and types of risk to the Corporation, including credit, interest rate, foreign exchange rate, implied volatility rate and liquidity risk. INTEREST RATE DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS In the normal course of its business, the Corporation enters into a variety of interest rate derivatives and foreign exchange contracts as part of its trading activities, which primarily focus on providing these products to customers, and in its interest rate and currency risk management strategy. These products in- volve, to varying degrees, credit risk and market risk. Credit risk is the pos- sibility that a loss may occur if a counterparty to a transaction fails to per- form according to the terms of the contract. Market risk is the adverse effect of a change in interest rates, currency rates or implied volatility rates on the value of a financial instrument. The notional amount of interest rate de- rivatives and foreign exchange contracts is the amount upon which interest and other payments under the contract are based. For interest rate derivatives, the notional amount is typically not exchanged. Therefore, notional amounts should not be taken as the measure of credit or market risk as they tend to greatly overstate the true economic risks of these contracts. The Corporation controls credit risk arising from interest rate derivatives and foreign exchange contracts using credit procedures similar to those used for traditional lending activities. The Corporation believes that fair value, which approximates the cost to replace the contract at current market rates should the counterparty default prior to settlement date, is generally representative of credit exposure related to interest rate derivatives and foreign exchange contracts at a point in time. Counterparty credit risk is also reduced through the use of master netting agreements. Such agreements provide for the offset- ting of amounts receivable and payable under interest rate derivatives or for- eign exchange contracts with the same counterparty. The market risk associated with interest rate derivatives and foreign exchange contracts is managed by es- tablishing and monitoring limits as to the types and degree of risk that may be undertaken and is measured using a value-at-risk methodology. Interest rate derivatives utilized by the Corporation include futures and for- wards, interest rate swaps and interest rate options. Futures and forward con- tracts generally are contracts for the delayed delivery of securities or money market instruments in which the buyer agrees to purchase, and the seller agrees to deliver, a specific instrument at a predetermined date for a specific price. Market risks on both types of agreements stem from market movements in the un- derlying securities' values, interest rates or implied volatility rates. Credit risk stems from the ability of the counterparties to meet the terms of the con- tracts. The Corporation's counterparty risk for futures is limited, as the ma- jority of these transactions are executed on organized exchanges that assume the obligations of counterparties, and generally require margin collateral and daily settlement of variation margins. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties based on a common notional principal amount and maturity date. The primary risks associated with interest rate swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. Interest rate options are contracts that allow the holder of the option to re- ceive cash, purchase, sell or enter into a financial instrument at a specified price within a specified period of time. Options include interest rate caps and floors, which are types of interest rate protection instruments involving the potential payment between seller and buyer of an interest differential. In ad- dition, other types of option products provide the holder with the right to en- ter into interest rate swap, cap and floor agreements with the writer. The pri- mary risks associated with interest rate options are the exposure to current and possible future movements in interest rates and the ability of the counterparties to meet the terms of the contracts. Foreign exchange contracts include such commitments as foreign currency spot, forward, futures, option and swap contracts. The primary risks in these trans- actions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contracts. 84 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the Corporation's notional amounts and fair val- ues of interest rate derivatives and foreign exchange contracts included in its trading and ALM portfolios.
TRADING PORTFOLIO(1) ALM PORTFOLIO(1) ------------------------------- -------------------------------------------- December 31, 1997 NOTIONAL FAIR VALUE(2)(3)(4) NOTIONAL FAIR VALUE(2)(3) UNRECOGNIZED (in millions) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS)(5) - ------------------------------------------------------------------------------------------------------- Interest rate contracts Futures and forwards... $42,842 $ 36 $ 69 $ 3,947 $ 21 $ 11 Interest rate swaps.... 20,451 113 160 11,162 132 $ 11 96 Interest rate options Purchased(6).......... 23,231 56 2,765 13 2 Written or sold....... 12,716 53 ------- --------- --------- ------- -------- ------- ---- Total interest rate con- tracts................. $99,240 $ 205 $ 282 $17,874 $ 166 $ 11 $109 ======= ========= ========= ======= ======== ======= ==== Foreign exchange con- tracts Spot and forward con- tracts................ $25,793 $ 476 $ 442 $ 2,430 $ 36 $ 41 $ (5) Options purchased...... 5,428 115 Options written or sold.................. 6,692 107 ------- --------- --------- ------- -------- ------- ---- Total foreign exchange contracts.............. $37,913 $ 591 $ 549 $ 2,430 $ 36 $ 41 $ (5) ======= ========= ========= ======= ======== ======= ==== - ------------------------------------------------------------------------------------------------------- Trading Portfolio(1) ALM Portfolio(1) ------------------------------- -------------------------------------------- December 31, 1996 Notional Fair Value(2)(3)(4) Notional Fair Value(2)(3) Unrecognized (in millions) Amount Asset Liability Amount Asset Liability Gain (Loss)(5) - ------------------------------------------------------------------------------------------------------- Interest rate contracts Futures and forwards... $47,927 $ 65 $ 64 $ 3,382 $(45) Interest rate swaps.... 9,332 58 54 6,975 $ 25 $ 40 (11) Interest rate options Purchased............. 6,471 14 Written or sold....... 4,593 13 ------- --------- --------- ------- -------- ------- ---- Total interest rate con- tracts................. $68,323 $ 137 $ 131 $10,357 $ 25 $ 40 $(56) ======= ========= ========= ======= ======== ======= ==== Foreign exchange con- tracts Spot and forward con- tracts................ $20,224 $ 313 $ 348 $ 1,755 $ 11 $ 9 $ 2 Options purchased...... 2,529 42 Options written or sold.................. 2,434 37 ------- --------- --------- ------- -------- ------- ---- Total foreign exchange contracts.............. $25,187 $ 355 $ 385 $ 1,755 $ 11 $ 9 $ 2 ======= ========= ========= ======= ======== ======= ==== - -------------------------------------------------------------------------------------------------------
(1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be ex- changed in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in other assets or other liabilities, as applicable. The majority of deriva- tives that are part of the ALM portfolio are accounted for on the accrual basis, and are not carried at fair value. In certain cases, contracts, such as futures, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) The credit exposure of interest rate derivatives and foreign exchange con- tracts at December 31 is represented by the fair value of contracts re- ported in the "Asset" column. (4) The average asset and liability fair value amounts for interest rate con- tracts included in the trading portfolio for the years ended December 31, 1997 and 1996 were approximately $158 million and $185 million, respective- ly, and $130 million and $129 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were approximately $435 million and $484 million, respec- tively, for the year ended December 31, 1997, and $224 million and $229 million, respectively, for the year 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 December 31, 1997, there were $7 million of unrecognized gains related to terminated contracts that are being amortized to net interest revenue over a weighted average period of 14 months. At De- cember 31, 1996, there were $16 million of unrecognized gains and $33 mil- lion 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. (6) At December 31, 1997, the ALM portfolio included equity contracts entered into by the Corporation's Argentine operations. These contracts are linked to Argentine deposit products, where the holder receives payment based on changes in the prices of underlying Argentine securities. 85 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Net trading gains or losses from interest rate derivatives are recorded in trading account profits and commissions. The Corporation's interest rate deriv- ative trading activities primarily include providing risk management products to its customers. Derivatives are also used to manage risk in other trading portfolios, such as emerging markets securities. The results of these deriva- tive activities are combined with the results of the respective trading portfo- lio to determine the overall performance of the trading business and, as such, are not included in the results of derivative trading activities. Net trading gains from interest rate derivative trading were $19 million for the year ended December 31, 1997, $4 million for the year ended December 31, 1996 and $7 mil- lion for the year ended December 31, 1995. Net trading gains from foreign exchange contracts are recorded in other income. Net trading gains from foreign exchange activities, which include foreign ex- change spot, forward and options contracts, for the years ended December 31, 1997, 1996 and 1995 were $88 million, $54 million and $60 million, respective- ly. CREDIT-RELATED FINANCIAL INSTRUMENTS A commitment to extend credit is a legally binding agreement to lend to a cus- tomer in the future that generally expires within a specified period of time. The extension of a commitment, which is subject to the Corporation's credit re- view and approval policies, gives rise to credit exposure when certain borrow- ing conditions are met and it is drawn upon. Until such time, it represents only potential exposure. In connection with entering into a commitment, the Corporation may obtain collateral if deemed necessary, based upon the Corpora- tion's credit evaluation. Such collateral varies but may include securities, receivables, inventory, fixed assets, personal property and real estate. The obligation to lend generally may be voided if the customer's financial condi- tion deteriorates or if the customer fails to meet certain covenants. Commit- ments to extend credit do not reflect the actual demand on liquidity that the Corporation will be subjected to in the future, since historical experience with loan commitments indicates that a large portion generally expire without being drawn upon. Standby letters of credit and foreign office guarantees are commitments that are primarily issued to third parties to guarantee obligations of the Corpora- tion's customers. Standby letters of credit may be issued as credit enhance- ments for corporate customers' commercial paper, bond issuances by municipali- ties or other debt obligations, and to guarantee other financial performance of a customer. The Corporation has current exposure only to the extent that a cus- tomer may default on the underlying transaction. The risks involved in the is- suance of standby letters of credit and foreign office guarantees are primarily credit risks. Again, the Corporation's credit review and approval policies and practices are adhered to when evaluating issuances of standbys or guarantees for customers. Similar to commitments to extend credit, the Corporation may ob- tain various types of collateral, if deemed necessary, based upon the Corpora- tion's credit evaluation. The following table summarizes the Corporation's credit-related financial in- struments:
December 31 1997 1996 (in millions) - ------------------------------------------------------------------------------ Fee-based or otherwise legally binding commitments to extend credit(1).................................................... $31,845 $26,742 Standby letters of credit, foreign office guarantees and similar instruments(2)....................................... $ 2,919 $ 2,508 Commercial letters of credit.................................. $ 1,587 $ 1,582 - ------------------------------------------------------------------------------
(1) Net of participations conveyed to others of zero in 1997 and $17 million in 1996. (2) Net of participations conveyed to others of $1,283 million in 1997 and $814 million in 1996. 86 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 24.CONCENTRATIONS OF CREDIT RISK Credit risk associated with concentrations can arise when changes in economic, industry or geographic factors affect groups of counterparties with similar economic characteristics, whose aggregate credit exposure is significant to the Corporation's total credit exposure. Consistent policies exist regarding the requirement for collateral security on asset based and real estate credits. Ap- proximately 40% and 50% of the Corporation's business activity in 1997 and 1996, respectively, was with customers located within New England. Information with respect to the Corporation's overseas business activities and its geo- graphic concentrations is included in Note 27. The Corporation's commitments to lend against, and loans collateralized by, domestic commercial real estate properties were approximately $6 billion in 1997 and $5 billion in 1996, of which 46% in 1997 and 70% in 1996 related to properties in New England. Also, combined domestic credit exposure from consumer lending and credits secured by 1-4 family residential properties totaled $12 billion in 1997 and $17 billion in 1996. There were no other significant concentrations of credit risk. 25.LEASE COMMITMENTS Rental expense for leases of real estate and equipment is summarized below:
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------- Rental expense.................................................. $130 $132 $125 Less sublease rental income..................................... 12 13 11 ---- ---- ---- Net rental expense.............................................. $118 $119 $114 ==== ==== ====
The Corporation has obligations under noncancelable operating leases for real estate and equipment that include renewal options and escalation clauses. The Corporation's minimum future rentals under its leases, exclusive of executory costs and net of sublease rental income, for the years 1998 through 2002 are $95 million, $88 million, $82 million, $72 million and $66 million, respective- ly, and $360 million for 2003 and later. Capital leases, the minimum rentals of which are included in the preceding amounts, are not significant. 26.CONTINGENCIES The Corporation and its subsidiaries are defendants in a number of legal pro- ceedings arising in the normal course of business, including claims that bor- rowers or others have been damaged as a result of the lending practices of the Corporation's subsidiaries. Management, after reviewing all actions and pro- ceedings pending against or involving the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's financial condi- tion or results of operations. 87 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 27.SEGMENT INFORMATION The Corporation operates within the financial services industry. This geo- graphic segment information is presented to meet the requirements of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," and differs from the information used by the Corporation to manage its businesses. Certain revenues and expenses are allocated differently for this segment information than for the Corporation's internal management reporting process. For example, revenues and expenses herein are allocated based on the domicile of the cus- tomer or service provider rather than to the business unit that earned or in- curred those revenues or expenses, and certain corporate overhead expenses, which are allocated to business units, have not been allocated to the interna- tional segment for this presentation. This geographic segment information does not consider other factors, such as method of funding (i.e., local vs. non-lo- cal currency) or location of any cash collateral or guarantees. As a result of the inter-relationships that exist within the Corporation's world-wide network, allocations of certain income and expense items are neces- sarily based on assumptions and subjective criteria. Estimates of interest costs charged to users of funds, stockholders' equity, and administrative and other expenses incurred by one area on behalf of another are allocated utiliz- ing various methodologies. The information presented is based on reporting as- sumptions in place at December 31, 1997. The following table presents the Corporation's geographic segment information in accordance with SFAS No. 14, which information differs from the Corpora- tion's Line of Business information used to manage its businesses.
Income Years Ended December 31 Total Total Before Net Period End (in millions) Revenue(1) Expense(1) Taxes Income Total Assets - -------------------------------------------------------------------------------- 1997 International Latin America................ $ 922 $ 639 $ 283 $170 $16,842 Europe....................... 68 39 29 17 1,621 Asia/Pacific................. 60 54 6 4 1,109 All other regions............ 2 (2) 4 2 312 ------ ------ ------ ---- ------- Total International......... 1,052 730 322 193 19,884 Domestic...................... 2,940 1,794 1,146 686 49,384 ------ ------ ------ ---- ------- Total....................... $3,992 $2,524 $1,468 $879 $69,268 ====== ====== ====== ==== ======= 1996 International Latin America................ $ 745 $ 495 $ 250 $143 $13,023 Europe....................... 103 40 63 37 1,626 Asia/Pacific................. 59 45 14 8 1,216 All other regions............ 2 (2) 4 2 100 ------ ------ ------ ---- ------- Total International......... 909 578 331 190 15,965 Domestic...................... 2,775 1,973 802 460 46,341 ------ ------ ------ ---- ------- Total....................... $3,684 $2,551 $1,133 $650 $62,306 ====== ====== ====== ==== ======= 1995 International Latin America................ $ 606 $ 433 $ 173 $ 98 $10,864 Europe....................... 91 62 29 17 1,891 Asia/Pacific................. 65 36 29 16 1,095 All other regions............ 2 7 (5) (3) 45 ------ ------ ------ ---- ------- Total International......... 764 538 226 128 13,895 Domestic...................... 2,794 1,813 981 550 45,528 ------ ------ ------ ---- ------- Total....................... $3,558 $2,351 $1,207 $678 $59,423 ====== ====== ====== ==== ======= - --------------------------------------------------------------------------------
(1) Total revenue includes net interest revenue and noninterest income. Total expense includes the provision for credit losses and noninterest expense. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires disclosure of fi- nancial and descriptive information about an entity's reportable operating seg- ments, which are defined by the standard as components of an entity that engage in business activities that generate revenues and expenses, and for which sepa- rate financial information is available that is reviewed regularly by senior management to evaluate performance and allocate resources. Such financial information should be reported on the basis that is used internally for senior management review. This standard is effective for financial statements for an- nual periods beginning after December 15, 1997, with restatement of comparative information for prior periods. This standard will change the method under which the Corporation reports its segment information, which information will be more consistent with the Corporation's Line of Business information. 88 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 28. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS The following is a condensed balance sheet of the Corporation (Parent Company only):
December 31 1997 1996 (in millions) - ------------------------------------------------------------------------------- ASSETS Cash and short-term investments in bank subsidiary............... $ 290 $ 723 Advances to subsidiaries Bank subsidiaries............................................... 1 Nonbank subsidiaries............................................ 1,080 718 Subordinated notes receivable from bank subsidiary............... 330 332 Investments in subsidiaries Bank subsidiaries............................................... 4,838 4,949 Nonbank subsidiaries............................................ 413 219 Other assets..................................................... 99 115 ------ ------ Total Assets................................................... $7,050 $7,057 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable.................................................... $1,616 $1,570 Other liabilities................................................ 51 38 Junior subordinated debt payable to subsidiary trusts............ 773 515 ------ ------ Total liabilities............................................... 2,440 2,123 ------ ------ Total stockholders' equity...................................... 4,610 4,934 ------ ------ Total Liabilities and Stockholders' Equity..................... $7,050 $7,057 ====== ======
The following is a condensed statement of income of the Corporation (Parent Company only):
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------ OPERATING INCOME Dividends from subsidiaries Bank subsidiaries......................................... $1,079 $537 $391 Nonbank subsidiaries...................................... 11 23 15 Interest from subsidiaries Bank subsidiaries......................................... 39 50 59 Nonbank subsidiaries...................................... 79 41 25 Noninterest income......................................... 2 9 ------ ---- ---- Total operating income.................................... 1,210 651 499 ------ ---- ---- OPERATING EXPENSE Interest expense........................................... 146 95 92 Other expense, net......................................... 8 14 6 ------ ---- ---- Total operating expense................................... 154 109 98 ------ ---- ---- Income before income taxes and equity in undistributed net income of subsidiaries.................................... 1,056 542 401 Provision for (Benefit from) income taxes.................. (10) (6) 2 ------ ---- ---- Income before equity in undistributed net income of subsidiaries.............................................. 1,066 548 399 Equity in undistributed net income of subsidiaries......... (187) 102 279 ------ ---- ---- Net Income................................................. $ 879 $650 $678 ====== ==== ====
89 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a condensed statement of cash flows of the Corporation (Parent Company only):
Years Ended December 31 1997 1996 1995 (in millions) - ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................... $ 879 $ 650 $ 678 Reconciliation of net income to net cash provided from operating activities Equity in undistributed net income of subsidiaries...... 187 (102) (279) Gain on sale of subsidiary.............................. (8) Other, net.............................................. (32) (52) 1 ----- ----- ----- Net cash provided from operating activities............ 1,034 496 392 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) short-term investments in bank subsidiary...................................... 448 (600) 86 Net cash used for advances to subsidiaries............... (361) (263) (203) Investments in subsidiaries.............................. (183) (16) (12) Proceeds from sale of subsidiary......................... 92 Repayment of subordinated note receivable by bank subsidiary.............................................. 250 ----- ----- ----- Net cash used for investing activities................. (96) (629) (37) ----- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Repayments/repurchases of notes payable.................. (404) (100) (150) Net proceeds from issuance of notes payable.............. 450 400 Net proceeds from issuance of junior subordinated debentures.............................................. 258 515 Net proceeds from issuance of common stock............... 108 92 70 Redemption of preferred stock............................ (230) Purchases of treasury stock.............................. (784) (490) (53) Dividends paid........................................... (322) (284) (221) ----- ----- ----- Net cash provided from (used for) financing activities............................................ (924) 133 (354) ----- ----- ----- Net change in cash and due from banks.................... 14 1 Cash and due from banks at January 1..................... 1 1 ----- ----- ----- Cash and due from banks at December 31................... $ 15 $ 1 $ 1 ===== ===== ===== Interest payments made................................... $ 150 $ 95 $ 90 Income tax payments made................................. $ 7 $ 6 $ 5 - ------------------------------------------------------------------------------
90 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 29.FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107 requires that the Corporation disclose estimated fair values for certain of its financial instruments. Financial instruments include such items as loans, deposits, securities, interest rate and foreign exchange rate con- tracts, swaps and other instruments as defined by the standard. Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and rele- vant available market information. Fair value information is intended to repre- sent an estimate of an amount at which a financial instrument could be ex- changed in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading mar- kets for a significant portion of the Corporation's financial instruments, the Corporation may not be able to settle its financial instruments immediately; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the Cor- poration's financial instruments, such as loans and deposits, are held to matu- rity and are realized or paid according to the contractual agreement with the customer. Where available, quoted market prices are used to estimate fair values. Howev- er, due to the nature of the Corporation's financial instruments, in many in- stances quoted market prices are not available. Accordingly, the Corporation has estimated fair values based on other valuation techniques, such as dis- counting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible income tax ramifications or estimated transac- tion costs. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial in- struments will change. Disclosure of fair values is not required for certain items such as lease fi- nancing, investments accounted for under the equity method of accounting, obli- gations for pension and other postretirement benefits, premises and equipment, OREO, prepaid expenses, core deposit intangibles and other customer relation- ships, other intangible assets and income tax assets and liabilities. Accord- ingly, the aggregate fair value amounts presented do not purport to represent, and should not be considered representative of, the underlying "market" or franchise value of the Corporation. Because the standard permits many alternative calculation techniques and be- cause numerous assumptions have been used to estimate the Corporation's fair values, reasonable comparisons of the Corporation's fair value information with that of other financial institutions cannot necessarily be made. The methods and assumptions used to estimate the fair values of each class of financial instrument are as follows: CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS IN OTHER BANKS, FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, DUE FROM CUS- TOMERS ON ACCEPTANCES, FUNDS BORROWED, AND ACCEPTANCES OUTSTANDING These items are generally short-term in nature and, accordingly, the carrying amounts re- ported in the balance sheet are reasonable approximations of their fair values. TRADING SECURITIES Trading securities are carried at fair value in the balance sheet. Such values are generally based on quoted, or other independent, market prices. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY Fair values are principally based on quoted, or other independent, market prices. For certain debt and equity investments made in connection with the Corporation's Private Equity Investing business that do not trade on established exchanges, and for which markets do not exist, estimates of fair value are based upon management's review of the investee's financial results, condition and prospects. 91 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) LOANS The fair value of accruing consumer mortgage loans is estimated using market quotes or by discounting contractual cash flows, adjusted for credit risk and prepayment estimates. Discount rates are obtained from secondary mar- ket sources. The fair value of accruing home equity loans is estimated using comparable market information adjusted for credit and other relevant character- istics. The fair value of all other accruing loans is estimated by discounting cash flows, using interest rates that consider the credit and interest rate risks inherent in the loans, and current economic and lending conditions. The fair value of nonaccrual loans is primarily estimated by discounting manage- ment's estimate of future cash flows using a rate commensurate with the risks involved. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS The carrying amount of accrued interest receivable approximates its fair value. Financial instruments classi- fied as other assets subject to the disclosure requirements of the standard consist principally of accounts receivable and investments in limited partner- ships. The carrying amounts of short-term receivables are considered to approx- imate their fair value. For longer-term receivables, fair value is estimated by discounting expected future cash flows using a discount rate commensurate with the risks involved. Estimates of fair value of investments in limited partner- ships are based upon management's review of the investee's financial results, condition and prospects. DEPOSITS The fair values of deposits subject to immediate withdrawal, such as interest and noninterest bearing checking, passbook savings and money market deposit accounts, are, by definition, equal to their carrying amounts. The car- rying amounts for variable rate certificates of deposit and other time deposits approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit and other time deposits are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities. ACCRUED EXPENSES AND OTHER LIABILITIES Financial instruments classified as ac- crued expenses and other liabilities subject to the disclosure requirements of the standard consist principally of short-term liabilities; the carrying amounts approximate their fair values. NOTES PAYABLE The fair value of long-term borrowings is estimated using second- ary market prices and does not include the fair values of related interest rate swap agreements, which are presented separately. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEBENTURES The fair value is estimated using secondary market prices. FOREIGN EXCHANGE RATE AND INTEREST RATE FINANCIAL INSTRUMENTS The fair values of foreign exchange rate and interest rate contracts, including contracts used to manage interest rate, currency and market risks, are estimated based on mar- ket information and other relevant characteristics using pricing models, in- cluding option models. OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS The fair value of commitments to ex- tend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the com- mitted rates. The fair values of foreign office guarantees and letters of credit are based on fees charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. 92 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the estimated fair values of the Corporation's financial instruments:
DECEMBER 31 1997 1996 ESTIMATED Estimated CARRYING FAIR Carrying Fair (in millions) AMOUNT VALUE Amount Value - ---------------------------------------------------------------------------------- ASSETS Cash and due from banks.................. $ 4,006 $ 4,006 $ 4,273 $ 4,273 Interest bearing deposits in other banks................................... 1,592 1,592 1,634 1,634 Federal funds sold and securities purchased under agreements to resell.... 2,017 2,017 1,857 1,857 Trading securities....................... 1,833 1,833 1,238 1,238 Securities(1) Available for sale...................... 9,847 10,001 7,804 7,956 Held to maturity........................ 636 639 680 675 Loans.................................... 41,590 38,877 Reserve for credit losses(2)............. (712) (883) ------- ------- 40,878 41,673 37,994 39,062 Due from customers on acceptances........ 462 462 438 438 Accrued interest receivable.............. 552 552 546 546 Financial instruments included in other assets.................................. 1,021 1,087 860 916 LIABILITIES Deposits................................. 45,761 45,793 42,831 42,916 Funds borrowed........................... 11,723 11,723 9,158 9,158 Acceptances outstanding.................. 460 460 448 448 Financial instruments included in accrued expenses and other liabilities.......... 1,225 1,225 630 630 Notes payable............................ 2,941 3,003 2,821 2,828 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures.............................. 747 765 500 497 INTEREST RATE CONTRACTS(3) Trading Asset................................... 205 137 Liability............................... (282) (131) Asset and liability management Asset................................... 166 25 Liability............................... (11) (40) FOREIGN EXCHANGE CONTRACTS(3) Trading Asset................................... 591 355 Liability............................... (549) (385) Asset and liability management Asset................................... 36 11 Liability............................... (41) (9) OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS Fee-based or otherwise legally binding commitments to extend credit............ (62) (65) Standby and commercial letters of credit, foreign office guarantees and similar instruments............................. (11) (12) - ----------------------------------------------------------------------------------
(1) Securities include investments made in connection with the Corporation's Private Equity Investing business that do not trade on established ex- changes, and for which no markets exist. At December 31, 1997 and 1996, these investments were classified as securities available for sale, and their estimated fair values exceeded the related carrying amounts by $154 million and $152 million, respectively. (2) The reserve for credit losses is established for future charge-offs aris- ing from all extensions of credit. The amount of the reserve associated with instruments other than loans, such as leases, commitments to extend credit, standby letters of credit and interest rate contracts, is not ma- terial. Accordingly, a separate determination of the reserve allocable to such instruments has not been made. (3) Additional information with respect to interest rate and foreign exchange contracts can be found in Note 23. The Corporation's accounting policy re- lated to such instruments is discussed in Note 1. 93 EX-21 22 LIST OF SUBSIDIARIES OF BANKBOSTON CORP. Exhibit 21 ---------- List of Subsidiaries of BankBoston Corporation Information reflected is as of March 1, 1998 except where noted. There is no parent company of BankBoston Corporation (the "Corporation"). BankBoston, N.A. ("BKB"), all of whose voting securities are owned indirectly by the Corporation, is the principal subsidiary of the Corporation. The Corporation's other major banking subsidiary is Rhode Island Hospital Trust National Bank. A number of entities which are owned wholly or in part, either directly or indirectly, by the Corporation are not listed below. However, their assets, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary of the Corporation as of December 31, 1997. JURISDICTION NAME OF SUBSIDIARY OF ORGANIZATION The Boston Bancorp MA BayBanks, Inc. MA BankBoston (NH), N.A. US BankBoston, N.A. (3) US BancBoston Aircraft Leasing Inc. MA BancBoston Financial Company MA BancBoston Insurance Agency, Inc. MA BancBoston Leasing Inc. MA BancBoston Leasing Services Inc. MA BancBoston Services, Inc. MA BancBoston Ventures Inc. MA BankBoston Development Company, L.L.C. (4) MA BankBoston International US Edge Act Corp. BankBoston Investor Services, Inc. MA BankBoston Retail Finance Inc. DE BayBanks Credit Corp. MA Boston EquiServe, L.P. (5) MA Boston World Holding Corporation MA Boston Overseas Financial Corporation US Edge Act Corp. RV Marine Funding Corporation DE West Broadway Security Corp. MA BancBoston Investments Inc. MA BancBoston Capital, Inc. MA BancBoston Leasing Investments Inc. MA BancBoston Real Estate Capital Corporation MA BancBoston Securities Inc. MA BancBoston Trust Company of New York NY Bank of Boston Florida, N.A. US BankBoston Capital Trust I DE BankBoston Capital Trust II DE BankBoston Capital Trust III DE BankBoston Maine, N.A. US Boston International Holdings Corporation MA Boston Overseas Holding Corp. US Edge Act Corp. Bulfinch Indemnity Company, Ltd. VT FSC Corp. MA Pacific National Corporation MA Rhode Island Hospital Trust National Bank US BancBoston Insurance Agency of Rhode Island, Inc. RI BankBoston Credit Corporation MA RIHT Life Insurance Co. AZ ______________________ (1) Except as noted, each such business organization is directly or indirectly owned by the Corporation. (2) BKB and certain other subsidiaries own a number of subsidiaries which hold real property acquired in connection with certain loan workout situations. If considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. (3) 92.72% owned by BayBanks, Inc. and .28% owned by Pacific National Corporation. (4) BKB owns 99.9% of BankBoston Development Company, L.L.C. and BancBoston Investments Inc. owns .1%. (5) BancBoston Services, Inc. owns a .5% interest in Boston EquiServe, L.P. and BankBoston, N.A. owns 49.5%. The other 50% is owned by Boston Financial Data Services which is a joint venture owned 50% by State Street Bank and DST, Inc. EX-23 23 CONSENT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS To The Board of Directors BankBoston Corporation We consent to the incorporation by reference, in the registration statements of BankBoston Corporation on Form S-3 (Registration Nos. 33-52571, 333-13697, 333- 38135, 333-47125, 333-47125-01 and 333-47125-02) and Form S-8 (Registration Nos. 33-1899, 33-11186, 33-64462, 333-00297, 333-07329, 333-09041, 333-12851, 333- 18999, 333-24199 and 333-41589) of our report dated January 15, 1998 on our audits of the consolidated financial statements of BankBoston Corporation and Subsidiaries as of December 31, 1997 and 1996, and for each of the years in the three-year period ended December 31, 1997 included in the Corporation's 1997 Annual Report to Stockholders and in Exhibit 13 to the Corporation's 1997 Annual Report on Form 10-K. The consolidated financial statements of BayBanks, Inc., for the year ended December 31, 1995, prior to the restatement for the 1996 pooling of interests, included in the 1995 restated consolidated financial statements were audited by other auditors whose reports expressed unqualified opinions on those financial statements. We audited the combination of the accompanying consolidated statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1995, after restatement for the 1996 pooling of interests; in our opinion, such consolidated financial statements have been properly combined on the basis described in Note 2 to the financial statements. /S/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 17, 1998 EX-27 24 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 DEC-31-1997 4,006 1,592 2,017 1,833 9,847 636 639 43,980 (712) 69,268 45,761 11,412 3,026 3,688 0 278 231 4,101 69,268 3,954 698 512 5,164 1,685 2,735 2,429 200 80 695 1,468 879 0 0 879 5.73 5.65 4.25 320 31 0 0 883 (366) 87 712 381 189 142 INCLUDES GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR SUBORDINATED DEBETURES.
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