-----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, TRCt0NBuX7eeeEXPm0nNOY/YbmFR78NM8irXYgxW+h57mV1Wwomml0exX6OzmVOc He8FHQ0E9XmTLQ0ROUopKg== 0000927016-98-004079.txt : 19981123 0000927016-98-004079.hdr.sgml : 19981123 ACCESSION NUMBER: 0000927016-98-004079 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKBOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06522 FILM NUMBER: 98752875 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF BOSTON CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-Q 1 FORM 10-Q - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 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, 02110 BOSTON, MASSACHUSETTS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 434-2200 FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT: NOT APPLICABLE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 31, 1998: Common Stock, $1.00 par value 294,615,638
- - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- BANKBOSTON CORPORATION TABLE OF CONTENTS
PAGE ---- CONSOLIDATED SELECTED FINANCIAL DATA...................................... 3 PART I FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 4 Financial Statements BankBoston Corporation and Subsidiaries Consolidated Balance Sheet.......................................... 28 Consolidated Statement of Income.................................... 30 Consolidated Statement of Changes in Stockholders' Equity........... 31 Consolidated Statement of Cash Flows................................ 32 Notes to Financial Statements........................................ 33 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................. 45 Item 6. Exhibits and Reports on Form 8-K.................................. 45 SIGNATURES................................................................ 46 LIST OF TABLES Consolidated Average Balance Sheet--Nine Quarters....................... 38 Consolidated Statement of Income--Nine Quarters......................... 39 Average Balances and Interest Rates--Quarter............................ 40 Average Balances and Interest Rates--Nine Months........................ 42 Change in Net Interest Revenue--Volume and Rate Analysis................ 44
2 BANKBOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1998 1997 ------- ------- QUARTERS ENDED SEPTEMBER 30 INCOME STATEMENT DATA Net interest revenue................................... $ 625 $ 571 Provision for credit losses............................ 60 40 Noninterest income..................................... 385 448 Noninterest expense.................................... 786 601 Net income............................................. 105 226 Per common share (1) Basic................................................ .35 .75 Diluted.............................................. .35 .73 Market value per common share (1) High................................................. 58 11/16 45 7/8 Low.................................................. 33 36 9/16 Return on average common equity........................ 8.75% 21.11% Return on average total assets......................... .57 1.36 NINE MONTHS ENDED SEPTEMBER 30 INCOME STATEMENT DATA Net interest revenue................................... $ 1,868 $ 1,807 Provision for credit losses............................ 260 160 Noninterest income..................................... 1,431 1,155 Noninterest expense.................................... 2,094 1,723 Net income............................................. 585 645 Per common share (1) Basic................................................ 1.96 2.07 Diluted.............................................. 1.94 2.04 Market value per common share (1) High................................................. 58 11/16 45 7/8 Low.................................................. 33 31 13/16 Return on average common equity........................ 16.82% 19.56% Return on average total assets......................... 1.10 1.34 AT SEPTEMBER 30 BALANCE SHEET DATA Loans and lease financing.............................. $45,747 $42,461 Total assets........................................... 73,834 68,230 Deposits............................................... 46,420 44,655 Total stockholders' equity............................. 4,715 4,382 Book value per common share (1)........................ 16.01 14.20 Regulatory capital ratios Risk-based capital ratios Tier 1............................................... 7.0% 7.8% Total................................................ 11.3 11.7 Leverage ratio........................................ 6.8 7.2
- - -------- (1) All per share information has been adjusted to reflect the Corporation's two-for-one stock split, effected in June 1998. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS GENERAL This discussion and analysis updates, and should be read in conjunction with, Management's Discussion and Analysis included in both the previously filed 1998 Quarterly Reports on Form 10-Q and the 1997 Annual Report to Stockholders of BankBoston Corporation (the Corporation), which is incorporated by reference into its 1997 Annual Report on Form 10-K. The Corporation's net income for the quarter ended September 30, 1998 was $105 million, compared with net income of $226 million for the third quarter of 1997. Both net income per common share and diluted net income per common share were $.35 for the third quarter of 1998, compared with net income per common share and diluted net income per common share of $.75 and $.73, respectively, for the third quarter of 1997. Net income for the first nine months of 1998 was $585 million, compared with $645 million for the same period in 1997. Net income per common share was $1.96 and diluted net income per common share was $1.94 for the first nine months of 1998, compared with net income per common share and diluted net income per common share of $2.07 and $2.04, respectively, for the same period in 1997. All quarterly and nine-month per common share amounts reflect the Corporation's two-for-one stock split which was effected in June 1998. During the third quarter of 1998, world financial markets experienced significant volatility resulting from the economic crises in Russia and Asia and speculation as to the economic future of other markets, such as those in Latin America. This volatility placed pressure on U.S. capital markets, as well as international markets, which, in turn, affected the Corporation's domestic-based capital markets-related businesses, particularly its Boston- based emerging markets and high yield trading units which generated combined trading losses of approximately $78 million (approximately $50 million after- tax or $.17 per common share on a diluted basis), compared with approximately $16 million in combined trading profits for the same period in 1997. These losses were offset, in part, by trading profits generated from the derivatives and foreign exchange trading and sales units which benefited from increased customer demand arising from the volatile market conditions, as well as by the combined contribution of the Corporation's Argentine and Brazilian operations. In the third quarter of 1998, operating income from Argentina and Brazil grew more than 50 percent from the same period in 1997, mainly due to wider spreads in Brazil, and to a lesser extent in Argentina, combined with growth in Argentine loan and lease financing, including the acquisition of Deutsche Bank Argentina, S.A. (Deutsche Argentina); as well as higher fee income, including higher deposit, credit card and mutual fund fees from Argentina, and higher trading profits from Brazil. In addition, the Corporation continued to explore strategic opportunities focused on expanding its core businesses, and to explore, on an ongoing basis, acquisition, divestiture and joint venture opportunities, as well as to analyze its business investments in the context of customer demands, competitive advantages, industry dynamics and earnings volatility. On August 31, 1998, the Corporation completed its acquisition from BankAmerica Corporation of the investment banking operations of Robertson Stephens, which management expects will strategically position the Corporation to offer additional equity underwriting, trading and research capabilities to its customers. Net income for the third quarter and the first nine months of 1998 included costs relating to this acquisition of approximately $80 million (approximately $51 million after-tax or $.17 per common share on a diluted basis), primarily reflecting the first installments of Robertson Stephens bonus payments recorded in connection with the acquisition. Additionally, the Corporation recorded charges of approximately $50 million (approximately $32 million after-tax or $.11 per common share on a diluted basis) in the third quarter of 1998 related to a planned 25 percent reduction in staff of the Emerging Markets Sales, Trading and Research unit; a realignment of its Asian operations, including the anticipated closing of a representative office in India and branch offices in Japan, the Philippines and Taiwan; and a writedown of its 17.5 percent equity investment in Korean Merchant Banking Corporation (KMBC). 4 The uncertainties which prevail in the world financial markets will continue to be affected by future events such as the timely and effective execution of economic reforms in various countries; the use of monetary and fiscal policy by various governments, including the United States; the extension of financial aid to emerging markets; the political stability in various countries; and the attitudes of the International Monetary Fund, the U.S. and other governments and investors. While the ultimate impact of these uncertainties to the Corporation can not be predicted, management will continue to monitor these events and manage its businesses to maximize future results within the parameters of established risk management processes. The Corporation may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance, and assumptions relating thereto. The Corporation may include forward-looking statements in its filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, in its reports to stockholders and other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others. The following factors, among others, could cause actual results to differ materially from the results in forward- looking statements made by the Corporation: significant changes and developments in world financial markets, particularly in Asia, Russia and Latin America, and the impact of these changes and developments on U.S. capital markets and the Corporation's capital markets- related businesses; the ability of various countries to institute timely and effective economic reforms; the uses of monetary and fiscal policy by various governments; changes in the competitive environment for financial services organizations and the Corporation's responses to these changes; the Corporation's ability and resources in both its domestic and international operations, such as in Argentina where multiple initiatives are in process, to execute its articulated business strategies and manage risks associated with integration of acquisitions and expansion plans; changes in technology and the successful allocation of technology resources across multiple projects, including efforts to address the Year 2000 issue, the business redesign initiative and the introduction of the euro; and the ability of the Corporation and its competitors, vendors and customers to respond effectively to the Year 2000 issue. A discussion of additional risks and uncertainties that could cause actual results to differ from forward-looking statements is included on page 29 of the Corporation's 1997 Annual Report to Stockholders, which is incorporated by reference into its 1997 Annual Report on Form 10-K. When relying on forward-looking statements to make decisions with respect to the Corporation, investors and others are cautioned to consider these and other risks and uncertainties. NET INTEREST REVENUE--(FULLY TAXABLE EQUIVALENT BASIS) This discussion of net interest revenue should be read in conjunction with Average Balances and Interest Rates and Change in Net Interest Revenue--Volume and Rate Analysis, presented elsewhere in this report. For this review of net interest revenue, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been adjusted to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35 percent, plus applicable state and local taxes, net of related federal tax benefits. The following table presents a summary of net interest revenue, on a fully taxable equivalent basis, and related average loans and lease financing and average earning asset balances and net interest margin for United States and International operations. 5
1998 1997 CHANGE QUARTERS ENDED SEPTEMBER 30 ------- ------- ------- (DOLLARS IN MILLIONS) United States operations Net interest revenue.............................. $ 413 $ 420 $ (7) Average loans and lease financing................. 30,450 31,317 (867) Average earning assets............................ 43,643 41,521 2,122 Net interest margin............................... 3.75% 4.01% (.26)% International operations Net interest revenue.............................. $ 217 $ 157 $ 60 Average loans and lease financing................. 14,619 11,112 3,507 Average earning assets............................ 19,226 16,248 2,978 Net interest margin............................... 4.47% 3.83% 0.64% Consolidated Net interest revenue.............................. $ 630 $ 577 $ 53 Average loans and lease financing................. 45,069 42,429 2,640 Average earning assets............................ 62,869 57,769 5,100 Net interest margin............................... 3.97% 3.96% .01% 1998 1997 CHANGE NINE MONTHS ENDED SEPTEMBER 30 ------- ------- ------- (DOLLARS IN MILLIONS) United States operations Net interest revenue.............................. $ 1,265 $ 1,367 $ (102) Average loans and lease financing................. 30,364 31,597 (1,233) Average earning assets............................ 42,307 41,789 518 Net interest margin............................... 4.00% 4.37% (.37)% International operations Net interest revenue.............................. $ 616 $ 455 $ 161 Average loans and lease financing................. 13,964 10,496 3,468 Average earning assets............................ 19,474 15,296 4,178 Net interest margin............................... 4.23% 3.98% 0.25% Consolidated Net interest revenue.............................. $ 1,881 $ 1,822 $ 59 Average loans and lease financing................. 44,328 42,093 2,235 Average earning assets............................ 61,781 57,085 4,696 Net interest margin............................... 4.07% 4.27% (.20)%
On a consolidated basis, net interest revenue increased approximately $53 million and $59 million in the quarterly and nine-month comparisons, respectively. These increases were primarily attributable to the Corporation's international operations, particularly in Brazil and Argentina, as well as growth in the domestic commercial loan portfolio. Domestic net interest revenue decreased $7 million in the quarterly comparison and $102 million in the nine-month comparison. This decrease mainly reflected the Corporation's divestiture of its National Consumer business; reduced lending in lower-margin, competitively priced portfolios, including indirect auto and residential mortgages; funding costs associated with the Corporation's redemption of its preferred shares in the third quarter of 1998; as well as funding costs of investments in bank-owned life insurance, the earnings from which are reflected in noninterest income. This decrease was partially offset by an increase in the Corporation's domestic commercial loan portfolio, particularly in the third quarter of 1998. With respect to the divestiture of 6 the National Consumer business, the quarterly comparison reflects a decline from the Corporation's contribution of its national credit card portfolio, with aggregate assets of approximately $1.2 billion, to a joint venture in the first quarter of 1998. The nine-month comparison further reflected the sales of Ganis Credit Corporation and Fidelity Acceptance Corporation (FAC), national consumer businesses with aggregate assets of approximately $1.9 billion and a net interest margin impact of approximately 25 basis points. Both the quarterly and nine-month comparisons reflected an increase in average earning assets, mainly due to an increase in federal funds sold and securities purchased under agreements to resell as well as an increase in investment securities. These increases, however, had little impact on net interest revenue and net interest margin. International net interest revenue increased $60 million in the quarterly comparison and $161 million in the nine-month comparison. These increases primarily reflected aggregate growth in average loans and leases from Argentine and Brazilian operations of approximately $3.0 billion in the quarterly comparison and $2.8 billion in the nine-month comparison. This growth included the acquisition of Deutsche Argentina. Net interest margin improved in both comparisons primarily due to wider spreads in Brazil, and to a lesser extent in Argentina, which resulted from balance sheet positioning and interest rate strategies that benefited from volatility in local markets caused primarily by recent world economic events. The Corporation expects continued pressure on its domestic margin caused, in part, by the decline in U.S. interest rates. However, the Corporation anticipates that this pressure will be somewhat mitigated by short-term opportunities in international operations, particularly in Brazil, to benefit from local market volatility arising from recent world economic events. Future levels of net interest revenue and margin will be affected by competitive pricing pressure on retail deposits, loans and other products; the mix and volume of assets and liabilities; the interest rate environment; the economic and political conditions in the countries where the Corporation does business; and other factors. As such, there can be no assurance as to the level of the Corporation's future net interest revenues or net interest margins. PROVISION FOR CREDIT LOSSES The provision for credit losses was $60 million in the third quarter of 1998, compared with $40 million in the third quarter of 1997. In the first nine months of 1998, the provision for credit losses was $260 million, compared with $160 million in the first nine months of 1997. The provision for credit losses reflects management's assessment of the adequacy of the reserve for credit losses, considering the current risk characteristics of the loan portfolio and economic conditions. The level of provision in the first nine months of 1998 included the impact of events in the International Private Bank in the first quarter of 1998, as discussed in the section entitled "Reserve for Credit Losses," as well as concern as to economic events in Asia, particularly in Indonesia in the first quarter of 1998. The amount of future provisions will continue to be a function of management's assessment of risks based upon its quarterly review of the reserve for credit losses. These risks include the longer-term impact of continued economic instability in world financial markets and the status of adoption of necessary economic reforms in various countries. Due to the economic volatility which has continued into the fourth quarter of 1998, management currently expects increased pressure on the ability of certain customers to repay their debts to the Corporation which could, in turn, result in increased provisions. As such, there can be no assurance as to the level of future provisions. See the "Reserve for Credit Losses" section for discussion of the reserve for credit losses and net credit losses. 7 NONINTEREST INCOME The following table presents the components of noninterest income.
THIRD QUARTER NINE MONTHS ----------------- --------------------- 1998 1997 CHANGE 1998 1997 CHANGE ---- ---- ------ ------ ------ ------ (IN MILLIONS) Financial service fees Deposit and ATM-related fees......... $ 78 $ 69 $ 9 $ 224 $ 189 $ 35 Letter of credit and acceptance fees................................ 21 19 2 59 53 6 Syndication and agent fees........... 17 22 (5) 51 60 (9) Other loan-related fees.............. 11 11 33 29 4 Advisory, brokerage and underwriting fees................................ 42 12 30 75 29 46 Other financial service fees......... 52 35 17 133 102 31 ---- ---- ---- ------ ------ ---- Total financial service fees....... 221 168 53 575 462 113 Mutual fund fees....................... 33 29 4 95 81 14 Personal trust fees.................... 40 37 3 122 107 15 Other trust and agency fees............ 9 7 2 27 20 7 Trading profits and commissions........ (52) 20 (72) (22) 67 (89) Securities portfolio gains, net........ 17 11 6 53 52 1 Net equity and mezzanine profits....... 54 61 (7) 190 153 37 Net foreign exchange trading profits... 35 18 17 96 57 39 Writedown on Korean equity investment.. (20) (20) (20) (20) Gain on sale of FAC.................... 68 (68) 68 (68) Gain on sale of HomeSide, Inc. ........ 165 165 Other income........................... 48 29 19 150 88 62 ---- ---- ---- ------ ------ ---- Total.............................. $385 $448 $(63) $1,431 $1,155 $276 ==== ==== ==== ====== ====== ====
Financial service fees increased $53 million in the quarterly comparison and $113 million in the nine-month comparison. In both comparisons, the increase in deposit and ATM-related fees was mainly due to higher deposit fees from Argentine operations as well as the repricing of certain domestic products. The increase in advisory, brokerage and underwriting fees in both comparisons was generated through expansion of the capital markets businesses, including approximately $20 million contributed by the acquired operations of Robertson Stephens during September 1998. In the quarterly and nine-month comparisons, other financial service fees increased, in part, due to higher credit card fees from Argentine operations and the third quarter 1998 acquisition of the OCA companies (OCA), a group of related companies forming the largest credit card and consumer finance business in Uruguay. Mutual fund fees increased in the quarterly and nine-month comparisons, primarily due to growth in mutual fund assets under management by Argentina and the Private Bank. Personal trust fees also increased, mainly from growth in domestic personal trust assets under management. In the quarterly and nine-month comparisons, trading profits and commissions declined, primarily due to trading losses of approximately $78 million incurred in the third quarter of 1998 by the Boston-based emerging markets and high yield trading units, and offset partially by trading profits achieved by other businesses, including the derivatives trading and sales unit as well as Brazilian operations, which generated combined trading profits of approximately $24 million. The trading losses reflected the high level of volatility in world financial markets arising from the economic crises in Russia and Asia and speculation as to the economic future of Latin American markets, as well as the recent illiquidity in the domestic high yield bond market. Net foreign exchange trading profits increased in the quarterly and nine-month comparisons because of increased product demand, mainly arising from the same volatile market conditions noted above. 8 Compared with the third quarter of 1997, net equity and mezzanine profits generated by the Corporation's Private Equity business declined slightly. In the nine-month comparison, these profits reflected the strong performance of the Private Equity business in the second quarter of 1998. As of September 30, 1998, the carrying value of the Private Equity portfolio was approximately $1.3 billion, compared with approximately $.9 billion as of September 30, 1997. The Corporation's capital markets-related businesses, including the Private Equity business, are particularly sensitive to market and economic conditions. As such, with the continued level of uncertainty in financial markets, management expects the profits of these businesses to remain under pressure. The third quarter of 1998 included a revaluation of the Corporation's 17.5 percent equity investment in KMBC, reflecting deterioration of that company's financial condition resulting from the decline in the Korean economy. The nine-month comparison included a pre-tax gain from the first quarter 1998 sale of the Corporation's 26 percent interest in HomeSide, Inc., an independent mortgage banking company. The growth in other income included earnings on the Corporation's investment in bank-owned life insurance of approximately $12 million in the quarterly comparison and $39 million in the nine-month comparison, the funding costs of which contributed to a corresponding decline in domestic net interest margin as previously discussed. Both comparisons also reflected gains from the sales of various loans, as well as the absence of an $11 million charge related to interest rate futures contracts that had been used to hedge the funding of FAC, which was sold in the third quarter of 1997. NONINTEREST EXPENSE The following table presents the components of noninterest expense.
THIRD QUARTER NINE MONTHS ---------------- -------------------- 1998 1997 CHANGE 1998 1997 CHANGE ---- ---- ------ ------ ------ ------ (IN MILLIONS) Employee costs........................... $449 $318 $131 $1,170 $ 939 $231 Occupancy and equipment.................. 99 86 13 289 260 29 Professional fees........................ 29 14 15 75 38 37 Advertising and public relations......... 30 25 5 84 73 11 Communications........................... 33 29 4 94 83 11 Amortization of goodwill................. 10 6 4 26 21 5 Other.................................... 136 123 13 356 309 47 ---- ---- ---- ------ ------ ---- Total.................................. $786 $601 $185 $2,094 $1,723 $371 ==== ==== ==== ====== ====== ====
In the quarterly and nine-month comparisons, the increase in noninterest expense was primarily driven by growth and investment spending in Latin America, including the acquisitions of Deutsche Argentina and OCA and the branch expansion programs in Brazil and Argentina; and ongoing initiatives to build the Corporation's various Wholesale Banking businesses, including the acquisition of Robertson Stephens and the expansion of other capital markets capabilities. In connection with the abovementioned acquisition of Robertson Stephens, the Corporation recorded costs of approximately $80 million, primarily reflecting the first installments of Robertson Stephens bonus payments recorded in connection with the acquisition. In addition, the Corporation recorded charges of approximately $30 million in the third quarter of 1998 related to a planned 25 percent reduction in staff of the Emerging Markets Sales, Trading and Research unit, as well as a realignment of its Asian operations, including the closing of offices in India, Japan, the Philippines and Taiwan. These charges consisted of anticipated employee severance costs, costs of terminating existing long-term lease obligations and other business contract losses. 9 In addition to the growth in noninterest expenses as described above, the quarterly and nine-month comparisons included costs incurred in connection with the New England Regional Consumer business, including the merger of Rhode Island Hospital Trust National Bank into BankBoston, N.A. and the redesign project, the final results of which are being integrated into the Corporation's business planning process. In both comparisons, these costs were offset partially by the Corporation's divestiture of its National Consumer business, as well as the absence of 1997 charges related to the integration of BayBanks and the merger of Bank of Boston Connecticut into BankBoston, N.A. The nine-month comparison also reflected higher incentive compensation consistent with the strong year-to-date performance of various businesses, as well as costs incurred in connection the realignments of the Corporation's European operations and the Private Bank. PROVISION FOR INCOME TAXES The provision for income taxes was $59 million in the third quarter of 1998, compared with $152 million in the third quarter of 1997. For the first nine months of 1998, the provision for income taxes was $360 million, compared with $434 million for the first nine months of 1997. The decrease in the provision resulted from lower taxable income in the third quarter of 1998. The Corporation's effective tax rates were 36 percent and 38 percent in the third quarter and the first nine months of 1998, respectively. In both the third quarter and first nine months of 1997, the effective tax rate was 40 percent. The decrease in the effective tax rates was primarily attributable to a change in the mix of the Corporation's tax base. FINANCIAL CONDITION CONSOLIDATED BALANCE SHEET At September 30, 1998, the Corporation's total assets were $73.8 billion, reflecting a $4.5 billion increase from total assets of $69.3 billion at December 31, 1997. This increase was mainly attributable to a $2.0 billion increase in available for sale securities, particularly U.S. government agency mortgage-backed securities and foreign debt securities; a $1.8 billion increase in total loans and lease financing, principally from growth in the domestic commercial loan portfolio and Argentine operations, including the acquisition of Deutsche Argentina; and a $2.3 billion increase in other assets. The increase in other assets included goodwill from the 1998 acquisitions of Deutsche Argentina, Robertson Stephens and OCA; an increase in the Corporation's investment in bank-owned life insurance; an increase in an equity investment in a joint venture to which the Corporation contributed certain lease financing assets in the second quarter of 1998; and an increase in investments in limited partnerships by the Private Equity business. The Corporation's carrying value of its available for sale portfolio reflected $28 million of pre-tax net unrealized appreciation at September 30, 1998. This net unrealized appreciation included $136 million of pre-tax net unrealized appreciation related to U.S. Treasury and government agency securities, substantially offset by $129 million of pre-tax net unrealized depreciation related to foreign debt securities, including emerging markets securities held in the Corporation's domestic-based portfolio. The potential for and timing of a recovery in the value of the Corporation's foreign debt securities, as well as the valuations of other securities in the portfolio, will be a function of market and economic conditions, which continue to be volatile. The increase in assets was primarily funded by increases in interest bearing deposits, other funds borrowed and notes payable. Notes payable increased approximately $1.5 billion from December 31, 1997, mainly due to the issuance of $.5 billion of subordinated debt by BankBoston, N.A. and $1.2 billion of senior medium-term notes by the Corporation, partially offset by the maturity of $.1 billion of floating rate notes and $.1 billion of senior medium-term notes originally issued by the Corporation. In June 1998, in anticipation of the Corporation's redemption of its preferred stock, a wholly-owned trust of the Corporation issued $250 million of capital securities and invested the proceeds in junior subordinated debt issued by the Corporation. See Note 6 of the Financial Statements for further discussion regarding these securities. In July 1998, the Corporation redeemed all of its remaining preferred stock, including its adjustable 10 rate cumulative preferred stock, Series A, Series B and Series C, and its fixed rate cumulative preferred stock, Series F, for a total redemption value of $278 million, which equaled the aggregate carrying value of the preferred stock. At the Corporation's annual meeting held on April 23, 1998, the Corporation's stockholders approved an increase in the number of authorized shares of common stock from 300 million shares to 500 million shares, and a change in the par value of such stock from $1.50 to $1.00 per share. On that same date, the Corporation's Board of Directors (the Board) also approved a two-for-one stock split executed in the form of a stock dividend of one share for every share held. Average common shares outstanding, per common share data and stock options used for earnings per share computations for all periods shown have been adjusted to reflect the impact of the stock split, which was effected on June 22, 1998. In October 1998, the Board declared a quarterly dividend of $.29 per share of common stock, payable on November 27, 1998 to shareholders of record on November 2, 1998. The future level of dividends paid on the Corporation's common stock will continue to be determined by the Board based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic conditions and other factors that the Board deems relevant. The Corporation's tangible common equity and common equity to total assets ratios were 5.4 percent and 6.4 percent, respectively, at September 30, 1998, compared with 5.8 percent and 6.3 percent, respectively, at December 31, 1997. The Corporation's Tier 1 and total capital ratios were 7.0 percent and 11.3 percent, respectively, at September 30, 1998, compared with 8.0 percent and 12.1 percent, respectively, at December 31, 1997. The Corporation's leverage ratio at September 30, 1998 was 6.8 percent, compared with 7.4 percent at December 31, 1997. The ratios at September 30, 1998 decreased from December 31, 1997 primarily as a result of the Corporation's acquisitions of Deutsche Argentina, Robertson Stephens and OCA. The Corporation has a capital planning process that is designed to maintain appropriate regulatory capital levels and ratios. As of September 30, 1998, the Corporation and its bank subsidiaries met all capital adequacy requirements to which they are subject. RISK MANAGEMENT The Corporation has a risk management process in place for the identification, measurement, monitoring and control of the risks inherent in its business, including credit, liquidity, market, transaction, strategic, compliance, reputation and transfer risks. Two significant transitory risks that impact these primary risk factors include the Year 2000 issue and the introduction of the euro, a unified currency scheduled for adoption by participating European countries on January 1, 1999. YEAR 2000 The following Year 2000 statements constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Readiness and Disclosure Act of 1998. The Corporation has an extensive worldwide program in place to address its exposure to the Year 2000 issue. This program is designed to assess, prioritize, correct, monitor and report on certain key elements of the project, including application systems; technical infrastructure, including the hardware through which applications operate, networking services, telecommunications and desktop technology; non-technology systems, including equipment with embedded chip technology and physical and environment infrastructure such as security systems; customers; wholesale fund providers, including various governments; counterparties in treasury and capital markets contracts; and vendors and service providers, including facilities management, utilities and telecommunications suppliers and software vendors. 11 The key elements of the Corporation's Year 2000 program have progressed through the following phases: . AWARENESS PHASE--the development of a comprehensive awareness strategy and structure for managing the project. . INVENTORY PHASE--the identification of a comprehensive inventory, including application systems, technical infrastructure and non- technology components, that could be impacted by the Year 2000 issue. . ASSESSMENT PHASE--the creation of detailed action plans to mitigate Year 2000 risks associated with the inventoried items. These plans include timetables and resource requirements that reflect the items' potential impact on the Corporation's business and operations. . REMEDIATION PHASE--the execution of action plans that include code enhancements and changes in application design, as well as software, hardware and non-technology component upgrades or replacements. . CERTIFICATION PHASE--the execution of a pre-defined process by cross- functional teams, including business unit partners, in an effort to ensure that application systems, technical infrastructure and non- technology components meet specific Year 2000 certification requirements. . READINESS TESTING PHASE--the testing of critical interdependencies between internal systems and business processes and third party technology interfaces using defined plans in an effort to ensure that certain requirements are met for the Year 2000. Integration testing focuses on internally dependent application systems, technology infrastructure and business processes. External testing focuses on critical technology interfaces with external service providers and customers from retail, wholesale and fiduciary activities. The Awareness, Inventory and Assessment phases were substantially completed by early 1998. Remediation is expected to be largely complete for all application systems, technical infrastructure and non-technology components by the end of 1998, followed by the Certification phase which is expected to be largely completed by the end of the first quarter of 1999. The Readiness Testing phase began in the third quarter of 1998 and will continue through mid-1999. The Corporation's Year 2000 initiative with respect to its customers, wholesale fund providers, counterparties, vendors and service providers has followed a strategy of identification, risk assessment, continuous monitoring and education, and contingency planning. Critical third parties have been identified. Risk assessments of credit customers, wholesale fund providers and treasury and capital markets counterparties have been performed using structured questionnaires combined with evaluations of potential monetary impact on the Corporation. As of September 30, 1998, the Corporation had largely assessed its exposure to credit customers, wholesale fund providers and capital markets and treasury counterparties. The results of these efforts have been incorporated into the Corporation's risk management processes, including credit customer risk ratings. Additionally, strategies have been developed to limit liquidity and settlement exposures. Although the Corporation has inventoried and rated the importance of a substantial number of its vendors and service providers, it is currently unable to predict the final readiness of its critical vendors and service providers. Management expects this element of the Corporation's Year 2000 program to remain challenging due to the complexities of vendor and service provider management. The Corporation will continue to educate its critical third parties on Year 2000 issues; to monitor their readiness and assess their potential impact on the Corporation; and to develop the necessary contingency plans. The Corporation expects to successfully complete its Year 2000 program in a timely and effective manner that mitigates risk. However, the Corporation is subject to risks and uncertainties due to the uniqueness of the Year 2000 issue; the significant interdependencies in business and financial markets and the range of activities and events outside of the Corporation's control; as well as the challenges created by recent acquisitions (i.e. Deutsche Argentina, Robertson Stephens and OCA), including their integration into the Corporation's Year 2000 12 program and the additional pressures placed on technology resources. Those risks and uncertainties could result in service delays, inaccurate and untimely information processing, funding delays, contract settlement and counterparty failures, increased credit losses, and reputation risk. Because the Corporation is still undergoing its certification and readiness testing and monitoring the status and potential impact of third parties, the Corporation is unable to predict with any certainty the extent of Year 2000 failures that could result, nor quantify the potential adverse effect that such failures could have on the Corporation's results of operations, liquidity, and financial condition. In addition to the previously discussed initiatives, the Corporation is developing business resumption, remediation and event contingency plans to prepare for potential systems failures at critical dates, failures of critical third parties to effectively remediate and certify their technologies, as well as any other unanticipated events that could arise with the date change. The development of these plans includes the identification of core business processes, critical to the Corporation's business and operations, and an assessment of failure scenarios. These plans will be subject to independent review by external consultants. The Corporation expects that its contingency planning for the Year 2000 issue will be substantially complete by the end of June 1999. The Corporation continues to expect that its total incremental costs of managing its Year 2000 risks, including costs already incurred, will be between $50-$75 million. The Corporation has not incurred, and is not likely to incur, project costs that are material to any reporting period. The majority of remaining costs are expected to be directed to the testing phase as well as final efforts to mitigate both currently known and subsequently discovered risks. Throughout the remainder of the project, the Corporation will also continue to allocate internal resources to address the Year 2000 issue. Additional information with respect to the Year 2000 issue and the Corporation's program to address this issue is included on page 37 of its 1997 Annual Report to Stockholders, which is incorporated by reference into its 1997 Annual report on Form 10-K. The Corporation's estimated costs and expected timetables made with respect to its Year 2000 initiative represent forward-looking statements that could differ materially from actual results due to changes in assumptions as the program evolves and new information becomes available; the impact of recent acquisitions; the Corporation's ability and resources to effectively execute its Year 2000 program; the impact of external market pressures on technology resources; the status of efforts by critical third parties to mitigate Year 2000 risks; and the extent to which unanticipated issues arise late in the project. INTRODUCTION OF THE EURO A cross-functional project team has been created to address the operational, business and system issues arising from the introduction of the euro on January 1, 1999. This introduction could impact a number of the Corporation's products and services to global customers, particularly with respect to asset management, cash management, treasury and payment activities. The euro project has been progressing according to schedule. The Corporation anticipates that its remaining efforts to address this issue will continue to progress in a timely manner, and that its programs will result in effective management of risks associated with the euro's introduction. However, there can be no assurance that the currency's introduction will not have any adverse impact on the Corporation, especially considering the interdependencies in global financial markets. The Corporation has not incurred, nor does it expect to incur, material costs in implementing this project. CREDIT RISK MANAGEMENT Credit risk is defined as the risk of loss from a counterparty's failure or inability to meet the payment or performance terms of a contract with the Corporation. The Corporation's risk management process includes the management of all forms of credit risk, including balance sheet and off-balance sheet exposures. A discussion of the Corporation's credit risk management policies is included on pages 37 and 38 of its 1997 Annual Report to Stockholders, which is incorporated by reference into its 1997 Annual Report to Stockholders on Form 10-K. 13 CREDIT PROFILE The components of the lending portfolio are as follows:
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 1998 1998 1998 1997 1997 -------- ------- -------- ------- -------- (IN MILLIONS) United States operations Commercial, industrial and financial...................... $18,218 $16,275 $15,887 $15,268 $15,062 Commercial real estate Construction.................. 209 219 260 271 317 Other......................... 4,089 3,876 3,736 4,211 3,845 Consumer-related loans Residential mortgages......... 2,111 2,229 2,551 2,570 2,720 Home equity loans............. 2,672 2,871 2,802 2,823 2,952 Credit card................... 393 412 503 1,756 1,596 Other......................... 2,693 2,753 2,801 2,956 3,118 Lease financing................. 1,607 1,609 2,017 1,938 1,880 Unearned income................. (231) (232) (303) (302) (293) ------- ------- ------- ------- ------- 31,761 30,012 30,254 31,491 31,197 ------- ------- ------- ------- ------- International operations Commercial and industrial....... 9,320 9,065 9,322 8,826 7,998 Banks and financial institutions................... 835 696 766 860 729 Governments and official institutions................... 73 82 102 95 94 Consumer related Residential mortgages......... 1,383 1,318 1,302 947 893 Credit card................... 339 248 226 182 155 Other......................... 1,164 1,087 987 828 678 Lease financing................... 652 519 517 452 345 All other......................... 408 375 492 378 440 Unearned income................... (188) (148) (146) (79) (68) ------- ------- ------- ------- ------- 13,986 13,242 13,568 12,489 11,264 ------- ------- ------- ------- ------- Total loans and lease financing.................. $45,747 $43,254 $43,822 $43,980 $42,461 ======= ======= ======= ======= =======
Total loans and lease financing increased approximately $1.8 billion from December 31, 1997, reflecting a $.3 billion increase in the domestic loan and lease financing portfolio and a $1.5 billion increase in the international loan and lease financing portfolio. The increase in the domestic portfolio included a $2.9 billion increase in commercial, industrial and financial loans, offset, in part, by a $2.2 billion decrease in consumer-related loans. The increase in domestic commercial, industrial and financial loans was mainly attributable to growth in a number of the special industry portfolios, including Media and Telecommunications, Energy and Utilities, and Environmental Services, as well as growth in the Asset Based Finance and Diversified Finance portfolios. The decrease in consumer-related loans was primarily due to the first quarter 1998 contribution of the Corporation's national credit card portfolio of approximately $1.2 billion to a newly formed national credit card venture, as well as a securitization of home equity loans of approximately $.4 billion early in the third quarter of 1998 and continuing reductions in residential mortgage and indirect auto loan balances. The increase in international loans and lease financing, particularly in the commercial and industrial and consumer-related loan portfolios, was primarily driven by growth in Argentine portfolios, including the acquisition of Deutsche Argentina. The international credit card portfolio also grew, in part, due to the acquisition of OCA. The Corporation's total loan portfolio at September 30, 1998 and December 31, 1997 included $1.2 billion and $1.6 billion of highly leveraged transaction (HLT) loans to 116 and 129 customers, respectively. The average 14 HLT loan size at September 30, 1998 and December 31, 1997 was approximately $10.2 million and $12.0 million, respectively. The amount of unused commitments for HLT's at September 30, 1998 was $.6 billion, compared with $1.2 billion at December 31, 1997. The amount of unused commitments does not necessarily represent the actual future funding requirements of the Corporation, since a portion can be syndicated or assigned to others or may expire without being drawn upon. At September 30, 1998, the Corporation had one nonaccrual HLT loan of approximately $5 million. There were no nonaccrual HLT loans at December 31, 1997. In addition, there was one credit loss of approximately $7 million from HLT loans in the third quarter of 1998. There were no credit losses from HLT loans in the same quarter of 1997. A discussion of the Corporation's HLT lending activities and policies, and the effect of these activities on results of operations, is included on page 39 of its 1997 Annual Report to Stockholders, which is incorporated by reference into its 1997 Annual Report to Stockholders on Form 10-K. NONACCRUAL LOANS AND OREO The details of consolidated nonaccrual loans and OREO are as follows:
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 1998 1998 1998 1997 1997 -------- ------- -------- ------- -------- (DOLLARS IN MILLIONS) United States Commercial, industrial and financial....................... $ 71 $ 63 $ 43 $ 59 $ 68 Commercial real estate Construction................... 2 2 3 3 4 Other.......................... 30 33 41 40 44 Consumer-related Residential mortgages.......... 36 42 46 50 51 Home equity.................... 18 15 15 14 26 Credit card.................... 6 6 6 26 22 Other.......................... 21 18 20 20 23 ---- ---- ---- ---- ---- 184 179 174 212 238 ---- ---- ---- ---- ---- International Commercial and industrial........ 103 107 97 64 58 Consumer-related Residential mortgages.......... 39 36 34 28 31 Credit card.................... 7 6 4 4 3 Other.......................... 33 26 18 12 7 ---- ---- ---- ---- ---- 182 175 153 108 99 ---- ---- ---- ---- ---- Total nonaccrual loans......... 366 354 327 320 337 OREO............................... 29 28 42 36 50 ---- ---- ---- ---- ---- Total.......................... $395 $382 $369 $356 $387 ==== ==== ==== ==== ==== Nonaccrual loans and OREO as a percent of related asset categories........................ 0.9% 0.9% 0.8% 0.8% 0.9%
Total nonaccrual loans and OREO at September 30, 1998 increased $39 million from December 31, 1997, reflecting an increase in international nonaccrual loans of $74 million, offset, in part, by a decrease in domestic nonaccrual loans of $28 million. The increase in international nonaccrual loans was primarily related to growth in Argentine and Indonesian nonaccrual loans of approximately $44 million and $22 million, respectively. The increase in Argentine nonaccrual loans reflected growth in Argentine loan portfolios, including the acquisition of Deutsche Argentina. The increase in Indonesian nonaccrual loans reflected Indonesia's continued economic difficulties. The decrease in domestic nonaccrual loans reflected a $20 million decrease in credit card nonaccrual loans and an $14 million decrease in residential mortgage nonaccrual loans, resulting from the Corporation's 15 contribution of its national credit card portfolio to a new national credit card venture in the first quarter of 1998 and reductions in residential mortgage lending, respectively. In addition, the Corporation holds in available for sale securities approximately $50 million of commercial paper of an international customer, on which earnings are not being recognized. The level of nonaccrual loans and leases and OREO is influenced by the economic environment, including interest rate trends and economic stability and other internal and external factors. As such, no assurance can be given as to future levels of nonaccrual loans and leases and OREO; however, sustained volatility in world financial markets could result in future increases in the level of nonaccrual loans. RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses considering evaluations of individual credits, net losses charged to the reserve, changes in quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in size and character of the credit risks and other pertinent factors. The credit risk of off-balance-sheet exposures is managed as part of the overall extension of credit to individual customers and is considered in assessing the overall adequacy of the reserve for credit losses. The amount of the reserve for credit losses associated with off-balance-sheet exposures is not significant. The amount of the reserve for credit losses is reviewed by management quarterly. The reserve for credit losses at September 30, 1998 was $740 million, compared with $712 million at December 31, 1997. At both periods, the reserve for credit losses represented 1.62 percent of outstanding loans and lease financing. The reserve for credit losses was 202 percent of nonaccrual loans and leases at September 30, 1998, compared to 222 percent at December 31, 1997. 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, which will be affected by future events and general economic conditions in the United States, Latin America, Asia and various other overseas markets; the impact of the Corporation's strategic decisions on various credit portfolios; and the potential impact that the Year 2000 issue could have on the ability of the Corporation's customers to repay their obligations. Therefore, no assurance can be given as to future levels of the reserve. Net credit losses were as follows:
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 1998 1998 1998 1997 1997 -------- ------- -------- ------- -------- (IN MILLIONS) QUARTERS ENDED United States Commercial, industrial and financial........................ $ 9 $ 5 $ 13 $ 8 $ 2 Commercial real estate............ (1) (1) (1) (2) Consumer-related Residential mortgages........... 1 1 2 2 1 Home equity..................... 1 1 2 2 2 Credit card..................... 6 6 20 25 24 Other........................... 13 11 19 15 12 --- --- ---- --- --- 29 23 55 52 39 --- --- ---- --- --- International Commercial........................ 7 13 76 1 15 Consumer-related Credit card..................... 6 2 2 2 3 Other........................... 17 13 8 5 4 --- --- ---- --- --- 30 28 86 8 22 --- --- ---- --- --- Total........................... $59 $51 $141 $60 $61 === === ==== === ===
16 Net credit losses decreased $2 million and increased $8 million compared with the third quarter of 1997 and second quarter of 1998, respectively. Compared with the third quarter of 1997, the decrease in net credit losses was principally driven by the divestiture of the national credit card portfolio in the first quarter of 1998, as well as a decrease in net credit losses arising from the international commercial portfolio. This decrease was almost entirely offset by an increase in credit losses in the domestic commercial and international consumer-related loan portfolios, the latter mainly driven by growth in the Argentine loan and lease financing portfolio, including the acquisition of Deutsche Argentina. Compared with the second quarter of 1998, net credit losses increased mainly due to increases in the international consumer-related portfolios, as well as increases in the domestic commercial, industrial and financial and other consumer-related portfolios. These increases were partially offset by a decrease in net credit losses in the international commercial portfolio. In the first quarter of 1998, net credit losses in the international commercial portfolio reflected a charge-off of approximately $66 million related to a series of loans to related borrowers that were initiated by a former officer in the Corporation's International Private Bank business. The Corporation has completed its investigation of the circumstances surrounding the above-mentioned loans and has taken disciplinary action with respect to a number of individuals. The Corporation is also vigorously pursuing collection of these loans, including claims under its insurance coverage. The future level of charge-offs will continue to be affected by the impact of global economic events on various domestic and international portfolios, as well as the mix and size of various portfolios. As such, there can be no assurance as to the level of future charge-offs. However, due to the economic volatility which has continued into the fourth quarter of 1998, management currently expects an increase in charge-offs in the future. 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. . 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 September 30, 1998, such outstandings related to emerging markets countries totaled $3.0 billion, compared with $2.8 billion at December 31, 1997. . 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. 17 The following table summarizes by country the Corporation's approximate cross-border outstandings that individually amounted to 1.0 percent or more of consolidated total assets at September 30, 1998 and December 31, 1997.
PERCENTAGE OF PUBLIC BANKS OTHER TOTAL TOTAL ASSETS COMMITMENTS(1) ------ ----- ------ ------ ------------- -------------- (DOLLARS IN MILLIONS) September 30, 1998(2) Argentina............ $775 $ 75 $1,125 $1,975 2.7% $ 15 Brazil............... 375 5 480 860 1.2 15 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
- - -------- (1) Included within commitments are letters of credit, guarantees and the undisbursed portions of loan commitments. (2) Cross-border outstandings in countries which fell between .75% and 1% of consolidated total assets were approximately as follows: September 30, 1998--United Kingdom $575 million; December 31, 1997--None. EMERGING MARKETS COUNTRIES At September 30, 1998 and December 31, 1997, approximately $5.5 billion and $6.5 billion, respectively, of the Corporation's cross-border outstandings were to emerging markets countries. These cross-border outstandings, of which approximately 81 percent were loans at September 30, 1998, were mainly composed of short-term trade credits, non-trade-related loans and leases, government securities, capital investments in branches and subsidiaries, and available for sale and trading positions managed by the Corporation's Emerging Markets Sales, Trading & Research business. LATIN AMERICA At September 30, 1998, approximately $4.8 billion, or 88 percent, of cross- border outstandings to emerging markets countries were to countries in Latin America, compared with $5.2 billion, or 80 percent, at December 31, 1997. Substantially all of these cross-border outstandings were to customers in countries in which the Corporation maintained branch networks and/or subsidiaries. During the third quarter of 1998, the Corporation's Argentine and Brazilian operations continued to take advantage of market volatility through their business mix and balance sheet strategies. In the third quarter of 1998, operating income from Argentina and Brazil grew more than 50 percent from the same period of 1997, mainly due to wider spreads in Brazil, and to a lesser extent in Argentina, combined with growth in Argentine loan and lease financing, including the acquisition of Deutsche Argentina; as well as higher fee income, including higher deposit, credit card and mutual fund fees from Argentina, and higher trading profits from Brazil. The Corporation has operated in Argentina since 1917, and is one of the largest foreign banks in the country. In Argentina, the Corporation offers products and services that include commercial and investment banking, credit cards, residential mortgages, automobile loans, mutual funds, brokerage, and custody. The Corporation's total assets in Argentina amounted to approximately $8.5 billion at September 30, 1998 and $6.6 billion at December 31, 1997. Included in these assets were cross-border outstandings of $2.0 billion and $1.8 billion at September 30, 1998 and December 31, 1997, respectively. Compared with December 31, 1997, Argentine loans and lease financing increased approximately $1.4 billion, mainly due to the acquisition of Deutsche Argentina. 18 The Corporation's nonaccrual Argentine loans were $135 million and $91 million at September 30, 1998 and December 31, 1997, respectively. The increase in nonaccrual loans was due primarily to growth in the Argentine loan and lease financing portfolio, including the Corporation's acquisition of Deutsche Argentina in January 1998 and the higher lever of consumer-related lending. The percentage of nonaccrual loans to total Argentine loans and lease financing was 2.2 percent at September 30, 1998, compared with 1.9 percent at December 31, 1997. Net credit losses were $18 million in the third quarter of 1998, compared with $14 million in the third quarter of 1997. In 1997, the Corporation began a branch expansion program, under which it planned to open approximately 70 new branches throughout Argentina to expand its distribution capacity. All of the branch openings were completed by the end of the second quarter of 1998. Additionally, in the first quarter of 1998, the Corporation completed the acquisition of Deutsche Argentina, including its branch network and approximately $1.0 billion of loans and $1.5 billion of deposits. Subsequently, Deutsche Argentina was merged into BankBoston, N.A. with systems integration completed in October 1998. The Corporation currently has approximately 140 branches in Argentina. The Corporation has operated in Brazil since 1947, and has a major presence in the country. In Brazil, the Corporation's offering of products and services includes commercial banking, consumer banking with a strong emphasis on high income consumers, trade financing, treasury and fee-based activities with a particular emphasis on global capital markets, mutual funds, custody and credit cards. The Corporation's total assets in Brazil amounted to approximately $6.4 billion at September 30, 1998, compared with approximately $6.2 billion at December 31, 1997. Included in total assets are cross-border outstandings of $.9 billion at September 30, 1998 and $1.3 billion at December 31, 1997. The Corporation's nonaccrual Brazilian loans were $14 million at September 30, 1998, compared with $12 million at December 31, 1997. The percentage of nonaccrual loans to total Brazilian loans and lease financing was .4 percent at the end of both periods. Net credit losses were $4 million in both the third quarter of 1998 and 1997. In 1997, the Corporation announced a branch expansion program, under which it planned to open approximately 30 new branches throughout Brazil in order to increase its distribution capacity in that country. The program is progressing on schedule with the opening of 21 new branches through September 30, 1998. The Corporation expects to have approximately 64 branches in Brazil upon completion of this program at the end of 1998. The Corporation's Argentine and Brazilian operations maintained currency positions at both September 30, 1998 and December 31, 1997. For further discussion of currency positions, see the "Market Risk Management" section. To date, the Corporation has not experienced significant credit difficulties in its Latin American loan portfolio as a result of the world economic situation; however, sustained economic volatility could negatively impact credit quality in the Latin American countries in which the Corporation operates. In addition, the individual economies in Latin America can be influenced by events in other Latin American countries. In this regard, the state of the Brazilian economy, including the effective execution of Brazilian economic reforms, is important not only to the long-term economic welfare of Brazil but also to the economies in other countries in Latin America in which the Corporation operates. It is expected that the situation in Latin America, particularly in Brazil, will continue to evolve and be influenced by economic developments in other areas of the world, including Asia, as well as trends in foreign investment. The Corporation has not experienced any collection problems as a result of currency restrictions or foreign exchange liquidity problems on its current portfolio of cross-border outstandings to Latin America. If the actions implemented by Latin American governments do not remain effective over time, the Corporation's Latin American operations, including its cross-border outstandings, could experience adverse effects, such as deterioration of credit quality and declines in levels of loans, deposits 19 and fee income. Each of these countries is at a different stage of development with a unique set of economic fundamentals; therefore, it is not possible to predict what developments will occur and what impact these developments will ultimately have on the economies of these countries or on the Corporation's financial condition and results of operations. ASIA At September 30, 1998, approximately $775 million, or approximately 10 percent, of total cross-border outstandings were to countries in Asia, compared with approximately $1.2 billion, or approximately 14 percent, at December 31, 1997. The decrease in Asian cross-border outstandings reflects the impact of the Corporation's efforts to actively manage and reduce its Asian exposures. Substantially all of these cross-border outstandings were to customers in countries in which the Corporation maintains branch networks and/or subsidiaries. The following table presents a summary of the Corporation's total cross- border outstandings in Asia at September 30, 1998 and December 31, 1997.
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------------------ ------------------------------ CROSS-BORDER CROSS-BORDER OUTSTANDINGS(1) COMMITMENTS(2) OUTSTANDINGS(1) COMMITMENTS(2) --------------- -------------- --------------- -------------- (IN MILLIONS) South Korea(3)... $315 $ 515 $ 35 Japan(4)......... 160 150 China............ 75 $10 145 35 Indonesia........ 60 10 200 15 Thailand......... 75 90 5 Taiwan(4)........ 55 50 5 Philippines...... 15 5 45 10 Other............ 10 10 25 10 ---- --- ------ ---- $765 $35 $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 percent ownership interest in Korean Merchant Banking Corporation. (4)Outstandings for Japan and Taiwan are not included in total emerging markets countries outstandings. The Corporation's Asian nonaccrual loans, primarily from Indonesian-related activities, were $24 million at September 30, 1998. For the first nine months of 1998, Asia had net credit losses of $12 million, including net recoveries of $2 million in the third quarter of 1998. Asian nonaccrual loans as of December 31, 1997 and net credit losses for 1997 were not significant. In addition, during the third quarter of 1998, the Corporation approved a realignment of its Asian operations, including the anticipated closing of a representative office in India and branch offices in Japan, the Philippines and Taiwan. Additionally, the Corporation recorded a writedown of its 17.5 percent equity investment in KMBC. Certain Asian countries continue to experience a significant economic and financial crisis, including devalued currencies, erosion of investor confidence and overcapacity across several industries. These events have led to corporate and financial sector bankruptcies as well as social and political instability, which could continue to result in a high level of volatility in world financial markets. The ultimate impact of the Asian crisis on the Corporation's financial condition and results of operations cannot be predicted at this time, and will be dependent on future events, including the success of the established IMF programs, the success of government programs, 20 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. As such, there can be no assurance on the level of future Asian nonaccrual loans and charge-offs. These conditions, as well as developments in other overseas markets, could also impact the Corporation's operations in other countries, particularly in Argentina and Brazil, 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. LIQUIDITY RISK MANAGEMENT Liquidity risk is defined as the risk of loss from the Corporation's inability to meet its obligations when they come due, without incurring unacceptable costs. For additional information related to the Corporation's liquidity risk management, see pages 47 and 48 of the Corporation's 1997 Annual Report to Stockholders, which is incorporated by reference into its 1997 Annual Report on Form 10-K. The Corporation's liquid assets, which consist primarily of interest bearing deposits in other banks, federal funds sold and resale agreements, money market loans and unencumbered U.S. Treasury and government agency securities, were $8.2 billion at September 30, 1998, compared with $9.5 billion at December 31, 1997. Also, the Corporation has access to additional funding through the public markets. Management considers overall liquidity at September 30, 1998 to be adequate to meet current obligations, to support expectations for future changes in asset and liability levels and to 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 currency exchange rates, of financial instruments. The Corporation's market risk management process includes the management of all forms of market risk, including balance sheet and off-balance-sheet exposures. Market risk is managed within policies and limits established by the Asset, Liability and Capital Committee (ALCCO) and the Market Risk Committee (MRC) and approved by the Board. The MRC 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. Further information with respect to the Corporation's management of market risk is included on pages 48 through 50 of the Corporation's 1997 Annual Report to Stockholders, which is incorporated by reference into its 1997 Annual Report on Form 10-K. TRADING ACTIVITIES The Corporation's trading activities involve providing risk management and capital markets products and services to its customers, including interest rate derivatives and foreign exchange contracts and debt and equity underwriting and distribution. In addition, the Corporation takes proprietary trading positions, including positions in high yield and emerging markets fixed income securities and local currency debt and equity securities. The risk positions taken by the Corporation in these financial instruments are subject to ALCCO and MRC approved limits. The Corporation manages the market risk related to its trading businesses 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 Corporation 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 the probability distribution of market variables and the liquidity of the underlying exposures. The VAR calculations include the effects of both interest rate and foreign exchange rate risks. The 21 portion of the aggregate VAR associated with the Corporation's foreign exchange trading activities is not significant. The calculations do not take into account the potential diversification benefits of the different positions taken across trading portfolios. At September 30, 1998, the aggregate VAR limit for the Corporation's trading businesses was approximately $55 million. The aggregate VAR exposure at September 30, 1998 and December 31, 1997 was approximately $31 million and $35 million, respectively. The aggregate average VAR exposure for the third quarter of 1998 and fourth quarter of 1997 was approximately $30 million and $31 million, respectively. In addition to the Corporation's VAR methodology, stress and scenario tests are performed regularly to assess exposure to event risk in each major trading product line and in the aggregate. While the VAR methodology is an effective tool for managing market risk in the Corporation's trading businesses, it does not preclude the occurrence of trading losses during periods of extreme volatility, such as that experienced in the third quarter of 1998. ASSET AND LIABILITY MANAGEMENT The Corporation's U.S. dollar denominated assets and liabilities are exposed to interest rate risk. At September 30, 1998, U.S. dollar denominated assets comprised the majority of the Corporation's balance sheet. The Corporation's U.S. dollar denominated positions are evaluated and managed centrally through the Global Treasury group, utilizing several modeling methodologies. The two principal methodologies used are market value sensitivity and net interest revenue at risk. The results of these methodologies 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's assets and liabilities resulting from changes in interest rates. Net interest revenue at risk is defined as the exposure of the Corporation's net interest revenue over the next twelve months to an adverse movement in interest rates. Both of these methodologies are designed to isolate the effects of market changes in interest rates on the Corporation's existing positions, and they exclude other factors such as competitive pricing considerations, future changes in the asset and liability mix and other possible management actions. Therefore, they are not by themselves measures of future levels of net interest revenue. These two methodologies provide different but complementary measures of the level of interest rate risk; the longer-term view is modeled through market value sensitivity, while the shorter-term view is evaluated through net interest revenue at risk over the next twelve months. Under current ALCCO directives, market value sensitivity cannot exceed 3 percent of total risk- based capital and net interest revenue at risk cannot exceed 2 percent of annual net interest revenue. The following table shows the Corporation's quarter-end and average U.S. dollar denominated positions for market value sensitivity and net interest revenue at risk at September 30, 1998 and December 31, 1997.
SEPTEMBER 30, 1998 DECEMBER 31, 1997(1) ------------------ ------------------------ QUARTER- QUARTERLY QUARTER- QUARTERLY END AVERAGE END AVERAGE -------- --------- ---------- ---------- (DOLLARS IN MILLIONS) Market value sensitivity(2).... $106 $136 $154 $146 % of risk-based capital........ 1.2% 1.7% 2.2% 2.1% Net interest revenue at risk(3)....................... $ 1 $ 3 $ 9 $ 12 % of net interest revenue...... .1% .1% .4% .5%
- - -------- (1) Amounts have been restated for comparability. (2) Based on a 100 basis point adverse upward interest rate shock. (3) Based on the greater of a 100 basis point adverse interest rate shock or a 200 basis point adverse change in interest rates over the next twelve- month period. At September 30, 1998 and December 31, 1997, the adverse position was based on a 100 basis point upward interest rate shock. 22 During the second quarter of 1998, the Corporation implemented a new interest rate risk model to measure the interest rate risk of its U.S. dollar denominated assets and liabilities. The model has various enhanced capabilities which include more complete automatic data feeds, increased availability of data on a transaction or account level, expanded scenario analysis, and automated reconciliations. The new model generates more refined market value sensitivity and net interest revenue at risk position calculations and provides for increased efficiency in the risk measurement process. Consequently, the restated interest rate risk positions at December 31, 1997, presented in the above table, were lower than those generated under the previous model due to the new model's enhanced capabilities as discussed above. At September 30, 1998 and December 31, 1997, the Corporation's market value sensitivity and net interest revenue at risk were negatively biased to rising interest rates. The decrease in the market value sensitivity and net interest revenue at risk was mainly attributable to the decrease in the sensitivity of the core deposit portfolio, as well as a decrease in fixed rate loans. Non-U.S. dollar denominated interest rate risk is managed by the Corporation's overseas units, with oversight by the Global Treasury group. ALCCO establishes overall limits for its non-U.S. dollar denominated interest rate risk using a combination of market value risk analysis and cumulative gap limits for each country in which the Corporation has local market interest rate risk. Limits are updated at least annually for current market conditions, considering business and economic conditions in the country at a particular point in time. The overseas units report as to compliance with these limits on a regular basis. During the third quarter of 1998, the Corporation continued to structure its balance sheet to take positions in the currencies of certain emerging markets and other countries where it operates. These positions are generally taken as dictated by prevailing market and economic conditions. The average currency positions during the quarters ended September 30, 1998 and December 31, 1997 were as follows:
QUARTERLY AVERAGE ------------------------------------ SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (IN MILLIONS) Argentina(1)............................... $252 $160 Brazil(2).................................. 152 35 Chile(1)................................... 10 29
- - -------- (1) Currency positions represent local currency assets funded by U.S. dollars in both periods presented. (2) Currency positions represent local U.S. dollar assets funded by local currency liabilities during the third quarter of 1998 and local currency assets funded by U.S. dollars during the fourth quarter of 1997. Whenever these positions are taken, they are subject to limits established by ALCCO. Compliance with these limits is reviewed regularly by market risk management. To date, these positions have been liquid in nature and management has been able to close and re-open these positions as necessary. The level of U.S. dollar and non-U.S. dollar exposure maintained by the Corporation is a function of the market environment and may change from period to period based on interest rate and other economic expectations. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives provide the Corporation with significant flexibility in managing its interest rate risk and foreign exchange exposures, enabling it to manage risk efficiently and respond quickly to changing market conditions while minimizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related derivative instruments, primarily interest rate swaps, as part of its asset and liability management 23 practices. Derivatives not used for asset and liability management are included in the derivatives trading portfolio and principally relate to providing risk management products to the Corporation's customers. All derivative activities are managed on a comprehensive basis, are included in the overall market risk measures and limits described above, and are subject to credit standards similar to those for balance sheet exposures. The following table summarizes the notional amounts and fair values of interest rate derivatives and foreign exchange contracts included in the Corporation's trading and asset and liability management (ALM) portfolios.
SEPTEMBER 30, 1998 ------------------------------------------------------------------------------ TRADING PORTFOLIO(1) ALM PORTFOLIO(1) ------------------------------- --------------------------------------------- FAIR VALUE(2)(3)(4) FAIR VALUE(2)(3) NOTIONAL ---------------------- NOTIONAL -------------------- UNRECOGNIZED AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS)(5) -------- --------- ----------- -------- -------- ---------- -------------- (IN MILLIONS) Interest rate contracts Futures and forwards... $11,509 $ 8 $ 8 $ 1,942 $ (7) Interest rate swaps.... 24,180 485 541 13,529 $ 330 $ 52 239 Interest rate options Purchased(6)........... 27,840 113 1,860 51 51 Written or sold(6)..... 17,665 94 1,360 65 (65) ------- --------- --------- ------- -------- -------- ---- Total interest rate contracts.............. $81,194 $ 606 $ 643 $18,691 $ 381 $ 117 $218 ======= ========= ========= ======= ======== ======== ==== Foreign exchange contracts Spot and forward contracts............. $47,429 $ 775 $ 803 $ 3,523 $ 16 $ 14 $ 2 Options purchased...... 3,338 77 3 Options written or sold.................. 3,429 69 ------- --------- --------- ------- -------- -------- ---- Total foreign exchange contracts.............. $54,196 $ 852 $ 872 $ 3,526 $ 16 $ 14 $ 2 ======= ========= ========= ======= ======== ======== ====
DECEMBER 31, 1997 ----------------------------------------------------------------------------- TRADING PORTFOLIO(1) ALM PORTFOLIO(1) ------------------------------- -------------------------------------------- FAIR VALUE(2)(3)(4) FAIR VALUE(2)(3) NOTIONAL ---------------------- NOTIONAL -------------------- UNRECOGNIZED AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS)(5) -------- --------- ----------- -------- -------- ---------- -------------- (IN MILLIONS) 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 contracts.............. $99,240 $ 205 $ 282 $17,874 $ 166 $ 11 $109 ======= ========= ========= ======= ======== ======= ==== Foreign exchange contracts Spot and forward contracts............. $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) ======= ========= ========= ======= ======== ======= ====
- - -------- (1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in other assets or other liabilities, as applicable. The majority of derivatives that are part of the ALM portfolio are accounted for on the accrual basis and not carried at fair value. In certain cases, contracts, such as futures, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) At September 30, 1998 and December 31, 1997, the credit exposure of interest rate derivatives and foreign exchange contracts is represented by the fair value of contracts reported in the "Asset" column. 24 (4) The average asset and liability fair value amounts for interest rate contracts included in the trading portfolio for the quarters ended September 30, 1998 and December 31, 1997 were approximately $428 million and $486 million, respectively, and $182 million and $247 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were approximately $677 million and $669 million, respectively, for the quarter ended September 30, 1998, and $538 million and $503 million, respectively, for the quarter ended December 31, 1997. (5) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, that has not been recognized in the income statement at the balance sheet date. This includes amounts related to contracts that have been terminated. Such amounts are recognized as an adjustment of yield over the period being managed. At September 30, 1998, there were $6 million of unrecognized gains related to terminated contracts that are being amortized to net interest revenue over a weighted average period of 39 months. At December 31, 1997, there were $7 million of unrecognized gains related to terminated contracts that were being amortized to net interest revenue over a weighted average period of 14 months. (6) At September 30, 1998 and 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 upon the changes in the prices of underlying emerging markets securities. The increase of $109 million in the net fair value of interest rate contracts included in the ALM portfolio was primarily due to a decrease in domestic interest rates, which resulted in an increase in the fair value of the domestic receive fixed interest rate swap portfolio. Net trading gains or losses from interest rate derivatives are recorded in trading account profits and commissions. The Corporation's interest rate derivative trading activities primarily include providing risk management products to its customers. Derivatives are also used to manage risk in other trading portfolios, such as emerging markets securities. The results of these derivative activities are combined with the results of the respective trading portfolio to determine the overall performance of the trading business and, as such, are not included in the results of derivative trading activities. Net trading gains from interest rate derivative trading for the quarter and nine months ended September 30, 1998 were $10 million and $18 million, respectively, and for the quarter and nine months ended September 30, 1997 were $3 million and $12 million, respectively. Net trading gains from foreign exchange contracts are recorded in other income. Net trading gains from foreign exchange activities, which include foreign exchange spot, forward and options contracts, for the quarter and nine months ended September 30, 1998 were $35 million and $96 million, respectively, and for the quarter and nine months ended September 30, 1997 were $18 million and $57 million, respectively. 25 The following table summarizes the remaining maturity of interest rate derivative financial instruments entered into for asset and liability management purposes as of September 30, 1998.
REMAINING MATURITY ------------------------------------------------------------------------ SEPTEMBER 30, DECEMBER 31, 1998 1997 1998 1999 2000 2001 2002 2003+ TOTAL TOTAL ------ ------- ----- ----- ----- ------ ------------- ------------ (DOLLARS IN MILLIONS) INTEREST RATE SWAPS Domestic Receive fixed rate swaps(1) Notional amount........ $ 450 $ 825 $ 545 $ 350 $ 125 $2,220 $ 4,515 $ 4,699 Weighted average receive rate.......... 6.02% 5.93% 5.77% 6.16% 6.59% 6.44% 6.21% 6.26% Weighted average pay rate.................. 5.69% 5.69% 5.67% 5.59% 5.69% 5.59% 5.63% 5.84% Pay fixed rate swaps(1) Notional amount........ $ 89 $ 170 $ 125 $ 73 $ 457 $ 344 Weighted average receive rate.......... 5.97% 5.29% 5.31% 5.32% 5.43% 5.85% Weighted average pay rate.................. 6.44% 5.37% 4.88% 5.13% 5.41% 6.03% Basis swaps(2) Notional amount........ $ 215 $ 200 $ 50 $ 292 $ 757 $ 725 Weighted average receive rate.......... 5.65% 5.67% 5.94% 5.98% 5.80% 7.53% Weighted average pay rate.................. 5.66% 5.69% 5.69% 6.62% 6.04% 5.98% Total Domestic Interest Rate Swaps Notional amount........ $ 754 $ 1,195 $ 720 $ 350 $ 125 $2,585 $ 5,729 $ 5,768 Weighted average receive rate(3)....... 5.91% 5.79% 5.70% 6.16% 6.59% 5.69% 5.79% 6.39% Weighted average pay rate(3)............... 5.77% 5.65% 5.54% 5.59% 5.69% 5.69% 5.67% 5.87% Total International Interest Rate Swaps Notional Amount(4)..... $ 50 $ 7,733 $ 15 $ 2 $ 7,800 $ 5,394 OTHER DERIVATIVE PRODUCTS Futures and forwards(5)............ $ 654 $ 1,288 $ 1,942 $ 3,947 Interest rate options purchased(6)........... $ 1,860 $ 1,860 $ 2,765 Interest rate options sold(6)................ $ 1,360 $ 1,360 ------ ------- ----- ----- ----- ------ ------- ------- Total Consolidated Notional Amount........ $1,458 $13,436 $ 720 $ 365 $ 125 $2,587 $18,691 $17,874 ====== ======= ===== ===== ===== ====== ======= =======
- - -------- (1) Approximately $2.9 billion of the receive fixed rate swaps are linked to fixed rate notes payable, and the remaining $1.6 billion to floating rate loans. Of the swaps linked to notes payable, approximately $1.6 billion are scheduled to mature in 2003 and thereafter. The majority of the pay fixed rate swaps are linked to notes payable. (2) Basis swaps represent swaps where both the pay rate and receive rate are floating rates. Most of the basis swaps are linked to notes payable. (3) The majority of the Corporation's interest rate swaps accrue at LIBOR. In arriving at the variable weighted average receive and pay rates, LIBOR rates in effect as of September 30, 1998 have been implicitly assumed to remain constant throughout the terms of the swaps. Future changes in LIBOR rates would affect the variable rate information disclosed. (4) At September 30, 1998 and December 31, 1997, the majority of the international portfolio is comprised of swaps entered into by the Corporation's Brazilian operations. These swaps typically include the exchange of floating rate indices that are limited to the Brazilian market. (5) Represents contracts entered into by the Corporation's Brazilian operations in the local market which are linked to short-term interest bearing assets and liabilities. (6) At September 30, 1998 and December 31, 1997, primarily includes 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. The Corporation routinely reviews its asset and liability derivative positions to determine whether such instruments continue to function as effective risk management tools. The utilization of derivative instruments is modified from time to time in response to changing market conditions, as well as changes in the characteristics and mix of the Corporation's related assets and liabilities. 26 Additional information on the Corporation's derivative products, including accounting policies, is included on pages 51 and 52, and in Notes 1 and 23 to the Financial Statements, in the Corporation's 1997 Annual Report to Stockholders, which is incorporated by reference in its 1997 Annual Report on Form 10-K. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that all derivative instruments, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. Changes in the derivative's fair value should be recognized currently in earnings unless the derivative is designated as a hedge. When designated as a hedge, the fair value should be recognized currently in earnings or in other nonowner changes in equity, depending on whether such designation is as a fair value or as a cash flow hedge. With respect to fair value hedges, the fair value of the derivative, as well as changes in the fair value of the hedged item, are reported in the income statement. With cash flow hedges, changes in the derivative's fair value are reported in other nonowner changes in equity and reclassified to the income statement in periods in which earnings are affected by the hedged variable cash flows or forecasted transaction. SFAS 133 also requires a company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and cannot be applied retroactively. The Corporation intends to adopt the Statement as of January 1, 2000; however, it has not yet quantified the financial statement impact of adoption, nor determined the method of adoption. The Corporation anticipates that adoption could increase volatility in earnings and other nonowner changes in equity, and could result in certain modifications to systems and hedging methodologies. 27 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS Cash and due from banks.............................. $ 3,380 $ 4,006 Interest bearing deposits in other banks............. 1,045 1,592 Federal funds sold and securities purchased under agreements to resell................................ 1,731 2,017 Trading securities................................... 1,625 1,833 Securities Available for sale................................. 11,910 9,865 Held to maturity (fair value of $602 in 1998 and $621 in 1997)..................................... 594 618 Loans and lease financing United States operations........................... 31,761 31,491 International operations........................... 13,986 12,489 ------- ------- Total loans and lease financing (net of unearned income of $419 in 1998 and $381 in 1997)........ 45,747 43,980 Reserve for credit losses............................ (740) (712) ------- ------- Net loans and lease financing...................... 45,007 43,268 Premises and equipment, net.......................... 1,289 1,042 Due from customers on acceptances.................... 344 462 Accrued interest receivable.......................... 554 552 Other assets......................................... 6,355 4,013 ------- ------- TOTAL ASSETS......................................... $73,834 $69,268 ======= =======
The accompanying notes are an integral part of these financial statements. 28 BANKBOSTON CORPORATION CONSOLIDATED BALANCE SHEET--(CONTINUED) (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing............................. $ 6,204 $ 8,507 Interest bearing................................ 26,646 25,104 Overseas offices Noninterest bearing............................. 1,206 1,085 Interest bearing................................ 12,364 11,065 ------- ------- Total deposits............................... 46,420 45,761 Funds borrowed Federal funds purchased.......................... 591 1,003 Term federal funds purchased..................... 2,144 2,530 Securities sold under agreements to repurchase... 2,198 1,789 Other funds borrowed............................. 8,281 6,401 Acceptances outstanding............................ 344 460 Accrued expenses and other liabilities............. 3,710 3,026 Notes payable...................................... 4,436 2,941 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures...... 995 747 ------- ------- TOTAL LIABILITIES.................................. 69,119 64,658 ------- ------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares--10,000,000 Issued and outstanding shares--3,673,941 in 1997........................................... 278 Common stock, par value $1.00 in 1998 and $1.50 in 1997 Authorized shares--500,000,000 in 1998 and 300,000,000 in 1997 Issued shares--307,376,853 in 1998 and 154,002,254 in 1997 Outstanding shares--294,596,378 in 1998 and 145,706,594 in 1997............................ 307 231 Surplus............................................ 1,123 1,219 Retained earnings.................................. 3,768 3,472 Net unrealized gain on securities available for sale, net of tax.................................. 17 53 Cumulative translation adjustments, net of tax..... (13) (11) Treasury stock, at cost (12,780,475 shares in 1998 and 8,295,660 shares in 1997)..................... (487) (632) ------- ------- TOTAL STOCKHOLDERS' EQUITY......................... 4,715 4,610 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $73,834 $69,268 ======= =======
The accompanying notes are an integral part of these financial statements. 29 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------- ------------------ 1998 1997 1998 1997 ------- ------- -------- -------- INTEREST INCOME Loans and lease financing, including fees.................................... $ 1,092 $ 973 $ 3,134 $ 2,948 Securities............................... 196 169 576 502 Trading securities....................... 24 30 90 86 Federal funds sold and securities purchased under agreements to resell.... 71 60 250 181 Deposits in other banks.................. 27 35 87 106 ------- ------- -------- -------- Total interest income.................. 1,410 1,267 4,137 3,823 ------- ------- -------- -------- INTEREST EXPENSE Deposits of domestic offices............. 240 238 716 701 Deposits of overseas offices............. 219 190 669 532 Funds borrowed........................... 238 207 655 599 Notes payable............................ 88 61 229 184 ------- ------- -------- -------- Total interest expense................. 785 696 2,269 2,016 ------- ------- -------- -------- NET INTEREST REVENUE....................... 625 571 1,868 1,807 Provision for credit losses.............. 60 40 260 160 ------- ------- -------- -------- Net interest revenue after provision for credit losses........................... 565 531 1,608 1,647 ------- ------- -------- -------- NONINTEREST INCOME Financial service fees................... 221 168 575 462 Trust and agency fees.................... 82 73 244 208 Trading profits and commissions.......... (52) 20 (22) 67 Net securities gains..................... 17 11 53 52 Other income............................. 117 176 581 366 ------- ------- -------- -------- Total noninterest income............... 385 448 1,431 1,155 ------- ------- -------- -------- NONINTEREST EXPENSE Salaries................................. 385 264 982 781 Employee benefits........................ 64 54 188 158 Occupancy expense........................ 58 50 168 152 Equipment expense........................ 41 36 121 108 Other expense............................ 238 197 635 524 ------- ------- -------- -------- Total noninterest expense.............. 786 601 2,094 1,723 ------- ------- -------- -------- Income before income taxes................. 164 378 945 1,079 Provision for income taxes................. 59 152 360 434 ------- ------- -------- -------- NET INCOME................................. $ 105 $ 226 $ 585 $ 645 ======= ======= ======== ======== NET INCOME APPLICABLE TO COMMON STOCK...... $ 104 $ 217 $ 576 $ 617 ======= ======= ======== ======== PER COMMON SHARE Net income Basic.................................... $ .35 $ .75 $ 1.96 $ 2.07 Diluted.................................. $ .35 $ .73 $ 1.94 $ 2.04 Dividends declared......................... $ .29 $ .26 $ .87 $ .73 AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS) Basic.................................... 294,379 290,766 293,570 297,750 Diluted.................................. 296,361 295,684 296,050 303,148
The accompanying notes are an integral part of these financial statements. 30 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS)
1998 1997 NINE MONTHS ENDED SEPTEMBER 30 ------ ------ BALANCE, BEGINNING OF PERIOD...................................... $4,610 $4,934 Net income........................................................ 585 645 Other nonowner changes in equity Change in unrealized gain on securities available for sale, net of tax and reclassification adjustment......................... (36) (8) Change in foreign currency translation adjustment, net of tax... (2) (3) ------ ------ Total nonowner changes in equity.............................. 547 634 ------ ------ Common stock issued in connection with Exercise of stock options....................................... 37 17 Dividend reinvestment and common stock purchase plan............ 17 16 Restricted stock grants, net of forfeitures..................... 16 7 Business combinations........................................... 7 Other, principally employee benefit plans....................... 31 27 Cash dividends declared Preferred stock................................................. (10) (28) Common stock.................................................... (255) (218) Purchases of treasury stock....................................... (784) Redemption of preferred stock..................................... (278) (230) ------ ------ BALANCE, END OF PERIOD............................................ $4,715 $4,382 ====== ======
The accompanying notes are an integral part of these financial statements. 31 BANKBOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
1998 1997 NINE MONTHS ENDED SEPTEMBER 30 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 585 $ 645 Reconciliation of net income to net cash provided from (used for) operating activities Provision for credit losses................................ 260 160 Depreciation and amortization.............................. 137 118 Provision for deferred taxes............................... (32) 64 Net gains on sales of securities and other assets.......... (399) (267) Change in trading securities............................... 208 (625) Net change in interest receivables and payables............ 25 Other, net................................................. (455) (477) -------- ------- Net cash provided from (used for) operating activities..... 329 (382) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) interest bearing deposits in other banks............................................. 547 (357) Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell............ 286 (1,190) Securities available for sale Sales...................................................... 8,485 4,758 Maturities................................................. 2,089 2,126 Purchases.................................................. (12,559) (8,494) Securities held to maturity Maturities................................................. 54 92 Purchases.................................................. (30) (48) Net cash used for lending and lease activities of nonbank entities................................................... (266) (270) Proceeds from sales of loan portfolios by bank subsidiaries............................................... 1,207 1,295 Net cash used for lending and lease activities of bank subsidiaries............................................... (2,057) (2,513) Proceeds from sales of other real estate owned.............. 37 20 Expenditures for premises and equipment..................... (395) (233) Proceeds from sales of business units, premises and equipment.................................................. 427 94 Payments for purchase business combinations, net of cash acquired................................................... (606) Purchase of investment in bank-owned life insurance......... (400) Other, net.................................................. 253 21 -------- ------- Net cash used for investing activities..................... (2,928) (4,699) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from (used for) deposits.................. (792) 1,824 Net cash provided from funds borrowed....................... 1,491 3,427 Repayments of notes payable................................. (380) (955) Net proceeds from issuance of notes payable................. 1,875 915 Net proceeds from issuance of guaranteed preferred beneficial interests in Corporation's junior subordinated debentures................................................. 248 247 Net proceeds from issuance of common stock.................. 84 58 Redemption of preferred stock............................... (278) (230) Purchases of treasury stock................................. (784) Dividends paid.............................................. (265) (246) -------- ------- Net cash provided from financing activities................ 1,983 4,256 Effect of foreign currency translation on cash.............. (10) (4) -------- ------- NET CHANGE IN CASH AND DUE FROM BANKS....................... (626) (829) CASH AND DUE FROM BANKS AT JANUARY 1........................ 4,006 4,273 -------- ------- CASH AND DUE FROM BANKS AT SEPTEMBER 30..................... $ 3,380 $ 3,444 ======== ======= Interest payments made...................................... $ 2,242 $ 2,021 Income tax payments made.................................... $ 257 $ 324
The accompanying notes are an integral part of these financial statements. 32 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS 1. The accompanying interim consolidated financial statements of BankBoston Corporation (the Corporation) are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information contained herein have been made. Certain amounts reported in prior periods have been reclassified for comparative purposes. This information should be read in conjunction with the Corporation's 1997 Annual Report on Form 10-K. 2. ACQUISITIONS In August 1998, the Corporation completed its acquisition of the investment banking operations of BancAmerica Robertson Stephens from BankAmerica Corporation for $400 million in cash. The acquired operations were merged into the Corporation's Section 20 subsidiary, BancBoston Securities Inc., which was renamed BancBoston Robertson Stephens Inc. In connection with the acquisition and in addition to the purchase price, the Corporation agreed to pay $400 million in cash compensation and stock options to employees over the next three and one-half years, of which $75 million was recorded in the third quarter of 1998. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of the acquired operations were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the acquisition is being amortized over a twenty-five year period. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. Pro forma results of operations including the acquisition for the nine months ended September 30, 1998 and the year ended December 31, 1997 are not presented, since the results would not have been significantly different in relation to the Corporation's results of operations. 3. SECURITIES A summary comparison of securities available for sale by type is as follows:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ---------------------------------------- CARRYING CARRYING COST VALUE COST VALUE --------- ------------------- ---------- (IN MILLIONS) U.S. Treasury........................... $ 828 $ 843 $ 936 $ 943 U.S. government agencies and corporations-- mortgage-backed securities............. 6,619 6,740 5,798 5,860 States and political subdivisions....... 38 39 54 54 Foreign debt securities................. 2,266 2,137 1,391 1,375 Other debt securities................... 1,192 1,210 890 895 Marketable equity securities............ 313 315 187 216 Other equity securities................. 626 626 522 522 --------- --------- -------- -------- $ 11,882 $ 11,910 $ 9,778 $ 9,865 ========= ========= ======== ========
Other equity securities included in securities available for sale are not traded on established exchanges and are carried at cost. 33 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A summary comparison of securities held to maturity by type is as follows:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 -------------------- -------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- (IN MILLIONS) U.S. Treasury........................ $ 7 $ 7 $ 6 $ 6 U.S. government agencies and corporations-- mortgage-backed securities.......... 495 503 520 523 Foreign debt securities.............. 13 13 11 11 Other debt securities................ 1 1 Other equity securities.............. 78 78 81 81 ---- ---- ---- ---- $594 $602 $618 $621 ==== ==== ==== ====
Other equity securities included in securities held to maturity represent securities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. 4. LOANS AND LEASE FINANCING The following are the details of loan and lease financing balances:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (IN MILLIONS) United States operations Commercial, industrial and financial............... $18,218 $15,268 Commercial real estate Construction..................................... 209 271 Other............................................ 4,089 4,211 Consumer-related Residential mortgages............................ 2,111 2,570 Home equity...................................... 2,672 2,823 Credit card...................................... 393 1,756 Other............................................ 2,693 2,956 Lease financing.................................... 1,607 1,938 Unearned income.................................... (231) (302) ------- ------- 31,761 31,491 ------- ------- International operations Commercial and industrial.......................... 9,320 8,826 Banks and other financial institutions............. 835 860 Governments and official institutions.............. 73 95 Consumer-related Residential mortgages............................ 1,383 947 Credit card...................................... 339 182 Other............................................ 1,164 828 Lease financing.................................... 652 452 All other.......................................... 408 378 Unearned income.................................... (188) (79) ------- ------- 13,986 12,489 ------- ------- $45,747 $43,980 ======= =======
34 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. RESERVE FOR CREDIT LOSSES An analysis of the reserve for credit losses is as follows:
QUARTERS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------- ------------------ 1998 1997 1998 1997 ------- ------- -------- -------- (IN MILLIONS) BALANCE, BEGINNING OF PERIOD.............. $ 734 $ 845 $ 712 $ 883 Provision................................. 60 40 260 160 Reserves of entities sold................. (95) (95) Reserves of entities acquired............. 5 19 Domestic credit losses Commercial, industrial and financial.... (11) (4) (37) (31) Commercial real estate.................. (1) (2) (5) (6) Consumer-related Residential mortgages................. (1) (1) (5) (5) Credit card........................... (6) (26) (32) (71) Home equity........................... (2) (3) (5) (8) Other................................. (17) (18) (57) (105) International credit losses............... (41) (26) (168) (57) ------- ------- -------- -------- Total credit losses................. (79) (80) (309) (283) ------- ------- -------- -------- Domestic recoveries Commercial, industrial and financial.... 2 2 9 6 Commercial real estate.................. 2 4 8 11 Consumer-related Residential mortgages................. 1 3 Credit card........................... 2 1 4 Home equity........................... 1 1 1 2 Other................................. 4 6 14 24 International recoveries.................. 11 4 24 14 ------- ------- -------- -------- Total recoveries.................... 20 19 58 64 ------- ------- -------- -------- Net credit losses......................... (59) (61) (251) (219) ------- ------- -------- -------- BALANCE, END OF PERIOD.................... $ 740 $ 729 $ 740 $ 729 ======= ======= ======== ========
At September 30, 1998, loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," totaled $207 million, of which $27 million related to loans with no valuation reserve and $180 million related to loans with a valuation reserve of $84 million. At December 31, 1997, impaired loans totaled $166 million, of which $34 million related to loans with no valuation reserve and $132 million related to loans with a valuation reserve of $40 million. For the quarters ended September 30, 1998 and 1997, average impaired loans were approximately $209 million and $201 million, respectively. For the nine months ended September 30, 1998 and 1997, average impaired loans were approximately $190 million and $220 million, respectively. Interest recognized on impaired loans during these periods was not material. 6. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEBENTURES Since November 1996, the Corporation has formed five wholly-owned grantor trusts, BankBoston Capital Trust I, II, III, IV and V (collectively, the Trusts), for the exclusive purpose of issuing capital securities 35 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (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, BankBoston Capital Trust I issued $250 million of its 8 1/4% Trust Securities, and BankBoston Capital Trust II issued $250 million of its 7 3/4% Trust Securities. 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 June 1997, BankBoston Capital Trust III issued $250 million of its floating rate Trust Securities. These Trust Securities have a liquidation preference of $1,000 per Trust Security, pay distributions quarterly at LIBOR plus .75%, can be prepaid at the option of Trust III, in whole or in part, on or after June 15, 2007, and are scheduled to mature on June 15, 2027. At September 30, 1998, the interest rate on these floating rate Trust Securities was 6.25%. In addition, in June 1998, BankBoston Capital Trust IV issued $250 million of its floating rate Trust Securities. These Trust Securities have a liquidation preference of $1,000 per Trust Security, pay distributions quarterly at LIBOR plus .60%, can be prepaid at the option of Trust IV, in whole or in part, on or after June 8, 2003, and are scheduled to mature on June 8, 2028. At September 30, 1998, the interest rate on these floating rate Trust Securities was 6.19%. The Corporation 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 assets of which are their respective subordinated debentures. The principal amount of subordinated debentures held by each Trust equals the aggregate liquidation amount of its Trust Securities and its common securities. The subordinated debentures bear interest at the same rate, and will mature on the same date, as the corresponding Trust Securities. 7. COMMON STOCK AND EARNINGS PER SHARE In April 1998, stockholders of the Corporation approved an increase in the number of authorized shares of common stock from 300 million shares to 500 million shares, and a change in the par value of such stock from $1.50 per share to $1.00 per share. In addition, the Corporation announced the approval by its Board of Directors of a two-for-one split of the Corporation's common stock, to be executed in the form of a stock dividend of one share for every share held. The stock dividend was paid on June 22, 1998. Average common shares outstanding, per common share data and stock options for all periods shown have been adjusted to reflect the effect of the stock split. A summary of the Corporation's calculation of earnings per share is as follows:
QUARTERS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------- ----------------- 1998 1997 1998 1997 -------- -------- -------- -------- (IN MILLIONS) Net income................................. $ 105 $ 226 $ 585 $ 645 Less preferred dividends................... 1 9 9 28 -------- -------- -------- -------- Net income applicable to common stock...... $ 104 $ 217 $ 576 $ 617 ======== ======== ======== ======== (SHARES IN THOUSANDS) Weighted average number of common shares outstanding used in calculation of basic earnings per share........................ 294,379 290,766 293,570 297,750 Incremental shares from the assumed exercise of dilutive stock options as of the beginning of the period............... 1,982 4,918 2,480 5,398 -------- -------- -------- -------- Weighted average number of common shares outstanding used in calculation of diluted earnings per share........................ 296,361 295,684 296,050 303,148 ======== ======== ======== ======== Basic earnings per common share.......... $ .35 $ .75 $ 1.96 $ 2.07 ======== ======== ======== ======== Diluted earnings per common share........ $ .35 $ .73 $ 1.94 $ 2.04 ======== ======== ======== ========
36 BANKBOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. CONTINGENCIES The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the normal course of business. Management, after reviewing all actions and proceedings pending against or involving the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's financial condition or results of operations. 9. NONOWNER CHANGES IN EQUITY Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting Comprehensive Income." Under this standard, the Corporation is required to report as comprehensive income, or nonowner changes in equity, all changes to stockholders' equity that result from transactions and other economic events during the reporting period, other than transactions with stockholders in their capacity as owners. For the Corporation, such nonowner changes in equity consist of net income and other nonowner changes, composed of unrealized gains and losses on securities available for sale and foreign currency translation adjustments. The Corporation has reported nonowner changes in equity for the nine months ended September 30, 1998 and 1997 in the accompanying consolidated statement of changes in stockholders' equity on a net-of-tax basis. The changes in unrealized gain on securities available for sale have also been presented net of reclassification adjustments related to net securities gains that were realized from sales of such securities during the respective periods. These gains, on an after-tax basis, amounted to $33 million and $31 million for the nine months ended September 30, 1998 and 1997, respectively. Tax provisions (benefits) related to other nonowner changes in equity for the nine months ended September 30, 1998 and 1997 were as follows: change in unrealized gain on securities available for sale, $(2) million and $16 million, respectively; reclassification adjustment, $20 million and $21 million, respectively; and change in foreign currency translation, $(1) and $(2) million, respectively. 10. PREFERRED STOCK REDEMPTION In July 1998, the Corporation redeemed all of the outstanding shares of its adjustable rate cumulative preferred stock, Series A, B and C, and its 7 7/8% cumulative preferred stock, Series F, at their total aggregate carrying value of $278 million, plus dividends payable through their respective redemption dates. 37 CONSOLIDATED BALANCE SHEET AVERAGES BY QUARTER LAST NINE QUARTERS
1996 1997 1998 --------------- ------------------------------- ----------------------- 3 4 1 2 3 4 1 2 3 ------- ------- ------- ------- ------- ------- ------- ------- ------- ASSETS (IN MILLIONS) Interest bearing deposits in other banks.................. $ 1,256 $ 1,405 $ 1,961 $ 1,748 $ 1,737 $ 1,683 $ 1,579 $ 1,077 $ 962 Federal funds sold and securities purchased under agreements to resell................. 1,708 2,047 2,189 1,896 2,018 2,322 2,524 3,252 3,483 Trading securities...... 1,467 1,459 1,498 1,590 1,924 1,769 2,072 2,248 1,663 Mortgages held for sale................... 21 44 Securities.............. 8,249 8,029 9,261 9,488 9,661 10,538 10,606 11,188 11,692 Loans and lease financing.............. 41,223 41,835 41,732 42,112 42,429 43,242 43,706 44,196 45,069 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets... 53,924 54,819 56,641 56,834 57,769 59,554 60,487 61,961 62,869 Other assets............ 6,125 6,237 6,583 7,112 7,935 8,538 9,223 9,275 9,632 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL ASSETS........... $60,049 $61,056 $63,224 $63,946 $65,704 $68,092 $69,710 $71,236 $72,501 ======= ======= ======= ======= ======= ======= ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing.... $ 6,694 $ 6,837 $ 6,951 $ 7,229 $ 7,182 $ 7,535 $ 7,482 $ 7,031 $ 6,186 Interest bearing....... 26,003 25,121 24,622 24,657 24,713 24,825 25,594 25,786 26,147 Overseas offices Noninterest bearing.... 491 455 599 626 709 883 1,134 1,178 1,019 Interest bearing....... 9,429 9,618 9,727 9,734 10,385 11,009 11,564 11,409 11,187 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total deposits......... 42,617 42,031 41,899 42,246 42,989 44,252 45,774 45,404 44,539 Federal funds purchased and repurchase agreements............. 4,739 5,167 5,923 5,776 6,047 6,318 5,337 5,358 6,825 Other funds borrowed.... 3,562 4,190 4,943 5,690 6,320 6,412 6,972 7,696 7,598 Notes payable(1)........ 2,674 2,983 3,316 3,351 3,336 3,524 3,749 4,392 5,149 Other liabilities....... 1,698 1,860 2,191 2,216 2,464 3,106 3,148 3,508 3,618 Stockholders' equity.... 4,759 4,825 4,952 4,667 4,548 4,480 4,730 4,878 4,772 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.. $60,049 $61,056 $63,224 $63,946 $65,704 $68,092 $69,710 $71,236 $72,501 ======= ======= ======= ======= ======= ======= ======= ======= =======
- - -------- (1) Amounts for 1997 and 1998 include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 38 CONSOLIDATED STATEMENT OF INCOME BY QUARTER--TAXABLE EQUIVALENT BASIS LAST NINE QUARTERS
1996 1997 1998 ------------- --------------------------- --------------------- 3 4 1 2 3 4 1 2 3 ------ ------ ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NET INTEREST REVENUE.... $591.4 $611.2 $620.0 $615.9 $571.1 $621.5 $603.3 $639.5 $624.9 Taxable equivalent adjustment............. 5.0 5.2 5.0 4.5 5.4 9.6 3.7 5.4 4.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total net interest revenue............... 596.4 616.4 625.0 620.4 576.5 631.1 607.0 644.9 629.6 Provision for credit losses................. 57.0 60.0 60.0 60.0 40.0 40.0 140.0 60.0 60.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net interest revenue after provision for credit losses......... 539.4 556.4 565.0 560.4 536.5 591.1 467.0 584.9 569.6 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST INCOME Financial service fees.. 140.4 146.6 137.5 155.7 168.4 193.6 162.8 191.7 220.6 Trust and agency fees... 61.6 65.0 66.0 69.4 72.8 74.8 79.3 82.1 82.3 Trading profits and commissions............ 20.7 17.2 19.3 27.9 19.9 (8.6) 34.0 (3.7) (52.1) Net securities gains.... 7.1 (.8) 8.8 31.9 11.3 27.4 24.8 11.4 16.6 Other income............ 106.7 111.5 98.1 91.9 175.8 121.2 288.1 175.9 117.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest income................ 336.5 339.5 329.7 376.8 448.2 408.4 589.0 457.4 385.1 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST EXPENSE Salaries................ 244.2 254.5 257.7 260.2 263.8 283.0 292.7 305.1 384.4 Employee benefits....... 49.1 44.4 52.7 51.3 54.0 56.3 60.9 63.3 64.1 Occupancy expense....... 51.1 50.6 50.8 52.1 49.6 51.3 54.4 55.8 58.3 Equipment expense....... 34.2 36.2 35.6 35.8 36.1 38.4 40.1 39.6 40.8 Acquisition, divestiture and restructuring expense................ 180.0 Other expense........... 153.8 162.2 147.4 178.5 197.8 171.5 212.9 183.6 238.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest expense............... 712.4 547.9 544.2 577.9 601.3 600.5 661.0 647.4 785.6 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes.................. 163.5 348.0 350.5 359.3 383.4 399.0 395.0 394.9 169.1 Provision for income taxes.................. 78.5 141.3 138.7 142.8 152.3 154.7 153.0 147.6 59.4 Taxable equivalent adjustment............. 5.0 5.2 5.0 4.5 5.4 9.6 3.7 5.4 4.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ 83.5 146.5 143.7 147.3 157.7 164.3 156.7 153.0 64.1 ------ ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME.............. $ 80.0 $201.5 $206.8 $212.0 $225.7 $234.7 $238.3 $241.9 $105.0 ====== ====== ====== ====== ====== ====== ====== ====== ====== PER COMMON SHARE(1) Net Income Basic.................. $ .23 $ .63 $ .64 $ .68 $ .75 $ .79 $ .80 $ .81 $ .35 Diluted................ .23 .62 .63 .68 .73 .78 .79 .80 .35 Cash dividends declared............... .22 .22 .22 .26 .26 .26 .29 .29 .29
- - -------- (1) All per share information has been adjusted to reflect the Corporation's two-for-one stock split, effected in June 1998. 39 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED SEPTEMBER 30, 1998 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S............................................... $ 139 $ 2 5.51% International..................................... 823 25 12.03 ------- ------ Total............................................ 962 27 11.09 ------- ------ ----- Federal Funds Sold and Resale Agreements U.S............................................... 2,351 30 5.13 International..................................... 1,132 41 14.32 ------- ------ Total............................................ 3,483 71 8.12 ------- ------ ----- Trading Securities U.S............................................... 926 16 6.88 International..................................... 737 8 4.20 ------- ------ Total............................................ 1,663 24 5.70 ------- ------ ----- Securities U.S. Available for sale (2)............................ 9,179 140 6.11 Held to maturity.................................. 598 11 6.82 International Available for sale (2)............................ 1,915 48 9.70 ------- ------ Total............................................ 11,692 199 6.74 ------- ------ ----- Loans and Lease Financing (Net of Unearned Income) U.S............................................... 30,450 640 8.33 International..................................... 14,619 454 12.33 ------- ------ Total loans and lease financing (3).............. 45,069 1,094 9.63 ------- ------ ----- Earning assets.................................... 62,869 1,415 8.92 ------ ----- Nonearning assets................................. 9,632 ------- Total Assets..................................... $72,501 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits.................................. $16,174 $ 105 2.57% Time deposits..................................... 9,973 138 5.50 International..................................... 11,187 216 7.67 ------- ------ Total............................................ 37,334 459 4.88 ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S............................................... 6,658 90 5.35 International..................................... 167 2 3.91 ------- ------ Total............................................ 6,825 92 5.31 ------- ------ ----- Other Funds Borrowed U.S............................................... 5,635 85 5.98 International..................................... 1,963 61 12.42 ------- ------ Total............................................ 7,598 146 7.65 ------- ------ ----- Notes Payable U.S. (4).......................................... 4,732 79 6.58 International..................................... 417 9 8.74 ------- ------ Total............................................ 5,149 88 6.75 ------- ------ ----- Total interest bearing liabilities................ 56,906 785 5.47 ------ ----- Demand deposits U.S............................... 6,186 Demand deposits International..................... 1,019 Other noninterest bearing liabilities............. 3,618 Stockholders' Equity.............................. 4,772 ------- Total Liabilities and Stockholders' Equity....... $72,501 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S............................................... $43,643 $ 413 3.75% International..................................... 19,226 217 4.47% ------- ------ Total............................................ $62,869 $ 630 3.97% ======= ======
- - -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual balances. (4) Amounts include guaranteed beneficial interests in Corporation's junior subordinated debentures. 40 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED SEPTEMBER 30, 1997 -------------------------------------- AVERAGE AVERAGE VOLUME INTEREST (1) RATE ------------ -------------- ---------- ASSETS (DOLLARS IN MILLIONS) Interest Bearing Deposits with Other Banks U.S.................................. $ 220 $ 4 6.84% International........................ 1,517 31 8.17 ------------ ---------- Total............................... 1,737 35 8.00 ------------ ---------- ---------- Federal Funds Sold and Resale Agreements U.S.................................. 476 7 5.77 International........................ 1,542 53 13.68 ------------ ---------- Total............................... 2,018 60 11.81 ------------ ---------- ---------- Trading Securities U.S.................................. 1,124 18 6.22 International........................ 800 12 6.10 ------------ ---------- Total............................... 1,924 30 6.17 ------------ ---------- ---------- Securities U.S. Available for sale(2)................ 7,742 128 6.61 Held to maturity..................... 642 10 6.28 International Available for sale(2)................ 1,277 36 11.33 ------------ ---------- Total............................... 9,661 174 7.11 ------------ ---------- ---------- Loans and Lease Financing (Net of Unearned Income) U.S. ................................ 31,317 659 8.35 International........................ 11,112 315 11.25 ------------ ---------- Total loans and lease financing(3).. 42,429 974 9.11 ------------ ---------- ---------- Earning assets....................... 57,769 1,273 8.74 ---------- ---------- Nonearning assets.................... 7,935 ------------ Total Assets........................ $ 65,704 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits..................... $ 14,673 $ 101 2.71% Time deposits........................ 10,040 143 5.65 International........................ 10,385 184 7.03 ------------ ---------- Total............................... 35,098 428 4.83 ------------ ---------- ---------- Federal Funds Purchased and Repurchase Agreements U.S. ................................ 5,819 84 5.76 International........................ 228 5 8.17 ------------ ---------- Total............................... 6,047 89 5.85 ------------ ---------- ---------- Other Funds Borrowed U.S. ................................ 4,669 70 5.96 International........................ 1,651 48 11.51 ------------ ---------- Total................................ 6,320 118 7.41 ------------ ---------- ---------- Notes Payable U.S.(4).............................. 2,945 51 6.95 International........................ 391 10 9.85 ------------ ---------- Total............................... 3,336 61 7.29 ------------ ---------- ---------- Total interest bearing liabilities... 50,801 696 5.43 ---------- ---------- Demand deposits U.S. ................ 7,182 Demand deposits International........ 709 Other noninterest bearing liabilities......................... 2,464 Stockholders' Equity................. 4,548 ------------ Total Liabilities and Stockholders' Equity............................. $ 65,704 ============ NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. ................................ $ 41,521 $ 420 4.01% International........................ 16,248 157 3.83% ------------ ---------- Total............................... $ 57,769 $ 577 3.96% ============ ==========
- - -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual balances. (4) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 41 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
NINE MONTHS ENDED SEPTEMBER 30, 1998 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- ASSETS (DOLLARS IN MILLIONS) Interest Bearing Deposits with Other Banks U.S............................................... $ 114 $ 4 5.63% International..................................... 1,090 82 10.05 ------- ------ Total............................................ 1,204 86 9.64 ------- ------ ----- Federal Funds Sold and Resale Agreements U.S............................................... 1,367 55 5.39 International..................................... 1,723 195 15.13 ------- ------ Total............................................ 3,090 250 10.82 ------- ------ ----- Trading Securities U.S............................................... 1,094 49 6.05 International..................................... 899 41 6.04 ------- ------ Total............................................ 1,993 90 6.04 ------- ------ ----- Securities U.S. Available for sale(2)............................. 8,753 423 6.53 Held to maturity.................................. 615 30 6.56 International Available for sale(2)............................. 1,798 133 9.74 ------- ------ Total............................................ 11,166 586 7.02 ------- ------ ----- Loans and Lease Financing (Net of Unearned Income) U.S............................................... 30,364 1,910 8.41 International..................................... 13,964 1,228 11.75 ------- ------ Total loans and lease financing(3)............... 44,328 3,138 9.46 ------- ------ ----- Earning assets.................................... 61,781 4,150 8.98 ------ ----- Nonearning assets................................. 9,358 ------- Total Assets..................................... $71,139 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits.................................. $15,398 $ 303 2.64% Time deposits..................................... 10,448 433 5.54 International..................................... 11,384 649 7.62 ------- ------ Total............................................ 37,230 1,385 4.98 ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S............................................... 5,660 232 5.48 International..................................... 185 7 4.96 ------- ------ Total............................................ 5,845 239 5.46 ------- ------ ----- Other Funds Borrowed U.S............................................... 5,634 252 5.99 International..................................... 1,790 164 12.22 ------- ------ Total............................................ 7,424 416 7.49 ------- ------ ----- Notes Payable U.S.(4)........................................... 4,074 204 6.71 International..................................... 361 25 9.20 ------- ------ Total............................................ 4,435 229 6.91 ------- ------ ----- Total interest bearing liabilities................ 54,934 2,269 5.52 ------ ----- Demand deposits U.S............................... 6,895 Demand deposits International..................... 1,110 Other noninterest bearing liabilities............. 3,427 Stockholders' Equity.............................. 4,773 ------- Total Liabilities and Stockholders' Equity....... $71,139 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S............................................... $42,307 $1,265 4.00% International..................................... 19,474 616 4.23% ------- ------ Total............................................ $61,781 $1,881 4.07% ======= ======
- - -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual balances. (4) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 42 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
NINE MONTHS ENDED SEPTEMBER 30, 1997 ---------------------------- AVERAGE AVERAGE VOLUME INTEREST (1) RATE ------- ------------ ------- ASSETS (DOLLARS IN MILLIONS) Interest Bearing Deposits with Other Banks U.S. ............................................ $ 363 $ 16 5.94% International.................................... 1,452 90 8.25 ------- ------ Total........................................... 1,815 106 7.79 ------- ------ ----- Federal Funds Sold and Resale Agreements U.S. ............................................ 607 25 5.39 International.................................... 1,427 156 14.64 ------- ------ Total........................................... 2,034 181 11.88 ------- ------ ----- Trading Securities U.S. ............................................ 975 45 6.14 International.................................... 697 41 7.89 ------- ------ Total........................................... 1,672 86 6.87 ------- ------ ----- Securities U.S. Available for sale(2)............................ 7,584 367 6.51 Held to maturity................................. 663 31 6.25 International Available for sale(2)............................ 1,224 117 13.19 ------- ------ Total........................................... 9,471 515 7.27 ------- ------ ----- Loans and Lease Financing (Net of Unearned Income) U.S. ............................................ 31,597 2,058 8.71 International.................................... 10,496 892 11.36 ------- ------ Total loans and lease financing(3).............. 42,093 2,950 9.37 ------- ------ ----- Earning assets................................... 57,085 3,838 8.99 ------ ----- Nonearning assets................................ 7,207 ------- Total Assets.................................... $64,292 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits................................. $14,768 $ 299 2.70% Time deposits.................................... 9,897 413 5.57 International.................................... 9,951 521 7.01 ------- ------ Total........................................... 34,616 1,233 4.76 ------- ------ ----- Federal Funds Purchased and Repurchase Agreements U.S. ............................................ 5,757 251 5.82 International.................................... 159 11 9.22 ------- ------ Total........................................... 5,916 262 5.91 ------- ------ ----- Other Funds Borrowed U.S. ............................................ 4,173 187 5.98 International.................................... 1,483 150 13.58 ------- ------ Total........................................... 5,656 337 7.98 ------- ------ ----- Notes Payable U.S.(4).......................................... 2,811 146 6.92 International.................................... 523 38 9.81 ------- ------ Total........................................... 3,334 184 7.37 ------- ------ ----- Total interest bearing liabilities............... 49,522 2,016 5.44 ------ ----- Demand deposits U.S.............................. 7,121 Demand deposits International.................... 645 Other noninterest bearing liabilities............ 2,291 Stockholders' Equity............................. 4,713 ------- Total Liabilities and Stockholders' Equity...... $64,292 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. ............................................ $41,789 $1,367 4.37% International.................................... 15,296 455 3.98% ------- ------ Total........................................... $57,085 $1,822 4.27% ======= ======
- - -------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual balances. (4) Amounts include guaranteed preferred beneficial interests in Corporation's junior subordinated debentures. 43 CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS The following tables present, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes. The change due to the volume/rate variance has been allocated to volume. THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997
INCREASE (DECREASE) DUE TO CHANGE IN --------------------- VOLUME RATE NET CHANGE ---------- --------- ---------- (IN MILLIONS) Interest income Loans and lease financing U.S. ..................................... $ (18) $ (1) $ (19) International............................. 109 30 139 ----- 120 ----- Other earning assets U.S. ..................................... 44 (12) 32 International............................. (14) 4 (10) ----- 22 ----- Total interest income......................... 115 27 142 Total interest expense........................ 64 25 89 ----- Net interest revenue.......................... $ 53 ===== NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997 INCREASE (DECREASE) DUE TO CHANGE IN --------------------- VOLUME RATE NET CHANGE ---------- --------- ---------- (IN MILLIONS) Interest income Loans and lease financing U.S....................................... $ (78) $ (70) $(148) International............................. 305 31 336 ----- 188 ----- Other earning assets U.S....................................... 80 (3) 77 International............................. 59 (12) 47 ----- 124 ----- Total interest income......................... 314 (2) 312 Total interest expense........................ 172 81 253 ----- Net interest revenue.......................... $ 59 =====
44 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Robertson Stephens Litigation. As previously disclosed, on August 31, 1998, the Corporation acquired the investment banking business of BancAmerica Robertson Stephens ("Robertson Stephens") from BankAmerica Corporation. At the time of the sale, Robertson Stephens was a defendant in several lawsuits in various state and federal courts claiming damages, some in large dollar amounts, arising out of Robertson Stephens' actions in connection with the proposed or actual underwriting or placement of securities. Pursuant to the terms of the sale, these lawsuits are now the responsibility of the Corporation. Management, after reviewing all actions and proceedings pending against the Corporation, including the above-mentioned lawsuits, 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
12(a) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits). 12(b) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits). 12(c) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements (excluding interest on deposits). 12(d) --Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements (including interest on deposits). 27 --Financial Data Schedules.
(b) Current Reports on Form 8-K. During the third quarter of 1998, the Corporation filed two Current Reports on Form 8-K, dated July 16, 1998 and August 31, 1998, respectively, which contained information pursuant to Items 5 and 7 of Form 8-K. The Corporation also filed a Current Report on Form 8-K, dated October 15, 1998, which contained information pursuant to Items 5 and 7 of Form 8-K. 45 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. BankBoston Corporation /s/ Charles K. Gifford _____________________________________ Charles K. Gifford Chairman of the Board and Chief Executive Officer /s/ Susannah M. Swihart _____________________________________ Susannah M. Swihart Vice Chair, Chief Financial Officer and Treasurer Date: November 13, 1998 46 EX-12.(A) 2 COMPUTATION OF CORPORATION EXCLUDING INTEREST EXHIBIT 12(a) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the nine months ended September 30, 1998 and 1997 and for the five years ended December 31, 1997 were as follows:
Nine Months Ended September 30, Years Ended December 31, ----------------- ------------------------------------------------ (Dollars in millions) 1998 1997 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- ------- -------- Net income $ 585 $ 645 $ 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 360 434 589 483 529 422 262 ------- ------- ------- ------- ------- ------- -------- Pretax earnings $ 945 $ 1,079 $ 1,468 $ 1,133 $ 1,207 $ 971 $ 605 ======= ======= ======= ======= ======= ======= ======== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 31 $ 29 $ 39 $ 40 $ 38 $ 35 $ 36 Interest on borrowed funds 884 783 1,050 873 1,079 1,038 384 ------- ------- ------- ------- ------- ------- -------- Total fixed charges $ 915 $ 812 $ 1,089 $ 913 $ 1,117 $ 1,073 $ 420 ======= ======= ======= ======= ======= ======= ======== Earnings (for ratio calculation) $ 1,860 $ 1,891 $ 2,557 $ 2,046 $ 2,324 $ 2,044 $ 1,025 ======= ======= ======= ======= ======= ======= ======== Total fixed charges $ 915 $ 812 $ 1,089 $ 913 $ 1,117 $ 1,073 $ 420 ======= ======= ======= ======= ======= ======= ======== Ratio of earnings to fixed charges 2.03 2.33 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) 3 COMPUTATION INCLUDING INTEREST ON DEPOSITS EXHIBIT 12(b) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the nine months ended September 30, 1998 and 1997 and for the five years ended December 31, 1997 were as follows:
Nine Months Ended September 30, Years Ended December 31, ------------------ ------------------------------------------------- (Dollars in millions) 1998 1997 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- -------- --------- Net income $ 585 $ 645 $ 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 360 434 589 483 529 422 262 -------- -------- -------- -------- -------- -------- --------- Pretax earnings $ 945 $ 1,079 $ 1,468 $ 1,133 $ 1,207 $ 971 $ 605 ======== ======== ======== ======== ======== ======== ========= Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 31 $ 29 $ 39 $ 40 $ 38 $ 35 $ 36 Interest on borrowed funds 884 783 1,050 873 1,079 1,038 384 Interest on deposits 1,385 1,233 1,685 1,680 1,791 1,301 1,177 -------- -------- -------- -------- -------- -------- --------- Total fixed charges $ 2,300 $ 2,045 $ 2,774 $ 2,593 $ 2,908 $ 2,374 $ 1,597 ======== ======== ======== ======== ======== ======== ========= Earnings (for ratio calculation) $ 3,245 $ 3,124 $ 4,242 $ 3,726 $ 4,115 $ 3,345 $ 2,202 ======== ======== ======== ======== ======== ======== ========= Total fixed charges $ 2,300 $ 2,045 $ 2,774 $ 2,593 $ 2,908 $ 2,374 $ 1,597 ======== ======== ======== ======== ======== ======== ========= Ratio of earnings to fixed charges 1.41 1.53 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) 4 PREFERRED STOCK DIVIDEND REQUIREMENTS EXCLUDING EXHIBIT 12(c) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Excluding Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (excluding interest on deposits) for the nine months ended September 30, 1998 and 1997 and for the five years ended December 31, 1997 were as follows:
Nine Months Ended September 30, Years Ended December 31, ----------------- ------------------------------------------------ (Dollars in millions) 1998 1997 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- ------- -------- Net income $ 585 $ 645 $ 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 360 434 589 483 529 422 262 ------- ------- ------- ------- ------- ------- -------- Pretax earnings $ 945 $ 1,079 $ 1,468 $ 1,133 $ 1,207 $ 971 $ 605 ======= ======= ======= ======= ======= ======= ======== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 31 $ 29 $ 39 $ 40 $ 38 $ 35 $ 36 Interest on borrowed funds 884 783 1,050 873 1,079 1,038 384 ------- ------- ------- ------- ------- ------- -------- Total fixed charges 915 812 1,089 913 1,117 1,073 420 Preferred stock dividend requirements 15 46 53 65 68 67 61 ------- ------- ------- ------- ------- ------- -------- Total combined fixed charges and preferred stock dividend requirements $ 930 $ 858 $ 1,142 $ 978 $ 1,185 $ 1,140 $ 481 ======= ======= ======= ======= ======= ======= ======== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 1,860 $ 1,891 $ 2,557 $ 2,046 $ 2,324 $ 2,044 $ 1,025 ======= ======= ======= ======= ======= ======= ======== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 2.00 2.20 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) 5 PREFERRED STOCK DIVIDENDS INCLUDING EXHIBIT 12(d) BANKBOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Including Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (including interest on deposits) for the nine months ended September 30, 1998 and 1997 and for the five years ended December 31, 1997 were as follows:
Nine Months Ended September 30, Years Ended December 31, ----------------- ------------------------------------------------ (Dollars in millions) 1998 1997 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- ------- -------- Net income $ 585 $ 645 $ 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 360 434 589 483 529 422 262 ------- ------- ------- ------- ------- ------- -------- Pretax earnings $ 945 $ 1,079 $ 1,468 $ 1,133 $ 1,207 $ 971 $ 605 ======= ======= ======= ======= ======= ======= ======== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 31 $ 29 $ 39 $ 40 $ 38 $ 35 $ 36 Interest on borrowed funds 884 783 1,050 873 1,079 1,038 384 Interest on deposits 1,385 1,233 1,685 1,680 1,791 1,301 1,177 ------- ------- ------- ------- ------- ------- -------- Total fixed charges 2,300 2,045 2,774 2,593 2,908 2,374 1,597 Preferred stock dividend requirements 15 46 53 65 68 67 61 ------- ------- ------- ------- ------- ------- -------- Total combined fixed charges and preferred stock dividend requirements $ 2,315 $ 2,091 $ 2,827 $ 2,658 $ 2,976 $ 2,441 $ 1,658 ======= ======= ======= ======= ======= ======= ======== Earnings (for ratio calculation) (Pretax earnings plus total fixed charges) $ 3,245 $ 3,124 $ 4,242 $ 3,726 $ 4,115 $ 3,345 $ 2,202 ======= ======= ======= ======= ======= ======= ======== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.40 1.49 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-27.1 6 FINANCIAL DATA SCHEDULE
9 THIS AMENDED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JUN-30-1998 3,727 1,224 2,614 1,866 11,142 604 608 43,254 (734) 70,499 45,196 12,282 2,742 4,902 0 278 307 4,395 70,499 2,043 380 305 2,728 926 1,485 1,243 200 36 396 781 480 0 0 480 1.61 1.58 4.12 354 33 0 0 712 (229) 37 734 410 234 90 INCLUDES GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR SUBORDINATED DEBENTURES. EARNINGS PER SHARE CALCULATIONS IN THIS AMENDED FINANCIAL DATA SCHEDULE REFLECT A 2 FOR 1 STOCK SPLIT EXECUTED IN THE FORM OF A STOCK DIVIDEND EFFECTED JUNE 22, 1998. PRIOR PERIOD FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THIS STOCK SPLIT.
EX-27.2 7 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 SEP-30-1998 3,380 1,045 1,731 1,625 11,910 594 602 45,747 (740) 73,834 46,420 12,886 3,710 5,759 0 0 307 4,408 73,834 3,134 576 427 4,137 1,385 2,269 1,868 260 53 635 945 945 0 0 585 1.96 1.94 4.07 366 34 0 0 712 (309) 58 740 454 222 64 INCLUDES GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR SUBORDINATED DEBENTURES.
-----END PRIVACY-ENHANCED MESSAGE-----