-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nalHncJp8O8mQKy4YHHV49bcRLzjJ0Dwg9R3t5w67sMMF+5tuOfPR2/BVbdzk+Tx 7Pup4rZIRntVKzg5JjglFQ== 0000950109-94-000863.txt : 19940517 0000950109-94-000863.hdr.sgml : 19940517 ACCESSION NUMBER: 0000950109-94-000863 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON 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: 1934 Act SEC FILE NUMBER: 001-06522 FILM NUMBER: 94528916 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-6522 BANK OF BOSTON CORPORATION (Exact name of Registrant as specified in its charter) Massachusetts 04-2471221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Federal Street, Boston, Massachusetts 02110 (Address of principal executive office) (Zip Code) 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 April 30, 1994: Common Stock, $2.25 par value 106,512,904 BANK OF BOSTON CORPORATION -------------------------- TABLE OF CONTENTS -----------------
Page CONSOLIDATED SELECTED FINANCIAL DATA 3 Part I - FINANCIAL INFORMATION Item 1. Financial Statements: ------- Bank of Boston Corporation and Subsidiaries: Consolidated Balance Sheet 4 Consolidated Statement of Income 6 Consolidated Statement of Changes in Stockholders' Equity 7 Consolidated Statement of Cash Flows 8 Notes to Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition ------- and Results of Operations 16 Part II - OTHER INFORMATION Item 1. Legal Proceedings 37 ------- Item 4. Submission of Matters to a Vote of Security Holders 37 ------- Item 5. Other Information 38 ------- Item 6. Exhibits and Reports on Form 8-K 38 ------- Signatures 39 LIST OF TABLES Consolidated Average Balance Sheet - Nine Quarters 31 Consolidated Statement of Income - Nine Quarters 32 Average Balances and Interest Rates - Quarter 33 Change in Net Interest Revenue - Volume and Rate Analysis 36
2 BANK OF BOSTON CORPORATION Consolidated Selected Financial Data (dollars in millions, except per share amounts)
Quarters Ended March 31 1994 1993 ---------- ---------- Income Statement Data: Net interest revenue $ 340.7 $ 324.2 Provision for credit losses 45.0 22.5 Noninterest income 235.1 174.4 Noninterest expense 346.7 375.7 Income before extraordinary item and cumulative effect of changes in accounting principles 102.7 59.5 Net income 96.1 83.7 Per common share: Income before extraordinary item and cumulative effect of changes in accounting principles: Primary .88 .49 Fully diluted .85 .48 Net income: Primary .82 .72 Fully diluted .79 .70 Market value per common share: High 25 5/8 28 7/8 Low 22 5/8 24 At March 31 Balance Sheet Data: Loans and lease financing $ 28,554 $ 25,312 Total assets 42,424 36,361 Deposits 28,153 28,151 Total stockholders' equity 2,947 2,632 Book value per common share 22.91 20.85 Regulatory capital ratios: Risk-based capital ratios: Tier 1 7.4% 7.5% Total 12.7 12.0 Leverage ratio 6.9 6.9
3 BANK OF BOSTON CORPORATION Consolidated Balance Sheet (in thousands)
ASSETS March 31 December 31 1994 1993 -------------- -------------- Cash and due from banks $ 3,068,563 $ 2,539,286 Interest bearing deposits in other banks 919,584 991,389 Federal funds sold and securities purchased under agreements to resell 2,641,505 1,454,478 Trading securities 390,183 305,775 Mortgages held for sale 808,914 1,321,607 Securities (Note 4): Available for sale 1,897,212 1,437,887 Held to maturity (fair value of $1,267,739 in 1994 and $1,568,617 in 1993) 1,292,173 1,568,823 Loans and lease financing (Note 5): United States Operations 22,230,149 22,560,194 International Operations 6,324,216 6,221,780 ---------- ---------- Total loans and lease financing (net of unearned income of $290,864 in 1994 and $311,955 in 1993) 28,554,365 28,781,974 Reserve for credit losses (Note 7) (664,167) (770,279) ---------- ---------- Net loans and lease financing 27,890,198 28,011,695 Accelerated disposition portfolio (Note 6) 240,963 Premises and equipment, net 520,884 522,271 Due from customers on acceptances 367,107 391,204 Accrued interest receivable 303,330 287,368 Other real estate owned 66,472 107,845 Other assets (Note 8) 2,016,745 1,648,274 ---------- ---------- TOTAL ASSETS $ 42,423,833 $ 40,587,902 ========== ==========
The accompanying notes are an integral part of these financial statements. 4 BANK OF BOSTON CORPORATION Consolidated Balance Sheet (continued) (in thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY March 31 December 31 1994 1993 ----------- ----------- Deposits: Domestic offices: Noninterest bearing $ 4,947,202 $ 5,040,028 Interest bearing 16,184,584 17,495,905 Overseas offices: Noninterest bearing 518,159 525,620 Interest bearing 6,503,357 6,552,592 ---------- ---------- Total deposits 28,153,302 29,614,145 Funds borrowed: Federal funds purchased 409,654 417,107 Term federal funds purchased 2,180,469 2,150,000 Securities sold under agreements to repurchase 1,212,260 798,842 Other funds borrowed 4,091,274 1,608,631 Acceptances outstanding 367,605 391,484 Accrued expenses and other liabilities (Note 8) 1,113,348 723,266 Notes payable (Note 9) 1,948,652 1,972,758 ---------- ---------- TOTAL LIABILITIES 39,476,564 37,676,233 ---------- ---------- Commitments and contingencies (Notes 2 and 10) Stockholders' equity: Preferred stock without par value: Authorized shares - 10,000,000 Issued shares - 4,593,941 508,436 508,436 Common stock, par value $2.25: Authorized shares - 200,000,000 Issued and outstanding shares - 106,458,828 in 1994 and 105,801,268 in 1993 239,532 238,053 Surplus 784,655 768,372 Retained earnings 1,416,356 1,361,960 Net unrealized gain on securities available for sale 3,158 42,980 Cumulative translation adjustments (4,868) (8,132) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 2,947,269 2,911,669 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,423,833 $ 40,587,902 ========== ==========
The accompanying notes are an integral part of these financial statements. 5 BANK OF BOSTON CORPORATION Consolidated Statement of Income (in thousands, except per share amounts)
Quarters Ended March 31 1994 1993 -------- -------- Interest Income (Note 11): Loans and lease financing, including fees $ 542,856 $ 517,272 Securities 60,588 69,480 Trading securities 2,558 1,956 Mortgages held for sale 15,653 13,364 Federal funds sold and securities purchased under agreements to resell 79,682 22,253 Deposits in other banks 22,338 35,997 -------- -------- Total interest income 723,675 660,322 -------- -------- Interest Expense (Note 11): Deposits of domestic offices 126,790 178,893 Deposits of overseas offices 112,816 85,788 Funds borrowed 110,104 42,716 Notes payable 33,195 28,735 -------- -------- Total interest expense 382,905 336,132 -------- -------- Net interest revenue (Note 11) 340,770 324,190 Provision for credit losses (Notes 6 and 7) 45,000 22,455 -------- -------- Net interest revenue after provision for credit losses 295,770 301,735 Noninterest Income: -------- -------- Financial service fees 92,412 71,253 Trust and agency fees 47,697 43,879 Trading profits and commissions 3,855 6,943 Securities gains 3,933 6,424 Other income (Notes 11 and 12) 87,189 45,922 -------- -------- Total noninterest income 235,086 174,421 -------- -------- Noninterest Expense: Salaries 157,843 159,142 Employee benefits 36,907 37,484 Occupancy expense 31,893 32,191 Equipment expense 23,585 25,565 Other real estate owned expense 5,268 19,428 Other expense 91,228 101,980 -------- -------- Total noninterest expense 346,724 375,790 -------- -------- Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles 184,132 100,366 Provision for income taxes 81,457 40,894 -------- -------- Income before extraordinary item and cumulative effect of changes in accounting principles 102,675 59,472 Extraordinary loss from early extinguishment of debt, net of tax (Note 9) (6,535) Cumulative effect of changes in accounting principles, net (Notes 13 and 14) 24,203 -------- -------- NET INCOME $ 96,140 $ 83,675 ======== ======== NET INCOME APPLICABLE TO COMMON STOCK $ 86,823 $ 75,737 ======== ======== Per Common Share: Income before extraordinary item and cumulative effect of changes in accounting principles: Primary $ .88 $ .49 Fully diluted $ .85 $ .48 Net Income Primary $ .82 $ .72 Fully diluted $ .79 $ .70 Dividends declared $ .22 $ .10 Average Number of Common Shares: Primary 106,198 104,962 Fully diluted 110,817 110,079
The accompanying notes are an integral part of these financial statements. 6 BANK OF BOSTON CORPORATION Consolidated Statement of Changes in Stockholders' Equity (in thousands)
Quarters Ended March 31 1994 1993 ---------- ---------- Balance, beginning of period $ 2,911,669 $ 2,553,530 Net income 96,140 83,675 Common stock issued in connection with: Dividend reinvestment and common stock purchase plan 4,100 1,524 Exercise of stock options 2,310 7,102 Restricted stock grants, net of forfeitures 9,709 2,816 Change in unearned compensation related to restricted stock grants (9,129) (2,442) Other, principally employee benefit plans 1,643 3,259 Cash dividends declared: Preferred stock (9,315) (7,937) Common stock (23,300) (8,490) Change in net unrealized appreciation on marketable equity securities of nonbanking subsidiary 373 Change in net unrealized gain on securities available for sale, net of tax (39,822) Translation adjustments, net of tax 3,264 (1,217) --------- --------- Balance, end of period $ 2,947,269 $ 2,632,193 ========= =========
The accompanying notes are an integral part of these financial statements. 7 BANK OF BOSTON CORPORATION Consolidated Statement of Cash Flows (in thousands)
Quarters Ended March 31 1994 1993 ---------- ---------- Cash Flows From Operating Activities: Net income $ 96,140 $ 83,675 Reconciliation of net income to net cash provided from operating activities: Extraordinary loss from early extinguishment of debt, net of tax 6,535 Cumulative effect of change in accounting for purchased mortgage servicing rights, net of tax 52,960 Cumulative effect of change in method of accounting for income taxes (77,163) Provision for credit losses 45,000 22,455 Depreciation and amortization 37,567 56,110 Provision for deferred taxes (55,475) 18,294 Net gains on sales of securities and other assets (41,544) (24,261) Change in trading securities (84,408) (144,516) Change in mortgages held for sale 512,693 275,851 Change in securities available for sale 710,586 Net change in interest receivables and payables (123,999) (52,798) Other, net (36,416) (1,594) ---------- ---------- Net cash provided from operating activities 356,093 919,599 ---------- ---------- Cash Flows From Investing Activities: Net cash provided from (used for) interest bearing deposits in other banks 71,805 (172,127) Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell (1,187,027) 141,718 Purchases of securities held to maturity (328,306) (758,240) Purchases of securities available for sale (Note 3) (6,479,426) Sales of securities held to maturity 9,779 Sales of securities available for sale (Note 3) 6,254,985 Maturities of securities held to maturity 366,365 307,045 Maturities of securities available for sale (Note 3) 165,673 Dispositions of venture capital investments 4,145 31,373 Loans and lease financing originated by nonbank entities (389,078) (767,762) Loans and lease financing collected by nonbank entities 455,153 844,173 Net cash used for lending activities of bank subsidiaries (239,941) (58,428) Lease financing originated by bank entities (3,169) (1,709) Lease financing collected by bank entities 6,218 4,158 Proceeds from sales of other real estate owned 16,306 45,269 Expenditures for premises and equipment (21,643) (22,316) Proceeds from sales of business units, premises and equipment 124,461 947 Other, net (38,070) (44,326) ---------- ---------- Net cash used for investing activities (1,221,549) (440,446) ---------- ---------- Cash Flows From Financing Activities: Net cash used for deposits (1,460,843) (950,280) Net cash provided from funds borrowed 2,919,077 232,448 Net repayments of notes payable (364,018) (13,229) Net proceeds from issuance of notes payable 339,912 4,483 Net proceeds from issuance of common stock 7,703 7,921 Dividends paid (32,615) (16,427) ---------- ---------- Net cash provided from (used for) financing activities 1,409,216 (735,084) Effect of foreign currency translation on cash (14,483) (21,715) ---------- ---------- NET CHANGE IN CASH AND DUE FROM BANKS 529,277 (277,646) Cash and Due from Banks at January 1 2,539,286 1,936,396 ---------- ---------- Cash and Due from Banks at March 31 $ 3,068,563 $ 1,658,750 ========== ========== Interest payments made $ 490,942 $ 391,373 Income tax payments made $ 34,418 $ 8,767
The accompanying notes are an integral part of these financial statements. 8 BANK OF BOSTON CORPORATION Notes to Financial Statements 1. The accompanying interim consolidated financial statements of Bank of Boston Corporation (the Corporation) are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information contained herein have been made. Prior period financial statements have been restated to give retroactive effect to the mergers with Society for Savings Bancorp, Inc. and Multibank Financial Corp., completed in July 1993, which were accounted for as poolings of interests. In addition, certain amounts reported in prior periods have been reclassified for comparative purposes. This information should be read in conjunction with the Corporation's 1993 Annual Report on Form 10-K. 2. Acquisitions: In September 1993, the Corporation reached a definitive agreement to acquire BankWorcester Corporation (BankWorcester) for $34 for each share of BankWorcester common stock outstanding, subject to an upward adjustment if the acquisition is not consummated on or before June 30, 1994. The total purchase price is expected to approximate $247 million. BankWorcester, the holding company for Worcester County Institution for Savings, had approximately $1.5 billion of assets, approximately $1.3 billion of deposits and 28 branches at March 31, 1994. The acquisition has been approved by the boards of directors of both companies, by BankWorcester's stockholders and by applicable federal regulators, but remains subject to required state regulatory approval and review by the United States Department of Justice (the Justice Department). Consummation of the transaction is expected during the second quarter of 1994. The acquisition will be accounted for as a purchase. In March 1994, the Corporation reached a definitive agreement to acquire Pioneer Financial, A Co-operative Bank (Pioneer) for $118 million in cash. Pioneer, a privately held financial institution based in Middlesex County, Massachusetts, had approximately $773 million of assets, approximately $720 million of deposits and 20 branches at March 31, 1994. The acquisition has been approved by the boards of directors of both companies and remains subject to required regulatory and Pioneer stockholder approvals and a review by the Justice Department. Consummation of the transaction is not expected until the second half of 1994. The acquisition will be accounted for as a purchase. 3. Significant Noncash Transactions - Statement of Cash Flows: During the first quarters of 1994 and 1993, the Corporation transferred approximately $15 million and $23 million, respectively, to Other Real Estate Owned (OREO) from loans. Loans made to facilitate sales of OREO properties totaled approximately $.9 million and $.3 million in the first quarters of 1994 and 1993, respectively. Other significant noncash transactions included the transfer of certain assets to an accelerated disposition portfolio, which is more fully discussed in Note 6. On December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with the new standard, cash flows from purchases, sales and maturities of securities available for sale are classified as cash flows from investing activities. In previous periods, this activity with regard to securities available for sale was classified as cash flows from operating activities and presented on a net basis. 9 Notes to Financial Statements, continued 4. Securities: A summary comparison of securities available for sale by type is as follows:
March 31, 1994 December 31, 1993 ------------------------------ ----------------------------- (in thousands) Cost Carrying value Cost Carrying value ----------- -------------- ----------- -------------- U.S. Treasury $ 418,749 $ 419,660 $ 108,017 $ 109,601 U.S. government agencies and corporations: Mortgage-backed securities 624,367 619,567 493,142 498,172 States and political subdivisions 242 236 478 474 Foreign debt securities 529,846 526,203 441,038 490,066 Other debt securities 165,157 165,157 149,585 149,585 Marketable equity securities 48,116 59,990 57,959 74,330 Other equity securities 106,399 106,399 115,659 115,659 --------- --------- --------- --------- $ 1,892,876 $ 1,897,212 $ 1,365,878 $ 1,437,887 ========= ========= ========= =========
In accordance with SFAS No. 115, securities available for sale are reported at fair value, except for equity securities with a cost of $106 million and $116 million at March 31, 1994 and December 31, 1993, respectively, which are not traded on established exchanges. These securities are reported at cost. A summary comparison of securities held to maturity, which are reported at amortized cost, by type is as follows:
March 31, 1994 December 31, 1993 --------------------------------- -------------------------------- (in thousands) Cost Fair value Cost Fair value ------------- ------------ ------------- ----------- U.S. Treasury $ 8,682 $ 8,687 $ 317,396 $ 317,599 U.S. government agencies and corporations: Mortgage-backed securities 1,071,562 1,047,528 1,045,574 1,044,026 States and political subdivisions 30,331 30,575 29,480 30,512 Foreign debt securities 98,161 97,512 108,503 108,610 Other debt securities 65 65 Other equity securities 83,437 83,437 67,805 67,805 --------- --------- --------- --------- $ 1,292,173 $ 1,267,739 $ 1,568,823 $ 1,568,617 ========= ========= ========= =========
10 Notes to Financial Statements, continued 5. Loans and Lease Financing: The following are the details of loan and lease financing balances:
March 31 December 31 1994 1993 (in thousands) ----------- ----------- United States Operations: Commercial, industrial and financial $ 12,064,261 $ 11,991,440 Real Estate: Secured by 1-4 family residential properties 3,921,957 4,159,069 Construction 541,906 617,426 Other commercial 2,851,454 3,123,024 Loans to individuals 1,795,219 1,609,566 Lease financing 1,256,855 1,263,267 Unearned income (201,503) (203,598) ---------- ---------- 22,230,149 22,560,194 ---------- ---------- International Operations: Loans and lease financing 6,413,577 6,330,137 Unearned income (89,361) (108,357) ---------- ---------- 6,324,216 6,221,780 ---------- ---------- $ 28,554,365 $ 28,781,974 ========== ==========
6. Accelerated Disposition Portfolio: In March 1994, the Corporation transferred $378 million of lower quality real estate exposure to an accelerated disposition portfolio. The exposures were transferred at their estimated disposition value, and the transfer resulted in additional credit losses of $119 million. This value reflects management's view as to the proceeds that would be realized on a liquidation basis, and is not indicative of the value that would be realized if such exposures were managed in the normal course of business or disposed of on a basis other than liquidation. The net remaining carrying value of the accelerated disposition portfolio was $259 million at March 31, 1994. Until liquidated, this portfolio will be carried at the lower of the newly established carrying value or estimated disposition value. The accelerated disposition portfolio consisted of the following:
Carrying Value Before Estimated Valuation Disposition Adjustment Value (in millions) ------------ ----------- Loans Nonaccrual real estate, including 1-4 family residential $193 $129 Performing renegotiated loans 75 51 Other performing real estate 40 30 OREO 31 31 ---- ---- Total balance sheet assets 339 241 Off-balance-sheet exposure (letters of credit) 39 18 ---- ---- Total exposure $378 $259 ==== ====
11 Notes to Financial Statements, continued 7. Reserve for Credit Losses: An analysis of the reserve for credit losses is as follows: (in thousands)
Quarters Ended March 31 1994 1993 -------- -------- Balance, beginning of period $ 770,279 $ 923,120 Provision 45,000 22,455 Domestic credit losses: Commercial, industrial and financial (2,570) (17,000) Real estate: Construction (260) (7,513) 1-4 family residential properties (3,367) (3,674) Other (9,029) (26,041) Loans to individuals (14,035) (8,558) Lease financing (2) International credit losses (16,436) (24,322) -------- ------- Total credit losses (45,697) (87,110) -------- ------- Domestic recoveries: Commercial, industrial and financial 3,978 3,112 Real estate: Construction 337 1,036 1-4 family residential properties 527 890 Other 1,998 502 Loans to individuals 3,421 4,233 Lease financing 43 22 International recoveries 3,281 1,513 -------- ------- Total recoveries 13,585 11,308 -------- ------- Net credit losses before losses related to accelerated disposition portfolio (32,112) (75,802) Credit losses related to exposures transferred to accelerated disposition portfolio (119,000) -------- ------- Net credit losses (151,112) (75,802) -------- ------- Balance, end of period $ 664,167 $ 869,773 ======== =======
8. Accounting for Unrealized Gains and Losses: Effective January 1, 1994, the Corporation adopted Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." The interpretation requires the reporting of gross unrealized gains and gross unrealized losses on foreign exchange and interest rate contracts separately as assets and liabilities, respectively, unless a right of setoff exists, including a right of setoff resulting from contracts executed with the same counterparty under a master netting arrangement. Previously, the Corporation reported unrealized gains and losses related to forward foreign exchange rate contracts, interest rate swap agreements and similar contracts on a net basis. Adoption of the interpretation resulted in an increase in both assets and liabilities of $333 million, and had no effect on the Corporation's net income, capital or risk-based capital ratios. 12 Notes to Financial Statements, continued 9. Notes Payable: In January 1994, the Corporation issued $300 million of 6 5/8% Subordinated Notes, due 2004. When the notes were issued, the Corporation entered into an interest rate swap agreement that effectively converted the fixed rate obligation to a floating rate obligation. Such rate was 4.01% at March 31, 1994. The subordinated notes are not subject to redemption prior to maturity. In March 1994, the Corporation redeemed its floating rate notes due September 2000 at their principal amount plus accrued interest. The carrying value of the notes at the time of redemption was $179 million. In addition, during the first quarter of 1994, a nonbanking subsidiary of the Corporation called for prepayment $186 million of its senior notes, with fixed interest rates ranging from 6.67% to 9.50%, at their principal amount plus accrued interest and a prepayment penalty. The loss on the early extinguishment of the debt amounted to $6.5 million, net of taxes, or $.06 per common share on both a primary and fully diluted basis, and is presented as an extraordinary item in the consolidated statement of income. 10. Contingencies: The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the normal course of business, including claims that borrowers or others have been damaged as a result of the Corporation's lending practices. One of these actions, commonly referred to as lender liability claims, has resulted in a judgment against a Corporation subsidiary, which is being appealed. 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 will not be material. 11. Brazilian Translation Gains and Losses: During the first quarter of 1994, the Corporation reclassified translation gains and losses associated with Brazilian local currency earning assets and interest bearing liabilities from noninterest income to interest income and interest expense, respectively. As a result of hyperinflation in Brazil, interest income and interest expense from these local currency assets and liabilities have had a significant impact on consolidated interest income and interest expense, while contributing only modestly to consolidated net interest revenue. The reclassification of these translation gains and losses, while having no effect on the Corporation's total revenue (net interest revenue plus noninterest income), provides a better presentation of consolidated interest income, interest expense and related yields; net interest revenue and related margin; and noninterest income. Translation gains and losses related to Brazilian local currency nonearning assets and noninterest bearing liabilities continue to be classified as noninterest income. The net translation gain/loss from these local currency nonearning assets and noninterest bearing liabilities was immaterial in both the first quarter of 1994 and the first quarter of 1993. The Corporation has followed a strategy of maintaining a currency position in Brazil that is designed to capitalize on the spread between Brazilian interest rates and devaluation. This strategy has generally involved investing dollar denominated/indexed interest bearing liabilities in local currency earning assets. The previous presentation resulted in high levels of net interest revenue that were mostly offset by translation losses recorded in noninterest income. This currency position at March 31, 1994 was $199 million and averaged $147 million in the first quarter of 1994, compared with an average of $66 million in the first quarter of 1993. Overall, the reclassification has resulted in the inclusion of $2,225 million of translation losses related to local currency earning assets within interest income and $2,096 million of translation gains related to local currency interest bearing liabilities within interest expense in the first quarter of 1994, resulting in a reclassification from noninterest income of $129 million of net translation losses. For the first quarter of 1993, $646 million of translation losses were reclassified to interest income and $623 million of translation gains were reclassified to interest expense, resulting in a reclassification from noninterest income of $23 million of net translation losses. 13 Notes to Financial Statements, continued 12. Sale of Factoring Business: In January 1994, the Corporation completed the sale of its United States factoring business, and recorded a pre-tax gain of $27 million on the transaction. The previously announced sale of the Corporation's Canadian factoring business remains subject to regulatory approval and is expected to close in mid-1994, for an additional pre-tax gain of approximately $5 million. The factoring businesses' contribution to the Corporation's net income in prior periods was not material. 13. Change in Accounting for Purchased Mortgage Servicing Rights: Effective January 1, 1993, the Corporation elected to change its method of accounting for purchased mortgage servicing rights (PMSR) to conform its financial reporting to the regulatory accounting rules adopted in the first quarter of 1993 by the banking regulators. Under these new rules, the carrying value of PMSR is recorded at the lesser of amortized cost or the estimated aggregate recoverable amount determined by applying the discount rate in effect at the time the servicing portfolios were purchased to the estimated future net cash flows from servicing the underlying mortgages. Prior to 1993, this valuation was performed on an undiscounted basis. The cumulative effect to January 1, 1993 of adopting this change in accounting principle was a decrease in income of $53 million, net of income taxes of $32 million, or $.50 per common share on a primary basis and $.48 per common share on a fully diluted basis. 14. Accounting for Income Taxes: Effective January 1, 1993, the Corporation adopted prospectively SFAS No. 109, "Accounting for Income Taxes," which principally affects accounting for deferred income taxes. The cumulative effect to January 1, 1993 of adopting this new standard, which is shown as a cumulative effect of a change in accounting principle, was an increase to first quarter income of $77 million or $.74 per common share on a primary basis and $.70 per common share on a fully diluted basis. The cumulative effect principally reflected the recognition of previously unrecorded tax benefit carryforwards. 15. Parent Company Condensed Financial Statements: The following is a condensed balance sheet of the Corporation (Parent Company only) at March 31, 1994 and December 31, 1993:
March 31 December 31 1994 1993 (in thousands) ----------- ----------- ASSETS Cash and short term investments in bank subsidiary $ 114,143 $ 206,920 Advances to subsidiaries: Bank subsidiaries 35,864 63,709 Nonbank subsidiaries 259,113 226,203 Subordinated notes receivable from bank subsidiary 580,000 400,000 Investments in subsidiaries: Bank subsidiaries 3,239,149 3,175,274 Nonbank subsidiaries 139,457 134,751 Other assets 26,608 22,846 --------- --------- TOTAL ASSETS $ 4,394,334 $ 4,229,703 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper due nonbank subsidiary $ 9,200 $ 10,200 Notes payable 1,413,280 1,293,247 Other liabilities 24,585 14,587 --------- --------- TOTAL LIABILITIES 1,447,065 1,318,034 --------- --------- TOTAL STOCKHOLDERS' EQUITY 2,947,269 2,911,669 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,394,334 $ 4,229,703 ========= =========
14 Notes to Financial Statements, continued 15. Parent Company Condensed Financial Statements, Continued: The following is a condensed income statement of the Corporation (Parent Company only) for the quarters ended March 31, 1994 and 1993:
1994 1993 (in thousands) ----------- ----------- OPERATING INCOME Dividend from bank subsidiary $ 3,200 Interest from subsidiaries: Bank subsidiaries 10,202 $ 8,800 Nonbank subsidiaries 1,605 1,246 ------ ------ Total operating income 15,007 10,046 ------ ------ EXPENSE Interest expense 17,542 11,859 Other expense, net 1,929 1,265 ------ ------ Total operating expense 19,471 13,124 ------ ------ Loss before income taxes, equity in undistributed net income of subsidiaries, extraordinary loss and cumulative effect of change in accounting principle (4,464) (3,078) Benefit from income taxes (2,790) (1,031) ------ ------ Loss before equity in undistributed net income of subsidiaries, extraordinary loss and cumulative effect of change in accounting principle (1,674) (2,047) Equity in undistributed net income of subsidiaries 98,174 87,435 ------ ------ Income before extraordinary item and cumulative effect of change in accounting principle 96,500 85,388 Extraordinary loss from early extinguishment of debt, net of tax (360) Cumulative effect of change in accounting for income taxes (1,713) ------ ------ NET INCOME $ 96,140 $ 83,675 ====== ======
The following is a condensed statement of cash flows of the Corporation (Parent Company only) for the quarters ended March 31, 1994 and 1993:
1994 1993 (in thousands) ----------- ----------- Cash Flows From Operating Activities: Net income $ 96,140 $ 83,675 Reconciliation of net income to net cash used for operating activities: Extraordinary item, net of tax 360 Cumulative effect of change in method of accounting for income taxes 1,713 Equity in undistributed net income of subsidiaries (98,174) (87,435) Net change in interest receivables and payables 6,624 (1,663) Other, net (383) (4,194) -------- ------- Net cash provided from (used for) operating activities 4,567 (7,904) -------- ------- Cash Flows From Investing Activities: Net cash provided from short-term investments 92,750 68,580 Net cash used for advances to subsidiaries (5,065) (1,965) Investments in subsidiaries (6,400) (50,000) Purchase of subordinated note receivable from bank subsidiary (180,000) -------- ------- Net cash provided from (used for) investing activities (98,715) 16,615 -------- ------- Cash Flows From Financing Activities: Net cash provided from (used for) commercial paper (1,000) 200 Net proceeds from issuance of notes payable 298,533 Repayments of notes payable (178,500) Net proceeds from issuance of common stock 7,703 7,921 Dividends paid (32,615) (16,427) -------- ------- Net cash provided from (used for) financing activities 94,121 (8,306) -------- ------- NET CHANGE IN CASH AND DUE FROM BANKS (27) 405 Cash and Due from Banks at January 1 550 236 -------- ------- Cash and Due from Banks at March 31 $ 523 $ 641 ======== ======= Interest payments made $ 10,900 $ 13,398 Income tax refunds received $ (7,870) $ (100)
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- GENERAL The Corporation's net income for the quarter ended March 31, 1994 was $96 million, compared with net income of $84 million for the same period in 1993. Net income per common share was $.82 on a primary basis and $.79 on a fully diluted basis, compared with net income per common share of $.72 on a primary basis and $.70 on a fully diluted basis for the first quarter of 1993. The 1994 results included an extraordinary loss, net of tax, of $7 million from the call for prepayment of $186 million of senior debt by a non-banking subsidiary and the redemption of $179 million of the Corporation's floating rate notes. The 1993 results included $24 million of income, net of tax, from the cumulative effect of changes in accounting principles. A cumulative benefit of $77 million was recorded as a result of the Corporation adopting Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," while a $53 million after-tax charge was recorded in connection with a change in accounting with respect to the valuation of purchased mortgage servicing rights (PMSR). Excluding the effects of the extraordinary loss and cumulative effect of changes in accounting principles, net income for the first quarter of 1994 was $103 million, compared with $60 million for the first quarter of 1993. On this basis, primary and fully diluted earnings per share were $.88 and $.85, respectively, in the first quarter of 1994 compared with $.49 and $.48, respectively, for the same period last year. NET INTEREST REVENUE - (Fully Taxable Equivalent Basis) The 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 on pages 33 through 36 of this report. For this review, 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% in 1994 and 34% in 1993, plus applicable state and local taxes, net of related federal tax benefits. The adjustment amounted to $1.5 million in the first quarter of 1994 compared with $1.8 million in the first quarter of 1993. During the first quarter of 1994, the Corporation reclassified translation gains and losses associated with Brazilian local currency earning assets and interest bearing liabilities from noninterest income to interest income and interest expense, respectively. This reclassification had no effect on the Corporation's total revenue (the sum of net interest revenue and noninterest income). As a result of hyperinflation in Brazil, interest income and interest expense from local currency assets and liabilities have had a significant impact on consolidated interest income and interest expense, while contributing only modestly to consolidated net interest revenue. In addition, the Corporation has followed a strategy of maintaining a currency position in Brazil that is designed to capitalize on the spread between Brazilian interest rates and devaluation. This strategy has generally involved investing dollar denominated/indexed interest bearing liabilities in local currency earning assets. Such a strategy has enabled the Corporation to improve its total revenue compared with what would have been earned from exclusively funding local currency assets with local currency liabilities. The previous presentation resulted in high levels of net interest revenue that were mostly offset by translation losses recorded in noninterest income. In order to better present the results of the Corporation's interest operations, including the net revenue earned from this currency position, translation gains and losses related to local currency earning assets and interest bearing liabilities have been reclassified to the related components of interest income and interest expense. Prior periods have been reclassified for comparative purposes and net interest margin has been presented on the basis of this revised classification. The Brazilian currency position, including its contribution to net interest revenue and the amount of translation losses that have been reclassified to interest income, is discussed below. Consolidated net interest revenue, on a fully taxable equivalent basis, was $342 million for the first quarter of 1994 compared with $326 million for the same period in 1993. Net interest margin in the first quarter of 1994 was 3.80% compared with 4.05% for the first quarter of 1993. 16 The following table presents a summary of net interest revenue, on a fully taxable equivalent basis, and related average earning asset balances and net interest margins for United States and International Operations:
Quarters Ended March 31 Change Change (dollars in millions) 1994 1993 Amount Percent ------ ------ ------ ------- United States Operations: Net interest revenue $ 274.1 $ 255.4 $ 18.7 7% Average loans and lease financing 22,305 20,l87 2,118 10 Average earning assets 27,403 25,859 1,544 6 Net interest margin 4.06% 4.01% .05% 1 International Operations: Net interest revenue $ 68.1 $ 70.6 $ (2.5) (4)% Average loans and lease financing 6,310 5,037 1,273 25 Average earning assets 9,099 6,817 2,282 33 Net interest margin 3.03% 4.20% (1.17)% (28) Consolidated: Net interest revenue $ 342.2 $ 326.0 $ 16.2 5% Average loans and lease financing 28,615 25,224 3,391 13 Average earning assets 36,502 32,676 3,826 12 Net interest margin 3.80% 4.05% (.25)% (6)
The improvement in net interest revenue from the first quarter of 1993 reflects an $18.7 million increase from domestic operations. This was primarily due to a $2.1 billion increase in average loan and lease volume, higher levels of noninterest bearing sources of funds, including deposits and stockholders' equity, and interest recoveries on loans. These factors were partially offset by a decline in loan fees. The domestic net interest margin rose slightly to 4.06% in the first quarter of 1994 compared with 4.01% in the same period of 1993. Internationally, net interest revenue declined $2.5 million from the first quarter of 1993 and margin dropped from 4.20% in the first quarter of 1993 to 3.03% in the first quarter of 1994. Although international average earning assets grew $2.3 billion, including a $1.3 billion increase in average loan and lease volume, narrower spreads resulted in a slight decline in net interest revenue from international operations. Spreads have narrowed over the past year in Argentina, mainly because of declining inflation, which has resulted from the continued stability of the economy. Spreads in Brazil have also declined during the past year, stemming from economic difficulties in the country and a change in the mix of assets from higher yielding loans to other earning assets. The Corporation's Brazilian currency position has enabled it to mitigate the negative effects of narrower spreads from operations in that country. While the international margin declined 117 basis points from the first quarter of 1993, margin for the first quarter of 1994 was 4 basis points higher than margin for the second half of 1993. 17 The following table presents a summary of net interest revenue earned from the Corporation's Brazilian currency position during the past nine quarters and the effect on net interest margin of reclassifying net translation losses associated with this position from noninterest income to net interest revenue:
March Dec. Sept. June March Dec. Sept. June March (dollars in millions) 1994 1993 1993 1993 1993 1992 1992 1992 1992 ------ ------ ------ ------ ------ ------ ------ ------ ------ Consolidated net interest revenue, on a fully taxable equivalent basis, excluding Brazilian currency position $ 331 $ 345 $ 339 $ 328 $ 322 $ 337 $ 326 $ 304 $ 283 Effect of Brazilian currency position: Interest income from currency position 140 90 34 41 27 16 13 20 18 Translation losses previously classified as noninterest income (129) (84) (30) (37) (23) (13) (9) (15) (13) ----- ----- ----- ----- ----- ----- ----- ----- ----- Net revenue from currency position 11 6 4 4 4 3 4 5 5 Consolidated net interest revenue, on a fully taxable equivalent basis, after reclassification of ----- ----- ----- ----- ----- ----- ----- ----- ----- net translation losses $ 342 $ 351 $ 343 $ 332 $ 326 $ 340 $ 330 $ 309 $ 288 ===== ===== ===== ===== ===== ===== ===== ===== ===== Consolidated net interest margin: Before reclassification of net translation losses 5.24% 4.77% 4.26% 4.43% 4.33% 4.21% 4.05% 3.99% 3.60% After reclassification of net translation losses 3.80% 3.86% 3.91% 3.99% 4.05% 4.06% 3.94% 3.81% 3.44% International net interest margin: Before reclassification of net translation losses 8.80% 6.98% 4.52% 5.63% 5.58% 4.57% 4.73% 4.79% 4.23% After reclassification of net translation losses 3.03% 2.99% 2.99% 3.59% 4.20% 3.74% 4.17% 3.73% 3.25% Average principal amount of currency position $ 147 $ 104 $ 53 $ 89 $ 66 $ 45 $ 40 $ 45 $ 42
Additional information on the reclassification of Brazilian translation gains and losses to net interest revenue, including a discussion of the effect of this reclassification related to all local currency assets and liabilities, can be found in Note 11 to the Financial Statements. The Corporation's currency position exposes it to losses should devaluation exceed local currency interest rates; such losses could be significant if government intervention results in a major unanticipated devaluation. Management, however, has been able to quickly close its position in the past when market conditions warranted. Further, management will continue to closely monitor the position and will alter the present strategy if necessary. While the position could increase or decrease from the March 31, 1994 level of $199 million, the size of the position will continue to be a function of management's assessment of the frequently changing economic situation in Brazil, a country that continues to be affected by hyperinflation and other economic difficulties. In addition, there will be a presidential election later this year in Brazil, bringing with it the potential for a change in economic policy both before and after the election. There can be no assurance, given the hyperinflationary conditions and economic difficulties experienced by Brazil, that the results of this position will not have an adverse effect on future levels of consolidated net interest revenue and margin. ********************** The increase in consolidated net interest revenue from the first quarter of 1993 is not necessarily indicative of future results. Net interest revenue and margin are affected by several factors, including the current interest rate environment, the mix and volume of assets and liabilities, the level of nonperforming assets, competitive pressures, 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 future levels of net interest revenue or margin. 18 PROVISION FOR CREDIT LOSSES The provision for credit losses was $45 million for the quarter ended March 31, 1994, compared with $22.5 million for the same period in 1993 and $10 million in the fourth quarter of 1993. The provision for credit losses in the first quarter of 1994 reflected management's assessment of the adequacy of the reserve for credit losses, taking into account the current risk characteristics of the loan portfolio and economic conditions. The increase in the provision for credit losses in the first quarter of 1994 also reflected, in part, the transfer of certain lower quality real estate assets to an accelerated disposition portfolio. This transfer is discussed below in Financial Condition - Credit Profile. The amount of future provisions will be a function of the quarterly review of the reserve for credit losses. This review will be affected by the risk characteristics of the portfolio and the economic conditions existing at that time and, therefore, there can be no assurance as to the amount of future provisions. NONINTEREST INCOME The following tables set forth the components of noninterest income, as well as a further breakdown of financial service fees and other income. Additional information on the change in noninterest income follows each table. Noninterest income for all periods has been restated to reflect the reclassification of certain Brazilian translation gains and losses. This reclassification is discussed in Net Interest Revenue and in Note 11 to the Financial Statements. Noninterest Income - ------------------ (in millions)
First Quarter -------------------------- 1994 1993 Change ---- ---- ------ Financial service fees $ 92 $ 71 $ 21 Trust and agency fees 48 44 4 Trading profits and commissions 4 7 (3) Securities portfolio gains, net 4 6 (2) Mezzanine/venture capital profits, net 14 21 (7) Foreign exchange trading profits 9 10 (1) Gain from sale of domestic factoring business 27 27 Other income 37 15 22 --- --- -- Total $ 235 $ 174 $ 61 === === ==
The increase in trust and agency fees reflected a higher volume of stock transfer business and higher fees from international mutual funds. The decline in mezzanine/venture capital profits from the first quarter of 1993 is mainly due to the absence of a large gain recorded on one transaction in that period. The increase in other income principally reflected net gains from the sale of securities originally acquired in connection with loan restructurings. On January 31, 1994, the Corporation completed the sale of its United States factoring business and recorded a gain of $27 million. The Corporation also has an agreement to sell its Canadian factoring business. This sale, which is subject to regulatory approval, is expected to close in mid-1994 for an additional pre-tax gain of approximately $5 million. 19 Financial Service Fees - ---------------------- (in millions)
First Quarter ------------------------- 1994 1993 Change ---- ---- ------ Deposit fees $ 30 $ 30 $ 0 Letter of credit and acceptance fees 13 14 (1) Mortgage servicing fees: Fee income 27 26 1 Amortization of mortgage servicing assets (17) (35) 18 --- --- --- Net mortgage servicing fees 10 (9) 19 Loan-related fees 14 9 5 Factoring fees 2 6 (4) Other 23 21 2 --- --- --- Total $ 92 $ 71 $ 21 === === ===
Financial service fees increased $21 million mainly due to a $19 million increase in net mortgage servicing fees. This increase primarily reflected lower amortization charges resulting from a declining rate of current and estimated future mortgage prepayments, as mortgage interest rates have risen. Future levels of amortization of mortgage servicing assets will be dependent on a number of factors, including changes in the level of mortgage interest rates and their effect on mortgage prepayments; as such, there can be no assurance as to the future amount of such amortization. In addition, loan-related fees increased principally due to higher syndication fees, while the decline in factoring fees reflected the January 31, 1994 sale of the Corporation's domestic factoring business. NONINTEREST EXPENSE The following table sets forth the components of noninterest expense: Noninterest Expense - ------------------- (in millions)
First Quarter ------------------------- 1994 1993 Change ---- ---- ------ Employee costs $ 195 $ 196 $ (1) Occupancy & equipment 55 58 (3) Professional fees 12 13 (1) Other 80 89 (9) --- --- --- Noninterest expense, excluding OREO costs 342 356 (14) OREO costs 5 19 (14) --- --- --- Total $ 347 $ 375 $ (28) === === ===
Noninterest expense, before OREO costs, declined $14 million from the first quarter of 1993. A decline in domestic employee costs was due, in part, to a lower number of employees, including a reduction caused by the January 31, 1994 sale of the Corporation's domestic factoring business. This decline was partially offset by higher payroll tax and compensation rates. The latter was affected by merit increases and a higher level of incentive compensation. Offsetting the decline in domestic employee costs was an increase in the international payroll, reflecting strategic investments in Latin America. Overall, the number of full time equivalent employees declined 1,200 between March 31, 1993 and March 31, 1994, from 19,700 to 18,500. Occupancy and equipment expense declined due, in part, to the recording of a property tax rebate in 1994. The decline in other expense included lower FDIC insurance premiums, stemming from lower rates and the refund of a portion of 1993's assessment, as well as a decline in travel expenses. The decline in OREO costs reflects lower valuation adjustments and a drop in the level of OREO assets from $156 million at March 31, 1993 to $66 million at March 31, 1994. 20 PROVISION FOR INCOME TAXES The provision for taxes on income before extraordinary items was $81 million for the first quarter of 1994, which represents an effective tax rate of 44%. In the first quarter of 1993, the Corporation reported a tax provision on income before the cumulative effect of accounting changes of $41 million, representing an effective tax rate of 41%. The increase in the income tax provision resulted from higher pre-tax income and, to a lesser extent, the higher effective tax rate. The increase in the effective tax rate resulted from the increase in federal income tax rates enacted in the middle of 1993, an increase in the estimate of foreign income taxes which may not be creditable for federal tax purposes, and an increase in the Corporation's effective state income tax rates. FINANCIAL CONDITION ------------------- CONSOLIDATED BALANCE SHEET At March 31, 1994, the Corproation's total assets were $42.4 billion, an increase of $1.8 billion from December 31, 1993. This increase was primarily due to a $1.2 billion increase in federal funds sold and resale agreements due, in part, to a higher level of resale agreements in overseas offices. During the first quarter of 1994, the Corporation adopted Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," that requires the reporting of gross unrealized gains and gross unrealized losses on foreign exchange and interest rate contracts separately as assets and liabilities. Netting of unrealized gains and losses is allowed if a right of setoff exists, including a right of setoff resulting from contracts executed with the same counterparty under a master netting arrangement. These unrealized gains and losses had previously been recorded on a net basis. The adoption of Interpretation No. 39 resulted in increases to other assets and other liabilities of $.3 billion compared with December 31, 1993. Other balance sheet changes between December 31, 1993 and March 31, 1994 included a $.5 billion decline in mortgages held for sale, reflecting a lower volume of mortgage originations and a $.2 billion decline in loans and leases, primarily resulting from the transfer of $308 million of domestic real estate- related loans to an accelerated disposition portfolio. Before the effect of this transfer, loans and leases increased $80 million reflecting, in part, higher international loans, mainly from Latin American operations. Additional information on the change in loans and leases from December 31, 1993 is contained in Credit Profile. In the fourth quarter of 1993, the Corporation's principal banking subsidiary, The First National Bank of Boston, initiated a short-term bank note program as an alternative source of funding. Funding obtained under this program amounted to $1.6 billion as of March 31, 1994, of which $1.2 billion was sold during the first quarter of 1994. This program, along with increased funds from other sources, including securities sold under agreements to repurchase and the treasury, tax and loan account, resulted in a $2.9 billion increase in funds borrowed. As a result of increased funds from these sources, the level of wholesale certificates of deposit and deposits obtained through retail programs with brokers (brokered CDs) was reduced. This resulted in a $1.3 billion decline in domestic interest bearing deposits, between December 31, 1993 and March 31, 1994, of which $700 million related to wholesale deposits and $300 million related to brokered CDs. The level of brokered CDs outstanding at March 31, 1994 was $400 million, compared with $700 million at December 31, 1993 and $1.7 billion at December 31, 1992. The Corporation's notes payable declined slightly from December 31, 1993. During the first quarter of 1994, the Corporation issued $300 million of 6 5/8% subordinated notes due 2004. This increase was more than offset by the Corporation's redemption of $179 million of its floating rate notes due 2000 at their principal amount plus accrued interest, and the call for prepayment of $186 million of senior debt by a nonbanking subsidiary of the Corporation, which had been due in installments through 1998, at its principal amount plus accrued interest and a prepayment penalty. The redemption of notes and the call for prepayment of senior debt, which were made to improve the Corporation's funding rates, resulted in an extraordinary loss, net of tax, in the first quarter of 1994 of $7 million. LIQUIDITY MANAGEMENT As of March 31, 1994 the Corporation's level of liquid assets stood at $5.0 billion, compared with $4.5 billion at December 31, 1993. In addition, Bank of Boston Corporation (on a Parent Company only basis) had net liquid assets (liquid assets in excess of short-term funding commitments) of $96 million at March 31, 1994, compared with $194 million at December 31, 1993. The decrease from December 31, 1993 resulted mainly from the redemption of the floating rate notes discussed above and the purchase of a $180 million subordinated note from The First National Bank of Boston, as discussed below, partially offset by the issuance of $300 million of subordinated notes, during the first quarter of 1994. In addition, $33 million was used for dividend payments on common and preferred stock. Management considers overall liquidity, on both a consolidated and Parent Company only basis, to be adequate at March 31, 1994 to meet current obligations, support its expectations for future changes in asset and liability levels and carry on normal operations. Further, the Corporation has access to additional liquidity through the public markets. 21 INTEREST RATE RISK MANAGEMENT Interest rate risk arises from the Corporation's normal banking activities due to an imbalance in the repricing or maturity schedules of assets and liabilities. The Corporation uses certain balance sheet items and off-balance- sheet financial markets instruments, including interest rate options, swaps and futures, in the management of this risk. These off-balance-sheet financial markets instruments provide the Corporation with important flexibility in managing interest rate exposure, enabling it to modify the repricing sensitivity of certain assets and liabilities. During 1993, the Corporation maintained a modest repricing imbalance on assets and liabilities that enabled it to benefit from declining domestic interest rates. In response to rising domestic interest rates in the first quarter of 1994, the Corporation changed its strategy by moving toward a more neutral position with respect to domestic interest rates. This change in strategy was accomplished through the use of certain balance sheet items and various off- balance-sheet financial markets instruments, including interest rate options, which as noted in the table below, increased from December 31, 1993. The following table presents information on the Corporation's off-balance-sheet financial markets instruments used for interest rate risk management purposes:
March 31, 1994 December 31, 1993 --------------------------------------------- --------------------------------------------------- Average Average Notional Remaining Fair Unrecognized Notional Remaining Fair Unrecognized (in millions) Amount Maturity Value(1) Gain/(Loss)(2) Amount Maturity Value(1) Gain(2) -------- --------- ------- -------------- -------- --------- ------- --------------- Futures and Forwards $ 2,889 3 months $ 39 $ 45 $3,581 3 months $ 2 $ 2 Interest Rate Swaps(3) 6,415 3 years (80) (77) 3,463 4 years 47 46 Interest Rate Options: Written or Sold 9,160 1 year (6) (3) 39 6 months Purchased 12,277 1 year 37 21 414 3 years 5 5 (1) 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. In certain cases, instruments are subject to daily cash settlements; as such, the fair value of these instruments is shown as zero in the table. (2) Unrecognized gain or loss represents the amount of gain or loss on the instruments as of the balance sheet date that has not been recognized in the income statement. Gains and losses on futures and forward contracts and options used to manage interest rate exposure are deferred and amortized over the period being managed as a component of interest income or expense. Income or expense on interest rate swap agreements used to manage interest rate exposure is accrued over the life of the agreement as an adjustment to interest income or expense. (3) The increase in the notional amount of interest rate swaps between December 31, 1993 and March 31, 1994 mainly reflects short term swaps from international operations whose fair value and unrecognized gain/loss at March 31, 1994 were immaterial.
The aggregate fair value of the off-balance-sheet financial markets instruments shown in the table above declined $64 million from December 31, 1993 to March 31, 1994. In addition, the unrecognized gain/loss moved from a gain of $53 million at December 31, 1993 to a loss of $14 million at March 31, 1994. These changes were mainly caused by the increase in domestic interest rates that occurred during the first quarter of 1994. Since the Corporation has maintained only modest repricing imbalances or a neutral position with respect to its assets and liabilities, including the effect of these off-balance-sheet financial instruments, the increases in domestic interest rates in the first quarter of 1994 did not have a significant effect on the Corporation's net interest revenue. The notional amounts of off-balance-sheet financial markets instruments represent the volume of outstanding transactions and do not represent the potential for gain or loss associated with the market risks or credit risk of such transactions. As such, the actual market or credit exposure for all these instruments is significantly less than the notional amounts. 22 CAPITAL In January and April 1994, the Board of Directors declared a quarterly dividend of $.22 per share, an increase from the $.10 per share that had been paid in each of the 1993 quarters. The payment of future common dividends will continue to be determined by the Board of Directors based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic and other factors deemed relevant by the Board of Directors, including the amount of dividends paid to the Corporation by its subsidiaries. The Corporation's Tier 1 and total capital ratios were 7.4% and 12.7%, respectively, at March 31, 1994, compared with 7.2% and 12.4%, respectively, at December 31, 1993. The Corporation's leverage ratio at March 31, 1994 was 6.9% compared with 6.8% at December 31, 1993. These ratios exceeded the minimum requirements of current regulations. The increase in the ratios from December 31 is a result of first quarter net income, net of common and preferred dividends, as well as the additional capital provided from the Corporation's subordinated debt issuance discussed above. Stockholders' equity increased $36 million between December 31, 1993 and March 31, 1994. This was mainly due to first quarter net income of $96 million, partially offset by the payment of dividends and a $40 million decline, net of tax, of unrealized gains in the securities available for sale portfolio. A major portion of this $40 million decline was due to a decline in the fair value of foreign debt securities. As of March 31, 1994, all of the Corporation's banking subsidiaries met both the minimum requirements of current regulations with respect to capital ratios and the capital ratio aspects of the "well capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The Corporation has received approval from the Office of the Comptroller of the Currency (the OCC) to merge South Shore Bank, Mechanics Bank and Multibank West into The First National Bank of Boston. These banking subsidiaries were acquired in connection with the Corporation's merger with Multibank Financial Corp., completed in July 1993. The merger with South Shore Bank was accomplished in May 1994, at which time a memorandum of understanding that had existed between South Shore Bank and the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks was terminated. The Corporation expects the remaining two mergers to occur by the end of the second quarter. Currently, two of the Corporation's subsidiaries, Bank of Boston Connecticut and Multibank West, would not be considered "well capitalized" for purposes of FDICIA due to an existing agreement and order, respectively, with their primary bank regulator. The agreement and the approval order with respect to these subsidiaries require that the subsidiary banks meet and maintain certain specific capital ratios, and each of the banks is in compliance with the requirement. The Corporation anticipates that the order with respect to Multibank West will be terminated upon completion of its merger with The First National Bank of Boston. The capital categories of the Corporation's banking subsidiaries are determined solely for purposes of applying FDICIA's provisions and, accordingly, such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's banking subsidiaries. In order to assist the Corporation's banking subsidiaries to maintain regulatory capital at desired levels and in connection with its capital planning process, the Corporation has provided capital contributions to certain of its banking subsidiaries in the past, and may contribute additional capital to its banking subsidiaries in future periods, if needed, to assist the subsidiaries in maintaining capital ratios at desired levels. While no capital contributions were made to banking subsidiaries during the first quarter of 1994, the Corporation purchased a $180 million subordinated note, which qualifies as tier 2 capital, from The First National Bank of Boston. ACQUISITIONS On March 2, 1994, the Corporation announced that it had reached a definitive agreement to acquire Pioneer Financial, A Co-operative Bank (Pioneer) for $118 million in cash. Pioneer, which is based in Massachusetts' Middlesex County, is a privately owned cooperative bank with total assets of approximately $773 million at March 31, 1994. The acquisition, which will be accounted for as a purchase, has been approved by the boards of directors of both companies. Completion of this acquisition, which is not expected to occur until the second half of 1994, is subject to approvals by the banking regulators and Pioneer stockholders, as well as a review by the United States Department of Justice (the Justice Department). No assurance can be given as to the outcome of this review or that approvals of the regulators will be obtained. Until actual consummation, Pioneer will continue to operate independently of the Corporation. On April 26, 1994, the OCC approved the Corporation's acquisition of BankWorcester Corporation (BankWorcester). The total purchase price is expected to be $247 million. BankWorcester, based in Worcester, Massachusetts, is the largest banking institution in Worcester County with total assets of $1.5 billion at March 31, 1994. Completion of the transaction, which is expected to occur in May 1994, remains subject to required approval by the state banking regulator and a review by the Justice Department. No assurance can be given as to the outcome of this review or that state regulatory approval will be obtained. Until actual consummation, BankWorcester will continue to operate independently of the Corporation. 23 CREDIT PROFILE The segments of the lending portfolio are as follows:
March 31 Dec. 31 Sept. 30 June 30 March 31 (in millions) 1994 1993 1993 1993 1993 -------- ------- -------- ------- -------- Domestic: Commercial, industrial and financial $ 12,080 $ 11,991 $ 11,380 $ 10,778 $ 10,131 Commercial real estate: Construction 572 617 705 714 740 Other 3,073 3,123 3,054 3,167 3,181 ------ ------ ------ ------ ------ Total commercial real estate 3,645 3,740 3,759 3,881 3,921 Real estate loans secured by 1-4 family residential properties 3,963 4,159 4,291 3,836 3,650 Loans to individuals 1,795 1,610 1,556 1,530 1,452 Lease financing 1,257 1,264 1,226 1,187 1,197 Unearned income (202) (204) (210) (298) (295) ------ ------ ------ ------ ------ 22,538 22,560 22,002 20,914 20,056 ====== ====== ====== ====== ====== International: Loans and lease financing, net of unearned income 6,324 6,222 5,935 5,464 5,256 ------ ------ ------ ------ ------ Subtotal 28,862 $ 28,782 $ 27,937 $ 26,378 $ 25,312 ------ ====== ====== ====== ====== Less loans transferred to accelerated disposition portfolio 308 ------ Total loans and lease financing $ 28,554 ======
Before the effect of the transfer of $308 million of domestic real estate- related loans to an accelerated disposition portfolio discussed below, the Corporation's domestic loans showed a slight decline from December 31, 1993. This was primarily caused by the sale of the domestic factoring business, decreases in the mortgage warehousing and residential mortgage portfolios and the paydown of several large loans. These decreases were essentially offset by increases in the specialized industry and consumer loan portfolios. International loans increased $102 million from December 31, 1993, mainly due to higher Latin American loan volume, particularly in Argentina. Additional information on the Corporation's international outstandings can be found under Cross-Border Outstandings. A discussion of the Corporation's real estate lending activities is included in the Corporation's 1993 Annual Report to Stockholders on pages 39 through 41, which is incorporated by reference in its 1993 Annual Report on Form 10-K. The following tables set forth the Corporation's domestic commercial real estate loans and OREO, and domestic commercial real estate nonaccrual loans and OREO, by geographic location at March 31, 1994. 24 DOMESTIC COMMERCIAL REAL ESTATE OUTSTANDINGS BY GEOGRAPHIC LOCATION
Other Other (in millions) Massachusetts Connecticut New England Florida Texas States Total Balance at March 31, 1994 (1) $1,137 $408 $755 $195 $65 $898 $3,458 ====== ==== ==== ==== === ==== ====== Balance at December 31, 1993 $1,373 $607 $802 $187 $54 $823 $3,846 ====== ==== ==== ==== === ==== ====== (1) Excludes assets transferred to accelerated disposition portfolio at March 31, 1994.
DOMESTIC COMMERCIAL REAL ESTATE NONACCRUAL LOANS AND OREO BY GEOGRAPHIC LOCATION
Other Other (in millions) Massachusetts Connecticut New England Florida Texas States Total Balance at March 31, 1994 (1) $ 63 $45 $39 $ 9 $5 $ 64 $225 ==== === === === == ==== ==== Balance at December 31, 1993 $103 $68 $52 $15 $8 $121 $367 ==== === === === == ==== ==== Percent of related outstandings at March 31, 1994 6% 11% 5% 5% 8% 7% 7% (1) Excludes assets transferred to accelerated disposition portfolio at March 31, 1994.
25 The details of consolidated nonaccrual loans and OREO are as follows:
March 31 Dec. 31 Sept. 30 June 30 March 31 (in millions) 1994 (1) 1993 1993 1993 1993 -------- ------- -------- ------- -------- Domestic: Commercial, industrial and financial $ 112 $ 121 $ 131 $ 150 $ 161 Commercial real estate: Construction 27 30 37 51 56 Other 134 231 225 275 317 ----- ----- ----- ----- ----- Total commercial real estate 161 261 262 326 373 Real estate loans secured by 1-4 family residential properties 17 64 65 59 61 Loans to individuals 13 10 13 20 21 Lease financing 0 1 1 1 3 ----- ----- ----- ----- ----- 303 457 472 556 619 ----- ----- ----- ----- ----- International 96 94 86 43 45 ----- ----- ----- ----- ----- Total nonaccrual loans 399 551 558 599 664 OREO 66 108 136 129 156 ----- ----- ----- ----- ----- Total $ 465 $ 659 $ 694 $ 728 $ 820 ===== ===== ===== ===== ===== Nonaccrual loans and OREO as a percent of related asset categories 1.6% 2.3% 2.5% 2.7% 3.2% (1) Excludes assets transferred to accelerated disposition portfolio.
The following table summarizes the changes in nonaccrual loans and OREO which have occurred during the last nine quarters:
1992 1993 1994 ---------------------------------------- ------------------------------------ ------ First Second Third Fourth First Second Third Fourth First (in millions) Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr ------- ------- ------- ------- ------ ------ ------ ------ ------ Beginning balance $ 1,838 $ 1,597 $ 1,323 $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659 Additions 150 156 184 180 107 117 135 127 169 Restructurings (60) (61) (104) (29) (13) (14) Transfers to accelerated disposition portfolio (before writedown) (224) Sales, payments and other decreases (199) (252) (180) (187) (132) (115) (105) (103) (88) Credit losses and valuation write-downs (132) (117) (110) (128) (91) (80) (64) (59) (51) ------- ------- ------- ------- ------ ------ ------ ------ ------ Ending balance $ 1,597 $ 1,323 $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659 $ 465 ======= ======= ======= ======= ====== ====== ====== ====== ======
Nonaccrual loans and OREO declined $194 million from December 31, 1993; however, exclusive of the transfer of $224 million of nonperforming real estate assets to the accelerated disposition portfolio discussed below, nonaccrual loans and OREO increased $30 million from December 31, 1993. The level of nonaccrual loans and leases and OREO is influenced by the economic environment, interest rates, regulatory attitudes and other internal and external factors. Although the Corporation expects that it will experience some increase in the level of nonaccrual loans, it believes that the level of nonaccruals will remain well within an acceptable range. 26 ACCELERATED DISPOSITION PORTFOLIO During the first quarter of 1994, in order to expedite the disposition of a component of its remaining problem real estate assets and to strengthen its balance sheet, the Corporation transferred $378 million of lower quality real estate exposure to an accelerated disposition portfolio. At the point of transfer, and after an individual review of each exposure, the Corporation took a chargeoff of $119 million, leaving the March 31, 1994 carrying value of the balance sheet portion of the pool at $241 million. A substantial portion of the credit risk associated with these assets had been considered in determining the adequacy of the Corporation's reserve for credit losses in prior periods. The carrying value approximates the estimated disposition value of the assets on a liquidation basis, and is not indicative of the value that would be realized if these assets were managed in the normal course of business or disposed of on a basis other than liquidation. Until liquidated, this portfolio will be carried at the lower of the newly established carrying value or estimated disposition value. The accelerated disposition portfolio consisted of the following:
Carrying Value Before Estimated Valuation Disposition Adjustment Value ------------ ----------- (in millions) Loans Nonaccrual real estate, including 1-4 family residential $ 193 $ 129 Performing renegotiated loans 75 51 Other performing real estate 40 30 OREO 31 31 ------- ------- Total balance sheet assets 339 241 Off-balance-sheet exposure (letters of credit) 39 18 ------- ------- Total exposure $ 378 $ 259 ======= =======
RENEGOTIATED LOANS As part of its approach to managing credit, the Corporation renegotiates certain of its loans when a determination is made that greater economic value will ultimately be realized under the new terms than through foreclosure, liquidation or bankruptcy. Renegotiated loans totaled $116 million at March 31, 1994, compared with $225 million at December 31, 1993. The decline was due to the transfer of $75 million of renegotiated loans to an accelerated disposition portfolio and the return of $34 million of renegotiated loans to nonaccrual status. The renegotiated loans outstanding at March 31, 1994, which had a yield of approximately 8 percent, are performing in accordance with their new terms and are not included in nonaccrual loans. Renegotiated loans as of each of the last five quarter-ends were as follows:
March 31 Dec. 31 Sept. 30 June 30 March 31 (dollars in millions) 1994 1993 1993 1993 1993 -------- ------- -------- ------- -------- Renegotiated loans $ 116 $ 225 $ 244 $ 248 $ 256 ==== ==== ==== ==== ==== Approximate yield on renegotiated 8% 8% 8% 8% 7% loans ==== ==== ==== ==== ====
In connection with the renegotiation of loans, the Corporation may obtain equity interests in the borrower. Under certain circumstances, the Corporation's investment in and loans to such borrowers are accounted for as investments and included in other assets. Such investments amounted to $42 million at March 31, 1994 compared with $41 million at December 31, 1993. HIGHLY LEVERAGED TRANSACTIONS The Corporation's total loan portfolio at March 31, 1994 included $1.2 billion of highly leveraged transaction (HLT) loans to 72 customers, compared with $1.3 billion to 75 customers at December 31, 1993. The average HLT loan size was $17 million at both March 31, 1994 and December 31, 1993. The HLT loans are to customers operating in a variety of industries. The amount of unused commitments for HLTs at March 31, 1994 was $409 million, compared with $540 million at December 31, 1993. 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 March 31, 1994, $4 million of the HLT portfolio was on nonaccrual status, compared with $10 million at December 31, 1993. There were no net credit losses from the HLT portfolio in the first quarter of 1994, compared with $2 million in the fourth quarter of 1993 and $10 million in the first quarter of 1993. The Corporation actively manages the risks in its HLT portfolio, including adherence to special HLT lending limits and periodic reviews of the portfolio by senior managers. The Corporation has historically been involved in transactions that qualify as HLTs and it expects to continue to agent and participate in such transactions in the future. The Corporation, however, does not currently anticipate a substantial increase in HLT lending over the March 31, 1994 level. A discussion of the Corporation's HLT lending activities, policies and the effect of these activities on results of operations is included in the Corporation's 1993 Annual Report to Stockholders on pages 41 through 43, which is incorporated by reference in its 1993 Annual Report on Form 10-K. 27 RESERVE FOR CREDIT LOSSES The reserve for credit losses at March 31, 1994 was $664 million, or 2.33%, of outstanding loans and leases, compared with $770 million or 2.68% at December 31, 1993 and $870 million, or 3.44%, at March 31, 1993. The reserve for credit losses was 166% of nonaccrual loans and leases at March 31, 1994, compared with 140% at December 31, 1993 and 131% at March 31, 1993. Net credit losses were $151 million for the first quarter of 1994, compared with $76 million for the first quarter of 1993. Excluding the writedowns in connection with the accelerated disposition portfolio, net credit losses were $32 million for the first quarter of 1994, and as a percentage of average loans and leases on an annualized basis were .46% in the first quarter of 1994, compared with .54% for the fourth quarter of 1993 and 1.22% for the first quarter of 1993. Net credit losses were as follows:
(in millions) First Quarter --------------- 1994 1993 ---- ---- Domestic: Commercial, industrial and financial $ (2) $ 14 Commercial real estate 7 32 Loans secured by 1-4 family residential properties 3 3 Loans to individuals 11 4 ---- ---- 19 53 International 13 23 Related to transfer to accelerated disposition portfolio 119 ---- ---- Total $ 151 $ 76 ==== ====
* * * * * * While the domestic economy continued its gradual improvement and interest rates increased during the first quarter of 1994, management cannot predict to what extent this recovery or changes in interest rates will affect future periods. In addition, it is uncertain what impact future changes in the economies in Latin America, and other foreign countries where the Corporation does business, will have on future periods. No assurance, therefore, can be given as to the Corporation's future levels of net income, loans, nonperforming assets or credit losses. 28 CROSS-BORDER OUTSTANDINGS Total cross-border outstandings, which are reported on a regulatory basis, represented 16% of consolidated total assets at March 31, 1994 and 14% at December 31, 1993. Cross-border outstandings in countries which individually amounted to 1% or more of consolidated total assets at March 31, 1994 and December 31, 1993 were approximately as follows:
Percentage of Consolidated (dollars in millions) Public Banks Other Total Total Assets Commitments(2) ------ ----- ------- ----- ------------ ------------- March 31, 1994 (1) - -------------- Argentina $270 $220 $1,035 $1,525 3.6 % $85 Brazil 45 795 840 2.0 20 Japan 790 50 840 2.0 5 United Kingdom 45 645 690 1.6 190 December 31,1993 (1) - ---------------- Argentina $255 $225 $1,025 $1,505 3.7 % $40 Brazil 110 695 805 2.0 20 United Kingdom 15 565 580 1.4 145 (1) Cross-border outstandings in countries which fell between .75% and 1.0% of consolidated total assets at March 31, 1994 and December 31, 1993 were approximately as follows: Chile $415 million and Korea $335 million at March 31, 1994; Canada $315 million, Chile $395 million and Korea $310 million at December 31, 1993. (2) Included within commitments are letters of credit and guarantees and the undisbursed portion of loan commitments. Amounts presented are net of reallocations.
At March 31, 1994, approximately $3.3 billion of the Corporation's cross-border outstandings were to Less Developed Countries (LDCs). These were principally comprised of $1.6 billion of short-term performing trade credits and capital investments in the Corporation's South American operations, $.9 billion of non- trade-related loans not subject to country debt rescheduling, and $.2 billion of securities. Only $4 million of the March 31, 1994 cross-border outstandings were non-trade-related loans and leases, which have been subject to country debt rescheduling agreements, of which $1 million are on nonaccrual. The Corporation does not separately allocate a portion of its reserve for credit losses for LDC loans and leases; however, they are considered in the determination of the adequacy of the overall reserve for credit losses. 29 Of the $3.3 billion of total LDC cross-border outstandings at March 31, 1994, approximately $1.5 billion or 45%, related to Argentina and $.8 billion, or 25%, related to Brazil. Changes in aggregate cross-border outstandings to Argentina and Brazil since December 31, 1993 were approximately as follows:
(in millions) Argentina Brazil --------- ------ Cross-border outstandings at December 31, 1993 $1,505 $805 Increase in non-trade-related loans and leases not subject to country debt rescheduling 59 Net change in trade-related cross-border outstandings, primarily short-term (56) 72 Net change in investment and trading securities 7 (12) Net change in local currency assets funded by non-local currency liabilities (27) Other 10 2 --------- ------- Cross-border outstandings at March 31, 1994 $1,525(1) $840(2) ========= ======= (1) Approximately 49% are non-trade-related local dollar loans funded by locally generated dollar liabilities and approximately 27% relates to trade-related outstandings. (2) Approximately 70% relates to trade-related outstandings.
The Corporation has not experienced and does not expect to experience any collection problems stemming from currency restrictions or foreign exchange liquidity problems on its current portfolio of LDC cross-border outstandings, except as such problems relate to its small remaining portfolio of non-trade- related cross-border outstandings subject to country debt rescheduling agreements. Management is monitoring the situation in Brazil closely as the country continues to be subject to hyperinflation and other economic difficulties. While minimal problems have been experienced to date with respect to the Corporation's current portfolio of LDC cross-border outstandings, there can be no assurance that such problems will not occur in the future. 30 Consolidated Balance Sheet Averages by Quarter Last Nine Quarters (in millions)
1992 1993 1994 ------------------------------------------- ----------------------------------------- -------- 1 2 3 4 1 2 3 4 1 ------------------------------------------- ----------------------------------------- -------- ASSETS Interest bearing deposits in other banks $ 1,195 $ 1,315 $ 1,222 $ 1,252 $ 1,262 $ 1,422 $ 1,305 $ 1,185 $ 1,083 Federal funds sold and securities purchased under agreements to resell 1,204 1,063 1,092 801 1,309 1,089 1,367 2,005 2,447 Trading securities 248 183 233 242 290 276 300 259 223 Mortgages held for sale 616 607 640 869 682 944 1,334 1,314 960 Securities 5,156 4,232 4,521 4,907 3,909 3,838 3,561 3,194 3,174 Loans and lease financing 25,198 25,248 25,577 25,269 25,224 25,854 26,953 28,172 28,615 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total earning assets 33,617 32,648 33,285 33,340 32,676 33,423 34,820 36,129 36,502 Other assets 3,377 3,592 3,589 3,956 3,775 4,078 4,248 4,274 4,712 ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL ASSETS $ 36,994 $ 36,240 $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214 ====== ====== ====== ====== ====== ====== ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Domestic offices: Noninterest bearing $ 3,669 $ 3,731 $ 3,762 $ 4,220 $ 4,031 $ 4,397 $ 4,578 $ 4,863 $ 4,633 Interest bearing 21,062 20,771 20,567 20,084 19,245 18,580 18,360 18,096 17,110 Overseas offices: Noninterest bearing 281 290 360 362 349 336 387 469 497 Interest bearing 4,102 4,314 4,322 4,214 4,537 4,881 5,218 5,819 6,375 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total deposits 29,114 29,106 29,011 28,880 28,162 28,194 28,543 29,247 28,615 Federal funds purchased and repurchase agreements 2,171 1,420 1,708 2,207 1,705 2,315 3,430 3,787 3,619 Other funds borrowed 1,638 1,578 1,713 1,507 1,436 1,606 1,485 1,603 2,411 Notes payable 1,192 1,187 1,186 1,223 1,669 1,670 1,752 1,876 2,194 Other liabilities 930 865 919 957 886 1,022 1,085 1,073 1,433 Stockholders' equity 1,949 2,084 2,337 2,522 2,593 2,694 2,773 2,817 2,942 ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,994 $ 36,240 $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214 ====== ====== ====== ====== ====== ====== ====== ====== ======
31 Consolidated Statement of Income by Quarter - Taxable Equivalent Basis Last Nine Quarters (in millions, except per share amounts)
1992 1993 1994 ------------------------------------- ------------------------------------- ------- 1 2 3 4 1 2 3 4 1 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net interest revenue $ 284.8 $ 306.7 $ 327.9 $ 336.3 $ 324.2 $ 330.5 $ 340.8 $ 349.3 $ 340.7 Taxable equivalent adjustment 2.8 2.2 2.1 3.7 1.8 1.7 2.3 2.0 1.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total Net Interest Revenue 287.6 308.9 330.0 340.0 326.0 332.2 343.1 351.3 342.2 Provision for credit losses 67.9 45.2 44.5 23.0 22.5 27.6 10.0 10.0 45.0 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net interest revenue after provision for credit losses 219.7 263.7 285.5 317.0 303.5 304.6 333.1 341.3 297.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Noninterest Income: Financial service fees 92.1 93.0 81.1 88.9 71.3 92.6 90.9 95.2 92.4 Trust and agency fees 42.4 40.5 41.1 42.0 43.9 45.2 43.1 45.5 47.7 Trading profits and commissions 4.5 5.4 5.5 .5 6.9 5.8 6.9 3.9 3.9 Securities portfolio gains 17.2 11.6 8.7 1.5 6.4 6.0 11.0 8.8 3.9 Other income 56.6 38.5 40.9 45.7 45.9 41.4 39.3 35.6 87.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest income 212.8 189.0 177.3 178.6 174.4 191.0 191.2 189.0 235.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- Noninterest Expense: Salaries 140.2 146.1 154.9 163.7 159.1 161.7 160.4 153.3 157.8 Employee benefits 31.9 32.9 30.4 25.6 37.5 33.7 32.2 32.7 36.9 Occupancy expense 32.2 31.6 31.7 31.0 32.2 32.2 32.2 31.3 31.9 Equipment expense 26.0 24.7 24.6 25.5 25.6 24.0 23.3 23.4 23.6 Restructuring expense 85.0 Other expense 130.3 125.7 123.9 141.2 121.3 116.7 107.1 105.9 96.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest expense 360.6 361.0 365.5 387.0 375.7 368.3 440.2 346.6 346.7 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles 71.9 91.7 97.3 108.6 102.2 127.3 84.1 183.7 185.6 ----- ----- ----- ----- ----- ----- ----- ----- ----- Provision for income taxes 28.2 41.6 40.3 42.7 40.9 54.2 40.4 79.2 81.4 Taxable equivalent adjustment 2.8 2.2 2.1 3.7 1.8 1.7 2.3 2.0 1.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- 31.0 43.8 42.4 46.4 42.7 55.9 42.7 81.2 82.9 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before extraordinary items and cumulative effect of changes in accounting principles 40.9 47.9 54.9 62.2 59.5 71.4 41.4 102.5 102.7 Extraordinary items 18.3 18.4 19.0 17.3 (6.6) Cumulative effect of changes in accounting principles, net 24.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- NET INCOME $ 59.2 $ 66.3 $ 73.9 $ 79.5 $ 83.7 $ 71.4 $ 41.4 $ 102.5 $ 96.1 ===== ===== ===== ===== ===== ===== ===== ===== ===== Per Common Share: Income before extraordinary items and cumulative effect of changes in accounting principles: Primary $ .60 $ .43 $ .47 $ .52 $ .49 $ .60 $ .30 $ .88 $ .88 Fully diluted .59 .42 .46 .50 .48 .59 .30 .85 .85 Net Income: Primary $ .60 $ .61 $ .65 $ .68 $ .72 $ .60 $ .30 $ .88 $ .82 Fully diluted .59 .59 .63 .66 .70 .59 .30 .85 .79 Cash dividends declared .10 .10 .10 .10 .10 .22
32 Average Balances and Interest Rates Quarters ended March 31 (dollars in millions)
CONSOLIDATED 1994 1993 ----------------------------------------- ------------------------------------- Average Interest Average Average Interest Average Balance (1) Rate(7) Balance (1) Rate(7) ------------------------------------------------------------------------------------- ASSETS Interest bearing deposits in other banks $ 1,083 $ 22.3 8.37% $ 1,262 $ 36.0 11.58% Federal funds sold and securities purchased under agreements to resell 2,447 79.7 13.21 1,309 22.3 6.89 Trading securities 223 2.5 4.49 290 1.9 2.64 Mortgages held for sale 960 15.7 6.61 682 13.4 7.94 Securities (2): Available for sale 1,093 37.2 13.80 Held to maturity 2,081 24.0 4.69 ------- ------ Total 3,174 61.2 7.83 3,909 70.1 7.28 Loans and lease financing (3) 28,615 543.7 7.71 25,224 518.4 8.33 ------- ------ ------- ------ Total earning assets - interest income 36,502 725.1 8.06 32,676 662.1 8.22 ------ ----- ------ ----- Cash and due from banks 2,157 1,672 Other assets 2,555 2,103 ------- ------ Total assets $ 41,214 $ 36,451 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Savings $ 9,257 $ 43.5 1.91% $ 9,220 $ 59.1 2.62% Time 7,853 86.3 4.46 10,025 122.0 4.94 International Operations 6,375 109.8 6.99 4,537 83.6 7.47 Federal funds purchased and repurchase agreements 3,619 36.8 4.12 1,705 16.5 3.91 Other funds borrowed 2,411 73.3 12.33 1,436 26.2 7.42 Notes payable 2,194 33.2 6.14 1,669 28.7 6.98 Intersegment funds, net ------- ------ ------- ------ Total interest bearing funds interest expense (4) 31,709 382.9 4.90 28,592 336.1 4.78 ------- ------ ----- ------ ----- Demand and other noninterest bearing deposits: United States Operations 4,633 4,031 International Operations 497 349 Other liabilities 1,433 886 Stockholders' equity 2,942 2,593 ------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,214 $ 36,451 ======= ======= NET INTEREST REVENUE $ 342.2 $ 326.0 ====== ====== INTEREST RATE MARGIN(6) 3.80% 4.05% (1) This data is shown with income on a fully taxable equivalent basis. (2) Prior to January 1, 1994, average balances for Securities Available for Sale and Securities Held to Maturity were not separately accumulated. (3) Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. (4) Average rates for interest bearing funds of United States Operations have been calculated after deducting applicable reserve requirements from average balances shown in the table. (5) Other liabilities includes net intersegment allocations. (6) Interest rate margin is calculated by dividing annualized net interest revenue by average total earning assets. (7) During the first quarter of 1994, the Corporation reclassified the translation gains and losses associated with Brazilian local currency earning assets and interest bearing liabilities from noninterest income to interest income and interest expense, respectively. This reclassification is more fully discussed in Note 11 to the Financial Statements.
33 Average Balances and Interest Rates Quarters ended March 31 (dollars in millions)
UNITED STATES OPERATIONS 1994 1993 -------------------------------------- -------------------------------------- Average Interest Average Average Interest Average Balance (1) Rate Balance (1) Rate ----------------------------------------------------------------------------------- ASSETS Interest bearing deposits in other banks $ 254 $ 1.7 2.78% $ 334 $ 2.9 3.55% Federal funds sold and securities purchased under agreements to resell 1,323 10.5 3.21 1,031 7.9 3.09 Trading securities 112 1.2 4.23 134 1.4 4.22 Mortgages held for sale 960 15.7 6.61 682 13.4 7.94 Securities (2): Available for sale 632 11.5 7.39 Held to maturity 1,817 21.3 4.76 ------ ----- Total 2,449 32.8 5.44 3,491 53.4 6.21 Loans and lease financing (3) 22,305 401.0 7.29 20,187 392.4 7.88 ------ ----- ------ ----- Total earning assets - interest income 27,403 462.9 6.85 25,859 471.4 7.39 ----- ---- ----- ---- Cash and due from banks 1,738 1,348 Other assets 1,692 1,418 ------ ------ Total assets $ 30,833 $ 28,625 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Savings $ 9,257 $ 43.5 1.91% $ 9,220 $ 59.1 2.62% Time 7,853 86.3 4.46 10,025 122.0 4.94 International Operations Federal funds purchased and repurchase agreements 3,390 26.6 3.18 1,515 10.8 2.87 Other funds borrowed 1,482 17.8 4.87 945 9.4 4.04 Notes payable 2,104 29.9 5.77 1,560 25.3 6.59 Intersegment funds, net (1,587) (15.3) (1,767) (10.6) ------ ----- ------ ----- Total interest bearing funds interest expense (4) 22,499 188.8 3.40 21,498 216.0 4.09 ----- ---- ----- ---- Demand and other noninterest bearing deposits: United States Operations 4,633 4,031 International Operations Other liabilities (5) 1,500 1,059 Stockholders' equity 2,201 2,037 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,833 $ 28,625 ====== ====== NET INTEREST REVENUE $ 274.1 $ 255.4 ===== ===== INTEREST RATE MARGIN(6) 4.06% 4.01% (1) This data is shown with income on a fully taxable equivalent basis. (2) Prior to January 1, 1994, average balances for Securities Available for Sale and Securities Held to Maturity were not separately accumulated. (3) Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. (4) Average rates for interest bearing funds of United States Operations have been calculated after deducting applicable reserve requirements from average balances shown in the table. (5) Other liabilities includes net intersegment allocations. (6) Interest rate margin is calculated by dividing annualized net interest revenue by average total earning assets.
34 Average Balances and Interest Rates Quarters ended March 31 (dollars in millions) INTERNATIONAL OPERATIONS
1994 1993 -------------------------------------- -------------------------------------- Average Interest Average Average Interest Average Balance (1) Rate(7) Balance (1) Rate(7) ----------------------------------------------------------------------------------- ASSETS Interest bearing deposits in other banks $ 829 $ 20.6 10.09% $ 928 $ 33.1 14.47% Federal funds sold and securities purchased under agreements to resell 1,124 69.2 24.97 278 14.4 20.93 Trading securities 111 1.3 4.76 156 .5 1.28 Mortgages held for sale Securities (2): Available for sale 461 25.7 22.60 Held to maturity 264 2.7 4.18 ------ ----- Total 725 28.4 15.88 418 16.7 16.24 Loans and lease financing (3) 6,310 142.7 9.17 5,037 126.0 10.14 ------ ----- ----- ----- Total earning assets - interest income 9,099 262.2 11.69 6,817 190.7 11.34 ----- ----- ----- ----- Cash and due from banks 419 324 Other assets 863 685 ------ ----- Total assets $ 10,381 $ 7,826 ====== ===== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Savings Time International Operations $ 6,375 $ 109.8 6.99% $ 4,537 $ 83.6 7.47% Federal funds purchased and repurchase agreements 229 10.2 18.22 190 5.7 12.19 Other funds borrowed 929 55.5 24.22 491 16.8 13.92 Notes payable 90 3.3 14.74 109 3.4 12.60 Intersegment funds, net 1,587 15.3 1.767 10.6 ------ ----- ----- ----- Total interest bearing funds interest expense (4) 9,210 194.1 8.55 7,094 120.1 6.87 ----- ----- ----- ----- Demand and other noninterest bearing deposits: United States Operations International Operations 497 349 Other liabilities (5) (67) (173) Stockholders' equity 741 556 ------ ----- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,381 $ 7,826 ====== ===== NET INTEREST REVENUE $ 68.1 $ 70.6 ===== ===== INTEREST RATE MARGIN(6) 3.03% 4.20% (1) This data is shown with income on a fully taxable equivalent basis. (2) Prior to January 1, 1994, average balances for Securities Available for Sale and Securities Held to Maturity were not separately accumulated. (3) Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. (4) Average rates for interest bearing funds of United States Operations have been calculated after deducting applicable reserve requirements from average balances shown in the table. (5) Other liabilities includes net intersegment allocations. (6) Interest rate margin is calculated by dividing annualized net interest revenue by average total earning assets. (7) During the first quarter of 1994, the Corporation reclassified the translation gains and losses associated with Brazilian local currency earning assets and interest bearing liabilities from noninterest income to interest income and interest expense, respectively. This reclassification is more fully discussed in Note 11 to the Financial Statements.
35 Change in Net Interest Revenue - Volume and Rate Analysis The following table summarizes the changes in net interest revenue, on a fully taxable equivalent basis, by the amount resulting from changes in rate and the amount resulting from changes in volume. First Quarter 1994 Compared With First Quarter 1993 - (in millions)
United States International Consolidated Increase Increase Increase (Decrease) (Decrease) (Decrease) Due to Due to Due to Change in Change in Change in Net Net Net Volume(2) Rate Change Volume(2) Rate Change Volume(2) Rate Change -------- ---- ------ --------- ----- ------ --------- ----- ------ Interest Income: Loans and lease financing $ 38.1 $ (29.5) $ 8.6 $ 28.8 $ (12.1) $ 16.7 $ 64.4 $ (39.1) $ 25.3 Other earning assets (7.0) (10.1) (17.1) 43.2 11.6 54.8 10.0 27.7 37.7 Adjustment (1) (5.0) 5.0 0.0 (6.2) 6.2 0.0 1.6 (1.6) 0.0 ---- ----- ----- ----- ----- ---- ---- ----- ---- Total interest income 26.1 (34.6) (8.5) 65.8 5.7 71.5 76.0 (13.0) 63.0 Total interest expense 10.6 (37.8) (27.2) 48.7 25.3 74.0 40.2 6.6 46.8 ---- ------ ------ ---- ----- ---- ---- ----- ---- Net Interest Revenue $ 15.5 $ 3.2 $ 18.7 $ 17.1 $ (19.6) $ (2.5) $ 35.8 $ (19.6) $ 16.2 ==== ===== ===== ==== ===== ===== ==== ====== ==== (1) Adjustment to reflect the effect on total volume and rate changes of the differences in the component mix of earning assets and interest bearing liabilities between periods. (2) The change due to the volume/rate variance has been allocated to volume.
36 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. As previously reported, in January 1994, the Securities and Exchange Commission (the Commission) commenced an administrative proceeding against the Corporation. The administrative proceeding relates to the Commission's claim that the Corporation's second quarter 1989 Form 10-Q did not disclose known trends or uncertainties with respect to the Corporation's credit portfolio and specifically its domestic commercial real estate portfolio. The Corporation reported a significant loss in the third quarter of 1989 as a result of adding to its reserve for credit losses, primarily due to deterioration in the credit quality of its domestic commercial real estate portfolio. Management believes that the disclosures made in its second quarter 1989 Form 10-Q were appropriate and intends to defend the action vigorously. A hearing before an administrative law judge commenced on May 2, 1994. Although management cannot predict the outcome of this proceeding, an unfavorable outcome will not result in any monetary penalties to the Corporation. Item 4. Submission of Matters to a Vote of Security Holders. (A) The Annual Meeting of Stockholders of the Corporation was held on April 28, 1994. (B) The following matters were submitted to a vote of the Stockholders of the Corporation:
(1) Election of Directors ------------------------- Nominee Total Votes For Total Votes Withheld - ------- --------------- -------------------- Gary L. Countryman 83,473,176 637,011 J. Donald Monan 83,452,398 657,789 Richard A. Smith 83,511,018 599,169 Ira Stepanian 83,503,218 606,969 William C. Van Faasen 83,426,591 683,596 (2) Selection of Independent Auditors ------------------------------------- Total Votes For 83,406,499 Total Votes Against 368,586 Total Abstentions 335,102 (3) Stockholder Proposal to Change Meeting Date ----------------------------------------------- Total Votes For 4,107,567 Total Votes Against 67,627,282 Total Abstentions 1,456,912 Total Broker Nonvotes 10,918,426
37 Item 5. Other Information As previously reported, in September 1993, the Corporation announced that it had reached a definitive agreement to acquire BankWorcester for $34.00 for each share of BankWorcester common stock outstanding, subject to an upward adjustment if the transaction is not consummated on or before June 30, 1994. It is expected that the total purchase price will be approximately $247 million. BankWorcester, the holding company for Worcester County Institution for Savings, had approximately $1.5 billion of assets, approximately $1.3 billion of deposits and 28 branches at March 31, 1994. The transaction has been approved by the boards of directors of both companies and by BankWorcester's stockholders. On April 26, 1994, the Corporation received approval for the acquisition from the OCC. The transaction is also subject to the approval of the Board of Bank Incorporation of the Commonwealth of Massachusetts (the Massachusetts BBI) and a 30 day review period during which time the Justice Department may challenge the transactions on antitrust grounds. In March 1994, the Corporation announced that it had reached a definitive agreement to acquire Pioneer for $118 million in cash. Pioneer, which is based in Middlesex County, Massachusetts, had approximately $773 million in assets, $720 million in deposits and 20 branches at March 31, 1994. The Pioneer transaction has been approved by the boards of directors of both companies. The Pioneer transaction is subject to the approval of Pioneer stockholders, the OCC and the Massachusetts BBI, and an application for approval of the transaction has been submitted to the OCC. The transaction may not be consummated until the 30th day after OCC approval is received, during which time the Justice Department may challenge the transaction on antitrust grounds. The Corporation's objective is to consummate the BankWorcester transaction by mid-year 1994 and the Pioneer transaction in the fall of 1994, although no assurances can be given that the requisite regulatory approvals will be granted or, if granted, that such approvals will be received within these time frames. As previously reported, the Corporation had applied for regulatory approval to merge Mechanics Bank, South Shore Bank and Multibank West into The First National Bank of Boston. On April 29, 1994, the Corporation received OCC approval for the proposed mergers, and on May 6, 1994 merged South Shore Bank into The First National Bank of Boston. It is anticipated that the remaining mergers will be consummated by mid-year 1994. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 11 Computation of Earnings Per Share. (b) Current Reports on Form 8-K. During the first quarter of 1994, the Corporation filed one Current Report on Form 8-K, dated January 5, 1994, which contained information pursuant to Items 5 and 7 of Form 8-K. 38 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. BANK OF BOSTON CORPORATION /S/Ira Stepanian ---------------- Ira Stepanian Chairman of the Board of Directors and Chief Executive Officer /S/William J. Shea ------------------ William J. Shea Vice Chairman, Chief Financial Officer and Treasurer May 13, 1994 - ------------ Date 39 EX-11 2 EXHIBIT 11 EXHIBIT 11 BANK OF BOSTON CORPORATION Computation of Earnings Per Common Share (in thousands, except per share amounts)
Quarters Ended -------------- March 31 EARNINGS 1994 1993 - -------- ---- ---- 1. Net income $ 96,140 $ 83,675 2. Less: Preferred dividends 9,317 7,938 ------- ------- 3. Net income applicable to primary earnings per common share 86,823 75,737 4. Add: Interest expense on convertible debentures, net of tax 1,061 1,078 ------- ------- 5. Net income applicable to fully diluted earnings per common share $ 87,884 $ 76,815 ======= ======= SHARES ------ 6. Weighted average number of common shares outstanding 106,198 104,962 7. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 589 1,075 8. Incremental shares from assumed conversion of debentures at date of issuance 4,030 4,042 ------- ------- 9. Adjusted number of common shares 110,817 110,079 ======= ======= PER SHARE CALCULATION --------------------- 10. Primary net income per common share $ .82 $ .72 (Item 3 / Item 6); see note below 11. Fully diluted net income per common share $ .79 $ .70 (Item 5 / Item 9); see note below Note - Income per common share before extraordinary items and cumulative effect of accounting changes, net, on both a primary and fully diluted basis for the quarters ended March 31, 1994 and March 31, 1993 are computed by adding to the numerator $6,535 and subtracting from the numerator $24,203, respectively.
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