-----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, PBX0TqY7v6w5wHcbqDsg740T7VnAsLiGKGlwvgiGQ910ssKwmiXUgLeVvKPOMzt5 YSbHdtgRdEQp6gLO2kafZQ== 0000950109-94-002115.txt : 19941116 0000950109-94-002115.hdr.sgml : 19941116 ACCESSION NUMBER: 0000950109-94-002115 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE 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: 94560180 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 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 1994: Common Stock, $2.25 par value 107,188,893 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.......................................... 18 Part II - OTHER INFORMATION Item 1. Legal Proceedings.................................................. 46 ------- Item 5. Other Information.................................................. 46 ------- Item 6. Exhibits and Reports on Form 8-K................................... 47 ------- Signatures..................................................................... 48 LIST OF TABLES Consolidated Average Balance Sheet - Nine Quarters.......................... 39 Consolidated Statement of Income - Nine Quarters............................ 40 Average Balances and Interest Rates - Quarter............................... 41 Average Balances and Interest Rates - Nine Months........................... 43 Change in Net Interest Revenue - Volume and Rate Analysis................... 45
2 BANK OF BOSTON CORPORATION Consolidated Selected Financial Data (dollars in millions, except per share amounts)
Quarters Ended September 30 1994 1993 --------- --------- Income Statement Data: Net interest revenue $ 423.9 $ 340.8 Provision for credit losses 25.0 10.0 Noninterest income 202.2 191.2 Noninterest expense 378.3 440.2 Net income 124.0 41.4 Per common share: Net income: Primary 1.07 .30 Fully diluted 1.04 .30 Market value per common share: High 27 3/8 25 7/8 Low 24 3/8 23 1/2 Nine Months Ended September 30 Income Statement Data: Net interest revenue $ 1,139.1 $ 995.5 Provision for credit losses 95.0 60.1 Noninterest income 629.5 556.6 Noninterest expense 1,097.3 1,184.2 Income before extraordinary item and cumulative effect of changes in accounting principles 321.2 172.3 Net income 314.6 196.5 Per common share: Income before extraordinary item and cumulative effect of changes in accounting principles: Primary 2.75 1.40 Fully diluted 2.66 1.36 Net income: Primary 2.69 1.63 Fully diluted 2.60 1.58 Market value per common share: High 28 1/2 28 7/8 Low 22 5/8 20 1/2 At September 30 Balance Sheet Data: Loans and lease financing $ 30,881 $ 27,937 Total assets 44,294 39,189 Deposits 30,313 28,533 Total stockholders' equity 3,113 2,781 Book value per common share 24.30 21.54 Regulatory capital ratios: Risk-based capital ratios: Tier 1 6.9% 7.2% Total 11.9 11.6 Leverage ratio 6.4 6.8
3 BANK OF BOSTON CORPORATION Consolidated Balance Sheet (in thousands, except share and per share amounts)
ASSETS September 30 December 31 1994 1993 ------------ ------------ Cash and due from banks $ 2,084,343 $ 2,539,286 Interest bearing deposits in other banks 1,172,763 991,389 Federal funds sold and securities purchased under agreements to resell 1,947,485 1,454,478 Trading securities 755,490 305,775 Mortgages held for sale 314,111 1,321,607 Securities (Note 4): Available for sale 2,214,036 1,437,887 Held to maturity (fair value of $1,974,423 in 1994 and $1,568,617 in 1993) 2,021,986 1,568,823 Loans and lease financing (Note 5): United States Operations 23,925,287 22,560,194 International Operations 6,955,492 6,221,780 ------------ ------------ Total loans and lease financing (net of unearned income of $268,400 in 1994 and $311,955 in 1993) 30,880,779 28,781,974 Reserve for credit losses (Note 7) (676,534) (770,279) ------------ ------------ Net loans and lease financing 30,204,245 28,011,695 Accelerated disposition portfolio (Note 6) 127,651 Premises and equipment, net 553,262 522,271 Due from customers on acceptances 325,018 391,204 Accrued interest receivable 314,433 287,368 Other real estate owned 92,487 107,845 Other assets (Note 8) 2,166,608 1,648,274 ------------ ------------ TOTAL ASSETS $ 44,293,918 $ 40,587,902 ============ ============
The accompanying notes are an integral part of these financial statements. 4 BANK OF BOSTON CORPORATION Consolidated Balance Sheet (in thousands, except share and per share amounts) (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30 December 31 1994 1993 ------------ ------------ Deposits: Domestic offices: Noninterest bearing $ 4,863,708 $ 5,040,028 Interest bearing 17,076,705 17,495,648 Overseas offices: Noninterest bearing 580,689 525,620 Interest bearing 7,791,437 6,552,849 ------------ ------------ Total deposits 30,312,539 29,614,145 Funds borrowed: Federal funds purchased 810,512 417,107 Term federal funds purchased 1,151,400 2,150,000 Securities sold under agreements to repurchase 1,351,423 798,842 Other funds borrowed 3,969,874 1,608,631 Acceptances outstanding 325,364 391,484 Accrued expenses and other liabilities (Note 8) 1,129,003 723,266 Notes payable (Note 9) 2,131,051 1,972,758 ------------ ------------ TOTAL LIABILITIES 41,181,166 37,676,233 ------------ ------------ Commitments and contingencies (Notes 2 and 10) Stockholders' equity: Preferred stock without par value: Authorized shares - 10,000,000 Issued and outstanding shares - 4,593,941 508,436 508,436 Common stock, par value $2.25: Authorized shares - 200,000,000 Issued and outstanding shares - 107,169,524 in 1994 and 105,801,268 in 1993 241,131 238,053 Surplus 800,612 768,372 Retained earnings 1,570,794 1,361,960 Net unrealized gain (loss) on securities available for sale (2,299) 42,980 Cumulative translation adjustments (5,922) (8,132) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 3,112,752 2,911,669 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,293,918 $ 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 Nine Months Ended September 30 September 30 ------------------------- ------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ----------- Interest Income (Note 11): Loans and lease financing, including fees $ 721,515 $ 531,978 $ 1,853,503 $ 1,565,764 Securities 60,947 64,063 165,190 197,981 Trading securities 29,882 3,018 57,441 6,898 Mortgages held for sale 9,639 23,831 36,267 54,137 Federal funds sold and securities purchased under agreements to resell 223,082 40,330 455,597 83,803 Deposits in other banks 38,479 36,034 79,291 108,151 ----------- ----------- ----------- ----------- Total interest income 1,083,544 699,254 2,647,289 2,016,734 ----------- ----------- ----------- ----------- Interest Expense (Note 11): Deposits of domestic offices 131,543 148,250 380,010 489,029 Deposits of overseas offices 202,352 107,452 435,582 277,103 Funds borrowed 295,020 73,999 599,926 170,400 Notes payable 30,749 28,734 92,665 84,692 ----------- ----------- ----------- ----------- Total interest expense 659,664 358,435 1,508,183 1,021,224 ----------- ----------- ----------- ----------- Net interest revenue (Note 11) 423,880 340,819 1,139,106 995,510 Provision for credit losses (Notes 6 and 7) 25,000 10,000 95,000 60,126 ----------- ----------- ----------- ----------- Net interest revenue after provision for credit losses 398,880 330,819 1,044,106 935,384 ----------- ----------- ----------- ----------- Noninterest Income: Financial service fees 104,315 90,928 290,638 254,756 Trust and agency fees 50,530 43,105 148,478 132,184 Trading profits and commissions 10,857 6,936 15,927 19,725 Securities gains 1,333 10,965 11,150 23,377 Other income (Notes 2 and 11) 35,112 39,306 163,306 126,589 ----------- ----------- ----------- ----------- Total noninterest income 202,147 191,240 629,499 556,631 ----------- ----------- ----------- ----------- Noninterest Expense: Salaries 168,052 160,374 487,464 481,232 Employee benefits 38,608 32,238 112,488 103,457 Occupancy expense 35,207 32,176 100,163 96,525 Equipment expense 24,183 23,282 71,137 72,822 Merger and restructuring charges and other related conversion costs 5,000 85,000 21,390 85,000 Other real estate owned expense 6,172 6,929 18,262 38,240 Other expense 101,037 100,178 286,444 306,967 ----------- ----------- ----------- ----------- Total noninterest expense 378,259 440,177 1,097,348 1,184,243 ----------- ----------- ----------- ----------- Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles 222,768 81,882 576,257 307,772 Provision for income taxes 98,799 40,438 255,113 135,461 ----------- ----------- ----------- ----------- Income before extraordinary item and cumulative effect of changes in accounting principles 123,969 41,444 321,144 172,311 Extraordinary loss from early extinguishment of debt, net of tax (Note 9) (6,535) Cumulative effect of changes in accounting principles, net (Notes 12 and 13) 24,203 ----------- ----------- ----------- ----------- NET INCOME $ 123,969 $ 41,444 $ 314,609 $ 196,514 =========== =========== =========== =========== NET INCOME APPLICABLE TO COMMON STOCK $ 114,580 $ 32,061 $ 286,546 $ 171,168 =========== =========== =========== =========== Per Common Share: Income before extraordinary item and cumulative effect of changes in accounting principles: Primary $ 1.07 $ .30 $ 2.75 $ 1.40 Fully diluted $ 1.04 $ .30 $ 2.66 $ 1.36 Net Income: Primary $ 1.07 $ .30 $ 2.69 $ 1.63 Fully diluted $ 1.04 $ .30 $ 2.60 $ 1.58 Dividends declared $ .22 $ .10 $ .66 $ .30 Average Number of Common Shares: Primary 106,981 105,443 106,602 105,232 Fully diluted 111,690 110,446 111,391 110,296
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)
1994 1993 ----------- ----------- Quarters Ended September 30 Balance, beginning of period $ 3,004,952 $ 2,756,315 Net income 123,969 41,444 Common stock issued in connection with: Dividend reinvestment and common stock purchase plan 7,055 1,751 Exercise of stock options 1,090 1,378 Restricted stock grants, net of forfeitures (287) (136) Change in unearned compensation related to restricted stock grants 1,488 563 Other, principally employee benefit plans 163 344 Cash dividends declared: Preferred stock (9,391) (9,161) Common stock (23,521) (10,541) Change in net unrealized appreciation on marketable equity securities of nonbanking subsidiary 234 Change in net unrealized gain or loss on securities available for sale, net of tax 6,070 Translation adjustments, net of tax 1,164 (668) ----------- ----------- Balance, end of period $ 3,112,752 $ 2,781,523 =========== =========== Nine Months Ended September 30 Balance, beginning of period $ 2,911,669 $ 2,553,530 Net income 314,609 196,514 Common stock issued in connection with: Dividend reinvestment and common stock purchase plan 18,547 4,691 Exercise of stock options 5,139 7,942 Restricted stock grants, net of forfeitures 9,212 2,621 Change in unearned compensation related to restricted stock grants (7,427) (1,244) Other, principally employee benefit plans 2,421 3,909 Preferred stock issued in public offering 67,595 Cash dividends declared: Preferred stock (28,096) (25,110) Common stock (70,253) (27,560) Change in net unrealized appreciation on marketable equity securities of nonbanking subsidiary 1,217 Change in net unrealized gain or loss on securities available for sale, net of tax (45,279) Translation adjustments, net of tax 2,210 (2,582) ----------- ----------- Balance, end of period $ 3,112,752 $ 2,781,523 =========== ===========
The accompanying notes are an integral part of these financial statements. 7 BANK OF BOSTON CORPORATION Consolidated Statement of Cash Flows (in thousands)
Nine Months Ended September 30 1994 1993 ------------ ------------ Cash Flows From Operating Activities: Net income $ 314,609 $ 196,514 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 95,000 60,126 Depreciation and amortization 131,099 131,423 Provision for deferred taxes (132,329) 77,805 Net gains on sales of securities and other assets (66,064) (57,181) Change in trading securities (449,715) (153,050) Change in mortgages held for sale 1,007,496 (414,218) Change in securities available for sale 433,441 Net change in interest receivables and payables (137,094) (35,654) Other, net 192,843 153,666 ------------ ------------ Net cash provided from operating activities 962,380 368,669 ------------ ------------ Cash Flows From Investing Activities: Net cash provided from (used for) interest bearing deposits in other banks (181,374) 340,038 Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell (493,007) 403,655 Purchases of securities held to maturity (1,297,331) (1,523,599) Purchases of securities available for sale (Note 3) (3,005,366) Sales of securities held to maturity 18,364 Sales of securities available for sale (Note 3) 2,315,560 Maturities of securities held to maturity 614,154 1,276,806 Maturities of securities available for sale (Note 3) 185,249 Dispositions of venture capital investments 14,725 58,099 Loans and lease financing originated by nonbank entities (2,901,918) (2,450,451) Proceeds from sales of loan portfolios by bank subsidiaries 160,557 Loans and lease financing collected by nonbank entities 2,413,641 2,297,170 Net cash used for lending activities of bank subsidiaries (1,911,453) (2,466,951) Lease financing originated by bank entities (20,365) (40,549) Lease financing collected by bank entities 19,696 18,041 Proceeds from sales of other real estate owned 37,730 102,906 Expenditures for premises and equipment (142,110) (64,537) Proceeds from sales of business units, premises and equipment 134,917 5,919 Other, net (431,718) 389,844 ------------ ------------ Net cash used for investing activities (4,488,413) (1,635,245) ------------ ------------ Cash Flows From Financing Activities: Net cash provided from (used for) deposits 698,394 (569,143) Net cash provided from funds borrowed 2,308,629 2,045,169 Net repayments of notes payable (537,800) (94,375) Net proceeds from issuance of notes payable 696,093 111,179 Net proceeds from issuance of preferred stock 67,595 Net proceeds from issuance of common stock 24,909 12,816 Dividends paid (98,349) (52,670) ------------ ------------ Net cash provided from financing activities 3,091,876 1,520,571 Effect of foreign currency translation on cash (20,786) (10,522) NET CHANGE IN CASH AND DUE FROM BANKS (454,943) 243,473 Cash and Due from Banks at January 1 2,539,286 1,936,396 ------------ ------------ Cash and Due from Banks at September 30 $ 2,084,343 $ 2,179,869 ============ ============ Interest payments made $ 1,618,212 $ 1,063,775 Income tax payments made $ 90,215 $ 45,240
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. 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 and Divestitures: On August 19, 1994, the Corporation completed its acquisition of Pioneer Financial, A Co-operative Bank (Pioneer), a $.8 billion privately held financial institution based in Middlesex County, Massachusetts. The total purchase price amounted to $117 million. On the date of acquisition, Pioneer was merged into The First National Bank of Boston (FNBB). The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Pioneer were recorded at their estimated fair values as of the acquisition date. The excess of the cost of the acquisition over the estimated fair values of the net assets acquired is being amortized over a fifteen year period. In connection with the acquisition, the Corporation recorded a restructuring charge, comprised of employee reduction costs, and paid other merger-related costs, primarily conversion costs, during the third quarter of 1994. The restructuring charge and conversion costs amounted to $5 million. The acquisition has been included in the Corporation's financial statements since the acquisition date. Pro forma results of operations including Pioneer for the nine months ended September 30, 1994 and 1993 are not presented since the results would not have been significantly different in relation to the Corporation's results of operations. On May 27, 1994, the Corporation completed its acquisition of BankWorcester Corporation (BankWorcester), a $1.5 billion bank holding company headquartered in Worcester, Massachusetts. The total purchase price amounted to $243 million. BankWorcester, through its wholly owned subsidiary, Worcester County Institution for Savings (WCiS), was engaged in retail and commercial banking. On the date of acquisition, WCiS was merged into FNBB. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of BankWorcester were recorded at their estimated fair values as of the acquisition date. The excess of the cost of the acquisition over the estimated fair values of the net assets acquired, excluding the excess allocated to core deposit intangibles, is being amortized over a twenty-five year period. The core deposit intangible is being amortized over a seven year period. In connection with the acquisition, the Corporation recorded a restructuring charge of $16 million, comprised principally of employee reduction costs and estimated conversion costs. The acquisition has been included in the Corporation's financial statements since the acquisition date. Pro forma results of operations including BankWorcester for the nine months ended September 30, 1994 and 1993 are not presented since the results would not have been significantly different in relation to the Corporation's results of operations. On June 24, 1994, the Corporation announced a definitive agreement to sell two of its affiliate banks, Bank of Vermont and Maine-based Casco Northern Bank, N.A. (Casco). Bank of Vermont, based in Burlington, Vermont, had $700 million in assets and $500 million in deposits as of September 30, 1994. It has 212 employees and operates 12 branches. Casco, headquartered in Portland, Maine, had $1.2 billion in assets and $900 million in deposits as of September 30, 1994. It has 524 employees and operates 34 branches. The sale is subject to the purchaser's receipt of required regulatory approvals. In addition, in January 1994, the Corporation completed the sale of its U.S. factoring business, and recorded a pre-tax gain of $27 million on the transaction. On November 10, 1994, the Corporation announced a definitive agreement to acquire Ganis Credit Corporation (Ganis), a privately-held consumer finance company headquartered in Newport Beach, California. Upon completion of the acquisition, the Corporation will pay Ganis stockholders approximately $20 million, and up to an additional $16 million based upon Ganis reaching certain performance goals over the next several years. The purchase price will be paid in shares of the Corporation's common stock, which is expected to be purchased by the Corporation in the open market. As of September 30, 1994, Ganis had 120 employees in 11 offices throughout the U.S. and approximately $30 million in total assets. 3. Significant Noncash Transactions - Statement of Cash Flows: During the first nine months of 1994 and 1993, the Corporation transferred approximately $60 million and $123 million, respectively, to Other Real Estate Owned (OREO) from loans. Loans made to facilitate sales of OREO properties totaled approximately $2 million and $3 million in the first nine months 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:
September 30, 1994 December 31, 1993 ------------------------------------ ---------------------------------- (in thousands) Cost Carrying value Cost Carrying value -------------- -------------- -------------- -------------- U.S. Treasury $ 646,523 $ 646,987 $ 108,017 $ 109,601 U.S. government agencies and corporations: Mortgage-backed securities 826,325 806,019 493,142 498,172 States and political subdivisions 144 135 478 474 Foreign debt securities 448,365 448,158 441,038 490,066 Other debt securities 136,521 136,493 149,585 149,585 Marketable equity securities 52,007 66,585 57,959 74,330 Other equity securities 109,659 109,659 115,659 115,659 -------------- -------------- -------------- ------------- $ 2,219,544 $ 2,214,036 $ 1,365,878 $ 1,437,887 ============== ============== ============== =============
In accordance with SFAS No. 115, securities available for sale are carried at fair value, except for equity securities not traded on established exchanges, which are carried at cost. The cost of such equity securities was $110 million and $116 million at September 30, 1994 and December 31, 1993, respectively. A summary comparison of securities held to maturity, which are carried at amortized cost, by type is as follows:
September 30, 1994 December 31, 1993 ------------------------------------ ---------------------------------- (in thousands) Cost Fair value Cost Fair value ------------ ------------ ------------ ------------ U.S. Treasury $ 317,428 $ 316,804 $ 317,396 $ 317,599 U.S. government agencies and corporations: Mortgage-backed securities 1,465,927 1,419,429 1,045,574 1,044,026 States and political subdivisions 29,641 29,785 29,480 30,512 Foreign debt securities 119,914 119,329 108,503 108,610 Other debt securities 65 65 Other equity securities 89,076 89,076 67,805 67,805 ------------ ------------ ------------ ------------ $ 2,021,986 $ 1,974,423 $ 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:
September 30 December 31 (in thousands) 1994 1993 ------------ ------------ United States Operations: Commercial, industrial and financial $ 11,988,440 $ 11,991,440 Real Estate: Secured by 1-4 family residential properties 4,878,075 4,159,069 Construction 463,530 617,426 Other commercial 3,110,044 3,123,024 Loans to individuals 2,372,809 1,609,566 Lease financing 1,311,528 1,263,267 Unearned income (199,139) (203,598) ------------ ------------ 23,925,287 22,560,194 ------------ ------------ International Operations: Loans and lease financing 7,024,753 6,330,137 Unearned income (69,261) (108,357) ------------ ------------ 6,955,492 6,221,780 ------------ ------------ $ 30,880,779 $ 28,781,974 ============ ============
6. Accelerated Disposition Portfolio: During the first quarter of 1994, the Corporation created an accelerated disposition portfolio by transferring $378 million of lower quality real estate exposure to this category. In connection with this transfer, a first quarter chargeoff of $119 million was recorded to reduce this exposure to its estimated disposition value of $259 million. During the second quarter, certain loans with an estimated disposition value of $31 million were added to the portfolio in connection with the Corporation's acquisition of BankWorcester; in addition, during the third quarter, the Corporation added certain loans with an estimated disposition value of $47 million to the portfolio. A portion of these loans were added in connection with the Corporation's acquisition of Pioneer. During the second and third quarters of 1994, the portfolio was reduced by $54 million and $138 million, respectively, as a result of dispositions. Until liquidated, this portfolio will be carried at the lower of the established carrying value or estimated disposition value. The accelerated disposition portfolio consisted of the following:
September 30 June 30 March 31 (in millions) 1994 1994 1994 ------------ ------------ ------------ Loans: Nonaccrual real estate, $ 50 $ 132 $ 129 including 1-4 family residential Performing renegotiated loans 37 46 51 Other performing real estate 27 26 30 OREO 13 14 31 ------------ ------------ ------------ Total balance sheet assets 127 218 241 Off-balance-sheet exposure (letters of credit) 18 18 18 ------------ ------------ ------------ Total exposure $ 145 $ 236 $ 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 Nine Months Ended September 30 September 30 ------------------------ ------------------------ 1994 1993 1994 1993 ---------- ---------- ---------- ---------- Balance, beginning of period $ 675,775 $ 835,230 $ 770,279 $ 923,120 Provision 25,000 10,000 95,000 60,126 Reserves of acquired banks 8,167 24,797 Domestic credit losses: Commercial, industrial and financial (9,529) (10,162) (21,293) (42,676) Real estate: Construction (986) (7,096) (3,019) (18,089) 1-4 family residential properties (2,617) (9,460) (8,884) (18,224) Other (11,575) (5,068) (33,369) (46,730) Loans to individuals (13,763) (15,655) (42,375) (33,658) Lease financing (63) (106) International credit losses (13,367) (9,876) (34,929) (60,180) ---------- ---------- ---------- ---------- Total credit losses (51,837) (57,380) (143,869) (219,663) ---------- ---------- ---------- ---------- Domestic recoveries: Commercial, industrial and financial 3,283 2,882 11,044 9,551 Real estate: Construction 807 332 1,175 1,440 1-4 family residential properties 531 1,813 1,445 3,957 Other 4,432 1,083 10,867 4,526 Loans to individuals 4,100 3,093 12,350 11,153 Lease financing 132 354 228 379 International recoveries 6,144 1,445 12,218 4,263 ---------- ---------- ---------- ---------- Total recoveries 19,429 11,002 49,327 35,269 ---------- ---------- ---------- ---------- Net credit losses before activities related to acelerated disposition portfolio (32,408) (46,378) (94,542) (184,394) Accelerated disposition portfolio: Credit losses upon transfer (20,000) (139,000) Recoveries on assets sold 20,000 20,000 ---------- ---------- ---------- ---------- Net credit losses (32,408) (46,378) (213,542) (184,394) ---------- ---------- ---------- ---------- Balance, end of period $ 676,534 $ 798,852 $ 676,534 $ 798,852 ========== ========== ========== ==========
8. Offsetting of Carrying Amounts Related to Certain Contracts: 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. At September 30, 1994, both assets and liabilities were increased by $323 million as a result of adoption of the interpretation. 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 interest rate was 5.76% at September 30, 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. In June 1994, the Corporation issued $100 million of floating rate senior notes, due 1996. The interest rate on such notes was 5.33% at September 30, 1994. In September 1994, FNBB issued $200 million of 8% Subordinated Notes, due 2004. When the notes were issued, FNBB entered into an interest rate swap agreement that effectively converted the fixed rate obligation to a floating rate obligation. Such interest rate was 5.94% at September 30, 1994. The subordinated notes are not subject to redemption prior to maturity. 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: A new economic program was implemented in Brazil on July 1, 1994. Prior to the third quarter of 1994, Brazil had been experiencing significant hyperinflation with very high interest rates on local currency transactions and substantial devaluations of the Brazilian currency against the U.S. dollar. As a result of the high local interest rates, interest income and interest expense from Brazilian local currency assets and liabilities had a significant effect on consolidated interest income and interest expense, while contributing only modestly to consolidated net interest revenue. In order to better present the effects of devaluations on the results of its interest operations, the Corporation, during the first quarter of 1994, reclassified the translation losses associated with Brazilian local currency earning assets and the translation gains associated with local currency interest bearing liabilities from noninterest income to interest income and interest expense, respectively. While the reclassification had no effect on the Corporation's total revenue (the sum of net interest revenue and noninterest income), it provided a better presentation of consolidated interest income, interest expense and related yields; net interest revenue and margin; and noninterest income. For the nine months ended September 30, 1994, $4,295 million of translation losses were included in interest income and $3,993 million of translation gains were included in interest expense, resulting in a reclassification from noninterest income of $302 million of net translation losses. For the nine months ended September 30, 1993, $2,582 million of translation losses were reclassified to interest income and $2,492 million of translation gains were reclassified to interest expense, resulting in a reclassification from noninterest income of $90 million of net translation losses. For the third quarter of 1993, $1,159 million of translation losses were reclassified to interest income and $1,129 million of translation gains were reclassified to interest expense, resulting in a reclassification from noninterest income of $30 million of net translation losses. As discussed below, this reclassification was not relevant or appropriate for the third quarter of 1994. 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 for the nine months ended September 30, 1994 and 1993, respectively. 13 Notes to Financial Statements, continued As part of its pre-economic program strategy, the Corporation maintained a currency position in Brazil that was designed to capitalize on the spread between high Brazilian interest rates and devaluation. This strategy had generally involved investing dollar denominated/indexed interest bearing liabilities in various types of local currency earning assets. Such a strategy enabled the Corporation to improve its total revenue compared with what would have been earned from funding local currency assets exclusively with local currency liabilities. As noted above, however, Brazil implemented a new economic program on July 1, 1994. As a result of this program, coupled with government intervention in the financial markets, inflation has declined substantially from a monthly rate of nearly 50% in June, 1994 to a monthly rate in the 1% to 4% range since the inception of the program and the new Brazilian currency has strengthened against the U.S. dollar. As discussed above, the Corporation had previously 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. Due to the implementation of the initial phase of the economic program in the third quarter, the factors which gave rise to this reclassification, hyperinflation and significant devaluations of the Brazilian currency against the dollar, were absent; consequently, such a reclassification was not relevant or appropriate for that period. The Corporation did continue to maintain a Brazilian currency position in the third quarter of 1994, however, with devaluation removed from the Brazilian economy, the strategic purpose for maintaining the currency position shifted from capitalizing on the spread between Brazilian interest rates and devaluation, to taking advantage of Brazil's currency strengthening against the U.S. dollar. The Corporation recognized $15 million of noninterest income from this position in the third quarter of 1994, stemming from the strengthening of Brazil's currency against the dollar. The currency position at September 30, 1994 was $150 million compared with $103 million at December 31, 1993 and averaged $142 million for the nine months ended September 30, 1994 compared with an average of $69 million for the nine months ended September 30, 1993. 14 Notes to Financial Statements, continued 12. 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. 13. 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. During the second quarter of 1994, the Corporation recognized $10 million of additional tax liability in connection with the merger of certain banking subsidiaries and the loss of preferential tax treatment. The additional liability was offset by the utilization of available foreign tax credit carryforwards. As a result of the increased utilization of tax credit carryforwards, the Corporation was able to reduce its valuation reserve for potential expiration of tax credit carryforwards by $10 million. 14. Parent Company Condensed Financial Statements: The following is a condensed balance sheet of the Corporation (Parent Company only) at September 30, 1994 and December 31, 1993:
September 30 December 31 (in thousands) 1994 1993 ----------- ----------- ASSETS Cash and short term investments in bank subsidiary $ 260,192 $ 206,920 Advances to subsidiaries: Bank subsidiaries 35,864 63,709 Nonbank subsidiaries 214,252 226,203 Subordinated notes receivable from bank subsidiary 580,000 400,000 Investments in subsidiaries: Bank subsidiaries 3,408,602 3,175,274 Nonbank subsidiaries 134,971 134,751 Other assets 29,545 22,846 ----------- ----------- TOTAL ASSETS $ 4,663,426 $ 4,229,703 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper due to nonbank subsidiary $ 17,209 $ 10,200 Notes payable 1,513,444 1,293,247 Other liabilities 20,021 14,587 ----------- ----------- TOTAL LIABILITIES 1,550,674 1,318,034 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 3,112,752 2,911,669 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,663,426 $ 4,229,703 =========== ===========
15 Notes to Financial Statements, continued 14. Parent Company Condensed Financial Statements, Continued: The following is a condensed income statement of the Corporation (Parent Company only) for the quarters and nine months ended September 30, 1994 and 1993:
Quarters Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- (in thousands) 1994 1993 1994 1993 --------- --------- --------- --------- OPERATING INCOME Dividends from subsidiaries: Bank subsidiaries $ 34,627 $ 1,986 $ 55,845 $ 1,986 Nonbank subsidiary 9,960 19,920 Interest from subsidiaries: Bank subsidiaries 12,455 8,947 33,633 25,924 Nonbank subsidiaries 2,511 1,502 6,443 4,044 --------- --------- --------- --------- Total operating income 59,553 12,435 115,841 31,954 --------- --------- --------- --------- EXPENSE Interest expense 20,481 13,484 54,624 36,951 Other expense, net 1,031 1,167 4,193 3,305 --------- --------- --------- --------- Total operating expense 21,512 14,651 58,817 40,256 --------- --------- --------- --------- Income (Loss) before income taxes, equity in undistributed net income of subsidiaries, extraordinary item and cumulative effect of change in accounting principle 38,041 (2,216) 57,024 (8,302) Benefit from income taxes (2,535) (1,547) (7,070) (3,584) --------- --------- --------- --------- Income (Loss) before equity in undistributed net income of subsidiaries, extraordinary item and cumulative effect of change in accounting principle 40,576 (669) 64,094 (4,718) Equity in undistributed net income of subsidiaries 83,393 42,113 250,875 202,945 --------- --------- --------- --------- Income before extraordinary item and cumulative effect of change in accounting principle 123,969 41,444 314,969 198,227 Extraordinary loss from early extinguishment of debt, net of tax (360) Cumulative effect of change in accounting for income taxes (1,713) --------- --------- --------- --------- NET INCOME $ 123,969 $ 41,444 $ 314,609 $ 196,514 ========= ========= ========= =========
16 Notes to Financial Statements, continued 14. Parent Company Condensed Financial Statements, Continued: The following is a condensed statement of cash flows of the Corporation (Parent Company only) for the nine months ended September 30, 1994 and 1993:
(in thousands) 1994 1993 ---------- ---------- Cash Flows From Operating Activities: Net income $ 314,609 $ 196,514 Reconciliation of net income to net cash provided from (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 (250,875) (202,945) Net change in interest receivables and payables 1,989 752 Other, net (1,673) (5,666) ---------- ---------- Net cash provided from (used for) operating activities 64,410 (9,632) ---------- ---------- Cash Flows From Investing Activities: Net cash provided from (used for) short-term investments (43,630) 176,180 Net cash provided from (used for) advances to subsidiaries 39,796 (145,047) Investments in subsidiaries (24,700) (149,000) Purchase of subordinated note receivable from bank subsidiary (180,000) ---------- ---------- Net cash used for investing activities (208,534) (117,867) ---------- ---------- Cash Flows From Financing Activities: Net cash provided from commercial paper 7,009 200 Net proceeds from issuance of notes payable 398,697 99,866 Net proceeds from issuance of common stock 24,909 12,816 Redemption of notes payable (178,500) Net proceeds from issuance of preferred stock 67,595 Dividends paid (98,349) (52,670) ---------- ---------- Net cash provided from financing activities 153,766 127,807 ---------- ---------- NET CHANGE IN CASH AND DUE FROM BANKS 9,642 308 Cash and Due from Banks at January 1 550 236 ---------- ---------- Cash and Due from Banks at September 30 $ 10,192 $ 544 ========== ========== Interest payments made $ 50,308 $ 36,234 Income tax refunds received $ (7,870) $ (1,500)
17 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 September 30, 1994 was $124 million, compared with net income of $41 million for the same period in 1993. Net income per common share was $1.07 on a primary basis and $1.04 on a fully diluted basis in the third quarter of 1994, compared with net income per common share of $.30 on both a primary basis and fully diluted basis for the third quarter of 1993. Net income for the first nine months of 1994 was $315 million compared with net income of $197 million for the first nine months of 1993. Net income per common share was $2.69 on a primary basis and $2.60 on a fully diluted basis for the first nine months of 1994, compared with net income per common share of $1.63 on a primary basis and $1.58 on a fully diluted basis for the first nine months of 1993. The 1994 results included (1) a $5 million charge ($3 million after tax) in the third quarter for a restructuring charge and conversion costs paid in connection with the Corporation's acquisition of Pioneer Financial, A Co-operative Bank (Pioneer); (2) a $16 million merger and restructuring charge ($9 million after tax) in the second quarter in connection with the Corporation's acquisition of BankWorcester Corporation (BankWorcester); and (3) an extraordinary loss, net of tax, of $7 million in the first quarter related to the 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 (1) $85 million ($57 million after tax) of merger and restructuring charges recorded in the third quarter, primarily in connection with the Corporation's July 1993 mergers with Society for Savings Bancorp, Inc. (Bancorp) and Multibank Financial Corp. (Multibank), as well as costs of downsizing and reconfiguring certain of the Corporation's business and corporate units; and (2) $24 million of income, net of tax, from the cumulative effect of changes in accounting principles, reflecting a $77 million benefit as a result of adopting Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," and a $53 million after-tax charge as a result of a change in accounting with respect to the valuation of purchased mortgage servicing rights (PMSR). The merger and restructuring charges and other related converstion costs are more fully discussed below under the caption "Noninterest Expense". Excluding the effects of the restructuring charges and other related conversion costs discussed above, net income for the third quarter of 1994 was $127 million, compared with $98 million for the third quarter of 1993. On this basis, primary and fully diluted earnings per share were $1.10 and $1.06, respectively, in the third quarter of 1994 compared with $.84 and $.82, respectively, for the same period last year. Excluding the effects of the restructuring charge and other related conversion costs, the extraordinary loss and the cumulative effect of changes in accounting principles, net income for the first nine months of 1994 was $333 million compared with $229 million for the first nine months of 1993. On this basis, primary and fully diluted earnings per share were $2.87 and $2.77, respectively, in the first nine months of 1994 compared with $1.94 and $1.88, 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 41 through 45 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 1993, plus applicable state and local taxes, net of related federal tax benefits. The adjustments amounted to $1.3 million and $4.3 million for the quarter and nine months ended September 30, 1994, respectively, compared with $2.3 million and $5.8 million for the same periods in 1993. Net interest revenue for prior periods has been restated to reflect the reclassification of certain Brazilian translation gains and losses. This reclassification is discussed below under the caption "Brazil" and in Note 11 to the Financial Statements. Consolidated net interest revenue, on a fully taxable equivalent basis, was $425 million for the third quarter of 1994, compared with $343 million for the same period in 1993. For the first nine months of 1994, net interest revenue was $1,143 million compared with $1,001 million for the same period in 1993. Net interest margin in the third quarter of 1994 was 4.34% compared with 3.91% in the third quarter of 1993. For the first nine months of 1994, net interest margin was 4.05% compared with 3.98% for the first nine months of 1993. 18 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 September 30 Change Change (dollars in millions) 1994 1993 Amount Percent --------- --------- ------- ------- United States Operations: Net interest revenue $ 319.3 $ 283.9 $ 35.4 12% Average loans and lease financing 23,431 21,282 2,149 10 Average earning assets 28,710 26,967 1,743 6 Net interest margin 4.41% 4.18% .23% 6 International Operations: Net interest revenue $ 105.9 $ 59.2 $ 46.7 79% Average loans and lease financing 6,931 5,671 1,260 22 Average earning assets 10,136 7,853 2,283 29 Net interest margin 4.15% 2.99% 1.16% 39 Consolidated: Net interest revenue $ 425.2 $ 343.1 $ 82.1 24% Average loans and lease financing 30,362 26,953 3,409 13 Average earning assets 38,846 34,820 4,026 12 Net interest margin 4.34% 3.91% .43% 11
Nine Months Ended September 30 Change Change (dollars in millions) 1994 1993 Amount Percent --------- --------- ------- ------- United States Operations: Net interest revenue $ 892.9 $ 806.7 $ 86.2 11% Average loans and lease financing 22,720 20,657 2,063 10 Average earning assets 28,071 26,352 1,719 7 Net interest margin 4.25% 4.09% .16% 4 International Operations: Net interest revenue $ 250.5 $ 194.6 $ 55.9 29% Average loans and lease financing 6,646 5,373 1,273 24 Average earning assets 9,679 7,309 2,370 32 Net interest margin 3.46% 3.56% (.10)% (3) Consolidated: Net interest revenue $ 1,143.4 $ 1,001.3 $ 142.1 14% Average loans and lease financing 29,366 26,030 3,336 13 Average earning assets 37,750 33,661 4,089 12 Net interest margin 4.05% 3.98% .07% 2
19 Both domestic and international operations contributed to the improvements in net interest revenue from the third quarter and first nine months of 1993. The domestic increases of $35 million compared with the third quarter of 1993 and $86 million compared with the first nine months of 1993 were driven by the combination of higher average loan volume, which grew approximately $2 billion in both the quarterly and full year comparisons, and wider spreads. Contributing to the loan volume increases were the acquisitions of BankWorcester, in May 1994, and Pioneer, in August 1994, which accounted for approximately $500 million of the quarterly increase and $1.3 billion of the nine month increase. In addition, the Corporation's personal banking, specialized finance and New England commercial lending businesses also contributed to the growth in average loan volume. Compared with the third quarter and first nine months of 1993, domestic spreads widened as the growth in earning asset yields, which has taken place during the course of 1994, has outpaced the increase in rates paid on interest bearing liabilities. The widening of spreads is also mainly responsible for net interest margin increasing by 23 basis points in the quarterly comparison and by 16 basis points in the nine month comparison. Internationally, the $47 million growth in net interest revenue from the third quarter of 1993 and the $56 million increase from the first nine months of 1993 were mainly attributable to Latin America. A significant factor in the international net interest revenue increase from prior year periods was an improved performance from Brazil in the third quarter of 1994. This resulted from the Corporation positioning itself to take advantage of interest rate movements during the initial phase of Brazil's new economic program, which was announced on July 1, 1994. A more detailed discussion of the Brazilian economic program and its effects on the Corporation is included below. Overall, net interest revenue from the Corporation's Brazilian business improved over $30 million from the third quarter of 1993 and over $40 million from the first nine months of 1993. In addition, increases in average earning international loans of $1.3 billion and in total average earning international assets of over $2 billion contributed to the growth in net interest revenue in both comparisons. The loan and earning asset growth primarily occurred in Latin America, with Argentina and Brazil contributing the largest increases. The effects of the growth in Brazilian loans and earning assets contributed to the Brazilian net interest revenue improvements referred to above. International net interest margin improved 116 basis points from the third quarter of 1993 primarily from the improved Brazilian results discussed above. Despite the improvement registered in the quarterly comparison, international net interest margin for the first nine months of 1994 was 10 basis points lower than the first nine months of 1993 primarily caused by narrower spreads in Argentina. This has resulted from declining inflation reflecting the continued stability of the Argentine economy. BRAZIL As discussed above, Brazil implemented a new economic program on July 1, 1994. As a result of this program, coupled with government intervention in the financial markets, inflation has declined substantially from a monthly rate of approximately 50% in June to a monthly rate in the 1% to 4% range since the inception of the program; the new Brazilian currency has strengthened against the U.S. dollar; and, during the initial stages of the program, real interest rates (the excess of local interest rates over Brazilian inflation) rose sharply before declining back to lower levels. The impact in the Brazilian financial markets, particularly with respect to the strengthening of Brazil's currency and the rise in real interest rates, presented arbitrage opportunities from which the Corporation benefited in the third quarter. As discussed above under the caption "Net Interest Revenue", Brazilian net interest revenue grew over $30 million from the third quarter of 1993 due, in part, to positions taken by the Corporation to benefit from the increase in real interest rates. In addition, and as discussed below, the Corporation recognized $15 million of noninterest income in the third quarter stemming from positions taken which benefited from the strengthening of Brazil's currency against the U.S. dollar. Information on changes in the Corporation's cross-border outstandings to Brazil can be found below under the caption "Cross-Border Outstandings". Prior to the third quarter of 1994, Brazil had been experiencing significant hyperinflation with very high interest rates on local currency transactions and substantial devaluations of the Brazilian currency against the U.S. dollar. As a result of the high local interest rates, interest income and interest expense from Brazilian local currency assets and liabilities had a significant effect on consolidated interest income and interest expense, while contributing only modestly to consolidated net interest revenue. In addition, and as part of its pre-economic program strategy, the Corporation maintained a currency position in Brazil that was designed to capitalize on the spread between high Brazilian interest rates and devaluation. This strategy had generally involved investing dollar denominated/indexed interest bearing liabilities in various types of local currency earning assets. Such a strategy enabled the Corporation to improve its total revenue compared with what would have been earned from funding local currency assets exclusively with local currency liabilities. In order to better present the effects of devaluations on the results of its interest operations, the Corporation, during the first quarter of 1994, reclassified the translation losses associated with Brazilian local 20 currency earning assets and the translation gains associated with local currency interest bearing liabilities from noninterest income to interest income and interest expense, respectively. While the reclassification had no effect on the Corporation's total revenue (the sum of net interest revenue and noninterest income), it provided a better presentation of consolidated interest income, interest expense and related yields; net interest revenue and margin; and noninterest income. Prior periods were restated for comparative purposes. The factors which gave rise to this reclassification, hyperinflation and significant devaluations of the Brazilian currency against the dollar, were absent in the third quarter of 1994 due to the effects of the new economic program and government intervention; consequently, such a reclassification was not relevant or appropriate for that period. The following table presents a summary of net interest revenue earned from the Corporation's Brazilian currency position for the eight quarters prior to the implementation of the new economic program on July 1, 1994. The information presented provides a summary of the net interest revenue earned from the position and the effect on net interest margin of reclassifying net translation losses associated with this position from noninterest income to net interest revenue:
June March Dec. Sept. June March Dec. Sept. (dollars in millions) 1994 1994 1993 1993 1993 1993 1992 1992 ------ ------ ------ ------ ------ ------ ------ ------ Consolidated net interest revenue, on a fully taxable equivalent basis, excluding Brazilian currency position $363 $331 $345 $339 $328 $322 $337 $326 Effect of Brazilian currency position: Interest income from currency position 186 140 90 34 41 27 16 13 Translation losses previously classified as noninterest income (173) (129) (84) (30) (37) (23) (13) (9) ------ ------ ------ ------ ------ ------ ------ ------ Net revenue from currency position 13 11 6 4 4 4 3 4 Consolidated net interest revenue, on a fully taxable equivalent basis, after reclassification of net translation ------ ------ ------ ------ ------ ------ ------ ------ losses $376 $342 $351 $343 $332 $326 $340 $330 ====== ====== ====== ====== ====== ====== ====== ====== Consolidated net interest margin: Before reclassification of net translation losses 5.81% 5.24% 4.77% 4.26% 4.43% 4.33% 4.21% 4.05% After reclassification of net translation losses 3.98% 3.80% 3.86% 3.91% 3.99% 4.05% 4.06% 3.94% International net interest margin: Before reclassification of net translation losses 10.23% 8.80% 6.98% 4.52% 5.63% 5.58% 4.57% 4.73% After reclassification of net translation losses 3.14% 3.03% 2.99% 2.99% 3.59% 4.20% 3.74% 4.17% Average principal amount of currency position $189 $147 $104 $53 $89 $66 $45 $40
The Corporation continued to maintain a Brazilian currency position in the third quarter of 1994; however, with devaluation removed from the Brazilian economy, the strategic purpose for maintaining this currency position shifted from capitalizing on the spread between Brazilian interest rates and devaluation, as discussed above, to taking advantage of Brazil's currency strengthening against the U.S. dollar. As noted previously, the Corporation recognized $15 million of noninterest income in the third quarter stemming from positions taken which benefited from the strengthening of Brazil's currency against the U.S. dollar. The average principal amount of the position maintained during the third quarter was $92 million, while the September 30, 1994 ending balance of the position was $150 million. This position exposes the Corporation to losses should the Brazilian currency weaken against the U.S. dollar; 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, both before and since the inception of the economic program, 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 September 30, 1994 level, the size of the position will continue to be a function of management's assessment of the frequently changing economic and political situation in Brazil, particularly in light of the government's new economic program. On October 3, 1994 Fernando Cardoso, a leading proponent of Brazil's new economic program, was elected as Brazil's new president. In addition, and in connection with the new economic program, certain banking reform measures have been announced and continue to be modified by the government as they assess the overall impact of the economic plan. The Corporation is currently evaluating the effect that these measures would have on its Brazilian operation. While the initial effects of Brazil's economic program produced a benefit to the Corporation in the third quarter, no assurance can be given as to what 21 effect the evolution of this economic program, including finalization of the banking reform measures, will have on the Corporation's financial position or results of operations in future periods. 22 PROVISION FOR CREDIT LOSSES The provision for credit losses was $25 million for the quarter ended September 30, 1994, compared with $10 million for the same period in 1993. For the first nine months of 1994, the provision for credit losses was $95 million compared with $60 million for the first nine months of 1993. The provision for credit losses reflected management's assessment of the adequacy of the reserve for credit losses, including the current risk characteristics of the loan portfolio and economic conditions. The level of the provision for credit losses in 1994 also reflected the effect of transferring certain lower quality real estate assets to an accelerated disposition portfolio. The accelerated disposition portfolio is discussed below under "Financial Condition". The amount of future provisions will be a function of the regular quarterly review of the reserve for credit losses, which considers the risk characteristics of the loan portfolio and the economic conditions existing at that time. NONINTEREST INCOME The following tables set forth the components of noninterest income, as well as a further breakdown of financial service fees. Additional information on the change in noninterest income follows each table. Noninterest income for prior periods has been restated to reflect the reclassification of certain Brazilian translation gains and losses. This reclassification is discussed above under the caption "Brazil" and in Note 11 to the Financial Statements.
Noninterest Income - ------------------ (in millions) Third Quarter Nine Months --------------------- --------------------- 1994 1993 Change 1994 1993 Change ---- ---- ------ ---- ---- ------ Financial service fees $ 104 $ 91 $ 13 $ 291 $ 255 $ 36 Trust and agency fees 51 43 8 148 132 16 Trading profits and commissions 11 7 4 16 20 (4) Securities portfolio gains, net 1 11 (10) 11 23 (12) Mezzanine/venture capital profits, net 9 12 (3) 27 36 (9) Foreign exchange trading profits 11 12 (1) 31 33 (2) Gain from sale of domestic factoring business 0 0 0 27 0 27 Other income 15 15 0 78 57 21 --- --- --- --- --- --- Total $ 202 $ 191 $ 11 $ 629 $ 556 $ 73 === === === === === ===
Trust and agency fees improved from the third quarter and first nine months of 1993 primarily as a result of increased volumes and new business in the stock transfer and Latin American mutual fund businesses. The changes in trading account profits from prior periods stemmed mainly from varying levels of profits earned from Latin American securities. Other income in the third quarter of 1994 included $15 million of exchange-rate related profits stemming from the strengthening of Brazil's currency against the U.S. dollar subsequent to the implementation of Brazil's new economic program on July 1, 1994. A further discussion of this revenue is included above under the caption "Brazil". In addition, other income in the third quarter of 1994 included the effect of approximately $15 million of charges associated with certain investments, including investments in foreign equity subsidiaries and writedowns of domestic investments acquired in connection with loan restructurings. The increase in other income from the first nine months of 1993 is due, in part, to 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. 23
Financial Service Fees - ---------------------- (in millions) Third Quarter Nine Months ---------------------- ---------------------- 1994 1993 Change 1994 1993 Change ---- ---- ------ ---- ---- ------ Deposit fees $ 32 $ 29 $ 3 $ 93 $ 90 $ 3 Letter of credit and acceptance fees 17 14 3 44 43 1 Mortgage servicing fees: Fee income 32 26 6 90 78 12 Amortization of mortgage servicing assets (16) (22) 6 (50) (76) 26 --- --- -- --- --- --- Net mortgage servicing fees 16 4 12 40 2 38 Loan-related fees 15 11 4 44 31 13 Factoring fees 1 7 (6) 4 21 (17) Other 23 26 (3) 66 68 (2) --- --- -- --- --- --- Total $ 104 $ 91 $ 13 $ 291 $ 255 $ 36 === === == === === ===
The increase in net mortgage servicing fee income from prior year periods reflected ongoing growth in BancBoston Mortgage Corporation's servicing portfolio, which rose to $35 billion at September 30, 1994 from $26 billion a year ago, as well as lower amortization of servicing rights resulting from a declining rate of current and estimated future mortgage prepayments, as mortgage interest rates have risen. Loan-related fees improved in both the quarterly and nine month comparisons, mainly reflecting growth in syndication activity. The decline in factoring fees from prior year periods is attributable to the January 31, 1994 sale of the Corporation's domestic factoring business. Other financial service fees have declined from prior year periods, stemming from the sale of the Corporation's freight management business. This was partially offset, however, by higher fees from the Corporation's Argentine credit card business. NONINTEREST EXPENSE The following table sets forth the components of noninterest expense:
Noninterest Expense - --------------------- (in millions) Third Quarter Nine Months ---------------------- ---------------------- 1994 1993 Change 1994 1993 Change ---- ---- ------ ---- ---- ------ Employee costs $ 207 $ 193 $ 14 $ 600 $ 585 $ 15 Occupancy & equipment 59 55 4 171 169 2 Professional fees 16 13 3 41 40 1 Other 85 87 (2) 246 267 (21) --- --- --- ----- ----- --- Noninterest expense, before restructuring, conversion- related and OREO costs 367 348 19 1,058 1,061 (3) Merger and restructuring charges and other related conversion costs 5 85 (80) 21 85 (64) OREO costs 6 7 (1) 18 38 (20) --- --- --- ----- ----- --- Total $ 378 $ 440 $ (62) $1,097 $1,184 $(87) === === === ===== ===== ===
24 Noninterest expense, before restructuring charges, conversion costs and OREO costs, increased $19 million from the third quarter of 1993 but declined $3 million from the first nine months of 1993. These changes were mainly due to higher employee and other costs stemming from the acquisitions of BankWorcester and Pioneer, as well as growth in Latin America. These increases were partially offset in the quarterly comparison and more than offset in the nine month comparison by other declines which resulted, in part, from a lower level of domestic employees, including declines from the sale of the domestic factoring business, and lower FDIC insurance premiums. Excluding the third quarter 1994 acquisition of Pioneer, employee levels at September 30, 1994 declined by approximately 550 from September 30, 1993. During the third quarter of 1993, the Corporation recorded merger and restructuring charges of $85 million, primarily in connection with its mergers with Bancorp and Multibank, which were completed in July 1993 and accounted for as poolings of interests. The charges also included the estimated costs of downsizing and reconfiguring certain of the Corporation's business and corporate units. The charges included only specific, reasonably measurable costs that directly resulted from the mergers or the downsizing and reconfiguration plan and were incremental to the Corporation's normal costs of operations. The charges did not contain any provisions for general reserves or operating losses of the affected operations. The following table sets forth significant components of the charges:
Employee Property Total Professional Reduction Conversion Related Fees Costs Costs Costs (in millions) ------------ --------- ---------- -------- ----- Mergers $ 13 $ 17 $ 29 $ 9 $ 68 Downsizing and reconfiguration 12 3 2 17 --- --- --- --- --- Total $ 13 $ 29 $ 32 $ 11 $ 85 === === === === ===
Significant components of the merger-related charges were professional fees, including investment banking, legal and accounting fees, stock registration costs and other costs of effecting the mergers; employee reduction costs, principally termination benefits paid to employees; conversion costs, including costs to convert loans, deposits and other computer systems of the acquired banks to a common Corporation system, costs of replacing Bancorp and Multibank customers' checkbooks, automatic teller machine cards and other deposit documents and costs to dispose of systems hardware and software of the acquired banks; and property related costs, including costs related to the closing of 24 branches and the disposition of other principal properties, such as post-closing lease payments and other monthly costs. Components related to the downsizing and reconfiguration plan included employee reduction costs and estimated costs related to the disposal of branches and other principal properties and exiting operating leases. Total employee reduction related to both the mergers and the downsizing and reconfiguration plan amounted to 950. During the third and fourth quarters of 1993, the Corporation charged costs totaling $40 million to the reserve created by the charges. Charges to the reserve during the nine months ended September 30, 1994 totaled $32 million. The remaining reserve of $13 million is principally comprised of the Corporation's liability for termination benefits and ongoing lease costs for facilities that have been abandoned. With the exception of the continuation of certain long-term lease payments related to abandoned facilities, the remaining costs are expected to be incurred in 1994 or 1995. During the second quarter of 1994, in connection with its acquisition of BankWorcester, which was completed in May 1994 and accounted for as a purchase, the Corporation recorded merger and restructuring charges of $16 million. Significant components of the charges included $6 million for estimated costs of employee reduction of 220; and $10 million for conversion costs, consisting of costs to convert loans, deposits and other computer systems to a common Corporation system and costs of replacing customers' checkbooks, automatic teller machine cards and other deposit documents. In addition, during the third quarter of 1994, in connection with its acquisition of Pioneer which was completed in August 1994 and accounted for as a purchase, the Corporation recorded a restructuring charge of $4 million, comprised of estimated costs of employee reduction of 194. The Corporation also paid $1 million of other merger- related costs, consisting principally of conversion costs, during the quarter, resulting in total costs for this acquisition recorded in the third quarter of $5 million. During the second and third quarters of 1994, the Corporation charged costs totaling $6 million to the BankWorcester and Pioneer reserves. The remaining costs of $14 million are expected to be incurred in 1994 and 1995. The decline in OREO costs in the nine month comparison is due, in part, to lower valuation adjustments. The level of OREO assets has declined from $136 million at September 30, 1993 to $93 million at September 30, 1994. 25 PROVISION FOR INCOME TAXES The provision for income taxes was $99 million for the third quarter of 1994, representing an effective tax rate of 44%. This compares with a provision and effective tax rate of $40 million and 49%, respectively, for the third quarter of 1993. For the first nine months of 1994 the provision for income taxes before extraordinary items was $255 million, representing an effective tax rate of 44%. This compares with a provision and effective tax rate before the cumulative effect of accounting changes of $135 million and 44%, respectively, for the first nine months of 1993. The increase in the income tax provision in both comparisons resulted from higher pre-tax income partially offset, in the case of the quarterly comparison, by a lower effective tax rate. The reduction in the effective tax rate in the third quarter of 1994 from that reported in the third quarter of 1993 was principally associated with the non-deductibility of certain merger-related costs incurred in 1993. 26 FINANCIAL CONDITION ------------------- CONSOLIDATED BALANCE SHEET At September 30, 1994, the Corporation's total assets were $44.3 billion, an increase of $.9 billion from June 30, 1994. This increase mainly reflected an increase in loans of $.9 billion stemming from the Pioneer acquisition and higher levels of consumer-related loans. Deposits also grew $.9 billion, reflecting the acquisition of Pioneer and an increase in deposits from overseas offices. Other balance sheet changes, which occurred in connection with the Corporation's management of its capital ratio and liquidity positions, included a decline in cash placed with the Federal Reserve, as funds were redeployed into earning asset categories, and a shift from term federal funds purchased into overnight federal funds purchased and repurchase agreements. LIQUIDITY MANAGEMENT At September 30, 1994, the Corporation's level of liquid assets stood at $5.3 billion, compared with $4.9 billion at June 30, 1994. 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 $237 million at September 30, 1994, compared with $216 million at June 30, 1994. The increase in the Parent Company's liquidity from June 30, 1994 resulted, in part, from the receipt of dividends from banking and non-banking subsidiaries in excess of quarterly dividends paid on the Corporation's common and preferred stock. Management considers overall liquidity at September 30, 1994, on both a consolidated and Parent Company only basis, to be adequate 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. DERIVATIVE FINANCIAL INSTRUMENTS AND INTEREST RATE RISK MANAGEMENT The Corporation participates as a counterparty in various derivative financial transactions in connection with its trading activities and for asset and liability management purposes. In the negotiated over-the-counter (OTC) markets, these instruments include swaps, forwards and options, which are based upon interest rates and foreign currencies. The OTC markets in which the Corporation operates are generally well established and liquid. Standardized exchange-traded futures contracts are also utilized. These transactions are subject to limits established by the Asset and Liability Committee and approved by the Corporation's Board of Directors. Derivatives have risks similar to balance sheet instruments. The principal or notional values of derivatives 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 of these instruments is significantly less than the notional amount and, historically, the Corporation's actual credit loss experience with respect to its derivatives has been immaterial. Gains and losses stemming from changes in the market values of the derivatives entered into in connection with the Corporation's trading activities are recognized currently as part of trading profits and commissions or foreign exchange profits. Income or expense related to instruments used to manage the Corporation's own balance sheet interest rate or foreign exchange risk are recorded over the period being managed as an adjustment to the yield of the related asset or liability. The primary focus of the Corporation's derivatives trading activities is to provide these products to the Corporation's customers. As such, the Corporation has generally taken only modest risk positions, within approved limits, with respect to its derivatives trading portfolio. Foreign exchange trading profits were $11 million in the third quarter of 1994 compared with $12 million in the third quarter of 1993. For the first nine months of 1994, foreign exchange trading profits were $31 million compared with $33 million for the first nine months of 1993. Trading profits from the Corporation's interest rate-related derivatives businesses were $3.0 million in the third quarter of 1994 compared with $1.6 million in the third quarter of 1993. For the first nine months of 1994, such profits were $6.5 million compared with $4.7 million for the first nine months of 1993. 27 The following table presents information on the significant categories of the Corporation's derivative financial instruments held in the trading portfolio:
Trading Portfolio - ----------------- September 30, 1994 December 31, 1993 ------------------ ----------------- Notional Fair Notional Fair (in millions) Amount Value(1) Amount Value(1) ------- ------ -------- ------- Futures and Forwards $19,080 $ 0 $15,026 $ 0 Interest Rate Swaps 11,296 60 6,732 84 Interest Rate Options: Written or Sold 12,633 (27) 5,744 (14) Purchased 10,927 34 4,922 25 Foreign Exchange: Spot and forward contracts 19,789 (9) 21,592 (10) Options written or sold 732 (17) 613 (22) Options purchased 907 14 691 21
(1) The trading portfolio is carried at fair value which 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 zero. In connection with its asset and liability management, the Corporation uses both balance sheet instruments, such as U.S. Treasury securities, and derivatives to manage interest rate risk. Interest rate risk can be defined as an exposure to a movement in interest rates which could have a positive or negative effect on the Corporation's net income or financial position. 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 seeks to minimize its risk of exposure to changes in interest rates while also allowing for some imbalance which could enable it to profit from favorable market opportunities. Derivatives provide the Corporation with important flexibility in managing its interest rate exposure, enabling it to efficiently manage risk while minimizing the impact on balance sheet leverage and liquidity. For example, the Corporation may have floating rate liabilities funding fixed rate assets during a period of rising interest rates. Through the use of an interest rate swap, the Corporation can effectively convert its floating rate liabilities to a fixed rate funding source and safeguard its interest rate spread against rising rates. Policies are established by management and approved by the Corporation's Board of Directors, which establish limits for the amount of the Corporation's income at risk and market value exposure that could result under various interest rate scenarios. To evaluate the Corporation's exposure to various potential changes in interest rates and to facilitate the management of interest rate risk, the Corporation uses computer simulation models which allow it to assess the impact on market value and net interest revenue from various interest rate scenarios given the Corporation's existing interest rate risk position. The Board of Directors has assigned implementation and monitoring of these limits to the Chairman of the Asset and Liability Committee. The Asset and Liability Committee also issues strategic directives that specify the extent to which these limits can be utilized considering the results of the interest rate and market value modeling and the Corporation's existing interest rate risk position. The amount of the Corporation's U.S. dollar structural interest rate risk position, which represents the significant portion of the Corporation's balance sheet, is currently subject to an aggregate limit of U.S. dollar interest rate risk exposure resulting from the effect of an adverse movement in interest rates on non-trading activities which may not exceed: (1) in the case of net interest income at risk, 2% of the Corporation's simulated net interest revenue over a one year period given a 100 basis point rate shock or a 200 basis point move in interest rates over the one year period; and (2) in the case of market value sensitivity, 2% of the Corporation's risk-based capital given a 100 basis point rate shock. The Corporation has generally operated well below these limits, however, no assurance can be given as to the level of future interest rate risk positions. In addition, the Corporation has established limits for its non- dollar interest rate risk by establishing notional limits derived from annual income at risk calculations. All overseas locations are required to report compliance with these notional limits on a monthly basis. 28 The following table presents information on the significant categories of the Corporation's derivative financial instruments held in the asset and liability management portfolio:
Asset and Liability Management Portfolio - ---------------------------------------- September 30, 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 $7,895 8 months $ 4 $ 9 $3,581 3 months $ 2 $ 2 Interest Rate Swaps 3,862 5 years (182) (183) 3,463 4 years 47 46 Interest Rate Options (3): Written or Sold 9,125 6 months (7) (4) 39 6 months 0 0 Purchased 12,253 7 months 37 35 414 3 years 5 5 Foreign Exchange - Spot and forward contracts 231 4 months 4 0 556 3 months 13 0
(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 zero. (2) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, that has not been recognized in the income statement at the balance sheet date. Such amounts are recognized as an adjustment of yield over the period being managed. At September 30, 1994, unrecognized gain/(loss) includes $23 million of unrecognized gain, with a weighted average amortization period of 21 months, from contracts which have been terminated or transferred to the trading portfolio, compared with $15 million, with a weighted average amortization period of 12 months, at December 31, 1993. Additional information on the Corporation's accounting policies for derivatives can be found in the Corporation's 1993 Annual Report to Stockholders on pages 59 and 60, which is incorporated by reference in its 1993 Annual Report on Form 10-K. (3) The increase in the notional amounts related to interest rate options from December 31, 1993 is due to transactions entered into during the first quarter of 1994 as the Corporation adjusted its strategy in response to rising domestic interest rates. 29 The following table summarizes the composition of the Corporation's interest rate swaps entered into for asset and liability management purposes as of September 30, 1994.
$ millions Maturity - ---------- 1994 1995 1996 1997 1998 1999+ Total Notional ---- ---- ---- ---- ---- ----- -------------- Domestic: Receive fixed rate swaps:(a) Notional Amount $155 $390 $12 $169 $50 $1,840 $2,616 Weighted average receive rate 5.63% 7.73% 7.11% 9.05% 5.46% 6.22% Weighted average pay rate 4.98% 4.96% 5.60% 4.92% 5.25% 5.21% Pay fixed rate swaps:(a) Notional Amount 0 422 44 49 17 45 $577 Weighted average receive rate - 5.12% 5.00% 5.03% 4.85% 5.14% Weighted average pay rate - 4.78% 7.80% 8.31% 9.26% 7.31% Basis swaps:(b) Notional Amount 25 142 21 5 2 0 $195 Weighted average receive rate 4.99% 4.93% 4.94% 4.94% 4.94% - Weighted average pay rate 5.06% 4.86% 5.70% 5.70% 5.70% - Total Domestic: Notional Value $180 $954 $77 $223 $69 $1,885 $3,388 Weighted average receive rate 5.54% 6.16% 5.25% 7.99% 5.29% 6.21% Weighted average pay rate 4.99% 4.86% 6.84% 5.56% 6.37% 5.26% Total International Notional Amount(c) $474 0 0 0 0 0 $474 Total Consolidated Notional Amount $654 $954 $77 $223 $69 $1,885 $3,862
(a) Of the receive fixed rate swaps, $1.1 billion were linked to floating rate loans, $1.2 billion were linked to fixed rate notes payable and the remainder principally to funds borrowed. Of the swaps linked to notes payable, $1 billion are scheduled to mature in 1999 and thereafter. Of the pay fixed swaps, $410 million were linked to short term funds borrowed and the remainder to principally loans and leases. All of the basis swaps were linked to loans. (b) Basis swaps represent swaps where both the pay rate and receive rate are floating rates. (c) The majority of the international portfolio (85%) is comprised of swaps conducted by the Corporation's Brazilian operation with a weighted average maturity of 28 days. These swaps typically include the exchange of floating rate indices which are limited to the Brazilian market. As noted in the Asset and Liability Management Portfolio table above, there has been a substantial decline in the fair value and unrecognized gain/loss of interest rate-related derivatives between December 31, 1993 and September 30, 1994. This decline was mainly caused by the increase in domestic interest rates that occurred during the first nine months of 1994. Since these derivatives are used to manage the Corporation's overall domestic interest rate risk, however, these declines should be considered in connection with changes in the value and yields of the Corporation's domestic assets and liabilities over the same period. In this context, the overall effect on the Corporation from rising domestic interest rates during the first nine months of 1994 was positive. The decline in the fair value of the derivatives during the third quarter of 1994 was offset by changes in the value of assets and liabilities. In addition, domestic net interest revenue in the third quarter of 1994 improved by $ 20 million over the second quarter due to wider spreads that were attributable to the increase in rates on earning assets outpacing the rise in rates on interest bearing liabilities. At September 30, 1994, the Corporation maintained a modest risk position to benefit from potential future increases in domestic interest rates, however, this position can be changed quickly through the use of derivatives and/or balance sheet instruments as market conditions warrant. 30 CAPITAL In October 1994, the Board of Directors declared a quarterly common dividend of $.27 per share, payable on November 25 and representing a $.05 per share increase from the previous quarterly dividend. The payment and level of future common dividends will continue to be determined by the Board of Directors based on the Corporation's financial condition, recent earnings history and other factors. The Corporation's Tier 1 and total capital ratios were 6.9% and 11.9%, respectively, at September 30, 1994, compared with 7.1% and 12.3%, respectively, at June 30, 1994. The Corporation's leverage ratio at September 30, 1994 was 6.4% compared with 6.6% at June 30, 1994. The decline in the ratios from June 30 is mainly a result of the acquisition of Pioneer. As of September 30, 1994, the capital ratios of the Corporation and all of its banking subsidiaries exceeded the minimum capital ratio requirements of the "well capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). 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. There were no capital contributions made to banking subsidiaries during the first nine months of 1994, however, the Corporation purchased a $180 million subordinated note, which qualifies as tier 2 capital, from The First National Bank of Boston (FNBB) during the first quarter of 1994. ACQUISITIONS AND DIVESTITURES The Corporation engages, and intends to continue to engage, in reviewing and discussing possible acquisitions and divestitures of various businesses in connection with the implementation of its business strategy. During 1994, the following events have occurred: . On January 31, 1994, the Corporation completed the sale of its domestic factoring business and recorded a pre-tax gain of $27 million. The sale of the Canadian factoring business was completed on October 31, 1994; a small gain will be recorded on this sale in the fourth quarter. . On May 27, 1994, the Corporation completed its acquisition of BankWorcester, a $1.5 billion bank holding company headquartered in Worcester, Massachusetts. Concurrent with the acquisition, BankWorcester's banking subsidiary, Worcester County Institution for Savings, was merged into FNBB. . On May 31, 1994, the Corporation completed the sale of its freight management business. . On June 24, 1994, the Corporation announced an agreement to sell two of its banking subsidiaries, Bank of Vermont and Casco Northern Bank, N.A. (Casco). At September 30, 1994, Casco and Bank of Vermont had $1.2 billion and $.7 billion of total assets, respectively. These sale transactions are subject to the purchaser obtaining required regulatory approvals. . On August 19, 1994, the Corporation completed its acquisition of Pioneer, a $.8 billion co-operative bank based in Middlesex County, Massachusetts. Concurrent with the acquisition, Pioneer was merged into FNBB. . On November 10, 1994, the Corporation announced a definitive agreement to acquire Ganis Credit Corporation (Ganis), a privately-held consumer finance company headquartered in Newport Beach, California, whose primary business involves collateralized lending for recreational vehicles and boats. Upon completion of the acquisition, the Corporation will pay Ganis stockholders approximately $20 million, and up to an additional $16 million based upon Ganis reaching certain performance goals over the next several years. The purchase price will be paid in shares of the Corporation's common stock, which is expected to be purchased by the Corporation in the open market. As of September 30, 1994, Ganis had 120 employees in 11 offices throughout the U.S. and approximately $30 million in total assets. Additional information on certain of these purchase and sale transactions can be found in Note 2 to the Financial Statements. 31 CREDIT PROFILE The segments of the lending portfolio are as follows:
Sept. 30 June 30 March 31 Dec. 31 Sept. 30 (in millions) 1994 1994 1994 1993 1993 --------- ---------- ---------- ---------- ---------- Domestic: Commercial, industrial and financial $ 11,987 $ 11,871 $ 12,064 $ 11,991 $ 11,380 Commercial real estate: Construction 464 499 542 617 705 Other 3,110 3,084 2,851 3,123 3,054 ------ ------ ------ ------ ------ Total commercial real estate 3,574 3,583 3,393 3,740 3,759 Real estate loans secured by 1-4 family residential properties 4,878 4,215 3,923 4,159 4,291 Loans to individuals 2,373 2,283 1,795 1,610 1,556 Lease financing 1,312 1,263 1,257 1,264 1,226 Unearned income (199) (198) (202) (204) (210) ------ ------ ------ ------ ------ 23,925 23,017 22,230 22,560 22,002 ------ ------ ------ ------ ------ International: Loans and lease financing, net of unearned income 6,956 6,949 6,324 6,222 5,935 ------ ------ ------ ------ ------ Total loan and lease financing $ 30,881 $ 29,966 $ 28,554 $ 28,782 $ 27,937 ====== ====== ====== ====== ======
The $.9 billion increase in domestic loans and leases from June 30, 1994 was mainly due to the acquisition of Pioneer, which contributed approximately $540 million in mostly consumer-related loans to the September 30, 1994 balance sheet, coupled with higher levels of residential mortgages and a modest increase in commercial loans. International loans were comparable to the level at June 30, 1994, as continued growth in Argentina and an increase in United Kingdom loans were offset by a decline in Brazilian loans. The Brazilian portfolio was reduced during the third quarter as a result of the uncertainty surrounding the country's new economic program and presidential elections. Additional information on the Corporation's Brazilian cross-border outstandings can be found below under the caption "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 domestic commercial real estate nonaccrual loans and OREO, by geographic location. 32 DOMESTIC COMMERCIAL REAL ESTATE OUTSTANDINGS BY GEOGRAPHIC LOCATION
Other Other (in millions) Massachusetts Connecticut New England Florida Texas States Total Balance at September 30, 1994 (1) $1,592 $411 $686 $183 $159 $631 $3,662 ====== ==== ==== ==== ==== ==== ====== Balance at December 31, 1993 $1,373 $607 $802 $187 $54 $823 $3,846 ====== ==== ==== ==== ==== ==== ======
(1) Excludes assets transferred to accelerated disposition portfolio during 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 September 30, 1994 (1) $80 $52 $36 $13 $5 $40 $226 ==== === === === === ==== ==== Balance at December 31, 1993 $103 $68 $52 $15 $8 $121 $367 ==== === === === === ==== ==== Percent of related outstandings at September 30, 1994 5% 13% 5% 7% 3% 6% 6% Percent of related outstandings at December 31, 1993 8% 11% 6% 8% 15% 15% 10%
(1) Excludes assets transferred to accelerated disposition portfolio during 1994. HIGHLY LEVERAGED TRANSACTIONS The Corporation's total loan portfolio at September 30, 1994 included $1.3 billion of highly leveraged transaction (HLT) loans to 78 customers, compared with $1.2 billion to 74 customers at June 30, 1994. The average HLT loan size was $16 million at September 30, 1994 and $17 million at June 30, 1994. The HLT loans are to customers operating in a variety of industries. The amount of unused commitments for HLTs at September 30, 1994 was $577 million, compared with $544 million at June 30, 1994. The amount of unused commitments does not necessarily represent the actual future funding requirements of the Corporation, since a portion can be syndicated or assigned to others or may expire without being drawn upon. At September 30, 1994, $23 million of the HLT portfolio was on nonaccrual status, compared with $24 million at June 30, 1994. Net credit losses from the HLT portfolio were $1 million in the third quarter of 1994 compared with $3 million in the preceding quarter. 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 September 30, 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. 33 NONACCRUAL LOANS AND OREO The details of consolidated nonaccrual loans and OREO are as follows:
Sept. 30 June 30 March 31 Dec. 31 Sept. 30 (in millions) 1994(1) 1994(1) 1994(1) 1993 1993 --------- ------- -------- ------- -------- Domestic: Commercial, industrial and financial $ 119 $ 131 $ 112 $ 121 $ 131 Commercial real estate: Construction 18 30 27 30 37 Other 119 160 134 231 225 ----- ----- ----- ----- ----- Total commercial real estate 137 190 161 261 262 Real estate loans secured by 1-4 family residential properties 35 30 17 64 65 Loans to individuals 15 9 13 10 13 Lease financing 0 0 0 1 1 ----- ----- ----- ----- ----- 306 360 303 457 472 ----- ----- ----- ----- ----- International 71 87 96 94 86 ----- ----- ----- ----- ----- Total nonaccrual loans 377 447 399 551 558 OREO 93 71 66 108 136 ----- ----- ----- ----- ----- Total $ 470 $ 518 $ 465 $ 659 $ 694 ===== ===== ===== ===== ===== Nonaccrual loans and OREO as a percent of related asset categories 1.5% 1.7% 1.6% 2.3% 2.5%
(1) Excludes assets transferred to accelerated disposition portfolio during 1994. The following table summarizes the changes in nonaccrual loans and OREO which have occurred during the last nine quarters:
1992 1993 1994 ------------------ -------------------------------------- --------------------------- Third Fourth First Second Third Fourth First Second Third (in millions) Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr ------- ------- ------ ------ ------ ------ ------ ----- ----- Beginning balance $ 1,323 $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659 $ 465 $ 518 Additions from acquisitions 12 8 Additions 184 180 107 117 135 127 169 173 132 Restructurings (104) (29) (13) (14) Transfers to accelerated disposition portfolio (before writedown) (224) (28) Sales, payments and other decreases (180) (187) (132) (115) (105) (103) (88) (80) (104) Credit losses and valuation write-downs (1) (110) (128) (91) (80) (64) (59) (51) (52) (56) ----- ----- ---- ---- ---- ---- ---- --- ---- Ending balance $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659 $ 465 $ 518 $ 470 ===== ===== ==== ==== ==== ==== ==== === ====
(1) Excludes net credit losses related to the transfer of assets to the accelerated disposition portfolio during 1994. Nonaccrual loans and OREO declined $48 million from June 30, 1994, including the transfer of an additional $28 million of nonperforming assets to the accelerated disposition portfolio (see further discussion below under the caption "Accelerated Disposition Portfolio"). Nonaccrual loans and OREO represented 1.5% of related assets at September 30, 1994 compared with 1.7% of related assets at June 30, 1994. The level of nonaccrual loans and OREO is influenced by the economic environment, interest rates, the regulatory environment 34 and other internal and external factors. As such, no assurance can be given as to future levels of nonaccrual loans and leases and OREO. 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 pool at $259 million, of which $241 million related to balance sheet exposure. During the second quarter, this portfolio was reduced by $54 million principally as a result of dispositions. Also, in connection with the BankWorcester acquisition, the Corporation acquired certain loans which it classified as available for sale. These loans were added to the accelerated disposition portfolio at their estimated disposition value of $31 million. As a result of the second quarter activity, the level of the accelerated disposition portfolio was reduced to $236 million at June 30, 1994, of which $218 million related to balance sheet exposure. During the third quarter of 1994, the Corporation transferred an additional $67 million of loans into the accelerated disposition portfolio. This pool consisted of two components: (1) loans, classified as available for sale, that were acquired in connection with the Pioneer acquisition and added to the accelerated disposition portfolio at their estimated disposition value of $11 million and (2) an additional $56 million of the Corporation's loans on which a chargeoff of $20 million was taken at the point of transfer into the portfolio. The aggregate carrying value of this pool at September 30, 1994 was $47 million. Also during the third quarter of 1994, the Corporation sold assets contained in the portfolio with a carrying value of $138 million and recorded a $20 million recovery on these transactions. As a result of the third quarter activity, the level of the accelerated disposition portfolio was reduced to $145 million at September 30, 1994, of which $127 million related to balance sheet exposure. The carrying value of the September 30 portfolio 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 established carrying value or estimated disposition value. The Corporation is actively engaged in a formal selling effort and, during October, 1994, sold approximately $50 million of the portfolio's remaining assets. 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 $72 million at September 30, 1994, compared with $81 million at June 30, 1994. The decline was due to the receipt of principal payments. The renegotiated loans outstanding at September 30, 1994, which had a yield of approximately 9 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:
Sept. 30 June 30 March 31 Dec. 31 Sept. 30 (dollars in millions) 1994 1994 1994 1993 1993 ------- ------- -------- ------- -------- Renegotiated loans $ 72 $ 81 $ 116 $ 225 $ 244 ==== ==== ==== ==== ==== Approximate yield on renegotiated loans 9% 9% 8% 8% 8% ==== ==== ==== ==== ====
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 $36 million at September 30, 1994 compared with $41 million at June 30, 1994. 35 RESERVE FOR CREDIT LOSSES The reserve for credit losses at September 30, 1994 was $677 million, or 2.19%, of outstanding loans and leases, compared with $676 million or 2.26% at June 30, 1994 and $799 million, or 2.86%, at September 30, 1993. The reserve for credit losses was 179% of nonaccrual loans and leases at September 30, 1994, compared with 151% at June 30, 1994 and 143% at September 30, 1993. Net credit losses, excluding the 1994 chargeoffs and recoveries in connection with the accelerated disposition portfolio, were $32 million for the third quarter of 1994 and were $95 million for the first nine months of 1994. This compares with $46 million for the third quarter and $184 million for the first nine months of 1993. As a percentage of average loans and leases on an annualized basis, net credit losses, excluding the 1994 chargeoffs and recoveries in connection with the accelerated disposition portfolio, were .42% in the third quarter of 1994, compared with .41% for the second quarter of 1994 and .68% for the third quarter of 1993.
Net credit losses are as follows: (in millions) Third Quarter Nine Months ----------------- ---------------- 1994* 1993 1994* 1993 ---- ---- ---- ---- Domestic: Commercial, industrial and financial $ 6 $ 7 $ 10 $ 33 Commercial real estate 7 11 25 59 Loans secured by 1-4 family residential properties 2 8 7 14 Loans to individuals 10 12 30 22 ---- ---- ---- ---- 25 38 72 128 International 7 8 23 56 ---- ---- ---- ---- Total $ 32 $ 46 $ 95 $ 184 ==== ==== ==== ====
*Excludes credit losses and recoveries related to assets contained in the accelerated disposition portfolio. * * * * * * * The economies of the United States and New England continued to improve and domestic interest rates continued to rise during the third quarter of 1994. Management, however, cannot currently predict to what extent the domestic economic recovery or future interest rate changes 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, particularly in Brazil, which implemented a new economic program in July and elected a new president in October. No assurance, therefore, can be given that the positive trends achieved during the third quarter and first nine months of 1994 will continue. 36 CROSS-BORDER OUTSTANDINGS Total cross-border outstandings, which are reported on a regulatory basis, represented 15% of consolidated total assets at September 30, 1994 compared with 14% at December 31, 1993. Cross-border outstandings in countries which individually amounted to 1% or more of consolidated total assets at September 30, 1994 and December 31, 1993 were approximately as follows:
Percentage of Consolidated (dollars in millions) Public Banks Other Total Total Assets Commitments(2) ------ ----- ------ ------ ------------- -------------- September 30, 1994 (1) ---------------------- Argentina $200 $340 $1,440 $1,980 4.5% $115 Brazil 50 620 670 1.5 20 United Kingdom 65 510 575 1.3 125 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 September 30, 1994 and December 31, 1993 were approximately as follows: Chile $390 million at September 30, 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 September 30, 1994, approximately $3.7 billion of the Corporation's cross- border outstandings were to Less Developed Countries (LDCs), of which $3.0 billion were to Argentina, Brazil and Chile, three countries in which the Corporation maintains a branch network and subsidiaries. The $3.7 billion of LDC cross-border outstandings were mainly comprised of short-term performing trade credits, capital investments in branches and subsidiaries, and non-trade- related loans and leases not subject to country debt rescheduling agreements. The Corporation does not separately allocate a portion of its reserve for credit losses for LDC loans and leases; however, these loans and leases are considered in the determination of the adequacy of the overall reserve for credit losses. 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 Change in non-trade-related loans and leases not subject to country debt rescheduling 334 (107) Net change in trade-related cross-border outstandings, primarily short-term (39) (98) Net change in investment and trading 135 63 securities Net change in local currency assets funded by non-local currency 4 liabilities Net change in placements 38 Other 7 3 ----- ---- Cross-border outstandings at September 30, 1994 $ 1,980(1) $ 670(2) ===== ====
(1) Approximately 51% are non-trade-related local dollar loans funded by locally generated dollar liabilities and approximately 23% are trade- related outstandings. (2) Approximately 62% are trade-related outstandings 37 As noted in the discussion above, primarily under the caption "Brazil", a new economic program was implemented on July 1 and a new president was elected on October 3, 1994. Given the present and future uncertainties related to these two events, the Corporation reduced the level of its Brazilian cross-border outstandings during the third quarter to $670 million at September 30, 1994 from $950 million at June 30, 1994. This decline was mainly accomplished through reductions in trade-related and non-trade-related cross-border loans. The Corporation is currently evaluating the effects of the economic program, including certain banking reform measures which have been announced and continue to be modified by the government as they assess the overall impact of the economic plan. As the various aspects of the economic program evolve, the Corporation will assess the levels of Brazilian cross-border outstandings and may increase or decrease the balance from the September 30 level as market conditions warrant and permit. No assurance can be given at this time, however, as to the future level of the Corporation's cross-border outstandings to Brazil. 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, including its cross-border outstandings to Argentina and Brazil, however, there can be no assurance that such problems will not occur in the future. 38 Consolidated Balance Sheet Averages by Quarter Last Nine Quarters (in millions)
1992 1993 1994 ----------------- --------------------------------------- ---------------------------- 3 4 1 2 3 4 1 2 3 ----------------- --------------------------------------- ---------------------------- ASSETS Interest bearing deposits in other banks $ 1,222 $ 1,252 $ 1,262 $ 1,422 $ 1,305 $ 1,185 $ 1,083 $ 902 $ 1,131 Federal funds sold and securities purchased under agreements to resell 1,092 801 1,309 1,089 1,367 2,005 2,447 3,485 2,595 Trading securities 233 242 290 276 300 259 452 402 618 Loans held for sale 640 869 682 944 1,334 1,314 960 824 651 Securities 4,521 4,907 3,909 3,838 3,561 3,194 2,945 3,164 3,489 Loans and lease financing 25,577 25,269 25,224 25,854 26,953 28,172 28,615 29,105 30,362 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total earning assets 33,285 33,340 32,676 33,423 34,820 36,129 36,502 37,882 38,846 Other assets 3,589 3,956 3,775 4,078 4,248 4,274 4,712 4,820 5,079 ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL ASSETS $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214 $ 42,702 $ 43,925 ====== ====== ====== ====== ====== ====== ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Domestic offices: Noninterest bearing $ 3,762 $ 4,220 $ 4,031 $ 4,397 $ 4,578 $ 4,863 $ 4,633 $ 4,403 $ 4,477 Interest bearing 20,567 20,084 19,245 18,580 18,360 18,096 17,110 16,672 17,309 Overseas offices: Noninterest bearing 360 362 349 336 387 469 497 393 415 Interest bearing 4,322 4,214 4,537 4,881 5,218 5,819 6,375 6,764 7,703 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total deposits 29,011 28,880 28,162 28,194 28,543 29,247 28,615 28,232 29,904 Federal funds purchased and repurchase agreements 1,708 2,207 1,705 2,315 3,430 3,787 3,619 4,014 3,728 Other funds borrowed 1,713 1,507 1,436 1,606 1,485 1,603 2,411 4,124 3,633 Notes payable 1,186 1,223 1,669 1,670 1,752 1,876 2,194 1,957 1,987 Other liabilities 919 957 886 1,022 1,085 1,073 1,433 1,404 1,625 Stockholders' equity 2,337 2,522 2,593 2,694 2,773 2,817 2,942 2,971 3,048 ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214 $ 42,702 $ 43,925 ====== ====== ====== ====== ====== ====== ====== ====== ======
39 Consolidated Statement of Income by Quarter - Taxable Equivalent Basis Last Nine Quarters (in millions, except per share amounts)
1992 1993 1994 --------------- ----------------------------------- -------------------------- 3 4 1 2 3 4 1 2 3 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net Interest Revenue $ 327.9 $ 336.3 $ 324.2 $ 330.5 $ 340.8 $ 349.3 $ 340.7 $ 374.5 $ 423.9 Taxable equivalent adjustment 2.1 3.7 1.8 1.7 2.3 2.0 1.5 1.5 1.3 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total net interest revenue 330.0 340.0 326.0 332.2 343.1 351.3 342.2 376.0 425.2 Provision for credit losses 44.5 23.0 22.5 27.6 10.0 10.0 45.0 25.0 25.0 ----- ----- ----- ----- ----- ----- ----- ----- ----- Net interest revenue after provision for credit losses 285.5 317.0 303.5 304.6 333.1 341.3 297.2 351.0 400.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Noninterest Income: Financial service fees 81.1 88.9 71.3 92.6 90.9 95.2 92.4 93.9 104.3 Trust and agency fees 41.1 42.0 43.9 45.2 43.1 45.5 47.7 50.3 50.6 Trading profits and commissions 5.5 .5 6.9 5.8 6.9 3.9 3.9 1.2 10.9 Securities portfolio gains 8.7 1.5 6.4 6.0 11.0 8.8 3.9 5.9 1.3 Other income 40.9 45.7 45.9 41.4 39.3 35.6 87.2 41.0 35.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest income 177.3 178.6 174.4 191.0 191.2 189.0 235.1 192.3 202.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Noninterest Expense: Salaries 154.9 163.7 159.1 161.7 160.4 153.3 157.8 161.5 168.1 Employee benefits 30.4 25.6 37.5 33.7 32.2 32.7 36.9 37.0 38.6 Occupancy expense 31.7 31.0 32.2 32.2 32.2 31.3 31.9 33.1 35.2 Equipment expense 24.6 25.5 25.6 24.0 23.3 23.4 23.6 23.4 24.2 Merger and restructuring charges 85.0 16.4 5.0 Other expense 123.9 141.2 121.3 116.7 107.1 105.9 96.5 101.0 107.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total noninterest expense 365.5 387.0 375.7 368.3 440.2 346.6 346.7 372.4 378.3 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles 97.3 108.6 102.2 127.3 84.1 183.7 185.6 170.9 224.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- Provision for income taxes 40.3 42.7 40.9 54.2 40.4 79.2 81.4 74.9 98.8 Taxable equivalent adjustment 2.1 3.7 1.8 1.7 2.3 2.0 1.5 1.5 1.3 ----- ----- ----- ----- ----- ----- ----- ----- ----- 42.4 46.4 42.7 55.9 42.7 81.2 82.9 76.4 100.1 ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before extraordinary items and cumulative effect of changes in accounting principles 54.9 62.2 59.5 71.4 41.4 102.5 102.7 94.5 124.0 Extraordinary items 19.0 17.3 (6.6) Cumulative effect of changes in accounting principles, net 24.2 ----- ----- ----- ----- ----- ----- ----- ----- ----- NET INCOME $ 73.9 $ 79.5 $ 83.7 $ 71.4 $ 41.4 $ 102.5 $ 96.1 $ 94.5 $ 124.0 ===== ===== ===== ===== ===== ===== ===== ===== ===== Per Common Share: Income before extraordinary items and cumulative effect of changes in accounting principles: Primary $ .47 $ .52 $ .49 $ .60 $ .30 $ .88 $ .88 $ .80 $ 1.07 Fully diluted .46 .50 .48 .59 .30 .85 .85 .77 1.04 Net Income: Primary $ .65 $ .68 $ .72 $ .60 $ .30 $ .88 $ .82 $ .80 $ 1.07 Fully diluted .63 .66 .70 .59 .30 .85 .79 .77 1.04 Cash dividends declared .10 .10 .10 .10 .10 .22 .22 .22
40 AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis Quarter Ended September 30, 1994
In Millions of Dollars - --------------------------------------------------------------------------------------------------------------------- ASSETS Average Average Volume Interest(1) Rate ------------------------------------ Interest Bearing Deposits with Other Banks U.S. $ 144 $ 1.8 4.81% International 987 36.6 14.76 -------- -------- Total 1,131 38.4 13.50 -------- -------- -------- Federal Funds Sold and Resale Agreements U.S. 1,317 14.7 4.42 International 1,278 208.4 64.69 -------- -------- Total 2,595 223.1 34.11 -------- -------- -------- Trading Securities U.S. 242 3.5 5.71 International 376 26.3 27.75 -------- -------- Total 618 29.8 19.12 -------- -------- -------- Loans Held for Sale U.S. (2) 651 10.1 6.17 -------- -------- -------- Securities U.S. Available For Sale (4) 1,300 19.1 5.83 Held to Maturity 1,626 24.4 5.95 International Available For Sale (4) 373 14.1 15.00 Held to Maturity 190 4.0 8.35 -------- -------- Total 3,489 61.6 7.00 -------- -------- -------- Loans and Leases (Net of Unearned Income) U.S. 23,431 463.2 7.84 International 6,931 258.7 14.81 -------- -------- Total Loans and Leases (3) 30,362 721.9 9.43 -------- -------- -------- Interest-Earning Assets 38,846 1,084.9 11.08 -------- -------- Non-Interest-Earning Assets 5,079 -------- Total Assets $ 43,925 ======== ----------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings Deposits $ 9,897 $ 51.4 2.06% Time Deposits 7,412 83.9 4.49 International 7,703 198.6 10.23 -------- -------- Total 25,012 333.9 5.30 -------- -------- -------- Federal Funds Purchased and Repurchase Agreements U.S. 3,596 35.8 3.94 International 132 17.0 50.98 -------- -------- Total 3,728 52.8 5.61 -------- -------- -------- Other Funds Borrowed U.S. 2,506 31.0 4.91 International 1,127 211.3 74.37 -------- -------- Total 3,633 242.3 26.46 -------- -------- -------- Notes Payable U.S. 1,836 27.8 6.01 International 151 2.9 7.76 -------- -------- Total 1,987 30.7 6.14 -------- -------- -------- Total Interest-Bearing Liabilities 34,360 659.7 7.62 -------- -------- Demand Deposits U.S. 4,477 Demand Deposits International 415 Other Non-Interest-Bearing Liabilities 1,625 Total Stockholders' Equity 3,048 -------- Total Liabilities and Stockholders' Equity $ 43,925 ======== ----------------------------------------------------------------------------------- NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 28,710 $ 319.3 4.41% International 10,136 105.9 4.15 -------- -------- Total $ 38,846 $ 425.2 4.34% ======== ======== - ---------------------------------------------------------------------------------------------------------------------
(1) This data is shown with income on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. (4) Average rate for Securities Available for sale is based on the securities' amortized cost. 41 AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis Quarter Ended September 30, 1993
In Millions of Dollars - -------------------------------------------------------------------------------------------------------------------- ASSETS Average Average Volume Interest(1) Rate ------------------------------------ Interest Bearing Deposits with Other Banks U.S. $ 365 $ 2.8 3.04% International (4) 940 33.2 14.02 -------- -------- Total 1,305 36.0 10.95 -------- -------- -------- Federal Funds Sold and Resale Agreements U.S. 734 5.7 3.05 International (4) 633 34.7 21.74 -------- -------- Total 1,367 40.4 11.70 -------- -------- -------- Trading Securities U.S. 171 1.6 3.67 International (4) 129 1.3 4.09 -------- -------- Total 300 2.9 3.85 -------- -------- -------- Loans Held for Sale U.S. (2) 1,334 23.8 7.09 -------- -------- -------- Securities U.S. (5) 3,081 45.1 5.81 International (4) (5) 480 20.3 16.67 -------- -------- Total 3,561 65.4 7.28 -------- -------- -------- Loans and Leases (Net of Unearned Income) U.S. 21,282 404.2 7.54 International (4) 5,671 128.9 9.02 -------- -------- Total Loans and Leases (3) 26,953 533.1 7.85 -------- -------- -------- Interest-Earning Assets 34,820 701.6 7.99 -------- -------- -------- Non-Interest-Earning Assets 4,248 -------- Total Assets $ 39,068 ======== - -------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings Deposits $ 9,457 $ 49.7 2.12% Time Deposits 8,903 100.3 4.47 International (4) 5,218 105.7 8.04 -------- -------- Total 23,578 255.7 4.30 -------- -------- -------- Federal Funds Purchased and Repurchase Agreements U.S. 3,326 25.7 3.06 International (4) 104 6.2 23.82 -------- -------- Total 3,430 31.9 3.69 -------- -------- -------- Other Funds Borrowed U.S. 830 12.6 6.03 International (4) 655 29.5 17.88 -------- -------- Total 1,485 42.1 11.25 -------- -------- -------- Notes Payable U.S. 1,681 27.0 6.37 International (4) 71 1.8 9.63 -------- -------- Total 1,752 28.8 6.51 -------- -------- -------- Total Interest-Bearing Liabilities 30,245 358.5 4.72 -------- -------- Demand Deposits U.S. 4,578 Demand Deposits International 387 Other Non-Interest-Bearing Liabilities 1,085 Total Stockholders' Equity 2,773 -------- Total Liabilities and Stockholders' Equity $ 39,068 ======== - -------------------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 26,967 $ 283.9 4.18% International 7,853 59.2 2.99 -------- -------- Total $ 34,820 $ 343.1 3.91% ======== ========= - --------------------------------------------------------------------------------------------------------------------
(1) This data is shown with income on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. (4) 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, and reclassified all prior periods. This reclassification is more fully discussed in Note 11 to the Financial Statements. (5) Prior to January 1, 1994, average balances for Securities Available for Sale and Securities Held to Maturity were not separately accumulated. 42 AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis Nine Months Ended September 30, 1994
In Millions of Dollars - -------------------------------------------------------------------------------------------------------------------- ASSETS Average Average Volume Interest (1) Rate ------------------------------------ Interest Bearing Deposits with Other Banks U.S. $ 192 $ 5.7 3.93% International (4) 848 73.6 11.62 ------ ------- Total 1,040 79.3 10.20 ------ ------- ----- Federal Funds Sold and Resale Agreements U.S. 1,495 43.5 3.89 International (4) 1,346 412.1 40.95 ------ ------- Total 2,841 455.6 21.44 ------ ------- ----- Trading Securities U.S. 179 6.9 5.14 International (4) 310 50.3 21.73 ------ ------- Total 489 57.2 15.65 ------ ------- ----- Loans Held for Sale U.S. (2) 811 38.5 6.36 ------ ------- ----- Securities U.S. Available For Sale (5) 1,206 60.0 6.65 Held to Maturity 1,467 59.1 5.39 International (4) Available For Sale (5) 320 35.7 14.92 Held to Maturity 210 12.4 7.89 ------ ------- Total 3,203 167.2 6.98 ------ ------- ----- Loans and Leases (Net of Unearned Income) U.S. 22,720 1,288.1 7.58 International (4) 6,646 565.7 11.38 ------ ------- Total Loans and Leases (3) 29,366 1,853.8 8.44 ------ ------- ----- Interest-Earning Assets 37,750 2,651.6 9.39 ------- ----- Non-Interest-Earning Assets 4,871 ------ Total Assets $ 42,621 ====== ------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings Deposits $ 9,525 $ 140.5 1.97% Time Deposits 7,506 250.2 4.46 International (4) 6,951 424.9 8.17 ------ ------- Total 23,982 815.6 4.55 ------ ------- ----- Federal Funds Purchased and Repurchase Agreements U.S. 3,559 96.7 3.63 International (4) 228 48.0 28.21 ------ ------- Total 3,787 144.7 5.11 ------ ------- ----- Other Funds Borrowed U.S. 2,211 80.5 4.87 International (4) 1,180 374.7 42.48 ------ ------- Total 3,391 455.2 17.95 ------ ------- ----- Notes Payable U.S. 1,920 82.6 5.75 International (4) 125 10.1 10.77 ------ ------- Total 2,045 92.7 6.06 ------ ------- ----- Total Interest-Bearing Liabilities 33,205 1,508.2 6.07 ------- ----- Demand Deposits U.S. 4,504 Demand Deposits International 435 Other Non-Interest-Bearing Liabilities 1,488 Total Stockholders' Equity 2,989 ------ Total Liabilities and Stockholders' Equity $ 42,621 ====== ------------------------------------------------------------------------------------ NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 28,071 $ 892.9 4.25% International 9,679 250.5 3.46 ------ ------- Total $ 37,750 $ 1,143.4 4.05% ====== ======= - --------------------------------------------------------------------------------------------------------------------
(1) This data is shown with income on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. (4) 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, and reclassified all prior periods. This reclassification is more fully discussed in Note 11 to the Financial Statements. (5) Average rate for Securities Available for sale is based on the securities' amortized cost. 43 AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis Nine Months Ended September 30, 1993
In Millions of Dollars - -------------------------------------------------------------------------------------------------------------------- ASSETS Average Average Volume Interest (1) Rate ------------------------------------ Interest Bearing Deposits with Other Banks U.S. $ 367 $ 8.8 3.20% International (4) 963 99.4 13.80 ------ ------- Total 1,330 108.2 10.87 ------ ------- ----- Federal Funds Sold and Resale Agreements U.S. 860 19.8 3.07 International (4) 395 64.0 21.66 ------ ------- Total 1,255 83.8 8.93 ------ ------- ----- Trading Securities U.S. 146 4.2 3.87 International (4) 143 2.4 2.23 ------ ------- Total 289 6.6 3.06 ------ ------- ----- Loans Held for Sale U.S. (2) 989 54.1 7.31 ------ ------- ----- Securities U.S. (5) 3,333 148.3 5.95 International (4) (5) 435 52.4 16.10 ------ ------- Total 3,768 200.7 7.12 ------ ------- ----- Loans and Leases (Net of Unearned Income) U.S. 20,657 1,191.0 7.71 International 5,373 378.1 9.41 ------ ------- Total Loans and Leases (3) 26,030 1,569.1 8.06 ------ ------- ----- Interest-Earning Assets 33,661 2,022.5 8.03 ------- ----- Non-Interest-Earning Assets 4,016 ------ Total Assets $ 37,677 ====== ------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings Deposits $ 9,350 $ 165.0 2.40% Time Deposits 9,375 329.6 4.70 International (4) 4,882 271.5 7.44 ------ ------- Total 23,607 766.1 4.34 ------ ------- ----- Federal Funds Purchased and Repurchase Agreements U.S. 2,366 52.6 2.98 International (4) 124 14.8 15.83 ------ ------- Total 2,490 67.4 3.62 ------ ------- ----- Other Funds Borrowed U.S. 922 34.7 5.02 International (4) 587 68.3 15.56 ------ ------- Total 1,509 103.0 9.12 ------ ------- ----- Notes Payable U.S. 1,602 77.4 6.46 International (4) 95 7.3 10.25 ------ ------- Total 1,697 84.7 6.67 ------ ------- ----- Total Interest-Bearing Liabilities 29,303 1,021.2 4.68 ------- ----- Demand Deposits U.S. 4,337 Demand Deposits International 357 Other Non-Interest-Bearing Liabilities 999 Total Stockholders' Equity 2,681 ------ Total Liabilities and Stockholders' Equity $ 37,677 ====== ------------------------------------------------------------------------------------ NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. $ 26,352 $ 806.7 4.09% International 7,309 194.6 3.56 ------ ------- Total $ 33,661 $ 1,001.3 3.98% ====== ======= - --------------------------------------------------------------------------------------------------------------------
(1) This data is shown with income on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. (4) 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, and reclassified all prior periods. This reclassification is more fully discussed in Note 11 to the Financial Statements. (5) Prior to January 1, 1994, average balances for Securities Available for Sale and Securities Held to Maturity were not separately accumulated. 44 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. Third Quarter 1994 Compared With Third 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 $ 42.5 $ 16.5 $ 59.0 $ 47.1 $ 82.7 $ 129.8 $ 81.1 $ 107.7 $ 188.8 Other earning assets (5.6) .2 (5.4) 92.1 107.8 199.9 26.3 168.2 194.5 Adjustment (1) (4.2) 4.2 0 (15.9) 15.9 0 5.0 (5.0) 0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total interest income 32.7 20.9 53.6 123.3 206.4 329.7 112.4 270.9 383.3 Total interest expense 13.3 4.9 18.2 99.5 183.5 283.0 68.4 232.8 301.2 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net Interest Revenue $ 19.4 $ 16.0 $ 35.4 $ 23.8 $ 22.9 $ 46.7 $ 44.0 $ 38.1 $ 82.1 ====== ====== ====== ====== ====== ====== ====== ====== ====== Nine Months 1994 Compared With Nine Months 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 $ 117.1 $ (20.0) $ 97.1 $ 108.3 $ 79.3 $ 187.6 $ 210.7 $ 74.0 $ 284.7 Other earning assets (13.6) (7.9) (21.5) 211.3 154.6 365.9 71.6 272.8 344.4 Adjustment (1) (11.3) 11.3 0 (38.2) 38.2 0 5.0 (5.0) 0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total interest income 92.2 (16.6) 75.6 281.4 272.1 553.5 287.3 341.8 629.1 Total interest expense 37.5 (48.1) (10.6) 220.0 277.6 497.6 163.4 323.6 487.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net Interest Revenue $ 54.7 $ 31.5 $ 86.2 $ 61.4 $ (5.5) $ 55.9 $ 123.9 $ 18.2 $ 142.1 ====== ====== ====== ====== ====== ====== ====== ====== ======
(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. 45 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. As previously reported, in March, 1993, a complaint was filed in Delaware Chancery Court against the Corporation, Bancorp and Bancorp's directors who voted in favor of the Corporation's acquisition of Bancorp. The action was brought by a Bancorp stockholder, individually and as a class action on behalf of all Bancorp stockholders of record on the date the acquisition was announced, and sought an injunction with respect to the proposed acquisition and damages in an unspecified amount. In July 1993, the Corporation acquired Bancorp. In December 1993, the Chancery Court granted summary judgment in favor of the Corporation, Bancorp and Bancorp's former directors. The plaintiff has appealed that decision to the Delaware Supreme Court. A hearing before a three-judge panel of the Court was held on April 5, 1994, and a second hearing was held before the full panel on October 21, 1994. As previously reported, in June 1985 a complaint was filed against FNBB in the U.S. District Court for the District of New Hampshire by private plaintiffs on behalf of the United States in a qui tam action under 3l U.S.C. # 3729, known as the False Claims Act. The complaint alleges that FNBB failed to disclose, or made false statements, to the Farmer's Home Administration (FmHA) in connection with securing and inducing payment on guarantees from the FmHA on loans by FNBB and certain investors to Stranway Corporation and its subsidiary Elmendorf Board Corporation. Damages are alleged in the amount of $50,000,000, plus interest, costs and attorneys fees. The United States, which must decide at the outset whether to take over civil prosecution of a False Claims Act suit initiated by a private plaintiff, has declined to enter an appearance in and take over the action. The action was transferred to the District of Massachusetts. On October 13, 1994, the District Court entered an order (1) denying plaintiff's' motion to substitute a new qui tam plaintiff and (2) dismissing the complaint against FNBB without prejudice to the original qui tam plaintiff reinstating the action within 30 days. FNBB denies the allegations in the complaint and, if the matter were to be reinstated, intends to defend the action vigorously. As previously reported, in January 1994, the Securities and Exchange Commission (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 was conducted in May 1994, and the parties subsequently filed post- trial briefs. Although management cannot predict the outcome of this proceeding, an unfavorable outcome will not result in any monetary penalties to the Corporation. Item 5. Other Information. On November 10, 1994, the Corporation announced that it had reached a definitive agreement to acquire Ganis Credit Corporation (Ganis). Ganis, based in Newport Beach, California, is a privately held consumer finance company whose primary business involves collateralized lending for recreational vehicles and boats. At September 30, 1994, Ganis had approximately $30 million in assets and 11 offices located in California, Texas, Florida, Pennsylvania and Massachusetts. Under the terms of the agreement, the shareholders of Ganis will receive approximately $20 million upon consummation of the transaction, plus up to an additional $16 million based upon Ganis reaching performance goals over the next several years. The purchase price will be paid in the Corporation's Common Stock and the Corporation expects to buy shares of its Common Stock in the market sufficient to cover the shares to be issued in the transaction. The Ganis transaction has been approved by the boards of directors of both companies and is subject to certain regulatory filings. The Corporation's objective is to consummate the Ganis transaction during the first quarter of 1995, although no assurance can be given that the transaction will be completed within this time frame. Recent Legislation On September 23, 1994, the Riegle Community Development and Regulatory Improvement Act of 1994 (Development Act) was enacted. The Development Act establishes financial and other assistance for entities involved primarily in community development activities. The Development Act's provisions also make changes in a number of areas including, among others: (i) increasing restrictions on some types of high interest loans; (ii) improving small business access to capital; (iii) requiring federal banking agencies to, among other things, coordinate examinations and establish uniform regulations and guidelines where appropriate; (iv) simplifying and expediting the processing and approvals for certain applications; (v) clarifying the FDIC's powers as a conservator or receiver; (vi) expanding the exemptions available to a holding company's subsidiary banks with respect to FDICIA's audit requirements; (v) adding flexibility to FDICIA's safety and soundness standards by, among other things, permitting 46 their issuance as guidelines and allowing banking agencies more discretion in handling noncompliance; (vi) amending certain requirements on insider loans; (vii) modifying local residency requirements for national bank directors; (viii) limiting the applicability of certain real estate settlement procedures; and (ix) extending some management interlocks exemptions. On September 28, 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (Interstate Act) was enacted. The Interstate Act's provisions, among other things: (i) permit bank holding companies to acquire control of banks in any state beginning September 28, 1995, subject to (a) specified maximum national and state deposit concentration limits; (b) any applicable state law provisions requiring that the acquired bank has to have been in existence for a specified period of up to 5 years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by banks in different states, including branching through bank mergers, beginning June 1, 1997, subject to the provisions noted in (i) and to any state laws that opt in as of an earlier date or opt out of the provision entirely; (iii) authorize states to enact legislation permitting interstate de novo branching; and (iv) provide for certain additional limitations on foreign bank activities. The full impact of the Development Act and the Interstate Act will not be completely known until the enactment and implementation by the various federal banking agencies of the underlying regulations and actions required by the Acts. However, it is anticipated that the Development Act may reduce certain regulatory burdens on financial institutions and the Interstate Act may facilitate consolidation within multilevel financial institutions and in the banking industry. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 11 Computation of Earnings Per Share. 12(a) Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits). 12(b) Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits). 12(c) Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (excluding interest on deposits). 12(d) Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (including interest on deposits). 27 Financial Data Schedule (b) Current Reports on Form 8-K. During the third quarter of 1994, the Corporation did not file any Current Reports on Form 8-K. 47 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 November 14, 1994 - ----------------- Date 48 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 Nine Months Ended September 30 September 30 EARNINGS 1994 1993 1994 1993 -------- --------- --------- --------- --------- 1. Net income $ 123,969 $ 41,444 $ 314,609 $ 196,514 2. Less: Preferred dividends 9,389 9,383 28,063 25,346 --------- --------- --------- --------- 3. Net income applicable to primary earnings per common share 114,580 32,061 286,546 171,168 4. Add: Interest expense on convertible debentures, net of tax 1,085 1,098 3,219 3,268 --------- --------- --------- --------- 5. Net income applicable to fully diluted earnings per common share $ 115,665 $ 33,159 $ 289,765 $ 174,436 ========= ========= ========= ========= SHARES ------ 6. Weighted average number of common shares outstanding 106,981 105,443 106,602 105,232 7. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 679 972 759 1,028 8. Incremental shares from assumed conversion of debentures at date of issuance 4,030 4,031 4,030 4,036 --------- --------- --------- --------- 9. Adjusted number of common shares 111,690 110,446 111,391 110,296 ========= ========= ========= ========= PER SHARE CALCULATION --------------------- 10. Primary net income per common share $ 1.07 $ .30 $ 2.69 $ 1.63 (Item 3 /Item 6); see note below 11. Fully diluted net income per common share $ 1.04 $ .30 $ 2.60 $ 1.58 (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 nine months ended September 30, 1994 and September 30, 1993 are computed by adding to the numerator $6,535 and subtracting from the numerator $24,203, respectively. EX-12.A 3 EXHIBIT 12A BANK OF BOSTON CORPORATION EXHIBIT 12(a) COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Excluding Interest on Deposits) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the nine months ended September 30, 1994 and 1993 and for the five years ended December 31, 1993 were as follows:
Nine Months Years Ended Ended September 30 December 31 ---------------------- ------------------------------------------------------- (Dollars in thousands) 1994 1993 1993 1992 1991 1990 1989 --------- ------- ------- ------- -------- -------- --------- Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax 6,535 (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) (24,203) Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951 --------- ------- ------- ------- -------- -------- --------- Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065 ========= ======= ======= ======= ======== ======== ========= Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482 Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007 --------- ------- ------- ------- -------- -------- --------- Total fixed charges 712,659 275,430 404,937 373,067 391,880 630,775 1,116,489 --------- ------- ------- ------- -------- -------- --------- Earnings (for ratio calculation) $ 1,288,916 $ 583,202 $ 894,443 $ 731,761 $ 212,977 $ 121,457 $ 1,339,554 ========= ======= ======= ======= ======== ======== ========= Total fixed charges $ 712,659 $ 275,430 $ 404,937 $ 373,067 $ 391,880 $ 630,775 $ 1,116,489 ========= ======= ======= ======= ======== ======== ========= Ratio of earnings to fixed charges 1.81 2.12 2.21 1.96 .54 .19 1.20 ========= ======= ======= ======= ======== ======== =========
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Ratios for the periods presented reflect the reclassification, where appropriate, of Brazilian translation gains and losses more fully discussed in Note 11 to the Financial Statements. EX-12.B 4 EXHIBIT 12B BANK OF BOSTON CORPORATION EXHIBIT 12(b) COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (Including Interest on Deposits) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the nine months ended September 30, 1994 and 1993 and for the five years ended December 31, 1993 were as follows:
Nine Months Years Ended Ended September 30 December 31 ----------------------- --------------------------------------------------------------------- (Dollars in thousands) 1994 1993 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax 6,535 (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) (24,203) Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951 --------- --------- --------- --------- --------- --------- --------- Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065 ========= ========= ========= ========= ========= ========= ========= Fixed charges: Portion of rental expense(net of sublease rental income) which approximates theinterest factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482 Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007 Interest on deposits 815,592 766,132 1,015,956 1,406,742 1,808,436 2,420,296 2,243,854 --------- --------- --------- --------- --------- --------- --------- Total fixed charges 1,528,251 1,041,562 1,420,893 1,779,809 2,200,316 3,051,071 3,360,343 --------- --------- --------- --------- --------- --------- --------- Earnings (for ratio calculation) $ 2,104,508 $ 1,349,334 $ 1,910,399 $ 2,138,503 $ 2,021,413 $ 2,541,753 $ 3,583,408 ========= ========= ========= ========= ========= ========= ========= Total fixed charges $ 1,528,251 $ 1,041,562 $ 1,420,893 $ 1,779,809 $ 2,200,316 $ 3,051,071 $ 3,360,343 ========= ========= ========= ========= ========= ========= ========= Ratio of earnings to fixed charges 1.38 1.30 1.34 1.20 .92 .83 1.07 ========= ========= ========= ========= ========= ========= =========
For purposes of computing the consolidated ratio of earnings to fixed charges "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Ratios for the periods presented reflect the reclassification, where appropriate, of Brazilian translation gains and losses more fully discussed in Note 11 to the Financial Statements. EX-12.C 5 EXHIBIT 12C BANK OF BOSTON CORPORATION EXHIBIT 12(c) COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Excluding Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (excluding interest on deposits) for the nine months ended September 30, 1994 and 1993 and for the five years ended December 31, 1993 were as follows:
Nine Months Years Ended Ended September 30 December 31 --------------------------- ----------------------------------------------------- (Dollars in thousands) 1994 1993 1993 1992 1991 1990 1989 --------- ------- ------- ------- -------- -------- --------- Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax 6,535 (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) (24,203) Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951 --------- ------- ------- ------- -------- -------- --------- Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065 ========= ======= ======= ======= ======== ======== ========= Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482 Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007 --------- ------- ------- ------- -------- -------- --------- Total fixed charges $ 712,659 $ 275,430 $ 404,937 $ 373,067 $ 391,880 $ 630,775 $ 1,116,489 Preferred stock dividend requirements 50,415 45,269 61,377 33,186 13,255 13,748 22,568 --------- ------- ------- ------- -------- -------- --------- Total combined fixed charges and preferred stock dividend requirements $ 763,074 $ 320,699 $ 466,314 $ 406,253 $ 405,135 $ 644,523 $ 1,139,057 ========= ======= ======= ======= ======== ======== ========= Earnings (for ratio calculation) (Pretax earnings (loss) plus total fixed charges) $ 1,288,916 $ 583,202 $ 894,443 $ 731,761 $ 212,977 $ 121,457 $ 1,339,554 ========= ======= ======= ======= ======== ======== ========= Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.69 1.82 1.92 1.80 .53 .19 1.18 ========= ======= ======= ======= ======== ======== =========
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. No tax adjustments were made in loss years. Ratios for the periods presented reflect the reclassification, where appropriate, of Brazilian translation gains and losses more fully discussed in Note 11 to the Financial Statements. EX-12.D 6 EXHIBIT 12D BANK OF BOSTON CORPORATION EXHIBIT 12(d) COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Including Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (including interest on deposits) for the nine months ended September 30, 1994 and 1993 and for the five years ended December 31, 1993 were as follows:
Nine Months Years Ended Ended September 30 December 31 ----------------------- ---------------------------------------------------------------------- (Dollars in thousands) 1994 1993 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax 6,535 (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) (24,203) Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951 --------- --------- --------- --------- --------- --------- --------- Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065 ========= ========= ========= ========= ========= ========= ========= Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482 Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007 Interest on deposits 815,592 766,132 1,015,956 1,406,742 1,808,436 2,420,296 2,243,854 --------- --------- --------- --------- --------- --------- --------- Total fixed charges 1,528,251 1,041,562 1,420,893 1,779,809 2,200,316 3,051,071 3,360,343 Preferred stock dividend requirements 50,415 45,269 61,377 33,186 13,255 13,748 22,568 --------- --------- --------- --------- --------- --------- --------- Total combined fixed charges and preferred stock dividend requirements $ 1,578,666 $ 1,086,831 $ 1,482,270 $ 1,812,995 $ 2,213,571 $ 3,064,819 $ 3,382,911 ========= ========= ========= ========= ========= ========= ========= Earnings (for ratio calculation) (Pretax earnings (loss) plus total fixed charges) $ 2,104,508 $ 1,349,334 $ 1,910,399 $ 2,138,503 $ 2,021,413 $ 2,541,753 $ 3,583,408 ========= ========= ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.33 1.24 1.29 1.18 .91 .83 1.06 ========= ========= ========= ========= ========= ========= =========
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income (loss) before extraordinary items and cumulative of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. No tax adjustments were made in loss years. Ratios for the periods presented reflect the reclassification, where appropriate, of Brazilian translation gains and losses more fully discussed in Note 11 to the Financial Statements. EX-27 7 EXHIBIT 27
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1994 SEP-30-1994 2,084,343 1,172,763 1,947,485 755,490 2,214,036 2,021,986 1,974,423 30,880,779 (676,534) 44,293,918 30,312,539 7,283,209 1,454,367 2,131,051 241,131 0 508,436 2,363,185 44,293,918 1,853,503 165,190 628,596 2,647,289 815,592 1,508,183 1,139,106 95,000 11,150 286,444 576,257 321,144 (6,535) 0 314,609 2.69 2.60 4.05 377,564 20,247 72,163 0 770,279 (143,869) 49,327 676,534 472,254 92,450 111,830
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