0000950109-95-003198.txt : 19950815 0000950109-95-003198.hdr.sgml : 19950815 ACCESSION NUMBER: 0000950109-95-003198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06522 FILM NUMBER: 95563437 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995 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) (617) 434-2200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) 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. [X] Yes [_] No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 31, 1995: Common Stock, $2.25 par value.......................111,682,448 ================================================================================ 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.......................................... 13 PART II OTHER INFORMATION ITEM 1. Legal Proceedings............................................... 40 ITEM 6. Exhibits and Reports on Form 8-K................................ 40 SIGNATURES............................................................... 41 LIST OF TABLES Consolidated Average Balance Sheet--Nine Quarters..................... 29 Consolidated Statement of Income--Nine Quarters....................... 30 Average Balances and Interest Rates--Quarter.......................... 31 Average Balances and Interest Rates--First Half....................... 35 Change in Net Interest Revenue--Volume and Rate Analysis.............. 39
2 BANK OF BOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1995 1994 QUARTERS ENDED JUNE 30 ------- ------- INCOME STATEMENT DATA: Net interest revenue.......................................... $ 434 $ 375 Provision for credit losses................................... 40 25 Noninterest income............................................ 236 192 Noninterest expense........................................... 392 372 Net income.................................................... 133 95 Per common share: Net income: Primary..................................................... 1.11 .80 Fully diluted............................................... 1.10 .77 Market value per common share: High........................................................ 38 1/4 28 1/2 Low......................................................... 29 3/8 23 1/8 SIX MONTHS ENDED JUNE 30 INCOME STATEMENT DATA: Net interest revenue.......................................... $ 860 $ 715 Provision for credit losses................................... 130 70 Noninterest income............................................ 529 428 Noninterest expense........................................... 775 719 Income before extraordinary item.............................. 259 198 Net income.................................................... 259 191 Per common share: Income before extraordinary item Primary..................................................... 2.19 1.68 Fully diluted............................................... 2.14 1.62 Net income: Primary..................................................... 2.19 1.62 Fully diluted............................................... 2.14 1.56 Market value per common share: High........................................................ 38 1/4 28 1/2 Low......................................................... 25 5/8 22 5/8 AT JUNE 30 BALANCE SHEET DATA: Loans and lease financing..................................... $31,388 $29,966 Total assets.................................................. 45,254 43,437 Deposits...................................................... 29,121 29,395 Total stockholders' equity.................................... 3,465 3,005 Book value per common share................................... 26.49 23.36 Regulatory capital ratios: Risk-based capital ratios: Tier 1...................................................... 7.7% 7.1% Total....................................................... 13.0 12.3 Leverage ratio............................................... 7.3 6.6
3 BANK OF BOSTON CORPORATION CONSOLIDATED BALANCE SHEET (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30 DECEMBER 31 1995 1994 ------- ----------- ASSETS Cash and due from banks.................................... $ 2,252 $ 2,317 Interest bearing deposits in other banks................... 1,517 1,556 Federal funds sold and securities purchased under agreements to resell...................................... 805 1,232 Trading securities......................................... 831 553 Mortgages held for sale.................................... 379 183 Securities (Note 4): Available for sale....................................... 3,011 2,997 Held to maturity (fair value of $1,841 in 1995 and $1,626 in 1994)................................................ 1,821 1,703 Loans and lease financing (Note 5): United States Operations................................. 23,454 23,916 International Operations................................. 7,934 7,089 ------- ------- Total loans and lease financing (net of unearned income of $264 in 1995 and $292 in 1994)..................... 31,388 31,005 Reserve for credit losses (Note 6)......................... (692) (680) ------- ------- Net loans and lease financing............................ 30,696 30,325 Premises and equipment, net................................ 563 569 Due from customers on acceptances.......................... 319 314 Accrued interest receivable................................ 368 355 Other assets............................................... 2,692 2,526 ------- ------- TOTAL ASSETS............................................... $45,254 $44,630 ======= =======
The accompanying notes are an integral part of these financial statements. 4 BANK OF BOSTON CORPORATION CONSOLIDATED BALANCE SHEET (CONTINUED) (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30 DECEMBER 31 1995 1994 ------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Domestic offices: Noninterest bearing................................... $ 4,719 $ 4,900 Interest bearing...................................... 16,279 16,841 Overseas offices: Noninterest bearing................................... 604 569 Interest bearing...................................... 7,519 9,046 ------- ------- Total deposits...................................... 29,121 31,356 Funds borrowed: Federal funds purchased................................. 933 369 Term federal funds purchased............................ 1,317 765 Securities sold under agreements to repurchase.......... 1,404 1,883 Other funds borrowed.................................... 5,391 3,343 Acceptances outstanding................................... 321 316 Accrued expenses and other liabilities.................... 1,192 1,287 Notes payable (Note 7).................................... 2,110 2,169 ------- ------- TOTAL LIABILITIES......................................... 41,789 41,488 ------- ------- Commitments and contingencies (Notes 2 and 8) Stockholders' equity: Preferred stock without par value: Authorized shares--10,000,000 Issued and outstanding shares--4,593,941.............. 508 508 Common stock, par value $2.25: Authorized shares--200,000,000 Issued shares--111,611,618 in 1995 and 107,584,349 in 1994 Outstanding shares--111,611,618 in 1995 and 106,547,149 in 1994................................... 251 242 Surplus................................................. 900 810 Retained earnings....................................... 1,831 1,655 Net unrealized loss on securities available for sale, net of tax............................................. (23) (40) Treasury stock, at cost (1,037,200 shares in 1994)...... (27) Cumulative translation adjustments, net of tax.......... (2) (6) ------- ------- TOTAL STOCKHOLDERS' EQUITY................................ 3,465 3,142 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $45,254 $44,630 ======= =======
The accompanying notes are an integral part of these financial statements. 5 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
QUARTERS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------- ----------------- 1995 1994 1995 1994 ------- ------- -------- -------- INTEREST INCOME: Loans and lease financing, including fees.... $ 808 $ 587 $ 1,554 $ 1,130 Securities................................... 87 60 162 104 Trading securities........................... 43 9 84 28 Mortgages held for sale...................... 5 13 9 28 Federal funds sold and securities purchased under agreements to resell.................. 93 153 196 233 Deposits in other banks...................... 67 18 132 41 ------- ------- -------- -------- Total interest income...................... 1,103 840 2,137 1,564 ------- ------- -------- -------- INTEREST EXPENSE: Deposits of domestic offices................. 159 121 298 249 Deposits of overseas offices................. 257 120 479 233 Funds borrowed............................... 215 195 422 305 Notes payable................................ 38 29 78 62 ------- ------- -------- -------- Total interest expense..................... 669 465 1,277 849 ------- ------- -------- -------- NET INTEREST REVENUE: 434 375 860 715 Provision for credit losses (Note 6)......... 40 25 130 70 ------- ------- -------- -------- Net interest revenue after provision for credit losses............................... 394 350 730 645 ------- ------- -------- -------- NONINTEREST INCOME: Financial service fees....................... 113 94 219 186 Trust and agency fees........................ 57 50 110 98 Other income (Note 2)........................ 66 48 200 144 ------- ------- -------- -------- Total noninterest income................... 236 192 529 428 ------- ------- -------- -------- NONINTEREST EXPENSE: Salaries..................................... 179 162 356 319 Employee benefits............................ 41 37 81 74 Occupancy expense............................ 34 33 69 65 Equipment expense............................ 26 23 50 47 Other expense................................ 112 117 219 214 ------- ------- -------- -------- Total noninterest expense.................. 392 372 775 719 ------- ------- -------- -------- Income before income taxes and extraordinary item........................................ 238 170 484 354 Provision for income taxes................... 105 75 225 156 ------- ------- -------- -------- Income before extraordinary item............. 133 95 259 198 Extraordinary loss from early extinguishment of debt, net of tax......................... 7 ------- ------- -------- -------- NET INCOME................................... $ 133 $ 95 $ 259 $ 191 ======= ======= ======== ======== NET INCOME APPLICABLE TO COMMON STOCK........ $ 124 $ 85 $ 240 $ 172 ======= ======= ======== ======== PER COMMON SHARE: Income before extraordinary item: Primary.................................... $ 1.11 $ .80 $ 2.19 $ 1.68 Fully diluted.............................. $ 1.10 $ .77 $ 2.14 $ 1.62 Net income (Note 7): Primary.................................... $ 1.11 $ .80 $ 2.19 $ 1.62 Fully diluted.............................. $ 1.10 $ .77 $ 2.14 $ 1.56 Dividends declared........................... $ .27 $ .22 $ .54 $ .44 AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS): Primary.................................... 111,369 106,619 109,335 106,410 Fully diluted.............................. 112,933 111,286 112,718 111,055
The accompanying notes are an integral part of these financial statements. 6 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS)
1995 1994 QUARTERS ENDED JUNE 30 ------ ------ BALANCE, BEGINNING OF PERIOD................................... $3,328 $2,947 Net income..................................................... 133 95 Common stock issued in connection with: Dividend reinvestment and common stock purchase plan......... 9 7 Restricted stock grants, net of forfeitures and change in unearned compensation....................................... 2 Other, principally employee benefit plans.................... 5 2 Cash dividends declared: Preferred stock.............................................. (9) (9) Common stock................................................. (30) (23) Change in net unrealized loss on securities available for sale, net of tax.................................................... 26 (12) Translation adjustments, net of tax............................ 1 (2) ------ ------ BALANCE, END OF PERIOD......................................... $3,465 $3,005 ====== ====== SIX MONTHS ENDED JUNE 30 BALANCE, BEGINNING OF PERIOD................................... $3,142 $2,912 Net income..................................................... 259 191 Common stock issued in connection with: Dividend reinvestment and common stock purchase plan......... 18 11 Conversion of subordinated convertible debentures............ 94 Acquisition of Ganis Credit Corporation...................... 22 Restricted stock grants, net of forfeitures and change in unearned compensation....................................... 3 1 Other, principally employee benefit plans.................... 12 5 Purchase of treasury stock..................................... (28) Cash dividends declared: Preferred stock.............................................. (19) (18) Common stock................................................. (59) (47) Change in net unrealized loss on securities available for sale, net of tax.................................................... 17 (51) Translation adjustments, net of tax............................ 4 1 ------ ------ BALANCE, END OF PERIOD......................................... $3,465 $3,005 ====== ======
The accompanying notes are an integral part of these financial statements. 7 BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
1995 1994 SIX MONTHS ENDED JUNE 30 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................... $ 259 $ 191 Reconciliation of net income to net cash provided from (used for) operating activities: Extraordinary loss from early extinguishment of debt, net of tax.................................................... 7 Provision for credit losses................................ 130 70 Depreciation and amortization.............................. 108 72 Provision for deferred taxes............................... 20 (92) Net gains on sales of securities and other assets.......... (131) (56) Change in trading securities............................... (278) (160) Change in mortgages held for sale.......................... (196) 822 Net change in interest receivables and payables............ 21 (78) Other, net................................................. (317) 179 ------- ------- Net cash provided from (used for) operating activities... (384) 955 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash provided from (used for) interest bearing deposits in other banks.............................................. 39 (15) Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell............. 427 (262) Purchases of securities held to maturity..................... (416) (857) Purchases of securities available for sale................... (1,781) (1,658) Sales of securities available for sale....................... 1,311 1,320 Maturities of securities held to maturity.................... 287 519 Maturities of securities available for sale.................. 468 88 Dispositions of venture capital investments.................. 65 8 Loans and lease financing originated by nonbank entities..... (3,669) (1,305) Loans and lease financing collected by nonbank entities...... 3,124 1,421 Net cash provided from (used for) lending activities of bank subsidiaries................................................ 31 (1,521) Proceeds from sales of other real estate owned............... 23 28 Expenditures for premises and equipment...................... (82) (82) Proceeds from sales of business units and premises and equipment................................................... 122 132 Other, net................................................... (65) (215) ------- ------- Net cash used for investing activities................... (116) (2,399) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net cash used for deposits................................... (2,235) (219) Net cash provided from funds borrowed........................ 2,685 2,200 Net repayments of notes payable.............................. (4) (421) Net proceeds from issuance of notes payable.................. 40 498 Net proceeds from issuance of common stock................... 28 17 Dividends paid............................................... (78) (65) ------- ------- Net cash provided from financing activities.............. 436 2,010 Effect of foreign currency translation on cash............... (1) (22) ------- ------- NET CHANGE IN CASH AND DUE FROM BANKS........................ (65) 544 CASH AND DUE FROM BANKS AT JANUARY 1......................... 2,317 2,539 ======= ======= CASH AND DUE FROM BANKS AT JUNE 30........................... $ 2,252 $ 3,083 ======= ======= Interest payments made....................................... $ 1,243 $ 953 Income tax payments made..................................... $ 302 $ 68
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 1994 Annual Report on Form 10-K. 2. ACQUISITIONS AND DIVESTITURES: During the first quarter of 1995, the Corporation completed its acquisition of Ganis Credit Corporation (Ganis), a privately-held consumer finance company headquartered in Newport Beach, California. The Corporation paid Ganis stockholders approximately $22 million in Corporation common stock and used 773,621 shares of its treasury stock, previously purchased in the open market, for the transaction. The Corporation will pay Ganis stockholders up to an additional $14 million in common stock if Ganis achieves certain performance goals over the next several years. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Ganis were recorded at their estimated fair values as of the acquisition date. Goodwill resulting from the acquisition is being amortized over a fifteen-year period. The acquisition has been included in the accompanying consolidated financial statements since the acquisition date. Early in the first quarter of 1995, the Corporation completed the sales of two of its affiliate banks, Bank of Vermont and Casco Northern Bank, N.A. The sales resulted in a combined pre-tax gain of approximately $75 million, or $30 million net of tax. 3. SIGNIFICANT NONCASH TRANSACTIONS--STATEMENT OF CASH FLOWS: During the first half of 1995 and 1994, the Corporation transferred approximately $33 million and $25 million, respectively, to Other Real Estate Owned (OREO) from loans. Loans made to facilitate sales of OREO properties totaled approximately $2 million in the first half of 1994. There were no loans made to facilitate sales of OREO properties in the first half of 1995. Other significant noncash transactions in 1995 included the issuance of common stock totaling approximately $94 million in connection with the Corporation's first quarter redemption of its convertible subordinated debentures due 2011. During the first quarter of 1994, the Corporation transferred $339 million of lower quality real estate exposure to an accelerated disposition portfolio. 4. SECURITIES: A summary comparison of securities available for sale by type is as follows:
JUNE 30, 1995 DECEMBER 31, 1994 --------------------- --------------------- COST CARRYING VALUE COST CARRYING VALUE ------ -------------- ------ -------------- (IN MILLIONS) U.S. Treasury................... $ 659 $ 665 $1,500 $1,487 U.S. government agencies and corporations--mortgage-backed securities..................... 1,366 1,370 796 766 Foreign debt securities......... 545 480 432 384 Other debt securities........... 256 257 142 142 Marketable equity securities.... 67 85 52 72 Other equity securities......... 154 154 146 146 ------ ------ ------ ------ $3,047 $3,011 $3,068 $2,997 ====== ====== ====== ======
Other equity securities included in securities available for sale are not traded on established exchanges, and are carried at cost. 9 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. SECURITIES (CONTINUED): A summary comparison of securities held to maturity by type is as follows:
JUNE 30, 1995 DECEMBER 31, 1994 -------------------- -------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- (IN MILLIONS) U.S. Treasury..................... $ 11 $ 11 $ 12 $ 11 U.S. government agencies and corporations--mortgage-backed securities....................... 1,568 1,588 1,449 1,375 States and political subdivisions. 23 24 30 30 Foreign debt securities........... 136 135 123 121 Other equity securities........... 83 83 89 89 ------ ------ ------ ------ $1,821 $1,841 $1,703 $1,626 ====== ====== ====== ======
Other equity securities included in securities held to maturity principally represent securities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. 5. LOANS AND LEASE FINANCING: The following are the details of loan and lease financing balances:
JUNE 30 DECEMBER 31 1995 1994 ------- ----------- (IN MILLIONS) UNITED STATES OPERATIONS: Commercial, industrial and financial.................... $11,907 $11,805 Commercial real estate: Construction.......................................... 327 354 Other commercial...................................... 2,489 3,141 Consumer-related loans: Secured by 1-4 family residential properties.......... 4,752 5,004 Other................................................. 2,834 2,462 Lease financing......................................... 1,356 1,366 Unearned income......................................... (211) (216) ------- ------- 23,454 23,916 ------- ------- INTERNATIONAL OPERATIONS: Loans and lease financing............................... 7,987 7,165 Unearned income......................................... (53) (76) ------- ------- 7,934 7,089 ------- ------- $31,388 $31,005 ======= =======
10 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. RESERVE FOR CREDIT LOSSES: An analysis of the reserve for credit losses is as follows:
QUARTERS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------- ----------------- 1995 1994 1995 1994 ------- ------- -------- -------- (IN MILLIONS) BALANCE, BEGINNING OF PERIOD.............. $ 696 $ 664 $ 680 $ 770 Provision................................. 40 25 130 70 Reserve of acquired bank.................. 17 17 Reserves of banking subsidiaries sold..... (32) Domestic credit losses: Commercial, industrial and financial.... (12) (9) (22) (12) Commercial real estate.................. (17) (14) (24) (24) Consumer-related loans: Secured by 1-4 family residential properties........................... (4) (3) (9) (6) Other................................. (15) (15) (29) (29) International credit losses............... (10) (5) (28) (21) ------- ------- ------- -------- Total credit losses....................... (58) (46) (112) (92) ------- ------- ------- -------- Domestic recoveries: Commercial, industrial and financial.... 3 4 4 8 Commercial real estate.................. 3 4 4 7 Consumer-related loans: Secured by 1-4 family residential properties........................... 1 2 1 Other................................. 5 5 11 8 International recoveries.................. 2 3 5 6 ------- ------- ------- -------- Total recoveries.......................... 14 16 26 30 ------- ------- ------- -------- Net credit losses excluding those related to exposures transferred to the accelerated disposition portfolio...... (44) (30) (86) (62) Credit losses related to exposures transferred to the accelerated disposition portfolio.................. (119) ------- ------- ------- -------- BALANCE, END OF PERIOD.................... $ 692 $ 676 $ 692 $ 676 ======= ======= ======= ========
Effective January 1, 1995, the Corporation adopted, prospectively, Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure". These standards require that loans be classified and accounted for as impaired loans when it is probable that the Corporation will be unable to collect all principal and interest due on a loan in accordance with the loan's original contractual terms. For purposes of applying these standards, impaired loans have been defined as all nonaccrual loans, exclusive of residential mortgage loans, consumer loans and leases. Impaired loans are valued based on the fair value of the related collateral in the case of commercial real estate loans and, for all other impaired loans, based on the present value of expected future cash flows, using the interest rate in effect at the time the loan was placed on nonaccrual status. Impairment exists when the recorded investment in a loan exceeds the value of the loan measured using the above-mentioned techniques. Such impairment is recognized as a valuation reserve, which is included as a part of the Corporation's overall reserve for credit losses. 11 BANK OF BOSTON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. RESERVE FOR CREDIT LOSSES (CONTINUED): The Corporation recognizes interest income on impaired loans consistent with its nonaccrual policy. When loans are placed on nonaccrual status, the related interest receivable is reversed against current period interest income. Interest payments received on nonaccrual loans are applied as a reduction of the principal balance when concern exists as to the ultimate collectibility of principal; otherwise, such payments are recorded as interest income. Adoption of these standards did not have a material effect on the Corporation's financial position or results of operations and did not result in any additional provision for credit losses as of January 1, 1995. At June 30, 1995, loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $284 million, of which $72 million related to loans with no valuation reserve and $212 million related to loans with a valuation reserve of $42 million. For the quarter and six months ended June 30, 1995, average impaired loans were approximately $279 million and $274 million, respectively. Interest recognized on impaired loans during the second quarter and six months ended June 30, 1995 was not material. 7. NOTES PAYABLE: In February 1995, the Corporation announced that it would redeem its 7.75% convertible subordinated debentures at 100.78% of their principal amount plus accrued interest to the date of redemption. Substantially all holders of the debt opted to convert their bonds to common stock prior to redemption, resulting in the issuance by the Corporation of approximately 4,008,000 shares of its common stock during March 1995. Of the total shares issued, approximately 530,000 shares were treasury shares which had been purchased by the Corporation in the open market. The remaining principal was redeemed by the Corporation. Primary earnings per share for the six months ended June 30, 1995 would have been $2.16 had the debentures been converted on January 1, 1995. 8. 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. 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 to its results of operations or financial condition. 12 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 June 30, 1995 was $133 million, compared with $95 million for the same period in 1994. Net income per common share was $1.11 on a primary basis and $1.10 on a fully diluted basis for the second quarter of 1995, compared with $.80 on a primary basis and $.77 on a fully diluted basis for the second quarter of 1994. Net income for the first half of 1995 was $259 million compared with $191 million for the first half of 1994. Net income per common share was $2.19 on a primary basis and $2.14 on a fully diluted basis for the first half of 1995, compared with $1.62 on a primary basis and $1.56 on a fully diluted basis for the first half of 1994. The 1994 results included 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 comparisons reflect the acquisitions of BankWorcester Corporation, Pioneer Financial, A Co-operative Bank and Ganis Credit Corporation (Ganis) during the second and third quarters of 1994 and first quarter of 1995, respectively, all of which were recorded as purchases. In addition, the comparisons reflect the sales of the Corporation's banking subsidiaries in Maine and Vermont early in the first quarter of 1995. Additional information on the acquisition of Ganis and the sales of Maine and Vermont can be found in Note 2 to the Financial Statements. During the second quarter of 1995, the Corporation announced that its consumer finance subsidiary, Fidelity Acceptance Corporation, would acquire the loan portfolio and 46 branches of Century Acceptance Corporation, a consumer finance company based in Kansas City, Missouri, for $129 million. This transaction, which will add approximately $110 million of consumer loans to the Corporation's portfolio, was completed on July 1, 1995. Also during the second quarter, the Corporation announced its agreement to form a joint venture with Boston Financial Data Services (a joint venture of State Street Bank and Trust Company and DST Systems, Inc.) combining their respective stock transfer businesses into a single entity to be 50 percent owned by each party. The joint venture will be known as BancBoston State Street Investor Services. In a separate transaction, the Corporation announced it will sell its corporate trust business to State Street Bank and Trust Company. These transactions are expected to be completed later this 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 31 through 39 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%, plus applicable state and local taxes, net of related federal tax benefits. This adjustment was not material in any of the periods presented. Consolidated net interest revenue, on a fully taxable equivalent basis, was $436 million for the second quarter of 1995 compared with $376 million for the same period in 1994. For the first half of 1995, net interest revenue was $863 million compared with $718 million for the same period in 1994. Net interest margin in the second quarter of 1995 was 4.49% compared with 3.98% in the second quarter of 1994. For the first six months of 1995, net interest margin was 4.52% compared with 3.89% for the first half of 1994. 13 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:
CHANGE 1995 1994 AMOUNT QUARTERS ENDED JUNE 30 ------- ------- ------ (DOLLARS IN MILLIONS) UNITED STATES OPERATIONS: Net interest revenue................................ $ 322 $ 299 $ 23 Average loans and lease financing................... 23,099 22,411 688 Average earning assets.............................. 28,471 28,092 379 Net interest margin................................. 4.54% 4.27% .27% INTERNATIONAL OPERATIONS: Net interest revenue................................ $ 114 $ 77 $ 37 Average loans and lease financing................... 7,829 6,694 1,135 Average earning assets.............................. 10,499 9,790 709 Net interest margin................................. 4.35% 3.14% 1.21% CONSOLIDATED: Net interest revenue................................ $ 436 $ 376 $ 60 Average loans and lease financing................... 30,928 29,105 1,823 Average earning assets.............................. 38,970 37,882 1,088 Net interest margin................................. 4.49% 3.98% .51% CHANGE 1995 1994 AMOUNT SIX MONTHS ENDED JUNE 30 ------- ------- ------ (DOLLARS IN MILLIONS) UNITED STATES OPERATIONS: Net interest revenue................................ $ 652 $ 573 $ 79 Average loans and lease financing................... 22,923 22,359 564 Average earning assets.............................. 28,063 27,746 317 Net interest margin................................. 4.69% 4.17% .52% INTERNATIONAL OPERATIONS: Net interest revenue................................ $ 211 $ 145 $ 66 Average loans and lease financing................... 7,605 6,501 1,104 Average earning assets.............................. 10,420 9,447 973 Net interest margin................................. 4.08% 3.09% .99% CONSOLIDATED: Net interest revenue................................ $ 863 $ 718 $ 145 Average loans and lease financing................... 30,528 28,860 1,668 Average earning assets.............................. 38,483 37,193 1,290 Net interest margin................................. 4.52% 3.89% .63%
Both domestic and international operations contributed to the improvements in net interest revenue and margin from the second quarter and first six months of 1994. Domestic net interest revenue for the second quarter and first six months of 1995 increased $23 million and $79 million, respectively, from the second quarter and first six months of 1994. Domestic margin increased 27 basis points in the quarterly comparison and 52 basis points in the six month comparison. Net interest revenue and margin increased, in part, due to increases in rates on earning assets outpacing rate increases on interest bearing liabilities, mainly retail deposits which have lagged the general increase in interest rates that has occurred since the 1994 periods. Also contributing to the increases in revenue and margin was an increase in average earning assets from the 1994 periods, which included a reduction in lower- yielding treasury assets and an increase in higher-yielding loans and leases, principally through growth in the consumer lending portfolio. Internationally, the growth in net interest revenue and margin of $37 million and 121 basis points, respectively, in the quarterly comparison, and $66 million and 99 basis points, respectively, in the six month comparison, was primarily driven by the Corporation's Argentine and Brazilian operations. Net interest revenue 14 and margin benefited from wider spreads in both Brazil and Argentina, reflecting the effects of government economic measures and positions taken by the Corporation, both of which enabled the Corporation to benefit from rising interest rates. International net interest revenue also benefited from a $0.7 billion increase in the quarterly and a $1.0 billion increase in the six month comparison in average earning assets, reflecting increases in average loans and leases for both period comparisons, including over $700 million in average loan growth in Argentina. When compared to the first quarter of 1995, consolidated net interest revenue increased $9 million and margin declined 7 basis points. The increase in net interest revenue from the prior quarter was mainly due to wider Latin American spreads and higher loan volume, principally in the Latin American and domestic consumer lending portfolios. The increase in net interest revenue was partially offset by, and the decline in margin principally reflected, narrower domestic spreads and lower interest recoveries. The Corporation has benefited from interest rate increases on domestic deposits not keeping pace with the increases in other market rates compared with the 1994 periods and from improvements in Argentina and Brazil, including the effects of the economic measures taken in those countries. The Corporation expects that there could be continued pressure on margin. However, future levels of net interest revenue and margin will continue to be affected by competitive pricing pressure on retail deposits, loans and other products; developments in the economic and political situations in Argentina and Brazil and in other countries where the Corporation does business; the current interest rate environment; and other factors. PROVISION FOR CREDIT LOSSES The provision for credit losses reflects management's assessment of the adequacy of the reserve for credit losses, considering the current risk characteristics of the loan portfolio and economic conditions. The provision for credit losses was $40 million for the quarter ended June 30, 1995, compared with $25 million for the same period in 1994. For the six months of 1995, the provision for credit losses was $130 million, including a special provision of $50 million in the first quarter reflecting management's intent to strengthen further the Corporation's loan loss reserve, compared with $70 million for the first six months of 1994. The level of the provision for credit losses in the first six months of 1994 reflected, in part, the effect of transferring certain lower quality real estate exposures to an accelerated disposition portfolio in the first quarter of 1994. The amount of future provisions will continue to be a function of the regular quarterly review of the reserve for credit losses, based upon management's assessment of risk at that time, and, as such, there can be no assurance as to the level of future provisions. NONINTEREST INCOME The following tables set forth the components of noninterest income, as well as a further breakdown of financial service fees. NONINTEREST INCOME
SECOND QUARTER SIX MONTHS ---------------- ---------------- 1995 1994 CHANGE 1995 1994 CHANGE ---- ---- ------ ---- ---- ------ (IN MILLIONS) Financial service fees..................... $113 $ 94 $19 $219 $186 $ 33 Trust and agency fees...................... 57 50 7 110 98 12 Trading profits and commissions............ 6 1 5 7 5 2 Securities portfolio gains, net............ 6 (6) 6 10 (4) Mezzanine/venture capital profits, net..... 23 5 18 39 19 20 Foreign exchange trading profits........... 16 11 5 28 20 8 Other income............................... 21 25 (4) 45 63 (18) ---- ---- --- ---- ---- ---- Subtotal................................. 236 192 44 454 401 53 Gains from sales of businesses............. 75 27 48 ---- ---- --- ---- ---- ---- Total.................................... $236 $192 $44 $529 $428 $101 ==== ==== === ==== ==== ====
15 Noninterest income before gains from sales of businesses grew $44 million and $53 million from the second quarter and first six months of 1994, respectively. The increases reflected higher financial service fees (detailed below), higher trust and agency fees, improved trading account profits, larger mezzanine/venture capital profits and increased foreign exchange trading profits. Trust and agency fees improved from the second quarter and first six months of 1994 primarily as a result of higher fees from the Latin American mutual fund business, principally Brazil, and increases in domestic stock transfer and personal trust fees. Trading account profits increased mainly due to higher profits from Latin American securities trading. Mezzanine/venture capital profits showed continued growth in the second quarter reflecting higher sales activity. Foreign exchange profits were higher compared with prior periods reflecting increases both domestically and in Latin America. The decline in other income from the second quarter of 1994 reflected lower gains from sales of mortgage servicing rights, while the decline from the first half of 1994 was mainly due to the absence of net gains recorded during the first quarter of 1994 from the sale of securities originally acquired in connection with loan restructurings. Gains from sales of businesses includes the first quarter of 1995 sale of the Corporation's Maine and Vermont banking subsidiaries for a pre-tax gain of $75 million ($30 million after-tax) and the first quarter of 1994 sale of its United States factoring business for a gain of $27 million ($15 million after- tax). FINANCIAL SERVICE FEES
SECOND QUARTER SIX MONTHS ---------------- ---------------- 1995 1994 CHANGE 1995 1994 CHANGE ---- ---- ------ ---- ---- ------ (IN MILLIONS) Deposit fees............................... $ 29 $31 $(2) $ 59 $ 61 $(2) Letter of credit and acceptance fees....... 16 14 2 35 27 8 Net mortgage servicing fees................ 27 13 14 48 23 25 Loan-related fees.......................... 17 15 2 30 29 1 Other...................................... 24 21 3 47 46 1 ---- --- --- ---- ---- --- Total.................................... $113 $94 $19 $219 $186 $33 ==== === === ==== ==== ===
Financial service fees increased $19 million from the second quarter of 1994 and $33 million from the first six months of 1994. These improvements were mainly due to an increase in net mortgage servicing fee income, reflecting the growth in the average servicing portfolio to approximately $37 billion at June 30, 1995 from approximately $30 billion a year ago. Also contributing to the changes in net mortgage servicing fee income from the 1994 periods were profits from contracts used to manage prepayment risk of the servicing portfolio and the impact of changing interest rates on amortization of the servicing assets. Letter of credit and acceptance fees increased from the prior year, mainly reflecting growth from international units, particularly Brazil. NONINTEREST EXPENSE The following tables set forth the components of noninterest expense. NONINTEREST EXPENSE
SECOND QUARTER SIX MONTHS ---------------- ---------------- 1995 1994 CHANGE 1995 1994 CHANGE ---- ---- ------ ---- ---- ------ (IN MILLIONS) Employee costs............................ $220 $199 $ 21 $437 $394 $43 Occupancy & equipment..................... 60 56 4 119 111 8 Other..................................... 109 94 15 214 185 29 ---- ---- ---- ---- ---- --- Noninterest expense, before acquisition- related charges and OREO costs......... 389 349 40 770 690 80 Acquisition-related charges............... 16 (16) 16 (16) OREO costs................................ 3 7 (4) 5 13 (8) ---- ---- ---- ---- ---- --- Total................................... $392 $372 $ 20 $775 $719 $56 ==== ==== ==== ==== ==== ===
16 Noninterest expense, before acquisition-related charges and OREO costs, was $389 million in the second quarter of 1995, compared with $349 million in the second quarter of 1994, and $770 million in the first six months of 1995, compared with $690 million in the first six months of 1994. Compared with all prior periods, the growth in noninterest expense reflects increases in the Corporation's Latin American and personal banking businesses, two businesses which the Corporation has been expanding. In addition, the increase in employee costs includes the effect of higher merit increases and higher levels of incentive compensation. Nonemployee costs increased, in part, due to higher levels of advertising and travel expense, including spending on key business initiatives, such as the Corporation's Global Initiative, and the promotion of new products, partially offset by lower professional fees. In addition, the 1995 periods reflect increased amortization of goodwill stemming from the Corporation's 1994 acquisitions, and the absence of a property tax rebate in the current year. The decline in OREO costs was primarily due to lower valuation adjustments. In connection with the acquisition of BankWorcester Corporation, the Corporation recorded a $16 million charge comprised principally of severance costs and estimated costs to consolidate facilities and operations. A majority of the costs associated with this acquisition have been incurred through June 30, 1995. The Federal Deposit Insurance Corporation recently announced that it will significantly reduce the level of domestic deposit insurance assessments it charges most commercial banks. The Corporation anticipates that its banking subsidiaries will pay significantly less in insurance assessments as a result of this action. However, it is unknown how the new level of insurance premiums will impact the pricing of the Corporation's various products. PROVISION FOR INCOME TAXES -------------------------- The provision for income taxes was $105 million and $75 million for the second quarter of 1995 and 1994, respectively, representing an effective tax rate of 44%. For the first six months of 1995, the provision for income taxes was $225 million, including $45 million associated with the $75 million gain on the sales of the Corporation's Maine and Vermont banking subsidiaries. The high level of tax associated with the gain on the sales of Maine and Vermont reflected the lower tax bases in these investments as a result of $35 million of non-tax deductible goodwill relating to these subsidiaries. Excluding this gain and related tax provision, the Corporation's effective tax rate in the first six months of 1995 was 44%, the same rate as in the first six months of 1994. FINANCIAL CONDITION CONSOLIDATED BALANCE SHEET At June 30, 1995, the Corporation's total assets were $45.3 billion, an increase of $700 million from December 31, 1994. Loans and leases grew by nearly $400 million due to higher levels of domestic consumer-related and Latin American loans partially offset by the decline in loans resulting from the sales of the Maine and Vermont banking subsidiaries during the first quarter of 1995. Increases in trading securities of $278 million, mortgages held for sale of $196 million and other assets of approximately $166 million were partially offset by decreases in federal funds sold of $427 million. Deposits declined approximately $2.2 billion, resulting from a $1.3 billion decrease in deposits from the sales of the Maine and Vermont banking subsidiaries and a decrease in deposits from overseas offices during the first quarter, offset by a $900 million increase in domestic deposits during the second quarter. The reduction in deposits from overseas was related to a shift in funding from Eurodollar deposits to term federal funds purchased during the first quarter. The increase in domestic deposits was largely due to an inflow of deposits from a new retail deposit product offered in the second quarter. Funds borrowed increased approximately $2.7 billion from December 31, 1994, mainly as a result of the aforementioned shift to term federal funds and increased borrowings of $1.2 billion under The First National Bank of Boston's medium-term bank note program. On August 1, 1995, the Corporation announced that it will redeem the $150 million principal amount outstanding of its 10.3% subordinated notes due September 1, 2000. 17 LIQUIDITY MANAGEMENT At June 30, 1995, the Corporation's level of liquid assets, which primarily consist of interest bearing deposits in other banks, federal funds sold and resale agreements, money market loans and unencumbered U.S. Treasury and government agency securities, stood at $5.3 billion, compared with $4.6 billion at December 31, 1994. The Corporation continues to have access to funds at market rates, and it recently received upgrades of its long-term debt from three major rating agencies. Management considers overall liquidity at June 30, 1995 to be adequate to meet current obligations, support its expectations for future changes in asset and liability levels and carry on normal operations. INTEREST RATE RISK MANAGEMENT Interest rate risk is defined as the exposure of the Corporation's net income or financial position to adverse movements in interest rates. The Corporation manages its interest rate risk within policies and limits established by the Asset and Liability Management Committee (ALCO) and approved by the Board of Directors. ALCO issues strategic directives to specify the extent to which Board-approved interest rate risk limits may be utilized taking into account the results of rate risk modeling processes as well as other internal and external factors. Interest rate risk related to non-trading, U.S. dollar denominated positions, which represents the significant portion of the consolidated balance sheet, is managed centrally through the Boston Treasury Group, using several modeling methodologies. These models are applied to the Corporation's existing or "static" balance sheet and off-balance-sheet positions and employ a number of assumptions. The two principal methodologies used are net interest income and market value sensitivity at risk. These two methodologies provide different but complementary measures of the level of the Corporation's U.S. dollar denominated interest rate risk. (Additional information with respect to these methodologies is included on pages 50 to 51 of the Corporation's Annual Report to Stockholders, which is incorporated by reference in its 1994 Annual Report on Form 10-K.) These methodologies are designed to isolate the effects of market changes in interest rates on the Corporation's existing positions and they exclude the effects from other factors, such as competitive pricing considerations, future changes in asset and liability mix, and other management actions. Therefore, these methodologies are not by themselves measures of future levels of net interest revenue. As discussed in the Net Interest Revenue section above, the Corporation's domestic margin has experienced a decline from the first quarter of 1995, due in part, to competitive pressures which have increased domestic deposit costs and correspondingly reduced domestic spreads. In terms of the effect from market changes in interest rates at June 30, 1995, the Corporation maintained a modest risk position to benefit from future increases in domestic interest rates over the next twelve months. As a result, the U.S. dollar denominated net interest revenue at risk based on a gradual 200 basis point adverse movement in market rates over a one year period was approximately $21 million or 1.3% of annualized net interest revenue compared with $11 million or less than 1%, respectively, at December 31, 1994. While the Corporation is positioned to benefit from an increase in interest rates in the short term, it would benefit from a decline in rates over the long term as measured by its market value sensitivity at risk. The Corporation's market value sensitivity at risk to an adverse 100 basis point interest rate shock was $34 million or 0.6% of risk-based capital. At December 31, 1994, these measures were essentially neutral. The level of both net interest revenue and market value sensitivity at risk were within ALCO limits, which remain unchanged from the limits in place at December 31, 1994. The Corporation has generally operated well below these limits; however, the level of future interest rate risk positions can be changed quickly through the use of derivatives and /or balance sheet instruments. 18 The Corporation utilizes a variety of financial instruments to manage interest rate risk, including derivatives. The Corporation routinely uses non- leveraged rate-related derivative instruments, primarily interest rate swaps, options and futures, as part of its asset and liability management practices. These derivatives provide the Corporation with significant flexibility in managing its interest rate risk exposure by allowing it to respond quickly to changes in market conditions while minimizing the impact on balance sheet leverage. All derivative activities are managed on a comprehensive basis, are subject to the overall income and market value at risk measures and limits described above, and are subject to credit standards similar to those applied to balance sheet exposures. Additional information with respect to the Corporation's interest rate risk management process is included on pages 50 to 51 of the Corporation's Annual Report to Stockholders, which is incorporated by reference in its 1994 Annual Report on Form 10-K. As detailed in the table below, the fair value of interest rate derivatives increased from December 31, 1994, which resulted in a decline in the unrecognized loss from $140 million at December 31, 1994 to an unrecognized gain of $1 million at June 30, 1995. The change in the fair value of this portfolio reflects the effect of changes in interest rates during 1995. Since these derivatives are used as part of the overall management of the Corporation's domestic interest rate risk, changes in the fair value of this portfolio are considered within the Corporation's overall domestic interest rate risk exposure. In response to the interest rate environment prevailing during the second quarter, the Corporation terminated $.4 billion of interest rate swaps and $3.9 billion of interest rate futures that were part of the domestic asset and liability management portfolio. These contracts were linked to short-term liabilities. The termination of these contracts resulted in a net loss of $7 million that is being amortized to net interest revenue as an adjustment to short-term liability yields over the remainder of the period that is being managed. 19 The following is a summary of interest rate derivatives and foreign exchange contracts included in the Corporation's asset and liability management portfolio.
FAIR VALUE(1)(2) UNRECOGNIZED NOTIONAL ------------------- GAIN/ AMOUNT ASSET LIABILITY (LOSS)(3) -------- ------- ---------- ------------ (IN MILLIONS) JUNE 30, 1995 Interest rate contracts(1)(4): Futures and forwards............... $15,197 $ 2 $ (69) Interest rate swaps................ 4,613 $ 39 46 26 Interest rate options: Purchased........................ 2,516 33 44 ------- ------- -------- ----- Total interest rate contracts........ $22,326 $ 72 $ 48 $ 1 ======= ======= ======== ===== Foreign exchange: Spot and forward contracts(1)...... $ 1,708 $ 3 $ 1 $ 2 ======= ======= ======== ===== DECEMBER 31, 1994 Interest rate contracts(1): Futures and forwards............... $16,566 $ 1 $ 36 Interest rate swaps................ 3,721 19 $225 (208) Interest rate options: Written or sold.................. 6,125 19 (17) Purchased........................ 7,709 39 49 ------- ------- -------- ----- Total interest rate contracts........ $34,121 $ 59 $ 244 $(140) ======= ======= ======== ===== Foreign exchange spot and forward contracts(1)........................ $ 604 $ 2 $ 5 $ (4) ======= ======= ======== =====
-------- (1) Contracts under master netting agreements are shown on a net basis. (2) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. In certain cases, instruments such as futures and forwards, are subject to daily cash settlements; as such, the fair value of these instruments is zero. The credit exposure of interest rate derivatives and foreign exchange contracts is represented by the fair value of contracts reported in the "Asset" column. (3) 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. Included in unrecognized gains or losses are gains or losses from contracts which have been terminated. At June 30, 1995 there were $57 million of unrecognized gains and $36 million of unrecognized losses that are being amortized to net interest revenue over a weighted average period of 27 months and 35 months, respectively. At December 31, 1994, there were unrecognized gains of $35 million that are being amortized to net interest revenue over a weighted average period of 14 months. (4) Includes contracts used to manage prepayment risk related to the Corporation's mortgage servicing portfolio. The results of such contracts are included in net mortgage servicing fees and are discussed above in Financial Service Fees. 20 The following table summarizes the remaining maturity of interest rate derivative financial instruments entered into for asset and liability management purposes as of June 30, 1995:
MATURITY 1995 1996 1997 1998 1999 2000+ TOTAL -------- ------ ------ ---- ---- ------ ------- (DOLLARS IN MILLIONS) Interest Rate Swaps Domestic: Receive fixed rate swaps(1): Notional amount....... $ 240 $ 142 $ 151 $ 50 $1,840 $ 2,423 Weighted average re- ceive rate........... 9.44% 6.55% 9.38% 5.46% 6.22% 6.74% Weighted average pay rate................. 6.05% 6.17% 6.09% 6.75% 6.45% 6.38% Pay fixed rate swaps(1): Notional amount....... $ 6 $ 85 $ 57 $ 35 $ 45 $ 85 $ 313 Weighted average re- ceive rate........... 6.32% 6.02% 6.09% 6.37% 6.36% 6.19% 6.17% Weighted average pay rate................. 6.53% 6.92% 7.78% 8.70% 7.36% 7.26% 7.42% Basis swaps(2): Notional amount....... $ 883 $ 50 $ 933 Weighted average re- ceive rate........... 5.43% 6.31% 5.48% Weighted average pay rate................. 5.56% 6.06% 5.59% Total Domestic Interest Rate Swaps: ------ ------ ------ ---- ---- ------ ------- Notional amount....... $ 246 $1,110 $ 208 $ 85 $ 45 $1,975 $ 3,669 Weighted average re- ceive rate(3)........ 9.37% 5.62% 8.48% 5.83% 6.36% 6.22% 6.37% Weighted average pay rate(3).............. 6.06% 5.74% 6.55% 7.55% 7.36% 6.48% 6.27% Total International In- terest Rate Swaps Notional Amount(4).... $ 944 $ 944 ------ ------ ------ ---- ---- ------ ------- Total Consolidated In- terest Rate Swaps Notional Amount....... $1,190 $1,110 $ 208 $ 85 $ 45 $1,975 $ 4,613 Other Derivative Prod- ucts Futures and forwards(5). 4,642 8,199 2,326 30 15,197 Interest rate options: Purchased............. 1,971 382 39 81 43 2,516 ------ ------ ------ ---- ---- ------ ------- Total Consolidated Notional Amount........ $7,803 $9,691 $2,573 $196 $ 88 $1,975 $22,326 ====== ====== ====== ==== ==== ====== =======
-------- (1) Of the receive fixed swaps, $1 billion were linked to floating rate loans, and the remainder principally to fixed rate notes payable. Of the swaps linked to notes payable, approximately $1 billion are scheduled to mature in 2000 and thereafter. (2) Basis swaps represent swaps where both the pay rate and receive rate are floating rates. The majority of the basis swaps are linked to loans. (3) The majority of the Corporation's interest rate swaps accrue at LIBOR (London Interbank Offered Rate). In arriving at the variable weighted average receive and pay rates, LIBOR rates in effect as of June 30, 1995 have been implicitly assumed to remain constant throughout the term of the swap. Future changes in LIBOR rates would affect the variable rate information disclosed. (4) The majority of the International portfolio is comprised of swaps from the Corporation's Brazilian operation with a weighted average maturity of less than 51 days. These swaps typically include the exchange of floating rate indices which are limited to the Brazilian market. (5) The majority of the futures used by the Corporation are linked to funds borrowed and are exchange-traded instruments. The reference instruments for these contracts comprise the major types available, such as Eurodollar deposits and U.S. Treasury notes. The forwards are used to manage the interest rate risk related to the Corporation's mortgages held for sale. Average rates are not meaningful for these products. 21 Derivatives not used in the asset and liability management portfolio are included in the derivatives trading portfolio. The primary focus of the Corporation's derivatives trading activities is related to providing risk management products to its customers. Net trading gains from interest rate derivatives for the quarter and six months ended June 30, 1995 were $3 million and $4 million, respectively, and for the quarter and six months ended June 30, 1994 were $.3 million and $3.5 million, respectively. Net trading gains from foreign exchange contracts for the quarter and six months ended June 30, 1995 were $16 million and $28 million, respectively, and for the quarter and six months ended June 30, 1994 were $11 million and $20 million, respectively. The following is a summary of the Corporation's notional amounts and fair values of interest rate derivatives and foreign exchange contracts included in its trading portfolio. Detailed information about the maturity profiles of trading instruments is not provided since these instruments may be traded at any time.
TRADING PORTFOLIO ------------------------------- AVERAGE FAIR FAIR VALUE(2) VALUE(3) NOTIONAL --------------- --------------- AMOUNT ASSET LIABILITY ASSET LIABILITY -------- ----- --------- ----- --------- (IN MILLIONS) JUNE 30, 1995 Interest rate contracts (1): Futures and forwards............. $29,653 Interest rate swaps.............. 6,552 $ 69 $ 45 $ 65 $ 43 Interest rate option: Written or sold................ 4,760 12 16 Purchased...................... 3,835 24 29 ------- ---- ---- ---- ---- Total interest rate contracts...... $44,800 $ 93 $ 57 $ 94 $ 59 ======= ==== ==== ==== ==== Foreign exchange contracts: Spot and forward contracts....... $19,984 $315 $314 $444 $448 Options written or sold.......... 632 13 16 Options purchased................ 1,912 14 17 ------- ---- ---- ---- ---- Total foreign exchange contracts... $22,528 $329 $327 $461 $464 ======= ==== ==== ==== ==== DECEMBER 31, 1994 Interest rate contract (1): Futures and forwards............. $17,257 Interest rate swaps.............. 12,604 $ 75 $ 40 $ 92 $ 45 Interest rate options: Written or sold................ 5,639 36 31 Purchased...................... 4,251 55 45 ------- ---- ---- ---- ---- Total interest rate contracts...... $39,751 $130 $ 76 $137 $ 76 ======= ==== ==== ==== ==== Foreign exchange contracts(1): Spot and forward contracts....... $17,142 $172 $186 $233 $244 Options written or sold.......... 753 9 13 Options purchased................ 811 8 11 ------- ---- ---- ---- ---- Total foreign exchange contracts... $18,706 $180 $195 $244 $257 ======= ==== ==== ==== ====
-------- (1) Contracts under master netting agreements are shown on a net basis. (2) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. In certain cases, contracts such as futures and forwards, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) Average fair value represents averages for second quarter 1995 and fourth quarter 1994. Additional information on the Corporation's derivative products, including accounting policies, is provided in Notes 1 and 21 to the Financial Statements in the Corporation's 1994 Annual Report to Stockholders, which is incorporated by reference in its 1994 Annual Report on Form 10-K. 22 CAPITAL The Corporation's Tier 1 and total capital ratios were 7.7% and 13.0%, respectively, at June 30, 1995, compared with 7.0% and 12.2%, respectively, at December 31, 1994. The Corporation's leverage ratio at June 30, 1995 was 7.3% compared with 6.5% at December 31, 1994. The improvement in these ratios reflected the sale of the Maine and Vermont banking subsidiaries, which resulted in a lower level of risk adjusted assets and the removal of $35 million of goodwill from the Corporation's balance sheet. In addition, the Corporation's Tier 1 capital ratio benefited from the redemption of $94 million of the Corporation's convertible subordinated debt. The conversion of subordinated debt is more fully discussed in Note 7 to the Financial Statements. As of June 30, 1995, 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 July 1995, the Board of Directors approved a 37% increase in the Corporation's quarterly common dividend to $.37 from $.27 per share, payable on August 25, 1995. 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. CREDIT PROFILE The segments of the lending portfolio are as follows:
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 1995 1995 1994 1994 1994 ------- -------- ------- -------- ------- (IN MILLIONS) Domestic: Commercial, industrial and fi- nancial........................ $11,907 $11,684 $11,805 $11,987 $11,871 Commercial real estate: Construction.................. 327 355 354 464 499 Other......................... 2,489 2,645 3,141 3,110 3,084 ------- ------- ------- ------- ------- Total commercial real es- tate....................... 2,816 3,000 3,495 3,574 3,583 Consumer-related loans: Secured by 1-4 family residen- tial properties.............. 4,752 4,635 5,004 4,878 4,215 Other......................... 2,834 2,603 2,462 2,373 2,283 Lease financing................. 1,356 1,350 1,366 1,312 1,263 Unearned income................. (211) (216) (216) (199) (198) ------- ------- ------- ------- ------- 23,454 23,056 23,916 23,925 23,017 ------- ------- ------- ------- ------- International: Loans and lease financing, net of unearned income............. 7,934 7,383 7,089 6,956 6,949 ------- ------- ------- ------- ------- Total loan and lease financ- ing........................ $31,388 $30,439 $31,005 $30,881 $29,966 ======= ======= ======= ======= =======
The decline in domestic loans and leases from December 31, 1994, reflected a $1.2 billion reduction from the sales of the Maine and Vermont banking subsidiaries, of which approximately $500 million was related to commercial real estate loans. Excluding these sales, domestic loans and leases grew over $700 million primarily due to higher levels of consumer-related loans. The international portfolio increased by $845 million principally due to ongoing growth in the Latin American portfolio. A further discussion of the Argentine and Brazilian operations is included under the caption "Emerging Markets Countries." The Corporation's domestic commercial real estate loans amounted to $2.8 billion at June 30, 1995 and $3.5 billion at December 31, 1994. Approximately 70% of these loans were located in New England at June 30, 1995 and December 31, 1994. 23 The Corporation's total loan portfolio at June 30, 1995 and December 31, 1994 included $1.3 billion of highly leveraged transaction (HLT) loans to 93 and 84 customers, respectively. The average HLT loan size was $14 million at June 30, 1995 and $15 million at December 31, 1994. The amount of unused commitments for HLTs at June 30, 1995 was $545 million, compared with $653 million at December 31, 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 June 30, 1995 and December 31, 1994, less than $1 million of the HLT portfolio was on nonaccrual status. There were no credit losses from the HLT portfolio in the first six months of 1995. The Corporation does not currently anticipate a substantial increase in HLT lending over the June 30, 1995 level. A discussion of the Corporation's real estate and HLT lending activities and policies is included in its 1994 Annual Report to Stockholders on pages 38 through 41, which is incorporated by reference in its 1994 Annual Report on Form 10-K. NONACCRUAL LOANS AND OREO The details of consolidated nonaccrual loans and leases and OREO are as follows:
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 1995 1995 1994 1994 1994 ------- -------- ------- -------- ------- (DOLLARS IN MILLIONS) Domestic: Commercial, industrial and finan- cial.............................. $106 $111 $113 $119 $131 Commercial real estate: Construction..................... 16 20 13 18 30 Other............................ 85 97 106 119 160 ---- ---- ---- ---- ---- Total commercial real estate... 101 117 119 137 190 Consumer-related loans: Secured by 1-4 family residential properties...................... 45 45 44 35 30 Other............................ 21 21 24 15 9 ---- ---- ---- ---- ---- 273 294 300 306 360 ---- ---- ---- ---- ---- International........................ 66 57 65 71 87 ---- ---- ---- ---- ---- Total nonaccrual loans......... 339 351 365 377 447 OREO................................. 78 71 76 93 71 ---- ---- ---- ---- ---- Total.......................... $417 $422 $441 $470 $518 ==== ==== ==== ==== ==== Nonaccrual loans and OREO as a percent of related asset categories. 1.3% 1.4% 1.4% 1.5% 1.7%
The decline in nonaccrual loans and OREO from December 31, 1994, includes a $27 million reduction from the sales of the Corporation's Maine and Vermont banking subsidiaries that were completed during the first quarter of 1995. The level of nonaccrual loans and OREO is influenced by the economic environment, interest rates, the regulatory environment and other internal and external factors. As such, no assurance can be given as to future levels of nonaccrual loans and leases and OREO. 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. Renegotiated loans were not material at June 30, 1995 and December 31, 1994. In addition, during 1994, the Corporation transferred certain of its lower quality real estate exposures, including a portion which was on nonaccrual status, to an accelerated disposition portfolio (ADP). During the first quarter of 1995, the Corporation disposed of substantially all its ADP assets, which totaled $118 million at December 31, 1994. 24 RESERVE FOR CREDIT LOSSES The reserve for credit losses at June 30, 1995 was $692 million, or 2.20% of outstanding loans and leases, compared with $680 million or 2.19%, at December 31, 1994. The reserve for credit losses was 204% of nonaccrual loans and leases at June 30, 1995, compared with 186% at December 31, 1994. During the first quarter, the Corporation implemented Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure." These statements affect the evaluation of the reserve for credit losses and require that impaired loans be evaluated based on the present value of expected future cash flows or the fair value of the collateral, as applicable. The adoption of these new standards, which is more fully discussed in Note 6 to the Financial Statements, did not have a significant effect on the Corporation. Net credit losses were $44 million for the second quarter of 1995 and $86 million for the first half of 1995. This compares with $30 million for the second quarter of 1994, and $62 million for the first half of 1994, excluding $119 million of first quarter 1994 writedowns in connection with the ADP. As a percentage of average loans and leases on an annualized basis, net credit losses were .57% in the second quarter of 1995, compared with .56% for the first quarter of 1995, and .41% for the second quarter of 1994. The increase in net credit losses in the first half of 1995 was mainly due to an increase in credit losses in the Corporation's domestic commercial, industrial and financial portfolio and higher international credit losses principally resulting from a charge-off of an Asian credit. In addition, there was an overall lower level of recoveries. Net credit losses are as follows:
SECOND QUARTER SIX MONTHS ---------------- ---------- 1995 1994* 1995 1994* ------- ------- ---- ----- (IN MILLIONS) Domestic: Commercial, industrial and financial.......... $ 9 $ 6 $18 $ 4 Commercial real estate........................ 14 10 20 17 Consumer-related loans: Secured by 1-4 family residential properties................................. 3 2 7 5 Other....................................... 10 9 18 20 ------- ------- --- --- 36 27 63 46 ------- ------- --- --- International................................... 8 3 23 16 ------- ------- --- --- Total..................................... $ 44 $ 30 $86 $62 ======= ======= === ===
-------- * Excludes credit losses in connection with assets transferred to the accelerated disposition portfolio. CROSS-BORDER OUTSTANDINGS At June 30, 1995 and December 31, 1994, total cross-border outstandings represented 15% of consolidated total assets. This included cross-border outstandings to emerging markets countries of approximately 9% for the respective periods. In accordance with bank regulatory rules, cross-border outstandings are amounts payable to the Corporation in U.S. dollars or other non-local currencies plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies. Excluded from cross-border outstandings for a given country are: . Local currency assets funded with U.S. dollars or other non-local currency where the provider of funds agrees that, in the event their claim cannot be repaid in the designated currency due to currency exchange restrictions in a given country, they will either accept payment in local currency or wait to receive the non-local currency until such time as it becomes available. Such transactions related only to emerging markets countries and totaled $1.0 billion at June 30, 1995 compared with $0.9 billion at December 31, 1994. 25 . Local currency outstanding funded with local currency. . U.S. dollar or other non-local currency outstandings reallocated as a result of external guarantees and cash collateral . U.S. dollar or other non-local currency outstandings reallocated as result of insurance contracts, primarily issued by United States government agencies Cross-border outstandings in countries which individually amounted to 1.0% or more of consolidated total assets at June 30, 1995 and December 31, 1994 were approximately as follows:
CONSOLIDATED PERCENTAGE OF PUBLIC BANKS OTHER TOTAL TOTAL ASSETS COMMITMENTS(2) ------ ----- ------ ------------ ------------- -------------- (DOLLARS IN MILLIONS) JUNE 30, 1995(1) Argentina............... $295 $ 45 $1,620 $1,960 4.3% $ 35 Brazil.................. 10 80 760 850 1.9 60 Chile................... 125 115 325 565 1.3 15 United Kingdom.......... 70 425 495 1.1 155 DECEMBER 31, 1994(1) Argentina............... $305 $ 40 $1,525 $1,870 4.2% $ 95 Brazil.................. 5 795 800 1.8 30 Chile................... 115 90 290 495 1.1 35 United Kingdom.......... 5 595 600 1.3 115
-------- (1) There were no countries in which cross-border outstandings fell within .75% and 1% of consolidated total assets at June 30, 1995 or December 31, 1994. (2) Included within commitments are letters of credit, guarantees and the undisbursed portion of loan commitments. In accordance with the regulatory definition of cross-border outstandings, included in Argentine cross-border outstandings are approximately $1 billion of Argendollar outstandings at June 30, 1995 and December 31, 1994, respectively. Argendollar outstandings are U.S. dollar claims from Argentine customers payable to the Corporation in Argentina, which are funded entirely by U.S. dollars borrowed in Argentina. EMERGING MARKETS COUNTRIES At June 30, 1995, approximately $4.1 billion of the Corporation's cross- border outstandings were to emerging markets countries, of which approximately 85% were loans. These cross-border outstandings were mainly comprised of short-term trade credits, non-trade-related loans and leases not subject to country debt rescheduling agreements and capital investments in branches and subsidiaries. Approximately $3.8 billion of the cross-border outstandings to emerging markets countries were to Argentina, Brazil, Chile, Colombia and Uruguay, five countries in which the Corporation maintains branches and/or subsidiaries. At June 30, 1995, cross-border outstandings to Chile, Colombia and Uruguay were $565 million, $140 million and $245 million, respectively. In addition, cross- border outstandings to Mexico were $160 million. The Corporation has received approval to open a subsidiary bank in Mexico, and it is expected that the subsidiary will commence operations during the third quarter. 26 Changes in aggregate cross-border outstandings to Argentina and Brazil since December 31, 1994 were approximately as follows:
ARGENTINA BRAZIL --------- ------ (IN MILLIONS) Cross-border outstandings at December 31, 1994............. $1,870 $800 Change in non-trade-related loans and leases not subject to country debt rescheduling................................. (41) 55 Net change in trade-related cross-border outstandings, primarily short-term...................................... 127 31 Net change in investment and trading securities............ (5) (42) Net change in placements................................... (4) Other...................................................... 13 6 ------ ---- Cross-border outstandings at June 30, 1995................. $1,960* $850* ====== ====
-------- * Approximately 27% for Argentina and 49% for Brazil are trade-related. As noted above, a significant portion of the Corporation's activities in emerging market countries are conducted in Argentina and Brazil. During the second quarter, Argentina re-elected its incumbent president to an additional term. This provided some stability to both the political environment and the economic markets, including an increase in deposit levels and overall liquidity. However, the country continues to be faced by significant challenges related to unemployment levels and the ability to meet economic targets mandated by the International Monetary Fund. The government has announced measures to further improve liquidity of local banks and it is expected that additional measures will be announced to strengthen further the overall financial system. The Corporation's operating results in Argentina have not been adversely affected by the economic and political events which have occurred in Latin America over the past three quarters. During the second quarter, there continued to be an increase in spreads caused by prevailing interest rates. Loan and deposit levels were relatively stable compared to the first quarter of 1995 while there was a slight increase in the level of nonperforming assets. However, the Corporation continues to expect some deterioration in credit quality over time and is closely monitoring the situation. The Corporation's Argentine bond portfolio, which is classified as available for sale securities, has remained relatively stable from the prior quarter. The after-tax unrealized loss is $37 million at June 30, 1995 compared to $49 million at March 31, 1995 and $30 million at December 31, 1994. If the actions announced by the Argentine government are not effective, particularly with regard to liquidity, the Corporation's Argentine operation could experience adverse effects, including stress on local liquidity, deterioration of credit quality, a further decline in the value of its securities portfolio and declines in loan and deposit values. Brazil continued to implement measures related to its July 1994 economic plan. During the second quarter, the government adjusted the band within which the local currency can trade against the U.S. dollar to .93 to .99 Brazilian reals per U.S. dollar. The current exchange rate is running slightly below or at the low end of the band. The government continues to implement measures to control inflation, which was approximately 2%-3% per month during the quarter. These measures contributed to the high real interest rate environment which existed during the quarter. In the second quarter, the Corporation's Brazilian results of operations were not adversely affected by the events which have occurred in Latin America over the past three quarters. The Corporation continues to monitor and evaluate the Brazilian economic program as it evolves and will adjust its strategy as deemed appropriate. It is not possible, however, to predict what effect the economic program will ultimately have on the Corporation. During the second quarter of 1995, a number of the Corporation's operations located in Latin America continued to structure their balance sheets to take positions in their local currencies. These positions continue to be subject to limits established by the Corporation's ALCO, with the amount of, and compliance with, the limits subject to regular review. For additional information related to the Corporation's Latin American balance sheet currency positions, see page 43 of the Corporation's 1994 Annual Report to Stockholders, which is incorporated by reference in its 1994 Annual Report on Form 10-K. 27 Each emerging markets country is at a different stage of development with a unique set of economic fundamentals. Therefore, it is expected that the economic situation in Latin America, including the effects of world financial markets on these economies, will continue to be unsettled. The Corporation has not experienced any collection problems as a result of currency restrictions or foreign exchange liquidity problems on its current portfolio of cross- border outstandings to emerging markets countries. The Corporation will continue to monitor the economic situation in Latin America and also its effect on those countries in which it has a local operation, cross-border outstandings and, where applicable, a currency position. It is not possible to predict what effect the economic situation in Latin America will ultimately have on the economies of these countries or on the Corporation's results of operations. For additional information related to the Corporation's Latin American cross-border outstandings, see pages 12 and 13 of the Corporation's 1994 Annual Report on Form 10-K, as well as pages 41 through 44 of the Corporation's 1994 Annual Report to Stockholders, which is incorporated by reference in such Form 10-K. ---------------- The Corporation's results of operations continue to be affected by the economies of the United States and New England. Management, however, cannot currently predict to what extent changes in the condition of the domestic economy or interest rates will affect future periods. In addition, it is uncertain what impact future changes in the economies in Latin America and other foreign countries where the Corporation does business will have on future periods. No assurance, therefore, can be given that the trends noted during the first half of 1995 will continue. 28 CONSOLIDATED BALANCE SHEET AVERAGES BY QUARTER LAST NINE QUARTERS
1993 1994 1995 ----------------------- ------------------------------- --------------- 2 3 4 1 2 3 4 1 2 ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN MILLIONS) ASSETS Interest bearing deposits in other banks.................. $ 1,422 $ 1,305 $ 1,185 $ 1,083 $ 902 $ 1,131 $ 1,062 $ 1,262 $ 1,309 Federal funds sold and securities purchased under agreements to resell................. 1,089 1,367 2,005 2,447 3,485 2,595 1,711 1,364 1,166 Trading securities...... 276 300 259 452 402 618 750 694 787 Loans held for sale..... 944 1,334 1,314 960 824 651 315 256 254 Securities.............. 3,838 3,561 3,194 2,945 3,164 3,489 4,435 4,288 4,526 Loans and lease financing.............. 25,854 26,953 28,172 28,615 29,105 30,362 31,076 30,123 30,928 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets. 33,423 34,820 36,129 36,502 37,882 38,846 39,349 37,987 38,970 Other assets............ 4,078 4,248 4,274 4,712 4,820 5,079 5,051 4,858 5,131 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL ASSETS............ $37,501 $39,068 $40,403 $41,214 $42,702 $43,925 $44,400 $42,845 $44,101 ======= ======= ======= ======= ======= ======= ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Domestic offices: Noninterest bearing... $ 4,397 $ 4,578 $ 4,863 $ 4,633 $ 4,403 $ 4,477 $ 4,701 $ 4,194 $ 4,196 Interest bearing...... 18,580 18,360 18,096 17,110 16,672 17,309 17,388 15,827 16,228 Overseas offices: Noninterest bearing... 336 387 469 497 393 415 481 415 416 Interest bearing...... 4,881 5,218 5,819 6,375 6,764 7,703 7,875 8,318 7,967 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total deposits....... 28,194 28,543 29,247 28,615 28,232 29,904 30,445 28,754 28,807 Federal funds purchased and repurchase agreements............. 2,315 3,430 3,787 3,619 4,014 3,728 3,333 3,699 3,896 Other funds borrowed.... 1,606 1,485 1,603 2,411 4,124 3,633 3,861 3,585 4,278 Notes payable........... 1,670 1,752 1,876 2,194 1,957 1,987 2,141 2,133 2,062 Other liabilities....... 1,022 1,085 1,073 1,433 1,404 1,625 1,491 1,467 1,661 Stockholders' equity.... 2,694 2,773 2,817 2,942 2,971 3,048 3,129 3,207 3,397 ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $37,501 $39,068 $40,403 $41,214 $42,702 $43,925 $44,400 $42,845 $44,101 ======= ======= ======= ======= ======= ======= ======= ======= =======
29 CONSOLIDATED STATEMENT OF INCOME BY QUARTER--TAXABLE EQUIVALENT BASIS LAST NINE QUARTERS
1993 1994 1995 -------------------- ---------------------------- ------------- 2 3 4 1 2 3 4 1 2 ------ ------ ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NET INTEREST REVENUE: $330.5 $340.8 $349.3 $340.7 $374.5 $423.9 $433.4 $425.9 $434.1 Taxable equivalent adjustment............. 1.7 2.3 2.0 1.5 1.5 1.3 2.7 1.4 1.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total net interest revenue................ 332.2 343.1 351.3 342.2 376.0 425.2 436.1 427.3 436.0 Provision for credit losses................. 27.6 10.0 10.0 45.0 25.0 25.0 35.0 90.0 40.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net interest revenue after provision for credit losses.......... 304.6 333.1 341.3 297.2 351.0 400.2 401.1 337.3 396.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST INCOME: Financial service fees.. 92.6 90.9 95.2 92.4 93.9 104.3 105.5 105.6 113.3 Trust and agency fees... 45.2 43.1 45.5 47.7 50.3 50.6 53.1 52.7 57.2 Trading profits and commissions............ 5.8 6.9 3.9 3.9 1.2 10.9 (.1) 1.1 6.1 Securities portfolio gains.................. 6.0 11.0 8.8 3.9 5.9 1.3 2.5 6.1 .2 Other income............ 41.4 39.3 35.6 87.2 41.0 35.1 37.6 127.7 59.3 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest income................ 191.0 191.2 189.0 235.1 192.3 202.2 198.6 293.2 236.1 ------ ------ ------ ------ ------ ------ ------ ------ ------ NONINTEREST EXPENSE: Salaries................ 161.7 160.4 153.3 157.8 161.5 168.1 177.8 176.4 179.6 Employee benefits....... 33.7 32.2 32.7 36.9 37.0 38.6 35.1 40.4 40.9 Occupancy expense....... 32.2 32.2 31.3 31.9 33.1 35.2 34.4 34.9 34.4 Equipment expense....... 24.0 23.3 23.4 23.6 23.4 24.2 24.9 24.1 25.7 Merger and restructuring charges................ 85.0 16.4 5.0 Other expense........... 116.7 107.1 105.9 96.5 101.0 107.2 109.7 107.4 111.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total noninterest expense............... 368.3 440.2 346.6 346.7 372.4 378.3 381.9 383.2 392.1 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles.. 127.3 84.1 183.7 185.6 170.9 224.1 217.8 247.3 240.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ Provision for income taxes.................. 54.2 40.4 79.2 81.4 74.9 98.8 94.3 120.6 104.8 Taxable equivalent adjustment............. 1.7 2.3 2.0 1.5 1.5 1.3 2.7 1.4 1.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ 55.9 42.7 81.2 82.9 76.4 100.1 97.0 122.0 106.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before extraordinary items and cumulative effect of changes in accounting principles............. 71.4 41.4 102.5 102.7 94.5 124.0 120.8 125.3 133.3 Extraordinary items..... (6.6) Cumulative effect of changes in accounting principles, net ------ ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME.............. $ 71.4 $ 41.4 $102.5 $ 96.1 $ 94.5 $124.0 $120.8 $125.3 $133.3 ====== ====== ====== ====== ====== ====== ====== ====== ====== PER COMMON SHARE: Income before extraordinary items and cumulative effect of changes in accounting principles: Primary................ $ .60 $ .30 $ .88 $ .88 $ .80 $ 1.07 $ 1.04 $ 1.08 $ 1.11 Fully diluted.......... .59 .30 .85 .85 .77 1.04 1.01 1.04 1.10 Net income: Primary................ $ .60 $ .30 $ .88 $ .82 $ .80 $ 1.07 $ 1.04 $ 1.08 $ 1.11 Fully diluted.......... .59 .30 .85 .79 .77 1.04 1.01 1.04 1.10 Cash dividends declared. .10 .10 .10 .22 .22 .22 .27 .27 .27
30 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED JUNE 30, 1995 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S..................... $ 362 $ 3 3.62% International........... 947 64 26.91 ------- ----- Total................ 1,309 67 20.49 ------- ----- ----- Federal Funds Sold and Resale Agreements U.S..................... 598 9 5.96 International........... 568 84 59.61 ------- ----- Total................ 1,166 93 32.10 ------- ----- ----- Trading Securities U.S..................... 227 3 6.35 International........... 560 40 28.50 ------- ----- Total................ 787 43 22.10 ------- ----- ----- Loans Held for Sale U.S..................... 254 5 7.62 ------- ----- ----- Securities U.S. Available for sale(2). 2,210 38 6.82 Held to maturity...... 1,721 29 6.88 International Available for sale(2). 387 15 13.40 Held to maturity...... 208 6 12.15 ------- ----- Total................ 4,526 88 7.80 ------- ----- ----- Loans and Leases (Net of Unearned Income) U.S..................... 23,099 507 8.81 International........... 7,829 302 15.45 ------- ----- Total loans and lease financing(3)....... 30,928 809 10.49 ------- ----- ----- Earning assets.......... 38,970 1,105 11.38 ----- ----- Nonearning assets....... 5,131 ------- TOTAL ASSETS............ $44,101 =======
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 31
QUARTER ENDED JUNE 30, 1995 ---------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE -------- ----------- ------- (DOLLARS IN MILLIONS) LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits........ $ 8,640 $ 56 2.61% Time deposits........... 7,588 106 5.60 International........... 7,967 254 12.79 -------- ---- Total................ 24,195 416 6.90 -------- ---- ----- Federal Funds Purchased and Repurchase Agreements U.S..................... 3,740 45 4.77 International........... 156 12 31.10 -------- ---- Total................ 3,896 57 5.82 -------- ---- ----- Other Funds Borrowed U.S..................... 3,448 55 6.44 International........... 830 103 49.76 -------- ---- Total................ 4,278 158 14.84 -------- ---- ----- Notes Payable U.S..................... 1,911 35 7.27 International........... 151 3 9.56 -------- ---- Total................ 2,062 38 7.44 -------- ---- ----- Total interest bearing liabilities............ 34,431 669 7.80 -------- ---- ----- Demand deposits U.S..... 4,196 Demand deposits International.......... 416 Other noninterest bearing liabilities.... 1,661 Total Stockholders' Equity................. 3,397 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 44,101 ======== NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE IN- TEREST EARNING ASSETS U.S..................... $ 28,471 $322 4.54% International........... 10,499 114 4.35 -------- ---- Total................ $ 38,970 $436 4.49 ======== ====
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 32 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED JUNE 30, 1994 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S. .............................. $ 187 $ 2 4.62% International...................... 715 16 9.16 ------- --- Total......................... 902 18 8.22 ------- --- ----- Federal Funds Sold and Resale Agreements U.S. .............................. 1,847 18 3.98 International...................... 1,638 135 32.94 ------- --- Total......................... 3,485 153 17.59 ------- --- ----- Trading Securities U.S. .............................. 183 2 4.93 International...................... 219 7 5.12 ------- --- Total......................... 402 9 5.00 ------- --- ----- Loans Held for Sale U.S. .............................. 824 13 6.23 ------- --- ----- Securities U.S. Available for sale(2).............. 1,427 25 7.17 Held to maturity................... 1,213 17 5.69 International Available for sale(2).............. 349 12 13.75 Held to maturity................... 175 6 13.38 ------- --- Total......................... 3,164 60 7.64 ------- --- ----- Loans and Leases (Net of Unearned Income) U.S. .............................. 22,411 424 7.59 International...................... 6,694 164 9.85 ------- --- Total loans and lease financing(3).................. 29,105 588 8.11 ------- --- ----- Earning assets..................... 37,882 841 8.91 --- ----- Nonearning assets.................. 4,820 ------- TOTAL ASSETS....................... $42,702 =======
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 33
QUARTER ENDED JUNE 30, 1994 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits......................... $ 9,413 $ 45 1.94% Time deposits............................ 7,259 80 4.42 International.............................. 6,764 116 6.90 ------- ---- Total................................. 23,436 241 4.14 ------- ---- ----- Federal Funds Purchased and Repurchase Agreements U.S. ...................................... 3,689 34 3.74 International.............................. 325 21 25.75 ------- ---- Total................................. 4,014 55 5.52 ------- ---- ----- Other Funds Borrowed U.S. ...................................... 2,641 32 4.81 International.............................. 1,483 108 29.19 ------- ---- Total................................. 4,124 140 13.58 ------- ---- ----- Notes Payable U.S. ...................................... 1,824 25 5.47 International.............................. 133 4 11.56 ------- ---- Total................................. 1,957 29 5.89 ------- ---- ----- Total interest bearing liabilities......... 33,531 465 5.57 ------- ---- ----- Demand deposits U.S. ...................... 4,403 Demand deposits International.............. 393 Other noninterest bearing liabilities...... 1,404 Total Stockholders' Equity................. 2,971 ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $42,702 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. ...................................... $28,092 $299 4.27% International.............................. 9,790 77 3.14 ------- ---- Total................................. $37,882 $376 3.98 ======= ====
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 34 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
SIX MONTHS ENDED JUNE 30, 1995 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S................................ $ 245 $ 5 4.57% International...................... 1,041 127 24.49 ------- ----- Total............................ 1,286 132 20.70 ------- ----- ----- Federal Funds Sold and Resale Agreements U.S................................ 563 17 5.99 International...................... 702 179 51.40 ------- ----- Total............................ 1,265 196 31.18 ------- ----- ----- Trading Securities U.S................................ 211 7 6.43 International...................... 530 77 29.48 ------- ----- Total............................ 741 84 22.92 ------- ----- ----- Loans Held for Sale U.S................................ 255 9 6.79 ------- ----- ----- Securities U.S. Available for sale(2).............. 2,210 74 6.73 Held to maturity................... 1,656 56 6.81 International Available for sale(2).............. 343 24 12.40 Held to maturity................... 199 10 10.13 ------- ----- Total............................ 4,408 164 7.52 ------- ----- ----- Loans and Leases (Net of Unearned Income) U.S................................ 22,923 1,006 8.85 International...................... 7,605 549 14.55 ------- ----- Total loans and lease financing(3)..................... 30,528 1,555 10.27 ------- ----- ----- Earning assets..................... 38,483 2,140 11.21 ----- ----- Nonearning assets.................. 4,990 ------- TOTAL ASSETS....................... $43,473 =======
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 35
SIX MONTHS ENDED JUNE 30, 1995 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits......................... $ 8,669 $ 107 2.52% Time deposits............................ 7,359 198 5.41 International.............................. 8,142 472 11.69 ------- ----- Total.................................... 24,170 777 6.49 ------- ----- ----- Federal Funds Purchased and Repurchase Agreements U.S........................................ 3,636 88 4.91 International.............................. 163 26 32.02 ------- ----- Total.................................... 3,799 114 6.07 ------- ----- ----- Other Funds Borrowed U.S........................................ 3,037 96 6.33 International.............................. 897 212 47.61 ------- ----- Total.................................... 3,934 308 15.74 ------- ----- ----- Notes Payable U.S........................................ 1,954 69 7.11 International.............................. 144 9 11.96 ------- ----- Total.................................... 2,098 78 7.44 ------- ----- ----- Total interest bearing liabilities......... 34,001 1,277 7.57 ----- ----- Demand deposits U.S........................ 4,195 Demand deposits International.............. 416 Other noninterest bearing liabilities...... 1,563 Total Stockholders' Equity................. 3,298 ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $43,473 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S........................................ $28,063 $ 652 4.69% International.............................. 10,420 211 4.08 ------- ----- Total.................................... $38,483 $ 863 4.52 ======= =====
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 36 AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
SIX MONTHS ENDED JUNE 30, 1994 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) ASSETS Interest Bearing Deposits with Other Banks U.S................................ $ 216 $ 4 3.63% International...................... 777 37 9.58 ------- ----- Total......................... 993 41 8.29 ------- ----- ----- Federal Funds Sold and Resale Agreements U.S................................ 1,586 29 3.66 International...................... 1,380 204 29.77 ------- ----- Total......................... 2,966 233 15.81 ------- ----- ----- Trading Securities U.S................................ 148 3 4.66 International...................... 280 24 17.30 ------- ----- Total......................... 428 27 12.93 ------- ----- ----- Loans Held for Sale U.S................................ 892 28 6.43 ------- ----- ----- Securities U.S. Available for sale(2)............ 1,161 41 7.09 Held to maturity................. 1,384 35 5.06 International Available for sale(2)............ 292 22 14.90 Held to maturity................. 217 8 7.83 ------- ----- Total......................... 3,054 106 6.61 ------- ----- ----- Loans and Leases (Net of Unearned Income) U.S................................ 22,359 825 7.44 International...................... 6,501 307 9.52 ------- ----- Total loans and lease financing(3).................. 28,860 1,132 7.91 ------- ----- ----- Earning assets..................... 37,193 1,567 8.49 ------- ----- ----- Nonearning assets.................. 4,765 ------- TOTAL ASSETS....................... $41,958 =======
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 37
SIX MONTHS ENDED JUNE 30, 1994 --------------------------- AVERAGE AVERAGE VOLUME INTEREST(1) RATE ------- ----------- ------- (DOLLARS IN MILLIONS) LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits........................... $ 9,336 $ 89 1.93% Time deposits.............................. 7,554 166 4.44 International.............................. 6,569 227 6.94 ------- ---- Total...................................... 23,459 482 4.14 ------- ---- ----- Federal Funds Purchased and Repurchase Agreements U.S. ...................................... 3,541 61 3.47 International.............................. 276 31 22.68 ------- ---- Total...................................... 3,817 92 4.86 ------- ---- ----- Other Funds Borrowed U.S. ...................................... 2,062 50 4.84 International.............................. 1,206 163 27.32 ------- ---- Total...................................... 3,268 213 13.14 ------- ---- ----- Notes Payable U.S. ...................................... 1,963 55 5.63 International.............................. 112 7 12.83 ------- ---- Total...................................... 2,075 62 6.02 ------- ---- ----- Total interest bearing liabilities......... 32,619 849 5.25 ------- ---- ----- Demand deposits U.S. ...................... 4,518 Demand deposits International.............. 445 Other noninterest bearing liabilities...... 1,418 Total Stockholders' Equity................. 2,958 ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $41,958 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. ...................................... $27,746 $573 4.17% International.............................. 9,447 145 3.09 ------- ---- Total...................................... $37,193 $718 3.89 ======= ====
-------- (1) Income is shown on a fully taxable equivalent basis. (2) Average rates for securities available for sale are based on the securities' amortized cost. (3) Loans and lease financing includes nonaccrual and renegotiated balances. 38 CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS SECOND QUARTER 1995 COMPARED WITH SECOND QUARTER 1994 The following table presents, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes. The change due to the volume/rate variance has been allocated to volume.
INCREASE (DECREASE) DUE TO CHANGE IN ----------- VOLUME RATE NET CHANGE ------ ---- ---------- (IN MILLIONS) Interest income: Loans and lease financing U.S. ..................... $ 15 $ 68 $ 83 International............. 44 94 138 ---- Total 221 ---- Other earnings assets U.S. ..................... (5) 15 10 International............. (34) 67 33 ---- Total 43 ---- Total interest income 31 233 264 Total interest expense 19 185 204 ---- Net interest revenue $ 60 ====
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
INCREASE (DECREASE) DUE TO CHANGE IN --------------------- VOLUME RATE NET CHANGE ---------- --------- ---------- (IN MILLIONS) Interest income: Loans and lease financing U.S. ........... $ 25 $ 156 $181 International... 80 162 242 ---- Total 423 ---- Other earnings assets U.S. ........... (8) 36 28 International... (20) 142 122 ---- Total 150 ---- Total interest income 72 501 573 Total interest expense 43 385 428 ---- Net interest revenue $145 ====
39 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, Society for Savings Bancorp, Inc. ("Bancorp") and certain Bancorp directors. 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 Corporation's proposed acquisition of Bancorp was announced, and sought an injunction with respect to the acquisition and damages in an unspecified amount. In May 1993, the Chancery Court denied the plaintiff's motion for a preliminary injunction and 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 appealed that decision to the Delaware Supreme Court and in December 1994, the Delaware Supreme Court issued a decision, which affirmed, in part, and reversed, in part, the Chancery Court's decision. The Delaware Supreme Court remanded the case to the Chancery Court for a determination of certain issues. On January 23, 1995, the defendants filed a motion for summary judgment with the Chancery Court and on June 15, 1995, the Court granted summary judgment in favor of the defendants on all claims except for an aiding and abetting claim against the Corporation on which no summary judgment motion has yet been filed. The Chancery Court also denied plaintiff's motion for rehearing. The plaintiff and certain defendants have filed motions to make the Chancery Court's most recent summary judgment decision final and appealable before the resolution of the aiding and abetting claim. The Corporation has denied the plaintiff's allegations and intends to continue to defend the action vigorously. As previously reported, in 1990 a class action complaint was filed in U.S. District Court for the District of Connecticut against Bancorp, two of its then senior officers and one former officer. The complaint, as subsequently amended, alleges that Bancorp's financial reports for fiscal years 1988, 1989 and the first half of 1990 contained material misstatements or omissions concerning its real estate loan portfolio and other matters, in violation of Connecticut common law and of Sections 10(b) and 20 of the Securities Exchange Act of 1934. The action was brought by a Bancorp shareholder, individually and as a class action on behalf of purchasers of Bancorp's stock from January 19, 1989 through November 30, 1990 and seeks damages in an unspecified amount. Bancorp and the defendant officers have denied the allegations of the amended complaint and on July 14, 1995 filed a motion for summary judgment. 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). 27 --Financial Data Schedule
(b) Current Reports on Form 8-K. During the second quarter of 1995, the Corporation filed one Current Report on Form 8-K, dated April 20, 1995, which contained information pursuant to Items 5 and 7 of Form 8-K. The Corporation also filed a Current Report on Form 8-K, dated July 20, 1995, which contained information pursuant to Items 5 and 7 of Form 8-K. 40 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/ Charles K. Gifford _____________________________________ CHARLES K. GIFFORD CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER AND PRESIDENT /s/ William J. Shea _____________________________________ WILLIAM J. SHEA VICE CHAIRMAN, CHIEF FINANCIAL OFFICER AND TREASURER Date: August 11, 1995 41 EX-11 2 EXHIBIT 11 EXHIBIT 11 BANK OF BOSTON CORPORATION COMPUTATION OF EARNINGS PER COMMON SHARE (IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
QUARTERS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------- ----------------- 1995 1994 1995 1994 ------- ------- -------- -------- EARNINGS -------- 1. Net income............................. $ 133 $ 95 $ 259 $ 191 2. Less: Preferred dividends.............. 9 10 19 19 ------- ------- -------- -------- 3. Net income applicable to primary earnings per common share............. 124 85 240 172 4. Add: Interest expense on convertible debentures, net of tax................ 1 2 ------- ------- -------- -------- 5. Net income applicable to fully diluted earnings per common share............. $ 124 $ 86 $ 240 $ 174 ======= ======= ======== ======== SHARES (IN THOUSANDS) ------ 6. Weighted average number of common shares outstanding.................... 111,369 106,619 109,335 106,410 7. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method............. 1,564 637 1,605 615 8. Incremental shares from assumed conversion of debentures at date of issuance.............................. 4,030 1,778 4,030 ------- ------- -------- -------- 9. Adjusted number of common shares....... 112,933 111,286 112,718 111,055 ======= ======= ======== ======== PER SHARE CALCULATION --------------------- 10. Primary net income per common share (Item 3 / Item 6)..................... $ 1.11 $ .80 $ 2.19 $ 1.62 11. Fully diluted net income per common share (Item 5 / Item 9)............... $ 1.10 $ .77 $ 2.14 $ 1.56
-------- Note-- Income per common share before extraordinary items, net of tax, on both a primary and fully diluted basis for the six months ended June 30, 1994 is computed by adding $7 million to the numerator. EX-12.A 3 EXHIBIT 12A EXHIBIT 12(A) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (EXCLUDING INTEREST ON DEPOSITS) The Corporation's ratios of earnings to fixed charges (excluding interest on deposits) for the six months ended June 30, 1995 and 1994 and for the five years ended December 31, 1994 were as follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ----------------- -------------------------------- 1995 1994 1994 1993 1992 1991 1990 -------- -------- ------ ---- ----- ----- ----- (DOLLARS IN MILLIONS) Net income (loss).......... $ 259 $ 191 $ 435 $299 $ 279 $(113) $(468) Extraordinary items, net of tax....................... 7 7 (73) (8) (44) Cumulative effect of changes in accounting principles, net of tax.... (24) Income tax expense (benefit)................. 225 156 349 215 153 (58) 3 -------- -------- ------ ---- ----- ----- ----- Pretax earnings (loss)... $ 484 $ 354 $ 791 $490 $ 359 $(179) $(509) ======== ======== ====== ==== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor......... 14 14 27 27 28 30 39 Interest on borrowed funds. 500 367 998 378 345 362 592 -------- -------- ------ ---- ----- ----- ----- Total fixed charges.... 514 381 1,025 405 373 392 631 -------- -------- ------ ---- ----- ----- ----- Earnings (for ratio calculation).............. $ 998 $ 735 $1,816 $895 $ 732 $ 213 $ 122 ======== ======== ====== ==== ===== ===== ===== Total fixed charges........ $ 514 $ 381 $1,025 $405 $ 373 $ 392 $ 631 ======== ======== ====== ==== ===== ===== ===== Ratio of earnings to fixed charges................... 1.94 1.93 1.77 2.21 1.96 .54 .19 ======== ======== ====== ==== ===== ===== =====
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. For the years ended December 31, 1991 and 1990, earnings were insufficient to cover fixed charges. Additional earnings necessary for the years ended December 31, 1991 and 1990 to bring the ratios of earnings to fixed charges to a one-to-one basis are $179 million and $509 million, respectively. EX-12.B 4 EXHIBIT 12B EXHIBIT 12(B) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (INCLUDING INTEREST ON DEPOSITS) The Corporation's ratios of earnings to fixed charges (including interest on deposits) for the six months ended June 30, 1995 and 1994 and for the five years ended December 31, 1994 were as follows:
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ----------------- ------------------------------------- 1995 1994 1994 1993 1992 1991 1990 -------- -------- ------ ------ ------ ------ ------ (DOLLARS IN MILLIONS) Net income (loss)....... $ 259 $ 191 $ 435 $ 299 $ 279 $ (113) $ (468) Extraordinary items, net of tax................. 7 7 (73) (8) (44) Cumulative effect of changes in accounting principles, net of tax. (24) Income tax expense (ben- efit).................. 225 156 349 215 153 (58) 3 -------- -------- ------ ------ ------ ------ ------ Pretax earnings (loss). $ 484 $ 354 $ 791 $ 490 $ 359 $ (179) $ (509) ======== ======== ====== ====== ====== ====== ====== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor....... 14 14 27 27 28 30 39 Interest on borrowed funds.................. 500 367 998 378 345 362 592 Interest on deposits.... 777 482 1,148 1,016 1,407 1,808 2,420 -------- -------- ------ ------ ------ ------ ------ Total fixed charges... 1,291 863 2,173 1,421 1,780 2,200 3,051 -------- -------- ------ ------ ------ ------ ------ Earnings (for ratio cal- culation).............. $ 1,775 $ 1,217 $2,964 $1,911 $2,139 $2,021 $2,542 ======== ======== ====== ====== ====== ====== ====== Total fixed charges..... $ 1,291 $ 863 $2,173 $1,421 $1,780 $2,200 $3,051 ======== ======== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges.......... 1.37 1.41 1.36 1.34 1.20 .92 .83 ======== ======== ====== ====== ====== ====== ======
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. For the years ended December 31, 1991 and 1990, earnings were insufficient to cover fixed charges. Additional earnings necessary for the years ended December 31, 1991 and 1990 to bring the ratios of earnings to fixed charges to a one-to-one basis are $179 million and $509 million, respectively. EX-27 5 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1995 JUN-30-1995 2,252 1,517 805 831 3,011 1,821 1,841 31,388 (692) 45,254 29,121 9,045 1,513 2,110 251 0 508 2,706 45,254 1,554 162 421 2,137 777 1,277 860 130 6 214 484 259 0 0 259 2.19 2.14 4.52 339 7 29 0 680 (112) 26 692 422 162 108