-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RyReWSU2gb4O+0hERPJVbFnQBi52U6MU8yUn6tfjoNZnZSqjk0nBCm16RPytY4GC BCeW8JWuYS2GR1bfVqNZBA== 0000950109-96-001582.txt : 19960319 0000950109-96-001582.hdr.sgml : 19960319 ACCESSION NUMBER: 0000950109-96-001582 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06522 FILM NUMBER: 96535629 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 10-K405 1 FORM 10-K405 FORM 10-K SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] 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 offices) (Zip Code) Registrant's telephone number, including area code: (6l7) 434-2200 Securities registered pursuant to Section 12(b) of the Act: ------------------------------------------------------- Title of each class - ---------------- Common Stock, par value $2.25 per share Preferred Stock Purchase Rights Adjustable Rate Cumulative Preferred Stock, Series A (liquidation preference $50 per share) Adjustable Rate Cumulative Preferred Stock, Series B (liquidation preference $50 per share) Adjustable Rate Cumulative Preferred Stock, Series C (liquidation preference $100 per share) Depositary Shares, each representing one-tenth of a share of 8.60% Cumulative Preferred Stock, Series E (liquidation preference $25 per Depositary Share) Depositary Shares, each representing one-tenth of a share of 7 7/8% Cumulative Preferred Stock, Series F (liquidation preference $25 per Depositary Share) Name of each exchange on which registered: ------------------------------------- Each class is registered on the Boston Stock Exchange and on the New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of shares of common Number of shares of common stock held by non-affiliates of Registrant stock outstanding as of as of March 5, 1996 March 5, 1996 ---------------------------- ------------------- $5,352,516,341 110,507,016 Documents Incorporated by Reference: - ---------------------- 1. Pertinent extracts from Registrant's 1995 Annual Report to Stockholders (Parts I, II and IV). 2. Pertinent extracts from Registrant's Proxy Statement in connection with the Registrant's 1996 Annual Meeting of Stockholders (Part III). INDEX Name of Item Page - ------------ ---- PART I Item 1. Business................................................. 3 Statistical Disclosure by Bank Holding Companies....... 14 Item 2. Properties............................................... 20 Item 3. Legal Proceedings........................................ 20 Item 3A. Executive Officers of the Corporation.................... 22 Item 4. Submission of Matters to a Vote of Security Holders...... 23 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 24 Item 6. Selected Financial Data.................................. 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 24 Item 8. Financial Statements and Supplementary Data.............. 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 25 PART III Item 10. Directors and Executive Officers of the Registrant....... 25 Item 11. Executive Compensation................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 26 Item 13. Certain Relationships and Related Transactions........... 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 26 SIGNATURES Signatures............................................... II-1 PART I Item 1. Business. THE CORPORATION Bank of Boston Corporation (the "Corporation") is a registered bank holding company, organized in 1970 under Massachusetts law with both national and international operations. The Corporation, through its subsidiaries, is engaged in providing a wide variety of personal, corporate and global banking services to individuals, corporate and institutional customers, governments and other financial institutions. The Corporation, together with its subsidiaries, operates a network of 500 offices across the U.S. and more than 100 offices in 23 countries in Latin America, Europe and Asia. As of December 31, 1995, approximately 72% of the Corporation's total loan volume consisted of domestic loans and leases, with the balance overseas. As of December 31, 1995, the Corporation's subsidiaries employed, in the aggregate, 17,881 full-time equivalent employees in their domestic and foreign operations. The Corporation's principal subsidiary is The First National Bank of Boston ("FNBB"), a national banking association with its headquarters in Massachusetts. Other major banking subsidiaries of the Corporation are Bank of Boston Connecticut ("BKB Connecticut") and Rhode Island Hospital Trust National Bank ("Hospital Trust"). The executive office of the Corporation and the head office of FNBB are located at 100 Federal Street, Boston, Massachusetts 02110 (Telephone (617) 434- 2200). Agreement to Acquire BayBanks, Inc. On December 12, 1995, the Corporation and BayBanks, Inc. ("BayBanks") entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which a wholly owned subsidiary of the Corporation will be merged with and into BayBanks (the "Merger") and BayBanks will become a subsidiary of the Corporation. BayBanks, a Boston-based bank holding company, had total assets of $12 billion as of December 31, 1995. In accordance with the terms of the Merger Agreement, at closing each outstanding share of BayBanks common stock, par value $2.00 per share (the "BayBanks Common Stock"), except for shares (i) held directly or indirectly by the Corporation, other than in a fiduciary capacity or as a result of debts previously contracted, or (ii) held by BayBanks as treasury stock, or (iii) shares held by stockholders as to which dissenters' rights have been exercised, will be converted into the right to receive 2.2 shares of the common stock of the Corporation, par value $2.25 per share. The Merger is intended to be a tax-free reorganization and is expected to be accounted for as a pooling of interests. Completion of the acquisition is subject to certain conditions, including approval of the holders of two-thirds of the shares of BayBanks common stock and of the holders of the majority of the Corporation's Common Stock, the approval of regulatory authorities, and other closing conditions customary in this type of transaction. The Merger Agreement is subject to termination in certain circumstances, including if the merger is not consummated by December 31, 1996. -3- Simultaneously with the execution of the Merger Agreement, on December 12, 1995, the Corporation and BayBanks entered into reciprocal stock option agreements (the "Stock Option Agreements") pursuant to which BayBanks granted the Corporation an option to purchase up to 3,907,120 shares of BayBanks common stock at a price of $83.75 per share and the Corporation granted to BayBanks an option to purchase up to 22,400,761 shares of the Corporation's Common Stock at a price of $47.50 per share (the "Options"), in each case equaling 19.9% of the outstanding shares of the respective granting company's stock. The Options are exercisable upon the occurrence of certain events described in the Stock Option Agreements. BUSINESS OF THE CORPORATION The Corporation's business is generally focused in the areas of personal banking, corporate banking and global banking. The Corporation's management is comprised of the Chairman's Office, which consists of Chairman, President and Chief Executive Officer Charles K. Gifford, Vice Chairman Edward A. O'Neal, and Vice Chairman, Chief Financial Officer and Treasurer William J. Shea, and a Corporate Working Committee. The Corporation's business is made up of core business units and corporate-wide support areas, each led by an executive with authority to operate and manage his or her respective area. These executives, along with the members of the Chairman's Office, comprise the Corporate Working Committee. These core business and corporate wide support areas work closely with one another and each is linked to one of the members of the Chairman's Office. Following the consummation of the BayBanks Merger, the combined company's principal bank will be called BayBank of Boston, N.A. The combined organization will conduct consumer banking business under the "BayBank" name and corporate and international business under the "Bank of Boston" name. William M. Crozier, Jr., Chairman and President of BayBanks, will become Chairman of the Board of Directors of the Corporation. Three other directors of BayBanks also will join the Corporation's Board. Charles K. Gifford, Chairman and Chief Executive Officer of the Corporation, will be President and Chief Executive Officer and will add the title of Chairman when Mr. Crozier retires in 1998. In order to provide flexibility to respond to future business needs and opportunities, the Corporation will be seeking approval from its stockholders at its 1996 Annual Meeting to increase the authorized shares of the Corporation's Common Stock from 200,000,000 shares to 300,000,000 shares and to change the par value of the Corporation's Common Stock from $2.25 to $1.50 per share. If approved, the additional authorized shares would be available for issuance by the Corporation in connection with possible investment opportunities, acquisitions of other companies or for other corporate purposes such as the raising of capital, the issuance of stock dividends, or the issuance of shares pursuant to the Corporation's dividend reinvestment plan, employee benefit plans and incentive compensation plans. As previously reported, in March 1995, the Board of Directors of the Corporation approved a $150 million repurchase program with respect to the Corporation's Common Stock. During 1995 and the first quarter of 1996, the Corporation completed this program with the repurchase of shares of the Corporation's Common Stock at a total cost of $148.1 million. All of the shares either have been or will be reissued in connection with various employee benefit programs and acquisitions. -4- For discussions of the Corporation's business activities, including its lending activities, its cross-border outstandings and the management of its off- balance sheet exposure, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 through 44 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which discussions are incorporated herein by reference. Activities in which the Corporation and its subsidiaries are presently engaged or which they may undertake in the future are subject to certain statutory and regulatory restrictions. Banks and bank holding companies are extensively regulated under both federal and state law. There are various legal limitations upon the extent to which bank subsidiaries of the Corporation can finance or otherwise supply funds to the Corporation or certain of its affiliates. See "Supervision and Regulation." For financial information on the Corporation's revenue, income and average assets attributable to its domestic and international operations, see "Segment Information" which appears in Note 24 to the Financial Statements and "Cross- Border Outstandings" and "Emerging Markets Countries," which appear on pages 35 through 38 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which information is hereby incorporated by reference. COMPETITION AND INDUSTRY CONSOLIDATION The Corporation's subsidiaries compete with other major financial institutions, including commercial banks, investment banks, mutual savings banks, savings and loan associations, credit unions, consumer finance companies, money market funds and other nonbank institutions, such as insurance companies, major retailers, brokerage firms, and investment companies in New England, throughout the United States, and internationally. Principal methods of competing effectively in the financial services industry are to improve customer service through the quality and range of services available, to improve efficiencies and to price services competitively. One outgrowth of the competitive environment discussed above has been significant consolidation within the financial services industry both on a national and regional level. The Corporation engages on an ongoing basis in reviewing and discussing strategic initiatives focused on leveraging its core competencies over attractive markets, including the expansion of its domestic personal banking and global banking businesses, increasing the capital markets activities of its corporate banking business, the divestiture of non-core business units and the formation of strategic alliances. Consistent with this strategy, in 1995 the Corporation engaged in the following transactions in addition to the BayBanks acquisition: On October 11, 1995, the Corporation announced a definitive agreement to acquire The Boston Bancorp ("Bancorp"), the holding company of South Boston Savings Bank, a Massachusetts chartered savings bank with approximately $1.3 billion in deposits at October 31, 1995. The transaction will be a tax free exchange of common stock and the purchase price is currently estimated at approximately $230 million. The transaction, which will be accounted for as a purchase, is currently anticipated to close in the middle of 1996, subject to the approval by federal and state bank regulators and the stockholders of Bancorp. -5- 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. Ganis specializes in collateralized lending for recreational vehicle and boats and had approximately $540 million in consumer loans outstanding at December 31, 1995. In July 1995, Fidelity Acceptance Corporation, the Corporation's national consumer finance company, completed the acquisition of approximately $110 million in consumer loans and assumed 46 branches of Century Acceptance Corporation, a national consumer finance company based in Kansas City, Missouri. Effective in the fourth quarter of 1995, the Corporation formed 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 that is 50% owned by each party. On March 15, 1996 the Corporation announced that it had closed its previously announced transaction relating to the sale of its mortgage banking business. On December 11, 1995, two equity investment firms, Thomas H. Lee Company ("Lee") and Madison Dearborn Partners ("Madison"), entered into an agreement to acquire the Corporation's mortgage banking subsidiary, BancBoston Mortgage Corporation ("BBMC") with the Corporation retaining a 45% interest. The new independent mortgage company, named HomeSide, Inc., will be positioned to compete more effectively in a consolidating mortgage banking industry. On March 4, 1996 HomeSide, Inc. signed a definitive agreement with Barnett Banks, Inc. relating to the purchase of Barnett Mortgage Company. This transaction is expected to close in the 2nd quarter of 1996. Under the agreement relating to the sale of BBMC, the Corporation agreed to receive a fixed price of $225 million and maintain a hedging program designed to protect the enterprise value of BBMC. On March 15, 1996, this transaction closed and the Corporation realized a net gain after taxes of approximately $40 million. An additional after-tax gain of approximately $30 million is expected to be reported in the second quarter of 1996. These gains are expected to be substantially offset by an after-tax net hedging loss of approximately $70 million to be recorded in the first quarter of 1996. These losses arise from hedge contracts purchased by the Corporation which are designed to protect the value of the Corporation's mortgage servicing assets and the value of its investment in BBMC. These values are affected by the level of prepayments made by mortgage holders resulting from changes in expected mortgage rates. The value of these contracts fluctuates inversely with the value of the mortgage servicing assets. Due to the sharp increase in long-term interest rates in the first quarter of 1996, the value of these contracts has declined. Concurrently, the value of the mortgage servicing assets and the amount of gain recognized and to be recognized by the Corporation on the disposition of BBMC has increased. This is caused by the fixed price sale nature of this transaction and the fact that the Corporation's investment in BBMC has declined due to the hedging results. Early in the first quarter of 1995, the Corporation completed the sale of two of its affiliate banks, Bank of Vermont and Casco Northern Bank, N.A., resulting in a pre-tax gain of approximately $75 million, or $30 million net of tax. In October 1995, the Corporation sold its corporate trust business to State Street Bank and Trust Company, resulting in a net pre-tax gain of $20 million, or $12 million net of tax. The Corporation intends to continue to explore strategic opportunities as they arise in order to expand its businesses in its selected markets and improve service to its customers. In 1994, federal legislation was enacted which permits certain interstate banking transactions. It is anticipated that this legislation may facilitate consolidation within financial institutions that currently have separate operations in two or more states and in the financial services industry. See "Supervision and Regulation" for a discussion of the impact of this and other legislation upon the Corporation and its subsidiaries. SUPERVISION AND REGULATION The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies in the states and countries where the Corporation and its subsidiaries operate. The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are often intended by the regulators primarily for the protection -6- of depositors or are aimed at carrying out broad public policy goals rather than for the protection of security holders. Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Corporation and its subsidiaries are subject are discussed below along with certain regulatory matters concerning the Corporation and its bank subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Corporation and its subsidiaries. The Corporation The Corporation, as a bank holding company under the Bank Holding Company Act of 1956, as amended, (the "BHCA"), is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and is regulated under the provisions of the BHCA. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Under the BHCA, the Corporation is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing or controlling banks or furnishing services to, or acquiring premises for, its affiliated banks. The Corporation may, however, engage in, and own voting shares of companies engaging in certain activities determined by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or to managing or controlling banks "as to be a proper incident thereto." The location of such "nonbank" subsidiaries of the Corporation is not restricted geographically under the BHCA. The Corporation is required by the BHCA to file with the Federal Reserve Board periodic reports and such additional reports as the Federal Reserve Board may require. The Federal Reserve Bank of Boston (the "Federal Reserve") performs examinations of the Corporation and certain of its subsidiaries. Since the Corporation is also a bank holding company under the laws of Massachusetts, the Commissioner of Banks for The Commonwealth of Massachusetts (the "Massachusetts Commissioner") has authority to require certain reports from the Corporation from time to time and to examine the Corporation and each of its subsidiaries other than national banking associations. Prior approval of the Massachusetts Board of Bank Incorporation (the "BBI") also may be required before the Corporation may acquire any additional commercial banks located in Massachusetts. Acquisitions by the Corporation of non-Massachusetts banks or bank holding companies may be subject to the prior approval by both the Massachusetts and the applicable state or federal banking regulators. Massachusetts has an interstate bank acquisition law which permits banking organizations outside Massachusetts to acquire Massachusetts banking organizations if the state law of the acquirer permits acquisitions of banking organizations in that state by Massachusetts-based banking organizations. Legislation has been proposed in Massachusetts to provide for an early opt-in to the federal interstate banking legislation. See "Legislation" below with respect to the federal interstate banking legislation enacted in 1994. -7- Massachusetts has a business combinations law which provides that if any acquirer buys 5% or more of a target company's stock without the prior approval of the target company's board of directors, it generally may not (i) complete the acquisition through a merger, (ii) pledge or sell any assets of the target company, or (iii) engage in other self-dealing transactions with the target company for a period of three years. The prior board approval requirement does not apply if the acquirer buys at least 90% of the target company's outstanding stock in the transaction in which it crosses the 5% threshold or if the acquirer, after crossing the threshold, obtains the approval of the target company's board of directors and two-thirds of the target company's stock held by persons other than the acquirer. This legislation automatically applies to Massachusetts corporations, including the Corporation, which did not elect to "opt out" of the statute. Massachusetts law also provides for classified boards of directors for most public companies incorporated in Massachusetts, unless the company elected to "opt out" of the law. As a result of this law, the Corporation's Board of Directors is divided into three classes of Directors and the three-year terms of the classes are staggered. Other Massachusetts legislation exists which is intended to provide limited anti-takeover protection to certain Massachusetts corporations by preventing an acquirer of certain percentages of such corporation's stock from obtaining voting rights in such stock unless the corporation's other stockholders authorize such voting rights. The legislation automatically applies to certain Massachusetts corporations which have not elected to "opt out" of the statute. The Corporation, by vote of its Board of Directors, has "opted out" of the statute's coverage. In June 1990, the Board of Directors of the Corporation adopted a stockholder rights agreement (the "Rights Agreement") providing for a dividend of one preferred stock purchase right for each outstanding share of common stock of the Corporation (the "Rights"). Under certain circumstances, the Rights would enable stockholders to purchase common stock of the Corporation or of an acquiring Corporation at a substantial discount. The dividend was distributed on July 12, 1990 to stockholders of record on that date. Holders of shares of the Corporation's common stock issued subsequent to that date receive the Rights with their shares. The Rights trade automatically with shares of the Corporation's common stock and become exercisable only under certain circumstances. The purpose of the Rights Agreement is to encourage potential acquirers to negotiate with the Corporation's Board of Directors prior to attempting a takeover and to provide the Board with leverage in negotiating on behalf of all stockholders the terms of any proposed takeover. The Rights may have certain anti-takeover effects. The Rights should not interfere, however, with any merger or other business combination approved by the Board of Directors. The Rights Agreement was amended on December 12, 1995, to exclude the BayBanks merger agreement, the stock option agreement granted by the Corporation to BayBanks in connection with the merger agreement, and all transactions contemplated thereby, from the scope of the Rights Agreement. For a further discussion of the Corporation's Rights Agreement, see the description of the Rights set forth in the Corporation's registration statement on Form 8-A relating to the Rights (including the Rights Agreement, dated as of June 28, 1990, between the Corporation and FNBB, as Rights Agent, which is attached as an exhibit to the Form 8-A) and the amendment thereto, which are incorporated herein by reference. -8- The Corporation's Bank Subsidiaries General The Corporation's bank subsidiaries that are national banks are subject to the supervision of, and are regularly examined by the Office of the Comptroller of the Currency (the "OCC"). The Corporation's state-chartered bank subsidiary is subject to the supervision of, and is regularly examined by, the Federal Deposit Insurance Corporation (the "FDIC") as well as by its state bank regulator. The Corporation's subsidiary banks' domestic deposits are insured by the Bank Insurance Fund of the FDIC to the extent allowed by law and, accordingly, the banks are subject to the regulations of the FDIC. As members of the Federal Reserve System, the nationally chartered banks are also subject to regulation by the Federal Reserve Board. Hospital Trust, as a member of the Federal Home Loan Bank of Boston, is also subject to the regulations of the Federal Housing Finance Board. FIRREA Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled bank or (ii) any assistance provided by the FDIC to a commonly controlled bank in danger of default. The term "default" is defined as the appointment of a conservator or receiver for such bank and "in danger of default" as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In addition, FIRREA broadened the enforcement powers of the federal banking agencies, including the power to impose fines and penalties over all financial institutions. Further, under FIRREA the failure to meet capital guidelines could subject a financial institution to a variety of regulatory actions, including the termination of deposit insurance by the FDIC. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") also provided for expanded regulation of financial institutions. Under FDICIA, banks are placed in one of five capital categories, ranging from "well- capitalized" to "critically undercapitalized," for which the federal banking agencies have established specific capital ratio levels. Pursuant to the agencies' regulations, an institution is considered "well capitalized" if it has a total risk-based capital ratio of at least 10%, a tier 1 risk-based capital ratio of at least 6%, a leverage capital ratio of at least 5% and is not subject to a cease and desist order, formal agreement, capital directive, or prompt corrective action directive that requires it to achieve or maintain a higher level of capital. At December 31, 1995, all of the Corporation's banking subsidiaries met the requirements of the "well capitalized" category. The capital categories of the Corporation's bank subsidiaries are determined solely for purposes of applying FDICIA's provisions, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's bank subsidiaries. Other Regulatory Restrictions The FDIC's deposit insurance assessments are based on a risk-based system. The risk-based system places a bank in one of nine risk categories, principally on the basis of its capital level and an evaluation of the bank's risk to the Bank Insurance Fund, and bases -9- premiums on the probability of loss to the FDIC with respect to each individual bank. During 1995, following the attainment of the BIF reserve ratio required by FDICIA, the FDIC reduced the assessment premiums for the BIF risk-based system to provide that the premiums assessable per $100 of insured deposits were to range from $0 to $.27. Under the reduced assessment rate schedule, institutions with the best risk assessment ratings will only have to pay the statutory minimum assessment of $2,000 per year. The Corporation's domestic subsidiary banks and the subsidiaries of such banks are subject to a large number of other regulatory restrictions, including certain restrictions upon: (i) any extensions of credit by such banks to, from or for the benefit of the Corporation and the Corporation's nonbank affiliates (collectively with the Corporation, the "Affiliates"), (ii) the purchase of assets or services from or the sale of assets or the provision of services to Affiliates, (iii) the issuance of a guarantee, acceptance or letter of credit on behalf of or for the benefit of Affiliates, (iv) the purchase of securities of which an Affiliate is a principal underwriter during the existence of the underwriting and (v) investments in stock or other securities issued by Affiliates or acceptance thereof as collateral for an extension of credit. The Corporation and all of its subsidiaries, including FNBB, are also subject to certain restrictions with respect to engaging in the issue, flotation, underwriting, public sale or distribution of certain types of securities. In addition, under both the BHCA and regulations which have been issued by the Federal Reserve Board, the Corporation and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of any property or the furnishing of any service. In operations in other countries, the Corporation and FNBB are also subject to restrictions imposed by the laws and banking authorities of such countries. The Corporation's bank subsidiaries are also required to maintain cash reserves against deposits and are subject to restrictions, among others, upon (i) the nature and amount of loans which they may make to a borrower; (ii) the nature and amount of securities in which they may invest; (iii) the amount which may be invested in bank premises; (iv) the geographic location of their branches; and (v) the nature and extent to which they can borrow money. Dividends The payment of dividends by the Corporation is determined by the Board of Directors based on the Corporation's liquidity, asset quality profile, capital adequacy, and recent earnings history, as well as economic conditions and other factors, including applicable government regulations and policies and the amount of dividends payable to the Corporation by its subsidiaries. In 1995, the aggregate dividends declared by the Corporation on its common and preferred stock were approximately $179 million. For each of the first two quarters of 1995, a dividend of $.27 per share was declared and paid on the Corporation's common stock. In each of the last two quarters of 1995, the Corporation declared and paid a dividend on its common stock of $.37 per share. The Corporation is a legal entity separate and distinct from its subsidiary banks and its other nonbank subsidiaries. The Corporation's revenues (on a parent company only basis) result primarily from interest and dividends paid to the Corporation by its subsidiaries. The right of the Corporation, and consequently the right of creditors and stockholders of the Corporation, to participate in any distribution of the assets or earnings of any subsidiary through the payment -10- of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries), except to the extent that claims of the Corporation in its capacity as a creditor may be recognized. It is the policy of the OCC and the Federal Reserve Board that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if after paying such dividends the bank or bank holding company would remain adequately capitalized. Federal banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. In addition, it is the position of the Federal Reserve Board that a bank holding company is expected to act as a source of financial strength to its subsidiary banks. Various federal and state laws, regulations and policies limit the ability of the Corporation's subsidiaries to pay dividends to the Corporation. Federal banking law requires the approval of the OCC if the aggregate total of the dividends declared by any of the Corporation's national bank subsidiaries in any calendar year will exceed the bank's net profits, as defined by applicable regulation, for that year combined with retained net profits for the preceding two years. Also, state law requires the approval of state bank regulatory authorities if the dividends declared by state banks exceed similar prescribed limits. In 1995, an aggregate of approximately $364 million of dividends were declared and paid by the Corporation's subsidiaries. Included in the amount of dividends paid to the Corporation by its subsidiaries was $205 million received from one of the Corporation's subsidiary bank holding companies in connection with its sale of Casco Northern Bank, N.A. The payment of any future dividends by the Corporation's subsidiaries will be determined based on a number of factors, including the subsidiary's liquidity, asset quality profile, capital adequacy and recent earnings history. Information concerning the Corporation and its bank subsidiaries with respect to dividends is set forth in Note 13 of the Notes to Financial Statements in the Corporation's 1995 Annual Report to Stockholders which is included in Exhibit 13 hereto and which discussion is incorporated herein by reference. See the related discussions set forth below in "Capital" and "Legislation." Capital Information concerning the Corporation and its bank subsidiaries with respect to capital is set forth under the caption "Capital Management" in the Corporation's 1995 Annual Report to Stockholders on pages 42 and 43, which pages are included in Exhibit 13 hereto and which discussion is incorporated herein by reference. See also "Legislation" below and "Dividends" above. Legislation In addition to extensive existing government regulation, laws and regulations in the states and countries where the Corporation and its subsidiaries do business can change in unpredictable ways, often with significant effects on the way in which financial institutions may conduct business. The enactment of banking legislation such as FIRREA and FDICIA has affected the banking industry by, among other things, broadening the powers of the federal banking agencies in a number of areas. Other legislation which has been enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and non-banking institutions, including insurance companies, brokerage firms, mutual funds, investment banks and major retailers. -11- In 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Act") was enacted. The Interstate Act's provisions, among other things: (i) permit bank holding companies to acquire control of banks in any state beginning September 28, 1995, subject to (a) specified maximum national and state deposit concentration limits; (b) any applicable state law provisions requiring that the acquired bank has to have been in existence for a specified period of up to 5 years; (c) any applicable nondiscriminatory state provisions that make an acquisition of a bank contingent upon a requirement to hold a portion of such bank's assets available for call by a state sponsored housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by banks in different states, including branching through bank mergers, beginning June 1, 1997, subject to the provisions noted in (i) and to any state laws that opt in as of an earlier date or opt out of the provision entirely; (iii) authorize states to enact legislation permitting interstate de novo branching; and (iv) provide for certain additional limitations on foreign bank activities. The full impact of the Interstate Act will not be completely known until the enactment and implementation by the various federal banking agencies of the underlying regulations and actions required by the Act. However, it is anticipated that the Interstate Act may facilitate consolidation within financial institutions that currently have separate operations in two or more states and in the financial services industry. Additional legislation which is considered from time to time could affect the business of the Corporation. See also "Supervision and Regulation -- the Corporation" discussed above. Regulatory Matters As previously reported, in January 1994, the Securities and Exchange Commission (the "Commission") commenced an administrative proceeding against the Corporation related to the Commission's claim that the Corporation's second quarter 1989 Form 10-Q did not disclose known trends or uncertainties with respect to the Corporation's credit portfolio, and specifically, its domestic commercial real estate portfolio. The Corporation reported a significant loss in the third quarter of 1989 as a result of adding to its reserve for credit losses, primarily due to deterioration in the credit quality of its domestic commercial real estate portfolio. A hearing before an administrative law judge was conducted in May 1994 and the judge issued a decision finding for the Commission on December 22, 1995. The decision included an order that prohibits the Corporation from committing or causing any violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The order became effective on February 26, 1996. The decision and order will not result in any monetary penalties to the Corporation. GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS In 1995, U.S. economic growth slowed to a more moderate but sustainable pace and, for the fifth consecutive year, inflation rose by 3 percent or less. Both developments reflect the Federal Reserve's 'pre-emptive' interest rate increases of 1994 and early 1995. Economic expansion also continued in New England, but at an even more modest pace than for the nation as a whole. Since the state of the regional economy reflects structural as well as cyclical forces, it is expected that New England will continue to lag the nation in job growth, as it has since the late 1980's. -12- The Corporation's earnings and business are also affected by the policies of various government and regulatory authorities in New England and throughout the United States, as well as foreign governments and international agencies, including, in the United States, the Federal Reserve Board. Important functions of the Federal Reserve Board, in addition to those enumerated under "Supervision and Regulation" above, are to regulate the supply of money and of bank credit, to deal with general economic conditions within the United States and to be responsive to international economic conditions. From time to time, the Federal Reserve Board and the central banks of foreign countries have taken specific steps to effect changes in the value of the United States dollar in foreign currency markets as well as to control domestic inflation and to control the country's money supply. The instruments of monetary policy employed by the Federal Reserve Board for these purposes (including interest rates and the level of cash reserves banks are required to maintain against deposits) influence, in various ways the interest rates paid on interest bearing liabilities and the interest received on earning assets, as well as the overall level of bank loans, investments and deposits. Inflation has generally had a minimal impact on the Corporation because substantially all of its assets and liabilities are of a monetary nature and a large portion of its operations are based in the United States, where inflation has been low. Prospective domestic and international economic and political conditions and the policies of the Federal Reserve Board, as well as other domestic and international regulatory authorities, may effect the future business and earnings of the Corporation. The Corporation will continue to monitor the economic situation in those countries in which the Corporation has local operations or cross-border exposure, particularly in Argentina and Brazil. Additional information with respect to the countries where the Corporation has local operations or cross- border exposure is included in "Cross-Border Outstandings" and "Emerging Markets Countries" on pages 35 through 38 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto and which discussions are incorporated herein by reference. This section should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" contained in the Corporation's 1995 Annual Report to Stockholders on pages 19 through 44, which pages are included in Exhibit 13 hereto and which discussion is incorporated herein by reference. -13- STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The information set forth below is being provided in accordance with the Securities Exchange Act of 1934, Industry Guide 3. Average Balances and Interest Rates The information required by this item is presented on pages 45 through 47 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. Change in Net Interest Revenue-Volume and Rate Analysis: 1995 compared with 1994, and 1994 compared with 1993 The information required by this item is presented on page 48 of the Corporation's 1995 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. Securities The following table sets forth the carrying values of securities held to maturity on the dates indicated:
December 31 1995 1994 1993 (In millions) U.S. Treasury $ 4 $ 12 $ 317 U.S. government agencies and corporations - Mortgage-backed securities 523 1,449 1,046 States and political subdivisions 5 30 29 Foreign debt securities 11 123 109 Other equity securities 70 89 68 ----- ----- ----- $ 613 $ 1,703 $ 1,569 ===== ===== =====
The following table sets forth the carrying values of securities available for sale on the dates indicated:
December 31 1995 1994 1993 (In millions) U.S. Treasury $ 665 $ 1,487 $ 110 U.S. government agencies and corporations - Mortgage-backed securities 3,037 766 498 States and political subdivisions 21 Foreign debt securities 685 384 490 Other debt securities 290 142 150 Marketable equity securities 152 72 74 Other equity securities 164 146 116 ----- ----- ----- $ 5,014 $ 2,997 $ 1,438 ===== ===== =====
-14- The following tables set forth the relative maturities and weighted average interest rates of securities available for sale and held to maturity at December 31, 1995, excluding equity securities. Certain securities, such as mortgage- backed securities, may not become due at a single maturity date. Such securities have been classified within the category that represents the due dates for the majority of the instrument. Rates for states and political subdivisions are stated on a fully taxable equivalent basis assuming a 35% federal income tax rate, adjusted for applicable state and local income taxes net of related federal tax benefit.
After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years Total Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate AVAILABLE FOR SALE (Dollars in millions) U.S. Treasury $ 652 6.3% $ 10 6.7% $ 3 7.1% $ 665 6.3% U.S. government agencies and corporations - Mortgage-backed securities 29 5.4 944 7.0 790 7.0 $ 1,274 6.3% 3,037 6.7 States and political subdivisions 8 3.6 4 11.3 9 9.3 21 7.7 Foreign debt securities 233 8.1 337 13.7 100 12.8 15 11.1 685 11.6 Other debt securities 31 12.3 67 13.3 187 10.3 5 9.9 290 11.2 --- ----- ----- ----- ----- Total carrying value $ 953 6.9% $ 1,362 9.0% $ 1,089 8.1% $ 1,294 6.3% $ 4,698 7.6% === ===== ===== ===== ===== After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years Total Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate HELD TO MATURITY (Dollars in millions) U.S. Treasury $ 4 5.4% $ 4 5.4% U.S. government agencies and corporations - Mortgage-backed securities $ 110 6.5% $ 197 7.1% $ 216 6.1% 523 6.5 States and political subdivisions 5 3.4 5 3.4 Foreign debt securities 2 6.9 5 5.6 3 6.8 1 7.7 11 6.3 --- ----- ----- ----- ----- Total carrying value $ 11 4.9% $ 115 6.4% $ 200 7.1% $ 217 6.1% $ 543 6.5% === ===== ===== ===== =====
Loans and Leases A portion of the information required by this item is presented on page 29 of the Corporation's 1995 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. Maturities and Sensitivities of Loans to Changes in Interest Rates The following table presents the maturities and interest rate sensitivity, based on original contractual terms, of the Corporation's loans at December 31, 1995, exclusive of domestic office loans secured by 1-4 family residential properties, domestic office loans to individuals and lease financing: -15-
After One But Within Within After December 31, 1995 One Year Five Five Total (In millions) Years Years Commercial, industrial and financial $ 5,024 $ 4,171 $ 2,226 $11,421 Real estate: Construction 211 117 8 336 Other commercial 1,029 1,142 99 2,270 Overseas offices 7,246 905 190 8,341 ------ ----- ----- ------- $ 13,510 $ 6,335 $ 2,523 $22,368 ------ ----- ----- ------- Loans with predetermined interest rates $ 3,215 $ 1,720 $ 342 $ 5,277 Loans with floating interest rates 10,295 4,615 2,181 17,091 ------ ----- ----- ------- $ 13,510 $ 6,335 $ 2,523 $22,368 ====== ===== ===== =======
The Corporation does not have an automatic renewal policy for maturing loans. Rather, loans are renewed at the maturity date only at the request of those customers who are deemed to be creditworthy by the Corporation. Additionally, the Corporation reviews such requests in substantially the same manner as applications by new customers for extensions of credit. The maturity dates and interest terms of renewed loans are based, in part, upon the needs of the individual customer and the Corporation's credit review and evaluation of current and future economic conditions. Since these factors have varied considerably, and will most likely continue to do so, the Corporation believes it is impracticable to estimate the amount of loans in the portfolio which may be renewed in the future. Nonaccrual Loans and Leases The majority of the information required by this item is presented on pages 31 and 32 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. The following table presents a five-year analysis of the Corporation's loans and leases that were over ninety days past due and remained on accrual status:
DECEMBER 31 - --------------------------------------------------------------------------------- (In millions) 1995 1994 1993 1992 1991 Loans and leases over ninety days past $ 16 $ 13 $ 7 $ 6 $ 3 due and on accrual status.............. - ---------------------------------------------------------------------------------
Renegotiated Loans Loans are renegotiated when the Corporation determines that it will ultimately receive greater economic value by revising the terms than through foreclosure, liquidation or bankruptcy. Candidates for renegotiation must meet specific guidelines and undergo extensive due diligence reviews. Once a renegotiation takes place, the loan is subject to the accounting and disclosure rules prescribed by SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Renegotiated loans at the end of each of the last five years were as follows:
December 31 (Dollars in millions) 1995 1994 1993 1992 1991 Renegotiated loans .................. $ 27 $ 68 $ 225 $ 401 $ 353 ===== ===== ===== ===== =====
-16- Cross-Border Outstandings The information required by this item is presented on pages 35 through 37 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. Reserve for Credit Losses: Allocation of Reserve for Credit Losses and Analysis of Reserve for Credit Losses The majority of the information required by this item is presented on pages 32 through 34 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. Allocation of Reserve for Credit Losses The following table presents the allocation of the reserve for credit losses by loan and lease financing category, with the excess between the total reserve and the amounts specifically allocated to each loan category identified as ''unallocated.'' The unallocated reserve is part of the general reserve of the Corporation and, as such, is available for both Domestic and International credit losses. The percentage of loans outstanding in each category to total loans is presented on page 31 of the Corporation's 1995 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference.
(dollars in millions) DECEMBER 31 1995 1994 1993 1992 PERCENT PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL UNITED STATES Commercial, industrial and financial . $182 24.7% $253 37.2% $246 31.9% $273 29.5% Commercial real estate, including construction......................... 95 12.9 136 20.0 234 30.3 320 34.7 Consumer related loans Secured by 1-4 family residential properties............. 20 2.7 20 3.0 25 3.2 27 2.9 Other................................ 98 13.3 74 10.9 61 8.0 60 6.5 Lease financing......................... 22 3.0 21 3.0 18 2.4 4 .5 ---- ----- ---- ----- ---- ----- ---- ----- 417 56.6 504 74.1 584 75.8 684 74.1 INTERNATIONAL.......................... 168 22.8 85 12.5 86 11.2 120 13.0 ---- ----- ---- ----- ---- ----- ---- ----- 585 79.4 589 86.6 670 87.0 804 87.1 Unallocated............................. 151 20.6 91 13.4 100 13.0 119 12.9 ---- ----- ---- ----- ---- ----- ---- ----- $736 100.0% $680 100.0% $770 100.0% $923 100.0% ==== ===== ==== ===== ==== ===== ==== ===== (dollars in millions) DECEMBER 31 1991 Percent Amount of Total United States Commercial, industrial and financial . $ 429 40.9% Commercial real estate, including construction......................... 298 28.3 Consumer related loans Secured by 1-4 family residential properties............. 21 2.0 Other................................ 79 7.5 Lease financing......................... 5 .5 ------ ----- 832 79.2 International.......................... 102 9.7 ------ ----- 934 88.9 Unallocated............................. 117 11.1 ------ ----- $1,051 100.0% ====== =====
The above allocation reflects provisions for credit losses for International operations for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 of $60 million, $25 million, $26 million, $12 million and $(1) million, respectively. International reserve transfers (to)from unallocated reserves and Domestic operations were $67 million, $4 million, $0, $19 million and $(3) million, respectively, for the same periods. -17- Deposits A portion of the information required by this item is presented on pages 45 through 47 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is incorporated herein by reference. The aggregate amount of deposits by foreign depositors in domestic offices averaged $1,131 million in 1995, $863 million in 1994, and $876 million in 1993. The following table presents the maturities of time certificates of deposit and other time deposits issued by domestic offices in denominations of $100,000 or more, at December 31, 1995:
Certificates Time of Deposit Deposits Total (In millions) Maturing within three months $ 846 $ 22 $ 868 After three but within six months 167 8 175 After six but within twelve months 140 6 146 After twelve months 825 61 886 ----- -- ----- $ 1,978 $ 97 $ 2,075 ===== == =====
The majority of foreign office deposits are in denominations of $100,000 or more. Return on Equity and Assets The information required by this item is presented on page 18 of the Corporation's 1995 Annual Report to Stockholders, which page is included in Exhibit 13 hereto, and such information is incorporated herein by reference. -18- Short-Term Borrowings The following table summarizes the Corporation's short-term borrowings for the three years ended December 31, 1995:
Maximum Average Average Weighted Amount Amount Interest Balance Average Outstanding Outstanding Rate (Dollars in millions) At end of Interest During the During the During the Category of Aggregate Short-Term Borrowings Period Rate (1) Period Period Period For the Year Ended December 31, 1995 Federal funds purchased (2) $ 1,675 5.22% $ 1,675 $ 985 5.89% Term federal funds purchased (2) 869 5.80 2,058 1,380 5.13 Securities sold under agreements to repurchase (3) 1,226 6.38 1,851 1,334 8.01 Demand notes issued to the U.S. Treasury (5) 304 4.73 1,051 383 5.62 All other (6) 2,500 13.40 3,474 2,921 17.65 For the Year Ended December 31, 1994 Federal funds purchased (2) $ 369 5.45% $ 1,131 $ 688 4.29% Term federal funds purchased (2) 765 5.77 2,504 1,793 3.62 Securities sold under agreements to repurchase (3) 1,883 5.89 1,883 1,192 8.58 Demand notes issued to the U.S. Treasury (5) 389 4.69 1,060 324 3.97 All other (6) 2,733 18.44 3,697 2,895 17.36 For the Year Ended December 31, 1993 Federal funds purchased (2) $ 417 3.02% $ 783 $ 701 3.01% Term federal funds purchased (2) 2,150 3.36 2,325 1,284 3.34 Securities sold under agreements to repurchase (3) 799 6.72 1,002 832 4.38 Commercial paper (4) 35 15 3.59 Demand notes issued to the U.S. Treasury (5) 118 2.73 1,219 400 2.81 All other (6) 1,164 24.77 1,164 708 8.42
____________________________________________________________________________ (1) The weighted average interest rates at year-end are not necessarily indicative of the Corporation's normal borrowing rates since interest rates for certain categories of borrowing are subject to abnormal short-term movements. (2) Federal funds purchased are overnight transactions while term federal funds purchased have maturities in excess of one day. A large portion of federal funds purchased arise because of money market activity in federal funds for regional correspondent banks. (3) Securities sold under agreements to repurchase by domestic offices mature within one year and are collateralized by U.S. Treasury and U.S. government agencies and corporation securities. The majority of securities sold under agreements to repurchase by overseas offices in 1995, 1994 and 1993 related to Brazilian operations of FNBB for which various Brazilian government securities served as collateral. (4) Commercial paper represents unsecured obligations with maximum maturities of nine months. (5) Demand notes issued to the U.S. Treasury represent depository liabilities that are not subject to reserve requirements and bear interest at one-quarter of one percent below the weekly average federal funds effective interest rate as published by the Federal Reserve. (6) In 1995 and 1994, the majority of other short-term borrowings represent short-term bank notes issued by FNBB and secured and unsecured obligations of the Corporation's overseas branches and subsidiaries. In 1993, the majority of other short-term borrowings represent secured and unsecured obligations of the Corporation's overseas branches and subsidiaries. -19- Item 2. Properties. The head offices of the Corporation and FNBB are located in a 37-story building at 100 Federal Street, Boston, Massachusetts. In 1995, FNBB leased approximately 95% of the building's approximately 1.3 million square feet. FNBB's data processing and record keeping operations are located at Columbia Park in Boston. The Columbia Park facility, comprising approximately 425,000 square feet, and the land on which it is situated are owned by FNBB. In addition, FNBB leases operations facilities in Dedham and Canton, Massachusetts, which comprise approximately 180,000 square feet and 105,000 square feet, respectively. The headquarters for FNBB's operations in Argentina are located in a 12- story historic landmark building in the center of Buenos Aires. The building consists of approximately 256,000 square feet and is owned by FNBB. The headquarters for FNBB's operations in Brazil are in 3 interconnected buildings in the center of Sao Paulo. FNBB owns a total of 119,000 square feet in the three buildings and leases another 102,000 square feet. In addition, FNBB owns a 10-story, 99,000 square foot building in Sao Paulo where it has consolidated part of its Brazilian operations. Hospital Trust owns a 30-story building and a building adjacent thereto at One Hospital Trust Plaza, Providence, Rhode Island. Hospital Trust occupies approximately 40% of the complex's approximately 546,000 square feet. In addition, Hospital Trust maintains an operations center in East Providence, Rhode Island that also serves as the primary backup for FNBB's Columbia Park facility. The East Providence operations center, which consists of approximately 141,000 square feet, is owned by Hospital Trust. BKB Connecticut's headquarters are in Hartford, Connecticut, where it has offices at 31 Pratt Street and 100 Pearl Street. BKB Connecticut owns and occupies approximately 50,000 square feet at the Pratt Street location, and owns an undivided one-half interest in the Pearl Street location where it currently occupies approximately 54,000 square feet. BKB Connecticut also maintains regional offices in Connecticut, the largest of which is in Waterbury and comprises approximately 157,000 square feet of owned space in three interconnected buildings. None of these properties is subject to any material encumbrance. The Corporation's subsidiaries also own or lease numerous other premises used in their domestic and foreign operations. Item 3. Legal Proceedings. The Corporation and its subsidiaries in 1995 were or currently are parties to a number of legal proceedings that have arisen in connection with the normal course of business activities of the Corporation, FNBB and the Corporation's other subsidiaries, including the following matters: Arnold/Society for Savings Bancorp, Inc. As previously reported, in March 1993, a complaint was filed in Delaware Chancery Court against the Corporation, Society for Savings Bancorp, Inc. ("Society") and certain Society directors. The action was brought by a Society stockholder, individually and as a class action on behalf of all Society stockholders of record on the date the Corporation proposed acquisition of Society 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, -20- the Corporation acquired Society. 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. Following the entry of an Order of Final Judgment by the Chancery Court, the plaintiff appealed the June 15, 1995 opinion to the Delaware Supreme Court. The matter was argued before the Delaware Supreme Court on February 21, 1996 and remains under advisement. Society Class Action. As previously reported, in 1990 a class action complaint was filed in U.S. District Court for the District of Connecticut against Society, two of its then senior officers and one former officer. The complaint, as subsequently amended, alleges that Society's financial reports for fiscal years 1988, 1989, and the first half of 1990 contained material misstatements or omissions concerning its real estate loan portfolio and other matters, in violation of Connecticut common law and of Sections 10(b) and 20 of the Securities Exchange Act of 1934. The action was brought by a Society shareholder, individually and as a class action on behalf of purchasers of Society's stock from January 19, 1989 through November 30, 1990 and seeks damages in an unspecified amount. Society and the defendant officers have denied the allegations of the amended complaint and on July 14, 1995 filed a motion for summary judgment. The plaintiff has filed its opposition to summary judgment, but the court has not yet rendered a decision. Lender Liability Litigation. The Corporation's subsidiaries, in the normal course of their business in collecting outstanding obligations, are named as defendants in complaints or counterclaims filed in various jurisdictions by borrowers or others who allege that lending practices by such subsidiaries have damaged the borrowers or others. Such claims, commonly referred to as lender liability claims, frequently request not only relief from repayment of the debt obligation, but also recovery of actual, consequential, and punitive damages. Fidelity Acceptance Corporation litigation. Fidelity Acceptance Corporation ("FAC"), an indirect subsidiary of the Corporation that is engaged in consumer lending, and/or certain of FAC's subsidiaries (collectively referred to as FAC), are defendants in class action and other lawsuits brought in Illinois, Alabama, Mississippi, Georgia and Missouri by FAC borrowers. These lawsuits, which include claims for punitive damages, challenge various of FAC's lending and insurance practices, including, among others, the placing of collateral protection insurance, calculating the amount of credit life insurance, and the determination of applicable interest rates. Management, after reviewing all actions and proceedings pending against the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings should not be material to the Corporation's results of operations or financial condition. -21- Item 3A. Executive Officers of the Corporation. Information with respect to the executive officers of the Corporation, as of March 1, 1996, is set forth below. Executive Officers are generally elected annually by the Board of Directors and hold office until the following year and until their successors are chosen and qualified, unless they sooner resign, retire, die or are removed. Except where otherwise noted, the positions listed for the officers are for both the Corporation and FNBB.
Executive Officer ----------------- Name Age Current Position Since ---- --- ---------------- ----- Charles K. Gifford 53 Chairman of the Board of Directors, Chief Executive Officer and 1987 President Edward A. O'Neal 51 Vice Chairman 1992 William J. Shea 48 Vice Chairman, Chief Financial Officer & Treasurer of the 1993 Corporation and Vice Chairman and Chief Financial Officer of FNBB Guilliaem Aertsen IV 48 Group Executive, Global Capital Markets 1993 Melville E. Blake III 41 Executive Director, Strategic Planning 1993 Robert L. Champion, Jr. 51 Executive Director, Corporate Administrative Services 1993 Barbara F. Clark 49 Group Executive, Media & Communications 1993 Edward P. Collins 49 Group Executive, Asset Based Finance 1993 Helen G. Drinan 48 Executive Director, Human Resources 1993 Robert E. Gallery 44 Regional Manager, Europe 1993 Susan P. Haney 48 Group Executive, The Private Bank 1993 Paul F. Hogan 50 Executive Vice President, Corporate Relationship Banking 1993 Thomas J. Hollister 41 Group Executive, Retail & Small Business 1993 Ira A. Jackson 47 Executive Director, External Affairs 1987 Robert T. Jefferson 48 Comptroller 1993 Michael R. Lezenski 48 Executive Director, Technology and System Services, Chief 1993 Technology Officer Mark A. MacLennan 42 Group Executive, Global Financial Services 1993 Peter J. Manning 57 Executive Director, Mergers & Acquisitions 1990 John L. Mastromarino 41 Executive Director, Risk Management December 1995 David E. McKown 58 Group Executive, Diversified Finance & Real Estate 1993 Henrique de Campos Meirelles 50 Regional Manager, Brazil 1994 Joanne E. Nuzzo 53 Executive Director, Banking Operations 1994 William H. Ott 43 Group Executive, Consumer Lending Group 1993 Joe K. Pickett 50 Group Executive, Mortgage Banking 1993 Richard A. Remis 41 Group Executive, New England Corporate Banking 1993 Manuel R. Sacerdote 53 Regional Manager, Southern Cone (Argentina, Uruguay, Chile) 1994 Gary A. Spiess 55 General Counsel and Clerk of the Corporation and General Counsel, 1987 Secretary & Cashier of FNBB Susannah M. Swihart 40 Group Executive, Chairman's Office 1993 Eliot N. Vestner, Jr. 60 Executive Counsel 1987 Bradford H. Warner 44 Group Executive, Global Treasury 1989
-22- All of the foregoing individuals have been officers of the Corporation or one of its subsidiaries for the past five years except for Messrs. Blake, Gallery, Mastromarino, O'Neal, Ott and Shea. Mr. Gallery came to the Corporation in 1991 from The First National Bank of Chicago where he had been Division Manager, Midwest since 1989. Prior to joining the Corporation in 1992, Mr. O'Neal was employed by Chemical Banking Corporation as Senior Executive Vice President, Operating Services and Nationwide Consumer in 1992 and Vice Chairman and Director from 1990 to 1991. Mr. Blake also joined the Corporation in 1992 and prior to that time had been Vice President of the MAC Group/Gemini Consulting since 1988. Mr. Ott came to the Corporation in 1992 from Constellation Bancorp where he served as Executive Vice President, Community Banking Division, and prior to that time was an Associate at TAC Associates from 1991 to 1992 and Senior Vice President, Community Banking Division of Fleet Bank from 1990 to 1991. Mr. Shea joined the Corporation in 1993 from Coopers & Lybrand, where he had served as a partner since 1983 and as Vice Chairman since 1991. Mr. Mastromarino joined the Corporation in 1995 from the OCC where he had served as Examiner-in-Charge of the OCC's London office from 1993 to 1995, and prior to that time was the OCC's Examiner-in-Charge at the Corporation since 1988. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. -23- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required by this Item is presented on pages 17, 18 and 49 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. Item 6. Selected Financial Data. The "Consolidated Selected Financial Data" of the Corporation for the six years ended December 31, 1995 appears on pages 17 and 18 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information in response to this Item is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 through 44 of the Corporation's 1995 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data required by this Item are included on the pages of the Corporation's 1995 Annual Report to Stockholders indicated below, which pages are included in Exhibit 13 hereto, and such statements and data are hereby incorporated by reference.
Page of 1995 Annual Report to Stockholders Summary of Quarterly Consolidated Financial Information and Common Stock Data.............................................. 49 Report of Independent Accountants..................................... 51 Bank of Boston Corporation: Consolidated Balance Sheet as of December 31, 1995 and 1994............................................................. 52 Consolidated Statement of Income for the years ended December 31, 1995, 1994 and 1993............................... 53 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993.......... 54 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993............................... 55 Notes to Financial Statements......................................... 56 through 79
-24- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. Information concerning the Executive Officers of the Corporation which responds to this Item is contained in the response to Item 3A contained in Part I of this Report and is hereby incorporated by reference herein. The information that responds to this Item with respect to Directors is contained under the heading "Election of Directors" in the Corporation's definitive proxy statement for its 1996 Annual Meeting of Stockholders, which is required to be filed pursuant to Regulation 14A of the Exchange Act and which will be filed with the Commission not later than 120 days after the end of the Corporation's fiscal year (the "Proxy Statement"). Information with respect to compliance by the Corporation's directors and executive officers with Section 16(a) of the Exchange Act is contained under the heading "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement. The foregoing information from the Proxy Statement is hereby incorporated by reference. Pursuant to General Instruction G(3) to Form 10-K, the foregoing information from the Proxy Statement is hereby incorporated by reference. Item 11. Executive Compensation. The information required in response to this Item is contained under the heading "Compensation of Executive Officers" in the Proxy Statement. Pursuant to General Instruction G(3) to Form 10-K, the foregoing information from the Proxy Statement, with the exception of the section entitled "Compensation Committee Report on Executive Compensation," is hereby incorporated by reference. In 1995, Ira Stepanian, the former Chairman and Chief Executive Officer of the Corporation and FNBB, entered into a retirement transition agreement with the Corporation and FNBB. Pursuant to the terms of the agreement, Mr. Stepanian is entitled to receive, until November 1998, payments of approximately $1,950,000 per year (representing continuation of his base salary at retirement plus the average of certain past bonuses) plus the continuation of pension, certain matching contributions, death benefits and other employee benefits during that period as though he had remained an active employee, but he will no longer participate in stock-based benefits. The portion of such payments and continuation arrangements made in 1995 is set forth in the Proxy Statement. In addition, Mr. Stepanian is entitled to office space and other perquisites available to other retired senior executives of the Corporation, to reimbursement of certain fees and expenses associated with the negotiation and execution of the retirement transition agreement and to the payment of employee benefits accrued during his service with the Corporation. Mr. Stepanian has agreed that, through November 1998, he will not compete with the Corporation or any of its subsidiaries in certain activities in New England. -25- Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required in response to this Item is contained under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement. Pursuant to General Instruction G(3) to Form 10-K, the foregoing information from the Proxy Statement is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions. The information required in response to this Item is contained under the heading "Indirect Interest of Directors and Executive Officers in Certain Transactions" in the Proxy Statement. Pursuant to General Instruction G(3) to Form 10-K, the foregoing information from the Proxy Statement is hereby incorporated by reference. -26- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) The financial statements required in response to this Item are listed in response to Item 8 of this Report and are incorporated herein by reference. (a)(2) Financial statement schedules have been omitted because the information is either not required, not applicable, or is included in the financial statements or notes thereto. (a)(3) Exhibits 3(a) - Restated Articles of Organization of the Corporation, as amended through November 24, 1993 incorporated herein by reference to Exhibit 3(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-6522). 3(b) - By-Laws of the Corporation, as amended through April 28, 1994, incorporated herein by reference to Exhibit 3(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522). 4(a) - Fiscal and Paying Agency Agreement dated as of February 10, 1986 defining rights of holders of the Corporation's Subordinated Floating Rate Notes Due 2001, incorporated herein by reference to Exhibit 4(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1985 (File No. 1-6522). 4(b) - Fiscal and Paying Agency Agreement dated as of August 26, 1986 defining rights of holders of the Corporation's Floating Rate Subordinated Equity Commitment Notes Due 1998 incorporated herein by reference to Exhibit 4(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1986 (File No. 1-6522). 4(c) - Indenture dated as of June 15, 1987 defining the rights of holders of the Corporation's 9 1/2% Subordinated Equity Contract Notes due 1997, incorporated herein by reference to Exhibit 4(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, l987 (File No. 1-6522). -27- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(3) Exhibits (cont'd) 4(d) - Subordinated Indenture dated as of June 15, 1992, as amended by the First Supplemental Indenture dated as of June 24, 1993, and forms of notes defining rights of the holders of the Corporation's 6 7/8% Subordinated Notes due 2003, the 6 5/8% Subordinated Notes due 2005, and the 6 5/8% Subordinated Notes due 2004, incorporated herein by reference to Exhibit 4(d) to the Corporation's Registration Statement on Form S-3 (Registration Numbers 33-48418 and 33-52571), Exhibits 4(e) and 4(f) to the Corporation's Current Report on Form 8-K dated June 24, 1993, Exhibit 4 to the Corporation's Current Report on Form 8-K dated November 15, 1993, and Exhibit 4 to the Corporation's Current Report on Form 8-K dated January 5, 1994 (File No. 1-6522). 4(e) - Senior Indenture dated as of June 15, 1992, and forms of notes defining rights of the holders of the Corporation's Senior Floating Rate Notes due June 1996 and the Corporation's Senior Floating Rate Medium-Term Notes Due Nine Months or More from the Date of Issue, incorporated herein by reference to Exhibit 4(c) to the Corporation's Registration Statement on Form S-3 (Registration Numbers 33-48418 and 33-52571), Exhibit 4 to the Corporation's Current Report on Form 8-K dated June 15, 1994 and Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated December 16, 1994 (File No. 1-6522). 4(f) - Rights Agreement, dated as of June 28, 1990, between the Corporation and FNBB, as Rights Agent, and the description of the Rights, incorporated herein by reference to the Corporation's registration statement on Form 8-A relating to the Rights and to Exhibit 1 of such registration statement (File No. 1-6522). 4(g) - Amendment, dated December 12, 1995, to the Corporation's Rights Agreement. 4(h) - Deposit Agreement, dated August 13, 1992 between the Corporation and FNBB, as Depositary, relating to the Corporation's Depositary Shares, each representing a one-tenth interest in the Corporation's 8.60% Cumulative Preferred Stock, Series E, incorporated herein by reference to Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated August 13, 1992 (File No. 1-6522). 4(i) - Deposit Agreement, dated as of June 30, 1993 between the Corporation and FNBB, as Depositary, relating to the Corporation's Depositary Shares, each representing a one-tenth interest in the Corporation's 7 7/8% Cumulative Preferred Stock, Series F, incorporated herein by reference to Exhibit 4(b) to the Corporation's Current Report on Form 8-K dated June 24, 1993 (File No. 1-6522). -28- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(3) Exhibits (cont'd) 10(a) - Bank of Boston Corporation 1982 Stock Option Plan, as amended, effective February 13, 1995, incorporated herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(b) - Bank of Boston Corporation 1986 Stock Option Plan, as amended, effective February 13, 1995, incorporated herein by reference to Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(c) - Bank of Boston Corporation and its Subsidiaries Performance Recognition Opportunity Plan, as amended effective June 23, 1994, incorporated herein by reference to Exhibit 10(c) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(d) - Bank of Boston Corporation Executive Deferred Compensation Plan, as amended, effective June 23, 1994, incorporated herein by reference to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(e) - The First National Bank of Boston Bonus Supplemental Employee Retirement Plan, as amended, through June 23, 1994, incorporated herein by reference to Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(f) - Description of the Corporation's Supplemental Life Insurance Plan, incorporated herein by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988 (File No. 1-6522).* 10(g) - The First National Bank of Boston Excess Benefit Supplemental Employee Retirement Plan, as amended, effective June 23, 1994, 1994, incorporated herein by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* - ----------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -29- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(3) Exhibits (cont'd) 10(h) - Bank of Boston Corporation 1991 Long-Term Stock Incentive Plan, as amended, effective February 13, 1995, incorporated herein by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(i) - Bank of Boston Corporation Relocation Policy, as amended through October, 1990, incorporated herein by reference to Exhibit 10(j) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 1-6522).* 10(j) - Description of the Corporation's Supplemental Long-Term Disability Plan effective as of February 10, 1994, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-6522).* 10(k) - Bank of Boston Corporation's Director Stock Award Plan effective as of January 1, 1995, incorporated herein by reference to Exhibit 10(m) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(l) - Form of Severance Agreement for certain officers, incorporated herein by reference to Exhibit 10(a) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 1-6522).* - ------------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -30- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(3) Exhibits (cont'd) 10(m) - Form of Severance Agreement for certain officers, incorporated herein by reference to Exhibit 10(b) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 1-6522).* 10(n) - Bank of Boston Corporation Directors Deferred Compensation Plan effective March 28, 1991, incorporated herein by reference to Exhibit 10(q) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(o) - The First National Bank of Boston Directors Deferred Compensation Plan effective March 28, 1991, incorporated herein by reference to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-6522).* 10(p) - Retirement Transition Agreement between the Corporation, FNBB and an executive officer.* 10(q) - Lease dated as of September 1, 1991 between The First National Bank of Boston and The Equitable Federal Street Realty Company Limited Partnership, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 1-6522). 11 - Computation of earnings per common share. 12(a) - Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (excluding interest on deposits). 12(b) - Computation of the Corporation's Consolidated Ratio of Earnings to Fixed Charges (including interest on deposits). 12(c) - Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (excluding interest on deposits). 12(d) - Computation of the Corporation's Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (including interest on deposits). 13 - Pages 17 through 49 and 51 through 79 of the Corporation's 1995 Annual Report to Stockholders. - --------------------------------------------- * Indicates that document is a management contract or compensatory plan or arrangement that is required to be filed as an exhibit to this Report pursuant to Item 14(c) of Form 10-K. -31- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(3) Exhibits (cont'd) 21 - List of subsidiaries of Bank of Boston Corporation. 23 - Consent of Independent Accountants. 24 - Power of attorney of certain officers and directors (included on pages II-1 through II-2). 27 - Financial Data Schedule 99 - Notice of Annual Meeting and Proxy Statement for the Annual Meeting of the Corporation's Stockholders to be held April 25, 1996, incorporated herein by reference to the Corporation's filing under Regulation 14A of the Exchange Act. (Pursuant to General Instruction G(3) to Form 10-K, the information required to be filed by Part III hereof is incorporated by reference from the Corporation's definitive proxy statement which is required to be filed pursuant to Regulation 14A and which will be filed with the Commission not later than 120 days after the end of the Corporation's fiscal year.) (b) During the fourth quarter of 1995, the Corporation filed two Current Reports on Form 8-K. The current reports, dated October 19, 1995 and December 12, 1995, contained information pursuant to items 5 and 7 of Form 8-K. The Corporation also filed Current Reports on Form 8-K dated January 16, 1996 and January 18, 1996, which contained information pursuant to items 5 and 7 of Form 8-K. -32- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, and Commonwealth of Massachusetts, on the 15th day of March, 1996. BANK OF BOSTON CORPORATION By /s/ CHARLES K. GIFFORD --------------------------------- (Charles K. Gifford) (Chairman, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates listed below. By so signing, each of the undersigned, in his or her capacity as a director or officer, or both, as the case may be, of the Corporation, does hereby appoint Charles K. Gifford, William J. Shea, Bradford H. Warner, Robert T. Jefferson and Gary A. Spiess, and each of them severally, or if more than one acts, a majority of them, his or her true and lawful attorneys or attorney to execute in his or her name, place and stead, in his or her capacity as a director or officer or both, as the case may be, of the Corporation, any and all amendments to said report and all instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises as fully and to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and approving the acts of said attorneys and each of them.
Signature Title Date --------- ----- ---- Chairman of the Board of Directors, /s/ CHARLES K. GIFFORD President, Chief Executive Officer - --------------------------- and Director March 15, 1996 (Charles K. Gifford) (Chief Executive Officer) Vice Chairman, /s/ WILLIAM J. SHEA Chief Financial Officer - --------------------------- and Treasurer March 15, 1996 (William J. Shea) (Chief Financial Officer) /s/ ROBERT T. JEFFERSON - ------------------------------ Comptroller March 15, 1996 (Robert T. Jefferson) (Chief Accounting Officer)
II-1
Signature Title Date --------- ----- ---- /s/ WAYNE A. BUDD Director March 15, 1996 - --------------------------------- (Wayne A. Budd) /s/ WILLIAM F. CONNELL Director March 15, 1996 - --------------------------------- (William F. Connell) /s/ Director - --------------------------------- (Gary L. Countryman) /s/ ALICE F. EMERSON Director March 15, 1996 - --------------------------------- (Alice F. Emerson) /s/ THOMAS J. MAY Director March 15, 1996 - --------------------------------- (Thomas J. May) /s/ DONALD F. McHENRY Director March 15, 1996 - --------------------------------- (Donald F. McHenry) /s/ J. DONALD MONAN Director March 15, 1996 - --------------------------------- (J. Donald Monan) /s/ PAUL C. O'BRIEN Director March 15, 1996 - --------------------------------- (Paul C. O'Brien) /s/ JOHN W. ROWE Director March 15, 1996 - --------------------------------- (John W. Rowe) /s/ Director - --------------------------------- (Richard A. Smith) /s/ Director - --------------------------------- (William C. Van Faasen) /s/ THOMAS B. WHEELER Director March 15, 1996 - --------------------------------- (Thomas B. Wheeler) /s/ ALFRED M. ZEIEN Director March 15, 1996 - --------------------------------- (Alfred M. Zeien)
II-2 EX-4.G 2 AMENDMENT, DATED 12/12/95 Exhibit 4(g) AMENDMENT TO RIGHTS AGREEMENT This AMENDMENT, dated as of December 12, 1995, is between BANK OF BOSTON CORPORATION, a Massachusetts corporation (the "Company"), and THE FIRST NATIONAL BANK OF BOSTON, as rights agent (the "Rights Agent"). Recitals -------- A. The Company and the Rights Agent are parties to a Rights Agreement dated as of June 28, 1990 (the "Rights Agreement"). B. The Company, Boston Merger Corp., a wholly owned subsidiary of the Company ("Merger Sub") and BayBanks, Inc. ("BayBanks") have entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Merger Sub will merge with and into BayBanks (the "Merger"), and the Company and BayBanks have entered into a related Stock Option Agreement (the "Option Agreement") pursuant to which BayBanks is granted the right to acquire Common Stock of the Company upon the occurrence of certain conditions. The Board of Directors of the Company has approved the Merger Agreement, the Merger and the Option Agreement. C. Pursuant to Section 27 of the Rights Agreement, the Board of Directors of the Company has determined that an amendment to the Rights Agreement as set forth herein is necessary and desirable in connection with the foregoing and the Company and the Rights Agent desire to evidence such amendment in writing. Accordingly, the parties agree as follows: 1. Amendment of Section 1(a). Section 1(a) of the Rights Agreement ------------------------- is amended to add the following sentence at the end thereof: "Notwithstanding anything in this Rights Agreement to the contrary, neither BayBanks nor any of its existing or future Affiliates or Associates shall be deemed to be an Acquiring Person solely by virtue of (i) the execution of the Merger Agreement and the Option Agreement, (ii) the acquisition of -2- Common Stock pursuant to the Merger Agreement or the Option Agreement or the consummation of the Merger, or (iii) the consummation of the other transactions contemplated by the Merger Agreement and the Option Agreement." 2. Amendment of Section 1(rr). Section 1(rr) of the Rights Agreement ------------------------- is amended to add the following proviso at the end thereof: "; provided, however, that no Triggering Event shall result solely by virtue of (i) the execution of the Merger Agreement and the Option Agreement, (ii) the acquisition of Common Stock pursuant to the Merger Agreement or the Option Agreement or the consummation of the Merger, or (iii) the consummation of the other transactions contemplated by the Merger Agreement and the Option Agreement." 3. Amendment of Section 1. Section 1 of the Rights Agreement is ---------------------- further amended to add the following paragraphs at the end thereof: (uu) "BayBanks" shall mean BayBanks, Inc., a Massachusetts corporation. (vv) "Merger" shall have the meaning set forth in the Merger Agreement. (ww) "Merger Agreement" shall mean the Agreement and Plan of Merger dated as of December 12, 1995, by and between the Company, Boston Merger Corp., a wholly owned subsidiary of the Company, and BayBanks, as amended from time to time." (xx) "Option Agreement" shall mean that certain Stock Option Agreement, dated as of December 12, 1995, by and between BayBanks and the Company relating to the right to acquire Common Stock, as amended from time to time." 4. Amendment of Section 3(a). Section 3(a) of the Rights Agreement is ------------------------ amended to add the following sentence at the end thereof: "Notwithstanding anything in this Rights Agreement to the contrary, a Distribution Date shall not be deemed to have occurred solely by virtue of (i) the execution of the Merger -3- Agreement and the Option Agreement, (ii) the acquisition of Common Stock pursuant to the Merger Agreement or the Option Agreement or the Consummation of the Merger, or (iii) the consummation of the other transactions contemplated by the Merger Agreement and the Option Agreement." 5. Amendment of Section 7(a). Section 7(a) of the Rights Agreement is ------------------------- amended to add the following sentence at the end thereof: "Notwithstanding anything in this Rights Agreement to the contrary, neither (i) the execution of the Merger Agreement and the Option Agreement; (ii) the acquisition of Common Stock pursuant to the Merger Agreement or the Option Agreement or the consummation of the Merger; nor (iii) the consummation of the other transactions contemplated in the Merger Agreement and the Option Agreement, shall be deemed to be events that cause the Rights to become exercisable pursuant to the provisions of this Section 7 or otherwise." 6. Amendment of Section 11. Section 11 of the Rights Agreement is ----------------------- amended to add the following sentence after the first sentence of said Section: "Notwithstanding anything in this Rights Agreement to the contrary, neither (i) the execution of the Merger Agreement and the Option Agreement; (ii) the acquisition of Common Stock pursuant to the Merger Agreement or the Option Agreement or the consummation of the Merger; nor (iii) the consummation of the other transactions contemplated in the Merger Agreement and the Option Agreement, shall be deemed to be a Section 11(a)(ii) Event or to cause the Rights to be adjusted or to become exercisable in accordance with this Section 11." 7. Amendment of Section 13. Section 13 of the Rights Agreement is ----------------------- amended to add the following sentence at the end thereof: "Notwithstanding anything in this Rights Agreement to the contrary, neither (i) the execution of the Merger Agreement and the Option Agreement; (ii) the acquisition of Common Stock pursuant to the Merger Agreement or the Option Agreement or the consummation of the Merger; nor (iii) the -4- consummation of the other transactions contemplated in the Merger Agreement and the Option Agreement, shall be deemed to be a Section 13 Event or to cause the Rights to be adjusted or to become exercisable in accordance with Section 13." 8. Effectiveness. This Amendment shall be deemed effective as of the ------------- date first written above, as if executed on such date. Except as amended hereby, the Rights Agreement shall remain in full force and effect and shall be otherwise unaffected hereby. 9. Miscellaneous. This Amendment shall be deemed to be a contract ------------- made under the laws of the Commonwealth of Massachusetts and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state. This Amendment may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. If any provisions, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, illegal or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be effected, impaired or invalidated. EXECUTED under seal as of the date set forth above. BANK OF BOSTON CORPORATION /s/ Peter J. Manning -------------------- Name: Peter J. Manning Title: Executive Director, Mergers & Acquisitions THE FIRST NATIONAL BANK OF BOSTON, as Rights Agent: /s/ Gary A. Spiess ------------------- Name: Gary A. Spiess Title: General Counsel & Clerk EX-10.P 3 RETIREMENT TRANSITION AGREEMENT Exhibit 10(p) RETIREMENT TRANSITION AGREEMENT ------------------------------- AGREEMENT dated October 26, 1995, by and between Bank of Boston Corporation, a Massachusetts corporation (the "Company"), The First National Bank of Boston, a national banking association (the "Bank") and Ira Stepanian, an individual residing at 300 Boylston Street, Boston, Massachusetts 02116 (the "Executive"). WHEREAS, the Executive, after many years of service, has retired from employment and from all officer, director and other positions held by him in the Company and all entities owned by or affiliated with the Company (collectively, "Subsidiaries"); and WHEREAS, the Company and the Bank wish to provide the Executive with fair and reasonable compensation and benefits in recognition of the Executive's valued years of service to the Company and its Subsidiaries; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other valuable consideration, the Company, the Bank and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this ------------- Agreement and not otherwise defined herein are provided in Section 14. 2. Company's and Bank's Covenants. In consideration of the Executive's ------------------------------ years of service and his covenants contained in Section 3, the Company and the Bank agree, under the conditions described herein, to pay to the Executive the following payments and to provide the following benefits: 2.1 Continuation Salary. The Bank shall pay to the Executive a ------------------- continuation salary at the rate of $880,000 per year from July 28, 1995 through the date upon which the Executive reaches sixty-two years of age (the "Extension Date"). The continuation salary shall be payable semi- monthly or otherwise in accordance with the Bank's customary practice with respect to salary payments to active senior officers of the Bank. 2.2 Annual Bonus. The Bank shall pay to the Executive (i) an annual ------------ bonus for 1995 in an amount equal to 57% of an -2- amount to be determined in good faith by the Compensation Committee, in accordance with the Performance Recognition Opportunity Plan, and (ii) annual bonus payments for the three years immediately succeeding 1995, each in an amount equal to $1,066,666.67. All such annual bonus payments shall be payable in accordance with the Bank's customary practices with respect to annual bonus payments. 2.3 Stock Options. All stock options held by the Executive are ------------- immediately exercisable and shall remain exercisable in accordance with their respective terms. All restricted stock awarded to the Executive has already vested and will be delivered to him at his request. 2.4 Retirement Plans. The Executive shall continue to accrue service ---------------- credit through the Extension Date under the Retirement Plan, the Bonus SERP, and the Excess SERP, or any successor plans thereto, calculated (a) at the compensation level equal to the continuation salary and annual bonus set forth in Sections 2.1 and 2.2, as applicable, adjusted (with respect to salary, but not bonus) at the beginning of each calendar year, beginning in 1996, by the actuarial salary escalation assumption in effect as of the beginning of such year for the Retirement Plan, (b) upon the assumption that no benefits would be payable under the foregoing plans until at or after age 62, and (c) with adjustment for any payments under the foregoing plans before age 62. If and to the extent that the Bank cannot provide any benefit that it is required to provide to the Executive under this Section under the foregoing plans, the Bank shall provide an equivalent benefit under another non-qualified arrangement, payable at or after age 62 in the same manner as benefits under the Retirement Plan. 2.5 Deferral Plan. Through the Extension Date, the Executive shall ------------- receive a matching contribution from the Bank under the Deferral Plan, calculated at the rate of 4% of the continuation salary paid under Section 2.1, adjusted in accordance with the actuarial salary escalation assumption described in Section 2.4. If and to the extent the Bank cannot provide this benefit under the Deferral Plan, the Bank shall provide an equivalent benefit under another nonqualified arrangement. Payments under this Section shall be made to the Executive at the same time and in the same manner as his other payments under the Deferral Plan. -3- 2.6 Death Benefit Payment. Upon the death of the Executive, --------------------- whether before, on or after the Extension Date, the Bank shall make a single sum payment to the person or persons designated by the Executive in writing or, in the absence of such designation, the executor or other personal representative of the Executive's estate of an amount equal, after payment of any applicable federal and state income taxes, to the amount by which $1,000,000 exceeds the life insurance payable upon the Executive's death under the Bank's Group Term Life Insurance Program; and the Bank may determine from time to time whether the payment shall be insured or made from the Bank's general assets. The Executive agrees to cooperate with the Bank in the event that the Bank seeks to obtain insurance on the Executive's life. 2.7 Employee Benefit Plans. Until the Extension Date, the ---------------------- Executive shall receive benefits equivalent in amount to the benefits he would receive if he continued to participate in all employee benefit plans (other than the Executive Life Insurance Plan and the Deferral Plan), including without limitation medical insurance plans, life insurance plans and financial counseling plan (including up to the stated limit, tax preparation service), currently maintained by the Bank, on a basis at least as advantageous to the Executive as the basis on which he participated therein on July 27, 1995. After the Extension Date, the Executive shall be entitled to participate in all plans providing post-retirement benefits maintained from time to time by the Bank, on a basis at least as advantageous to the Executive as the basis on which any person who retired on the Extension Date from one of the most senior executive positions at the Bank (the "Peer Executive") would be eligible to participate from time to time. Notwithstanding the foregoing and except as provided in Section 2.3, the Executive shall not be entitled to participate in any stock option plan, restricted stock award plan or other stock-based plan maintained by the Company. 2.8 Fringe Benefits. The Executive shall be entitled to all --------------- fringe benefits offered to a Peer Executive from time to time, for so long as a Peer Executive is entitled to such benefits, including without limitation office space with secretarial and administrative support services, parking space, occasional car services provided by Boston Coach or a similar limousine service, and reimbursement for reasonable costs incurred in connection with home alarm services. The Company shall match contributions to the Museum of Fine Arts -4- pledged by the Executive before July 27, 1995 in amounts not to exceed $25,000 per year through the Extension Date. 2.9 Legal and Accounting Fees. The Bank shall pay to the ------------------------- Executive all reasonable legal, accounting and other advisory fees and expenses incurred by the Executive in connection with the negotiation and execution of this Agreement. Payments shall be made promptly after delivery of the Executive's written request for payment accompanied with such evidence of fees and expenses incurred as the Bank reasonably may require. 2.10 Indemnification. The Company or the Bank, as the case may --------------- be, shall indemnify the Executive against all loss, cost, liability and expense arising from the Executive's past service to the Company or any Subsidiary, including without limitation any pending securities litigation, whether as officer, director, employee, fiduciary of any employee benefit plan or otherwise, upon terms at least as favorable to the Executive as those provided by the Articles of Organization and By-laws of the Company or the Bank, as the case may be, on July 27, 1995. 2.11 Nondisparagement. Not the Company nor any Subsidiary nor ---------------- any officers or directors thereof have disparaged or shall disparage the Executive with respect to any matter, including without limitation the Executive's past or prospective performance. 3. Executive's Covenants. In consideration of the payments and benefits --------------------- contained in Section 2, the Executive agrees to abide by all the covenants set forth in this Section 3 below: 3.1 Confirmation of Retirement. The Executive confirms that he -------------------------- has retired as an employee of the Company and all its Subsidiaries, effective July 27, 1995. 3.2 Confirmation of Resignation of Offices. The Executive -------------------------------------- confirms that he has, in a separate instrument, resigned as a director of the Company and the Bank and confirms that he has resigned from all other officer, director and other positions held by him in the Company or in any Subsidiary, effective July 27, 1995, 3.3 Confidential Information. The Executive will not disclose ------------------------ to any other Person (except as required by applicable law or in connection with the performance of his duties and responsibilities hereunder), or use for the benefit or gain of himself or any other -5- Person with which he may be associated in any way, any Confidential Information obtained by him incident to his employment with the Company or a Subsidiary. 3.4 Agreement Not to Compete. The Executive agrees that, through the ------------------------ Extension Date, the Executive shall not engage in competition with the Company or any of its Subsidiaries anywhere in the six New England states, as employee, director, consultant, agent, or otherwise, for (a) any bank or other financial services institution, which together with its subsidiaries and affiliates, is of comparable size to the Company or larger (whether measured by assets or market capitalization) or (b) BayBanks, Inc. and its subsidiaries and affiliates. The Executive may hold stock or a limited partnership interest of 5% or less in any entity described in clauses (a) and (b) of the preceding sentence without violating this Agreement. 3.5 Agreement Not to Solicit. The Executive shall not solicit any ------------------------ employee of the Company or a Subsidiary to leave such employment or to provide services to the Executive or any business entity by which the Executive is employed or in which the Executive has a material financial interest or encourage any customer of the Company or a Subsidiary to terminate its relationship with the Company or a Subsidiary. Soliciting a former employee of the Company or a Subsidiary to provide such services shall not be a violation of this Agreement. 3.6 Nondisparagement. The Executive has not disparaged and shall not ---------------- disparage the Company or any Subsidiary or the owners, officers, directors, employees, or agents thereof with respect to any matter, including without limitation the Company's or any Subsidiary's financial condition, management, personnel, quality of service, quality of product, or past or prospective performance. 3.7 Unique Nature of Agreement; Specific Enforcement. The Executive ------------------------------------------------ agrees and acknowledges that the rights and obligations contained in this Section 3 are of a unique and special nature and that the Company and the Bank are, therefore, without an adequate legal remedy in the event of the Executive's violation of the covenants contained in this Section 3. The Executive agrees that the covenants made by the Executive contained in this Section 3 shall be specifically enforceable in equity, in addition to all other rights and remedies, at law or in equity or otherwise, that may be available to the Company or the Bank. -6- 3.8 Unenforceable Restrictions. In the event that any provision -------------------------- contained in this Section 3 shall be deemed by any court to be unenforceable by reason of the extent, duration or geographical scope or other provisions hereof, then the parties hereto contemplate that the court shall reduce such extent, duration, geographical scope or other provision hereof and enforce this Section 3 in its reduced form for all purposes in the manner contemplated hereby. 4. No Mitigation. The Executive is not required to seek other employment ------------- or to attempt in any way to reduce any amounts payable to the Executive by the Company or the Bank pursuant to Section 2. Further, the amount of any payment or benefit provided for in Section 2 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or, except as expressly provided in this Agreement, by retirement benefits. 5. Mutual Releases. Each of the Company and its Subsidiaries hereby --------------- releases the Executive from all liabilities and obligations to them or any of them known to them or any of them at the date of this Agreement, other than the liabilities and obligations set forth in this Agreement, and the Executive hereby releases the Company and all its Subsidiaries, senior executive officers, and directors from all liabilities and obligations to him known to him at the date of this Agreement, other than the liabilities and obligations set forth in this Agreement. 6. Successors, Binding Agreement. ----------------------------- 6.1 In addition to any obligations imposed by law upon any successor to the Company or the Bank, the Company or the Bank, as the case may be, will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business and/or assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company or the Bank, as the case may be, would be required to perform it if no such succession had taken place. 6.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder if the Executive had -7- continued to live, payments of the types described in Schedule A shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate unless otherwise provided herein. 7. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company or the Bank: Bank of Boston Corporation 100 Federal Street Boston, MA 02110 Attention: Director, Human Resources Copy to: General Counsel To the Executive: Mr. Ira Stepanian 300 Boylston Street Boston, MA 02116 Copy to: Richard R. Kelly, Esq. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA 02111 8. Miscellaneous. No provision of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. Except as expressly provided herein, no waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall -8- be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts, and this Agreement shall be an instrument under seal. 9. Withholding. All payments made by the Company or the Bank under this ----------- Agreement shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. 10. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but all of which together will constitute one and the same instrument. 12. Settlement of Disputes. All claims by the Executive for benefits ---------------------- under this Agreement shall be in writing and shall be directed to and determined by the Compensation Committee. Any denial by the Compensation Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by a court of competent jurisdiction in Boston, Massachusetts. Any dispute concerning rights under a plan maintained by the Company or the Bank shall be settled in accordance with the terms of the plan. 13. Termination. This Agreement shall terminate upon the fulfillment of ----------- the last commitment or obligation owing by any party. 14. Definitions. For purposes of this Agreement, the following terms ----------- shall have the meanings indicated below: (A) "Board" shall mean the Board of Directors of the Company. -9- (B) "Bonus SERP" shall mean The First National Bank of Boston Bonus Supplemental Employee Retirement Plan. (C) "Compensation Committee" shall mean the Compensation and Nominating Committee of the Board. (D) "Confidential Information" shall mean all information of the Company, its Subsidiaries and its customers and prospective customers, including without limitation financial information, business plans, prospects and opportunities (such as financial projections and forecasts, business and strategic plans, lending relationships, financial product developments, or possible acquisitions or dispositions of businesses or facilities), which has been discussed or considered by the employees, management or the Board of the Company or a Subsidiary, but does not include any information which has become part of the public domain or which is generally known within the field or trade. (E) "Deferral Plan" shall mean the Bank of Boston Corporation and its Subsidiaries Deferred Compensation Plan. (F) "Excess SERP" shall mean The First National Bank of Boston Excess Benefit Supplemental Employee Retirement Plan. (G) "Person" shall mean an individual, a corporation, an association, a partnership, an estate, a trust and any other entity or organization. (H) "Retirement Plan" shall mean the Retirement Plan of The First National Bank of Boston and Certain Affiliated Companies. (I) "Thrift Plan" shall mean the Thrift-Incentive Plan of The First National Bank of Boston and Certain Affiliated Companies. 15. Discrimination Claim Release. The Executive hereby releases and ---------------------------- forever discharges the Company and its Subsidiaries from all claims under all state and federal discrimination laws including but not limited to laws prohibiting discrimination on the basis of age. The Executive shall have up to twenty-one days from October 7, 1995 or until October 28, 1995, to execute this Agreement. The Executive shall have an additional seven days to revoke this Agreement after its execution by providing -10- written notice of revocation to the Company. The Executive hereby agrees to confer with his attorney prior to executing this Agreement. IN WITNESS WHEREOF, the Company and the Bank, by their duly authorized representative, and the Executive have signed and sealed this Agreement as of the date first written above. BANK OF BOSTON CORPORATION BY: /s/ Helen G. Drinan ------------------- Helen G. Drinan Executive Director, Human Resources THE FIRST NATIONAL BANK OF BOSTON By: /s/ Helen G. Drinan ------------------- Helen G. Drinan Executive Director, Human Resources /s/ Ira Stepanian ----------------- Ira Stepanian Schedule A ---------- Description Section Reference Continuation Salary 2.1 Annual Bonus 2.2 Death Benefit Payment 2.6 Indemnification 2.10 Amounts Accrued or Incurred Before Death Various EX-11 4 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 BANK OF BOSTON CORPORATION Computation of Per Share Earnings (in millions, except per share amounts)
EARNINGS Years Ended December 31 -------- 1995 1994 1993 ------- ------- ------- 1. Net income $ 541 $ 435 $ 299 2. Less: Preferred dividends 37 37 35 ------- ------- ------- 3. Net income applicable to primary earnings per common share 504 398 264 4. Add: Interest expense on convertible debentures, net of tax 4 4 ------- ------- ------- 5. Net income applicable to fully diluted earnings per common share $ 504 $ 402 $ 268 ======= ======= ======= SHARES ------ 6. Weighted average number of common shares outstanding 110,716 106,730 105,336 7. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method 1,959 668 888 8. Incremental shares from assumed conversion of debentures at date of issuance 885 4,029 4,034 ------- ------- ------- 9. Adjusted number of common shares 113,560 111,427 110,258 ======= ======= ======= PER SHARE CALCULATION --------------------- 10. Primary net income per common share $ 4.55 $ 3.73 $ 2.51 (Item 3 / Item 6); see note below 11. Fully diluted net income per common share $ 4.43 $ 3.61 $ 2.44 (Item 5 / Item 9); see note below
Note - Income per common share before extraordinary item and cumulative effect of changes in accounting principles, net of tax, on both a primary and fully diluted basis for the years ended December 31, 1994 and 1993 is computed by adding to the numerator the extraordinary loss from early extinguishment of debt, net of tax, in 1994 of $7 million and subtracting from the numerator the cumulative effect of accounting changes, net of tax, in 1993 of $24 million. EX-12.A 5 COMPUTATION OF EARNINGS (EXCLUDING INTEREST) 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 five years ended December 31, 1995 were as follows:
Years Ended December 31, ---------------------------------------------- (Dollars in millions) 1995 1994 1993 1992 1991 ----- ----- ---- ---- ---- Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113) Extraordinary items, net of 7 (73) (8) tax Cumulative effect of changes in accounting principles, (24) net of tax Income tax expense (benefit) 444 349 215 153 (58) ----- ----- ---- ---- ---- Pretax earnings (loss) 985 791 490 359 (179 ----- ----- ---- ---- ---- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 29 27 27 28 30 Interest on borrowed funds 1,021 998 378 345 362 ----- ----- ---- ---- ---- Total fixed charges 1,050 1,025 405 373 392 ----- ----- ---- ---- ---- Earnings (for ratio calculation) $ 2,035 $ 1,816 $ 895 $ 732 $ 213 ===== ===== ==== ==== ==== Total fixed charges $ 1,050 $ 1,025 $ 405 $ 373 $ 392 ===== ===== ==== ==== ==== Ratio of earnings to fixed charges 1.94 1.77 2.21 1.96 .54 ===== ===== ==== ==== ====
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 year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary to bring the ratio of earnings to fixed charges to a one-to-one basis are $179 million. EX-12.B 6 COMPUTATION OF EARNINGS (INCLUDING INTEREST) 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 five years ended December 31, 1995 were as follows:
Years Ended December 31, ----------------------------------------------------- (Dollars in millions) 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113) Extraordinary items, net of tax 7 (73) (8) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense (benefit) 444 349 215 153 (58) ----- ----- ----- ----- ----- Pretax earnings (loss) 985 791 490 359 (179) ----- ----- ----- ----- ----- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 29 27 27 28 30 Interest on borrowed funds 1,021 998 378 345 362 Interest on deposits 1,557 1,148 1,016 1,407 1,808 ----- ----- ----- ----- ----- Total fixed charges 2,607 2,173 1,421 1,780 2,200 ----- ----- ----- ----- ----- Earnings (for ratio calculation) $ 3,592 $ 2,964 $ 1,911 $ 2,139 $ 2,021 ===== ===== ===== ===== ===== Total fixed charges $ 2,607 $ 2,173 $ 1,421 $ 1,780 $ 2,200 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 1.38 1.36 1.34 1.20 .92 ===== ===== ===== ===== =====
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 year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary to bring the ratio of earnings to fixed charges to a one-to-one basis are $179 million. EX-12.C 7 COMPUTATION OF EARNINGS (EXCLUDING INTEREST) EXHIBIT 12(c) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Excluding Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (excluding interest on deposits) for the five years ended December 31, 1995 were as follows:
Years Ended December 31, ---------------------------------------------- (Dollars in millions) 1995 1994 1993 1992 1991 ----- ----- ---- ---- ---- Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113) Extraordinary items, net of 7 (73) (8) tax Cumulative effect of changes in accounting principles, (24) net of tax Income tax expense (benefit) 444 349 215 153 (58) ----- ----- ---- ---- ---- Pretax earnings (loss) $ 985 $ 791 $ 490 $ 359 $ (179) ===== ===== ==== ==== ==== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 29 $ 27 $ 27 $ 28 $ 30 Interest on borrowed funds 1,021 998 378 345 362 ----- ----- ---- ---- ---- Total fixed charges 1,050 1,025 405 373 392 Preferred stock dividend requirements 68 67 61 33 13 ----- ----- ---- ---- ---- Total combined fixed charges and preferred stock dividend requirements $ 1,118 $ 1,092 $ 466 $ 406 $ 405 ===== ===== ==== ==== ==== Earnings (for ratio calculation) (Pretax earnings (loss) plus total fixed charges) $ 2,035 $ 1,816 $ 895 $ 732 $ 213 ===== ===== ==== ==== ==== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.82 1.66 1.92 1.80 .53 ===== ===== ==== ==== ====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (excluding interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. No tax adjustments were made in loss years. For the year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary to bring the ratio of earnings to fixed charges to a one-to-one basis are $179 million. EX-12.D 8 COMPUTATION OF EARNINGS (INCLUDING INTEREST) EXHIBIT 12(d) BANK OF BOSTON CORPORATION COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (Including Interest on Deposits) The Corporation's ratios of earnings to combined fixed charges and preferred stock dividend requirements (including interest on deposits) for the five years ended December 31, 1995 were as follows:
Years Ended December 31, ---------------------------------------------------- (Dollars in millions) 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113) Extraordinary items, net of tax 7 (73) (8) Cumulative effect of changes in accounting principles, net of tax (24) Income tax expense (benefit) 444 349 215 153 (58) ----- ----- ----- ----- ----- Pretax earnings (loss) $ 985 $ 791 $ 490 $ 359 $ (179) ===== ===== ===== ===== ===== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 29 $ 27 $ 27 $ 28 $ 30 Interest on borrowed funds 1,021 998 378 345 362 Interest on deposits 1,557 1,148 1,016 1,407 1,808 ----- ----- ----- ----- ----- Total fixed charges 2,607 2,173 1,421 1,780 2,200 Preferred stock dividend requirements 68 67 61 33 13 ----- ----- ----- ----- ----- Total combined fixed charges and preferred stock dividend requirements $ 2,675 $ 2,240 $ 1,482 $ 1,813 $ 2,213 ===== ===== ===== ===== ===== Earnings (for ratio calculation) (Pretax earnings (loss) plus total fixed charges) $ 3,592 $ 2,964 $ 1,911 $ 2,139 $ 2,021 ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.34 1.32 1.29 1.18 .91 ===== ===== ===== ===== =====
For purposes of computing the consolidated ratio of earnings to combined fixed charges and preferred stock dividend requirements "earnings" represent income (loss) before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. "Fixed charges" include gross interest expense (including interest on deposits) and the proportion deemed representative of the interest factor of rent expense, net of income from subleases. Pretax earnings required for preferred stock dividends were computed using tax rates for the applicable year. No tax adjustments were made in loss years. For the year ended December 31, 1991, earnings were insufficient to cover fixed charges. Additional earnings necessary to bring the ratio of earnings to fixed charges to a one-to-one basis are $179 million. EX-13 9 PAGES 17-49 AND 51-79 OF CORP. 1995 ANNUAL REPORT - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ BANK OF BOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1995 1994 1993 1992 1991 1990 (dollars in millions, except per share amounts) - ------------------------------------------------------------------------------- INCOME STATEMENT DATA Interest income............... $4,319 $3,718 $2,739 $3,007 $3,285 $4,235 Interest expense.............. 2,578 2,146 1,394 1,752 2,170 3,012 ------- ------- ------- ------- ------ ------ Net interest revenue........ 1,741 1,572 1,345 1,255 1,115 1,223 Provision for credit losses... 250 130 70 181 519 764 ------- ------- ------- ------- ------ ------ Net interest revenue after provision for credit loss- es......................... 1,491 1,442 1,275 1,074 596 459 Noninterest income............ 1,091 828 746 759 763 764 Noninterest expense(1)........ 1,597 1,479 1,531 1,474 1,538 1,732 ------- ------- ------- ------- ------ ------ Income (Loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles................... 985 791 490 359 (179) (509) Provision for (Benefit from) income taxes............... 444 349 215 153 (58) 3 ------- ------- ------- ------- ------ ------ Income (Loss) before extraor- dinary items and cumulative effect of changes in account- ing principles............... 541 442 275 206 (121) (512) Extraordinary items Gains (losses) from early extinguishment of debt, net of tax................. (7) 8 44 Recognition of prior year tax benefit carryforwards.. 73 Cumulative effect of changes in accounting principles, net(2)....................... 24 ------- ------- ------- ------- ------ ------ Net income (loss)........... $541 $435 $299 $279 $(113) $(468) ======= ======= ======= ======= ====== ====== Net income (loss) applicable to common stock............ $504 $398 $264 $259 $(126) $(482) ======= ======= ======= ======= ====== ====== Per common share Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles Primary..................... $4.55 $3.79 $2.28 $1.82 $(1.42) $(5.67) Fully diluted............... 4.43 3.67 2.22 1.78 (1.42) (5.67) Net income (loss) Primary..................... 4.55 3.73 2.51 2.54 (1.33) (5.20) Fully diluted............... 4.43 3.61 2.44 2.45 (1.33) (5.20) Cash dividends declared...... 1.28 .93 .40 .10 .10 .82 Average number of common shares (in thousands) Primary...................... 110,716 106,730 105,336 101,977 94,730 92,634 Fully diluted................ 113,560 111,427 110,258 107,157 94,730 92,634 - -------------------------------------------------------------------------------
(1) Includes, in 1995, $28 million in charges mainly related to exiting, reor- ganizing and downsizing certain business and corporate staff units. In- cludes, in 1994, costs of $21 million in connection with the Corporation's acquisitions of BankWorcester Corporation and Pioneer Financial, A Co-oper- ative Bank; and, in 1993, acquisition-related costs and reorganization charges of $85 million, primarily in connection with the Corporation's mergers with Society for Savings Bancorp, Inc. (Society) and Multibank Fi- nancial Corp. (Multibank), as well as estimated costs of downsizing and reconfiguring certain of the Corporation's business and corporate units. Also includes reorganization charges of $54 million in 1991 and $139 mil- lion in 1990, comprised of $7 million in 1991 and $89 million in 1990 in connection with a Society reorganization plan, and $47 million in 1991 and $50 million in 1990 in connection with the Corporation's plans for the con- solidation and downsizing of various domestic and international operations and facilities and staff reductions. (2) Includes a cumulative benefit of $77 million resulting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and a cumulative charge of $53 million, net of taxes, relating to a change in accounting principles pertaining to the valuation of purchased mortgage servicing rights. 17 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- BANK OF BOSTON CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1995 1994 1993 1992 1991 1990 (dollars in millions, except per share amounts) - ---------------------------------------------------------------------------------- SELECTED RATIOS Return on average as- sets..................... 1.21% 1.01% .78% .76% (.30)% (1.07)% Return on average common equity(3)................ 17.14 15.82 11.78 13.37 (7.28) (21.68) Common dividend payout ratio.................... 28.1 24.9 14.4 3.4 NM NM Common equity to total assets................... 6.8 5.9 5.9 5.7 4.5 4.7 Average total stockhold- ers' equity to average total assets............. 7.7 7.0 7.1 6.0 5.1 5.6 Risk-based capital ratios Tier 1................. 8.0 7.0 7.2 7.1 5.2 5.3 Total.................. 12.8 12.2 12.4 12.0 9.3 9.4 Leverage ratio........... 7.4 6.5 6.8 6.6 4.6 4.5 Net credit losses to av- erage loans and lease fi- nancing.................. .54 .82 .84 1.22 1.87 2.50 Reserve for credit losses to loans and lease fi- nancing.................. 2.37 2.19 2.68 3.63 4.14 3.90 Reserve for credit losses to nonaccrual loans and lease financing.......... 238.29 186.22 139.69 118.51 69.48 53.93 Nonaccrual loans and OREO as a percent of related asset categories......... 1.2 1.4 2.3 3.7 7.2 8.1 Market value/book value.. 159.9 104.7 101.3 126.2 63.9 32.5 BALANCE SHEET DATA AT DECEMBER 31 Loans and lease financ- ing...................... $31,067 $31,005 $28,782 $25,399 $25,368 $26,220 Reserve for credit loss- es....................... (736) (680) (770) (923) (1,051) (1,023) Total assets............. 47,397 44,630 40,588 37,315 38,309 39,351 Deposits................. 30,948 31,356 29,614 29,102 29,291 31,813 Funds borrowed........... 8,763 6,360 4,975 2,947 4,634 2,704 Notes payable............ 2,139 2,169 1,973 1,686 1,419 1,536 Stockholders' equity..... 3,751 3,142 2,912 2,554 1,919 2,046 Common shares outstanding (in thousands)........... 112,086 106,547 105,801 104,664 95,025 93,575 Common stockholders of record(4)................ 21,962 23,005 23,633 25,263 27,665 27,414 Number of employees...... 17,881 18,355 18,644 19,459 18,752 20,339 Per common share Book value.............. $28.93 $24.72 $22.71 $20.21 $18.00 $19.64 Market value............ 46 1/4 25 7/8 23 25 1/2 11 1/2 6 3/8 AVERAGE BALANCE SHEET DATA Loans and lease financ- ing...................... $31,116 $29,790 $26,586 $25,330 $26,167 $28,949 Securities............... 4,724 3,510 3,624 4,704 5,098 4,509 Other earning assets..... 3,551 4,845 4,089 3,195 3,298 6,865 ------- ------- ------- ------- ------- ------- Total earning assets... 39,391 38,145 34,299 33,229 34,563 40,323 ------- ------- ------- ------- ------- ------- Cash and due from banks.. 1,924 2,071 1,790 1,596 1,485 1,780 Other assets............. 3,297 2,845 2,278 2,030 1,867 1,667 ------- ------- ------- ------- ------- ------- Total average assets... $44,612 $43,061 $38,367 $36,855 $37,915 $43,770 ======= ======= ======= ======= ======= ======= Deposits................. $29,301 $29,301 $28,539 $29,028 $29,861 $33,505 Funds borrowed........... 8,167 7,180 4,349 3,485 3,544 4,518 Other liabilities........ 1,606 1,488 1,017 919 1,014 1,218 Notes payable............ 2,092 2,069 1,743 1,197 1,552 2,098 Stockholders' equity..... 3,446 3,023 2,719 2,226 1,944 2,431 ------- ------- ------- ------- ------- ------- Total average liabili- ties and stockholders' equity................. $44,612 $43,061 $38,367 $36,855 $37,915 $43,770 ======= ======= ======= ======= ======= ======= - ----------------------------------------------------------------------------------
(3) For purposes of this ratio, preferred stock dividends have been deducted from net income. (4) The number of stockholders of record includes banks and brokers who act as nominees, each of whom may represent more than one stockholder. NM--Not meaningful. 18 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Bank of Boston Corporation (the Corporation) is a registered bank holding com- pany which, together with its subsidiaries, operates a network of 500 offices across the U.S. and more than 100 offices in 23 countries in Latin America, Europe and Asia. The Corporation's major banking subsidiaries are The First National Bank of Boston (FNBB), Bank of Boston Connecticut and Rhode Island Hospital Trust National Bank. STRATEGIC INITIATIVES The Corporation continues to take strategic initiatives focused on leveraging its core competencies over attractive markets, including the expansion of its domestic personal banking and global banking businesses, increasing the capi- tal markets activities of its corporate banking business, the divestiture of non-core business units and the formation of strategic alliances. MERGER AGREEMENT WITH BAYBANKS On December 12, 1995, the Corporation and BayBanks, Inc. (BayBanks) jointly announced a definitive agreement under which the Corporation would acquire BayBanks in a tax-free exchange of stock where the Corporation will exchange 2.2 shares of its common stock for each share of BayBanks common stock. The transaction will be accounted for as a pooling of interests. The merger is ex- pected to be completed by the middle of 1996, and is subject to a number of conditions, including approval by federal and state bank regulators and the stockholders of both companies. No assurance can be given that approvals of the stockholders or the regulators will be obtained. The Corporation antici- pates incurring merger and reorganization costs of approximately $140 million (on a pre-tax basis) in connection with the merger. The combination of the two Boston-based institutions will create a consumer and corporate banking leader operating in 36 states and 24 countries, with approximately $60 billion in as- sets and $40 billion in deposits. OTHER ACQUISITIONS During the past year, the Corporation conducted the following additional ac- quisition activities: . In February 1995, the Corporation completed its acquisition of Ganis Credit Corporation (Ganis), which is headquartered in Newport Beach, California. Ganis specializes in collateralized lending for recreational vehicles and boats, and had approximately $540 million in consumer loans outstanding at December 31, 1995. . In July 1995, Fidelity Acceptance Corporation (FAC), the Corporation's na- tional consumer finance company, completed the acquisition of approximately $110 million in consumer loans and assumed 46 branches of Century Accept- ance Corporation, a national consumer finance company based in Kansas City, Missouri. . In October 1995, the Corporation announced a definitive agreement to ac- quire The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank, a Massachusetts chartered savings bank with approximately $1.3 billion in deposits. This transaction, which will be accounted for as a purchase, is currently anticipated to close in the middle of 1996, sub- ject to approval by federal and state bank regulators and the stockholders of Bancorp. DIVESTITURES In 1995, the Corporation sold the following non-strategic business units: . In the first quarter of 1995, following its strategy to focus on the south- ern New England market, the Corporation completed the sales of its Vermont and Maine banking subsidiaries, Bank of Vermont (Vermont) and Casco North- ern Bank, N.A. (Casco), resulting in a pre-tax gain of approximately $75 million, or $30 million net of tax. Vermont and Casco combined had loans of approximately $1.2 billion and deposits of approximately $1.3 billion at December 31, 1994. . In October 1995, the Corporation sold its corporate trust business, result- ing in a net pre-tax gain of $20 million, or $12 million net of tax. STRATEGIC ALLIANCES AND OTHER INITIATIVES During 1995, the Corporation entered into the following strategic alliances, and took the following other strategic initiatives, to improve efficiencies and economies of scale of certain of its business units: . Effective in October 1995, the Corporation formed a joint venture with Bos- ton Financial Data Services (a joint venture of State Street Bank and Trust Company and DST Systems, Inc.), which combined their respective stock transfer businesses into a single entity that is 50 percent owned by each party. . In December 1995, the Corporation announced it would enter into a joint venture with two equity investors, the Thomas H. Lee Company and Madison Dearborn Partners, to form an independent mortgage company. The joint ven- ture structure is expected to provide a means to achieve the growth and scale deemed necessary to succeed in the mortgage banking industry. The Corporation will 19 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- contribute its BancBoston Mortgage Corporation (BBMC) subsidiary in return for cash and a minority equity interest in the newly formed entity. The transac- tion is expected to be completed in the first half of 1996. . During 1995, the Corporation initiated further expansion into consumer mar- kets by placing new automatic teller machines (ATMs) in retail locations, establishing in-store supermarket branches, introducing computer home bank- ing and re-entering the domestic credit card business. . In 1995, the Corporation continued to emphasize growth and improve efficien- cies in its global banking business, particularly in Latin America. In this regard, the Corporation established subsidiary banks in Colombia and Mexico and a representative office in China, and announced the formation of a joint venture in the Philippines. The Corporation realigned its European and cer- tain other operations during 1995, including the announced closing of its Luxembourg operations and the disposition of its Puerto Rican and Haitian branches. The Corporation also introduced its Global Initiative program, an export program designed to help small- to medium-sized companies, princi- pally based in New England, conduct business in Latin America and other parts of the world. . The Corporation continued to expand its private equity investing and capital markets activities as evidenced by the growth in profits from the equity and mezzanine business and related corporate finance fee income. During the year, the Corporation formed its Emerging Markets group, a global capital markets unit which will link emerging markets sales and trading, treasury risk-management products and Latin American/Asian investment banking. The Corporation also reconfigured its corporate banking organization to link closely all its relationship management units (domestic, international, spe- cialized and middle market), to establish the key distribution channel for its increasingly sophisticated array of capital markets and other products, and to optimize customer service and delivery capabilities. Additional information on certain of the transactions described above is in- cluded in Note 2 to the Financial Statements. 20 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ RESULTS OF OPERATIONS The following is a discussion and analysis of the Corporation's consolidated results of operations. In order to understand this section in context, it should be read in conjunction with the Financial Statements included elsewhere in this report. OVERVIEW Table 1 presents the Corporation's income before extraordinary item and cumula- tive effect of changes in accounting principles and net income, as well as re- lated primary and fully diluted earnings per common share amounts for 1995, 1994 and 1993. The Corporation's 1995 net income increased $106 million, or 24%, from the 1994 level. Net income per common share on a fully diluted basis for 1995 increased $.82, or 23%, from the 1994 level. TABLE 1 -- RESULTS OF OPERATIONS
Years Ended December 31 1995 1994 1993 (in millions, except per share amounts) - --------------------------------------------------------------------------------- Income before extraordinary item and cumulative effect of changes in accounting principles ............................ $ 541 $ 442 $ 275 Extraordinary loss from early extinguishment of debt, net of tax.......................................................... (7) Cumulative effect of changes in accounting principles, net of tax(1)....................................................... 24 ----- ----- ----- Net income.................................................... $ 541 $ 435 $ 299 ===== ===== ===== Per common share Income before extraordinary item and cumulative effect of changes in accounting principles Primary..................................................... $4.55 $3.79 $2.28 Fully diluted............................................... 4.43 3.67 2.22 Net income Primary..................................................... 4.55 3.73 2.51 Fully diluted............................................... 4.43 3.61 2.44
- -------------------------------------------------------------------------------- (1) Reflects a $77 million benefit as a result of adopting Statement of Finan- cial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," as of January 1, 1993, and a $53 million after-tax charge as a result of a change in accounting with respect to the valuation of purchased mortgage servicing rights (PMSR). Chart 1 presents the Corporation's total revenues on a taxable equivalent ba- sis, excluding gains from the sales of businesses, for each of the three years in the period ended December 31, 1995. On this basis, revenues grew $367 mil- lion, or over 15%, in 1995, and $281 million, or over 13%, in 1994. A detailed discussion of the net interest revenue and noninterest income components of revenue follows. [BAR CHART 1 DESCRIPTION BELOW] Bar Chart 1 entitled "Total Revenues Excluding Gains on Sales of Businesses" - ---------------------------------------------------------------------------- The Corporation's total revenues (excluding gains on sales of businesses) for the years ended December 31, 1995, 1994 and 1993, respectively, were as follows:
(in millions) 1993 1994 1995 (fully taxable equivalent ------ ------ ---- basis) Net Interest Revenue $1,353 $1,579 $1,751 Noninterest income $746 $801 $996 ------ ---- ---- Total $2,099 $2,380 $2,747
NET INTEREST REVENUE This discussion of net interest revenue should be read in conjunction with Av- erage Balances and Interest Rates and Change in Net Interest Revenue -- Volume and Rate Analysis, presented elsewhere in this report. Table 2 presents a sum- mary of net interest revenue, related average earning assets and net interest margin. For this review of net interest revenue, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been ad- justed to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35%, plus applicable state and local taxes, net of related federal tax benefits. TABLE 2 -- NET INTEREST REVENUE, AVERAGE EARNING ASSETS AND NET INTEREST MARGIN
Years Ended December 31 (dollars in millions) U.S. International Consolidated - ------------------------------------------------------------------------------ Net interest revenue (fully taxable equivalent basis) 1995.................................... $ 1,305 $ 446 $ 1,751 1994.................................... 1,231 348 1,579 1993.................................... 1,096 257 1,353 Average earning assets 1995.................................... $28,512 $10,879 $39,391 1994.................................... 28,339 9,806 38,145 1993.................................... 26,742 7,557 34,299 Net interest margin 1995.................................... 4.58% 4.10% 4.45% 1994.................................... 4.34% 3.54% 4.14% 1993.................................... 4.10% 3.40% 3.94%
21 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- 1995 VS. 1994 Both domestic and international operations contributed to the improvements in net interest revenue and margin from 1994. The domestic net interest revenue increase of $74 million resulted from both a higher level of earning assets and wider spreads. Average earning assets in- creased $173 million, reflecting a $162 million increase in average loan and lease volume. Contributing to the loan volume increase was a higher level of consumer-related loans, reflecting growth of FAC's portfolio, the full year ef- fects of the 1994 acquisitions of Pioneer Financial, A Co-operative Bank (Pio- neer) and BankWorcester Corporation (BankWorcester), and the effect of the early 1995 acquisition of Ganis, partially offset by the impact of the 1995 Vermont and Casco sales and lower domestic commercial loans and residential mortgages. Wider spreads mainly reflected the shift in the Corporation's aver- age loan portfolio towards higher-yielding consumer-related loans, and earning asset yield growth which generally outpaced rate increases on interest bearing liabilities, particularly retail deposits, during the first half of the year. The widening of spreads was also mainly responsible for the domestic net inter- est margin increasing by 24 basis points compared with 1994. Information on the Corporation's management of interest rate risk is discussed in the "Interest Rate Risk Management" section. The international net interest revenue increase of $98 million and the interna- tional net interest margin increase of 56 basis points were primarily attribut- able to the Corporation's operations in Latin America. These increases were due to wider spreads as well as increases in average earning assets. The increase in spreads was, in part, due to a shift in mix to higher-yielding loans from lower-yielding treasury assets as well as the effects of asset and liability positions taken by the Corporation in Latin America which enabled it to benefit from prevailing interest rates. International volume growth included an in- crease of over $600 million in average loans and leases in Argentina from 1994. Consolidated net interest margin increased throughout 1994 to 4.39% in the fourth quarter of 1994. The margin increased further to 4.56% in the first quarter of 1995, and declined in each of the subsequent 1995 quarters, to 4.35% in the fourth quarter. The declines in margin during 1995 reflected the nar- rower domestic spreads being experienced by the industry as competitive rate increases on interest bearing liabilities, particularly retail deposits, caught up with yield growth on earning assets. In addition, international margin in- creased in the first half of 1995, mainly as a result of widening spreads in both Argentina and Brazil, which reflected the effects of government economic measures and interest rate positions taken by the Corporation enabling it to benefit from rising rates. Spreads generally narrowed in the second half of 1995, particularly in Argentina, as a result of declining interest rates stem- ming from increasing economic stability in that country during this period. See the "Emerging Markets Countries" section for further discussion. The Corporation expects continued pressure on margin in the future. Future lev- els of net interest revenue and margin will be affected by competitive pricing pressure on retail deposits, loans and other products; the mix and volume of assets and liabilities; the current interest rate environment; the economic and political conditions in the countries where the Corporation does business; and other factors. NONINTEREST INCOME The composition of noninterest income is presented in Table 3 and Chart 2: TABLE 3 -- NONINTEREST INCOME
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- Financial service fees Net mortgage servicing fees.................................. $ 163 $ 57 $ 6 Deposit fees................................................. 117 126 122 Loan-related fees............................................ 70 60 45 Letter of credit and acceptance fees......................... 69 61 58 Other financial service fees................................. 104 92 119 ------ ---- ---- Total financial service fees................................ 523 396 350 Trust and agency fees......................................... 217 201 178 Net equity and mezzanine profits.............................. 110 30 38 Net foreign exchange trading profits.......................... 57 42 45 Trading profits and commissions............................... 22 16 24 Net securities gains.......................................... 9 14 32 Gains on sales of businesses.................................. 95 27 Other income.................................................. 58 102 79 ------ ---- ---- Total....................................................... $1,091 $828 $746 ====== ==== ====
[BAR CHART 2 DESCRIPTION BELOW] Bar Chart 2 entitled "NonInterest Income" - ----------------------------------------- Chart 2 reports the Corporation's total noninterest income for the years ended December 31, 1995, 1994 and 1993, respectively, as follows:
(in millions) 1993 1994 1995 ---- ---- ---- Fees $528 $597 $740 Trading $101 $72 $88 Other $117 $159 $263 ---- ---- ---- Total $746 $828 $1,091
1995 VS. 1994 The $127 million increase in financial service fees reflected a significant in- crease in net mortgage servicing fees as well as higher loan-related fees and other financial service fees and higher letter of credit and acceptance fees, partially offset by a decline in deposit fees. Net mortgage servicing fees in- creased 22 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ $106 million compared with 1994. As a result of the declining interest rate en- vironment in the fourth quarter of 1995, the Corporation recognized $67 million of gains (net of increased servicing amortization) from the increase in market value of contracts used to manage prepayment risk in the mortgage servicing portfolio. See the "Interest Rate Risk Management" section for a further dis- cussion of these contracts and their potential effect on income. Excluding these gains, net mortgage servicing fees increased $39 million from 1994, re- flecting the growth in the average servicing portfolio from $32 billion in 1994 to $40 billion in 1995. See the "Strategic Alliances and Other Initiatives" section for further discussion of the announced joint venture involving the Corporation's mortgage banking operations. The growth in loan-related and other financial service fees was mainly due to higher syndication and advisory fees, reflecting the Corporation's increased emphasis on its capital markets busi- ness. Partially offsetting the increase in other financial service fees was the absence of factoring fees in 1995, due to the sale of the Corporation's domes- tic factoring business in 1994, which resulted in a pre-tax gain of $27 million ($15 million net of tax). Letter of credit and acceptance fees increased $8 million compared with 1994 due to a higher volume of business. Deposit fees de- clined compared to 1994, mainly resulting from the $1.3 billion decline in de- posits due to the 1995 sales of Vermont and Casco, which resulted in a pre-tax gain of $75 million ($30 million net of tax). Net equity and mezzanine profits improved $80 million from 1994, as a result of a higher level of sales activity in 1995. The improvement in trust and agency fees mainly reflected higher fees from the Brazilian mutual fund business, as total funds under management increased to $2.5 billion at December 31, 1995, from $1.7 billion a year ago, which was partially offset by the absence of cor- porate trust and domestic stock transfer fees in the fourth quarter of 1995. As previously discussed in the "Strategic Initiatives" section, the Corporation sold its corporate trust business on October 1, 1995, which resulted in a net pre-tax gain of $20 million ($12 million net of tax), and spun off its domestic stock transfer business into a joint venture effective in October 1995. Foreign exchange trading activities principally include trading of spot and forward contracts in major foreign currencies. Net foreign exchange trading profits were $15 million higher compared with 1994, as increases were posted by inter- national and domestic treasury operations. Trading account profits increased due to a higher level of profits from international securities trading during the second half of 1995. Offsetting these improvements were declines in other noninterest income and net securities gains. Other income declined, in part, due to a loss of $17 million on the transfer of approximately $1.3 billion of low-yielding residential mortgage loans into the held for sale account, sub- stantially all of which were sold by December 31, 1995. Also contributing to the decline in other income were $17 million of valuation-related charges asso- ciated with certain investments and other assets, including assets being re- tained by the Corporation in connection with the mortgage banking joint ven- ture, and the absence of net gains recorded in the first quarter of 1994 from the sale of securities originally acquired in connection with loan restructurings. Partially offsetting these items was a net improvement in the results of investments accounted for under the equity method. Other income in 1994 included $15 million of exchange-related profits arising from the strengthening of Brazil's currency against the U.S. dollar subsequent to the implementation of Brazil's new economic program in July 1994, and approximately $15 million of charges associated with certain investments. NONINTEREST EXPENSE The composition of noninterest expense is presented in Table 4 and Chart 3: TABLE 4 -- NONINTEREST EXPENSE
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- Employee costs............................................ $ 897 $ 813 $771 Occupancy and equipment................................... 240 231 224 FDIC insurance premiums................................... 24 51 62 Other..................................................... 399 341 345 ------ ------ ------ Noninterest expense, excluding OREO costs and special charges................................................. 1,560 1,436 1,402 OREO costs................................................ 9 22 44 Acquisition, divestiture and restructuring expense........ 28 21 85 ------ ------ ------ Total................................................... $1,597 $1,479 $1,531 ====== ====== ======
[BAR CHART 3 DESCRIPTION BELOW] Bar Chart 3 entitled "NonInterest Expense Excluding Oreo Costs and Special - -------------------------------------------------------------------------- Charges" - -------- Chart 3 reports the Corporation's total noninterest expense excluding Oreo costs and special charges for the years ended December 31, 1995, 1994 and 1993, respectively, as follows: (in millions) 1993 1994 1995 ------ ------ ------ Employee Costs $771 $813 $897 Occupancy/Equipment $224 $231 $240 Other $407 $392 $423 ---- ---- ---- Total $1,402 $1,436 $1,560 23 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- 1995 VS. 1994 The growth in noninterest expense before acquisition, divestiture and restruc- turing expense and OREO costs reflected increases in the Corporation's Latin American, personal banking and capital markets businesses which the Corporation has been expanding. The increase in employee costs mainly included higher merit increases and higher levels of incentive compensation, including stock awards made to senior management under a plan tied to the Corporation's common stock price. The $9 million increase in occupancy and equipment from 1994 was the re- sult of higher expenses from international operations, mainly Latin America. The $27 million decline in FDIC insurance premiums reflected a reduction in the FDIC assessment rate effective in June 1995. Other expense increased from 1994 as a result of growth and business development in the Latin American and per- sonal banking businesses. This increase included higher levels of advertising and marketing expense, including increases related to new retail deposit prod- ucts, the Corporation's re-entry into the domestic credit card business, the introduction of a home banking product and customer surveys. In addition, growth in travel, communications and software costs and increased goodwill am- ortization contributed to the increase in other expenses. The decline in OREO costs was primarily due to lower valuation adjustments. During the fourth quarter of 1995, the Corporation recorded $28 million of charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. Included within these charges were expenses related to reorganizations underway in the European business, including the closing of the Luxembourg operations, corporate banking, certain Asian operations and var- ious other units. In addition, a charge was included for curtailment losses as defined by SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Bene- fits." The curtailment losses resulted from the announced joint venture of the mortgage banking business which will remove mortgage banking employees from the Corporation's postretirement and pension plans. Additional information on these items is included in Note 17 to the Financial Statements. PROVISION FOR CREDIT LOSSES The provision for credit losses was $250 million in 1995, compared with $130 million in 1994 and $70 million in 1993. The provision for credit losses in each year reflected management's assessment of the adequacy of the reserve for credit losses, including the risk characteristics of the loan portfolio and economic conditions. The 1995 provision for credit losses included special pro- visions of $75 million reflecting management's intent to strengthen further the Corporation's loan loss reserve (see further discussion in the "Reserve for Credit Losses" section). The 1994 provision reflected the effect of transfer- ring certain lower quality real estate exposures to an accelerated disposition portfolio (ADP) (see further discussion in the "Accelerated Disposition Portfo- lio" section). The amount of future provisions will be a function of the regu- lar quarterly review of the reserve for credit losses, which considers the risk characteristics of the loan portfolio and economic conditions existing at that time. PROVISION FOR INCOME TAXES The 1995 income tax provision was $444 million, compared with $349 million for 1994 and $215 million for 1993. The 1995 provision included $45 million associ- ated with the $75 million gain on the sales of Vermont and Casco. The high level of tax associated with this gain reflected the lower tax bases in these investments as a result of $35 million of non-tax deductible goodwill associ- ated with these subsidiaries. Excluding the impact of these sales, the Corpora- tion's effective tax rate in 1995 was 44%, the same rate as in 1994 and 1993. During 1995, the Massachusetts Legislature enacted a bill to reduce the state income tax rate for banks from 12.5% to 10.5% to be phased in over five years, and to permit apportionment of a bank's taxable income. Additionally, in 1995, the Corporation reached a favorable settlement of an outstanding Massachusetts tax matter relating to income earned on certain securities. These items did not have a significant effect on the Corporation's 1995 effective tax rate, since the reduction in the current tax provision from the tax law changes and the settlement were offset by the required reduction in FNBB's net deferred tax as- sets resulting from the tax law changes. The changes in the Massachusetts tax law are expected to have a favorable impact on the Corporation's effective tax rate in 1996. 24 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------- ---------------------------------------- ------------------------------------ ---------------------------------------- LINE OF BUSINESS RESULTS The Corporation is managed through its Corporate Working Committee, which is comprised of executives who are responsible for various revenue-generating businesses and corporate support areas. For purposes of the line of business presentation below, the Corporation has assigned each revenue-generating busi- ness to one of three broad business lines: Personal, Corporate and Global Bank- ing. Since synergies among these lines result in an overlap of certain activi- ties among some of the underlying businesses, particularly among the capital markets and corporate product areas, judgment was used in determining where a business was assigned. The line of business results reflect assignments and allocations of items made within the Corporation's internal management reporting process. Most balance sheet and income statement items are specifically attributed to individual businesses. In measuring revenues and expenses of the individual businesses, the management reporting process utilizes funds transfer pricing under a matched funding concept for the purpose of allocating net interest revenue, and applies various techniques for the purpose of allocating costs associated with corporate support areas. The provision for credit losses is distributed based on a judgmental process which takes into account various factors, including loan levels, asset quality and credit loss experience. When current year changes in organizational structure and/or the management reporting process oc- cur, prior period information is restated to maintain comparability among peri- ods. Selected financial information for the Personal, Corporate and Global banking lines for 1995 and 1994 is presented in Table 5. TABLE 5 -- LINE OF BUSINESS SELECTED FINANCIAL INFORMATION
For The Years Ended December 31 Personal Corporate Global (in millions) Banking Banking Banking Other Total - -------------------------------------------------------------------------------- Revenues (fully taxable equivalent basis) 1995................................... $1,065 $902 $747 $128 $2,842 1994................................... 956 823 581 47 2,407 Expenses (excluding OREO) 1995................................... 701 354 505 28 1,588 1994................................... 679 345 412 21 1,457 Credit provision and OREO 1995................................... 97 62 60 40 259 1994................................... 72 55 25 152 Pretax income 1995................................... 267 486 182 60 995 1994................................... 205 423 144 26 798 Net income 1995................................... 149 268 103 21 541 1994................................... 114 233 80 8 435 Average loans and leases 1995................................... 8,369 15,007 7,740 31,116 1994................................... 7,255 15,946 6,589 29,790 - --------------------------------------------------------------------------------
PERSONAL BANKING Personal Banking serves over 2 million households nationally and encompasses the following individual businesses: Retail and Small Business Banking, Con- sumer Lending, Private Banking and Mortgage Banking. Within Retail and Small Business Banking, the Corporation operates 279 branches throughout Massachusetts, Connecticut and Rhode Island and manages approxi- mately $13 billion of deposits. Consumer Lending is a national franchise with a portfolio of approximately $5 billion. In addition to providing its customers with home equity loans and other products, the group operates two wholly owned national consumer finance companies, Ganis and FAC, with a combined presence of 185 offices in 31 states. Ganis provides its customers with financing for rec- reational vehicles and luxury boats, while FAC serves the needs of a sub-prime customer base by providing financing for automobiles and other consumer prod- ucts. Private Banking caters to customers with high net worth and offers in- vestment management services, trust and estate planning, jumbo mortgages and personal tax planning. The business has 13 offices located in southern New En- gland and Florida and has $15 billion of assets under management. Mortgage Banking operates through BBMC, with 32 offices located throughout the United 25 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- States. BBMC had a servicing portfolio of $42 billion at December 31, 1995, ranking it among the top twenty mortgage companies in the country. As discussed previously, the Corporation's mortgage banking business is expected to become part of a new mortgage banking joint venture in 1996. The announced acquisition of BayBanks, which had approximately $12 billion of assets at December 31, 1995, is expected to enhance the Corporation's personal banking capabilities and New England regional market share. Also during 1995, the Corporation expanded its retail delivery channels, including in-store su- permarket branches, remote ATMs and telebanking capacity, and became the first New England bank to introduce a home banking product in conjunction with Microsoft and Intuit. In addition, the Corporation re-entered the domestic credit card business in 1995, and, by year-end, had approximately 102,000 ac- counts with outstanding balances of approximately $124 million. During 1995, pre-tax income from Personal Banking increased $62 million, or 30%, from 1994. This improvement was mainly due to higher revenue of $109 mil- lion, which more than offset increases in expenses and credit costs. Revenue growth was led by Consumer Lending which benefited from an increase in average loans and leases of over $1 billion, most of which came from Ganis and FAC. In addition, net mortgage servicing fees, excluding special items, increased $39 million, reflecting an $8 billion increase in average servicing volume. The $22 million increase in expenses was primarily due to growth in Retail Banking and Consumer Lending, partly offset by lower FDIC expense. This reflects strategic expansion in these areas which resulted in a higher volume of loans, the pur- chase of Ganis in February 1995, the re-entry into the domestic credit card business and the introduction of other new products. The increase in credit costs is primarily a function of the higher level and mix of loans. CORPORATE BANKING Corporate Banking seeks preferred provider status with its customers by deliv- ering relationship-driven financial solutions. Services provided include lend- ing, corporate finance, equity and mezzanine financing, treasury, cash manage- ment, leasing, trade financing and custody. The lending operation is national in scope with a portfolio of approximately $15 billion. The client base ranges from middle market businesses to large, multinational corporations. Included within the lending operation are specialty areas such as media and communica- tions, high technology, energy and utilities, real estate and environmental services. During 1995, the Corporation continued to focus on expanding its capital mar- kets activities through syndications, private placements and public markets. In addition, during 1995, the corporate trust business was sold, a joint venture with Boston Financial Data Services related to the stock transfer business was formed, and the Corporate Banking organization was realigned to enhance cus- tomer service and delivery capabilities. During 1995, pre-tax income from Corporate Banking increased $63 million, or 15%, from 1994. This improvement was primarily due to higher revenue of $79 million, reflecting the strong performance of its equity and mezzanine busi- ness. The size of the equity and mezzanine portfolio was approximately $550 million at December 31, 1995. In addition, fees from the corporate finance business grew during 1995, primarily resulting from a higher level of syndica- tion activity. Partially offsetting these revenue improvements was a $939 mil- lion decline in average loans and leases. This reflected the Corporation's ac- tive management of its balance sheet, which resulted in a decline in lower- yielding commercial loans, coupled with reductions in commercial loans as a re- sult of the sales of Vermont and Casco in early 1995. GLOBAL BANKING Global Banking operates through a network of over 100 offices in more than 20 foreign countries. Individual businesses include Southern Cone (Argentina, Chile and Uruguay), Brazil, Central America, Europe, Asia and International Private Banking. In order to capitalize on its strong presence in these mar- kets, the Corporation has been expanding its Emerging Markets sales, trading and investment banking activities. The Corporation's largest foreign operations are located in Argentina and Bra- zil. The Corporation has operated in Argentina since 1917, has a network of over 40 branches and is one of the largest foreign banks in the country. The Corporation's Argentine operations offer a wide array of products concentrating in the corporate, middle market, treasury and retail businesses. Products and services offered include credit cards, residential mortgages, auto loans, mu- tual funds, brokerage, custody and portfolio management. The Corporation also participates in a pension company joint venture in Argentina. The Corporation has operated in Brazil since 1946, has a network of nearly 30 branches and is one of the largest foreign banks in the country. The principal businesses of the Corporation's Brazilian operations include corporate lending, trade financ- ing, treasury and fee-based activities, with particular emphasis on mutual funds, custody and credit cards. In Europe and Asia, the Corporation operates through offices in the United Kingdom, France, Germany, Japan, South Korea, China, Taiwan, Hong Kong, Singa- pore and Indonesia. These European and Asian offices represent multi-faceted businesses which provide trade finance, foreign exchange and other services while catering to the needs of U.S. multinational clients. During 1995, the Corporation's Central American business was expanded through the establishment of subsidiary banks in Colombia and Mexico. Also in 1995, the Corporation established a representative office in China and announced the for- mation of a joint venture in the Philippines. Other events in Global Bank- 26 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ ing in 1995 included the realignment of the Corporation's European operations, the announced closing of its Luxembourg operations and the dispositions of its Puerto Rican and Haitian branches. During 1995, pre-tax income from Global Banking increased $38 million, or 26%, from 1994. This improvement was mainly due to higher revenue of $166 million, reflecting higher loan levels, wider spreads and a growth in noninterest income in Argentina and Brazil. The increased noninterest income was largely the re- sult of higher mutual fund and letter of credit fees in Brazil coupled with higher revenues from the Argentine pension, retail and treasury businesses. These revenue improvements were partially offset by a $93 million increase in expenses and a $35 million increase in credit costs. The growth in expenses was related to the cost of expanding the Argentine and Brazilian operations, while the increased level of credit costs reflected a higher level of loans. OTHER Included in the Other category are items that the Corporation considers to be outside its three business lines' normal and recurring operations, and, as such, it did not assign them to any of the main businesses. In 1995, revenue items included $95 million of gains on the sales of Vermont, Casco and the cor- porate trust business; $67 million of gains (net of increased servicing amorti- zation) in the fourth quarter from an increase in the market value of contracts used to manage prepayment risk in the mortgage servicing portfolio; $17 million of losses on the transfer and sale of residential mortgage loans; and $17 mil- lion of valuation-related charges associated with certain investments and other assets. Expense items in 1995 represented $28 million of expenses related to the divestiture and reorganization of certain operations. In 1994, revenue items included the $27 million gain on the sale of the domestic factoring busi- ness and approximately $20 million in revenues recognized from the Corporation positioning itself to take advantage of interest rate movements during the ini- tial phase of Brazil's new economic program. Expense items in 1994 represented $21 million of expenses in connection with the acquisitions of BankWorcester and Pioneer. 27 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------- ---------------------------------------- ------------------------------------ ---------------------------------------- FINANCIAL CONDITION Credit, liquidity, interest rate and capital management are important elements to be considered in understanding and assessing the Corporation's financial condition. A discussion of these areas follows. CREDIT MANAGEMENT The Corporation employs a risk management process to manage all forms of credit risk, including balance sheet and off-balance-sheet exposures. The Credit Pol- icy Committee, on a corporate-wide basis, establishes all credit policies for the Corporation, approves underwriting standards and concentration limits, and grants credit approval authorities. An independent credit function monitors compliance by individual units with the Corporation's credit policies, works to ensure that credit due diligence and credit administration meet acceptable standards, and is responsible for the effectiveness of the loan review process. In addition, a credit information unit provides reports on credit exposures on a corporate-wide basis. The independent credit function includes a staff of credit officers, reporting directly to the Senior Credit Officer (SCO). These credit officers are assigned to work with the various business units to ensure the integrity of the credit process. Business unit management has the primary responsibility to evaluate credit risk, ensure that each individual credit ex- posure is appropriately risk rated, and monitor and manage credit risks within policy and portfolio guidelines. A risk review unit, which reports indepen- dently of both the business and credit units, audits the integrity of risk rat- ings and the adequacy of the credit process for all units of the Corporation. Through monthly meetings with the business unit heads and the frequent review of credit quality information, senior management in Boston oversees the world- wide credit activities of the Corporation, including both corporate and con- sumer credit areas. The level of management needed to approve credit exposures varies according to the size and level of risk of the credit. Corporate credits meeting specified size and risk rating thresholds must be approved by the Se- nior Credit Committee, which is chaired by the SCO and is composed of senior credit officers and senior business unit managers on a rotating basis. Portfo- lio limits and underwriting standards are established for both consumer and commercial credit exposures with common risk characteristics, such as industry or product type. An important aspect of the Corporation's portfolio management process is the management of large, individual credits, which are governed by relationship limits that are set according to risk rating. The Corporation has also established target risk rating profiles for business units across the Cor- poration. The Corporation also sets country limits on cross-border exposures to borrowers and counterparties domiciled in other countries. All limits are re- viewed regularly and adjusted based on the Corporation's assessment of relevant conditions. The Corporate Finance unit is integral to portfolio management and to enhancing the liquidity of the wholesale loan portfolio. Corporate Finance is responsible for arranging participations in loans where the Corporation is the lead bank. This unit maintains contact with other institutional lenders and investors in bank structured loans, maintains information on credit structure and pricing by risk category, evaluates the market liquidity of facilities, and syndicates Corporation-agented facilities to attain desired hold levels. The Corporation employs a corporate-wide process to review individual credits and identify emerging problems. Credits that deteriorate into certain defined risk categories are managed by a separate loan review unit composed of profes- sional asset recovery specialists who establish detailed asset management plans designed to mitigate risk of credit loss to the Corporation. The Corporation continually seeks to improve its credit culture to balance as- sociated risks with its goal of optimizing its value to its stockholders and customers. While sound credit policies serve to reduce the Corporation's expo- sure to credit risks, they do not insulate the Corporation from losses. 28 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- LOANS AND LEASES Table 6 shows a breakdown of the portfolio for the last five years. TABLE 6 -- LOANS AND LEASE FINANCING PORTFOLIO
December 31 1995 1994 1993 1992 1991 (dollars in millions) BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent - ---------------------------------------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial................. $11,439 36.8% $11,805 38.1% $11,991 41.7% $10,329 40.7% $10,346 40.8% Commercial real estate Construction............ 336 1.1 354 1.1 617 2.1 854 3.4 1,028 4.1 Other................... 2,272 7.3 3,141 10.1 3,123 10.8 3,202 12.6 3,587 14.2 Consumer-related loans Secured by 1-4 family residential properties.. 3,861 12.4 5,004 16.1 4,159 14.5 3,630 14.3 3,884 15.3 Other................... 3,397 11.0 2,462 7.9 1,610 5.6 1,436 5.6 1,506 5.9 Lease financing........... 1,409 4.5 1,366 4.4 1,264 4.4 1,214 4.7 1,277 5.0 Unearned income........... (216) (.7) (216) (.7) (204) (.7) (205) (.8) (243) (1.0) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 22,498 72.4 23,916 77.0 22,560 78.4 20,460 80.5 21,385 84.3 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- INTERNATIONAL Commercial and industrial................ 6,398 20.6 5,136 16.6 4,650 16.2 3,646 14.4 2,928 11.5 Banks and other financial institutions.............. 682 2.2 614 2.0 602 2.1 385 1.5 152 .6 Governments and official institutions.............. 82 .3 33 .1 22 .1 54 .2 141 .6 Lease financing........... 285 .9 329 1.1 265 .9 218 .9 242 1.0 All other................. 1,159 3.7 1,053 3.4 791 2.7 721 2.8 609 2.4 Unearned income........... (37) (.1) (76) (.2) (108) (.4) (85) (.3) (89) (.4) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- 8,569 27.6 7,089 23.0 6,222 21.6 4,939 19.5 3,983 15.7 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans and lease financing................. $31,067 100.0% $31,005 100.0% $28,782 100.0% $25,399 100.0% $25,368 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== - ----------------------------------------------------------------------------------------------------------------
Total loans and lease financing increased approximately $60 million from Decem- ber 31, 1994, as the increase in international loans and leases more than off- set the decline in domestic loans and leases. The decline in domestic loans from December 31, 1994, reflected a $1.2 billion reduction from the sales of Vermont and Casco in the first quarter of 1995, of which approximately $500 million was related to commercial real estate loans, and the transfer of ap- proximately $1.3 billion of low-yielding residential mortgage loans into the held for sale account in the fourth quarter of 1995, substantially all of which were sold by December 31, 1995. The transfer and sale of these residential mortgage loans were undertaken in connection with a program to remove low-re- turn assets from the Corporation's balance sheet, which, in part, also accounts for the decline in the commercial and industrial and real estate portfolios. Excluding the sales of Vermont and Casco and the residential mortgage loans, domestic loans and leases grew approximately $1.1 billion, primarily due to higher levels of consumer-related loans, largely accomplished through the ac- quisition of Ganis and its origination activities throughout the year, and growth in the FAC loan portfolio by $250 million from December 31, 1994. International loans increased to $8.6 billion at December 31, 1995, from $7.1 billion at December 31, 1994. This growth has primarily occurred in Latin Amer- ica, particularly in the loan portfolios of Argentina and Brazil. Total loans in these two countries have grown approximately $1.1 billion since December 31, 1994. Other countries contributing to the increase in international loans from December 31, 1994 were Chile, Colombia and Mexico, with increases of approxi- mately $210 million, $85 million and $60 million, respectively. A further dis- cussion of these operations is included in the "Emerging Markets Countries" section. 29 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- DOMESTIC COMMERCIAL REAL ESTATE LOANS Table 7 details domestic commercial real estate loans by geographic location as of the last three year-ends. The portion attributable to other states at the end of 1995 was dispersed among approximately 25 states. TABLE 7 -- DOMESTIC COMMERCIAL REAL ESTATE LOANS
Other December 31 New Other (in millions) MA CT England States Total - -------------------------------------------------------------------------------- 1995.......................................... $1,219 $302 $222 $ 865 $2,608 ====== ==== ==== ====== ====== 1994.......................................... $1,480 $411 $629 $ 975 $3,495 ====== ==== ==== ====== ====== 1993.......................................... $1,348 $578 $790 $1,024 $3,740 ====== ==== ==== ====== ======
A significant portion of the commercial real estate portfolio is comprised of loans from which ultimate payment to the Corporation is expected to come from the sale, operation or refinancing of the underlying property. The collateral underlying substantially all of these loans is valued at least annually using various real estate valuation techniques, including discounted cash flows and appraisals. The remaining portfolio is primarily composed of outstandings se- cured by real estate which is owner-occupied and where the underlying business credit, rather than the property, is viewed as the principal source of repay- ment. Overall, the level of commercial real estate loans to all geographic areas declined during 1995, particularly in northern New England due to the sales of Vermont and Casco. HLTS Included in commercial, industrial and financial loans are loans made by many of the Corporation's lending businesses to finance transactions involving leveraged buyouts, acquisitions, and recapitalizations. These loans are desig- nated as highly leveraged transactions (HLTs), if, by the nature of the loan terms and the profile of the customer, the transaction qualifies for this clas- sification under the current bank regulatory definition of HLTs. Additionally, the HLT definition encompasses other, more traditional credit arrangements, where a high degree of leverage would be expected, such as asset-based lending and lending to the communications industry, particularly cable, where equity is traditionally low and cash flow is the predominant factor in assessing repay- ment ability. Table 8 summarizes the Corporation's HLT portfolio for the last three years. TABLE 8 -- HIGHLY LEVERAGED TRANSACTION PORTFOLIO
Years Ended December 31 1995 1994 1993 (dollars in millions) - ------------------------------------------------------------------------------- Total loans.............................................. $1,342 $1,272 $1,304 Number of companies...................................... 101 84 75 Average loan size........................................ $ 13 $ 15 $ 17 Unused lending commitments............................... $ 639 $ 653 $ 540 Nonaccrual loans......................................... $ 1 $ 10 Net credit losses (recoveries)........................... $ (4) $ 6 $ 21 Equity and mezzanine investments......................... $ 144 $ 105 $ 121
The Corporation's HLT portfolio is spread among a variety of industries. At De- cember 31, 1995, the largest segments of the HLT portfolio by industry were as follows: the transportation industry -- $177 million to 11 customers; the food, beverage and tobacco industry -- $164 million to 14 customers; petroleum, chem- icals, rubber and plastics -- $110 million to 8 customers; and the communica- tions industry -- $108 million to 7 customers. Yields on HLT loans are gener- ally higher than most other commercial loans. Typically, interest rates on new HLTs range from 1.5% to 2.75% over the London Interbank Bank Offered Rate (LI- BOR) and fees charged range from .75% to 1.5% of the principal amount commit- ted. The Corporation has historically been involved in transactions that are designated as HLTs, and it expects to continue to agent and participate in such transactions in the future. 30 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- NONACCRUAL LOANS AND LEASES AND OREO Table 9 summarizes nonaccrual loans and leases by type and as a percentage of the related consolidated loan category. TABLE 9 -- NONACCRUAL LOANS AND LEASES AND OREO
December 31 1995 1994 1993 1992 1991 Percent Percent Percent Percent Percent Of Loan of Loan of Loan of Loan of Loan (dollars in millions) Balance Category Balance Category Balance Category Balance Category Balance Category - -------------------------------------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial.......... $ 66 .6% $113 1.0% $120 .9% $203 1.8% $ 390 3.4% Commercial real estate Construction........... 24 7.1 13 3.7 30 4.9 81 9.5 123 11.9 Other.................. 78 3.4 106 3.4 230 7.4 345 10.8 740 20.6 Consumer-related loans Secured by 1-4 family residential properties............. 43 1.1 44 .9 64 1.5 58 1.6 70 1.8 Other.................. 32 .9 24 1.0 10 .6 26 1.8 32 2.1 ---- ---- ---- ---- ------ 243 1.1 300 1.2 454 2.0 713 3.5 1,355 6.3 ---- ---- ---- ---- ------ INTERNATIONAL Commercial and industri- al..................... 34 .5 17 .3 63 1.4 55 1.4 58 1.8 Banks and other financial institutions........... 1 .2 1 .2 2 1.5 Governments and official institutions........... 3 11.8 4 8.0 53 37.5 All other............... 32 2.8 47 4.5 31 4.0 6 .8 45 7.4 ---- ---- ---- ---- ------ 66 .8 65 .9 97 1.6 66 1.3 158 4.0 ---- ---- ---- ---- ------ Total nonaccrual loans and leases............. 309 1.0 365 1.2 551 1.9 779 3.1 1,513 6.0 OREO.................... 50 76 108 170 326 ---- ---- ---- ---- ------ Total................... $359 $441 $659 $949 $1,839 ==== ==== ==== ==== ====== - --------------------------------------------------------------------------------------------------------------
Total nonaccrual loans and leases and OREO declined $82 million to $359 million at December 31, 1995, from $441 million at December 31, 1994. The decline from December 31, 1994 included a $27 million reduction from the sales of Vermont and Casco, and reflected the payoff of several domestic commercial loans and a decrease in the inflow of new loans placed on nonaccrual. The management of the Corporation's nonaccrual loans and leases and OREO is discussed above in the "Credit Management" section. Table 10 summarizes the changes in nonaccrual loans and leases and OREO that have occurred during the last three years. TABLE 10 -- CHANGES IN NONACCRUAL LOANS AND LEASES AND OREO
(dollars in millions) 1995 1994 1993 - ------------------------------------------------------------------------------ Balance, January 1.......................................... $441 $659 $949 Assets from acquired entities............................... 20 Assets of entities sold..................................... (27) Additions................................................... 496 610 486 Sales, restructurings, payments and other decreases......... (311) (380) (482) Transfers to ADP............................................ (252) Net credit losses and valuation adjustments, excluding writedowns associated with transfers to ADP................. (240) (216) (294) ---- ---- ---- Balance, December 31........................................ $359 $441 $659 ==== ==== ==== Ending balance as a percentage of related assets............ 1.2% 1.4% 2.3% ==== ==== ====
31 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- The level of nonaccrual loans and leases and OREO is influenced by the economic environment, interest rates and other internal and external factors. The ratio of nonaccrual loans and OREO to related asset categories has declined to 1.2% of related assets at December 31, 1995. No assurance can be given, however, that this historically low level can be sustained by the Corporation. Informa- tion on the Corporation's accounting policy for nonaccrual loans and leases is included in Note 1 to the Financial Statements. ACCELERATED DISPOSITION PORTFOLIO During 1994, in order to expedite the disposition of problem real estate expo- sures and to strengthen its balance sheet, the Corporation transferred certain of its lower quality real estate exposures, including a portion which was on nonaccrual status, to ADP. In connection with the transfer, the Corporation re- corded credit losses of $119 million to reduce the carrying value of the expo- sures to their estimated disposition value of $395 million at the date of transfer. The Corporation had disposed of all its ADP assets at December 31, 1995, with minimal additional gains and losses on disposition. Remaining off-balance-sheet commitments included in ADP are expected to be disposed of by the middle of 1996. RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses consider- ing evaluations of individual credits and concentrations of credit risks, net losses charged to the reserve, changes in quality of the credit portfolio, lev- els of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in size and character of the credit risks and other pertinent factors. The amount of the reserve is reviewed by management quarterly. The reserve for credit losses at December 31, 1995 was $736 million, or 2.37% of outstanding loans and leases, compared with $680 million, or 2.19%, at De- cember 31, 1994. The reserve for credit losses was 238% of nonaccrual loans and leases at December 31, 1995, compared to 186% at December 31, 1994. In light of the effect of economic events on Latin American economies in the early part of 1995, and the recent industry trends in consumer credit, combined with the growth in the Corporation's Latin American lending and domestic consumer lend- ing portfolios, the Corporation recorded special provisions for credit losses totaling $75 million during 1995 ($50 million in the first quarter and $25 mil- lion in the fourth quarter). The net increase in the reserve reflects the 1995 provision for credit losses of $250 million, including these special provi- sions, partially offset by reductions from the sales of Vermont and Casco and by net credit losses incurred during the year. The future level of the reserve will continue to be a function of management's evaluation of the Corporation's credit exposures existing at the time. Therefore, no assurance can be given re- garding the future level of the reserve. During the first quarter of 1995, the Corporation implemented 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 Dis- closure." These standards 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 applica- ble. The adoption of these new standards, which is more fully discussed in Note 7 to the Financial Statements, did not have a significant effect on the Corpo- ration's financial statements and related financial information. 32 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- Table 11 presents a five-year analysis of the Corporation's reserve for credit losses and related ratios. TABLE 11 -- RESERVE FOR CREDIT LOSSES AND RELATED RATIOS
(dollars in millions) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------- Balance, January 1................ $ 680 $ 770 $ 923 $ 1,051 $ 1,023 Provision......................... 250 130 70 181 519 Reserves of acquired entities..... 6 25 Reserves of entities sold......... (32) Credit losses, excluding those related to ADP.................... (230) (194) (273) (412) (598) Recoveries........................ 62 68 50 103 107 ------- ------- ------- ------- ------- Net credit losses................. (168) (126) (223) (309) (491) Credit losses related to ADP...... (119) ------- ------- ------- ------- ------- Balance, December 31.............. $ 736 $ 680 $ 770 $ 923 $ 1,051 ======= ======= ======= ======= ======= Loans and lease financing at December 31....................... $31,067 $31,005 $28,782 $25,399 $25,368 Average loans and lease financing......................... $31,116 $29,790 $26,586 $25,330 $26,167 Reserve for credit losses to total loans and leases at December 31... 2.37% 2.19% 2.68% 3.63% 4.14% Reserve for credit losses to nonaccrual loans and leases at December 31....................... 238% 186% 140% 119% 69% Reserve for credit losses to nonaccrual and renegotiated loans and leases at December 31......... 219% 157% 99% 78% 56% Net credit losses to average loans and lease financing............... .54% .82% .84% 1.22% 1.87% Net credit losses to provision for credit losses..................... 67.31% 188.37% 317.95% 170.94% 94.49% Total recoveries to total credit losses............................ 26.83% 21.74% 18.36% 25.09% 17.94% - --------------------------------------------------------------------------------
33 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ As detailed in Table 12, net credit losses were $168 million in 1995, compared to $126 million in 1994, excluding $119 million of writedowns in connection with ADP. In 1995, the Corporation experienced higher international credit losses, principally resulting from the Argentine consumer portfolio, and higher domestic commercial and industrial and consumer-related credit losses. In addition, there was a lower level of recoveries. TABLE 12 -- NET CREDIT LOSSES
Years Ended December 31 1995 1994 1993 1992 1991 (in millions) - ------------------------------------------------------------------------------- DOMESTIC CREDIT LOSSES Commercial, industrial and financial........ $ (40) $ (28) $ (56) $ (99) $(166) Commercial real estate Construction............................... (7) (10) (19) (59) (108) Other...................................... (39) (40) (63) (129) (188) Consumer-related loans Secured by 1-4 family residential properties................................ (19) (14) (22) (24) (17) Other...................................... (66) (54) (47) (46) (65) ----- ----- ----- ----- ----- (171) (146) (207) (357) (544) INTERNATIONAL CREDIT LOSSES................. (59) (48) (66) (55) (54) ----- ----- ----- ----- ----- Credit losses, excluding those related to exposures transferred to ADP............. (230) (194) (273) (412) (598) DOMESTIC RECOVERIES Commercial, industrial and financial........ 10 14 15 32 44 Commercial real estate Construction............................... 1 4 2 4 4 Other...................................... 13 13 6 3 4 Consumer-related loans Secured by 1-4 family residential properties................................ 2 2 4 3 2 Other...................................... 21 17 17 19 18 ----- ----- ----- ----- ----- 47 50 44 61 72 INTERNATIONAL RECOVERIES.................... 15 18 6 42 35 ----- ----- ----- ----- ----- Total recoveries.......................... 62 68 50 103 107 ----- ----- ----- ----- ----- Net credit losses, excluding those related to exposures transferred to ADP.......... (168) (126) (223) (309) (491) Credit losses related to exposures transferred to ADP......................... (119) ----- ----- ----- ----- ----- Total net credit losses................... $(168) $(245) $(223) $(309) $(491) ===== ===== ===== ===== ===== - -------------------------------------------------------------------------------
The Corporation's ability and willingness to extend new credit is a function of a variety of factors, including competition for customers' business; an analysis of a loan's potential profitability and risk profile; acquisitions or divestitures of companies or portfolios; and economic conditions in New England, other parts of the United States and other countries where the Corporation does business. In addition, certain segments of the loan portfolio may increase or decrease from the December 31, 1995 level in accordance with strategic or credit management decisions made by the Corporation. Given these factors, the rate of change in the size and mix of the Corporation's loan portfolios experienced during the past few years may not be indicative of future loan levels. Further information on the Corporation's loans and lease financing portfolio can be found in Note 6 to the Financial Statements. 34 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- CROSS-BORDER OUTSTANDINGS At December 31, 1995, total cross-border outstandings represented 16% of con- solidated total assets, compared with 15% at December 31, 1994 and 14% at De- cember 31, 1993. In accordance with bank regulatory rules, cross-border outstandings are: . Amounts payable to the Corporation in U.S. dollars or other non-local cur- rencies. . Amounts payable in local currency but funded with U.S. dollars or other non- local currencies. Included in these outstandings are deposits in other banks, resale agreements, trading securities, securities available for sale, securities held to maturity, loans and lease financing, amounts due from customers on acceptances and ac- crued interest receivable. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers are unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. The Corporation manages its cross-border outstandings using country exposure limits as mentioned in the "Credit Management" section. 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 providers of funds agree that, in the event their claims cannot be repaid in the designated currency due to currency exchange restrictions in a given country, they may either accept payment in local currency or wait to receive the non-local currency until such time as it becomes available in the local market. At December 31, 1995, such outstandings related to emerg- ing markets countries totaled $1.3 billion compared with $.9 billion at De- cember 31, 1994. . Local currency outstandings funded with local currency. . U.S. dollar or other non-local currency outstandings reallocated as a result of external guarantees or cash collateral. . U.S. dollar or other non-local currency outstandings reallocated as a result of insurance contracts, primarily issued by U.S. government agencies. Table 13 details the Corporation's approximate cross-border outstandings in countries which individually amounted to 1.0% or more of its consolidated total assets at December 31, 1995, 1994 and 1993. TABLE 13 -- CROSS-BORDER OUTSTANDINGS
Percentage Of (dollars in millions) Public Banks Other Total Total Assets Commitments(2) - -------------------------------------------------------------------------------- DECEMBER 31, 1995(1) ARGENTINA............... $465 $ 50 $1,710 $2,225 4.7% $ 45 BRAZIL.................. 25 20 980 1,025 2.2 35 UNITED KINGDOM.......... 100 570 670 1.4 130 CHILE................... 150 125 365 640 1.4 15 December 31, 1994(1) Argentina............... $305 $ 40 $1,525 $1,870 4.2% $ 95 Brazil.................. 5 795 800 1.8 30 United Kingdom.......... 5 595 600 1.3 115 Chile................... 115 90 290 495 1.1 35 December 31, 1993(1) Argentina............... $255 $225 $1,025 $1,505 3.7% $ 40 Brazil.................. 110 695 805 2.0 20 United Kingdom.......... 15 565 580 1.4 145 - --------------------------------------------------------------------------------
(1) Cross-border outstandings in countries which totaled between .75% and 1% of consolidated total assets at December 31, 1995, 1994 and 1993 were approxi- mately as follows: 1995--South Korea $365 million; 1994--None; 1993--Canada $315 million, Chile $395 million and South Korea $310 million. (2) Included within commitments are letters of credit, guarantees and the undisbursed portion of loan commitments. 35 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- To comply with the regulatory definition of cross-border outstandings, the Cor- poration included approximately $1.3 billion of Argendollar outstandings in its cross-border total for Argentina at December 31, 1995, compared with approxi- mately $1 billion at December 31, 1994 and $.7 billion at December 31, 1993. These are outstandings payable to the Corporation in U.S. dollars, which are funded entirely by dollars borrowed within Argentina. EMERGING MARKETS COUNTRIES At December 31, 1995, approximately $4.8 billion of the Corporation's cross- border outstandings were to emerging markets countries, of which approximately 83% 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, government securities and capital investments in branches and subsidiaries. At December 31, 1995, approximately $4.6 billion of the cross-border outstandings to emerging markets countries were to countries in which the Cor- poration maintains branch networks and/or subsidiaries. ARGENTINA AND BRAZIL The Corporation has a network of over 40 branches and is one of the largest foreign banks in Argentina. The Corporation's Argentine operations offer a wide array of products concentrating in the corporate, middle market, treasury and retail businesses, including credit cards, residential mortgages and auto loans. In addition, other products are offered, such as mutual funds, broker- age, custody and portfolio management. The Corporation also participates in a pension company joint venture. During 1995, the Argentine financial system came under stress as a result of Mexico's economic difficulties, referred to as the "Mexican Situation," which resulted in a decrease in Argentine financial system liquidity as deposits left the country, and which also contributed to some credit deterioration in the Corporation's Argentine portfolio. In the third quarter, this trend began to reverse and financial system liquidity has returned to pre-Mexican Situation levels. Throughout this period the Corporation maintained, and at times in- creased, its deposit levels. As noted, the Corporation had experienced some credit deterioration due to the Mexican Situation (see Table 14), which con- tributed to the $11 million increase in credit losses, principally in its Ar- gentine retail portfolio. However, the improvement in the country's economic situation, as evidenced by lower interest rates and stronger financial markets performance from earlier in the year, has resulted in an improvement in the Corporation's credit profile. The Corporation's Argentine securities portfolio is utilized for both asset and liability management and trading purposes. At December 31, 1995, the securities portfolio, which includes available for sale and trading account securities, amounted to $486 million, compared to $230 million at December 31, 1994. The increase in the securities portfolio was due to a combination of factors, in- cluding the purchase of $50 million of Argentine government bonds that were part of the government's international funding arrangement, higher trading ac- tivity and securities purchased to meet reserve requirements. The after-tax unrealized loss in the available for sale portfolio was $6 million at December 31, 1995, compared to $30 million at December 31, 1994. The decline in the af- ter-tax unrealized loss reflected an improvement in the Argentine financial markets, particularly during the fourth quarter of 1995. Gains and losses from sales of securities and trading account profits did not change significantly from 1994. The Corporation has a network of nearly 30 branches and is one of the largest foreign banks in Brazil. The principal businesses of the Corporation's Brazil- ian operations include corporate lending, trade financing, treasury, mutual funds, custody and credit cards. During 1995, the Brazilian economy continued to operate under the economic reforms begun in July 1994. Inflation for 1995 was approximately 23%, significantly less than recent levels. The government also maintained a floating band exchange rate policy which resulted in gradual devaluation of the Brazilian currency (Real, or Reais) relative to the U.S. dollar. The exchange rate band is currently .97 to 1.06 Reais to the U.S. dol- lar, and the exchange rate at December 31, 1995 was .97 Reais to the U.S. dol- lar. The government also maintained a relatively high interest rate environ- ment. Rates on short-term interbank deposits averaged approximately 3% per month above the rate of inflation, or approximately 45% for the year. The rela- tively stable Real and high interest environment benefited the Corporation's net interest margin (see discussion in the "Net Interest Revenue" section). The changing economic situation in Brazil resulted in customers moving their funds to banks of higher quality, which contributed, in part, to the increase in the Corporation's deposit and mutual funds levels. The Corporation's mutual funds under management in Brazil amounted to $2.5 billion at December 31, 1995, compared to $1.7 billion at December 31, 1994, making it the eighth largest mu- tual fund manager in Brazil. Also, the Corporation increased its presence in Brazil's global capital market activities, as evidenced by a $300 million in- crease in custody volumes, which were $3.0 billion at December 31, 1995, com- pared to $2.7 billion at December 31, 1994. In addition, the Corporation bene- fited from the expanding Brazilian economy through increased large corporate lending. The Corporation's Brazilian nonaccrual loans and net credit losses, which are detailed in Table 14, have not changed significantly from 1994. The Corporation continues to monitor and evaluate the evolving Argentine and Brazilian economic programs, and will adjust its strategy as deemed appropri- ate. 36 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- Table 14 shows changes in Argentine and Brazilian cross-border outstandings from December 31, 1994, nonaccrual loans at December 31, 1995 and 1994, and net credit losses for 1995 and 1994. TABLE 14 -- CHANGES IN ARGENTINE AND BRAZILIAN CROSS-BORDER OUTSTANDINGS; NONACCRUAL LOANS; NET CREDIT LOSSES
(in millions) Argentina Brazil - ------------------------------------------------------------------------------ Cross-border outstandings at December 31, 1994.............. $1,870 $ 800 Change in non-trade-related loans and leases not subject to country debt rescheduling................................... 75 215 Net change in trade-related cross-border outstandings, primarily short-term........................................ 105 30 Net change in investment and trading securities............. 183 (23) Other....................................................... (8) 3 ------ ------ CROSS-BORDER OUTSTANDINGS AT DECEMBER 31, 1995.............. $2,225 $1,025 ====== ====== Nonaccrual loans DECEMBER 31, 1995.......................................... $ 52 $ 8 December 31, 1994.......................................... 35 8 Net credit losses 1995....................................................... $ 33 $ 6 1994....................................................... 20 - ------------------------------------------------------------------------------
OTHER EMERGING MARKETS COUNTRIES Along with Argentina and Brazil, the Corporation maintains branch networks in Chile and Uruguay of 10 and 12 branches, respectively. These operations offer a wide array of banking services, including retail mortgage lending and invest- ment banking. At December 31, 1995, cross-border outstandings were $640 million to Chile and $225 million to Uruguay. In addition, during 1995, the Corporation opened subsidiary banks in Colombia and Mexico. These operations will enable the Corporation to expand its existing activities in these countries, including local lending to multinational and large, indigenous corporate customers. At December 31, 1995, cross-border outstandings to Colombia and Mexico were $235 million and $210 million, respec- tively. The Corporation's activities in Mexico, including its cross-border outstandings, have not been significantly impacted by that country's economic difficulties. CURRENCY POSITIONS When deemed appropriate, the Corporation will structure its balance sheet to take positions in the currencies of emerging markets and other countries where it operates. This usually occurs when the Corporation believes that it can max- imize its spread from interest operations by funding local currency assets with U.S. dollars rather than using local currency liabilities or by funding U.S. dollar assets with local currency liabilities. Whenever these positions are taken, they are subject to limits established by the Corporation's Asset and Liability Management Committee (ALCO), with the amount of, and compliance with, the limits subject to regular review. Table 15 presents the Corporation's more significant currency positions in emerging markets countries in 1995. These positions represent local currency assets funded by U.S. dollars. TABLE 15 -- SIGNIFICANT CURRENCY POSITIONS IN EMERGING MARKETS COUNTRIES
December 31, Average Position for (in millions) 1995 1995 - -------------------------------------------------------------------------------- Argentina..................................... $ 82 $50 Brazil........................................ 132 11 Chile......................................... 7 11 Colombia...................................... 9 14
In addition to the emerging markets countries above, the Corporation has main- tained a currency position in its South Korean operation of $82 million at De- cember 31, 1995, and an average position of $86 million during 1995. The Corpo- ration is funding local currency assets with U.S. dollars to maximize spreads from interest operations, as previously described. These positions expose the Corporation to losses should the local currencies weaken against the U.S. dollar at a rate greater than increases in local cur- rency interest rates; such losses could be significant if a major unanticipated devaluation occurs. To date, however, these positions have been liquid in na- ture and local management has been able to close and re-open these positions as necessary. 37 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- It is expected that the economic situation in Latin America, including the ef- fect of world financial markets on these economies, will continue to be unset- tled. 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. However, if the actions implemented by Latin American governments do not remain effec- tive over time, particularly with regard to liquidity, the Corporation's opera- tions could experience adverse effects, including stress on local liquidity, deterioration of credit quality, a decline in the value of its securities port- folio and declines in loan and deposit levels. The Corporation will continue to monitor the economies of Latin American countries in which it has local opera- tions, cross-border outstandings and, where applicable, currency positions. Each emerging markets country is at a different stage of development with a unique set of economic fundamentals; therefore, it is not possible to predict what developments will occur and what impact these developments will ultimately have on the economies of these countries or on the Corporation's financial statements. LIQUIDITY MANAGEMENT Liquidity is defined as the ability to meet known near-term and projected long- term funding commitments, while supporting selective business expansion in ac- cordance with the Corporation's strategic plan. The Corporation proactively manages liquidity according to policy set by, and oversight provided by, ALCO to ensure its ability to meet present and future funding needs in domestic and overseas markets. U.S. dollar liquidity management is centralized in Boston, with overseas operations managing all local currency positions. The Corpora- tion's U.S. dollar liquidity is monitored on a daily basis and is reviewed monthly by ALCO, which is chaired by the Treasury Group Executive. It is also reviewed monthly by the Executive Committee of the Corporation's Board of Di- rectors; a review by the full Board of Directors (the Board) occurs quarterly. Available liquidity sources are measured against anticipated needs for the Cor- poration as a whole, the parent company and each of the subsidiary banks. Al- ternative funding strategies are reviewed, updated and implemented by ALCO as considered necessary. The Corporation's liquid assets consist primarily of interest bearing deposits in other banks, federal funds sold and resale agreements, money market loans, and unencumbered U.S. Treasury and U.S. government agency securities. Table 16 presents the levels of the Corporation's liquid assets as of each of the last three year-ends. TABLE 16 -- LIQUID ASSETS
December 31 1995 1994 1993 (in billions) - -------------------------------------------------------------------------------- Liquid assets.................................................... $5.8 $4.6 $4.5
Deposits are the principal source of the Corporation's funding. Table 17 in- cludes information related to the Corporation's funding sources for the last three years. TABLE 17 -- FUNDING SOURCES
December 31 1995 1994 1993 (dollars in billions) - -------------------------------------------------------------------------------- DOMESTIC Interest bearing deposits................................. $16.6 $16.8 $17.5 Noninterest bearing deposits.............................. 4.8 4.9 5.0 ----- ----- ----- Total deposits............................................ 21.4 21.7 22.5 Funds borrowed............................................ 7.7 5.3 4.2 Notes payable............................................. 1.7 2.0 1.9 ----- ----- ----- $30.8 $29.0 $28.6 ===== ===== ===== INTERNATIONAL Interest bearing deposits................................. $ 9.0 $ 9.1 $ 6.6 Noninterest bearing deposits.............................. .6 .6 .5 ----- ----- ----- Total deposits............................................ 9.6 9.7 7.1 Funds borrowed............................................ 1.1 1.1 .8 Notes payable............................................. .4 .2 .1 ----- ----- ----- $11.1 $11.0 $ 8.0 ===== ===== ===== CONSOLIDATED Interest bearing deposits................................. $25.6 $25.9 $24.1 Noninterest bearing deposits.............................. 5.4 5.5 5.5 ----- ----- ----- Total deposits............................................ 31.0 31.4 29.6 Funds borrowed............................................ 8.8 6.4 5.0 Notes payable............................................. 2.1 2.2 2.0 ----- ----- ----- $41.9 $40.0 $36.6 ===== ===== ===== Deposits as a percentage of Loans...................................................... 100% 101% 103% Total assets............................................... 65% 70% 73%
Domestic deposits declined approximately $300 million from 1994, resulting from a $1.3 billion decrease in deposits from the sales of Vermont and Casco and other deposit outflows, replaced, in part, by new deposit inflows from a new retail deposit product which was first offered in the second quarter of 1995. Domestic funds borrowed increased approximately $2.4 billion from December 31, 1994, mainly as a result of increased borrowings of approximately $1.9 billion under FNBB's medium-term bank note program and increased federal funds pur- chased, partially offset by decreased securities sold under agreements to re- purchase. The FNBB medium-term notes have a weighted average maturity of 258 days. Notes payable declined slightly due to the conversion of $94 million of the Corporation's subordinated debt into common stock during the first quarter of 1995, and the redemption of $150 million of its subordinated debt during the third quarter of 1995, for the most part offset by new debt issued during the year, primarily by the Corporation's Brazilian operations. In addition, the Corporation has a shelf registration filed with the Securities and Exchange Commission with a remaining availability of $1.2 billion at January 31, 1996, which can be used for the issuance of equity or debt securities, including se- curities issued under a medium-term note program established by the Corporation in December 1994. Additional information on the Corporation's notes payable can be found in Note 10 to the Financial Statements. 38 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ The Corporation continues to have access to funds at competitive rates, and, during 1995, received upgrades from three major rating agencies. Based upon the Corporation's liquid asset level and its ability to access the public markets for additional funding when necessary, management considers overall liquidity at December 31, 1995 adequate to meet current obligations, support expectations for future changes in asset and liability levels and carry on normal opera- tions. INTEREST RATE RISK MANAGEMENT Interest rate risk can be defined as the exposure of the Corporation's net in- come or financial condition to adverse movements in interest rates. Interest rate risk is managed within policies and limits established by ALCO and ap- proved by the Board. ALCO issues strategic directives to specify the extent to which Board-approved rate risk limits are utilized, taking into account the re- sults of the rate risk modeling process as well as other internal and external factors. The objective of ALCO's directives is to manage and control the ef- fects of changes in interest rates on the Corporation's income statement and financial condition. Management seeks to enhance earnings, principally net in- terest revenue, and protect economic value, while ensuring that risks from ad- verse movements in interest rates are in compliance with ALCO directives. This objective is achieved through the development and implementation of interest rate risk management strategies, including various balance sheet actions and the use of interest rate derivatives. Interest rate risk related to non-trading, U.S. dollar denominated positions, which represented over 80% of the consolidated balance sheet at December 31, 1995, is managed centrally through the Boston Treasury group. Interest rate risk associated with these positions is evaluated and managed through several modeling methodologies. The two principal methodologies used are market value sensitivity and net interest revenue at risk. The results of these models are reviewed monthly with ALCO and at least quarterly with the Board. MARKET VALUE SENSITIVITY is defined as the potential change in market value, or the economic value, of the institution resulting from changes in interest rates. Market value sensitivity is determined by calculating the effect on the Corporation's existing assets, liabilities and off-balance-sheet positions given an immediate rise or fall in interest rates (rate shock). NET INTEREST REVENUE AT RISK is defined as the exposure of the Corporation's net interest revenue over the next twelve months to an adverse movement in in- terest rates. Net interest revenue at risk is modeled based on both an interest rate shock scenario and a gradual change in interest rates over a period of time. The simulated net interest revenue under these scenarios is used to eval- uate how differences in asset, liability and off-balance-sheet repricing struc- tures will be reflected in the next twelve months' results of operations. The rate risk models consider such variables as: . repricing characteristics of assets and liabilities; . rate change differentials, such as federal funds rates versus savings ac- count rates; . maturity effects, such as calls on securities; . rate barrier effects, such as caps and floors, on assets and liabilities; and . prepayment volatility on various fixed rate assets such as residential mortgages, mortgage-backed securities and consumer loans. Both of these models are designed to isolate the effects of market changes in interest rates on the Corporation's existing positions, and they exclude other factors such as competitive pricing considerations, future changes in the asset and liability mix and other management actions, and, therefore, are not by themselves measures of future levels of net interest revenue. These two methodologies provide different but complementary measures of the level of interest rate risk: the longer term view is modeled through market value sensitivity, while the shorter term view is evaluated through net inter- est revenue at risk over the next twelve months. Under current ALCO directives, market value sensitivity cannot exceed 2 percent of risk-based capital and net interest revenue at risk cannot exceed 2 percent of net interest revenue over the next twelve-month period. Table 18 illustrates the year-end and average positions for market value sensi- tivity and net interest revenue at risk. TABLE 18 -- MARKET VALUE SENSITIVITY AND NET INTEREST REVENUE AT RISK POSITIONS
1995 1994 (dollars in millions) YEAR-END AVERAGE Year-end(3) Average - -------------------------------------------------------------------------------- Market Value Sensitivity (1)............... $87 $48 $11 % of risk-based capital.................... 1.6% 0.9% 0.2% - -------------------------------------------------------------------------------- Net Interest Revenue at Risk (2)........... $24 $16 $11 $ 7 % of net interest revenue.................. 1.4% 1.0% 0.7% 0.5% - --------------------------------------------------------------------------------
(1) Based on a 100 basis point adverse interest rate shock. (2) Based on the greater of a 100 basis point adverse interest rate shock or a 200 basis point adverse change in interest rates over the next twelve-month period. (3) The market value sensitivity position was negligible at December 31, 1994. 39 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- At December 31, 1995, the Corporation's adverse market value sensitivity was to rising interest rates. This exposure to rising interest rates increased gradu- ally throughout 1995, as a result of changes in the balance sheet mix, includ- ing a net increase in fixed rate consumer and commercial loans and securities, and other management actions. Accordingly, the monthly market value sensitivity positions ranged from 0.2% to 1.7% of risk-based capital, which were in compli- ance with ALCO directives. Included in the market value sensitivity model is the value of the Corpora- tion's mortgage servicing assets and the interest rate contracts used to reduce the exposure of these assets to declining interest rates. These assets are af- fected by the level of prepayments made by mortgage holders resulting from de- clines in mortgage rates. The Corporation manages such risk by entering into short-term interest rate options on long-term U.S. Treasury securities. The value of these contracts and related mortgage servicing assets will fluctuate based on changes in long-term interest rates. For example, by late February 1996, as a result of an increase in long-term interest rates, the value of these contracts had declined by approximately $110 million from December 31, 1995. Changes in the value of the contracts are recorded in current period in- come as a component of net mortgage servicing fees. Concurrently, this interest rate increase resulted in an increase in the value of the Corporation's mort- gage servicing assets, which are carried at amortized cost. A loss, if any, re- sulting from the contracts will be partially offset by the gain anticipated upon consummation of the mortgage banking joint venture transaction, which gain will be increased by the realization of a portion of the increased value of the mortgage servicing assets. The impact on the Corporation's results of opera- tions from such changes in value in 1995 is discussed further in the "Noninter- est Income" section. The Corporation's accounting policies for mortgage servic- ing assets and related interest rate contracts are included in Note 1 to the Financial Statements. In contrast to market value sensitivity, the Corporation's net interest revenue at risk at December 31, 1995 is to declining interest rates over the next twelve months. As a result, net interest revenue would be adversely affected by a decline in interest rates. The risk position was neutral during the first quarter of 1995, and trended upward during the remainder of the year, mainly reflecting the change in the Corporation's retail deposit mix. The exposure was managed through several actions, including the purchase of fixed-rate securi- ties and the termination of $6 billion notional amount of a series of interest rate futures contracts that were linked to the Corporation's short-term float- ing rate wholesale funding. As a result, the monthly net interest revenue at risk positions ranged from .1% to 1.7% of net interest revenue, which were in compliance with ALCO directives. The level of exposure maintained by the Corporation is a function of the market environment and will change from period to period based on interest rate and other economic expectations. As noted above, the market value sensitivity and net interest revenue at risk models are complementary in nature. The Corpora- tion's exposure to rising interest rates under the longer-term view, and to de- clining interest rates under the shorter-term view, is managed simultaneously in compliance with ALCO directives. The interest rate exposure for each model is dependent on the balance sheet mix and the terms and pricing of balance sheet and off-balance-sheet items at a specific point in time. Although changes in balance sheet mix and other management actions affect each model different- ly, the combined results indicate that interest rate risk is managed consistent with ALCO directives. ALCO determines its interest rate risk management strat- egy by considering the impact of changes in interest rates on each model, and, hence, the short- and long-term effects on the Corporation's financial state- ments. NON-U.S. DOLLAR DENOMINATED INTEREST RATE RISK Non-U.S. dollar denominated interest rate risk is managed by the Corporation's overseas units, with oversight by the Boston Treasury group. The Corporation, through ALCO, has established limits for its non-U.S. dollar denominated inter- est rate risk using cumulative gap limits for each country in which the Corpo- ration has local market interest rate risk. Gap is the difference between the amount of assets and liabilities that mature or are repriced during a given pe- riod of time. A "positive" gap results when more assets than liabilities mature or are repriced in a given time frame. Conversely, a "negative" gap results when there are more liabilities than assets maturing or being repriced during a given time period. Gap limits are updated at least annually for current market conditions, and consider what the impact of a particular interest rate movement in the country would have on the cumulative gap position. The level of interest rate risk positions taken by these units varies based on economic conditions in the country at a particular point in time. The overseas units report compliance with these limits to the Boston Treasury group on a regular basis. Derivatives used by the international operations as part of their asset and liability man- agement process are included in Tables 19 and 20. At December 31, 1995 and 1994, the level of such derivative activity was not significant. During 1995, the cumulative gap positions in each country were within ALCO limits. For addi- tional information related to the Corporation's international operations, see discussions in the "Cross-Border Outstandings" and "Emerging Markets Countries" sections. DERIVATIVE FINANCIAL INSTRUMENTS ASSET AND LIABILITY MANAGEMENT Derivatives provide the Corporation with significant flexibility in managing its interest rate risk exposure, enabling it to manage risk efficiently and re- spond quickly to changing market conditions by minimizing the impact on balance sheet leverage. The Corporation routinely uses non-leveraged rate-related de- rivative instruments, primarily interest rate swaps and futures, as part of its asset and liability management practices. All derivative activities are managed on a comprehensive basis, are included in the overall net interest revenue and market value at risk measures and limits described above, and are subject to credit standards similar to those for balance sheet exposures. 40 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ Table 19 summarizes the remaining maturity of interest rate derivative finan- cial instruments entered into for asset and liability management purposes as of December 31, 1995. The level and term of such contracts may be adjusted as nec- essary, in response to balance sheet changes and other management actions, in compliance with ALCO directives for market value sensitivity and net interest revenue at risk. TABLE 19 -- REMAINING MATURITY OF INTEREST RATE DERIVATIVES
Remaining Maturity 1995 1994 (dollars in millions) 1996 1997 1998 1999 2000 2001+ Total Total - --------------------------------------------------------------------------------------- INTEREST RATE SWAPS DOMESTIC Receive fixed rate swaps (1) Notional amount....... $ 402 $ 151 $ 60 $340 $1,500 $ 2,453 $ 2,461 Weighted average receive rate......... 6.08% 8.94% 5.61% 5.50% 6.38% 6.35% 6.64% Weighted average pay rate................. 5.86% 5.93% 5.91% 5.80% 5.86% 5.86% 5.82% Pay fixed rate swaps (1) Notional amount....... $ 85 $ 39 $ 34 $ 44 $ 40 $ 59 $ 301 $ 638 Weighted average receive rate......... 5.46% 5.96% 6.09% 5.85% 7.03% 7.12% 6.19% 6.02% Weighted average pay rate................. 6.92% 6.84% 8.70% 7.37% 5.85% 5.78% 6.81% 5.76% Basis swaps (2) Notional amount....... $ 1,249 $ 50 $ 300 $ 1,599 $ 171 Weighted average receive rate......... 5.89% 5.88% 6.33% 5.97% 6.01% Weighted average pay rate................. 5.92% 5.63% 5.67% 5.86% 5.71% TOTAL DOMESTIC INTEREST RATE SWAPS Notional amount....... $ 1,736 $ 190 $ 94 $ 44 $430 $1,859 $ 4,353 $ 3,270 Weighted average receive rate (3)..... 5.91% 8.33% 5.79% 5.85% 5.69% 6.40% 6.20% 6.49% Weighted average pay rate (3)............. 5.96% 6.12% 6.93% 7.37% 5.78% 5.83% 5.93% 5.81% TOTAL INTERNATIONAL INTEREST RATE SWAPS Notional amount (4)... $ 1,475 $ 1,475 $ 451 OTHER DERIVATIVE PRODUCTS Futures and forwards (5).................... $10,218 $2,300 $12,518 $16,566 Interest rate options (6) Purchased............. 3,805 39 $ 81 $ 43 3,968 7,709 Written or sold....... 360 360 6,125 ------- ------ ---- ----- ---- ------ ------- ------- TOTAL CONSOLIDATED NOTIONAL AMOUNT........ $17,594 $2,529 $175 $ 87 $430 $1,859 $22,674 $34,121 ======= ====== ==== ===== ==== ====== ======= ======= - ---------------------------------------------------------------------------------------
(1) Of the receive fixed rate swaps, approximately $1 billion are linked to floating rate loans, and the remainder principally to fixed rate notes pay- able. Of the swaps linked to notes payable, approximately $1 billion are scheduled to mature in 2001 and thereafter. The majority of pay fixed rate swaps are linked to fixed rate loans. (2) Basis swaps represent swaps where both the pay rate and receive rate are floating rates. All of the basis swaps are linked to floating rate mort- gages and short-term bank notes. (3) The majority of the Corporation's interest rate swaps accrue at LIBOR. In arriving at the variable weighted average receive and pay rates, LIBOR rates in effect as of December 31, 1995 have been implicitly assumed to re- main constant throughout the terms of the swaps. Future changes in LIBOR rates would affect the variable rate information disclosed. (4) The majority of the international portfolio is comprised of swaps entered into by the Corporation's Brazilian operation with a weighted average matu- rity of less than 90 days. These swaps typically include the exchange of floating rate indices that are limited to the Brazilian market. (5) The majority of the futures used by the Corporation are linked to short- term liabilities and are exchange-traded instruments. The reference instru- ments for these contracts comprise the major types available, such as Euro- dollar 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. (6) At December 31, 1995, primarily includes interest rate options used to man- age prepayment risk related to the Corporation's mortgage servicing portfo- lio. 41 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- Table 20 summarizes the fair value and unrecognized gains (losses) of derivatives used for asset and liability management purposes. Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of the balance sheet date. The increase in fair value of interest rate derivative contracts, as reflected in the change from a net unrecognized loss of $140 million at December 31, 1994 to a net unrecognized gain of $15 million at December 31, 1995, was primarily due to the change in market interest rates during 1995. TABLE 20 -- FAIR VALUE AND UNRECOGNIZED GAINS (LOSSES)
December 31 1995 1994 Fair Value (1) (2) Unrecognized Fair Value (1) (2) Unrecognized (in millions) Asset Liability Gain (Loss) (3) Asset Liability Gain (Loss) (3) - ------------------------------------------------------------------------------------------------------ Interest rate contracts Interest rate swaps... $ 92 $ 7 $102 $19 $ 225 $(208) Futures and forwards.. 10 (89) 1 36 Interest rate options.............. 119 34 2 39 19 32 --------- -------- ---- -------- --------- ----- $ 211 $ 51 $ 15 $ 59 $ 244 $(140) ========= ======== ==== ======== ========= ===== - ------------------------------------------------------------------------------------------------------
(1) In certain cases, instruments such as futures are subject to daily cash settlements; therefore, the fair value of these instruments is zero. (2) Interest rate options include the fair value of options used to manage pre- payment risk related to the Corporation's mortgage servicing portfolio. (3) Unrecognized gain or loss is based upon fair values and represents the amount of gain or loss that has not been recognized in the income statement at the balance sheet date. These amounts are recognized in income as ad- justments to yield over the period being managed. The Corporation's utilization of derivative instruments is modified from time to time in response to changing market conditions, as well as changes in the characteristics and mix of the Corporation's related assets and liabilities. In this respect, during 1995, the Corporation terminated $.7 billion notional amount of interest rate swaps and $6 billion notional amount of interest rate futures contracts. The futures contracts were part of a series of three-month contracts that were linked to the Corporation's continuing need for short-term wholesale funding. Included in unrecognized gains (losses) at December 31, 1995 were deferred gains of $32 million and deferred losses of $2 million related to terminated contracts that are being amortized to net interest revenue over weighted average periods of 32 months and 23 months, respectively. At December 31, 1994, unrecognized gains of $35 million related to terminated contracts were being amortized to net interest revenue over a weighted average period of 14 months. The Corporation routinely reviews its asset and liability derivative positions to determine that such instruments continue to function as effective risk management tools. DERIVATIVE AND FOREIGN EXCHANGE CONTRACT TRADING INSTRUMENTS The primary focus of the Corporation's trading activities is to provide risk management products to its customers. Market trading instruments include for- eign exchange, interest rate and currency derivatives. The Corporation takes modest risk positions in these instruments, all of which are subject to ALCO- approved limits. Interest rate derivatives trading activities include interest rate swaps and interest rate options, futures and forwards. Foreign exchange trading activities principally include trading of spot and forward contracts in major foreign currencies. Additional information with respect to the Corporation's asset and liability management and trading derivatives, including accounting policies, is included in Notes 1 and 20 to the Financial Statements. DERIVATIVE AND FOREIGN EXCHANGE CONTRACT CREDIT RISK Credit risk arises from the possibility that a counterparty to a transaction, as a result of financial difficulties, is unable to perform according to the terms of the contract. At a given point in time, the credit risk exposure of off-balance-sheet interest rate derivative and foreign exchange contracts is equal to the fair value of contracts with a positive, or asset, value, which would approximate the cost to replace these contracts at current market prices if each counterparty defaulted. These credit risk exposures are managed as part of the overall extension of credit to individual customer relationships and are also considered in assessing the overall adequacy of the reserve for credit losses. Gross credit-related losses relative to interest rate derivatives and foreign exchange contracts have been negligible to date. Refer to Note 20 to the Financial Statements for further discussion. CAPITAL MANAGEMENT At December 31, 1995, the Corporation had $3.8 billion in stockholders' equity, compared with $3.1 billion at December 31, 1994 and $2.9 billion at December 31, 1993. The growth in stockholders' equity from the end of 1994 mainly re- sulted from retention of earnings, net of the payment of dividends on common and preferred stock, the conversion of $94 million of the Corporation's con- vertible subordinated debt into 42 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ common stock during the first quarter of 1995, and the increase in the fair value of securities available for sale, net of tax. The Corporation's quarterly dividend was increased 37 percent, from $.27 per share in the first two quarters of 1995 to $.37 per share in the last two quar- ters of 1995. The level of dividends paid on the Corporation's common stock is determined by the Board based on the Corporation's liquidity, asset quality profile, capital adequacy and recent earnings history, as well as economic con- ditions and other factors deemed relevant by the Board, including the amount of dividends paid to the Corporation by its subsidiaries. A capital planning process is in place to assist the Corporation and its bank subsidiaries in maintaining appropriate capital levels and ratios. ALCO is re- sponsible for approving all major balance sheet initiatives and managing capi- tal usage for the Corporation and its principal operating units. The Corpora- tion's Boston Treasury group creates and maintains the capital plan, which is focused on the attainment of the Corporation's strategic objectives. The Boston Treasury group reports to ALCO monthly on the current and pro forma capital po- sitions of the Corporation and each of its principal bank subsidiaries. Regulatory risk-based capital requirements take into account the differing risk profiles of banking organizations by assigning risk weights to both assets and the credit equivalent amounts of off-balance-sheet exposures. Capital is di- vided into two tiers. Tier 1 capital includes common stockholders' equity and qualifying preferred stock, and Tier 2 capital includes, subject to certain limitations, limited-life preferred stock, mandatory convertible securities, subordinated debt and a portion of the reserve for credit losses. Table 21 presents the Corporation's capital position and related ratios as of the last three year-ends. TABLE 21 -- CAPITAL POSITION
Well December 31 1995 1994 1993 Capitalized (dollars in millions) Minimum* - -------------------------------------------------------------------------------- Risk-based capital ratios Tier 1 capital ratio (Tier 1 capital/total risk-adjusted assets)... 8.0% 7.0% 7.2% 6.00% Total capital ratio (Total capital/total risk-adjusted assets)... 12.8% 12.2% 12.4% 10.00% Leverage ratio (Tier 1 capital/adjusted total average assets)................... 7.4% 6.5% 6.8% 5.00% Tier 1 capital........................... $ 3,391 $ 2,874 $ 2,754 Tier 2 capital........................... $ 2,058 $ 2,100 $ 1,971 Total capital............................ $ 5,449 $ 4,974 $ 4,725 Total risk-adjusted assets............... $42,636 $40,786 $38,179 Common equity/assets ratio............... 6.8% 5.9% 5.9% - --------------------------------------------------------------------------------
* The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established minimum ratios for banks to be considered "well capitalized." These ratios are determined solely for the purpose of applying FDICIA's pro- visions and, accordingly, such capital categories may not constitute an accu- rate representation of the overall financial condition or prospects of any bank. Compared to the prior year-end, the improvement in the Corporation's capital ratios at December 31, 1995 reflected the impact of current year earnings and the sales of Vermont and Casco, which resulted in a lower level of risk-ad- justed 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 above-noted conversion of $94 million of convertible subordinated debt into common stock. The redemption of $150 million of subordinated debt in the third quarter of 1995, partially offset the improvement in the total capital ratio. The conversion and redemption of subordinated debt are more fully dis- cussed in Note 10 to the Financial Statements. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (the FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." This standard amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require that rights to service mortgage loans origi- nated for sale be recognized as separate assets either upon origination (if a definitive plan to sell the loans and retain the rights exists) or upon sale of the loans based on the relative fair values of the rights and loans, similar to PMSR. This standard also requires that mortgage servicing rights be assessed for impairment based on the fair value of those rights. See the "Strategic Al- liances and Other Initiatives" section for further discussion of the announced joint venture of the Corporation's mortgage banking operations. 43 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Com- pensation." This standard encourages, but does not require, adoption of a fair value-based accounting method for stock-based compensation arrangements and would supercede the provisions of Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees." An entity may con- tinue to apply APB No. 25 provided the entity discloses its pro forma net in- come and earnings per share as if the fair value-based method had been applied in measuring compensation cost. The Corporation intends to continue applying APB No. 25 and to disclose the pro forma information required by SFAS No. 123. These standards are effective January 1, 1996. The Corporation does not expect that, upon adoption, these standards will have a material effect on its finan- cial statements. 1994 VS. 1993 NET INTEREST REVENUE Domestic net interest revenue increased $135 million to $1,231 million, result- ing from both a higher level of earning assets and wider spreads. Average earn- ing assets increased $1.6 billion, reflecting a $2.0 billion increase in aver- age loan volume offset by a $.4 billion decline in other earning assets, mainly mortgages held for sale. Contributing to the loan volume increase was a higher level of consumer-related loans, a portion of which came from the acquisitions of BankWorcester and Pioneer. In addition, the Corporation's average volume of domestic commercial loans increased, primarily from growth in some of the Cor- poration's specialty lending areas and the New England commercial lending busi- ness. The wider domestic spreads mainly reflected growth in earning asset yields, which outpaced increases in rates paid on interest bearing liabilities during 1994. The widening of spreads was also mainly responsible for the domes- tic net interest margin increasing by 24 basis points compared with 1993. The international net interest revenue increase of $91 million to $348 million was primarily attributable to the Corporation's operations in Latin America, two-thirds of which related to operations in Brazil. During the first half of 1994, Brazil's net interest revenue increased from 1993, as earning asset growth more than offset narrower spreads. During the second half of 1994, after the country's July 1994 economic program reduced inflation from approximately 50% to 1% per month, the Corporation maintained funding strategies which bene- fited from these economic changes and resulted in wider spreads. An increase in average Brazilian loan volume of $450 million from 1993 also contributed to the improvement in net interest revenue. Brazil's second half performance was the major factor behind the international margin improving 14 basis points compared with 1993. NONINTEREST INCOME The $46 million increase in financial service fees to $396 million primarily reflected improvements in net mortgage servicing fees and loan-related fees. Net mortgage servicing fees increased $51 million compared with 1993, reflect- ing a higher volume of servicing, as well as lower amortization of PMSR. Loan- related fees improved $15 million, mainly reflecting growth in syndication ac- tivity. The major factor offsetting these improvements was a decline of $20 million in factoring fees due to the sale of the Corporation's domestic factor- ing business in the first quarter of 1994. Trust and agency fees improved $23 million from the 1993 level of $178 million, primarily as a result of increased volumes and new business in the domestic stock transfer and Latin American mutual fund businesses. The $18 million de- cline in net securities gains reflected a lower level of sales. In addition, both trading account profits and net equity and mezzanine profits declined $8 million. Other income of $102 million in 1994, improved $23 million from 1993, and included a $23 million gain recognized in the first quarter from the sale of securities originally acquired in connection with loan restructurings. NONINTEREST EXPENSE Excluding acquisition, divestiture and restructuring expense and OREO costs, noninterest expense increased $34 million, or 2%, from 1993. This growth is primarily attributable to higher employee costs of $42 million, which reflected a greater number of employees in Latin America, as the Corporation continued its strategic expansion in this area; higher compensation rates, including nor- mal salary and incentive compensation increases; and a decline in the amount of loan origination costs deferred, reflecting a lower volume of originations in 1994. These increases were mitigated by a lower level of domestic employees. Nonemployee costs declined $8 million, reflecting an $11 million decline in FDIC insurance premiums, the result of lower assessment rates and a partial re- fund of 1993's assessment, and lower legal fees. These declines were partially offset by increases in various nonemployee cost categories from the 1994 acqui- sitions of BankWorcester and Pioneer. The reduction in OREO costs from 1993 primarily reflected lower valuation adjustments on OREO properties. During 1994, in connection with its acquisitions of BankWorcester and Pioneer, the Corporation recorded acquisition-related costs of $21 million. During 1993, the Corporation recorded acquisition-related costs of $68 million in connection with its mergers with Society and Multibank, and reorganization charges of $17 million in connection with downsizing and reconfiguring certain of its business and corporate units. Additional information on these items is included in Note 17 to the Financial Statements. 44 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- BANK OF BOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1995 - -------------------------------------------------------------------------------- AVERAGE AVERAGE BALANCE INTEREST(1) RATE ASSETS Interest bearing deposits in other banks U.S.............................................. $ 205 $ 11 5.60% International.................................... 1,087 206 18.91 ------- ------ Total........................................... 1,292 217 16.80 ------- ------ ----- Federal funds sold and resale agreements U.S.............................................. 374 22 5.91 International.................................... 649 271 41.77 ------- ------ Total........................................... 1,023 293 28.65 ------- ------ ----- Trading securities U.S.............................................. 202 13 6.16 International.................................... 602 171 28.45 ------- ------ Total........................................... 804 184 22.86 ------- ------ ----- Loans held for sale U.S.(2).......................................... 432 30 7.02 ------- ------ ----- Securities U.S. Available for sale(3)........................... 2,488 176 7.08 Held to maturity................................ 1,611 107 6.69 International Available for sale(3)........................... 422 64 13.36 Held to maturity................................ 203 16 7.66 ------- ------ Total........................................... 4,724 363 7.69 ------- ------ ----- Loans and lease financing U.S.............................................. 23,200 2,064 8.90 International.................................... 7,916 1,178 14.88 ------- ------ Total(4)........................................ 31,116 3,242 10.42 ------- ------ ----- Total earning assets.............................. 39,391 4,329 10.99 ------ ----- Nonearning assets................................. 5,221 ------- Total assets(5)................................. $44,612 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits................................ $ 8,963 $ 245 2.73% Time deposits................................... 7,535 423 5.61 International Banks in foreign countries...................... 2,257 145 6.42 Other foreign savings and time.................. 5,804 744 12.82 ------- ------ Total........................................... 24,559 1,557 6.34 ------- ------ ----- Federal funds purchased and repurchase agreements U.S.............................................. 3,510 189 5.40 International.................................... 189 45 23.60 ------- ------ Total........................................... 3,699 234 6.33 ------- ------ ----- Other funds borrowed U.S.............................................. 3,577 229 6.41 International.................................... 891 403 45.16 ------- ------ Total........................................... 4,468 632 14.14 ------- ------ ----- Notes payable U.S.............................................. 1,882 132 7.04 International.................................... 210 23 10.87 ------- ------ Total........................................... 2,092 155 7.42 ------- ------ ----- Total interest bearing liabilities................ 34,818 2,578 7.40 ------ ----- Demand deposits-U.S............................... 4,286 Demand deposits-International..................... 456 Other noninterest bearing liabilities............. 1,606 Stockholders' equity.............................. 3,446 ------- Total liabilities and stockholders' equity(5)... $44,612 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S.............................................. $28,512 $1,305 4.58% International.................................... 10,879 446 4.10% ------- ------ Total........................................... $39,391 $1,751 4.45% ======= ====== - ------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Average rates for securities available for sale are based on the securi- ties' amortized cost. (4) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $56 million. (5) As of December 31, 1995, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respec- tively, amounted to 28%. 45 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ BANK OF BOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1994 - -------------------------------------------------------------------------------- AVERAGE AVERAGE BALANCE INTEREST(1) RATE ASSETS Interest bearing deposits in other banks U.S. ............................................ $ 181 $ 7 3.97% International.................................... 864 109 12.54 ------- ------ Total........................................... 1,045 116 11.06 ------- ------ ----- Federal funds sold and resale agreements U.S. ............................................ 1,301 53 4.05 International.................................... 1,255 547 43.62 ------- ------ Total........................................... 2,556 600 23.47 ------- ------ ----- Trading securities U.S. ............................................ 160 8 5.34 International.................................... 398 105 26.26 ------- ------ Total........................................... 558 113 20.27 ------- ------ ----- Loans held for sale U.S.(2).......................................... 686 43 6.30 ------- ------ ----- Securities U.S. Available for sale(3)........................... 1,422 93 6.58 Held to maturity................................ 1,550 89 5.75 International Available for sale(3)........................... 332 47 14.63 Held to maturity................................ 206 17 8.12 ------- ------ Total........................................... 3,510 246 7.00 ------- ------ ----- Loans and lease financing U.S. ............................................ 23,038 1,788 7.76 International.................................... 6,752 819 12.14 ------- ------ Total(4)........................................ 29,790 2,607 8.75 ------- ------ ----- Total earning assets.............................. 38,145 3,725 9.77 ------ ----- Nonearning assets................................. 4,916 ------- Total assets(5)................................. $43,061 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits................................ $ 9,585 $ 196 2.04% Time deposits................................... 7,536 341 4.53 International Banks in foreign countries...................... 2,118 277 13.09 Other foreign savings and time.................. 5,062 334 6.60 ------- ------ Total........................................... 24,301 1,148 4.72 ------- ------ ----- Federal funds purchased and repurchase agreements U.S. ............................................ 3,470 132 3.80 International.................................... 203 65 31.96 ------- ------ Total........................................... 3,673 197 5.36 ------- ------ ----- Other funds borrowed U.S. ............................................ 2,327 118 5.06 International.................................... 1,180 553 46.87 ------- ------ Total........................................... 3,507 671 19.13 ------- ------ ----- Notes payable U.S. ............................................ 1,942 117 6.02 International.................................... 127 13 10.36 ------- ------ Total........................................... 2,069 130 6.28 ------- ------ ----- Total interest bearing liabilities................ 33,550 2,146 6.40 ------ ----- Demand deposits-U.S............................... 4,553 Demand deposits-International..................... 447 Other noninterest bearing liabilities............. 1,488 Stockholders' equity.............................. 3,023 ------- Total liabilities and stockholders' equity(5)... $43,061 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S. ............................................ $28,339 $1,231 4.34% International.................................... 9,806 348 3.54% ------- ------ Total........................................... $38,145 $1,579 4.14% ======= ====== - ------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Amounts include the Corporation's accelerated disposition portfolio. (3) Average rates for securities available for sale are based on the securi- ties' amortized cost. (4) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $52 million. (5) As of December 31, 1994, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respec- tively, amounted to 26%. 46 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- BANK OF BOSTON CORPORATION AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1993 - -------------------------------------------------------------------------------- AVERAGE AVERAGE BALANCE INTEREST(1) RATE ASSETS Interest bearing deposits in other banks U.S. ............................................ $ 341 $ 11 3.22% International.................................... 952 130 13.66 ------- ------ Total........................................... 1,293 141 10.91 ------- ------ ----- Federal funds sold and resale agreements U.S. ............................................ 962 29 3.07 International.................................... 482 109 22.56 ------- ------ Total........................................... 1,444 138 9.59 ------- ------ ----- Trading securities U.S. ............................................ 152 6 4.03 International.................................... 129 4 3.19 ------- ------ Total........................................... 281 10 3.65 ------- ------ ----- Loans held for sale U.S. ............................................ 1,071 76 7.06 ------- ------ ----- Securities(2) U.S. ............................................ 3,153 188 5.95 International.................................... 471 77 16.35 ------- ------ Total........................................... 3,624 265 7.30 ------- ------ ----- Loans and lease financing U.S. ............................................ 21,063 1,602 7.60 International.................................... 5,523 515 9.32 ------- ------ Total(3)........................................ 26,586 2,117 7.96 ------- ------ ----- Total earning assets.............................. 34,299 2,747 8.01 ------ ----- Nonearning assets................................. 4,068 ------- Total assets(4)................................. $38,367 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits U.S. Savings deposits................................ $ 9,367 $ 212 2.30% Time deposits................................... 9,199 425 4.62 International Banks in foreign countries...................... 1,461 80 5.46 Other foreign savings and time.................. 3,657 299 8.18 ------- ------ Total........................................... 23,684 1,016 4.29 ------- ------ ----- Federal funds purchased and repurchase agreements U.S.............................................. 2,697 81 3.02 International.................................... 119 19 15.80 ------- ------ Total........................................... 2,816 100 3.57 ------- ------ ----- Other funds borrowed U.S.............................................. 879 49 5.59 International.................................... 654 115 17.54 ------- ------ Total........................................... 1,533 164 10.69 ------- ------ ----- Notes payable U.S.............................................. 1,654 105 6.32 International.................................... 89 9 10.22 ------- ------ Total........................................... 1,743 114 6.52 ------- ------ ----- Total interest bearing liabilities................ 29,776 1,394 4.70 ------ ----- Demand deposits-U.S............................... 4,470 Demand deposits-International..................... 385 Other noninterest bearing liabilities............. 1,017 Stockholders' equity.............................. 2,719 ------- Total liabilities and stockholders' equity(4)... $38,367 ======= NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS U.S.............................................. $26,742 $1,096 4.10% International.................................... 7,557 257 3.40% ------- ------ Total........................................... $34,299 $1,353 3.94% ======= ====== - ------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis. (2) Prior to January 1, 1994, average balances for securities available for sale and securities held to maturity were not separately accumulated. (3) Loans and lease financing includes nonaccrual and renegotiated balances. Interest on loans and lease financing includes net fees of $56 million. (4) As of December 31, 1993, average international assets and liabilities as a percentage of total average consolidated assets and liabilities, respec- tively, amounted to 23%. 47 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- BANK OF BOSTON CORPORATION CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS The following tables present, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes for 1995 com- pared with 1994, and 1994 compared with 1993. The change due to the volume/rate variance has been allocated to volume.
1995 Compared with 1994 1994 Compared with 1993 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in (in millions) Volume Rate Net Change Volume Rate Net Change - ------------------------------------------------------------------------------------------------ EARNING ASSETS Interest bearing deposits in other banks U.S.................... $ 1 $ 3 $ 4 $ (6) $ 2 $ (4) International.......... 42 55 97 (11) (10) (21) -------- ------- 101 (25) -------- ------- Federal funds sold and resale agreements U.S.................... (55) 24 (31) 14 10 24 International.......... (253) (23) (276) 337 101 438 -------- ------- (307) 462 -------- ------- Trading securities U.S.................... 3 2 5 2 2 International.......... 58 8 66 71 30 101 -------- ------- 71 103 -------- ------- Loans held for sale U.S.................... (18) 5 (13) (25) (8) (33) -------- ------- Securities U.S.................... 78 23 101 (14) 8 (6) International.......... 11 5 16 8 (21) (13) -------- ------- 117 (19) -------- ------- Loans and lease financing U.S.................... 15 261 276 153 33 186 International.......... 173 186 359 149 155 304 -------- ------- 635 490 -------- ------- Interest income......... 138 466 604 375 603 978 -------- ------- INTEREST BEARING LIABILITIES Deposits U.S. savings........... (17) 66 49 7 (23) (16) U.S. time.............. 1 81 82 (76) (8) (84) International.......... 97 181 278 175 57 232 -------- ------- 409 132 -------- ------- Federal funds purchased and repurchase agreements U.S.................... 2 55 57 30 21 51 International.......... (3) (17) (20) 27 19 46 -------- ------- 37 97 -------- ------- Other funds borrowed U.S.................... 80 31 111 73 (4) 69 International.......... (130) (20) (150) 247 191 438 -------- ------- (39) 507 -------- ------- Notes payable U.S.................... (4) 19 15 17 (5) 12 International.......... 9 1 10 4 4 -------- ------- 25 16 -------- ------- Interest expense........ 82 350 432 216 536 752 -------- ------- Net interest revenue.... $ 172 $ 226 ======== =======
48 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ BANK OF BOSTON CORPORATION SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA
1995 1994 (dollars in millions, FOURTH THIRD SECOND FIRST Fourth Third Second First except per share amounts) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Interest income.......... $ 1,070 $ 1,113 $ 1,103 $ 1,033 $ 1,071 $ 1,083 $ 840 $ 724 Interest expense......... 628 674 669 607 638 659 466 383 ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue... 442 439 434 426 433 424 374 341 Provision for credit losses.................. 75 45 40 90 35 25 25 45 ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue after provision for credit losses......... 367 394 394 336 398 399 349 296 Noninterest income(1).... 313 249 236 293 199 202 192 235 Noninterest expense(2)... 429 393 392 383 382 378 372 347 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes and extraordinary item.................... 251 250 238 246 215 223 169 184 Provision for income taxes................... 109 110 105 121 94 99 75 81 ------- ------- ------- ------- ------- ------- ------- ------- Income before extraordinary item...... 142 140 133 125 121 124 94 103 ------- ------- ------- ------- ------- ------- ------- ------- Extraordinary loss from early extinguishment of debt, net of tax........ (7) ------- ------- ------- ------- ------- ------- ------- ------- Net income............... $ 142 $ 140 $ 133 $ 125 $ 121 $ 124 $ 94 $ 96 ======= ======= ======= ======= ======= ======= ======= ======= AVERAGE BALANCE SHEET DATA Loans and lease financing............... $31,763 $31,625 $30,928 $30,123 $31,076 $30,362 $29,105 $28,615 Securities............... 5,247 4,824 4,526 4,288 4,435 3,489 3,164 2,945 Other earning assets..... 3,697 3,418 3,516 3,576 3,838 4,995 5,613 4,942 ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets... 40,707 39,867 38,970 37,987 39,349 38,846 37,882 36,502 Cash and due from banks.. 1,350 1,249 1,309 1,262 2,178 2,116 1,828 2,157 Other assets............. 4,176 4,069 3,822 3,596 2,873 2,963 2,992 2,555 ------- ------- ------- ------- ------- ------- ------- ------- Total average assets... $46,233 $45,185 $44,101 $42,845 $44,400 $43,925 $42,702 $41,214 ======= ======= ======= ======= ======= ======= ======= ======= Deposits................. $30,303 $29,268 $28,807 $28,754 $30,445 $29,904 $28,232 $28,615 Funds borrowed........... 8,512 8,679 8,174 7,284 7,194 7,361 8,138 6,030 Other liabilities........ 1,647 1,643 1,661 1,467 1,491 1,625 1,404 1,433 Notes payable............ 2,109 2,065 2,062 2,133 2,141 1,987 1,957 2,194 Stockholders' equity..... 3,662 3,530 3,397 3,207 3,129 3,048 2,971 2,942 ------- ------- ------- ------- ------- ------- ------- ------- Total average liabilities and stockholders' equity.. $46,233 $45,185 $44,101 $42,845 $44,400 $43,925 $42,702 $41,214 ======= ======= ======= ======= ======= ======= ======= ======= PER COMMON SHARE Income before extraordinary item Primary................ $ 1.18 $ 1.17 $ 1.11 $ 1.08 $ 1.04 $ 1.07 $ .80 $ .88 Fully diluted.......... 1.17 1.15 1.10 1.04 1.01 1.04 .77 .85 Net Income Primary................ 1.18 1.17 1.11 1.08 1.04 1.07 .80 .82 Fully diluted.......... 1.17 1.15 1.10 1.04 1.01 1.04 .77 .79 Cash dividends declared.. .37 .37 .27 .27 .27 .22 .22 .22 Market value High................... 49 3/8 47 5/8 38 1/4 30 3/8 29 1/8 27 3/8 28 1/2 25 5/8 Low.................... 43 5/8 36 3/4 29 3/8 25 5/8 24 5/8 24 3/8 23 1/8 22 5/8 AVERAGE NUMBER OF COMMON SHARES (in thousands) Primary................ 112,285 111,865 111,369 107,278 107,108 106,981 106,619 106,198 Fully diluted.......... 114,036 113,803 112,933 111,820 111,831 111,690 111,286 110,817 - -------------------------------------------------------------------------------------------
(1) Includes a $20 million gain from the sale of the corporate trust business in the fourth quarter of 1995, a $75 million gain from the sale of the Cor- poration's Maine and Vermont banking subsidiaries in the first quarter of 1995, and a $27 million gain from the sale of the domestic factoring busi- ness in the first quarter of 1994. (2) Includes $28 million in charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units in the fourth quarter of 1995, and $5 million and $16 million of acquisition-related costs in the third and second quarters of 1994, respectively, related to the Corpora- tion's acquisitions of Pioneer Financial, A Co-operative Bank and BankWorcester Corporation. The common stock of the Corporation, which is the only class of its securities entitled to vote at the Annual Meeting of Stockholders, is listed and traded on the New York and Boston stock exchanges. 49 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- The Board of Directors and Stockholders Bank of Boston Corporation: We have audited the accompanying consolidated balance sheets of Bank of Boston Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1995. These financial statements are the responsibility of the Corporation's manage- ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bank of Boston Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consoli- dated results of their operations and cash flows for each of the years in the three year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Notes 1, 15 and 19 to the financial statements, the Corporation has adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," Statement of Fi- nancial Accounting Standards No. 109, "Accounting for Income Taxes," and changed its method of accounting for purchased mortgage servicing rights, ef- fective January 1, 1993; adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective December 31, 1993; and adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure," effec- tive January 1, 1995. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts January 18, 1996 51 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- BANK OF BOSTON CORPORATION CONSOLIDATED BALANCE SHEET
December 31 1995 1994 (dollars in millions, except per share amounts) - --------------------------------------------------------------------------------- ASSETS Cash and due from banks....................................... $ 2,645 $ 2,317 Interest bearing deposits in other banks...................... 1,250 1,556 Federal funds sold and securities purchased under agreements to resell..................................................... 1,350 1,232 Trading securities............................................ 1,109 553 Mortgages held for sale....................................... 889 183 Securities Available for sale........................................... 5,014 2,997 Held to maturity (fair value of $620 in 1995 and $1,626 in 1994)........................................................ 613 1,703 Loans and lease financing (net of unearned income of $253 in 1995 and $292 in 1994)........................................ 31,067 31,005 Reserve for credit losses..................................... (736) (680) ------- ------- Net loans and lease financing................................ 30,331 30,325 Premises and equipment, net................................... 617 569 Due from customers on acceptances............................. 359 314 Accrued interest receivable................................... 456 355 Other assets.................................................. 2,764 2,526 ------- ------- TOTAL ASSETS.................................................. $47,397 $44,630 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Domestic offices Noninterest bearing......................................... $ 4,839 $ 4,900 Interest bearing............................................ 16,564 16,841 Overseas offices Noninterest bearing......................................... 552 569 Interest bearing............................................ 8,993 9,046 ------- ------- Total deposits.............................................. 30,948 31,356 Funds borrowed................................................ 8,763 6,360 Acceptances outstanding....................................... 359 316 Accrued expenses and other liabilities........................ 1,437 1,287 Notes payable................................................. 2,139 2,169 ------- ------- Total liabilities............................................. 43,646 41,488 ------- ------- Commitments and contingencies Stockholders' equity Preferred stock without par value Authorized shares--10,000,000 Issued shares--4,593,941.................................... 508 508 Common stock, par value $2.25 Authorized shares--200,000,000 Issued shares--112,571,508 in 1995 and 107,584,349 in 1994 Outstanding shares--112,086,150 in 1995 and 106,547,149 in 1994........................................................ 253 242 Surplus...................................................... 932 810 Retained earnings............................................ 2,020 1,655 Net unrealized gain (loss) on securities available for sale, net of tax................................................... 64 (40) Treasury stock, at cost (485,358 shares in 1995 and 1,037,200 shares in 1994).............................................. (22) (27) Cumulative translation adjustments, net of tax............... (4) (6) ------- ------- Total stockholders' equity.................................... 3,751 3,142 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $47,397 $44,630 ======= ======= - ---------------------------------------------------------------------------------
The Accompanying Notes Are an Integral Part of These Financial Statements. 52 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31 1995 1994 1993 (dollars in millions, except per share amounts) - -------------------------------------------------------------------------------- INTEREST INCOME Loans and lease financing, including fees.............. $ 3,240 $ 2,606 $ 2,112 Securities............................................. 355 242 261 Trading securities..................................... 184 113 10 Mortgages held for sale................................ 30 41 76 Federal funds sold and securities purchased under agreements to resell.................................. 293 600 139 Deposits in other banks................................ 217 116 141 ------- ------- ------- Total interest income................................. 4,319 3,718 2,739 ------- ------- ------- INTEREST EXPENSE Deposits of domestic offices........................... 645 520 630 Deposits of overseas offices........................... 912 628 386 Funds borrowed......................................... 866 868 264 Notes payable.......................................... 155 130 114 ------- ------- ------- Total interest expense................................ 2,578 2,146 1,394 ------- ------- ------- Net interest revenue.................................. 1,741 1,572 1,345 Provision for credit losses............................ 250 130 70 ------- ------- ------- Net interest revenue after provision for credit losses............................................... 1,491 1,442 1,275 ------- ------- ------- NONINTEREST INCOME Financial service fees................................. 523 396 350 Trust and agency fees.................................. 217 201 178 Trading profits and commissions........................ 22 16 24 Net securities gains................................... 9 14 32 Other income........................................... 320 201 162 ------- ------- ------- Total noninterest income.............................. 1,091 828 746 ------- ------- ------- NONINTEREST EXPENSE Salaries............................................... 736 665 635 Employee benefits...................................... 161 148 136 Occupancy expense...................................... 140 135 128 Equipment expense...................................... 100 96 96 Other real estate owned expense........................ 9 22 44 Acquisition, divestiture and restructuring expense..... 28 21 85 Other expense.......................................... 423 392 407 ------- ------- ------- Total noninterest expense............................. 1,597 1,479 1,531 ------- ------- ------- Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles............................................ 985 791 490 Provision for income taxes............................. 444 349 215 ------- ------- ------- Income before extraordinary item and cumulative effect of changes in accounting principles................... 541 442 275 Extraordinary loss from early extinguishment of debt, net of tax............................................ (7) ------- ------- ------- Income before cumulative effect of changes in accounting principles................................. 541 435 275 Cumulative effect of changes in accounting principles, net................................................... 24 ------- ------- ------- NET INCOME............................................. $ 541 $ 435 $ 299 ======= ======= ======= NET INCOME APPLICABLE TO COMMON STOCK.................. $ 504 $ 398 $ 264 ======= ======= ======= PER COMMON SHARE Income before extraordinary item and cumulative effect of changes in accounting principles Primary............................................... $ 4.55 $ 3.79 $ 2.28 Fully diluted......................................... 4.43 3.67 2.22 Net income Primary............................................... 4.55 3.73 2.51 Fully diluted......................................... 4.43 3.61 2.44 Cash dividends declared................................ 1.28 .93 .40 AVERAGE NUMBER OF COMMON SHARES (in thousands) Primary............................................... 110,716 106,730 105,336 Fully diluted......................................... 113,560 111,427 110,258 - --------------------------------------------------------------------------------
The Accompanying Notes Are an Integral Part of These Financial Statements. 53 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- - -------------------------------------------------------------------------------- BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31 1995 1994 1993 (dollars in millions, except per share amounts) - -------------------------------------------------------------------------------- PREFERRED STOCK Balance, January 1...................................... $ 508 $ 508 $ 438 Preferred stock issued--280,000 shares.................. 70 ------ ------ ------ Balance, December 31.................................... 508 508 508 ------ ------ ------ COMMON STOCK Balance, January 1...................................... 242 238 236 Common stock issued Dividend reinvestment and common stock purchase plan-- 861,235 shares in 1995, 1,103,539 shares in 1994 and 286,201 shares in 1993................................. 2 2 1 Exercise of stock options, net of surrendered shares-- 627,478 shares in 1995, 305,918 shares in 1994 and 623,291 shares in 1993................................. 1 1 1 Conversion of subordinated convertible debentures-- 3,477,792 shares in 1995............................... 8 Restricted stock grants, net of forfeitures--(11,610) shares in 1995 and 252,363 shares in 1994.............. 1 ------ ------ ------ Balance, December 31.................................... 253 242 238 ------ ------ ------ SURPLUS Balance, January 1...................................... 810 769 750 Dividend reinvestment and common stock purchase plan.... 33 25 6 Exercise of stock options............................... 15 5 11 Conversion of subordinated convertible debentures....... 71 Acquisition of Ganis Credit Corporation................. 1 Restricted stock........................................ 2 9 1 Other, principally employee benefit plans............... 2 3 Preferred stock issued, net of issuance costs........... (2) ------ ------ ------ Balance, December 31.................................... 932 810 769 ------ ------ ------ RETAINED EARNINGS Balance, January 1...................................... 1,655 1,362 1,136 Net income.............................................. 541 435 299 Restricted stock........................................ 3 (6) Cash dividends declared Preferred stock........................................ (37) (37) (35) Common stock--$1.28 per share in 1995, $.93 per share in 1994 and $.40 per share in 1993..................... (142) (99) (38) ------ ------ ------ Balance, December 31.................................... 2,020 1,655 1,362 ------ ------ ------ NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE Balance, January 1...................................... (40) 43 Change in net unrealized gain (loss) on securities available for sale, net of tax.......................... 104 (83) 43 ------ ------ ------ Balance, December 31.................................... 64 (40) 43 ------ ------ ------ TREASURY STOCK Balance, January 1...................................... (27) (1) Purchases of treasury stock--1,482,139 shares in 1995 and 1,037,200 shares in 1994............................ (50) (27) Treasury stock reissued Dividend reinvestment and common stock purchase plan-- 331,782 shares in 1995................................. 9 Exercise of stock options--36,395 shares in 1995 and 104,398 shares in 1993................................. 1 1 Conversion of subordinated convertible debentures-- 530,475 shares in 1995................................. 15 Acquisition of Ganis Credit Corporation--773,621 shares in 1995................................................ 21 Restricted stock grants--255,520 shares in 1995........ 6 Other, principally employee benefit plans--106,188 shares in 1995......................................... 3 ------ ------ ------ Balance, December 31.................................... (22) (27) ------ ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1...................................... (6) (8) (5) Translation adjustments, net of tax..................... 2 2 (3) ------ ------ ------ Balance, December 31.................................... (4) (6) (8) ------ ------ ------ TOTAL STOCKHOLDERS' EQUITY, DECEMBER 31................. $3,751 $3,142 $2,912 ====== ====== ====== - --------------------------------------------------------------------------------
The Accompanying Notes Are an Integral Part of These Financial Statements. 54 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ BANK OF BOSTON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31 1995 1994 1993 (in millions) - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.......................................... $ 541 $ 435 $ 299 Reconciliation of net income to net cash provided from (used for) operating activities Cumulative effect of change in accounting for income taxes...................................... (77) Cumulative effect of change in accounting for purchased mortgage servicing rights, net of tax... 53 Extraordinary loss from early extinguishment of debt, net of tax.................................. 7 Provision for credit losses........................ 250 130 70 Depreciation and amortization...................... 210 177 175 Provision for deferred taxes....................... 37 70 119 Net gains on sales of securities available for sale and other assets.................................. (208) (114) (68) Change in trading securities....................... (556) (247) (114) Change in mortgages held for sale.................. (706) 1,139 (399) Change in securities available for sale, net of transfers......................................... 992 Net change in interest receivables and payables.... (59) (162) 4 Other, net......................................... 120 (14) 133 ------- ------- ------- Net cash provided from (used for) operating activities....................................... (371) 1,421 1,187 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) interest bearing deposits in other banks............................ 306 (565) 316 Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell.......................................... (118) 223 (267) Purchases of securities held to maturity............ (589) (1,373) (1,723) Maturities of securities held to maturity........... 558 993 1,808 Purchase of securities available for sale........... (3,323) (4,294) Sales of securities available for sale.............. 1,822 2,541 Maturities of securities available for sale......... 813 231 Dispositions of equity and mezzanine financing investments........................................ 122 121 97 Loans and lease financing originated by nonbank entities........................................... (7,107) (2,773) (3,589) Loans and lease financing collected by nonbank entities........................................... 5,632 2,814 3,365 Proceeds from sales of loan portfolios by bank subsidiaries....................................... 1,439 76 171 Loan portfolios purchased by bank subsidiaries...... (44) Net cash used for lending activities of bank subsidiaries....................................... (256) (2,455) (3,394) Lease financing originated by bank entities......... (11) (24) (50) Lease financing collected by bank entities.......... 59 24 22 Proceeds from sales of other real estate owned...... 61 53 142 Expenditures for premises and equipment............. (198) (187) (97) Proceeds from sales of business units, premises and equipment.......................................... 166 159 8 Other, net.......................................... (554) (380) (168) ------- ------- ------- Net cash used for investing activities............ (1,178) (4,816) (3,403) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from (used for) deposits.......... (408) 1,742 512 Net cash provided from funds borrowed............... 2,403 1,385 2,028 Net proceeds from issuance of notes payable......... 220 698 519 Repayments/repurchases of notes payable............. (155) (502) (231) Net proceeds from issuance of common stock.......... 64 35 20 Net proceeds from issuance of preferred stock....... 68 Purchases of treasury stock......................... (50) (27) Dividends paid...................................... (179) (136) (73) ------- ------- ------- Net cash provided from financing activities....... 1,895 3,195 2,843 ------- ------- ------- Effect of foreign currency translation on cash...... (18) (22) (24) ------- ------- ------- Net change in cash and due from banks............... 328 (222) 603 Cash and due from banks at January 1................ 2,317 2,539 1,936 ------- ------- ------- Cash and due from banks at December 31.............. $ 2,645 $ 2,317 $ 2,539 ======= ======= ======= - --------------------------------------------------------------------------------
The Accompanying Notes Are an Integral Part of These Financial Statements. 55 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial reporting and accounting policies of Bank of Boston Corporation (the Corporation) conform to generally accepted accounting principles. Certain prior period amounts have been reclassified to conform with current financial statement presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make esti- mates and assumptions that affect the amounts reported in the financial state- ments and accompanying notes. Actual results could differ from those estimates. The following is a summary of the significant accounting policies. BASIS OF PRESENTATION The consolidated financial statements include the Corporation and its majority owned subsidiaries, including its major banking subsidiaries: The First Na- tional Bank of Boston (FNBB), Bank of Boston Connecticut and Rhode Island Hos- pital Trust National Bank. All material intercompany accounts and transactions have been eliminated in consolidation. Investments in 20% to 50%-owned compa- nies are accounted for using the equity method. The equity interest in their earnings is included in other income. The excess of cost over the assigned value of the net assets of companies acquired, or goodwill, is included in other assets and is amortized on a straight-line basis, generally over periods ranging from ten to twenty-five years. FOREIGN CURRENCY TRANSLATION The Corporation translates the financial statements of its foreign operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Under the provisions of SFAS No. 52, a func- tional currency is designated for each foreign unit, generally the currency of the primary economic environment in which it operates. Where the functional currency is not the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end exchange rates, while income and expenses are trans- lated using average rates for the period. The resulting translation adjustments and any related hedge gains and losses are recorded, net of tax, as a separate component of stockholders' equity. For foreign units operating in highly inflationary economies, the functional currency is the U.S. dollar. Their financial statements are translated into U.S. dollars using period-end exchange rates for monetary assets and liabili- ties, exchange rates in effect on the date of acquisition for premises and equipment (and related depreciation) and certain investments, and the average exchange rate during the period for income and expenses. The resulting transla- tion adjustments and related hedge gains and losses for these units are re- corded in current period income. The Corporation hedges a portion of its exposure to translation gains and losses in overseas branches and foreign subsidiaries through the purchase of foreign exchange rate contracts and through investments in fixed assets and certain securities. TRADING SECURITIES Trading securities comprise securities purchased in connection with the Corpo- ration's trading activities and, as such, are expected to be sold in the near term. The Corporation carries trading securities at fair value; realized and unrealized gains and losses on trading securities are recorded currently in trading profits and commissions, a component of noninterest income. Obligations to deliver securities not yet purchased are carried at fair value in funds bor- rowed. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY Securities are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which the Corporation adopted effective December 31, 1993. All debt and equity securities that are not purchased in connection with the Corporation's trading activities are clas- sified as either securities held to maturity or securities available for sale. Securities held to maturity are debt securities that the Corporation has the positive intent and ability to hold to maturity. These securities are reported at cost, adjusted for amortization of premium and accretion of discount. Secu- rities available for sale are debt securities that the Corporation may not hold to maturity, as well as equity securities. These securities include debt secu- rities that are purchased in connection with the Corporation's asset/liability risk management strategy and that may be sold in response to changes in inter- est rates, resultant prepayment risk and other related factors; securities held in connection with the Corporation's equity and mezzanine financing business; and other securities that are intended to be held for indefinite periods of time, but which may not be held to maturity. Within the available for sale cat- egory, equity securities that have a readily determinable fair value and debt securities are reported at fair value, with unrealized gains and losses record- ed, net of tax, as a separate component of stockholders' equity. Equity securi- ties that do not have a readily determinable fair value are reported at cost. If a security available for sale or held to maturity has experienced a decline in value that is deemed other than temporary, it is written down to its esti- mated fair value through a charge to current period income. Realized gains and losses with respect to securities, which are 56 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) generally computed on a specific identified cost basis, are included in net se- curities gains, except for gains and losses with respect to equity and mezza- nine securities, which are included in other income. INTEREST RATE DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS The Corporation enters into a variety of interest rate derivatives in connec- tion with its trading activities, including providing these products to its customers, and as part of its interest rate risk management strategy. Such de- rivatives include interest rate futures and forwards, interest rate swaps and interest rate options. Derivatives are included in either the trading portfolio or the asset and liability management portfolio. Derivatives included in the trading portfolio are carried at fair value. Real- ized and unrealized changes in fair value are recognized in current period in- come as a component of trading profits and commissions. The asset and liability management portfolio is comprised of derivatives used by the Corporation as part of its interest rate risk management strategy. When derivatives are included in the asset and liability management portfolio, they are linked to the related assets and/or liabilities. Income or loss on deriva- tives are recognized on the same basis as the linked assets or liabilities. If the related assets are carried at fair value or the lower of cost or fair val- ue, the fair value of the derivatives are combined with the fair value of the assets and are recognized in income based on the method of accounting used for the linked assets. If the assets or liabilities are carried at cost, the deriv- atives are either accounted for on the accrual basis, with income or expense accrued over the life of the agreements as an adjustment to the yield of the related assets or liabilities, or marked to fair value, with any gain or loss deferred and amortized over the period being managed as an adjustment to the yield of the related assets or liabilities. In this connection, interest rate swaps, caps and floors are accounted for on the accrual basis and interest rate futures, forwards and other option agreements are marked to fair value, with gains and losses deferred and amortized over the period being managed. The Cor- poration does not utilize written options as part of its interest rate risk management strategy unless they are included as part of an overall option strategy that effectively creates a net purchased option position. If a con- tract is terminated, any remaining unrecognized gain or loss is deferred and amortized as an adjustment to the yield of the related assets or liabilities over the remainder of the period that is being managed. If the linked assets or liabilities are disposed of prior to the end of the period being managed, the related derivatives are marked to fair value, with any resulting gain or loss recognized in current period income as an adjustment to the gain or loss on the disposal of the related assets or liabilities. Included in the asset and liability management portfolio are interest rate op- tions used to manage prepayment risk resulting from a decline in interest rates related to the Corporation's mortgage servicing portfolio. While the Corpora- tion utilizes these contracts as part of a risk management strategy, the cur- rent composition of the option portfolio has not been structured for economic reasons to provide a sufficient expectation that the change in its value, re- sulting from changes in interest rates, will substantially offset the change in the value of the mortgage servicing rights to which it is linked. As a result, these contracts are currently valued at fair value with the realized and unrealized changes in fair value recorded in the statement of income as part of net mortgage servicing fees, a component of financial service fees. The Corporation also enters into foreign exchange contracts in connection with its trading activities, including providing these products to its customers, and to hedge a portion of its own foreign exchange risk, which is principally related to foreign currency translation (see "Foreign Currency Translation" above). The trading portfolio includes foreign currency spot, forward, future, option and cross-currency interest rate swap contracts. Foreign exchange trad- ing positions are valued at current market rates, with the net foreign exchange trading gain or loss recorded in the statement of income as a component of other income. LOANS AND LEASE FINANCING Loans are reported at their principal outstanding, net of charge-offs and un- earned income, if any. Mortgages held for sale are reported separately at the lower of aggregate cost or fair value. Interest income on loans is accrued as earned. Unearned income on loans and leases is recognized on a basis approximating a level rate of return over the term of the loan. Loan origination fees and costs are accounted for in accor- dance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," which requires the deferral of these fees and costs and subsequent amortization to income over the life of the related credit or facility. Fees that adjust the yield on the underlying credit are included in interest income on loans and lease financing. Fees for credit-related services are included in financial service fees, a component of noninterest income. Lease financing receivables, including leveraged leases, are reported at the aggregate of lease payments receivable and the estimated residual values, net of unearned and deferred income, including unamortized investment credits. Leveraged leases are reported net of nonrecourse debt. Unearned income is rec- ognized to yield a level rate of return on the net investment in the leases. 57 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- The Corporation places loans and leases on nonaccrual status when any portion of the principal or interest is ninety days past due, unless it is well secured and in the process of collection, or earlier when concern exists as to the ul- timate collectibility of principal or interest. Whenever a loan or lease is placed on nonaccrual status, all other credit exposures to the same borrower are also placed on nonaccrual status, except when it can be clearly demon- strated that such credit exposures are well secured, fully performing and insu- lated from the weakness surrounding the nonaccrual credit to which they relate. When loans or leases are placed on nonaccrual status, the related interest re- ceivable is reversed against interest income of the current period. Interest payments received on nonaccrual loans and leases are applied as a reduction of the principal balance when concern exists as to the ultimate collection of principal; otherwise, such payments are recognized as interest income. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the ultimate collectibility of principal or interest. The Corporation may renegotiate the contractual terms of a loan because of a deterioration in the financial condition of the borrower. The carrying value of a renegotiated loan is reduced by the fair value of any asset or equity inter- est received, and by the extent, if any, that future cash receipts required un- der the new terms do not equal the loan balance at the time of renegotiation. Renegotiated loans performing in accordance with their new terms are not re- ported as nonaccrual loans unless concern exists as to the ultimate collectibility of principal or interest under the new terms. Interest, if any, is recognized in income to yield a level rate of return over the life of the renegotiated loan. RESERVE FOR CREDIT LOSSES AND PROVISION FOR CREDIT LOSSES The reserve for credit losses is available for future charge-offs of extensions of credit. The reserve is increased by the provision for credit losses and by recoveries of items previously charged off, and is decreased as credits are charged off. A charge-off occurs once a probability of loss has been deter- mined, with consideration given to such factors as the customer's financial condition, underlying collateral and guarantees. The provision for credit losses is based upon management's estimate of the amount necessary to maintain the reserve at an adequate level, considering evaluations of individual credits and concentrations of credit risk, net losses charged to the reserve, changes in quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, cross-border risks, changes in the size and character of the credit risks and other pertinent fac- tors. Effective January 1, 1995, the Corporation adopted, prospectively, 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 a loan be classified and accounted for as an impaired loan when it is probable that the Corporation will be unable to collect all principal and interest due on the loan in accordance with the loan's original contractual terms. The Corporation uses the same criteria in placing a loan on nonaccrual status. Accordingly, for purposes of applying these standards, impaired loans have been defined as all nonaccrual loans, ex- clusive 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. A loan's observable market value may be used as an alternate valuation technique. Im- pairment exists when the recorded investment in a loan exceeds the value of the loan measured using the above-mentioned valuation techniques. Such impairment is recognized as a valuation reserve, which is included as a part of the Corpo- ration's overall reserve for credit losses. The Corporation recognizes interest income on impaired loans consistent with its nonaccrual policy. The adoption of these new standards did not have a material impact on the Cor- poration's overall reserve for credit losses, and did not affect its charge-off or income recognition policies. PREMISES AND EQUIPMENT Premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the estimated life of the improvement or the term of the lease. PURCHASED AND EXCESS MORTGAGE SERVICING ASSETS Purchased mortgage servicing rights (PMSR) represent the cost of purchasing the right to service mortgage loans originated by others. Excess mortgage servicing receivables (EMSR) represent the present value of the servicing fee income re- tained in excess of a normal servicing fee rate when mortgage loans are sold. PMSR and EMSR are reported as assets and are amortized as reductions of servic- ing fee income, a component of noninterest income, over the estimated servicing period in proportion to the estimated future net cash flows from the loans serviced. Remaining PMSR asset balances are evaluated for impairment by deter- mining their estimated aggregate recoverable amount through applying the dis- count rate in effect at the time the servicing portfolios were purchased to the 58 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------- estimated future net cash flows from servicing the underlying mortgages. The carrying value is written down for any impairment; such writedowns are re- corded as reductions of servicing fee income. Prior to 1993, this valuation was performed on an undiscounted basis. EMSR is also evaluated for impairment based on estimated future cash flows on a discounted basis. Effective January 1, 1993, the Corporation elected to change its method of ac- counting for PMSR to conform its financial reporting to regulatory accounting rules adopted by the banking regulators in the first quarter of 1993. The cu- mulative effect to January 1, 1993 of adopting this change in accounting prin- ciple was a decrease in income of $53 million (net of taxes of $32 million), or $.50 per common share on a primary basis and $.48 per common share on a fully diluted basis. In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights," was is- sued. This standard, which is effective January 1, 1996, amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require that rights to service mortgage loans originated for sale be recognized as separate assets either upon origination (if a definitive plan to sell the loans and retain the rights exists) or upon sale of the loans, based on the relative fair values of the rights and loans. This standard also requires that mortgage servicing rights be assessed for impairment based on the fair value of those rights, us- ing a stratified method. The Corporation does not expect that adoption of this standard will have a material impact on its financial statements. ACCELERATED DISPOSITION PORTFOLIO In 1994, the Corporation transferred certain lower quality real estate expo- sures to an accelerated disposition portfolio (ADP), which was included in other assets. The exposures were transferred at their estimated disposition values, with the excess, if any, of the exposures over the disposition values charged to the reserve for credit losses. Subsequent declines in disposition value are recorded in noninterest income. Gains, if any, are not recognized until realized. Income recognition is based upon existing policies for accru- ing and nonaccrual loans and other real estate owned. OTHER REAL ESTATE OWNED Other real estate owned (OREO), which is included in other assets, includes properties on which the Corporation has foreclosed and taken title. OREO is reported at the lower of the carrying value of the loan or the fair value of the property obtained, less estimated selling costs. The excess, if any, of the loan over the fair value of the property at the time of transfer from loans to OREO is charged to the reserve for credit losses. Subsequent declines in the fair value of the property and net operating results of the property are recorded in noninterest expense. INCOME TAXES The Corporation accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Current tax liabilities or assets are recog- nized, through charges or credits to the current tax provision, for the esti- mated taxes payable or refundable for the current year. Net deferred tax lia- bilities or assets are recognized, through charges or credits to the deferred tax provision, for the estimated future tax effects, based on enacted tax rates, attributable to temporary differences and tax benefit carryforwards. Deferred tax liabilities are recognized for temporary differences that will result in amounts taxable in the future, and deferred tax assets are recog- nized for temporary differences and tax benefit carryforwards that will result in amounts deductible or creditable in the future. The effect of enacted changes in tax law, including changes in tax rates, on these deferred tax as- sets and liabilities is recognized in income in the period that includes the enactment date. A deferred tax valuation reserve is established if it is more likely than not that all or a portion of the Corporation's deferred tax assets will not be realized. Changes in the deferred tax valuation reserve are recog- nized through charges or credits to the deferred tax provision. For financial reporting purposes, investment tax credits received in connection with lease financing are recognized as lease income over the investment life of the re- lated asset. PER SHARE CALCULATIONS Primary net income per common share is computed by dividing net income, re- duced by dividends on preferred stock, by the weighted average number of com- mon shares outstanding for each period presented. For fully diluted net income per common share, net income is reduced by preferred stock dividends and in- creased by the interest, net of income tax benefit, recorded on the Corpora- tion's convertible debentures. Such adjusted net income is divided by the weighted average number of common shares outstanding for each period plus the shares representing the dilutive effect of stock options outstanding and the shares that would result from conversion of the Corporation's convertible de- bentures. The effect of stock options and convertible debentures is excluded from the computation of fully diluted net income per common share in periods in which their effect would be anti-dilutive. As described in Note 10, the Corporation's convertible debentures were con- verted to common stock in March 1995. 2. MERGERS, ACQUISITIONS, JOINT VENTURES AND DIVESTITURES In July 1993, the Corporation completed its mergers with Society for Savings, Bancorp, Inc. (Society), a $2.4 billion registered bank holding company based in Hartford, Connecticut, and Multibank Financial Corp. (Multibank), a $2.4 billion registered bank holding company based in Dedham, Massachusetts. In connection with the merger with Society, the Corporation issued 9.6 million shares of its common stock for all of the outstanding shares of Society common stock by exchanging .80 of a share of its common stock for each outstanding Society share. In connection with the merger with Multibank, the Corporation issued 10.4 million shares of its common stock for all of the outstanding shares of Multibank common stock by exchanging 1.125 shares of its common stock for each 59 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- outstanding Multibank share. These mergers were accounted for as poolings of interests and as such are reflected in the accompanying consolidated financial statements as though the Corporation, Society and Multibank had been combined as of the beginning of the earliest period presented. In May 1994, the Corporation completed its acquisition of BankWorcester Corpo- ration (BankWorcester), a $1.5 billion bank holding company based in Worcester, Massachusetts. The total purchase price amounted to $243 million. In addition, in August 1994, the Corporation completed its acquisition of Pioneer Financial, A Co-operative Bank (Pioneer), a $.8 billion bank based in Middlesex County, Massachusetts. The total purchase price amounted to $117 million. These acqui- sitions were accounted for as purchases and, accordingly, the assets and lia- bilities of each were recorded at their estimated fair values as of the acqui- sition dates. Goodwill resulting from the acquisitions is being amortized over a twenty-five year period for BankWorcester and a fifteen-year period for Pio- neer. A core deposit intangible resulting from the BankWorcester acquisition is being amortized over a seven-year period. Both acquisitions have been included in the accompanying consolidated financial statements since their respective acquisition dates. Pro forma results of operations including BankWorcester and Pioneer for the years ended December 31, 1994 and 1993 are not presented, since the results would not have been significantly different in relation to the Cor- poration's results of operations. In January 1995, the Corporation completed the sales of two of its affiliate banks, Bank of Vermont and Casco Northern Bank, N.A. (Casco). The sales re- sulted in a combined pre-tax gain of approximately $75 million, or $30 million net of tax. In February 1995, the Corporation completed its acquisition of Ganis Credit Corporation (Ganis), a privately-held consumer finance company headquartered in Newport Beach, California. The Corporation issued Ganis stockholders approxi- mately $22 million in Corporation common stock, comprised of 773,621 shares of its treasury stock previously purchased in the open market. In January 1996, the Corporation issued Ganis stockholders an additional $7 million in its com- mon stock, comprised of 153,741 shares of its treasury stock previously pur- chased in the open market, as a result of the achievement by Ganis of certain performance goals. The Corporation will issue Ganis stockholders up to an addi- tional $7 million in common stock if Ganis achieves certain additional perfor- mance 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. In October 1995, the Corporation announced a definitive agreement to acquire The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank, a Massachussetts chartered savings bank. Pursuant to the agreement, Bancorp will convert most of its assets into cash equivalents, including its commercial real estate loan portfolio and the majority of its investment securities, prior to the closing of the transaction. The Corporation will assume all of Bancorp's deposits, currently approximating $1.3 billion. The Corporation will acquire Bancorp in exchange for shares of its common stock, which it anticipates it will purchase in the open market. The transaction, which is subject to the ap- proval of the shareholders of Bancorp and regulatory agencies, is expected to close in the middle of 1996 and will be accounted for as a purchase. Effective in October 1995, the Corporation formed 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 which is 50 percent owned by each party. Additionally, in October 1995, the Corporation completed the sale of its corporate trust busi- ness. This sale resulted in a pre-tax gain of $20 million, or $12 million net of tax. In December 1995, the Corporation announced an agreement to form a joint ven- ture to create an independent mortgage company based in Jacksonville, Florida. The Corporation will contribute BancBoston Mortgage Corporation (BBMC) in ex- change for cash and a minority equity interest in the new company. The transac- tion is expected to close in the first half of 1996. In addition, in December 1995, the Corporation announced an agreement to merge with BayBanks, Inc. (BayBanks), a $12 billion bank holding company based in Boston. The Corporation will exchange 2.2 shares of its common stock for each share of BayBanks common stock. The merger is currently anticipated to be com- pleted by the middle of 1996, and is subject to approval by federal and state bank regulators and the stockholders of both companies. The transaction is ex- pected to be accounted for as a pooling of interests. 3. STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, cash and due from banks are con- sidered to be cash equivalents. Foreign currency cash flows are converted to U.S. dollars using average rates for the period. During 1995, 1994 and 1993, the Corporation paid interest of approximately $2.5 billion, $2.2 billion and $2.8 billion, respectively. The Corporation paid income taxes of approximately $467 million in 1995, $173 million in 1994 and $56 million in 1993. During 1995, 1994 and 1993, the Corporation transferred approximately $46 million, $74 million and $132 mil- 60 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------- lion, respectively, to OREO from loans. There were no loans made to facilitate sales of OREO properties in 1995; such loans in 1994 and 1993 totaled approxi- mately $2 million and $9 million, respectively. Non-cash transactions in 1995 included $94 million from the issuance of common stock in connection with the redemption of the Corporation's convertible subordinated debentures due 2011, which is more fully described in Note 10. In addition, $1.3 billion of securi- ties held to maturity were transferred to securities available for sale in con- nection with "A Guide to Implementation of Statement 115 on Accounting for Cer- tain Investments in Debt and Equity Securities" (the Special Report), issued by the Financial Accounting Standards Board (the FASB) in November 1995, which al- lowed the Corporation to reassess the classification of securities held at that time. This transfer is more fully described in Note 5. During 1994, the Corpo- ration transferred a total of $387 million of lower quality real estate expo- sure to ADP. During 1993, the Corporation transferred approximately $861 mil- lion of securities held to maturity to securities available for sale, in con- nection with the Corporation's mergers with Society and Multibank, as well as the Corporation's adoption of SFAS No. 115. In accordance with the new stan- dard, cash flows from purchases, sales and maturities of securities available for sale in 1995 and 1994 were classified as investing activities in the accom- panying consolidated statement of cash flows. For 1993, these cash flows were classified as an operating activity and presented on a net basis. 4. RESERVE REQUIREMENTS, RESTRICTED DEPOSITS AND PLEDGED ASSETS At December 31, 1995 and 1994, cash and due from banks included $876 million and $818 million, respectively, to satisfy the reserve requirements of the Fed- eral Reserve System and various foreign central banks. Interest bearing depos- its in other banks held to satisfy foreign central bank reserve requirements totaled $37 million and $30 million at December 31, 1995 and 1994, respective- ly. At December 31, 1995 and 1994, securities, loans and other assets with a book value of $3.6 billion and $4.1 billion, respectively, were pledged to collateralize repurchase agreements, public deposits and other items. 5. SECURITIES A summary comparison of securities available for sale by type is as follows:
Gross Gross December 31, 1995 Unrealized Unrealized Carrying (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. Treasury........................... $ 660 $ 5 $ 665 U.S. government agencies and corporations--Mortgage-backed securities............................. 2,969 71 $ 3 3,037 States and political subdivisions....... 19 2 21 Foreign debt securities................. 698 5 18 685 Other debt securities................... 299 9 290 Marketable equity securities............ 100 52 152 Other equity securities................. 164 164 ------ ---- --- ------ $4,909 $135 $30 $5,014 ====== ==== === ======
Gross Gross December 31, 1994 Unrealized Unrealized Carrying (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. Treasury........................... $1,500 $13 $1,487 U.S. government agencies and corporations--Mortgage-backed securities............................. 796 30 766 Foreign debt securities................. 432 $ 4 52 384 Other debt securities................... 142 142 Marketable equity securities............ 52 21 1 72 Other equity securities................. 146 146 ------ --- --- ------ $3,068 $25 $96 $2,997 ====== === === ======
Other equity securities included in securities available for sale are not traded on established exchanges and are carried at cost. However, in accordance with SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," fair values were estimated for these securities. These fair values exceeded cost by $76 million and $70 million at December 31, 1995 and 1994, 61 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- respectively. Further information with respect to the fair value of these secu- rities is included in Note 26. A summary comparison of securities held to maturity by type is as follows:
Gross Gross December 31, 1995 Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. Treasury........................... $ 4 $ 4 U.S. government agencies and corporations--Mortgage-backed securities.............................. 523 $ 8 $ 1 530 States and political subdivisions....... 5 5 Foreign debt securities................. 11 11 Other equity securities................. 70 70 ---- --- --- ---- $613 $ 8 $ 1 $620 ==== === === ====
Gross Gross December 31, 1994 Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------ U.S. Treasury.......................... $ 12 $ 1 $ 11 U.S. government agencies and corporations--Mortgage-backed securities............................. 1,449 74 1,375 States and political subdivisions...... 30 30 Foreign debt securities................ 123 2 121 Other equity securities................ 89 89 ------ --- ------ $1,703 $77 $1,626 ====== === ======
Other equity securities included in securities held to maturity represent secu- rities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. The FASB Special Report, which provided guidance on the implementation of SFAS No. 115, allowed companies, no later than December 31, 1995, to make a one-time reassessment of the classification of their securities portfolios between available for sale and held to maturity. As a result of this reassessment, the Corporation transferred $1.3 billion of securities from held to maturity to available for sale, with a net after-tax unrealized gain of $27 million re- corded in stockholder's equity. A summary comparison of debt securities available for sale by contractual matu- rity is as follows:
December 31 1995 1994 FAIR Fair (in millions) COST VALUE Cost Value - ------------------------------------------------------------------------------- Within one year.................................... $ 951 $ 953 $ 617 $ 615 After one but within five years.................... 1,348 1,362 1,502 1,475 After five but within ten years.................... 1,064 1,089 238 197 After ten years.................................... 1,282 1,294 513 492 ------ ------ ------ ------ $4,645 $4,698 $2,870 $2,779 ====== ====== ====== ======
A summary comparison of debt securities held to maturity by contractual matu- rity is as follows:
December 31 1995 1994 AMORTIZED FAIR Amortized Fair (in millions) COST VALUE Cost Value - -------------------------------------------------------------------------------- Within one year................................ $ 11 $ 11 $ 41 $ 41 After one but within five years..................................... 115 115 545 527 After five but within ten years...................................... 200 208 304 293 After ten years................................ 217 216 724 676 ---- ---- ------ ------ $543 $550 $1,614 $1,537 ==== ==== ====== ======
Certain securities, such as mortgage-backed securities, may not become due at a single maturity date. Such securities have been classified within the category that encompasses the due dates for the majority of the instrument. Included in 1995's net securities gains were gross gains of $11 million and gross losses of $2 million related to the sale of debt securities available for sale. Total proceeds from such securities sales amounted to $1.3 billion. For 1994, net securities gains included gross gains of $23 million and gross losses of $9 million related to the sale of debt securities available for sale. Total proceeds from such securities sales in 1994 amounted to $2.2 billion. For 1993, net securities gains included gross gains of $39 million and gross losses of $1 million related to the sale of debt securities available for sale. Total pro- ceeds from such securities sales in 1993 amounted to $4.3 billion. 62 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. LOANS AND LEASE FINANCING
December 31 1995 1994 (in millions) - -------------------------------------------------------------------------------- UNITED STATES Commercial, industrial and financial.......................... $11,439 $11,805 Commercial real estate Construction................................................. 336 354 Other........................................................ 2,272 3,141 Consumer-related loans Secured by 1-4 family residential properties................. 3,861 5,004 Other........................................................ 3,397 2,462 Lease financing............................................... 1,409 1,366 Unearned income............................................... (216) (216) ------- ------- 22,498 23,916 ======= ======= INTERNATIONAL Commercial and industrial..................................... 6,398 5,136 Banks and other financial institutions........................ 682 614 Governments and official institutions......................... 82 33 Lease financing............................................... 285 329 All other..................................................... 1,159 1,053 Unearned income............................................... (37) (76) ------- ------- 8,569 7,089 ------- ------- $31,067 $31,005 ======= =======
7. RESERVE FOR CREDIT LOSSES An analysis of changes in the reserve for credit losses follows:
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- BALANCE, JANUARY 1........................................ $ 680 $ 770 $ 923 Reserves of acquired entities............................. 6 25 Reserves of entities sold................................. (32) Provision................................................. 250 130 70 Credit losses............................................. (230) (194) (273) Recoveries................................................ 62 68 50 ----- ----- ----- Net credit losses........................................ (168) (126) (223) Credit losses related to exposures transferred to ADP..... (119) ----- ----- ----- BALANCE, DECEMBER 31...................................... $ 736 $ 680 $ 770 ===== ===== =====
As described in Note 1, the adoption of SFAS No. 114, as amended by SFAS No. 118, on January 1, 1995 did not have a material effect on the Corporation's fi- nancial statements, and did not result in any additional provision for credit losses as of January 1, 1995. At December 31, 1995, impaired loans in accor- dance with these standards totaled $202 million, of which loans totaling $87 million required no valuation reserve and loans totaling $115 million required a valuation reserve of $23 million. For the year ended December 31, 1995, aver- age impaired loans were approximately $245 million. Interest recognized on im- paired loans during the year ended December 31, 1995 was not material. 8. OTHER ASSETS
December 31 1995 1994 (in millions) - ------------------------------------------------------------------------------- Accounts receivable.............................................. $ 393 $ 541 PMSR and EMSR.................................................... 548 428 Prepaid pension cost............................................. 174 174 Goodwill and other intangibles................................... 302 312 Precious metal assets............................................ 136 175 Investments in limited partnerships.............................. 183 148 Equity investments in affiliates................................. 145 109 ADP.............................................................. 118 OREO............................................................. 50 76 Refundable income taxes.......................................... 38 29 Equity investments from loan restructurings...................... 20 23 All other........................................................ 775 393 ------ ------ $2,764 $2,526 ====== ======
9. FUNDS BORROWED
December 31 1995 1994 (in millions) - ------------------------------------------------------------------------------- Federal funds purchased.......................................... $1,675 $ 369 Term federal funds purchased..................................... 869 765 Securities sold under agreements to repurchase................... 1,226 1,883 Short-term bank notes............................................ 1,190 1,569 Medium-term bank notes........................................... 1,871 Demand notes issued to the U.S. Treasury......................... 304 389 All other........................................................ 1,628 1,385 ------ ------ $8,763 $6,360 ====== ======
All other funds borrowed included borrowings with maturities of greater than one year of $318 million at December 31, 1995 and $221 million at December 31, 1994. At December 31, 1995 and 1994, the Corporation had availability under various bor- 63 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- rowing arrangements of $1.4 billion and $1.7 billion, respectively. The Corpo- ration had no significant compensating balance arrangements at December 31, 1995 and 1994. 10.NOTES PAYABLE
By Remaining Maturity at December 31 Due less than Due Due 1995 1994 (in millions) 1 year 1-5 years 6-10 years Total Total - ------------------------------------------------------------------------------- PARENT COMPANY Senior notes..................... $100 $ 100 $ 100 Subordinated notes............... $235 $ 934 1,169 1,320 Convertible subordinated debentures....................... 94 ---- ---- ------ ------ ------ Subtotal......................... 100 235 934 1,269 1,514 SUBSIDIARIES Senior notes..................... 27 274 157 458 243 Subordinated notes............... 15 397 412 412 ---- ---- ------ ------ ------ Subtotal......................... 27 289 554 870 655 ---- ---- ------ ------ ------ $127 $524 $1,488 $2,139 $2,169 ==== ==== ====== ====== ======
Notes payable are unsecured obligations of the Corporation or its subsidiaries. Certain of the indentures under which these notes were issued prohibit the Cor- poration from making any payment or other distribution in the stock of FNBB un- less FNBB unconditionally guarantees payment of principal and interest on the notes. The distribution shown above by remaining maturity is based on contrac- tual maturity. Notes payable at December 31, 1995 and 1994 include fixed rate notes of $1,659 million and $1,534 million, respectively, and variable rate notes of $480 mil- lion and $635 million, respectively. Fixed rate notes outstanding at December 31, 1995 mature at various dates through 2005 at interest rates ranging from 6.63% to 10.50%. The consolidated weighted average interest rates on fixed rate notes at December 31, 1995 and 1994 were 7.78% and 7.74%, respectively. The Corporation has entered into interest rate swap agreements that have effec- tively converted its fixed rate obligations to floating rate obligations. At December 31, 1995, such interest rates ranged from 5.75% to 5.95%. Variable rate notes outstanding, with interest rates ranging from 5.93% to 9.25% at De- cember 31, 1995, mature at various dates through 2003. The consolidated weighted average interest rates on variable rate notes at December 31, 1995 and 1994 were 6.71% and 7.24%, respectively. During 1995, the Corporation called for redemption its 7.75% convertible subor- dinated debentures due June 2011 at 100.78% of their principal amount plus ac- crued 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. Of the total shares issued, approximately 530,000 shares were treasury shares previously purchased by the Corporation in the open market. Primary earnings per share for the year ended December 31, 1995 would have been $4.52 had the debentures been converted on January 1, 1995. Also during 1995, the Corporation redeemed its 10.30% subordinated notes due September 2000 at their $150 million principal amount plus accrued interest. During 1994, the Corporation redeemed its floating rate notes due September 2000, with a carrying value of $179 million, at their principal amount plus ac- crued interest, and a nonbanking subsidiary of the Corporation prepaid $186 million of its senior notes, with fixed interest rates ranging from 6.67% to 9.50%, at their principal amount plus accrued interest and a prepayment penal- ty. The loss on these early extinguishments of debt amounted to $7 million, net of tax, or $.06 per common share on both a primary and fully diluted basis, and is presented as an extraordinary item in the accompanying consolidated state- ment of income. Notes payable maturing during the next five years amount to: $127 million in 1996, $404 million in 1997 and $120 million in 1998. There are no notes payable maturing in 1999 and 2000. 11.PREFERRED STOCK A summary of the Corporation's Adjustable Rate Cumulative Preferred Stock (Ad- justable Rate Preferred Stock) issued and outstanding is as follows:
Series A Series B Series C - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 and 1994 Shares........................................... 1,044,843 1,574,315 774,783 Amount (in millions)............................. $ 52 $ 79 $ 77 Dividend rates At December 31, 1995............................ 6.00% 6.00% 5.50% Minimum......................................... 6.00% 6.00% 5.50% Maximum......................................... 13.00% 13.00% 12.50% Dividends per share 1995............................................ $ 3.06 $ 3.01 $ 5.50 1994............................................ $ 3.02 $ 3.02 $ 5.51 1993............................................ $ 3.01 $ 3.01 $ 5.51 Liquidation preference per share........................................ $ 50 $ 50 $ 100
64 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------- A summary of the Corporation's Fixed Rate Cumulative Preferred Stock (Fixed Rate Preferred Stock) issued and outstanding is as follows:
Series E Series F - ------------------------------------------------------------------------------- Outstanding at December 31, 1995 and 1994 Shares...................................................... 920,000 280,000 Amount (in millions)........................................ $ 230 $ 70 Dividend rate............................................... 8.60% 7.88% Dividends per share......................................... $ 21.50 $ 19.69 Liquidation preference per share............................ $ 250 $ 250
The Fixed Rate Preferred Stock is held by stockholders in the form of deposi- tary shares, with each depositary share representing a one-tenth interest in a share of the respective preferred stock, and entitles the holder to a propor- tional interest in all rights and preferences of a share of Fixed Rate Pre- ferred Stock, including dividend, voting, redemption and liquidation rights. Dividends on all series of preferred stock are cumulative and, when declared, are payable quarterly. The dividend rates for the Adjustable Rate Preferred Stock are determined according to a formula based upon the highest of three in- terest rate benchmarks. Neither the Adjustable Rate Preferred Stock nor the Fixed Rate Preferred Stock have preemptive or general voting rights. The pre- ferred stock is redeemable, in whole or in part, at the option of the Corpora- tion as follows: Series A and B Preferred Stock are redeemable at $50 per share and Series C Preferred Stock is redeemable at $100 per share. The Series E and Series F Preferred Stock are redeemable on and after September 15, 1997 and July 15, 1998, respectively, at $250 per share ($25 per depositary share). 12.STOCKHOLDER RIGHTS PLAN In 1990, the Board of Directors of the Corporation adopted a stockholder rights plan. The plan provides for the distribution of one preferred stock purchase right for each outstanding share of common stock of the Corporation. Each right entitles the holder, following the occurrence of certain events, to purchase a unit, consisting of one-thousandth of a share of Junior Participating Preferred Stock, Series D, at a purchase price of $50 per unit, subject to adjustment. The rights will not be exercisable or transferable apart from the common stock except under certain circumstances in which a person or group of affiliated persons acquires, or commences a tender offer to acquire, 15% or more of the Corporation's common stock. Rights held by such an acquiring person or persons may thereafter become void. Under certain circumstances, a right may become a right to purchase common stock or assets of the Corporation or common stock of an acquiring corporation at a substantial discount. Under certain circumstanc- es, the Corporation may redeem the rights at $.01 per right. The rights will expire in July 2000 unless earlier redeemed or exchanged by the Corporation. As a result of the Corporation's agreement to merge with BayBanks, described in Note 2, the plan was amended to exclude the transactions contemplated by that agreement. 13.DIVIDENDS AND LOAN RESTRICTIONS Bank regulations require the approval of bank regulatory authorities if the dividends declared by a bank subsidiary exceed certain prescribed limits. For 1996, aggregate dividend declarations by the Corporation's bank subsidiaries without prior regulatory approval are limited to approximately $697 million of their undistributed earnings at December 31, 1995, plus an additional amount equal to their net profits, as defined, for 1996 up to the date of any dividend declaration. However, for any dividend declaration, the Corporation's subsidi- aries, as well as the Corporation itself, must consider additional factors such as the amount of current period net income, liquidity, asset quality, capital adequacy and economic conditions. It is likely that these factors would further limit the amount of dividends which the banking subsidiaries could declare. In addition, bank regulators have the authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. Each bank subsidiary is also prohibited by the bank regulatory authorities from granting loans and advances to the Parent Company that exceed certain limits. Assuming declaration of the maximum amount of dividends under the regulations described above, any loans and advances would be limited to an aggregate of ap- proximately $331 million and would be subject to specific collateral require- ments. Based on the foregoing limitations, an aggregate of approximately $2.7 billion of the Parent Company's investment in bank subsidiaries of $3.7 billion, which includes bank holding companies and their subsidiaries, was restricted from transfer to the Parent Company at December 31, 1995. 14.OTHER INCOME
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- Net equity and mezzanine profits................................ $110 $ 30 $ 38 Net foreign exchange trading profits............................ 57 42 45 Precious metal income........................................... 16 13 9 Net gains from sales of mortgage inventories.................... 13 10 Gains from sales of mortgage servicing rights................... 10 11 1 Equity in undistributed earnings of affiliates.................. 18 1 16 Exchange-rate related profits from Brazil....................... 15 Gain on sale of domestic factoring business..................... 27 Gain on sale of Maine and Vermont bank subsidiaries............. 75 Gain on sale of corporate trust business........................ 20 All other....................................................... 14 49 43 ---- ---- ---- $320 $201 $162 ==== ==== ====
65 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 15.EMPLOYEE BENEFITS The Corporation maintains non-contributory defined benefit pension plans (the Plans) covering substantially all domestic employees. The Corporation funds the Plans in compliance with the requirements of the Employee Retirement Income Se- curity Act of 1974 and the Internal Revenue Code of 1986, as amended. The principal plan is an account balance defined benefit plan in which each el- igible employee has an account to which amounts are allocated based on level of pay and years of service, and which grows at a specified rate of interest. Ben- efits accrued prior to 1989 are based on years of service, highest average com- pensation and social security benefits. Employee benefits expense (income) for the Plans included the following:
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- Service cost (benefits earned during the period)............ $ 18 $ 20 $ 17 Interest cost on projected benefit obligation............... 24 22 20 Return on plan assets Actual..................................................... (113) 8 (43) Actuarial deferral of gains (losses)....................... 73 (51) 4 Amortization Unrecognized net asset..................................... (4) (4) (4) Unrecognized prior service cost............................ 2 1 3 Other, net................................................. 1 1 (2) ----- ---- ---- Net pension expense (income)................................ $ 1 $ (3) $ (5) ===== ==== ==== - -------------------------------------------------------------------------------
The following table sets forth the funded status of the Plans:
December 31 1995 1994 1993 (dollars in millions) - ------------------------------------------------------------------------------ Projected benefit obligation Vested benefits........................................... $ 272 $215 $183 Nonvested benefits........................................ 33 32 29 ----- ---- ---- Accumulated benefit obligation............................. 305 247 212 Effect of projected future compensation levels............. 56 60 62 ----- ---- ---- Projected benefit obligation............................... $ 361 $307 $274 ===== ==== ==== Plan assets at fair value (primarily listed stocks and fixed income securities)................................... $ 521 $432 $444 ===== ==== ==== Plan assets in excess of projected benefit obligation...... $ 160 $125 $170 Unrecognized net loss...................................... 14 50 Unrecognized prior service cost............................ 9 12 21 Unrecognized net asset..................................... (9) (13) (17) ----- ---- ---- Prepaid pension cost....................................... $ 174 $174 $174 ===== ==== ==== Assumptions used in actuarial calculations are as follows: Weighted average discount rate at December 31............. 7.25% 8.25% 7.5% Rate of increase in future compensation levels at December 31........................................................ 4.5% 4.5% 4.5% Account balance interest rate at December 31.............. 6.0% 6.5% 6.0% Expected long-term rate of return on assets for the years ended December 31......................................... 9.0% 9.5% 9.5% - ------------------------------------------------------------------------------
66 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Corporation also maintains nonqualified deferred compensation and retire- ment plans for certain officers. All benefits provided under these plans are unfunded and any payments to plan participants are made by the Corporation. As of December 31, 1995 and 1994, approximately $19 million and $17 million, re- spectively, were included in accrued expenses and other liabilities for these plans. For each of the years ended December 31, 1995 and 1994, expenses related to these plans were $3 million. For the year ended December 31, 1993, the ex- pense was $1 million. The Corporation provides certain health and life insurance benefits for retired domestic employees. Eligible employees currently receive credits of up to $10,000 based on years of service, which are used to purchase postretirement health care coverage through the Corporation. Life insurance coverage is depen- dent on years of service at retirement. Pursuant to SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which was adopted effective January 1, 1993, these postretirement benefits are recognized over the service lives of the employees. The components of postretirement benefits expense were as follows:
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- Service cost (benefits earned during the period)............... $ 1 $ 1 $ 1 Interest cost on projected benefit obligation.................. 5 5 6 Amortization Unrecognized transition obligation............................ 4 4 4 Unrecognized net gain......................................... (1) (1) --- --- --- Net postretirement benefits expense............................ $ 9 $10 $10 === === ===
The following table sets forth the status of the Corporation's accumulated postretirement benefit obligation:
December 31 1995 1994 1993 (dollars in millions) - -------------------------------------------------------------------------------- Accumulated benefit obligation Retirees............................ $ 48 $ 50 $ 62 Active employees--eligible to retire............................. 6 7 5 Active employees--not eligible to retire............................. 9 9 10 ------------ ------------ ------------ Accumulated postretirement benefit obligation.......................... 63 66 77 Unrecognized net gain................ 17 15 4 Unrecognized transition obligation... (60) (73) (77) ------------ ------------ ------------ Postretirement benefit liability..... $ 20 $ 8 $ 4 ============ ============ ============ Assumptions used in actuarial calculations are as follows: Weighted average discount rate at December 31........................ 7.25% 8.25% 7.50% Rate of increase in future compensation levels at December 31................................. 4.50% 4.50% 4.50% Medical cost trend rate............. 8% 11% 12% declining to declining to declining to 5% in the 5% in the 5% in the year 1999 year 2001 year 2001 Effect of 1% increase in medical cost trend rate on Accumulated postretirement benefit obligation......................... 5.80% 5.90% 4.80% Postretirement benefits expense..... 4.90% 4.90% 4.10% - --------------------------------------------------------------------------------
In 1995, the Corporation recognized curtailment losses in connection with its pension and postretirement plans. These losses were primarily a result of the anticipated contribution of BBMC to a new mortgage banking joint venture, and represented the effect of expected employee reductions on the Corporation's pension and postretirement plans. The BBMC curtailment losses are more fully described in Note 17. The Corporation maintains thrift incentive plans covering the majority of do- mestic employees. Under these plans, employer contributions are generally based on the amount of eligible employee contributions. The amounts charged to oper- ating expense for these plans were $10 million, $12 million and $10 million in the years ended December 31, 1995, 1994 and 1993, respectively. 67 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 16.STOCK OPTIONS AND AWARDS The Corporation's stock incentive plans include the 1991 Long-Term Stock Incen- tive Plan (the 1991 Plan), and the 1986 and 1982 Stock Option Plans (the 1986 and 1982 Plans). The 1991 Plan provides for the award of stock options, re- stricted stock and stock appreciation rights (SARs) to key employees. Awards may be made under the 1991 Plan until December 31, 1996. No additional grants may be made under the 1986 and 1982 Plans. Shares issued under these plans may be authorized but unissued shares, treasury shares or shares purchased in the open market. Options are granted at prices not less than the fair market value of the common stock on the date of grant. Options granted under the 1991 plan generally have been exercisable in equal installments on the date of grant and the first anni- versary of the grant date. Under the 1986 Plan, options granted are generally exercisable in equal installments on the date of grant and each of the three anniversary dates thereafter. Options under the 1982 Plan are fully vested. All options expire not later than 10 years after the date of grant. The 1986 Plan allowed for the granting of rights to receive Tax Offset Payments with respect to Non-Qualified Stock Options, which are intended to compensate the partici- pant for the difference in tax treatment of Incentive Stock Options and Non- Qualified Stock Options. At December 31, 1995, Tax Offset Payments with respect to 78,334 options, granted in 1987, were outstanding. Compensation expense for Tax Offset Payments for the year ended December 31, 1995 was $1 million. There were 22,400 SARs, at a grant price of $28.63, outstanding at December 31, 1995. Compensation expense associated with these awards was $.4 million for the year ended December 31, 1995. A total of 6,348,905 shares of common stock were reserved for issuance under the above plans at December 31, 1995. Options outstanding at December 31, 1995 were at prices ranging from $6.10 to $47.88 per share. The following is a summary of the changes in options outstanding:
1995 1994 1993 - -------------------------------------------------------------------------------- Options outstanding, January 1................. 3,390,820 2,976,751 3,705,690 Granted ($24.38 to $47.88 per share)........... 1,118,662 927,489 445,103 Exercised ($5.63 to $30.50 per share).......... (861,567) (427,756) (800,524) Canceled....................................... (23,749) (85,664) (373,518) --------- --------- --------- Options outstanding, December 31............... 3,624,166 3,390,820 2,976,751 ========= ========= ========= Options exercisable, December 31............... 3,083,110 2,890,244 2,731,896 ========= ========= ========= Shares available for future grants............. 2,724,739 3,929,107 5,087,600 ========= ========= =========
Under terms of restricted stock awards, employees are generally required to maintain employment with the Corporation for a period of five years after the award in order to become fully vested in the shares awarded. Performance-based restricted stock has also been awarded, which vests if the market price of the Corporation's common stock reaches certain stated levels within specified peri- ods. During 1995, the common stock price levels for vesting of 180,200 shares of performance restricted stock granted in 1994 were reached, and the shares were released from forfeiture restriction. Restricted stock is recorded at the fair market value of the common stock on the date of award or, if a perfor- mance-based award, the value required for vesting. At the date of award, un- earned compensation of the same amount is recorded as a reduction of retained earnings and is amortized as compensation expense over the vesting period. The following is a summary of the activity in restricted stock:
1995 1994 1993 - ------------------------------------------------------------------------------ Share balance, January 1.......................... 683,264 509,490 496,425 Awards........................................... 255,520 282,200 111,100 Forfeitures...................................... (11,610) (29,837) (87,360) Released from forfeiture restrictions............ (377,182) (78,589) (10,675) -------- ------- ------- Share balance, December 31........................ 549,992 683,264 509,490 ======== ======= ======= (in millions) Unearned compensation at December 31 (a reduction of retained earnings)............................. $ 8 $ 11 $ 5 Compensation expense.............................. $ 10 $ 4 $ 1
In November 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was issued, and is effective January 1, 1996. This new standard requires either the recording of compensation expense for all stock awards and stock option grants, or significantly increased disclosures for such awards and grants made after December 31, 1994. The Corporation intends to disclose the information required by the standard. 17. ACQUISITION, DIVESTITURE AND RESTRUCTURING EXPENSE During 1995, the Corporation recorded $28 million of charges mainly related to exiting, reorganizing and downsizing certain business and corporate staff units. These charges included expenses related to reorganizations underway in the Corporation's European business, including the closing of the Luxembourg operations, corporate banking and various other units, and the reorganization of certain Asian operations. The charges 68 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) included $16 million, comprised of estimated costs of employee reduction of ap- proximately 265, including executive, managerial and staff positions, and $4 million related to equipment and certain lease obligations. In addition, the charges included $8 million of curtailment losses as defined by SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." The curtailment losses re- sulted from the announced joint venture of the mortgage banking business, which is expected to remove mortgage banking employees from the Corporation's pension and postretirement plans. The majority of the remaining reserve of $19 million at December 31, 1995 is expected to be utilized in 1996. During 1994, in connection with its acquisitions of BankWorcester and Pioneer, the Corporation recorded acquisition-related costs of $21 million. Significant components of the costs included $10 million for estimated costs of employee reduction of 414, and $11 million for estimated conversion costs. These conver- sions were completed in 1994, and consisted of costs to convert loans, deposits and other computer systems to a common Corporation system, as well as costs of replacing customers' checkbooks, automatic teller machine cards and other de- posit documents. During 1994, the Corporation charged costs totaling $12 mil- lion to the BankWorcester and Pioneer reserves. Substantially all of the re- maining costs, principally comprised of the Corporation's liability for invol- untary termination benefits, were paid during 1995. During 1993, the Corporation recorded acquisition-related costs and reorganiza- tion charges of $85 million, primarily in connection with its mergers with So- ciety and Multibank. The costs also included the estimated costs of downsizing and reconfiguring certain of the Corporation's business and corporate units. Significant components of the acquisition-related costs included professional fees; employee reduction costs, principally termination benefits paid to em- ployees; conversion costs, including costs to convert loans, deposits and other computer systems of the acquired banks to a common Corporation system and costs to dispose of systems hardware and software of the acquired banks; and property related costs, including costs related to the closing of 24 branches and the disposition of other principal properties, such as post-closing lease payments and other monthly costs. Components related to the downsizing and reconfiguration plan included employee reduction costs and estimated costs re- lated to the disposal of branches and other principal properties and exiting operating leases. Total employee reduction related to both the mergers and the downsizing and reconfiguration plan amounted to 950. During 1993, the Corpora- tion charged costs totaling $40 million to the reserve created by the charges. Charges to the reserve during 1994 totaled $35 million, and the remainder of the costs were paid during 1995. 18.OTHER EXPENSE
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- FDIC insurance premiums......................................... $ 24 $ 51 $ 62 Legal fees...................................................... 23 25 27 Consulting and other professional fees.......................... 26 29 29 Communications.................................................. 67 62 59 Advertising..................................................... 61 41 37 Forms and supplies.............................................. 26 23 24 Travel and customer contact..................................... 28 22 22 Software costs.................................................. 22 19 19 Other staff costs............................................... 20 17 15 Amortization of goodwill and other intangibles.................. 26 17 12 All other....................................................... 100 86 101 ---- ---- ---- $423 $392 $407 ==== ==== ====
19.INCOME TAXES The components of the provision for income taxes were as follows:
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------- CURRENT TAX PROVISION Federal..................................................... $236 $ 91 $ 16 Foreign Based on income............................................ 91 48 27 Withheld on interest and dividends......................... 22 15 8 State and local............................................. 58 125 45 ---- ---- ---- 407 279 96 ---- ---- ---- DEFERRED TAX PROVISION (BENEFIT) Federal..................................................... (1) 115 107 State and local............................................. 38 (45) 12 ---- ---- ---- 37 70 119 ---- ---- ---- Income tax provision before extraordinary item and cumulative effect of changes in accounting principles...... 444 349 215 INCOME TAXES APPLICABLE TO EXTRAORDINARY ITEM AND CHANGES IN ACCOUNTING PRINCIPLES Loss from early extinguishment of debt...................... (4) Change in accounting for income taxes....................... (77) Change in accounting for PMSR............................... (32) ---- ---- ---- $444 $345 $106 ==== ==== ====
69 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- Excluded from the above table are tax effects related to certain items which were recorded directly in stockholders' equity, including foreign currency translation, market value adjustments related to securities available for sale, stock options and restricted stock. Net tax effects recorded directly in stock- holders' equity amounted to a $63 million charge in 1995, a $63 million benefit in 1994 and a $26 million charge in 1993. The income tax provision included tax provisions related to securities gains of $3 million in 1995, $6 million in 1994 and $13 million in 1993. Effective January 1, 1993, the Corporation adopted, prospectively, SFAS No. 109, which principally affects accounting for deferred income taxes. The cumu- lative effect to January 1, 1993 of adopting the standard was an increase to net income of $77 million, or $.74 per common share on a primary basis and $.70 per common share on a fully diluted basis. The following table reconciles the expected federal tax provision before ex- traordinary item and cumulative effect of changes in accounting principles, based on the federal statutory tax rate of 35% in 1995, 1994 and 1993, to the actual consolidated tax provision before extraordinary item and cumulative ef- fect of changes in accounting principles:
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------ Expected tax provision applicable to income before extraordinary item and cumulative effect of changes in accounting principles....................................... $345 $277 $171 Effect of State and local income taxes, net of federal tax benefit... 63 52 37 Tax-exempt income.......................................... (3) (2) (3) Non-creditable foreign taxes............................... 11 9 5 Non-deductible goodwill from sale of subsidiaries.......... 11 Other, net................................................. 17 13 5 ---- ---- ---- Actual tax provision before extraordinary item and cumulative effect of changes in accounting principles....... $444 $349 $215 ==== ==== ====
The components of the net deferred tax asset (liability) were as follows:
December 31 1995 1994 (in millions) - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS Reserve for credit losses......................................... $ 294 $ 307 Foreign operations................................................ 63 30 Interest on nonaccrual loans...................................... 45 83 Mortgage servicing rights......................................... 39 33 Unrealized loss on securities available for sale.................. 32 Other............................................................. 72 87 ----- ----- Deferred tax assets.............................................. 513 572 DEFERRED TAX LIABILITIES Leasing operations................................................ (485) (474) Pension obligations............................................... (65) (71) Unrealized gain on securities available for sale.................. (42) Other............................................................. (34) (26) ----- ----- Deferred tax liabilities......................................... (626) (571) ----- ----- Net deferred tax asset (liability)................................ $(113) $ 1 ===== =====
During 1994, the Corporation eliminated its deferred tax valuation reserve, which was $56 million as of January 1, 1994, as a result of writing off certain fully reserved state deferred tax assets, executing certain tax planning strat- egies and partially settling an Internal Revenue Service (IRS) examination. The execution of the tax planning strategies and the partial settlement of the IRS examination resulted in the realization of deferred tax assets, some of which had been partially reserved. The deferred tax provision was reduced by the re- lease of these reserves; however, this reduction was offset by an increase in the current tax provision from these events. Accordingly, there was no net ef- fect on the Corporation's earnings. During 1995, The Commonwealth of Massachusetts passed a law which reduces the state income tax rate for financial institutions from 12.5% to 10.5% to be phased in over five years, and permits apportionment of a bank's taxable in- come. Additionally, in 1995, the Corporation reached a favorable settlement of an outstanding Massachusetts tax matter relating to income earned on certain securities. These items did not have a significant effect on the Corporation's 1995 effective tax rate, since the reduction in the current tax provision from the tax law changes and the settlement were offset by the required reduction in FNBB's net deferred tax assets resulting from the tax law changes. 70 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - ------------------------------------------- It is expected that the Corporation's deferred tax assets at December 31, 1995 will be realized from the reversal of existing deferred tax liabilities and from the recognition of future taxable income, without relying on tax planning strategies that the Corporation might not ordinarily follow. Domestic pre-tax income was $756 million in 1995, $613 million in 1994 and $279 million in 1993. Foreign pre-tax income, defined as income generated from oper- ations that are located outside the United States, was $229 million in 1995, $178 million in 1994 and $125 million in 1993. 20. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments represent various degrees and types of risk to the Corporation, including credit, interest rate, foreign exchange rate and liquidity risk. INTEREST RATE DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS In the normal course of its business, the Corporation enters into a variety of interest rate derivatives and foreign exchange contracts as part of its trading activities, which primarily focus on providing these products to customers, and in its interest rate and currency risk management strategy. These products in- volve, to varying degrees, credit risk and market risk. Credit risk is the pos- sibility that a loss may occur if a counterparty to a transaction fails to per- form according to the terms of the contract. Market risk is the effect of a change in interest rates or currency rates on the value of a financial instru- ment. The notional amount of interest rate derivatives and foreign exchange contracts is the amount upon which interest and other payments under the con- tract are based. For interest rate derivatives, the notional amount is typi- cally not exchanged. Therefore, the notional amounts should not be taken as the measure of credit or market risk. The Corporation controls credit risk arising from interest rate derivatives and foreign exchange contracts using credit procedures similar to those used for traditional lending activities. The Corporation believes that fair value, which approximates the cost to replace the contract at the current market rates should the counterparty default prior to settlement date, is generally repre- sentative of credit exposure related to interest rate derivatives and foreign exchange contracts at a point in time. Counterparty credit risk is also reduced through the use of master netting agreements. Such agreements provide for the offsetting of amounts receivable and payable under interest rate derivatives or foreign exchange contracts with the same counterparty. The market risk associ- ated with interest rate derivatives and foreign exchange contracts is managed by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Interest rate derivatives utilized by the Corporation include futures and for- wards, interest rate swaps and interest rate options. Futures and forward con- tracts generally are contracts for the delayed delivery of securities or money market instruments in which the buyer agrees to purchase, and the seller agrees to deliver, a specific instrument at a predetermined date for a specific price. Risks on both types of agreements stem from market movements in the underlying securities' values and interest rates and from the ability of the counterparties to meet the terms of the contracts. The Corporation's counterparty risk for futures is limited, as the majority of these transactions are executed on organized exchanges that assume the obligations of counterparties, and generally require margin collateral and daily settlement of variation margins. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties based on a common notional principal amount and maturity date. The primary risks associated with interest rate swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. Interest rate options are contracts that allow the holder of the option to re- ceive cash, purchase, sell or enter into a financial instrument at a specified price within a specified period of time. Options include interest rate caps and floors, which are types of interest rate protection instruments involving the potential payment between seller and buyer of an interest differential. In ad- dition, other types of option products provide the holder with the right to en- ter into interest rate swap, cap and floor agreements with the "writer." The primary risks associated with all types of options are the exposure to current and the possible future movements in interest rates and the ability of the counterparties to meet the terms of the contracts. Foreign exchange contracts include such commitments as foreign currency spot, forward, futures, option and swap contracts. The primary risks in these trans- actions arise from exposure to changes in foreign currency exchange rates and the ability of the counterparties to meet the terms of the contract. 71 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- The following is a summary of the Corporation's notional amounts and fair val- ues of interest rate derivatives and foreign exchange contracts included in its trading and asset and liability management (ALM) portfolios.
Trading Portfolio(1)(6) ALM Portfolio(1) --------------------------------- ---------------------------------------------- December 31, 1995 Notional Fair Value (2)(3)(5) Notional Fair Value (2)(3) Unrecognized(4) (in millions) Amount Asset Liability Amount Asset Liability Gain (Loss) - ---------------------------------------------------------------------------------------------------------- Interest rate contracts Futures and forwards... $30,789 $12,518 $ 10 $ (89) Interest rate swaps.... 9,169 $ 91 $ 80 5,828 $ 92 7 102 Interest rate options Purchased............. 3,411 9 3,968 119 2 Written or sold....... 3,986 9 360 34 ------- ---------- ---------- ------- -------- -------- ----- Total interest rate contracts............... $47,355 $ 100 $ 89 $22,674 $ 211 $ 51 $ 15 ======= ========== ========== ======= ======== ======== ===== Foreign exchange contracts Spot and forward contracts.............. $13,072 $ 171 $ 167 $ 1,257 $ 3 $ 5 $ (2) Options purchased...... 1,044 13 Options written or sold................... 1,130 16 ------- ---------- ---------- ------- -------- -------- ----- Total foreign exchange contracts............... $15,246 $ 184 $ 183 $ 1,257 $ 3 $ 5 $ (2) ======= ========== ========== ======= ======== ======== ===== Trading Portfolio(1)(6) ALM Portfolio(1) --------------------------------- ---------------------------------------------- December 31, 1994 Notional Fair Value (2)(3)(5) Notional Fair Value (2)(3) Unrecognized(4) (in millions) Amount Asset Liability Amount Asset Liability Gain (Loss) - ---------------------------------------------------------------------------------------------------------- Interest rate contracts Futures and forwards... $17,257 $16,566 $ 1 $ 36 Interest rate swaps.... 12,604 $ 75 $ 40 3,721 19 $ 225 (208) Interest rate options Purchased............. 4,251 55 7,709 39 49 Written or sold....... 5,639 36 6,125 19 (17) ------- ---------- ---------- ------- -------- -------- ----- Total interest rate contracts............... $39,751 $ 130 $ 76 $34,121 $ 59 $ 244 $(140) ======= ========== ========== ======= ======== ======== ===== Foreign exchange contracts Spot and forward contracts.............. $17,142 $ 172 $ 186 $ 604 $ 2 $ 5 $ (4) Options purchased...... 811 8 Options written or sold................... 753 9 ------- ---------- ---------- ------- -------- -------- ----- Total foreign exchange contracts............... $18,706 $ 180 $ 195 $ 604 $ 2 $ 5 $ (4) ======= ========== ========== ======= ======== ======== ===== - --------------------------------------------------------------------------------------------------------------
(1) Contracts under master netting agreements are shown on a net basis for both the trading and ALM portfolios. (2) Fair value represents the amount at which a given instrument could be ex- changed in an arm's length transaction with a third party as of the balance sheet date. The fair value amounts of the trading portfolio are included in other assets or other liabilities, as applicable. The majority of deriva- tives that are part of the ALM portfolio are accounted for on the accrual basis, and not carried at fair value. In certain cases, contracts, such as futures, are subject to daily cash settlements; as such, the fair value of these instruments is zero. (3) The credit exposure of interest rate derivatives and foreign exchange con- tracts is represented by the fair value of contracts reported in the "As- set" column. (4) Unrecognized gain or loss represents the amount of gain or loss, based on fair value, that has not been recognized in the income statement at the balance sheet date.This includes amounts related to contracts which have been terminated. Such amounts are recognized as an adjustment of yield over the period being managed. At December 31, 1995, there were $32 million of unrecognized gains and $2 million of unrecognized losses related to termi- nated contracts that are being amortized to net interest revenue over a weighted average period of 32 months and 23 months, respectively. At Decem- ber 31, 1994, unrecognized gains of $35 million related to terminated con- tracts were being amortized to net interest revenue over a weighted average period of 14 months. (5) The average asset and liability fair value amounts for interest rate contracts included in the trading portfolio for the years ended December 31, 1995 and 1994 were $99 million and $67 million, respectively, and $148 million and $83 million, respectively. The average asset and liability fair value amounts for foreign exchange contracts included in the trading portfolio were $313 million and $313 million, respectively, for the year ended December 31, 1995, and $278 million and $283 million, respectively, for the year ended December 31, 1994. (6) Net trading gains or losses from interest rate derivatives and foreign ex- change contracts are recorded in trading account profits and commissions and other income, respectively. Net trading gains from interest rate deriv- atives for the years ended December 31, 1995, 1994 and 1993 were $7 mil- lion, $7 million and $5 million, respectively. Net trading gains from for- eign exchange activities, which include foreign exchange spot, forward and options contracts, for the years ended December 31, 1995, 1994 and 1993 were $57 million, $42 million and $45 million, respectively. 72 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) CREDIT-RELATED FINANCIAL INSTRUMENTS A commitment to extend credit is a legally binding agreement to lend to a cus- tomer in the future that generally expires within a specified period of time. The extension of a commitment, which is subject to the Corporation's credit re- view and approval policies, gives rise to credit exposure when certain borrow- ing conditions are met and it is drawn upon. Until such time, it represents only potential exposure. In connection with entering into a commitment, the Corporation may obtain collateral if deemed necessary, based upon the Corpora- tion's credit evaluation. Such collateral varies but may include securities, receivables, inventory, fixed assets, personal property and real estate. The obligation to lend generally may be voided if the customer's financial condi- tion deteriorates or if the customer fails to meet certain covenants. Commit- ments to extend credit do not reflect the actual demand on liquidity that the Corporation will be subjected to in the future, since historical experience with loan commitments indicates that a large portion generally expire without being drawn upon. Standby letters of credit and foreign office guarantees are commitments that are primarily issued to third parties to guarantee obligations of the Corpora- tion's customers. Standby letters of credit may be issued as credit enhance- ments for corporate customers' commercial paper, bond issuances by municipali- ties or other debt obligations, and to guarantee other financial performance of a customer. The Corporation has current exposure only to the extent that a cus- tomer may default on the underlying transaction. The risks involved in the is- suance of standby letters of credit and foreign office guarantees are primarily credit risks. Again, the Corporation's credit review and approval policies and practices are adhered to when evaluating issuances of standbys or guarantees for customers. Similar to commitments to extend credit, the Corporation may ob- tain various types of collateral, if deemed necessary, based upon the Corpora- tion's credit evaluation. The following table summarizes the Corporation's credit-related financial in- struments:
Years Ended December 31 1995 1994 (in millions) - ------------------------------------------------------------------------------ Fee-based or otherwise legally binding commitments to extend credit(1).................................................... $19,935 $19,948 Standby letters of credit, foreign office guarantees and similar instruments(2)....................................... $ 2,177 $ 2,157 Commercial letters of credit.................................. $ 1,381 $ 1,174 - ------------------------------------------------------------------------------
(1) Net of participations conveyed to others of $233 million in 1995 and $324 million in 1994. (2) Net of participations conveyed to others of $703 million in 1995 and $364 million in 1994. 21.CONCENTRATIONS OF CREDIT RISK Credit risk associated with concentrations can arise when changes in economic, industry or geographic factors affect groups of counterparties with similar economic characteristics, whose aggregate credit exposure is significant to the Corporation's total credit exposure. Consistent policies exist regarding the requirement for collateral security on asset based and real estate credits. Ap- proximately 40% and 50% of the Corporation's business activity in 1995 and 1994, respectively, was with customers located within New England. Information with respect to the Corporation's overseas business activities and its geo- graphic concentrations is included in Note 24. The Corporation's commitments to lend and loans collateralized by domestic commercial real estate properties were approximately $4 billion and $5 billion in 1995 and 1994, respectively, of which 75%, in both years, was related to properties in New England. Also, com- bined domestic credit exposure from consumer lending and credits secured by 1-4 family residential properties totaled $8 billion and $9 billion in 1995 and 1994, respectively. There were no other significant concentrations of credit risk. 22.LEASE COMMITMENTS Rental expense for leases of real estate and equipment is summarized below:
Years Ended December 31 1995 1994 1993 (in millions) - -------------------------------------------------------------------------------- Rental expense................................................... $96 $92 $94 Less sublease rental income...................................... 10 12 12 --- --- --- Net rental expense............................................... $86 $80 $82 === === ===
The Corporation has obligations under noncancelable operating leases for real estate and equipment which include renewal options and escalation clauses. The Corporation's minimum future rentals under its leases, exclusive of executory costs and net of sublease rental income, for the years 1996 through 2000 are $82 million, $68 million, $66 million, $61 million and $57 million, respective- ly, and $457 million for 2001 and later. Capital leases, the minimum rentals of which are included in the preceding amounts, are not significant. 23.CONTINGENCIES The Corporation and its subsidiaries are defendants in a number of legal pro- ceedings arising in the normal course of business, including claims that bor- rowers or others have been damaged as a result of the lending practices of the Corporation's subsidiaries. Management, after reviewing all actions and pro- ceedings pending against or involving the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings will not be material to the Corporation's financial state- ments. 73 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- 24.SEGMENT INFORMATION The Corporation operates within the financial services industry. The geographic segment information presented in the following table is provided to meet the requirements of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," and differs from the information used by the Corporation to manage its businesses and report its line of business results. Certain revenues and expenses are allocated differently for this segment information than for the Corporation's management reporting and line of business results. For example, revenues and expenses herein are allocated based on the domicile of the cus- tomer or service provider rather than to the business that earned or incurred those revenues or expenses, and certain corporate overhead expenses, which are allocated to business units, have not been allocated to the international seg- ment for this presentation. This geographic segment information does not con- sider other factors, such as method of funding (i.e., local vs. non-local cur- rency) or location of any cash collateral or guarantees. As a result of the inter-relationships that exist within the Corporation's worldwide network, allocations of certain income and expense items are neces- sarily based on assumptions and subjective criteria. Estimates of interest costs charged to users of funds, stockholders' equity, and administrative and other expenses incurred by one area on behalf of another are allocated utiliz- ing internal methodologies. The information presented is based on reporting as- sumptions in place at December 31, 1995.
Period Income End Years Ended December 31 Total Total Before Net Total (in millions) Revenue(1) Expense(1) Taxes(2) Income Assets - -------------------------------------------------------------------------------- 1995 INTERNATIONAL LATIN AMERICA.................. $ 606 $ 433 $173 $ 98 $10,864 EUROPE......................... 91 62 29 17 1,891 ASIA/PACIFIC................... 65 36 29 16 1,095 ALL OTHER REGIONS.............. 2 7 (5) (3) 45 ------ ------ ---- ---- ------- TOTAL INTERNATIONAL........... 764 538 226 128 13,895 DOMESTIC........................ 2,068 1,309 759 413 33,502 ------ ------ ---- ---- ------- TOTAL......................... $2,832 $1,847 $985 $541 $47,397 ====== ====== ==== ==== ======= 1994 International Latin America.................. $ 480 $ 331 $149 $ 83 $ 7,822 Europe......................... 72 40 32 18 1,776 Asia/Pacific................... 55 39 16 9 973 All other regions.............. 14 11 3 2 337 ------ ------ ---- ---- ------- Total International........... 621 421 200 112 10,908 Domestic........................ 1,779 1,188 591 323 33,722 ------ ------ ---- ---- ------- Total......................... $2,400 $1,609 $791 $435(3) $44,630 ====== ====== ==== ==== ======= 1993 International Latin America.................. $ 364 $ 265 $ 99 $ 56 $ 6,630 Europe......................... 60 47 13 7 1,546 Asia/Pacific................... 49 51 (2) (1) 976 All other regions.............. 19 23 (4) (3) 234 ------ ------ ---- ---- ------- Total International........... 492 386 106 59 9,386 Domestic........................ 1,599 1,215 384 240 31,202 ------ ------ ---- ---- ------- Total......................... $2,091 $1,601 $490 $299(4) $40,588 ====== ====== ==== ==== ======= - --------------------------------------------------------------------------------
(1) Total revenue includes net interest revenue and noninterest income. Total expense includes the provision for credit losses and noninterest expense. (2) Excludes extraordinary item and cumulative effect of changes in accounting principles. (3) Includes a $7 million extraordinary loss, net of tax, from early extin- guishment of debt that, for purposes of this analysis, has been allocated to domestic. (4) Includes a $24 million cumulative effect of a change in accounting, net of tax, for PMSR and income taxes that, for purposes of this analysis, have both been allocated to domestic. 74 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 25. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS The following is a condensed balance sheet of the Corporation (Parent Company only):
December 31 1995 1994 (in millions) - ------------------------------------------------------------------------------- ASSETS Cash and short-term investments in bank subsidiary............... $ 119 $ 205 Advances to subsidiaries Bank subsidiaries............................................... 19 36 Nonbank subsidiaries............................................ 437 217 Subordinated notes receivable from bank subsidiary............... 580 580 Investments in subsidiaries Bank subsidiaries............................................... 3,684 3,461 Nonbank subsidiaries............................................ 161 137 Other assets..................................................... 47 43 ------ ------ TOTAL ASSETS................................................... $5,047 $4,679 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable.................................................... $1,269 $1,514 Other liabilities................................................ 27 23 ------ ------ Total liabilities............................................... 1,296 1,537 ------ ------ Total stockholders' equity...................................... 3,751 3,142 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $5,047 $4,679 ====== ======
The following is a condensed statement of income of the Corporation (Parent Company only):
Years Ended December 31 1995 1994 1993 (in millions) - -------------------------------------------------------------------------------- OPERATING INCOME Dividends from subsidiaries Bank subsidiaries(1)......................................... $349 $ 95 $ 7 Nonbank subsidiaries......................................... 15 30 Interest from subsidiaries Bank subsidiaries............................................ 59 46 37 Nonbank subsidiaries......................................... 25 9 3 Noninterest income............................................ 9 ---- ---- ---- Total operating income...................................... 457 180 47 ---- ---- ---- OPERATING EXPENSE Interest expense.............................................. 92 79 51 Other expense, net............................................ 6 5 4 ---- ---- ---- Total operating expense...................................... 98 84 55 ---- ---- ---- Income (Loss) before income taxes, equity in undistributed net income of subsidiaries and cumulative effect of change in accounting principle......................................... 359 96 (8) Provision for (Benefit from) income taxes..................... 2 (11) (6) ---- ---- ---- Income (Loss) before equity in undistributed net income of subsidiaries and cumulative effect of change in accounting principle.................................................... 357 107 (2) Equity in undistributed net income of subsidiaries............ 184 328 303 ---- ---- ---- Income before cumulative effect of change in accounting principle.................................................... 541 435 301 Cumulative effect of change in accounting for income taxes.... (2) ---- ---- ---- NET INCOME.................................................... $541 $435 $299 ==== ==== ==== - --------------------------------------------------------------------------------
(1) Dividends in 1995 included $205 million from a subsidiary bank holding company in connection with the sale of Casco. 75 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- The following is a condensed statement of cash flows of the Corporation (Parent Company only):
Years Ended December 31 1995 1994 1993 (in millions) - ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................... $ 541 $ 435 $ 299 Reconciliation of net income to net cash provided from (used for) operating activities Cumulative effect of change in accounting for income taxes................................................... 2 Equity in undistributed net income of subsidiaries...... (184) (328) (303) Gain on sale of subsidiary.............................. (8) Other, net.............................................. 4 (10) (6) ----- ----- ----- Net cash provided from (used for) operating activities............................................. 353 97 (8) ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from short-term investments in banking subsidiary............................................... 86 1 81 Net cash provided from (used for) advances to subsidiaries............................................. (203) 37 (149) Investments in subsidiaries.............................. (12) (39) (299) Proceeds on sale of subsidiary........................... 92 Purchase of subordinated note receivable from bank subsidiary............................................... (180) ----- ----- ----- Net cash used for investing activities................. (37) (181) (367) ----- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Repayments/repurchases of notes payable.................. (150) (189) (88) Net proceeds from issuance of notes payable.............. 400 449 Net proceeds from issuance of common stock............... 64 35 20 Net proceeds from issuance of preferred stock............ 68 Purchases of treasury stock.............................. (50) (27) Dividends paid........................................... (179) (136) (73) ----- ----- ----- Net cash provided from (used for) financing activities............................................. (315) 83 376 ----- ----- ----- Net change in cash and due from banks.................... 1 (1) 1 Cash and due from banks at January 1..................... 1 ----- ----- ----- Cash and due from banks at December 31................... $ 1 $ 1 ===== ===== ===== Interest payments made................................... $ 90 $ 73 $ 46 Income tax payments made (refunds received).............. $ 5 $ (8) $ (2) - ------------------------------------------------------------------------------
76 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 26. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107 requires that the Corporation disclose estimated fair values for certain of its financial instruments. Financial instruments include such items as loans, deposits, securities, interest rate and foreign exchange rate con- tracts, swaps and other instruments as defined by the standard. Fair value estimates are generally subjective in nature and are dependent upon a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and rele- vant available market information. Fair value information is intended to repre- sent an estimate of an amount at which a financial instrument could be ex- changed in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading mar- kets for a significant portion of the Corporation's financial instruments, the Corporation may not be able to settle its financial instruments immediately; as such, the fair values are not necessarily indicative of the amounts that could be realized through immediate settlement. In addition, the majority of the Cor- poration's financial instruments, such as loans and deposits, are held to matu- rity and are realized or paid according to the contractual agreement with the customer. Where available, quoted market prices are used to estimate fair values. Howev- er, due to the nature of the Corporation's financial instruments, in many in- stances quoted market prices are not available. Accordingly, the Corporation has estimated fair values based on other valuation techniques, such as dis- counting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. Fair values are estimated without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible income tax ramifications or estimated transac- tion costs. Fair values are also estimated at a specific point in time and are based on interest rates and other assumptions at that date. As events change the assumptions underlying these estimates, the fair values of financial in- struments will change. Disclosure of fair values is not required for certain items such as lease fi- nancing, investments accounted for under the equity method of accounting, obli- gations for pensions and other postretirement benefits, premises and equipment, OREO, prepaid expenses, PMSR, core deposit intangibles and other customer rela- tionships, other intangible assets and income tax assets and liabilities. Ac- cordingly, the aggregate fair value amounts presented do not purport to repre- sent, and should not be considered representative of, the underlying "market" or franchise value of the Corporation. Because the standard permits many alternative calculation techniques and be- cause numerous assumptions have been used to estimate the Corporation's fair values, reasonable comparisons of the Corporation's fair value information with that of other financial institutions cannot necessarily be made. The methods and assumptions used to estimate the fair values of each class of financial instrument are as follows: CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS IN OTHER BANKS, FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, FUNDS BORROWED, DUE FROM CUSTOMERS ON ACCEPTANCES AND ACCEPTANCES OUTSTANDING These items are generally short-term in nature and, accordingly, the carrying amounts reported in the balance sheet are reasonable approximations of their fair values. TRADING SECURITIES Trading securities are carried at fair value in the balance sheet. Such values are generally based on quoted market prices. MORTGAGES HELD FOR SALE Fair values are based on the estimated value at which the loans could be sold in the secondary market. The fair value of commitments to issue mortgage loans, net of forward contracts to sell mortgage loans, is included as part of the disclosure of off-balance-sheet financial instruments. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY Fair values are principally based on quoted market prices. For certain debt and equity invest- ments made in connection with the Corporation's equity and mezzanine financing business that do not trade on established exchanges and for which markets do not exist, estimates of fair value are based upon management's review of the investee's financial results, condition and prospects. LOANS The fair value of accruing consumer mortgage loans is estimated using market quotes or by discounting contractual cash flows, adjusted for credit risk and prepayment estimates. Discount rates are obtained from secondary mar- ket sources. The fair value of accruing home equity loans is estimated using comparable market information adjusted for credit and other relevant character- istics. The fair value of all other accruing loans is estimated by discounting cash flows, using interest rates that consider the credit and interest rate risks inherent in the loans, and current economic and lending conditions. The fair value of nonaccrual loans is primarily estimated by discounting manage- ment's estimate of future cash flows using a rate commensurate with the risks involved. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS The carrying amount of accrued in- terest receivable approximates its fair value. Financial instruments classified as other assets sub- 77 ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ----------------------------- ------------------------------------------------- ---------------------------- ------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - -------------------------------------------------------------------------------- ject to the disclosure requirements of the standard consist principally of ac- counts receivable, EMSR, investments in limited partnerships and, in 1994, ADP. The carrying amounts of short-term receivables are considered to approximate their fair value. For longer-term receivables, fair value is estimated by dis- counting expected future cash flows using a discount rate commensurate with the risks involved. The fair value of EMSR is based on the present value of ex- pected future cash flows and the estimated servicing life. Estimates of fair value of investments in limited partnerships are based upon management's review of the investee's financial results, condition and prospects. The carrying amount of real estate assets held for accelerated disposition approximates fair value, as such assets are carried at the lower of their value upon transfer to the portfolio or their current estimated disposition value. DEPOSITS The fair values of deposits subject to immediate withdrawal, such as interest and noninterest bearing checking, passbook savings and money market deposit accounts, are equal to their carrying amounts. The carrying amounts for variable rate certificates of deposit and other time deposits approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit and other time deposits are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities. ACCRUED EXPENSES AND OTHER LIABILITIES Financial instruments classified as ac- crued expenses and other liabilities subject to the disclosure requirements of the standard consist principally of short-term liabilities; the carrying amounts approximate their fair values. NOTES PAYABLE The fair value of long-term borrowings is estimated using second- ary market prices and does not include the fair values of related interest rate swap agreements, which are presented separately. FOREIGN EXCHANGE RATE AND INTEREST RATE FINANCIAL INSTRUMENTS The fair values of foreign exchange rate and interest rate contracts, including contracts used to manage interest rate, currency and market risks, are estimated based on mar- ket information adjusted for credit and other relevant characteristics using pricing models, including option models. OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS The fair value of commitments to ex- tend credit is estimated using the fees charged to enter into similar legally binding agreements, taking into account the remaining terms of the agreements and customers' credit ratings. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the com- mitted rates. The fair values of foreign office guarantees and letters of credit are based on fees charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. 78 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------ NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the estimated fair values of the Corporation's financial instruments:
December 31 1995 1994 Estimated Estimated Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - ---------------------------------------------------------------------------------- ASSETS Cash and due from banks.................. $ 2,645 $ 2,645 $ 2,317 $ 2,317 Interest bearing deposits in other banks................................... 1,250 1,250 1,556 1,556 Federal funds sold and securities purchased under agreements to resell.... 1,350 1,350 1,232 1,232 Trading securities....................... 1,109 1,109 553 553 Mortgages held for sale.................. 889 898 183 184 Securities(1) Available for sale...................... 5,014 5,090 2,997 3,067 Held to maturity........................ 613 620 1,703 1,626 Loans.................................... 29,373 29,310 Reserve for credit losses(2)............. (736) (680) ------- ------- 28,637 29,539 28,630 29,200 Due from customers on acceptances........ 359 359 314 314 Accrued interest receivable.............. 456 456 355 355 Financial instruments included in other assets.................................. 597 685 829 857 LIABILITIES Deposits................................. 30,948 31,019 31,356 31,322 Funds borrowed........................... 8,763 8,763 6,360 6,360 Acceptances outstanding.................. 359 359 316 316 Financial instruments included in accrued expenses and other liabilities.......... 463 463 595 595 Notes payable............................ 2,139 2,205 2,169 2,057 INTEREST RATE CONTRACTS(3) Trading Asset................................... 100 130 Liability............................... (89) (76) Asset and liability management Asset................................... 211 59 Liability............................... (51) (244) FOREIGN EXCHANGE CONTRACTS(3) Trading Asset................................... 184 180 Liability............................... (183) (195) Asset and liability management Asset................................... 3 2 Liability............................... (5) (5) OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS Fee based or otherwise legally binding commitments to extend credit............ (54) (33) Standby and commercial letters of credit, foreign office guarantees and similar instruments............................. (32) (50) - ----------------------------------------------------------------------------------
(1) Securities include investments made in connection with the Corporation's equity and mezzanine financing business that do not trade on established exchanges, and for which no markets exist. At December 31, 1995 and 1994, these investments were classified as securities available for sale, and their estimated fair values exceeded the related carrying amounts by $76 million and $70 million, respectively. (2) The reserve for credit losses is established for future charge-offs arising from all extensions of credit. The Corporation has not made a specific al- location of the reserve to other instruments such as leases, commitments to extend credit, standby letters of credit and interest rate contracts. Ac- cordingly, a separate determination of the reserve allocable to loans has not been made. (3) Additional information with respect to interest rate and foreign exchange contracts can be found in Note 20 to the Financial Statements. The Corpora- tion's accounting policy related to such instruments is discussed in Note 1 to the Financial Statements. 79 EX-21 10 LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries of Bank of Boston Corporation There is no parent company of Bank of Boston Corporation (the "Corporation"). The First National Bank of Boston (the "FNBB"), all of whose voting securities (except for directors' qualifying shares) are owned directly or indirectly by the Corporation, is the principal subsidiary of the Corporation. Other major banking subsidiaries of the Corporation are Bank of Boston Connecticut and Rhode Island Hospital Trust National Bank. A number of entities which are owned wholly or in part, either directly or indirectly, by the Corporation are not listed below. However, their assets if considered in the aggregate as a single subsidiary would not constitute a significant subsidiary of the Corporation.
JURISDICTION NAME OF SUBSIDIARY OF ORGANIZATION The First National Bank of Boston US BancBoston Financial Company MA Bank of Boston International US Edge Act Corp. Boston Overseas Financial Corp. US Edge Act Corp. Boston World Holding Corporation MA BancBoston Leasing, Inc. MA BancBoston Aircraft Leasing, Inc. MA BancBoston Leasing Services, Inc. MA HomeSide, Inc.(4) DE BancBoston Services, Inc. MA Boston EquiServe, L.P.(3) MA BancBoston Ventures Inc. MA Ganis Credit Corporation DE 1784 Investor Services, Inc. MA BancBoston Capital Inc. MA BancBoston Holdings, Inc. MA Rhode Island Hospital Trust National Bank US Bank of Boston Connecticut CT Bank of Boston Florida, N.A. US Bank of Boston (Maine), N.A. US Bullfinch Indemnity Company, LTD VT Thor Credit Corp. DE RIHT Life Insurance Co. AZ Colonial Bancorp, Inc. MA Bank of Boston Connecticut CT BancBoston Capital Inc. MA Fidelity Acceptance Corporation MN BancBoston Leasing Investments Inc. MA BancBoston Trust Company of New York NY BancBoston Investments Inc. MA BancBoston Real Estate Capital Corporation MA Boston International Holdings Corporation MA Boston Overseas Holding Corporation MA FSC Corp MA Multibank Financial Corp. MA - -----------------------------------------------------------------
(1) Except as noted, each such business organization is directly or indirectly owned by the Corporation. (2) FNBB and certain other subsidiaries own a number of subsidiaries which hold real property acquired in connection with certain loan workout situations. If considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. (3) Boston EquiServe, L.P. is 50% owned by Boston Financial Data Services, which is a joint venture owned by State Street Bank and DST, Inc. (4) HomeSide, Inc. is 55% owned by Thomas H. Lee Company and Madison Dearborn Partners. EX-23 11 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS To The Board of Directors Bank of Boston Corporation We consent to the incorporation by reference, in the registration statements of Bank of Boston Corporation on Form S-4 (333-01559), Forms S-3 (Registration Nos. 33-29515, 33-52571, 33-57723, and 33-61721) and on Forms S-8 (Registration Nos. 333-00297, 33-1899, 33-11186, 33-64462, 33-65850 and 33-66012) of our report dated January 18, 1996 on our audits of the consolidated financial statements of Bank of Boston Corporation and Subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, included in the Corporation's 1995 Annual Report to Stockholders and in Exhibit 13 to the Corporation's 1995 Annual Report on Form 10-K. /S/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 15, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1995 DEC-31-1995 2,645 1,250 1,350 1,109 5,014 613 620 31,067 (736) 47,397 30,948 6,573 1,796 2,139 0 508 253 2,990 47,397 3,240 355 724 4,319 1,557 2,578 1,741 250 9 423 985 541 0 0 541 4.55 4.43 4.45 309 16 28 0 680 (230) 62 736 417 168 151
-----END PRIVACY-ENHANCED MESSAGE-----