-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, T89QMdMFK7SDmuYUf6T0T7sDdkVbPkMog7xBjf4sYaZ7dxdKwYs5nOxYwCqFeoev 4MO4v9DSxqGiE4rAEF4wcA== 0000950135-94-000121.txt : 19940308 0000950135-94-000121.hdr.sgml : 19940308 ACCESSION NUMBER: 0000950135-94-000121 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-06522 FILM NUMBER: 94514720 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-K 1 BANK OF BOSTON FORM 10-K 1 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, 1993 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 2 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 (#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.[ ] Aggregate market value of Number of shares of shares of common stock common stock held by non-affiliates of outstanding as of Registrant as of February 25, 1994 February 25, 1994 - ---------------------------------- ----------------- $2,482,823,070 106,357,915 Documents Incorporated by Reference: - ------------------------------------- 1. Pertinent extracts from Registrant's 1993 Annual Report to Stockholders (Parts I, II and IV). 2. Pertinent extracts from Registrant's Proxy Statement in connection with the Registrant's 1994 Annual Meeting of Stockholders (Part III). 3 INDEX Name of Item Page - ------------ ---- PART I Item 1. Business 1 Item 2. Properties 19 Item 3. Legal Proceedings 20 Item 3A. Executive Officers of the Corporation 23 Item 4. Submission of Matters to a Vote of Security Holders 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 27 Item 6. Selected Financial Data 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 Item 8. Financial Statements and Supplementary Data 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 PART III Item 10. Directors and Executive Officers of the Registrant 29 Item 11. Executive Compensation 29 Item 12. Security Ownership of Certain Beneficial Owners and Management 29 Item 13. Certain Relationships and Related Transactions 29 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30 SIGNATURES Signatures II-1 -i- 4 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. Through its subsidiaries, the Corporation is engaged in providing a wide variety of financial services to individuals, corporate and institutional customers, governments and other financial institutions. These services include individual and community banking, consumer finance, mortgage origination and servicing, domestic corporate and investment banking, leasing, international banking, commercial real estate lending, private banking, trust, correspondent banking, and securities and payments processing. 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 Casco Northern Bank, N.A. ("Casco") in Maine, Bank of Boston Connecticut ("BKB Connecticut"), Rhode Island Hospital Trust National Bank ("Hospital Trust"), Bank of Vermont, and in Massachusetts, South Shore Bank, Mechanics Bank and Multibank West. As of December 31, 1993, approximately 78% of the Corporation's total loan volume consisted of domestic loans and leases, with the balance overseas. The Corporation's banking subsidiaries maintain approximately 320 branches in Massachusetts, Rhode Island, Connecticut, Maine and Vermont. The Corporation, through its subsidiaries, has a presence in approximately 33 states of the United States and in approximately 23 foreign countries. As of December 31, 1993, the Corporation's subsidiaries employed in the aggregate approximately 18,600 full-time equivalent employees in their domestic and foreign operations. 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). BUSINESS OF THE CORPORATION The Corporation's business is generally focused in the areas of retail banking, corporate banking and international banking. In October of 1993, the Corporation announced certain organizational and management changes, including the creation of a new Chairman's Office and the establishment of a twenty-nine member Corporate Working Committee. The Chairman's Office consists of Chairman 5 and Chief Executive Officer Ira Stepanian, President and Chief Operating Officer Charles K. Gifford, Vice Chairman, Chief Financial Officer and Treasurer William J. Shea, and Vice Chairman Edward A. O'Neal. The Corporation's businesses were previously organized into five major groups and a number of other major centralized functions. This group structure was replaced by fifteen core business and ten corporate-wide support areas, each led by an executive with authority to operate and manage his or her respective area. These twenty-five executives and 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. For discussions of the Corporation's business activities, including its lending activities, its cross-border outstandings, and the management of its foreign currency exposure, see "Management's Financial Review," "Cross-Border Outstandings," and "Off-Balance-Sheet Financial Markets Instruments" on pages 32 through 51, 86 and 87, and 47 and 48, respectively, of the Corporation's 1993 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 banking subsidiaries of the Corporation can finance or otherwise supply funds to the Corporation or certain of its affiliates. See "Supervision and Regulation." 2 6 The following table presents selected financial information concerning the business of the Corporation on a geographic basis.
(in millions) United States International Operations Operations Consolidated ------------- ------------- ------------ For the Year Ended December 31, 1993(1) - -------------------- Net Interest Revenue $ 1,087.8 $ 431.0 $ 1,518.8 Net Income $ 220.3 $ 78.7 $ 299.0 Total Average Assets $ 29,718 $ 8,649 $ 38,367 For the Year Ended December 31, 1992(1) - ----------------- Net Interest Revenue $ 1,033.8 $ 272.0 $ 1,305.8 Net Income $ 226.3 $ 52.6 $ 278.9 Total Average Assets $ 29,995 $ 6,860 $ 36,855 For the Year Ended December 31, 1991(1) - ----------------- Net Interest Revenue $ 951.2 $ 163.6 $ 1,114.8 Net Income (Loss) $ (162.1) $ 49.0 $ (113.1) Total Average Assets $ 32,803 $ 5,112 $ 37,915 - ------------------------------------------------------------ (1) This data is presented generally in a manner whereby assets and income are segregated by geographic location based upon the domicile of the customer or borrower. This information should be read in conjunction with "Geographic Segment Information" which appears on pages 84 and 85 and with information included under the caption "Cross-border Outstandings" which appears on pages 86 and 87 of the Corporation's 1993 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 non-banking institutions, such as insurance companies, major retailers, brokerage firms, and investment companies in New England, throughout the United States, and internationally. One of the principal 3 7 methods of competing effectively in the financial services industry is to improve customer service through the quality and range of services available, easing access to facilities and pricing. See "Supervision and Regulation" with respect to the impact of legislation upon the Corporation and its subsidiaries. One outgrowth of the competitive environment discussed above has been a significant number of consolidations in the banking industry both on a national and regional level. The Corporation engages on an ongoing basis in reviewing and discussing possible acquisitions of financial institutions, as well as banking and other assets in order to expand its business incident to the implementation of its business strategy. The Corporation intends to continue to explore acquisition opportunities as they arise in order to take advantage of the continuing consolidation in the banking industry. In July 1993, the Corporation completed its acquisitions of Society for Savings Bancorp, Inc., a $2.4 billion registered bank holding company based in Hartford, Connecticut ("Bancorp") and Multibank Financial Corp., a $2.4 billion registered bank holding company based in Dedham, Massachusetts ("Multibank"). In addition, in September 1993, the Corporation announced that it had reached a definitive agreement to acquire BankWorcester Corporation ("BankWorcester") for $34.00 for each share of BankWorcester common stock outstanding, subject to an upward adjustment if the transaction is not consummated on or before June 30, 1994. It is expected that the total purchase price will be approximately $247 million. BankWorcester, the holding company for Worcester County Institution for Savings, had approximately $1.5 billion of assets, approximately $1.3 billion of deposits and 28 branches at December 31, 1993. The transaction has been approved by the boards of directors of both companies and by BankWorcester's stockholders. In March 1994, the Corporation announced that it had reached a definitive agreement to acquire Pioneer Financial, A Co-operative Bank ("Pioneer Bank") for $118 million in cash. Pioneer Bank, which is based in Middlesex County, Massachusetts had approximately $773 million in assets, $720 million in deposits and 20 branches at December 31, 1993. The Pioneer Bank transaction has been approved by the boards of directors of both companies. Both pending transactions are subject to the approval of the Office of the Comptroller of the Currency (the "OCC") and the Board of Bank Incorporation of the Commonwealth of Massachusetts (the "Massachusetts 4 8 BBI"), and applications for approval for the BankWorcester acquisition have been submitted to the OCC and the Massachusetts BBI. Neither transaction may be consummated until the 30th day after OCC approval is received, during which time the United States Department of Justice may challenge the transactions on antitrust grounds. The Corporation's objective is to consummate the BankWorcester transaction by mid-year 1994 and the Pioneer Bank transaction in the fall of 1994 although no assurances can be given that the requisite regulatory approvals will be granted or, if granted, that such approvals will be received within these time frames. 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 agencies of federal and state governments. The Corporation and its subsidiaries are engaged on a regular basis in discussions with such regulators and agencies on a variety of matters which arise in connection with this regulatory and supervisory process. The supervisory or regulatory activities may, but need not, be directly related to the financial services provided by the Corporation and its subsidiaries. The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are often intended by the regulators primarily for the protection 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 noted below along with certain current regulatory matters concerning the Corporation and its banking 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. 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 5 9 regulated under the provisions of the BHCA. 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 "non-bank" 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. 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. 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 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. 6 10 In addition, 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 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 plan 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. 7 11 The purpose of the Rights 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. For a further discussion of the Corporation's stockholder rights plan 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), which is incorporated herein by reference. The Banking Subsidiaries General The Corporation's banking subsidiaries that are national banks are subject to the supervision of, and are regularly examined by, the OCC. The Corporation's state-chartered banking subsidiaries are subject to the supervision of, and are regularly examined by, the Federal Deposit Insurance Corporation (the "FDIC") as well as by their respective state regulators. The Corporation's domestic subsidiary banks' deposits are insured by 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. Bank of Vermont and Hospital Trust, as members of the Federal Home Loan Bank of Boston, are also subject to the regulations of the Federal Housing Finance Board. FIRREA Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), an FDIC insured institution 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 FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. The term "default" is defined to mean the appointment of a conservator or receiver for such institution and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in 8 12 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 provides for expanded regulation of financial institutions. Under FDICIA, banks are placed in one of five capital categories, 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% and a leverage capital ratio of at least 5%. In addition, regardless of a bank's capital level, a bank is not considered "well capitalized" if it is 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. An institution is considered "adequately capitalized" if it has a total risk-based capital ratio of at least 8%, a tier 1 risk-based capital ratio of at least 4% and a leverage capital ratio of at least 4%. Institutions with capital levels below those necessary to qualify as "adequately capitalized" are deemed to be either "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," depending on their specific capital levels. FDICIA, through its prompt corrective action ("PCA") system, imposes significant operational and management restrictions on banks that are not considered at least "adequately capitalized". At December 31, 1993, FNBB satisfied the requirements of the "well capitalized" category and the Corporation's other banking subsidiaries satisfied the requirements of the "adequately capitalized" or "well capitalized" categories. The capital categories of the Corporation's banking subsidiaries are determined solely for purposes of applying FDICIA's PCA provisions, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of any of the Corporation's banking subsidiaries. 9 13 Under FDICIA's PCA system, a bank in the "undercapitalized" category must submit a capital restoration plan guaranteed by its parent company. The liability of the parent company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became undercapitalized, or the amount needed to comply with the plan. A bank in the "undercapitalized" category also is subject to limitations in numerous areas including, but not limited to: asset growth; acquisitions; branching; new business lines; acceptance of brokered deposits; and borrowings from the Federal Reserve. Progressively more burdensome restrictions are applied to banks in the "undercapitalized" category that fail to submit or implement a capital plan and to banks that are in the "significantly undercapitalized" or "critically undercapitalized" categories. In addition, a bank's primary federal banking agency is authorized to downgrade the bank's capital category to the next lower category upon a determination that the bank is in an unsafe or unsound condition or is engaged in an unsafe or unsound practice. An unsafe or unsound practice can include receipt by the institution of a rating on its most recent examination of three or worse (on a scale of 1 (best) to 5 (worst)), with respect to its asset quality, management, earnings or liquidity. The FDIC's deposit insurance assessments have moved under FDICIA from a flat-rate system to 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 premiums on the probability of loss to the FDIC with respect to each individual bank. During 1993, the FDIC's risk-based system provided that the highest and lowest premiums assessable per $100 of insured deposits were $.31 and $.23, respectively, with a greater difference between the rates possible in 1994 or 1995. FDICIA and the regulations issued thereunder also have (i) limited the use of brokered deposits to well capitalized banks, and adequately capitalized banks that have received waivers from the FDIC; (ii) established restrictions on the permissible investments and activities of FDIC-insured state chartered banks and their subsidiaries; (iii) implemented uniform real estate lending rules; (iv) prescribed standards to limit the risks posed by credit exposure between banks; (v) revised risk-based capital rules to include components for measuring the risk posed by interest rate changes; (vi) amended various consumer banking laws; (vii) increased restrictions on loans to a bank's insiders; (viii) 10 14 established standards in a number of areas to assure bank safety and soundness; and (ix) implemented additional requirements for institutions that have $500 million or more in total assets with respect to annual independent audits, audit committees, and management reports related to financial statements, internal controls and compliance with designated laws and regulations. The Corporation continues to analyze the effect of, and address its ongoing compliance with, the various regulations issued under FDICIA. It is anticipated that FDICIA, and the regulations enacted thereunder, will continue to result in more limitations on banking activities generally, and increased costs for the Corporation and the banking industry because of higher FDIC assessments and higher costs of compliance, documentation and record keeping. Other Regulatory Restrictions 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 non-banking 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 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. 11 15 The Corporation's banking 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 portion of their respective assets 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 (excluding significant non-recurring transactions) 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 subsidiary banks. In 1993, the aggregate dividends declared by the Corporation on its common stock and preferred stock were approximately $73 million. For each quarter of 1993, a dividend of $.10 per share was declared and paid on the Corporation's common stock. In the first quarter of 1994, the Corporation declared a dividend on its common stock of $.22 per share. The declaration and payment of dividends on the Corporation's common stock was previously subject to the prior approval of the Federal Reserve and the Division of Banking Supervision and Regulation of the Federal Reserve Board pursuant to an agreement between the Corporation and the Federal Reserve entered into in 1991. In October 1993, the Federal Reserve terminated the agreement. The Corporation is a legal entity separate and distinct from its subsidiary banks and its other non-bank 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 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. 12 16 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 banking 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 banking 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 certain prescribed limits. In 1993, approximately $7 million of dividends were declared by one of the Corporation's banking subsidiaries. The payment of any future dividends by the Corporation's banking subsidiaries will be determined based on a number of factors, including the subsidiary's liquidity, asset quality profile, capital adequacy and recent earnings history. In addition, as discussed below, two of the Corporation's banking subsidiaries, BKB Connecticut and South Shore Bank, are subject to regulatory agreements which require prior regulatory approval and prior notice, respectively, for the payment of dividends. See the related discussions set forth below in "Capital," "Legislation" and "Regulatory Agreements." Capital Information concerning the Corporation and its banking subsidiaries with respect to capital is set forth in the discussion of "Capital Management" contained in the Corporation's 1993 Annual Report to Stockholders on pages 49 and 50, which pages are included in Exhibit 13 hereto and which discussion is incorporated herein by reference. See also "Legislation" and "Regulatory Agreements" discussed below and "Dividends" discussed above. 13 17 Legislation In addition to extensive existing government regulation, federal and state statutes and regulations can change in unpredictable ways, often with significant effects on the way in which financial institutions may conduct business. 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. Similarly, 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 is considered from time to time, such as interstate branching, could, if enacted, significantly affect the business of the Corporation. See also "Supervision and Regulation -- the Corporation" discussed above. Regulatory Matters During 1993, certain regulatory agreements between the Corporation or its banking subsidiaries and their respective banking agencies were terminated by the agencies as a result of improvements in the areas addressed in those agreements. Information on the terminated and remaining agreements is set forth below. As previously reported, in 1989, FNBB entered into an agreement with the OCC to address certain areas, and the Corporation entered into a similar memorandum of understanding with the Federal Reserve. In 1991 the Corporation entered into a written agreement with the Federal Reserve that was essentially a formalization of the then existing memorandum of understanding. In February 1993 and October 1993, respectively, the OCC and the Federal Reserve terminated the agreements as a result of the progress made by FNBB and the Corporation in the areas addressed by the agreements. As previously reported, in 1991 Casco and Hospital Trust entered into agreements with the OCC that were substantially similar to the OCC's agreement with FNBB. In February 1993, the OCC terminated the agreements with Casco and Hospital Trust as a result of the progress made by Casco and Hospital Trust in the areas addressed in their respective agreements. As previously reported, Bank of Vermont and its regulators, the FDIC and the Commissioner of Banking, Insurance and Securities of the State of Vermont (the 14 18 "Vermont Commissioner"), entered into a memorandum of understanding in 1992. In October 1993, the FDIC and the Vermont Commissioner terminated the memorandum as a result of Bank of Vermont's compliance with its provisions. As previously reported, in 1992 Bancorp and Multibank entered into written agreements with the Federal Reserve. In September 1993, the Federal Reserve terminated the agreements with Bancorp and Multibank as a result of the progress made by Bancorp and Multibank in the areas addressed in their respective agreements. As previously reported, in connection with the acquisition of Bancorp, BKB Connecticut was merged with and into Bancorp's subsidiary bank, Society for Savings ("Society"), and Society changed its name to "BKB Connecticut" following the merger. The resulting bank remains subject to a stipulation and agreement entered into by BKB Connecticut with the Connecticut Banking Commissioner in 1991 pursuant to which BKB Connecticut is required, among other things, to reduce the level of its classified assets, to maintain appropriate reserves, and to maintain its tier 1 leverage capital ratio in excess of minimum regulatory requirements. As of December 31, 1993, BKB Connecticut's tier 1 leverage capital ratio was above the minimum required under its agreement. The agreement requires the prior written consent of the Connecticut Banking Commissioner and the Regional Director of the FDIC for the payment of dividends by BKB Connecticut. The agreement, as amended, also requires BKB Connecticut to submit semiannual progress reports to the regulators of actions taken under the agreement. BKB Connecticut has implemented or is implementing improvements in the various areas addressed in its agreement. As previously reported, Mechanics Bank entered into a memorandum of understanding with the FDIC and the Massachusetts Commissioner in 1991. In January 1994, the FDIC and the Massachusetts Commissioner terminated the agreement with Mechanics Bank as a result of the progress made by Mechanics Bank in the areas addressed in the agreement. As previously reported, South Shore Bank entered into a memorandum of understanding with the FDIC and the Massachusetts Commissioner in 1992, which incorporated the terms of an earlier memorandum of understanding entered into in 1991. The memorandum of understanding addresses certain areas, including management, asset quality, reserves, 15 19 profitability, capital ratios, and dividends. South Shore Bank is also subject to the ongoing conditions of the FDIC's approval order relating to the merger of two other banks into South Shore Bank. The conditions of the approval order require, among other things, a plan to reduce classified asset levels and that South Shore Bank have, as of December 31, 1993, a minimum tier 1 leverage capital ratio of at least 6.0%. As of December 31, 1993, South Shore Bank was in compliance with the capital ratio aspects of, and had adopted or was implementing improvements in the various areas addressed in, the agreement and approval order. As previously reported, as part of the 1991 merger of two of Multibank's banking subsidiaries, the FDIC issued an approval order which requires that the resulting bank, Multibank West, comply with certain conditions. The approval order addresses, among other things, uniform policies and procedures, risk ratings, asset quality, reserves and funds management, and requires that Multibank West maintain an equity-to-assets ratio of at least 5%. Multibank West, which is required to file periodic progress reports with the FDIC, has complied with all of the aspects of the approval order. The Corporation is currently in the process of seeking regulatory approval to merge Mechanics Bank, South Shore Bank and Multibank West into FNBB. While it is anticipated that the mergers will be consummated by mid-year 1994, there can be no assurances that the requisite regulatory approvals will be granted or, if granted, that such approvals will be received within this time frame. As previously reported, in January 1994, the Securities and Exchange Commission (the "Commission") commenced an administrative proceeding against the Corporation. The administrative proceeding relates to the Commission's claim that the Corporation's second quarter 1989 Form 10-Q did not disclose known trends or uncertainties with respect to the Corporation's credit portfolio and specifically its domestic commercial real estate portfolio. The Corporation reported a significant loss in the third quarter of 1989 as a result of adding to its reserve for credit losses, primarily due to deterioration in the credit quality of its domestic commercial real estate portfolio. Management believes that the disclosures made in its second quarter 1989 Form 10-Q were appropriate and intends to defend the action vigorously. Although management cannot predict the outcome of this proceeding, an unfavorable outcome will not result in any monetary penalties to the Corporation. 16 20 GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS The earnings and business of the Corporation and its subsidiaries are affected by a number of external influences. The economic and political conditions in which the Corporation and its subsidiaries operate can vary greatly. Such conditions include volatile foreign exchange markets and, in certain countries, high rates of inflation and foreign exchange liquidity problems. In 1993, the economies of New England and the United States reflected modest improvement and for most of 1993, the Corporation experienced improved domestic loan demand. The economic downturn in New England, however, predated the national recession and since the state of the regional economy reflects structural as well as cyclical forces, New England's economic recovery may be slower and more uneven than for the country as a whole. 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," 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. As discussed in "Management's Financial Review," a currency position maintained by the Corporation in Brazil, a country with a hyperinflationary economy, has had an effect on the levels of net interest 17 21 revenue, noninterest income and net interest margin, while modestly benefiting total revenue. 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. This section should be read in conjunction with "Management's Financial Review" contained in the Corporation's 1993 Annual Report to Stockholders on pages 32 through 51, which pages are included in Exhibit 13 hereto and which discussion is incorporated herein by reference. 18 22 CONSOLIDATED STATISTICAL INFORMATION The "Consolidated Statistical Information" is incorporated herein by reference from the following pages of the Corporation's 1993 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto. This information should be read in conjunction with the financial statements incorporated by reference in Item 8 of this Report. Page of 1993 Annual Report to Stockholders Average Balances and Interest Rates: Consolidated 79 United States Operations 80 International Operations 81 Change in Net Interest Revenue-Volume and Rate Analysis: 1993 compared with 1992 82 1992 compared with 1991 83 Geographic Segment Information 84 Cross-border Outstandings 86 and 87 Loans and Lease Financing 88 Nonaccrual Loans and Leases 89 Reserve for Credit Losses: Allocation of Reserve for Credit Losses 90 Analysis of Reserve for Credit Losses 91 Securities 92 Deposits 92 Short-term Borrowings 93 Consolidated Selected Financial Data-Selected Ratios 31 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 1993, FNBB leased approximately 70% of the building's approximately 1.3 million square feet. FNBB's securities and payments processing center is located in Canton, Massachusetts, where FNBB leases approximately 85% of the Canton office building's approximately 275,000 square feet. FNBB's data processing and record keeping operations are located at Columbia Park in Boston. The Columbia Park facility, comprising approximately 405,000 square feet, and the land on which it is situated are owned by FNBB. In addition, FNBB leases Multibank's former 19 23 operations facility in Dedham, Massachusetts, which comprises approximately 158,000 square feet. The headquarters for FNBB's operations in Argentina and Brazil are located in a 10-story building in Buenos Aires and a 20-story building in Sao Paulo, respectively. The Buenos Aires and Sao Paulo facilities, comprising approximately 256,000 and 187,000 square feet, respectively, are owned by FNBB. 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 has recently moved its headquarters to 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, which was the former Bancorp headquarters. BKB Connecticut owns an undivided one-half interest in the Pearl Street location and 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. Casco's headquarters are located at One and Two Monument Square in Portland, Maine. Casco leases approximately 135,000 square feet of the complex and currently occupies approximately 76,000 square feet of that space. Bank of Vermont's headquarters in Burlington, Vermont consist of approximately 77,000 square feet of owned space in four 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 domestic and foreign operations. Item 3. Legal Proceedings. The Corporation and its subsidiaries in 1993 were or currently are parties to a number of legal proceedings that have arisen in connection with the normal course of business 20 24 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, Bancorp and Bancorp's directors who voted in favor of the Corporation's acquisition of Bancorp. The action was brought by a Bancorp stockholder, individually and as a class action on behalf of all Bancorp stockholders of record on the date the acquisition was announced, and sought an injunction with respect to the proposed acquisition and damages in an unspecified amount. In May 1993, the Chancery Court denied the plaintiff's motion for a preliminary injunction and in July 1993, the Corporation acquired Bancorp. In December 1993, the Chancery Court granted summary judgment in favor of the Corporation, Bancorp and Bancorp's former directors. The plaintiff has appealed that decision to the Delaware Supreme Court, where the matter is currently pending. Bancorp Class Action. As previously reported, a class action complaint was filed in U.S. District Court for the District of Connecticut against Bancorp, two of its then senior officers and one former officer. The complaint, as subsequently amended, alleges that Bancorp's financial reports for fiscal years 1988, 1989, and the first half of 1990 contained material misstatements or omissions concerning its real estate loan portfolio and other matters, in violation of Connecticut common law and of Sections 10(b) and 20 of the Securities Exchange Act of 1934. The action was brought by a Bancorp shareholder, individually and as a class action on behalf of purchasers of Bancorp's stock from January 19, 1989 through November 30, 1990 and seeks damages in an unspecified amount. Bancorp and the defendant officers have denied the allegations of the amended complaint and intend to defend the action vigorously. 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, some in very large dollar amounts. During 1991, one such claim resulted in a judgment being entered against Hospital Trust for 21 25 approximately $4.0 million, plus interest. The judgment against Hospital Trust remains on appeal. Stranway/Elmendorf Case. As previously reported, in June 1985 a complaint was filed against FNBB in the U.S. District Court for the District of New Hampshire by private plaintiffs on behalf of the United States in a qui tam action under 3l U.S.C. # 3729, known as the False Claims Act. The complaint alleges that FNBB failed to disclose, or made false statements, to the Farmer's Home Administration ("FmHA") in connection with securing and inducing payment on guarantees from the FmHA on loans by FNBB and certain investors to Stranway Corporation and its subsidiary Elmendorf Board Corporation. Damages are alleged in the amount of $50,000,000, plus interest, costs and attorneys fees. The United States, which must decide at the outset whether to take over civil prosecution of a False Claims Act suit initiated by a private plaintiff, has declined to enter an appearance in and take over the action. The action was transferred to the District of Massachusetts. In 1986, FNBB filed a motion to dismiss the suit for lack of subject matter jurisdiction and the motion was denied by the District Court in 1988. Discovery has been essentially completed in the case. FNBB denies the allegations in the complaint and intends to continue to defend the action vigorously. 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 will not be material. 22 26 Item 3A. Executive Officers of the Corporation. Information with respect to the executive officers of the Corporation, as of March 1, 1994, 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.
Date Assumed Executive Officer Name and Age Current Position Position - --------------- ---------------- -------- Ira Stepanian Chairman of the Board 1981 57 of Directors and Chief Executive Officer Charles K. Gifford President and Chief Operating 1987 51 Officer Edward A. O'Neal Vice Chairman 1992 49 William J. Shea Vice Chairman, Chief Financial January 1993 46 Officer & Treasurer of the Corporation and Vice Chairman and Chief Financial Officer of FNBB Constantin R. Boden Group Executive, 1990 57 Latin America, Asia International Private Banking Helen G. Drinan Executive Director, April 1993 46 Human Resources Paul F. Hogan Executive Director, April 1993 49 Credit & Loan Review Ira A. Jackson Executive Director, 1987 45 External Affairs Robert T. Jefferson Comptroller March 1993 46
23 27
Date Assumed Executive Officer Name and Age Current Position Position - --------------- ---------------- -------- Peter J. Manning Executive Director, 1990 55 Mergers & Acquisitions, Audit & Risk Review Gary A. Spiess General Counsel and Clerk 1987 53 of the Corporation and General Counsel, Secretary & Cashier of FNBB Eliot N. Vestner, Jr. Executive Counsel, 1987 58 Regulatory Affairs Bradford H. Warner Group Executive, Treasury 1989 42 Guilliaem Aertsen IV Group Executive, October 1993 46 Real Estate (FNBB) Melville E. Blake III Executive Director, October 1993 39 Strategic Planning (FNBB) Robert L. Champion, Jr. Executive Director, October 1993 49 Corporate Administrative Services (FNBB) Barbara F. Clark Group Executive, October 1993 47 Media & Communications (FNBB) Edward P. Collins Group Executive, October 1993 46 US Lending, Leasing & Asset Based Lending (FNBB) Robert E. Gallery Group Executive, October 1993 42 NE Large Corporate Banking & NE Corporate Banking, CT, RI (FNBB) Susan P. Haney Group Executive, October 1993 46 The Private Bank (FNBB)
24 28
Date Assumed Executive Officer Name and Age Current Position Position - --------------- ---------------- -------- Thomas J. Hollister Group Executive, October 1993 39 Retail & Small Business (FNBB) David W. Kruger Group Executive, October 1993 51 Global Products (FNBB) Michael R. Lezenski Executive Director, October 1993 46 Technology Services & Banking Operations (FNBB) Mark A. MacLennan Group Executive, October 1993 40 Multinational, Europe & Financial Institutions (FNBB) David E. McKown Group Executive, October 1993 56 Entrepreneurial Lending, Mezzanine & Corporate Finance (FNBB) William H. Ott Group Executive, October 1993 41 Consumer Finance (FNBB) Joe K. Pickett Group Executive, October 1993 48 Mortgage Banking (FNBB) Richard A. Remis Group Executive, October 1993 39 NE Corporate Banking-MA, ME, NH & VT (FNBB) Susannah M. Swihart Group Executive, October 1993 38 Specialized Finance (FNBB)
All of the foregoing individuals have been officers of the Corporation or one of its subsidiaries for the past five years except for Ms. Haney and Messrs. Blake, Champion, Gallery, O'Neal, Ott and Shea. Prior to joining the Corporation in 1990, Ms. Haney was Senior Vice President/Manager of Portfolio Accounting for The Boston Company since 1988 and Mr. Champion was Senior Vice President and Department Head, General Services for Continental Bank from 1976. Mr. Gallery came to the Corporation in 1991 from The First National Bank of Chicago where he was Division Manager, Midwest since 1989. Prior to 25 29 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, Vice Chairman and Director from 1990 to 1991 and Group Executive Consumer Banking Group from 1987 to 1990. Mr. Blake also joined the Corporation in 1992 and prior to that time was Vice President of the MAC Group/Gemini Consulting since 1988. Mr. Ott also 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, Senior Vice President, Community Banking Division of Fleet Bank from 1990 to 1991 and Vice President of Bank of America from 1975 to 1990. 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. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 26 30 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required by this Item is presented on pages 30, 31 and 95 of the Corporation's 1993 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, 1993 appears on pages 30 and 31 of the Corporation's 1993 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 Financial Review" on pages 32 through 51 of the Corporation's 1993 Annual Report to Stockholders, which pages are included in Exhibit 13 hereto, and such information is hereby incorporated by reference. 27 31 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 1993 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 1993 Annual Report to Stockholders Report of Independent Accountants 53 Bank of Boston Corporation and Subsidiaries: Consolidated Balance Sheet as of December 31, 1993 and 1992 54 Consolidated Statement of Income for the years ended December 31, 1993, 1992 and 1991 55 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991 56 and 57 Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991 58 Notes to Financial Statements 59 through 78 Summary of Quarterly Consolidated Financial Information and Common Stock Data 95
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 28 32 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 1994 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. 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 sections entitled "Compensation Committee Report on Executive Compensation" and "Five-Year Stockholder Return Comparison," is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required in response to this Item is contained under the heading "Beneficial Ownership of Securities" 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. 29 33 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. 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. 3(b) - By-Laws of the Corporation, as amended through October 28, 1993. 4(a) - Indenture dated as of January 15, 1986 defining rights of holders of the Corporation's 7 3/4% Convertible Subordinated Debentures Due 2011, incorporated herein by reference to Exhibit 4(b) 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 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(c) - 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). 30 34 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (cont'd). (a)(3) Exhibits (cont'd) 4(d) - 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). 4(e) - Indenture dated as of July 15, 1988 and form of note defining rights of the holders of the Corporation's 10.30% Subordinated Notes due September 1, 2000, incorporated herein by reference to Exhibit 4(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988 (File No. 1-6522). 4(f) - Fiscal and Paying Agency Agreement dated as of September 12, 1985 defining rights of holders of the Corporation's Floating Rate Notes Due 2000, incorporated herein by reference to Exhibit 4(c) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1985 (File No. 1-6522). 4(g) - 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 Number 33-48418), to Exhibits 4(e) and 4(f) to the Corporation's Current Report on Form 8-K dated June 24, 1993, to Exhibit 4 to the Corporation's Current Report on Form 8-K dated November 15, 1993 and to Exhibit 4 to the Corporation's Current Report on Form 8-K dated January 5, 1994 (File No. 1-6522). 31 35 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (cont'd). (a)(3) Exhibits (cont'd) 4(h) - 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(i) - 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(j) - 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). 10(a) Bank of Boston Corporation 1982 Stock Option Plan as amended through August 24, 1989, incorporated herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 (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. 32 36 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (cont'd). (a)(3) Exhibits (cont'd) 10(b) Bank of Boston Corporation 1986 Stock Option Plan as amended through August 24, 1989, incorporated herein by reference to Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 1-6522).* 10(c) Bank of Boston Corporation and its Subsidiaries Performance Recognition Opportunity Plan, as amended effective January 27, 1994.* 10(d) Bank of Boston Corporation Executive Non-Qualified Deferred Compensation Plan, as amended through March 12, 1991, incorporated herein by reference to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 1-6522).* 10(e) The First National Bank of Boston Bonus Supplemental Employee Retirement Plan, as amended through September 13, 1990, incorporated herein by reference to Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (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, effective as of January 1, 1989, incorporated herein by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 (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. 33 37 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (cont'd). (a)(3) Exhibits (cont'd) 10(h) Bank of Boston Corporation 1991 Long-Term Stock Incentive Plan, as amended through January 27, 1994.* 10(i) Employment Agreement dated July 7, 1992 between The First National Bank of Boston and Edward A. O'Neal, incorporated herein by reference to Exhibit 10(k) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 1-6522).* 10(j) Employment Agreement dated December 4, 1992 between The First National Bank of Boston and William J. Shea, incorporated herein by reference to Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 1-6522).* 10(k) 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(l) - Description of the Corporation's Supplemental Long-Term Disability Plan effective as of February 10, 1994.* 10(m) Bank of Boston Corporation's Director Stock Award Plan effective as of May 1, 1993.* 10(n) 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). _____________________________________________________________ * 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. 34 38 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (cont'd). (a)(3) Exhibits (cont'd) 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 30 through 51, 53 through 93 and 95 of the Corporation's 1993 Annual Report to Stockholders. 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). 35 39 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (cont'd). (a)(3) Exhibits (cont'd) 99 - Notice of Annual Meeting and Proxy Statement for the Annual Meeting of the Corporation's Stockholders to be held April 28, 1994. (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 1993, the Corporation filed three Current Reports on Form 8-K. The current reports, dated October 28, 1993, November 2, 1993 and November 15, 1993, contained information pursuant to Items 5 and 7 of Form 8-K. The Corporation also filed one Current Report on Form 8-K, dated January 5, 1994, which contained information pursuant to Items 5 and 7 of Form 8-K. 36 40 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 4th day of March, 1994. BANK OF BOSTON CORPORATION By /s/ IRA STEPANIAN ------------------------------- (Ira Stepanian) (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 Ira Stepanian, 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, Chief Executive Officer and Director /s/ IRA STEPANIAN (Chief Executive Officer) March 4, 1994 - ----------------------------- (Ira Stepanian) /s/ CHARLES K. GIFFORD President and Chief Operating March 4, 1994 - ----------------------------- Officer and Director (Charles K. Gifford) /s/ WILLIAM J. SHEA Vice Chairman, March 4, 1994 - ----------------------------- Chief Financial Officer and Treasurer (William J. Shea) (Chief Financial Officer) /s/ ROBERT T. JEFFERSON Comptroller March 4, 1994 - ----------------------------- (Chief Accounting Officer) (Robert T. Jefferson)
II-1 41
Signature Title Date --------- ----- ---- /s/ WAYNE A. BUDD Director March 4, 1994 - ----------------------------- (Wayne A. Budd) /s/ JOHN J. CAREY Director March 4, 1994 - ----------------------------- (John J. Carey) /s/ WILLIAM F. CONNELL Director March 4, 1994 - ----------------------------- (William F. Connell) /s/ GARY L. COUNTRYMAN Director March 4, 1994 - ----------------------------- (Gary L. Countryman) /s/ ALICE F. EMERSON Director March 4, 1994 - ----------------------------- (Alice F. Emerson) /s/ DONALD F. MCHENRY Director March 4, 1994 - ----------------------------- (Donald F. McHenry) /s/ J. DONALD MONAN Director March 4, 1994 - ----------------------------- (J. Donald Monan) /s/ PAUL C. O'BRIEN Director March 4, 1994 - ----------------------------- (Paul C. O'Brien) /s/ JOHN W. ROWE Director March 4, 1994 - ----------------------------- (John W. Rowe) Director , 1994 - ----------------------------- (Richard A. Smith) /s/ WILLIAM C. VAN FAASEN Director March 4, 1994 - ----------------------------- (William C. Van Faasen) /s/ THOMAS B. WHEELER Director March 4, 1994 - ----------------------------- (Thomas B. Wheeler) /s/ ALFRED M. ZEIEN Director March 4, 1994 - ----------------------------- (Alfred M. Zeien) /s/ CHARLES A. ZRAKET Director March 4, 1994 - ----------------------------- (Charles A. Zraket)
II-2 EX-3.A 2 RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3(a) BANK OF BOSTON CORPORATION Boston, Massachusetts Restated Articles of Organization Rev.11/93 2 BANK OF BOSTON CORPORATION Restated Articles of Organization
Table of Contents Page ARTICLE 1 Name 1 ARTICLE 2 Purpose 1 ARTICLE 3 Authorized Capital Stock 1 ARTICLE 4 Common Stock 1 Preferred Stock, General 1 Preferred Stock, Series A 2 Preferred Stock, Series B 18 Preferred Stock, Series C 34 Preferred Stock, Series D 49 Preferred Stock, Series E 60 Preferred Stock, Series F 70 ARTICLE 5 Transfer Restrictions, if any 80 ARTICLE 6 Amendment of By-Laws 80 Stockholders Meetings 80 Corporation as Partner 80 Limitation on Director Liability 80
3 BANK OF BOSTON CORPORATION ARTICLES OF ORGANIZATION Restated November 24, 1993 ARTICLE 1 The name by which the corporation shall be known is "Bank of Boston Corporation." ARTICLE 2 The purposes for which the corporation is formed are as follows: To buy, sell, deal in, or hold securities of every kind and description; and in general to carry on any business permitted to corporations organized under Chapter 156B of the Massachusetts General Laws as now in force or hereafter amended. ARTICLE 3 The total number of shares and the par value, if any, of each class of stock which the corporation is authorized to issue is as follows: Preferred Stock, no par value: 10,000,000 Common Stock par value $2.25 per share: 200,000,000 ARTICLE 4 (A) There shall be a class of common stock having a par value of $2.25 per share consisting of 200,000,000 shares. The holders of record of such common stock shall have one vote for each share of such common stock held by them, respectively. (B) There shall be a class of Preferred Stock consisting of 10,000,000 shares without par value. The shares of the Preferred Stock are to be issuable at any time or from time to time in one or more series as and when established by the Board of Directors, each such series to have such 4 designation or title as may be fixed by the Directors prior to the issuance of any shares thereof, and each such series may differ from every other series already outstanding as may be determined by the Directors prior to the issuance of any shares thereof, in any or all of the following, but in no other respects: (a) the rate of dividend (cumulative or non-cumulative) to which holders of the Preferred Stock of any such series shall be entitled; (b) the terms and manner of the redemption by the corporation of the Preferred Stock of any such series; (c) the special or relative rights of the holders of the Preferred Stock of any such series in the event of the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up of the corporation; (d) the terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of any such series; (e) the right, if any, of the holders of Preferred Stock of any such series to convert the same into stock of any other class or classes or into other securities of the corporation, and the terms and conditions of such conversion; and (f) the voting rights, if any, of the holders of Preferred Stock of any such series. (C) Preferred Stock, Series A 1. DEFINITIONS OF CERTAIN EXPRESSIONS USED IN THIS PARAGRAPH. As used in this Article 4, the following capitalized words and expressions have the respective meanings set out below: "Applicable Rate" Except as provided below in this definition, the Applicable Rate for any quarterly dividend period commencing on or after June 16, 1984 shall be (x) 1.95% less than (y) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate 2 5 and the Twenty Year Constant Maturity Rate (each as hereinafter defined) for such dividend period. If the corporation determines in good faith that: (i) any one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate cannot be determined for any particular quarterly dividend period, then the Applicable Rate for such dividend period shall be 1.95% less than the higher of whichever two of such rates can be so determined; (ii) only one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any particular quarterly dividend period, then the Applicable Rate for such dividend period shall be 1.95% less than the rate that can be so determined; or (iii) none of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any particular quarterly dividend period, then the Applicable Rate in effect for the preceding quarterly dividend period shall be continued for such dividend period. However, the Applicable Rate for any quarterly dividend period shall in no event be less than six percent (6%) per annum nor greater than thirteen percent (13%) per annum. "Articles of Organization" mean the Articles of Organization of the corporation as amended and in effect from time to time, including the amendment thereof effected pursuant to this paragraph. "Board of Governors" means the Board of Governors of the Federal Reserve System or any governmental entity which may be granted the powers referred to herein currently exercised by the Board of Governors. "Calendar Period" means a period of fourteen calendar days. 3 6 "Common Stock" means the capital stock of the corporation so designated and authorized from time to time and being stock which is junior to all series of the Preferred Stock in respect of dividend payments and of distributions or payments upon Liquidation. "corporation" means Bank of Boston Corporation and includes any successor corporation by merger, consolidation or otherwise if the stockholders of the former continue as stockholders of the continuing or combined corporation. "Junior Dividend Stock" means (i) the Common Stock and (ii) any series of the Preferred Stock which is specifically made junior to the Series A Stock, and any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of payments of dividends. "Junior Liquidation Stock" means (i) the Common Stock and (ii) any series of the Preferred Stock which is specifically made junior to the Series A Stock and any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of distributions or payments upon Liquidation. "Junior Stock" means the Common Stock, the Junior Dividend Stock and the Junior Liquidation Stock. "Liquidation" means the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the corporation, but shall not include (i) merger or consolidation of the corporation with another corporation pursuant to any statute which provides in effect that the stockholders of the former shall continue as stockholders of the continuing or combined corporation and (ii) the acquisition by the corporation of assets or stock of another corporation. "Preferred Stock" means the authorized class of the capital stock of the corporation so designated of which there are currently 10,000,000 shares authorized. "Series A Stock" means the series of Preferred Stock created by this paragraph. 4 7 "Special Securities" means securities which can, at the option of the holder, be surrendered at face value in payment of federal estate taxes or which provide tax benefits for the holder and are priced to reflect such tax benefits or which were issued at a deep or substantial discount. "Ten Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years). "Ten Year Constant Maturity Rate" Except as provided below in this definition, the Ten Year Constant Maturity Rate for each quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such yield shall be published during the relevant Calendar Period) as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series A Stock is being determined. If the Board of Governors does not publish such a weekly per annum Ten Year Average Yield during any such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Ten Year Average Yield shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per 5 8 annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eight nor more than 12 years, as published for such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Ten Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than 12 years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. "Treasury Bill Rate" Except as provided below in this definition, the Treasury Bill Rate for any quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series A Stock is being determined. If the Board of Governors does not publish such a weekly per annum market 6 9 discount rate during any such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) of all of the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such rates, by any Federal Reserve Bank or by any such U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Treasury Bill Rate for any dividend period as provided above in this paragraph, the Treasury Bill Rate for such dividend period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of 7 10 the issues of marketable interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by a least three recognized dealers in U.S. Government securities selected by the corporation. "Twenty Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 20 years). "Twenty Year Constant Maturity Rate" Except as provided below in this definition, the Twenty Year Constant Maturity Yield for any quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series A Stock is being determined. If the Board of Governors does not publish such a weekly per annum Twenty Year Average Yield during any such Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Twenty Year Average Yield shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend 8 11 period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than 18 nor more 2 than 22 years, as published during such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Twenty Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than 18 nor more than 22 years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers of national reputation in U.S. Government securities selected by the corporation. 2. NUMBER OF SHARES AND DESIGNATION. 1,045,712 shares of Preferred Stock are hereby constituted as a series of Preferred Stock, liquidation preference $50 per share, and designated as Adjustable Rate Cumulative Preferred Stock, Series A. No additional shares of Preferred Stock may be issued as Series A Stock. 3. PREFERENCES. The preferences of each share of the Series A Stock with respect to dividend payments or to distributions or payments upon Liquidation will be in every respect on a parity with the preferences of every other share of Preferred Stock and of every other class of the capital stock of the corporation (other than Common Stock) from time to time outstanding, which other shares of the Preferred Stock and which other classes of capital stock are 9 12 not made senior or junior to the Series A Stock as to dividend payments or to distributions or payments upon Liquidation. 4. LIQUIDATION. Upon Liquidation, the holders of the then outstanding Series A Stock shall be entitled, before any distribution or payment is made upon any of the Junior Liquidation Stock, to be paid in cash an amount equal to $50 per share of Series A Stock so held by them plus all accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for such payment. If upon Liquidation, the amounts payable with respect to shares of Series A Stock and to any other shares of the capital stock of the corporation ranking as to any such distribution on a parity with the Series A Stock are not paid in full, the holders of shares of the Series A Stock and of such other shares shall share ratably in any such distribution of assets of the corporation in proportion to the full respective preferential amounts to which they are entitled. Notice of Liquidation, stating the date when and the place where the amount payable on Liquidation will be paid, shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but no more than sixty (60) days prior to the date fixed for such liquidation payment, to the holders of the shares of the Series A Stock, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series A Stock, or any defect in such notice, shall not affect the validity of the proceedings for the making of liquidation payments on any other shares of the Series A Stock or of any other series or class of the capital stock of the corporation. If such notice shall have been duly mailed and if, on or before the date fixed for liquidation payments designated in such notice, the funds necessary for such liquidation payments shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series A Stock shall not have been delivered for cancellation, the shares represented 10 13 thereby shall no longer be deemed outstanding on and after the date such funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date fixed for such liquidation payments so designated, and all rights with respect to the shares of the Series A Stock shall terminate forthwith after such liquidation payment date, excepting only the right of the holder to receive the liquidation price thereof of $50 per share plus unpaid dividends accrued to such liquidation payment date but without interest thereon. The corporation's obligation to provide funds for liquidation payments shall be deemed fulfilled if, on or before the liquidation payment date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having capital and surplus of at least $50,000,000, funds necessary for such liquidation payments, in trust, with irrevocable instructions that such funds be applied to such liquidation payments. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such liquidation payment date shall be released or repaid to the corporation, after which the holder or holders of shares of Series A Stock shall look only to the corporation for payment of liquidation payments. 5. DIVIDENDS. (a) Dividend Rate. Dividends on each share of the Series A Stock shall be payable (i) at a quarterly rate of 10.60% per annum for the quarter ended June 15, 1984 and (ii) for each quarterly dividend period commencing on or after June 16, 1984, at a rate computed by multiplying $50 by the Applicable Rate (as defined herein) for such period and multiplying the result by the fraction of a year represented by such period, based upon a year of 365 or 366 days, as the case may be. (b) Payment of Dividends. Dividends on each share of the Series A Stock shall be fully cumulative and shall accrue whether or not earned, without interest, from the date of issuance of each share, and shall be payable in arrears on the 15th day of March, June, September and December in each year in which such shares are outstanding out of funds legally available for the payment of dividends, when, as and if declared by the Board of Directors. 11 14 In the event that there shall be outstanding shares of any other series of the Preferred Stock or of any other class of the capital stock of the corporation ranking on a parity as to dividends with shares of the Series A Stock, the corporation, in making any dividend payment on account of arrears on shares of the Series A Stock or such other series of the Preferred Stock or such other class of capital stock, shall make payment ratably upon all outstanding shares of the Series A Stock, such other series of the Preferred Stock and such other class of capital stock in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of the Series A Stock, such other series of the Preferred Stock and such other class of capital stock to the date of such dividend payment. So long as any shares of the Series A Stock are outstanding, the corporation shall not (i) declare or pay or set apart for payment any dividend or other distribution (other than dividends or distributions payable in shares of Junior Stock) for any period upon any Junior Stock or any stock of the corporation ranking on a parity with the Series A Stock as to dividends or upon Liquidation or (ii) redeem, purchase or otherwise acquire for any consideration any shares of Junior Stock or any capital stock of the corporation ranking on a parity with the Series A Stock as to dividends or upon Liquidation, unless, in either case, all dividends payable to holders of shares of the Series A Stock and of any stock of the corporation ranking on a parity therewith as to dividends for its current dividend period and all past dividend periods have been paid (or are contemporaneously being paid), or a sum sufficient for the payment thereof has been irrevocably set aside in trust for the holders of all such shares; except that, notwithstanding clause (i) of this paragraph 5(b), the corporation may pay dividends on the shares of the Series A Stock and shares of stock of the corporation ranking on a parity therewith as to dividends ratably in accordance with the sums which would be payable on such shares if all dividends, including accumulations, if any, were declared and paid in full. 12 15 6. REDEMPTION. (a) Redemption Price. Shares of the Series A Stock shall not be redeemable on or prior to March 30, 1989. After March 30, 1989, and in accordance with this paragraph 6, the shares of the Series A Stock shall be redeemable at any time or from time to time, in whole or in part, at the option of the corporation by vote of its Board of Directors; provided, however, that any partial redemption, in the opinion of an investment banking firm of national reputation selected by the corporation, shall not adversely affect the marketability of those shares of Series A Stock not redeemed. The redemption price shall be $51.50 per share if shares are redeemed on or prior to March 30, 1994 and $50 per share if shares are redeemed thereafter, plus in each case an amount equal to all unpaid dividends, whether or not earned or declared, accrued to the date fixed for redemption. (b) Redemption Procedure. Notice of any proposed redemption of all or any of the shares of the Series A Stock under this paragraph 6 shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but not more than sixty (60) days prior to the date fixed for such redemption, to the holders of the shares of the Series A Stock to be redeemed, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series A Stock designated for redemption, or any defect in such notice, shall not affect the validity of the proceedings for the redemption of any other shares of the Series A Stock. If such notice of redemption shall have been duly mailed and if, on or before the date fixed for redemption designated in such notice, the funds necessary for the redemption shall have been provided by the corporation in accordance with the provisions of the following sentence, then notwithstanding that any certificate of shares of Series A Stock so called for redemption shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such 13 16 funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date of redemption so designated, and all rights with respect to the shares of the Series A Stock so called for redemption shall terminate forthwith after such redemption date, excepting only the right of each holder to receive the redemption price thereof plus unpaid dividends accrued to such redemption date but without interest thereon. The corporation's obligation to provide funds for redemption shall be deemed fulfilled if, on or before the redemption date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having capital and surplus of at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions that such funds be applied to the redemption of the shares of Series A Stock so called for redemption. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such redemption date shall be released or repaid to the corporation, after which the holder or holders of such shares of Series A Stock so called for redemption shall look only to the corporation for payment of the redemption price. (c) Pro Rata Redemption. If any proposed redemption of shares of the Series A Stock shall be of less than all then outstanding shares of Series A Stock, such redemption shall be made on a pro rata basis, as nearly as possible, among all holders of shares of the Series A Stock outstanding at the time of redemption in the same proportion that each such holder's then respective holding of such shares shall bear to the aggregate number of such shares then outstanding. (d) Dividend Arrearages. Notwithstanding the foregoing provisions of this paragraph 6, if any dividends on shares of the Series A Stock are in arrears, no other shares of the Preferred Stock shall be redeemed, and the corporation shall not purchase or otherwise acquire any shares of the Preferred Stock unless all outstanding shares of the Series A Stock are simultaneously redeemed in accordance with the foregoing provisions of this paragraph 6, and the corporation shall not purchase or otherwise acquire any shares of the Series A Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of 14 17 shares of the Series A Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Series A Stock. 7. VOTING RIGHTS. (a) General. The holders of shares of Series A Stock shall not, by virtue of their ownership thereof, be entitled to vote upon any matter except as otherwise provided in the Articles of Organization or by law. Whenever the holders of any shares of the Series A Stock shall be entitled to vote upon any matter, each outstanding share of the Series A Stock entitled to vote on such matter shall be entitled to one (1) vote. (b) Two-Thirds Approval. So long as any shares of the Series A Stock are outstanding, the corporation shall not, without first obtaining the consent, given in writing or in person or by proxy or at a meeting called for the purpose, of the holders of at least two-thirds (2/3rds) of the outstanding shares of the Series A Stock: (i) authorize or create any other class of capital stock (or series thereof) the shares of which rank prior to shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of stock of any other class of capital stock (or series thereof) the shares of which rank prior to the shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; (ii) authorize or create any other series of Preferred Stock, the shares of which rank prior to shares of Series A Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of any other series of Preferred Stock which rank prior to the shares of Series A Stock in respect of dividend payments or distributions or payments upon Liquidation; 15 18 (iii) reclassify any shares of any class of capital stock into a class ranking prior to the Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; reclassify any shares of Preferred Stock into a series which ranks prior to Series A Stock in respect of dividend payments or distributions or payments upon Liquidation; or reclassify any shares of Junior Stock into Series A Stock; or (iv) authorize any amendment to the Articles of Organization which would adversely affect the rights of the holders of the Series A Stock. For the purposes of this subparagraph (iv), the term "adversely affects" shall have the meaning as it has in Section 77 of Chapter 156B of the Massachusetts General Laws, as in effect on April 29, 1983. (c) Special Voting Rights. Notwithstanding the foregoing, in the event that, at any time after the date of original issue of the shares of the Series A Stock, an amount equal to the full accrued dividends for six or more quarterly dividend periods, whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the corporation shall promptly take all necessary actions to increase the authorized number of directors of the corporation by one (1) and the holders of the shares of the Series A Stock then outstanding shall be entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the corporation (such right to elect one (1) director being hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; provided, however, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Series A Stock by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph 7(c) shall cease (subject to renewal from time to time upon the same terms and conditions) and the term of office of the person who is at that time a director elected by 16 19 such holders shall terminate and the number of directors of the corporation shall be automatically reduced by one (1). (d) Special Voting Rights; Procedure. At any time after the special voting rights shall have become vested in the holders of the shares of the Series A Stock as provided in paragraph 7(c), the Clerk of the corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of the shares of the Series A Stock then outstanding, addressed to the corporation at its principal office, shall call a special meeting of the holders of the shares of the Series A Stock for the purpose of electing such additional director, such meeting to be held at any place as provided by the By-Laws of the corporation for meetings of the corporation's stockholders, and upon not less than ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Clerk of the corporation, then the holders of 10% of the shares of the Series A Stock then outstanding may, by written notice to the Clerk of the corporation, designate any person to call such meeting, and the person so designated may call such meeting at any such place as provided above and upon not less than ten (10) nor more than twenty (20) days notice and for that purpose shall have access to the stockholder record books of the corporation. No such special meeting of the holders of the shares of the Series A Stock and no adjournment thereof shall be held on a date later than thirty days before the annual meeting of stockholders of the corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the shares of the Series A Stock then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the corporation. (e) Vacancy in Office of Director Elected by Holders of Series A Stock. With respect to a vacancy arising in the directorship referred to in paragraph 7(c) at any time 17 20 when the special voting rights are in effect pursuant to paragraph 7(c), upon the written request of the holders of 10% of the shares of the Series A Stock then outstanding, addressed to the corporation at its principal office, the Clerk of the corporation shall give notice of a special meeting of holders of the shares of the Series A Stock of the election of a director to fill such vacancy caused by the death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt by the Clerk of the corporation of such written request. So long as special voting rights are in effect pursuant to paragraph 7(c), any director who shall have been so elected by the holders of the Series A Stock may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. 8. STATUS OF REDEEMED SHARES OF SERIES A STOCK. All shares of Series A Stock which have been redeemed by the corporation pursuant to paragraph 6 shall have, after such redemption, the status of authorized but unissued shares of Preferred Stock without designation of series and may be reissued but not as shares of Series A Stock. (D) Preferred Stock, Series B 1. DEFINITIONS OF CERTAIN EXPRESSIONS USED IN THIS PARAGRAPH. As used in this Article 4, the following capitalized words and expressions have the respective meanings set out below: "Applicable Rate" Except as provided below in this definition, the Applicable Rate for any quarterly dividend period commencing on or after September 16, 1985 shall be (x) 2.20% less than (y) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate (each as hereinafter defined) for such dividend period. If the corporation determines in good faith that: 18 21 (i) any one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate cannot be determined for any particular quarterly dividend period, then the Applicable Rate for such dividend period shall be 2.20% less than the higher of whichever two of such rates can be so determined; (ii) only one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any particular quarterly dividend period, then the Applicable Rate for such dividend period shall be 2.20% less than the rate that can be so determined; or (iii) none of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any particular quarterly dividend period, then the Applicable Rate in effect for the preceding quarterly dividend period shall be continued for such dividend period. However, the Applicable Rate for any quarterly dividend period shall in no event be less than six percent (6%) per annum nor greater than thirteen percent (13%) per annum. "Articles of Organization" means the Articles of Organization of the corporation as amended and in effect from time to time, including the amendment thereof effected pursuant to this paragraph. "Board of Governors" means the Board of Governors of the Federal Reserve System or any governmental entity which may be granted the powers referred to herein currently exercised by the Board of Governors. "Calendar Period" means a period of fourteen calendar days. "Common Stock" means the capital stock of the corporation so designated and authorized from time to time and being stock which is junior to all series of the Preferred Stock in respect of dividend payments and of distributions or payments upon Liquidation. 19 22 "corporation" means Bank of Boston Corporation and includes any successor corporation by merger, consolidation or otherwise if the stockholders of the former continue as stockholders of the continuing or combined corporation. "Junior Dividend Stock" means (i) the Common Stock and (ii) any series of the Preferred Stock which is specifically made junior to the Series B Stock and any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of payments of dividends. "Junior Liquidation Stock" means (i) the Common Stock and (ii) any series of the Preferred Stock which is specifically made junior to the Series B Stock and any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of distributions or payments upon Liquidation. "Junior Stock" means the Common Stock, the Junior Dividend Stock and the Junior Liquidation Stock. "Liquidation" means the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the corporation, but shall not include (i) the merger or consolidation of the corporation with another corporation pursuant to any statute which provides in effect that the stockholders of the former shall continue as stockholders of the continuing or combined corporation and (ii) the acquisition by the corporation of assets or stock of another corporation. "Preferred Stock" means the authorized class of the capital stock of the corporation so designated of which there are currently 10,000,000 shares authorized. "Series B Stock" means the series of Preferred Stock created by this paragraph. "Special Securities" means securities which can, at the option of the holder, be surrendered at face value in payment of federal estate taxes or which provide tax benefits for the holder and are priced to reflect such 20 23 tax benefits or which were issued at a deep or substantial discount. "Ten Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 10 years). "Ten Year Constant Maturity Rate" Except as provided below in this definition, the Ten Year Constant Maturity Rate for each quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such yield shall be published during the relevant Calendar Period) as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series B Stock is being determined. If the Board of Governors does not publish such a weekly per annum Ten Year Average Yield during any such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Ten Year Average Yield shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eight 21 24 nor more than 12 years, as published for such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Ten Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than 12 years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. "Treasury Bill Rate" Except as provided below in this definition, the Treasury Bill Rate for any quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series B Stock is being determined. If the Board of Governors does not publish such a weekly per annum market discount rate during any such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. 22 25 Treasury bills, as published weekly during such Calendar Period by any Federal Reserve Bank or any U.S. Government department or agency selected by the corporation. If a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) of all of the U.S. Treasury Bills then having maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such rates, by any Federal Reserve Bank or by any such U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason no such U.S. Treasury Bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest bearing U.S. Treasury securities with a maturity of not less than 80 or more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Treasury Bill Rate for any dividend period as provided above in this paragraph, the Treasury Bill Rate for such dividend period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the 23 26 corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. "Twenty Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 20 years). "Twenty Year Constant Maturity Rate" Except as provided below in this definition, the Twenty Year Constant Maturity Yield for any quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series B Stock is being determined. If the Board of Governors does not publish such a weekly per annum Twenty Year Average Yield during any such Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields, (or the one weekly per annum Twenty Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Twenty Year Average Yield shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) 24 27 then having maturities of not less than 18 nor more than 22 years, as published during such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Twenty Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than 18 nor more than 22 years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers of national reputation in U.S. Government securities selected by the corporation. 2. NUMBER OF SHARES AND DESIGNATION. 1,576,068 shares of Preferred Stock are hereby constituted as a series of Preferred Stock, liquidation preference $50 per share, and designated as Adjustable Rate Cumulative Preferred Stock, Series B. No additional shares of Preferred Stock may be issued as Series B Stock. 3. PREFERENCES. The preferences of each share of the Series B Stock with respect to dividend payments or to distributions or payments upon Liquidation will be in every respect on a parity with the preferences of every other share of Preferred Stock and of every other class of the capital stock of the corporation (other than Common Stock), from time to time outstanding, which other shares of the Preferred Stock and which other classes of capital stock are not made senior or junior to the Series B Stock as to dividend payments or to distributions or payments upon Liquidation. 4. LIQUIDATION. Upon Liquidation, the holders of the then outstanding Series B Stock shall be entitled, before any distribution or payment is made upon any of the Junior 25 28 Liquidation Stock, to be paid in cash an amount equal to $50 per share of Series B Stock so held by them plus all accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for such payment. If upon Liquidation, the amounts payable with respect to shares of Series B Stock and to any other shares of the capital stock of the corporation ranking as to any such distribution on a parity with the Series B Stock are not paid in full, the holders of shares of the Series B Stock and of such other shares shall share ratably in any such distribution of assets of the corporation in proportion to the full respective preferential amounts to which they are entitled. Notice of Liquidation, stating the date when and the place where the amount payable on Liquidation will be paid, shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but no more than sixty (60) days prior to the date fixed for such liquidation payment, to the holders of the shares of the Series B Stock, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series B Stock, or any defect in such notice, shall not affect the validity of the proceedings for the making of liquidation payments on any other shares of the Series B Stock or of any other series or class of the capital stock of the corporation. If such notice shall have been duly mailed and if, on or before the date fixed for liquidation payments designated in such notice, the funds necessary for such liquidation payments shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series B Stock shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been set aside, the dividends thereon shall cease to accrue from and after the date fixed for such liquidation payments so designated, and all rights with respect to the shares of the Series B Stock shall terminate forthwith after such liquidation payment date, excepting only the right of the holder to receive the liquidation price thereof of $50 per share plus unpaid dividends accrued to such liquidation payment date but 26 29 without interest thereon. The corporation's obligation to provide funds for liquidation payments shall be deemed fulfilled if, on or before the liquidation payment date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a capital and surplus of at least $50,000,000, funds necessary for such liquidation payments, in trust, with irrevocable instructions that such funds be applied to such liquidation payments. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such liquidation payment date shall be released or repaid to the corporation, after which the holder or holders of shares of Series B Stock shall look only to the corporation for payment of liquidation payments. 5. DIVIDENDS. (a) Dividend Rate. Dividends on each share of the Series B Stock shall be payable (i) at a quarterly rate of 8.30% per annum for the quarter ended September 15, 1985, and (ii) for each quarterly dividend period commencing on or after September 16, 1985, at a rate computed by multiplying $50 by the Applicable Rate (as defined herein) for such period and multiplying the result by the fraction of a year represented by such period, based upon a year of 365 or 366 days, as the case may be. (b) Payment of Dividends. Dividends on each share of the Series B Stock shall be fully cumulative and shall accrue whether or not earned, without interest, from the date of issuance of each share, and shall be payable in arrears on the 15th day of March, June, September, and December in each year in which such shares are outstanding out of funds legally available for the payment of dividends, when, as and if declared by the Board of Directors. In the event that there shall be outstanding shares of any other series of the Preferred Stock or of any other class of the capital stock of the corporation ranking on a parity as to dividends with shares of the Series B Stock, the corporation, in making any dividend payment on account of arrears on shares of the Series B Stock or such other 27 30 series of the Preferred Stock or such other class of capital stock, shall make payment ratably upon all outstanding shares of the Series B Stock, such other series of the Preferred Stock and such other class of capital stock in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of the Series B Stock, such other series of the Preferred Stock and such other class of capital stock to the date of such dividend payment. So long as any shares of the Series B Stock are outstanding, the corporation shall not (i) declare or pay or set apart for payment any dividend or other distribution (other than dividends or distributions payable in shares of Junior Stock) for any period upon any Junior Stock or any stock of the corporation ranking on a parity with the Series B Stock as to dividends or upon Liquidation or (ii) redeem, purchase or otherwise acquire for any consideration any shares of Junior Stock or any capital stock of the corporation ranking on a parity with the Series B Stock as to dividends or upon Liquidation, unless, in either case, all dividends payable to holders of shares of the Series B Stock and of any stock of the corporation ranking on a parity therewith as to dividends for its current dividend period and all past dividend periods have been paid (or are contemporaneously being paid), or a sum sufficient for the payment thereof has been irrevocably set aside in trust for the holders of all such shares; except that, notwithstanding clause (i) of this paragraph 5(b) the corporation may pay dividends on the shares of the Series B Stock and shares of stock of the corporation ranking on a parity therewith as to dividends ratably in accordance with the sums which would be payable on such shares if all dividends, including accumulations, if any, were declared and paid in full. 6. REDEMPTION. (a) Redemption Price. Shares of the Series B Stock shall not be redeemable on or prior to June 20, 1990. After June 20, 1990, and in accordance with this paragraph 6, the shares of the Series B Stock shall be redeemable at any time or from time to time, in whole or in part, at the option of the corporation by vote of its Board of Directors; provided, however, that any partial redemption, 28 31 in the opinion of an investment banking firm of national reputation selected by the corporation, shall not adversely affect the marketability of those shares of Series B Stock not redeemed. The redemption price shall be $51.50 per share if shares are redeemed on or prior to June 20, 1995 and $50 per share if shares are redeemed thereafter, plus in each case an amount equal to all unpaid dividends, whether or not earned or declared, accrued to the date fixed for redemption. (b) Redemption Procedure. Notice of any proposed redemption of all or any of the shares of the Series B Stock under this paragraph 6 shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but not more than sixty (60) days prior to the date fixed for such redemption, to the holders of the shares of the Series B Stock to be redeemed, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series B Stock designated for redemption, or any defect in such notice, shall not affect the validity of the proceedings for the redemption of any other shares of the Series B Stock. If such notice of redemption shall have been duly mailed and if, on or before the date fixed for redemption designated in such notice, the funds necessary for the redemption shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series B Stock so called for redemption shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been set aside, the dividends thereon shall cease to accrue from and after the date of redemption so designated, and all rights with respect to the shares of the Series B Stock so called for redemption shall terminate forthwith after such redemption date, excepting only the right of each holder to receive the redemption price thereof plus unpaid dividends accrued to such redemption date but without interest thereon. The corporation's obligation to provide funds for redemption shall be deemed fulfilled if, on or before the redemption 29 32 date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a capital and surplus of at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions that such funds be applied to the redemption of the shares of Series B Stock so called for redemption. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such redemption date shall be released or repaid to the corporation, after which the holder or holders of shares of Series B Stock so called for redemption shall look only to the corporation for payment of the redemption price. (c) Pro Rata Redemption. If any proposed redemption of shares of the Series B Stock shall be less than all then outstanding shares of Series B Stock, such redemption shall be made on a pro rata basis, as nearly as possible, among all holders of shares of the Series B Stock outstanding at the time of redemption in the same proportion that each such holder's then respective holding of such shares shall bear to the aggregate number of such shares then outstanding. (d) Dividend Arrearages. Notwithstanding the foregoing provisions of this paragraph 6, if any dividends on shares of the Series B Stock are in arrears, no other shares of the Preferred Stock shall be redeemed, and the corporation shall not purchase or otherwise acquire any shares of the Preferred Stock, unless all outstanding shares of the Series B Stock are simultaneously redeemed in accordance with the foregoing provisions of this paragraph 6, and the corporation shall not purchase or otherwise acquire any shares of the Series B Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of the Series B Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Series B Stock. 7. VOTING RIGHTS. (a) General. The holders of shares of Series B Stock shall not, by virtue of their ownership thereof, be entitled to vote upon any matter except as otherwise provided in the Articles of Organization or by law. 30 33 Whenever the holders of any shares of the Series B Stock shall be entitled to vote upon any matter, each outstanding share of the Series B Stock entitled to vote on such matter shall be entitled to one (1) vote. (b) Two-Thirds Approval. So long as any shares of the Series B Stock are outstanding, the corporation shall not, without first obtaining the consent, given in writing or in person or by proxy or at a meeting called for the purpose, of the holders of at least two-thirds (2/3rds) of the outstanding shares of the Series B Stock: (i) authorize or create any other class of capital stock (or series thereof), the shares of which rank prior to shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of stock of any other class of capital stock (or series thereof) the shares of which rank prior to the shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; (ii) authorize or create any other series of Preferred Stock, the shares of which rank prior to shares of Series B Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of any other series of Preferred Stock which rank prior to the shares of Series B Stock in respect of dividend payments or distributions or payments upon Liquidation; (iii) reclassify any shares of any class of capital stock into a class ranking prior to the Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; reclassify any shares of Preferred Stock into a series which ranks prior to Series B Stock in respect of dividend payments or distributions or payments upon Liquidation; or reclassify any shares of Junior Stock into Series B Stock; or 31 34 (iv) authorize any amendment to the Articles of Organization which would adversely affect the rights of the holders of the Series B Stock. For the purposes of this subparagraph (iv), the term "adversely affects" shall have the same meaning as it has in Section 77 of Chapter 156B of the Massachusetts General Laws, as in effect on November 25, 1983. (c) Special Voting Rights. Notwithstanding the foregoing, in the event that, at any time after the date of original issue of the shares of the Series B Stock, an amount equal to the full accrued dividends for six (6) or more quarterly dividend periods, whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the corporation shall promptly take all necessary actions to increase the authorized number of directors of the corporation by one (1) and the holders of the shares of the Series B Stock then outstanding shall be entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the corporation (such right to elect one (1) director being hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; provided, however, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Series B Stock by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph 7(c) shall cease (subject to renewal from time to time upon the same terms and conditions) and the term of office of the person who is at that time a director elected by such holders shall terminate and the number of directors of the corporation shall be automatically reduced by one (1). (d) Special Voting Rights; Procedure. At any time after the special voting rights shall have become vested in the holders of the shares of the Series B Stock as provided in paragraph 7(c), the Clerk of the corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of 32 35 the shares of the Series B Stock then outstanding, addressed to the corporation at its principal office, shall call a special meeting of the holders of the shares of the Series B Stock for the purpose of electing such additional director, such meeting to be held at any place as provided by the By-Laws of the corporation for meetings of the corporation's stockholders, and upon not less than ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Clerk of the corporation, then the holders of 10% of the shares of the Series B Stock then outstanding may, by written notice to the Clerk of the corporation, designate any person to call such meeting, and the person so designated may call such meeting, at any such place as provided above and upon not less than ten (10) nor more than twenty (20) days notice and for that purpose shall have access to the stockholder record books of the corporation. No such special meeting of the holders of the shares of the Series B Stock and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of stockholders of the corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the shares of the Series B Stock then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the corporation. (e) Vacancy in Office of Director Elected by Holders of Series B Stock. With respect to a vacancy arising in the directorship referred to in paragraph 7(c) at any time when the special voting rights are in effect pursuant to paragraph 7(c), upon the written request of the holders of 10% of the shares of the Series B Stock then outstanding, addressed to the corporation at its principal office, the Clerk of the corporation shall give notice of a special meeting of holders of the shares of the Series B Stock of the election of a director to fill such vacancy caused by the death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt 33 36 by the Clerk of the corporation of such written request. So long as special voting rights are in effect pursuant to paragraph 7(c), any director who shall have been so elected by the holders of the Series B Stock may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. 8. STATUS OF REDEEMED SHARES OF SERIES B STOCK. All shares of the Series B Stock which have been redeemed by the corporation pursuant to paragraph 6 shall have, after such redemption, the status of authorized but unissued shares of Preferred Stock without designation of series and may be reissued but not as shares of Series B Stock. (E) Preferred Stock, Series C 1. DEFINITIONS OF CERTAIN EXPRESSIONS USED IN THIS PARAGRAPH. As used in this Article 4, the following capitalized words and expressions have the respective meanings set out below: "Applicable Rate" Except as provided below in this definition, the Applicable Rate for any quarterly dividend period commencing on or after December 16, 1985 shall be (x) 2.75% less than (y) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate (each as hereinafter defined) for such dividend period. If the corporation determines in good faith that: (i) any one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate cannot be determined for any particular quarterly dividend period, then the Applicable Rate for such dividend period shall be 2.75% less than the higher of whichever two of such rates can be so determined; (ii) only one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any particular 34 37 quarterly dividend period, then the Applicable Rate for such dividend period shall be 2.75% less than the rate that can be so determined; or (iii) none of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any particular quarterly dividend period, then the Applicable Rate in effect for the preceding quarterly dividend period shall be continued for such dividend period. However, the Applicable Rate for any quarterly dividend period shall in no event be less than five and one-half percent (5 1/2%) per annum nor greater than twelve and one-half percent (12 1/2%) per annum. "Articles of Organization" means the Articles of Organization of the corporation as amended and in effect from time to time, including the amendment thereof effected pursuant to this paragraph. "Board of Governors" means the Board of Governors of the Federal Reserve System or any governmental entity which may be granted the powers referred to herein currently exercised by the Board of Governors. "Calendar Period" means a period of fourteen calendar days. "Common Stock" means the capital stock of the corporation so designated and authorized from time to time and being stock which is junior to all series of the Preferred Stock in respect of dividend payments and of distributions or payments upon Liquidation. "corporation" means Bank of Boston Corporation and includes any successor corporation by merger, consolidation or otherwise if the stockholders of the former continue as stockholders of the continuing or combined corporation. "Junior Dividend Stock" means (i) the Common Stock and (ii) any series of the Preferred Stock which is specifically made junior to the Series C Stock, and any class of capital stock of the corporation which is 35 38 specifically made junior to the Preferred Stock, in respect of payments of dividends. "Junior Liquidation Stock" means (i) the Common Stock and (ii) any series of the Preferred Stock which is specifically made junior to the Series C Stock and any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of distributions or payments upon Liquidation. "Junior Stock" means the Common Stock, the Junior Dividend Stock and the Junior Liquidation Stock. "Liquidation" means the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the corporation, but shall not include (i) the merger or consolidation of the corporation with another corporation pursuant to any statute which provides in effect that the stockholders of the former shall continue as stockholders of the continuing or combined corporation and (ii) the acquisition by the corporation of assets or stock of another corporation. "Preferred Stock" means the authorized class of the capital stock of the corporation so designated of which there are currently 10,000,000 shares authorized. "Series C Stock" means the series of Preferred Stock created by this paragraph. "Special Securities" means securities which can, at the option of the holder, be surrendered at face value in payment of federal estate taxes or which provide tax benefits for the holder and are priced to reflect such tax benefits or which were issued at a deep or substantial discount. "Ten Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 10 years). "Ten Year Constant Maturity Rate" Except as provided below in this definition, the Ten Year Constant Maturity Rate for each quarterly dividend period shall be the 36 39 arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such yield shall be published during the relevant Calendar Period) as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series C Stock is being determined. If the Board of Governors does not publish such a weekly per annum Ten Year Average Yield during any such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Ten Year Average Yield shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eight nor more than 12 years, as published for such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Ten Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the 37 40 closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than 12 years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in the U.S. Government securities selected by the corporation. "Treasury Bill Rate" Except as provided below in this definition, the Treasury Bill Rate for any quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series C Stock is being determined. If the Board of Governors does not publish such a weekly per annum market discount rate during any such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates, (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills as published weekly during such Calendar Period by any Federal Reserve Bank or any U.S. Government department or agency selected by the corporation. If a per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such 38 41 rate shall be published during the relevant Calendar Period) of all of the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such rates, by any Federal Reserve Bank or by any such U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, or if for any reason the corporation cannot determine the Treasury Bill Rate for any quarterly dividend period as provided above in this paragraph, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. "Twenty Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of 20 years. "Twenty Year Constant Maturity Rate" Except as provided below in this definition, the Twenty Year Constant Maturity Yield for any quarterly dividend period shall be the arithmetic average (rounded, if not a whole multiple of five hundredths of a percentage point, to the nearest whole such fraction of a percentage point) of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly by the Board of Governors during the Calendar Period immediately prior to the 10 calendar days preceding the 15th day of March, June, September or December, as the case may be, occurring prior to the commencement of the dividend period for which the dividend rate on the shares of the Series C Stock is 39 42 being determined. If the Board of Governors does not publish such a weekly per annum Twenty Year Average Yield during any such Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Twenty Year Average Yield shall not be published by the Board of Governors or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than 18 nor more than 22 years, as published during such Calendar Period by the Board of Governors or, if the Board of Governors shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Twenty Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than 18 nor more than 22 years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers of national reputation in U.S. Government securities selected by the corporation. 40 43 2. NUMBER OF SHARES AND DESIGNATION. 775,390 shares of Preferred Stock are hereby constituted as a series of Preferred Stock, liquidation preference $100 per share, and designated as Adjustable Rate Cumulative Preferred Stock, Series C. No additional shares of Preferred Stock may be issued as Series C Stock. 3. PREFERENCES. The preferences of each share of the Series C Stock with respect to dividend payments or to distributions or payments upon Liquidation will be in every respect on a parity with the preferences of every other share of Preferred Stock and of every other class of the capital stock of the corporation (other than Common Stock), from time to time outstanding, which other shares of the Preferred Stock and which other classes of capital stock are not made senior or junior to the Series C Stock as to dividend payments or to distributions or payments upon Liquidation. 4. LIQUIDATION. Upon Liquidation, the holders of the then outstanding Series C Stock shall be entitled, before any distribution or payment is made upon any of the Junior Liquidation Stock, to be paid in cash an amount equal to $100 per share of Series C Stock so held by them plus all accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for such payment. If upon Liquidation, the amounts payable with respect to shares of Series C Stock and to any other shares of the capital stock of the corporation ranking as to any such distribution on a parity with the Series C Stock are not paid in full, the holders of shares of the Series C Stock and of such other shares shall share ratably in any such distribution of assets of the corporation in proportion to the full respective preferential amounts to which they are entitled. Notice of Liquidation, stating the date when and the place where the amount payable on Liquidation will be paid, shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but no more than sixty (60) days prior to the date fixed for such liquidation payment, to the holders of the shares of the Series C Stock, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, 41 44 and failure duly to give such notice by mail to any holder of shares of Series C Stock, or any defect in such notice, shall not affect the validity of the proceedings for the making of liquidation payments on any other shares of the Series C Stock or of any other series or class of the capital stock of the corporation. If such notice shall have been duly mailed and if, on or before the date fixed for liquidation payments designated in such notice, the funds necessary for such liquidation payments shall have been provided by the corporation in accordance with the provisions of the following sentence, then notwithstanding that any certificate of shares of Series C Stock shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date fixed for such liquidation payments so designated, and all rights with respect to the shares of the Series C Stock shall terminate forthwith after such liquidation payment date, excepting only the right of the holder to receive the liquidation price thereof of $100 per share plus unpaid dividends accrued to such liquidation payment date but without interest thereon. The corporation's obligation to provide funds for liquidation payments shall be deemed fulfilled if, on or before the liquidation payment date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a capital and surplus of at least $50,000,000, funds necessary for such liquidation payments, in trust, with irrevocable instructions that such funds be applied to such liquidation payments. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such liquidation payment date shall be released or repaid to the corporation, after which the holder or holders of shares of Series C Stock shall look only to the corporation for payment of liquidation payments. 5. DIVIDENDS. (a) Dividend Rate. Dividends on each share of the Series C Stock shall be payable (i) at a quarterly rate of 7.70% per annum for the period ended December 15, 1985, and (ii) for each quarterly dividend period commencing on or after December 16, 1985, at a rate computed by multiplying $100 42 45 by the Applicable Rate (as defined herein) for such period and multiplying the result by the fraction of a year represented by such period, based upon a year of 365 or 366 days, as the case may be. (b) Payment of Dividends. Dividends on each share of the Series C Stock shall be fully cumulative and shall accrue whether or not earned, without interest, from the date of issuance of each share, and shall be payable in arrears on the 15th day of March, June, September and December in each year in which such shares are outstanding out of funds legally available for the payment of dividends, when, as and if declared by the Board of Directors. In the event that there shall be outstanding shares of any other series of the Preferred Stock or of any other class of the capital stock of the corporation ranking on a parity as to dividends with shares of the Series C Stock, the corporation, in making any dividend payment on account of arrears on shares of the Series C Stock or such other series of the Preferred Stock or such other class of capital stock, shall make payment ratably upon all outstanding shares of the Series C Stock, such other series of the Preferred Stock and such other class of capital stock in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of the Series C Stock, such other series of the Preferred Stock and such other class of capital stock to the date of such dividend payment. So long as any shares of the Series C Stock are outstanding, the corporation shall not (i) declare or pay or set apart for payment any dividend or other distribution (other than dividends or distributions payable in shares of Junior Stock) for any period upon any Junior Stock or any stock of the corporation ranking on a parity with the Series C Stock as to dividends or upon Liquidation or (ii) redeem, purchase or otherwise acquire for any consideration any shares of Junior Stock or any capital stock of the corporation ranking on a parity with the Series C Stock as to dividends or upon Liquidation, unless, in either case, all dividends payable to holders of shares of the Series C Stock and of any stock of the corporation ranking on a parity therewith as to dividends for its current dividend period and all past dividend 43 46 periods have been paid (or are contemporaneously being paid), or a sum sufficient for the payment thereof has been irrevocably set aside in trust for the holders of all such shares; except that, notwithstanding clause (i) of this paragraph 5(b), the corporation may pay dividends on the shares of the Series C Stock and shares of stock of the corporation ranking on a parity therewith as to dividends ratably in accordance with the sums which would be payable on such shares if all dividends, including accumulations, if any, were declared and paid in full. 6. REDEMPTION. (a) Redemption Price. Shares of the Series C Stock shall not be redeemable on or prior to November 14, 1990. After November 14, 1990 and in accordance with this paragraph 6, the shares of the Series C Stock shall be redeemable at any time or from time to time, in whole or in part, at the option of the corporation by vote of its Board of Directors; provided, however, that any partial redemption, in the opinion of an investment banking firm of national reputation selected by the corporation, shall not adversely affect the marketability of those shares of Series C Stock not redeemed. The redemption price shall be $103.00 per share if shares are redeemed on or prior to November 14, 1995 and $100 per share if shares are redeemed thereafter, plus in each case an amount equal to all unpaid dividends, whether or not earned or declared, accrued to the date fixed for redemption. (b) Redemption Procedure. Notice of any proposed redemption of all or any of the shares of the Series C Stock under this paragraph 6 shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but not more than sixty (60) days prior to the date fixed for such redemption, to the holders of the shares of the Series C Stock to be redeemed, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series C Stock designated for redemption, or any defect in such notice, shall not affect the validity of the proceedings for the redemption of any 44 47 other shares of the Series C Stock. If such notice of redemption shall have been duly mailed and if, on or before the date fixed for redemption designated in such notice, the funds necessary for the redemption shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series C Stock so called for redemption shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date of redemption so designated, and all rights with respect to the shares of the Series C Stock so called for redemption shall terminate forthwith after such redemption date, excepting only the right of each holder to receive the redemption price thereof plus unpaid dividends accrued to such redemption date but without interest thereon. The corporation's obligation to provide funds for redemption shall be deemed fulfilled if, on or before the redemption date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a capital and surplus of at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions that such funds be applied to the redemption of the shares of Series C Stock so called for redemption. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such redemption date shall be released or repaid to the corporation, after which the holder or holders of shares of Series C Stock so called for redemption shall look only to the corporation for payment of the redemption price. (c) Pro Rata Redemption. If any proposed redemption of shares of the Series C Stock shall be less than all then outstanding shares of Series C Stock, such redemption shall be made on a pro rata basis, as nearly as possible, among all holders of shares of the Series C Stock outstanding at the time of redemption in the same proportion that each such holder's then respective holding of such shares shall bear to the aggregate number of such shares then outstanding. 45 48 (d) Dividend Arrearages. Notwithstanding the foregoing provisions of this paragraph 6, if any dividends on shares of the Series C Stock are in arrears, no other shares of the Preferred Stock shall be redeemed, and the corporation shall not purchase or otherwise acquire any shares of the Preferred Stock, unless all outstanding shares of the Series C Stock are simultaneously redeemed, and the corporation shall not purchase or otherwise acquire any shares of the Series C Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of the Series C Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Series C Stock. 7. VOTING RIGHTS. (a) General. The holders of shares of Series C Stock shall not, by virtue of their ownership thereof, be entitled to vote upon any matter except as otherwise provided in the Articles of Organization or by law. Whenever the holders of any shares of the Series C Stock shall be entitled to vote upon any matter, each outstanding share of the Series C Stock entitled to vote on such matter shall be entitled to one (1) vote. (b) Two-Thirds Approval. So long as any shares of the Series C Stock are outstanding, the corporation shall not, without first obtaining the consent, given in writing or in person or by proxy or at a meeting called for the purpose, of the holders of at least two-thirds (2/3rds) of the outstanding shares of the Series C Stock: (i) authorize or create any other class of capital stock (or series thereof), the shares of which rank prior to shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of stock of any other class of capital stock (or series thereof) the shares of which rank prior to the shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; 46 49 (ii) authorize or create any other series of Preferred Stock, the shares of which rank prior to shares of Series C Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of any other series of Preferred Stock which rank prior to the shares of Series C Stock in respect of dividend payments or distributions or payments upon Liquidation; (iii) reclassify any shares of any class of capital stock into a class ranking prior to the Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; reclassify any shares of Preferred Stock into a series which ranks prior to Series C Stock in respect of dividend payments or distributions or payments upon Liquidation; or reclassify any shares of Junior Stock into Series C Stock; or (iv) authorize any amendment to the Articles of Organization which would adversely affect the rights of the holders of the Series C Stock. For the purposes of this subclause (iv), the term "adversely affects" shall have the same meaning as it has in Section 77 of Chapter 156B of the Massachusetts General Laws, as in effect on February 10, 1984. (c) Special Voting Rights. Notwithstanding the foregoing, in the event that, at any time after the date of original issue of the shares of the Series C Stock, an amount equal to the full accrued dividends for six (6) or more quarterly dividend periods, whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the corporation shall promptly take all necessary actions to increase the authorized number of directors of the corporation by one (1) and the holders of the shares of the Series C Stock then outstanding shall be entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the corporation (such right to elect one (1) director being 47 50 hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; provided, however, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Series C Stock by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph 7(c) shall cease (subject to renewal from time to time upon the same terms and conditions) and the term of office of the person who is at that time a director elected by such holders shall terminate and the number of directors of the corporation shall be automatically reduced by one (1). (d) Special Voting Rights; Procedure. At any time after the special voting rights shall have become vested in the holders of the shares of the Series C Stock as provided in paragraph 7(c), the Clerk of the corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of the shares of the Series C Stock then outstanding, addressed to the corporation at its principal office, shall call a special meeting of the holders of the shares of the Series C Stock for the purpose of electing such additional director, such meeting to be held at any place as provided by the By-Laws of the corporation for meetings of the corporation's stockholders, and upon not less than ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Clerk of the corporation, then the holders of 10% of the shares of the Series C Stock then outstanding may, by written notice to the Clerk of the corporation, designate any person to call such meeting, and the person so designated may call such meeting, at any such place as provided above and upon not less than ten (10) nor more than twenty (20) days notice and for that purpose shall have access to the stockholder record books of the corporation. No such special meeting of the holders of the shares of the Series C Stock and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of stockholders of the corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the 48 51 shares of the Series C Stock then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the corporation. (e) Vacancy in Office of Director Elected by Holders of Series C Stock. With respect to a vacancy arising in the directorship referred to in paragraph 7(c) at any time when the special voting rights are in effect pursuant to paragraph 7(c), upon the written request of the holders of 10% of the shares of the Series C Stock then outstanding, addressed to the corporation at its principal office, the Clerk of the corporation shall give notice of a special meeting of holders of the shares of the Series C Stock of the election of a director to fill such vacancy caused by the death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt by the Clerk of the corporation of such written request. So long as special voting rights are in effect pursuant to paragraph 7(c), any director who shall have been so elected by the holders of the Series C Stock may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. 8. STATUS OF REDEEMED SHARES OF SERIES C STOCK. All shares of the Series C Stock which have been redeemed by the corporation pursuant to paragraph 6 shall have, after such redemption, the status of authorized but unissued shares of Preferred Stock without designation of series and may be reissued but not as shares of Series C Stock. (F) Preferred Stock, Series D 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Junior Participating Preferred Stock, 49 52 Series D" and the number of shares constituting such series shall be 200,000. 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of preferred stock ranking prior and superior to the shares of Junior Participating Preferred Stock, Series D with respect to dividends, the holders of shares of Junior Participating Preferred Stock, Series D shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Junior Participating Preferred Stock, Series D, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $3.10 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all noncash dividends or other distributions other than a dividend payable in shares of common stock, par value $2.25 per share, of the corporation (the "Common Stock") or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Junior Participating Preferred Stock, Series D. In the event the corporation shall at any time after June 28, 1990 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Junior Participating Preferred Stock, Series D were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock 50 53 outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The corporation shall declare a dividend or distribution on the Junior Participating Preferred Stock, Series D as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $3.10 per share on the Junior Participating Preferred Stock, Series D shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Junior Participating Preferred Stock, Series D from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Junior Participating Preferred Stock, Series D, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Junior Participating Preferred Stock, Series D entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Junior Participating Preferred Stock, Series D in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Junior Participating Preferred Stock, Series D entitled to receive payment of a dividend or distribution declared thereon, which record date shall be 51 54 no more than 30 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. The holders of shares of Junior Participating Preferred Stock, Series D shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Junior Participating Preferred Stock, Series D shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the corporation. In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Junior Participating Preferred Stock, Series D were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Junior Participating Preferred Stock, Series D and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the corporation. (C)(i) If at any time dividends on any Junior Participating Preferred Stock, Series D shall be in arrears in an amount equal to the full accrued dividends for six (6) or more quarterly dividends periods, whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the corporation shall promptly take all necessary actions to increase the authorized number of directors of the corporation by one (1) and the holders of the shares of the Junior Participating Preferred Stock, Series D then outstanding shall be 52 55 entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the corporation (such right to elect one (1) director being hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; provided, however, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Junior Participating Preferred Stock, Series D by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph (C)(i) of this Section 3 shall cease (subject to renewal from time to time upon the same terms and conditions) and the term of office of the person who is at that time a director elected by such holders shall terminate and the number of directors of the corporation shall be automatically reduced by one (1). (ii) At any time after the special voting rights shall have become vested in the holders of the shares of the Junior Participating Preferred Stock, Series D as provided in paragraph (C)(i) of this Section 3, the Clerk of the corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of the shares of the Junior Participating Preferred Stock, Series D then outstanding, addressed to the corporation at its principal office, shall call a special meeting of the holders of the shares of the Junior Participating Preferred Stock, Series D for the purpose of electing such additional director, such meeting to be held at any place as provided by the Bylaws of the corporation for meetings of the corporation's stockholders, and upon not less then ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Clerk of the corporation, then the holders of 10% of the shares of the Junior Participating Preferred Stock, Series D then outstanding may, by written notice to the Clerk of the corporation, designate any person to call such meeting, and the person so designated may call such meeting, at any such place as provided above and upon not less then ten (10) nor more than twenty (20) days notice and for that purpose shall have access to the stockholder record books of the corporation. No such special meeting 53 56 of the holders of the shares of the Junior Participating Preferred Stock, Series D and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of stockholders of the corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the shares of the Junior Participating Preferred Stock, Series D then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the corporation. (C)(iii) With respect to a vacancy arising in the directorship referred to in paragraph (C)(i) of this Section 3 at any time when the special voting rights are in effect pursuant to paragraph (C)(i) of this Section 3, upon the written request of the holders of 10% of the shares of the Junior Participating Preferred Stock, Series D then outstanding, addressed to the corporation at its principal office, the Clerk of the corporation shall give notice of a special meeting of holders of the shares of the Junior Participating Preferred Stock, Series D of the election of a director to fill such vacancy caused by death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt by the Clerk of the corporation of such written request. So long as special voting rights are in effect pursuant to paragraph (i) of this Section 3(c), any director who shall have been so elected by the holders of the Junior Participating Preferred Stock, Series D may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. (D) Except as set forth herein, holders of Junior Participating Preferred Stock, Series D shall have no special voting rights and their consent shall not be 54 57 required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Junior Participating Preferred Stock, Series D as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Junior Participating Preferred Stock, Series D outstanding shall have been paid in full, the corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Participating Preferred Stock, Series D; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Participating Preferred Stock, Series D, except dividends paid ratably on the Junior Participating Preferred Stock, Series D and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Participating Preferred Stock, Series D, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Junior Participating Preferred Stock, Series D; 55 58 (iv) purchase or otherwise acquire for consideration any shares of Junior Participating Preferred Stock, Series D, or any shares of stock ranking on a parity with the Junior Participating Preferred Stock, Series D, except pursuant to Section 8 or in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. The corporation shall not permit any subsidiary of the corporation to purchase or otherwise acquire for consideration any shares of stock of the corporation unless the corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Junior Participating Preferred Stock, Series D purchased or otherwise acquired by the corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Participating Preferred Stock, Series D unless, prior thereto, the holders of shares of Junior Participating Preferred Stock, Series D shall have received $1,000.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series D 56 59 Liquidation Preference"). Following the payment of the full amount of the Series D Liquidation Preference, no additional distributions shall be made to the holders of shares of Junior Participating Preferred Stock, Series D unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series D Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii) immediately above being referred to as the "Adjustment Number"). Following the payment of the full amount of the Series D Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Junior Participating Preferred Stock, Series D and Common Stock, respectively, holders of Junior Participating Preferred Stock, Series D and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Junior Participating Preferred Stock, Series D and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series D Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Junior Participating Preferred Stock, Series D, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted 57 60 by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. CONSOLIDATION, MERGER, ETC. In case the corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash or any other property, then in any such case the shares of Junior Participating Preferred Stock, Series D shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Junior Participating Preferred Stock, Series D shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. REDEMPTION. The outstanding shares of Junior Participating Preferred Stock, Series D may be redeemed at the option of the Board of Directors as a whole, but not in part, at any time, or from time to time, at a cash price per share equal to 100 percent of (i) the product of the Adjustment Number times the Average Market Value (as such term is hereinafter defined) of the Common Stock, plus (ii) all dividends which on the redemption date have accrued on the shares to be redeemed and have not been paid, or declared and a sum sufficient for the payment thereof set apart, without interest. The "Average Market Value" is the average of the closing sale prices of the Common Stock 58 61 during the 30 day period immediately preceding the date before the redemption date on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed, or, if such stock is not listed on any such exchange, the average of the closing sale prices with respect to a share of Common Stock during such 30 day period, as quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value of the Common Stock as determined by the Board of Directors in good faith. 9. RANKING. The Junior Participating Preferred Stock, Series D shall rank junior to all other series of the corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. 10. AMENDMENT. At such time as shares of Junior Participating Preferred Stock, Series D are outstanding, the Articles of Organization of the corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Junior Participating Preferred Stock, Series D so as to affect them adversely without the affirmative vote of the holders of two-thirds or more of the outstanding shares of Junior Participating Preferred Stock, Series D, voting separately as a class. 11. FRACTIONAL SHARES. Junior Participating Preferred Stock, Series D may be issued in fractions of a share which shall entitle the holder, in proportion to such holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Junior Participating Preferred Stock, Series D. 12. CANCELLATION. Any shares of the Junior Participating Preferred Stock, Series D redeemed, exchanged, or purchased or otherwise acquired by the corporation in any manner whatsoever shall be retired and canceled promptly after the 59 62 acquisition thereof; all such shares shall upon their cancellation become authorized but unissued shares of preferred stock. (G) Preferred Stock, Series E 1. DEFINITIONS OF CERTAIN EXPRESSIONS USED IN THIS PARAGRAPH. As used in this Article 4, the following capitalized words and expressions have the respective meanings set out below: "Articles of Organization" means the Articles of Organization of the corporation as amended and in effect from time to time, including the amendment thereof effected pursuant to this paragraph. "Common Stock" means the capital stock of the corporation so designated and authorized from time to time and being stock which is junior to all series of the Preferred Stock in respect of dividend payments and of distribution or payments upon Liquidation. "corporation" means Bank of Boston Corporation and includes any successor corporation by merger, consolidation or otherwise if the stockholders of the former continue as stockholders of the continuing or combined corporation. "Junior Dividend Stock" means (i) the Common Stock, (ii) any series of the Preferred Stock which is specifically made junior to the Series E Stock, including the corporation's Junior Participating Preferred Stock, Series D and (iii) any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of payments of dividends. "Junior Liquidation Stock" means (i) the Common Stock, (ii) any series of the Preferred Stock which is specifically made junior to the Series E Stock, including the corporation's Junior Participating Preferred Stock, Series D and (iii) any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of distributions or payments upon Liquidation. "Junior Stock" means the Common Stock, the Junior Dividend Stock and the Junior Liquidation Stock. 60 63 "Liquidation" means the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the corporation, but shall not include (i) the merger or consolidation of the corporation with another corporation pursuant to any statute which provides in effect that the stockholders of the former shall continue as stockholders of the continuing or combined corporation and (ii) the acquisition by the corporation of assets or stock of another corporation. "Preferred Stock" means the authorized class of the capital stock of the corporation so designated of which there are currently 10,000,000 shares authorized. "Series E Stock" means the series of Preferred Stock created by this paragraph. 2. NUMBER OF SHARES AND DESIGNATION. 920,000 shares of Preferred Stock are hereby constituted as a series of Preferred Stock, liquidation preference $250 per share, and designated as 8.60% Cumulative Preferred Stock, Series E. No additional shares of Preferred Stock may be issued as Series E Stock. 3. PREFERENCES. The preferences of each share of the Series E Stock with respect to dividend payments or to distributions or payments upon Liquidation will be in every respect on a parity with the preferences of every other share of Preferred Stock and of every other class of the capital stock of the corporation (other than Common Stock), from time to time outstanding, which other shares of the Preferred Stock and which other classes of capital stock are not made senior or junior to the Series E Stock as to dividend payments or to distributions or payments upon Liquidation. 4. LIQUIDATION. Upon Liquidation, the holders of the then outstanding Series E Stock shall be entitled, before any distribution or payment is made upon any of the Junior Liquidation Stock, to be paid in cash an amount equal to $250 per share of Series E Stock so held by them plus all accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for such payment. If upon Liquidation, the amounts payable with respect to shares of 61 64 Series E Stock and to any other shares of the capital stock of the corporation ranking as to any such distribution on a parity with the Series E Stock are not paid in full, the holders of shares of the Series E Stock and of such other shares shall share ratably in any such distribution of assets of the corporation in proportion to the full respective preferential amounts to which they are entitled. Notice of Liquidation, stating the date when and the place where the amount payable on Liquidation will be paid, shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but no more than sixty (60) days prior to the date fixed for such liquidation payment, to the holders of the shares of the Series E Stock, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series E Stock, or any defect in such notice, shall not affect the validity of the proceedings for the making of liquidation payments on any other shares of the Series E Stock or of any other series or class of the capital stock of the corporation. If such notice shall have been duly mailed and if, on or before the date fixed for liquidation payments designated in such notice, the funds necessary for such liquidation payments shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series E Stock shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date fixed for such liquidation payments so designated, and all rights with respect to the shares of the Series E Stock shall terminate forthwith after such liquidation payment date, excepting only the right of the holder to receive the liquidation price thereof of $250 per share plus unpaid dividends accrued to such liquidation payment date but without interest thereon. The corporation's obligation to provide funds for liquidation payments shall be deemed fulfilled if, on or before the liquidation payment date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a 62 65 capital and surplus of at least $50,000,000, funds necessary for such liquidation payments, in trust, with irrevocable instructions that such funds be applied to such liquidation payments. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such liquidation payment date shall be released or repaid to the corporation, after which the holder or holders of shares of Series E Stock shall look only to the corporation for payment of liquidation payments. 5. DIVIDENDS. (a) Dividend Rate. Dividends on each share of the Series E Stock shall be payable quarterly based on an annual rate of 8.60% multiplied by $250. Dividends payable on the Series E Stock for any period less than a full dividend period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. (b) Payment of Dividends. Dividends on each share of the Series E Stock shall be fully cumulative and shall accrue whether or not earned, without interest, from the date of issuance of each share, and shall be payable in arrears on the 15th day of March, June, September and December in each year, commencing on December 15, 1992, in which such shares are outstanding out of funds legally available for the payment of dividends, when, as and if declared by the Board of Directors. In the event that there shall be outstanding shares of any other series of the Preferred Stock or of any other class of the capital stock of the corporation ranking on a parity as to dividends with shares of the Series E Stock, the corporation, in making any dividend payment on account of arrears on shares of the Series E Stock or such other series of the Preferred Stock or such other class of capital stock, shall make payment ratably upon all outstanding shares of the Series E Stock, such other series of the Preferred Stock and such other class of capital stock in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of the Series E Stock, such other series of the Preferred Stock and such other class of capital stock to the date of such dividend payment. 63 66 So long as any shares of the Series E Stock are outstanding, the corporation shall not (i) declare or pay or set apart for payment any dividend or other distribution (other than dividends or distributions payable in shares of Junior Stock) for any period upon any Junior Stock or any stock of the corporation ranking on a parity with the Series E Stock as to dividends or upon Liquidation or (ii) redeem, purchase or otherwise acquire for any consideration any shares of Junior Stock or any capital stock of the corporation ranking on a parity with the Series E Stock as to dividends or upon Liquidation, unless, in either case, all dividends payable to holders of shares of the Series E Stock and of any stock of the corporation ranking on a parity therewith as to dividends for its current dividend period and all past dividend periods have been paid (or are contemporaneously being paid), or a sum sufficient for the payment thereof has been irrevocably set aside in trust for the holders of all such shares; except that, notwithstanding clause (i) of this paragraph 5(b), the corporation may pay dividends on the shares of the Series E Stock and shares of stock of the corporation ranking on a parity therewith as to dividends ratably in accordance with the sums which would be payable on such shares if all dividends, including accumulations, if any, were declared and paid in full. 6. REDEMPTION. (a) Redemption Price. Shares of the Series E Stock shall not be redeemable prior to September 15, 1997. On and after such date, and in accordance with this paragraph 6, the shares of the Series E Stock shall be redeemable at any time or from time to time, in whole or in part, at the option of the corporation by vote of its Board of Directors, with the prior approval of the Board of Governors of the Federal Reserve System (if such approval is required at the time of redemption). The redemption price shall be $250 per share plus an amount equal to all unpaid dividends, whether or not earned or declared, accrued to the date fixed for redemption. (b) Redemption Procedure. Notice of any proposed redemption of all or any of the shares of the Series E Stock under this paragraph 6 shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but not more than sixty (60) days prior to the 64 67 date fixed for such redemption, to the holders of the shares of the Series E Stock to be redeemed, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series E Stock designated for redemption, or any defect in such notice, shall not affect the validity of the proceedings for the redemption of any other shares of the Series E Stock. If such notice of redemption shall have been duly mailed and if, on or before the date fixed for redemption designated in such notice, the funds necessary for the redemption shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series E Stock so called for redemption shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date of redemption so designated, and all rights with respect to the shares of the Series E Stock so called for redemption shall terminate forthwith after such redemption date, excepting only the right of each holder to receive the redemption price thereof plus unpaid dividends accrued to such redemption date but without interest thereon. The corporation's obligation to provide funds for redemption shall be deemed fulfilled if, on or before the redemption date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a capital and surplus of at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions that such funds be applied to the redemption of the shares of Series E Stock so called for redemption. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such redemption date shall be released or repaid to the corporation, after which the holder or holders of shares of Series E Stock so called for redemption shall look only to the corporation for payment of the redemption price. (c) Pro Rata Redemption. If any proposed redemption of shares of the Series E Stock shall be less than all then outstanding shares of Series E Stock, such redemption shall 65 68 be made on a pro rata basis, as nearly as possible, among all holders of shares of the Series E Stock outstanding at the time of redemption in the same proportion that each such holder's then respective holding of such shares shall bear to the aggregate number of such shares then outstanding. (d) Dividend Arrearages. Notwithstanding the foregoing provisions of this paragraph 6, if any dividends on shares of the Series E Stock are in arrears, no other shares of the Preferred Stock shall be redeemed, and the corporation shall not purchase or otherwise acquire any shares of the Preferred Stock, unless all outstanding shares of the Series E Stock are simultaneously redeemed in accordance with the foregoing provisions of this paragraph 6, and the corporation shall not purchase or otherwise acquire any shares of the Series E Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of the Series E Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Series E Stock. 7. VOTING RIGHTS. (a) General. The holders of shares of Series E Stock shall not, by virtue of their ownership thereof, be entitled to vote upon any matter except as otherwise provided in the Articles of Organization or by law. Whenever the holders of any shares of the Series E Stock shall be entitled to vote upon any matter, each outstanding share of the Series E Stock entitled to vote on such matter shall be entitled to one (1) vote. (b) Two-Thirds Approval. So long as any shares of the Series E Stock are outstanding, the corporation shall not, without first obtaining the consent, given in writing or in person or by proxy or at a meeting called for the purpose, of the holders of at least two-thirds (2/3rds) of the outstanding shares of the Series E Stock: (i) authorize or create any other class of capital stock (or series thereof), the shares of which rank prior to shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or 66 69 other securities by their terms convertible into or evidencing a right to purchase shares of stock of any other class of capital stock (or series thereof) the shares of which rank prior to the shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; (ii) authorize or create any other series of Preferred Stock, the shares of which rank prior to shares of Series E Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of any other series of Preferred Stock which rank prior to the shares of Series E Stock in respect of dividend payments or distributions or payments upon Liquidation; (iii) reclassify any shares of any class of capital stock into a class ranking prior to the Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; reclassify any shares of Preferred Stock into a series which ranks prior to Series E Stock in respect of dividend payments or distributions or payments upon Liquidation; or reclassify any shares of Junior Stock into Series E Stock; or (iv) authorize any amendment to the Articles of Organization which would adversely affect the rights of the holders of the Series E Stock. For the purposes of this subparagraph (iv), the term "adversely affects" shall have the same meaning as it has in Section 77 of Chapter 156B of the Massachusetts General Laws, as in effect on August 6, 1992. (c) Special Voting Rights. Notwithstanding the foregoing, in the event that, at any time after the date of original issue of the shares of the Series E Stock, an amount equal to the full accrued dividends for six (6) or more quarterly dividend periods, whether or not consecutive, 67 70 shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the corporation shall promptly take all necessary actions to increase the authorized number of directors of the corporation by one (1), and the holders of the shares of the Series E Stock then outstanding shall be entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the corporation (such right to elect one (1) director being hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; provided, however, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Series E Stock by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph 7(c) shall cease (subject to renewal from time to time upon the same terms and conditions), and the term of office of the person who is at that time a director elected by such holders shall terminate and the number of directors of the corporation shall be automatically reduced by one (1). (d) Special Voting Rights; Procedure. At any time after the special voting rights shall have become vested in the holders of the shares of the Series E Stock as provided in paragraph 7(c), the Clerk of the corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of the shares of the Series E Stock then outstanding, addressed to the corporation at its principal office, shall call a special meeting of the holders of the shares of the Series E Stock for the purpose of electing such additional director, such meeting to be held at any place as provided by the By-Laws of the corporation for meetings of the corporation's stockholders, and upon not less than ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Clerk of the corporation, then the holders of 10% of the shares of the Series E Stock then outstanding may, by written notice to the Clerk of the corporation, designate any person to call such meeting, and the person so designated may call such meeting, at any such place as provided above and upon not less than ten (10) nor more than 68 71 twenty (20) days notice and for that purpose shall have access to the stockholder record books of the corporation. No such special meeting of the holders of the shares of the Series E Stock and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of stockholders of the corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the shares of the Series E Stock then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the corporation. (e) Vacancy in Office of Director Elected by Holders of Series E Stock. With respect to a vacancy arising in the directorship referred to in paragraph 7(c) at any time when the special voting rights are in effect pursuant to paragraph 7(c), upon the written request of the holders of 10% of the shares of the Series E Stock then outstanding, addressed to the corporation at its principal office, the Clerk of the corporation shall give notice of a special meeting of holders of the shares of the Series E Stock of the election of a director to fill such vacancy caused by the death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt by the Clerk of the corporation of such written request. So long as special voting rights are in effect pursuant to paragraph 7(c), any director who shall have been so elected by the holders of the Series E Stock may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. 8. STATUS OF REDEEMED SHARES OF SERIES E STOCK. All shares of the Series E Stock which have been redeemed by the corporation pursuant to paragraph 6 shall have, after such redemption, the status of authorized but unissued shares of 69 72 Preferred Stock without designation of series and may be reissued but not as shares of Series E Stock. (H) Preferred Stock, Series F 1. DEFINITIONS OF CERTAIN EXPRESSIONS USED IN THIS PARAGRAPH. As used in this Section 4, the following capitalized words and expressions have the respective meanings set out below: "Articles of Organization" mean the Articles of Organization of the corporation as amended and in effect from time to time, including the amendment thereof effected pursuant to this paragraph. "Common Stock" means the capital stock of the corporation so designated and authorized from time to time and being stock which is junior to all series of the Preferred Stock in respect of dividend payments and of distributions or payments upon Liquidation. "corporation" means Bank of Boston Corporation and includes any successor corporation by merger, consolidation or otherwise if the stockholders of the former continue as stockholders of the continuing or combined corporation. "Junior Dividend Stock" means (i) the Common Stock, (ii) any series of the Preferred Stock which is specifically made junior to the Series F Stock, including the corporation's Junior Participating Preferred Stock, Series D and (iii) any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of payments of dividends. "Junior Liquidation Stock" means (i) the Common Stock, (ii) any series of the Preferred Stock which is specifically made junior to the Series F Stock, including the corporation's Junior Participating Preferred Stock, Series D and (iii) any class of capital stock of the corporation which is specifically made junior to the Preferred Stock, in respect of distributions or payments upon Liquidation. 70 73 "Junior Stock" means the Common Stock, the Junior Dividend Stock and the Junior Liquidation Stock. "Liquidation" means the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the corporation, but shall not include (i) the merger or consolidation of the corporation with another corporation pursuant to any statute which provides in effect that the stockholders of the former shall continue as stockholders of the continuing or combined corporation and (ii) the acquisition by the corporation of assets or stock of another corporation. "Preferred Stock" means the authorized class of the capital stock of the corporation so designated of which there are currently 10,000,000 shares authorized. "Series F Stock" means the series of Preferred Stock created by this paragraph. 2. NUMBER OF SHARES AND DESIGNATION. 280,000 shares of Preferred Stock are hereby constituted as a series of Preferred Stock, liquidation preference $250 per share, and designated as 7 7/8% Cumulative Preferred Stock, Series F. No additional shares of Preferred Stock may be issued as Series F Stock. 3. PREFERENCES. The preferences of each share of the Series F Stock with respect to dividend payments or to distributions or payments upon Liquidation will be in every respect on a parity with the preferences of every other share of Preferred Stock and of every other class of the capital stock of the corporation (other than Common Stock), from time to time outstanding, which other shares of the Preferred Stock and which other classes of capital stock are not made senior or junior to the Series F Stock as to dividend payments or to distributions or payments upon Liquidation. 4. LIQUIDATION. Upon Liquidation, the holders of the then outstanding Series F Stock shall be entitled, before any distribution or payment is made upon any of the Junior Liquidation Stock, to be paid in cash an amount equal to $250 per share of Series F Stock so held by them plus all accrued and unpaid dividends thereon (whether or not earned 71 74 or declared) to the date fixed for such payment. If upon Liquidation, the amounts payable with respect to shares of Series F Stock and to any other shares of the capital stock of the corporation ranking as to any such distribution on a parity with the Series F Stock are not paid in full, the holders of shares of the Series F Stock and of such other shares shall share ratably in any such distribution of assets of the corporation in proportion to the full respective preferential amounts to which they are entitled. Notice of Liquidation, stating the date when and the place where the amount payable on Liquidation will be paid, shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but no more than sixty (60) days prior to the date fixed for such liquidation payment, to the holders of the shares of the Series F Stock, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series F Stock, or any defect in such notice, shall not affect the validity of the proceedings for the making of liquidation payments on any other shares of the Series F Stock or of any other series or class of the capital stock of the corporation. If such notice shall have been duly mailed and if, on or before the date fixed for liquidation payments designated in such notice, the funds necessary for such liquidation payments shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series F Stock shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date fixed for such liquidation payments so designated, and all rights with respect to the shares of the Series F Stock shall terminate forthwith after such liquidation payment date, excepting only the right of the holder to receive the liquidation price thereof of $250 per share plus unpaid dividends accrued to such liquidation payment date but without interest thereon. The corporation's obligation to provide funds for liquidation payments shall be deemed fulfilled if, on or before the liquidation payment date, the 72 75 corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a capital and surplus of at least $50,000,000, funds necessary for such liquidation payments, in trust, with irrevocable instructions that such funds be applied to such liquidation payments. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such liquidation payment date shall be released or repaid to the corporation, after which the holder or holders of shares of Series F Stock shall look only to the corporation for payment of liquidation payments. 5. DIVIDENDS. (a) Dividend Rate. Dividends on each share of the Series F Stock shall be payable quarterly based on an annual rate of 7 7/8% multiplied by $250. Dividends payable on the Series F Stock shall be computed (i) for any period other than a full dividend period, on the basis of a 360-day year consisting of twelve 30-day months and (ii) for each full dividend period, by dividing the annual dividend rate by four. (b) Payment of Dividends. Dividends on each share of the Series F Stock shall be fully cumulative and shall accrue whether or not earned, without interest, from the date of issuance of each share, and shall be payable in arrears on the 15th day of March, June, September and December in each year, commencing on September 15, 1993, in which such shares are outstanding out of funds legally available for the payment of dividends, when, as and if declared by the Board of Directors. In the event that there shall be outstanding shares of any other series of the Preferred Stock or of any other class of the capital stock of the corporation ranking on a parity as to dividends with shares of the Series F Stock, the corporation, in making any dividend payment on account of arrears on shares of the Series F Stock or such other series of the Preferred Stock or such other class of capital stock, shall make payment ratably upon all outstanding shares of the Series F Stock, such other 73 76 series of the Preferred Stock and such other class of capital stock in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of the Series F Stock, such other series of the Preferred Stock and such other class of capital stock to the date of such dividend payment. So long as any shares of the Series F Stock are outstanding, the corporation shall not (i) declare or pay or set apart for payment any dividend or other distribution (other than dividends or distributions payable in shares of Junior Stock) for any period upon any Junior Stock or any stock of the corporation ranking on a parity with the Series F Stock as to dividends or upon Liquidation or (ii) redeem, purchase or otherwise acquire for any consideration any shares of Junior Stock or any capital stock of the corporation ranking on a parity with the Series F Stock as to dividends or upon Liquidation, unless, in either case, all dividends payable to holders of shares of the Series F Stock and of any stock of the corporation ranking on a parity therewith as to dividends for its current dividend period and all past dividend periods have been paid (or are contemporaneously being paid), or a sum sufficient for the payment thereof has been irrevocably set aside in trust for the holders of all such shares; except that, notwithstanding clause (i) of this paragraph 5(b), the corporation may pay dividends on the shares of the Series F Stock and shares of stock of the corporation ranking on a parity therewith as to dividends ratably in accordance with the sums which would be payable on such shares if all dividends, including accumulations, if any, were declared and paid in full. 6. REDEMPTION. (a) Redemption Price. Shares of the Series F Stock shall not be redeemable prior to July 15, 1998. On and after such date, and in accordance with this paragraph 6, the shares of the Series F Stock shall be redeemable at any time or from time to time, in whole or in part, at the option of the corporation by vote of its Board of Directors, with the prior approval of the Board of Governors of the Federal Reserve System (if such approval is required at the time of redemption). The redemption price shall be $250 per share plus an amount equal to all 74 77 unpaid dividends, whether or not earned or declared, accrued to the date fixed for redemption. (b) Redemption Procedure. Notice of any proposed redemption of all or any of the shares of the Series F Stock under this paragraph 6 shall be sent by the Clerk of the corporation by first class mail, postage prepaid, at least thirty (30) but not more than sixty (60) days prior to the date fixed for such redemption, to the holders of the shares of the Series F Stock to be redeemed, at their respective addresses appearing on the books of the corporation. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, and failure duly to give such notice by mail to any holder of shares of Series F Stock designated for redemption, or any defect in such notice, shall not affect the validity of the proceedings for the redemption of any other shares of the Series F Stock. If such notice of redemption shall have been duly mailed and if, on or before the date fixed for redemption designated in such notice, the funds necessary for the redemption shall have been provided by the corporation in accordance with the provisions of the following sentence, then, notwithstanding that any certificate of shares of Series F Stock so called for redemption shall not have been delivered for cancellation, the shares represented thereby shall no longer be deemed outstanding on and after the date such funds shall have been so provided, the dividends thereon shall cease to accrue from and after the date of redemption so designated, and all rights with respect to the shares of the Series F Stock so called for redemption shall terminate forthwith after such redemption date, excepting only the right of each holder to receive the redemption price thereof plus unpaid dividends accrued to such redemption date but without interest thereon. The corporation's obligation to provide funds for redemption shall be deemed fulfilled if, on or before the redemption date, the corporation shall deposit with a bank or trust company (which may be an affiliate of the corporation), having a capital and surplus of at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions that such funds be applied to the redemption of the shares of Series F Stock so called for 75 78 redemption. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of five years from such redemption date shall be released or repaid to the corporation, after which the holder or holders of shares of Series F Stock so called for redemption shall look only to the corporation for payment of the redemption price. (c) Pro Rata Redemption. If any proposed redemption of shares of the Series F Stock shall be less than all then outstanding shares of Series F Stock, such redemption shall be made on a pro rata basis, as nearly as possible, among all holders of shares of the Series F Stock outstanding at the time of redemption in the same proportion that each such holder's then respective holding of such shares shall bear to the aggregate number of such shares then outstanding. (d) Dividend Arrearages. Notwithstanding the foregoing provisions of this paragraph 6, if any dividends on shares of the Series F Stock are in arrears, no other shares of the Preferred Stock shall be redeemed, and the corporation shall not purchase or otherwise acquire any shares of the Preferred Stock, unless all outstanding shares of the Series F Stock are simultaneously redeemed in accordance with the foregoing provisions of this paragraph 6, and the corporation shall not purchase or otherwise acquire any shares of the Series F Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of the Series F Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Series F Stock. 7. VOTING RIGHTS. (a) General. The holders of shares of Series F Stock shall not, by virtue of their ownership thereof, be entitled to vote upon any matter except as otherwise provided in the Articles of Organization or by law. Whenever the holders of any shares of the Series F Stock shall be entitled to vote upon any matter, each outstanding share of the Series F Stock entitled to vote on such matter shall be entitled to one (1) vote. 76 79 (b) Two-Thirds Approval. So long as any shares of the Series F Stock are outstanding, the corporation shall not, without first obtaining the consent, given in writing or in person or by proxy or at a meeting called for the purpose, of the holders of at least two-thirds (2/3rds) of the outstanding shares of the Series F Stock: (i) authorize or create any other class of capital stock (or series thereof), the shares of which rank prior to shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of stock of any other class of capital stock (or series thereof) the shares of which rank prior to the shares of Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; (ii) authorize or create any other series of Preferred Stock, the shares of which rank prior to shares of Series F Stock in respect of dividend payments or distributions or payments upon Liquidation; or authorize, create or issue any bonds, notes, debentures, obligations, stock or other securities by their terms convertible into or evidencing a right to purchase shares of any other series of Preferred Stock which rank prior to the shares of Series F Stock in respect of dividend payments or distributions or payments upon Liquidation; (iii) reclassify any shares of any class of capital stock into a class ranking prior to the Preferred Stock in respect of dividend payments or distributions or payments upon Liquidation; reclassify any shares of Preferred Stock into a series which ranks prior to Series F Stock in respect of dividend payments or distributions or payments upon Liquidation; or reclassify any shares of Junior Stock into Series F Stock; or (iv) authorize any amendment to the Articles of Organization which would adversely affect the rights of the holders of the Series F Stock. For the purposes of 77 80 this subparagraph (iv), the term "adversely affects" shall have the same meaning as it has in Section 77 of Chapter 156B of the Massachusetts General Laws, as in effect on June 24, 1993. (c) Special Voting Rights. Notwithstanding the foregoing, in the event that, at any time after the date of original issue of the shares of the Series F Stock, an amount equal to the full accrued dividends for six (6) or more quarterly dividend periods, whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof irrevocably set aside in trust for the holders of all of such shares, the Board of Directors of the corporation shall promptly take all necessary actions to increase the authorized number of directors of the corporation by one (1), and the holders of the shares of the Series F Stock then outstanding shall be entitled (by series, voting as a single class) to elect one (1) person director to the Board of Directors of the corporation (such right to elect one (1) director being hereinafter sometimes referred to as the "special voting rights"), each outstanding share having such right being entitled for such purpose to one vote; provided, however, that at such time as the arrearage in payment of dividends which gave rise to the exercise of the special voting rights has been cured with regard to the Series F Stock by waiver or payment of all accrued dividends, the right of the holders of such shares so to vote as provided in this paragraph 7(c) shall cease (subject to renewal from time to time upon the same terms and conditions), and the term of office of the person who is at that time a director elected by such holders shall terminate and the number of directors of the corporation shall be automatically reduced by one (1). (d) Special Voting Rights; Procedure. At any time after the special voting rights shall have become vested in the holders of the shares of the Series F Stock as provided in paragraph 7(c), the Clerk of the corporation, as promptly as possible but in any event within twenty (20) days after receipt of the written request of the holders of 10% of the shares of the Series F Stock then outstanding, addressed to the corporation at its principal office, shall call a special meeting of the holders of the shares of the Series F Stock for the purpose of electing such 78 81 additional director, such meeting to be held at any place as provided by the By-Laws of the corporation for meetings of the corporation's stockholders, and upon not less than ten (10) nor more than twenty (20) days notice. If such meeting shall not be so called within twenty (20) days after receipt of the request by the Clerk of the corporation, then the holders of 10% of the shares of the Series F Stock then outstanding may, by written notice to the Clerk of the corporation, designate any person to call such meeting, and the person so designated may call such meeting, at any such place as provided above and upon not less than ten (10) nor more than twenty (20) days notice and for that purpose shall have access to the stockholder record books of the corporation. No such special meeting of the holders of the shares of the Series F Stock and no adjournment thereof shall be held on a date later than thirty (30) days before the annual meeting of stockholders of the corporation. At any meeting so called or at any annual meeting held at any time when the special voting rights are in effect, the holders of a majority of the shares of the Series F Stock then outstanding, present in person or by proxy, shall be sufficient to constitute a quorum for the election of such additional director, and such additional director, together with any and all other directors who are then members of the Board of Directors, shall constitute the duly elected directors of the corporation. (e) Vacancy in Office of Director Elected by Holders of Series F Stock. With respect to a vacancy arising in the directorship referred to in paragraph 7(c) at any time when the special voting rights are in effect pursuant to paragraph 7(c), upon the written request of the holders of 10% of the shares of the Series F Stock then outstanding, addressed to the corporation at its principal office, the Clerk of the corporation shall give notice of a special meeting of holders of the shares of the Series F Stock of the election of a director to fill such vacancy caused by the death, resignation or other inability to serve as a director elected by such holders, to be held not less than ten (10) nor more than twenty (20) days following receipt by the Clerk of the corporation of such written request. So long as special voting rights are in effect pursuant to paragraph 7(c), any director who shall have been so elected by the holders of the Series F Stock may be 79 82 removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. 8. STATUS OF REDEEMED SHARES OF SERIES F STOCK. All shares of the Series F Stock which have been redeemed by the corporation pursuant to paragraph 6 shall have, after such redemption, the status of authorized but unissued shares of Preferred Stock without designation of series and may be reissued but not as shares of Series F Stock. ARTICLE 5 The restrictions, if any, imposed by these Articles of Organization upon the transfer of shares of stock of any class are as follows: None. ARTICLE 6 (A) The Directors may amend, add to or repeal the By-Laws in whole or in part except with respect to any provision thereof which, by law or the By-Laws requires action of the stockholders. (B) Meetings of the stockholders may be held anywhere in the United States. (C) The corporation may be a partner in any business enterprise which the corporation would have the power to conduct by itself. (D) No director shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that this provision shall not eliminate the liability of a director, to the extent that such liability is provided by applicable law, (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve 80 83 intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 (or successor provisions) of Chapter 156B of the Massachusetts General Laws or (iv) for any transaction from which the director derived an improper personal benefit. This provision shall not eliminate the liability of a director for any act or omission occurring prior to the date upon which this provision becomes effective. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 81 EX-3.B 3 BY-LAWS 1 EXHIBIT 3(b) BANK OF BOSTON CORPORATION BY-LAWS Revised to October 28, 1993 2 BY-LAWS OF BANK OF BOSTON CORPORATION TABLE OF CONTENTS ARTICLE I MEETINGS OF THE STOCKHOLDERS
PAGE SECTION 1. Place of Meeting;Adjournment 1 SECTION 2. Annual Meeting 1 SECTION 3. Special Meetings 2 SECTION 4. Notices of Meetings 2 SECTION 5. Quorum 5 SECTION 6. Organization 5 SECTION 7. Voting by Stockholders; Proxies 6 SECTION 8. Inspectors 7 SECTION 9. Action without Meeting 7
ARTICLE II BOARD OF DIRECTORS
SECTION 1. General Powers; Issue of Stock 8 SECTION 2. Number, Qualification, Election and Term of Office 8 SECTION 3. Nominations for Director 9 SECTION 4. Quorum and Manner of Acting 11 SECTION 5. First Meeting 11 SECTION 6. Regular Meetings 12 SECTION 7. Special Meetings 12 SECTION 8. Notices of Meetings 12 SECTION 9. Organization of Meetings 13 SECTION 10. Order of Business. 13 SECTION 11. Action by Directors without a Meeting 13 SECTION 12. Resignation 14 SECTION 13. Removal 14 SECTION 14. Vacancies 14 SECTION 15. Fees and Expenses of Directors 15 SECTION 16. Validity of Acts of Directors 15 SECTION 17. Transactions with the Corporation 15
3 ARTICLE III COMMITTEES
PAGE SECTION 1. Executive Committee 16 SECTION 2. Audit Committee 18 SECTION 3. Compensation and Nominating Committee 19 SECTION 4. Community Investment Committee 20 SECTION 5. Other Committees 21 SECTION 6. Changes in Committee Membership; Filling of Vacancies 21 SECTION 7. Records of Committee Action and Board of Directors' Approval 21 SECTION 8. Committee Proceedings 22 SECTION 9. Action of Committees without a Meeting 22 SECTION 10. General Authority of Committees 23
ARTICLE IV OFFICERS
SECTION 1. Titles and Qualifications 23 SECTION 2. Appointment and Terms of Office 23 SECTION 3. Duties; Fidelity Bond 24 SECTION 4. The Chairman of the Board 24 SECTION 5. The President 25 SECTION 6. The Vice Chairmen 25 SECTION 7. The Treasurer 25 SECTION 8. The Comptroller 26 SECTION 9. The Clerk and the Secretary of the Board of Directors 26 SECTION 10. The General Auditor 27 SECTION 11. The Vice Presidents 27 SECTION 12. The Assistant Treasurers and Assistant Clerks 27 SECTION 13. Resignation 27 SECTION 14. Vacancies 28 SECTION 15. Compensation of Officers, Employees and Other Agents 28 SECTION 16. Designated Officer 28
4 ARTICLE V STOCK
PAGE SECTION 1. Stock Certificates 28 SECTION 2. Transfer of Stock 29 SECTION 3. Transfer Agent and Registrar; Regulations 30 SECTION 4. Lost, Mutilated or Destroyed Certificates 30 SECTION 5. Record Date for Determination of Stockholders Rights; Close of Transfer Books 30 SECTION 6. Dividends 31 SECTION 7. Control Share Acquisitions 32
ARTICLE VI GENERAL PROVISIONS
SECTION 1. Offices 32 SECTION 2. Seal 32 SECTION 3. Fiscal Year 32 SECTION 4. Annual Reports 32 SECTION 5. Execution of Instruments 33 SECTION 6. Voting of Securities 33 SECTION 7. Powers of Attorney 34 SECTION 8. Issue of Debt Securities and Other Obligations 35 SECTION 9. Corporate Records 35 SECTION 10. Indemnification of Directors, Officers and Others 35
ARTICLE VII AMENDMENTS
SECTION 1. General 39
ARTICLE VIII EMERGENCY BY-LAWS
SECTION 1. Effective Period 39 SECTION 2. Meetings of the Board of Directors 40 SECTION 3. Emergency Location of Head Office 40 SECTION 4. Preservation of Continuity of Management 40 SECTION 5. Immunity 40 SECTION 6. Amendment of Emergency By-Laws 40
5 BANK OF BOSTON CORPORATION BY-LAWS ARTICLE I MEETINGS OF THE STOCKHOLDERS SECTION 1. Place of Meeting; Adjournment. Meetings of the stockholders may be held at the main office of the corporation in the City of Boston, County of Suffolk, Commonwealth of Massachusetts, or at such places within or without the Commonwealth of Massachusetts as may be specified in the notices of such meetings; provided, that, when any meeting is convened, the presiding officer, if directed by the Board of Directors, may adjourn the meeting for a period of time not to exceed 30 days if (a) no quorum is present for the transaction of business or (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders (i) to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders or (ii) otherwise to exercise effectively their voting rights. The presiding officer in such event shall announce the adjournment and date, time and place of reconvening and shall cause notice thereof to be posted at the place of meeting designated in the notice which was sent to the stockholders, and if such date is more than 10 days after the original date of the meeting the Clerk shall give notice thereof in the manner provided in Section 4 of this Article I. SECTION 2. Annual Meeting. The annual meeting of stockholders of the corporation for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date and at such time as shall be determined by the Board of Directors each year, which date and time may subsequently be changed at any time, including the year any such determination occurs. 6 -2- SECTION 3. Special Meetings. Except as provided in the Articles of Organization with respect to the ability of holders of preferred stock to call a special meeting in certain circumstances, special meetings of the stockholders may be called by the President at the direction of the Chairman of the Board or by a majority of the directors, and shall be called by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer upon the written application of stockholders who hold one hundred percent in interest of the capital stock of the corporation entitled to be voted at the proposed meeting. Such request shall state the purpose or purposes of the proposed meeting and may designate the place, date and hour of such meeting; provided, however, that no such request shall designate a date not a full business day or an hour not within normal business hours as the date or hour of such meeting. As used in these By-Laws, the expression business day means a day other than a day which, at a particular place, is a public holiday or a day other than a day on which banking institutions at such place are allowed or required, by law or otherwise, to remain closed. SECTION 4. Notices of Meetings. A printed notice of the place, date and hour and stating the purposes of each meeting of the stockholders shall be given by the Clerk (or other person authorized by law or these By-Laws) at least 10 days before the date fixed for the meeting to each stockholder entitled to vote at such meeting, and to each other stockholder who, under the Articles of Organization or these By-Laws, is entitled to such notice, by leaving such notice with him or her at his or her residence or usual place of business, or by mailing such notice by mail, postage prepaid and addressed to such stockholder at his or her address as it appears in the records of the corporation. Such further notice shall be given by publication or otherwise, as may be required by law or as may be ordered by the Board of Directors. No notice need be given to any stockholder if such stockholder, or his or her authorized attorney, waives such notice by a writing executed before or after the meeting and filed with the records of the meeting or by his or her presence, in person or by proxy, at the meeting. 7 -3- It shall be the duty of every stockholder to furnish to the Clerk of the corporation or to the transfer agent, if any, of the class of stock owned by such stockholder, his or her post office address and to notify the Clerk or the transfer agent of any change therein. No business may be transacted at a meeting of the stockholders except that (a) specified in the notice thereof given by or at the direction of the Board of Directors or in a supplemental notice given by or at the direction of the Board of Directors and otherwise in compliance with the provisions hereof, (b) brought before the meeting by or at the direction of the Board of Directors or the presiding officer or (c) properly brought before the meeting by or on behalf of any stockholder who shall have been a stockholder of record at the time of giving of notice by such stockholder provided for in this paragraph and who shall continue to be entitled at the time of such meeting to vote thereat and who complies with the notice procedures set forth in this paragraph with respect to any business sought to be brought before the meeting by or on behalf of such stockholder other than the election of directors and with the notice provisions set forth in Section 3 of Article II with respect to the election of directors. In addition to any other applicable requirements, for business to be properly brought before a meeting by or on behalf of a stockholder (other than a stockholder proposal included in the corporation's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), the stockholder must have given timely notice thereof in writing to the Clerk of the corporation. In order to be timely given, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation (a) not less than 75 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation or (b) in the case of a special meeting or in the event that the annual meeting is called for a date (including any change in a date determined by the Board pursuant to Section 2 of this Article I) more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so received not later than the close 8 -4- of business on the 20th day following the day on which notice of the date of such meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. Such stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and record address of the stockholder proposing such business, (c) the class and number of shares of capital stock of the corporation held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice by the stockholder and (d) all other information which would be required to be included in a proxy statement or other filings required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Regulation 14A under the Exchange Act (the "Proxy Rules"). In the event the proposed business to be brought before the meeting by or on behalf of a stockholder relates or refers to a proposal or transaction involving the stockholder or a third party which, if it were to have been consummated at the time of the meeting, would have required of such stockholder or third party or any of the affiliates of either of them any prior notification to, filing with, or any orders or other action by, any governmental authority, then any such notice to the Clerk shall be accompanied by appropriate evidence of the making of all such notifications or filings and the issuance of all such orders and the taking of all such actions by all such governmental authorities. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section 4; provided, however, that nothing in this Section 4 shall be deemed to preclude discussion by any stockholder of any business properly brought before such meeting. The presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that business 9 -5- was not properly brought before the meeting in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and that business shall be disregarded. SECTION 5. Quorum. At all meetings of the stockholders, the holders of record of a majority in interest of all stock issued, outstanding and entitled to vote thereat, or, if two or more classes of stock are issued, outstanding and entitled to vote as separate classes, a majority in interest of each class, present in person or represented by proxy, shall constitute a quorum requisite for the transaction of business, except as otherwise provided by law, by the Articles of Organization or by these By-Laws. Stock of the corporation owned directly or indirectly by the corporaton, if any, other than shares of stock held in a fiduciary capacity shall not be deemed outstanding for this purpose. If a quorum is not present or represented at any meeting of the stockholders, the stockholders present or represented and entitled to vote thereat, present in person or represented by proxy, by a majority vote, shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until the requisite amount of voting stock shall be present or represented. At any adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as first convened had there been a quorum. The stockholders present at a duly organized meeting may continue to transact business until adjournment notwithstanding the withdrawal of one or more stockholders or their proxy or proxies so as to leave less than a quorum present or represented. SECTION 6. Organization. At every meeting of the stockholders, the Chairman of the Board or the President or, in their absence, a person chosen by majority vote of the stockholders entitled to vote thereat, present in person or represented by proxy, shall act as chairman; and the Clerk, or in his or her absence, any Assistant Clerk, or in the absence of all such officers, any person present appointed by the chairman shall act as secretary of the meeting. The secretary of the meeting need not be sworn. 10 -6- SECTION 7. Voting by Stockholders; Proxies. Except as otherwise provided by law or the Articles of Organization, at all meetings of stockholders each stockholder shall have one vote for each share of stock entitled to vote and registered in his or her name. Any stockholder may vote in person or by proxy dated not more than six months prior to the meeting and filed with the secretary of the meeting. Every proxy shall be in writing, executed by a stockholder or his or her authorized attorney-in-fact, and dated. A proxy need not be sealed, witnessed or acknowledged. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. No proxy shall be valid after the final adjournment of the meeting. The attendance at any meeting of a stockholder who has therefore given a proxy shall not have the effect of revoking the same unless the stockholder so attending shall, in writing, so notify the secretary of the meeting at any time prior to the voting of the proxy. The corporation shall not, directly, or indirectly, vote any of its own stock other than shares of stock held in a fiduciary capacity. Any shares disqualified from being voted shall not be counted in determining the proportion of or the number of shares or votes required to pass or to vote upon or to consent or assent to any matter. Prior to each meeting of stockholders, the Clerk shall make or cause to be made a full, true and complete list, in alphabetical order, of stockholders entitled to notice of and to vote at the meeting showing the number of shares of each class having voting rights held of record by each. When a determination of stockholders entitled to vote at any meeting has been made as provided by law, such determination shall apply to any adjournment of such meeting, except when the determination has been made by the closing of the transfer books and the stated period has expired. 11 -7- At all meetings of stockholders, all questions, except as otherwise expressly provided by law or the Articles of Organization or these By-Laws, shall be determined by a majority vote of the stockholders entitled to vote thereon who are present in person or represented by proxy, or, if two or more classes of stock are entitled to vote as separate classes, a majority vote of the stockholders of each class, present in person or represented by proxy. Except as otherwise expressly provided by law, the Articles of Organization or these By-Laws, at all meetings of stockholders the voting shall be by show of hands or voice vote, but any qualified voter may demand a stock vote, by shares of stock, upon any question, whereupon such stock vote shall be taken by ballot, each of which shall state the name of the stockholder voting and the number of shares voted by him or her, and, if such ballot be cast by a proxy, it shall also state the name of the proxy. All elections shall be decided by plurality vote. SECTION 8. Inspectors. At each meeting of the stockholders, the polls shall be opened and closed by the proxies and ballots shall be received and taken in charge by and all questions touching on the qualifications of voters and the validity of proxies and the acceptance and rejection of votes shall be decided by two inspectors. Such inspectors shall be appointed by the Board of Directors before or at the meeting, or, if no such appointment shall have been made, then by the presiding officer at the meeting. If for any reason any inspector previously appointed shall fail to attend or refuse or be unable to serve, an inspector in place of the one so failing to attend or refusing or unable to serve shall be appointed, either by the Board of Directors or by the presiding officer at the meeting. No director or candidate for the office of director shall be appointed an inspector. The inspectors shall file with the Clerk or other secretary of the meeting a certificate setting forth the results of each vote taken by ballot at the meeting. SECTION 9. Action without Meeting. Any action which may be taken by stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action by a writing filed with the records of the meetings of stockholders. Any such consent shall be 12 -8- treated for all purposes as a vote at a meeting and may be described as such in any certificate or other document filed with or furnished to any public official, governmental agency or other person having dealings with the corporation. ARTICLE II BOARD OF DIRECTORS SECTION 1. General Powers; Issue of Stock. The property and business of the corporation shall be managed by the Board of Directors which may exercise all powers of the corporation except such powers as are by law or by the Articles of Organization or by these By-Laws conferred upon or reserved to the stockholders. The Board of Directors and the Executive Committee shall have power to issue and sell or otherwise dispose of such shares of the corporation's authorized but unissued capital stock to such persons and at such times and for such consideration and upon such terms as it shall determine from time to time. SECTION 2. Number, Qualification, Election and Term of Office. The Board of Directors shall be composed of not less than three nor more than thirty-five directors. Within the limits specified, the number of directors shall be determined from time to time by vote of a majority of the entire Board; provided, however, that no decrease in the number of directors constituting the entire Board of Directors made pursuant to this Section 2 shall shorten the term of any incumbent director. The Board of Directors shall be divided into three classes, as nearly equal in number as possible. The Directors need not be stockholders. To be nominated to serve or to serve as a director, an individual must be eligible to serve as a director both at the time the Board of Directors votes to nominate such individual or receives notice in accordance with Section 3 of this Article of a stockholder's intent to nominate such individual and at the time of such election, and the stockholder making such nomination (and any party on whose behalf or in concert with whom such stockholder is acting) must be qualified at the time of making such nomination to have such individual serve as the nominee of such stockholder (and any party on whose behalf or in 13 -9- concert with whom such stockholder is acting) if such individual is elected. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting held in the third year following the year of their election and until their successors are duly elected and qualified or until their earlier resignation, death or removal; provided, that in the event of failure to hold such an annual meeting or to hold such election at such meeting, the election of directors may be held at any special meeting of the stockholders called for that purpose. Directors, except those appointed by the Board of Directors to fill vacancies, shall be elected by a plurality vote of the stockholders, voting by ballot either in person or by proxy. As used in these By-Laws, the expression "entire Board" means the number of directors in office at a particular time. SECTION 3. Nominations for Director. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors, except as provided in the Articles of Organization with respect to nominations by holders of preferred stock in certain circumstances. Nominations of persons for election to the Board of Directors at the annual meeting may be made at the annual meeting of stockholders (a) by the Board of Directors or at the direction of the Board of Directors by any nominating committee or person appointed by the Board or (b) by any stockholder of record at the time of giving of notice provided for in this Section 3 and who shall continue to be entitled at the time of the meeting to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3 rather than the notice procedures with respect to other business set forth in Section 4 of Article I. Nominations by stockholders shall be made only after timely notice by such stockholder in writing to the Clerk of the corporation. In order to be timely given, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 75 nor more than 125 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation; provided, however, that in 14 -10- the event that the meeting is called for a date, including any change in a date determined by the Board pursuant to Section 2 of Article I, more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so received not later than the close of business on the 20th day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever first occurs. Such stockholder's notice to the Clerk shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation, if any, which are beneficially owned by the person, (iv) any other information regarding the nominee as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules, and (v) the consent of each nominee to serve as a director of the corporation if so elected; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice, (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a representation that the stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) is qualified at the time of giving such notice to have such individual serve as the nominee of such stockholder (and any party on whose behalf or in concert with whom such stockholder is acting) if such individual is elected, accompanied by copies of any notification or filings with, or orders or other actions by, any governmental authority which are required in order for such stockholder (and any party on whose behalf such stockholder is acting) to be so qualified, (v) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder and (vi) such other 15 -11- information regarding such stockholder as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth herein. The presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 4. Quorum and Manner of Acting. One-third of the directors in office (but in no event fewer than two) shall constitute a quorum for the transaction of business at any meeting and, except as otherwise provided by law or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Directors shall be deemed present at a meeting when present in person or by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. In the absence of a quorum, a majority of the directors present, or if only two directors are present, either director, or the sole director present, may adjourn any meeting to a day certain or from time to time until a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted if the meeting had been held when originally called. A director may not vote or otherwise act by proxy. SECTION 5. First Meeting. The Board of Directors elected at any annual meeting of stockholders shall meet at the Head Office of The First National Bank of Boston in the City of Boston and Commonwealth of Massachusetts, immediately after the final adjournment of such meeting or as soon as practicable (but not more than 30 days) thereafter for purposes of organization, the election of 16 -12- officers for the succeeding year and the transaction of other business. No notice of such meeting need be given. SECTION 6. Regular Meetings. Except for the first meeting of the Board of Directors to be held immediately following the annual election of directors, regular meetings of the Board of Directors shall be held on the fourth Thursday in each month, except the month in which the annual election of directors is held, at one o'clock in the afternoon in the directors' room at the Head Office of The First National Bank of Boston in the City of Boston, or at such other time or at such other place, or both, as shall be designated in the notice of meeting given to the directors as provided in these By-Laws. If the day designated for a regular meeting of the Board of Directors would not be a business day (as defined in Section 3 of Article I of these By-Laws) at the place where the meeting is to be held, then the meeting shall be held on such other business day as the Board of Directors may have previously designated, or if no such day shall have been designated, the meeting shall be held on the first business day at such place preceding the date originally designated for such meeting. Any regular meeting of the Board of Directors may be dispensed with by an appropriate vote passed by the Board of Directors at any prior meeting. SECTION 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Clerk at the written request of three or more directors. Special meetings of the Board of Directors may be held at such place and time as may be designated in the call of the meeting. SECTION 8. Notices of Meetings. Notice of the time and place of each regular or special meeting of the Board of Directors shall be given to each director at least 48 hours before such meeting if delivered personally or sent by mail or at least 24 hours before such meeting if given by telephone, telex, telegraph or other electronic means. Notice by mail shall be deemed to be given when deposited in the post office or a letter box in postage-paid sealed wrappers or when transmitted by telegraph or telex, and addressed separately to each director at his or her address 17 -13- appearing on the records of the corporation. Notices of meetings of the Board of Directors need not include a statement of the business to be transacted thereat unless required by law or these By-Laws. No notice of any adjourned meeting of the Board of Directors need be given other than by announcement at the session of the meeting which is being adjourned. Failure to give any such notice of any meeting, or any irregularity in the notice thereof, shall not invalidate any proceedings taken thereat if a quorum is present and if all absent directors, either before or after the meeting, shall sign a waiver of notice or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the minutes of the meetings to which they relate. SECTION 9. Organization of Meetings. At each meeting of the Board of Directors, the Chairman of the Board or the President or, in their absence, a director chosen by a majority of the directors present shall act as chairman. The Clerk, or, in his or her absence, any person appointed by the chairman, shall act as secretary of the meeting and keep minutes of the proceedings. The secretary of the meeting need not be sworn. SECTION 10. Order of Business. At all meetings of the Board of Directors, business shall be transacted in the order determined by the chairman of the meeting, subject to approval of the directors present thereat. SECTION 11. Action by Directors without a Meeting. Unless otherwise restricted by the Articles of Organization or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or of such committee. Any such consent shall be treated for all purposes as a vote duly adopted by the Board of Directors or such committee at a meeting and may be described as such in any certificate or other document filed with or furnished to 18 -14- any public official, governmental agency or other person having dealings with the corporation. SECTION 12. Resignation. Any director may resign at any time by giving written notice of his or her resignation to the Chairman of the Board or the President or the Clerk. Such resignation shall take effect upon its receipt or at any later date specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 13. Removal. A director may be removed by the affirmative vote of a majority of the shares outstanding and entitled to vote in the election of directors only for cause. A director may be removed for cause only after reasonable notice and opportunity to be heard before the stockholders. For such time as the corporation is subject to paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws, "cause" with respect to the removal of any director by the stockholders shall mean only (a) conviction of a felony, (b) declaration of unsound mind by order of court, (c) gross dereliction of duty, (d) commission of an action involving moral turpitude, or (e) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the corporation. If at any time the corporation shall no longer be subject to paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws, (a) a director may be removed from office with or without cause by the vote of the holders of a majority of the shares entitled to vote in the election of directors and may be removed from office with cause by vote of a majority of the directors then in office, and (b) a director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him or her. SECTION 14. Vacancies. The Board of Directors may act notwithstanding a vacancy or vacancies in its membership; but if the office of any director shall become vacant by reason of an increase in size of the Board of 19 -15- Directors, or the death, resignation, disqualification or removal of a director or otherwise, such vacancy or vacancies shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum. Any director elected in accordance with this Section 14 shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until his or her successor shall have been elected and qualified or until his or her earlier resignation, death or removal. SECTION 15. Fees and Expenses of Directors. Each director who is not an officer or employee of the corporation or any of its affiliates may be paid such fees for his or her services and for attendance at meetings of the Board of Directors or of any committee thereof as the Board of Directors may determine from time to time to be appropriate. Such fees may be payable currently or on a deferred basis. In addition, each such director shall be entitled to reimbursement for reasonable expenses incurred by him or her in order to attend meetings of the Board of Directors and committees thereof or otherwise in connection with the performance of his or her duties as a director. SECTION 16. Validity of Acts of Directors. All action taken by any meeting of the Board of Directors or of a committee of the directors or by any person acting as a director shall, notwithstanding that it shall afterwards be discovered that there was some defect in the election or appointment or continuance in office of any such director or person acting as a director, or that they or any of them were disqualified, or had vacated office, or were not entitled to vote in relation to the matter acted upon, be as valid as if such person had been duly elected or appointed, had continued in office and was qualified to be a director and entitled to vote on such matter. SECTION 17. Transactions with the Corporation. No contract or other transaction between the corporation and one or more of its directors or between the corporation or any other corporation, partnership, voluntary association, trust or other organization of which any of its directors is a director or officer or in which he or she has any 20 -16- financial interest shall be void or voidable for this reason or because any such director is present at or participates in the meeting of the Board of Directors or of the committee thereof which authorizes the contract or transactions or because his or her vote is counted for such purpose (a) if the material facts as to the contract or transaction and as to his or her relationship or interest are disclosed to the Board of Directors or such committee and the Board of Directors or such committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of disinterested directors even though the disinterested directors be less than a quorum or (b) if the material facts as to the contract or transaction and as to his or her relationship or interest are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of the shareholders or (c) if the contract or transaction is fair and reasonable as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, such committee or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee thereof which authorizes the contract or transaction. ARTICLE III COMMITTEES SECTION 1. Executive Committee. There shall be an Executive Committee composed of the Chairman of the Board, the President and such number of other directors, not less than five nor more than seven, as the Board of Directors may appoint from time to time by resolution passed by the vote of a majority of the entire Board. The Board of Directors may also, from time to time, by similar resolution, appoint one or more alternate members of the Executive Committee who may attend and act in the place of any absent or disqualified member or members of the Executive Committee at any meeting thereof. Subject to the provisions of Section 6 of this Article III, the term of office of any appointed member or alternate member of the Executive Committee shall expire on the date specified in the resolution of appointment or any earlier date on which he or she ceases to be a director. Any director who has 21 -17- served as a member or alternate member of the Executive Committee shall be eligible for reappointment to a new term of office. During the intervals between meetings of the Board of Directors, the Executive Committee, unless expressly provided otherwise by law or these By-Laws, shall have and may exercise all the authority of the Board of Directors, except that it shall not be entitled to (i) change the principal office of the corporation; (ii) amend or repeal these By-Laws or to adopt new by-laws; (iii) elect officers required by law to be elected by the stockholders or directors or to fill vacancies in any such offices; (iv) change the number of the Board of Directors or to fill vacancies in the Board of Directors; (v) remove officers or directors from office; (vi) fix the remuneration of any director for serving on the Board of Directors or any Committee thereof or for services to the corporation in any other capacity; (vii) authorize the payment of any dividend or distribution to stockholders; (viii) authorize the reacquisition for value of stock of the corporation; or (ix) authorize a merger of a subsidiary entity into the corporation. The action taken by the Executive Committee at each meeting shall be reported to the Board of Directors and shall be subject to alteration or repeal by the latter, provided that no alteration or repeal by the Board of Directors of action taken by the Executive Committee shall prejudice the rights or acts of any third person. 22 -18- The Executive Committee shall hold meetings at such times and places and upon such notice as it may from time to time determine. Other meetings of the Executive Committee may be called at any time by the Chairman of the Board or by the President or by any three members of the Executive Committee or by the Secretary of the Board of Directors at the written request of the person or persons entitled to call such a meeting. SECTION 2. Audit Committee. There shall be an Audit Committee composed of such number of directors (not less than three) as the Board of Directors, by resolution passed by the vote of a majority of the entire Board may appoint, none of whom shall be an employee of the corporation. The duties of the Audit Committee shall be (a) to recommend to the Board of Directors for approval by the stockholders the appointment of a firm of independent public accountants ("the Auditors") to audit the accounts of the corporation and such of its subsidiaries as the Committee may recommend for the financial year in respect of which such appointment is made; (b) to make, or cause to be made by the Auditors, such examinations or audits of the affairs and operations of the corporation or of any one or more of its subsidiaries, of such scope, with such objects, and at such times or intervals as the Committee may determine in its discretion or as may be ordered by the Board of Directors or the Executive Committee; (c) to submit to the Board of Directors as soon as may be convenient following the conclusion of each examination or audit made by or at the direction of the Committee, a written report relative thereto; and (d) to oversee the activities of the General Auditor and his or her staff. The Committee shall also be responsible for conducting periodic performance evaluations and establishing the compensation of the General Auditor. 23 -19- A notation with respect to each report made to the Board of Directors by the Audit Committee and of the action taken thereon by the Board of Directors shall be made in the minutes of the latter. SECTION 3. Compensation and Nominating Committee. There shall be a Compensation and Nominating Committee composed of such number of directors (not less than three nor more than six) as the Board of Directors, by resolution passed by vote of a majority of the entire Board, may appoint, none of whom shall be an employee of the corporation. The Chairman of the Board and the President shall serve as ex officio members of the Committee solely when it is acting in its capacity as a nominating committee pursuant to subparagraphs (e) and (f). The Chairman of the Board and the President shall not be deemed to be members of the Committee when it is acting with respect to compensation matters pursuant to subparagraphs (a) through (d). No person who serves as a member of the Compensation and Nominating Committee when it acts with respect to compensation matters shall be eligible for an award of bonus under any bonus plan or incentive plan or otherwise or for the grant of an option of contingent credit under any stock option plan or stock bonus plan. The duties of the Compensation and Nominating Committee shall be (a) after considering the recommendations of the Chairman of the Board, to make recommendations to the Board of Directors from time to time as to the salaries of all employees of the corporation who are in positions or at salary levels designated from time to time by the Board of Directors on the recommendation of the Committee; (b) to review the salary programs and other benefit plans or arrangements affecting directors or employees of the corporation (except any such program, plan or arrangement imposed upon the corporaton by law), to discharge any other responsibility placed upon the 24 -20- Committee by any such benefit plans or arrangements or specifically delegated by the Board of Directors to the Committee and from time to time to present to the Board of Directors the views of the Committee with respect to proposed changes in any such program, plan or other arrangement, which shall have been brought to their attention by management; (c) to make, or cause to be made, such special studies and reports pertaining to the corporation's compensation policies and practices as may be requested of the Committee from time to time by the Board of Directors; (d) to execute as it sees fit from time to time the powers and to discharge the duties vested in it from time to time by the terms of any pension or other benefit plan or arrangement affecting directors or employees of the corporation; (e) to consider and recommend to the Board of Directors candidates for appointment or election as directors who are proposed to it by the Chairman of the Board, by any other officer of the corporation, or any director or stockholder; and (f) to perform such functions as may be assigned to it from time to time by the Board of Directors. SECTION 4. Community Investment Committee. The Board of Directors may from time to time appoint a Community Investment Committee composed of not less than three nor more than five directors. The duties of the Committee shall be from time to time to review and evaluate the policies established by the corporation's subsidiary banks relating to the discharge by the subsidiary banks of their responsibilities under the Community Reinvestment Act of 1977, as amended (Section 2901 et seq. of Title 12 of the United States Code) and regulations thereunder, or any other applicable Federal or state law or regulations thereunder relating to substantially the same subject as the Community Reinvestment Act of 1977, as amended, and oversee the 25 -21- implementation of such policies by the corporation's subsidiary banks and make reports to the Board of Directors from time to time of its findings and recommendations. SECTION 5. Other Committees. The Board of Directors may, from time to time, by resolution passed by the vote of a majority of the entire Board, constitute such other standing or special committees as it deems desirable and may dissolve any such committee by like resolution at its pleasure. Each such committee shall have such authority and perform such duties not inconsistent with law and these By-Laws as may be assigned to it by the Board of Directors. Vacancies in any such committee shall be filled by resolution passed by the vote of a majority of the entire Board. No such committee shall be granted or shall exercise any authority which shall have been delegated to another committee by these By-Laws or by resolution of the Board of Directors or which, in the absence of such delegation, could not be exercised by the Executive Committee. SECTION 6. Changes in Committee Membership; Filling of Vacancies. The Board of Directors by resolution passed by a vote of the majority of the entire Board may at any time or from time to time (a) increase or reduce the number of members of any committee, within any applicable limits imposed by these By-Laws, (b) remove any member from any committee, (c) appoint a director to fill a vacancy in, or to be an additional member of, any committee, and (d) discharge any committee except a standing committee established pursuant to this Article III. SECTION 7. Records of Committee Action and Board of Directors' Approval. Each committee appointed by the Board of Directors shall keep a record of its acts and proceedings which shall be open for inspection at any time by any director. Such record shall be submitted to the Board of Directors at such time or times as may be required 26 -22- by these By-Laws or as may be requested by the Board of Directors. Failure to submit such record, or failure of the Board of Directors to approve any action indicated therein shall not invalidate any action otherwise lawful, to the extent that it has been carried out by the corporation prior to the time the record of such action was, or should have been, submitted to the Board of Directors as herein provided. The action of the Board of Directors at any meeting with respect to action taken by any standing committee shall be recorded in the minutes of the meeting. SECTION 8. Committee Proceedings. In the absence of specific provisions in these By-Laws or regulations imposed by the Board of Directors, a committee may meet and adjourn and otherwise regulate its meetings as it thinks fit. A committee may appoint a chairman of its meetings if none has been appointed by the Board of Directors or is designated elsewhere in this Article III. If no such chairman has been appointed, or if at any meeting the chairman is not present within five minutes after the time appointed for the holding of the meeting, the members present may choose one of their number to be chairman of the meeting. A quorum for the transaction of business at any meeting of a committee shall be a majority of the fixed number of members thereof for the time being (whether or not any seat is vacant) unless a different rule shall have been adopted by a resolution passed by the vote of a majority of the Board of Directors. A resolution passed by the vote of a majority of the members present at the time of voting if a quorum is present shall be the act of the committee. In the case of an equality of votes the Chairman shall have a second or casting vote. A committee cannot sub-delegate any of its powers or duties within its membership or to any other person or persons unless authorized to do so by the Board of Directors or these By-Laws. Committee members cannot vote by proxy. SECTION 9. Action of Committees without a Meeting. Any action required or permitted to be taken by a committee of the Board of Directors may be taken without a meeting if all members of the committee consent thereto in writing either before or after the action is taken and the writing or writings evidencing such consent are filed with the 27 -23- minutes of proceedings of such committee. For all purposes of these By-Laws, any such consent shall constitute a resolution duly passed by such committee. SECTION 10. General Authority of Committees. Any committee appointed by the Board of Directors pursuant to this Article III shall be at liberty (a) to meet and confer with employees of the corporation and its subsidiaries on all matters relating to the work of the committee which fall within the purview of such employees and to be informed by any of them as to the policies, practices, and controls of the division or department of the corporation or of the subsidiary of the corporation to which he or she is assigned; (b) to examine all reports which are relevant to the work of the committee (i) made by the corporation or any of its subsidiaries to regulatory authorities and (ii) of examinations of the corporation or any of its subsidiaries made by regulatory authorities. ARTICLE IV OFFICERS SECTION 1. Titles and Qualifications. The officers of the corporation shall be a Chairman of the Board, a President, a Treasurer, a Comptroller, a Clerk, a General Auditor, one or more Executive Vice Presidents and such other officers including one or more Vice Chairmen as may be appointed from time to time in accordance with these By-Laws. Except as otherwise provided by law, the duties of any two officers may be discharged by the same person, but the President shall not serve at the same time as Treasurer, Comptroller, or Clerk. The Chairman of the Board and the President must be directors. SECTION 2. Appointment and Terms of Office. The Chairman of the Board, the President, any Vice Chairman, any Vice President, the Treasurer, the Comptroller, the 28 -24- Clerk and the General Auditor shall be chosen by a majority vote of the entire Board at the first meeting of the Board of Directors following each annual meeting of stockholders (or special meeting of stockholders in lieu of such annual meeting) or by the Board of Directors from time to time and each shall hold office until the following first meeting of the Board of Directors and until his or her successor is chosen and qualifies, unless he or she sooner resigns, retires, dies, is removed or becomes disqualified. Other officers may be appointed from time to time by the Board of Directors, the Chairman of the Board or the President. Each other officer shall have such title, exercise such power and perform such duties and hold office for such term as shall be determined by the Board of Directors, the Chairman of the Board or the President, as the case may be. SECTION 3. Duties; Fidelity Bond. The duties and authority of each officer of the corporation, other than as set forth in these By-Laws, shall be prescribed and may be varied from time to time by the Board of Directors, the Chairman of the Board or the President, as the case may be. The Board of Directors shall provide for such bond and fidelity insurance covering the officers of the corporation and for the faithful and honest discharge of their duties as the Board may determine. Such bonds or insurance may be in individual, schedule or blanket form and the premiums therefor shall be paid by the corporation. SECTION 4. The Chairman of the Board. The Chairman of the Board shall be the Chief Executive Officer of the corporation and shall have the general control and management of the business and affairs of the corporation. When present, he or she shall preside at all meetings of the Board of Directors and of stockholders. He or she shall have such powers and duties as usually are incident to the Office of Chief Executive Officer and shall perform such other duties as may be imposed on him or her by law, the Articles of Organization and these By-Laws, or as may be assigned to him or her by the Board of Directors. The Chairman of the Board shall be a member of the Executive Committee. A vacancy occurring in the office of the Chairman of the Board shall be filled promptly by the Board of Directors. 29 -25- SECTION 5. The President. The President shall be the Chief Operating Officer of the corporation and shall have the general control and management of the operations of the corporation. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors and the stockholders. The President shall be subject to the direction of the Board of Directors and of the Chairman of the Board under whose direct supervision he or she shall be. The President shall perform such duties as may be imposed on him or her by law, the Articles of Organization and these By-Laws or as may be assigned to him or her by the Board of Directors or the Chairman of the Board. He or she shall have such powers and duties as are usually incident to the Office of President and Chief Operating Officer. The President shall be a member of the Executive Committee. A vacancy occurring in the office of the President shall be filled promptly by the Board of Directors. SECTION 6. The Vice Chairmen. Each Vice Chairman shall perform the duties imposed upon him or her by these By-Laws or assigned to him or her by the Board of Directors, the Chairman of the Board or the President. The Vice Chairmen shall be senior in rank to the Executive Vice Presidents and all other Vice Presidents including Senior Vice Presidents. A vacancy occurring in an office of a Vice Chairman may be filled by the Board of Directors. SECTION 7. The Treasurer. The Treasurer shall have custody and control over all funds and securities of the corporation, maintain full and adequate accounts of all moneys received and paid by him or her on account of the corporation and, subject to the control of the Board of Directors shall discharge all duties incident to the office of Treasurer. The Treasurer shall have authority, in connection with the normal business of the corporation, to sign or endorse negotiable instruments, contracts, leases and other documents. The Treasurer shall render an account of his or her transactions to the Board of Directors whenever and as often as may be requested. A vacancy in the office of Treasurer shall be filled promptly by the Board of Directors. 30 -26- SECTION 8. The Comptroller. The Comptroller shall be the chief accounting officer of the corporation. He or she shall establish accounting policy for the corporation, maintain complete and accurate books and records concerning its financial transactions, prepare its financial statements and, subject to the control of the Board of Directors, discharge all duties incident to the office of the Comptroller. The Comptroller shall have authority, in connection with the normal business of the corporation, to sign or endorse negotiable instruments, contracts, leases and other documents. A vacancy in the office of Comptroller shall be filed promptly by the Board of Directors. SECTION 9. The Clerk and the Secretary of the Board of Directors. The Clerk shall be the principal recording officer of the corporation. He or she shall be the Secretary of the Board of Directors and of the Executive Committee and of the Audit Committee. He or she shall attend and keep minutes of all proceedings at meetings of the stockholders, the Board of Directors, the Executive Committee and of each committee appointed by the Board of Directors which shall not have appointed any other person to serve as its secretary. The Clerk shall have charge of the corporate seal, minute books of the corporation and of such other corporate records, books and papers as the Board of Directors or the Executive Committee may order to be kept in his or her custody or under his or her control. The Clerk shall have authority to affix the seal of the corporation to all instruments executed under seal and to attest thereto. As required by law, these By-Laws or the Board of Directors, the Clerk shall give or cause to be given notice to the stockholders of each annual and special meeting and to the directors of each regular and special meeting of the Board of Directors except the first meeting after their election in each year; and the Clerk shall perform such other duties as may be imposed upon him or her by law, these By-Laws, the Board of Directors, the Audit Committee or the Chairman of the Board, under whose direct supervision he or she shall be. The Clerk shall be a resident of the Commonwealth of Massachusetts unless a resident agent has been appointed by the corporation pursuant to law to accept service of process. A vacancy in 31 -27- the office of Clerk shall be filled promptly by the Board of Directors. SECTION 10. The General Auditor. The General Auditor shall direct the internal audit activities of the corporation and shall provide the Audit Committee with objective and timely information to aid in measuring and evaluating the operations of the corporation. In the conduct of this responsibility, the General Auditor shall perform such duties as may be imposed upon him or her by these By-Laws, the Board of Directors and the Audit Committee. To assure the professional independence of the General Auditor, he or she shall report directly and solely to the Audit Committee. For purposes of internal administration, the General Auditor shall report to a senior officer of the corporation other than the Chairman of the Board or the President. A vacancy occurring in the office of the General Auditor shall be filled promptly by the Board of Directors. SECTION 11. The Vice Presidents. Each Vice President shall perform the duties imposed upon him or her by these By- Laws or assigned to him or her by the Board of Directors, the Chairman of the Board or the President. The Executive Vice President shall be senior in rank to all other Vice Presidents including Senior Vice Presidents. A vacancy occurring in an office of a Vice President may be filled by the Board of Directors. SECTION 12. The Assistant Treasurers and Assistant Clerks. Each Assistant Treasurer shall perform such duties as may be assigned to him or her by the Board of Directors, the Chairman of the Board, the President or the Treasurer. Each Assistant Clerk shall perform such duties as may be assigned to him or her by the Board of Directors, the Chairman of the Board, the President or the Clerk, and shall have the authority to affix the seal of the corporation to all instruments executed under seal and to attest thereto. SECTION 13. Resignation. Any officer may resign at any time by giving written notice to the Chairman of the Board, the President or the Clerk. The resignation of any officer shall take effect upon its receipt or on any later 32 -28- date specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be required to make it effective. SECTION 14. Vacancies. Except for those offices to be filled by the Board of Directors, the Chairman of the Board or the President may fill any vacancy occurring in any office by reason of death, resignation, retirement or other cause and may, in its discretion, leave offices unfilled for such period as it may determine. SECTION 15. Compensation of Officers, Employees and Other Agents. The Board of Directors shall have power to fix, and to vary from time to time, the compensation of all officers, employees and other agents of the corporation for their services as such. SECTION 16. Designated Officer. The term designated officer of the corporation, whenever it appears in a resolution or vote of the Board of Directors of the corporation shall refer to any one of the Chairman of the Board, the President, any Vice Chairman, the Treasurer, an Assistant Treasurer, the Comptroller, any Vice President of whatever rank, the Clerk, an Assistant Clerk, the Secretary of the Board of Directors, the Executive Counsel, the General Counsel and the General Auditor unless the resolution or vote of the Board of Directors otherwise provides. ARTICLE V STOCK SECTION 1. Stock Certificates. Each stockholder shall be entitled to a certificate or certificates of stock of the corporation in such form as the Board of Directors may from time to time prescribe. Each certificate shall be numbered and entered in the books of the corporation as it is issued, shall state the holder's name and the number and the class and the designation of the series, if any, of his or her shares, shall be signed by the Chairman, the President or a Vice President and by the Treasurer or an Assistant Treasurer and may, but need not, be sealed with 33 -29- the seal of the corporation. If any stock certificate is signed by a transfer agent, or by a registrar, other than a director, officer or employee of the corporation, the signatures of the officers of the corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed on any certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the corporation and delivered with the same effect as if he or she were such officer at the time of issue. Every certificate of stock which is subject to any restriction on transfer pursuant to the Articles of Organization, these By-Laws or any agreement to which the corporation is a party, or which is issued while the corporation is authorized to issue more than one class or series of stock, shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back the full text of the restriction or the preferences, voting powers, qualifications and special or relative rights of each class or series or, alternatively, a statement of the existence of such restriction and such preferences, powers, qualifications and rights and a statement that the corporation will furnish a copy of the restriction and such preferences, powers, qualifications and rights to the holder of such certificate upon written request and without charge. SECTION 2. Transfer of Stock. Subject to any applicable transfer restrictions at the time in force, shares of stock of the corporation shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives. Such transfer shall be effected by delivery of the old certificate, together with a duly executed assignment and power to transfer endorsed thereon or attached thereto and with such proof of the authenticity of the signature and such proof of authority to make the transfer as the corporation or its agents may reasonably require, to the person in charge of the stock and transfer books and ledgers or to such other person as the Board of Directors may designate, who shall thereupon cancel the old certificate and issue a new certificate. The corporation may treat the holder of record of any share or shares of stock as the owner of such stock, and shall not be bound to 34 -30- recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, or otherwise, save as expressly provided by law. SECTION 3. Transfer Agent and Registrar; Regulations. The corporation shall, if and whenever the Board of Directors shall so determine, maintain one or more transfer offices or agencies, each in charge of a transfer agent designated by the Board of Directors at which the shares of the capital stock of the corporation shall be transferable, and also one or more registry offices, each in charge of a registrar designated by the Board of Directors, where such shares of stock shall be registered, and no certificate for shares of the capital stock of the corporation in respect of which a registrar and transfer agent shall have been designated, shall be valid unless countersigned by such transfer agent and registered by such registrar. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. SECTION 4. Lost, Mutilated or Destroyed Certificates. No certificate for shares of stock of the corporation shall be issued in place of any certificate alleged to have been lost, mutilated or destroyed, except upon production of such evidence of the loss, mutilation or destruction and upon indemnification of the corporation and its agents to such extent and in such manner as the Board of Directors may prescribe and as permitted by law. SECTION 5. Record Date for Determination of Stockholders' Rights; Close of Transfer Books. The Board of Directors may fix in advance a date, not exceeding 60 days preceding the date of any meeting of stockholders, or the date fixed for the payment of any dividend, or the making of any other distribution to stockholders, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for the determination of the stockholders entitled to notice of, and to vote at, any 35 -31- such meeting and any adjournment thereof, or entitled to receive payment of any such dividend or distribution, or receive any such allotment of rights, or as the last day on which stockholders may effectively exercise rights in respect of any such change or conversion or exchange of capital stock, or as the last day on which they may effectively express such consent or dissent, and in such case only stockholders of record on the date so fixed shall be so entitled, notwithstanding any transfer of stock on the books of the corporation after the date fixed as aforesaid. In lieu of fixing such a record date or last day, the Board of Directors may close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed: (i) The record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the date next preceeding the day on which notice is given. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. SECTION 6. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Articles of Organization, may be declared by the Board of Directors at any regular or special meeting, payable in cash, in property, or in shares of the capital stock, subject to the limitations, if any, imposed by law or the Articles of Organization. Before payment of any dividends, there may be set aside out of any funds of the corporation available for dividends, such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and 36 -32- the Board of Directors may modify or abolish any such reserve. SECTION 7. Control Share Acquisitions. Until such time as this Section 7 shall be repealed or these By-Laws shall be amended to provide otherwise, in each case in accordance with Article VII of these By-Laws, the provisions of Chapter 110D of the Massachusetts General Laws shall not apply to "control share acquisitions" of the corporation within the meaning of said Chapter 110D. ARTICLE VI GENERAL PROVISIONS SECTION 1. Offices. The principal office of the corporation shall be in the City of Boston, County of Suffolk, Commonwealth of Massachusetts. The corporation may also have offices at such other place or places within or without the Commonwealth of Massachusetts as the Board of Directors may from time to time determine. SECTION 2. Seal. The seal of the corporation shall be in the following form: (Image omitted is a circle with the words "Bank of Boston Corporation" inside the outer edge, the date "1970" in the center and the word "Massachusetts" below the date) When authorized by the Board of Directors and to the extent permitted by law and these By-Laws, a facsimile of the corporate seal may be affixed or reproduced. SECTION 3. Fiscal Year. The fiscal year of the corporation shall be coincident with the calendar year unless another fiscal year shall have been fixed by the Board of Directors. SECTION 4. Annual Reports. The Chairman of the Board or the President shall make and present to the annual meeting of stockholders a report showing the aggregate amounts of assets and liabilities of the corporation as of the end of the last preceding fiscal year. A copy of such report shall be mailed to each stockholder of the 37 -33- corporation. Such report may also contain such other information and may be in such detail as either the Chairman of the Board or the President may determine in his or her absolute discretion. SECTION 5. Execution of Instruments. All contracts, conveyances, promises or orders for the payment of money or other obligations authorized by the Board of Directors to be executed or endorsed by an officer of the corporation in its behalf shall be executed or endorsed by the Chairman of the Board, the President, any Vice Chairman, any Vice President, the Treasurer and the Clerk, except as the Board of Directors may generally or in particular cases otherwise determine and except that checks drawn on any dividend and special accounts may bear the facsimile signature, affixed thereto by a mechanical device, of such officer or agent as the Board of Directors shall authorize, and except also that bonds, notes, debentures or other evidences of indebtedness authenticated by a manual signature on behalf of a trustee or an authenticating agent appointed by the Board of Directors may bear such facsimile signature or signatures of such officer or officers of the corporation as the Board of Directors shall authorize. SECTION 6. Voting of Securities. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President, each Vice Chairman, the Treasurer, each Executive Vice President, each Senior Vice President, each Vice President and the Clerk, each acting alone, shall have authority on behalf of the corporation (a) to attend and act and vote in person for the corporation and as its duly appointed agent and attorney-in-fact at any meeting of the holders of securities or creditors of any person (as hereinafter defined) any securities of whom are owned or held with power to vote by the corporation or any indebtedness of whom is owed to the corporation, (b) to appoint, by an instrument in writing, a proxy or several proxies to attend and act and vote for the corporation at any such meeting and (c) to execute and deliver in the name and on behalf of the corporation any consent or waiver by the corporation as a security holder or creditor of any such person. As used in this Section, the word "person" includes a natural person, a corporation, a company, a partnership, a voluntary association, a proprietorship, a 38 -34- trust, an estate, a government (national, state, regional or local) or a department or agency thereof, and any other form of legal entity however designated and wherever formed or existing. Each officer named in this Section and each person designated by any such officer as a proxy for this corporation shall have and may exercise at any such meeting any and all rights and powers incident to the ownership of such securities or indebtedness which an owner would have if personally present. SECTION 7. Powers of Attorney. The Chairman of the Board, the President, each Vice Chairman, or any Executive Vice President may from time to time and at any time by power of attorney appoint any person (as defined in Section 6 of this Article VI) or persons to be the attorney or attorneys of the corporation for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board of Directors) and for such period and subject to such conditions as the officer making such appointment may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with such attorney or attorneys as the officer making such appointment may think it and may also authorize any such attorney to appoint a substitute or substitutes and to delegate all or any of the powers, authorities and discretions vested in any such attorney or attorneys, except such power of substitution (without prejudice to the power of such attorney or attorneys to exercise concurrently any of the powers delegated and to revoke or vary any such appointment). The Chairman of the Board, the President, each Vice Chairman, or any Executive Vice President may at any time revoke any power of attorney executed by any of those officers currently or formerly in office, provided that no such revocation shall invalidate any act performed by the attorney or attorneys (or any substitute or substitutes appointed thereunder) in the exercise of the powers conferred thereby between the revocation thereof and the time such revocation becomes known to the attorney or attorneys, or to any such substitute or substitutes, and any such power of attorney shall at all times be conclusively binding on the corporation and its successors in favor of third parties who have not received notice of the revocation thereof. 39 -35- SECTION 8. Issue of Debt Securities and Other Obligations. The Board of Directors shall have the power to authorize and cause to be executed and issued bonds, notes, debentures, warrants, guaranties or other obligations of the corporation, secured or not secured, upon such terms, in such manner and upon such conditions as may be fixed or approved by vote of the Board of Directors or of the Executive Committee prior to the issue thereof. SECTION 9. Corporate Records. The original, or attested copies, of the Articles or Organization, By-Laws and records of all meetings of incorporators and stockholders, and stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in the Commonwealth of Massachusetts at the principal office of the corporation, or at an office of its Clerk, its resident agent or its transfer agent. Such copies and records need not all be kept in the same office. They shall be available at all reasonable times for inspection by any stockholder for any proper purpose. They shall not be available for inspection to secure a list of stockholders or other information for the purpose of selling such list or information or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the corporation. SECTION 10. Indemnification of Directors, Officers and Others. (a) The corporation shall, to the extent legally permissible, indemnify each of the directors and officers of the corporation against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by such director or officer in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which such director or officer may be involved or with which such director or officer may be threatened, while in office or thereafter, by reason of such director or officer being or having been such a director or officer of the corporation or by reason of such director or officer serving or having served at the request of the corporation 40 -36- as a director, officer or trustee of a wholly owned subsidiary of the corporation or having served in any capacity with respect to any employee benefit plan maintained by the corporation or any wholly owned subsidiary of the corporation, except with respect to any matter as to which such director or officer shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation or of such subsidiary or, to the extent that such matter relates to service with respect to any such employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such indemnification shall be ordered by a court or unless such compromise shall be approved as in the best interest of the corporation, after notice that it involves such indemnification: (i) by a disinterested majority of the directors of the corporation then in office; or (ii) by a majority of the disinterested directors of the corporation then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such director or officer appears to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation; or (iii) by the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested director or officer. Expenses, including counsel fees, reasonably incurred by any director or officer of the corporation in connection with the defense or disposition of any such action, suit or other proceeding shall be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such director or officer to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this paragraph (a). If in an action, suit or proceeding brought by or in the right of the corporation, a director of the corporation is held not liable for monetary damages, whether because that director 41 -37- is relieved of personal liability under the provisions of Article 6 of the Articles of Organization of the corporation or otherwise, that director shall be deemed to have met the standard of conduct set forth above and to be entitled to indemnification for expenses reasonably incurred in the defense of such action, suit or proceeding. (b) The corporation may indemnify each person who serves at the request of the corporation as a director, officer or trustee of any wholly owned subsidiary of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by such person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which such person may be involved or with which such person may be threatened, while in office or thereafter, by reason of such person being or having been a director, officer or trustee of such subsidiary or having acted in any such capacity with respect to any such employee benefit plan, except with respect to any matter as to which such person shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation or of such subsidiary or, to the extent that such matter relates to service with respect to any such employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan. Expenses, including counsel fees, reasonably incurred by any such person in connection with the defense or disposition of any such action, suit or other proceeding may be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such person to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this Section. Except as hereinafter provided in this paragraph (b), indemnification under this paragraph (b) shall be made by the corporation only as authorized by the Board of Directors of the corporation in each specific case. 42 -38- To the extent that any person who serves at the request of the corporation as a director, officer of trustee of any wholly owned subsidiary of the corporation or in any capacity with respect to any employee benefit plan maintained by the corporation or any such subsidiary has been wholly successful in the defense of any action, suit or proceeding referred to above in this paragraph (b) or of any claim or issue therein, such person shall, without further authorization of the Board of Directors of the corporation, be indemnified by the corporation as hereinabove provided upon presentation to the Board of Directors of the corporation of a claim for indemnification and evidence reasonably satisfactory to the Board of Directors of the corporation of such wholly successful defense. As used in this paragraph (b) the term "wholly successful" means that the action, suit or proceeding or the claim or issue has been finally terminated without a finding of liability or guilt against the person seeking indemnification and the time for taking an appeal or other court or administrative action therein has expired or, in the case of a threatened proceeding, a reasonable period of time, determined by independent legal counsel selected by the Board of Directors of the corporation, has elapsed since the threat was made without the proceeding having been instituted and, in either case, without any payment or promise having been made to induce a settlement or compromise. (c) As used in this Section, the terms "director", "officer" and "trustee" include the relevant individual's heirs, executors and administrators, an "interested" director or officer is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending, and a "wholly owned subsidiary" means any corporation, business trust, partnership or other business entity of which the corporation owns directly or through one or more wholly owned subsidiaries all of the outstanding capital stock or other shares of beneficial interest (other than directors' qualifying shares) entitled to vote generally. All directors, officers and trustees of wholly owned subsidiaries of the corporation and persons who serve in any capacity with respect to any employee benefit plan maintained by any such subsidiary shall be deemed to serve 43 -39- or to have served in such capacity at the request of the corporation. The indemnification by the corporation provided for in his Section l0 shall not be exclusive of or affect any other rights to which any director, officer, trustee or pension plan fiduciary or other person may be entitled. Nothing contained in this Section shall either limit the power of the corporation to indemnify corporate personnel other than directors and officers or affect any rights to indemnification by the corporation to which corporate personnel other than directors and officers of the corporation and persons who serve at the request of the corporation as directors, officers or trustees of wholly owned subsidiaries of the corporation or in any capacity with respect to any employee benefit plan maintained by any such subsidiary may be entitled by contract or otherwise under law. ARTICLE VII AMENDMENTS SECTION 1. General. These By-Laws may be amended, added to or repealed in whole or in part (a) by vote of the stockholders at a meeting where the substance of the proposed amendment is stated in the notice of the meeting, or (b) by vote of a majority of the entire Board, except that no amendment may be made by the Board of Directors on matters reserved to the stockholders by law or the Articles of Organization or which changes the provisions of these By-Laws relating to the removal of directors or to the requirements for amendment of these By-Laws. Notice of any amendment, addition or repeal of any By-Law by the directors stating the substance of such action shall be given to all stockholders entitled to vote on amending the By-Laws not later than the time when notice is given of the meeting of stockholders next following such action by the Board of Directors. Any By-Law adopted by the directors may be amended or repealed by the stockholders. ARTICLE VIII EMERGENCY BY-LAWS SECTION 1. Effective Period. The emergency By-Laws set forth in this Article VIII shall be effective only during the continuance of a national emergency proclaimed 44 -40- by the President of the United States of America or by other governmental authority following an attack on the United States of America or another catastrophic event as a result of which a regular quorum of the Board of Directors or of the Executive Committee cannot readily be convened. During any such emergency, the provisions of this Article VIII shall supersede any different provisions contained in the preceding Articles of these By-Laws. SECTION 2. Meetings of the Board of Directors. During any such emergency, a meeting of the Board of Directors may be called by any director or officer who deems it necessary. The meeting shall be held at such time or place as the person calling the meeting may specify in giving notice thereof. Such notice may be given in writing or orally and by such means of communication (including announcement by radio) as in the judgment of the person giving the same are then feasible to reach as many of the directors as it is reasonably possible to reach under the prevailing circumstances. Two directors shall constitute a quorum for the transaction of business at any such meeting. SECTION 3. Emergency Location of Head Office. With effect during any such emergency, the Board of Directors may change the location of the Head Office of the corporation or designate one or more alternative locations or authorize one or more officers to do so. SECTION 4. Preservation of Continuity of Management. In order to preserve continuity of management of the corporation during any such emergency, the Board of Directors may provide and from time to time change lines of succession in management in the event that during such emergency any or all of the officers shall die or be missing or for any reason be rendered incapable of discharging his or her or their respective duties. SECTION 5. Immunity. No director, officer or employee of the corporation acting in accordance with these emergency By-Laws shall be liable for any act or omission except willful misconduct. SECTION 6. Amendment of Emergency By-Laws. The provisions of this Article VIII can be amended or repealed 45 -41- during any emergency by resolution of the directors or the shareholders but no such amendment or repeal shall prejudice any rights or immunities acquired by any director, officer or employee under Section 5 of this Article VIII in respect of action taken or omitted by him or her prior to such amendment or repeal. Any such amendment may make such further or different provisions as may be deemed to be practical and necessary to deal with the circumstances of the emergency. EX-10.C 4 PERFORMANCE RECOGNITION OPPORTUNITY PLAN 1 EXHIBIT 10(c) Amendment To The Bank of Boston and Its Subsidiaries Performance Recognition Opportunity Plan The Bank of Boston and Its Subsidiaries Performance Recognition Opportunity Plan is hereby amended effective January 27, 1994 as follows: 1) Section 6.3.2 of the Plan is hereby amended in its entirety as follows: "6.3.2 Approval of Awards. After all the steps contemplated in 6.3.1 have been completed, the Office of the Chairman shall approve the schedule of Eligible Employees receiving awards and the amount of awards for each, except that (i) the Committee shall approve the amount of the awards, if any, for those senior executives of the Participating Subsidiaries so designated by it from time to time, and (ii) the Committee shall recommend to the Board of Directors for approval the amount of the awards, if any, for each of the Chairman of the Board of Directors, the President and any Vice Chairman of the Board of Directors or such other officer or officers as the Committee may recommend and that the Board does so approve. Awards may be approved by the Office of the Chairman, the Committee and the Board of Directors for up to as many as all or as few as none of the persons listed on the schedule of Eligible Employees and awards shall be in such amounts as the Office of the Chairman, the Committee and the Board of Directors, respectively, approves." 2) Any and all references in the Plan to "Office of the CEO" shall be changed to Office of the Chairman. EX-10.H 5 LONG TERM STOCK INCENTIVE PLAN 1 EXHIBIT 10(h) BANK OF BOSTON CORPORATION 1991 Long-Term Stock Incentive Plan (As amended through January 27, 1994) 1. Purpose. The Bank of Boston Corporation 1991 Long-Term Stock Incentive Plan (the "Plan") has been adopted to encourage and create significant ownership of the Common Stock of the Corporation by key officers and employees of the Corporation and its Affiliates. Additional purposes of the Plan include providing a meaningful incentive to Participants to make substantial contributions to the Corporation's future success, enhancing the Corporation's ability to attract and retain persons who will make such contributions, and ensuring that the Corporation has competitive compensation opportunities for such key officers and employees. By meeting these objectives, the Plan is intended to benefit the interests of the stockholders of the Corporation. 2. Definitions. As used herein, the following words or terms have the meanings set forth below. The masculine gender is used throughout the Plan but is intended to apply to members of both sexes. 2.1. "Affiliate" means any business entity that is directly or indirectly controlled by the Corporation or any 2 - 2 - entity in which the Corporation has a significant equity interest, as determined by the Committee or the Board of Directors. 2.2. "Award" means any Option, Stock Appreciation Right or Restricted Stock granted under the Plan. 2.3. "Board of Directors" means the Board of Directors of the Corporation, except that, whenever action is to be taken under the Plan with respect to a Reporting Person, "Board of Directors" shall mean only such directors who are disinterested persons within the meaning of Rule 16b-3 under the Exchange Act or any successor rule. 2.4. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. 2.5. "Committee" means the Compensation and Nominating Committee of the Board of Directors. "Committee," whenever action is to be taken under the Plan with respect to a Reporting Person, shall mean only such members who are disinterested persons within the meaning of Rule 16b-3 under the Exchange Act or any successor rule. To the extent that the Committee delegates its power to make Awards as permitted by Section 4.1, all references in the Plan to the Committee's authority to make Awards and determinations with respect thereto shall be deemed to include the Committee's delegate or delegates. 2.6. "Common Stock" or "Stock" means the Common Stock of the Corporation. 3 - 3 - 2.7. "Corporation" means Bank of Boston Corporation, a corporation established under the laws of the Commonwealth of Massachusetts. 2.8. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner determined by the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 2.9. "Disability" means a physical or mental condition of such a nature that it would qualify a Participant for benefits under the long-term disability insurance plan of The First National Bank of Boston or any successor plan. 2.10. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. 2.11. "Fair Market Value," in the case of a share of Common Stock on a particular day, means the closing price of the Common Stock for that day as reported in the "NYSE-Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event "NYSE-Composite Transactions" cease to be reported, the Committee shall adopt some other appropriate method for determining Fair Market Value. 2.12. "Incentive Stock Option" means an Option which is intended to satisfy the requirements of Section 422(b) of 4 - 4 - the Code or any successor provision. 2.13. "Nonstatutory Stock Option" means an Option which is not intended to qualify as an Incentive Stock Option. 2.14. "Option" means an Incentive Stock Option or a Nonstatutory Stock Option. 2.15. "Participant" means an individual selected by the Committee or the Board of Directors to receive an Award under the Plan. 2.16. "Reporting Person" means a person required to file reports under Section 16(a) of the Exchange Act or any successor statute. 2.17. "Restricted Stock" means shares of Common Stock awarded to a Participant, subject to such forfeiture provisions or restrictions on transfer, if any, as may be established by the Committee or the Board of Directors. 2.18. "Retirement" means termination of employment with the Corporation or any Affiliate if such termination of employment constitutes normal retirement, early retirement, disability retirement or other retirement as provided for at the time of such termination of employment under the applicable retirement program then maintained by the Corporation or the Affiliate, provided that the Participant does not continue in the employment of the Corporation or any Affiliate and provided further that such termination does not constitute a Termination for Cause. 2.19. "Stock Appreciation Right" or "SAR" means a right to receive the excess, if any, of the Fair Market Value of a 5 - 5 - share of Common Stock on the date the Stock Appreciation Right is exercised over the grant price of the SAR. 2.20. "Termination for Cause" means the termination of a Participant's employment due to any act which, in the discretion of the Committee or the Board of Directors, as the case may be, is deemed inimical to the best interests of the Corporation or any Affiliate, including, but not limited to: (i) willful and gross misconduct in respect of the Participant's duties for the Corporation or the Affiliate, (ii) conviction of a felony or perpetration of a common law fraud, (iii) willful failure to comply with applicable laws or regulations with respect to the execution of the Corporation's or the Affiliate's businesses or (iv) theft, fraud, embezzlement, dishonesty or other conduct which has resulted or is likely to result in material economic or other damage to the Corporation or any Affiliate. 3. Effective Date and Term. The Plan shall become effective upon its approval by the Corporation's stockholders, and Awards may be granted under the Plan from and after the date of such approval. No Awards may be made under the Plan after December 31, 1996, but Awards theretofore granted may extend beyond that date. 4. Administration. 4.1. The Plan shall be administered by the Committee. Subject to the provisions set forth herein, the Committee shall have full authority to determine the provisions of Awards, to interpret the terms of the Plan and of Awards 6 - 6 - made under the Plan, to adopt, amend and rescind rules and guidelines for the administration of the Plan and for its own acts and proceedings and to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers who are also directors of the Corporation the power to make Awards to Participants who are not Reporting Persons at the time of such Awards and all determinations under the Plan with respect thereto, provided that the Committee shall fix the maximum amount of Awards for such Participants as a group. 4.2. Notwithstanding Section 4.1 and subject to the provisions set forth herein, the Board of Directors shall have full authority to determine the provisions of Awards made under the Plan to (i) the Chairman of the Board of Directors, President and any Vice Chairman of the Board of the Board of Directors and (ii) any other officer or officers that the Board of Directors, upon recommendation of the Committee, shall designate. 4.3. The decision of the Committee or the Board of Directors on any matter as to which the Committee or the Board of Directors is given authority under Sections 4.1 and 4.2 above shall be final and binding on all persons concerned. 7 - 7 - 5. Shares Subject to the Plan. 5.1. The maximum number of shares of Common Stock that will be available for issuance under the Plan shall be 7,447,749, subject to adjustment in accordance with the provisions of Section 5.3. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. 5.2. If any Award in respect of shares of Common Stock expires or is terminated unexercised or is forfeited for any reason or settled in a manner that results in fewer shares outstanding than were initially awarded, including without limitation the surrender of shares as full or partial payment for the Award or any tax obligation thereon, the shares subject to such Award or so surrendered, as the case may be, to the extent of such expiration, termination, forfeiture or decrease, shall remain available for issuance under the Plan. 5.3. In the event of a stock dividend, stock split or other change in corporate structure or capitalization affecting the Common Stock or any other transaction (including, without limitation, an extraordinary cash dividend) which, in the determination of the Committee or the Board of Directors, affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under the Plan, then the Committee or the Board of Directors shall equitably adjust any or all of (i) the number and kind of 8 - 8 - shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards, and (iii) the Option or grant price with respect to any of the foregoing, provided that the number of shares subject to any Award shall always be a whole number. In the event of any merger, consolidation, dissolution or liquidation of the Corporation, the Committee or the Board of Directors, in its sole discretion, may, as to any outstanding Awards, make such substitution or adjustment in the aggregate number of shares reserved for issuance under the Plan and in the number and purchase price (if any) of shares subject to such Awards as it may determine, make outstanding Awards fully exercisable, or amend or terminate such Awards upon such terms and conditions as it shall provide (which, in the case of the termination of the vested portion of any Award, shall require payment or other consideration which the Committee or the Board of Directors deems equitable in the circumstances). 6. Eligibility for Awards. Any officer or employee of the Corporation or its Affiliates who, in the opinion of the Committee or the Board of Directors, is in a position to have a significant effect upon the Corporation's business and consolidated earnings, shall be eligible to receive an Award under the Plan. 7. Grant of Awards. 7.1. From time to time while the Plan is in effect, the Committee or the Board of Directors pursuant to Section 4.2, 9 - 9 - may, in the absolute discretion of each, select from among the persons eligible to receive Awards (including persons to whom Awards were previously granted) those persons to whom Awards are to be granted. 7.2. The Committee or the Board of Directors, as the case may be, shall, in the absolute discretion of each, determine the number of shares of Common Stock or SARs to be subject to each Award made by it under the Plan. 8. Options. 8.1. Incentive Stock Options or Nonstatutory Stock Options. Options granted under the Plan may be either Incentive Stock Options or Nonstatutory Stock Options, as the Committee or the Board of Directors, as the case may be, shall determine at the time of each grant of Options hereunder. The terms and conditions of Incentive Stock Options shall be subject to and comply with Section 422(b) of the Code or any successor provision, and any regulations thereunder. 8.2. Option Price. The Option price per share of Common Stock, with respect to each Option, shall not be less than the Fair Market Value per share at the time the Option is granted. 8.3. Period of Options. An Option shall be exercisable during such period of time as the Committee or the Board of Directors may specify, subject, in the case of Incentive Stock Options, to any limitation required by the Code. It is contemplated that the Committee or the Board of Directors 10 - 10 - will normally provide that an Option shall not be exercisable after the expiration of ten years from the date the Option is granted. 8.4. Exercise of Options. Each Option shall be made exercisable at such time or times as the Committee or the Board of Directors shall determine. It is contemplated that the Committee or the Board of Directors will normally provide that the right to exercise an Option will accrue immediately with respect to 50 percent of the number of shares of Common Stock subject to the Option and that the right to exercise the Option with respect to the balance of the shares subject thereto will accrue on the first anniversary of the date of grant. However, the Committee or the Board of Directors may, in its discretion, in any case provide that the Option will be exercisable immediately with respect to all the shares of Common Stock subject to the Option or that the right to exercise the Option will accrue in different installments and at different times from those set forth above. In the case of an Option made exercisable in installments, the Committee or the Board of Directors may later determine to accelerate the time at which one or more of such installments may be exercised. The Committee or the Board of Directors may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state tax or securities laws, as it considers necessary or advisable. 11 4 - 11 - 8.5. Payment for and Delivery of Stock. The shares of Stock purchased on any exercise of an Option granted hereunder shall be paid for in full in cash at the time of such exercise or, to the extent permitted by the Committee or the Board of Directors, by delivery of shares of Common Stock, valued at their Fair Market Value on the date of delivery, or such other lawful consideration as the Committee or the Board of Directors may determine. The Committee or the Board of Directors may provide for the automatic award of an Option upon the delivery of shares to the Corporation in payment of another Option for up to the number of shares delivered to the Corporation in payment of such other Option. 8.6. Termination of Employment. 8.6.1. Death during Employment. If a Participant dies during employment after attaining age 62 and at a time when he is entitled to exercise an Option, then at any time or times within three years after death (or such greater or lesser period after death as may be specified in the documentation evidencing the Option) such Option may be exercised in part or in full as to all of the shares subject to the Option. If a Participant dies during employment prior to attaining age 62 and at a time when he is entitled to exercise an Option, then at any time or times within one year after death (or such greater or lesser period after death as may be specified in the documentation evidencing the Option) such Option may be exercised, but only as to any 12 - 12 - or all of those shares which the Participant was entitled to purchase immediately prior to his death. In either case, Options exercisable after death may be exercised by the Participant's Designated Beneficiary, and except as so exercised shall expire at the end of the specified post-death exercise period. In no event, however, may any Option granted under the Plan be exercised after the expiration of the Option exercise period established at the time of grant. 8.6.2. Retirement or Disability. In the event of a Participant's Retirement or Disability at a time when he is entitled to exercise an Option, then at any time or times within the period determined under (a) or (b) below, whichever is applicable, such Option may be exercised as follows: (a) In the case of Retirement or Disability after attaining age 62, then within three years after Retirement or Disability (or such greater or lesser period after Retirement or Disability as may be specified in the documentation evidencing the Option) the Participant may exercise such Option in full or in part as to all of the shares subject to the Option. If the Participant dies within this three-year (or other specified) post-Retirement or post-Disability exercise period, his Option may be exercised by his Designated Beneficiary, to the same extent as if the deceased Participant had survived, during a period equal to the greater of one year from the date of his death or the remainder of such three-year or other specified post- 13 - 13 - Retirement or post-Disability exercise period. (b) In the case of Retirement or Disability prior to attaining age 62, then within one year after Retirement or Disability (or such greater or lesser period after Retirement or Disability as may be specified in the documentation evidencing the Option) the Participant may exercise such Option only as to those shares which he was entitled to purchase immediately prior to his Retirement or Disability. If the Participant dies within this one-year (or other specified) post- Retirement or post-Disability exercise period, his Option may be exercised by his Designated Beneficiary, to the same extent as if the deceased Participant had survived, during the greater of one year from the date of his death or, if a post-Retirement or post-Disability exercise period greater than one year was specified in the Option documentation, the remainder of such longer period. Except as exercised within the applicable period described above, each Option shall expire at the end of such period. In no event, however, may any Option granted under the Plan be exercised after the expiration of the Option exercise period established at the time of grant. 8.6.3. Other Termination of Employment. If the employment of a Participant terminates for any reason other than his death, Retirement or Disability, all Options held by the Participant may be exercised following such termination of employment only to the extent if any, 14 - 14 - approved by the Committee or the Board of Directors and, except to such extent, shall expire upon such termination. If the Committee or the Board of Directors so decides, an Option may provide that a leave of absence granted by the Corporation or an Affiliate is not a termination of employment for the purpose of this subsection 8.6.3, and in the absence of such a provision the Committee or the Board of Directors may in any particular case determine that such a leave of absence is not a termination of employment for such purpose. 9. Stock Appreciation Rights. 9.1. Grant Forms of SARs. Subject to the provisions of the Plan, the Committee or the Board of Directors may award SARs related to an Option (at or after the award of the Option, subject to the provisions of Section 3), or alone and unrelated to an Option. 9.2. Grant Price. The Committee or the Board of Directors shall establish the grant price of an SAR at the time the SAR is granted, which price shall not be less than the Fair Market Value of the Common Stock at the time of grant. 9.3. Payment of SARs. SARs may be payable in cash, shares of Common Stock or a combination of the two, as provided by the Committee or the Board of Directors. Shares issued on the settlement of the exercise of SARs shall be valued at their Fair Market Value on the date of exercise. 15 - 15 - 9.4. Termination of Employment. The Committee or the Board of Directors shall determine the effect on an SAR of the death, Retirement, Disability or other termination of employment of a Participant and the extent to which, and the period during which, the Participant or the Participant's legal representative, guardian or Designated Beneficiary may receive payment of such an SAR. 10. Restricted Stock. 10.1. Restrictions on Shares. Subject to the provisions of the Plan, the Committee or the Board of Directors may award shares of Restricted Stock, alone or in combination with other Awards under the Plan. Such shares may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Committee or the Board of Directors, during the period, if any, that such shares are subject to forfeiture or, to the extent provided in Section 10.2, during a period after such shares are delivered to the Participant free of any risk of forfeiture. 10.2. Lapse of Restrictions. Except as provided in this Section 10.2 or in Section 10.4 below, shares of Restricted Stock granted as of any date shall be subject to the forfeiture restrictions described in Section 10.5 and shall become free of such restrictions in the following installments: one-third on the third anniversary of the date of grant, an additional one-third on the fourth anniversary of the date of grant, and the remaining one-third on the fifth anniversary of the date of grant. Notwithstanding the 16 - 16 - lapse of forfeiture restrictions as of any anniversary of the date of grant, 50% of the shares freed of such restrictions as of such date may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Committee or the Board of Directors, until the earliest of (i) ten years after the date of grant, (ii) the date on which the Participant attains age 55 or (iii) the date of the Participant's death or Disability. Notwithstanding the provisions of Section 10.1 or this Section 10.2, the Committee or the Board of Directors may, in its discretion, award shares of Restricted Stock having different terms from those set forth above, including, without limitation, shares which are nonforfeitable or freely transferable upon grant and shares having restrictions which lapse upon the attainment of specified performance goals or targets, as determined by the Committee or the Board of Directors. 10.3. Participants' Rights in Restricted Stock. Shares of Restricted Stock shall be evidenced in such manner as the Committee or the Board of Directors may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and, except as otherwise determined by the Committee or the Board of Directors, shall be delivered to the Participant upon the lapse of forfeiture restrictions with respect to such shares. Except as otherwise provided by the Committee or the Board of Directors, during the period that shares of 17 - 17 - Restricted Stock are subject to forfeiture and after such shares are delivered to the Participant free of any risk of forfeiture, dividends with respect to any such shares shall be paid to, and voting rights with respect to any such shares shall be vested in, the Participant. The Committee or the Board of Directors may provide that the payment of any dividends payable with respect to shares of Restricted Stock that are subject to forfeiture may be deferred by the Participant, with or without interest. 10.4. Death, Retirement or Disability; Other Terminations of Restrictions 10.4.1. Death. Except as otherwise provided by the Committee or the Board of Directors, if a Participant dies, then any shares of Restricted Stock awarded pursuant to the Plan that have not been forfeited shall be delivered to the Participant's Designated Beneficiary free of any restrictions (other than restrictions that may be required under federal or state securities laws). 10.4.2. Retirement or Disability. Except as otherwise provided by the Committee or the Board of Directors, in the event of a Participant's Retirement or Disability, then any shares of Restricted Stock awarded pursuant to the Plan that have not been forfeited shall be delivered to the Participant free of any restrictions (other than restrictions that may be required under federal or state securities laws). 18 - 18 - 10.4.3. Other Terminations of Restrictions. In addition to the provisions for the termination of restrictions set forth in subsections 10.4.1 and 10.4.2, the Committee or the Board of Directors may terminate or modify restrictions on Restricted Stock at any time to the extent it so determines. 10.5. Forfeiture of Awards. If a Participant terminates employment for any reason other than one of the reasons specified in subsections 10.4.1 or 10.4.2, then any shares of Restricted Stock which are then subject to forfeiture shall thereupon automatically be forfeited to the Corporation. For purposes of this Section 10.5, a Participant shall not be considered to have terminated employment if he is employed, by the Corporation or any Affiliate or if he is on a leave of absence from the Corporation or any Affiliate under circumstances which the Committee or the Board of Directors determines should not result in forfeiture under the Plan. 10.6. Consideration for Restricted Stock. Shares of Restricted Stock shall be issued for no cash consideration or such minimum consideration as may be required under applicable law. 11. General Provisions Applicable to Awards. 11.1. Non-transferability of Awards. No Award under the Plan may be transferred by the Participant otherwise than by will or by the laws of descent and distribution, and during the Participant's lifetime, Options or SARs may be exercised 19 - 19 - only by the Participant or by the Participant's guardian or legal representative. 11.2. Documentation of Awards. Each Award under the Plan shall be evidenced by a writing delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee or the Board of Directors considers necessary or advisable to achieve the purposes of the Plan or comply with applicable tax and regulatory laws and accounting principles. The Committee or the Board of Directors need not require the execution of any instrument or acknowledgement of notice of a Grant under the Plan, in which case the acceptance of such an Award by the respective Participant will constitute agreement to the terms and conditions of the Award. 11.3. Committee or Board of Director Discretion. Each type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Committee or the Board of Directors need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee or the Board of Directors at the time of award or at any time thereafter. 20 - 20 - 11.4. Tax Withholding. The Committee or the Board of Directors shall require, on such terms as it deems necessary, that the Participant pay to the Corporation, or make other satisfactory provision for payment of, any federal, state or local taxes required by law to be withheld in respect of Awards under the Plan. In the Committee's or the Board of Directors' discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of delivery. The Corporation and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. 11.5. Foreign Nationals. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee or the Board of Directors considers necessary or advisable to achieve the purposes of the Plan or comply with applicable laws. Notwithstanding the provisions of this Section 11.5, Awards to any such individuals who are Reporting Persons shall be made in accordance with the other provisions of the Plan, except as otherwise permitted by Rule 16b-3 under the Exchange Act or any successor rule. 21 - 21 - 11.6. Amendment of Award. The Committee or the Board of Directors may amend, modify, terminate or waive any condition or provision of any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonstatutory Stock Option; provided, however, that the Committee or the Board of Directors may not (except in accordance with Section 5.3) increase the number of shares subject to any outstanding Award or decrease the Option or award price of the Award. The Participant's consent to any such action shall be required unless the Committee or the Board of Directors determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 12. Miscellaneous. 12.1. No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment. The Corporation and its Affiliates expressly reserve the right at any time to terminate the employment of a Participant free from any liability or claim under the Plan, except as may be expressly provided in the applicable Award. 12.2. No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a EX-10.L 6 LONG TERM DISABILITY PLAN 1 EXHIBIT 10(L) Description of Supplemental Long Term Disability Plan Under the Bank's Group Long Term Disability Insurance Policy (the "Policy"), employees may be entitled to disability benefits of 60% of base salary, subject to certain Policy dollar limits. The Bank has made available to its senior executives, including Messrs. Stepanian and Gifford, a supplemental long term disability plan which provides a disability benefit equal to the benefit not covered under the Policy because of Policy dollar limits, thus enabling the senior executives to receive a long term disability benefit of 60% of base salary. EX-10.M 7 DIRECTORS STOCK AWARD PLAN 1 EXHIBIT 10(m) BANK OF BOSTON CORPORATION Director Stock Award Plan (Effective May 1, 1993) 1. Purpose. The Bank of Boston Corporation Director Stock Award Plan (the "Plan") has been adopted to assist in attracting and retaining non-employee members of the Corporation's Board of Directors and to promote identification of their interests with those of stockholders of the Corporation. 2. Definitions. As used herein, the following words or terms have the meanings set forth below: 2.1 "Affiliate" means any business entity that is directly or indirectly controlled by the Corporation or any entity in which the Corporation has a significant equity interest, as determined by the Director of Human Resources. 2.2 "Award" means the Shares awarded under the Plan. 2.3 "Award Date" means January 1 and July 1 of each year, commencing on July 1, 1993. 2.4 "Award Period" means a six-month period immediately preceding each Award Date; provided, however, that the initial Award Period under the Plan shall begin on May 1, 1993 and shall end on June 30, 1993. 2.5 "Board of Directors" means the Board of Directors of the Corporation. 2.6 "Common Stock" means the Common Stock, par value $2.25 per share, of the Corporation. 2 -2- 2.7 "Corporation" means Bank of Boston Corporation, a corporation established under the laws of the Commonwealth of Massachusetts. 2.8 "Director of Human Resources" means the Director of Human Resources of the Corporation. 2.9 "Fair Market Value," in the case of a share of Common Stock on a particular day, means the closing price of the Common Stock for that day as reported in the "New York Stock Exchange Composite Transactions" section of the Eastern Edition of The Wall Street Journal, or if no prices are quoted for that day, for the last preceding day on which such prices of Common Stock are so quoted. In the event "New York Stock Exchange Composite Transactions" cease to be reported, the Director of Human Resources shall adopt some other appropriate method for determining Fair Market Value. 2.10 "Full Award" means a number of Shares (rounded to the nearest whole share) having an aggregate Fair Market Value of $5,000 on the last business day of the immediately preceding Award Period. 2.11 "Non-Employee Director" means as of any date a person who on such date is a director of the Corporation and is not an employee of the Corporation or any Affiliate. A director of the Corporation who is also an employee of the Corporation or any Affiliate shall become eligible to participate in the Plan upon termination of such employment. 2.12 "Prorated Award" means a Full Award multiplied by a fraction, the numerator of which is the number of days that a person served as a Non-Employee Director during the 3 -3- immediately preceding Award Period and the denominator of which is the total number of days in such Award Period. 2.13 "Shares" means shares of Common Stock. 3. Effective Date. The Plan shall become effective on May 1, 1993, subject to the approval of the Corporation's stockholders at the Corporation's 1993 Annual Meeting of Stockholders. 4. Administration. 4.1 The Plan shall be administered by the Director of Human Resources. Subject to the provisions set forth herein, the Director of Human Resources shall have full authority to construe and interpret the terms of the Plan and to make all determinations and take all other actions necessary or advisable for the administration of the Plan, except that the persons entitled to receive Awards and the dates and amounts of such Awards shall be determined as provided in Article 7, and the Director of Human Resources shall have no discretion as to such matters. The Director of Human Resources may delegate to one or more officers of the Corporation or any Affiliate the authority to perform administrative functions under the Plan. 4.2 Any determinations or actions made or taken by the Director of Human Resources pursuant to this Article shall be binding and final. 5. Shares Available for Awards. 5.1 The maximum number of Shares that may be issued under the Plan shall be 100,000, subject to adjustment in accordance with the provisions of Section 5.2. Shares 4 -4- issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. 5.2 In the event of any change in the outstanding shares of Common Stock by reason of a stock dividend or distribution, stock split, recapitalization, combination or exchange of shares, or by reason of any merger, consolidation, spinoff or other corporate reorganization in which the Corporation is the surviving corporation, the number and kind of Shares awarded thereafter in each grant under the Plan and the total number and kind of Shares that may be issued under the Plan shall be equitably adjusted by the Board of Directors, whose determination shall be binding and final. 6. Eligibility. Awards shall be made only to Non-Employee Directors, as provided in Article 7. 7. Awards. In consideration of past services rendered, on each Award Date, each person who is then a Non-Employee Director shall, automatically and without necessity of any action by the Director of Human Resources, be entitled to receive (i) a Full Award, in the case of a person who was a Non-Employee Director during all of the immediately preceding Award Period or (ii) a Prorated Award, in the case of a person who was a Non-Employee Director for less than all of such Award Period. Stock certificates representing Awards shall be delivered to Non-Employee Directors as soon as practicable following each Award Date, unless other arrangements are 5 -5- made with the Corporation by the Non-Employee Director. 8. General Provisions. 8.1 Non-Assignability. No right to receive an Award hereunder shall be transferable or assignable by a Plan participant other than by will or the laws of descent and distribution. 8.2 No Right to Service. Participating in the Plan does not constitute a guarantee or contract of service as a director. 8.3 Amendment and Termination. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time; provided, however, that the provisions of the Plan relating to the determination of persons entitled to receive Awards pursuant to Article 7 and the dates and amounts of such Awards shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 8.4 Registration of Shares. Nothing in the Plan shall be construed to require the Corporation to register under the Securities Act of 1933, as amended, any Shares awarded under the Plan. 8.5 Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts. EX-11 8 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 BANK OF BOSTON CORPORATION Computation of Per Share Earnings (in thousands, except per share amounts)
Years Ended December 31 1993 1992 1991 ---- ---- ---- EARNINGS 1. Net income (loss) $ 299,026 $ 278,881 $ (113,155) 2. Less: Preferred dividends 34,689 19,870 13,205 --------- --------- --------- 3. Net income applicable to primary earnings per common share 264,337 259,011 (126,360) 4. Add: Interest expense on convertible debentures, net of tax (a) 4,303 4,382 --------- --------- --------- 5. Net income applicable to fully diluted earnings per common share $ 268,640 $ 263,393 $ (126,360) ========= ========= ========= SHARES 6. Weighted average number of common shares outstanding 105,336 101,977 94,730 7. Incremental shares from assumed exercise of dilutive stock options as of the beginning of the period using the treasury stock method (a) 888 1,137 8. Incremental shares from assumed conversion of debentures at date of issuance (a) 4,034 4,043 --------- --------- --------- 9. Adjusted number of common shares 110,258 107,157 94,730 ========= ========= ========= PER SHARE CALCULATION 10. Primary net income per common share $ 2.51 $ 2.54 $ (1.33) (Item 3 + Item 6); see note below 11. Fully diluted net income per common share $ 2.44 $ 2.45 $ (1.33) (Item 5 + Item 9); see note below (a) The effect of stock options and convertible debentures is excluded from the computation of fully diluted net income (loss) per common share in years in which their effect is antidilutive.
Note - Income (Loss) per common share before extraordinary items 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, 1993, 1992 and 1991 is computed by subtracting from the numerator the cumulative effect of accounting changes, net of tax, in 1993 of $24,203 and the extraordinary items of $72,968 and $7,758 in 1992 and 1991, respectively. EX-12.A 9 COMPUTATION OF EARNINGS TO FIXED CHARGES 1 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, 1993 were as follows:
Years Ended December 31, ---------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) Income tax expense (benefit) 214,683 152,781 (57,990) 2,579 84,951 ---------- ---------- ---------- ---------- ---------- Pretax earnings (loss) 489,506 358,694 (178,903) (509,318) 223,065 ---------- ---------- ---------- ---------- ---------- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 27,063 28,159 30,370 38,747 35,482 Interest on borrowed funds 1,719,111 1,029,054 608,552 1,229,816 1,953,723 ---------- ---------- ---------- ---------- ---------- Total fixed charges 1,746,174 1,057,213 638,922 1,268,563 1,989,205 ---------- ---------- ---------- ---------- ---------- Earnings (for ratio calculation) $ 2,235,680 $ 1,415,907 $ 460,019 $ 759,245 $ 2,212,270 ========== ========== ========== ========== ========== Total fixed charges $ 1,746,174 $ 1,057,213 $ 638,922 $ 1,268,563 $ 1,989,205 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.28 1.34 .72 .60 1.11 ========== ========== ========== ========== ==========
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. EX-12.B 10 COMPUTATION OF EARNINGS INCLUDING INTEREST 1 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, 1993 were as follows:
Years Ended December 31, ---------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) Income tax expense (benefit) 214,683 152,781 (57,990) 2,579 84,951 ---------- ---------- ---------- ---------- ---------- Pretax earnings (loss) 489,506 358,694 (178,903) (509,318) 223,065 ---------- ---------- ---------- ---------- ---------- Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor 27,063 28,159 30,370 38,747 35,482 Interest on borrowed funds 1,719,111 1,029,054 608,552 1,229,816 1,953,723 Interest on deposits 3,856,025 2,771,873 2,731,559 3,236,691 3,357,336 ---------- ---------- ---------- ---------- ---------- Total fixed charges 5,602,199 3,829,086 3,370,481 4,505,254 5,346,541 ---------- ---------- ---------- ---------- ---------- Earnings (for ratio calculation) $ 6,091,705 $ 4,187,780 $ 3,191,578 $ 3,995,936 $ 5,569,606 ========== ========== ========== ========== ========== Total fixed charges $ 5,602,199 $ 3,829,086 $ 3,370,481 $ 4,505,254 $ 5,346,541 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.09 1.09 .95 .89 1.04 ========== ========== ========== ========== ==========
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. EX-12.C 11 COMPUTATION OF EARNINGS TO COMBINED FIXED CHARGES 1 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, 1993 were as follows:
Years Ended December 31, ---------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) Income tax expense (benefit) 214,683 152,781 (57,990) 2,579 84,951 ---------- ---------- ---------- ---------- ---------- Pretax earnings (loss) $ 489,506 $ 358,694 $ (178,903) (509,318) $ 223,065 ========== ========== ========== ========== ========== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 27,063 $ 28,159 $ 30,370 $ 38,747 $ 35,482 Interest on borrowed funds 1,719,111 1,029,054 608,552 1,229,816 1,953,723 ---------- ---------- ---------- ---------- ---------- Total fixed charges 1,746,174 1,057,213 638,922 1,268,563 1,989,205 Preferred stock dividend requirements 61,377 33,186 13,255 13,748 22,568 ---------- ---------- ---------- ---------- ---------- Total combined fixed charges and preferred stock dividend requirements $ 1,807,551 $ 1,090,399 $ 652,177 $ 1,282,311 $ 2,011,773 ========== ========== ========== ========== ========== Earnings (for ratio calculation) (Pretax earnings (loss) plus total fixed charges) $ 2,235,680 $ 1,415,907 $ 460,019 $ 759,245 $ 2,212,270 ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.24 1.30 .71 .59 1.10 ========== ========== ========== ========== ==========
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. EX-12.D 12 COMPUTATION OF EARNINGS INCLUDING DEPOSITS 1 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, 1993 were as follows:
Years Ended December 31, ---------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114 Extraordinary items, net of tax (72,968) (7,758) (43,649) Cumulative effect of changes in accounting principles, net of tax (24,203) Income tax expense (benefit) 214,683 152,781 (57,990) 2,579 84,951 ---------- ---------- ---------- ---------- ---------- Pretax earnings (loss) $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065 ========== ========== ========== ========== ========== Fixed charges: Portion of rental expense (net of sublease rental income) which approximates the interest factor $ 27,063 $ 28,159 $ 30,370 $ 38,747 $ 35,482 Interest on borrowed funds 1,719,111 1,029,054 608,552 1,229,816 1,953,723 Interest on deposits 3,856,025 2,771,873 2,731,559 3,236,691 3,357,336 ---------- ---------- ---------- ---------- ---------- Total fixed charges 5,602,199 3,829,086 3,370,481 4,505,254 5,346,541 Preferred stock dividend requirements 61,377 33,186 13,255 13,748 22,568 ---------- ---------- ---------- ---------- ---------- Total combined fixed charges and preferred stock dividend requirements $ 5,663,576 $ 3,862,272 $ 3,383,736 $ 4,519,002 $ 5,369,109 ========== ========== ========== ========== ========== Earnings (for ratio calculation) (Pretax earnings (loss) plus total fixed charges) $ 6,091,705 $ 4,187,780 $ 3,191,578 $ 3,995,936 $ 5,569,606 ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 1.08 1.08 .94 .88 1.04 ========== ========== ========== ========== ==========
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. EX-13 13 CONSOLIDATED FINANCIAL DATA FROM ANNUAL REPORT 1 BANK OF BOSTON CORPORATION -------------------------------------------------------------------------------- CONSOLIDATED SELECTED FINANCIAL DATA --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1993 1992 1991 1990 1989 1988 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA(1) Interest income........................................ $ 6,823.9 $ 5,106.7 $4,454.9 $5,689.4 $6,699.5 $5,237.1 Interest expense....................................... 5,305.1 3,800.9 3,340.1 4,466.5 5,311.1 3,872.4 --------- --------- -------- -------- -------- -------- Net interest revenue............................... 1,518.8 1,305.8 1,114.8 1,222.9 1,388.4 1,364.7 Provision for credit losses(2)......................... 70.1 180.6 518.7 764.3 773.7 176.0 --------- --------- -------- -------- -------- -------- Net interest revenue after provision for credit losses........................................... 1,448.7 1,125.2 596.1 458.6 614.7 1,188.7 Noninterest income(3).................................. 571.6 707.6 762.9 764.1 1,019.2 764.8 Noninterest expense(2)(4).............................. 1,530.8 1,474.1 1,537.9 1,732.0 1,410.8 1,366.0 --------- --------- -------- -------- -------- -------- Income (Loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles........................................... 489.5 358.7 (178.9) (509.3) 223.1 587.5 Provision for (Benefit from) income taxes.............. 214.7 152.8 (58.0) 2.6 85.0 205.1 --------- --------- -------- -------- -------- -------- Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles........... 274.8 205.9 (120.9) (511.9) 138.1 382.4 Extraordinary items: Recognition of prior year tax benefit carryforwards.................................... 73.0 Gains from early extinguishment of debt, net of tax.............................................. 7.8 43.7 Cumulative effect of changes in accounting principles, net(5)............................................... 24.2 --------- --------- -------- -------- -------- -------- Net income (loss).................................. $ 299.0 $ 278.9 $ (113.1) $ (468.2) $ 138.1 $ 382.4 ========= ========= ======== ======== ======== ======== Net income (loss) applicable to common stock....... $ 264.3 $ 259.0 $ (126.4) $ (482.0) $ 124.2 $ 368.0 ========= ========= ======== ======== ======== ======== Per common share: Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles: Primary............................................ $ 2.28 $ 1.82 $ (1.42) $ (5.67) $ 1.37 $ 4.28 Fully diluted...................................... 2.22 1.78 (1.42) (5.67) 1.37 4.12 Net income (loss): Primary............................................ 2.51 2.54 (1.33) (5.20) 1.37 4.28 Fully diluted...................................... 2.44 2.45 (1.33) (5.20) 1.37 4.12 Cash dividends declared(6)........................... .40 .10 .10 .82 1.24 1.12 Average number of common shares: (in thousands) Primary............................................ 105,336 101,977 94,730 92,634 90,435 86,078 Fully diluted...................................... 110,258 107,157 94,730 92,634 90,777 90,478 AVERAGE BALANCE SHEET DATA(1) Loans and lease financing(2)........................... $ 26,586 $ 25,330 $ 26,167 $ 28,949 $ 32,061 $ 29,588 Securities............................................. 3,624 4,704 5,098 4,509 4,831 4,341 Other earning assets................................... 4,089 3,195 3,298 6,865 3,243 2,578 --------- --------- -------- -------- -------- -------- Total Earning Assets................................. 34,299 33,229 34,563 40,323 40,135 36,507 --------- --------- -------- -------- -------- -------- Cash and due from banks................................ 1,790 1,596 1,485 1,780 1,826 1,795 Other assets(2)........................................ 2,278 2,030 1,867 1,667 1,713 1,814 --------- --------- -------- -------- -------- -------- Total Average Assets................................. $ 38,367 $ 36,855 $ 37,915 $ 43,770 $ 43,674 $ 40,116 ========= ========= ======== ======== ======== ======== Deposits............................................... $ 28,539 $ 29,028 $ 29,861 $ 33,505 $ 29,440 $ 26,539 Funds borrowed......................................... 4,349 3,485 3,544 4,518 7,823 7,959 Other liabilities...................................... 1,017 919 1,014 1,218 1,551 1,142 Notes payable.......................................... 1,743 1,197 1,552 2,098 2,254 2,194 Stockholders' equity................................... 2,719 2,226 1,944 2,431 2,606 2,282 --------- --------- -------- -------- -------- -------- Total Average Liabilities and Stockholders' Equity... $ 38,367 $ 36,855 $ 37,915 $ 43,770 $ 43,674 $ 40,116 ========= ========= ======== ======== ======== ======== (1) Consolidated selected financial data for each of the five years in the period ended December 31, 1992 has been restated, except where specifically noted, to reflect the Corporation's mergers with Society for Savings Bancorp, Inc. (Bancorp) and Multibank Financial Corp. (Multibank), which were completed in July 1993 and accounted for as poolings of interests. (2) During 1993, in response to guidance issued by banking regulators, the Corporation reclassified its in-substance repossessions (ISRs) from other real estate owned (OREO) to loans. In addition, valuation adjustments to write down the loans to the fair value of the underlying collateral are treated as credit losses rather than OREO expense. All prior period amounts were reclassified for comparative purposes. Accordingly, valuation adjustments related to ISRs were reclassified from OREO expense to the provision for credit losses for each period, with corresponding amounts recorded as credit losses. The reclassifications of these valuation adjustments for each of the five years in the period ended December 31, 1992 amounted to $37 million, $54 million, $36 million, $4 million and zero, respectively. (3) Includes a $43 million gain from the settlement of certain pension obligations in 1990, and in 1989, $190 million of gains from sales of the domestic credit card portfolios and a $52 million gain from the settlement of certain pension obligations. (4) Includes merger and restructuring charges of $85 million in 1993, primarily in connection with the Corporation's mergers with Bancorp and Multibank, as well as other expense reduction initiatives of the Corporation. Also includes restructuring charges of $54 million in 1991, and $139 million in 1990, including $7 million in 1991 and $89 million in 1990 in connection with a Bancorp restructuring plan, and $47 million in 1991, and $50 million in 1990 in connection with the Corporation's plans for the consolidation and downsizing of various domestic and international operations and facilities and staff reductions. (5) Includes a cumulative benefit of $77 million resulting from the adoption of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," and a cumulative charge of $53 million, net of taxes, relating to a change in accounting methodology pertaining to the valuation of purchased mortgage servicing rights. (6) Amounts represent the historical cash dividends of the Corporation.
30 2 BANK OF BOSTON CORPORATION -------------------------------------------------------------------------------- CONSOLIDATED SELECTED FINANCIAL DATA, -------------------------------------------------------------------------------- CONTINUED
1993 1992 1991 1990 1989 1988 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SELECTED RATIOS(1) Return on average assets............................... .78% .76% (.30)% (1.07)% .32% .95% Return on average common equity(7)..................... 11.78 13.37 (7.28) (21.68) 5.18 17.75 Common dividend payout ratio(8)........................ 14.4 3.4 NM NM 155.0 24.0 Common equity to total assets.......................... 5.9 5.7 4.5 4.7 5.0 5.3 Average total stockholders' equity to average total assets............................................... 7.1 6.0 5.1 5.6 6.0 5.7 Risk-based capital ratios: Tier 1............................................... 7.2 7.1 5.2 5.3 NA NA Total................................................ 12.4 12.0 9.3 9.4 NA NA Leverage ratio......................................... 6.8 6.6 4.6 4.5 NA NA Net credit losses to average loans and lease financing............................................ .84 1.22 1.87 2.50 1.65 .74 Reserve for credit losses to loans and lease financing............................................ 2.68 3.63 4.14 3.90 3.20 2.33 Reserve for credit losses to nonaccrual loans and lease financing............................................ 139.69 118.51 69.48 56.26 59.34 66.99 Nonaccrual loans and OREO as a percent of related asset categories........................................... 2.3 3.7 7.2 7.8 6.0 4.1 Market value/book value................................ 101.28 126.2 63.9 32.5 73.5 92.1 BALANCE SHEET DATA AT DECEMBER 31(1) Loans and lease financing.............................. $ 28,782 $ 25,399 $ 25,368 $ 26,210 $ 30,762 $ 31,752 Reserve for credit losses.............................. (770) (923) (1,051) (1,023) (983) (741) Total assets........................................... 40,588 37,315 38,309 39,351 46,663 42,893 Deposits............................................... 29,614 29,102 29,291 31,813 34,105 28,739 Funds borrowed......................................... 4,975 2,947 4,634 2,704 6,420 8,312 Notes payable.......................................... 1,973 1,686 1,419 1,536 2,124 1,859 Stockholders' equity................................... 2,912 2,554 1,919 2,046 2,562 2,501 Common shares outstanding (in thousands)............... 105,801 104,664 95,025 93,575 91,057 89,408 Common stockholders of record(9)....................... 23,633 25,263 27,665 27,414 22,700 22,551 Number of employees.................................... 18,644 19,459 18,752 20,339 21,733 22,462 Per common share: Book value........................................... $ 22.71 $ 20.21 $ 18.00 $ 19.64 $ 25.85 $ 25.65 Market value......................................... 23 25 1/2 11 1/2 6 3/8 19 23 5/8 (1) Consolidated selected financial data for each of the five years in the period ended December 31, 1992 has been restated, except where specifically noted, to reflect the Corporation's mergers with Society for Savings Bancorp, Inc. (Bancorp) and Multibank Financial Corp. (Multibank), which were completed in July 1993 and accounted for as poolings of interests. (7) For purposes of this ratio, preferred stock dividends have been deducted from net income. (8) Ratios are based on the historical cash dividends and net income applicable to common stock of the Corporation. (9) 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 NA - Information for calculating the risk-based capital ratios and leverage ratio prior to 1990 is unavailable.
31 3 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- Bank of Boston Corporation is a superregional bank holding company with both national and international operations. The Corporation's major banking subsidiaries are The First National Bank of Boston (FNBB), South Shore Bank, Mechanics Bank and Multibank West, all with headquarters in Massachusetts; Casco Northern Bank, N.A. (Casco), in Maine; Bank of Boston Connecticut (Connecticut); Rhode Island Hospital Trust National Bank (Hospital Trust), and Bank of Vermont (Vermont). FNBB is the largest of the banking subsidiaries with total assets of $29.5 billion, representing approximately three-quarters of the Corporation's total assets as of December 31, 1993. MERGERS, ACQUISITIONS AND BUSINESS UNIT SALES During 1993, the Corporation completed its mergers with Society for Savings Bancorp, Inc. (Bancorp), a registered bank holding company based in Hartford, Connecticut and Multibank Financial Corp. (Multibank), a registered bank holding company based in Dedham, Massachusetts. These two mergers combined to add nearly $5 billion in total assets to the Corporation. These mergers were accounted for as poolings of interests and as such, are reflected in the consolidated financial statements as though the Corporation, Bancorp and Multibank had been combined as of the beginning of the earliest period presented. In addition, on September 21, 1993, the Corporation announced that it had reached a definitive agreement to acquire BankWorcester Corporation (BankWorcester). The BankWorcester transaction is subject to approval by the bank regulators. Additional information on the transactions described above is included in Note 2 to the Financial Statements. On December 7, 1993, the Corporation announced the sale of its United States and Canadian factoring businesses. The sale of the United States business was completed on January 31, 1994, and the Corporation recorded a pre-tax gain of approximately $27 million on the transaction at that time. The sale of the Canadian business is subject to regulatory approval and is expected to close in mid-1994 for an additional pre-tax gain of approximately $5 million. The factoring businesses' contribution to the Corporation's net income was not material. The Corporation engages on an ongoing basis in reviewing and discussing possible acquisitions of financial institutions, as well as banking and other assets, in order to expand its business incident to the implementation of its business strategy. The Corporation intends to continue to explore acquisition opportunities as they arise in order to take advantage of the continuing consolidation in the banking industry. REVIEW OF FINANCIAL STATEMENTS The following is a discussion and analysis of the Corporation's consolidated results of operations and financial position. In order to understand this section in context, it should be read in conjunction with the Financial Statements on pages 53 through 78 and Consolidated Statistical Information on pages 79 through 94 of this report. OVERVIEW Results of Operations In 1993, the Corporation reported net income of $299 million, or $2.51 per share on a primary basis and $2.44 per share on a fully diluted basis. This compares with net income of $279 million, or $2.54 per share on a primary basis and $2.45 per share on a fully diluted basis, in 1992. The Corporation's 1993 net income included $77 million of income representing the cumulative effect to January 1, 1993 of its adoption of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," and a $53 million charge (net of income taxes of $32 million) representing the cumulative effect to January 1, 1993 of a change in its accounting for purchased mortgage servicing rights (PMSR). In addition, 1993's net income included a $57 million charge (net of income taxes of $28 million) for merger and restructuring charges, primarily related to the Corporation's 1993 mergers with Bancorp and Multibank. The Corporation's 1992 net income included $73 million of extraordinary income related to the recognition of prior year tax benefit carryforwards. Excluding the cumulative effect of accounting changes and merger and restructuring charges, net income for 1993 was $332 million. This represented an increase of $126 million, compared with 1992's net income of $206 million, measured on the same basis. Pre-tax income in 1993, on a fully taxable equivalent basis and excluding the effect of 1993's $85 million merger and restructuring charge, increased $213 million from 1992, caused, in part, by a $179 million decline in credit costs, which includes the provision for credit losses and costs related to other real estate owned (OREO). The provision for credit losses declined $110 million, reflecting management's assessment of the current risk characteristics of the loan portfolio and level of the reserve for credit losses in light of further declines in nonaccrual loans and leases and net credit losses, as well as modestly improved United States and New England economies. Nonaccrual loans and leases were $551 million at December 31, 1993, compared with $779 million at December 31, 1992 and $1,513 million at December 31, 1991. Net credit losses were $223 million in 1993, compared with $309 million in 1992 and $490 million in 1991. OREO costs declined $69 million in 1993, primarily because of lower valuation adjustments reflecting the lower level of OREO. In addition to the significant reduction in credit costs during 1993, total revenue, which is the sum of net interest revenue on a fully taxable equivalent basis and noninterest income, increased by $74 million. This was mainly the result of improved net interest revenue reflecting wider domestic spreads and higher international average loan volume. Noninterest expense, before OREO costs and merger and restructuring charges, increased $41 million from 1992. This reflected a higher average number of employees, normal salary increases, higher advertising expenses and an increase in Federal Deposit Insurance Corporation (FDIC) deposit 32 4 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED insurance. A significant portion of the increase in noninterest expense was attributable to the Corporation's increased investment in growth businesses, mainly in Latin America and domestic Retail and Small Business Banking. While the full year increase in noninterest expense was $41 million, there was a $24 million decline between the first and second half of 1993. In addition, noninterest expense in the fourth quarter of 1993 was $15 million lower than in the fourth quarter of 1992. In 1991, the Corporation reported a net loss of $113 million, or $1.33 per share on both a primary and fully diluted basis. This compares with net income in 1992 of $279 million. Credit costs in 1992 were $338 million lower than 1991, reflecting a significant decline in the levels of nonaccrual loans and net credit losses, while total revenue, on a fully taxable equivalent basis, was $126 million higher in 1992 compared with 1991. In addition, 1991 included a $54 million restructuring charge. Consolidated Balance Sheet At December 31, 1993, Bank of Boston Corporation was the nineteenth largest bank holding company in the United States, with total assets of $40.6 billion, compared with $37.3 billion at the end of 1992. The change in total assets from the end of 1992 included a $3.4 billion increase in loans, partially offset by a $1.1 billion decline in securities. Loans and leases were $28.8 billion at December 31, 1993, compared with $25.4 billion at the end of 1992. Loans from domestic operations grew $2.1 billion, reflecting a $1.7 billion increase in commercial and industrial loans and a $.5 billion increase in residential mortgages, which more than offset a $.3 billion decline in commercial real estate loans. Loans from international operations grew $1.3 billion since December 31, 1992, and have grown $2.2 billion since December 31, 1991. These increases were attributable to higher levels of Latin American loans, as the Corporation has expanded its Latin American businesses, particularly in Argentina and Brazil. These two countries accounted for most of the increase in international loans. Nonaccrual loans and leases and OREO amounted to $659 million, or 2.3% of related asset categories, at December 31, 1993, compared with $949 million, or 3.7%, and $1,838 million, or 7.2% of related asset categories, at December 31, 1992 and 1991, respectively. The reserve for credit losses was $770 million at December 31, 1993, compared with $923 million at the end of 1992. The reserve as a percent of nonaccrual loans and leases was 140% at December 31, 1993, and 119% at the end of 1992. The reserve as a percent of total loans and leases was 2.68% at the end of 1993, and 3.63% at the end of 1992. Securities, including both securities available for sale and securities held to maturity, decreased $1.1 billion from December 31, 1992. The comparative split of securities between securities available for sale and securities held to maturity was affected by the transfer of certain Bancorp and Multibank securities from the held to maturity to the available for sale category at the date of their mergers with the Corporation. In addition, mezzanine and venture securities were reclassified from the held to maturity to the available for sale category at December 31, 1993 in connection with the Corporation's adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on December 31, 1993. The adoption of SFAS No. 115 also resulted in a $42 million increase in stockholders' equity as of December 31, 1993. The overall decline in total securities resulted, in part, from sales of securities available for sale. The Corporation recognized $32 million of gains on sales of securities in 1993, of which $25 million came from the domestic available for sale portfolio and the balance from the international available for sale portfolio. Additional information regarding the Corporation's securities and its accounting policies, including the adoption of SFAS No. 115, can be found in Notes 1 and 5 to the Financial Statements. Deposits were $29.6 billion at December 31, 1993, representing a $.5 billion increase from the end of 1992. This reflected a $.6 billion increase in noninterest bearing deposits, primarily from domestic offices. Total interest bearing deposits declined $.1 billion, including a $2.1 billion decline from domestic offices, offset by a $2.0 billion increase from international offices. In addition, funds borrowed grew $2.0 billion between December 31, 1992 and December 31, 1993. Stockholders' equity totaled $2.9 billion at December 31, 1993, compared with $2.6 billion at the end of 1992. The Corporation's regulatory risk-based capital ratios at December 31, 1993 were 7.2% for tier 1 capital and 12.4% for total capital, and its leverage ratio was 6.8%. This compares with ratios of 7.1% for tier 1 capital, 12.0% for total capital and 6.6% for leverage at December 31, 1992. All of the capital ratios exceeded the minimum requirements set by current regulations. The increase in stockholders' equity and the capital ratios at the end of 1993 mainly reflected the retention of earnings coupled with the issuance of $70 million of preferred stock on June 30, 1993. In addition, the total capital ratio benefited from the issuance of $450 million of subordinated notes during the year. The Board of Directors declared quarterly common dividends of $.10 per share in each quarter of 1993 and on January 27, 1994 declared a quarterly common dividend of $.22 per share. RESULTS OF OPERATIONS REVENUE Total revenue, the sum of net interest revenue on a fully taxable equivalent basis and noninterest income, was $2,098 million in 1993, compared with $2,024 million in 1992. During 1993, the Corporation continued its strategy of maintaining a currency position in Brazil that is designed to capitalize on the spread between local Brazilian interest rates and devaluation. This strategy has involved investing capital or dollar denominated/indexed liabilities in local currency assets, leaving the Corporation "underhedged". With local Brazilian interest rates exceeding the rate of devaluation during the past two years, such a strategy has 33 5 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED enabled the Corporation to improve its total revenue compared with what would have been earned from funding local currency assets with local currency liabilities. The Corporation accounts for this position in accordance with SFAS No. 52, "Foreign Currency Translation," which results in higher levels of net interest revenue that are partially offset by translation losses included in noninterest income. Below is an analysis of total revenue, net interest revenue, noninterest income and net interest margin showing the effect of the Brazilian currency position for 1993 and 1992; such a position was not significant in 1991. Consolidated total revenue and net interest revenue are presented on a fully taxable equivalent basis. Total revenue attributable to the Corporation's entire Brazilian operation, including the portion related to the currency position, represented approximately 5% of consolidated total revenue in 1993 and 1992.
NET INTEREST REVENUE NONINTEREST INCOME TOTAL REVENUE YEARS ENDED DECEMBER 31 1993 1992 CHANGE 1993 1992 CHANGE 1993 1992 CHANGE (IN MILLIONS) Consolidated, excluding estimated effect of Brazilian currency position................... $1,335 $1,250 $ 85 $ 745 $ 757 $ (12) $ 2,080 $2,007 $ 73 Estimated effect of Brazilian currency position............................ 192 67 125 (174) (50) (124) 18 17 1 ------ ------ ----- ----- ----- ------ ------- ------ ---- Total consolidated.................... $1,527 $1,317 $ 210 $ 571 $ 707 $ (136) $ 2,098 $2,024 $ 74 ====== ====== ===== ===== ===== ====== ======= ====== ====
CONSOLIDATED INTERNATIONAL NET INTEREST MARGIN NET INTEREST MARGIN YEARS ENDED DECEMBER 31 1993 1992 CHANGE 1993 1992 CHANGE Excluding estimated effect of Brazilian currency position............................................. 3.89% 3.76% .13% 3.16% 3.46% (.30)% Estimated effect of Brazilian currency position........ .56 .20 .36 2.54 1.13 1.41 ---- ---- --- ---- ---- ---- Total net interest margin.............................. 4.45% 3.96% .49% 5.70% 4.59% 1.11% ==== ==== === ==== ==== ====
An increase in the average level of the Brazilian currency position from approximately $40 million in 1992 to approximately $80 million in 1993, coupled with higher Brazilian interest and devaluation rates in 1993, have significantly affected the levels of consolidated net interest revenue, noninterest income and net interest margin as compared with 1992. There was little change, however, in the total revenue from this position, which was estimated to be $18 million in 1993, compared with $17 million in 1992. Additional revenue from maintaining a higher average position in 1993 was offset by a narrowing of the spread between local interest rates and devaluation. The level of the position grew during the course of 1993, and stood at $103 million at December 31, 1993, compared with $27 million at December 31, 1992. The Corporation's currency position exposes it to losses should devaluation exceed local currency interest rates; such losses could be significant if government intervention results in a major unanticipated devaluation. Management, however, has been able to quickly close its position during the past year when market conditions warranted. Management will continue to closely monitor the position and will alter the present strategy if necessary. The position could increase or decrease from the year-end 1993 level. The level of the position and, in turn, its effect on total revenue, net interest revenue, noninterest income and net interest margin, will continue to be a function of management's assessment of the frequently changing economic situation in Brazil, a country that continues to be hindered by hyperinflation and economic difficulties. In addition, 1994 is a presidential election year in Brazil, which brings with it the potential for change in economic policy, both before and after the election. There can be no assurance, given the hyperinflationary conditions and economic difficulties experienced by Brazil, that the results of this position will not have an adverse effect on future levels of total revenue, net interest revenue, noninterest income and net interest margin. The following pages present a detailed analysis of the Corporation's net interest revenue, net interest margin and noninterest income. NET INTEREST REVENUE (FULLY TAXABLE EQUIVALENT BASIS) This discussion of net interest revenue excludes the estimated effect of the Brazilian currency position discussed above. For this review, interest income that is either exempt from federal income taxes or taxed at a preferential rate has been adjusted to a fully taxable equivalent basis. This adjustment has been calculated using a federal income tax rate of 35% for 1993, and 34% for 1992 and 1991, plus applicable state and local income taxes, net of related federal income tax benefits. 34 6 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED The following table shows a summary of net interest revenue, related average earning assets and net interest margin. Consolidated and international net interest revenue and margin exclude the estimated effect of the Brazilian currency position.
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS) 1993 1992 1991 UNITED STATES OPERATIONS Net interest revenue..................................................... $ 1,087.8 $1,033.8 $ 951.2 Tax equivalent adjustment................................................ 7.8 10.8 20.8 --------- -------- -------- Net interest revenue -- (fully taxable equivalent basis)................. $ 1,095.6 $1,044.6 $ 972.0 ========= ======== ======== Average loans and lease financing........................................ $ 21,063 $ 20,892 $ 22,729 Average earning assets................................................... $ 26,742 $ 27,305 $ 30,043 Net interest margin...................................................... 4.10% 3.83% 3.24% INTERNATIONAL OPERATIONS Net interest revenue -- (fully taxable equivalent basis)................. $ 239.1 $ 205.2 $ 163.6 ========= ======== ======== Average loans and lease financing........................................ $ 5,523 $ 4,438 $ 3,438 Average earning assets................................................... $ 7,557 $ 5,924 $ 4,520 Net interest margin...................................................... 3.16% 3.46% 3.62% CONSOLIDATED Net interest revenue..................................................... $ 1,326.9 $1,239.0 $1,114.8 Tax equivalent adjustment................................................ 7.8 10.8 20.8 --------- -------- -------- Net interest revenue -- (fully taxable equivalent basis)................. $ 1,334.7 $1,249.8 $1,135.6 ========= ======== ======== Average loans and lease financing........................................ $ 26,586 $ 25,330 $ 26,167 Average earning assets................................................... $ 34,299 $ 33,229 $ 34,563 Net interest margin...................................................... 3.89% 3.76% 3.29%
1993 Compared with 1992 Consolidated net interest revenue, on a fully taxable equivalent basis, was $1,335 million in 1993, an increase of $85 million from $1,250 million in 1992. Consolidated net interest margin grew 13 basis points, from 3.76% in 1992 to 3.89% in 1993. The improvement in net interest revenue resulted, in part, from a $51 million increase from domestic operations. The domestic increase was mainly attributable to wider domestic spreads resulting from lower deposit costs, higher levels of noninterest bearing sources of funds, including deposits and stockholders' equity, and a decline in nonaccrual loans and leases and OREO. Although average domestic loan volume was up only slightly from 1992 and, therefore, contributed modestly to the growth in domestic net interest revenue, there was a $2.1 billion increase in the ending balance of domestic loans and leases between December 31, 1992 and December 31, 1993. Domestic loans and leases declined during the course of 1992 and through the first quarter of 1993, with growth in the portfolio occurring during the last three quarters of 1993. The increase in international net interest revenue of $34 million was mainly caused by a $1.1 billion increase in average loan volume stemming from Latin American operations, particularly Argentina and Brazil. Narrower international spreads partially offset the improvement that resulted from volume growth. The 13 basis point increase in consolidated net interest margin reflected a higher domestic margin, resulting from the same factors that caused the growth in net interest revenue as discussed above. The margin improvement from domestic operations was partially offset by a decline in margin from international operations. Spreads narrowed in Argentina, mainly because of the stabilizing economy, which has resulted in declining inflation. In addition, spreads on local currency operations (local currency assets funded with local currency liabilities) in Brazil were narrower, stemming, in part, from a change in the mix of assets from higher-yielding loans to other earning assets. The levels of increases in net interest revenue and margin from 1992 to 1993 are not necessarily indicative of future results. Net interest revenue and margin are affected by the current interest rate environment, the mix and volume of assets and liabilities, the level of nonperforming assets, competitive pressure, economic and political conditions in the countries where the Corporation does business, and other factors. As such, there can be no assurance as to the future levels of net interest revenue or margin. 1992 Compared with 1991 Consolidated net interest revenue, on a fully taxable equivalent basis and excluding the estimated effect of the Brazilian currency position, was $1,250 million in 1992, compared with $1,136 million in 1991. In addition, net interest margin grew from 3.29% in 1991 to 3.76% in 1992. The improvement in net interest revenue mainly reflected a $73 million increase from domestic operations, stemming from lower funding costs, a decline in the level of nonaccrual loans and leases and OREO, and higher levels of noninterest bearing sources of funds, including deposits and stockholders' equity. These same factors helped increase the domestic margin. The positive factors affecting domestic net interest revenue more than offset a decline caused by a $2.7 billion drop in average earning assets. Net interest revenue from international operations grew $41 million due to average loan growth of $1 billion, primarily in Latin America. The loan growth more than offset the effect of a 16 basis point decline in international margin. 35 7 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED NONINTEREST INCOME The following is an analysis of the major components of noninterest income.
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN MILLIONS) Financial service fees (see table below)........................................... $ 350 $ 355 $ 357 Trust and agency fees.............................................................. 178 166 157 Trading profits and commissions.................................................... 24 16 22 Securities gains................................................................... 32 39 29 Mezzanine/venture capital profits.................................................. 38 17 41 Net foreign exchange trading profits............................................... 45 41 41 Gains from sales of mortgage servicing rights...................................... 1 15 34 Recognition of deferred gain from the 1984 sale of the headquarters building....... 16 Other.............................................................................. 77 92 82 ----- ----- ----- Subtotal..................................................................... 745 757 763 Estimated effect of Brazilian currency position.................................... (174) (50) ----- ----- ----- Total........................................................................ $ 571 $ 707 $ 763 ===== ===== =====
The following is an analysis of the major components of financial service fees.
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN MILLIONS) Deposit fees....................................................................... $ 122 $ 119 $ 111 Letter of credit and acceptance fees............................................... 58 55 51 Mortgage servicing fees: Fee income....................................................................... 105 99 91 Amortization of mortgage servicing assets........................................ (99) (71) (37) ----- ----- ----- Net mortgage servicing fees.................................................... 6 28 54 Loan-related fees.................................................................. 45 35 28 Factoring fees..................................................................... 29 31 34 Other.............................................................................. 90 87 79 ----- ----- ----- Total.......................................................................... $ 350 $ 355 $ 357 ===== ===== =====
1993 Compared with 1992 Consolidated noninterest income was $571 million in 1993, compared with $707 million in 1992. This decline was mainly caused by a $124 million increase in net translation/hedge losses from the estimated effect of the Corporation's Brazilian currency position; however, the negative effect on noninterest income from this currency position was offset by a $125 million increase in net interest revenue. A detailed discussion of the Brazilian currency position is included on page 33. Excluding the estimated effect of the Brazilian currency position, noninterest income in 1993 was $745 million, compared with $757 million in 1992. During 1993, there was a $21 million increase in profits from mezzanine and venture investments, as a result of a large gain from one sale transaction recorded in 1993; a $17 million increase in financial service fees (excluding net mortgage servicing fees), including a $10 million increase in loan-related fees; a $12 million increase in trust and agency fees, principally from higher stock transfer and international mutual fund fees, and an $8 million increase in trading profits and commissions, primarily from Argentine securities. Trading profits and commissions included $5 million in 1993 and $3 million in 1992 from trading in off-balance-sheet financial markets instruments. More than offsetting these improvements were declines in several noninterest income categories, including a $22 million decrease in net mortgage servicing fees, which reflected a $28 million increase in the level of amortization of mortgage servicing assets. The increase in amortization was moderated by a $6 million increase in gross mortgage servicing fees, stemming from a higher level of originations and the retention of servicing business. As a result of a substantial increase in mortgage prepayments that began in the latter half of 1992 and continued throughout 1993, amortization of PMSR was increased. In addition, effective January 1, 1993, the Corporation changed its method of evaluating the carrying value of PMSR to a discounted method adopted by the banking regulators in the first quarter of 1993. The Corporation recorded an additional charge of $17 million in 1993 from applying this new methodology, all of which was recorded in the first quarter of 1993. The cumulative effect of applying this new method to January 1, 1993 is discussed in Note 9 to the Financial Statements. Also, beginning in the first quarter of 1993, the Corporation refined its risk management strategy with respect to PMSR by entering into contracts that are designed to reimburse the Corporation for a portion of the reduction in value of PMSR, as interest rates fall and prepayments increase. The level of amortization in 1993 was modestly benefited by these contracts. The Corporation will continue its regular review of the mortgage servicing portfolio and, if conditions warrant, will adjust its future amortization levels or take additional writedowns in light of changes in interest rates, prepayment experience and other factors. No assurance can be given as to the future level of net mortgage servicing fees, as they will be affected by a variety of factors including changes in the level of mortgage interest rates. Additional items affecting noninterest income were: the recognition in 1992 of the remaining $16 million unamor- 36 8 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED tized gain from the 1984 sale of the Corporation's headquarters building, as a result of the termination of the original lease agreement and subsequent entry into a new lease of the building; a $14 million decline in gains from the sales of mortgage servicing rights, and a $7 million decline in securities gains, as lower gains from sales of U.S. government securities more than offset higher gains from sales of Argentine securities. The $15 million decline in other income included lower gains from the sales of assets received in connection with lending activities. 1992 Compared with 1991 Noninterest income declined $56 million from 1991, of which $50 million was attributable to the estimated effect of the Brazilian currency position on 1992 results. The estimated effect of this position on 1991 was not significant. Excluding the estimated effect of the Brazilian currency position, noninterest income declined $6 million from 1991. Net mortgage servicing fees declined $26 million because of higher amortization of mortgage servicing assets, resulting from the higher level of prepayments that the Corporation began experiencing in the second half of 1992. In addition, profits from mezzanine and venture investments declined $24 million as the third quarter of 1991 included a large gain from one sale transaction, and gains from sales of mortgage servicing rights declined $19 million, mainly from Bancorp's 1991 sale of its entire portfolio of these rights. These declines were partially offset by a $24 million increase in financial service fees, excluding net mortgage servicing fees, the recognition in 1992 of the remaining $16 million unamortized gain from the 1984 sale of the Corporation's headquarters building discussed above, a $10 million increase in securities gains and a $9 million increase in trust and agency fees. NONINTEREST EXPENSE The following table is an analysis of the major components of noninterest expense.
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN MILLIONS) Salaries...................................................................... $ 635 $ 605 $ 571 Employee benefits............................................................. 136 121 113 Occupancy expense............................................................. 128 126 135 Equipment expense............................................................. 96 101 103 Professional fees............................................................. 56 68 80 FDIC deposit insurance........................................................ 62 56 56 Other......................................................................... 289 284 293 ------- ------ ------ Noninterest expense, excluding OREO costs and special charges............. 1,402 1,361 1,351 OREO costs.................................................................... 44 113 113 Merger and restructuring charge............................................... 85 54 Acquisition-related costs..................................................... 20 ------- ------ ------ Total................................................................. $ 1,531 $1,474 $1,538 ======= ====== ======
1993 Compared with 1992 Noninterest expense was $1,531 million in 1993, compared with $1,474 million in 1992. Noninterest expense, excluding OREO costs and special charges, increased $41 million from $1,361 million in 1992 to $1,402 million in 1993. This mainly resulted from an increase in employee costs, including a $30 million rise in salaries and a $15 million increase in employee benefits. The growth in employee costs reflected increased investments in growth businesses, mainly in Latin America and domestic Retail and Small Business Banking, a higher average number of employees, normal salary increases and the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." Additional information on SFAS No. 106 can be found in Note 16 to the Financial Statements. In addition, advertising costs increased $8 million and FDIC deposit insurance grew $6 million reflecting higher assessment rates. These increases were partially offset by a $12 million decline in professional fees, attributable to lower consulting and legal expense, and a $5 million decline in equipment expense, caused by lower rent and repair expenses. While noninterest expense grew $41 million and the average number of employees increased as described above, noninterest expense, excluding OREO costs, in the fourth quarter of 1993 was $15 million less than the fourth quarter of 1992, and the number of employees declined by 815 between December 31, 1992 and December 31, 1993, from 19,459 to 18,644. The improvement in the fourth quarter comparison reflected management's efforts to reduce costs and staff levels, as well as the integration of the operations of Bancorp and Multibank, which are discussed below. There can be no assurance, however, that these improvements in noninterest expense and the trend in employee levels will continue as the Corporation continues to assess new business opportunities and additional investments in businesses considered strategically important to the Corporation. During the third quarter of 1993, the Corporation recorded $85 million of merger and restructuring charges ($57 million after taxes). These charges were primarily recorded in connection with the July 1993 mergers with Bancorp and Multibank and included investment banking and other professional fees, stock issuance costs and other expenses associated with the mergers, as well as estimated costs to reorganize and restructure facilities and operations, systems conversion costs and severance costs associated with the integration of these entities. A portion of the total charge covered the costs of other expense reduction initiatives in the Corporation. Since both of the mergers represented in- 37 9 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED market combinations, the Corporation estimates that it will achieve cost savings, primarily through reductions in staff, as well as systems and space consolidations. Current estimates are that the Corporation will achieve savings approximating 40% of the annual pre-merger level of noninterest expense (excluding OREO costs) of Bancorp's and Multibank's New England operations. Certain of these savings were achieved in the second half of 1993, and additional savings will be achieved through 1995, as the Corporation implements the remainder of its detailed integration plans. There can be no assurance, however, as to the level or timing of actual cost savings from the integrations of Bancorp and Multibank. In addition, these savings could be offset by increased costs from new business opportunities or additional investments in businesses considered strategically important to the Corporation. OREO costs declined $69 million from 1992, reflecting lower valuation writedowns associated with these assets, as the OREO balance declined 36% from December 31, 1992 to December 31, 1993. 1992 Compared with 1991 Noninterest expense, excluding OREO costs, restructuring charges and acquisition-related costs, increased $10 million in 1992 from 1991. Employee costs rose $42 million, mainly reflecting an increase in incentive compensation, higher employee costs from Brazilian and Argentine operations, an increase in the number of domestic employees and normal salary increases. In addition, advertising expense grew $9 million stemming from new domestic and international advertising campaigns launched in 1992. Factors, which offset the growth in employee costs and advertising expense, were the absence of a $17 million write-off of computer equipment, bank premises, and undeveloped real estate recorded by Bancorp in 1991, a $12 million decline in professional fees as a result of lower problem loan-related expenses and proactive management of legal fees, and a $9 million decline in occupancy expense as lower domestic rent expense, the result of space consolidations and the renegotiation of leases, more than offset the absence of amortization associated with the unamortized gain from the 1984 sale of the Corporation's headquarters building. In addition, 1991 included a $54 million restructuring charge ($7 million of which was recorded by Bancorp) incurred mainly in connection with the Corporation's plans for the consolidation and downsizing of various domestic and international operations and facilities and reducing the number of employees. Also included in 1991 were $20 million of expenses associated with the Corporation's unsuccessful bid to acquire the failed Bank of New England franchise and merger discussions with Shawmut National Corporation that were terminated. PROVISION FOR CREDIT LOSSES The provision for credit losses was $70 million in 1993, compared with $180 million in 1992, and $519 million in 1991. The $110 million decline from 1992 reflected management's assessment of the current risk characteristics of the loan portfolio and level of the reserve for credit losses in light of further declines in nonaccrual loans and leases and net credit losses, as well as modestly improved United States and New England economies and other factors. Nonaccrual loans and leases declined $962 million, from $1,513 million at the end of 1991 to $551 million at the end of 1993 and, as a result, the reserve for credit losses increased to 140% of nonaccrual loans and leases at December 31, 1993, compared with 119% at the end of 1992, and 69% at the end of 1991. Consolidated net credit losses declined to $223 million in 1993, compared with $309 million in 1992, and $490 million in 1991. Net credit losses exceeded the provision for credit losses in each of the last two years: by $153 million in 1993, and by $128 million in 1992. While it is anticipated that the provision for credit losses will increase from the 1993 level, the amount will be a function of the quarterly review of the reserve for credit losses. This review will be affected by the risk characteristics of the portfolio and the economic conditions existing at that time and, therefore, there can be no assurance as to the amount of future provisions. During 1993, the Corporation reclassified in-substance repossessions (ISRs) from OREO to nonaccrual loans. ISRs are loans where the borrower has little or no remaining equity in the collateral when considering its fair value; where repayment can only be expected to come from the operation or sale of the property and where the borrower has effectively abandoned control of the property, or where it is doubtful that the borrower will be able to rebuild equity in the property. Although the Corporation did not possess title to these properties, it carried these properties as OREO since 1989, as required by the bank regulators. In June 1993, however, the regulators revised their position to allow ISRs to be carried as loans. The Corporation chose to reclassify ISRs from OREO to nonaccrual loans, and has restated the balance sheets and income statements of all prior periods for comparative purposes. Additional information on the reclassification of ISRs is included in Note 6 to the Financial Statements. PROVISION FOR INCOME TAXES The 1993 income tax provision was $215 million, compared with a provision of $153 million in 1992, and a benefit of $58 million in 1991. The current year provision included the effect of the 1993 federal income tax law changes, which were not significant. A minor increase in the provision from a higher income tax rate on current earnings was offset by required adjustments to the Corporation's deferred tax balance. Effective January 1, 1993, the Corporation adopted prospectively SFAS No. 109, which principally affected the manner in which the Corporation accounted for deferred income taxes. The cumulative effect to January 1, 1993 of adopting SFAS No. 109 was an increase to net income of $77 million. The 1992 provision was offset by the recognition of prior year tax benefit carryforwards of $73 million, which are shown separately as extraordinary income. The 1991 income tax benefit included $52 million ($34 million after federal income tax effect) from a tax settlement reached with The Commonwealth of Massachusetts and $25 million from the refund of prior years' federal minimum taxes. These benefits were offset by the inability of the 38 10 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED Corporation to recognize in 1991, for financial statement purposes, $61 million of tax benefits related to foreign tax credits and net operating loss carryforwards in that year. Additional information with respect to the Corporation's income taxes, including information related to the adoption of SFAS No. 109, is included in Note 20 to the Financial Statements. FINANCIAL CONDITION Asset quality and asset/liability management, including liquidity, interest rate risk and capital resources, are important elements to be considered in understanding and assessing the Corporation's financial condition. 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. As discussed on page 33, a currency position maintained by the Corporation in Brazil, a country with a hyperinflationary economy, has had an effect on the levels of net interest revenue, noninterest income and net interest margin, while modestly benefiting total revenue. ASSET QUALITY CREDIT POLICY The Senior Credit Officer, in consultation with the Credit Policy Committee, is responsible for ensuring that credit policies are well constructed and complete, approving underwriting guidelines and approving those credit authorities over $1 million that are granted to individual officers. In addition, the Credit Department, reporting to the Senior Credit Officer, is responsible for ensuring that credit due diligence and administration meet the Corporation's standards and conform to the Corporation's policies. The Credit Policy Committee is responsible for reviewing and approving portfolio concentration limits relating to industry, geography and product type. The Corporation also has a risk rating system that is intended to assess risk in the credit portfolio and identify problems before they result in losses. This system, which is overseen by the Risk Review Department, is an important element in the monitoring process. The Risk Review Department is independent from the core businesses' credit areas. It reviews the risk rating process and tests the ratings that are established by lending officers. While sound credit policies serve to reduce the Corporation's exposure to credit risks, they do not insulate the Corporation from losses. LOANS AND LEASES Of the Corporation's $35.9 billion in earning assets at December 31, 1993, 80% were loans and leases, compared with 77% at the end of 1992. The remaining earning assets were invested in interest bearing deposits in other banks, federal funds sold and resale agreements, mortgages held for sale and securities. The size of the loan portfolio relative to total earning assets exposes the Corporation to varying degrees of credit risk. While the Corporation experienced deterioration in certain portions of its loan portfolio in prior years, particularly in the domestic commercial real estate portfolio, nonaccrual loans and leases and OREO have been reduced to $659 million at December 31, 1993, from $949 million at the end of 1992, and $1,838 million at the end of 1991. These decreases included reductions in domestic commercial real estate nonaccrual loans and OREO of $227 million in 1993 and $591 million in 1992. The reductions reflected the results of a number of programs introduced by the Corporation over the last few years that reinforced its commitment to a stronger management of credit, as well as the effects of modestly improved economies in the United States and New England in 1993. Further discussion on the management of the Corporation's domestic commercial real estate portfolio can be found in the Domestic Commercial Real Estate Loans and OREO section on page 40. Domestic loans and leases as of December 31, 1993 were $22.6 billion and accounted for 78% of the consolidated portfolio, compared with $20.5 billion and 81% at the end of 1992, and $21.4 billion and 84% at the end of 1991. Slightly more than half of the domestic loans and leases were to borrowers domiciled in New England. The $2.1 billion growth in 1993 included a $.6 billion increase in loans from the Specialized Finance businesses, mainly Energy and Utilities, Transportation and Environmental Services, as the Corporation benefited from its status as a top-tier relationship bank to these industries; a $.5 billion increase in residential mortgages, resulting from a decision to retain more mortgages in 1993 rather than sell them into the secondary market, and a $.3 billion increase in loans from the New England Corporate lending businesses. The remainder of the increase came from other commercial lending businesses and loans to individuals. The domestic loan growth has been helped by the Bank of Boston Credit Initiative that was announced in May 1992. The largest single category of domestic loans and leases, which is diversified as to industry, consists of lending to commercial, industrial and financial borrowers, and equaled 53% of domestic loans and leases at December 31, 1993. Retail loans, which include residential mortgage, home equity and installment loans, amounted to 26% of the domestic portfolio. Loans secured by commercial real estate were 17% of the domestic portfolio and represented the only industry concentration that exceeded 10% of the portfolio. While total domestic loans and leases rose $2.1 billion during 1993, the proportion of domestic loans and leases to total loans and leases has declined during the past two years. This resulted from an increase in international loans and leases, from $4.0 billion at December 31, 1991, and $4.9 billion at December 31, 1992 to $6.2 billion at December 31, 1993. These increases mainly reflected growth in the Corporation's Argentine and Brazilian portfolios. The Corporation has a strong market position in both of these countries. Information on the Corporation's cross-border outstandings to these and other countries can be found in Consolidated Statistical Information on pages 86 and 87. 39 11 - ------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - ------------------------------------------------------------------------------- CONTINUED Consolidated loans and leases grew 13% from the end of 1992 and the Corporation continues to pursue new lending opportunities. The Corporation's ability to extend new credit, however, is a function of a variety of factors, including competition for customers' business and the economies in New England, other parts of the United States and in other countries where the Corporation does business. As such, there can be no assurance that the rate of loan growth experienced in 1993 will be sustained in the future. Further information on the Corporation's loan and lease portfolio can be found in Consolidated Statistical Information on pages 88 through 89 and in Note 6 to the Financial Statements. Domestic Commercial Real Estate Loans and OREO The Corporation's domestic commercial real estate portfolio, including OREO, was $3.8 billion at December 31, 1993, compared with $4.2 billion at the end of 1992, and $4.9 billion at the end of 1991. The $1.1 billion decrease since the end of 1991 reflected the effect of tighter underwriting standards for new loans and renewals or extensions of existing loans; payments received; sales of OREO properties; credit losses and valuation adjustments recorded, and proactive management of the portfolio. The table below details domestic commercial real estate loans and OREO by geographic location. The portion attributable to other states at the end of 1993 was spread among approximately 23 states. DOMESTIC COMMERCIAL REAL ESTATE OUTSTANDINGS BY GEOGRAPHIC LOCATION
OTHER NEW OTHER (IN MILLIONS) MASSACHUSETTS CONNECTICUT ENGLAND FLORIDA TEXAS STATES TOTAL Balance at December 31, 1993................ $1,373 $607 $802 $187 $ 54 $823 $3,846 ====== ==== ==== ==== ==== ==== ====== Balance at December 31, 1992................ $1,348 $775 $805 $234 $ 91 $971 $4,224 ====== ==== ==== ==== ==== ==== ====== Balance at December 31, 1991................ $1,774 $964 $854 $268 $115 $963 $4,938 ====== ==== ==== ==== ==== ==== ======
Developmental real estate outstandings, which are included in the totals shown above, were approximately $3.2 billion at December 31, 1993, compared with $3.3 billion at the end of 1992. These are assets from which ultimate payment to the Corporation is expected to come from the sale, operation or refinancing of the underlying property. The collateral underlying developmental real estate outstandings is valued at least annually using various real estate valuation techniques, including discounted cash flows and appraisals. The remaining portfolio of $.6 billion at December 31, 1993, and $.9 billion at the end of 1992 was primarily composed of outstandings, secured by real estate, where the property is not viewed as the principal source of repayment and is usually occupied by the owner. The Corporation has been an active real estate lender for over forty years. While it has had experience with the cyclical nature of real estate markets, the simultaneous deterioration in New England and several other markets nationwide had a significant adverse effect on the quality of the Corporation's domestic commercial real estate portfolio during the past several years. These markets have experienced overbuilding, high vacancy rates and reduced lease rates, which have triggered a shortfall of revenues. This effect has been experienced with respect to all types of properties to such an extent that many borrowers have been unable to service their debt. Through its active management of the portfolio during the past few years and because of a modestly improved economy in 1993, the Corporation has been able to reduce its domestic commercial real estate nonaccrual loans and OREO. The reduced interest rate environment has assisted in these efforts. At December 31, 1993, total domestic commercial real estate nonaccrual loans and OREO were $367 million, compared with $594 million at the end of 1992, and $1,185 million at the end of 1991. The following table details domestic commercial real estate nonaccrual loans and OREO by geographic location at December 31, 1993: DOMESTIC COMMERCIAL REAL ESTATE NONACCRUAL LOANS AND OREO BY GEOGRAPHIC LOCATION
OTHER NEW OTHER (DOLLARS IN MILLIONS) MASSACHUSETTS CONNECTICUT ENGLAND FLORIDA TEXAS STATES TOTAL Balance at December 31, 1993................ $103 $ 68 $ 52 $15 $ 8 $121 $ 367 ==== ==== ==== === ==== ==== ==== Percent of related outstandings............. 9% 13% 6% 8% 15% 11% 10% Balance at December 31, 1992................ $179 $118 $ 88 $22 $12 $175 $ 594 ==== ==== ==== === ==== ==== ==== Percent of related outstandings............. 13% 15% 11% 9% 13% 18% 14% Balance at December 31, 1991................ $358 $237 $177 $45 $24 $344 $1,185 ==== ==== ==== === === ==== ===== Percent of related outstandings............. 20% 25% 21% 17% 21% 36% 24%
40 12 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED The Corporation continues to actively manage its pool of domestic commercial real estate loans and OREO in an effort to minimize losses by quickly identifying and resolving problems. The Boston-based Real Estate Department manages the majority of the Corporation's accruing domestic commercial real estate loans. The Asset Recovery Department, which includes real estate lenders and workout specialists, handles substantially all of the Corporation's domestic nonaccrual commercial real estate loans and OREO. These departments continually review their portfolios and update plans for resolution of problem real estate assets, focusing on the sale and refinancing options that are realistically available in the current market. An essential part of the workout strategy is the regular monitoring of property cash flows. Where appropriate, these departments will work with borrowers and guarantors of loans to improve equity in the properties or otherwise renegotiate the credits so that they can make a positive contribution to the Corporation. If a renegotiation is accomplished, it is accounted for in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings" (see discussion of Renegotiated Loans on page 44). If warranted, the Corporation will foreclose on the collateral. When a property becomes owned, the strategy is to dispose of the property as soon as possible with the objective of maximizing value to the Corporation. Domestic OREO, which is included in the preceding table, was $106 million at December 31, 1993, compared with $168 million at the end of 1992, and $322 million at the end of 1991. The commercial real estate portfolio is affected by changes in the economy, interest rates, the supply of commercial properties and other factors. While the level of domestic commercial real estate nonaccrual loans and OREO has declined during the past three years, no assurance can be given as to the future level of domestic commercial real estate nonaccrual loans and OREO. HLTs Loans made by many of the Corporation's lending divisions to finance transactions involving leveraged buyouts, acquisitions, and recapitalizations are classified as HLTs, if, by the nature of the loan terms and the profile of the customer, the transaction qualifies for this classification under the current bank regulatory definition of HLTs. The HLT definition encompasses areas where a high degree of leverage would be expected in a traditional lending environment, 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 repayment ability. Under the definition, an HLT is a credit extended to, or an investment made in, a business where the transaction involves the buyout, acquisition, or recapitalization of an existing business, and where one of the following three criteria is met: the transaction at least doubles the customer's liabilities and results in a leverage ratio greater than 50%; the transaction results in a leverage ratio greater than 75%, or the transaction is designated an HLT by its syndication agent. Leverage is defined as the ratio of total liabilities, which include subordinated debt and nonperpetual preferred stock, to total assets. The definition excludes loans and exposures to customers in which the total original financing package, including all obligations held by all participants, amounts to $20 million or less. Delisting of a credit from HLT status is allowed under certain circumstances related to the customer's performance. HLT loans were $1.3 billion, or 5% of the total loan and lease portfolio, at December 31, 1993, compared with $1.6 billion, or 6%, at the end of 1992 and $2.6 billion, or 10%, at end of 1991. The decline in HLT loans from December 31, 1992 was mainly a result of a combination of principal payments and delistings. Of the total HLT portfolio outstanding at December 31, 1993, 94% were domestic credits that were spread over 21 states, with 13% to companies with headquarters in New England. 41 13 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED The following is an analysis of the year-end outstanding HLT loan portfolio by industry, segregated between those in which the Corporation has a lending specialization and others: HLT LOANS BY INDUSTRY
DECEMBER 31 NUMBER OF PERCENT OF 1993 1992 1991 (DOLLARS IN MILLIONS) COMPANIES OUTSTANDING Outstandings Outstandings INDUSTRY SPECIALIZATION Cable................................................. 9 13% $ 167 $ 447 $ 538 Broadcasting.......................................... 6 4 56 137 324 Media and publishing.................................. 4 7 90 71 172 -- ---- ------ ------ ------ Total communications................................ 19 24 313 655 1,034 High technology....................................... 3 2 22 70 224 Transportation........................................ 4 9 119 115 124 Energy and utilities.................................. 3 5 70 19 30 Insurance and mutual funds............................ 2 3 37 18 39 -- ---- ------ ------ ------ Total industry specialization....................... 31 43 561 877 1,451 -- ---- ------ ------ ------ OTHERS Food, beverages and tobacco........................... 12 21 271 50 169 Consumer products/retailing........................... 7 6 81 127 182 Metals................................................ 1 2 27 132 208 Machinery, equipment and components................... 4 5 69 159 212 Textiles and apparel.................................. 3 4 50 51 71 Health care........................................... 4 4 51 32 73 Other................................................. 13 15 194 159 254 -- ---- ------ ------ ------ Total others........................................ 44 57 743 710 1,169 -- ---- ------ ------ ------ Total HLTs........................................ 75 100% $1,304 $1,587 $2,620 == ==== ====== ====== ======
The following is an analysis of the HLT loan portfolio by loan size at the end of 1993, 1992 and 1991: HLT LOANS BY SIZE
DECEMBER 31 1993 1992 1991 NUMBER OF AVERAGE (DOLLARS IN MILLIONS) COMPANIES OUTSTANDINGS LOAN SIZE Average Loan Size OUTSTANDING LOAN SIZE $0 - 24.................................................... 57 $ 650 $11 $ 12 $ 13 $25 - 49................................................... 14 441 32 37 36 $50 - 74................................................... 4 213 53 63 66 $75 - 99................................................... 96 $100+...................................................... 114 120 -- ------ 75 $1,304 17 21 23 == ====== === ===== =====
In addition to the loans above, certain of the Corporation's outstanding mezzanine and venture capital investments meet the definition of HLT investments. Such investments amounted to $121 million in 24 companies at December 31, 1993, compared with $152 million in 32 companies at December 31, 1992, and $193 million in 43 companies at the end of 1991. The amount of unused lending commitments for HLTs at December 31, 1993 was $540 million, compared with $404 million at December 31, 1992, and $639 million at the end of 1991. These totals do not necessarily represent the actual future funding by the Corporation since a portion can be syndicated or assigned to others or may expire without being drawn upon. During 1993, the Corporation made commitments in connection with HLT financings of approximately $654 million, with an average commitment size of approximately $30 million. The Corporation recognizes that in an economic downturn or sustained period of high interest rates, borrowers whose loans are classified as HLTs may experience financial stress. As a result, risks associated with certain of these transactions may be higher than for more traditional financings. The approval process for HLTs includes varying levels of individual and committee reviews based upon the loan size. The process also includes a review by the Syndications Division if distribution of the transaction is contemplated. Individual customer, underwriting and internal limits are in effect for all of the Corporation's loans, including special limits, established in 1990, on HLTs held for the Corporation's own account. These special limits are $50 million if the HLT is agented by the Corporation and $25 million for all other HLTs. Once originated, all credits are subject to periodic reviews, with the frequency of the review determined by the loan's risk rating. In general, HLT loans are assets that yield more than most commercial loans. Typically, interest rates on new HLTs range from 1.5% to 2.75% over LIBOR and fees charged range from .75% to 1.5% of the principal amount committed. Certain fees are deferred and recognized as income in future periods in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." 42 14 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED During 1993, the Corporation recognized approximately $16 million of fee income on HLT loans, of which $8 million related to fees received and deferred in prior years and $7 million reflected fees received and recognized in 1993 from loans originated prior to 1993. In addition, the Corporation received $4 million of fees related to loans originated in 1993, of which $1 million was recognized as income during the year. During 1992, the Corporation recognized approximately $26 million of fee income on HLT loans, of which $7 million related to fees received and deferred in prior years and $18 million reflected fees received and recognized in 1992 from loans originated prior to 1992. In addition, the Corporation received $3 million of fees related to loans originated in 1992, of which $1 million was recognized as income during that year. During 1991, the Corporation recognized approximately $18 million of fee income on HLT loans. HLT net credit losses were $21 million in 1993, compared with $19 million in 1992, and $50 million in 1991. Of the total net credit losses during the past three years, 68% related to three large credits. The 1993 and 1992 net credit losses included $7 million, and $8 million, respectively, related to HLTs collateralized by commercial real estate. HLT nonaccruals at December 31, 1993 were $10 million compared with $57 million at December 31, 1992, and $155 million at the end of 1991. Included in the nonaccrual amounts for 1993, 1992 and 1991 were $4 million, $14 million and $22 million, respectively, which were collateralized by commercial real estate and are, therefore, also reflected in the amounts and tables detailed in the Domestic Commercial Real Estate Loans and OREO section on pages 40 to 41. Over the past several years, the Corporation has experienced a significant reduction in its HLT activities. At the end of 1989, the Corporation's HLT loan portfolio stood at $5.3 billion, compared with $1.3 billion at the end of 1993, a 75% reduction. During 1993, 1992 and 1991, respectively, twenty new loans totaling $380 million, eight new loans totaling $116 million and twelve new loans totaling $145 million were funded. It is estimated that the new HLT loans did not make a significant contribution to the Corporation's pre-tax results and gross revenues in 1993, 1992 and 1991. Historically, the Corporation has been actively involved in transactions that qualify as HLTs and it expects to continue to agent and participate in such transactions in the future. The Corporation, however, does not currently anticipate a substantial increase in HLT lending over the level at December 31, 1993. NONACCRUAL LOANS AND LEASES AND OREO Under the Corporation's nonaccrual policy, a loan or lease is placed on nonaccrual status when collectibility of principal or interest is doubtful, or when any portion of the principal or interest is ninety days past due, unless it is well secured and in the process of collection. Whenever a loan or lease is placed on nonaccrual status, all other credit exposures to the same borrower are also placed on nonaccrual status; exceptions are made only when it can be clearly demonstrated that such credits are well secured, fully performing and insulated from the weakness surrounding the nonaccrual credit to which they relate. 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. The following table is a summary of nonaccrual loans and leases and OREO:
DECEMBER 31 1993 1992 1991 (DOLLARS IN MILLIONS) DOMESTIC NONACCRUAL LOANS AND LEASES Commercial, industrial and financial............................................. $ 118 $ 201 $ 385 Construction..................................................................... 30 81 123 Other commercial real estate..................................................... 231 345 740 Real estate secured by 1-4 family residences..................................... 64 58 69 Loans to individuals............................................................. 10 26 32 Lease financing.................................................................. 1 2 5 ----- ----- ------ 454 713 1,354 INTERNATIONAL NONACCRUAL LOANS AND LEASES 97 66 159 ----- ----- ------ Total nonaccrual loans and leases 551 779 1,513 OREO Domestic......................................................................... 106 168 322 International.................................................................... 2 2 3 ----- ----- ------ Total nonaccrual loans and leases and OREO..................................... $ 659 $ 949 $1,838 ===== ===== ====== Nonaccrual loan and leases and OREO as a percent of related asset categories....... 2.3% 3.7% 7.2% ===== ===== ======
43 15 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED The following table summarizes the changes in nonaccrual loans and leases and OREO that have occurred during the last two years:
YEARS ENDED DECEMBER 31 1993 1992 (IN MILLIONS) Beginning balance......................................................................... $ 949 $ 1,838 Additions................................................................................. 486 670 Sales, restructurings, payments and other decreases....................................... (482) (1,072) Charge-offs and valuation adjustments..................................................... (294) (487) ------ -------- Ending balance............................................................................ $ 659 $ 949 ====== ========
The level of nonaccrual loans and leases and OREO is influenced by the economic environment, interest rates, regulatory attitudes and other internal and external factors. While the Corporation has experienced a decline in the balance of its nonaccrual loans and leases and OREO during the past two years, additions, as seen in the above table, exceeded outflows before the effect of charge-offs and valuation adjustments, by $4 million in 1993; for the second half of 1993, additions were higher than outflows by $54 million. At December 31, 1993, the ratio of nonaccrual loans and OREO to related asset categories was 2.3%, the lowest reported by the Corporation in over a decade. Given this low level of nonaccrual loans and leases and OREO, the Corporation may experience an increase in the level of these assets in 1994. RENEGOTIATED LOANS Loans are renegotiated when the Corporation determines that it will ultimately receive greater economic value by relaxing the terms than through foreclosure, liquidation or bankruptcy. Candidates for renegotiation must meet specific guidelines and undergo extensive due diligence reviews. Guidelines consider the quality of the borrower and the borrower's ability to enhance the value of the property; the collateral; the ability of the guarantor, if any, to perform, and the economic value of the renegotiated loan relative to foreclosure and other options. Renegotiation also allows the Corporation to maintain the customer relationship and grants the customer more time to regain equity in the property. The terms of the renegotiation generally involve some or all of the following characteristics: a reduction in the interest pay rate to reflect actual property income, an extension of loan maturity date to allow time for stabilization of property income and partial forgiveness of principal and interest. In certain circumstances, the Corporation also obtains the right to share in future benefits arising from the upside potential of the collateral. Once a renegotiation takes place, the loan is subject to the accounting and disclosure rules prescribed by SFAS No. 15. Renegotiated loans, which are performing in accordance with their new terms and, therefore, are not included in nonaccrual loans, amounted to $225 million at December 31, 1993, compared with $401 million at December 31, 1992, and $353 million at the end of 1991. The average current yield on these loans was approximately 8% at December 31, 1993, 1992 and 1991. Of the renegotiated loans at December 31, 1993, $126 million were domestic commercial real estate loans. Additionally, in connection with the restructuring of loans, the Corporation may obtain equity interests in the borrower. Such interests, which are included in other assets, amounted to $41 million at December 31, 1993, compared with $30 million at the end of 1992 and 1991. During 1993, $19 million of loans were renegotiated. These additions to the renegotiated portfolio were more than offset by the transfer to a conventional fully performing status of $143 million of loans, that had sustained a market rate of interest, in conformity with SFAS No. 15. Other outflows from the renegotiated loan portfolio during 1993 included the transfer of $21 million to nonaccrual status. Additional information with respect to the Corporation's renegotiated loans is included in Note 6 to the Financial Statements. RESERVE FOR CREDIT LOSSES The Corporation determines the level of its reserve for credit losses using a credit-by-credit assessment of higher risk credit exposures in the portfolio, based upon internal credit ratings, and an analysis of loan concentrations by industry for the rest of the portfolio; an evaluation of credit risk related to off-balance-sheet financial instruments; cross-border risks, and other internal and external factors. The other factors considered in the assessment include current economic and political conditions, levels of nonaccrual and other problem credits, historical trends in the portfolio and the level and quality of credit management. The reserve for credit losses was $770 million at December 31, 1993, compared with $923 million at the end of 1992, and $1,051 million at the end of 1991. The reserve for credit losses was 2.68% of loans and leases at December 31, 1993, compared with 3.63% at December 31, 1992, and 4.14% at the end of 1991. The reserve as a percentage of nonaccrual loans was 140% at December 31, 1993, compared with 119% at December 31, 1992, and 69% at the end of 1991. As a percentage of nonaccrual and renegotiated loans, the reserve was 99% at December 31, 1993, compared with 78% at December 31, 1992, and 56% at the end of 1991. 44 16 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED Net credit losses for 1993, 1992 and 1991 were as follows:
YEARS ENDED DECEMBER 31 1993 1992 1991 (DOLLARS IN MILLIONS) DOMESTIC NET CREDIT LOSSES Commercial, industrial and financial............................................. $ 40 $ 66 $ 120 Commercial real estate........................................................... 73 181 287 Real estate secured by 1-4 family residences..................................... 18 21 16 Loans to individuals............................................................. 31 27 46 Lease financing.................................................................. 1 1 2 ----- ----- ----- 163 296 471 INTERNATIONAL NET CREDIT LOSSES.................................................... 60 13 19 ----- ----- ----- Total.......................................................................... $223 $ 309 $ 490 ===== ===== ===== Net credit losses to average loans and leases...................................... .84% 1.22% 1.87%
The higher level of international net credit losses in 1993 was mainly due to charge-offs taken on certain Asian loans. The Corporation exercises considerable efforts to recover loans even though they have been charged off. The following table compares gross credit losses with recoveries for 1993, 1992 and 1991.
YEARS END DECEMBER 31 1993 1992 1991 (DOLLARS IN MILLIONS) Gross credit losses................................................................. $273 $ 412 $ 597 Recoveries.......................................................................... $ 50 $ 103 $ 107 Ratio of recoveries to gross credit losses.......................................... 18.3% 25.0% 17.9%
OFF-BALANCE-SHEET CREDIT-RELATED INSTRUMENTS In the normal course of business, the Corporation makes various commitments, which differ from the Corporation's funded lending activities in that they are executory in nature. These include credit-related obligations, such as commitments to extend credit, standby letters of credit and foreign office guarantees, that are provided to meet the financing needs of customers. In addition, credit risk is also contained in the off-balance-sheet financial markets instruments, which are discussed on page 47. Off-balance-sheet instruments are subject to the same credit standards, financial controls and monitoring practices used for loans and leases. At December 31, 1993, the Corporation's unused commitments to lend, net of participations to other financial institutions, aggregated $17.4 billion, compared with $15.0 billion at the end of 1992. These amounts 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 portion generally expire without being drawn upon. Standby letters of credit and foreign office guarantees, net of participations, were $2.3 billion at December 31, 1993, compared with $2.1 billion at the end of 1992. Additional information with respect to the Corporation's off-balance-sheet credit-related instruments is included in Notes 21 and 28 to the Financial Statements. ASSET/LIABILITY MANAGEMENT The Boston-based Treasury Department is responsible for managing the Corporation's asset/liability process with respect to liquidity and interest rate risk. In addition, the Corporation relies upon the collective experience of its management in Treasury areas throughout its global network. Capital is managed by Treasury in coordination with the Finance function. 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 accordance with the Corporation's strategic plan. The Corporation proactively manages liquidity to ensure its ability to meet present and future funding needs. Liquidity is monitored on a daily basis and is reviewed monthly by the Executive Committee of the Corporation's Board of Directors; a review by the full Board of Directors occurs quarterly. Management's Asset/Liability Committee (ALCO), which is chaired by the Treasury Department Executive, reviews liquidity monthly. The adequacy of sources of liquidity is measured against anticipated needs for the Corporation as a whole, the Parent Company and each of the subsidiary banks. Alternative funding strategies are reviewed by ALCO, updated and implemented as considered necessary. Deposits are the principal source of the Corporation's liquidity and amounted to $29.6 billion, or 73%, of total assets at December 31, 1993, as compared with $29.1 billion, or 78%, of total assets at December 31, 1992. In addition, deposits were 103% of the Corporation's outstanding loans and leases at December 31, 1993, compared with 115% at the end of 1992. The overall increase in deposits from the end of 1992 was mainly due to higher levels of interest bearing deposits in overseas offices and noninterest bearing deposits in domestic offices, partially offset by a decline in interest bearing deposits in domestic offices. International interest bearing deposits increased $2 billion and were mainly used to fund the Corporation's Latin American loan growth, while a $.5 billion increase in domestic noninterest bearing deposits primarily resulted from a higher volume of business from mortgage banking companies and customers. Included in the increase in international interest bearing deposits was a $.4 billion increase from the Corporation's banking operation in Argentina, which represented growth of 54% from December 31, 1992. During the year, the 45 17 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED Corporation expanded its retail operation in Argentina as the local economy continued its improvement and loan demand rose. A $2.1 billion decline in interest bearing deposits in domestic offices was due to a combination of a lower level of deposits obtained through retail programs with brokers (brokered CDs) and a decline in retail deposits. The level of brokered CDs declined $1 billion since the end of 1992, from $1.7 billion to $700 million. Brokered CDs had been issued with original maturities of one to three years; however, they are no longer actively used as a source of additional liquidity. The Corporation has replaced these deposits and funded a portion of its loan growth through the wholesale funding markets, which included the use of term federal funds purchased and FNBB's short-term Bank Note program discussed below. With respect to domestic retail interest bearing deposits, the banking industry continued to be challenged by the issue of deposit retention during 1993 in the face of historically low interest rates. New deposit products such as the "First Rate Plus" and "Max" accounts enabled the Corporation to better compete for consumer deposits and are part of the Corporation's strategic emphasis on Retail and Small Business Banking. 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 government agency securities. At December 31, 1993, total liquid assets stood at $4.5 billion, compared with $4.7 billion at December 31, 1992. The Corporation's ability to access funds at market rates continued to improve in 1993 as it received upgrades from all major ratings agencies during the year. In 1993, the Corporation issued $70 million of preferred stock and $450 million of subordinated debt, while FNBB commenced a $2 billion short-term Bank Note program. At December 31, 1993, $350 million of notes from this program were outstanding and it is anticipated that FNBB will be issuing additional notes in 1994. Management believes that its liquidity position at December 31, 1993 is adequate to support the Corporation's future liquidity needs. The balance sheet of Bank of Boston Corporation (on a Parent Company only basis) reflected a liquid asset level in excess of short-term funding commitments of $194 million at December 31, 1993, compared with $272 million at the end of 1992. During 1993, Parent Company liquidity was increased as a result of the aforementioned issuances of $450 million of subordinated notes and $70 million of preferred stock. The major uses of liquidity during the year included $299 million of capital cash contributions and $149 million of advances to various banking and non-banking subsidiaries. These funds provided capital in support of balance sheet growth during the year and enabled the banking subsidiaries to maintain appropriate regulatory capital ratios (see further discussion in the Capital Management section on page 49). In addition, the Parent Company called for redemption $88 million of its notes payable that were due in 1996, and used $73 million for dividend payments on common and preferred stock. Management considers the Parent Company's overall liquidity at December 31, 1993 to be adequate to meet current obligations and carry on normal operations. At December 31, 1993, substantially all of the Parent Company's funding came from stockholders' equity and notes payable with no scheduled principal payment dates until 1997. In January, 1994, the Parent Company issued $300 million of subordinated notes and, in February 1994, announced its intent to redeem $179 million of notes payable due in September, 2000. INTEREST RATE RISK MANAGEMENT Interest rate risk can be defined as an exposure to a movement in interest rates that could have an adverse effect on the Corporation's net income or financial position. Interest rate risk arises from the Corporation's normal banking activities due to an imbalance in the repricing or maturity schedules of assets and liabilities. The Corporation seeks to limit its risk of exposure to changes in interest rates, while also allowing for some imbalance that could enable it to profit from favorable market opportunities. The Corporation uses certain balance sheet items and off-balance-sheet financial markets instruments, including interest rate futures and swaps, in the management of its interest rate risk. Off-balance-sheet financial markets instruments provide the Corporation with important flexibility in managing its interest rate exposure, enabling it to efficiently manage risk while minimizing the impact on balance sheet leverage and liquidity. Historically, the Corporation has not had a significant amount of anticipatory hedge transactions. Additional information on off-balance-sheet financial markets instruments is included on page 47. The Corporation manages its interest rate risk within policies approved and limits established by the Board of Directors. The Executive Committee of the Board of Directors reviews the Corporation's interest rate risk profile on a monthly basis; a review by the full Board of Directors occurs quarterly. ALCO determines appropriate general guidelines and specific directives for the management of interest rate risk within Board established policy and limits. ALCO also reviews the Corporation's interest rate risk profile, including tactical and planned strategic management initiatives, monthly. The Treasury Department Executive, who is the Chairman of ALCO, is responsible for reporting on the Corporation's interest rate risk management initiatives to the Chairman's Office, ALCO, and the Board of Directors. Interest rate risk limits and directives are established to restrict volatility in income at risk and market value sensitivity, which could result under various interest rate scenarios. A variety of methodologies, including static gap analysis, net interest revenue simulation and market value modeling, are used to evaluate the Corporation's exposure to various potential changes in interest rates and to facilitate the management of interest rate exposure. One method of monitoring interest rate risk is through the analysis of gap positions. Simply stated, gap is the difference between the amount of assets and the amount of liabilities that mature or are repriced during a given period 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 period of time. Gap positions can be quickly modified by management as warranted by market conditions. 46 18 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED The following table shows the gap position of the Corporation at December 31, 1993. INTEREST SENSITIVITY GAP ANALYSIS(1)
AFTER 1 AFTER 3 YEAR MONTHS BUT BUT WITHIN 3 WITHIN WITHIN AFTER 5 NONINTEREST (IN MILLIONS) MONTHS 1 YEAR 5 YEARS YEARS BEARING TOTAL ASSETS Interest bearing deposits in other banks............................. $ 839 $ 146 $ 6 $ 991 Federal funds sold and securities purchased under agreements to resell............................ 1,434 20 1,454 Trading securities(2)............... 306 306 Mortgages held for sale(2).......... 1,322 1,322 Securities: Available for sale(3)........... 620 262 306 $ 77 $ 173 1,438 Held to maturity(3)............. 171 716 577 37 68 1,569 Loans and lease financing(4): United States operations........ 14,250 2,998 4,308 549 (308) 21,797 International operations........ 3,472 2,058 526 70 89 6,215 Other nonearning assets............. 5,496 5,496 -------- ------ ------ ----- ------- ------- TOTAL ASSETS........................ $ 22,414 $6,200 $5,723 $ 733 $ 5,518 $40,588 ======== ====== ====== ===== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Total deposits: Domestic offices(5)............. $ 13,088 $2,482 $1,418 $ 508 $ 5,040 $22,536 Overseas offices................ 5,671 803 77 1 526 7,078 Funds borrowed...................... 4,084 779 106 6 4,975 Notes payable....................... 507 163 514 789 1,973 Noninterest bearing liabilities..... 1,115 1,115 Stockholders' equity................ 2,911 2,911 -------- ------ ------ ----- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $ 23,350 $4,227 $2,115 $1,304 $ 9,592 $40,588 ======== ====== ====== ====== ======= ======= Interest sensitivity gap before the net effect of off-balance-sheet financial markets instruments..... $ (936) $1,973 $3,608 $ (571) $(4,074) Net effect of off-balance-sheet financial markets instruments(6).................... (1,205) (307) 357 1,155 -------- ------ ------ ----- Interest sensitivity gap adjusted for off-balance-sheet financial markets instruments............... $ (2,141) $1,666 $3,965 $ 584 $(4,074) ======== ====== ====== ====== ======= CUMULATIVE INTEREST SENSITIVITY GAP............................... $ (475) $3,490 $4,074 $ 0 ====== ====== ====== ======= (1) Allocations to specific interest sensitivity periods are based primarily on the earlier of the repricing or maturity date. (2) Since trading securities and mortgages held for sale are expected to be sold in a relatively short period of time, they are included in the "within 3 months" category. (3) Noninterest bearing securities include certain venture capital debt and equity securities, as well as Federal Reserve and Federal Home Loan Bank stock. (4) Nonaccrual loans and leases and the reserve for credit losses are shown within the "noninterest bearing" category. (5) Domestic savings deposits and NOW accounts have been allocated 100% to the "within 3 months" category based upon the Corporation's recent experience with these deposits and assessment of current market conditions. (6) Includes off-balance-sheet financial markets instruments used to modify the repricing sensitivity of certain assets and liabilities, principally loans, deposits and notes payable.
Exposure to interest rate risk can be altered by management, as warranted, through changes in the Corporation's asset/liability structure or the use of off-balance-sheet financial markets instruments, such as interest rate futures and swap agreements. During the year, the Corporation maintained a modest repricing imbalance on assets and liabilities, enabling it to benefit from a decline in long term rates, which resulted in a flattening of the yield curve. This action contributed to the Corporation's improvement in net interest revenue throughout 1993. OFF-BALANCE-SHEET FINANCIAL MARKETS INSTRUMENTS The Corporation, through its subsidiary banks, participates as a counterparty in various off-balance-sheet financial markets instruments. Such instruments are also known as derivatives. In the negotiated over-the-counter (OTC) markets, these instruments include swaps, forwards and options, which are based upon interest rates and foreign currencies. Standardized exchange-traded futures contracts are also utilized. The Corporation enters into such transactions in connection with its trading activities, including offering them to its customers. For asset/liability management purposes, these instruments may also be used to manage the Corporation's own interest rate and currency risks. The principal or notional values of commitments related to off-balance-sheet financial markets instruments represent the volume of outstanding transactions and do not represent the potential for gain or loss associated with the market risks or credit risk of such transactions. As such, the actual market or credit exposure for all these instruments is significantly less than the notional amount. Gains and losses stemming from changes in the market values of the 47 19 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED financial markets instruments entered into in connection with the Corporation's trading activities are recognized currently as part of trading profits and commissions or foreign exchange profits. The majority of the Corporation's off- balance-sheet financial markets instruments, not used in managing interest rate or foreign exchange risk, are hedged with other such instruments. Profits and losses from instruments used to manage the Corporation's own balance sheet interest rate or foreign exchange risk are netted against the results of the item being hedged. The Corporation enters into foreign exchange contracts and foreign currency options primarily in connection with its trading activities and to hedge foreign currency risk. In addition, the Corporation uses foreign exchange contracts to hedge a portion of its exposure to translation gains and losses from overseas branches and foreign subsidiaries. Foreign exchange contracts include such commitments as foreign currency spot, forward, futures, option and swap contracts. The risks in these transactions result from trading in a volatile commodity and the ability of the counterparties to deliver under the terms of the contract. The Corporation actively monitors all transactions and positions against predetermined limits assigned to business units and types of currency to ensure reasonable risk taking. The Corporation enters into interest rate swap agreements in connection with its trading activities, including offering these agreements to its customers, and to manage its own interest rate risk. These agreements 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 notional value is the basis for calculating payment streams and is never exchanged. The primary risks associated with swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. The Corporation uses futures and forward contracts, including forward rate agreements, in connection with its trading activities and to manage its own interest rate exposure. Futures and forward contracts 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 make a delivery of a specific instrument at a predetermined date for a specific price. These contracts also include agreements that are settled between counterparties based on a notional principal value and do not involve an actual movement of principal. 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 purchases and writes (or sells) interest rate options in connection with its trading and risk management activities, including providing these products to its customers, and to manage its own interest rate exposure. Interest rate options are contracts that allow the holder of the option to receive 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 potential payment between the seller and buyer of an interest differential. In addition, other types of option products provide the holder with the right to enter 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 expected movements in interest rates and the ability of the counterparties to meet the terms of the contracts. The following presents information concerning the off-balance-sheet financial markets instruments discussed above as of December 31, 1993:
RISK MANAGEMENT PORTFOLIO TRADING PORTFOLIO AVERAGE NOTIONAL FAIR NOTIONAL REMAINING FAIR UNRECOGNIZED (DOLLARS IN MILLIONS) AMOUNT VALUE(1) AMOUNT MATURITY VALUE(1) GAIN(2) Futures and forwards................................ $15,026 $3,581 3 months $ 2 $ 2 Interest rate swaps................................. 6,732 $ 84 3,463 4 years 47 46 Interest rate options: Written or sold................................. 5,744 (14) 39 6 months Purchased....................................... 4,922 25 414 3 years 5 5 Foreign exchange: Spot and forward contracts...................... 21,592 (10) 556 3 months 13 Options written or sold......................... 613 (22) Options purchased............................... 691 21 (1) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third party as of December 31, 1993. In certain cases, such as the futures and forwards contained in the trading portfolio, instruments are subject to daily cash settlements; as such the fair value of these instruments is zero. Instruments in the trading portfolio are marked to market with changes in fair value recognized as either trading profits and commissions or foreign exchange trading profits. Additional information on amounts recognized as trading profits and commissions and foreign exchange trading profits is included in the Noninterest Income section on page 36. (2) Unrecognized gain represents the amount of gain earned on the instruments as of December 31, 1993 that has not been recognized in the income statement or, in certain cases, cumulative translation adjustments. The unrecognized gain for interest rate swaps contained in the risk management portfolio includes $15 million associated with swaps that were transferred to the trading portfolio during the year. This $15 million represents the remaining unamortized amount of the deferred gain that existed as of the date of transfer to the trading portfolio. The notional and fair values of these swaps are included in the trading portfolio.
Historically, the Corporation has experienced minimal credit losses associated with its off-balance-sheet financial markets instruments. Additional information with respect to the Corporation's off-balance-sheet financial markets instruments, including its accounting policies, is included in Notes 1, 21 and 28 to the Financial Statements. CAPITAL MANAGEMENT At December 31, 1993, the Corporation had $2.9 billion in stockholders' equity, compared with $2.6 billion at December 31, 1992. The growth in stockholders' equity from the end of 1992 mainly reflected retention of earnings, the issuance of $70 million of preferred stock during the year 48 20 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED and a $42 million increase from the Corporation's adoption of SFAS No. 115 (see Note 5 to the Financial Statements for further discussion of SFAS No. 115). These increases were partially offset by the payment of $73 million in dividends on common and preferred stock. 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. In addition, capital is divided into two tiers. Tier 1 capital includes common stockholders' equity and qualifying preferred stock. Tier 2, or supplementary capital, includes, subject to certain limitations, limited-life preferred stock, mandatory convertible securities, subordinated debt and a portion of the reserve for credit losses. Total capital is defined as the sum of tier 1 and tier 2 capital. At December 31, 1993, banking organizations were required to meet a minimum total capital ratio of 8%, with at least one-half being in the form of tier 1 capital. In addition, higher tier 1 and total capital ratios can be imposed on particular institutions at the discretion of the regulatory agencies. Banking organizations are also subject to a minimum leverage capital ratio, which is defined as the ratio of tier 1 capital to adjusted total average assets, of 3%; however, all but the most highly rated organizations are expected to maintain an additional cushion of at least 100 to 200 basis points above this minimum. The following presents the Corporation's regulatory capital position: REGULATORY CAPITAL
REGULATORY DECEMBER 31 1993 1992 MINIMUM (DOLLARS IN MILLIONS) Risk-based capital ratios: Tier 1 capital ratio............................................ 7.2% 7.1% 4.00% Total capital ratio............................................. 12.4% 12.0% 8.00% Leverage ratio...................................................... 6.8% 6.6% 3.00%(1) Tier 1 capital...................................................... $ 2,754 $ 2,437 Total capital....................................................... $ 4,725 $ 3,987 Total risk-adjusted assets.......................................... $ 38,179 $34,405 (1) Plus an additional cushion of at least 100 to 200 basis points for all but the most highly rated institutions.
The Corporation has in place a capital planning process, to assist the Corporation and its banking subsidiaries in maintaining appropriate capital levels and ratios. In June 1993, the Corporation issued $70 million of preferred stock and $100 million of subordinated notes and in November 1993, it issued an additional $350 million of subordinated notes. The Corporation, as a condition of the Federal Reserve Board's approval of the Multibank merger, committed to use the proceeds from the June preferred stock and subordinated note issuances exclusively in addressing any needs in the Corporation's banking subsidiaries. By December 31, 1993, the Corporation had fulfilled this commitment. During 1993, the Board of Directors declared quarterly dividends of $.10 per share on the Corporation's common stock and in January 1994, a quarterly dividend of $.22 was declared. The payment of dividends on the Corporation's common stock 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 deemed relevant by the Board of Directors, including applicable government regulations and policies and the amount of dividends paid to the Corporation by its subsidiaries. On October 7, 1993, a 1991 agreement between the Corporation and the Federal Reserve and the Division of Banking Supervision and Regulation of the Federal Reserve Board was terminated. Among other things, this agreement had required regulatory approval of the declaration and payment of dividends on the Corporation's common stock. At December 31, 1993, all of the Corporation's banking subsidiaries' capital ratios met both the minimum regulatory requirements and the capital ratio aspects of the "well capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) (see further discussion of FDICIA on page 50). The "well capitalized" minimum ratios are 6% for tier 1 capital, 10% for total capital and 5% for leverage. The Corporation's banking subsidiary located in Connecticut, as well as two of the subsidiaries acquired in connection with the Multibank merger (South Shore Bank and Multibank West) would, in each case, not currently be considered "well capitalized" under FDICIA due to an existing agreement or order with their respective bank regulatory agency. The Connecticut banking subsidiary is subject to a stipulation and agreement with the Connecticut Banking Commissioner and South Shore Bank is subject to a memorandum of understanding (MOU) with the FDIC and the Massachusetts Commissioner of Banks. Multibank West, the resulting bank from the 1991 merger of two of Multibank's banking subsidiaries, is subject to the conditions of the FDIC's approval order in connection with that merger. The agreements and approval order with respect to these subsidiaries require that the subsidiary banks meet and maintain certain specific capital ratios. Each of these banking subsidiaries is in compliance with the capital ratio aspects of its respective agreement or approval order. The Corporation expects to merge South Shore Bank, Multibank West and Mechanics Bank into FNBB during the first half of 1994. These mergers are subject to regulatory approval and no assurance can be given that such approval will be obtained. The capital categories of the Corporation's banking subsidiaries are determined solely for the purpose of applying FDICIA's provisions and, accordingly, such capital categories may not constitute an 49 21 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED accurate representation of the overall financial condition or prospects of any of the Corporation's banking subsidiaries. In order to support the balance sheet growth of the Corporation's banking subsidiaries and to assist them in maintaining regulatory capital at desired levels, the Corporation has made capital contributions, and may make future capital contributions, to certain of its banking subsidiaries. Such capital contributions during 1993 consisted of $240 million to FNBB, $17 million to Connecticut, $12 million to South Shore Bank, $4 million to Vermont, $3 million to Multibank West and $3 million to Casco. During 1993, Hospital Trust paid $7 million in dividends to the Parent Company. The level of future dividends from bank subsidiaries is dependent on a number of factors. Such factors include capital adequacy, net income, liquidity, asset quality and economic conditions. In addition, bank regulations require the approval of bank regulatory authorities if dividends declared by bank subsidiaries exceed certain prescribed limits. Also, under the Connecticut banking subsidiary's regulatory agreement discussed above, the Connecticut subsidiary would need regulatory approval to remit a dividend to the Parent Company. During the first quarter of 1993, the Office of the Comptroller of the Currency terminated its formal agreements with FNBB, Hospital Trust and Casco. In addition, an MOU between Vermont and the FDIC was lifted in October 1993 and a similar agreement between Mechanics Bank and the FDIC was lifted in January 1994. Additional information on dividends and the remaining subsidiary regulatory agreements can be found in Notes 14 and 25 to the Financial Statements. REGULATORY AND ACCOUNTING ISSUES New Accounting Standards As discussed previously, the Corporation has adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in its 1993 Financial Statements. Additional information on SFAS Nos. 106, 109 and 115 can be found in Notes 16, 20 and 5 to the Financial Statements, respectively. In addition, SFAS No. 112, "Employers' Accounting for Postemployment Benefits Other than Pensions," is required to be adopted beginning in 1994; Financial Accounting Standards Board (FASB) Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," is also required to be adopted beginning in 1994, and SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," is required to be adopted beginning in 1995. Information on SFAS No. 112, FASB Interpretation No. 39 and SFAS No. 114 can be found in Notes 16, 21 and 6 to the Financial Statements, respectively. SECURITIES AND EXCHANGE COMMISSION ADMINISTRATIVE PROCEEDING As previously announced by the Corporation in its public filings, in January 1994, the Securities and Exchange Commission (SEC) instituted an administrative proceeding against the Corporation. The administrative proceeding relates to the SEC'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 the domestic commercial real estate portfolio. Management believes that the disclosures made in its second quarter of 1989 Form 10-Q were appropriate and intends to defend this action vigorously. While there can be no assurance as to the outcome of this matter, the ultimate disposition will not result in monetary penalties to the Corporation. FDICIA FDICIA has provided for expanded regulation of financial institutions. The applicability of many of its provisions is based upon an institution's capital category in relation to the five categories established by FDICIA (for which the banking agencies have set specific capital ratio and other requirements). The federal banking agencies have issued regulations in a number of areas to implement FDICIA's provisions and these regulations impose progressively more restrictive constraints on the operations and management of banks, which are not at least "adequately capitalized,"as they move into lower capital categories. As noted on page 49, all of the Corporation's banking subsidiaries have capital ratios that meet the requirements of the "well capitalized" category under FDICIA. Additionally, the regulations issued by the banking agencies under FDICIA, among other things: establish a risk-based system for deposit insurance premiums; limit the ability of many banks to use brokered deposits; increase requirements related to independent audits; restrict investments and activities of state-chartered banks; set standards for real estate lending; increase lending restrictions with respect to a bank's executive officers and directors, and establish standards in a number of areas with respect to safety and soundness. Certain of these provisions are discussed elsewhere in this report. The Corporation continues to analyze the effect of, and address its ongoing compliance with, the various regulations issued under FDICIA. It is anticipated that FDICIA, and the regulations enacted thereunder, will continue to result in more limitations on banking activities generally, and increased costs for the Corporation and the banking industry because of higher FDIC assessments, and higher costs of compliance, documentation and record keeping. 50 22 - -------------------------------------------------------------------------------- MANAGEMENT'S FINANCIAL REVIEW - -------------------------------------------------------------------------------- CONTINUED SUMMARY Significant progress was made by the Corporation during 1993: - 1993 net income, excluding the cumulative effects of accounting changes and merger and restructuring charges improved 61% over 1992's income before extraordinary item. - Loans and leases grew $3.4 billion between December 31, 1992 and December 31, 1993. - Nonaccrual loans and leases and OREO declined 31% between December 31, 1992 and December 31, 1993. - Net credit losses declined from $309 million in 1992 to $223 million in 1993. - The Corporation added nearly $5 billion in assets through its mergers with Bancorp and Multibank. The economies of the United States and New England improved modestly in 1993 contributing, in part, to many of the improvements noted above. Management, however, cannot currently predict to what extent the domestic economic recovery will affect future periods. In addition, it is uncertain what impact future changes in the economies in Latin America and other foreign countries where the Corporation does business will have on future periods. No assurance, therefore, can be given that the positive trends achieved in 1993 will continue. 51 23 - -------------------------------------------------------------------------------- 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, 1993 and 1992, 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, 1993. These financial statements are the responsibility of the Corporation's management. 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 standards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting 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 presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 1993 and 1992, and the consolidated results of their operations and cash flows for each of the years in the three year period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Notes 1, 5, 9, 16 and 20 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 Financial Accounting Standards No. 109, "Accounting for Income Taxes," and changed its method of accounting for purchased mortgage servicing rights, effective January 1, 1993; and adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective December 31, 1993. Boston, Massachusetts January 20, 1994 53 24 Bank of Boston Corporation - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET - --------------------------------------------------------------------------------
DECEMBER 31 1993 1992 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Cash and due from banks (Notes 3 and 4)................................................. $ 2,539,286 $ 1,936,396 Interest bearing deposits in other banks (Note 4)....................................... 991,389 1,307,497 Federal funds sold and securities purchased under agreements to resell.................. 1,454,478 1,187,013 Trading securities...................................................................... 305,775 192,198 Mortgages held for sale................................................................. 1,321,607 922,311 Securities: Available for sale (fair value of $1,523,736 in 1992) (Notes 4 and 5)................. 1,437,887 1,497,138 Held to maturity (fair value of $1,568,617 in 1993 and $2,754,838 in 1992) (Notes 4 and 5).............................................................................. 1,568,823 2,635,399 Loans and lease financing (net of unearned income of $311,955 in 1993 and $290,139 in 1992) (Notes 4 and 6)....................................................................... 28,781,974 25,399,332 Reserve for credit losses (Note 7)...................................................... (770,279) (923,120) ------------ ----------- Net loans and lease financing................................................... 28,011,695 24,476,212 Premises and equipment, net............................................................. 522,271 507,059 Due from customers on acceptances....................................................... 391,204 228,524 Accrued interest receivable............................................................. 287,368 287,955 Other real estate owned (Note 6)........................................................ 107,845 169,757 Other assets (Notes 8 and 16)........................................................... 1,648,274 1,967,110 ------------ ----------- TOTAL ASSETS............................................................................ $ 40,587,902 $37,314,569 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Domestic offices: Noninterest bearing................................................................. $ 5,040,028 $ 4,513,995 Interest bearing.................................................................... 17,495,905 19,579,369 Overseas offices: Noninterest bearing................................................................. 525,620 434,320 Interest bearing.................................................................... 6,552,592 4,573,970 ------------ ----------- Total deposits.................................................................. 29,614,145 29,101,654 Funds borrowed (Note 10)................................................................ 4,974,580 2,946,827 Acceptances outstanding................................................................. 391,484 228,626 Accrued expenses and other liabilities.................................................. 723,266 797,895 Notes payable (Note 11)................................................................. 1,972,758 1,686,037 ------------ ----------- Total liabilities....................................................................... 37,676,233 34,761,039 ------------ ----------- Commitments and contingencies (Notes 2, 21, 23 and 24) Stockholders' equity (Note 13): Preferred stock without par value (Note 12): Authorized shares - 10,000,000 Issued shares - 4,593,941 in 1993 and 4,313,941 in 1992............................. 508,436 438,436 Common stock, par value $2.25 (Notes 11 and 17): Authorized shares - 200,000,000 Issued shares - 105,801,268 in 1993 and 104,783,039 in 1992 Outstanding shares - 105,801,268 in 1993 and 104,664,290 in 1992.................... 238,053 235,762 Surplus............................................................................... 768,372 749,491 Retained earnings (Notes 14 and 17)................................................... 1,361,960 1,135,647 Net unrealized gain on securities available for sale (Note 5)......................... 42,980 226 Cumulative translation adjustments.................................................... (8,132) (5,182) Treasury stock, at cost (118,749 shares in 1992)...................................... (850) ------------ ----------- Total stockholders' equity.............................................................. 2,911,669 2,553,530 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................................. $ 40,587,902 $37,314,569 ============ ===========
The accompanying notes are an integral part of these financial statements. 54 25 BANK OF BOSTON CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST INCOME Loans and lease financing, including fees............................... $3,035,050 $3,180,378 $3,343,127 Securities.............................................................. 1,068,555 563,485 446,314 Trading securities...................................................... 10,353 9,154 17,363 Mortgages held for sale................................................. 75,592 57,888 38,710 Federal funds sold and securities purchased under agreements to resell................................................................ 1,569,654 516,413 120,923 Deposits in other banks................................................. 1,064,717 779,407 488,458 ----------- ----------- ---------- Total interest income............................................... 6,823,921 5,106,725 4,454,895 ----------- ----------- ---------- INTEREST EXPENSE Deposits of domestic offices............................................ 629,556 923,609 1,389,258 Deposits of overseas offices............................................ 2,956,469 1,848,264 1,342,301 Funds borrowed.......................................................... 1,605,538 955,412 498,120 Notes payable........................................................... 113,573 73,642 110,432 ----------- ----------- ---------- Total interest expense.............................................. 5,305,136 3,800,927 3,340,111 ----------- ----------- ---------- Net interest revenue.............................................. 1,518,785 1,305,798 1,114,784 Provision for credit losses (Notes 6 and 7)............................. 70,126 180,567 518,656 ----------- ----------- ---------- Net interest revenue after provision for credit losses.............. 1,448,659 1,125,231 596,128 ----------- ----------- ---------- NONINTEREST INCOME Financial service fees.................................................. 349,966 355,076 356,962 Trust and agency fees................................................... 177,648 166,092 157,396 Trading profits and commissions......................................... 23,605 15,779 22,368 Securities gains (Notes 5 and 20)....................................... 32,207 38,987 29,053 Other income (Note 15).................................................. (11,796) 131,640 197,131 ----------- ----------- ---------- Total noninterest income............................................ 571,630 707,574 762,910 ----------- ----------- ---------- NONINTEREST EXPENSE Salaries................................................................ 634,581 604,874 571,377 Employee benefits (Note 16)............................................. 136,139 120,818 112,543 Occupancy expense (Note 23)............................................. 127,828 126,488 134,892 Equipment expense....................................................... 96,220 100,825 102,816 Other real estate owned expense (Note 6)................................ 43,809 112,670 112,741 Merger and restructuring expense (Note 18).............................. 85,000 53,623 Other expense (Note 19)................................................. 407,206 408,436 449,949 ----------- ----------- ---------- Total noninterest expense........................................... 1,530,783 1,474,111 1,537,941 ----------- ----------- ---------- Income (Loss) before income taxes, extraordinary items and cumulative effect of changes in accounting principles............................ 489,506 358,694 (178,903) Provision for (Benefit from) income taxes (Note 20)..................... 214,683 152,781 (57,990) ----------- ----------- ---------- Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles...................................... 274,823 205,913 (120,913) Extraordinary items: Recognition of prior year tax benefit carryforwards (Note 20)......... 72,968 Gains from early extinguishment of debt, net of tax (Notes 11 and 20)................................................................. 7,758 ----------- ----------- ---------- Income (Loss) before cumulative effect of changes in accounting principles............................................................ 274,823 278,881 (113,155) Cumulative effect of changes in accounting principles, net (Notes 9 and 20)................................................................... 24,203 ----------- ---------- ---------- NET INCOME (LOSS)................................................. $ 299,026 $ 278,881 $ (113,155) =========== ========== ========== NET INCOME (LOSS) APPLICABLE TO COMMON STOCK...................... $ 264,337 $ 259,011 $ (126,360) =========== ========== ========== PER COMMON SHARE Income (Loss) before extraordinary items and cumulative effect of changes in accounting principles: Primary............................................................. $ 2.28 $ 1.82 $ (1.42) Fully diluted....................................................... $ 2.22 $ 1.78 $ (1.42) Net income (loss): Primary............................................................. $ 2.51 $ 2.54 $ (1.33) Fully diluted....................................................... $ 2.44 $ 2.45 $ (1.33) Cash dividends declared................................................. $ .40 $ .10 $ .10 AVERAGE NUMBER OF COMMON SHARES Primary............................................................. 105,336 101,977 94,730 Fully diluted....................................................... 110,258 107,157 94,730
The accompanying notes are an integral part of these financial statements. 55 26 BANK OF BOSTON CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) CUMULATIVE TWO YEARS ENDED DECEMBER 31, PREFERRED COMMON RETAINED ON TRANSLATION TREASURY 1993 STOCK STOCK SURPLUS EARNINGS SECURITIES ADJUSTMENTS STOCK TOTAL (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) BALANCE, JANUARY 1, 1992....... $ 208,436 $ 214,082 $ 613,984 $ 887,108 $(333) $(3,484) $ (877) $1,918,916 Net income -- 1992............. 278,881 278,881 Common stock issued in connection with: Public offering -- 8,493,000 shares..................... 19,109 127,462 146,571 Dividend reinvestment and stock purchase plan -- 104,997 shares............. 236 2,043 2,279 Exercise of stock options -- 783,227 shares (Note 17)... 1,534 7,494 9,028 Restricted stock grants, net of forfeitures -- 181,725 shares.......... 409 3,771 4,180 Change in unearned compensation related to restricted stock grants (Note 17).................. (2,838) (2,838) Other, principally employee benefit plans -- 174,314 shares.......... 392 2,336 27 2,755 Preferred stock issued in connection with public offering -- 920,000 shares (Note 12).................... 230,000 (7,599) 222,401 Cash dividends declared: Preferred stock (Note 12).... (19,052) (19,052) Common stock -- $.10 per share...................... (8,452) (8,452) Change in net unrealized gains and losses on marketable equity securities of nonbanking subsidiary........ 559 559 Translation adjustments, net of tax.......................... (1,698) (1,698) --------- --------- --------- ---------- ------- ------- -------- ---------- BALANCE, DECEMBER 31, 1992..... 438,436 235,762 749,491 1,135,647 226 (5,182) (850) 2,553,530 Net income -- 1993............. 299,026 299,026 Common stock issued in connection with: Dividend reinvestment and stock purchase plan -- 286,201 shares............. 644 5,943 31 6,618 Exercise of stock options -- 800,524 shares (Note 17)... 1,354 11,293 747 13,394 Restricted stock grants, net of forfeitures -- 13,740 shares (Note 17)........................ 31 1,510 (1,871) 72 (258) Change in unearned compensation related to restricted stock grants (Note 17).................. 1,734 1,734 Other, principally employee benefit plans -- 116,223 shares.......... 262 2,540 2,802 Preferred stock issued in connection with public offering -- 280,000 shares (Note 12).................... 70,000 (2,405) 67,595 Cash dividends declared: Preferred stock (Note 12).... (34,459) (34,459) Common stock -- $.40 per share...................... (38,117) (38,117) Net unrealized gain on securities available for sale (Note 5)..................... 42,754 42,754 Translation adjustments, net of tax.......................... (2,950) (2,950) --------- --------- --------- ---------- ------- ------- -------- ---------- BALANCE, DECEMBER 31, 1993..... $ 508,436 $ 238,053 $ 768,372 $1,361,960 $42,980 $(8,132) $ 0 $2,911,669 ========= ========= ========= ========== ======= ======= ======== ==========
The accompanying notes are an integral part of these financial statements. 56 27 BANK OF BOSTON CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- CONTINUED
NET UNREALIZED GAIN (LOSS) CUMULATIVE PREFERRED COMMON RETAINED ON TRANSLATION TREASURY YEAR ENDED DECEMBER 31, 1991 STOCK STOCK SURPLUS EARNINGS SECURITIES ADJUSTMENTS STOCK TOTAL (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) BALANCE, JANUARY 1, 1991....... $ 208,436 $ 210,859 $ 606,945 $1,024,102 $(2,807) $(1,005) $ (1,005) $2,045,525 Net loss -- 1991............... (113,155) (113,155) Common stock issued in connection with: Dividend reinvestment and stock purchase plan -- 723,386 shares............. 1,627 2,718 4,345 Exercise of stock options -- 20,546 shares (Note 17).... 46 306 352 Restricted stock grants, net of forfeitures -- 244,150 shares.......... 546 1,846 2,392 Change in unearned compensation related to restricted stock grants (Note 17).................. (2,245) (2,245) Other, employee benefit plans -- 446,163 shares.......... 1,004 2,169 (3) 128 3,298 Cash dividends declared: Preferred stock (Note 12).... (13,255) (13,255) Common stock -- $.10 per share...................... (8,336) (8,336) Change in net unrealized gains and losses on marketable equity securities of nonbanking subsidiary........ 2,474 2,474 Translation adjustments, net of tax.......................... (2,479) (2,479) --------- --------- --------- ---------- ------ ------- -------- ---------- BALANCE, DECEMBER 31, 1991..... $ 208,436 $ 214,082 $ 613,984 $ 887,108 $ (333) $(3,484) $ (877) $1,918,916 ========= ========= ========= ========== ====== ======= ======== ==========
The accompanying notes are an integral part of these financial statements. 57 28 BANK OF BOSTON CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................................... $ 299,026 $ 278,881 $ (113,155) Reconciliation of net income (loss) to net cash provided from operating activities: Cumulative effect of change in accounting for income taxes........... (77,163) Cumulative effect of change in accounting for PMSR, net ot tax....... 52,960 Extraordinary income from recognition of prior year tax benefit carryforwards...................................................... (72,968) Extraordinary gains from early extinguishment of debt, net of tax.... (7,758) Provision for credit losses.......................................... 70,126 180,567 518,656 Depreciation and amortization........................................ 175,244 153,238 116,358 Provision for deferred taxes......................................... 118,818 109,934 101,636 Net gains on sales of securities and other assets.................... (68,382) (86,773) (103,715) Change in trading securities......................................... (113,577) 8,057 (23,309) Change in mortgages held for sale.................................... (399,296) (441,846) (186,254) Change in securities available for sale, net of transfers............ 991,827 2,575,266 Net change in interest receivables and payables...................... 3,929 9,110 (9,460) Other, net........................................................... 400,419 10,022 (121,374) ----------- ---------- ---------- Net cash provided from operating activities........................ 1,453,931 2,723,488 171,625 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) interest bearing deposits in other banks................................................................ 316,108 (118,569) 47,755 Net cash provided from (used for) federal funds sold and securities purchased under agreements to resell................................. (267,465) (313,792) 371,212 Purchases of securities held to maturity............................... (1,722,476) (1,433,038) (8,295,182) Sales of securities held to maturity................................... 9,820 8,064 3,356,035 Maturities of securities held to maturity.............................. 1,807,983 999,001 3,570,171 Dispositions of venture capital investments............................ 96,627 71,170 54,558 Loans and lease financing originated by nonbank entities............... (5,418,156) (5,323,498) (5,453,265) Loans and lease financing collected by nonbank entities................ 4,927,419 5,214,499 5,542,951 Proceeds from sales of loan portfolios by bank subsidiaries............ 171,059 25,313 32,090 Loan portfolios purchased by bank subsidiaries......................... (44,000) (97,375) (698,700) Net cash provided from (used for) lending activities of bank subsidiaries......................................................... (3,393,717) (779,825) 1,045,387 Lease financing originated by bank entities............................ (50,429) (7,365) (40,333) Lease financing collected by bank entities............................. 22,193 17,215 26,535 Proceeds from sales of other real estate owned......................... 141,995 309,508 185,651 Expenditures for premises and equipment................................ (96,785) (73,755) (52,134) Proceeds from sales of business units, premises and equipment.......... 7,552 11,973 10,036 Other, net............................................................. (177,761) 16,126 572,331 ----------- ---------- ---------- Net cash provided from (used for) investing activities............... (3,670,033) (1,474,348) 275,098 ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from (used for) deposits............................. 512,491 (189,229) (2,516,344) Net cash provided from (used for) funds borrowed....................... 2,027,753 (1,687,196) 2,132,104 Proceeds from issuance of notes payable................................ 519,024 304,605 116,012 Repayments/repurchases of notes payable................................ (230,763) (31,716) (426,592) Net proceeds from issuance of common stock............................. 19,883 155,936 7,887 Net proceeds from issuance of preferred stock.......................... 67,595 222,401 Dividends paid......................................................... (72,576) (27,504) (28,964) ----------- ---------- ---------- Net cash provided from (used for) financing activities............... 2,843,407 (1,252,703) (715,897) ----------- ---------- ---------- Effect of foreign currency translation on cash......................... (24,415) (46,772) (76,790) ----------- ---------- ---------- Net change in cash and due from banks.................................. 602,890 (50,335) (345,964) Cash and due from banks at January 1................................... 1,936,396 1,986,731 2,332,695 ----------- ---------- ---------- Cash and due from banks at December 31................................. $ 2,539,286 $1,936,396 $1,986,731 =========== ========== ==========
The accompanying notes are an integral part of these financial statements. 58 29 - -------------------------------------------------------------------------------- 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. Prior period financial statements have been restated to give retroactive effect to the mergers with Society for Savings Bancorp, Inc. (Bancorp) and Multibank Financial Corp. (Multibank) completed on July 9, 1993 and July 13, 1993, respectively, which were accounted for as poolings of interests. See Note 2 for additional information regarding the mergers. In addition, certain prior period amounts have been reclassified to conform with current financial statement presentation. 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 National Bank of Boston (FNBB); South Shore Bank; Mechanics Bank; Multibank West; Casco Northern Bank, N.A. (Casco); Bank of Boston Connecticut (Connecticut); Rhode Island Hospital Trust National Bank (Hospital Trust); and Bank of Vermont (Vermont). Intercompany accounts and transactions have been eliminated in consolidation. Investments in 20% to 50%-owned companies 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 is included in other assets and is amortized on a straight-line basis predominantly over a twenty-five year period. 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 functional 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 translated 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 a highly inflationary economy, 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 liabilities, exchange rates in effect on the date of acquisition for property and equipment (and related depreciation) and certain investments, and an average exchange rate during the period for income and expenses. The resulting translation adjustments and related hedge gains and losses for these units are recorded in the income statement as a component of other 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. Securities. Effective December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Additional information with respect to this change in accounting principle is included in Note 5. Under this new standard, all debt and equity securities are classified into one of three categories: securities held to maturity, securities available for sale or trading securities. 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. Securities available for sale are debt securities that the Corporation may not hold to maturity, and equity securities. Excluded from this category are securities purchased in connection with the Corporation's trading activities. Securities available for sale include securities which are purchased in connection with the Corporation's asset/liability risk management strategy and may be sold in response to changes in interest rates, resultant prepayment risk and other related factors; securities held in connection with the Corporation's venture capital 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 category, equity securities that have a readily determinable fair value and debt securities are reported at fair value, with unrealized gains and losses, generally computed on a specific identified cost basis, recorded net of tax, as a separate component of stockholders' equity. Securities that are not traded on established exchanges are reported at cost. Prior to the adoption of SFAS No. 115, securities available for sale and marketable equity securities not designated as available for sale were reported at the lower of aggregate cost or fair value. There were no valuation adjustments with respect to any period under the prior policy. If a security available for sale or a security held to maturity has experienced a decline in value that is other than temporary, it is written down to its estimated fair value through a charge to current period income. Realized gains and losses are generally computed on a specific identified cost basis and are included in current period income. Trading securities include securities purchased in connection with the Corporation's trading activities and as such are expected to be sold in the near term. The Corporation reports 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 reported as funds borrowed. Foreign Exchange Trading. Foreign exchange trading positions, including foreign currency spot, forward, future, option and cross-currency interest rate swap positions, are valued at current market rates. Net foreign exchange trading gains or losses are recorded in the income statement as a component of other income. 59 30 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED Interest Rate Contracts. Futures and forward contracts, including future rate agreements, and interest rate swap agreements entered into in connection with trading activities, are reported at fair value, with gains and losses recognized currently in trading profits and commissions. Gains and losses on futures and forward contracts used to manage interest rate exposure are deferred and amortized over the period being managed as a component of interest income or expense. Income or expense on interest rate swap agreements used to manage interest rate exposure is accrued over the life of the agreement as an adjustment to interest income or expense. Options purchased and written in connection with trading activities are reported at fair value, with gains and losses recognized currently in trading profits and commissions. Gains and losses on agreements used to manage interest rate exposure are amortized over the life of the agreement as an adjustment to interest income or expense. Loans and Lease Financing. Loans are reported at their principal outstanding, net of charge-offs and unearned income, if any. Mortgages held for sale are reported at the lower of aggregate cost or fair value. Loans include in- substance repossessions (ISRs). As discussed more fully in Note 6, ISRs were previously classified as other real estate owned. 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 accordance 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 recognized in income to yield a level rate of return on the net investment in the leases. 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 ultimate 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 demonstrated that such credit exposures are well secured, fully performing and insulated from the weakness surrounding the nonaccrual credit to which they relate. When loans or leases are placed on nonaccrual status, the related interest receivable 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 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 interest received, and by the extent, if any, that future cash receipts required under 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 reported as nonaccrual loans unless concern exists as to the ultimate collection of principal or interest. 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 determined, 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 factors. Other Real Estate Owned. Other real estate owned (OREO) 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 value of the property and net operating results of the property are recorded in noninterest expense. 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 retained when mortgage loans are sold in excess of a normal servicing fee rate. PMSR and EMSR are reported as assets and are amortized as reductions of servicing 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. 60 31 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED Remaining PMSR asset balances are evaluated for impairment by determining their estimated recoverable amount through applying the discount rate in effect at the time the servicing portfolios were purchased to the estimated future net cash flows from servicing the underlying mortgages. The carrying value is written down for any impairment; such writedowns are recorded as reductions of servicing fee income. Prior to 1993, this valuation was performed on an undiscounted basis. Note 9 includes additional information with respect to this change in accounting principle. EMSR is also evaluated for impairment based on estimated future cash flows on a discounted basis. 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. Precious Metals. The Corporation engages in various precious metal activities including sales and consignment of precious metals to commercial customers and investors, arbitrage activities and trading of precious metals. Substantially all precious metal positions resulting from the commercial business and arbitrage activities are hedged with futures and forward contracts. Such precious metal positions are reported at cost and the difference between the fixed futures or forward contract price and cost is amortized into precious metal income, a component of nontinterest income, over the life of the contract. Unhedged positions are valued at fair value with gains and losses recorded in precious metal income. Fees received in connection with precious metal activities are recorded in precious metal income as earned. Precious metal assets, including receivables from the commercial business, are recorded in other assets. Income Taxes. The Corporation accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which was prospectively adopted effective January 1, 1993, and, in connection therewith, records certain items of income and expense in different periods for financial reporting than for income tax reporting purposes. Note 20 includes additional information with respect to the adoption of this new accounting standard. Under this new standard, current tax liabilities or assets are recognized, through charges or credits to the current tax provision, for the estimated taxes payable or refundable for the current year. Net deferred tax liabilities 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 recognized for temporary differences and tax benefit carryforwards that will result in amounts deductible or creditable in the future. 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 recognized 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 related asset. Per Share Calculations. Primary net income per common share is computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares outstanding for each period presented. For fully diluted net income per common share, net income is reduced by preferred stock dividends and increased by the interest, net of income tax benefit, recorded on the Corporation'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 debentures. 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. Cash dividends declared per common share for all periods presented represent the historical cash dividends of the Corporation. 2 MERGERS AND ACQUISITIONS On July 9, 1993 and July 13, 1993, respectively, the Corporation completed its mergers with Bancorp, a $2.4 billion registered bank holding company based in Hartford, Connecticut, and Multibank, a $2.4 billion registered bank holding company based in Dedham, Massachusetts. In connection with the merger with Bancorp, the Corporation issued 9.6 million shares of its common stock for all of the outstanding shares of Bancorp common stock by exchanging .80 of a share of its common stock for each outstanding Bancorp 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 outstanding Multibank share. These mergers were accounted for as poolings of interests and as such are reflected in the consolidated financial statements as though the Corporation, Bancorp and Multibank had been combined as of the beginning of the earliest period presented. As a condition of the approval of the Corporation's merger with Multibank by the Board of Governors of the Federal Reserve System (the Federal Reserve Board), in June 1993, the Corporation raised regulatory capital of approximately $170 million, comprised of $70 million of preferred stock and $100 million of subordinated debt. This regulatory capital was required to be maintained exclusively for use in addressing any needs in the Corporation's banking subsidiaries. By December 31, 1993, the Corporation had utilized this capital accordingly. Notes 11 and 12 provide additional information concerning this preferred stock and subordinated debt. The following table sets forth the results of operations of Bancorp, Multibank and the Corporation for the six months ended June 30, 1993. These six month results are included 61 32 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED in the results of operations for the year ended December 31, 1993, presented in the accompanying consolidated statement of income. The combined amounts reflect adjustments to conform Bancorp's accounting policy for postretirement benefits under SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," to that adopted by the Corporation and to eliminate unamortized premium on loans purchased by a banking subsidiary of the Corporation from Bancorp.
SIX MONTHS ENDED JUNE 30, 1993 (IN MILLIONS) BANCORP MULTIBANK CORPORATION COMBINED Net interest revenue...... $62.4 $53.4 $598.2 $714.8 Noninterest income........ $14.2 $20.9 $270.2 $305.3 Net income................ $ 8.0 $ 9.5 $132.9 $155.1
The following table sets forth reconciliations of revenue and net income previously reported by the Corporation with the combined amounts presented in the accompanying consolidated statements of income for the years ended December 31, 1992 and 1991. The combined amounts for the year ended December 31, 1992 reflect an adjustment to eliminate the effect of the purchase of loans by a banking subsidiary of the Corporation from Bancorp during that year.
YEAR ENDED DECEMBER 31, 1992 (IN MILLIONS) BANCORP MULTIBANK CORPORATION COMBINED Net interest revenue...... $107.7 $106.4 $1,087.4 $1,305.8 Noninterest income........ $ 33.3 $ 35.7 $ 640.3 $ 707.6 Net income................ $ 9.7 $ 4.6 $ 263.1 $ 278.9 YEAR ENDED DECEMBER 31, 1991 (IN MILLIONS) BANCORP MULTIBANK CORPORATION COMBINED Net interest revenue...... $104.7 $103.5 $906.2 $1,114.8 Noninterest income........ $ 53.9 $ 39.3 $676.9 $ 762.9 Net income (loss)......... $(64.5) $(15.2) $(26.6) $(113.1)
On September 21, 1993, the Corporation announced that it had reached a definitive agreement to acquire BankWorcester Corporation (BankWorcester) for $34 for each share of BankWorcester common stock outstanding, subject to an upward adjustment if the acquisition is not consummated on or before June 30, 1994. It is expected that the total purchase price will approximate $247 million. BankWorcester, the holding company for Worcester County Institution for Savings, had approximately $1.5 billion of assets, approximately $1.3 billion of deposits and 28 branches at December 31, 1993. The acquisition has been approved by the boards of directors of both companies and by BankWorcester's stockholders, and remains subject to the receipt of required regulatory approvals. The acquisition will be accounted for as a purchase. 3 STATEMENT OF CASH FLOWS For purposes of the Statement of Cash Flows, cash and due from banks are considered to be cash equivalents. Foreign currency cash flows are converted to U.S. dollars using average rates for the period. During 1993, 1992 and 1991, the Corporation paid interest of approximately $5,302 million, $3,815 million and $3,384 million, respectively. The Corporation paid income taxes of approximately $56 million in 1993, $49 million in 1992, and received net income tax refunds of approximately $94 million in 1991. During 1993, 1992 and 1991, the Corporation transferred approximately $132 million, $249 million and $416 million, respectively, to OREO from loans. Loans made to facilitate sales of OREO properties totaled approximately $9 million, $51 million and $45 million in 1993, 1992, and 1991, respectively. Noncash transactions during 1993 also included transfers of approximately $861 million of securities held to maturity to securities available for sale. These transfers resulted from the Corporation's mergers with Bancorp and Multibank, as well as the Corporation's adoption of SFAS No. 115, which is described more fully in Note 5. During 1992, approximately $66 million of securities held to maturity were transferred to securities available for sale. 4 RESERVE REQUIREMENTS, RESTRICTED DEPOSITS AND PLEDGED ASSETS At December 31, 1993 and 1992, cash and due from banks included $1,392 million and $662 million, respectively, to satisfy the reserve requirements of the Federal Reserve and various foreign central banks. Interest bearing deposits in other banks held to satisfy foreign central bank reserve requirements totaled $39 million and $12 million at December 31, 1993 and 1992, respectively. At December 31, 1993 and 1992, securities, loans and other assets with a book value of $3,757 million and $5,467 million, respectively, were pledged to collateralize repurchase agreements, public deposits and other items. 5 SECURITIES A summary comparison of securities held to maturity by type is as follows:
GROSS GROSS UNREALIZED UNREALIZED FAIR DECEMBER 31, 1993 COST GAINS LOSSES VALUE (IN THOUSANDS) U.S. Treasury.... $ 317,396 $ 276 $ 73 $ 317,599 U.S. government agencies and corporations -- Mortgage-backed securities... 1,045,574 131 1,679 1,044,026 States and political subdivisions... 29,480 1,049 17 30,512 Foreign debt securities..... 108,503 285 178 108,610 Other debt securities..... 65 65 Other equity securities..... 67,805 67,805 ---------- ------ ------ ---------- $1,568,823 $1,741 $1,947 $1,568,617 ========== ====== ====== ==========
62 33 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED
GROSS GROSS UNREALIZED UNREALIZED FAIR DECEMBER 31, 1992 COST GAINS LOSSES VALUE (IN THOUSANDS) U.S. Treasury... $ 285,177 $ 365 $ 113 $ 285,429 U.S. government agencies and corporations -- Mortgage-backed securities.... 1,774,677 27,796 1,151 1,801,322 States and political subdivisions... 51,104 1,385 6 52,483 Foreign debt securities.... 125,244 116 866 124,494 Other debt securities.... 175,074 17,518 192,592 Marketable equity securities.... 31,035 14,555 591 44,999 Other equity securities.... 192,862 60,657 253,519 ---------- -------- ------ ---------- $2,635,173 $122,392 $2,727 $2,754,838 ========== ======== ====== ==========
Other equity securities reported in securities held to maturity at December 31, 1993 represent securities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such securities are considered to approximate cost. A summary comparison of securities available for sale by type is as follows:
GROSS GROSS UNREALIZED UNREALIZED CARRYING DECEMBER 31, 1993 COST GAINS LOSSES VALUE (IN THOUSANDS) U.S. Treasury.... $ 108,017 $ 1,584 $ 109,601 U.S. government agencies and corporations -- Mortgage-backed securities... 493,142 5,804 $ 774 498,172 States and political subdivisions... 478 4 474 Foreign debt securities..... 441,038 49,622 594 490,066 Other debt securities..... 149,585 149,585 Marketable equity securities..... 57,959 19,989 3,618 74,330 Other equity securities..... 115,659 115,659 ---------- ------- ------ ---------- $1,365,878 $76,999 $4,990 $1,437,887 ========== ======= ====== ==========
CARRYING GROSS GROSS VALUE UNREALIZED UNREALIZED FAIR DECEMBER 31, 1992 (COST) GAINS LOSSES VALUE (IN THOUSANDS) U.S. Treasury...... $ 525,702 $3,546 $ 522,156 U.S. government agencies and corporations -- Mortgage-backed securities........ 568,553 $16,558 1,100 584,011 Foreign debt securities........ 344,218 15,585 565 359,238 Other debt securities........ 49,093 106 49,199 Other equity securities........ 9,572 60 500 9,132 ---------- ------- ------ ---------- $1,497,138 $32,309 $5,711 $1,523,736 ========== ======= ====== ==========
On December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In connection with the adoption of this new standard, certain debt and equity securities, principally venture capital and mezzanine securities with a cost and related unrealized gain of $309 million and $16 million, respectively, were transferred from securities held to maturity to securities available for sale. In addition, in accordance with the new standard, all debt securities, and those equity securities with a readily determinable fair value, were reported at fair value. The excess of fair value over cost, which amounted to $42 million, net of tax, was reported as a separate component of stockholders' equity. The remaining equity securities, with a cost of $116 million, which are not traded on established exchanges, were reported 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 $45 million and $58 million at December 31, 1993 and 1992, respectively. Further information with respect to the fair value of these securities is included in Note 28. A summary of debt securities held to maturity by contractual maturity is as follows:
1993 1992 DECEMBER 31 FAIR FAIR (IN MILLIONS) COST VALUE COST VALUE Within one year.......... $ 397.6 $ 398.4 $ 422.4 $ 423.8 After one but within five years......... 167.8 167.9 328.7 342.6 After five but within ten years......... 92.9 93.8 377.8 389.8 After ten years......... 842.7 840.7 1,282.4 1,300.1 -------- -------- -------- -------- $1,501.0 $1,500.8 $2,411.3 $2,456.3 ======== ======== ======== ========
A summary of debt securities available for sale by contractual maturity is as follows:
1993 CARRYING 1992 DECEMBER 31 CARRYING VALUE FAIR (IN MILLIONS) COST VALUE (COST) VALUE Within one $ 369.4 $ 272.1 year.......... $ 362.6 $ 273.9 After one but 351.9 678.4 within five years......... 317.0 684.6 After five but 114.1 119.9 within ten years......... 105.0 127.9 After ten 412.5 417.2 years......... 407.7 428.2 -------- -------- -------- -------- $1,192.3 $1,247.9 $1,487.6 $1,514.6 ======== ======== ======== ========
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 1993's securities gains were gross gains of $39 million and gross losses of $.7 million related to the sale of debt securities. Total proceeds from such sales amounted to $4,247 million. For 1992, securities gains included gross gains of $51 million and gross losses of $16 million related to securities sales. Total proceeds from securities sales in 1992 amounted to $5,675 million. For 1991, securities gains included gross gains of $30 million and gross losses of $2.8 million related to securities sales. Total 63 34 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED proceeds from securities sales in 1991 amounted to $3,159 million. 6 LOANS AND LEASE FINANCING The following are the details of loan and lease financing balances:
DECEMBER 31 1993 1992 (IN THOUSANDS) United States Operations: Commercial, industrial and financial.......................... $ 11,991,440 $ 10,328,473 Real estate: Secured by 1-4 family residential properties....................... 4,159,069 3,630,181 Construction....................... 617,426 854,395 Other commercial................... 3,123,024 3,202,114 Loans to individuals................. 1,609,566 1,436,451 Lease financing...................... 1,263,267 1,213,851 Unearned income...................... (203,598) (205,394) ------------- ------------ 22,560,194 20,460,071 ------------- ------------ International Operations: Commercial and industrial............ 4,650,227 3,645,799 Banks and other financial institutions. . 602,287 385,054 Governments and official institutions....................... 22,069 53,474 Lease financing...................... 264,597 218,442 All other............................ 790,957 721,237 Unearned income...................... (108,357) (84,745) ------------- ------------ 6,221,780 4,939,261 ------------- ------------ $ 28,781,974 $ 25,399,332 ============= ============
In 1993, in response to guidance issued by banking regulators, the Corporation reclassified loans which met the definition of ISRs from OREO to loans. In addition, valuation adjustments to write down the loans to the fair value of the underlying collateral are treated as credit losses and charged to the reserve for credit losses rather than OREO expense. All prior periods have been reclassified for comparative purposes. The application of this treatment resulted in $189 million of ISRs, previously classified as OREO, being classified as other commercial real estate loans, and reported as nonaccrual loans, at December 31, 1992. In addition, valuation adjustments related to ISRs amounting to $37 million and $54 million for the years ended December 31, 1992 and 1991, respectively, which had previously been reported as OREO expense, have been reclassified to the provision for credit losses, with corresponding amounts recorded as credit losses. These reclassifications had no effect on net income or the ending balance of the reserve for credit losses for any period. Renegotiated loans that are performing in accordance with their new terms are classified as accruing loans. Such loans amounted to $225 million and $401 million at December 31, 1993 and 1992, respectively. The average yield on these loans was approximately 8% at December 31, 1993 and 1992. At December 31, 1993, there were no material commitments to lend additional funds to customers whose loans have been renegotiated. For the years ended December 31, 1993 and 1992, interest income that would have been recognized if the loans had been current at their original contractual rates amounted to $21 million and $37 million, respectively, while the amount recognized as interest income in the same periods amounted to $18 million and $21 million, respectively. In connection with the restructuring of loans, the Corporation may also obtain equity interests in the borrower. When the Corporation's equity interest exceeds twenty percent of the company, the fair value of the Corporation's investment in and loans to the borrower is transferred to other assets and accounted for as an investment. Such equity interests amounted to $41 million at December 31, 1993 and $30 million at December 31, 1992. In May 1993, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," was issued. This standard requires that impaired loans, including loans restructured in a troubled debt restructuring involving a modification of terms, be evaluated based on the present value of expected future cash flows discounted at the loan's effective interest rate or, if the loan is collateral dependent, based on the fair value of the collateral. This standard is effective for fiscal years beginning after December 15, 1994. The Corporation is currently evaluating this new standard, which will be adopted prospectively, and has not yet determined its potential effect. 7 RESERVE FOR CREDIT LOSSES An analysis of changes in the reserve for credit losses is as follows:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) Balance, January 1......... $ 923,120 $1,051,209 $1,022,625 Provision.................. 70,126 180,567 518,656 Credit losses.............. (273,101) (412,036) (597,240) Recoveries................. 50,134 103,380 107,168 ---------- ---------- ---------- Net credit losses.......... (222,967) (308,656) (490,072) ---------- ---------- ---------- Balance, December 31....... $ 770,279 $ 923,120 $1,051,209 ========== ========== ==========
8 OTHER ASSETS Other assets consisted of the following:
DECEMBER 31 1993 1992 (IN THOUSANDS) Accounts receivable..................... $ 445,394 $ 744,228 Purchased and excess mortgage servicing assets................................. 272,776 318,517 Prepaid pension cost.................... 173,659 168,482 Excess of cost over assigned value of net assets acquired.................... 127,383 139,636 Precious metal assets................... 151,078 110,015 Investments in limited partnerships..... 123,369 91,219 Equity investments in affiliates........ 76,698 74,382 Refundable income taxes................. 42,739 44,970 Other prepaid expenses.................. 33,474 37,716 Equity investments from loan restructurings......................... 41,369 30,256 All other............................... 160,335 207,689 ------------ ----------- $ 1,648,274 $ 1,967,110 ============ ===========
64 35 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED 9 CHANGE IN ACCOUNTING FOR PURCHASED MORTGAGE SERVICING RIGHTS Effective January 1, 1993, the Corporation elected to change its method of accounting for PMSR to conform its financial reporting to regulatory accounting rules adopted by the banking regulators in the first quarter of 1993. Under these new rules, the carrying value of PMSR is recorded at the lesser of amortized cost or the estimated aggregate recoverable amount determined by applying the discount rate in effect at the time the servicing portfolios were purchased to the estimated future net cash flows from servicing the underlying mortgages. Prior to 1993, this valuation was performed on an undiscounted basis. The cumulative effect to January 1, 1993 of adopting this change in accounting principle was a decrease in income of $53 million (net of taxes of $32 million), or $.50 per common share on a primary basis and $.48 per common share on a fully diluted basis. If this new accounting method had been applied during 1992, income before extraordinary items would have been reduced by approximately $19 million, or $.19 per common share on a primary basis and $.18 per common share on a fully diluted basis. Determination of the effect of retroactive application of the new accounting method during 1991 on results of that period was not practicable. 10 FUNDS BORROWED Funds borrowed consisted of the following:
DECEMBER 31 1993 1992 (IN THOUSANDS) Federal funds purchased................. $ 417,107 $ 468,138 Term federal funds purchased............ 2,150,000 280,000 Securities sold under agreements to repurchase............................. 798,842 1,121,655 Short-term bank notes................... 350,000 Demand notes issued to the U.S. Treasury............................... 117,359 106,253 Federal Home Loan Bank borrowings....... 80,000 205,000 All other............................... 1,061,272 765,781 ------------ ----------- $ 4,974,580 $ 2,946,827 ============ ===========
All other funds borrowed include long-term borrowings of $327 million at December 31, 1993 and $395 million at December 31, 1992. At December 31, 1993 and 1992, the Corporation had availability under various borrowing arrangements of $1,949 million and $763 million, respectively. 11 NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31 1993 1992 (IN THOUSANDS) PARENT COMPANY Floating rate subordinated equity commitment notes, due February 1996 (issued February 1984)..... $ 87,960 Subordinated equity contract notes, due August 1997 (issued August 1987).................... $ 129,255 129,255 Floating rate subordinated equity commitment notes, 3.55% at December 31, 1993, due August 1998 (issued August 1986)....... 106,400 106,400 Floating rate notes, 6.00% at December 31, 1993, due September 2000 (issued September 1985).... 178,500 178,500 Subordinated notes, due September 2000 (issued August 1988)....... 150,000 150,000 Floating rate subordinated notes, 5.00% at December 31, 1993, due February 2001 (issued February 1986)........................... 186,100 186,100 Subordinated notes, $100 million principal, due July 2003 (issued June 1993)...................... 99,873 Subordinated notes, $350 million principal, due December 2005 (issued November 1993).......... 348,723 7.75% convertible subordinated debentures, due June 2011 (issued January 1986)........... 94,396 94,660 ---------- ---------- 1,293,247 932,875 ---------- ---------- SUBSIDIARIES Medium term notes, weighted average effective interest rate of 8.88% at December 31, 1993, due 1994........................ 108,300 113,137 8.375% subordinated capital notes, due December 15, 1998........... 15,264 15,264 8.375% subordinated notes, $200 million principal, due December 2002 (issued December 1992)..... 198,835 198,705 Other notes, weighted average effective interest rate of 8.26% at December 31, 1993, due 1994 through 2001.................... 357,112 426,056 ---------- ---------- 679,511 753,162 ---------- ---------- $1,972,758 $1,686,037 ========== ==========
Notes payable are unsecured obligations of the Corporation or its subsidiaries. Certain of the indentures under which these notes were issued prohibit the Corporation from making any payment or other distribution in the stock of FNBB unless FNBB unconditionally guarantees payment of principal and interest on the notes. The Corporation's equity commitment and equity contract notes were designed to qualify as capital under prior regulatory capital rules as a result of the Corporation's commitment under the terms of the agreements to issue equity securities equal to the principal amount of the notes on or before their maturity. These notes continue to qualify as a component of total capital under the current risk-based capital regulations. The Corporation's equity contract notes bear interest at 9.50%. At the time of the issuance of these notes, the Corporation entered into an interest rate swap agreement, which effectively converted this fixed rate 65 36 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED obligation into a floating rate obligation. Such interest rate was 3.58% at December 31, 1993. In December 1993, the Corporation redeemed its equity commitment notes due February 1996 at the principal amount plus accrued interest. The Corporation's subordinated notes due September 2000 are redeemable at par in 1995 and bear interest at 10.30%. When the notes were issued, the Corporation entered into an interest rate swap agreement which, for the first seven years, effectively converted the fixed rate obligation to a floating rate obligation. At December 31, 1993, such interest rate was 3.85%. The 7.75% convertible subordinated debentures are convertible at the option of the holder into 4,030,586 shares of common stock of the Corporation at any time on or before June 15, 2011, at a conversion price of $23.42 per share, subject to certain adjustments. The debentures are redeemable at the option of the Corporation, in whole or in part, at any time, at prices ranging from 101.55% in 1994 to 100% in 1995 of the principal amount plus accrued interest. In June 1993, the Corporation issued $100 million of 6 7/8% Subordinated Notes, due 2003. The subordinated notes are not subject to redemption prior to maturity. The subordinated notes were issued by the Corporation as part of its commitment to the Federal Reserve Board to raise regulatory capital in connection with its merger with Multibank, as described in Note 2. When the notes were issued, the Corporation entered into an interest rate swap agreement which effectively converted the fixed rate obligation to a floating rate obligation. At December 31, 1993, such interest rate was 4.14%. In November 1993, the Corporation issued $350 million of 6 5/8% Subordinated Notes, due 2005. The subordinated notes are not subject to redemption prior to maturity. When the notes were issued, the Corporation entered into an interest rate swap agreement which effectively converted the fixed rate obligation to a floating rate obligation. At December 31, 1993, such interest rate was 3.87%. Included in other notes at December 31, 1993 and 1992 were $266 million and $315 million, respectively, of senior notes issued by a nonbanking subsidiary of the Corporation. The notes, due in installments through 1998, bear interest at rates ranging from 6.67% to 9.50%. The notes can be prepaid at various dates at the option of the issuer, with the payment of predetermined prepayment penalties. During 1991, the Corporation repurchased and retired $15 million of its notes payable at a gain. The gain, which amounted to $7.8 million or $.08 per common share, net of taxes of $.8 million, is presented as an extraordinary item in the consolidated statement of income. Notes payable maturing during the next five years amount to: $133 million in 1994, $72 million in 1995, $39 million in 1996, $258 million in 1997 and $214 million in 1998. In January 1994, the Corporation issued $300 million of 6 5/8% Subordinated Notes, due 2004. When the notes were issued, the Corporation entered into an interest rate swap agreement that effectively converted the fixed rate obligation to a floating rate obligation. The subordinated notes are not subject to redemption prior to maturity. In February 1994, the Corporation notified the holders of its floating rate notes due September 2000 that it would redeem those notes in March 1994 at the principal amount plus accrued interest. 12 PREFERRED STOCK On August 13, 1992, the Corporation sold 9.2 million depositary shares. Each depositary share represents a one-tenth interest in a share of the Corporation's 8.60% Cumulative Preferred Stock, Series E, with a liquidation preference of $250 per preferred share (Series E Preferred Stock). In June 1993, the Corporation sold 2.8 million depositary shares. Each depositary share represents a one-tenth interest in a share of the Corporation's 7 7/8% Cumulative Preferred Stock, Series F, with a liquidation preference of $250 per preferred share (Series F Preferred Stock). Each depositary share entitles the holder to a proportional interest in all rights and preferences of a share of Series E or Series F Preferred Stock, including dividend, voting, redemption and liquidation rights. Both the Series E and Series F Preferred Stock have no preemptive or general voting rights. The Series E and Series F Preferred Stock will not be redeemable prior to September 15, 1997 and July 15, 1998, respectively. On and after those dates, the Series E and Series F Preferred Stock will be redeemable at the option of the Corporation, in whole or in part, at the liquidation preference of $250 per share (equivalent to $25 per depositary share), plus dividends accrued and unpaid at the respective redemption date. The depositary shares with respect to the Series F Preferred Stock were issued by the Corporation as part of its commitment to the Federal Reserve Board to raise regulatory capital in connection with its merger with Multibank, as described in Note 2. A summary of the Corporation's Adjustable Rate Cumulative Preferred Stock (Adjustable Rate Preferred Stock) issued and outstanding is as follows:
SERIES A SERIES B SERIES C Outstanding at December 31, 1993 and 1992: Shares....................... 1,044,843 1,574,315 774,783 Amount (in thousands)......... $ 52,242 $ 78,716 $ 77,478 Liquidation preference per share......................... $ 50 $ 50 $ 100 Dividend rates: At December 31, 1993......... 6.00% 6.00% 5.50% Minimum....................... 6.00% 6.00% 5.50% Maximum....................... 13.00% 13.00% 12.50% Dividends per share: 1993......................... $ 3.01 $ 3.01 $ 5.51 1992.......................... $ 3.13 $ 3.04 $ 5.54 1991.......................... $ 3.37 $ 3.25 $ 5.96
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 66 37 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED interest rate benchmarks. The Adjustable Rate Preferred Stock has no preemptive or general voting rights, and is redeemable, in whole or in part, at the option of the Corporation. Series A Preferred Stock is redeemable at $51.50 per share through March 29, 1994 and at $50 per share thereafter; Series B Preferred Stock is redeemable at $51.50 per share through June 19, 1995 and at $50 per share thereafter; and Series C Preferred Stock is redeemable at $103 per share through November 13, 1995 and at $100 per share thereafter. 13 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 circumstances, 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. 14 DIVIDENDS AND LOAN RESTRICTIONS Bank regulations require the approval of bank regulatory authorities if the dividends declared by banking subsidiaries exceed certain prescribed limits. For 1994, aggregate dividend declarations by the Corporation's banking subsidiaries without prior regulatory approval are limited to approximately $503 million of their undistributed earnings at December 31, 1993, plus an additional amount equal to their net profits for 1994, as defined, up to the date of any dividend declaration. However, for any dividend declaration, the Corporation's banking subsidiaries, as well as the Corporation itself, must consider additional factors such as: the amount of current period net income, liquidity, asset quality profile, 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, banking regulators have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. Each banking 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 such loans and advances would be limited to an aggregate of approximately $322 million and would be subject to specific collateral requirements. Under the foregoing regulations, an aggregate of approximately $2,350 million of the Parent Company's investment in banking subsidiaries of $3,175 million, which includes bank holding companies and their subsidiaries, was restricted from transfer to the Parent Company at December 31, 1993. 15 OTHER INCOME The components of other income were as follows:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) Mezzanine/venture capital profits, net................. $ 38,066 $ 16,904 $ 40,908 Net foreign exchange trading profits...................... 45,322 40,952 40,886 Precious metal income......... 9,326 10,664 18,990 Net gains from sales of mortgage inventories......... 7,497 2,763 4,700 Gains from sales of mortgage servicing rights............. 651 14,768 34,045 Recognition of deferred gain from 1984 sale of the headquarters building........ 16,200 Net translation/hedge results from Brazilian currency position..................... (174,000) (50,000) Gain on sale of assets received in connection with lending activities........... 2,741 10,605 10,747 Equity in undistributed earnings of affiliates....... 15,923 11,493 9,832 Gains on sales of branches and other operations............. 8,403 All other..................... 42,678 57,291 28,620 -------- --------- --------- $(11,796) $ 131,640 $ 197,131 ======== ========= =========
During 1993 and 1992, the Corporation maintained a currency position in Brazil in order to take advantage of the spread between local Brazilian interest rates and devaluation of Brazil's local currency. This position significantly affected the levels of consolidated net interest revenue, noninterest income and net interest margin in both periods. For the years ended December 31, 1993 and 1992, this position resulted in net interest revenue of $192 million and $67 million, respectively, and net translation/hedge losses, a component of noninterest income, of $174 million and $50 million, respectively. The impact on 1991 results was not significant. 16 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 Security Act. The principal plan is an account balance defined benefit plan in which each employee has an account to which amounts are allocated based on level of pay and years of service and which grows at a specific rate of interest. Benefits accrued 67 38 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED prior to 1989 are based on years of service, highest average compensation and social security benefits. Employee benefits expense was reduced by net pension income of the Plans, which included the following:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) Service cost (benefits earned during the period).......... $17,695 $ 15,405 $ 15,154 Interest cost on projected benefit obligation........... 19,719 18,045 16,642 Return on plan assets: Actual...................... (42,978) (29,449) (58,386) Actuarial deferral of gains (losses)................... 3,833 (4,339) 25,224 Amortization: Unrecognized net asset...... (4,065) (4,066) (4,065) Unrecognized prior service cost....................... 2,974 2,974 3,177 Other, net................... (2,080) (439) (1,898) ------- -------- -------- Net pension income............ $(4,902) $ (1,869) $ (4,152) ======= ======== ========
The following table sets forth the funded status of the Plans:
DECEMBER 31 1993 1992 1991 (IN THOUSANDS) Projected benefit obligation: Vested benefits............ $ 182,918 $155,379 $104,712 Nonvested benefits......... 29,184 26,088 22,806 --------- -------- -------- Accumulated benefit obligation................. 212,102 181,467 127,518 Effect of projected future compensation levels........ 62,010 64,952 63,838 --------- -------- -------- Projected benefit obligation.................. $ 274,112 $246,419 $191,356 ========= ======== ======== Plan assets at fair value (primarily listed stocks and fixed income securities).... $ 443,601 $395,655 $363,762 ========= ======== ======== Plan assets in excess of projected benefit obligation.................. $ 169,489 $149,236 $172,406 Unrecognized net (gain) loss........................ (96) 17,274 (5,413) Unrecognized prior service cost....................... 21,238 23,009 24,479 Unrecognized net asset....... (16,972) (21,037) (25,103) --------- -------- -------- Prepaid pension cost......... $ 173,659 $168,482 $166,369 ========= ======== ======== Assumptions used in actuarial computations were: Weighted average discount rate....................... 7.5% 8.0-10.0% 8.0-10.0% Rate of increase in future compensation levels......... 4.5% 5.0-6.0% 5.0-7.0% Expected long-term rate of return on assets............ 9.5% 7.6-10.0% 9.5-11.0%
The Corporation also maintains nonqualified deferred compensation and retirement 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, 1993 and 1992, approximately $14 million was included in accrued expenses and other liabilities for these plans. For the years ended December 31, 1993, 1992 and 1991, expense related to these plans was $1.4 million, $1.6 million, and $1.5 million, respectively. The Corporation provides certain health and life insurance benefits for certain retired employees. Eligible domestic employees currently receive credits, up to $10,000, based on years of service which are used to purchase postretirement health care coverage through the Corporation. Prior to 1993, the costs of these health and life insurance benefits, which included the costs of current and prior plans, were expensed currently as paid. Effective January 1, 1993, the Corporation adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," which requires the recognition of postretirement benefits over the service lives of the employees rather than on a cash basis. The Corporation elected to recognize its accumulated benefit obligation of $82 million at January 1, 1993 on a straight-line basis over a 20-year transition period. The adoption of the new standard resulted in an increase in 1993 employee benefits expense of approximately $4 million. The components of postretirement benefits expense for the year ended December 31, 1993 were as follows:
(IN THOUSANDS) Service cost (benefits earned during the period)......................................... $ 942 Interest cost on projected benefit obligation..... 5,712 Amortization: Unrecognized transition obligation.............. 4,062 Unamortized gain................................ (340) -------- Net postretirement benefits expense............. $ 10,376 ========
The following table sets forth the status of the Corporation's accumulated postretirement benefit obligation, which was unfunded, as of December 31, 1993 and January 1, 1993:
DECEMBER 31 JANUARY 1 1993 1993 (IN THOUSANDS) Accumulated benefit obligation: Retirees...................... $ 61,874 $ 69,159 Actives -- eligible to retire...................... 4,974 4,533 Actives -- not eligible to retire...................... 9,824 8,000 -------- -------- Accumulated postretirement benefit obligation............ $ 76,672 $ 81,692 Unrecognized net gain........... 4,615 Unrecognized transition obligation.................... (77,188) (81,692) -------- -------- Postretirement benefit liability..................... $ 4,099 $ 0 ======== ========
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. The assumed weighted average health care cost trend rate was 12% for 1994. Such rate decreases gradually to 5% through the year 2001 and remains level thereafter. The assumed rate of increase in future compensation levels used was 4.5%. An increase of 1% in the assumed health care cost trend rate would result in increases of 4.8% in the accumulated postretirement benefit obligation and 4.1% in annual postretirement benefits expense. Actual cash payments of postretirement benefits other than pensions were $6.3 million, $4.1 million and $4.2 million in the years ended December 31, 1993, 1992 and 1991, respectively. The Corporation maintains thrift incentive plans covering the majority of domestic employees. Under these plans, employer contributions are generally based on the amount of eligible employee contributions. The amounts charged to operating expense for these plans were $10 million in 1993, $8 million in 1992 and $9 million in 1991. The Financial Accounting Standards Board has issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits," to be effective for years beginning after December 15, 1993, which requires accruing the expected cost of providing postemployment benefits, such as salary continua- 68 39 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED tion, severance benefits, continuation of health care benefits and life insurance coverage, to former or inactive employees, after employment but before retirement, if certain conditions are met. This new standard is not expected to have a material effect on the Corporation's financial statements. 17 STOCK OPTIONS AND AWARDS The Corporation's stock incentive plans include the 1991 Long-Term Stock Incentive Plan (the 1991 Plan), the 1986 and 1982 Stock Option Plans (the 1986 and 1982 Plans), the Multibank 1982 Employee Stock Option Plan (the Multibank Plan) and the Society for Savings 1983 Stock Incentive Program (the Society Plan). The 1991 Plan provides for the award of stock options, restricted 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 1982, 1986, Society, or Multibank Plans. Shares reserved under these plans may be authorized but unissued shares, treasury shares or shares purchased on the open market. Options under the above plans are granted at prices not less than the fair market value of the common stock on the date of grant. Stock options under the 1991 Plan are generally exercisable in equal installments on the date of grant and the first anniversary of the grant date. Under the 1986 and 1982 Plans, options granted are generally exercisable in equal installments on the date of grant and each of the three anniversary dates thereafter. Options under the Multibank and Society Plans are fully vested, with the exception of 334 options, which will fully vest in 1994. 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 participant for the difference in tax treatment of Incentive Stock Options and Non-Qualified Stock Options. At December 31, 1993, Tax Offset Payments with respect to 115,294 options, granted in 1987, were outstanding. There was no compensation expense for Tax Offset Payments for the years ended December 31, 1993, 1992 and 1991. A total of 8,064,351 shares of common stock were reserved for issuance under the above plans at December 31, 1993. Options outstanding at December 31, 1993 were at prices ranging from $5.63 to $30.50 per share. The following is a summary of the changes in options outstanding:
1993 1992 1991 Options outstanding, January 1............. 3,705,690 3,733,165 2,813,052 Granted ($5.63 to $25.50 per share)............ 445,103 857,408 1,332,756 Exercised ($5.63 to $24.63 per share)..... (800,524) (783,227) (20,546) Canceled................ (373,518) (101,656) (392,097) --------- --------- --------- Options outstanding, December 31........... 2,976,751 3,705,690 3,733,165 ========= ========= ========= Options exercisable, December 31........... 2,731,896 3,020,511 2,633,378 ========= ========= ========= Shares available for future grants......... 5,087,600 2,309,692 3,327,251 ========= ========= =========
Generally, SARs entitle the holder to receive an amount equal to the excess of the fair market value of a share of common stock on the exercise date over the fair market value at the date of grant. SARs are available under the 1991 Plan and the 1988 Stock Appreciation Rights Plan (the 1988 SARs Plan). At December 31, 1993, 42,950 SARs were outstanding under the 1988 SARs Plan, at a grant price of $24.63. At December 31, 1992 and 1991, 68,174 SARs were outstanding at prices ranging from $22.75 to $24.63. No SARs have been granted under the 1991 Plan at December 31, 1993. Compensation expense (income) related to outstanding SARs was $(30) thousand and $115 thousand for the years ended December 31, 1993 and 1992, respectively. There was no compensation expense for SARs in 1991. The 1991 Plan also provides for the granting of restricted stock. Employees are generally required to maintain employment with the Corporation for a period of five years after the grant in order to become fully vested in the shares granted. Restricted stock issued under the 1991 Plan is recorded at the fair market value of the shares on the date of grant. The resulting unearned compensation is recorded as a reduction of retained earnings and is amortized as compensation expense over the restriction period. During 1993, 111,100 shares of restricted stock were awarded, 87,360 shares were forfeited and 10,675 shares were released from restrictions. At December 31, 1993, there were 509,490 restricted shares outstanding with associated unearned compensation, recorded as a reduction of retained earnings, of $5.2 million. Compensation expense recorded in the years ended December 31, 1993, 1992 and 1991 with respect to restricted stock was $1.3 million, $1.2 million and $.3 million, respectively. 18 MERGER AND RESTRUCTURING EXPENSE In 1993 and 1991, the Corporation recorded merger and restructuring charges of $85 million and $54 million, respectively. The merger and restructuring charges recorded in 1993 were primarily in connection with the Corporation's mergers with Bancorp and Multibank. Such charges consisted of investment banking and other professional fees, stock issuance costs, estimated facilities and operations consolidation costs and severance costs associated with 69 40 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED expected reorganization following the mergers. The charges also included the cost of expense reduction initiatives undertaken by the Corporation. The 1991 restructuring charges were recorded primarily in connection with the Corporation's plans for consolidating and downsizing various domestic and international operations and facilities and reducing the number of employees. 19 OTHER EXPENSE The components of other expense were as follows:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) FDIC deposit insurance.......... $ 61,942 $ 56,390 $ 55,945 Professional: Legal fees..................... 26,441 31,280 41,975 Consulting and other professional fees............ 29,166 36,616 37,659 Communications.................. 59,307 57,895 55,580 Advertising..................... 37,572 29,492 20,527 Forms and supplies.............. 24,343 23,356 23,447 Travel and customer contact..... 22,018 24,944 23,198 Acquisition-related, evaluation and bid costs.................. 19,801 Software costs.................. 19,154 17,645 17,175 Write off of real estate, bank premises and computer equipment...................... 16,519 Other staff costs............... 14,661 13,502 12,896 Amortization of excess of cost over assigned value of net assets acquired................ 11,961 11,373 10,910 Property and casualty insurance...................... 6,759 8,872 7,365 Insurance claims and policy reserves of insurance subsidiary..................... 7,742 6,934 6,570 Non-income taxes................ 4,942 7,210 11,159 Regulatory examination fees..... 4,423 4,326 4,806 All other....................... 76,775 78,601 84,417 ---------- --------- --------- $ 407,206 $ 408,436 $ 449,949 ========== ========= =========
20 INCOME TAXES Effective January 1, 1993, the Corporation adopted prospectively SFAS No. 109, "Accounting for Income Taxes," which principally affects accounting for deferred income taxes. The cumulative effect to January 1, 1993 of adopting this new standard 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 cumulative effect principally reflected the recognition of previously unrecorded tax benefit carryforwards. Under this new standard, deferred tax assets and liabilities are recognized for the estimated future income tax consequences attributable to tax benefit carryforwards and to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are required to be measured using enacted tax rates. The effect of enacted changes in tax law, including changes in tax rates, on these deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. During 1993, the Corporation's federal income tax rate was increased to 35%; the effect of this change was not significant to the deferred tax balance. The new standard also requires that a valuation reserve be established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. At December 31, 1993, the Corporation had a $56 million valuation reserve, which had decreased $5 million during 1993. This reserve has been established for certain future state and federal tax benefits which may not be fully utilized. It is expected that the deferred tax assets, net of the valuation reserve, 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 ordinarily might not follow. The components of the net deferred tax liability at December 31, 1993 were as follows:
(IN THOUSANDS) Deferred tax assets: Federal and state tax benefit carryforwards........ $ 282,537 Reserve for credit losses.......................... 330,753 Interest on nonaccrual loans....................... 80,747 Purchased mortgage servicing rights................ 21,085 Deferred credit related fees....................... 19,956 Other.............................................. 56,982 --------- Deferred tax assets.............................. 792,060 Valuation reserve................................... (56,000) --------- Deferred tax assets, net of reserve.............. 736,060 --------- Deferred tax liabilities: Leasing operations................................. 615,443 Pension obligations................................ 74,989 Foreign operations................................. 14,600 Other.............................................. 48,180 --------- Deferred tax liabilities......................... 753,212 --------- Net deferred tax liability.......................... $ 17,152 =========
At December 31, 1993, the Corporation's federal tax benefit carryforwards were as follows: (IN MILLIONS)
ALTERNATIVE FOREIGN MINIMUM INVESTMENT YEAR OF TAX TAX TAX EXPIRATION CREDIT CREDIT CREDIT TOTAL 1994................... $ 70.3 $ 1.3 $ 71.6 1995................... 34.4 1.9 36.3 1996................... 10.9 4.5 15.4 1997................... 25.0 7.3 32.3 1998................... 26.3 2.4 28.7 1999-2004.............. 62.1 62.1 None................... $19.9 19.9 ------- ----- ----- ------- Total.................. $ 166.9 $19.9 $79.5 $ 266.3 ======= ===== ===== =======
In addition, at December 31, 1993, the Corporation had state tax benefit carryforwards, net of federal tax effects, of $16.2 million that expire in 1994 through 1998. 70 41 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED The components of the provision for (benefit from) income taxes were as follows:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) Current tax provision (benefit): Federal..................... $ 15,591 $ 9,374 $ (139,939) Foreign: Based on income........... 26,918 14,941 15,750 Withheld on interest and dividends............... 8,499 4,663 5,593 State and local............. 44,857 13,869 (41,030) --------- --------- ---------- 95,865 42,847 (159,626) --------- --------- ---------- Deferred tax provision (benefit): Federal..................... 106,439 75,723 23,784 State and local............. 12,379 34,211 13 Reduction of net deferred tax asset................. 77,839 --------- --------- ---------- 118,818 109,934 101,636 --------- --------- ---------- Income tax provision (benefit) before extraordinary items and cumulative effect of changes in accounting principles.... 214,683 152,781 (57,990) Income taxes applicable to extraordinary items and changes in accounting principles: Recognition of prior year tax benefit carryforwards........... (72,968) Gain from early extinguishment of debt.................... 815 Change in accounting for purchased mortgage servicing rights........ (32,362) Change in accounting for income taxes............ (77,163) --------- --------- ---------- $ 105,158 $ 79,813 $ (57,175) ========= ========= ==========
Not included in the above table were the 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 stockholders' equity amounted to a $26 million charge in 1993 and a $2.5 million benefit in 1992. There were no such tax effects in 1991. The income tax provision (benefit) included tax provisions related to securities gains of $13 million in 1993, $15 million in 1992 and $3.9 million in 1991. During 1991, the Corporation recorded a $52 million state tax benefit as a result of reaching a settlement with The Commonwealth of Massachusetts (the Commonwealth) of tax claims by FNBB covering tax years 1976 through 1990. The claims were based on FNBB's position that the exercise of the Commonwealth's taxing authority over FNBB's income from sources outside Massachusetts, including foreign countries, violated the federal and Massachusetts constitutions. Under the terms of the settlement, the Commonwealth refunded $37 million in taxes paid by FNBB. The settlement also specified the Massachusetts tax treatment associated with any federal tax adjustments subsequently determined to affect FNBB's returns for tax years 1982 through 1990, which resulted in a $15 million reduction in FNBB's state tax accruals. The current federal income tax benefit for 1991 reflected the Corporation's decision to carryback its 1990 net operating loss to recover taxes paid in prior years, including a $25 million refund of federal minimum taxes. This decision also resulted in the elimination of a majority of the Corporation's remaining deferred tax asset in 1991, and changed the composition of the Corporation's tax benefit carryforwards. The components of the deferred tax provision before extraordinary items and cumulative effect of changes in accounting principles were as follows:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) Reserve for credit losses..... $ 51,859 $ 51,162 $ (8,850) Leasing operations............ 14,422 32,333 49,402 Interest on nonaccrual loans........................ 12,375 52,009 5,714 Deferred credit related fees......................... (3,833) (2,713) 2,652 Unremitted earnings of foreign equity subsidiaries.......... 5,433 2,925 2,158 Foreign operations............ (12,888) (2,205) 1,247 Sale of headquarters building..................... 7,113 3,160 Purchased mortgage servicing rights....................... (7,861) (14,239) 3,715 Depreciation and amortization................. 1,082 1,108 (2,648) Net tax benefit carryforwards realized (generated)......... 74,158 (33,808) (26,824) Net unrecognized tax benefits..................... 355 39,966 Other, net.................... (15,929) 15,894 31,944 -------- --------- --------- $118,818 $ 109,934 $ 101,636 ======== ========= =========
The following table reconciles the expected federal tax provision (benefit) before extraordinary items and cumulative effect of changes in accounting principles, based on the federal statutory tax rate of 35% in 1993 and 34% in 1992 and 1991, to the actual consolidated tax provision before extraordinary items and cumulative effect of changes in accounting principles:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN MILLIONS) Expected tax provision (benefit) applicable to income (loss) before extraordinary items and cumulative effect of changes in accounting principles......................... $171.3 $ 122.0 $ (60.8) Effect of: State and local income taxes, net of federal tax benefit.......... 37.2 31.8 7.3 State tax case settlement, net of federal tax provision............ (34.3) Tax-exempt income.................. (2.8) (4.1) (9.4) Minimum tax refund................. (24.6) Foreign tax credit carryforward.... 19.4 Non-creditable foreign taxes....... 4.7 2.0 1.9 Tax benefits of net operating loss not recognized................... 41.7 Other, net......................... 4.3 1.1 .8 -------- ------- ------- Actual tax provision (benefit) before extraordinary items and cumulative effect of changes in accounting principles.............. $ 214.7 $ 152.8 $ (58.0) ======== ======= =======
71 42 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED Domestic pre-tax income (loss) was $279 million in 1993, $251 million in 1992, and $(261) million in 1991. Foreign pre-tax income, defined as income generated from operations that are located outside the United States, was $125 million in 1993, $108 million in 1992, and $82 million in 1991. 21 FINANCIAL INSTRUMENTS WITH OFF- BALANCE-SHEET RISK Financial instruments with off-balance-sheet risk represent various degrees and types of risk to the Corporation including credit, interest rate, foreign exchange rate and liquidity risk. Interest rate and foreign exchange rate contracts are entered into in connection with the Corporation's trading activities, including providing certain of these products to its customers, and to manage its own interest rate and foreign exchange exposure. The Corporation enters into offsetting contracts or employs other hedging techniques in an effort to limit its exposure to interest rate and foreign exchange rate risk. CREDIT-RELATED INSTRUMENTS A commitment to extend credit is a legally binding agreement to lend to a customer 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 review and approval policies, gives rise to credit exposure when certain borrowing 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 Corporation's credit evaluation. Such collateral varies but may include securities, receivables, inventory, fixed assets, personal property and real estate. The obligation to lend may be voided if the customer's financial condition deteriorates or if the customer fails to meet certain covenants. Commitments 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 a third party to guarantee an obligation by the Corporation's customers. Standby letters of credit may be issued as credit enhancements for corporate customers' commercial paper, bond issuances by municipalities or other debt obligations, and to guarantee other financial performance of a customer. The Corporation has a current exposure only to the extent that a customer may default on the underlying transaction. The risks involved in the issuance 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 obtain various types of collateral, if deemed necessary, based upon the Corporation's credit evaluation. FINANCIAL MARKETS INSTRUMENTS The principal or notional value of commitments related to various financial markets instruments should not be taken as the measure of credit, interest rate, liquidity or foreign exchange risk, since these values do not represent the cost of replacing the contracts at current rates. In addition, the principal or gross notional values do not reflect the effect of hedges or other offsetting positions. Except for instruments used to manage the Corporation's own balance sheet interest rate and foreign exchange risk, gains and losses stemming from changes in the market values of the financial markets instruments described below are recognized currently as part of trading profits and commissions or foreign exchange profits. The majority of the Corporation's off-balance-sheet financial markets instruments not used in managing balance sheet, interest rate or foreign exchange risk are hedged with other such instruments. The Corporation has historically experienced minimal credit loss with respect to its capital markets instruments. The Corporation enters into foreign exchange contracts and foreign currency options primarily in connection with its trading activities and to hedge foreign currency risk. In addition, the Corporation uses foreign exchange contracts to hedge a portion of its exposure to translation gains and losses from overseas branches and foreign subsidiaries. Foreign exchange contracts include such commitments as foreign currency spot, forward, futures, option and swap contracts. The risks in these transactions arise from the ability of the counterparties to deliver under the terms of the contract and the risk of trading a volatile commodity. The Corporation actively monitors all transactions and positions against predetermined limits assigned to business units and types of currency to ensure reasonable risk taking. The Corporation also enters into interest rate swap agreements in connection with its trading activities, including offering these agreements to its customers, and to manage its own interest rate risk. These agreements 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 notional value is the basis for calculating payment streams and is never exchanged. The primary risks associated with swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. The Corporation uses futures and forward contracts, including future rate agreements, in connection with its trading activities and to manage its own interest rate exposure. Futures and forward contracts 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 make delivery of a specific instrument at a predetermined date for a specific price. These contracts also include agreements which are settled between counterparties based on a notional principal value and do not involve an actual movement of principal. 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. 72 43 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED The Corporation purchases and writes interest rate options in connection with its trading and risk management activities, including providing these products to its customers, and to manage its own interest rate exposure. Interest rate options are contracts that allow the holder of the option to receive 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 potential payment between seller and buyer of an interest differential. In addition, other types of option products provide the holder with the right to enter 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 expected movements in interest rates and the ability of the counterparties to meet the terms of the contracts. A summary of the principal or notional amounts of significant financial instruments with off-balance-sheet risk is as follows:
YEARS ENDED DECEMBER 31 1993 1992 (IN MILLIONS) Fee based or otherwise legally binding commitments to extend credit(1)............ $ 17,391 $ 15,034 Standby letters of credit, foreign office guarantees and similar instruments(2)...... 2,344 2,144 Commercial letters of credit................ 1,033 726 Foreign exchange rate contracts: Commitments to purchase foreign currencies and U.S. dollar exchange................ 22,148 19,696 Notional value of options: Written or sold......................... 613 772 Purchased................................ 691 754 Notional value of cross currency interest rate swaps............................... 57 145 Interest rate contracts: Futures and forwards...................... 18,607 13,287 Notional value of interest rate swaps...... 10,195 9,595 Notional value of options: Written or sold......................... 5,783 5,289 Purchased................................ 5,336 5,085 Residential mortgage loans sold with recourse................................... 119 205 (1) Net of participations conveyed to others of $549 million in 1993 and $664 million in 1992. (2) Net of participations conveyed to others of $293 million in 1993 and $292 million in 1992.
The Corporation's off-balance-sheet financial instruments entered into in connection with its trading activities include both foreign exchange rate and interest rate contracts, which are valued at current market rates, with unrealized gains and losses recorded on a net basis in the accompanying consolidated balance sheet. These amounts represent the current cost of replacing the outstanding contracts. The Corporation's credit exposure on these contracts can be estimated as the gross aggregate unrealized gains, which represent the maximum possible loss the Corporation would incur if all related counterparties failed completely to perform according to the terms of their contracts. At December 31, 1993, gross unrealized gains recorded in the accompanying consolidated balance sheet were $190 million and $267 million on interest rate and foreign exchange rate contracts, respectively. Included in the above table are interest rate swap agreements used to manage interest rate exposure, which are not valued at current market rates, and accordingly, are not reflected in the $190 million discussed above, that have gross unrealized gains at December 31, 1993. The notional value of these swaps was $1,350 million and the gross unrealized gains were approximately $70 million. In March 1992, Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," was issued. The interpretation, which is required to be adopted by the Corporation at the beginning of 1994, will require the reporting of gross unrealized gains and gross unrealized losses on the Corporation's foreign exchange and interest rate contracts separately as assets and liabilities, respectively, unless a right of setoff exists, including a right of setoff resulting from contracts executed with the same counterparty under a master netting arrangement. Through December 31, 1993, the Corporation reported unrealized gains and losses related to forward foreign exchange rate contracts, interest rate swap agreements and similar contracts on a net basis, which the Corporation believes was consistent with banking industry practice. The adoption of this interpretation for balance sheet presentation purposes will not affect the net income or capital of the Corporation, and will not affect the Corporation's risk-based capital ratios, which have historically incorporated the gross unrealized gains on these contracts. If this interpretation was currently effective, the Corporation's assets and liabilities as of December 31, 1993 would have each increased by approximately $421 million. 22 CONCENTRATIONS OF CREDIT RISK Credit risk associated with concentrations is impacted 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. Nearly half of the Corporation's business activity is with customers located within New England. Information with respect to the Corporation's overseas business activities and its geographic concentrations is included in Note 26. As of December 31, 1993, the Corporation's loans and commitments to lend collateralized by commercial real estate properties were approximately $4 billion, of which two-thirds was related to properties in New England. There were no other significant concentrations of credit risk. 73 44 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED 23 LEASE COMMITMENTS Rental expense for leases of real estate and equipment is summarized below:
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) Rental expense................. $93,819 $ 97,318 $ 104,398 Less sublease rental income.... 12,302 12,842 13,289 ------- -------- --------- Net rental expense............. $81,517 $ 84,476 $ 91,109 ======= ======== =========
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 1994 through 1998 are $66 million, $61 million, $57 million, $52 million and $51 million, respectively, and $439 million for 1999 and later. Capital leases, the minimum rentals of which are included in the preceding amounts, are not significant. 24 CONTINGENCIES The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the normal course of business, including claims that borrowers or others have been damaged as a result of the lending practices of the Corporation's subsidiaries. One of these actions, commonly referred to as lender liability claims, has resulted in a judgment against a Corporation subsidiary, which is being appealed. Management, after reviewing all actions and proceedings pending against or involving the Corporation and its subsidiaries, considers that the aggregate loss, if any, resulting from the final outcome of these proceedings will not be material. 25 REGULATORY MATTERS From 1989 through 1993, each of the Corporation, Bancorp and Multibank, as well as each of their banking subsidiaries, operated at various times under a regulatory agreement or order. At December 31, 1993, all such agreements or orders had been terminated, except for those with Connecticut, South Shore Bank, Multibank West and Mechanics Bank; the latter three are banking subsidiaries of Multibank. The agreement with Mechanics Bank was terminated in January 1994. The agreements with respect to Connecticut and South Shore Bank address certain areas, including management, asset quality, reserves, profitability, capital ratios and dividends. In addition, South Shore Bank is subject to certain ongoing conditions of an approval order of the Federal Deposit Insurance Corporation (the FDIC) relating to the merger of Durfee Attleboro Bank and Falmouth National Bank into South Shore Bank. The conditions of the FDIC approval order require, among other things, that a plan to reduce classified asset levels and maintain certain capital ratios be implemented. Each of the banks is required to file periodic progress reports with its regulator. Both Connecticut and South Shore Bank are in compliance with the capital ratio aspects of, and have adopted or are implementing improvements in various areas addressed in, their respective agreements. Multibank West is subject to an FDIC approval order resulting from the merger of First Agricultural Bank and Multibank National of Western Massachusetts, in which the resulting bank was named Multibank West. The approval order addresses, among other things, uniform policies and procedures, risk ratings, asset quality, reserves and funds management, and the maintenance of certain capital ratios. Multibank West, who is required to file periodic progress reports with the FDIC, has complied with all of the aspects of its approval order. 26 SEGMENT INFORMATION The Corporation operates within the financial services industry segment. Services are provided through a network of offices located both in the United States and overseas. Geographic segment information for the Corporation for the years ended December 31, 1993, 1992 and 1991 is presented in the Consolidated Statistical Information section, under the caption Geographic Segment Information, on pages 84 and 85. 27 PARENT COMPANY CONDENSED FINANCIAL STATEMENTS The following is a condensed balance sheet of the Corporation (Parent Company only) at December 31, 1993 and 1992:
DECEMBER 31 1993 1992 (IN THOUSANDS) ASSETS Cash and short term investments in bank subsidiary.................... $ 206,920 $ 288,026 Advances to subsidiaries: Bank subsidiaries.................. 63,709 83,510 Nonbank subsidiaries................ 226,203 57,197 Subordinated notes receivable from bank subsidiary..................... 400,000 400,000 Investments in subsidiaries: Bank subsidiaries.................. 3,175,274 2,541,645 Nonbank subsidiaries................ 134,751 122,331 Other assets......................... 22,846 17,460 ------------ ---------- TOTAL ASSETS......................... $ 4,229,703 $3,510,169 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992 Commercial paper due to nonbank subsidiary.......................... $ 10,200 $ 10,000 Notes payable........................ 1,293,247 932,875 Other liabilities.................... 14,587 13,764 ------------ ---------- Total liabilities.................... 1,318,034 956,639 ------------ ---------- Total stockholders' equity........... 2,911,669 2,553,530 ------------ ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 4,229,703 $3,510,169 ============ ==========
74 45 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED The following is a condensed income statement of the Corporation (Parent Company only):
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) OPERATING INCOME Dividend from bank subsidiary............... $ 6,986 Interest from subsidiaries: Bank subsidiaries...... 37,064 $ 27,866 $ 40,184 Nonbank subsidiaries... 3,159 4,605 6,787 --------- --------- ---------- Total operating income..... 47,209 32,471 46,971 --------- --------- ---------- OPERATING EXPENSE Interest expense........... 51,075 48,943 65,952 Other expense, net......... 3,997 4,125 38,127 --------- --------- ---------- Total operating expense.... 55,072 53,068 104,079 --------- --------- ---------- Loss before income taxes, equity in undistributed net income (loss) of subsidiaries, extraordinary item and cumulative effect of change in accounting principle................ (7,863) (20,597) (57,108) Benefit from income taxes.................... (6,191) (2,555) (5,921) --------- --------- ---------- Loss before equity in undistributed net income (loss) of subsidiaries, extraordinary item and cumulative effect of change in accounting principle................ (1,672) (18,042) (51,187) Equity in undistributed net income (loss) of subsidiaries............. 302,411 296,923 (69,726) --------- --------- ---------- Income (Loss) before extraordinary item and cumulative effect of change in accounting principle................ 300,739 278,881 (120,913) Extraordinary gain from early extinguishment of debt, net of tax......... 7,758 Cumulative effect of change in accounting for income taxes.................... (1,713) --------- --------- ---------- NET INCOME (LOSS).......... $ 299,026 $ 278,881 $ (113,155) ========= ========= ==========
During 1991, the Corporation forgave $15 million of debt from BancBoston Financial Company, a secured finance and factoring nonbank subsidiary of FNBB, thereby providing additional capital to FNBB. The forgiveness of debt is reported in the Parent Company's other expense and is offset by a reduction in the Parent Company's equity in undistributed loss of subsidiaries. The following is a condensed statement of cash flows of the Corporation (Parent Company only):
YEARS ENDED DECEMBER 31 1993 1992 1991 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)....... $ 299,026 $ 278,881 $ (113,155) Reconciliation of net income (loss) to net cash used for operating activities: Cumulative effect of change in accounting for income taxes.... 1,713 Extraordinary gain from early extinguishment of debt, net of tax.... (7,758) Equity in undistributed net (income) loss of subsidiaries........ (302,411) (296,923) 69,726 Net change in interest receivables and payables............ 5,676 (906) 1,173 Other, net............ (12,379) (8,611) 1,529 ---------- ---------- ---------- Net cash used for operating activities........ (8,375) (27,559) (48,485) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided from (used for) short-term investments in banking subsidiary............ 81,420 (135,590) 192,800 Net cash provided from (used for) advances to subsidiaries.......... (149,205) 129,130 100,257 Investments in subsidiaries.......... (299,000) (164,133) (62,431) Purchase of subordinated note receivable from bank subsidiary....... (150,000) ---------- ---------- ---------- Net cash provided from (used for) investing activities........ (366,785) (320,593) 230,626 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from (used for) commercial paper................. 200 (3,029) (131,499) Repayments/repurchases of notes payable...... (88,224) (31,167) Net proceeds from issuance of notes payable............... 448,596 Net proceeds from issuance of common stock................. 19,883 155,418 7,887 Net proceeds from issuance of preferred stock................. 67,595 222,401 Dividends paid.......... (72,576) (27,504) (28,083) ---------- ---------- ---------- Net cash provided from (used for) financing activities........ 375,474 347,286 (182,862) ---------- ---------- ---------- Net change in cash and due from banks........ 314 (866) (721) Cash and due from banks at January 1.......... 236 1,102 1,823 ---------- ---------- ---------- Cash and due from banks at December 31........ $ 550 $ 236 $ 1,102 ========== ========== ========== Interest payments made.................. $ 45,918 $ 50,004 $ 70,726 Income tax payments made (refunds received).... $ (1,500) $ (253) $ 4,696
In 1992, the Corporation transferred BancBoston Leasing Services, Inc. (BBLSI), a nonbank project finance leasing 75 46 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED subsidiary, to FNBB. The transfer was accomplished by a capital contribution of all of the shares of BBLSI from the Corporation to FNBB. The capital contribution, reported in the Parent Company only financial statements, amounted to $45 million. 28 FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," 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 contracts, 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 relevant available market information. Fair value information is intended to represent an estimate of an amount at which a financial instrument could be exchanged in a current transaction between a willing buyer and seller engaging in an exchange transaction. However, since there are no established trading markets for a significant portion of the Corporation's financial instruments, the Corporation may not be able to immediately settle its financial instruments; 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 Corporation's financial instruments, such as loans and deposits, are held to maturity and are realized or paid according to the contractual agreement with the customer. Where available, quoted market prices are used to estimate fair values. However, due to the nature of the Corporation's financial instruments, in many instances quoted market prices are not available. Accordingly, the Corporation has estimated fair values based on other valuation techniques, such as discounting 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 transaction 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 instruments will change. Disclosure of fair values is not required for certain items such as lease financing, investments accounted for under the equity method of accounting, obligations for pensions and other postretirement benefits, premises and equipment, OREO, prepaid expenses, PMSR, core deposit intangibles and other customer relationships, other intangible assets and income tax assets and liabilities. Accordingly, the aggregate fair value amounts presented do not purport to represent 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 because numerous assumptions have been used to estimate the Corporation's fair values, reasonable comparisons of the Corporation's fair value information with other financial institutions' fair value information cannot necessarily be made. The methods and assumptions used to estimate the fair values of each class of financial instruments 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 on 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, considering the fair value of commitments to issue mortgage loans, net of forward contracts to sell mortgage loans. Securities available for sale and securities held to maturity. Fair values are principally based on quoted market prices. For certain debt and equity investments made in connection with the Corporation's venture capital 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 market sources. The fair values of accruing home equity loans are estimated using comparable market information adjusted for credit and other relevant characteristics. 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 estimated by discounting management'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 interest receivable approximates its fair value. Financial instruments classified as other assets subject to the disclosure requirements of the standard consist principally of accounts receivable, EMSR and investments in limited partnerships. The carrying amounts of short-term receivables are considered to approximate their fair value. For longer-term receivables, fair value is estimated by discounting 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 expected 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. 76 47 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED 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 accrued expenses and other liabilities subject to the disclosure requirements of the standard consist principally of short-term liabilities and the carrying amounts approximate their fair values. Notes payable. The fair value of long-term borrowings is estimated using secondary 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 exposure and market risks, are estimated based on market information adjusted for credit and other relevant characteristics using pricing models, including option models. Other unrecognized financial instruments. The fair value of commitments to extend 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 committed 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. 77 48 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINUED The estimated fair values of the Corporation's financial instruments at December 31, 1993 and 1992 are presented in the following tables. The estimated fair value of loans exceeded their carrying amount, net of the reserve for credit losses, principally because the estimated fair values under the standard do not take into account concentrations of credit risk, including the size of credits and other factors considered by management in its determination of the level of the reserve for credit losses. In addition, the reserve for credit losses is established on an undiscounted basis and, also, considers credit losses related to other financial instruments, principally commitments to lend and letters of credit. Further, the total estimated fair value of loans increased over the related carrying amount as a result of the low interest rate environment.
DECEMBER 31 1993 1992 ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR (IN MILLIONS) AMOUNT VALUE AMOUNT VALUE ASSETS Cash and due from banks............... $ 2,539 $ 2,539 $ 1,936 $ 1,936 Interest bearing deposits in other banks............... 991 991 1,307 1,307 Federal funds sold and securities purchased under agreements to resell.............. 1,454 1,454 1,187 1,187 Trading securities.... 306 306 192 192 Mortgages held for sale................ 1,322 1,324 922 922 Securities(1): Available for sale.............. 1,438 1,483 1,497 1,524 Held to maturity.... 1,569 1,569 2,635 2,755 Loans................. 27,254 23,967 Reserve for credit losses(2)........... (770) (923) ------- ------- 26,484 27,200 23,044 23,600 Due from customers on acceptances......... 391 391 229 229 Accrued interest receivable.......... 287 287 288 288 Financial instruments included in other assets.............. 596 626 861 877 LIABILITIES Deposits.............. 29,614 29,736 29,102 29,274 Funds borrowed........ 4,975 4,975 2,947 2,947 Acceptances outstanding......... 391 391 229 229 Financial instruments included in accrued expenses and other liabilities......... 398 398 532 532 Notes payable......... 1,973 2,024 1,686 1,709 (1) For investments made in connection with the Corporation's venture capital and mezzanine financing business that do not trade on established exchanges, and for which no markets exist, fair values were estimated, based on management's review of the investee's financial results, condition and prospects. At December 31, 1993 these investments were classified as securities available for sale, and their estimated fair value exceeded the related carrying amount by $45 million. At December 31, 1992, these investments were classified as securities held to maturity, and their estimated fair value exceeded the related carrying amount by $58 million. (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 allocation of the reserve to other instruments such as leases, commitments to extend credit, standby letters of credit and interest rate contracts. Accordingly, a separate determination of the reserve allocable to loans is not made.
DECEMBER 31 1993 1992 ESTIMATED ESTIMATED FAIR FAIR (IN MILLIONS) VALUE VALUE OTHER FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Interest rate contracts: Futures and forwards(3) Interest rate swaps: In a net receivable position........ $160 $147 In a net payable position........... (76) (107) Options: Written or sold..................... (14) (69) Purchased........................... 30 62 Foreign exchange rate contracts: Commitments to purchase foreign currencies and U.S. dollar exchange: In a receivable position............ 246 310 In a payable position............... (243) (212) Options: Written or sold..................... (22) (45) Purchased........................... 21 28 Cross-currency interest rate swaps.... (1) (3) UNRECOGNIZED SWAPS USED TO MANAGE INTEREST RATE EXPOSURE(4) Interest rate swaps: In a net receivable position........ 70 125 In a net payable position........... (23) (19) OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS Fee based or otherwise legally binding commitments to extend credit.......... (27) (45) Standby and commercial letters of credit, foreign office guarantees and similar instruments................... (42) (55) (3) These contracts generally settle daily; as a result, fair value approximates zero. (4) Information with respect to the accounting for these instruments is included in Note 1.
78 49 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- The following three tables present average balance and interest rate information for the Corporation on a consolidated basis and separately for its United States and International Operations. Incorporated in these tables is an adjustment of tax exempt income to a fully taxable equivalent basis. This adjustment is calculated assuming a 35% federal income tax in 1993 and a 34% federal income tax rate in 1992 and 1991 adjusted for applicable state and local income taxes net of the related federal tax benefit. Data for loans includes nonaccrual and renegotiated balances as well as fees earned on loans. Average rates for interest bearing deposits of United States Operations have been calculated after deducting applicable reserve requirements from average balances shown in the table. Interest rates in International Operations reflect the Corporation's operations in highly inflationary economies and include the effect of the currency position maintained in Brazil, which is discussed in Management's Financial Review on page 33. AVERAGE BALANCES AND INTEREST RATES -- CONSOLIDATED
YEARS ENDED DECEMBER 31 1993 1992 1991 AVERAGE AVERAGE Average Average Average Average (DOLLARS IN MILLIONS) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate ASSETS Interest bearing deposits in other banks.................. $ 1,293 $1,064.7 82.35% $1,246 $ 779.4 62.57% $1,267 $ 494.1 39.03% Federal funds sold and resale agreements................... 1,444 1,569.6 108.68 1,039 516.4 49.68 1,349 115.7 8.57 Trading securities............. 281 10.2 3.65 227 8.9 3.95 261 17.1 6.54 Mortgages held for sale........ 1,071 75.6 7.06 683 57.9 8.47 421 38.7 9.19 Securities: U.S. Treasury................ 580 22.8 3.94 1,537 84.6 5.50 2,491 163.6 6.57 U.S. government agencies and corporations............... 2,085 115.8 5.56 2,237 149.9 6.70 1,669 141.9 8.50 States and political subdivisions............... 45 3.6 7.85 66 5.7 8.56 95 9.4 9.88 Other........................ 914 929.9 101.75 864 328.5 38.04 843 137.9 16.37 Loans and lease financing(1)... 26,586 3,039.5 11.43 25,330 3,186.2 12.58 26,167 3,357.3 12.83 ------- -------- ------- ------- ------- ------- ------ ------- ------- Total earning assets -- interest income.............. 34,299 6,831.7 19.92 33,229 5,117.5 15.40 34,563 4,475.7 12.95 ------- -------- ------- ------- ------- ------- ------ ------- ------- Cash and due from banks........ 1,790 1,596 1,485 Other assets................... 2,278 2,030 1,867 ------- ------- ------- Total assets................... $38,367 $36,855 $37,915 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Savings...................... $ 9,367 211.9 2.30 $ 9,461 303.0 3.28 $ 9,596 482.9 5.14 Time......................... 9,199 425.2 4.62 11,159 638.0 5.72 12,601 943.7 7.52 International Operations..... 5,118 2,948.9 57.62 4,238 1,830.9 43.20 3,781 1,305.0 34.52 Federal funds purchased and repurchase agreements........ 2,816 303.0 10.76 1,877 183.4 9.77 2,322 166.7 7.18 Other borrowed funds........... 1,533 1,302.5 84.97 1,608 772.0 47.99 1,222 313.4 26.02 Notes payable.................. 1,743 113.6 6.52 1,197 73.6 6.15 1,552 128.4 8.27 ------- -------- ------- ------- ------- ------- ------ ------- ------- Total interest bearing funds -- interest expense............. 29,776 5,305.1 17.90 29,540 3,800.9 12.97 31,074 3,340.1 10.84 ------- -------- ------- ------- ------- ------- ------ ------- ------- Demand and other noninterest bearing deposits............. 4,855 4,170 3,883 Other liabilities.............. 1,017 919 1,014 Stockholders' equity........... 2,719 2,226 1,944 ------- ------- ------- Total liabilities and stockholders' equity......... $38,367 $36,855 $37,915 ======= ======= ======= Net Interest Revenue........... $1,526.6 $1,316.6 $1,135.6 ======= ======= ======= Interest Rate Spread(2)........ 2.02% 2.43% 2.11% Interest Rate Margin(3)........ 4.45% 3.96% 3.29% (1) Interest on loans and lease financing includes net fees earned of $56 million in 1993, $49 million in 1992, and $42 million in 1991. Net fees from International Operations were not significant in 1993, 1992 and 1991. (2) Interest rate spread is the average rate earned on total average earning assets less the average rate paid for average interest bearing funds. (3) Interest rate margin is calculated by dividing net interest revenue by total average earning assets.
79 50 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED AVERAGE BALANCES AND INTEREST RATES -- UNITED STATES OPERATIONS
1993 1992 1991 YEARS ENDED DECEMBER 31 AVERAGE AVERAGE Average Average Average Average (DOLLARS IN MILLIONS) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate ASSETS Interest bearing deposits in other banks................ $ 341 $ 11.0 3.22% $ 350 $ 12.6 3.60% $ 479 $ 29.6 6.17% Federal funds sold and resale agreements................. 962 29.5 3.07 913 32.3 3.54 1,322 79.3 6.00 Trading securities........... 152 6.1 4.03 169 7.4 4.43 234 14.8 6.34 Mortgages held for sale...... 1,071 75.6 7.06 683 57.9 8.47 421 38.7 9.19 Securities: U.S. Treasury.............. 580 22.8 3.94 1,537 84.6 5.50 2,491 163.6 6.57 U.S. government agencies and corporations......... 2,085 115.8 5.56 2,237 149.9 6.70 1,669 141.9 8.50 States and political subdivisions............. 45 3.6 7.85 66 5.7 8.56 95 9.4 9.88 Other...................... 443 45.4 10.23 458 60.7 13.27 603 51.8 8.60 Loans and lease financing.... 21,063 1,601.6 7.60 20,892 1,712.2 8.20 22,729 2,130.2 9.37 -------- -------- -------- -------- -------- -------- Total earning assets -- interest income............ 26,742 1,911.4 7.15 27,305 2,123.3 7.78 30,043 2,659.3 8.85 -------- ------ -------- -------- -------- ------ Cash and due from banks...... 1,458 1,319 1,297 Other assets................. 1,518 1,371 1,463 -------- -------- -------- Total assets................. $ 29,718 $ 29,995 $ 32,803 ======== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Savings.................... $ 9,367 211.9 2.30 $ 9,461 303.0 3.28 $ 9,596 482.9 5.14 Time....................... 9,199 425.2 4.62 11,159 638.0 5.72 12,601 943.7 7.52 Federal funds purchased and repurchase agreements...... 2,697 81.5 3.02 1,764 53.4 3.02 2,220 119.1 5.36 Other borrowed funds......... 879 49.2 5.59 1,161 72.9 6.28 941 58.0 6.29 Notes payable................ 1,654 104.5 6.32 1,087 61.8 5.69 1,446 117.4 8.12 Intersegment funding, net.... (1,754) (56.5) (1,303) (50.4) (404) (33.8) -------- -------- -------- -------- -------- -------- Total interest bearing funds -- interest expense........ 22,042 815.8 3.73 23,329 1,078.7 4.67 26,400 1,687.3 6.46 -------- ------ -------- -------- -------- ------ Demand and other noninterest bearing deposits........... 4,470 3,847 3,592 Other liabilities(1)......... 1,100 1,008 1,120 Stockholders' equity......... 2,106 1,811 1,691 -------- -------- -------- Total liabilities and stockholders' equity....... $ 29,718 $ 29,995 $ 32,803 ======== ======= ======= Net Interest Revenue......... $1,095.6 $1,044.6 $ 972.0 ======== ======= ======= Interest Rate Spread(2)...... 3.42% 3.11% 2.39% Interest Rate Margin(3)...... 4.10% 3.83% 3.24% (1) Other liabilities includes net noninterest bearing intersegment funding. (2) Interest rate spread is the average rate earned on total average earning assets less the average rate paid for average interest bearing funds. (3) Interest rate margin is calculated by dividing net interest revenue by total average earning assets.
80 51 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED AVERAGE BALANCES AND INTEREST RATES -- INTERNATIONAL OPERATIONS
1993 1992 1991 YEARS ENDED DECEMBER 31 AVERAGE AVERAGE Average Average Average Average (DOLLARS IN MILLIONS) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate ASSETS Interest bearing deposits in other banks................. $ 952 $1,053.7 110.64% $ 896 $ 766.8 85.59% $ 788 $ 464.5 58.99% Resale agreements....... 482 1,540.1 319.08 126 484.1 384.13 27 36.4 133.42 Trading securities...... 129 4.1 3.19 58 1.5 2.54 27 2.3 8.29 Securities -- other..... 471 884.5 188.04 406 267.8 65.98 240 86.1 35.90 Loans and lease financing............. 5,523 1,437.9 26.03 4,438 1,474.0 33.21 3,438 1,227.1 35.69 --------- -------- ------- -------- ------ -------- Total earning assets -- interest income....... 7,557 4,920.3 65.11 5,924 2,994.2 50.54 4,520 1,816.4 40.19 -------- ------- -------- ------ -------- ------ Cash and due from banks................. 332 277 188 Other assets............ 760 659 404 --------- ------- ------ Total assets............ $8,649 $ 6,860 $5,112 ========= ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Banks in foreign countries........... $1,461 722.2 49.44 $ 1,479 534.2 36.12 $1,641 430.2 26.21 Other foreign savings and time............ 3,657 2,226.7 60.89 2,759 1,296.7 47.00 2,140 874.8 40.89 --------- -------- ------- ------- -------- ------ ------ -------- ------ Total............... 5,118 2,948.9 57.62 4,238 1,830.9 43.20 3,781 1,305.0 34.52 Repurchase agreements... 119 221.5 184.67 113 130.0 115.76 102 47.6 46.71 Other borrowed funds.... 654 1,253.3 191.66 447 699.1 156.32 281 255.4 90.76 Notes payable........... 89 9.1 10.22 110 11.8 10.75 106 11.0 10.32 Intersegment funding, net................... 1,754 56.5 1,303 50.4 404 33.8 --------- -------- ------- -------- ------ -------- Total interest bearing funds -- interest expense............... 7,734 4,489.3 58.05 6,211 2,722.2 43.83 4,674 1,652.8 35.36 -------- ------- -------- ------ -------- ------ Noninterest bearing deposits.............. 385 323 291 Other liabilities(1).... (83) (89) (106) Stockholders' equity.... 613 415 253 --------- ------- ------ Total liabilities and stockholders' equity................ $8,649 $ 6,860 $5,112 ========= ======= ====== Net Interest Revenue.... $ 431.0 $ 272.0 $ 163.6 ======== ======= ====== Interest Rate Spread(2)............. 7.06% 6.71% 4.83% Interest Rate Margin(3)............. 5.70% 4.59% 3.62% (1) Other liabilities includes net noninterest bearing intersegment funding. (2) Interest rate spread is the average rate earned on total average earning assets less the average rate paid for average interest bearing funds. (3) Interest rate margin is calculated by dividing net interest revenue by total average earning assets.
AVERAGE ASSET AND LIABILITY RATIOS
YEAR ENDED DECEMBER 31 1993 1992 1991 Average assets of International Operations to average consolidated assets........................ 23% 19% 13% Average liabilities of International Operations to average consolidated liabilities.............. 23% 19% 14%
81 52 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS 1993 Compared with 1992 The following table presents, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes for 1993 as compared with 1992. The change due to the volume/rate variance has been allocated to volume, and the change because of the difference in the number of days in the periods has been allocated to rate.
Consolidated United States International Increase Increase Increase (Decrease) (Decrease) (Decrease) Due to Change in Net Due to Change in Net Due to Change in Net (IN MILLIONS) Volume Rate Change Volume Rate Change Volume Rate Change EARNING ASSETS Interest bearing deposits in other banks............. $ 39.0 $ 246.3 $ 285.3 $ (.3) $ (1.3) $ (1.6) $ 62.4 $ 224.5 $ 286.9 Federal funds sold and resale agreements........ 440.0 613.2 1,053.2 1.4 (4.2) (2.8) 1,138.0 (82.0) 1,056.0 Trading securities........ 2.0 (.7) 1.3 (.6) (.7) (1.3) 2.2 .4 2.6 Mortgages held for sale.............. 27.4 (9.7) 17.7 27.4 (9.7) 17.7 Securities: U.S. Treasury..... (37.8) (24.0) (61.8) (37.8) (24.0) (61.8) U.S. government agencies and corporations.... (8.5) (25.6) (34.1) (8.5) (25.6) (34.1) States and political subdivisions.... (1.6) (.5) (2.1) (1.6) (.5) (2.1) Other............. 51.3 550.1 601.4 (1.4) (13.9) (15.3) 121.4 495.3 616.7 Loans and lease financing......... 143.7 (290.4) (146.7) 13.0 (123.6) (110.6) 282.4 (318.5) (36.1) Adjustment(1)....... (442.3) 442.3 (31.9) 31.9 (543.2) 543.2 -------- -------- -------- ------ -------- -------- -------- -------- -------- Interest income..... 213.2 1,501.0 1,714.2 (40.3) (171.6) (211.9) 1,063.2 862.9 1,926.1 -------- -------- -------- ------ -------- -------- -------- -------- -------- INTEREST BEARING FUNDS Deposits: Savings........... (.3) (90.8) (91.1) (.3) (90.8) (91.1) Time.............. (90.6) (122.2) (212.8) (90.6) (122.2) (212.8) International Operations...... 507.0 611.0 1,118.0 507.0 611.0 1,118.0 Federal funds purchased and repurchased agreements........ 101.1 18.5 119.6 28.1 28.1 14.1 77.4 91.5 Other borrowed funds............. (64.4) 594.9 530.5 (15.7) (8.0) (23.7) 396.2 158.0 554.2 Notes payable....... 35.5 4.5 40.0 35.8 6.9 42.7 (2.1) (.6) (2.7) Intersegment funding, net...... (14.5) 8.4 (6.1) 14.5 (8.4) 6.1 Adjustments(1)...... (322.8) 322.8 40.0 (40.0) 40.4 (40.4) -------- -------- -------- ------ -------- -------- -------- -------- -------- Interest expense.... 165.5 1,338.7 1,504.2 (17.2) (245.7) (262.9) 970.1 797.0 1,767.1 -------- -------- -------- ------ -------- -------- -------- -------- -------- Net Interest Revenue........... $ 47.7 $ 162.3 $ 210.0 $(23.1) $ 74.1 $ 51.0 $ 93.1 $ 65.9 $ 159.0 ======= ======= ======= ===== ======= ======= ======= ======= ======= (1) Adjustment to reflect the effect on total volume and rate changes of the differences in the component mix of earning assets and interest bearing liabilities from year to year.
82 53 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS 1992 Compared with 1991 The following table presents, on a fully taxable equivalent basis, an analysis of the effect on net interest revenue of volume and rate changes for 1992 as compared with 1991. The change due to the volume/rate variance has been allocated to volume, and the change because of the difference in the number of days in the periods has been allocated to rate.
Consolidated United States International Increase Increase Increase (Decrease) (Decrease) (Decrease) Due to Change in Net Due to Change in Net Due to Change in Net (IN MILLIONS) Volume Rate Change Volume Rate Change Volume Rate Change EARNING ASSETS Interest bearing deposits in other banks..... $ (12.8) $ 298.1 $ 285.3 $ (4.7) $ (12.3) $ (17.0) $ 92.8 $ 209.5 $ 302.3 Federal funds sold and resale agreements...... (153.9) 554.6 400.7 (14.5) (32.5) (47.0) 379.3 68.4 447.7 Trading securities...... (1.4) (6.8) (8.2) (2.9) (4.5) (7.4) .8 (1.6) (.8) Mortgages held for sale............ 22.2 (3.0) 19.2 22.2 (3.0) 19.2 Securities: U.S. Treasury... (52.4) (26.6) (79.0) (52.4) (26.6) (79.0) U.S. government agencies and corporations... 38.0 (30.0) 8.0 38.0 (30.0) 8.0 States and political subdivisions... (2.5) (1.2) (3.7) (2.4) (1.3) (3.7) Other........... 7.9 182.7 190.6 (19.2) 28.1 8.9 109.5 72.2 181.7 Loans and lease financing....... (105.2) (65.9) (171.1) (150.6) (267.4) (418.0) 332.3 (85.4) 246.9 Adjustment(1)..... 54.7 (54.7) (26.5) 26.5 (205.0) 205.0 -------- -------- -------- -------- -------- -------- -------- -------- -------- Interest income... (205.4) 847.2 641.8 (213.0) (323.0) (536.0) 709.7 468.1 1,177.8 -------- -------- -------- -------- -------- -------- -------- -------- -------- INTEREST BEARING FUNDS Deposits: Savings......... (5.5) (174.4) (179.9) (5.5) (174.4) (179.9) Time............ (79.6) (226.1) (305.7) (79.6) (226.1) (305.7) International Operations.... 197.5 328.4 525.9 197.5 328.4 525.9 Federal funds purchased and repurchase agreements...... (43.5) 60.2 16.7 (13.7) (52.0) (65.7) 12.0 70.4 82.4 Other borrowed funds........... 194.1 264.5 458.6 15.0 (.1) 14.9 259.2 184.5 443.7 Notes payable..... (21.9) (32.9) (54.8) (20.4) (35.2) (55.6) .4 .4 .8 Intersegment funding, net.... (34.8) 18.2 (16.6) 34.8 (18.2) 16.6 Adjustment(1)..... (393.7) 393.7 30.9 (30.9) 141.3 (141.3) -------- -------- -------- -------- -------- -------- -------- -------- -------- Interest expense......... (152.6) 613.4 460.8 (108.1) (500.5) (608.6) 645.2 424.2 1,069.4 -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Interest Revenue......... $ (52.8) $ 233.8 $ 181.0 $ (104.9) $ 177.5 $ 72.6 $ 64.5 $ 43.9 $ 108.4 ======= ======= ======= ======= ======= ======= ======= ======= ======= (1) Adjustment to reflect the effect on total volume and rate changes of the differences in the component mix of earning assets and interest bearing liabilities from year to year.
83 54 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED GEOGRAPHIC SEGMENT INFORMATION The following tables present geographic segment information for the Corporation for each of the three years ended December 31, 1993. This geographic segment information presents assets and income segregated into regional locations based upon the domicile of the customer or borrower, but without regard to such factors as method of funding (i.e., local vs. non-local currency) 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 necessarily based on assumptions and subjective criteria. Interest expense allocations, for example, are based on an assumed average money market rate. Corporate capital is allocated based primarily on geographic location of average assets. Additionally, certain allocations have been made among units based upon the Corporation's management accounting system whereby noninterest income and noninterest expenses are adjusted to reflect the cost of services provided by one unit to another, including corporate overhead. The Corporation has a large branch network in Latin America, mainly in Argentina and Brazil. Argentina continues to experience declining inflation and an improving economy. The Corporation's Argentine operation has strategically grown in line with the overall business expansion leading to an increase in indigenous dollar lending. Brazil continues to be subject to hyperinflation and political uncertainty. During 1993, the Corporation continued its strategy of maintaining a currency position in Brazil that is designed to capitalize on the spread between local Brazilian interest rates and devaluation. This has led to the increase in net interest revenue offset by a decline in noninterest income reported in Latin America for 1993 (See Management's Financial Review -- Results of Operations on pages 33 and 34). While the Corporation has operated in Brazil for many years and management is monitoring the situation in Brazil closely, there can be no assurance that these conditions will not have an adverse effect on future earnings and nonaccrual levels. For purposes of evaluating the potential of certain risks associated with the Corporation's cross-border outstandings (see pages 86 and 87), factors such as method of funding and location of any cash collateral or guarantees should be taken into account. 84 55 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED
Total All Inter- United FOR THE YEAR ENDED Latin Asia/ Other national States DECEMBER 31, 1993 America Europe Pacific Regions Operations Operations Consolidated (IN MILLIONS) Net interest revenue.... $389.9 $ 24.6 $10.9 $ 5.6 $431.0 $1,087.8 $1,518.8 Provision for credit losses................ 5.9 1.9 13.0 5.4 26.2 43.9 70.1 Net interest revenue after provision for credit losses......... 384.0 22.7 (2.1) .2 404.8 1,043.9 1,448.7 Noninterest income...... (48.4) 41.9 34.6 13.3 41.4 530.2 571.6 Noninterest expense..... 230.1 39.7 33.5 18.1 321.4 1,209.4 1,530.8 Noninterest allocations, net charge (credit)... 5.8 12.0 1.1 18.9 (18.9) Income (Loss) before income taxes and cumulative effect of changes in accounting principles............ 99.7 12.9 (2.1) (4.6) 105.9 383.6 489.5 Cumulative effect of changes in accounting principles(1)......... 24.2 24.2 NET INCOME (LOSS)....... 74.2 9.5 (1.7) (3.3) 78.7 220.3 299.0 TOTAL ASSETS AT DECEMBER 31.................... 6,630 1,546 976 234 9,386 31,202 40,588 TOTAL AVERAGE ASSETS.... 5,911 1,513 930 295 8,649 29,718 38,367 FOR THE YEAR ENDED DECEMBER 31, 1992 Net interest revenue.... $232.6 $ 20.7 $12.6 $ 6.1 $272.0 $1,033.8 $1,305.8 Provision for credit losses................ (33.0) 39.0 8.0 (2.0) 12.0 168.6 180.6 Net interest revenue after provision for credit losses......... 265.6 (18.3) 4.6 8.1 260.0 865.2 1,125.2 Noninterest income...... 68.7 19.0 36.5 11.6 135.8 571.8 707.6 Noninterest expense..... 195.4 42.1 31.6 17.0 286.1 1,188.0 1,474.1 Noninterest allocations, net charge (credit)... 16.1 20.5 .8 .1 37.5 (37.5) Income (Loss) before income taxes and extraordinary item.... 122.8 (61.9) 8.7 2.6 72.2 286.5 358.7 NET INCOME (LOSS)....... 106.8 (63.3) 6.5 2.6 52.6 226.3 278.9 TOTAL ASSETS AT DECEMBER 31.................... 4,954 1,539 902 211 7,606 29,709 37,315 TOTAL AVERAGE ASSETS.... 4,101 1,624 886 249 6,860 29,995 36,855 FOR THE YEAR ENDED DECEMBER 31, 1991 Net interest revenue.... $116.0 $ 32.3 $ 9.6 $ 5.7 $163.6 $ 951.2 $1,114.8 Provision for credit losses................ (5.0) 5.0 3.0 (4.0) (1.0) 519.7 518.7 Net interest revenue after provision for credit losses......... 121.0 27.3 6.6 9.7 164.6 431.5 596.1 Noninterest income...... 98.5 26.0 27.5 12.7 164.7 598.2 762.9 Noninterest expense..... 169.4 36.2 27.2 19.9 252.7 1,285.2 1,537.9 Noninterest allocations, net charge (credit)... (9.8) 16.8 (.6) 6.4 (6.4) Income (Loss) before income taxes and extraordinary item.... 59.9 .3 7.5 2.5 70.2 (249.1) (178.9) NET INCOME (LOSS)....... 41.6 .3 5.3 1.8 49.0 (162.1) (113.1) TOTAL ASSETS AT DECEMBER 31.................... 2,871 1,719 879 230 5,699 32,610 38,309 TOTAL AVERAGE ASSETS.... 2,525 1,623 756 208 5,112 32,803 37,915 (1) Represents the change in accounting for purchased mortgage servicing rights attributable to United States Operations and the change in accounting for income taxes that, for purposes of this analysis only, has been allocated to United States Operations.
85 56 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED CROSS-BORDER OUTSTANDINGS At December 31, 1993, total cross-border outstandings represented 14% of consolidated total assets, while representing 15% at December 31, 1992 and 13% at December 31, 1991. Cross-border outstandings are presented on a regulatory basis and are defined as amounts payable to the Corporation in U.S. dollars or other non-local currencies, plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies. Included in these outstandings are deposits in other banks, resale agreements, securities available for sale, securities held to maturity, trading securities, loans and lease financing, amounts due from customers on acceptances and accrued interest receivable. Excluded from the computation of cross-border outstandings for a given country are local currency outstandings funded with local currency. Also excluded are local currency transactions funded with non-local currency where the provider of funds agrees that, in the event their claim cannot be repaid in U.S. dollars or other non-local currency due to a situation unrelated to a normal credit risk, they will either accept payment in local currency or wait to receive the non-local currency until such time as it becomes available. In addition, U.S. dollar or other non-local currency outstandings reallocated as a result of external guarantees and cash collateral are also excluded. Cross-border outstandings in countries which individually amounted to 1.0% or more of consolidated total assets at December 31, 1993, 1992 and 1991 were approximately as follows:
Percentage of Consolidated Public Banks Other Total Total Assets Commitments(2) (DOLLARS IN MILLIONS) 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 DECEMBER 31, 1992(1) Argentina............................. $ 90 $ 5 $ 845 $ 940 2.5% $ 40 Brazil................................ 20 540 560 1.5 20 Japan................................. 465 50 515 1.4 20 United Kingdom........................ 35 555 590 1.6 130 DECEMBER 31, 1991(1) Argentina............................. $ 65 $ 470 $ 535 1.4% $ 20 Canada................................ $145 335 480 1.3 60 Japan................................. 670 25 695 1.8 United Kingdom........................ 150 645 795 2.1 75 (1) Cross-border outstandings in countries which fell within .75% and 1% of consolidated total assets at December 31, 1993, 1992 and 1991 were approximately as follows: 1993, Canada $315 million, Chile $395 million and Korea $310 million; 1992, Canada $285 million, Chile $360 million and Korea $330 million; 1991, Brazil $305 million and Korea $310 million. (2) Included within commitments are letters of credit and guarantees and the undisbursed portion of loan commitments. Amounts presented are net of reallocations.
All of the overseas activities of the Corporation's subsidiaries and their branches are subject to the political conditions in, and regulatory policies of, the governments of the countries in which the activities are conducted, including the policies of such governments toward indebtedness to foreign lenders, private business and the United States. In addition, high rates of inflation and local, regional and worldwide economic conditions affect local economies and governments in varying degrees of severity and, accordingly, may also affect the Corporation's overseas activities. The Corporation routinely assesses the risks associated with all of its cross-border outstandings. This process includes management's review of various factors affecting each country and results in the establishment of individual country exposure limits. From time to time, due to foreign exchange liquidity problems, currency restrictions or other situations unrelated to normal credit risk, conditions in a country may be such that non-local currency debt service payments are not made as originally scheduled. This has occurred in many less developed countries (LDC) and debt, which could not be serviced, had to be rescheduled. At December 31, 1993, however, only $5 million of the Corporation's cross-border outstandings were subject to country debt rescheduling agreements. 86 57 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED At December 31, 1993, the Corporation had $3.2 billion of total LDC cross-border outstandings, of which approximately $1,505 million, or 47%, related to Argentina and $805 million, or 25%, related to Brazil. Changes in aggregate cross-border outstandings to Argentina and Brazil since December 31, 1992 were approximately as follows:
(IN MILLIONS) Argentina Brazil Cross-border outstandings as of December 31, 1992............................................. $ 940 $560 Increase in non-trade related loans and leases not subject to country debt rescheduling....... 318 139 Net change in trade-related cross-border outstandings, primarily short-term................... 82 (1) Increase in securities........................................................................ 153 110 Interest income accrued....................................................................... 99 50 Collections of interest....................................................................... (84) (43) Other......................................................................................... (3) (10) ----- ---- Cross-border outstandings as of December 31, 1993............................................. $1,505(1) $805(2) ===== ==== (1) Approximately 33% are trade-related outstandings and approximately 45% are non-trade-related local-dollar loans funded by locally generated dollar liabilities. (2) Approximately 66% are trade-related outstandings.
During 1993, the Argentine economy continued to stabilize, resulting in a further decline in the country's inflation rate. Argentina's inflation, which was at hyperinflationary levels in the late 1980's, has declined to approximately 7% in 1993. As a result, the Corporation has strategically grown its Argentine operation and, in turn, its cross-border outstandings, as credit demand has increased and markets such as the retail segment have grown. The growth in Argentine cross-border outstandings mainly reflected increases in non-trade-related local-dollar loans funded by locally generated dollar liabilities, securities available for sale and trade-related outstandings. The increase in Brazilian cross-border outstandings reflected a higher level of securities available for sale and non-trade-related loans. Contributing to this increase was the Corporations's strategy to take a currency position by funding local currency assets with capital and non-local currency liabilities, as local currency interest rates continued to exceed the rate of devaluation. This position, which leaves the Corporation "underhedged" and exposed to losses should devaluation exceed local interest rates, is discussed further in Management's Financial Review on page 33. The Brazilian economy continues to experience difficulties and hyperinflationary conditions. Also, in 1994 there will be a presidential election, which may result in changes in economic policy both before and after the election. Management continues to monitor its position in Brazil closely. The Corporation has not experienced and does not expect to experience any collection problems, stemming from currency restrictions or foreign exchange liquidity problems, on its current portfolio of LDC cross-border outstandings, except as such problems relate to its remaining $5 million portfolio of non-trade-related cross-border outstandings, which is subject to country debt rescheduling agreements. There can be no assurance, however, that such problems will not occur. 87 58 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED LOANS AND LEASE FINANCING The loan and lease financing portfolio is diversified both in terms of geography, industry and product. The only category of loans and leases which exceeded 10% of the portfolio was loans collateralized by real estate. For a discussion of the Corporation's domestic commercial real estate and highly leveraged transaction portfolios, refer to Management's Financial Review on pages 40 to 43. The following table presents details of consolidated loan and lease financing balances outstanding on the dates indicated.
1993 1992 1991 1990 1989 DECEMBER 31 BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent (DOLLARS IN MILLIONS) UNITED STATES OPERATIONS Commercial, industrial and financial...... $11,991.4 41.7% $10,328.5 40.7% $10,345.4 40.8% $11,413.8 43.5% $13,335.7 43.3% Real Estate: Secured by 1-4 family residential properties... 4,159.1 14.5 3,630.2 14.3 3,884.4 15.3 3,505.4 13.4 4,002.7 13.0 Construction.... 617.4 2.1 854.4 3.4 1,027.9 4.1 1,520.0 5.8 2,657.7 8.6 Other commercial.... 3,123.0 10.8 3,202.1 12.6 3,587.3 14.2 3,863.6 14.7 4,407.9 14.3 Loans to individuals..... 1,609.6 5.6 1,436.4 5.6 1,506.3 5.9 1,663.5 6.3 2,203.2 7.2 Lease financing....... 1,263.3 4.4 1,213.9 4.7 1,277.0 5.0 1,380.5 5.3 1,556.6 5.1 Unearned income.......... (203.6) (.7) (205.4) (.8) (243.0) (1.0) (395.1) (1.5) (550.3) (1.8) --------- ----- -------- ---- -------- ---- -------- ---- -------- ---- 22,560.2 78.4 20,460.1 80.5 21,385.3 84.3 22,951.7 87.5 27,613.5 89.7 ========= ===== ======== ==== ======== ==== ======== ==== ======== ==== INTERNATIONAL OPERATIONS Commercial and industrial..... 4,650.2 16.2 3,645.8 14.4 2,928.1 11.5 2,193.0 8.4 2,229.2 7.3 Banks and other financial institutions.... 602.3 2.1 385.0 1.5 152.0 .6 154.5 .6 46.3 .2 Governments and official institutions.... 22.1 .1 53.5 .2 140.7 .6 209.2 .8 251.6 .8 Lease financing....... 264.6 .9 218.4 .9 241.8 1.0 142.1 .5 186.1 .6 All other........ 791.0 2.7 721.2 2.8 608.7 2.4 641.8 2.5 530.2 1.7 Unearned income.......... (108.4) (.4) (84.7) (.3) (88.9) (.4) (72.5) (.3) (85.3) (.3) --------- ----- -------- ---- -------- ---- -------- ---- -------- ---- 6,221.8 21.6 4,939.2 19.5 3,982.4 15.7 3,268.1 12.5 3,158.1 10.3 --------- ----- -------- ---- -------- ---- -------- ---- -------- ---- $28,782.0 100.0% $25,399.3 100.0% $25,367.7 100.0% $26,219.8 100.0% $30,771.6 100.0% ========= ===== ======== ==== ======== ==== ======== ==== ======== ====
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. The following table presents the maturities and interest rate sensitivity, based on original contractual terms, of the Corporation's loans at December 31, 1993, exclusive of domestic office loans secured by 1-4 family residential properties, domestic office loans to individuals and lease financing.
AFTER ONE BUT WITHIN AFTER WITHIN FIVE FIVE (IN MILLIONS) ONE YEAR YEARS YEARS TOTAL Commercial, industrial and financial....................................... $ 5,520.0 $3,938.6 $2,320.8 $11,779.4 Real estate: Construction........................................................... 329.7 218.7 62.2 610.6 Other commercial....................................................... 1,389.4 1,513.4 214.4 3,117.2 Overseas offices........................................................... 5,786.5 429.7 74.0 6,290.2 -------- ------- ------- -------- $13,025.6 $6,100.4 $2,671.4 $21,797.4 ======== ======= ======= ======== Loans with predetermined interest rates.................................... $ 3,103.7 $2,208.0 $ 436.6 $ 5,748.3 Loans with floating interest rates......................................... 9,921.9 3,892.4 2,234.8 16,049.1 -------- ------- ------- -------- $13,025.6 $6,100.4 $2,671.4 $21,797.4 ======== ======= ======= ========
88 59 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED NONACCRUAL LOANS AND LEASES The Corporation's policy for nonaccrual loans and leases is discussed in Note 1 to the Financial Statements under the caption Loans and Lease Financing. The following is a summary of nonaccrual loans and leases by type and as a percentage of the related consolidated loan category:
DECEMBER 31 1993 1992 1991 1990 1989 PERCENT Percent Percent Percent Percent (DOLLARS IN OF LOAN of Loan of Loan of Loan of Loan MILLIONS) BALANCE CATEGORY Balance Category Balance Category Balance Category Balance Category UNITED STATES OPERATIONS Commercial, industrial and financial...... $118.8 1.0% $200.7 1.9% $ 385.0 3.7% $ 419.4 3.7% $ 252.7 1.9% Real Estate: Secured by 1-4 family residen- tial properties... 63.9 1.5 58.6 1.6 69.4 1.8 60.1 1.7 36.6 .9 Construction... 30.1 4.9 80.9 9.5 122.7 11.9 288.0 18.9 339.2 12.8 Other commercial... 230.7 7.4 344.7 10.8 739.8 20.6 899.7 23.3 699.0 15.9 Loans to individuals.... 10.0 .6 26.4 1.8 32.2 2.1 41.7 2.5 31.1 1.4 Lease financing...... 1.0 .1 1.6 .2 5.3 .5 5.8 .6 1.1 .1 ------ ------ ------- ------- ------- 454.5 2.0 712.9 3.5 1,354.4 6.3 1,714.7 7.5 1,359.7 4.9 ------ ------ ------- ------- ------- INTERNATIONAL OPERATIONS Commercial and industrial..... 63.0 1.4 53.7 1.5 56.2 1.9 80.7 3.7 126.6 5.7 Banks and other financial institutions... .7 .2 2.3 1.5 6.3 4.1 10.4 22.5 Governments and official institutions... 2.6 11.8 4.3 8.0 52.7 37.5 81.9 39.1 144.4 57.4 Lease financing...... 1.5 1.1 2.1 1.4 2.9 4.2 3.9 3.9 All other........ 31.3 4.0 5.8 .8 45.2 7.4 10.6 1.7 1.5 .3 ------ ------ ------- ------- ------- 96.9 1.6 66.0 1.3 158.5 4.0 182.4 5.6 286.8 9.1 ------ ------ ------- ------- ------- $551.4 1.9% $778.9 3.1% $1,512.9 6.0% $1,897.1 7.2% $1,646.5 5.4% ====== ====== ======= ======= =======
In addition to nonaccrual loans and leases, the Corporation had other real estate owned that, at December 31, amounted to $108 million in 1993, $170 million in 1992, $326 million in 1991, $244 million in 1990 and $188 million in 1989. At December 31, 1993, 1992, 1991, 1990 and 1989, $7.2 million, $5.6 million, $2.5 million, $53 million and $5.9 million, respectively, of loans and leases were over ninety days past due and still on accrual status. The following is an analysis of interest income related to loans and leases on nonaccrual status:
DECEMBER 31, 1993 United States International (IN MILLIONS) Operations Operations Consolidated Interest income that would have been recognized if the loans had been current at original contractual rates................................ $44.5 $8.8 $53.3 Amount recognized as interest income................................... 12.0 3.0 15.0 ----- ---- ----- Difference............................................................. $32.5 $5.8 $38.3 ===== ==== =====
89 60 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- continued RESERVE FOR CREDIT LOSSES The Corporation's reserve for credit losses is available for future chargeoffs of extensions of credit. The provision for credit losses, added to the reserve by charges to income, is based upon management's estimation 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 the quality of the credit portfolio, levels of nonaccrual loans and leases, current economic conditions, international transfer risks, changes in the size and character of the credit risks and other pertinent factors warranting current recognition. The Corporation charges all or a portion of a loan or lease receivable against the reserve when a probability of loss has been established, with consideration given to such factors as the customer's financial condition, underlying collateral and guarantees. The Corporation uses a loan rating system in its United States and International Operations to assist management in its evaluation of the loan portfolio. At least annually, individual loans are reviewed and ratings adjusted, if applicable, based upon potential risk. If indicated by the assigned rating, particular loans are reviewed more frequently. Allocation of Reserve for Credit Losses The Corporation's reserve for credit losses is a general reserve available for all categories of prospective credit loss. The Corporation has made an allocation of its reserve giving consideration to management's evaluation of risk in the portfolios. The following table presents the allocation of the reserve by loan and lease financing category. For the percentage of loans outstanding in each category to total loans, refer to the "Loans and Lease Financing" table on page 88.
DECEMBER 31 1993 1992 1991 PERCENT Percent Percent OF of of (DOLLARS IN MILLIONS) AMOUNT TOTAL Amount Total Amount Total UNITED STATES OPERATIONS Commercial, industrial and financial....................... $245.6 31.9% $273.3 29.5% $ 428.7 40.9% Real Estate: Secured by 1-4 family residential properties........ 24.8 3.2 26.9 2.9 21.4 2.0 Commercial including construction................... 233.7 30.3 319.9 34.7 297.7 28.3 Loans to individuals.............. 61.4 8.0 59.9 6.5 79.0 7.5 Lease financing................... 18.3 2.4 4.2 .5 5.6 .5 ------ ----- ----- ---- ------- ---- 583.8 75.8 684.2 74.1 832.4 79.2 INTERNATIONAL OPERATIONS.......... 86.2 11.2 120.0 13.0 102.0 9.7 ------ ----- ----- ---- ------- ---- 670.0 87.0 804.2 87.1 934.4 88.9 Unallocated....................... 100.3 13.0 118.9 12.9 116.8 11.1 ------ ----- ----- ---- ------- ---- $770.3 100.0% $923.1 100.0% $1,051.2 100.0% ======= ===== ===== ===== ======= ===== DECEMBER 31 1990 1989 Percent Percent of of (DOLLARS IN MILLIONS) Amount Total Amount Total UNITED STATES OPERATIONS Commercial, industrial and financial....................... $ 392.3 38.3% $217.8 22.2% Real Estate: Secured by 1-4 family residential properties........ 10.1 1.0 8.2 .8 Commercial including construction................... 409.2 40.0 451.6 45.9 Loans to individuals.............. 49.7 4.9 29.1 3.0 Lease financing................... 5.8 .6 5.3 .5 ---- ---- ----- ---- 867.1 84.8 712.0 72.4 INTERNATIONAL OPERATIONS.......... 125.0 12.2 200.0 20.4 ----- ---- ----- ---- 992.1 97.0 912.0 92.8 Unallocated....................... 30.5 3.0 71.0 7.2 ----- ---- ----- ---- $1,022.6 100.0% $983.0 100.0% ======= ===== ===== =====
90 61 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED Analysis of Reserve for Credit Losses The following table presents a five year analysis of the Corporation's reserve for credit losses:
DECEMBER 31 1993 1992 1991 1990 1989 (DOLLARS IN MILLIONS) DOMESTIC OPERATIONS(1) BALANCE, JANUARY 1.............................................. $ 803.1 $ 949.2 $ 897.6 $ 783.0 $ 375.9 Provision....................................................... 43.9 149.9 522.8 784.9 845.7 Domestic credit losses: Commercial, industrial and financial.......................... (55.1) (98.0) (163.8) (255.8) (157.7) Real estate: Construction................................................ (18.5) (58.8) (108.0) (140.6) (187.9) 1-4 family................................................... (21.9) (24.0) (17.4) (7.6) (5.7) Other........................................................ (63.3) (128.8) (187.5) (242.2) (73.0) Loans to individuals........................................... (47.4) (46.3) (64.8) (66.3) (63.1) Lease financing................................................ (.9) (.9) (1.8) (1.8) (1.1) -------- ------- -------- -------- ------- Total domestic credit losses.................................... (207.1) (356.8) (543.3) (714.3) (488.5) Domestic recoveries: Commercial, industrial and financial.......................... 15.1 31.7 43.6 18.4 28.2 Real estate: Construction................................................ 2.0 4.1 4.4 3.8 2.3 1-4 family................................................... 4.2 3.2 1.7 1.3 1.0 Other........................................................ 6.4 2.3 3.9 5.0 1.5 Loans to individuals........................................... 16.5 19.3 18.4 15.3 16.7 Lease financing................................................ .2 .1 .2 .2 -------- ------- -------- -------- ------- Total domestic recoveries....................................... 44.2 60.8 72.1 44.0 49.9 -------- ------- -------- -------- ------- Net domestic credit losses...................................... (162.9) (296.0) (471.2) (670.3) (438.6) -------- ------- -------- -------- ------- BALANCE, DECEMBER 31............................................ 684.1 803.1 949.2 897.6 783.0 -------- ------- -------- -------- ------- INTERNATIONAL OPERATIONS BALANCE, JANUARY 1.............................................. 120.0 102.0 125.0 200.0 389.0 Provision....................................................... 26.2 12.0 (1.0) (27.5) (72.0) International credit losses..................................... (65.9) (55.3) (53.9) (82.2) (114.5) International recoveries........................................ 5.9 42.6 35.0 27.8 24.1 -------- ------- -------- -------- ------- Net international credit losses................................. (60.0) (12.7) (18.9) (54.4) (90.4) -------- ------- -------- -------- ------- Transfer to (from) unallocated reserve and domestic operations..................................................... 18.7 (3.1) 6.9 (26.6) -------- ------- -------- -------- ------- BALANCE, DECEMBER 31............................................ 86.2 120.0 102.0 125.0 200.0 -------- ------- -------- -------- ------- TOTAL DOMESTIC AND INTERNATIONAL RESERVE FOR CREDIT LOSSES, DECEMBER 31..................................... $ 770.3 $ 923.1 $1,051.2 $1,022.6 $ 983.0 ======= ====== ======= ======= ====== Loans and lease financing at December 31........................ $ 28,782 $25,399 $ 25,368 $ 26,210 $30,762 ======= ====== ======= ======= ====== Average loans and lease financing............................... $ 26,586 $25,330 $ 26,167 $ 28,949 $32,061 ======= ====== ======= ======= ====== Ratios: Reserve for credit losses to loans and lease financing at December 31................................................. 2.68% 3.63% 4.14% 3.90% 3.20% Net credit losses to average loans and lease financing......... .84 1.22 1.87 2.50 1.65 Net credit losses to provision for credit losses............... 317.95 170.94 94.49 94.82 70.82 Total recoveries to total credit losses........................ 18.36 25.09 17.94 9.01 12.26 (1) For basis of presentation only, in this analysis the unallocated reserve for credit losses previously discussed has been included in Domestic Operations. However, the unallocated reserve is part of the general reserve of the Corporation and, as such, is available for both Domestic and International credit losses.
91 62 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED SECURITIES On December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Notes 1 and 5 to the Financial Statements describe the effect of the adoption of this standard on the classification and carrying value of securities. The following table sets forth the carrying values of securities held to maturity of the Corporation on the dates indicated:
DECEMBER 31 1993 1992 1991 (IN MILLIONS) U.S. Treasury.................................................................. $ 317.4 $ 285.2 $ 331.6 U.S. government agencies and corporations-- Mortgage-backed securities................................................. 1,045.6 1,774.7 1,908.5 States and political subdivisions.............................................. 29.5 51.1 60.5 Foreign debt securities........................................................ 108.5 125.2 104.7 Other debt securities.......................................................... 175.1 207.1 Marketable equity securities................................................... 31.0 21.8 Other equity securities........................................................ 67.8 192.9 179.6 --------- -------- -------- $ 1,568.8 $2,635.2 $2,813.8 ========= ======== ========
The following table sets forth the carrying values of securities available for sale of the Corporation on the dates indicated:
DECEMBER 31 1993 1992 1991 (IN MILLIONS) U.S. Treasury.................................................................. $ 109.6 $ 525.7 $2,828.1 U.S. government agencies and corporations-- Mortgage-backed securities................................................. 498.2 568.5 514.0 States and political subdivisions.............................................. .5 14.4 Foreign debt securities........................................................ 490.0 344.2 178.5 Other debt securities.......................................................... 149.6 49.1 .5 Marketable equity securities................................................... 74.3 Other equity securities........................................................ 115.7 9.6 5.6 --------- -------- -------- $ 1,437.9 $1,497.1 $3,541.1 ========= ======== ========
The following table sets forth the relative maturities and weighted average interest rates of securities both available for sale and held to maturity at December 31, 1993, 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 the related federal tax benefit.
AFTER ONE BUT WITHIN FIVE AFTER FIVE BUT WITHIN ONE YEAR YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE (DOLLARS IN MILLIONS) U.S. Treasury.... $394.8 3.2% $ 26.9 7.6% $ 5.3 6.0% $ 427.0 3.5% U.S. government agencies and corporations-- Mortgage-backed securities... 5.0 8.3 170.1 5.0 115.2 6.3 $1,253.5 5.7% 1,543.8 5.7 States and political subdivisions.... 17.4 5.8 8.9 9.2 2.4 10.4 1.3 8.8 30.0 7.3 Foreign debt securities...... 305.0 125.5 226.4 7.8 66.7 7.7 .4 3.3 598.5 67.7 Other debt securities...... 44.8 12.7 87.4 13.5 17.4 12.0 149.6 13.1 ------ ------ ------ -------- -------- Total carrying value...... $767.0 52.5 $519.7 7.9 $207.0 7.3 $1,255.2 5.7 $2,748.9 19.3 ====== ====== ====== ======== ========
DEPOSITS The aggregate amount of deposits by foreign depositors in domestic offices averaged $876 million in 1993, $1,298 million in 1992 and $1,922 million in 1991. 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, 1993:
CERTIFICATES TIME OF DEPOSIT DEPOSITS TOTAL (IN MILLIONS) Maturing within three months.......................................................... $1,621.0 $ 6.4 $1,627.4 After three but within six months..................................................... 313.4 6.8 320.2 After six but within twelve months.................................................... 164.5 8.5 173.0 After twelve months................................................................... 616.0 134.4 750.4 -------- ----- ------- $2,714.9 $156.1 $2,871.0 ======== ====== ========
The majority of foreign office deposits are in denominations of $100,000 or more. 92 63 - -------------------------------------------------------------------------------- CONSOLIDATED STATISTICAL INFORMATION - -------------------------------------------------------------------------------- CONTINUED SHORT-TERM BORROWINGS
Daily Weighted Maximum Average Average Amount Amount Interest Weighted Outstanding Outstanding Rate Balance Average During During During (DOLLARS IN MILLIONS) at End of Interest the the the CATEGORY OF AGGREGATE SHORT-TERM BORROWINGS Period Rate(1) Period Period Period FOR THE YEAR ENDED DECEMBER 31, 1993 Federal funds purchased(2).......................... $ 417.1 3.02% $ 783.4 $ 700.7 3.01% Term federal funds purchased(2)..................... 2,150.0 3.36 2,325.2 1,283.8 3.34 Securities sold under agreements to repurchase(3)... 798.8 39.45 1,001.7 832.2 28.73 Commercial paper(4)................................. 34.5 14.9 3.59 Demand notes issued to the U.S. Treasury(5)......... 117.4 2.73 1,219.4 400.2 2.81 All other(6)........................................ 1,164.1 171.5 1,164.1 707.5 169.37 FOR THE YEAR ENDED DECEMBER 31, 1992 Federal funds purchased(2).......................... $ 468.1 3.05% $ 729.0 $ 555.9 3.41% Term federal funds purchased(2)..................... 280.0 3.78 360.0 67.8 3.81 Securities sold under agreements to repurchase(3)... 1,121.7 14.23 2,116.8 1,253.3 12.91 Commercial paper(4)................................. 41.5 13.7 3.63 Demand notes issued to the U.S. Treasury(5)......... 106.3 3.00 1,551.7 508.8 3.49 All other(6)........................................ 576.0 108.30 673.9 503.8 131.54 FOR THE YEAR ENDED DECEMBER 31, 1991 Federal funds purchased(2).......................... $ 503.6 4.19% $ 630.8 $ 566.8 5.63% Term federal funds purchased(2)..................... 8.5 5.15 76.0 33.6 6.76 Securities sold under agreements to repurchase(3)... 2,058.7 4.88 2,930.4 1,721.8 7.68 Commercial paper(4)................................. 13.0 9.74 199.7 81.7 6.43 Demand notes issued to the U.S. Treasury(5)......... 1,315.9 4.07 1,330.8 557.5 5.49 All other(6)........................................ 544.8 96.07 551.4 359.4 63.05 (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 corporations securities. The majority of securities sold under agreements to repurchase by overseas offices in 1993 and 1992 related to the Brazilian operation of FNBB for which various Brazilian government securities served as collateral. The majority of securities sold under agreements to repurchase by overseas offices in 1991 related to the Chilean operations of FNBB for which various Chilean 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) The majority of other short-term borrowings represent secured and unsecured obligations of the Corporation's overseas branches and subsidiaries.
93 64 - -------------------------------------------------------------------------------- SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA - -------------------------------------------------------------------------------- In the opinion of management, all adjustments which include only normal recurring adjustments necessary to present fairly the the results of operations for each of the following quarterly periods, have been made.
1993 1992 (IN MILLIONS, EXCEPT SHARE AND PER SHARE FOURTH THIRD SECOND FIRST Fourth Third Second First AMOUNTS) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter INCOME STATEMENT DATA(1) Interest income....................... $2,225.2 $1,858.2 $1,434.0 $1,306.5 $1,283.2 $1,296.1 $1,276.8 $1,250.6 Interest expense...................... 1,792.5 1,487.0 1,066.6 959.0 933.7 959.6 954.9 952.7 ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue(2)............... 432.7 371.2 367.4 347.5 349.5 336.5 321.9 297.9 Provision for credit losses........... 10.0 10.0 27.6 22.5 23.0 44.5 45.2 67.9 ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue after provision for credit losses....................... 422.7 361.2 339.8 325.0 326.5 292.0 276.7 230.0 Noninterest income(2)(3).............. 105.6 160.8 154.1 151.1 165.4 168.7 173.8 199.7 Noninterest expense(4)................ 346.6 440.2 368.3 375.7 387.0 365.5 361.0 360.6 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes, extraordinary item, and cumulative effects of changes in accounting principles............ 181.7 81.8 125.6 100.4 104.9 95.2 89.5 69.1 Provision for income taxes............ 79.2 40.4 54.2 40.9 42.7 40.3 41.6 28.2 ------- ------- ------- ------- ------- ------- ------- ------- Income before extraordinary item and cumulative effect of changes in accounting principles............... 102.5 41.4 71.4 59.5 62.2 54.9 47.9 40.9 Recognition of prior year tax benefit carryforwards....................... 17.3 19.0 18.4 18.3 Cumulative effect of changes in accounting principles, net..................... 24.2 ------- ------- ------- ------- ------- ------- ------- ------- Net Income............................ $ 102.5 $ 41.4 $ 71.4 $ 83.7 $ 79.5 $ 73.9 $ 66.3 $ 59.2 ======= ======= ======= ======= ======= ======= ======= ======= AVERAGE BALANCE SHEET DATA(1) Loans and lease financing............. $ 28,172 $ 26,953 $ 25,854 $ 25,224 $ 25,269 $ 25,577 $25,248 $ 25,198 Securities............................ 3,194 3,561 3,838 3,909 4,907 4,521 4,232 5,156 Other earning assets.................. 4,763 4,306 3,731 3,543 3,164 3,187 3,168 3,263 ------- ------- ------- ------- ------- ------- ------- ------- Total earning assets.............. 36,129 34,820 33,423 32,676 33,340 33,285 32,648 33,617 Cash and due from banks............... 1,924 1,845 1,716 1,672 1,734 1,534 1,612 1,503 Other assets.......................... 2,350 2,403 2,362 2,103 2,222 2,055 1,980 1,874 ------- ------- ------- ------- ------- ------- ------- ------- Total Average Assets.............. $ 40,403 $ 39,068 $ 37,501 $ 36,451 $ 37,296 $ 36,874 $36,240 $ 36,994 ======= ======= ======= ======= ======= ======= ======= ======= Deposits.............................. $ 29,247 $ 28,543 $ 28,194 $ 28,162 $ 28,880 $ 29,011 $29,106 $ 29,114 Funds borrowed........................ 5,390 4,915 3,921 3,141 3,714 3,421 2,998 3,809 Other liabilities..................... 1,073 1,085 1,022 886 957 919 865 930 Notes payable......................... 1,876 1,752 1,670 1,669 1,223 1,186 1,187 1,192 Stockholders' equity.................. 2,817 2,773 2,694 2,593 2,522 2,337 2,084 1,949 ------- ------- ------- ------- ------- ------- ------- ------- Total Average Liabilities and Stockholders' Equity............ $ 40,403 $ 39,068 $ 37,501 $ 36,451 $ 37,296 $ 36,874 $36,240 $ 36,994 ======= ======= ======= ======= ======= ======= ======= ======= PER COMMON SHARE(1) Income before extraordinary item and cumulative effect of changes in accounting principles: Primary............................. $ .88 $ .30 $ .60 $ .49 $ .52 $ .47 $ .43 $ .60 Fully diluted....................... $ .85 $ .30 $ .59 $ .48 $ .50 $ .46 $ .42 $ .59 Net Income: Primary............................. $ .88 $ .30 $ .60 $ .72 $ .68 $ .65 $ .61 $ .60 Fully diluted....................... $ .85 $ .30 $ .59 $ .70 $ .66 $ .63 $ .59 $ .59 Cash dividends declared............... $ .10 $ .10 $ .10 $ .10 $ .10 Market value: High................................. 25 5/8 25 7/8 28 3/8 28 7/8 26 25 24 7/8 20 Low................................. 21 3/8 23 1/2 20 1/2 24 19 3/8 18 7/8 16 1/4 11 5/8 AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS) Primary............................... 105,644 105,443 105,285 104,962 104,548 104,407 104,118 95,408 Fully diluted......................... 110,308 110,446 110,077 110,079 109,531 109,281 109,302 100,132 (1) Quarterly consolidated financial information and common stock data for each of the quarters in the periods ended December 31, 1993 and 1992 have been restated, except for cash dividends declared, to reflect the Corporation's mergers with Bancorp and Multibank, which were completed in July 1993 and accounted for as poolings of interests. (2) The levels of consolidated net interest revenue and noninterest income in 1993 and 1992 are affected by the Corporation's currency position in Brazil, which is maintained to take advantage of the spread between local Brazilian interest rates and devaluation of Brazil's local currency. A detailed discussion of the Brazilian currency position is discussed in Management's Financial Review on page 33. (3) Includes a $17 million charge to net mortgage servicing fees in the first quarter of 1993 from applying the new method of accounting for PMSR and $16 million in the first quarter of 1992 from the recognition of the remaining unamortized gain from the 1984 sale of the Corporation's headquarters building following the termination of the original lease agreement and subsequent entry into a new lease of the building. (4) Includes $85 million in the third quarter of 1993 of merger and restructuring charges, primarily in connection with the Corporation's mergers with Bancorp and Multibank, as well as other expense reduction initiatives of the Corporation.
The common stock of the Corporation, which is the only class of its securities entitled to vote at the Annual Meeting, is listed and traded on the New York and Boston Stock Exchanges. 95 EX-21 14 LIST OF SUBSIDARIES 1 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 by the Corporation, is the principal subsidiary of the Corporation. Other major banking subsidiaries of the Corporation are Bank of Vermont, Casco Northern Bank, N.A., Bank of Boston Connecticut, Rhode Island Hospital Trust National Bank, South Shore Bank, Mechanics Bank and Multbank West. 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(1) OF INCORPORATION The First National Bank of Boston(2) 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 Bank of Boston Canada Canada Boston Factors of Canada, Inc. Canada BancBoston Leasing, Inc. MA Boston Leasing Corporation MA Randolph Computer Corporation DEL BancBoston Leasing Services, Inc. MA BancBoston Mortgage Corporation FLA BancBoston Ventures Inc. MA BancBoston Capital Inc.(3) MA BancBoston Trust Company of New York NY BancBoston Investments Inc. MA BancBoston Real Estate Capital Corp.(2) MA BankVermont Corporation VT Bank of Vermont(2) VT Boston Overseas Holding Corporation MA Casco Northern Corporation MA Casco Northern Bank, N.A(2) US Colonial Bancorp, Inc. MA Bank of Boston Connecticut(2)(4) CT BancBoston Capital Inc.(3) MA Fidelity Acceptance Corporation MN Master Plans Corp. MA (1) Except as noted, each such business organization is either wholly-owned by the Corporation or wholly-owned by a one hundred percent owned subsidiary of 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) BancBoston Capital, Inc. is owned 24.9% by the Corporation and 75.1% by Bank of Boston Connecticut. (4) Bank of Boston Connecticut is owned 57% by Society for Savings Bancorp, Inc. and 43% by Colonial Bancorp, Inc.
2
JURISDICTION NAME OF SUBSIDIARY(1) OF INCORPORATION FSC Corp MA FNBC Acceptance Corporation AL First Louisiana Acceptance Corporation LA Multibank Financial Corp. MA Multibank West(2) MA Mechanics Bank(2) MA South Shore Bank(2) MA Multibank Leasing Corporation MA Multibank Services Corporation(5) MA RIHT Financial Corporation MA Rhode Island Hospital Trust National Bank(2) US Bank of Boston Florida, N.A. US RIHT Life Insurance Co. AZ Society for Savings Bancorp, Inc. MA Bank of Boston Connecticut(4) CT (1) Except as noted, each such business organization is either wholly-owned by the Corporation or wholly-owned by a one hundred percent owned subsidiary of 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) BancBoston Capital, Inc. is owned 24.9% by the Corporation and 75.1% by Bank of Boston Connecticut. (4) Bank of Boston Connecticut is owned 57% by Society for Savings Bancorp, Inc. and 43% by Colonial Bancorp, Inc. (5) Multibank Services Corporation is owned 44% by South Shore Bank, 30% by Mechanics Bank and 26% by Multibank West.
EX-23 15 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS 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-3 (Registration No. 33-29515) and on Forms S-8 (Registration Nos. 33-23407, 33-1899, 33-11186, 33-64462, 33-65850 and 33-66012) of our report dated January 20, 1994 on our audits of the consolidated financial statements of Bank of Boston Corporation and subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, included in the Corporation's 1993 Annual Report to Stockholders and in Exhibit 13 to the Corporation's 1993 Annual Report on Form 10-K. COOPERS & LYBRAND Boston, Massachusetts March 4, 1994 -----END PRIVACY-ENHANCED MESSAGE-----