<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-6522
BANK OF BOSTON CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2471221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Federal Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 434-2200
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of April 30, 1994:
Common Stock, $2.25 par value 106,512,904
<PAGE>
BANK OF BOSTON CORPORATION
--------------------------
<TABLE>
TABLE OF CONTENTS
-----------------
<CAPTION>
Page
<S> <C>
CONSOLIDATED SELECTED FINANCIAL DATA 3
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
-------
Bank of Boston Corporation and Subsidiaries:
Consolidated Balance Sheet 4
Consolidated Statement of Income 6
Consolidated Statement of Changes in Stockholders' Equity 7
Consolidated Statement of Cash Flows 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
-------
and Results of Operations 16
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 37
-------
Item 4. Submission of Matters to a Vote of Security Holders 37
-------
Item 5. Other Information 38
-------
Item 6. Exhibits and Reports on Form 8-K 38
-------
Signatures 39
LIST OF TABLES
Consolidated Average Balance Sheet - Nine Quarters 31
Consolidated Statement of Income - Nine Quarters 32
Average Balances and Interest Rates - Quarter 33
Change in Net Interest Revenue - Volume and Rate Analysis 36
</TABLE>
2
<PAGE>
<TABLE>
BANK OF BOSTON CORPORATION
Consolidated Selected Financial Data
(dollars in millions, except per share amounts)
<CAPTION>
Quarters Ended March 31 1994 1993
---------- ----------
<S> <C> <C>
Income Statement Data:
Net interest revenue $ 340.7 $ 324.2
Provision for credit losses 45.0 22.5
Noninterest income 235.1 174.4
Noninterest expense 346.7 375.7
Income before extraordinary item and
cumulative effect of changes in
accounting principles 102.7 59.5
Net income 96.1 83.7
Per common share:
Income before extraordinary item and
cumulative effect of changes in
accounting principles:
Primary .88 .49
Fully diluted .85 .48
Net income:
Primary .82 .72
Fully diluted .79 .70
Market value per common share:
High 25 5/8 28 7/8
Low 22 5/8 24
At March 31
Balance Sheet Data:
Loans and lease financing $ 28,554 $ 25,312
Total assets 42,424 36,361
Deposits 28,153 28,151
Total stockholders' equity 2,947 2,632
Book value per common share 22.91 20.85
Regulatory capital ratios:
Risk-based capital ratios:
Tier 1 7.4% 7.5%
Total 12.7 12.0
Leverage ratio 6.9 6.9
</TABLE>
3
<PAGE>
<TABLE>
BANK OF BOSTON CORPORATION
Consolidated Balance Sheet
(in thousands)
<CAPTION>
ASSETS March 31 December 31
1994 1993
-------------- --------------
<S> <C> <C>
Cash and due from banks $ 3,068,563 $ 2,539,286
Interest bearing deposits in other banks 919,584 991,389
Federal funds sold and securities
purchased under agreements to resell 2,641,505 1,454,478
Trading securities 390,183 305,775
Mortgages held for sale 808,914 1,321,607
Securities (Note 4):
Available for sale 1,897,212 1,437,887
Held to maturity (fair value of
$1,267,739 in 1994 and $1,568,617
in 1993) 1,292,173 1,568,823
Loans and lease financing (Note 5):
United States Operations 22,230,149 22,560,194
International Operations 6,324,216 6,221,780
---------- ----------
Total loans and lease financing
(net of unearned income of
$290,864 in 1994 and $311,955
in 1993) 28,554,365 28,781,974
Reserve for credit losses (Note 7) (664,167) (770,279)
---------- ----------
Net loans and lease financing 27,890,198 28,011,695
Accelerated disposition portfolio (Note 6) 240,963
Premises and equipment, net 520,884 522,271
Due from customers on acceptances 367,107 391,204
Accrued interest receivable 303,330 287,368
Other real estate owned 66,472 107,845
Other assets (Note 8) 2,016,745 1,648,274
---------- ----------
TOTAL ASSETS $ 42,423,833 $ 40,587,902
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
BANK OF BOSTON CORPORATION
Consolidated Balance Sheet (continued)
(in thousands, except share and per share amounts)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31 December 31
1994 1993
----------- -----------
<S> <C> <C>
Deposits:
Domestic offices:
Noninterest bearing $ 4,947,202 $ 5,040,028
Interest bearing 16,184,584 17,495,905
Overseas offices:
Noninterest bearing 518,159 525,620
Interest bearing 6,503,357 6,552,592
---------- ----------
Total deposits 28,153,302 29,614,145
Funds borrowed:
Federal funds purchased 409,654 417,107
Term federal funds purchased 2,180,469 2,150,000
Securities sold under agreements to repurchase 1,212,260 798,842
Other funds borrowed 4,091,274 1,608,631
Acceptances outstanding 367,605 391,484
Accrued expenses and other liabilities (Note 8) 1,113,348 723,266
Notes payable (Note 9) 1,948,652 1,972,758
---------- ----------
TOTAL LIABILITIES 39,476,564 37,676,233
---------- ----------
Commitments and contingencies (Notes 2 and 10)
Stockholders' equity:
Preferred stock without par value:
Authorized shares - 10,000,000
Issued shares - 4,593,941 508,436 508,436
Common stock, par value $2.25:
Authorized shares - 200,000,000
Issued and outstanding shares -
106,458,828 in 1994 and
105,801,268 in 1993 239,532 238,053
Surplus 784,655 768,372
Retained earnings 1,416,356 1,361,960
Net unrealized gain on securities available
for sale 3,158 42,980
Cumulative translation adjustments (4,868) (8,132)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,947,269 2,911,669
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,423,833 $ 40,587,902
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
BANK OF BOSTON CORPORATION
Consolidated Statement of Income
(in thousands, except per share amounts)
<CAPTION>
Quarters Ended March 31 1994 1993
-------- --------
<S> <C> <C>
Interest Income (Note 11):
Loans and lease financing, including fees $ 542,856 $ 517,272
Securities 60,588 69,480
Trading securities 2,558 1,956
Mortgages held for sale 15,653 13,364
Federal funds sold and securities
purchased under agreements to resell 79,682 22,253
Deposits in other banks 22,338 35,997
-------- --------
Total interest income 723,675 660,322
-------- --------
Interest Expense (Note 11):
Deposits of domestic offices 126,790 178,893
Deposits of overseas offices 112,816 85,788
Funds borrowed 110,104 42,716
Notes payable 33,195 28,735
-------- --------
Total interest expense 382,905 336,132
-------- --------
Net interest revenue (Note 11) 340,770 324,190
Provision for credit losses (Notes 6 and 7) 45,000 22,455
-------- --------
Net interest revenue after provision
for credit losses 295,770 301,735
Noninterest Income: -------- --------
Financial service fees 92,412 71,253
Trust and agency fees 47,697 43,879
Trading profits and commissions 3,855 6,943
Securities gains 3,933 6,424
Other income (Notes 11 and 12) 87,189 45,922
-------- --------
Total noninterest income 235,086 174,421
-------- --------
Noninterest Expense:
Salaries 157,843 159,142
Employee benefits 36,907 37,484
Occupancy expense 31,893 32,191
Equipment expense 23,585 25,565
Other real estate owned expense 5,268 19,428
Other expense 91,228 101,980
-------- --------
Total noninterest expense 346,724 375,790
-------- --------
Income before income taxes, extraordinary item
and cumulative effect of changes in
accounting principles 184,132 100,366
Provision for income taxes 81,457 40,894
-------- --------
Income before extraordinary item and
cumulative effect of changes in accounting principles 102,675 59,472
Extraordinary loss from early extinguishment of debt,
net of tax (Note 9) (6,535)
Cumulative effect of changes in accounting principles,
net (Notes 13 and 14) 24,203
-------- --------
NET INCOME $ 96,140 $ 83,675
======== ========
NET INCOME APPLICABLE TO COMMON STOCK $ 86,823 $ 75,737
======== ========
Per Common Share:
Income before extraordinary item and
cumulative effect of changes
in accounting principles:
Primary $ .88 $ .49
Fully diluted $ .85 $ .48
Net Income
Primary $ .82 $ .72
Fully diluted $ .79 $ .70
Dividends declared $ .22 $ .10
Average Number of Common Shares:
Primary 106,198 104,962
Fully diluted 110,817 110,079
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
BANK OF BOSTON CORPORATION
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
<CAPTION>
Quarters Ended March 31 1994 1993
---------- ----------
<S> <C> <C>
Balance, beginning of period $ 2,911,669 $ 2,553,530
Net income 96,140 83,675
Common stock issued in connection with:
Dividend reinvestment and common
stock purchase plan 4,100 1,524
Exercise of stock options 2,310 7,102
Restricted stock grants, net of forfeitures 9,709 2,816
Change in unearned compensation related to
restricted stock grants (9,129) (2,442)
Other, principally employee benefit plans 1,643 3,259
Cash dividends declared:
Preferred stock (9,315) (7,937)
Common stock (23,300) (8,490)
Change in net unrealized appreciation on marketable
equity securities of nonbanking subsidiary 373
Change in net unrealized gain on securities
available for sale, net of tax (39,822)
Translation adjustments, net of tax 3,264 (1,217)
--------- ---------
Balance, end of period $ 2,947,269 $ 2,632,193
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
BANK OF BOSTON CORPORATION
Consolidated Statement of Cash Flows
(in thousands)
<CAPTION>
Quarters Ended March 31 1994 1993
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 96,140 $ 83,675
Reconciliation of net income to net cash
provided from operating activities:
Extraordinary loss from early extinguishment
of debt, net of tax 6,535
Cumulative effect of change in accounting
for purchased mortgage servicing rights,
net of tax 52,960
Cumulative effect of change in method of
accounting for income taxes (77,163)
Provision for credit losses 45,000 22,455
Depreciation and amortization 37,567 56,110
Provision for deferred taxes (55,475) 18,294
Net gains on sales of securities
and other assets (41,544) (24,261)
Change in trading securities (84,408) (144,516)
Change in mortgages held for sale 512,693 275,851
Change in securities available for sale 710,586
Net change in interest receivables and payables (123,999) (52,798)
Other, net (36,416) (1,594)
---------- ----------
Net cash provided from operating activities 356,093 919,599
---------- ----------
Cash Flows From Investing Activities:
Net cash provided from (used for) interest bearing
deposits in other banks 71,805 (172,127)
Net cash provided from (used for)
federal funds sold and securities purchased under
agreements to resell (1,187,027) 141,718
Purchases of securities held to maturity (328,306) (758,240)
Purchases of securities available for sale (Note 3) (6,479,426)
Sales of securities held to maturity 9,779
Sales of securities available for sale (Note 3) 6,254,985
Maturities of securities held to maturity 366,365 307,045
Maturities of securities available for sale (Note 3) 165,673
Dispositions of venture capital investments 4,145 31,373
Loans and lease financing originated by
nonbank entities (389,078) (767,762)
Loans and lease financing collected by
nonbank entities 455,153 844,173
Net cash used for lending activities of
bank subsidiaries (239,941) (58,428)
Lease financing originated by bank entities (3,169) (1,709)
Lease financing collected by bank entities 6,218 4,158
Proceeds from sales of other real estate owned 16,306 45,269
Expenditures for premises and equipment (21,643) (22,316)
Proceeds from sales of business units,
premises and equipment 124,461 947
Other, net (38,070) (44,326)
---------- ----------
Net cash used for investing activities (1,221,549) (440,446)
---------- ----------
Cash Flows From Financing Activities:
Net cash used for deposits (1,460,843) (950,280)
Net cash provided from funds borrowed 2,919,077 232,448
Net repayments of notes payable (364,018) (13,229)
Net proceeds from issuance of notes payable 339,912 4,483
Net proceeds from issuance of common stock 7,703 7,921
Dividends paid (32,615) (16,427)
---------- ----------
Net cash provided from (used for) financing
activities 1,409,216 (735,084)
Effect of foreign currency translation on cash (14,483) (21,715)
---------- ----------
NET CHANGE IN CASH AND DUE FROM BANKS 529,277 (277,646)
Cash and Due from Banks at January 1 2,539,286 1,936,396
---------- ----------
Cash and Due from Banks at March 31 $ 3,068,563 $ 1,658,750
========== ==========
Interest payments made $ 490,942 $ 391,373
Income tax payments made $ 34,418 $ 8,767
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
BANK OF BOSTON CORPORATION
Notes to Financial Statements
1. The accompanying interim consolidated financial statements of Bank of
Boston Corporation (the Corporation) are unaudited. In the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information contained
herein have been made. Prior period financial statements have been
restated to give retroactive effect to the mergers with Society for Savings
Bancorp, Inc. and Multibank Financial Corp., completed in July 1993, which
were accounted for as poolings of interests. In addition, certain amounts
reported in prior periods have been reclassified for comparative purposes.
This information should be read in conjunction with the Corporation's 1993
Annual Report on Form 10-K.
2. Acquisitions:
In September 1993, the Corporation reached a definitive agreement to
acquire BankWorcester Corporation (BankWorcester) for $34 for each share of
BankWorcester common stock outstanding, subject to an upward adjustment if
the acquisition is not consummated on or before June 30, 1994. The total
purchase price is expected to approximate $247 million. BankWorcester, the
holding company for Worcester County Institution for Savings, had
approximately $1.5 billion of assets, approximately $1.3 billion of
deposits and 28 branches at March 31, 1994. The acquisition has been
approved by the boards of directors of both companies, by BankWorcester's
stockholders and by applicable federal regulators, but remains subject to
required state regulatory approval and review by the United States
Department of Justice (the Justice Department). Consummation of the
transaction is expected during the second quarter of 1994. The acquisition
will be accounted for as a purchase.
In March 1994, the Corporation reached a definitive agreement to acquire
Pioneer Financial, A Co-operative Bank (Pioneer) for $118 million in cash.
Pioneer, a privately held financial institution based in Middlesex County,
Massachusetts, had approximately $773 million of assets, approximately $720
million of deposits and 20 branches at March 31, 1994. The acquisition has
been approved by the boards of directors of both companies and remains
subject to required regulatory and Pioneer stockholder approvals and a
review by the Justice Department. Consummation of the transaction is not
expected until the second half of 1994. The acquisition will be accounted
for as a purchase.
3. Significant Noncash Transactions - Statement of Cash Flows:
During the first quarters of 1994 and 1993, the Corporation transferred
approximately $15 million and $23 million, respectively, to Other Real
Estate Owned (OREO) from loans. Loans made to facilitate sales of OREO
properties totaled approximately $.9 million and $.3 million in the first
quarters of 1994 and 1993, respectively. Other significant noncash
transactions included the transfer of certain assets to an accelerated
disposition portfolio, which is more fully discussed in Note 6.
On December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with the new standard, cash
flows from purchases, sales and maturities of securities available for sale
are classified as cash flows from investing activities. In previous
periods, this activity with regard to securities available for sale was
classified as cash flows from operating activities and presented on a net
basis.
9
<PAGE>
Notes to Financial Statements, continued
4. Securities:
<TABLE>
A summary comparison of securities available for sale by type is as
follows:
<CAPTION>
March 31, 1994 December 31, 1993
------------------------------ -----------------------------
(in thousands) Cost Carrying value Cost Carrying value
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 418,749 $ 419,660 $ 108,017 $ 109,601
U.S. government
agencies and corporations:
Mortgage-backed securities 624,367 619,567 493,142 498,172
States and political subdivisions 242 236 478 474
Foreign debt securities 529,846 526,203 441,038 490,066
Other debt securities 165,157 165,157 149,585 149,585
Marketable equity
securities 48,116 59,990 57,959 74,330
Other equity securities 106,399 106,399 115,659 115,659
--------- --------- --------- ---------
$ 1,892,876 $ 1,897,212 $ 1,365,878 $ 1,437,887
========= ========= ========= =========
</TABLE>
In accordance with SFAS No. 115, securities available for sale are reported at
fair value, except for equity securities with a cost of $106 million and $116
million at March 31, 1994 and December 31, 1993, respectively, which are not
traded on established exchanges. These securities are reported at cost.
<TABLE>
A summary comparison of securities held to maturity, which are reported at
amortized cost, by type is as follows:
<CAPTION>
March 31, 1994 December 31, 1993
--------------------------------- --------------------------------
(in thousands) Cost Fair value Cost Fair value
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 8,682 $ 8,687 $ 317,396 $ 317,599
U.S. government
agencies and corporations:
Mortgage-backed securities 1,071,562 1,047,528 1,045,574 1,044,026
States and political
subdivisions 30,331 30,575 29,480 30,512
Foreign debt securities 98,161 97,512 108,503 108,610
Other debt securities 65 65
Other equity securities 83,437 83,437 67,805 67,805
--------- --------- --------- ---------
$ 1,292,173 $ 1,267,739 $ 1,568,823 $ 1,568,617
========= ========= ========= =========
</TABLE>
10
<PAGE>
Notes to Financial Statements, continued
5. Loans and Lease Financing:
<TABLE>
The following are the details of loan and lease financing balances:
<CAPTION>
March 31 December 31
1994 1993
(in thousands) ----------- -----------
<S> <C> <C>
United States Operations:
Commercial, industrial and financial $ 12,064,261 $ 11,991,440
Real Estate:
Secured by 1-4 family residential properties 3,921,957 4,159,069
Construction 541,906 617,426
Other commercial 2,851,454 3,123,024
Loans to individuals 1,795,219 1,609,566
Lease financing 1,256,855 1,263,267
Unearned income (201,503) (203,598)
---------- ----------
22,230,149 22,560,194
---------- ----------
International Operations:
Loans and lease financing 6,413,577 6,330,137
Unearned income (89,361) (108,357)
---------- ----------
6,324,216 6,221,780
---------- ----------
$ 28,554,365 $ 28,781,974
========== ==========
</TABLE>
6. Accelerated Disposition Portfolio:
In March 1994, the Corporation transferred $378 million of lower quality
real estate exposure to an accelerated disposition portfolio. The exposures
were transferred at their estimated disposition value, and the transfer
resulted in additional credit losses of $119 million. This value reflects
management's view as to the proceeds that would be realized on a
liquidation basis, and is not indicative of the value that would be
realized if such exposures were managed in the normal course of business or
disposed of on a basis other than liquidation. The net remaining carrying
value of the accelerated disposition portfolio was $259 million at March
31, 1994. Until liquidated, this portfolio will be carried at the lower of
the newly established carrying value or estimated disposition value.
<TABLE>
The accelerated disposition portfolio consisted of the following:
<CAPTION>
Carrying
Value Before Estimated
Valuation Disposition
Adjustment Value
(in millions) ------------ -----------
<S> <C> <C>
Loans
Nonaccrual real estate, including 1-4 family residential $193 $129
Performing renegotiated loans 75 51
Other performing real estate 40 30
OREO 31 31
---- ----
Total balance sheet assets 339 241
Off-balance-sheet exposure (letters of credit) 39 18
---- ----
Total exposure $378 $259
==== ====
</TABLE>
11
<PAGE>
Notes to Financial Statements, continued
7. Reserve for Credit Losses:
<TABLE>
An analysis of the reserve for credit losses is as follows:
(in thousands)
<CAPTION>
Quarters Ended March 31 1994 1993
-------- --------
<S> <C> <C>
Balance, beginning of period $ 770,279 $ 923,120
Provision 45,000 22,455
Domestic credit losses:
Commercial, industrial and financial (2,570) (17,000)
Real estate:
Construction (260) (7,513)
1-4 family residential properties (3,367) (3,674)
Other (9,029) (26,041)
Loans to individuals (14,035) (8,558)
Lease financing (2)
International credit losses (16,436) (24,322)
-------- -------
Total credit losses (45,697) (87,110)
-------- -------
Domestic recoveries:
Commercial, industrial and financial 3,978 3,112
Real estate:
Construction 337 1,036
1-4 family residential properties 527 890
Other 1,998 502
Loans to individuals 3,421 4,233
Lease financing 43 22
International recoveries 3,281 1,513
-------- -------
Total recoveries 13,585 11,308
-------- -------
Net credit losses before losses related to accelerated
disposition portfolio (32,112) (75,802)
Credit losses related to exposures transferred to
accelerated disposition portfolio (119,000)
-------- -------
Net credit losses (151,112) (75,802)
-------- -------
Balance, end of period $ 664,167 $ 869,773
======== =======
</TABLE>
8. Accounting for Unrealized Gains and Losses:
Effective January 1, 1994, the Corporation adopted Financial Accounting
Standards Board Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts." The interpretation requires the reporting of gross
unrealized gains and gross unrealized losses on foreign exchange and
interest rate contracts separately as assets and liabilities, respectively,
unless a right of setoff exists, including a right of setoff resulting from
contracts executed with the same counterparty under a master netting
arrangement. Previously, the Corporation reported unrealized gains and
losses related to forward foreign exchange rate contracts, interest rate
swap agreements and similar contracts on a net basis. Adoption of the
interpretation resulted in an increase in both assets and liabilities of
$333 million, and had no effect on the Corporation's net income, capital or
risk-based capital ratios.
12
<PAGE>
Notes to Financial Statements, continued
9. Notes Payable:
In January 1994, the Corporation issued $300 million of 6 5/8% Subordinated
Notes, due 2004. When the notes were issued, the Corporation entered into
an interest rate swap agreement that effectively converted the fixed rate
obligation to a floating rate obligation. Such rate was 4.01% at March 31,
1994. The subordinated notes are not subject to redemption prior to
maturity. In March 1994, the Corporation redeemed its floating rate notes
due September 2000 at their principal amount plus accrued interest. The
carrying value of the notes at the time of redemption was $179 million. In
addition, during the first quarter of 1994, a nonbanking subsidiary of the
Corporation called for prepayment $186 million of its senior notes, with
fixed interest rates ranging from 6.67% to 9.50%, at their principal amount
plus accrued interest and a prepayment penalty. The loss on the early
extinguishment of the debt amounted to $6.5 million, net of taxes, or $.06
per common share on both a primary and fully diluted basis, and is
presented as an extraordinary item in the consolidated statement of income.
10. Contingencies:
The Corporation and its subsidiaries are defendants in a number of legal
proceedings arising in the normal course of business, including claims that
borrowers or others have been damaged as a result of the Corporation's
lending practices. One of these actions, commonly referred to as lender
liability claims, has resulted in a judgment against a Corporation
subsidiary, which is being appealed. Management, after reviewing all
actions and proceedings pending against or involving the Corporation and
its subsidiaries, considers that the aggregate loss, if any, resulting from
the final outcome of these proceedings will not be material.
11. Brazilian Translation Gains and Losses:
During the first quarter of 1994, the Corporation reclassified
translation gains and losses associated with Brazilian local currency
earning assets and interest bearing liabilities from noninterest income
to interest income and interest expense, respectively. As a result of
hyperinflation in Brazil, interest income and interest expense from these
local currency assets and liabilities have had a significant impact on
consolidated interest income and interest expense, while contributing
only modestly to consolidated net interest revenue. The reclassification
of these translation gains and losses, while having no effect on the
Corporation's total revenue (net interest revenue plus noninterest
income), provides a better presentation of consolidated interest income,
interest expense and related yields; net interest revenue and related
margin; and noninterest income. Translation gains and losses related to
Brazilian local currency nonearning assets and noninterest bearing
liabilities continue to be classified as noninterest income. The net
translation gain/loss from these local currency nonearning assets and
noninterest bearing liabilities was immaterial in both the first quarter
of 1994 and the first quarter of 1993.
The Corporation has followed a strategy of maintaining a currency
position in Brazil that is designed to capitalize on the spread between
Brazilian interest rates and devaluation. This strategy has generally
involved investing dollar denominated/indexed interest bearing
liabilities in local currency earning assets. The previous presentation
resulted in high levels of net interest revenue that were mostly offset
by translation losses recorded in noninterest income. This currency
position at March 31, 1994 was $199 million and averaged $147 million in
the first quarter of 1994, compared with an average of $66 million in the
first quarter of 1993.
Overall, the reclassification has resulted in the inclusion of $2,225
million of translation losses related to local currency earning assets
within interest income and $2,096 million of translation gains related to
local currency interest bearing liabilities within interest expense in
the first quarter of 1994, resulting in a reclassification from
noninterest income of $129 million of net translation losses. For the
first quarter of 1993, $646 million of translation losses were
reclassified to interest income and $623 million of translation gains
were reclassified to interest expense, resulting in a reclassification
from noninterest income of $23 million of net translation losses.
13
<PAGE>
Notes to Financial Statements, continued
12. Sale of Factoring Business:
In January 1994, the Corporation completed the sale of its United States
factoring business, and recorded a pre-tax gain of $27 million on the
transaction. The previously announced sale of the Corporation's Canadian
factoring business remains subject to regulatory approval and is expected
to close in mid-1994, for an additional pre-tax gain of approximately $5
million. The factoring businesses' contribution to the Corporation's net
income in prior periods was not material.
13. Change in Accounting for Purchased Mortgage Servicing Rights:
Effective January 1, 1993, the Corporation elected to change its method of
accounting for purchased mortgage servicing rights (PMSR) to conform its
financial reporting to the regulatory accounting rules adopted in the first
quarter of 1993 by the banking regulators. Under these new rules, the
carrying value of PMSR is recorded at the lesser of amortized cost or the
estimated aggregate recoverable amount determined by applying the discount
rate in effect at the time the servicing portfolios were purchased to the
estimated future net cash flows from servicing the underlying mortgages.
Prior to 1993, this valuation was performed on an undiscounted basis. The
cumulative effect to January 1, 1993 of adopting this change in accounting
principle was a decrease in income of $53 million, net of income taxes of
$32 million, or $.50 per common share on a primary basis and $.48 per
common share on a fully diluted basis.
14. Accounting for Income Taxes:
Effective January 1, 1993, the Corporation adopted prospectively SFAS No.
109, "Accounting for Income Taxes," which principally affects accounting
for deferred income taxes. The cumulative effect to January 1, 1993 of
adopting this new standard, which is shown as a cumulative effect of a
change in accounting principle, was an increase to first quarter income
of $77 million or $.74 per common share on a primary basis and $.70 per
common share on a fully diluted basis. The cumulative effect principally
reflected the recognition of previously unrecorded tax benefit
carryforwards.
15. Parent Company Condensed Financial Statements:
<TABLE>
The following is a condensed balance sheet of the Corporation (Parent
Company only) at March 31, 1994 and December 31, 1993:
<CAPTION>
March 31 December 31
1994 1993
(in thousands) ----------- -----------
<S> <C> <C>
ASSETS
Cash and short term investments in bank subsidiary $ 114,143 $ 206,920
Advances to subsidiaries:
Bank subsidiaries 35,864 63,709
Nonbank subsidiaries 259,113 226,203
Subordinated notes receivable from bank subsidiary 580,000 400,000
Investments in subsidiaries:
Bank subsidiaries 3,239,149 3,175,274
Nonbank subsidiaries 139,457 134,751
Other assets 26,608 22,846
--------- ---------
TOTAL ASSETS $ 4,394,334 $ 4,229,703
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper due nonbank subsidiary $ 9,200 $ 10,200
Notes payable 1,413,280 1,293,247
Other liabilities 24,585 14,587
--------- ---------
TOTAL LIABILITIES 1,447,065 1,318,034
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,947,269 2,911,669
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,394,334 $ 4,229,703
========= =========
</TABLE>
14
<PAGE>
Notes to Financial Statements, continued
15. Parent Company Condensed Financial Statements, Continued:
<TABLE>
The following is a condensed income statement of the Corporation (Parent
Company only) for the quarters ended March 31, 1994 and 1993:
<CAPTION>
1994 1993
(in thousands) ----------- -----------
<S> <C> <C>
OPERATING INCOME
Dividend from bank subsidiary $ 3,200
Interest from subsidiaries:
Bank subsidiaries 10,202 $ 8,800
Nonbank subsidiaries 1,605 1,246
------ ------
Total operating income 15,007 10,046
------ ------
EXPENSE
Interest expense 17,542 11,859
Other expense, net 1,929 1,265
------ ------
Total operating expense 19,471 13,124
------ ------
Loss before income taxes, equity in undistributed net income of
subsidiaries, extraordinary loss and cumulative effect of
change in accounting principle (4,464) (3,078)
Benefit from income taxes (2,790) (1,031)
------ ------
Loss before equity in undistributed net income of subsidiaries,
extraordinary loss and cumulative effect of change in
accounting principle (1,674) (2,047)
Equity in undistributed net income of subsidiaries 98,174 87,435
------ ------
Income before extraordinary item and cumulative effect of
change in accounting principle 96,500 85,388
Extraordinary loss from early extinguishment of debt, net of tax (360)
Cumulative effect of change in accounting for income taxes (1,713)
------ ------
NET INCOME $ 96,140 $ 83,675
====== ======
</TABLE>
<TABLE>
The following is a condensed statement of cash flows of the Corporation
(Parent Company only) for the quarters ended March 31, 1994 and 1993:
<CAPTION>
1994 1993
(in thousands) ----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 96,140 $ 83,675
Reconciliation of net income to net cash used for operating activities:
Extraordinary item, net of tax 360
Cumulative effect of change in method of accounting for income taxes 1,713
Equity in undistributed net income of subsidiaries (98,174) (87,435)
Net change in interest receivables and payables 6,624 (1,663)
Other, net (383) (4,194)
-------- -------
Net cash provided from (used for) operating activities 4,567 (7,904)
-------- -------
Cash Flows From Investing Activities:
Net cash provided from short-term investments 92,750 68,580
Net cash used for advances to subsidiaries (5,065) (1,965)
Investments in subsidiaries (6,400) (50,000)
Purchase of subordinated note receivable from bank subsidiary (180,000)
-------- -------
Net cash provided from (used for) investing activities (98,715) 16,615
-------- -------
Cash Flows From Financing Activities:
Net cash provided from (used for) commercial paper (1,000) 200
Net proceeds from issuance of notes payable 298,533
Repayments of notes payable (178,500)
Net proceeds from issuance of common stock 7,703 7,921
Dividends paid (32,615) (16,427)
-------- -------
Net cash provided from (used for) financing activities 94,121 (8,306)
-------- -------
NET CHANGE IN CASH AND DUE FROM BANKS (27) 405
Cash and Due from Banks at January 1 550 236
-------- -------
Cash and Due from Banks at March 31 $ 523 $ 641
======== =======
Interest payments made $ 10,900 $ 13,398
Income tax refunds received $ (7,870) $ (100)
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
GENERAL
The Corporation's net income for the quarter ended March 31, 1994 was $96
million, compared with net income of $84 million for the same period in 1993.
Net income per common share was $.82 on a primary basis and $.79 on a fully
diluted basis, compared with net income per common share of $.72 on a primary
basis and $.70 on a fully diluted basis for the first quarter of 1993. The 1994
results included an extraordinary loss, net of tax, of $7 million from the
call for prepayment of $186 million of senior debt by a non-banking subsidiary
and the redemption of $179 million of the Corporation's floating rate notes.
The 1993 results included $24 million of income, net of tax, from the
cumulative effect of changes in accounting principles. A cumulative benefit of
$77 million was recorded as a result of the Corporation adopting Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
while a $53 million after-tax charge was recorded in connection with a change
in accounting with respect to the valuation of purchased mortgage servicing
rights (PMSR). Excluding the effects of the extraordinary loss and cumulative
effect of changes in accounting principles, net income for the first quarter
of 1994 was $103 million, compared with $60 million for the first quarter of
1993. On this basis, primary and fully diluted earnings per share were $.88
and $.85, respectively, in the first quarter of 1994 compared with $.49 and
$.48, respectively, for the same period last year.
NET INTEREST REVENUE - (Fully Taxable Equivalent Basis)
The discussion of net interest revenue should be read in conjunction with
Average Balances and Interest Rates and Change in Net Interest Revenue - Volume
and Rate Analysis on pages 33 through 36 of this report. For this review,
interest income that is either exempt from federal income taxes or taxed at a
preferential rate has been adjusted to a fully taxable equivalent basis. This
adjustment has been calculated using a federal income tax rate of 35% in 1994
and 34% in 1993, plus applicable state and local taxes, net of related federal
tax benefits. The adjustment amounted to $1.5 million in the first quarter of
1994 compared with $1.8 million in the first quarter of 1993.
During the first quarter of 1994, the Corporation reclassified translation
gains and losses associated with Brazilian local currency earning assets and
interest bearing liabilities from noninterest income to interest income and
interest expense, respectively. This reclassification had no effect on the
Corporation's total revenue (the sum of net interest revenue and noninterest
income). As a result of hyperinflation in Brazil, interest income and interest
expense from local currency assets and liabilities have had a significant
impact on consolidated interest income and interest expense, while
contributing only modestly to consolidated net interest revenue. In addition,
the Corporation has followed a strategy of maintaining a currency position in
Brazil that is designed to capitalize on the spread between Brazilian interest
rates and devaluation. This strategy has generally involved investing dollar
denominated/indexed interest bearing liabilities in local currency earning
assets. Such a strategy has enabled the Corporation to improve its total
revenue compared with what would have been earned from exclusively funding
local currency assets with local currency liabilities. The previous
presentation resulted in high levels of net interest revenue that were mostly
offset by translation losses recorded in noninterest income. In order to
better present the results of the Corporation's interest operations, including
the net revenue earned from this currency position, translation gains and
losses related to local currency earning assets and interest bearing
liabilities have been reclassified to the related components of interest
income and interest expense. Prior periods have been reclassified for
comparative purposes and net interest margin has been presented on the basis
of this revised classification. The Brazilian currency position, including its
contribution to net interest revenue and the amount of translation losses that
have been reclassified to interest income, is discussed below.
Consolidated net interest revenue, on a fully taxable equivalent basis, was $342
million for the first quarter of 1994 compared with $326 million for the same
period in 1993. Net interest margin in the first quarter of 1994 was 3.80%
compared with 4.05% for the first quarter of 1993.
16
<PAGE>
<TABLE>
The following table presents a summary of net interest revenue, on a fully
taxable equivalent basis, and related average earning asset balances and net
interest margins for United States and International Operations:
<CAPTION>
Quarters Ended March 31 Change Change
(dollars in millions) 1994 1993 Amount Percent
------ ------ ------ -------
<S> <C> <C> <C> <C>
United States Operations:
Net interest revenue $ 274.1 $ 255.4 $ 18.7 7%
Average loans and lease financing 22,305 20,l87 2,118 10
Average earning assets 27,403 25,859 1,544 6
Net interest margin 4.06% 4.01% .05% 1
International Operations:
Net interest revenue $ 68.1 $ 70.6 $ (2.5) (4)%
Average loans and lease financing 6,310 5,037 1,273 25
Average earning assets 9,099 6,817 2,282 33
Net interest margin 3.03% 4.20% (1.17)% (28)
Consolidated:
Net interest revenue $ 342.2 $ 326.0 $ 16.2 5%
Average loans and lease financing 28,615 25,224 3,391 13
Average earning assets 36,502 32,676 3,826 12
Net interest margin 3.80% 4.05% (.25)% (6)
</TABLE>
The improvement in net interest revenue from the first quarter of 1993 reflects
an $18.7 million increase from domestic operations. This was primarily due to a
$2.1 billion increase in average loan and lease volume, higher levels of
noninterest bearing sources of funds, including deposits and stockholders'
equity, and interest recoveries on loans. These factors were partially offset
by a decline in loan fees. The domestic net interest margin rose slightly to
4.06% in the first quarter of 1994 compared with 4.01% in the same period of
1993. Internationally, net interest revenue declined $2.5 million from the
first quarter of 1993 and margin dropped from 4.20% in the first quarter of 1993
to 3.03% in the first quarter of 1994. Although international average earning
assets grew $2.3 billion, including a $1.3 billion increase in average loan and
lease volume, narrower spreads resulted in a slight decline in net interest
revenue from international operations. Spreads have narrowed over the past
year in Argentina, mainly because of declining inflation, which has resulted
from the continued stability of the economy. Spreads in Brazil have also
declined during the past year, stemming from economic difficulties in the
country and a change in the mix of assets from higher yielding loans to other
earning assets. The Corporation's Brazilian currency position has enabled it
to mitigate the negative effects of narrower spreads from operations in that
country. While the international margin declined 117 basis points from the
first quarter of 1993, margin for the first quarter of 1994 was 4 basis points
higher than margin for the second half of 1993.
17
<PAGE>
<TABLE>
The following table presents a summary of net interest revenue earned from the
Corporation's Brazilian currency position during the past nine quarters and the
effect on net interest margin of reclassifying net translation losses associated
with this position from noninterest income to net interest revenue:
<CAPTION>
March Dec. Sept. June March Dec. Sept. June March
(dollars in millions) 1994 1993 1993 1993 1993 1992 1992 1992 1992
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated net interest revenue,
on a fully taxable equivalent basis,
excluding Brazilian currency position $ 331 $ 345 $ 339 $ 328 $ 322 $ 337 $ 326 $ 304 $ 283
Effect of Brazilian currency position:
Interest income from currency position 140 90 34 41 27 16 13 20 18
Translation losses previously classified
as noninterest income (129) (84) (30) (37) (23) (13) (9) (15) (13)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net revenue from currency position 11 6 4 4 4 3 4 5 5
Consolidated net interest revenue, on a fully
taxable equivalent basis, after reclassification of ----- ----- ----- ----- ----- ----- ----- ----- -----
net translation losses $ 342 $ 351 $ 343 $ 332 $ 326 $ 340 $ 330 $ 309 $ 288
===== ===== ===== ===== ===== ===== ===== ===== =====
Consolidated net interest margin:
Before reclassification of net translation losses 5.24% 4.77% 4.26% 4.43% 4.33% 4.21% 4.05% 3.99% 3.60%
After reclassification of net translation losses 3.80% 3.86% 3.91% 3.99% 4.05% 4.06% 3.94% 3.81% 3.44%
International net interest margin:
Before reclassification of net translation losses 8.80% 6.98% 4.52% 5.63% 5.58% 4.57% 4.73% 4.79% 4.23%
After reclassification of net translation losses 3.03% 2.99% 2.99% 3.59% 4.20% 3.74% 4.17% 3.73% 3.25%
Average principal amount of currency position $ 147 $ 104 $ 53 $ 89 $ 66 $ 45 $ 40 $ 45 $ 42
</TABLE>
Additional information on the reclassification of Brazilian translation gains
and losses to net interest revenue, including a discussion of the effect of this
reclassification related to all local currency assets and liabilities, can be
found in Note 11 to the Financial Statements.
The Corporation's currency position exposes it to losses should devaluation
exceed local currency interest rates; such losses could be significant if
government intervention results in a major unanticipated devaluation.
Management, however, has been able to quickly close its position in the past
when market conditions warranted. Further, management will continue to closely
monitor the position and will alter the present strategy if necessary. While
the position could increase or decrease from the March 31, 1994 level of $199
million, the size of the position will continue to be a function of management's
assessment of the frequently changing economic situation in Brazil, a country
that continues to be affected by hyperinflation and other economic difficulties.
In addition, there will be a presidential election later this year in Brazil,
bringing with it the potential for a change in economic policy both before and
after the election. There can be no assurance, given the hyperinflationary
conditions and economic difficulties experienced by Brazil, that the results of
this position will not have an adverse effect on future levels of consolidated
net interest revenue and margin.
**********************
The increase in consolidated net interest revenue from the first quarter of 1993
is not necessarily indicative of future results. Net interest revenue and
margin are affected by several factors, including the current interest rate
environment, the mix and volume of assets and liabilities, the level of
nonperforming assets, competitive pressures, economic and political conditions
in the countries where the Corporation does business and other factors. As
such, there can be no assurance as to the future levels of net interest revenue
or margin.
18
<PAGE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $45 million for the quarter ended March 31,
1994, compared with $22.5 million for the same period in 1993 and $10 million in
the fourth quarter of 1993. The provision for credit losses in the first quarter
of 1994 reflected management's assessment of the adequacy of the reserve for
credit losses, taking into account the current risk characteristics of the loan
portfolio and economic conditions. The increase in the provision for credit
losses in the first quarter of 1994 also reflected, in part, the transfer of
certain lower quality real estate assets to an accelerated disposition
portfolio. This transfer is discussed below in Financial Condition - Credit
Profile. The amount of future provisions will be a function of the quarterly
review of the reserve for credit losses. This review will be affected by the
risk characteristics of the portfolio and the economic conditions existing at
that time and, therefore, there can be no assurance as to the amount of future
provisions.
NONINTEREST INCOME
The following tables set forth the components of noninterest income, as well as
a further breakdown of financial service fees and other income. Additional
information on the change in noninterest income follows each table. Noninterest
income for all periods has been restated to reflect the reclassification of
certain Brazilian translation gains and losses. This reclassification is
discussed in Net Interest Revenue and in Note 11 to the Financial Statements.
<TABLE>
Noninterest Income
- ------------------
(in millions)
<CAPTION>
First Quarter
--------------------------
1994 1993 Change
---- ---- ------
<S> <C> <C> <C>
Financial service fees $ 92 $ 71 $ 21
Trust and agency fees 48 44 4
Trading profits and commissions 4 7 (3)
Securities portfolio gains, net 4 6 (2)
Mezzanine/venture capital profits, net 14 21 (7)
Foreign exchange trading profits 9 10 (1)
Gain from sale of domestic factoring business 27 27
Other income 37 15 22
--- --- --
Total $ 235 $ 174 $ 61
=== === ==
</TABLE>
The increase in trust and agency fees reflected a higher volume of stock
transfer business and higher fees from international mutual funds. The decline
in mezzanine/venture capital profits from the first quarter of 1993 is mainly
due to the absence of a large gain recorded on one transaction in that period.
The increase in other income principally reflected net gains from the sale of
securities originally acquired in connection with loan restructurings.
On January 31, 1994, the Corporation completed the sale of its United States
factoring business and recorded a gain of $27 million. The Corporation also has
an agreement to sell its Canadian factoring business. This sale, which is
subject to regulatory approval, is expected to close in mid-1994 for an
additional pre-tax gain of approximately $5 million.
19
<PAGE>
<TABLE>
Financial Service Fees
- ----------------------
(in millions)
<CAPTION>
First Quarter
-------------------------
1994 1993 Change
---- ---- ------
<S> <C> <C> <C>
Deposit fees $ 30 $ 30 $ 0
Letter of credit and acceptance
fees 13 14 (1)
Mortgage servicing fees:
Fee income 27 26 1
Amortization of mortgage
servicing assets (17) (35) 18
--- --- ---
Net mortgage servicing fees 10 (9) 19
Loan-related fees 14 9 5
Factoring fees 2 6 (4)
Other 23 21 2
--- --- ---
Total $ 92 $ 71 $ 21
=== === ===
</TABLE>
Financial service fees increased $21 million mainly due to a $19 million
increase in net mortgage servicing fees. This increase primarily reflected
lower amortization charges resulting from a declining rate of current and
estimated future mortgage prepayments, as mortgage interest rates have risen.
Future levels of amortization of mortgage servicing assets will be dependent on
a number of factors, including changes in the level of mortgage interest rates
and their effect on mortgage prepayments; as such, there can be no assurance as
to the future amount of such amortization. In addition, loan-related fees
increased principally due to higher syndication fees, while the decline in
factoring fees reflected the January 31, 1994 sale of the Corporation's domestic
factoring business.
NONINTEREST EXPENSE
The following table sets forth the components of noninterest expense:
<TABLE>
Noninterest Expense
- -------------------
(in millions)
<CAPTION>
First Quarter
-------------------------
1994 1993 Change
---- ---- ------
<S> <C> <C> <C>
Employee costs $ 195 $ 196 $ (1)
Occupancy & equipment 55 58 (3)
Professional fees 12 13 (1)
Other 80 89 (9)
--- --- ---
Noninterest expense,
excluding OREO costs 342 356 (14)
OREO costs 5 19 (14)
--- --- ---
Total $ 347 $ 375 $ (28)
=== === ===
</TABLE>
Noninterest expense, before OREO costs, declined $14 million from the first
quarter of 1993. A decline in domestic employee costs was due, in part, to a
lower number of employees, including a reduction caused by the January 31, 1994
sale of the Corporation's domestic factoring business. This decline was
partially offset by higher payroll tax and compensation rates. The latter was
affected by merit increases and a higher level of incentive compensation.
Offsetting the decline in domestic employee costs was an increase in the
international payroll, reflecting strategic investments in Latin America.
Overall, the number of full time equivalent employees declined 1,200 between
March 31, 1993 and March 31, 1994, from 19,700 to 18,500. Occupancy and
equipment expense declined due, in part, to the recording of a property tax
rebate in 1994. The decline in other expense included lower FDIC insurance
premiums, stemming from lower rates and the refund of a portion of 1993's
assessment, as well as a decline in travel expenses. The decline in OREO costs
reflects lower valuation adjustments and a drop in the level of OREO assets
from $156 million at March 31, 1993 to $66 million at March 31, 1994.
20
<PAGE>
PROVISION FOR INCOME TAXES
The provision for taxes on income before extraordinary items was $81 million
for the first quarter of 1994, which represents an effective tax rate of 44%.
In the first quarter of 1993, the Corporation reported a tax provision on
income before the cumulative effect of accounting changes of $41 million,
representing an effective tax rate of 41%. The increase in the income tax
provision resulted from higher pre-tax income and, to a lesser extent, the
higher effective tax rate. The increase in the effective tax rate resulted
from the increase in federal income tax rates enacted in the middle of 1993,
an increase in the estimate of foreign income taxes which may not be
creditable for federal tax purposes, and an increase in the Corporation's
effective state income tax rates.
FINANCIAL CONDITION
-------------------
CONSOLIDATED BALANCE SHEET
At March 31, 1994, the Corproation's total assets were $42.4 billion, an
increase of $1.8 billion from December 31, 1993. This increase was primarily
due to a $1.2 billion increase in federal funds sold and resale agreements
due, in part, to a higher level of resale agreements in overseas offices.
During the first quarter of 1994, the Corporation adopted Financial Accounting
Standards Board Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts," that requires the reporting of gross unrealized gains and
gross unrealized losses on foreign exchange and interest rate contracts
separately as assets and liabilities. Netting of unrealized gains and losses
is allowed if a right of setoff exists, including a right of setoff resulting
from contracts executed with the same counterparty under a master netting
arrangement. These unrealized gains and losses had previously been recorded on
a net basis. The adoption of Interpretation No. 39 resulted in increases to
other assets and other liabilities of $.3 billion compared with December 31,
1993. Other balance sheet changes between December 31, 1993 and March 31, 1994
included a $.5 billion decline in mortgages held for sale, reflecting a lower
volume of mortgage originations and a $.2 billion decline in loans and leases,
primarily resulting from the transfer of $308 million of domestic real estate-
related loans to an accelerated disposition portfolio. Before the effect of
this transfer, loans and leases increased $80 million reflecting, in part,
higher international loans, mainly from Latin American operations. Additional
information on the change in loans and leases from December 31, 1993 is
contained in Credit Profile.
In the fourth quarter of 1993, the Corporation's principal banking subsidiary,
The First National Bank of Boston, initiated a short-term bank note program as
an alternative source of funding. Funding obtained under this program amounted
to $1.6 billion as of March 31, 1994, of which $1.2 billion was sold during
the first quarter of 1994. This program, along with increased funds from other
sources, including securities sold under agreements to repurchase and the
treasury, tax and loan account, resulted in a $2.9 billion increase in funds
borrowed. As a result of increased funds from these sources, the level of
wholesale certificates of deposit and deposits obtained through retail
programs with brokers (brokered CDs) was reduced. This resulted in a $1.3
billion decline in domestic interest bearing deposits, between December 31,
1993 and March 31, 1994, of which $700 million related to wholesale deposits
and $300 million related to brokered CDs. The level of brokered CDs
outstanding at March 31, 1994 was $400 million, compared with $700 million at
December 31, 1993 and $1.7 billion at December 31, 1992. The Corporation's
notes payable declined slightly from December 31, 1993. During the first
quarter of 1994, the Corporation issued $300 million of 6 5/8% subordinated
notes due 2004. This increase was more than offset by the Corporation's
redemption of $179 million of its floating rate notes due 2000 at their
principal amount plus accrued interest, and the call for prepayment of $186
million of senior debt by a nonbanking subsidiary of the Corporation, which
had been due in installments through 1998, at its principal amount plus
accrued interest and a prepayment penalty. The redemption of notes and the
call for prepayment of senior debt, which were made to improve the
Corporation's funding rates, resulted in an extraordinary loss, net of tax, in
the first quarter of 1994 of $7 million.
LIQUIDITY MANAGEMENT
As of March 31, 1994 the Corporation's level of liquid assets stood at $5.0
billion, compared with $4.5 billion at December 31, 1993. In addition, Bank of
Boston Corporation (on a Parent Company only basis) had net liquid assets
(liquid assets in excess of short-term funding commitments) of $96 million at
March 31, 1994, compared with $194 million at December 31, 1993. The decrease
from December 31, 1993 resulted mainly from the redemption of the floating
rate notes discussed above and the purchase of a $180 million subordinated
note from The First National Bank of Boston, as discussed below, partially
offset by the issuance of $300 million of subordinated notes, during the first
quarter of 1994. In addition, $33 million was used for dividend payments on
common and preferred stock. Management considers overall liquidity, on both a
consolidated and Parent Company only basis, to be adequate at March 31, 1994
to meet current obligations, support its expectations for future changes in
asset and liability levels and carry on normal operations. Further, the
Corporation has access to additional liquidity through the public markets.
21
<PAGE>
INTEREST RATE RISK MANAGEMENT
Interest rate risk arises from the Corporation's normal banking activities due
to an imbalance in the repricing or maturity schedules of assets and
liabilities. The Corporation uses certain balance sheet items and off-balance-
sheet financial markets instruments, including interest rate options, swaps and
futures, in the management of this risk. These off-balance-sheet financial
markets instruments provide the Corporation with important flexibility in
managing interest rate exposure, enabling it to modify the repricing sensitivity
of certain assets and liabilities.
During 1993, the Corporation maintained a modest repricing imbalance on assets
and liabilities that enabled it to benefit from declining domestic interest
rates. In response to rising domestic interest rates in the first quarter of
1994, the Corporation changed its strategy by moving toward a more neutral
position with respect to domestic interest rates. This change in strategy was
accomplished through the use of certain balance sheet items and various off-
balance-sheet financial markets instruments, including interest rate options,
which as noted in the table below, increased from December 31, 1993. The
following table presents information on the Corporation's off-balance-sheet
financial markets instruments used for interest rate risk management purposes:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
--------------------------------------------- ---------------------------------------------------
Average Average
Notional Remaining Fair Unrecognized Notional Remaining Fair Unrecognized
(in millions) Amount Maturity Value(1) Gain/(Loss)(2) Amount Maturity Value(1) Gain(2)
-------- --------- ------- -------------- -------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Futures and Forwards $ 2,889 3 months $ 39 $ 45 $3,581 3 months $ 2 $ 2
Interest Rate Swaps(3) 6,415 3 years (80) (77) 3,463 4 years 47 46
Interest Rate Options:
Written or Sold 9,160 1 year (6) (3) 39 6 months
Purchased 12,277 1 year 37 21 414 3 years 5 5
<FN>
(1) Fair value represents the amount at which a given instrument could be exchanged in an arm's length transaction with a third
party as of the balance sheet date. In certain cases, instruments are subject to daily cash settlements; as such, the fair value
of these instruments is shown as zero in the table.
(2) Unrecognized gain or loss represents the amount of gain or loss on the instruments as of the balance sheet date that has not
been recognized in the income statement. Gains and losses on futures and forward contracts and options used to manage interest
rate exposure are deferred and amortized over the period being managed as a component of interest income or expense. Income or
expense on interest rate swap agreements used to manage interest rate exposure is accrued over the life of the agreement as an
adjustment to interest income or expense.
(3) The increase in the notional amount of interest rate swaps between December 31, 1993 and March 31, 1994 mainly reflects short
term swaps from international operations whose fair value and unrecognized gain/loss at March 31, 1994 were immaterial.
</TABLE>
The aggregate fair value of the off-balance-sheet financial markets instruments
shown in the table above declined $64 million from December 31, 1993 to March
31, 1994. In addition, the unrecognized gain/loss moved from a gain of $53
million at December 31, 1993 to a loss of $14 million at March 31, 1994. These
changes were mainly caused by the increase in domestic interest rates that
occurred during the first quarter of 1994. Since the Corporation has maintained
only modest repricing imbalances or a neutral position with respect to its
assets and liabilities, including the effect of these off-balance-sheet
financial instruments, the increases in domestic interest rates in the first
quarter of 1994 did not have a significant effect on the Corporation's net
interest revenue.
The notional amounts of off-balance-sheet financial markets instruments
represent the volume of outstanding transactions and do not represent the
potential for gain or loss associated with the market risks or credit risk of
such transactions. As such, the actual market or credit exposure for all these
instruments is significantly less than the notional amounts.
22
<PAGE>
CAPITAL
In January and April 1994, the Board of Directors declared a quarterly dividend
of $.22 per share, an increase from the $.10 per share that had been paid in
each of the 1993 quarters. The payment of future common dividends will continue
to be determined by the Board of Directors based on the Corporation's liquidity,
asset quality profile, capital adequacy and recent earnings history, as well as
economic and other factors deemed relevant by the Board of Directors, including
the amount of dividends paid to the Corporation by its subsidiaries.
The Corporation's Tier 1 and total capital ratios were 7.4% and 12.7%,
respectively, at March 31, 1994, compared with 7.2% and 12.4%, respectively, at
December 31, 1993. The Corporation's leverage ratio at March 31, 1994 was 6.9%
compared with 6.8% at December 31, 1993. These ratios exceeded the minimum
requirements of current regulations. The increase in the ratios from December 31
is a result of first quarter net income, net of common and preferred dividends,
as well as the additional capital provided from the Corporation's subordinated
debt issuance discussed above. Stockholders' equity increased $36 million
between December 31, 1993 and March 31, 1994. This was mainly due to first
quarter net income of $96 million, partially offset by the payment of dividends
and a $40 million decline, net of tax, of unrealized gains in the securities
available for sale portfolio. A major portion of this $40 million decline was
due to a decline in the fair value of foreign debt securities.
As of March 31, 1994, all of the Corporation's banking subsidiaries met both the
minimum requirements of current regulations with respect to capital ratios and
the capital ratio aspects of the "well capitalized" category under the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The Corporation
has received approval from the Office of the Comptroller of the Currency (the
OCC) to merge South Shore Bank, Mechanics Bank and Multibank West into The First
National Bank of Boston. These banking subsidiaries were acquired in connection
with the Corporation's merger with Multibank Financial Corp., completed in July
1993. The merger with South Shore Bank was accomplished in May 1994, at which
time a memorandum of understanding that had existed between South Shore Bank and
the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of
Banks was terminated. The Corporation expects the remaining two mergers to occur
by the end of the second quarter. Currently, two of the Corporation's
subsidiaries, Bank of Boston Connecticut and Multibank West, would not be
considered "well capitalized" for purposes of FDICIA due to an existing
agreement and order, respectively, with their primary bank regulator. The
agreement and the approval order with respect to these subsidiaries require that
the subsidiary banks meet and maintain certain specific capital ratios, and each
of the banks is in compliance with the requirement. The Corporation anticipates
that the order with respect to Multibank West will be terminated upon completion
of its merger with The First National Bank of Boston. The capital categories of
the Corporation's banking subsidiaries are determined solely for purposes of
applying FDICIA's provisions and, accordingly, such capital categories may not
constitute an accurate representation of the overall financial condition or
prospects of any of the Corporation's banking subsidiaries. In order to assist
the Corporation's banking subsidiaries to maintain regulatory capital at desired
levels and in connection with its capital planning process, the Corporation has
provided capital contributions to certain of its banking subsidiaries in the
past, and may contribute additional capital to its banking subsidiaries in
future periods, if needed, to assist the subsidiaries in maintaining capital
ratios at desired levels. While no capital contributions were made to banking
subsidiaries during the first quarter of 1994, the Corporation purchased a $180
million subordinated note, which qualifies as tier 2 capital, from The First
National Bank of Boston.
ACQUISITIONS
On March 2, 1994, the Corporation announced that it had reached a definitive
agreement to acquire Pioneer Financial, A Co-operative Bank (Pioneer) for $118
million in cash. Pioneer, which is based in Massachusetts' Middlesex County, is
a privately owned cooperative bank with total assets of approximately $773
million at March 31, 1994. The acquisition, which will be accounted for as a
purchase, has been approved by the boards of directors of both companies.
Completion of this acquisition, which is not expected to occur until the second
half of 1994, is subject to approvals by the banking regulators and Pioneer
stockholders, as well as a review by the United States Department of Justice
(the Justice Department). No assurance can be given as to the outcome of this
review or that approvals of the regulators will be obtained. Until actual
consummation, Pioneer will continue to operate independently of the Corporation.
On April 26, 1994, the OCC approved the Corporation's acquisition of
BankWorcester Corporation (BankWorcester). The total purchase price is expected
to be $247 million. BankWorcester, based in Worcester, Massachusetts, is the
largest banking institution in Worcester County with total assets of $1.5
billion at March 31, 1994. Completion of the transaction, which is expected to
occur in May 1994, remains subject to required approval by the state banking
regulator and a review by the Justice Department. No assurance can be given as
to the outcome of this review or that state regulatory approval will be
obtained. Until actual consummation, BankWorcester will continue to operate
independently of the Corporation.
23
<PAGE>
CREDIT PROFILE
The segments of the lending portfolio are as follows:
<TABLE>
<CAPTION>
March 31 Dec. 31 Sept. 30 June 30 March 31
(in millions) 1994 1993 1993 1993 1993
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and financial $ 12,080 $ 11,991 $ 11,380 $ 10,778 $ 10,131
Commercial real estate:
Construction 572 617 705 714 740
Other 3,073 3,123 3,054 3,167 3,181
------ ------ ------ ------ ------
Total commercial real estate 3,645 3,740 3,759 3,881 3,921
Real estate loans secured by
1-4 family residential properties 3,963 4,159 4,291 3,836 3,650
Loans to individuals 1,795 1,610 1,556 1,530 1,452
Lease financing 1,257 1,264 1,226 1,187 1,197
Unearned income (202) (204) (210) (298) (295)
------ ------ ------ ------ ------
22,538 22,560 22,002 20,914 20,056
====== ====== ====== ====== ======
International:
Loans and lease financing, net of
unearned income 6,324 6,222 5,935 5,464 5,256
------ ------ ------ ------ ------
Subtotal 28,862 $ 28,782 $ 27,937 $ 26,378 $ 25,312
------ ====== ====== ====== ======
Less loans transferred to accelerated
disposition portfolio 308
------
Total loans and lease financing $ 28,554
======
</TABLE>
Before the effect of the transfer of $308 million of domestic real estate-
related loans to an accelerated disposition portfolio discussed below, the
Corporation's domestic loans showed a slight decline from December 31, 1993.
This was primarily caused by the sale of the domestic factoring business,
decreases in the mortgage warehousing and residential mortgage portfolios and
the paydown of several large loans. These decreases were essentially offset by
increases in the specialized industry and consumer loan portfolios.
International loans increased $102 million from December 31, 1993, mainly due to
higher Latin American loan volume, particularly in Argentina. Additional
information on the Corporation's international outstandings can be found under
Cross-Border Outstandings.
A discussion of the Corporation's real estate lending activities is included in
the Corporation's 1993 Annual Report to Stockholders on pages 39 through 41,
which is incorporated by reference in its 1993 Annual Report on Form 10-K. The
following tables set forth the Corporation's domestic commercial real estate
loans and OREO, and domestic commercial real estate nonaccrual loans and OREO,
by geographic location at March 31, 1994.
24
<PAGE>
<TABLE>
DOMESTIC COMMERCIAL REAL ESTATE OUTSTANDINGS BY GEOGRAPHIC LOCATION
<CAPTION>
Other Other
(in millions) Massachusetts Connecticut New England Florida Texas States Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 (1) $1,137 $408 $755 $195 $65 $898 $3,458
====== ==== ==== ==== === ==== ======
Balance at December 31, 1993 $1,373 $607 $802 $187 $54 $823 $3,846
====== ==== ==== ==== === ==== ======
<FN>
(1) Excludes assets transferred to accelerated disposition portfolio at
March 31, 1994.
</TABLE>
<TABLE>
DOMESTIC COMMERCIAL REAL ESTATE NONACCRUAL LOANS AND OREO BY GEOGRAPHIC LOCATION
<CAPTION>
Other Other
(in millions) Massachusetts Connecticut New England Florida Texas States Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 (1) $ 63 $45 $39 $ 9 $5 $ 64 $225
==== === === === == ==== ====
Balance at December 31, 1993 $103 $68 $52 $15 $8 $121 $367
==== === === === == ==== ====
Percent of related outstandings
at March 31, 1994 6% 11% 5% 5% 8% 7% 7%
<FN>
(1) Excludes assets transferred to accelerated disposition portfolio at
March 31, 1994.
</TABLE>
25
<PAGE>
The details of consolidated nonaccrual loans and OREO are as follows:
<TABLE>
<CAPTION>
March 31 Dec. 31 Sept. 30 June 30 March 31
(in millions) 1994 (1) 1993 1993 1993 1993
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and financial $ 112 $ 121 $ 131 $ 150 $ 161
Commercial real estate:
Construction 27 30 37 51 56
Other 134 231 225 275 317
----- ----- ----- ----- -----
Total commercial real estate 161 261 262 326 373
Real estate loans secured by 1-4
family residential properties 17 64 65 59 61
Loans to individuals 13 10 13 20 21
Lease financing 0 1 1 1 3
----- ----- ----- ----- -----
303 457 472 556 619
----- ----- ----- ----- -----
International 96 94 86 43 45
----- ----- ----- ----- -----
Total nonaccrual loans 399 551 558 599 664
OREO 66 108 136 129 156
----- ----- ----- ----- -----
Total $ 465 $ 659 $ 694 $ 728 $ 820
===== ===== ===== ===== =====
Nonaccrual loans and OREO as a
percent of related asset categories 1.6% 2.3% 2.5% 2.7% 3.2%
<FN>
(1) Excludes assets transferred to accelerated disposition portfolio.
</TABLE>
The following table summarizes the changes in nonaccrual loans and OREO which
have occurred during the last nine quarters:
<TABLE>
<CAPTION>
1992 1993 1994
---------------------------------------- ------------------------------------ ------
First Second Third Fourth First Second Third Fourth First
(in millions) Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
------- ------- ------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $ 1,838 $ 1,597 $ 1,323 $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659
Additions 150 156 184 180 107 117 135 127 169
Restructurings (60) (61) (104) (29) (13) (14)
Transfers to accelerated
disposition portfolio
(before writedown) (224)
Sales, payments
and other decreases (199) (252) (180) (187) (132) (115) (105) (103) (88)
Credit losses and valuation
write-downs (132) (117) (110) (128) (91) (80) (64) (59) (51)
------- ------- ------- ------- ------ ------ ------ ------ ------
Ending balance $ 1,597 $ 1,323 $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659 $ 465
======= ======= ======= ======= ====== ====== ====== ====== ======
</TABLE>
Nonaccrual loans and OREO declined $194 million from December 31, 1993;
however, exclusive of the transfer of $224 million of nonperforming real
estate assets to the accelerated disposition portfolio discussed below,
nonaccrual loans and OREO increased $30 million from December 31, 1993. The
level of nonaccrual loans and leases and OREO is influenced by the economic
environment, interest rates, regulatory attitudes and other internal and
external factors. Although the Corporation expects that it will experience
some increase in the level of nonaccrual loans, it believes that the level of
nonaccruals will remain well within an acceptable range.
26
<PAGE>
ACCELERATED DISPOSITION PORTFOLIO
During the first quarter of 1994, in order to expedite the disposition of a
component of its remaining problem real estate assets and to strengthen its
balance sheet, the Corporation transferred $378 million of lower quality real
estate exposure to an accelerated disposition portfolio. At the point of
transfer, and after an individual review of each exposure, the Corporation
took a chargeoff of $119 million, leaving the March 31, 1994 carrying value of
the balance sheet portion of the pool at $241 million. A substantial portion
of the credit risk associated with these assets had been considered in
determining the adequacy of the Corporation's reserve for credit losses in
prior periods. The carrying value approximates the estimated disposition value
of the assets on a liquidation basis, and is not indicative of the value that
would be realized if these assets were managed in the normal course of
business or disposed of on a basis other than liquidation. Until liquidated,
this portfolio will be carried at the lower of the newly established carrying
value or estimated disposition value.
The accelerated disposition portfolio consisted of the following:
<TABLE>
<CAPTION>
Carrying
Value Before Estimated
Valuation Disposition
Adjustment Value
------------ -----------
(in millions)
<S> <C> <C>
Loans
Nonaccrual real estate, including 1-4 family residential $ 193 $ 129
Performing renegotiated loans 75 51
Other performing real estate 40 30
OREO 31 31
------- -------
Total balance sheet assets 339 241
Off-balance-sheet exposure (letters of credit) 39 18
------- -------
Total exposure $ 378 $ 259
======= =======
</TABLE>
RENEGOTIATED LOANS
As part of its approach to managing credit, the Corporation renegotiates
certain of its loans when a determination is made that greater economic value
will ultimately be realized under the new terms than through foreclosure,
liquidation or bankruptcy. Renegotiated loans totaled $116 million at March 31,
1994, compared with $225 million at December 31, 1993. The decline was due to
the transfer of $75 million of renegotiated loans to an accelerated disposition
portfolio and the return of $34 million of renegotiated loans to nonaccrual
status. The renegotiated loans outstanding at March 31, 1994, which had a
yield of approximately 8 percent, are performing in accordance with their new
terms and are not included in nonaccrual loans.
Renegotiated loans as of each of the last five quarter-ends were as follows:
<TABLE>
<CAPTION>
March 31 Dec. 31 Sept. 30 June 30 March 31
(dollars in millions) 1994 1993 1993 1993 1993
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Renegotiated loans $ 116 $ 225 $ 244 $ 248 $ 256
==== ==== ==== ==== ====
Approximate yield on renegotiated 8% 8% 8% 8% 7%
loans ==== ==== ==== ==== ====
</TABLE>
In connection with the renegotiation of loans, the Corporation may obtain equity
interests in the borrower. Under certain circumstances, the Corporation's
investment in and loans to such borrowers are accounted for as investments and
included in other assets. Such investments amounted to $42 million at March 31,
1994 compared with $41 million at December 31, 1993.
HIGHLY LEVERAGED TRANSACTIONS
The Corporation's total loan portfolio at March 31, 1994 included $1.2 billion
of highly leveraged transaction (HLT) loans to 72 customers, compared with $1.3
billion to 75 customers at December 31, 1993. The average HLT loan size was $17
million at both March 31, 1994 and December 31, 1993. The HLT loans are to
customers operating in a variety of industries. The amount of unused
commitments for HLTs at March 31, 1994 was $409 million, compared with $540
million at December 31, 1993. The amount of unused commitments does not
necessarily represent the actual future funding requirements of the Corporation,
since a portion can be syndicated or assigned to others or may expire without
being drawn upon. At March 31, 1994, $4 million of the HLT portfolio was on
nonaccrual status, compared with $10 million at December 31, 1993. There were
no net credit losses from the HLT portfolio in the first quarter of 1994,
compared with $2 million in the fourth quarter of 1993 and $10 million in the
first quarter of 1993. The Corporation actively manages the risks in its HLT
portfolio, including adherence to special HLT lending limits and periodic
reviews of the portfolio by senior managers. The Corporation has historically
been involved in transactions that qualify as HLTs and it expects to continue to
agent and participate in such transactions in the future. The Corporation,
however, does not currently anticipate a substantial increase in HLT lending
over the March 31, 1994 level. A discussion of the Corporation's HLT lending
activities, policies and the effect of these activities on results of operations
is included in the Corporation's 1993 Annual Report to Stockholders on pages 41
through 43, which is incorporated by reference in its 1993 Annual Report on Form
10-K.
27
<PAGE>
RESERVE FOR CREDIT LOSSES
The reserve for credit losses at March 31, 1994 was $664 million, or 2.33%, of
outstanding loans and leases, compared with $770 million or 2.68% at December
31, 1993 and $870 million, or 3.44%, at March 31, 1993. The reserve for credit
losses was 166% of nonaccrual loans and leases at March 31, 1994, compared with
140% at December 31, 1993 and 131% at March 31, 1993.
Net credit losses were $151 million for the first quarter of 1994, compared with
$76 million for the first quarter of 1993. Excluding the writedowns in
connection with the accelerated disposition portfolio, net credit losses were
$32 million for the first quarter of 1994, and as a percentage of average loans
and leases on an annualized basis were .46% in the first quarter of 1994,
compared with .54% for the fourth quarter of 1993 and 1.22% for the first
quarter of 1993.
<TABLE>
Net credit losses were as follows:
<CAPTION>
(in millions) First Quarter
---------------
1994 1993
---- ----
<S> <C> <C>
Domestic:
Commercial, industrial and financial $ (2) $ 14
Commercial real estate 7 32
Loans secured by 1-4 family residential
properties 3 3
Loans to individuals 11 4
---- ----
19 53
International 13 23
Related to transfer to accelerated
disposition portfolio 119
---- ----
Total $ 151 $ 76
==== ====
</TABLE>
* * * * * *
While the domestic economy continued its gradual improvement and interest
rates increased during the first quarter of 1994, management cannot predict to
what extent this recovery or changes in interest rates will affect future
periods. In addition, it is uncertain what impact future changes in the
economies in Latin America, and other foreign countries where the Corporation
does business, will have on future periods. No assurance, therefore, can be
given as to the Corporation's future levels of net income, loans,
nonperforming assets or credit losses.
28
<PAGE>
CROSS-BORDER OUTSTANDINGS
Total cross-border outstandings, which are reported on a regulatory basis,
represented 16% of consolidated total assets at March 31, 1994 and 14% at
December 31, 1993. Cross-border outstandings in countries which individually
amounted to 1% or more of consolidated total assets at March 31, 1994 and
December 31, 1993 were approximately as follows:
<TABLE>
<CAPTION>
Percentage of
Consolidated
(dollars in millions) Public Banks Other Total Total Assets Commitments(2)
------ ----- ------- ----- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994 (1)
- --------------
Argentina $270 $220 $1,035 $1,525 3.6 % $85
Brazil 45 795 840 2.0 20
Japan 790 50 840 2.0 5
United Kingdom 45 645 690 1.6 190
December 31,1993 (1)
- ----------------
Argentina $255 $225 $1,025 $1,505 3.7 % $40
Brazil 110 695 805 2.0 20
United Kingdom 15 565 580 1.4 145
<FN>
(1) Cross-border outstandings in countries which fell between .75% and 1.0% of
consolidated total assets at March 31, 1994 and December 31, 1993 were
approximately as follows: Chile $415 million and Korea $335 million at
March 31, 1994; Canada $315 million, Chile $395 million and Korea $310
million at December 31, 1993.
(2) Included within commitments are letters of credit and guarantees and the
undisbursed portion of loan commitments. Amounts presented are net of
reallocations.
</TABLE>
At March 31, 1994, approximately $3.3 billion of the Corporation's cross-border
outstandings were to Less Developed Countries (LDCs). These were principally
comprised of $1.6 billion of short-term performing trade credits and capital
investments in the Corporation's South American operations, $.9 billion of non-
trade-related loans not subject to country debt rescheduling, and $.2 billion of
securities. Only $4 million of the March 31, 1994 cross-border outstandings
were non-trade-related loans and leases, which have been subject to country debt
rescheduling agreements, of which $1 million are on nonaccrual. The Corporation
does not separately allocate a portion of its reserve for credit losses for LDC
loans and leases; however, they are considered in the determination of the
adequacy of the overall reserve for credit losses.
29
<PAGE>
Of the $3.3 billion of total LDC cross-border outstandings at March 31, 1994,
approximately $1.5 billion or 45%, related to Argentina and $.8 billion, or 25%,
related to Brazil. Changes in aggregate cross-border outstandings to Argentina
and Brazil since December 31, 1993 were approximately as follows:
<TABLE>
<CAPTION>
(in millions) Argentina Brazil
--------- ------
<S> <C> <C>
Cross-border outstandings at December 31, 1993 $1,505 $805
Increase in non-trade-related loans and leases not
subject to country debt rescheduling 59
Net change in trade-related cross-border
outstandings, primarily short-term (56) 72
Net change in investment and trading securities 7 (12)
Net change in local currency assets
funded by non-local currency liabilities (27)
Other 10 2
--------- -------
Cross-border outstandings at March 31, 1994 $1,525(1) $840(2)
========= =======
<FN>
(1) Approximately 49% are non-trade-related local dollar loans funded by
locally generated dollar liabilities and approximately 27% relates to
trade-related outstandings.
(2) Approximately 70% relates to trade-related outstandings.
</TABLE>
The Corporation has not experienced and does not expect to experience any
collection problems stemming from currency restrictions or foreign exchange
liquidity problems on its current portfolio of LDC cross-border outstandings,
except as such problems relate to its small remaining portfolio of non-trade-
related cross-border outstandings subject to country debt rescheduling
agreements. Management is monitoring the situation in Brazil closely
as the country continues to be subject to hyperinflation and other economic
difficulties. While minimal problems have been experienced to date with
respect to the Corporation's current portfolio of LDC cross-border
outstandings, there can be no assurance that such problems will not occur in
the future.
30
<PAGE>
<TABLE>
Consolidated Balance Sheet Averages by Quarter
Last Nine Quarters
(in millions)
<CAPTION>
1992 1993 1994
------------------------------------------- ----------------------------------------- --------
1 2 3 4 1 2 3 4 1
------------------------------------------- ----------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing deposits in
other banks $ 1,195 $ 1,315 $ 1,222 $ 1,252 $ 1,262 $ 1,422 $ 1,305 $ 1,185 $ 1,083
Federal funds sold and
securities purchased under
agreements to resell 1,204 1,063 1,092 801 1,309 1,089 1,367 2,005 2,447
Trading securities 248 183 233 242 290 276 300 259 223
Mortgages held for sale 616 607 640 869 682 944 1,334 1,314 960
Securities 5,156 4,232 4,521 4,907 3,909 3,838 3,561 3,194 3,174
Loans and lease financing 25,198 25,248 25,577 25,269 25,224 25,854 26,953 28,172 28,615
------ ------ ------ ------ ------ ------ ------ ------ ------
Total earning assets 33,617 32,648 33,285 33,340 32,676 33,423 34,820 36,129 36,502
Other assets 3,377 3,592 3,589 3,956 3,775 4,078 4,248 4,274 4,712
------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL ASSETS $ 36,994 $ 36,240 $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214
====== ====== ====== ====== ====== ====== ====== ====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Domestic offices:
Noninterest bearing $ 3,669 $ 3,731 $ 3,762 $ 4,220 $ 4,031 $ 4,397 $ 4,578 $ 4,863 $ 4,633
Interest bearing 21,062 20,771 20,567 20,084 19,245 18,580 18,360 18,096 17,110
Overseas offices:
Noninterest bearing 281 290 360 362 349 336 387 469 497
Interest bearing 4,102 4,314 4,322 4,214 4,537 4,881 5,218 5,819 6,375
------ ------ ------ ------ ------ ------ ------ ------ ------
Total deposits 29,114 29,106 29,011 28,880 28,162 28,194 28,543 29,247 28,615
Federal funds purchased and
repurchase agreements 2,171 1,420 1,708 2,207 1,705 2,315 3,430 3,787 3,619
Other funds borrowed 1,638 1,578 1,713 1,507 1,436 1,606 1,485 1,603 2,411
Notes payable 1,192 1,187 1,186 1,223 1,669 1,670 1,752 1,876 2,194
Other liabilities 930 865 919 957 886 1,022 1,085 1,073 1,433
Stockholders' equity 1,949 2,084 2,337 2,522 2,593 2,694 2,773 2,817 2,942
------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 36,994 $ 36,240 $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
31
<PAGE>
<TABLE>
Consolidated Statement of Income by Quarter - Taxable Equivalent Basis
Last Nine Quarters
(in millions, except per share amounts)
<CAPTION>
1992 1993 1994
------------------------------------- ------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 1 2 3 4 1
----- ----- ----- ----- ----- ----- ----- ----- -----
Net interest revenue $ 284.8 $ 306.7 $ 327.9 $ 336.3 $ 324.2 $ 330.5 $ 340.8 $ 349.3 $ 340.7
Taxable equivalent adjustment 2.8 2.2 2.1 3.7 1.8 1.7 2.3 2.0 1.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Net Interest Revenue 287.6 308.9 330.0 340.0 326.0 332.2 343.1 351.3 342.2
Provision for credit losses 67.9 45.2 44.5 23.0 22.5 27.6 10.0 10.0 45.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Net interest revenue after
provision for credit losses 219.7 263.7 285.5 317.0 303.5 304.6 333.1 341.3 297.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Noninterest Income:
Financial service fees 92.1 93.0 81.1 88.9 71.3 92.6 90.9 95.2 92.4
Trust and agency fees 42.4 40.5 41.1 42.0 43.9 45.2 43.1 45.5 47.7
Trading profits and commissions 4.5 5.4 5.5 .5 6.9 5.8 6.9 3.9 3.9
Securities portfolio gains 17.2 11.6 8.7 1.5 6.4 6.0 11.0 8.8 3.9
Other income 56.6 38.5 40.9 45.7 45.9 41.4 39.3 35.6 87.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Total noninterest income 212.8 189.0 177.3 178.6 174.4 191.0 191.2 189.0 235.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Noninterest Expense:
Salaries 140.2 146.1 154.9 163.7 159.1 161.7 160.4 153.3 157.8
Employee benefits 31.9 32.9 30.4 25.6 37.5 33.7 32.2 32.7 36.9
Occupancy expense 32.2 31.6 31.7 31.0 32.2 32.2 32.2 31.3 31.9
Equipment expense 26.0 24.7 24.6 25.5 25.6 24.0 23.3 23.4 23.6
Restructuring expense 85.0
Other expense 130.3 125.7 123.9 141.2 121.3 116.7 107.1 105.9 96.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Total noninterest expense 360.6 361.0 365.5 387.0 375.7 368.3 440.2 346.6 346.7
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes, extraordinary items and
cumulative effect of changes in
accounting principles 71.9 91.7 97.3 108.6 102.2 127.3 84.1 183.7 185.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Provision for income taxes 28.2 41.6 40.3 42.7 40.9 54.2 40.4 79.2 81.4
Taxable equivalent adjustment 2.8 2.2 2.1 3.7 1.8 1.7 2.3 2.0 1.5
----- ----- ----- ----- ----- ----- ----- ----- -----
31.0 43.8 42.4 46.4 42.7 55.9 42.7 81.2 82.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before extraordinary
items and cumulative effect of
changes in accounting principles 40.9 47.9 54.9 62.2 59.5 71.4 41.4 102.5 102.7
Extraordinary items 18.3 18.4 19.0 17.3 (6.6)
Cumulative effect of changes in
accounting principles, net 24.2
----- ----- ----- ----- ----- ----- ----- ----- -----
NET INCOME $ 59.2 $ 66.3 $ 73.9 $ 79.5 $ 83.7 $ 71.4 $ 41.4 $ 102.5 $ 96.1
===== ===== ===== ===== ===== ===== ===== ===== =====
Per Common Share:
Income before
extraordinary items and
cumulative effect of changes in
accounting principles:
Primary $ .60 $ .43 $ .47 $ .52 $ .49 $ .60 $ .30 $ .88 $ .88
Fully diluted .59 .42 .46 .50 .48 .59 .30 .85 .85
Net Income:
Primary $ .60 $ .61 $ .65 $ .68 $ .72 $ .60 $ .30 $ .88 $ .82
Fully diluted .59 .59 .63 .66 .70 .59 .30 .85 .79
Cash dividends declared .10 .10 .10 .10 .10 .22
</TABLE>
32
<PAGE>
<TABLE>
Average Balances and Interest Rates
Quarters ended March 31
(dollars in millions)
<CAPTION>
CONSOLIDATED 1994 1993
----------------------------------------- -------------------------------------
Average Interest Average Average Interest Average
Balance (1) Rate(7) Balance (1) Rate(7)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing deposits in other banks $ 1,083 $ 22.3 8.37% $ 1,262 $ 36.0 11.58%
Federal funds sold and securities
purchased under agreements to resell 2,447 79.7 13.21 1,309 22.3 6.89
Trading securities 223 2.5 4.49 290 1.9 2.64
Mortgages held for sale 960 15.7 6.61 682 13.4 7.94
Securities (2):
Available for sale 1,093 37.2 13.80
Held to maturity 2,081 24.0 4.69
------- ------
Total 3,174 61.2 7.83 3,909 70.1 7.28
Loans and lease financing (3) 28,615 543.7 7.71 25,224 518.4 8.33
------- ------ ------- ------
Total earning assets - interest income 36,502 725.1 8.06 32,676 662.1 8.22
------ ----- ------ -----
Cash and due from banks 2,157 1,672
Other assets 2,555 2,103
------- ------
Total assets $ 41,214 $ 36,451
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Savings $ 9,257 $ 43.5 1.91% $ 9,220 $ 59.1 2.62%
Time 7,853 86.3 4.46 10,025 122.0 4.94
International Operations 6,375 109.8 6.99 4,537 83.6 7.47
Federal funds purchased and repurchase
agreements 3,619 36.8 4.12 1,705 16.5 3.91
Other funds borrowed 2,411 73.3 12.33 1,436 26.2 7.42
Notes payable 2,194 33.2 6.14 1,669 28.7 6.98
Intersegment funds, net ------- ------ ------- ------
Total interest bearing funds
interest expense (4) 31,709 382.9 4.90 28,592 336.1 4.78
------- ------ ----- ------ -----
Demand and other noninterest bearing
deposits:
United States Operations 4,633 4,031
International Operations 497 349
Other liabilities 1,433 886
Stockholders' equity 2,942 2,593
------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 41,214 $ 36,451
======= =======
NET INTEREST REVENUE $ 342.2 $ 326.0
====== ======
INTEREST RATE MARGIN(6) 3.80% 4.05%
<FN>
(1) This data is shown with income on a fully taxable equivalent basis.
(2) Prior to January 1, 1994, average balances for Securities Available for
Sale and Securities Held to Maturity were not separately accumulated.
(3) Data for loans includes nonaccrual and renegotiated balances as well as
fees earned on loans.
(4) Average rates for interest bearing funds of United States Operations have
been calculated after deducting applicable reserve requirements from
average balances shown in the table.
(5) Other liabilities includes net intersegment allocations.
(6) Interest rate margin is calculated by dividing annualized net interest
revenue by average total earning assets.
(7) During the first quarter of 1994, the Corporation reclassified the
translation gains and losses associated with Brazilian local currency
earning assets and interest bearing liabilities from noninterest income to
interest income and interest expense, respectively. This reclassification
is more fully discussed in Note 11 to the Financial Statements.
</TABLE>
33
<PAGE>
<TABLE>
Average Balances and Interest Rates
Quarters ended March 31
(dollars in millions)
<CAPTION>
UNITED STATES OPERATIONS 1994 1993
-------------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Balance (1) Rate Balance (1) Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing deposits in other banks $ 254 $ 1.7 2.78% $ 334 $ 2.9 3.55%
Federal funds sold and securities
purchased under agreements to resell 1,323 10.5 3.21 1,031 7.9 3.09
Trading securities 112 1.2 4.23 134 1.4 4.22
Mortgages held for sale 960 15.7 6.61 682 13.4 7.94
Securities (2):
Available for sale 632 11.5 7.39
Held to maturity 1,817 21.3 4.76
------ -----
Total 2,449 32.8 5.44 3,491 53.4 6.21
Loans and lease financing (3) 22,305 401.0 7.29 20,187 392.4 7.88
------ ----- ------ -----
Total earning assets - interest income 27,403 462.9 6.85 25,859 471.4 7.39
----- ---- ----- ----
Cash and due from banks 1,738 1,348
Other assets 1,692 1,418
------ ------
Total assets $ 30,833 $ 28,625
====== ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Savings $ 9,257 $ 43.5 1.91% $ 9,220 $ 59.1 2.62%
Time 7,853 86.3 4.46 10,025 122.0 4.94
International Operations
Federal funds purchased and repurchase
agreements 3,390 26.6 3.18 1,515 10.8 2.87
Other funds borrowed 1,482 17.8 4.87 945 9.4 4.04
Notes payable 2,104 29.9 5.77 1,560 25.3 6.59
Intersegment funds, net (1,587) (15.3) (1,767) (10.6)
------ ----- ------ -----
Total interest bearing funds
interest expense (4) 22,499 188.8 3.40 21,498 216.0 4.09
----- ---- ----- ----
Demand and other noninterest bearing
deposits:
United States Operations 4,633 4,031
International Operations
Other liabilities (5) 1,500 1,059
Stockholders' equity 2,201 2,037
------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 30,833 $ 28,625
====== ======
NET INTEREST REVENUE $ 274.1 $ 255.4
===== =====
INTEREST RATE MARGIN(6) 4.06% 4.01%
<FN>
(1) This data is shown with income on a fully taxable equivalent basis.
(2) Prior to January 1, 1994, average balances for Securities Available for
Sale and Securities Held to Maturity were not separately accumulated.
(3) Data for loans includes nonaccrual and renegotiated balances as well
as fees earned on loans.
(4) Average rates for interest bearing funds of United States Operations have
been calculated after deducting applicable reserve requirements from
average balances shown in the table.
(5) Other liabilities includes net intersegment allocations.
(6) Interest rate margin is calculated by dividing annualized net interest
revenue by average total earning assets.
</TABLE>
34
<PAGE>
<TABLE>
Average Balances and Interest Rates
Quarters ended March 31
(dollars in millions)
INTERNATIONAL OPERATIONS
<CAPTION>
1994 1993
-------------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Balance (1) Rate(7) Balance (1) Rate(7)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing deposits in other banks $ 829 $ 20.6 10.09% $ 928 $ 33.1 14.47%
Federal funds sold and securities
purchased under agreements to resell 1,124 69.2 24.97 278 14.4 20.93
Trading securities 111 1.3 4.76 156 .5 1.28
Mortgages held for sale
Securities (2):
Available for sale 461 25.7 22.60
Held to maturity 264 2.7 4.18
------ -----
Total 725 28.4 15.88 418 16.7 16.24
Loans and lease financing (3) 6,310 142.7 9.17 5,037 126.0 10.14
------ ----- ----- -----
Total earning assets - interest income 9,099 262.2 11.69 6,817 190.7 11.34
----- ----- ----- -----
Cash and due from banks 419 324
Other assets 863 685
------ -----
Total assets $ 10,381 $ 7,826
====== =====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Savings
Time
International Operations $ 6,375 $ 109.8 6.99% $ 4,537 $ 83.6 7.47%
Federal funds purchased and repurchase
agreements 229 10.2 18.22 190 5.7 12.19
Other funds borrowed 929 55.5 24.22 491 16.8 13.92
Notes payable 90 3.3 14.74 109 3.4 12.60
Intersegment funds, net 1,587 15.3 1.767 10.6
------ ----- ----- -----
Total interest bearing funds
interest expense (4) 9,210 194.1 8.55 7,094 120.1 6.87
----- ----- ----- -----
Demand and other noninterest bearing
deposits:
United States Operations
International Operations 497 349
Other liabilities (5) (67) (173)
Stockholders' equity 741 556
------ -----
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 10,381 $ 7,826
====== =====
NET INTEREST REVENUE $ 68.1 $ 70.6
===== =====
INTEREST RATE MARGIN(6) 3.03% 4.20%
<FN>
(1) This data is shown with income on a fully taxable equivalent basis.
(2) Prior to January 1, 1994, average balances for Securities Available
for Sale and Securities Held to Maturity were not separately
accumulated.
(3) Data for loans includes nonaccrual and renegotiated balances as well as
fees earned on loans.
(4) Average rates for interest bearing funds of United States Operations have
been calculated after deducting applicable reserve requirements from
average balances shown in the table.
(5) Other liabilities includes net intersegment allocations.
(6) Interest rate margin is calculated by dividing annualized net interest
revenue by average total earning assets.
(7) During the first quarter of 1994, the Corporation reclassified the
translation gains and losses associated with Brazilian local currency
earning assets and interest bearing liabilities from noninterest income
to interest income and interest expense, respectively. This
reclassification is more fully discussed in Note 11 to the Financial
Statements.
</TABLE>
35
<PAGE>
Change in Net Interest Revenue - Volume and Rate Analysis
The following table summarizes the changes in net interest revenue, on a fully
taxable equivalent basis, by the amount resulting from changes in rate and the
amount resulting from changes in volume.
First Quarter 1994 Compared With First Quarter 1993 - (in millions)
<TABLE>
<CAPTION>
United States International Consolidated
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Due to Due to
Change in Change in Change in
Net Net Net
Volume(2) Rate Change Volume(2) Rate Change Volume(2) Rate Change
-------- ---- ------ --------- ----- ------ --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and lease financing $ 38.1 $ (29.5) $ 8.6 $ 28.8 $ (12.1) $ 16.7 $ 64.4 $ (39.1) $ 25.3
Other earning assets (7.0) (10.1) (17.1) 43.2 11.6 54.8 10.0 27.7 37.7
Adjustment (1) (5.0) 5.0 0.0 (6.2) 6.2 0.0 1.6 (1.6) 0.0
---- ----- ----- ----- ----- ---- ---- ----- ----
Total interest income 26.1 (34.6) (8.5) 65.8 5.7 71.5 76.0 (13.0) 63.0
Total interest expense 10.6 (37.8) (27.2) 48.7 25.3 74.0 40.2 6.6 46.8
---- ------ ------ ---- ----- ---- ---- ----- ----
Net Interest Revenue $ 15.5 $ 3.2 $ 18.7 $ 17.1 $ (19.6) $ (2.5) $ 35.8 $ (19.6) $ 16.2
==== ===== ===== ==== ===== ===== ==== ====== ====
<FN>
(1) Adjustment to reflect the effect on total volume and rate changes of the
differences in the component mix of earning assets and interest bearing
liabilities between periods.
(2) The change due to the volume/rate variance has been allocated to volume.
</TABLE>
36
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, in January 1994, the Securities and Exchange Commission
(the Commission) commenced an administrative proceeding against the Corporation.
The administrative proceeding relates to the Commission's claim that the
Corporation's second quarter 1989 Form 10-Q did not disclose known trends or
uncertainties with respect to the Corporation's credit portfolio and
specifically its domestic commercial real estate portfolio. The Corporation
reported a significant loss in the third quarter of 1989 as a result of adding
to its reserve for credit losses, primarily due to deterioration in the credit
quality of its domestic commercial real estate portfolio. Management believes
that the disclosures made in its second quarter 1989 Form 10-Q were appropriate
and intends to defend the action vigorously. A hearing before an administrative
law judge commenced on May 2, 1994. Although management cannot predict the
outcome of this proceeding, an unfavorable outcome will not result in any
monetary penalties to the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders.
(A) The Annual Meeting of Stockholders of the Corporation was held on April 28,
1994.
(B) The following matters were submitted to a vote of the Stockholders of the
Corporation:
<TABLE>
<CAPTION>
(1) Election of Directors
-------------------------
Nominee Total Votes For Total Votes Withheld
- ------- --------------- --------------------
<S> <C> <C>
Gary L. Countryman 83,473,176 637,011
J. Donald Monan 83,452,398 657,789
Richard A. Smith 83,511,018 599,169
Ira Stepanian 83,503,218 606,969
William C. Van Faasen 83,426,591 683,596
<CAPTION>
(2) Selection of Independent Auditors
-------------------------------------
<S> <C>
Total Votes For 83,406,499
Total Votes Against 368,586
Total Abstentions 335,102
<CAPTION>
(3) Stockholder Proposal to Change Meeting Date
-----------------------------------------------
<S> <C>
Total Votes For 4,107,567
Total Votes Against 67,627,282
Total Abstentions 1,456,912
Total Broker Nonvotes 10,918,426
</TABLE>
37
<PAGE>
Item 5. Other Information
As previously reported, in September 1993, the Corporation announced that it had
reached a definitive agreement to acquire BankWorcester for $34.00 for each
share of BankWorcester common stock outstanding, subject to an upward adjustment
if the transaction is not consummated on or before June 30, 1994. It is
expected that the total purchase price will be approximately $247 million.
BankWorcester, the holding company for Worcester County Institution for Savings,
had approximately $1.5 billion of assets, approximately $1.3 billion of deposits
and 28 branches at March 31, 1994. The transaction has been approved by the
boards of directors of both companies and by BankWorcester's stockholders. On
April 26, 1994, the Corporation received approval for the acquisition from the
OCC. The transaction is also subject to the approval of the Board of Bank
Incorporation of the Commonwealth of Massachusetts (the Massachusetts BBI) and a
30 day review period during which time the Justice Department may challenge the
transactions on antitrust grounds.
In March 1994, the Corporation announced that it had reached a definitive
agreement to acquire Pioneer for $118 million in cash. Pioneer, which is based
in Middlesex County, Massachusetts, had approximately $773 million in assets,
$720 million in deposits and 20 branches at March 31, 1994. The Pioneer
transaction has been approved by the boards of directors of both companies. The
Pioneer transaction is subject to the approval of Pioneer stockholders, the OCC
and the Massachusetts BBI, and an application for approval of the transaction
has been submitted to the OCC. The transaction may not be consummated until the
30th day after OCC approval is received, during which time the Justice
Department may challenge the transaction on antitrust grounds.
The Corporation's objective is to consummate the BankWorcester transaction by
mid-year 1994 and the Pioneer transaction in the fall of 1994, although no
assurances can be given that the requisite regulatory approvals will be
granted or, if granted, that such approvals will be received within these time
frames.
As previously reported, the Corporation had applied for regulatory approval to
merge Mechanics Bank, South Shore Bank and Multibank West into The First
National Bank of Boston. On April 29, 1994, the Corporation received OCC
approval for the proposed mergers, and on May 6, 1994 merged South Shore Bank
into The First National Bank of Boston. It is anticipated that the remaining
mergers will be consummated by mid-year 1994.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11 Computation of Earnings Per Share.
(b) Current Reports on Form 8-K.
During the first quarter of 1994, the Corporation filed one
Current Report on Form 8-K, dated January 5, 1994, which
contained information pursuant to Items 5 and 7 of Form 8-K.
38
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK OF BOSTON CORPORATION
/S/Ira Stepanian
----------------
Ira Stepanian
Chairman of the Board of Directors and
Chief Executive Officer
/S/William J. Shea
------------------
William J. Shea
Vice Chairman,
Chief Financial Officer and
Treasurer
May 13, 1994
- ------------
Date
39
<PAGE>
EXHIBIT 11
BANK OF BOSTON CORPORATION
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended
--------------
March 31
EARNINGS 1994 1993
- -------- ---- ----
<S> <C> <C>
1. Net income $ 96,140 $ 83,675
2. Less: Preferred dividends 9,317 7,938
------- -------
3. Net income applicable to primary
earnings per common share 86,823 75,737
4. Add: Interest expense on convertible
debentures, net of tax 1,061 1,078
------- -------
5. Net income applicable to fully diluted
earnings per common share $ 87,884 $ 76,815
======= =======
SHARES
------
6. Weighted average number of common shares
outstanding 106,198 104,962
7. Incremental shares from assumed exercise
of dilutive stock options as of the
beginning of the period using the treasury
stock method 589 1,075
8. Incremental shares from assumed conversion
of debentures at date of issuance 4,030 4,042
------- -------
9. Adjusted number of common shares 110,817 110,079
======= =======
PER SHARE CALCULATION
---------------------
10. Primary net income per common share $ .82 $ .72
(Item 3 / Item 6); see note below
11. Fully diluted net income per common share $ .79 $ .70
(Item 5 / Item 9); see note below
<FN>
Note - Income per common share before extraordinary items and cumulative effect
of accounting changes, net, on both a primary and fully diluted basis for the
quarters ended March 31, 1994 and March 31, 1993 are computed by adding to the
numerator $6,535 and subtracting from the numerator $24,203, respectively.
</TABLE>
