<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 September 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-6522
BANK OF BOSTON CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2471221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Federal Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 434-2200
Former name, former address and former fiscal year, if changed since last
report: Not applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of October 31, 1994:
Common Stock, $2.25 par value 107,188,893
<PAGE>
BANK OF BOSTON CORPORATION
--------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<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.......................................... 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 46
-------
Item 5. Other Information.................................................. 46
-------
Item 6. Exhibits and Reports on Form 8-K................................... 47
-------
Signatures..................................................................... 48
LIST OF TABLES
Consolidated Average Balance Sheet - Nine Quarters.......................... 39
Consolidated Statement of Income - Nine Quarters............................ 40
Average Balances and Interest Rates - Quarter............................... 41
Average Balances and Interest Rates - Nine Months........................... 43
Change in Net Interest Revenue - Volume and Rate Analysis................... 45
</TABLE>
2
<PAGE>
BANK OF BOSTON CORPORATION
Consolidated Selected Financial Data
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended September 30 1994 1993
--------- ---------
<S> <C> <C>
Income Statement Data:
Net interest revenue $ 423.9 $ 340.8
Provision for credit losses 25.0 10.0
Noninterest income 202.2 191.2
Noninterest expense 378.3 440.2
Net income 124.0 41.4
Per common share:
Net income:
Primary 1.07 .30
Fully diluted 1.04 .30
Market value per common share:
High 27 3/8 25 7/8
Low 24 3/8 23 1/2
Nine Months Ended September 30
Income Statement Data:
Net interest revenue $ 1,139.1 $ 995.5
Provision for credit losses 95.0 60.1
Noninterest income 629.5 556.6
Noninterest expense 1,097.3 1,184.2
Income before extraordinary item and
cumulative effect of changes in
accounting principles 321.2 172.3
Net income 314.6 196.5
Per common share:
Income before extraordinary item and
cumulative effect of changes in
accounting principles:
Primary 2.75 1.40
Fully diluted 2.66 1.36
Net income:
Primary 2.69 1.63
Fully diluted 2.60 1.58
Market value per common share:
High 28 1/2 28 7/8
Low 22 5/8 20 1/2
At September 30
Balance Sheet Data:
Loans and lease financing $ 30,881 $ 27,937
Total assets 44,294 39,189
Deposits 30,313 28,533
Total stockholders' equity 3,113 2,781
Book value per common share 24.30 21.54
Regulatory capital ratios:
Risk-based capital ratios:
Tier 1 6.9% 7.2%
Total 11.9 11.6
Leverage ratio 6.4 6.8
</TABLE>
3
<PAGE>
BANK OF BOSTON CORPORATION
Consolidated Balance Sheet
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS September 30 December 31
1994 1993
------------ ------------
<S> <C> <C>
Cash and due from banks $ 2,084,343 $ 2,539,286
Interest bearing deposits in other banks 1,172,763 991,389
Federal funds sold and securities
purchased under agreements to resell 1,947,485 1,454,478
Trading securities 755,490 305,775
Mortgages held for sale 314,111 1,321,607
Securities (Note 4):
Available for sale 2,214,036 1,437,887
Held to maturity (fair value of
$1,974,423 in 1994 and
$1,568,617 in 1993) 2,021,986 1,568,823
Loans and lease financing (Note 5):
United States Operations 23,925,287 22,560,194
International Operations 6,955,492 6,221,780
------------ ------------
Total loans and lease financing
(net of unearned income of
$268,400 in 1994 and $311,955
in 1993) 30,880,779 28,781,974
Reserve for credit losses (Note 7) (676,534) (770,279)
------------ ------------
Net loans and lease financing 30,204,245 28,011,695
Accelerated disposition portfolio (Note 6) 127,651
Premises and equipment, net 553,262 522,271
Due from customers on acceptances 325,018 391,204
Accrued interest receivable 314,433 287,368
Other real estate owned 92,487 107,845
Other assets (Note 8) 2,166,608 1,648,274
------------ ------------
TOTAL ASSETS $ 44,293,918 $ 40,587,902
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
BANK OF BOSTON CORPORATION
Consolidated Balance Sheet
(in thousands, except share and per share amounts)
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY September 30 December 31
1994 1993
------------ ------------
<S> <C> <C>
Deposits:
Domestic offices:
Noninterest bearing $ 4,863,708 $ 5,040,028
Interest bearing 17,076,705 17,495,648
Overseas offices:
Noninterest bearing 580,689 525,620
Interest bearing 7,791,437 6,552,849
------------ ------------
Total deposits 30,312,539 29,614,145
Funds borrowed:
Federal funds purchased 810,512 417,107
Term federal funds purchased 1,151,400 2,150,000
Securities sold under agreements to
repurchase 1,351,423 798,842
Other funds borrowed 3,969,874 1,608,631
Acceptances outstanding 325,364 391,484
Accrued expenses and other liabilities
(Note 8) 1,129,003 723,266
Notes payable (Note 9) 2,131,051 1,972,758
------------ ------------
TOTAL LIABILITIES 41,181,166 37,676,233
------------ ------------
Commitments and contingencies (Notes 2
and 10)
Stockholders' equity:
Preferred stock without par value:
Authorized shares - 10,000,000
Issued and outstanding shares -
4,593,941 508,436 508,436
Common stock, par value $2.25:
Authorized shares - 200,000,000
Issued and outstanding shares -
107,169,524 in 1994 and
105,801,268 in 1993 241,131 238,053
Surplus 800,612 768,372
Retained earnings 1,570,794 1,361,960
Net unrealized gain (loss) on
securities available for sale (2,299) 42,980
Cumulative translation adjustments (5,922) (8,132)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,112,752 2,911,669
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 44,293,918 $ 40,587,902
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
BANK OF BOSTON CORPORATION
Consolidated Statement of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income (Note 11):
Loans and lease financing, including fees $ 721,515 $ 531,978 $ 1,853,503 $ 1,565,764
Securities 60,947 64,063 165,190 197,981
Trading securities 29,882 3,018 57,441 6,898
Mortgages held for sale 9,639 23,831 36,267 54,137
Federal funds sold and securities
purchased under agreements to resell 223,082 40,330 455,597 83,803
Deposits in other banks 38,479 36,034 79,291 108,151
----------- ----------- ----------- -----------
Total interest income 1,083,544 699,254 2,647,289 2,016,734
----------- ----------- ----------- -----------
Interest Expense (Note 11):
Deposits of domestic offices 131,543 148,250 380,010 489,029
Deposits of overseas offices 202,352 107,452 435,582 277,103
Funds borrowed 295,020 73,999 599,926 170,400
Notes payable 30,749 28,734 92,665 84,692
----------- ----------- ----------- -----------
Total interest expense 659,664 358,435 1,508,183 1,021,224
----------- ----------- ----------- -----------
Net interest revenue (Note 11) 423,880 340,819 1,139,106 995,510
Provision for credit losses (Notes 6 and 7) 25,000 10,000 95,000 60,126
----------- ----------- ----------- -----------
Net interest revenue after provision for
credit losses 398,880 330,819 1,044,106 935,384
----------- ----------- ----------- -----------
Noninterest Income:
Financial service fees 104,315 90,928 290,638 254,756
Trust and agency fees 50,530 43,105 148,478 132,184
Trading profits and commissions 10,857 6,936 15,927 19,725
Securities gains 1,333 10,965 11,150 23,377
Other income (Notes 2 and 11) 35,112 39,306 163,306 126,589
----------- ----------- ----------- -----------
Total noninterest income 202,147 191,240 629,499 556,631
----------- ----------- ----------- -----------
Noninterest Expense:
Salaries 168,052 160,374 487,464 481,232
Employee benefits 38,608 32,238 112,488 103,457
Occupancy expense 35,207 32,176 100,163 96,525
Equipment expense 24,183 23,282 71,137 72,822
Merger and restructuring charges and other
related conversion costs 5,000 85,000 21,390 85,000
Other real estate owned expense 6,172 6,929 18,262 38,240
Other expense 101,037 100,178 286,444 306,967
----------- ----------- ----------- -----------
Total noninterest expense 378,259 440,177 1,097,348 1,184,243
----------- ----------- ----------- -----------
Income before income taxes, extraordinary item
and cumulative effect of changes in
accounting principles 222,768 81,882 576,257 307,772
Provision for income taxes 98,799 40,438 255,113 135,461
----------- ----------- ----------- -----------
Income before extraordinary item and cumulative
effect of changes in accounting principles 123,969 41,444 321,144 172,311
Extraordinary loss from early extinguishment of
debt, net of tax (Note 9) (6,535)
Cumulative effect of changes in accounting
principles, net (Notes 12 and 13) 24,203
----------- ----------- ----------- -----------
NET INCOME $ 123,969 $ 41,444 $ 314,609 $ 196,514
=========== =========== =========== ===========
NET INCOME APPLICABLE TO
COMMON STOCK $ 114,580 $ 32,061 $ 286,546 $ 171,168
=========== =========== =========== ===========
Per Common Share:
Income before extraordinary item and cumulative
effect of changes in accounting principles:
Primary $ 1.07 $ .30 $ 2.75 $ 1.40
Fully diluted $ 1.04 $ .30 $ 2.66 $ 1.36
Net Income:
Primary $ 1.07 $ .30 $ 2.69 $ 1.63
Fully diluted $ 1.04 $ .30 $ 2.60 $ 1.58
Dividends declared $ .22 $ .10 $ .66 $ .30
Average Number of Common Shares:
Primary 106,981 105,443 106,602 105,232
Fully diluted 111,690 110,446 111,391 110,296
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
BANK OF BOSTON CORPORATION
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Quarters Ended September 30
Balance, beginning of period $ 3,004,952 $ 2,756,315
Net income 123,969 41,444
Common stock issued in connection with:
Dividend reinvestment and common
stock purchase plan 7,055 1,751
Exercise of stock options 1,090 1,378
Restricted stock grants, net of
forfeitures (287) (136)
Change in unearned compensation
related to restricted stock grants 1,488 563
Other, principally employee
benefit plans 163 344
Cash dividends declared:
Preferred stock (9,391) (9,161)
Common stock (23,521) (10,541)
Change in net unrealized appreciation
on marketable equity securities of
nonbanking subsidiary 234
Change in net unrealized gain or loss
on securities available for sale, net
of tax 6,070
Translation adjustments, net of tax 1,164 (668)
----------- -----------
Balance, end of period $ 3,112,752 $ 2,781,523
=========== ===========
Nine Months Ended September 30
Balance, beginning of period $ 2,911,669 $ 2,553,530
Net income 314,609 196,514
Common stock issued in connection with:
Dividend reinvestment and common
stock purchase plan 18,547 4,691
Exercise of stock options 5,139 7,942
Restricted stock grants, net of
forfeitures 9,212 2,621
Change in unearned compensation
related to restricted stock grants (7,427) (1,244)
Other, principally employee
benefit plans 2,421 3,909
Preferred stock issued in public offering 67,595
Cash dividends declared:
Preferred stock (28,096) (25,110)
Common stock (70,253) (27,560)
Change in net unrealized appreciation
on marketable equity securities of
nonbanking subsidiary 1,217
Change in net unrealized gain or loss
on securities available for sale, net
of tax (45,279)
Translation adjustments, net of tax 2,210 (2,582)
----------- -----------
Balance, end of period $ 3,112,752 $ 2,781,523
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
BANK OF BOSTON CORPORATION
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30 1994 1993
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 314,609 $ 196,514
Reconciliation of net income to net cash
provided from operating activities:
Extraordinary loss from early
extinguishment of debt, net of tax 6,535
Cumulative effect of change in
accounting for purchased mortgage
servicing rights, net of tax 52,960
Cumulative effect of change in
method of accounting for income
taxes (77,163)
Provision for credit losses 95,000 60,126
Depreciation and amortization 131,099 131,423
Provision for deferred taxes (132,329) 77,805
Net gains on sales of securities
and other assets (66,064) (57,181)
Change in trading securities (449,715) (153,050)
Change in mortgages held for sale 1,007,496 (414,218)
Change in securities available for
sale 433,441
Net change in interest receivables
and payables (137,094) (35,654)
Other, net 192,843 153,666
------------ ------------
Net cash provided from operating
activities 962,380 368,669
------------ ------------
Cash Flows From Investing Activities:
Net cash provided from (used for)
interest bearing deposits in other
banks (181,374) 340,038
Net cash provided from (used for)
federal funds sold and securities
purchased under agreements to resell (493,007) 403,655
Purchases of securities held to maturity (1,297,331) (1,523,599)
Purchases of securities available for
sale (Note 3) (3,005,366)
Sales of securities held to maturity 18,364
Sales of securities available for sale
(Note 3) 2,315,560
Maturities of securities held to
maturity 614,154 1,276,806
Maturities of securities available for
sale (Note 3) 185,249
Dispositions of venture capital
investments 14,725 58,099
Loans and lease financing originated by
nonbank entities (2,901,918) (2,450,451)
Proceeds from sales of loan portfolios
by bank subsidiaries 160,557
Loans and lease financing collected by
nonbank entities 2,413,641 2,297,170
Net cash used for lending activities of
bank subsidiaries (1,911,453) (2,466,951)
Lease financing originated by bank
entities (20,365) (40,549)
Lease financing collected by bank
entities 19,696 18,041
Proceeds from sales of other real
estate owned 37,730 102,906
Expenditures for premises and equipment (142,110) (64,537)
Proceeds from sales of business units,
premises and equipment 134,917 5,919
Other, net (431,718) 389,844
------------ ------------
Net cash used for investing
activities (4,488,413) (1,635,245)
------------ ------------
Cash Flows From Financing Activities:
Net cash provided from (used for)
deposits 698,394 (569,143)
Net cash provided from funds borrowed 2,308,629 2,045,169
Net repayments of notes payable (537,800) (94,375)
Net proceeds from issuance of notes
payable 696,093 111,179
Net proceeds from issuance of preferred
stock 67,595
Net proceeds from issuance of common
stock 24,909 12,816
Dividends paid (98,349) (52,670)
------------ ------------
Net cash provided from financing
activities 3,091,876 1,520,571
Effect of foreign currency translation
on cash (20,786) (10,522)
NET CHANGE IN CASH AND DUE FROM BANKS (454,943) 243,473
Cash and Due from Banks at January 1 2,539,286 1,936,396
------------ ------------
Cash and Due from Banks at September 30 $ 2,084,343 $ 2,179,869
============ ============
Interest payments made $ 1,618,212 $ 1,063,775
Income tax payments made $ 90,215 $ 45,240
</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. Certain amounts reported in prior periods have been
reclassified for comparative purposes. This information should be read in
conjunction with the Corporation's 1993 Annual Report on Form 10-K.
2. Acquisitions and Divestitures:
On August 19, 1994, the Corporation completed its acquisition of Pioneer
Financial, A Co-operative Bank (Pioneer), a $.8 billion privately held
financial institution based in Middlesex County, Massachusetts. The total
purchase price amounted to $117 million. On the date of acquisition,
Pioneer was merged into The First National Bank of Boston (FNBB). The
acquisition was accounted for as a purchase and, accordingly, the assets
and liabilities of Pioneer were recorded at their estimated fair values as
of the acquisition date. The excess of the cost of the acquisition over
the estimated fair values of the net assets acquired is being amortized
over a fifteen year period. In connection with the acquisition, the
Corporation recorded a restructuring charge, comprised of employee
reduction costs, and paid other merger-related costs, primarily conversion
costs, during the third quarter of 1994. The restructuring charge and
conversion costs amounted to $5 million. The acquisition has been included
in the Corporation's financial statements since the acquisition date. Pro
forma results of operations including Pioneer for the nine months ended
September 30, 1994 and 1993 are not presented since the results would not
have been significantly different in relation to the Corporation's results
of operations.
On May 27, 1994, the Corporation completed its acquisition of BankWorcester
Corporation (BankWorcester), a $1.5 billion bank holding company
headquartered in Worcester, Massachusetts. The total purchase price
amounted to $243 million. BankWorcester, through its wholly owned
subsidiary, Worcester County Institution for Savings (WCiS), was engaged in
retail and commercial banking. On the date of acquisition, WCiS was merged
into FNBB. The acquisition was accounted for as a purchase and,
accordingly, the assets and liabilities of BankWorcester were recorded at
their estimated fair values as of the acquisition date. The excess of the
cost of the acquisition over the estimated fair values of the net assets
acquired, excluding the excess allocated to core deposit intangibles, is
being amortized over a twenty-five year period. The core deposit
intangible is being amortized over a seven year period. In connection with
the acquisition, the Corporation recorded a restructuring charge of $16
million, comprised principally of employee reduction costs and estimated
conversion costs. The acquisition has been included in the Corporation's
financial statements since the acquisition date. Pro forma results of
operations including BankWorcester for the nine months ended September 30,
1994 and 1993 are not presented since the results would not have been
significantly different in relation to the Corporation's results of
operations.
On June 24, 1994, the Corporation announced a definitive agreement to sell
two of its affiliate banks, Bank of Vermont and Maine-based Casco Northern
Bank, N.A. (Casco). Bank of Vermont, based in Burlington, Vermont, had $700
million in assets and $500 million in deposits as of September 30, 1994. It
has 212 employees and operates 12 branches. Casco, headquartered in
Portland, Maine, had $1.2 billion in assets and $900 million in deposits as
of September 30, 1994. It has 524 employees and operates 34 branches. The
sale is subject to the purchaser's receipt of required regulatory
approvals. In addition, in January 1994, the Corporation completed the sale
of its U.S. factoring business, and recorded a pre-tax gain of $27 million
on the transaction.
On November 10, 1994, the Corporation announced a definitive agreement to
acquire Ganis Credit Corporation (Ganis), a privately-held consumer finance
company headquartered in Newport Beach, California. Upon completion of the
acquisition, the Corporation will pay Ganis stockholders approximately $20
million, and up to an additional $16 million based upon Ganis reaching
certain performance goals over the next several years. The purchase price
will be paid in shares of the Corporation's common stock, which is expected
to be purchased by the Corporation in the open market. As of September 30,
1994, Ganis had 120 employees in 11 offices throughout the U.S. and
approximately $30 million in total assets.
3. Significant Noncash Transactions - Statement of Cash Flows:
During the first nine months of 1994 and 1993, the Corporation transferred
approximately $60 million and $123 million, respectively, to Other Real
Estate Owned (OREO) from loans. Loans made to facilitate sales of OREO
properties totaled approximately $2 million and $3 million in the first
nine months of 1994 and 1993, respectively. Other significant noncash
transactions included the transfer of certain assets to an accelerated
disposition portfolio, which is more fully discussed in
Note 6.
On December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with the new standard, cash
flows from purchases, sales and maturities of securities available for sale
are classified as cash flows from investing activities. In previous
periods, this activity with regard to securities available for sale was
classified as cash flows from operating activities and presented on a net
basis.
9
<PAGE>
Notes to Financial Statements, continued
4. Securities:
A summary comparison of securities available for sale by type is as
follows:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------------------------ ----------------------------------
(in thousands) Cost Carrying value Cost Carrying value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 646,523 $ 646,987 $ 108,017 $ 109,601
U.S. government
agencies and corporations:
Mortgage-backed securities 826,325 806,019 493,142 498,172
States and political subdivisions 144 135 478 474
Foreign debt securities 448,365 448,158 441,038 490,066
Other debt securities 136,521 136,493 149,585 149,585
Marketable equity
securities 52,007 66,585 57,959 74,330
Other equity securities 109,659 109,659 115,659 115,659
-------------- -------------- -------------- -------------
$ 2,219,544 $ 2,214,036 $ 1,365,878 $ 1,437,887
============== ============== ============== =============
</TABLE>
In accordance with SFAS No. 115, securities available for sale are carried
at fair value, except for equity securities not traded on established
exchanges, which are carried at cost. The cost of such equity securities
was $110 million and $116 million at September 30, 1994 and December 31,
1993, respectively.
A summary comparison of securities held to maturity, which are carried at
amortized cost, by type is as follows:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------------------------ ----------------------------------
(in thousands) Cost Fair value Cost Fair value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 317,428 $ 316,804 $ 317,396 $ 317,599
U.S. government
agencies and corporations:
Mortgage-backed securities 1,465,927 1,419,429 1,045,574 1,044,026
States and political
subdivisions 29,641 29,785 29,480 30,512
Foreign debt securities 119,914 119,329 108,503 108,610
Other debt securities 65 65
Other equity securities 89,076 89,076 67,805 67,805
------------ ------------ ------------ ------------
$ 2,021,986 $ 1,974,423 $ 1,568,823 $ 1,568,617
============ ============ ============ ============
</TABLE>
10
<PAGE>
Notes to Financial Statements, continued
5. Loans and Lease Financing:
The following are the details of loan and lease financing balances:
<TABLE>
<CAPTION>
September 30 December 31
(in thousands) 1994 1993
------------ ------------
<S> <C> <C>
United States Operations:
Commercial, industrial and financial $ 11,988,440 $ 11,991,440
Real Estate:
Secured by 1-4 family residential
properties 4,878,075 4,159,069
Construction 463,530 617,426
Other commercial 3,110,044 3,123,024
Loans to individuals 2,372,809 1,609,566
Lease financing 1,311,528 1,263,267
Unearned income (199,139) (203,598)
------------ ------------
23,925,287 22,560,194
------------ ------------
International Operations:
Loans and lease financing 7,024,753 6,330,137
Unearned income (69,261) (108,357)
------------ ------------
6,955,492 6,221,780
------------ ------------
$ 30,880,779 $ 28,781,974
============ ============
</TABLE>
6. Accelerated Disposition Portfolio:
During the first quarter of 1994, the Corporation created an accelerated
disposition portfolio by transferring $378 million of lower quality real
estate exposure to this category. In connection with this transfer, a
first quarter chargeoff of $119 million was recorded to reduce this
exposure to its estimated disposition value of $259 million. During the
second quarter, certain loans with an estimated disposition value of $31
million were added to the portfolio in connection with the Corporation's
acquisition of BankWorcester; in addition, during the third quarter, the
Corporation added certain loans with an estimated disposition value of $47
million to the portfolio. A portion of these loans were added in
connection with the Corporation's acquisition of Pioneer. During the
second and third quarters of 1994, the portfolio was reduced by $54 million
and $138 million, respectively, as a result of dispositions. Until
liquidated, this portfolio will be carried at the lower of the established
carrying value or estimated disposition value.
The accelerated disposition portfolio consisted of the following:
<TABLE>
<CAPTION>
September 30 June 30 March 31
(in millions) 1994 1994 1994
------------ ------------ ------------
<S> <C> <C> <C>
Loans:
Nonaccrual real estate, $ 50 $ 132 $ 129
including 1-4 family residential
Performing renegotiated loans 37 46 51
Other performing real estate 27 26 30
OREO 13 14 31
------------ ------------ ------------
Total balance sheet assets 127 218 241
Off-balance-sheet exposure (letters
of credit) 18 18 18
------------ ------------ ------------
Total exposure $ 145 $ 236 $ 259
============ ============ ============
</TABLE>
11
<PAGE>
Notes to Financial Statements, continued
7. Reserve for Credit Losses:
An analysis of the reserve for credit losses is as follows:
(in thousands)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 675,775 $ 835,230 $ 770,279 $ 923,120
Provision 25,000 10,000 95,000 60,126
Reserves of acquired banks 8,167 24,797
Domestic credit losses:
Commercial, industrial
and financial (9,529) (10,162) (21,293) (42,676)
Real estate:
Construction (986) (7,096) (3,019) (18,089)
1-4 family residential properties (2,617) (9,460) (8,884) (18,224)
Other (11,575) (5,068) (33,369) (46,730)
Loans to individuals (13,763) (15,655) (42,375) (33,658)
Lease financing (63) (106)
International credit losses (13,367) (9,876) (34,929) (60,180)
---------- ---------- ---------- ----------
Total credit losses (51,837) (57,380) (143,869) (219,663)
---------- ---------- ---------- ----------
Domestic recoveries:
Commercial, industrial
and financial 3,283 2,882 11,044 9,551
Real estate:
Construction 807 332 1,175 1,440
1-4 family residential properties 531 1,813 1,445 3,957
Other 4,432 1,083 10,867 4,526
Loans to individuals 4,100 3,093 12,350 11,153
Lease financing 132 354 228 379
International recoveries 6,144 1,445 12,218 4,263
---------- ---------- ---------- ----------
Total recoveries 19,429 11,002 49,327 35,269
---------- ---------- ---------- ----------
Net credit losses before activities related
to acelerated disposition portfolio (32,408) (46,378) (94,542) (184,394)
Accelerated disposition portfolio:
Credit losses upon transfer (20,000) (139,000)
Recoveries on assets sold 20,000 20,000
---------- ---------- ---------- ----------
Net credit losses (32,408) (46,378) (213,542) (184,394)
---------- ---------- ---------- ----------
Balance, end of period $ 676,534 $ 798,852 $ 676,534 $ 798,852
========== ========== ========== ==========
</TABLE>
8. Offsetting of Carrying Amounts Related to Certain Contracts:
Effective January 1, 1994, the Corporation adopted Financial Accounting
Standards Board Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts." The interpretation requires the reporting of gross
unrealized gains and gross unrealized losses on foreign exchange and
interest rate contracts separately as assets and liabilities, respectively,
unless a right of setoff exists, including a right of setoff resulting from
contracts executed with the same counterparty under a master netting
arrangement. Previously, the Corporation reported unrealized gains and
losses related to forward foreign exchange rate contracts, interest rate
swap agreements and similar contracts on a net basis. At September 30,
1994, both assets and liabilities were increased by $323 million as a
result of adoption of the interpretation.
12
<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 interest rate was 5.76% at
September 30, 1994. The subordinated notes are not subject to redemption
prior to maturity. In March 1994, the Corporation redeemed its floating
rate notes due September 2000 at their principal amount plus accrued
interest. The carrying value of the notes at the time of redemption was
$179 million. In addition, during the first quarter of 1994, a nonbanking
subsidiary of the Corporation called for prepayment $186 million of its
senior notes, with fixed interest rates ranging from 6.67% to 9.50%, at
their principal amount plus accrued interest and a prepayment penalty. The
loss on the early extinguishment of the debt amounted to $6.5 million, net
of taxes, or $.06 per common share on both a primary and fully diluted
basis, and is presented as an extraordinary item in the consolidated
statement of income. In June 1994, the Corporation issued $100 million of
floating rate senior notes, due 1996. The interest rate on such notes was
5.33% at September 30, 1994. In September 1994, FNBB issued $200 million
of 8% Subordinated Notes, due 2004. When the notes were issued, FNBB
entered into an interest rate swap agreement that effectively converted the
fixed rate obligation to a floating rate obligation. Such interest rate was
5.94% at September 30, 1994. The subordinated notes are not subject to
redemption prior to maturity.
10. Contingencies:
The Corporation and its subsidiaries are defendants in a number of legal
proceedings arising in the normal course of business, including claims that
borrowers or others have been damaged as a result of the Corporation's
lending practices. One of these actions, commonly referred to as lender
liability claims, has resulted in a judgment against a Corporation
subsidiary, which is being appealed. Management, after reviewing all
actions and proceedings pending against or involving the Corporation and
its subsidiaries, considers that the aggregate loss, if any, resulting from
the final outcome of these proceedings will not be material.
11. Brazilian Translation Gains and Losses:
A new economic program was implemented in Brazil on July 1, 1994. Prior to
the third quarter of 1994, Brazil had been experiencing significant
hyperinflation with very high interest rates on local currency transactions
and substantial devaluations of the Brazilian currency against the U.S.
dollar. As a result of the high local interest rates, interest income and
interest expense from Brazilian local currency assets and liabilities had a
significant effect on consolidated interest income and interest expense,
while contributing only modestly to consolidated net interest revenue.
In order to better present the effects of devaluations on the results of
its interest operations, the Corporation, during the first quarter of 1994,
reclassified the translation losses associated with Brazilian local
currency earning assets and the translation gains associated with local
currency interest bearing liabilities from noninterest income to interest
income and interest expense, respectively. While the reclassification had
no effect on the Corporation's total revenue (the sum of net interest
revenue and noninterest income), it provided a better presentation of
consolidated interest income, interest expense and related yields; net
interest revenue and margin; and noninterest income. For the nine months
ended September 30, 1994, $4,295 million of translation losses were
included in interest income and $3,993 million of translation gains were
included in interest expense, resulting in a reclassification from
noninterest income of $302 million of net translation losses. For the nine
months ended September 30, 1993, $2,582 million of translation losses were
reclassified to interest income and $2,492 million of translation gains
were reclassified to interest expense, resulting in a reclassification from
noninterest income of $90 million of net translation losses. For the third
quarter of 1993, $1,159 million of translation losses were reclassified to
interest income and $1,129 million of translation gains were reclassified
to interest expense, resulting in a reclassification from noninterest
income of $30 million of net translation losses. As discussed below, this
reclassification was not relevant or appropriate for the third quarter of
1994. Translation gains and losses related to Brazilian local currency
nonearning assets and noninterest bearing liabilities continue to be
classified as noninterest income. The net translation gain/loss from these
local currency nonearning assets and noninterest bearing liabilities was
immaterial for the nine months ended September 30, 1994 and 1993,
respectively.
13
<PAGE>
Notes to Financial Statements, continued
As part of its pre-economic program strategy, the Corporation maintained a
currency position in Brazil that was designed to capitalize on the spread
between high Brazilian interest rates and devaluation. This strategy had
generally involved investing dollar denominated/indexed interest bearing
liabilities in various types of local currency earning assets. Such a
strategy enabled the Corporation to improve its total revenue compared with
what would have been earned from funding local currency assets exclusively
with local currency liabilities. As noted above, however, Brazil
implemented a new economic program on July 1, 1994. As a result of this
program, coupled with government intervention in the financial markets,
inflation has declined substantially from a monthly rate of nearly 50% in
June, 1994 to a monthly rate in the 1% to 4% range since the inception of
the program and the new Brazilian currency has strengthened against the
U.S. dollar. As discussed above, the Corporation had previously
reclassified translation gains and losses associated with Brazilian local
currency earning assets and interest bearing liabilities from noninterest
income to interest income and interest expense, respectively. Due to the
implementation of the initial phase of the economic program in the third
quarter, the factors which gave rise to this reclassification,
hyperinflation and significant devaluations of the Brazilian currency
against the dollar, were absent; consequently, such a reclassification was
not relevant or appropriate for that period.
The Corporation did continue to maintain a Brazilian currency position in
the third quarter of 1994, however, with devaluation removed from the
Brazilian economy, the strategic purpose for maintaining the currency
position shifted from capitalizing on the spread between Brazilian interest
rates and devaluation, to taking advantage of Brazil's currency
strengthening against the U.S. dollar. The Corporation recognized $15
million of noninterest income from this position in the third quarter of
1994, stemming from the strengthening of Brazil's currency against the
dollar. The currency position at September 30, 1994 was $150 million
compared with $103 million at December 31, 1993 and averaged $142 million
for the nine months ended September 30, 1994 compared with an average of
$69 million for the nine months ended September 30, 1993.
14
<PAGE>
Notes to Financial Statements, continued
12. Change in Accounting for Purchased Mortgage Servicing Rights:
Effective January 1, 1993, the Corporation elected to change its method of
accounting for purchased mortgage servicing rights (PMSR) to conform its
financial reporting to the regulatory accounting rules adopted in the first
quarter of 1993 by the banking regulators. Under these new rules, the
carrying value of PMSR is recorded at the lesser of amortized cost or the
estimated aggregate recoverable amount determined by applying the discount
rate in effect at the time the servicing portfolios were purchased to the
estimated future net cash flows from servicing the underlying mortgages.
Prior to 1993, this valuation was performed on an undiscounted basis. The
cumulative effect to January 1, 1993 of adopting this change in accounting
principle was a decrease in income of $53 million, net of income taxes of
$32 million, or $.50 per common share on a primary basis and $.48 per
common share on a fully diluted basis.
13. Accounting for Income Taxes:
Effective January 1, 1993, the Corporation adopted prospectively SFAS No.
109, "Accounting for Income Taxes," which principally affects accounting
for deferred income taxes. The cumulative effect to January 1, 1993 of
adopting this new standard, which is shown as a cumulative effect of a
change in accounting principle, was an increase to first quarter income of
$77 million or $.74 per common share on a primary basis and $.70 per common
share on a fully diluted basis. The cumulative effect principally
reflected the recognition of previously unrecorded tax benefit
carryforwards.
During the second quarter of 1994, the Corporation recognized $10 million
of additional tax liability in connection with the merger of certain
banking subsidiaries and the loss of preferential tax treatment. The
additional liability was offset by the utilization of available foreign tax
credit carryforwards. As a result of the increased utilization of tax
credit carryforwards, the Corporation was able to reduce its valuation
reserve for potential expiration of tax credit carryforwards by $10
million.
14. Parent Company Condensed Financial Statements:
The following is a condensed balance sheet of the Corporation (Parent
Company only) at September 30, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
September 30 December 31
(in thousands) 1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Cash and short term investments in
bank subsidiary $ 260,192 $ 206,920
Advances to subsidiaries:
Bank subsidiaries 35,864 63,709
Nonbank subsidiaries 214,252 226,203
Subordinated notes receivable from
bank subsidiary 580,000 400,000
Investments in subsidiaries:
Bank subsidiaries 3,408,602 3,175,274
Nonbank subsidiaries 134,971 134,751
Other assets 29,545 22,846
----------- -----------
TOTAL ASSETS $ 4,663,426 $ 4,229,703
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper due to nonbank
subsidiary $ 17,209 $ 10,200
Notes payable 1,513,444 1,293,247
Other liabilities 20,021 14,587
----------- -----------
TOTAL LIABILITIES 1,550,674 1,318,034
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,112,752 2,911,669
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 4,663,426 $ 4,229,703
=========== ===========
</TABLE>
15
<PAGE>
Notes to Financial Statements, continued
14. Parent Company Condensed Financial Statements, Continued:
The following is a condensed income statement of the Corporation (Parent
Company only) for the quarters and nine months ended September 30, 1994 and
1993:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
(in thousands) 1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiaries:
Bank subsidiaries $ 34,627 $ 1,986 $ 55,845 $ 1,986
Nonbank subsidiary 9,960 19,920
Interest from subsidiaries:
Bank subsidiaries 12,455 8,947 33,633 25,924
Nonbank subsidiaries 2,511 1,502 6,443 4,044
--------- --------- --------- ---------
Total operating income 59,553 12,435 115,841 31,954
--------- --------- --------- ---------
EXPENSE
Interest expense 20,481 13,484 54,624 36,951
Other expense, net 1,031 1,167 4,193 3,305
--------- --------- --------- ---------
Total operating expense 21,512 14,651 58,817 40,256
--------- --------- --------- ---------
Income (Loss) before income taxes, equity
in undistributed net income of
subsidiaries, extraordinary item and
cumulative effect of change in
accounting principle 38,041 (2,216) 57,024 (8,302)
Benefit from income taxes (2,535) (1,547) (7,070) (3,584)
--------- --------- --------- ---------
Income (Loss) before equity in
undistributed net income of subsidiaries,
extraordinary item and cumulative effect
of change in accounting principle 40,576 (669) 64,094 (4,718)
Equity in undistributed net income of
subsidiaries 83,393 42,113 250,875 202,945
--------- --------- --------- ---------
Income before extraordinary item and
cumulative effect of change in
accounting principle 123,969 41,444 314,969 198,227
Extraordinary loss from early
extinguishment of debt, net of tax (360)
Cumulative effect of change in
accounting for income taxes (1,713)
--------- --------- --------- ---------
NET INCOME $ 123,969 $ 41,444 $ 314,609 $ 196,514
========= ========= ========= =========
</TABLE>
16
<PAGE>
Notes to Financial Statements, continued
14. Parent Company Condensed Financial Statements, Continued:
The following is a condensed statement of cash flows of the Corporation
(Parent Company only) for the nine months ended September 30, 1994 and
1993:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 314,609 $ 196,514
Reconciliation of net income to net
cash provided from (used for) operating
activities:
Extraordinary item, net of tax 360
Cumulative effect of change in method
of accounting for income taxes 1,713
Equity in undistributed net income of
subsidiaries (250,875) (202,945)
Net change in interest receivables and
payables 1,989 752
Other, net (1,673) (5,666)
---------- ----------
Net cash provided from (used for)
operating activities 64,410 (9,632)
---------- ----------
Cash Flows From Investing Activities:
Net cash provided from (used for) short-term
investments (43,630) 176,180
Net cash provided from (used for) advances to
subsidiaries 39,796 (145,047)
Investments in subsidiaries (24,700) (149,000)
Purchase of subordinated note receivable
from bank subsidiary (180,000)
---------- ----------
Net cash used for investing activities (208,534) (117,867)
---------- ----------
Cash Flows From Financing Activities:
Net cash provided from
commercial paper 7,009 200
Net proceeds from issuance of notes
payable 398,697 99,866
Net proceeds from issuance of
common stock 24,909 12,816
Redemption of notes payable (178,500)
Net proceeds from issuance of
preferred stock 67,595
Dividends paid (98,349) (52,670)
---------- ----------
Net cash provided from financing
activities 153,766 127,807
---------- ----------
NET CHANGE IN CASH AND DUE FROM BANKS 9,642 308
Cash and Due from Banks at January 1 550 236
---------- ----------
Cash and Due from Banks at September 30 $ 10,192 $ 544
========== ==========
Interest payments made $ 50,308 $ 36,234
Income tax refunds received $ (7,870) $ (1,500)
</TABLE>
17
<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 September 30, 1994 was $124
million, compared with net income of $41 million for the same period in 1993.
Net income per common share was $1.07 on a primary basis and $1.04 on a fully
diluted basis in the third quarter of 1994, compared with net income per common
share of $.30 on both a primary basis and fully diluted basis for the third
quarter of 1993. Net income for the first nine months of 1994 was $315 million
compared with net income of $197 million for the first nine months of 1993. Net
income per common share was $2.69 on a primary basis and $2.60 on a fully
diluted basis for the first nine months of 1994, compared with net income per
common share of $1.63 on a primary basis and $1.58 on a fully diluted basis for
the first nine months of 1993.
The 1994 results included (1) a $5 million charge ($3 million after tax) in the
third quarter for a restructuring charge and conversion costs paid in
connection with the Corporation's acquisition of Pioneer Financial, A
Co-operative Bank (Pioneer); (2) a $16 million merger and restructuring charge
($9 million after tax) in the second quarter in connection with the
Corporation's acquisition of BankWorcester Corporation (BankWorcester); and (3)
an extraordinary loss, net of tax, of $7 million in the first quarter related to
the prepayment of $186 million of senior debt by a non-banking subsidiary and
the redemption of $179 million of the Corporation's floating rate notes. The
1993 results included (1) $85 million ($57 million after tax) of merger and
restructuring charges recorded in the third quarter, primarily in connection
with the Corporation's July 1993 mergers with Society for Savings Bancorp, Inc.
(Bancorp) and Multibank Financial Corp. (Multibank), as well as costs of
downsizing and reconfiguring certain of the Corporation's business and corporate
units; and (2) $24 million of income, net of tax, from the cumulative effect of
changes in accounting principles, reflecting a $77 million benefit as a result
of adopting Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," and a $53 million after-tax charge as a result of
a change in accounting with respect to the valuation of purchased mortgage
servicing rights (PMSR). The merger and restructuring charges and other related
converstion costs are more fully discussed below under the caption "Noninterest
Expense".
Excluding the effects of the restructuring charges and other related conversion
costs discussed above, net income for the third quarter of 1994 was $127
million, compared with $98 million for the third quarter of 1993. On this basis,
primary and fully diluted earnings per share were $1.10 and $1.06, respectively,
in the third quarter of 1994 compared with $.84 and $.82, respectively, for the
same period last year. Excluding the effects of the restructuring charge and
other related conversion costs, the extraordinary loss and the cumulative effect
of changes in accounting principles, net income for the first nine months of
1994 was $333 million compared with $229 million for the first nine months of
1993. On this basis, primary and fully diluted earnings per share were $2.87 and
$2.77, respectively, in the first nine months of 1994 compared with $1.94 and
$1.88, respectively, for the same period last year.
NET INTEREST REVENUE - (Fully Taxable Equivalent Basis)
The discussion of net interest revenue should be read in conjunction with
Average Balances and Interest Rates and Change in Net Interest Revenue - Volume
and Rate Analysis on pages 41 through 45 of this report. For this review,
interest income that is either exempt from federal income taxes or taxed at a
preferential rate has been adjusted to a fully taxable equivalent basis. This
adjustment has been calculated using a federal income tax rate of 35% in 1994
and 1993, plus applicable state and local taxes, net of related federal tax
benefits. The adjustments amounted to $1.3 million and $4.3 million for the
quarter and nine months ended September 30, 1994, respectively, compared with
$2.3 million and $5.8 million for the same periods in 1993. Net interest revenue
for prior periods has been restated to reflect the reclassification of certain
Brazilian translation gains and losses. This reclassification is discussed below
under the caption "Brazil" and in Note 11 to the Financial Statements.
Consolidated net interest revenue, on a fully taxable equivalent basis, was $425
million for the third quarter of 1994, compared with $343 million for the same
period in 1993. For the first nine months of 1994, net interest revenue was
$1,143 million compared with $1,001 million for the same period in 1993. Net
interest margin in the third quarter of 1994 was 4.34% compared with 3.91% in
the third quarter of 1993. For the first nine months of 1994, net interest
margin was 4.05% compared with 3.98% for the first nine months of 1993.
18
<PAGE>
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:
<TABLE>
<CAPTION>
Quarters Ended September 30 Change Change
(dollars in millions) 1994 1993 Amount Percent
--------- --------- ------- -------
<S> <C> <C> <C> <C>
United States Operations:
Net interest revenue $ 319.3 $ 283.9 $ 35.4 12%
Average loans and lease
financing 23,431 21,282 2,149 10
Average earning assets 28,710 26,967 1,743 6
Net interest margin 4.41% 4.18% .23% 6
International Operations:
Net interest revenue $ 105.9 $ 59.2 $ 46.7 79%
Average loans and lease
financing 6,931 5,671 1,260 22
Average earning assets 10,136 7,853 2,283 29
Net interest margin 4.15% 2.99% 1.16% 39
Consolidated:
Net interest revenue $ 425.2 $ 343.1 $ 82.1 24%
Average loans and lease
financing 30,362 26,953 3,409 13
Average earning assets 38,846 34,820 4,026 12
Net interest margin 4.34% 3.91% .43% 11
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30 Change Change
(dollars in millions) 1994 1993 Amount Percent
--------- --------- ------- -------
<S> <C> <C> <C> <C>
United States Operations:
Net interest revenue $ 892.9 $ 806.7 $ 86.2 11%
Average loans and lease
financing 22,720 20,657 2,063 10
Average earning assets 28,071 26,352 1,719 7
Net interest margin 4.25% 4.09% .16% 4
International Operations:
Net interest revenue $ 250.5 $ 194.6 $ 55.9 29%
Average loans and lease
financing 6,646 5,373 1,273 24
Average earning assets 9,679 7,309 2,370 32
Net interest margin 3.46% 3.56% (.10)% (3)
Consolidated:
Net interest revenue $ 1,143.4 $ 1,001.3 $ 142.1 14%
Average loans and lease
financing 29,366 26,030 3,336 13
Average earning assets 37,750 33,661 4,089 12
Net interest margin 4.05% 3.98% .07% 2
</TABLE>
19
<PAGE>
Both domestic and international operations contributed to the improvements in
net interest revenue from the third quarter and first nine months of 1993. The
domestic increases of $35 million compared with the third quarter of 1993 and
$86 million compared with the first nine months of 1993 were driven by the
combination of higher average loan volume, which grew approximately $2 billion
in both the quarterly and full year comparisons, and wider spreads.
Contributing to the loan volume increases were the acquisitions of
BankWorcester, in May 1994, and Pioneer, in August 1994, which accounted for
approximately $500 million of the quarterly increase and $1.3 billion of the
nine month increase. In addition, the Corporation's personal banking,
specialized finance and New England commercial lending businesses also
contributed to the growth in average loan volume. Compared with the third
quarter and first nine months of 1993, domestic spreads widened as the growth in
earning asset yields, which has taken place during the course of 1994, has
outpaced the increase in rates paid on interest bearing liabilities. The
widening of spreads is also mainly responsible for net interest margin
increasing by 23 basis points in the quarterly comparison and by 16 basis points
in the nine month comparison.
Internationally, the $47 million growth in net interest revenue from the third
quarter of 1993 and the $56 million increase from the first nine months of 1993
were mainly attributable to Latin America. A significant factor in the
international net interest revenue increase from prior year periods was an
improved performance from Brazil in the third quarter of 1994. This resulted
from the Corporation positioning itself to take advantage of interest rate
movements during the initial phase of Brazil's new economic program, which was
announced on July 1, 1994. A more detailed discussion of the Brazilian economic
program and its effects on the Corporation is included below. Overall, net
interest revenue from the Corporation's Brazilian business improved over $30
million from the third quarter of 1993 and over $40 million from the first nine
months of 1993. In addition, increases in average earning international loans of
$1.3 billion and in total average earning international assets of over $2
billion contributed to the growth in net interest revenue in both comparisons.
The loan and earning asset growth primarily occurred in Latin America, with
Argentina and Brazil contributing the largest increases. The effects of the
growth in Brazilian loans and earning assets contributed to the Brazilian net
interest revenue improvements referred to above. International net interest
margin improved 116 basis points from the third quarter of 1993 primarily from
the improved Brazilian results discussed above. Despite the improvement
registered in the quarterly comparison, international net interest margin for
the first nine months of 1994 was 10 basis points lower than the first nine
months of 1993 primarily caused by narrower spreads in Argentina. This has
resulted from declining inflation reflecting the continued stability of the
Argentine economy.
BRAZIL
As discussed above, Brazil implemented a new economic program on July 1, 1994.
As a result of this program, coupled with government intervention in the
financial markets, inflation has declined substantially from a monthly rate of
approximately 50% in June to a monthly rate in the 1% to 4% range since the
inception of the program; the new Brazilian currency has strengthened against
the U.S. dollar; and, during the initial stages of the program, real interest
rates (the excess of local interest rates over Brazilian inflation) rose sharply
before declining back to lower levels. The impact in the Brazilian financial
markets, particularly with respect to the strengthening of Brazil's currency and
the rise in real interest rates, presented arbitrage opportunities from which
the Corporation benefited in the third quarter. As discussed above under the
caption "Net Interest Revenue", Brazilian net interest revenue grew over $30
million from the third quarter of 1993 due, in part, to positions taken by the
Corporation to benefit from the increase in real interest rates. In addition,
and as discussed below, the Corporation recognized $15 million of noninterest
income in the third quarter stemming from positions taken which benefited from
the strengthening of Brazil's currency against the U.S. dollar. Information on
changes in the Corporation's cross-border outstandings to Brazil can be found
below under the caption "Cross-Border Outstandings".
Prior to the third quarter of 1994, Brazil had been experiencing significant
hyperinflation with very high interest rates on local currency transactions and
substantial devaluations of the Brazilian currency against the U.S. dollar. As
a result of the high local interest rates, interest income and interest expense
from Brazilian local currency assets and liabilities had a significant effect on
consolidated interest income and interest expense, while contributing only
modestly to consolidated net interest revenue. In addition, and as part of its
pre-economic program strategy, the Corporation maintained a currency position in
Brazil that was designed to capitalize on the spread between high Brazilian
interest rates and devaluation. This strategy had generally involved investing
dollar denominated/indexed interest bearing liabilities in various types of
local currency earning assets. Such a strategy enabled the Corporation to
improve its total revenue compared with what would have been earned from funding
local currency assets exclusively with local currency liabilities. In order to
better present the effects of devaluations on the results of its interest
operations, the Corporation, during the first quarter of 1994, reclassified the
translation losses associated with Brazilian local
20
<PAGE>
currency earning assets and the translation gains associated with local currency
interest bearing liabilities from noninterest income to interest income and
interest expense, respectively. While the reclassification had no effect on the
Corporation's total revenue (the sum of net interest revenue and noninterest
income), it provided a better presentation of consolidated interest income,
interest expense and related yields; net interest revenue and margin; and
noninterest income. Prior periods were restated for comparative purposes. The
factors which gave rise to this reclassification, hyperinflation and significant
devaluations of the Brazilian currency against the dollar, were absent in the
third quarter of 1994 due to the effects of the new economic program and
government intervention; consequently, such a reclassification was not relevant
or appropriate for that period.
The following table presents a summary of net interest revenue earned from the
Corporation's Brazilian currency position for the eight quarters prior to the
implementation of the new economic program on July 1, 1994. The information
presented provides a summary of the net interest revenue earned from the
position and the effect on net interest margin of reclassifying net translation
losses associated with this position from noninterest income to net interest
revenue:
<TABLE>
<CAPTION>
June March Dec. Sept. June March Dec. Sept.
(dollars in millions) 1994 1994 1993 1993 1993 1993 1992 1992
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated net interest revenue,
on a fully taxable equivalent basis,
excluding Brazilian currency position $363 $331 $345 $339 $328 $322 $337 $326
Effect of Brazilian currency position:
Interest income from currency
position 186 140 90 34 41 27 16 13
Translation losses previously
classified as noninterest income (173) (129) (84) (30) (37) (23) (13) (9)
------ ------ ------ ------ ------ ------ ------ ------
Net revenue from currency position 13 11 6 4 4 4 3 4
Consolidated net interest revenue, on a
fully taxable equivalent basis, after
reclassification of net translation ------ ------ ------ ------ ------ ------ ------ ------
losses $376 $342 $351 $343 $332 $326 $340 $330
====== ====== ====== ====== ====== ====== ====== ======
Consolidated net interest margin:
Before reclassification of net
translation losses 5.81% 5.24% 4.77% 4.26% 4.43% 4.33% 4.21% 4.05%
After reclassification of net
translation losses 3.98% 3.80% 3.86% 3.91% 3.99% 4.05% 4.06% 3.94%
International net interest margin:
Before reclassification of net
translation losses 10.23% 8.80% 6.98% 4.52% 5.63% 5.58% 4.57% 4.73%
After reclassification of net
translation losses 3.14% 3.03% 2.99% 2.99% 3.59% 4.20% 3.74% 4.17%
Average principal amount of currency
position $189 $147 $104 $53 $89 $66 $45 $40
</TABLE>
The Corporation continued to maintain a Brazilian currency position in the third
quarter of 1994; however, with devaluation removed from the Brazilian economy,
the strategic purpose for maintaining this currency position shifted from
capitalizing on the spread between Brazilian interest rates and devaluation, as
discussed above, to taking advantage of Brazil's currency strengthening against
the U.S. dollar. As noted previously, the Corporation recognized $15 million of
noninterest income in the third quarter stemming from positions taken which
benefited from the strengthening of Brazil's currency against the U.S. dollar.
The average principal amount of the position maintained during the third quarter
was $92 million, while the September 30, 1994 ending balance of the position was
$150 million. This position exposes the Corporation to losses should the
Brazilian currency weaken against the U.S. dollar; such losses could be
significant if government intervention results in a major unanticipated
devaluation. Management, however, has been able to quickly close its position
in the past, both before and since the inception of the economic program, when
market conditions warranted. Further, management will continue to closely
monitor the position and will alter the present strategy if necessary. While
the position could increase or decrease from the September 30, 1994 level, the
size of the position will continue to be a function of management's assessment
of the frequently changing economic and political situation in Brazil,
particularly in light of the government's new economic program.
On October 3, 1994 Fernando Cardoso, a leading proponent of Brazil's new
economic program, was elected as Brazil's new president. In addition, and in
connection with the new economic program, certain banking reform measures have
been announced and continue to be modified by the government as they assess the
overall impact of the economic plan. The Corporation is currently evaluating the
effect that these measures would have on its Brazilian operation. While the
initial effects of Brazil's economic program produced a benefit to the
Corporation in the third quarter, no assurance can be given as to what
21
<PAGE>
effect the evolution of this economic program, including finalization of the
banking reform measures, will have on the Corporation's financial position or
results of operations in future periods.
22
<PAGE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $25 million for the quarter ended September
30, 1994, compared with $10 million for the same period in 1993. For the first
nine months of 1994, the provision for credit losses was $95 million compared
with $60 million for the first nine months of 1993. The provision for credit
losses reflected management's assessment of the adequacy of the reserve for
credit losses, including the current risk characteristics of the loan portfolio
and economic conditions. The level of the provision for credit losses in 1994
also reflected the effect of transferring certain lower quality real estate
assets to an accelerated disposition portfolio. The accelerated disposition
portfolio is discussed below under "Financial Condition". The amount of future
provisions will be a function of the regular quarterly review of the reserve for
credit losses, which considers the risk characteristics of the loan portfolio
and the economic conditions existing at that time.
NONINTEREST INCOME
The following tables set forth the components of noninterest income, as well as
a further breakdown of financial service fees. Additional information on the
change in noninterest income follows each table. Noninterest income for prior
periods has been restated to reflect the reclassification of certain Brazilian
translation gains and losses. This reclassification is discussed above under the
caption "Brazil" and in Note 11 to the Financial Statements.
<TABLE>
<CAPTION>
Noninterest Income
- ------------------
(in millions)
Third Quarter Nine Months
--------------------- ---------------------
1994 1993 Change 1994 1993 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Financial service fees $ 104 $ 91 $ 13 $ 291 $ 255 $ 36
Trust and agency fees 51 43 8 148 132 16
Trading profits and commissions 11 7 4 16 20 (4)
Securities portfolio gains, net 1 11 (10) 11 23 (12)
Mezzanine/venture capital
profits, net 9 12 (3) 27 36 (9)
Foreign exchange trading profits 11 12 (1) 31 33 (2)
Gain from sale of domestic
factoring business 0 0 0 27 0 27
Other income 15 15 0 78 57 21
--- --- --- --- --- ---
Total $ 202 $ 191 $ 11 $ 629 $ 556 $ 73
=== === === === === ===
</TABLE>
Trust and agency fees improved from the third quarter and first nine months of
1993 primarily as a result of increased volumes and new business in the stock
transfer and Latin American mutual fund businesses. The changes in trading
account profits from prior periods stemmed mainly from varying levels of profits
earned from Latin American securities. Other income in the third quarter of
1994 included $15 million of exchange-rate related profits stemming from the
strengthening of Brazil's currency against the U.S. dollar subsequent to the
implementation of Brazil's new economic program on July 1, 1994. A further
discussion of this revenue is included above under the caption "Brazil". In
addition, other income in the third quarter of 1994 included the effect of
approximately $15 million of charges associated with certain investments,
including investments in foreign equity subsidiaries and writedowns of domestic
investments acquired in connection with loan restructurings. The increase in
other income from the first nine months of 1993 is due, in part, to net gains
from the sale of securities originally acquired in connection with loan
restructurings.
On January 31, 1994, the Corporation completed the sale of its United States
factoring business and recorded a gain of $27 million.
23
<PAGE>
<TABLE>
<CAPTION>
Financial Service Fees
- ----------------------
(in millions)
Third Quarter Nine Months
---------------------- ----------------------
1994 1993 Change 1994 1993 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Deposit fees $ 32 $ 29 $ 3 $ 93 $ 90 $ 3
Letter of credit and acceptance
fees 17 14 3 44 43 1
Mortgage servicing fees:
Fee income 32 26 6 90 78 12
Amortization of mortgage
servicing assets (16) (22) 6 (50) (76) 26
--- --- -- --- --- ---
Net mortgage servicing fees 16 4 12 40 2 38
Loan-related fees 15 11 4 44 31 13
Factoring fees 1 7 (6) 4 21 (17)
Other 23 26 (3) 66 68 (2)
--- --- -- --- --- ---
Total $ 104 $ 91 $ 13 $ 291 $ 255 $ 36
=== === == === === ===
</TABLE>
The increase in net mortgage servicing fee income from prior year periods
reflected ongoing growth in BancBoston Mortgage Corporation's servicing
portfolio, which rose to $35 billion at September 30, 1994 from $26 billion a
year ago, as well as lower amortization of servicing rights resulting from a
declining rate of current and estimated future mortgage prepayments, as mortgage
interest rates have risen. Loan-related fees improved in both the quarterly and
nine month comparisons, mainly reflecting growth in syndication activity. The
decline in factoring fees from prior year periods is attributable to the January
31, 1994 sale of the Corporation's domestic factoring business. Other financial
service fees have declined from prior year periods, stemming from the sale of
the Corporation's freight management business. This was partially offset,
however, by higher fees from the Corporation's Argentine credit card business.
NONINTEREST EXPENSE
The following table sets forth the components of noninterest expense:
<TABLE>
<CAPTION>
Noninterest Expense
- ---------------------
(in millions)
Third Quarter Nine Months
---------------------- ----------------------
1994 1993 Change 1994 1993 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Employee costs $ 207 $ 193 $ 14 $ 600 $ 585 $ 15
Occupancy & equipment 59 55 4 171 169 2
Professional fees 16 13 3 41 40 1
Other 85 87 (2) 246 267 (21)
--- --- --- ----- ----- ---
Noninterest expense, before
restructuring, conversion-
related and OREO costs 367 348 19 1,058 1,061 (3)
Merger and restructuring charges
and other related conversion costs 5 85 (80) 21 85 (64)
OREO costs 6 7 (1) 18 38 (20)
--- --- --- ----- ----- ---
Total $ 378 $ 440 $ (62) $1,097 $1,184 $(87)
=== === === ===== ===== ===
</TABLE>
24
<PAGE>
Noninterest expense, before restructuring charges, conversion costs and OREO
costs, increased $19 million from the third quarter of 1993 but declined $3
million from the first nine months of 1993. These changes were mainly due to
higher employee and other costs stemming from the acquisitions of BankWorcester
and Pioneer, as well as growth in Latin America. These increases were partially
offset in the quarterly comparison and more than offset in the nine month
comparison by other declines which resulted, in part, from a lower level of
domestic employees, including declines from the sale of the domestic factoring
business, and lower FDIC insurance premiums. Excluding the third quarter 1994
acquisition of Pioneer, employee levels at September 30, 1994 declined by
approximately 550 from September 30, 1993.
During the third quarter of 1993, the Corporation recorded merger and
restructuring charges of $85 million, primarily in connection with its mergers
with Bancorp and Multibank, which were completed in July 1993 and accounted for
as poolings of interests. The charges also included the estimated costs of
downsizing and reconfiguring certain of the Corporation's business and corporate
units. The charges included only specific, reasonably measurable costs that
directly resulted from the mergers or the downsizing and reconfiguration plan
and were incremental to the Corporation's normal costs of operations. The
charges did not contain any provisions for general reserves or operating losses
of the affected operations.
The following table sets forth significant components of the charges:
<TABLE>
<CAPTION>
Employee Property Total
Professional Reduction Conversion Related
Fees Costs Costs Costs
(in millions) ------------ --------- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Mergers $ 13 $ 17 $ 29 $ 9 $ 68
Downsizing and
reconfiguration 12 3 2 17
--- --- --- --- ---
Total $ 13 $ 29 $ 32 $ 11 $ 85
=== === === === ===
</TABLE>
Significant components of the merger-related charges were professional fees,
including investment banking, legal and accounting fees, stock registration
costs and other costs of effecting the mergers; employee reduction costs,
principally termination benefits paid to employees; conversion costs, including
costs to convert loans, deposits and other computer systems of the acquired
banks to a common Corporation system, costs of replacing Bancorp and Multibank
customers' checkbooks, automatic teller machine cards and other deposit
documents and costs to dispose of systems hardware and software of the acquired
banks; and property related costs, including costs related to the closing of 24
branches and the disposition of other principal properties, such as post-closing
lease payments and other monthly costs. Components related to the downsizing and
reconfiguration plan included employee reduction costs and estimated costs
related to the disposal of branches and other principal properties and exiting
operating leases. Total employee reduction related to both the mergers and the
downsizing and reconfiguration plan amounted to 950. During the third and fourth
quarters of 1993, the Corporation charged costs totaling $40 million to the
reserve created by the charges. Charges to the reserve during the nine months
ended September 30, 1994 totaled $32 million.
The remaining reserve of $13 million is principally comprised of the
Corporation's liability for termination benefits and ongoing lease costs for
facilities that have been abandoned. With the exception of the continuation of
certain long-term lease payments related to abandoned facilities, the remaining
costs are expected to be incurred in 1994 or 1995.
During the second quarter of 1994, in connection with its acquisition of
BankWorcester, which was completed in May 1994 and accounted for as a purchase,
the Corporation recorded merger and restructuring charges of $16 million.
Significant components of the charges included $6 million for estimated costs of
employee reduction of 220; and $10 million for conversion costs, consisting of
costs to convert loans, deposits and other computer systems to a common
Corporation system and costs of replacing customers' checkbooks, automatic
teller machine cards and other deposit documents. In addition, during the third
quarter of 1994, in connection with its acquisition of Pioneer which was
completed in August 1994 and accounted for as a purchase, the Corporation
recorded a restructuring charge of $4 million, comprised of estimated costs of
employee reduction of 194. The Corporation also paid $1 million of other merger-
related costs, consisting principally of conversion costs, during the quarter,
resulting in total costs for this acquisition recorded in the third quarter of
$5 million. During the second and third quarters of 1994, the Corporation
charged costs totaling $6 million to the BankWorcester and Pioneer reserves. The
remaining costs of $14 million are expected to be incurred in 1994 and 1995.
The decline in OREO costs in the nine month comparison is due, in part, to lower
valuation adjustments. The level of OREO assets has declined from $136 million
at September 30, 1993 to $93 million at September 30, 1994.
25
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes was $99 million for the third quarter of 1994,
representing an effective tax rate of 44%. This compares with a provision and
effective tax rate of $40 million and 49%, respectively, for the third quarter
of 1993. For the first nine months of 1994 the provision for income taxes
before extraordinary items was $255 million, representing an effective tax rate
of 44%. This compares with a provision and effective tax rate before the
cumulative effect of accounting changes of $135 million and 44%, respectively,
for the first nine months of 1993. The increase in the income tax provision in
both comparisons resulted from higher pre-tax income partially offset, in the
case of the quarterly comparison, by a lower effective tax rate. The reduction
in the effective tax rate in the third quarter of 1994 from that reported in the
third quarter of 1993 was principally associated with the non-deductibility of
certain merger-related costs incurred in 1993.
26
<PAGE>
FINANCIAL CONDITION
-------------------
CONSOLIDATED BALANCE SHEET
At September 30, 1994, the Corporation's total assets were $44.3 billion, an
increase of $.9 billion from June 30, 1994. This increase mainly reflected an
increase in loans of $.9 billion stemming from the Pioneer acquisition and
higher levels of consumer-related loans. Deposits also grew $.9 billion,
reflecting the acquisition of Pioneer and an increase in deposits from overseas
offices. Other balance sheet changes, which occurred in connection with the
Corporation's management of its capital ratio and liquidity positions, included
a decline in cash placed with the Federal Reserve, as funds were redeployed into
earning asset categories, and a shift from term federal funds purchased into
overnight federal funds purchased and repurchase agreements.
LIQUIDITY MANAGEMENT
At September 30, 1994, the Corporation's level of liquid assets stood at $5.3
billion, compared with $4.9 billion at June 30, 1994. In addition, Bank of
Boston Corporation (on a Parent Company only basis) had net liquid assets
(liquid assets in excess of short-term funding commitments) of $237 million at
September 30, 1994, compared with $216 million at June 30, 1994. The increase in
the Parent Company's liquidity from June 30, 1994 resulted, in part, from the
receipt of dividends from banking and non-banking subsidiaries in excess of
quarterly dividends paid on the Corporation's common and preferred stock.
Management considers overall liquidity at September 30, 1994, on both a
consolidated and Parent Company only basis, to be adequate to meet current
obligations, support its expectations for future changes in asset and liability
levels and carry on normal operations. Further, the Corporation has access to
additional liquidity through the public markets.
DERIVATIVE FINANCIAL INSTRUMENTS AND INTEREST RATE RISK MANAGEMENT
The Corporation participates as a counterparty in various derivative financial
transactions in connection with its trading activities and for asset and
liability management purposes. In the negotiated over-the-counter (OTC) markets,
these instruments include swaps, forwards and options, which are based upon
interest rates and foreign currencies. The OTC markets in which the Corporation
operates are generally well established and liquid. Standardized exchange-traded
futures contracts are also utilized. These transactions are subject to limits
established by the Asset and Liability Committee and approved by the
Corporation's Board of Directors.
Derivatives have risks similar to balance sheet instruments. The principal or
notional values of derivatives represent the volume of outstanding transactions
and do not represent the potential for gain or loss associated with the market
risks or credit risk of such transactions. As such, the actual market or credit
exposure for all of these instruments is significantly less than the notional
amount and, historically, the Corporation's actual credit loss experience with
respect to its derivatives has been immaterial.
Gains and losses stemming from changes in the market values of the derivatives
entered into in connection with the Corporation's trading activities are
recognized currently as part of trading profits and commissions or foreign
exchange profits. Income or expense related to instruments used to manage the
Corporation's own balance sheet interest rate or foreign exchange risk are
recorded over the period being managed as an adjustment to the yield of the
related asset or liability.
The primary focus of the Corporation's derivatives trading activities is to
provide these products to the Corporation's customers. As such, the Corporation
has generally taken only modest risk positions, within approved limits, with
respect to its derivatives trading portfolio. Foreign exchange trading profits
were $11 million in the third quarter of 1994 compared with $12 million in the
third quarter of 1993. For the first nine months of 1994, foreign exchange
trading profits were $31 million compared with $33 million for the first nine
months of 1993. Trading profits from the Corporation's interest rate-related
derivatives businesses were $3.0 million in the third quarter of 1994 compared
with $1.6 million in the third quarter of 1993. For the first nine months of
1994, such profits were $6.5 million compared with $4.7 million for the first
nine months of 1993.
27
<PAGE>
The following table presents information on the significant categories of the
Corporation's derivative financial instruments held in the trading portfolio:
<TABLE>
<CAPTION>
Trading Portfolio
- -----------------
September 30, 1994 December 31, 1993
------------------ -----------------
Notional Fair Notional Fair
(in millions) Amount Value(1) Amount Value(1)
------- ------ -------- -------
<S> <C> <C> <C> <C>
Futures and Forwards $19,080 $ 0 $15,026 $ 0
Interest Rate Swaps 11,296 60 6,732 84
Interest Rate Options:
Written or Sold 12,633 (27) 5,744 (14)
Purchased 10,927 34 4,922 25
Foreign Exchange:
Spot and forward contracts 19,789 (9) 21,592 (10)
Options written or sold 732 (17) 613 (22)
Options purchased 907 14 691 21
</TABLE>
(1) The trading portfolio is carried at fair value which represents the amount
at which a given instrument could be exchanged in an arm's length
transaction with a third party as of the balance sheet date. In certain
cases, instruments are subject to daily cash settlements; as such, the fair
value of these instruments is zero.
In connection with its asset and liability management, the Corporation uses both
balance sheet instruments, such as U.S. Treasury securities, and derivatives to
manage interest rate risk. Interest rate risk can be defined as an exposure to
a movement in interest rates which could have a positive or negative effect on
the Corporation's net income or financial position. Interest rate risk arises
from the Corporation's normal banking activities due to an imbalance in the
repricing or maturity schedules of assets and liabilities. The Corporation
seeks to minimize its risk of exposure to changes in interest rates while also
allowing for some imbalance which could enable it to profit from favorable
market opportunities. Derivatives provide the Corporation with important
flexibility in managing its interest rate exposure, enabling it to efficiently
manage risk while minimizing the impact on balance sheet leverage and liquidity.
For example, the Corporation may have floating rate liabilities funding fixed
rate assets during a period of rising interest rates. Through the use of an
interest rate swap, the Corporation can effectively convert its floating rate
liabilities to a fixed rate funding source and safeguard its interest rate
spread against rising rates.
Policies are established by management and approved by the Corporation's Board
of Directors, which establish limits for the amount of the Corporation's income
at risk and market value exposure that could result under various interest rate
scenarios. To evaluate the Corporation's exposure to various potential changes
in interest rates and to facilitate the management of interest rate risk, the
Corporation uses computer simulation models which allow it to assess the impact
on market value and net interest revenue from various interest rate scenarios
given the Corporation's existing interest rate risk position. The Board of
Directors has assigned implementation and monitoring of these limits to the
Chairman of the Asset and Liability Committee. The Asset and Liability Committee
also issues strategic directives that specify the extent to which these limits
can be utilized considering the results of the interest rate and market value
modeling and the Corporation's existing interest rate risk position. The amount
of the Corporation's U.S. dollar structural interest rate risk position, which
represents the significant portion of the Corporation's balance sheet, is
currently subject to an aggregate limit of U.S. dollar interest rate risk
exposure resulting from the effect of an adverse movement in interest rates on
non-trading activities which may not exceed: (1) in the case of net interest
income at risk, 2% of the Corporation's simulated net interest revenue over a
one year period given a 100 basis point rate shock or a 200 basis point move in
interest rates over the one year period; and (2) in the case of market value
sensitivity, 2% of the Corporation's risk-based capital given a 100 basis point
rate shock. The Corporation has generally operated well below these limits,
however, no assurance can be given as to the level of future interest rate risk
positions. In addition, the Corporation has established limits for its non-
dollar interest rate risk by establishing notional limits derived from annual
income at risk calculations. All overseas locations are required to report
compliance with these notional limits on a monthly basis.
28
<PAGE>
The following table presents information on the significant categories of the
Corporation's derivative financial instruments held in the asset and liability
management portfolio:
<TABLE>
<CAPTION>
Asset and Liability Management Portfolio
- ----------------------------------------
September 30, 1994 December 31, 1993
---------------------------------------------- ----------------------------------------------
Average Average
Notional Remaining Fair Unrecognized Notional Remaining Fair Unrecognized
(in millions) Amount Maturity Value(1) Gain/(Loss)(2) Amount Maturity Value(1) Gain(2)
------- --------- ------- -------------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Futures and Forwards $7,895 8 months $ 4 $ 9 $3,581 3 months $ 2 $ 2
Interest Rate Swaps 3,862 5 years (182) (183) 3,463 4 years 47 46
Interest Rate Options (3):
Written or Sold 9,125 6 months (7) (4) 39 6 months 0 0
Purchased 12,253 7 months 37 35 414 3 years 5 5
Foreign Exchange -
Spot and forward
contracts 231 4 months 4 0 556 3 months 13 0
</TABLE>
(1) Fair value represents the amount at which a given instrument could be
exchanged in an arm's length transaction with a third party as of the
balance sheet date. In certain cases, instruments are subject to daily cash
settlements; as such, the fair value of these instruments is zero.
(2) Unrecognized gain or loss represents the amount of gain or loss, based on
fair value, that has not been recognized in the income statement at the
balance sheet date. Such amounts are recognized as an adjustment of yield
over the period being managed. At September 30, 1994, unrecognized
gain/(loss) includes $23 million of unrecognized gain, with a weighted
average amortization period of 21 months, from contracts which have been
terminated or transferred to the trading portfolio, compared with $15
million, with a weighted average amortization period of 12 months, at
December 31, 1993. Additional information on the Corporation's accounting
policies for derivatives can be found in the Corporation's 1993 Annual
Report to Stockholders on pages 59 and 60, which is incorporated by
reference in its 1993 Annual Report on Form 10-K.
(3) The increase in the notional amounts related to interest rate options from
December 31, 1993 is due to transactions entered into during the first
quarter of 1994 as the Corporation adjusted its strategy in response to
rising domestic interest rates.
29
<PAGE>
The following table summarizes the composition of the Corporation's interest
rate swaps entered into for asset and liability management purposes as of
September 30, 1994.
<TABLE>
<CAPTION>
$ millions Maturity
- ----------
1994 1995 1996 1997 1998 1999+ Total Notional
---- ---- ---- ---- ---- ----- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Receive fixed rate swaps:(a)
Notional Amount $155 $390 $12 $169 $50 $1,840 $2,616
Weighted average receive rate 5.63% 7.73% 7.11% 9.05% 5.46% 6.22%
Weighted average pay rate 4.98% 4.96% 5.60% 4.92% 5.25% 5.21%
Pay fixed rate swaps:(a)
Notional Amount 0 422 44 49 17 45 $577
Weighted average receive rate - 5.12% 5.00% 5.03% 4.85% 5.14%
Weighted average pay rate - 4.78% 7.80% 8.31% 9.26% 7.31%
Basis swaps:(b)
Notional Amount 25 142 21 5 2 0 $195
Weighted average receive rate 4.99% 4.93% 4.94% 4.94% 4.94% -
Weighted average pay rate 5.06% 4.86% 5.70% 5.70% 5.70% -
Total Domestic:
Notional Value $180 $954 $77 $223 $69 $1,885 $3,388
Weighted average receive rate 5.54% 6.16% 5.25% 7.99% 5.29% 6.21%
Weighted average pay rate 4.99% 4.86% 6.84% 5.56% 6.37% 5.26%
Total International Notional Amount(c) $474 0 0 0 0 0 $474
Total Consolidated Notional Amount $654 $954 $77 $223 $69 $1,885 $3,862
</TABLE>
(a) Of the receive fixed rate swaps, $1.1 billion were linked to floating rate
loans, $1.2 billion were linked to fixed rate notes payable and the remainder
principally to funds borrowed. Of the swaps linked to notes payable, $1 billion
are scheduled to mature in 1999 and thereafter. Of the pay fixed swaps, $410
million were linked to short term funds borrowed and the remainder to
principally loans and leases. All of the basis swaps were linked to loans.
(b) Basis swaps represent swaps where both the pay rate and receive rate are
floating rates.
(c) The majority of the international portfolio (85%) is comprised of swaps
conducted by the Corporation's Brazilian operation with a weighted average
maturity of 28 days. These swaps typically include the exchange of floating
rate indices which are limited to the Brazilian market.
As noted in the Asset and Liability Management Portfolio table above, there has
been a substantial decline in the fair value and unrecognized gain/loss of
interest rate-related derivatives between December 31, 1993 and September 30,
1994. This decline was mainly caused by the increase in domestic interest rates
that occurred during the first nine months of 1994. Since these derivatives are
used to manage the Corporation's overall domestic interest rate risk, however,
these declines should be considered in connection with changes in the value and
yields of the Corporation's domestic assets and liabilities over the same
period. In this context, the overall effect on the Corporation from rising
domestic interest rates during the first nine months of 1994 was positive. The
decline in the fair value of the derivatives during the third quarter of 1994
was offset by changes in the value of assets and liabilities. In addition,
domestic net interest revenue in the third quarter of 1994 improved by $ 20
million over the second quarter due to wider spreads that were attributable to
the increase in rates on earning assets outpacing the rise in rates on interest
bearing liabilities. At September 30, 1994, the Corporation maintained a
modest risk position to benefit from potential future increases in domestic
interest rates, however, this position can be changed quickly through the use of
derivatives and/or balance sheet instruments as market conditions warrant.
30
<PAGE>
CAPITAL
In October 1994, the Board of Directors declared a quarterly common dividend of
$.27 per share, payable on November 25 and representing a $.05 per share
increase from the previous quarterly dividend. The payment and level of future
common dividends will continue to be determined by the Board of Directors based
on the Corporation's financial condition, recent earnings history and other
factors.
The Corporation's Tier 1 and total capital ratios were 6.9% and 11.9%,
respectively, at September 30, 1994, compared with 7.1% and 12.3%, respectively,
at June 30, 1994. The Corporation's leverage ratio at September 30, 1994 was
6.4% compared with 6.6% at June 30, 1994. The decline in the ratios from June
30 is mainly a result of the acquisition of Pioneer. As of September 30, 1994,
the capital ratios of the Corporation and all of its banking subsidiaries
exceeded the minimum capital ratio requirements of the "well capitalized"
category under the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA). The capital categories of the Corporation's banking subsidiaries are
determined solely for purposes of applying FDICIA's provisions and, accordingly,
such capital categories may not constitute an accurate representation of the
overall financial condition or prospects of any of the Corporation's banking
subsidiaries. In order to assist the Corporation's banking subsidiaries to
maintain regulatory capital at desired levels and in connection with its capital
planning process, the Corporation has provided capital contributions to certain
of its banking subsidiaries in the past, and may contribute additional capital
to its banking subsidiaries in future periods, if needed, to assist the
subsidiaries in maintaining capital ratios at desired levels. There were no
capital contributions made to banking subsidiaries during the first nine months
of 1994, however, the Corporation purchased a $180 million subordinated note,
which qualifies as tier 2 capital, from The First National Bank of Boston (FNBB)
during the first quarter of 1994.
ACQUISITIONS AND DIVESTITURES
The Corporation engages, and intends to continue to engage, in reviewing and
discussing possible acquisitions and divestitures of various businesses in
connection with the implementation of its business strategy. During 1994, the
following events have occurred:
. On January 31, 1994, the Corporation completed the sale of its domestic
factoring business and recorded a pre-tax gain of $27 million. The sale
of the Canadian factoring business was completed on October 31, 1994; a
small gain will be recorded on this sale in the fourth quarter.
. On May 27, 1994, the Corporation completed its acquisition of
BankWorcester, a $1.5 billion bank holding company headquartered in
Worcester, Massachusetts. Concurrent with the acquisition,
BankWorcester's banking subsidiary, Worcester County Institution for
Savings, was merged into FNBB.
. On May 31, 1994, the Corporation completed the sale of its freight
management business.
. On June 24, 1994, the Corporation announced an agreement to sell two of
its banking subsidiaries, Bank of Vermont and Casco Northern Bank, N.A.
(Casco). At September 30, 1994, Casco and Bank of Vermont had $1.2
billion and $.7 billion of total assets, respectively. These sale
transactions are subject to the purchaser obtaining required regulatory
approvals.
. On August 19, 1994, the Corporation completed its acquisition of
Pioneer, a $.8 billion co-operative bank based in Middlesex County,
Massachusetts. Concurrent with the acquisition, Pioneer was merged into
FNBB.
. On November 10, 1994, the Corporation announced a definitive agreement to
acquire Ganis Credit Corporation (Ganis), a privately-held consumer
finance company headquartered in Newport Beach, California, whose primary
business involves collateralized lending for recreational vehicles and
boats. Upon completion of the acquisition, the Corporation will pay Ganis
stockholders approximately $20 million, and up to an additional $16
million based upon Ganis reaching certain performance goals over the next
several years. The purchase price will be paid in shares of the
Corporation's common stock, which is expected to be purchased by the
Corporation in the open market. As of September 30, 1994, Ganis had 120
employees in 11 offices throughout the U.S. and approximately $30 million
in total assets.
Additional information on certain of these purchase and sale transactions can be
found in Note 2 to the Financial Statements.
31
<PAGE>
CREDIT PROFILE
The segments of the lending portfolio are as follows:
<TABLE>
<CAPTION>
Sept. 30 June 30 March 31 Dec. 31 Sept. 30
(in millions) 1994 1994 1994 1993 1993
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and financial $ 11,987 $ 11,871 $ 12,064 $ 11,991 $ 11,380
Commercial real estate:
Construction 464 499 542 617 705
Other 3,110 3,084 2,851 3,123 3,054
------ ------ ------ ------ ------
Total commercial real estate 3,574 3,583 3,393 3,740 3,759
Real estate loans secured by
1-4 family residential properties 4,878 4,215 3,923 4,159 4,291
Loans to individuals 2,373 2,283 1,795 1,610 1,556
Lease financing 1,312 1,263 1,257 1,264 1,226
Unearned income (199) (198) (202) (204) (210)
------ ------ ------ ------ ------
23,925 23,017 22,230 22,560 22,002
------ ------ ------ ------ ------
International:
Loans and lease financing, net of
unearned income 6,956 6,949 6,324 6,222 5,935
------ ------ ------ ------ ------
Total loan and lease financing $ 30,881 $ 29,966 $ 28,554 $ 28,782 $ 27,937
====== ====== ====== ====== ======
</TABLE>
The $.9 billion increase in domestic loans and leases from June 30, 1994 was
mainly due to the acquisition of Pioneer, which contributed approximately $540
million in mostly consumer-related loans to the September 30, 1994 balance
sheet, coupled with higher levels of residential mortgages and a modest increase
in commercial loans. International loans were comparable to the level at June
30, 1994, as continued growth in Argentina and an increase in United Kingdom
loans were offset by a decline in Brazilian loans. The Brazilian portfolio was
reduced during the third quarter as a result of the uncertainty surrounding the
country's new economic program and presidential elections. Additional
information on the Corporation's Brazilian cross-border outstandings can be
found below under the caption "Cross-Border Outstandings".
A discussion of the Corporation's real estate lending activities is included in
the Corporation's 1993 Annual Report to Stockholders on pages 39 through 41,
which is incorporated by reference in its 1993 Annual Report on Form 10-K. The
following tables set forth the Corporation's domestic commercial real estate
loans, and domestic commercial real estate nonaccrual loans and OREO, by
geographic location.
32
<PAGE>
DOMESTIC COMMERCIAL REAL ESTATE OUTSTANDINGS BY GEOGRAPHIC LOCATION
<TABLE>
<CAPTION>
Other Other
(in millions) Massachusetts Connecticut New England Florida Texas States Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 (1) $1,592 $411 $686 $183 $159 $631 $3,662
====== ==== ==== ==== ==== ==== ======
Balance at December 31, 1993 $1,373 $607 $802 $187 $54 $823 $3,846
====== ==== ==== ==== ==== ==== ======
</TABLE>
(1) Excludes assets transferred to accelerated disposition portfolio during
1994.
DOMESTIC COMMERCIAL REAL ESTATE NONACCRUAL LOANS AND OREO BY GEOGRAPHIC LOCATION
<TABLE>
<CAPTION>
Other Other
(in millions) Massachusetts Connecticut New England Florida Texas States Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 (1) $80 $52 $36 $13 $5 $40 $226
==== === === === === ==== ====
Balance at December 31, 1993 $103 $68 $52 $15 $8 $121 $367
==== === === === === ==== ====
Percent of related outstandings
at September 30, 1994 5% 13% 5% 7% 3% 6% 6%
Percent of related outstandings
at December 31, 1993 8% 11% 6% 8% 15% 15% 10%
</TABLE>
(1) Excludes assets transferred to accelerated disposition portfolio during
1994.
HIGHLY LEVERAGED TRANSACTIONS
The Corporation's total loan portfolio at September 30, 1994 included $1.3
billion of highly leveraged transaction (HLT) loans to 78 customers, compared
with $1.2 billion to 74 customers at June 30, 1994. The average HLT loan size
was $16 million at September 30, 1994 and $17 million at June 30, 1994. The HLT
loans are to customers operating in a variety of industries. The amount of
unused commitments for HLTs at September 30, 1994 was $577 million, compared
with $544 million at June 30, 1994. The amount of unused commitments does not
necessarily represent the actual future funding requirements of the Corporation,
since a portion can be syndicated or assigned to others or may expire without
being drawn upon. At September 30, 1994, $23 million of the HLT portfolio was
on nonaccrual status, compared with $24 million at June 30, 1994. Net credit
losses from the HLT portfolio were $1 million in the third quarter of 1994
compared with $3 million in the preceding quarter. The Corporation actively
manages the risks in its HLT portfolio, including adherence to special HLT
lending limits and periodic reviews of the portfolio by senior managers. The
Corporation has historically been involved in transactions that qualify as HLTs
and it expects to continue to agent and participate in such transactions in the
future. The Corporation, however, does not currently anticipate a substantial
increase in HLT lending over the September 30, 1994 level. A discussion of the
Corporation's HLT lending activities, policies and the effect of these
activities on results of operations is included in the Corporation's 1993 Annual
Report to Stockholders on pages 41 through 43, which is incorporated by
reference in its 1993 Annual Report on Form 10-K.
33
<PAGE>
NONACCRUAL LOANS AND OREO
The details of consolidated nonaccrual loans and OREO are as follows:
<TABLE>
<CAPTION>
Sept. 30 June 30 March 31 Dec. 31 Sept. 30
(in millions) 1994(1) 1994(1) 1994(1) 1993 1993
--------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and financial $ 119 $ 131 $ 112 $ 121 $ 131
Commercial real estate:
Construction 18 30 27 30 37
Other 119 160 134 231 225
----- ----- ----- ----- -----
Total commercial real estate 137 190 161 261 262
Real estate loans secured by 1-4
family residential properties 35 30 17 64 65
Loans to individuals 15 9 13 10 13
Lease financing 0 0 0 1 1
----- ----- ----- ----- -----
306 360 303 457 472
----- ----- ----- ----- -----
International 71 87 96 94 86
----- ----- ----- ----- -----
Total nonaccrual loans 377 447 399 551 558
OREO 93 71 66 108 136
----- ----- ----- ----- -----
Total $ 470 $ 518 $ 465 $ 659 $ 694
===== ===== ===== ===== =====
Nonaccrual loans and OREO as a
percent of related asset categories 1.5% 1.7% 1.6% 2.3% 2.5%
</TABLE>
(1) Excludes assets transferred to accelerated disposition portfolio during
1994.
The following table summarizes the changes in nonaccrual loans and OREO which
have occurred during the last nine quarters:
<TABLE>
<CAPTION>
1992 1993 1994
------------------ -------------------------------------- ---------------------------
Third Fourth First Second Third Fourth First Second Third
(in millions) Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
------- ------- ------ ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $ 1,323 $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659 $ 465 $ 518
Additions from acquisitions 12 8
Additions 184 180 107 117 135 127 169 173 132
Restructurings (104) (29) (13) (14)
Transfers to accelerated
disposition portfolio
(before writedown) (224) (28)
Sales, payments
and other decreases (180) (187) (132) (115) (105) (103) (88) (80) (104)
Credit losses and valuation
write-downs (1) (110) (128) (91) (80) (64) (59) (51) (52) (56)
----- ----- ---- ---- ---- ---- ---- --- ----
Ending balance $ 1,113 $ 949 $ 820 $ 728 $ 694 $ 659 $ 465 $ 518 $ 470
===== ===== ==== ==== ==== ==== ==== === ====
</TABLE>
(1) Excludes net credit losses related to the transfer of assets to the
accelerated disposition portfolio during 1994.
Nonaccrual loans and OREO declined $48 million from June 30, 1994, including the
transfer of an additional $28 million of nonperforming assets to the accelerated
disposition portfolio (see further discussion below under the caption
"Accelerated Disposition Portfolio"). Nonaccrual loans and OREO represented 1.5%
of related assets at September 30, 1994 compared with 1.7% of related assets at
June 30, 1994. The level of nonaccrual loans and OREO is influenced by the
economic environment, interest rates, the regulatory environment
34
<PAGE>
and other internal and external factors. As such, no assurance can be given as
to future levels of nonaccrual loans and leases and OREO.
ACCELERATED DISPOSITION PORTFOLIO
During the first quarter of 1994, in order to expedite the disposition of a
component of its remaining problem real estate assets and to strengthen its
balance sheet, the Corporation transferred $378 million of lower quality real
estate exposure to an accelerated disposition portfolio. At the point of
transfer, and after an individual review of each exposure, the Corporation took
a chargeoff of $119 million, leaving the March 31, 1994 carrying value of the
pool at $259 million, of which $241 million related to balance sheet exposure.
During the second quarter, this portfolio was reduced by $54 million principally
as a result of dispositions. Also, in connection with the BankWorcester
acquisition, the Corporation acquired certain loans which it classified as
available for sale. These loans were added to the accelerated disposition
portfolio at their estimated disposition value of $31 million. As a result of
the second quarter activity, the level of the accelerated disposition portfolio
was reduced to $236 million at June 30, 1994, of which $218 million related to
balance sheet exposure.
During the third quarter of 1994, the Corporation transferred an additional $67
million of loans into the accelerated disposition portfolio. This pool
consisted of two components: (1) loans, classified as available for sale, that
were acquired in connection with the Pioneer acquisition and added to the
accelerated disposition portfolio at their estimated disposition value of $11
million and (2) an additional $56 million of the Corporation's loans on which a
chargeoff of $20 million was taken at the point of transfer into the portfolio.
The aggregate carrying value of this pool at September 30, 1994 was $47 million.
Also during the third quarter of 1994, the Corporation sold assets contained in
the portfolio with a carrying value of $138 million and recorded a $20 million
recovery on these transactions. As a result of the third quarter activity, the
level of the accelerated disposition portfolio was reduced to $145 million at
September 30, 1994, of which $127 million related to balance sheet exposure.
The carrying value of the September 30 portfolio approximates the estimated
disposition value of the assets on a liquidation basis, and is not indicative of
the value that would be realized if these assets were managed in the normal
course of business or disposed of on a basis other than liquidation. Until
liquidated, this portfolio will be carried at the lower of the established
carrying value or estimated disposition value. The Corporation is actively
engaged in a formal selling effort and, during October, 1994, sold
approximately $50 million of the portfolio's remaining assets.
RENEGOTIATED LOANS
As part of its approach to managing credit, the Corporation renegotiates certain
of its loans when a determination is made that greater economic value will
ultimately be realized under the new terms than through foreclosure, liquidation
or bankruptcy. Renegotiated loans totaled $72 million at September 30, 1994,
compared with $81 million at June 30, 1994. The decline was due to the receipt
of principal payments. The renegotiated loans outstanding at September 30,
1994, which had a yield of approximately 9 percent, are performing in accordance
with their new terms and are not included in nonaccrual loans.
Renegotiated loans as of each of the last five quarter-ends were as follows:
<TABLE>
<CAPTION>
Sept. 30 June 30 March 31 Dec. 31 Sept. 30
(dollars in millions) 1994 1994 1994 1993 1993
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Renegotiated loans $ 72 $ 81 $ 116 $ 225 $ 244
==== ==== ==== ==== ====
Approximate yield on renegotiated loans 9% 9% 8% 8% 8%
==== ==== ==== ==== ====
</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 $36 million at September
30, 1994 compared with $41 million at June 30, 1994.
35
<PAGE>
RESERVE FOR CREDIT LOSSES
The reserve for credit losses at September 30, 1994 was $677 million, or 2.19%,
of outstanding loans and leases, compared with $676 million or 2.26% at June 30,
1994 and $799 million, or 2.86%, at September 30, 1993. The reserve for credit
losses was 179% of nonaccrual loans and leases at September 30, 1994, compared
with 151% at June 30, 1994 and 143% at September 30, 1993.
Net credit losses, excluding the 1994 chargeoffs and recoveries in connection
with the accelerated disposition portfolio, were $32 million for the third
quarter of 1994 and were $95 million for the first nine months of 1994. This
compares with $46 million for the third quarter and $184 million for the first
nine months of 1993. As a percentage of average loans and leases on an
annualized basis, net credit losses, excluding the 1994 chargeoffs and
recoveries in connection with the accelerated disposition portfolio, were .42%
in the third quarter of 1994, compared with .41% for the second quarter of 1994
and .68% for the third quarter of 1993.
<TABLE>
<CAPTION>
Net credit losses are as follows:
(in millions)
Third Quarter Nine Months
----------------- ----------------
1994* 1993 1994* 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic:
Commercial, industrial and financial $ 6 $ 7 $ 10 $ 33
Commercial real estate 7 11 25 59
Loans secured by 1-4 family residential properties 2 8 7 14
Loans to individuals 10 12 30 22
---- ---- ---- ----
25 38 72 128
International 7 8 23 56
---- ---- ---- ----
Total $ 32 $ 46 $ 95 $ 184
==== ==== ==== ====
</TABLE>
*Excludes credit losses and recoveries related to assets contained in the
accelerated disposition portfolio.
* * * * * * *
The economies of the United States and New England continued to improve and
domestic interest rates continued to rise during the third quarter of 1994.
Management, however, cannot currently predict to what extent the domestic
economic recovery or future interest rate changes will affect future periods.
In addition, it is uncertain what impact future changes in the economies in
Latin America and other foreign countries where the Corporation does business
will have on future periods, particularly in Brazil, which implemented a new
economic program in July and elected a new president in October. No assurance,
therefore, can be given that the positive trends achieved during the third
quarter and first nine months of 1994 will continue.
36
<PAGE>
CROSS-BORDER OUTSTANDINGS
Total cross-border outstandings, which are reported on a regulatory basis,
represented 15% of consolidated total assets at September 30, 1994 compared with
14% at December 31, 1993. Cross-border outstandings in countries which
individually amounted to 1% or more of consolidated total assets at September
30, 1994 and December 31, 1993 were approximately as follows:
<TABLE>
<CAPTION>
Percentage of
Consolidated
(dollars in millions) Public Banks Other Total Total Assets Commitments(2)
------ ----- ------ ------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1994 (1)
----------------------
Argentina $200 $340 $1,440 $1,980 4.5% $115
Brazil 50 620 670 1.5 20
United Kingdom 65 510 575 1.3 125
December 31, 1993 (1)
----------------------
Argentina $255 $225 $1,025 $1,505 3.7% $ 40
Brazil 110 695 805 2.0 20
United Kingdom 15 565 580 1.4 145
</TABLE>
(1) Cross-border outstandings in countries which fell between .75% and 1.0% of
consolidated total assets at September 30, 1994 and December 31, 1993 were
approximately as follows: Chile $390 million at September 30, 1994;
Canada $315 million, Chile $395 million and Korea $310 million at December
31, 1993.
(2) Included within commitments are letters of credit and guarantees and the
undisbursed portion of loan commitments. Amounts presented are net of
reallocations.
At September 30, 1994, approximately $3.7 billion of the Corporation's cross-
border outstandings were to Less Developed Countries (LDCs), of which $3.0
billion were to Argentina, Brazil and Chile, three countries in which the
Corporation maintains a branch network and subsidiaries. The $3.7 billion of
LDC cross-border outstandings were mainly comprised of short-term performing
trade credits, capital investments in branches and subsidiaries, and non-trade-
related loans and leases not subject to country debt rescheduling agreements.
The Corporation does not separately allocate a portion of its reserve for credit
losses for LDC loans and leases; however, these loans and leases are considered
in the determination of the adequacy of the overall reserve for credit losses.
Changes in aggregate cross-border outstandings to Argentina and Brazil since
December 31, 1993 were approximately as follows:
<TABLE>
<CAPTION>
(in millions) Argentina Brazil
---------- -------
<S> <C> <C>
Cross-border outstandings at December 31, 1993 $ 1,505 $ 805
Change in non-trade-related loans and
leases not subject to
country debt rescheduling 334 (107)
Net change in trade-related
cross-border outstandings, primarily
short-term (39) (98)
Net change in investment and trading 135 63
securities
Net change in local currency assets
funded by non-local currency 4
liabilities
Net change in placements 38
Other 7 3
----- ----
Cross-border outstandings at September 30, 1994 $ 1,980(1) $ 670(2)
===== ====
</TABLE>
(1) Approximately 51% are non-trade-related local dollar loans funded by
locally generated dollar liabilities and approximately 23% are trade-
related outstandings.
(2) Approximately 62% are trade-related outstandings
37
<PAGE>
As noted in the discussion above, primarily under the caption "Brazil", a new
economic program was implemented on July 1 and a new president was elected on
October 3, 1994. Given the present and future uncertainties related to these two
events, the Corporation reduced the level of its Brazilian cross-border
outstandings during the third quarter to $670 million at September 30, 1994 from
$950 million at June 30, 1994. This decline was mainly accomplished through
reductions in trade-related and non-trade-related cross-border loans. The
Corporation is currently evaluating the effects of the economic program,
including certain banking reform measures which have been announced and continue
to be modified by the government as they assess the overall impact of the
economic plan. As the various aspects of the economic program evolve, the
Corporation will assess the levels of Brazilian cross-border outstandings and
may increase or decrease the balance from the September 30 level as market
conditions warrant and permit. No assurance can be given at this time, however,
as to the future level of the Corporation's cross-border outstandings to
Brazil.
The Corporation has not experienced and does not expect to experience any
collection problems stemming from currency restrictions or foreign exchange
liquidity problems on its current portfolio of LDC cross-border outstandings,
including its cross-border outstandings to Argentina and Brazil, however, there
can be no assurance that such problems will not occur in the future.
38
<PAGE>
Consolidated Balance Sheet Averages by Quarter
Last Nine Quarters
(in millions)
<TABLE>
<CAPTION>
1992 1993 1994
----------------- --------------------------------------- ----------------------------
3 4 1 2 3 4 1 2 3
----------------- --------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing deposits in
other banks $ 1,222 $ 1,252 $ 1,262 $ 1,422 $ 1,305 $ 1,185 $ 1,083 $ 902 $ 1,131
Federal funds sold and
securities purchased under
agreements to resell 1,092 801 1,309 1,089 1,367 2,005 2,447 3,485 2,595
Trading securities 233 242 290 276 300 259 452 402 618
Loans held for sale 640 869 682 944 1,334 1,314 960 824 651
Securities 4,521 4,907 3,909 3,838 3,561 3,194 2,945 3,164 3,489
Loans and lease financing 25,577 25,269 25,224 25,854 26,953 28,172 28,615 29,105 30,362
------ ------ ------ ------ ------ ------ ------ ------ ------
Total earning assets 33,285 33,340 32,676 33,423 34,820 36,129 36,502 37,882 38,846
Other assets 3,589 3,956 3,775 4,078 4,248 4,274 4,712 4,820 5,079
------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL ASSETS $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214 $ 42,702 $ 43,925
====== ====== ====== ====== ====== ====== ====== ====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Domestic offices:
Noninterest bearing $ 3,762 $ 4,220 $ 4,031 $ 4,397 $ 4,578 $ 4,863 $ 4,633 $ 4,403 $ 4,477
Interest bearing 20,567 20,084 19,245 18,580 18,360 18,096 17,110 16,672 17,309
Overseas offices:
Noninterest bearing 360 362 349 336 387 469 497 393 415
Interest bearing 4,322 4,214 4,537 4,881 5,218 5,819 6,375 6,764 7,703
------ ------ ------ ------ ------ ------ ------ ------ ------
Total deposits 29,011 28,880 28,162 28,194 28,543 29,247 28,615 28,232 29,904
Federal funds purchased and
repurchase agreements 1,708 2,207 1,705 2,315 3,430 3,787 3,619 4,014 3,728
Other funds borrowed 1,713 1,507 1,436 1,606 1,485 1,603 2,411 4,124 3,633
Notes payable 1,186 1,223 1,669 1,670 1,752 1,876 2,194 1,957 1,987
Other liabilities 919 957 886 1,022 1,085 1,073 1,433 1,404 1,625
Stockholders' equity 2,337 2,522 2,593 2,694 2,773 2,817 2,942 2,971 3,048
------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 36,874 $ 37,296 $ 36,451 $ 37,501 $ 39,068 $ 40,403 $ 41,214 $ 42,702 $ 43,925
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
39
<PAGE>
Consolidated Statement of Income by Quarter - Taxable Equivalent Basis
Last Nine Quarters
(in millions, except per share amounts)
<TABLE>
<CAPTION>
1992 1993 1994
--------------- ----------------------------------- --------------------------
3 4 1 2 3 4 1 2 3
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Revenue $ 327.9 $ 336.3 $ 324.2 $ 330.5 $ 340.8 $ 349.3 $ 340.7 $ 374.5 $ 423.9
Taxable equivalent adjustment 2.1 3.7 1.8 1.7 2.3 2.0 1.5 1.5 1.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Total net interest revenue 330.0 340.0 326.0 332.2 343.1 351.3 342.2 376.0 425.2
Provision for credit losses 44.5 23.0 22.5 27.6 10.0 10.0 45.0 25.0 25.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Net interest revenue after
provision for credit losses 285.5 317.0 303.5 304.6 333.1 341.3 297.2 351.0 400.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Noninterest Income:
Financial service fees 81.1 88.9 71.3 92.6 90.9 95.2 92.4 93.9 104.3
Trust and agency fees 41.1 42.0 43.9 45.2 43.1 45.5 47.7 50.3 50.6
Trading profits and commissions 5.5 .5 6.9 5.8 6.9 3.9 3.9 1.2 10.9
Securities portfolio gains 8.7 1.5 6.4 6.0 11.0 8.8 3.9 5.9 1.3
Other income 40.9 45.7 45.9 41.4 39.3 35.6 87.2 41.0 35.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Total noninterest income 177.3 178.6 174.4 191.0 191.2 189.0 235.1 192.3 202.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Noninterest Expense:
Salaries 154.9 163.7 159.1 161.7 160.4 153.3 157.8 161.5 168.1
Employee benefits 30.4 25.6 37.5 33.7 32.2 32.7 36.9 37.0 38.6
Occupancy expense 31.7 31.0 32.2 32.2 32.2 31.3 31.9 33.1 35.2
Equipment expense 24.6 25.5 25.6 24.0 23.3 23.4 23.6 23.4 24.2
Merger and restructuring charges 85.0 16.4 5.0
Other expense 123.9 141.2 121.3 116.7 107.1 105.9 96.5 101.0 107.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Total noninterest expense 365.5 387.0 375.7 368.3 440.2 346.6 346.7 372.4 378.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes, extraordinary items and
cumulative effect of changes in
accounting principles 97.3 108.6 102.2 127.3 84.1 183.7 185.6 170.9 224.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Provision for income taxes 40.3 42.7 40.9 54.2 40.4 79.2 81.4 74.9 98.8
Taxable equivalent adjustment 2.1 3.7 1.8 1.7 2.3 2.0 1.5 1.5 1.3
----- ----- ----- ----- ----- ----- ----- ----- -----
42.4 46.4 42.7 55.9 42.7 81.2 82.9 76.4 100.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before extraordinary
items and cumulative effect of
changes in accounting principles 54.9 62.2 59.5 71.4 41.4 102.5 102.7 94.5 124.0
Extraordinary items 19.0 17.3 (6.6)
Cumulative effect of changes in
accounting principles, net 24.2
----- ----- ----- ----- ----- ----- ----- ----- -----
NET INCOME $ 73.9 $ 79.5 $ 83.7 $ 71.4 $ 41.4 $ 102.5 $ 96.1 $ 94.5 $ 124.0
===== ===== ===== ===== ===== ===== ===== ===== =====
Per Common Share:
Income before
extraordinary items and
cumulative effect of changes in
accounting principles:
Primary $ .47 $ .52 $ .49 $ .60 $ .30 $ .88 $ .88 $ .80 $ 1.07
Fully diluted .46 .50 .48 .59 .30 .85 .85 .77 1.04
Net Income:
Primary $ .65 $ .68 $ .72 $ .60 $ .30 $ .88 $ .82 $ .80 $ 1.07
Fully diluted .63 .66 .70 .59 .30 .85 .79 .77 1.04
Cash dividends declared .10 .10 .10 .10 .10 .22 .22 .22
</TABLE>
40
<PAGE>
AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis
Quarter Ended September 30, 1994
<TABLE>
<CAPTION>
In Millions of Dollars
- ---------------------------------------------------------------------------------------------------------------------
ASSETS Average Average
Volume Interest(1) Rate
------------------------------------
<S> <C> <C> <C> <C>
Interest Bearing Deposits with
Other Banks U.S. $ 144 $ 1.8 4.81%
International 987 36.6 14.76
-------- --------
Total 1,131 38.4 13.50
-------- -------- --------
Federal Funds Sold and Resale
Agreements U.S. 1,317 14.7 4.42
International 1,278 208.4 64.69
-------- --------
Total 2,595 223.1 34.11
-------- -------- --------
Trading Securities U.S. 242 3.5 5.71
International 376 26.3 27.75
-------- --------
Total 618 29.8 19.12
-------- -------- --------
Loans Held for Sale U.S. (2) 651 10.1 6.17
-------- -------- --------
Securities U.S.
Available For Sale (4) 1,300 19.1 5.83
Held to Maturity 1,626 24.4 5.95
International
Available For Sale (4) 373 14.1 15.00
Held to Maturity 190 4.0 8.35
-------- --------
Total 3,489 61.6 7.00
-------- -------- --------
Loans and Leases
(Net of Unearned Income) U.S. 23,431 463.2 7.84
International 6,931 258.7 14.81
-------- --------
Total Loans and Leases (3) 30,362 721.9 9.43
-------- -------- --------
Interest-Earning Assets 38,846 1,084.9 11.08
-------- --------
Non-Interest-Earning Assets 5,079
--------
Total Assets $ 43,925
========
-----------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits U.S.
Savings Deposits $ 9,897 $ 51.4 2.06%
Time Deposits 7,412 83.9 4.49
International 7,703 198.6 10.23
-------- --------
Total 25,012 333.9 5.30
-------- -------- --------
Federal Funds Purchased
and Repurchase Agreements U.S. 3,596 35.8 3.94
International 132 17.0 50.98
-------- --------
Total 3,728 52.8 5.61
-------- -------- --------
Other Funds Borrowed U.S. 2,506 31.0 4.91
International 1,127 211.3 74.37
-------- --------
Total 3,633 242.3 26.46
-------- -------- --------
Notes Payable U.S. 1,836 27.8 6.01
International 151 2.9 7.76
-------- --------
Total 1,987 30.7 6.14
-------- -------- --------
Total Interest-Bearing Liabilities 34,360 659.7 7.62
-------- --------
Demand Deposits U.S. 4,477
Demand Deposits International 415
Other Non-Interest-Bearing Liabilities 1,625
Total Stockholders' Equity 3,048
--------
Total Liabilities and Stockholders' Equity $ 43,925
========
-----------------------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 28,710 $ 319.3 4.41%
International 10,136 105.9 4.15
-------- --------
Total $ 38,846 $ 425.2 4.34%
======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This data is shown with income on a fully taxable equivalent basis.
(2) Amounts include the Corporation's accelerated disposition portfolio.
(3) Data for loans includes nonaccrual and renegotiated balances as well as fees
earned on loans.
(4) Average rate for Securities Available for sale is based on the securities'
amortized cost.
41
<PAGE>
AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis
Quarter Ended September 30, 1993
<TABLE>
<CAPTION>
In Millions of Dollars
- --------------------------------------------------------------------------------------------------------------------
ASSETS Average Average
Volume Interest(1) Rate
------------------------------------
<S> <C> <C> <C>
Interest Bearing Deposits with
Other Banks U.S. $ 365 $ 2.8 3.04%
International (4) 940 33.2 14.02
-------- --------
Total 1,305 36.0 10.95
-------- -------- --------
Federal Funds Sold and Resale
Agreements U.S. 734 5.7 3.05
International (4) 633 34.7 21.74
-------- --------
Total 1,367 40.4 11.70
-------- -------- --------
Trading Securities U.S. 171 1.6 3.67
International (4) 129 1.3 4.09
-------- --------
Total 300 2.9 3.85
-------- -------- --------
Loans Held for Sale U.S. (2) 1,334 23.8 7.09
-------- -------- --------
Securities U.S. (5) 3,081 45.1 5.81
International (4) (5) 480 20.3 16.67
-------- --------
Total 3,561 65.4 7.28
-------- -------- --------
Loans and Leases
(Net of Unearned Income) U.S. 21,282 404.2 7.54
International (4) 5,671 128.9 9.02
-------- --------
Total Loans and Leases (3) 26,953 533.1 7.85
-------- -------- --------
Interest-Earning Assets 34,820 701.6 7.99
-------- -------- --------
Non-Interest-Earning Assets 4,248
--------
Total Assets $ 39,068
========
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits U.S.
Savings Deposits $ 9,457 $ 49.7 2.12%
Time Deposits 8,903 100.3 4.47
International (4) 5,218 105.7 8.04
-------- --------
Total 23,578 255.7 4.30
-------- -------- --------
Federal Funds Purchased
and Repurchase Agreements U.S. 3,326 25.7 3.06
International (4) 104 6.2 23.82
-------- --------
Total 3,430 31.9 3.69
-------- -------- --------
Other Funds Borrowed U.S. 830 12.6 6.03
International (4) 655 29.5 17.88
-------- --------
Total 1,485 42.1 11.25
-------- -------- --------
Notes Payable U.S. 1,681 27.0 6.37
International (4) 71 1.8 9.63
-------- --------
Total 1,752 28.8 6.51
-------- -------- --------
Total Interest-Bearing Liabilities 30,245 358.5 4.72
-------- --------
Demand Deposits U.S. 4,578
Demand Deposits International 387
Other Non-Interest-Bearing Liabilities 1,085
Total Stockholders' Equity 2,773
--------
Total Liabilities and Stockholders' Equity $ 39,068
========
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 26,967 $ 283.9 4.18%
International 7,853 59.2 2.99
-------- --------
Total $ 34,820 $ 343.1 3.91%
======== =========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This data is shown with income on a fully taxable equivalent basis.
(2) Amounts include the Corporation's accelerated disposition portfolio.
(3) Data for loans includes nonaccrual and renegotiated balances as well as fees
earned on loans.
(4) During the first quarter of 1994, the Corporation reclassified the
translation gains and losses associated with Brazilian local currency
earning assets and interest bearing liabilities from noninterest income to
interest income and interest expense, respectively, and reclassified all
prior periods. This reclassification is more fully discussed in Note 11 to
the Financial Statements.
(5) Prior to January 1, 1994, average balances for Securities Available for Sale
and Securities Held to Maturity were not separately accumulated.
42
<PAGE>
AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis
Nine Months Ended September 30, 1994
<TABLE>
<CAPTION>
In Millions of Dollars
- --------------------------------------------------------------------------------------------------------------------
ASSETS Average Average
Volume Interest (1) Rate
------------------------------------
<S> <C> <C> <C>
Interest Bearing Deposits with
Other Banks U.S. $ 192 $ 5.7 3.93%
International (4) 848 73.6 11.62
------ -------
Total 1,040 79.3 10.20
------ ------- -----
Federal Funds Sold and Resale
Agreements U.S. 1,495 43.5 3.89
International (4) 1,346 412.1 40.95
------ -------
Total 2,841 455.6 21.44
------ ------- -----
Trading Securities U.S. 179 6.9 5.14
International (4) 310 50.3 21.73
------ -------
Total 489 57.2 15.65
------ ------- -----
Loans Held for Sale U.S. (2) 811 38.5 6.36
------ ------- -----
Securities U.S.
Available For Sale (5) 1,206 60.0 6.65
Held to Maturity 1,467 59.1 5.39
International (4)
Available For Sale (5) 320 35.7 14.92
Held to Maturity 210 12.4 7.89
------ -------
Total 3,203 167.2 6.98
------ ------- -----
Loans and Leases
(Net of Unearned Income) U.S. 22,720 1,288.1 7.58
International (4) 6,646 565.7 11.38
------ -------
Total Loans and Leases (3) 29,366 1,853.8 8.44
------ ------- -----
Interest-Earning Assets 37,750 2,651.6 9.39
------- -----
Non-Interest-Earning Assets 4,871
------
Total Assets $ 42,621
======
------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits U.S.
Savings Deposits $ 9,525 $ 140.5 1.97%
Time Deposits 7,506 250.2 4.46
International (4) 6,951 424.9 8.17
------ -------
Total 23,982 815.6 4.55
------ ------- -----
Federal Funds Purchased
and Repurchase Agreements U.S. 3,559 96.7 3.63
International (4) 228 48.0 28.21
------ -------
Total 3,787 144.7 5.11
------ ------- -----
Other Funds Borrowed U.S. 2,211 80.5 4.87
International (4) 1,180 374.7 42.48
------ -------
Total 3,391 455.2 17.95
------ ------- -----
Notes Payable U.S. 1,920 82.6 5.75
International (4) 125 10.1 10.77
------ -------
Total 2,045 92.7 6.06
------ ------- -----
Total Interest-Bearing Liabilities 33,205 1,508.2 6.07
------- -----
Demand Deposits U.S. 4,504
Demand Deposits International 435
Other Non-Interest-Bearing Liabilities 1,488
Total Stockholders' Equity 2,989
------
Total Liabilities and Stockholders' Equity $ 42,621
======
------------------------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 28,071 $ 892.9 4.25%
International 9,679 250.5 3.46
------ -------
Total $ 37,750 $ 1,143.4 4.05%
====== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This data is shown with income on a fully taxable equivalent basis.
(2) Amounts include the Corporation's accelerated disposition portfolio.
(3) Data for loans includes nonaccrual and renegotiated balances as well as fees
earned on loans.
(4) During the first quarter of 1994, the Corporation reclassified the
translation gains and losses associated with Brazilian local currency
earning assets and interest bearing liabilities from noninterest income to
interest income and interest expense, respectively, and reclassified all
prior periods. This reclassification is more fully discussed in Note 11 to
the Financial Statements.
(5) Average rate for Securities Available for sale is based on the securities'
amortized cost.
43
<PAGE>
AVERAGE BALANCES AND INTEREST RATES, Taxable Equivalent Basis
Nine Months Ended September 30, 1993
<TABLE>
<CAPTION>
In Millions of Dollars
- --------------------------------------------------------------------------------------------------------------------
ASSETS Average Average
Volume Interest (1) Rate
------------------------------------
<S> <C> <C> <C>
Interest Bearing Deposits with
Other Banks U.S. $ 367 $ 8.8 3.20%
International (4) 963 99.4 13.80
------ -------
Total 1,330 108.2 10.87
------ ------- -----
Federal Funds Sold and Resale
Agreements U.S. 860 19.8 3.07
International (4) 395 64.0 21.66
------ -------
Total 1,255 83.8 8.93
------ ------- -----
Trading Securities U.S. 146 4.2 3.87
International (4) 143 2.4 2.23
------ -------
Total 289 6.6 3.06
------ ------- -----
Loans Held for Sale U.S. (2) 989 54.1 7.31
------ ------- -----
Securities U.S. (5) 3,333 148.3 5.95
International (4) (5) 435 52.4 16.10
------ -------
Total 3,768 200.7 7.12
------ ------- -----
Loans and Leases
(Net of Unearned Income) U.S. 20,657 1,191.0 7.71
International 5,373 378.1 9.41
------ -------
Total Loans and Leases (3) 26,030 1,569.1 8.06
------ ------- -----
Interest-Earning Assets 33,661 2,022.5 8.03
------- -----
Non-Interest-Earning Assets 4,016
------
Total Assets $ 37,677
======
------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits U.S.
Savings Deposits $ 9,350 $ 165.0 2.40%
Time Deposits 9,375 329.6 4.70
International (4) 4,882 271.5 7.44
------ -------
Total 23,607 766.1 4.34
------ ------- -----
Federal Funds Purchased
and Repurchase Agreements U.S. 2,366 52.6 2.98
International (4) 124 14.8 15.83
------ -------
Total 2,490 67.4 3.62
------ ------- -----
Other Funds Borrowed U.S. 922 34.7 5.02
International (4) 587 68.3 15.56
------ -------
Total 1,509 103.0 9.12
------ ------- -----
Notes Payable U.S. 1,602 77.4 6.46
International (4) 95 7.3 10.25
------ -------
Total 1,697 84.7 6.67
------ ------- -----
Total Interest-Bearing Liabilities 29,303 1,021.2 4.68
------- -----
Demand Deposits U.S. 4,337
Demand Deposits International 357
Other Non-Interest-Bearing Liabilities 999
Total Stockholders' Equity 2,681
------
Total Liabilities and Stockholders' Equity $ 37,677
======
------------------------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 26,352 $ 806.7 4.09%
International 7,309 194.6 3.56
------ -------
Total $ 33,661 $ 1,001.3 3.98%
====== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This data is shown with income on a fully taxable equivalent basis.
(2) Amounts include the Corporation's accelerated disposition portfolio.
(3) Data for loans includes nonaccrual and renegotiated balances as well as fees
earned on loans.
(4) During the first quarter of 1994, the Corporation reclassified the
translation gains and losses associated with Brazilian local currency
earning assets and interest bearing liabilities from noninterest income to
interest income and interest expense, respectively, and reclassified all
prior periods. This reclassification is more fully discussed in Note 11 to
the Financial Statements.
(5) Prior to January 1, 1994, average balances for Securities Available for Sale
and Securities Held to Maturity were not separately accumulated.
44
<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.
Third Quarter 1994 Compared With Third 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 $ 42.5 $ 16.5 $ 59.0 $ 47.1 $ 82.7 $ 129.8 $ 81.1 $ 107.7 $ 188.8
Other earning
assets (5.6) .2 (5.4) 92.1 107.8 199.9 26.3 168.2 194.5
Adjustment (1) (4.2) 4.2 0 (15.9) 15.9 0 5.0 (5.0) 0
------ ------ ------ ------ ------ ------ ------ ------ ------
Total interest
income 32.7 20.9 53.6 123.3 206.4 329.7 112.4 270.9 383.3
Total interest
expense 13.3 4.9 18.2 99.5 183.5 283.0 68.4 232.8 301.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest
Revenue $ 19.4 $ 16.0 $ 35.4 $ 23.8 $ 22.9 $ 46.7 $ 44.0 $ 38.1 $ 82.1
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
Nine Months 1994 Compared With Nine Months 1993 - (in millions)
United States International Consolidated
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Due to Due to
Change in Change in Change in
Net Net Net
Volume(2) Rate Change Volume(2) Rate Change Volume(2) Rate Change
--------- ---- ------ --------- ---- ------ --------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and lease
financing $ 117.1 $ (20.0) $ 97.1 $ 108.3 $ 79.3 $ 187.6 $ 210.7 $ 74.0 $ 284.7
Other earning
assets (13.6) (7.9) (21.5) 211.3 154.6 365.9 71.6 272.8 344.4
Adjustment (1) (11.3) 11.3 0 (38.2) 38.2 0 5.0 (5.0) 0
------ ------ ------ ------ ------ ------ ------ ------ ------
Total interest
income 92.2 (16.6) 75.6 281.4 272.1 553.5 287.3 341.8 629.1
Total interest
expense 37.5 (48.1) (10.6) 220.0 277.6 497.6 163.4 323.6 487.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest
Revenue $ 54.7 $ 31.5 $ 86.2 $ 61.4 $ (5.5) $ 55.9 $ 123.9 $ 18.2 $ 142.1
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Adjustment to reflect the effect on total volume and rate changes of the
differences in the component mix of earning assets and interest bearing
liabilities between periods.
(2) The change due to the volume/rate variance has been allocated to volume.
45
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, in March, 1993, a complaint was filed in
Delaware Chancery Court against the Corporation, Bancorp and Bancorp's directors
who voted in favor of the Corporation's acquisition of Bancorp. The action was
brought by a Bancorp stockholder, individually and as a class action on behalf
of all Bancorp stockholders of record on the date the acquisition was announced,
and sought an injunction with respect to the proposed acquisition and damages in
an unspecified amount. In July 1993, the Corporation acquired Bancorp. In
December 1993, the Chancery Court granted summary judgment in favor of the
Corporation, Bancorp and Bancorp's former directors. The plaintiff has appealed
that decision to the Delaware Supreme Court. A hearing before a three-judge
panel of the Court was held on April 5, 1994, and a second hearing was held
before the full panel on October 21, 1994.
As previously reported, in June 1985 a complaint was filed against
FNBB in the U.S. District Court for the District of New Hampshire by private
plaintiffs on behalf of the United States in a qui tam action under 3l U.S.C. #
3729, known as the False Claims Act. The complaint alleges that FNBB failed to
disclose, or made false statements, to the Farmer's Home Administration (FmHA)
in connection with securing and inducing payment on guarantees from the FmHA on
loans by FNBB and certain investors to Stranway Corporation and its subsidiary
Elmendorf Board Corporation. Damages are alleged in the amount of $50,000,000,
plus interest, costs and attorneys fees. The United States, which must decide at
the outset whether to take over civil prosecution of a False Claims Act suit
initiated by a private plaintiff, has declined to enter an appearance in and
take over the action. The action was transferred to the District of
Massachusetts. On October 13, 1994, the District Court entered an order (1)
denying plaintiff's' motion to substitute a new qui tam plaintiff and (2)
dismissing the complaint against FNBB without prejudice to the original qui tam
plaintiff reinstating the action within 30 days. FNBB denies the allegations in
the complaint and, if the matter were to be reinstated, intends to defend the
action vigorously.
As previously reported, in January 1994, the Securities and Exchange
Commission (Commission) commenced an administrative proceeding against the
Corporation. The administrative proceeding relates to the Commission's claim
that the Corporation's second quarter 1989 Form 10-Q did not disclose known
trends or uncertainties with respect to the Corporation's credit portfolio and
specifically its domestic commercial real estate portfolio. The Corporation
reported a significant loss in the third quarter of 1989 as a result of adding
to its reserve for credit losses, primarily due to deterioration in the credit
quality of its domestic commercial real estate portfolio. Management believes
that the disclosures made in its second quarter 1989 Form 10-Q were appropriate
and intends to defend the action vigorously. A hearing before an administrative
law judge was conducted in May 1994, and the parties subsequently filed post-
trial briefs. Although management cannot predict the outcome of this proceeding,
an unfavorable outcome will not result in any monetary penalties to the
Corporation.
Item 5. Other Information.
On November 10, 1994, the Corporation announced that it had reached a
definitive agreement to acquire Ganis Credit Corporation (Ganis). Ganis, based
in Newport Beach, California, is a privately held consumer finance company whose
primary business involves collateralized lending for recreational vehicles and
boats. At September 30, 1994, Ganis had approximately $30 million in assets and
11 offices located in California, Texas, Florida, Pennsylvania and
Massachusetts. Under the terms of the agreement, the shareholders of Ganis will
receive approximately $20 million upon consummation of the transaction, plus up
to an additional $16 million based upon Ganis reaching performance goals over
the next several years. The purchase price will be paid in the Corporation's
Common Stock and the Corporation expects to buy shares of its Common Stock in
the market sufficient to cover the shares to be issued in the transaction. The
Ganis transaction has been approved by the boards of directors of both companies
and is subject to certain regulatory filings. The Corporation's objective is to
consummate the Ganis transaction during the first quarter of 1995, although no
assurance can be given that the transaction will be completed within this time
frame.
Recent Legislation
On September 23, 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (Development Act) was enacted. The Development Act
establishes financial and other assistance for entities involved primarily in
community development activities. The Development Act's provisions also make
changes in a number of areas including, among others: (i) increasing
restrictions on some types of high interest loans; (ii) improving small business
access to capital; (iii) requiring federal banking agencies to, among other
things, coordinate examinations and establish uniform regulations and guidelines
where appropriate; (iv) simplifying and expediting the processing and approvals
for certain applications; (v) clarifying the FDIC's powers as a conservator or
receiver; (vi) expanding the exemptions available to a holding company's
subsidiary banks with respect to FDICIA's audit requirements; (v) adding
flexibility to FDICIA's safety and soundness standards by, among other things,
permitting
46
<PAGE>
their issuance as guidelines and allowing banking agencies more discretion in
handling noncompliance; (vi) amending certain requirements on insider loans;
(vii) modifying local residency requirements for national bank directors; (viii)
limiting the applicability of certain real estate settlement procedures; and
(ix) extending some management interlocks exemptions.
On September 28, 1994, the Riegle-Neal Interstate Banking and Branching Act
of 1994 (Interstate Act) was enacted. The Interstate Act's provisions, among
other things: (i) permit bank holding companies to acquire control of banks in
any state beginning September 28, 1995, subject to (a) specified maximum
national and state deposit concentration limits; (b) any applicable state law
provisions requiring that the acquired bank has to have been in existence for a
specified period of up to 5 years; (c) any applicable nondiscriminatory state
provisions that make an acquisition of a bank contingent upon a requirement to
hold a portion of such bank's assets available for call by a state sponsored
housing entity; and (d) applicable anti-trust laws; (ii) authorize interstate
mergers by banks in different states, including branching through bank mergers,
beginning June 1, 1997, subject to the provisions noted in (i) and to any state
laws that opt in as of an earlier date or opt out of the provision entirely;
(iii) authorize states to enact legislation permitting interstate de novo
branching; and (iv) provide for certain additional limitations on foreign bank
activities.
The full impact of the Development Act and the Interstate Act will not be
completely known until the enactment and implementation by the various federal
banking agencies of the underlying regulations and actions required by the Acts.
However, it is anticipated that the Development Act may reduce certain
regulatory burdens on financial institutions and the Interstate Act may
facilitate consolidation within multilevel financial institutions and in the
banking industry.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11 Computation of Earnings Per Share.
12(a) Computation of the Corporation's Consolidated Ratio of
Earnings to Fixed Charges (excluding interest on deposits).
12(b) Computation of the Corporation's Consolidated Ratio of
Earnings to Fixed Charges (including interest on deposits).
12(c) Computation of the Corporation's Consolidated Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividend Requirements (excluding interest on deposits).
12(d) Computation of the Corporation's Consolidated Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividend Requirements (including interest on deposits).
27 Financial Data Schedule
(b) Current Reports on Form 8-K.
During the third quarter of 1994, the Corporation did not file any
Current Reports on Form 8-K.
47
<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
November 14, 1994
- -----------------
Date
48
<PAGE>
EXHIBIT 11
BANK OF BOSTON CORPORATION
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30 September 30
EARNINGS 1994 1993 1994 1993
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1. Net income $ 123,969 $ 41,444 $ 314,609 $ 196,514
2. Less: Preferred dividends 9,389 9,383 28,063 25,346
--------- --------- --------- ---------
3. Net income applicable to primary
earnings per common share 114,580 32,061 286,546 171,168
4. Add: Interest expense on convertible
debentures, net of tax 1,085 1,098 3,219 3,268
--------- --------- --------- ---------
5. Net income applicable to fully diluted
earnings per common share $ 115,665 $ 33,159 $ 289,765 $ 174,436
========= ========= ========= =========
SHARES
------
6. Weighted average number of common shares outstanding 106,981 105,443 106,602 105,232
7. Incremental shares from assumed exercise
of dilutive stock options as of the beginning
of the period using the treasury stock method 679 972 759 1,028
8. Incremental shares from assumed conversion
of debentures at date of issuance 4,030 4,031 4,030 4,036
--------- --------- --------- ---------
9. Adjusted number of common shares 111,690 110,446 111,391 110,296
========= ========= ========= =========
PER SHARE CALCULATION
---------------------
10. Primary net income per common share $ 1.07 $ .30 $ 2.69 $ 1.63
(Item 3 /Item 6); see note below
11. Fully diluted net income per common share $ 1.04 $ .30 $ 2.60 $ 1.58
(Item 5 /Item 9); see note below
</TABLE>
Note - Income per common share before extraordinary items and cumulative effect
of accounting changes, net, on both a primary and fully diluted basis for the
nine months ended September 30, 1994 and September 30, 1993 are computed by
adding to the numerator $6,535 and subtracting from the numerator $24,203,
respectively.
<PAGE>
BANK OF BOSTON CORPORATION EXHIBIT 12(a)
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Excluding Interest on Deposits)
The Corporation's ratios of earnings to fixed charges (excluding interest on
deposits) for the nine months ended September 30, 1994 and 1993 and for the five
years ended December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Nine Months Years
Ended Ended
September 30 December 31
---------------------- -------------------------------------------------------
(Dollars in thousands)
1994 1993 1993 1992 1991 1990 1989
--------- ------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114
Extraordinary items, net of tax 6,535 (72,968) (7,758) (43,649)
Cumulative effect of changes
in accounting principles, net of tax (24,203) (24,203)
Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951
--------- ------- ------- ------- -------- -------- ---------
Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065
========= ======= ======= ======= ======== ======== =========
Fixed charges:
Portion of rental expense
(net of sublease rental income)
which approximates the interest factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482
Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007
--------- ------- ------- ------- -------- -------- ---------
Total fixed charges 712,659 275,430 404,937 373,067 391,880 630,775 1,116,489
--------- ------- ------- ------- -------- -------- ---------
Earnings (for ratio calculation) $ 1,288,916 $ 583,202 $ 894,443 $ 731,761 $ 212,977 $ 121,457 $ 1,339,554
========= ======= ======= ======= ======== ======== =========
Total fixed charges $ 712,659 $ 275,430 $ 404,937 $ 373,067 $ 391,880 $ 630,775 $ 1,116,489
========= ======= ======= ======= ======== ======== =========
Ratio of earnings to fixed charges 1.81 2.12 2.21 1.96 .54 .19 1.20
========= ======= ======= ======= ======== ======== =========
</TABLE>
For purposes of computing the consolidated ratio of earnings to fixed charges
"earnings" represent income (loss) before extraordinary items and cumulative
effect of changes in accounting principles plus applicable income taxes and
fixed charges. "Fixed charges" include gross interest expense (excluding
interest on deposits) and the proportion deemed representative of the interest
factor of rent expense, net of income from subleases. Ratios for the periods
presented reflect the reclassification, where appropriate, of Brazilian
translation gains and losses more fully discussed in Note 11 to the Financial
Statements.
<PAGE>
BANK OF BOSTON CORPORATION EXHIBIT 12(b)
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Including Interest on Deposits)
The Corporation's ratios of earnings to fixed charges (including interest on
deposits) for the nine months ended September 30, 1994 and 1993 and for the
five years ended December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Nine Months Years
Ended Ended
September 30 December 31
----------------------- ---------------------------------------------------------------------
(Dollars in thousands)
1994 1993 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114
Extraordinary items, net of
tax 6,535 (72,968) (7,758) (43,649)
Cumulative effect of changes
in accounting principles,
net of tax (24,203) (24,203)
Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951
--------- --------- --------- --------- --------- --------- ---------
Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065
========= ========= ========= ========= ========= ========= =========
Fixed charges:
Portion of rental
expense(net of sublease
rental income) which
approximates theinterest
factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482
Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007
Interest on deposits 815,592 766,132 1,015,956 1,406,742 1,808,436 2,420,296 2,243,854
--------- --------- --------- --------- --------- --------- ---------
Total fixed charges 1,528,251 1,041,562 1,420,893 1,779,809 2,200,316 3,051,071 3,360,343
--------- --------- --------- --------- --------- --------- ---------
Earnings (for ratio
calculation) $ 2,104,508 $ 1,349,334 $ 1,910,399 $ 2,138,503 $ 2,021,413 $ 2,541,753 $ 3,583,408
========= ========= ========= ========= ========= ========= =========
Total fixed charges $ 1,528,251 $ 1,041,562 $ 1,420,893 $ 1,779,809 $ 2,200,316 $ 3,051,071 $ 3,360,343
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges 1.38 1.30 1.34 1.20 .92 .83 1.07
========= ========= ========= ========= ========= ========= =========
</TABLE>
For purposes of computing the consolidated ratio of earnings to fixed charges
"earnings" represent income (loss) before extraordinary items and cumulative
effect of changes in accounting principles plus applicable income taxes and
fixed charges. "Fixed charges" include gross interest expense (including
interest on deposits) and the proportion deemed representative of the interest
factor of rent expense, net of income from subleases. Ratios for the periods
presented reflect the reclassification, where appropriate, of Brazilian
translation gains and losses more fully discussed in Note 11 to the Financial
Statements.
<PAGE>
BANK OF BOSTON CORPORATION EXHIBIT 12(c)
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(Excluding Interest on Deposits)
The Corporation's ratios of earnings to combined fixed charges and preferred
stock dividend requirements (excluding interest on deposits) for the
nine months ended September 30, 1994 and 1993 and for the five years ended
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Nine Months Years
Ended Ended
September 30 December 31
--------------------------- -----------------------------------------------------
(Dollars in thousands)
1994 1993 1993 1992 1991 1990 1989
--------- ------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114
Extraordinary items, net of tax 6,535 (72,968) (7,758) (43,649)
Cumulative effect of changes in
accounting principles, net of
tax (24,203) (24,203)
Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951
--------- ------- ------- ------- -------- -------- ---------
Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065
========= ======= ======= ======= ======== ======== =========
Fixed charges:
Portion of rental expense
(net of sublease rental
income) which approximates
the interest factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482
Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007
--------- ------- ------- ------- -------- -------- ---------
Total fixed charges $ 712,659 $ 275,430 $ 404,937 $ 373,067 $ 391,880 $ 630,775 $ 1,116,489
Preferred stock dividend
requirements 50,415 45,269 61,377 33,186 13,255 13,748 22,568
--------- ------- ------- ------- -------- -------- ---------
Total combined fixed charges
and preferred stock dividend
requirements $ 763,074 $ 320,699 $ 466,314 $ 406,253 $ 405,135 $ 644,523 $ 1,139,057
========= ======= ======= ======= ======== ======== =========
Earnings (for ratio calculation)
(Pretax earnings (loss) plus
total fixed charges) $ 1,288,916 $ 583,202 $ 894,443 $ 731,761 $ 212,977 $ 121,457 $ 1,339,554
========= ======= ======= ======= ======== ======== =========
Ratio of earnings to combined
fixed charges and preferred
stock dividend requirements 1.69 1.82 1.92 1.80 .53 .19 1.18
========= ======= ======= ======= ======== ======== =========
</TABLE>
For purposes of computing the consolidated ratio of earnings to combined fixed
charges and preferred stock dividend requirements "earnings" represent income
(loss) before extraordinary items and cumulative effect of changes in accounting
principles plus applicable income taxes and fixed charges. "Fixed charges"
include gross interest expense (excluding interest on deposits) and the
proportion deemed representative of the interest factor of rent expense, net of
income from subleases. Pretax earnings required for preferred stock dividends
were computed using tax rates for the applicable year. No tax adjustments were
made in loss years. Ratios for the periods presented reflect the
reclassification, where appropriate, of Brazilian translation gains and losses
more fully discussed in Note 11 to the Financial Statements.
<PAGE>
BANK OF BOSTON CORPORATION EXHIBIT 12(d)
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(Including Interest on Deposits)
The Corporation's ratios of earnings to combined fixed charges and preferred
stock dividend requirements (including interest on deposits) for the nine months
ended September 30, 1994 and 1993 and for the five years ended December 31, 1993
were as follows:
<TABLE>
<CAPTION>
Nine Months Years
Ended Ended
September 30 December 31
----------------------- ----------------------------------------------------------------------
(Dollars in thousands)
1994 1993 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 314,609 $ 196,514 $ 299,026 $ 278,881 $ (113,155) $ (468,248) $ 138,114
Extraordinary items, net of
tax 6,535 (72,968) (7,758) (43,649)
Cumulative effect of changes
in accounting principles,
net of tax (24,203) (24,203)
Income tax expense (benefit) 255,113 135,461 214,683 152,781 (57,990) 2,579 84,951
--------- --------- --------- --------- --------- --------- ---------
Pretax earnings (loss) $ 576,257 $ 307,772 $ 489,506 $ 358,694 $ (178,903) $ (509,318) $ 223,065
========= ========= ========= ========= ========= ========= =========
Fixed charges:
Portion of rental
expense (net of
sublease rental income)
which approximates the
interest factor 20,068 20,338 27,063 28,159 30,370 38,747 35,482
Interest on borrowed funds 692,591 255,092 377,874 344,908 361,510 592,028 1,081,007
Interest on deposits 815,592 766,132 1,015,956 1,406,742 1,808,436 2,420,296 2,243,854
--------- --------- --------- --------- --------- --------- ---------
Total fixed charges 1,528,251 1,041,562 1,420,893 1,779,809 2,200,316 3,051,071 3,360,343
Preferred stock dividend
requirements 50,415 45,269 61,377 33,186 13,255 13,748 22,568
--------- --------- --------- --------- --------- --------- ---------
Total combined fixed
charges and preferred
stock dividend requirements $ 1,578,666 $ 1,086,831 $ 1,482,270 $ 1,812,995 $ 2,213,571 $ 3,064,819 $ 3,382,911
========= ========= ========= ========= ========= ========= =========
Earnings (for ratio
calculation)
(Pretax earnings (loss)
plus total fixed charges) $ 2,104,508 $ 1,349,334 $ 1,910,399 $ 2,138,503 $ 2,021,413 $ 2,541,753 $ 3,583,408
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to combined
fixed charges and preferred
stock dividend requirements 1.33 1.24 1.29 1.18 .91 .83 1.06
========= ========= ========= ========= ========= ========= =========
</TABLE>
For purposes of computing the consolidated ratio of earnings to combined fixed
charges and preferred stock dividend requirements "earnings" represent income
(loss) before extraordinary items and cumulative of changes in accounting
principles plus applicable income taxes and fixed charges. "Fixed charges"
include gross interest expense (including interest on deposits) and the
proportion deemed representative of the interest factor of rent expense, net of
income from subleases. Pretax earnings required for preferred stock dividends
were computed using tax rates for the applicable year. No tax adjustments were
made in loss years. Ratios for the periods presented reflect the
reclassification, where appropriate, of Brazilian translation gains and losses
more fully discussed in Note 11 to the Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1994 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 2,084,343
<INT-BEARING-DEPOSITS> 1,172,763
<FED-FUNDS-SOLD> 1,947,485
<TRADING-ASSETS> 755,490
<INVESTMENTS-HELD-FOR-SALE> 2,214,036
<INVESTMENTS-CARRYING> 2,021,986
<INVESTMENTS-MARKET> 1,974,423
<LOANS> 30,880,779
<ALLOWANCE> (676,534)
<TOTAL-ASSETS> 44,293,918
<DEPOSITS> 30,312,539
<SHORT-TERM> 7,283,209
<LIABILITIES-OTHER> 1,454,367
<LONG-TERM> 2,131,051
<COMMON> 241,131
0
508,436
<OTHER-SE> 2,363,185
<TOTAL-LIABILITIES-AND-EQUITY> 44,293,918
<INTEREST-LOAN> 1,853,503
<INTEREST-INVEST> 165,190
<INTEREST-OTHER> 628,596
<INTEREST-TOTAL> 2,647,289
<INTEREST-DEPOSIT> 815,592
<INTEREST-EXPENSE> 1,508,183
<INTEREST-INCOME-NET> 1,139,106
<LOAN-LOSSES> 95,000
<SECURITIES-GAINS> 11,150
<EXPENSE-OTHER> 286,444
<INCOME-PRETAX> 576,257
<INCOME-PRE-EXTRAORDINARY> 321,144
<EXTRAORDINARY> (6,535)
<CHANGES> 0
<NET-INCOME> 314,609
<EPS-PRIMARY> 2.69
<EPS-DILUTED> 2.60
<YIELD-ACTUAL> 4.05
<LOANS-NON> 377,564
<LOANS-PAST> 20,247
<LOANS-TROUBLED> 72,163
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 770,279
<CHARGE-OFFS> (143,869)
<RECOVERIES> 49,327
<ALLOWANCE-CLOSE> 676,534
<ALLOWANCE-DOMESTIC> 472,254
<ALLOWANCE-FOREIGN> 92,450
<ALLOWANCE-UNALLOCATED> 111,830
</TABLE>
