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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ___________ to __________
Commission file number: 1-6522
BANK OF BOSTON CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2471221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Federal Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (6l7) 434-2200
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Common Stock, par value $2.25 per share
Preferred Stock Purchase Rights
Adjustable Rate Cumulative Preferred Stock, Series A (liquidation preference $50
per share)
Adjustable Rate Cumulative Preferred Stock, Series B (liquidation preference $50
per share)
Adjustable Rate Cumulative Preferred Stock, Series C (liquidation preference
$100 per share)
Depositary Shares, each representing one-tenth of a share of 8.60% Cumulative
Preferred Stock, Series E (liquidation preference $25 per Depositary Share)
Depositary Shares, each representing one-tenth of a share of 7 7/8% Cumulative
Preferred Stock, Series F (liquidation preference $25 per Depositary Share)
Name of each exchange on which registered:
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Each class is registered on the Boston Stock Exchange and on the New York Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of shares of common Number of shares of common
stock held by non-affiliates of Registrant stock outstanding as of
as of March 5, 1996 March 5, 1996
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$5,352,516,341 110,507,016
Documents Incorporated by Reference:
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1. Pertinent extracts from Registrant's 1995 Annual Report to Stockholders
(Parts I, II and IV).
2. Pertinent extracts from Registrant's Proxy Statement in connection with the
Registrant's 1996 Annual Meeting of Stockholders (Part III).
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INDEX
Name of Item Page
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PART I
Item 1. Business................................................. 3
Statistical Disclosure by Bank Holding Companies....... 14
Item 2. Properties............................................... 20
Item 3. Legal Proceedings........................................ 20
Item 3A. Executive Officers of the Corporation.................... 22
Item 4. Submission of Matters to a Vote of Security Holders...... 23
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................... 24
Item 6. Selected Financial Data.................................. 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 24
Item 8. Financial Statements and Supplementary Data.............. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant....... 25
Item 11. Executive Compensation................................... 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 26
Item 13. Certain Relationships and Related Transactions........... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................ 26
SIGNATURES
Signatures............................................... II-1
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PART I
Item 1. Business.
THE CORPORATION
Bank of Boston Corporation (the "Corporation") is a registered bank
holding company, organized in 1970 under Massachusetts law with both national
and international operations. The Corporation, through its subsidiaries, is
engaged in providing a wide variety of personal, corporate and global banking
services to individuals, corporate and institutional customers, governments and
other financial institutions. The Corporation, together with its subsidiaries,
operates a network of 500 offices across the U.S. and more than 100 offices in
23 countries in Latin America, Europe and Asia. As of December 31, 1995,
approximately 72% of the Corporation's total loan volume consisted of domestic
loans and leases, with the balance overseas. As of December 31, 1995, the
Corporation's subsidiaries employed, in the aggregate, 17,881 full-time
equivalent employees in their domestic and foreign operations.
The Corporation's principal subsidiary is The First National Bank of
Boston ("FNBB"), a national banking association with its headquarters in
Massachusetts. Other major banking subsidiaries of the Corporation are Bank of
Boston Connecticut ("BKB Connecticut") and Rhode Island Hospital Trust National
Bank ("Hospital Trust").
The executive office of the Corporation and the head office of FNBB are
located at 100 Federal Street, Boston, Massachusetts 02110 (Telephone (617) 434-
2200).
Agreement to Acquire BayBanks, Inc.
On December 12, 1995, the Corporation and BayBanks, Inc. ("BayBanks")
entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant
to which a wholly owned subsidiary of the Corporation will be merged with and
into BayBanks (the "Merger") and BayBanks will become a subsidiary of the
Corporation. BayBanks, a Boston-based bank holding company, had total assets of
$12 billion as of December 31, 1995.
In accordance with the terms of the Merger Agreement, at closing each
outstanding share of BayBanks common stock, par value $2.00 per share (the
"BayBanks Common Stock"), except for shares (i) held directly or indirectly by
the Corporation, other than in a fiduciary capacity or as a result of debts
previously contracted, or (ii) held by BayBanks as treasury stock, or
(iii) shares held by stockholders as to which dissenters' rights have been
exercised, will be converted into the right to receive 2.2 shares of the common
stock of the Corporation, par value $2.25 per share. The Merger is intended to
be a tax-free reorganization and is expected to be accounted for as a pooling of
interests.
Completion of the acquisition is subject to certain conditions, including
approval of the holders of two-thirds of the shares of BayBanks common stock and
of the holders of the majority of the Corporation's Common Stock, the approval
of regulatory authorities, and other closing conditions customary in this type
of transaction. The Merger Agreement is subject to termination in certain
circumstances, including if the merger is not consummated by December 31, 1996.
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Simultaneously with the execution of the Merger Agreement, on December 12,
1995, the Corporation and BayBanks entered into reciprocal stock option
agreements (the "Stock Option Agreements") pursuant to which BayBanks granted
the Corporation an option to purchase up to 3,907,120 shares of BayBanks common
stock at a price of $83.75 per share and the Corporation granted to BayBanks an
option to purchase up to 22,400,761 shares of the Corporation's Common Stock at
a price of $47.50 per share (the "Options"), in each case equaling 19.9% of the
outstanding shares of the respective granting company's stock. The Options are
exercisable upon the occurrence of certain events described in the Stock Option
Agreements.
BUSINESS OF THE CORPORATION
The Corporation's business is generally focused in the areas of personal
banking, corporate banking and global banking. The Corporation's management is
comprised of the Chairman's Office, which consists of Chairman, President and
Chief Executive Officer Charles K. Gifford, Vice Chairman Edward A. O'Neal, and
Vice Chairman, Chief Financial Officer and Treasurer William J. Shea, and a
Corporate Working Committee. The Corporation's business is made up of core
business units and corporate-wide support areas, each led by an executive with
authority to operate and manage his or her respective area. These executives,
along with the members of the Chairman's Office, comprise the Corporate Working
Committee. These core business and corporate wide support areas work closely
with one another and each is linked to one of the members of the Chairman's
Office. Following the consummation of the BayBanks Merger, the combined
company's principal bank will be called BayBank of Boston, N.A. The combined
organization will conduct consumer banking business under the "BayBank" name and
corporate and international business under the "Bank of Boston" name. William
M. Crozier, Jr., Chairman and President of BayBanks, will become Chairman of the
Board of Directors of the Corporation. Three other directors of BayBanks also
will join the Corporation's Board. Charles K. Gifford, Chairman and Chief
Executive Officer of the Corporation, will be President and Chief Executive
Officer and will add the title of Chairman when Mr. Crozier retires in 1998.
In order to provide flexibility to respond to future business needs and
opportunities, the Corporation will be seeking approval from its stockholders at
its 1996 Annual Meeting to increase the authorized shares of the Corporation's
Common Stock from 200,000,000 shares to 300,000,000 shares and to change the par
value of the Corporation's Common Stock from $2.25 to $1.50 per share. If
approved, the additional authorized shares would be available for issuance by
the Corporation in connection with possible investment opportunities,
acquisitions of other companies or for other corporate purposes such as the
raising of capital, the issuance of stock dividends, or the issuance of shares
pursuant to the Corporation's dividend reinvestment plan, employee benefit plans
and incentive compensation plans.
As previously reported, in March 1995, the Board of Directors of the
Corporation approved a $150 million repurchase program with respect to the
Corporation's Common Stock. During 1995 and the first quarter of 1996, the
Corporation completed this program with the repurchase of shares of the
Corporation's Common Stock at a total cost of $148.1 million. All of the shares
either have been or will be reissued in connection with various employee benefit
programs and acquisitions.
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For discussions of the Corporation's business activities, including its
lending activities, its cross-border outstandings and the management of its off-
balance sheet exposure, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 19 through 44 of the Corporation's
1995 Annual Report to Stockholders, which pages are included in Exhibit 13
hereto and which discussions are incorporated herein by reference.
Activities in which the Corporation and its subsidiaries are presently
engaged or which they may undertake in the future are subject to certain
statutory and regulatory restrictions. Banks and bank holding companies are
extensively regulated under both federal and state law. There are various legal
limitations upon the extent to which bank subsidiaries of the Corporation can
finance or otherwise supply funds to the Corporation or certain of its
affiliates. See "Supervision and Regulation."
For financial information on the Corporation's revenue, income and average
assets attributable to its domestic and international operations, see "Segment
Information" which appears in Note 24 to the Financial Statements and "Cross-
Border Outstandings" and "Emerging Markets Countries," which appear on pages 35
through 38 of the Corporation's 1995 Annual Report to Stockholders, which pages
are included in Exhibit 13 hereto and which information is hereby incorporated
by reference.
COMPETITION AND INDUSTRY CONSOLIDATION
The Corporation's subsidiaries compete with other major financial
institutions, including commercial banks, investment banks, mutual savings
banks, savings and loan associations, credit unions, consumer finance companies,
money market funds and other nonbank institutions, such as insurance companies,
major retailers, brokerage firms, and investment companies in New England,
throughout the United States, and internationally. Principal methods of
competing effectively in the financial services industry are to improve customer
service through the quality and range of services available, to improve
efficiencies and to price services competitively.
One outgrowth of the competitive environment discussed above has been
significant consolidation within the financial services industry both on a
national and regional level. The Corporation engages on an ongoing basis in
reviewing and discussing strategic initiatives focused on leveraging its core
competencies over attractive markets, including the expansion of its domestic
personal banking and global banking businesses, increasing the capital markets
activities of its corporate banking business, the divestiture of non-core
business units and the formation of strategic alliances. Consistent with this
strategy, in 1995 the Corporation engaged in the following transactions in
addition to the BayBanks acquisition:
On October 11, 1995, the Corporation announced a definitive agreement to
acquire The Boston Bancorp ("Bancorp"), the holding company of South Boston
Savings Bank, a Massachusetts chartered savings bank with approximately $1.3
billion in deposits at October 31, 1995. The transaction will be a tax free
exchange of common stock and the purchase price is currently estimated at
approximately $230 million. The transaction, which will be accounted for as a
purchase, is currently anticipated to close in the middle of 1996, subject to
the approval by federal and state bank regulators and the stockholders of
Bancorp.
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During the first quarter of 1995, the Corporation completed its acquisition
of Ganis Credit Corporation ("Ganis"), a privately-held consumer finance company
headquartered in Newport Beach, California. Ganis specializes in collateralized
lending for recreational vehicle and boats and had approximately $540 million in
consumer loans outstanding at December 31, 1995. In July 1995, Fidelity
Acceptance Corporation, the Corporation's national consumer finance company,
completed the acquisition of approximately $110 million in consumer loans and
assumed 46 branches of Century Acceptance Corporation, a national consumer
finance company based in Kansas City, Missouri.
Effective in the fourth quarter of 1995, the Corporation formed a joint
venture with Boston Financial Data Services (a joint venture of State Street
Bank and Trust Company and DST Systems, Inc.), combining their respective stock
transfer businesses into a single entity that is 50% owned by each party.
On March 15, 1996 the Corporation announced that it had closed its
previously announced transaction relating to the sale of its mortgage banking
business.
On December 11, 1995, two equity investment firms, Thomas H. Lee Company
("Lee") and Madison Dearborn Partners ("Madison"), entered into an agreement to
acquire the Corporation's mortgage banking subsidiary, BancBoston Mortgage
Corporation ("BBMC") with the Corporation retaining a 45% interest. The new
independent mortgage company, named HomeSide, Inc., will be positioned to
compete more effectively in a consolidating mortgage banking industry.
On March 4, 1996 HomeSide, Inc. signed a definitive agreement with Barnett
Banks, Inc. relating to the purchase of Barnett Mortgage Company. This
transaction is expected to close in the 2nd quarter of 1996.
Under the agreement relating to the sale of BBMC, the Corporation agreed to
receive a fixed price of $225 million and maintain a hedging program designed to
protect the enterprise value of BBMC. On March 15, 1996, this transaction closed
and the Corporation realized a net gain after taxes of approximately $40
million. An additional after-tax gain of approximately $30 million is expected
to be reported in the second quarter of 1996. These gains are expected to be
substantially offset by an after-tax net hedging loss of approximately $70
million to be recorded in the first quarter of 1996.
These losses arise from hedge contracts purchased by the Corporation which
are designed to protect the value of the Corporation's mortgage servicing assets
and the value of its investment in BBMC. These values are affected by the level
of prepayments made by mortgage holders resulting from changes in expected
mortgage rates. The value of these contracts fluctuates inversely with the value
of the mortgage servicing assets. Due to the sharp increase in long-term
interest rates in the first quarter of 1996, the value of these contracts has
declined. Concurrently, the value of the mortgage servicing assets and the
amount of gain recognized and to be recognized by the Corporation on the
disposition of BBMC has increased. This is caused by the fixed price sale nature
of this transaction and the fact that the Corporation's investment in BBMC has
declined due to the hedging results.
Early in the first quarter of 1995, the Corporation completed the sale of
two of its affiliate banks, Bank of Vermont and Casco Northern Bank, N.A.,
resulting in a pre-tax gain of approximately $75 million, or $30 million net of
tax.
In October 1995, the Corporation sold its corporate trust business to State
Street Bank and Trust Company, resulting in a net pre-tax gain of $20 million,
or $12 million net of tax.
The Corporation intends to continue to explore strategic opportunities as
they arise in order to expand its businesses in its selected markets and improve
service to its customers.
In 1994, federal legislation was enacted which permits certain interstate
banking transactions. It is anticipated that this legislation may facilitate
consolidation within financial institutions that currently have separate
operations in two or more states and in the financial services industry. See
"Supervision and Regulation" for a discussion of the impact of this and other
legislation upon the Corporation and its subsidiaries.
SUPERVISION AND REGULATION
The business in which the Corporation and its subsidiaries are engaged is
subject to extensive supervision, regulation and examination by various bank
regulatory authorities and other governmental agencies in the states and
countries where the Corporation and its subsidiaries operate. The supervision,
regulation and examination to which the Corporation and its subsidiaries are
subject are often intended by the regulators primarily for the protection
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of depositors or are aimed at carrying out broad public policy goals rather than
for the protection of security holders.
Several of the more significant regulatory provisions applicable to banks
and bank holding companies to which the Corporation and its subsidiaries are
subject are discussed below along with certain regulatory matters concerning the
Corporation and its bank subsidiaries. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory provisions. Any change in
applicable law or regulation may have a material effect on the business and
prospects of the Corporation and its subsidiaries.
The Corporation
The Corporation, as a bank holding company under the Bank Holding Company
Act of 1956, as amended, (the "BHCA"), is registered with the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") and is regulated
under the provisions of the BHCA. The BHCA requires every bank holding company
to obtain the prior approval of the Federal Reserve Board before it may acquire
substantially all of the assets of any bank, or ownership or control of any
voting shares of any bank, if, after such acquisition, it would own or control,
directly or indirectly, more than 5% of the voting shares of such bank.
Under the BHCA, the Corporation is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in any business
other than that of banking, managing or controlling banks or furnishing services
to, or acquiring premises for, its affiliated banks. The Corporation may,
however, engage in, and own voting shares of companies engaging in certain
activities determined by the Federal Reserve Board, by order or by regulation,
to be so closely related to banking or to managing or controlling banks "as to
be a proper incident thereto." The location of such "nonbank" subsidiaries of
the Corporation is not restricted geographically under the BHCA. The
Corporation is required by the BHCA to file with the Federal Reserve Board
periodic reports and such additional reports as the Federal Reserve Board may
require. The Federal Reserve Bank of Boston (the "Federal Reserve") performs
examinations of the Corporation and certain of its subsidiaries.
Since the Corporation is also a bank holding company under the laws of
Massachusetts, the Commissioner of Banks for The Commonwealth of Massachusetts
(the "Massachusetts Commissioner") has authority to require certain reports from
the Corporation from time to time and to examine the Corporation and each of its
subsidiaries other than national banking associations. Prior approval of the
Massachusetts Board of Bank Incorporation (the "BBI") also may be required
before the Corporation may acquire any additional commercial banks located in
Massachusetts. Acquisitions by the Corporation of non-Massachusetts banks or
bank holding companies may be subject to the prior approval by both the
Massachusetts and the applicable state or federal banking regulators.
Massachusetts has an interstate bank acquisition law which permits banking
organizations outside Massachusetts to acquire Massachusetts banking
organizations if the state law of the acquirer permits acquisitions of banking
organizations in that state by Massachusetts-based banking organizations.
Legislation has been proposed in Massachusetts to provide for an early opt-in to
the federal interstate banking legislation. See "Legislation" below with respect
to the federal interstate banking legislation enacted in 1994.
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Massachusetts has a business combinations law which provides that if any
acquirer buys 5% or more of a target company's stock without the prior approval
of the target company's board of directors, it generally may not (i) complete
the acquisition through a merger, (ii) pledge or sell any assets of the target
company, or (iii) engage in other self-dealing transactions with the target
company for a period of three years. The prior board approval requirement does
not apply if the acquirer buys at least 90% of the target company's outstanding
stock in the transaction in which it crosses the 5% threshold or if the
acquirer, after crossing the threshold, obtains the approval of the target
company's board of directors and two-thirds of the target company's stock held
by persons other than the acquirer. This legislation automatically applies to
Massachusetts corporations, including the Corporation, which did not elect to
"opt out" of the statute. Massachusetts law also provides for classified boards
of directors for most public companies incorporated in Massachusetts, unless the
company elected to "opt out" of the law. As a result of this law, the
Corporation's Board of Directors is divided into three classes of Directors and
the three-year terms of the classes are staggered.
Other Massachusetts legislation exists which is intended to provide limited
anti-takeover protection to certain Massachusetts corporations by preventing an
acquirer of certain percentages of such corporation's stock from obtaining
voting rights in such stock unless the corporation's other stockholders
authorize such voting rights. The legislation automatically applies to certain
Massachusetts corporations which have not elected to "opt out" of the statute.
The Corporation, by vote of its Board of Directors, has "opted out" of the
statute's coverage.
In June 1990, the Board of Directors of the Corporation adopted a
stockholder rights agreement (the "Rights Agreement") providing for a dividend
of one preferred stock purchase right for each outstanding share of common stock
of the Corporation (the "Rights"). Under certain circumstances, the Rights
would enable stockholders to purchase common stock of the Corporation or of an
acquiring Corporation at a substantial discount. The dividend was distributed
on July 12, 1990 to stockholders of record on that date. Holders of shares of
the Corporation's common stock issued subsequent to that date receive the Rights
with their shares. The Rights trade automatically with shares of the
Corporation's common stock and become exercisable only under certain
circumstances.
The purpose of the Rights Agreement is to encourage potential acquirers to
negotiate with the Corporation's Board of Directors prior to attempting a
takeover and to provide the Board with leverage in negotiating on behalf of all
stockholders the terms of any proposed takeover. The Rights may have certain
anti-takeover effects. The Rights should not interfere, however, with any
merger or other business combination approved by the Board of Directors. The
Rights Agreement was amended on December 12, 1995, to exclude the BayBanks
merger agreement, the stock option agreement granted by the Corporation to
BayBanks in connection with the merger agreement, and all transactions
contemplated thereby, from the scope of the Rights Agreement. For a further
discussion of the Corporation's Rights Agreement, see the description of the
Rights set forth in the Corporation's registration statement on Form 8-A
relating to the Rights (including the Rights Agreement, dated as of June 28,
1990, between the Corporation and FNBB, as Rights Agent, which is attached as an
exhibit to the Form 8-A) and the amendment thereto, which are incorporated
herein by reference.
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The Corporation's Bank Subsidiaries
General
The Corporation's bank subsidiaries that are national banks are subject to
the supervision of, and are regularly examined by the Office of the Comptroller
of the Currency (the "OCC"). The Corporation's state-chartered bank subsidiary
is subject to the supervision of, and is regularly examined by, the Federal
Deposit Insurance Corporation (the "FDIC") as well as by its state bank
regulator. The Corporation's subsidiary banks' domestic deposits are insured by
the Bank Insurance Fund of the FDIC to the extent allowed by law and,
accordingly, the banks are subject to the regulations of the FDIC. As members
of the Federal Reserve System, the nationally chartered banks are also subject
to regulation by the Federal Reserve Board. Hospital Trust, as a member of the
Federal Home Loan Bank of Boston, is also subject to the regulations of the
Federal Housing Finance Board.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a bank can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the
default of a commonly controlled bank or (ii) any assistance provided by the
FDIC to a commonly controlled bank in danger of default. The term "default" is
defined as the appointment of a conservator or receiver for such bank and "in
danger of default" as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance. In
addition, FIRREA broadened the enforcement powers of the federal banking
agencies, including the power to impose fines and penalties over all financial
institutions. Further, under FIRREA the failure to meet capital guidelines
could subject a financial institution to a variety of regulatory actions,
including the termination of deposit insurance by the FDIC.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
also provided for expanded regulation of financial institutions. Under FDICIA,
banks are placed in one of five capital categories, ranging from "well-
capitalized" to "critically undercapitalized," for which the federal banking
agencies have established specific capital ratio levels. Pursuant to the
agencies' regulations, an institution is considered "well capitalized" if it has
a total risk-based capital ratio of at least 10%, a tier 1 risk-based capital
ratio of at least 6%, a leverage capital ratio of at least 5% and is not subject
to a cease and desist order, formal agreement, capital directive, or prompt
corrective action directive that requires it to achieve or maintain a higher
level of capital. At December 31, 1995, all of the Corporation's banking
subsidiaries met the requirements of the "well capitalized" category. The
capital categories of the Corporation's bank subsidiaries are determined solely
for purposes of applying FDICIA's provisions, and such capital categories may
not constitute an accurate representation of the overall financial condition or
prospects of any of the Corporation's bank subsidiaries.
Other Regulatory Restrictions
The FDIC's deposit insurance assessments are based on a risk-based system.
The risk-based system places a bank in one of nine risk categories, principally
on the basis of its capital level and an evaluation of the bank's risk to the
Bank Insurance Fund, and bases
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premiums on the probability of loss to the FDIC with respect to each individual
bank. During 1995, following the attainment of the BIF reserve ratio required by
FDICIA, the FDIC reduced the assessment premiums for the BIF risk-based system
to provide that the premiums assessable per $100 of insured deposits were to
range from $0 to $.27. Under the reduced assessment rate schedule, institutions
with the best risk assessment ratings will only have to pay the statutory
minimum assessment of $2,000 per year.
The Corporation's domestic subsidiary banks and the subsidiaries of such
banks are subject to a large number of other regulatory restrictions, including
certain restrictions upon: (i) any extensions of credit by such banks to, from
or for the benefit of the Corporation and the Corporation's nonbank affiliates
(collectively with the Corporation, the "Affiliates"), (ii) the purchase of
assets or services from or the sale of assets or the provision of services to
Affiliates, (iii) the issuance of a guarantee, acceptance or letter of credit on
behalf of or for the benefit of Affiliates, (iv) the purchase of securities of
which an Affiliate is a principal underwriter during the existence of the
underwriting and (v) investments in stock or other securities issued by
Affiliates or acceptance thereof as collateral for an extension of credit. The
Corporation and all of its subsidiaries, including FNBB, are also subject to
certain restrictions with respect to engaging in the issue, flotation,
underwriting, public sale or distribution of certain types of securities. In
addition, under both the BHCA and regulations which have been issued by the
Federal Reserve Board, the Corporation and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of any property or the furnishing of any service. In
operations in other countries, the Corporation and FNBB are also subject to
restrictions imposed by the laws and banking authorities of such countries.
The Corporation's bank subsidiaries are also required to maintain cash
reserves against deposits and are subject to restrictions, among others, upon
(i) the nature and amount of loans which they may make to a borrower; (ii) the
nature and amount of securities in which they may invest; (iii) the amount which
may be invested in bank premises; (iv) the geographic location of their
branches; and (v) the nature and extent to which they can borrow money.
Dividends
The payment of dividends by the Corporation is determined by the Board of
Directors based on the Corporation's liquidity, asset quality profile, capital
adequacy, and recent earnings history, as well as economic conditions and other
factors, including applicable government regulations and policies and the amount
of dividends payable to the Corporation by its subsidiaries.
In 1995, the aggregate dividends declared by the Corporation on its common
and preferred stock were approximately $179 million. For each of the first two
quarters of 1995, a dividend of $.27 per share was declared and paid on the
Corporation's common stock. In each of the last two quarters of 1995, the
Corporation declared and paid a dividend on its common stock of $.37 per share.
The Corporation is a legal entity separate and distinct from its subsidiary
banks and its other nonbank subsidiaries. The Corporation's revenues (on a
parent company only basis) result primarily from interest and dividends paid to
the Corporation by its subsidiaries. The right of the Corporation, and
consequently the right of creditors and stockholders of the Corporation, to
participate in any distribution of the assets or earnings of any subsidiary
through the payment
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of such dividends or otherwise is necessarily subject to the prior claims of
creditors of the subsidiary (including depositors, in the case of banking
subsidiaries), except to the extent that claims of the Corporation in its
capacity as a creditor may be recognized.
It is the policy of the OCC and the Federal Reserve Board that banks and
bank holding companies, respectively, should pay dividends only out of current
earnings and only if after paying such dividends the bank or bank holding
company would remain adequately capitalized. Federal banking regulators also
have authority to prohibit banks and bank holding companies from paying
dividends if they deem such payment to be an unsafe or unsound practice. In
addition, it is the position of the Federal Reserve Board that a bank holding
company is expected to act as a source of financial strength to its subsidiary
banks.
Various federal and state laws, regulations and policies limit the ability
of the Corporation's subsidiaries to pay dividends to the Corporation. Federal
banking law requires the approval of the OCC if the aggregate total of the
dividends declared by any of the Corporation's national bank subsidiaries in any
calendar year will exceed the bank's net profits, as defined by applicable
regulation, for that year combined with retained net profits for the preceding
two years. Also, state law requires the approval of state bank regulatory
authorities if the dividends declared by state banks exceed similar prescribed
limits. In 1995, an aggregate of approximately $364 million of dividends were
declared and paid by the Corporation's subsidiaries. Included in the amount of
dividends paid to the Corporation by its subsidiaries was $205 million received
from one of the Corporation's subsidiary bank holding companies in connection
with its sale of Casco Northern Bank, N.A. The payment of any future dividends
by the Corporation's subsidiaries will be determined based on a number of
factors, including the subsidiary's liquidity, asset quality profile, capital
adequacy and recent earnings history. Information concerning the Corporation
and its bank subsidiaries with respect to dividends is set forth in Note 13 of
the Notes to Financial Statements in the Corporation's 1995 Annual Report to
Stockholders which is included in Exhibit 13 hereto and which discussion is
incorporated herein by reference. See the related discussions set forth below
in "Capital" and "Legislation."
Capital
Information concerning the Corporation and its bank subsidiaries with
respect to capital is set forth under the caption "Capital Management" in the
Corporation's 1995 Annual Report to Stockholders on pages 42 and 43, which pages
are included in Exhibit 13 hereto and which discussion is incorporated herein by
reference. See also "Legislation" below and "Dividends" above.
Legislation
In addition to extensive existing government regulation, laws and
regulations in the states and countries where the Corporation and its
subsidiaries do business can change in unpredictable ways, often with
significant effects on the way in which financial institutions may conduct
business. The enactment of banking legislation such as FIRREA and FDICIA has
affected the banking industry by, among other things, broadening the powers of
the federal banking agencies in a number of areas. Other legislation which has
been enacted in recent years has substantially increased the level of
competition among commercial banks, thrift institutions and non-banking
institutions, including insurance companies, brokerage firms, mutual funds,
investment banks and major retailers.
-11-
<PAGE>
In 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the
"Interstate Act") was enacted. The Interstate Act's provisions, among other
things: (i) permit bank holding companies to acquire control of banks in any
state beginning September 28, 1995, subject to (a) specified maximum national
and state deposit concentration limits; (b) any applicable state law provisions
requiring that the acquired bank has to have been in existence for a specified
period of up to 5 years; (c) any applicable nondiscriminatory state provisions
that make an acquisition of a bank contingent upon a requirement to hold a
portion of such bank's assets available for call by a state sponsored housing
entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by
banks in different states, including branching through bank mergers, beginning
June 1, 1997, subject to the provisions noted in (i) and to any state laws that
opt in as of an earlier date or opt out of the provision entirely;
(iii) authorize states to enact legislation permitting interstate de novo
branching; and (iv) provide for certain additional limitations on foreign bank
activities.
The full impact of the Interstate Act will not be completely known until the
enactment and implementation by the various federal banking agencies of the
underlying regulations and actions required by the Act. However, it is
anticipated that the Interstate Act may facilitate consolidation within
financial institutions that currently have separate operations in two or more
states and in the financial services industry.
Additional legislation which is considered from time to time could affect
the business of the Corporation. See also "Supervision and Regulation -- the
Corporation" discussed above.
Regulatory Matters
As previously reported, in January 1994, the Securities and Exchange
Commission (the "Commission") commenced an administrative proceeding against the
Corporation related to the Commission's claim that the Corporation's second
quarter 1989 Form 10-Q did not disclose known trends or uncertainties with
respect to the Corporation's credit portfolio, and specifically, its domestic
commercial real estate portfolio. The Corporation reported a significant loss
in the third quarter of 1989 as a result of adding to its reserve for credit
losses, primarily due to deterioration in the credit quality of its domestic
commercial real estate portfolio. A hearing before an administrative law judge
was conducted in May 1994 and the judge issued a decision finding for the
Commission on December 22, 1995. The decision included an order that prohibits
the Corporation from committing or causing any violations of Section 13(a) of
the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The order became
effective on February 26, 1996. The decision and order will not result in any
monetary penalties to the Corporation.
GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS
In 1995, U.S. economic growth slowed to a more moderate but sustainable pace
and, for the fifth consecutive year, inflation rose by 3 percent or less. Both
developments reflect the Federal Reserve's 'pre-emptive' interest rate increases
of 1994 and early 1995. Economic expansion also continued in New England, but
at an even more modest pace than for the nation as a whole. Since the state of
the regional economy reflects structural as well as cyclical forces, it is
expected that New England will continue to lag the nation in job growth, as it
has since the late 1980's.
-12-
<PAGE>
The Corporation's earnings and business are also affected by the policies of
various government and regulatory authorities in New England and throughout the
United States, as well as foreign governments and international agencies,
including, in the United States, the Federal Reserve Board. Important functions
of the Federal Reserve Board, in addition to those enumerated under "Supervision
and Regulation" above, are to regulate the supply of money and of bank credit,
to deal with general economic conditions within the United States and to be
responsive to international economic conditions. From time to time, the Federal
Reserve Board and the central banks of foreign countries have taken specific
steps to effect changes in the value of the United States dollar in foreign
currency markets as well as to control domestic inflation and to control the
country's money supply. The instruments of monetary policy employed by the
Federal Reserve Board for these purposes (including interest rates and the level
of cash reserves banks are required to maintain against deposits) influence, in
various ways the interest rates paid on interest bearing liabilities and the
interest received on earning assets, as well as the overall level of bank loans,
investments and deposits. Inflation has generally had a minimal impact on the
Corporation because substantially all of its assets and liabilities are of a
monetary nature and a large portion of its operations are based in the United
States, where inflation has been low. Prospective domestic and international
economic and political conditions and the policies of the Federal Reserve Board,
as well as other domestic and international regulatory authorities, may effect
the future business and earnings of the Corporation.
The Corporation will continue to monitor the economic situation in those
countries in which the Corporation has local operations or cross-border
exposure, particularly in Argentina and Brazil. Additional information with
respect to the countries where the Corporation has local operations or cross-
border exposure is included in "Cross-Border Outstandings" and "Emerging Markets
Countries" on pages 35 through 38 of the Corporation's 1995 Annual Report to
Stockholders, which pages are included in Exhibit 13 hereto and which
discussions are incorporated herein by reference.
This section should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" contained in the
Corporation's 1995 Annual Report to Stockholders on pages 19 through 44, which
pages are included in Exhibit 13 hereto and which discussion is incorporated
herein by reference.
-13-
<PAGE>
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The information set forth below is being provided in accordance with the
Securities Exchange Act of 1934, Industry Guide 3.
Average Balances and Interest Rates
The information required by this item is presented on pages 45 through 47 of
the Corporation's 1995 Annual Report to Stockholders, which pages are included
in Exhibit 13 hereto, and such information is incorporated herein by reference.
Change in Net Interest Revenue-Volume and Rate Analysis: 1995 compared with
1994, and 1994 compared with 1993
The information required by this item is presented on page 48 of the
Corporation's 1995 Annual Report to Stockholders, which page is included in
Exhibit 13 hereto, and such information is incorporated herein by reference.
Securities
The following table sets forth the carrying values of securities held to
maturity on the dates indicated:
<TABLE>
<CAPTION>
December 31 1995 1994 1993
<S> <C> <C> <C>
(In millions)
U.S. Treasury $ 4 $ 12 $ 317
U.S. government agencies
and corporations -
Mortgage-backed securities 523 1,449 1,046
States and political subdivisions 5 30 29
Foreign debt securities 11 123 109
Other equity securities 70 89 68
----- ----- -----
$ 613 $ 1,703 $ 1,569
===== ===== =====
</TABLE>
The following table sets forth the carrying values of securities available for
sale on the dates indicated:
<TABLE>
<CAPTION>
December 31 1995 1994 1993
(In millions)
<S> <C> <C> <C>
U.S. Treasury $ 665 $ 1,487 $ 110
U.S. government agencies
and corporations -
Mortgage-backed securities 3,037 766 498
States and political subdivisions 21
Foreign debt securities 685 384 490
Other debt securities 290 142 150
Marketable equity securities 152 72 74
Other equity securities 164 146 116
----- ----- -----
$ 5,014 $ 2,997 $ 1,438
===== ===== =====
</TABLE>
-14-
<PAGE>
The following tables set forth the relative maturities and weighted average
interest rates of securities available for sale and held to maturity at December
31, 1995, excluding equity securities. Certain securities, such as mortgage-
backed securities, may not become due at a single maturity date. Such
securities have been classified within the category that represents the due
dates for the majority of the instrument. Rates for states and political
subdivisions are stated on a fully taxable equivalent basis assuming a 35%
federal income tax rate, adjusted for applicable state and local income taxes
net of related federal tax benefit.
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
(Dollars in millions)
U.S. Treasury $ 652 6.3% $ 10 6.7% $ 3 7.1% $ 665 6.3%
U.S. government agencies
and corporations -
Mortgage-backed
securities 29 5.4 944 7.0 790 7.0 $ 1,274 6.3% 3,037 6.7
States and political
subdivisions 8 3.6 4 11.3 9 9.3 21 7.7
Foreign debt securities 233 8.1 337 13.7 100 12.8 15 11.1 685 11.6
Other debt securities 31 12.3 67 13.3 187 10.3 5 9.9 290 11.2
--- ----- ----- ----- -----
Total carrying value $ 953 6.9% $ 1,362 9.0% $ 1,089 8.1% $ 1,294 6.3% $ 4,698 7.6%
=== ===== ===== ===== =====
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
(Dollars in millions)
U.S. Treasury $ 4 5.4% $ 4 5.4%
U.S. government agencies
and corporations -
Mortgage-backed
securities $ 110 6.5% $ 197 7.1% $ 216 6.1% 523 6.5
States and political
subdivisions 5 3.4 5 3.4
Foreign debt securities 2 6.9 5 5.6 3 6.8 1 7.7 11 6.3
--- ----- ----- ----- -----
Total carrying value $ 11 4.9% $ 115 6.4% $ 200 7.1% $ 217 6.1% $ 543 6.5%
=== ===== ===== ===== =====
</TABLE>
Loans and Leases
A portion of the information required by this item is presented on page 29 of
the Corporation's 1995 Annual Report to Stockholders, which page is included in
Exhibit 13 hereto, and such information is incorporated herein by reference.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the maturities and interest rate sensitivity, based
on original contractual terms, of the Corporation's loans at December 31, 1995,
exclusive of domestic office loans secured by 1-4 family residential properties,
domestic office loans to individuals and lease financing:
-15-
<PAGE>
<TABLE>
<CAPTION>
After One
But
Within Within After
December 31, 1995 One Year Five Five Total
(In millions) Years Years
<S> <C> <C> <C> <C>
Commercial, industrial and financial $ 5,024 $ 4,171 $ 2,226 $11,421
Real estate:
Construction 211 117 8 336
Other commercial 1,029 1,142 99 2,270
Overseas offices 7,246 905 190 8,341
------ ----- ----- -------
$ 13,510 $ 6,335 $ 2,523 $22,368
------ ----- ----- -------
Loans with predetermined interest rates $ 3,215 $ 1,720 $ 342 $ 5,277
Loans with floating interest rates 10,295 4,615 2,181 17,091
------ ----- ----- -------
$ 13,510 $ 6,335 $ 2,523 $22,368
====== ===== ===== =======
</TABLE>
The Corporation does not have an automatic renewal policy for maturing loans.
Rather, loans are renewed at the maturity date only at the request of those
customers who are deemed to be creditworthy by the Corporation. Additionally,
the Corporation reviews such requests in substantially the same manner as
applications by new customers for extensions of credit. The maturity dates and
interest terms of renewed loans are based, in part, upon the needs of the
individual customer and the Corporation's credit review and evaluation of
current and future economic conditions. Since these factors have varied
considerably, and will most likely continue to do so, the Corporation believes
it is impracticable to estimate the amount of loans in the portfolio which may
be renewed in the future.
Nonaccrual Loans and Leases
The majority of the information required by this item is presented on pages 31
and 32 of the Corporation's 1995 Annual Report to Stockholders, which pages are
included in Exhibit 13 hereto, and such information is incorporated herein by
reference.
The following table presents a five-year analysis of the Corporation's loans and
leases that were over ninety days past due and remained on accrual status:
<TABLE>
<CAPTION>
DECEMBER
31
- ---------------------------------------------------------------------------------
(In millions) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Loans and leases over ninety days past $ 16 $ 13 $ 7 $ 6 $ 3
due and on accrual status..............
- ---------------------------------------------------------------------------------
</TABLE>
Renegotiated Loans
Loans are renegotiated when the Corporation determines that it will ultimately
receive greater economic value by revising the terms than through foreclosure,
liquidation or bankruptcy. Candidates for renegotiation must meet specific
guidelines and undergo extensive due diligence reviews. Once a renegotiation
takes place, the loan is subject to the accounting and disclosure rules
prescribed by SFAS No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings."
Renegotiated loans at the end of each of the last five years were as follows:
<TABLE>
<CAPTION>
December 31
(Dollars in millions) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Renegotiated loans .................. $ 27 $ 68 $ 225 $ 401 $ 353
===== ===== ===== ===== =====
</TABLE>
-16-
<PAGE>
Cross-Border Outstandings
The information required by this item is presented on pages 35 through 37 of the
Corporation's 1995 Annual Report to Stockholders, which pages are included in
Exhibit 13 hereto, and such information is incorporated herein by reference.
Reserve for Credit Losses: Allocation of Reserve for Credit Losses and Analysis
of Reserve for Credit Losses
The majority of the information required by this item is presented on pages 32
through 34 of the Corporation's 1995 Annual Report to Stockholders, which pages
are included in Exhibit 13 hereto, and such information is incorporated herein
by reference.
Allocation of Reserve for Credit Losses
The following table presents the allocation of the reserve for credit losses by
loan and lease financing category, with the excess between the total reserve and
the amounts specifically allocated to each loan category identified as
''unallocated.'' The unallocated reserve is part of the general reserve of the
Corporation and, as such, is available for both Domestic and International
credit losses. The percentage of loans outstanding in each category to total
loans is presented on page 31 of the Corporation's 1995 Annual Report to
Stockholders, which page is included in Exhibit 13 hereto, and such information
is incorporated herein by reference.
<TABLE>
<CAPTION>
(dollars in millions)
DECEMBER 31 1995 1994 1993 1992
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES
Commercial, industrial and financial . $182 24.7% $253 37.2% $246 31.9% $273 29.5%
Commercial real estate, including
construction......................... 95 12.9 136 20.0 234 30.3 320 34.7
Consumer related loans
Secured by 1-4 family
residential properties............. 20 2.7 20 3.0 25 3.2 27 2.9
Other................................ 98 13.3 74 10.9 61 8.0 60 6.5
Lease financing......................... 22 3.0 21 3.0 18 2.4 4 .5
---- ----- ---- ----- ---- ----- ---- -----
417 56.6 504 74.1 584 75.8 684 74.1
INTERNATIONAL.......................... 168 22.8 85 12.5 86 11.2 120 13.0
---- ----- ---- ----- ---- ----- ---- -----
585 79.4 589 86.6 670 87.0 804 87.1
Unallocated............................. 151 20.6 91 13.4 100 13.0 119 12.9
---- ----- ---- ----- ---- ----- ---- -----
$736 100.0% $680 100.0% $770 100.0% $923 100.0%
==== ===== ==== ===== ==== ===== ==== =====
<CAPTION>
(dollars in millions)
DECEMBER 31 1991
Percent
Amount of Total
<S> <C> <C>
United States
Commercial, industrial and financial . $ 429 40.9%
Commercial real estate, including
construction......................... 298 28.3
Consumer related loans
Secured by 1-4 family
residential properties............. 21 2.0
Other................................ 79 7.5
Lease financing......................... 5 .5
------ -----
832 79.2
International.......................... 102 9.7
------ -----
934 88.9
Unallocated............................. 117 11.1
------ -----
$1,051 100.0%
====== =====
</TABLE>
The above allocation reflects provisions for credit losses for International
operations for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 of
$60 million, $25 million, $26 million, $12 million and $(1) million,
respectively. International reserve transfers (to)from unallocated reserves and
Domestic operations were $67 million, $4 million, $0, $19 million and $(3)
million, respectively, for the same periods.
-17-
<PAGE>
Deposits
A portion of the information required by this item is presented on pages 45
through 47 of the Corporation's 1995 Annual Report to Stockholders, which pages
are included in Exhibit 13 hereto, and such information is incorporated herein
by reference.
The aggregate amount of deposits by foreign depositors in domestic offices
averaged $1,131 million in 1995, $863 million in 1994, and $876 million in 1993.
The following table presents the maturities of time certificates of deposit and
other time deposits issued by domestic offices in denominations of $100,000 or
more, at December 31, 1995:
<TABLE>
<CAPTION>
Certificates Time
of Deposit Deposits Total
(In millions)
<S> <C> <C> <C>
Maturing within three months $ 846 $ 22 $ 868
After three but within six months 167 8 175
After six but within twelve months 140 6 146
After twelve months 825 61 886
----- -- -----
$ 1,978 $ 97 $ 2,075
===== == =====
</TABLE>
The majority of foreign office deposits are in denominations of $100,000 or
more.
Return on Equity and Assets
The information required by this item is presented on page 18 of the
Corporation's 1995 Annual Report to Stockholders, which page is included in
Exhibit 13 hereto, and such information is incorporated herein by reference.
-18-
<PAGE>
Short-Term Borrowings
The following table summarizes the Corporation's short-term borrowings for
the three years ended December 31, 1995:
<TABLE>
<CAPTION>
Maximum Average Average
Weighted Amount Amount Interest
Balance Average Outstanding Outstanding Rate
(Dollars in millions) At end of Interest During the During the During the
Category of Aggregate Short-Term Borrowings Period Rate (1) Period Period Period
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1995
Federal funds purchased (2) $ 1,675 5.22% $ 1,675 $ 985 5.89%
Term federal funds purchased (2) 869 5.80 2,058 1,380 5.13
Securities sold under agreements to repurchase (3) 1,226 6.38 1,851 1,334 8.01
Demand notes issued to the U.S. Treasury (5) 304 4.73 1,051 383 5.62
All other (6) 2,500 13.40 3,474 2,921 17.65
For the Year Ended December 31, 1994
Federal funds purchased (2) $ 369 5.45% $ 1,131 $ 688 4.29%
Term federal funds purchased (2) 765 5.77 2,504 1,793 3.62
Securities sold under agreements to repurchase (3) 1,883 5.89 1,883 1,192 8.58
Demand notes issued to the U.S. Treasury (5) 389 4.69 1,060 324 3.97
All other (6) 2,733 18.44 3,697 2,895 17.36
For the Year Ended December 31, 1993
Federal funds purchased (2) $ 417 3.02% $ 783 $ 701 3.01%
Term federal funds purchased (2) 2,150 3.36 2,325 1,284 3.34
Securities sold under agreements to repurchase (3) 799 6.72 1,002 832 4.38
Commercial paper (4) 35 15 3.59
Demand notes issued to the U.S. Treasury (5) 118 2.73 1,219 400 2.81
All other (6) 1,164 24.77 1,164 708 8.42
</TABLE>
____________________________________________________________________________
(1) The weighted average interest rates at year-end are not necessarily
indicative of the Corporation's normal borrowing rates since interest
rates for certain categories of borrowing are subject to abnormal short-term
movements.
(2) Federal funds purchased are overnight transactions while term federal funds
purchased have maturities in excess of one day. A large portion of
federal funds purchased arise because of money market activity in federal funds
for regional correspondent banks.
(3) Securities sold under agreements to repurchase by domestic offices mature
within one year and are collateralized by U.S. Treasury and U.S.
government agencies and corporation securities. The majority of securities sold
under agreements to repurchase by overseas offices in 1995, 1994
and 1993 related to Brazilian operations of FNBB for which various Brazilian
government securities served as collateral.
(4) Commercial paper represents unsecured obligations with maximum maturities of
nine months.
(5) Demand notes issued to the U.S. Treasury represent depository liabilities
that are not subject to reserve requirements and bear interest at
one-quarter of one percent below the weekly average federal funds effective
interest rate as published by the Federal Reserve.
(6) In 1995 and 1994, the majority of other short-term borrowings represent
short-term bank notes issued by FNBB and secured and unsecured obligations of
the Corporation's overseas branches and subsidiaries. In 1993, the majority of
other short-term borrowings represent secured and unsecured obligations of the
Corporation's overseas branches and subsidiaries.
-19-
<PAGE>
Item 2. Properties.
The head offices of the Corporation and FNBB are located in a 37-story
building at 100 Federal Street, Boston, Massachusetts. In 1995, FNBB leased
approximately 95% of the building's approximately 1.3 million square feet.
FNBB's data processing and record keeping operations are located at Columbia
Park in Boston. The Columbia Park facility, comprising approximately 425,000
square feet, and the land on which it is situated are owned by FNBB. In
addition, FNBB leases operations facilities in Dedham and Canton, Massachusetts,
which comprise approximately 180,000 square feet and 105,000 square feet,
respectively.
The headquarters for FNBB's operations in Argentina are located in a 12-
story historic landmark building in the center of Buenos Aires. The building
consists of approximately 256,000 square feet and is owned by FNBB. The
headquarters for FNBB's operations in Brazil are in 3 interconnected buildings
in the center of Sao Paulo. FNBB owns a total of 119,000 square feet in the
three buildings and leases another 102,000 square feet. In addition, FNBB owns a
10-story, 99,000 square foot building in Sao Paulo where it has consolidated
part of its Brazilian operations.
Hospital Trust owns a 30-story building and a building adjacent thereto at
One Hospital Trust Plaza, Providence, Rhode Island. Hospital Trust occupies
approximately 40% of the complex's approximately 546,000 square feet. In
addition, Hospital Trust maintains an operations center in East Providence,
Rhode Island that also serves as the primary backup for FNBB's Columbia Park
facility. The East Providence operations center, which consists of approximately
141,000 square feet, is owned by Hospital Trust.
BKB Connecticut's headquarters are in Hartford, Connecticut, where it has
offices at 31 Pratt Street and 100 Pearl Street. BKB Connecticut owns and
occupies approximately 50,000 square feet at the Pratt Street location, and owns
an undivided one-half interest in the Pearl Street location where it currently
occupies approximately 54,000 square feet. BKB Connecticut also maintains
regional offices in Connecticut, the largest of which is in Waterbury and
comprises approximately 157,000 square feet of owned space in three
interconnected buildings.
None of these properties is subject to any material encumbrance. The
Corporation's subsidiaries also own or lease numerous other premises used in
their domestic and foreign operations.
Item 3. Legal Proceedings.
The Corporation and its subsidiaries in 1995 were or currently are parties
to a number of legal proceedings that have arisen in connection with the normal
course of business activities of the Corporation, FNBB and the Corporation's
other subsidiaries, including the following matters:
Arnold/Society for Savings Bancorp, Inc. As previously reported, in March
1993, a complaint was filed in Delaware Chancery Court against the Corporation,
Society for Savings Bancorp, Inc. ("Society") and certain Society directors.
The action was brought by a Society stockholder, individually and as a class
action on behalf of all Society stockholders of record on the date the
Corporation proposed acquisition of Society was announced, and sought an
injunction with respect to the acquisition and damages in an unspecified amount.
In May 1993, the Chancery Court denied the plaintiff's motion for a preliminary
injunction and in July 1993,
-20-
<PAGE>
the Corporation acquired Society. On January 23, 1995, the defendants filed a
motion for summary judgment with the Chancery Court and on June 15, 1995, the
Court granted summary judgment in favor of the defendants on all claims except
for an aiding and abetting claim against the Corporation on which no summary
judgment motion has yet been filed. The Chancery Court also denied plaintiff's
motion for rehearing. Following the entry of an Order of Final Judgment by the
Chancery Court, the plaintiff appealed the June 15, 1995 opinion to the Delaware
Supreme Court. The matter was argued before the Delaware Supreme Court on
February 21, 1996 and remains under advisement.
Society Class Action. As previously reported, in 1990 a class action
complaint was filed in U.S. District Court for the District of Connecticut
against Society, two of its then senior officers and one former officer. The
complaint, as subsequently amended, alleges that Society's financial reports for
fiscal years 1988, 1989, and the first half of 1990 contained material
misstatements or omissions concerning its real estate loan portfolio and other
matters, in violation of Connecticut common law and of Sections 10(b) and 20 of
the Securities Exchange Act of 1934. The action was brought by a Society
shareholder, individually and as a class action on behalf of purchasers of
Society's stock from January 19, 1989 through November 30, 1990 and seeks
damages in an unspecified amount. Society and the defendant officers have
denied the allegations of the amended complaint and on July 14, 1995 filed a
motion for summary judgment. The plaintiff has filed its opposition to summary
judgment, but the court has not yet rendered a decision.
Lender Liability Litigation. The Corporation's subsidiaries, in the normal
course of their business in collecting outstanding obligations, are named as
defendants in complaints or counterclaims filed in various jurisdictions by
borrowers or others who allege that lending practices by such subsidiaries have
damaged the borrowers or others. Such claims, commonly referred to as lender
liability claims, frequently request not only relief from repayment of the debt
obligation, but also recovery of actual, consequential, and punitive damages.
Fidelity Acceptance Corporation litigation. Fidelity Acceptance Corporation
("FAC"), an indirect subsidiary of the Corporation that is engaged in consumer
lending, and/or certain of FAC's subsidiaries (collectively referred to as FAC),
are defendants in class action and other lawsuits brought in Illinois, Alabama,
Mississippi, Georgia and Missouri by FAC borrowers. These lawsuits, which
include claims for punitive damages, challenge various of FAC's lending and
insurance practices, including, among others, the placing of collateral
protection insurance, calculating the amount of credit life insurance, and the
determination of applicable interest rates.
Management, after reviewing all actions and proceedings pending against the
Corporation and its subsidiaries, considers that the aggregate loss, if any,
resulting from the final outcome of these proceedings should not be material to
the Corporation's results of operations or financial condition.
-21-
<PAGE>
Item 3A. Executive Officers of the Corporation.
Information with respect to the executive officers of the Corporation, as
of March 1, 1996, is set forth below. Executive Officers are generally elected
annually by the Board of Directors and hold office until the following year and
until their successors are chosen and qualified, unless they sooner resign,
retire, die or are removed. Except where otherwise noted, the positions listed
for the officers are for both the Corporation and FNBB.
<TABLE>
<CAPTION>
Executive Officer
-----------------
Name Age Current Position Since
---- --- ---------------- -----
<S> <C> <C> <C>
Charles K. Gifford 53 Chairman of the Board of Directors, Chief Executive Officer and 1987
President
Edward A. O'Neal 51 Vice Chairman 1992
William J. Shea 48 Vice Chairman, Chief Financial Officer & Treasurer of the 1993
Corporation and Vice Chairman and Chief Financial Officer of
FNBB
Guilliaem Aertsen IV 48 Group Executive, Global Capital Markets 1993
Melville E. Blake III 41 Executive Director, Strategic Planning 1993
Robert L. Champion, Jr. 51 Executive Director, Corporate Administrative Services 1993
Barbara F. Clark 49 Group Executive, Media & Communications 1993
Edward P. Collins 49 Group Executive, Asset Based Finance 1993
Helen G. Drinan 48 Executive Director, Human Resources 1993
Robert E. Gallery 44 Regional Manager, Europe 1993
Susan P. Haney 48 Group Executive, The Private Bank 1993
Paul F. Hogan 50 Executive Vice President, Corporate Relationship Banking 1993
Thomas J. Hollister 41 Group Executive, Retail & Small Business 1993
Ira A. Jackson 47 Executive Director, External Affairs 1987
Robert T. Jefferson 48 Comptroller 1993
Michael R. Lezenski 48 Executive Director, Technology and System Services, Chief 1993
Technology Officer
Mark A. MacLennan 42 Group Executive, Global Financial Services 1993
Peter J. Manning 57 Executive Director, Mergers & Acquisitions 1990
John L. Mastromarino 41 Executive Director, Risk Management December 1995
David E. McKown 58 Group Executive, Diversified Finance & Real Estate 1993
Henrique de Campos Meirelles 50 Regional Manager, Brazil 1994
Joanne E. Nuzzo 53 Executive Director, Banking Operations 1994
William H. Ott 43 Group Executive, Consumer Lending Group 1993
Joe K. Pickett 50 Group Executive, Mortgage Banking 1993
Richard A. Remis 41 Group Executive, New England Corporate Banking 1993
Manuel R. Sacerdote 53 Regional Manager, Southern Cone (Argentina, Uruguay, Chile) 1994
Gary A. Spiess 55 General Counsel and Clerk of the Corporation and General Counsel, 1987
Secretary & Cashier of FNBB
Susannah M. Swihart 40 Group Executive, Chairman's Office 1993
Eliot N. Vestner, Jr. 60 Executive Counsel 1987
Bradford H. Warner 44 Group Executive, Global Treasury 1989
</TABLE>
-22-
<PAGE>
All of the foregoing individuals have been officers of the Corporation or
one of its subsidiaries for the past five years except for Messrs. Blake,
Gallery, Mastromarino, O'Neal, Ott and Shea. Mr. Gallery came to the Corporation
in 1991 from The First National Bank of Chicago where he had been Division
Manager, Midwest since 1989. Prior to joining the Corporation in 1992, Mr.
O'Neal was employed by Chemical Banking Corporation as Senior Executive Vice
President, Operating Services and Nationwide Consumer in 1992 and Vice Chairman
and Director from 1990 to 1991. Mr. Blake also joined the Corporation in 1992
and prior to that time had been Vice President of the MAC Group/Gemini
Consulting since 1988. Mr. Ott came to the Corporation in 1992 from
Constellation Bancorp where he served as Executive Vice President, Community
Banking Division, and prior to that time was an Associate at TAC Associates from
1991 to 1992 and Senior Vice President, Community Banking Division of Fleet Bank
from 1990 to 1991. Mr. Shea joined the Corporation in 1993 from Coopers &
Lybrand, where he had served as a partner since 1983 and as Vice Chairman since
1991. Mr. Mastromarino joined the Corporation in 1995 from the OCC where he had
served as Examiner-in-Charge of the OCC's London office from 1993 to 1995, and
prior to that time was the OCC's Examiner-in-Charge at the Corporation since
1988.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
-23-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required by this Item is presented on pages 17, 18 and 49
of the Corporation's 1995 Annual Report to Stockholders, which pages are
included in Exhibit 13 hereto, and such information is hereby incorporated by
reference.
Item 6. Selected Financial Data.
The "Consolidated Selected Financial Data" of the Corporation for the six
years ended December 31, 1995 appears on pages 17 and 18 of the Corporation's
1995 Annual Report to Stockholders, which pages are included in Exhibit 13
hereto, and such information is hereby incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information in response to this Item is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 19 through 44 of the Corporation's 1995 Annual Report to Stockholders,
which pages are included in Exhibit 13 hereto, and such information is hereby
incorporated by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this Item are
included on the pages of the Corporation's 1995 Annual Report to Stockholders
indicated below, which pages are included in Exhibit 13 hereto, and such
statements and data are hereby incorporated by reference.
<TABLE>
<CAPTION>
Page of 1995 Annual
Report to Stockholders
<S> <C>
Summary of Quarterly Consolidated Financial Information
and Common Stock Data.............................................. 49
Report of Independent Accountants..................................... 51
Bank of Boston Corporation:
Consolidated Balance Sheet as of December 31, 1995
and 1994............................................................. 52
Consolidated Statement of Income for the years
ended December 31, 1995, 1994 and 1993............................... 53
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1995, 1994 and 1993.......... 54
Consolidated Statement of Cash Flows for the years
ended December 31, 1995, 1994 and 1993............................... 55
Notes to Financial Statements......................................... 56 through 79
</TABLE>
-24-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Executive Officers of the Corporation which
responds to this Item is contained in the response to Item 3A contained in Part
I of this Report and is hereby incorporated by reference herein. The
information that responds to this Item with respect to Directors is contained
under the heading "Election of Directors" in the Corporation's definitive proxy
statement for its 1996 Annual Meeting of Stockholders, which is required to be
filed pursuant to Regulation 14A of the Exchange Act and which will be filed
with the Commission not later than 120 days after the end of the Corporation's
fiscal year (the "Proxy Statement"). Information with respect to compliance by
the Corporation's directors and executive officers with Section 16(a) of the
Exchange Act is contained under the heading "Compliance with Section 16(a) of
the Exchange Act" in the Proxy Statement. The foregoing information from the
Proxy Statement is hereby incorporated by reference. Pursuant to General
Instruction G(3) to Form 10-K, the foregoing information from the Proxy
Statement is hereby incorporated by reference.
Item 11. Executive Compensation.
The information required in response to this Item is contained under the
heading "Compensation of Executive Officers" in the Proxy Statement. Pursuant
to General Instruction G(3) to Form 10-K, the foregoing information from the
Proxy Statement, with the exception of the section entitled "Compensation
Committee Report on Executive Compensation," is hereby incorporated by
reference.
In 1995, Ira Stepanian, the former Chairman and Chief Executive Officer of
the Corporation and FNBB, entered into a retirement transition agreement with
the Corporation and FNBB. Pursuant to the terms of the agreement, Mr. Stepanian
is entitled to receive, until November 1998, payments of approximately
$1,950,000 per year (representing continuation of his base salary at retirement
plus the average of certain past bonuses) plus the continuation of pension,
certain matching contributions, death benefits and other employee benefits
during that period as though he had remained an active employee, but he will no
longer participate in stock-based benefits. The portion of such payments and
continuation arrangements made in 1995 is set forth in the Proxy Statement. In
addition, Mr. Stepanian is entitled to office space and other perquisites
available to other retired senior executives of the Corporation, to
reimbursement of certain fees and expenses associated with the negotiation and
execution of the retirement transition agreement and to the payment of employee
benefits accrued during his service with the Corporation. Mr. Stepanian has
agreed that, through November 1998, he will not compete with the Corporation or
any of its subsidiaries in certain activities in New England.
-25-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required in response to this Item is contained under the
headings "Security Ownership of Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners" in the Proxy Statement. Pursuant to
General Instruction G(3) to Form 10-K, the foregoing information from the Proxy
Statement is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
The information required in response to this Item is contained under the
heading "Indirect Interest of Directors and Executive Officers in Certain
Transactions" in the Proxy Statement. Pursuant to General Instruction G(3) to
Form 10-K, the foregoing information from the Proxy Statement is hereby
incorporated by reference.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The financial statements required in response to this Item are listed in
response to Item 8 of this Report and are incorporated herein by reference.
(a)(2) Financial statement schedules have been omitted because the information
is either not required, not applicable, or is included in the financial
statements or notes thereto.
(a)(3) Exhibits
3(a) - Restated Articles of Organization of the Corporation, as amended
through November 24, 1993 incorporated herein by reference to
Exhibit 3(a) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1993 (File No. 1-6522).
3(b) - By-Laws of the Corporation, as amended through April 28, 1994,
incorporated herein by reference to Exhibit 3(b) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-6522).
4(a) - Fiscal and Paying Agency Agreement dated as of February 10, 1986
defining rights of holders of the Corporation's Subordinated
Floating Rate Notes Due 2001, incorporated herein by reference to
Exhibit 4(d) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1985 (File No. 1-6522).
4(b) - Fiscal and Paying Agency Agreement dated as of August 26, 1986
defining rights of holders of the Corporation's Floating Rate
Subordinated Equity Commitment Notes Due 1998 incorporated herein
by reference to Exhibit 4(e) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1986 (File No. 1-6522).
4(c) - Indenture dated as of June 15, 1987 defining the rights of holders
of the Corporation's 9 1/2% Subordinated Equity Contract Notes due
1997, incorporated herein by reference to Exhibit 4(g) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, l987 (File No. 1-6522).
-27-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(3) Exhibits (cont'd)
4(d) - Subordinated Indenture dated as of June 15, 1992, as amended by the
First Supplemental Indenture dated as of June 24, 1993, and forms
of notes defining rights of the holders of the Corporation's 6 7/8%
Subordinated Notes due 2003, the 6 5/8% Subordinated Notes due
2005, and the 6 5/8% Subordinated Notes due 2004, incorporated
herein by reference to Exhibit 4(d) to the Corporation's
Registration Statement on Form S-3 (Registration Numbers 33-48418
and 33-52571), Exhibits 4(e) and 4(f) to the Corporation's Current
Report on Form 8-K dated June 24, 1993, Exhibit 4 to the
Corporation's Current Report on Form 8-K dated November 15, 1993,
and Exhibit 4 to the Corporation's Current Report on Form 8-K dated
January 5, 1994 (File No. 1-6522).
4(e) - Senior Indenture dated as of June 15, 1992, and forms of notes
defining rights of the holders of the Corporation's Senior Floating
Rate Notes due June 1996 and the Corporation's Senior Floating Rate
Medium-Term Notes Due Nine Months or More from the Date of Issue,
incorporated herein by reference to Exhibit 4(c) to the
Corporation's Registration Statement on Form S-3 (Registration
Numbers 33-48418 and 33-52571), Exhibit 4 to the Corporation's
Current Report on Form 8-K dated June 15, 1994 and Exhibit 4(b) to
the Corporation's Current Report on Form 8-K dated December 16,
1994 (File No. 1-6522).
4(f) - Rights Agreement, dated as of June 28, 1990, between the
Corporation and FNBB, as Rights Agent, and the description of the
Rights, incorporated herein by reference to the Corporation's
registration statement on Form 8-A relating to the Rights and to
Exhibit 1 of such registration statement (File No. 1-6522).
4(g) - Amendment, dated December 12, 1995, to the Corporation's Rights
Agreement.
4(h) - Deposit Agreement, dated August 13, 1992 between the Corporation
and FNBB, as Depositary, relating to the Corporation's Depositary
Shares, each representing a one-tenth interest in the Corporation's
8.60% Cumulative Preferred Stock, Series E, incorporated herein by
reference to Exhibit 4(b) to the Corporation's Current Report on
Form 8-K dated August 13, 1992 (File No. 1-6522).
4(i) - Deposit Agreement, dated as of June 30, 1993 between the
Corporation and FNBB, as Depositary, relating to the Corporation's
Depositary Shares, each representing a one-tenth interest in the
Corporation's 7 7/8% Cumulative Preferred Stock, Series F,
incorporated herein by reference to Exhibit 4(b) to the
Corporation's Current Report on Form 8-K dated June 24, 1993 (File
No. 1-6522).
-28-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(3) Exhibits (cont'd)
10(a) - Bank of Boston Corporation 1982 Stock Option Plan, as amended,
effective February 13, 1995, incorporated herein by reference to
Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-6522).*
10(b) - Bank of Boston Corporation 1986 Stock Option Plan, as amended,
effective February 13, 1995, incorporated herein by reference to
Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-6522).*
10(c) - Bank of Boston Corporation and its Subsidiaries Performance
Recognition Opportunity Plan, as amended effective June 23, 1994,
incorporated herein by reference to Exhibit 10(c) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-6522).*
10(d) - Bank of Boston Corporation Executive Deferred Compensation Plan,
as amended, effective June 23, 1994, incorporated herein by
reference to Exhibit 10(d) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994 (File No.
1-6522).*
10(e) - The First National Bank of Boston Bonus Supplemental Employee
Retirement Plan, as amended, through June 23, 1994, incorporated
herein by reference to Exhibit 10(e) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1994 (File
No. 1-6522).*
10(f) - Description of the Corporation's Supplemental Life Insurance
Plan, incorporated herein by reference to Exhibit 10(h) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1988 (File No. 1-6522).*
10(g) - The First National Bank of Boston Excess Benefit Supplemental
Employee Retirement Plan, as amended, effective June 23, 1994,
1994, incorporated herein by reference to Exhibit 10(g) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-6522).*
- -----------------------------------------------
* Indicates that document is a management contract or compensatory plan or
arrangement that is required to be filed as an exhibit to this Report pursuant
to Item 14(c) of Form 10-K.
-29-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(3) Exhibits (cont'd)
10(h) - Bank of Boston Corporation 1991 Long-Term Stock Incentive Plan,
as amended, effective February 13, 1995, incorporated herein by
reference to Exhibit 10(h) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1994 (File No.
1-6522).*
10(i) - Bank of Boston Corporation Relocation Policy, as amended through
October, 1990, incorporated herein by reference to Exhibit 10(j)
to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990 (File No. 1-6522).*
10(j) - Description of the Corporation's Supplemental Long-Term
Disability Plan effective as of February 10, 1994, incorporated
herein by reference to Exhibit 10(l) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993 (File
No. 1-6522).*
10(k) - Bank of Boston Corporation's Director Stock Award Plan effective
as of January 1, 1995, incorporated herein by reference to
Exhibit 10(m) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-6522).*
10(l) - Form of Severance Agreement for certain officers, incorporated
herein by reference to Exhibit 10(a) to the Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994
(File No. 1-6522).*
- -------------------------------------------------
* Indicates that document is a management contract or compensatory plan or
arrangement that is required to be filed as an exhibit to this Report pursuant
to Item 14(c) of Form 10-K.
-30-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(3) Exhibits (cont'd)
10(m) - Form of Severance Agreement for certain officers, incorporated
herein by reference to Exhibit 10(b) to the Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994
(File No. 1-6522).*
10(n) - Bank of Boston Corporation Directors Deferred Compensation Plan
effective March 28, 1991, incorporated herein by reference to
Exhibit 10(q) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-6522).*
10(o) - The First National Bank of Boston Directors Deferred Compensation
Plan effective March 28, 1991, incorporated herein by reference
to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994 (File No. 1-6522).*
10(p) - Retirement Transition Agreement between the Corporation, FNBB
and an executive officer.*
10(q) - Lease dated as of September 1, 1991 between The First National
Bank of Boston and The Equitable Federal Street Realty Company
Limited Partnership, incorporated herein by reference to
Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-6522).
11 - Computation of earnings per common share.
12(a) - Computation of the Corporation's Consolidated Ratio of Earnings
to Fixed Charges (excluding interest on deposits).
12(b) - Computation of the Corporation's Consolidated Ratio of Earnings
to Fixed Charges (including interest on deposits).
12(c) - Computation of the Corporation's Consolidated Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividend
Requirements (excluding interest on deposits).
12(d) - Computation of the Corporation's Consolidated Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividend
Requirements (including interest on deposits).
13 - Pages 17 through 49 and 51 through 79 of the Corporation's 1995
Annual Report to Stockholders.
- ---------------------------------------------
* Indicates that document is a management contract or compensatory plan or
arrangement that is required to be filed as an exhibit to this Report pursuant
to Item 14(c) of Form 10-K.
-31-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(3) Exhibits (cont'd)
21 - List of subsidiaries of Bank of Boston Corporation.
23 - Consent of Independent Accountants.
24 - Power of attorney of certain officers and directors (included on
pages II-1 through II-2).
27 - Financial Data Schedule
99 - Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of the Corporation's Stockholders to be held April 25,
1996, incorporated herein by reference to the Corporation's
filing under Regulation 14A of the Exchange Act. (Pursuant to
General Instruction G(3) to Form 10-K, the information required
to be filed by Part III hereof is incorporated by reference from
the Corporation's definitive proxy statement which is required to
be filed pursuant to Regulation 14A and which will be filed with
the Commission not later than 120 days after the end of the
Corporation's fiscal year.)
(b) During the fourth quarter of 1995, the Corporation filed two Current
Reports on Form 8-K. The current reports, dated October 19, 1995 and
December 12, 1995, contained information pursuant to items 5 and 7 of
Form 8-K. The Corporation also filed Current Reports on Form 8-K dated
January 16, 1996 and January 18, 1996, which contained information pursuant
to items 5 and 7 of Form 8-K.
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Boston,
and Commonwealth of Massachusetts, on the 15th day of March, 1996.
BANK OF BOSTON CORPORATION
By /s/ CHARLES K. GIFFORD
---------------------------------
(Charles K. Gifford)
(Chairman, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates listed below. By so signing, each of the undersigned, in his or her
capacity as a director or officer, or both, as the case may be, of the
Corporation, does hereby appoint Charles K. Gifford, William J. Shea, Bradford
H. Warner, Robert T. Jefferson and Gary A. Spiess, and each of them severally,
or if more than one acts, a majority of them, his or her true and lawful
attorneys or attorney to execute in his or her name, place and stead, in his or
her capacity as a director or officer or both, as the case may be, of the
Corporation, any and all amendments to said report and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission. Each of said attorneys shall have full power and
authority to do and perform in the name and on behalf of each of the
undersigned, in any and all capacities, every act whatsoever requisite or
necessary to be done in the premises as fully and to all intents and purposes as
each of the undersigned might or could do in person, hereby ratifying and
approving the acts of said attorneys and each of them.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board of Directors,
/s/ CHARLES K. GIFFORD President, Chief Executive Officer
- --------------------------- and Director March 15, 1996
(Charles K. Gifford) (Chief Executive Officer)
Vice Chairman,
/s/ WILLIAM J. SHEA Chief Financial Officer
- --------------------------- and Treasurer March 15, 1996
(William J. Shea) (Chief Financial Officer)
/s/ ROBERT T. JEFFERSON
- ------------------------------ Comptroller March 15, 1996
(Robert T. Jefferson) (Chief Accounting Officer)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WAYNE A. BUDD Director March 15, 1996
- ---------------------------------
(Wayne A. Budd)
/s/ WILLIAM F. CONNELL Director March 15, 1996
- ---------------------------------
(William F. Connell)
/s/ Director
- ---------------------------------
(Gary L. Countryman)
/s/ ALICE F. EMERSON Director March 15, 1996
- ---------------------------------
(Alice F. Emerson)
/s/ THOMAS J. MAY Director March 15, 1996
- ---------------------------------
(Thomas J. May)
/s/ DONALD F. McHENRY Director March 15, 1996
- ---------------------------------
(Donald F. McHenry)
/s/ J. DONALD MONAN Director March 15, 1996
- ---------------------------------
(J. Donald Monan)
/s/ PAUL C. O'BRIEN Director March 15, 1996
- ---------------------------------
(Paul C. O'Brien)
/s/ JOHN W. ROWE Director March 15, 1996
- ---------------------------------
(John W. Rowe)
/s/ Director
- ---------------------------------
(Richard A. Smith)
/s/ Director
- ---------------------------------
(William C. Van Faasen)
/s/ THOMAS B. WHEELER Director March 15, 1996
- ---------------------------------
(Thomas B. Wheeler)
/s/ ALFRED M. ZEIEN Director March 15, 1996
- ---------------------------------
(Alfred M. Zeien)
</TABLE>
II-2
<PAGE>
Exhibit 4(g)
AMENDMENT TO RIGHTS AGREEMENT
This AMENDMENT, dated as of December 12, 1995, is between BANK OF
BOSTON CORPORATION, a Massachusetts corporation (the "Company"), and THE FIRST
NATIONAL BANK OF BOSTON, as rights agent (the "Rights Agent").
Recitals
--------
A. The Company and the Rights Agent are parties to a Rights Agreement
dated as of June 28, 1990 (the "Rights Agreement").
B. The Company, Boston Merger Corp., a wholly owned subsidiary of the
Company ("Merger Sub") and BayBanks, Inc. ("BayBanks") have entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Merger
Sub will merge with and into BayBanks (the "Merger"), and the Company and
BayBanks have entered into a related Stock Option Agreement (the "Option
Agreement") pursuant to which BayBanks is granted the right to acquire Common
Stock of the Company upon the occurrence of certain conditions. The Board of
Directors of the Company has approved the Merger Agreement, the Merger and the
Option Agreement.
C. Pursuant to Section 27 of the Rights Agreement, the Board of
Directors of the Company has determined that an amendment to the Rights
Agreement as set forth herein is necessary and desirable in connection with the
foregoing and the Company and the Rights Agent desire to evidence such amendment
in writing.
Accordingly, the parties agree as follows:
1. Amendment of Section 1(a). Section 1(a) of the Rights Agreement
-------------------------
is amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither BayBanks nor any of its existing or future
Affiliates or Associates shall be deemed to be an Acquiring Person
solely by virtue of (i) the execution of the Merger Agreement and
the Option Agreement, (ii) the acquisition of
<PAGE>
-2-
Common Stock pursuant to the Merger Agreement or the Option
Agreement or the consummation of the Merger, or (iii) the
consummation of the other transactions contemplated by the Merger
Agreement and the Option Agreement."
2. Amendment of Section 1(rr). Section 1(rr) of the Rights Agreement
-------------------------
is amended to add the following proviso at the end thereof:
"; provided, however, that no Triggering Event shall result solely
by virtue of (i) the execution of the Merger Agreement and the
Option Agreement, (ii) the acquisition of Common Stock pursuant to
the Merger Agreement or the Option Agreement or the consummation
of the Merger, or (iii) the consummation of the other transactions
contemplated by the Merger Agreement and the Option Agreement."
3. Amendment of Section 1. Section 1 of the Rights Agreement is
----------------------
further amended to add the following paragraphs at the end thereof:
(uu) "BayBanks" shall mean BayBanks, Inc., a Massachusetts
corporation.
(vv) "Merger" shall have the meaning set forth in the Merger
Agreement.
(ww) "Merger Agreement" shall mean the Agreement and Plan of
Merger dated as of December 12, 1995, by and between the Company,
Boston Merger Corp., a wholly owned subsidiary of the Company, and
BayBanks, as amended from time to time."
(xx) "Option Agreement" shall mean that certain Stock Option
Agreement, dated as of December 12, 1995, by and between BayBanks
and the Company relating to the right to acquire Common Stock, as
amended from time to time."
4. Amendment of Section 3(a). Section 3(a) of the Rights Agreement is
------------------------
amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, a Distribution Date shall not be deemed to have occurred
solely by virtue of (i) the execution of the Merger
<PAGE>
-3-
Agreement and the Option Agreement, (ii) the acquisition of Common
Stock pursuant to the Merger Agreement or the Option Agreement or
the Consummation of the Merger, or (iii) the consummation of the
other transactions contemplated by the Merger Agreement and the
Option Agreement."
5. Amendment of Section 7(a). Section 7(a) of the Rights Agreement is
-------------------------
amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither (i) the execution of the Merger Agreement and
the Option Agreement; (ii) the acquisition of Common Stock
pursuant to the Merger Agreement or the Option Agreement or the
consummation of the Merger; nor (iii) the consummation of the
other transactions contemplated in the Merger Agreement and the
Option Agreement, shall be deemed to be events that cause the
Rights to become exercisable pursuant to the provisions of this
Section 7 or otherwise."
6. Amendment of Section 11. Section 11 of the Rights Agreement is
-----------------------
amended to add the following sentence after the first sentence of said Section:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither (i) the execution of the Merger Agreement and
the Option Agreement; (ii) the acquisition of Common Stock
pursuant to the Merger Agreement or the Option Agreement or the
consummation of the Merger; nor (iii) the consummation of the
other transactions contemplated in the Merger Agreement and the
Option Agreement, shall be deemed to be a Section 11(a)(ii) Event
or to cause the Rights to be adjusted or to become exercisable in
accordance with this Section 11."
7. Amendment of Section 13. Section 13 of the Rights Agreement is
-----------------------
amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither (i) the execution of the Merger Agreement and
the Option Agreement; (ii) the acquisition of Common Stock
pursuant to the Merger Agreement or the Option Agreement or the
consummation of the Merger; nor (iii) the
<PAGE>
-4-
consummation of the other transactions contemplated in the Merger
Agreement and the Option Agreement, shall be deemed to be a
Section 13 Event or to cause the Rights to be adjusted or to
become exercisable in accordance with Section 13."
8. Effectiveness. This Amendment shall be deemed effective as of the
-------------
date first written above, as if executed on such date. Except as amended
hereby, the Rights Agreement shall remain in full force and effect and shall be
otherwise unaffected hereby.
9. Miscellaneous. This Amendment shall be deemed to be a contract
-------------
made under the laws of the Commonwealth of Massachusetts and for all purposes
shall be governed by and construed in accordance with the laws of such state
applicable to contracts to be made and performed entirely within such state.
This Amendment may be executed in any number of counterparts, each of such
counterparts shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same instrument. If any
provisions, covenant or restriction of this Amendment is held by a court of
competent jurisdiction or other authority to be invalid, illegal or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Amendment shall remain in full force and effect and shall
in no way be effected, impaired or invalidated.
EXECUTED under seal as of the date set forth above.
BANK OF BOSTON
CORPORATION
/s/ Peter J. Manning
--------------------
Name: Peter J. Manning
Title: Executive Director,
Mergers & Acquisitions
THE FIRST NATIONAL
BANK OF BOSTON,
as Rights Agent:
/s/ Gary A. Spiess
-------------------
Name: Gary A. Spiess
Title: General Counsel & Clerk
<PAGE>
Exhibit 10(p)
RETIREMENT TRANSITION AGREEMENT
-------------------------------
AGREEMENT dated October 26, 1995, by and between Bank of Boston
Corporation, a Massachusetts corporation (the "Company"), The First National
Bank of Boston, a national banking association (the "Bank") and Ira Stepanian,
an individual residing at 300 Boylston Street, Boston, Massachusetts 02116 (the
"Executive").
WHEREAS, the Executive, after many years of service, has retired from
employment and from all officer, director and other positions held by him in the
Company and all entities owned by or affiliated with the Company (collectively,
"Subsidiaries"); and
WHEREAS, the Company and the Bank wish to provide the Executive with fair
and reasonable compensation and benefits in recognition of the Executive's
valued years of service to the Company and its Subsidiaries;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other valuable consideration, the Company, the Bank
and the Executive hereby agree as follows:
1. Defined Terms. The definitions of capitalized terms used in this
-------------
Agreement and not otherwise defined herein are provided in Section 14.
2. Company's and Bank's Covenants. In consideration of the Executive's
------------------------------
years of service and his covenants contained in Section 3, the Company and the
Bank agree, under the conditions described herein, to pay to the Executive the
following payments and to provide the following benefits:
2.1 Continuation Salary. The Bank shall pay to the Executive a
-------------------
continuation salary at the rate of $880,000 per year from July 28, 1995
through the date upon which the Executive reaches sixty-two years of age
(the "Extension Date"). The continuation salary shall be payable semi-
monthly or otherwise in accordance with the Bank's customary practice with
respect to salary payments to active senior officers of the Bank.
2.2 Annual Bonus. The Bank shall pay to the Executive (i) an annual
------------
bonus for 1995 in an amount equal to 57% of an
<PAGE>
-2-
amount to be determined in good faith by the Compensation Committee, in
accordance with the Performance Recognition Opportunity Plan, and (ii)
annual bonus payments for the three years immediately succeeding 1995, each
in an amount equal to $1,066,666.67. All such annual bonus payments shall
be payable in accordance with the Bank's customary practices with respect
to annual bonus payments.
2.3 Stock Options. All stock options held by the Executive are
-------------
immediately exercisable and shall remain exercisable in accordance with
their respective terms. All restricted stock awarded to the Executive has
already vested and will be delivered to him at his request.
2.4 Retirement Plans. The Executive shall continue to accrue service
----------------
credit through the Extension Date under the Retirement Plan, the Bonus
SERP, and the Excess SERP, or any successor plans thereto, calculated (a)
at the compensation level equal to the continuation salary and annual bonus
set forth in Sections 2.1 and 2.2, as applicable, adjusted (with respect to
salary, but not bonus) at the beginning of each calendar year, beginning in
1996, by the actuarial salary escalation assumption in effect as of the
beginning of such year for the Retirement Plan, (b) upon the assumption
that no benefits would be payable under the foregoing plans until at or
after age 62, and (c) with adjustment for any payments under the foregoing
plans before age 62. If and to the extent that the Bank cannot provide any
benefit that it is required to provide to the Executive under this Section
under the foregoing plans, the Bank shall provide an equivalent benefit
under another non-qualified arrangement, payable at or after age 62 in the
same manner as benefits under the Retirement Plan.
2.5 Deferral Plan. Through the Extension Date, the Executive shall
-------------
receive a matching contribution from the Bank under the Deferral Plan,
calculated at the rate of 4% of the continuation salary paid under Section
2.1, adjusted in accordance with the actuarial salary escalation assumption
described in Section 2.4. If and to the extent the Bank cannot provide this
benefit under the Deferral Plan, the Bank shall provide an equivalent
benefit under another nonqualified arrangement. Payments under this
Section shall be made to the Executive at the same time and in the same
manner as his other payments under the Deferral Plan.
<PAGE>
-3-
2.6 Death Benefit Payment. Upon the death of the Executive,
---------------------
whether before, on or after the Extension Date, the Bank shall make a
single sum payment to the person or persons designated by the Executive in
writing or, in the absence of such designation, the executor or other
personal representative of the Executive's estate of an amount equal, after
payment of any applicable federal and state income taxes, to the amount by
which $1,000,000 exceeds the life insurance payable upon the Executive's
death under the Bank's Group Term Life Insurance Program; and the Bank may
determine from time to time whether the payment shall be insured or made
from the Bank's general assets. The Executive agrees to cooperate with the
Bank in the event that the Bank seeks to obtain insurance on the
Executive's life.
2.7 Employee Benefit Plans. Until the Extension Date, the
----------------------
Executive shall receive benefits equivalent in amount to the benefits he
would receive if he continued to participate in all employee benefit plans
(other than the Executive Life Insurance Plan and the Deferral Plan),
including without limitation medical insurance plans, life insurance plans
and financial counseling plan (including up to the stated limit, tax
preparation service), currently maintained by the Bank, on a basis at least
as advantageous to the Executive as the basis on which he participated
therein on July 27, 1995. After the Extension Date, the Executive shall be
entitled to participate in all plans providing post-retirement benefits
maintained from time to time by the Bank, on a basis at least as
advantageous to the Executive as the basis on which any person who retired
on the Extension Date from one of the most senior executive positions at
the Bank (the "Peer Executive") would be eligible to participate from time
to time. Notwithstanding the foregoing and except as provided in Section
2.3, the Executive shall not be entitled to participate in any stock option
plan, restricted stock award plan or other stock-based plan maintained by
the Company.
2.8 Fringe Benefits. The Executive shall be entitled to all
---------------
fringe benefits offered to a Peer Executive from time to time, for so long
as a Peer Executive is entitled to such benefits, including without
limitation office space with secretarial and administrative support
services, parking space, occasional car services provided by Boston Coach
or a similar limousine service, and reimbursement for reasonable costs
incurred in connection with home alarm services. The Company shall match
contributions to the Museum of Fine Arts
<PAGE>
-4-
pledged by the Executive before July 27, 1995 in amounts not to exceed
$25,000 per year through the Extension Date.
2.9 Legal and Accounting Fees. The Bank shall pay to the
-------------------------
Executive all reasonable legal, accounting and other advisory fees and
expenses incurred by the Executive in connection with the negotiation and
execution of this Agreement. Payments shall be made promptly after delivery
of the Executive's written request for payment accompanied with such
evidence of fees and expenses incurred as the Bank reasonably may require.
2.10 Indemnification. The Company or the Bank, as the case may
---------------
be, shall indemnify the Executive against all loss, cost, liability and
expense arising from the Executive's past service to the Company or any
Subsidiary, including without limitation any pending securities litigation,
whether as officer, director, employee, fiduciary of any employee benefit
plan or otherwise, upon terms at least as favorable to the Executive as
those provided by the Articles of Organization and By-laws of the Company
or the Bank, as the case may be, on July 27, 1995.
2.11 Nondisparagement. Not the Company nor any Subsidiary nor
----------------
any officers or directors thereof have disparaged or shall disparage the
Executive with respect to any matter, including without limitation the
Executive's past or prospective performance.
3. Executive's Covenants. In consideration of the payments and benefits
---------------------
contained in Section 2, the Executive agrees to abide by all the covenants set
forth in this Section 3 below:
3.1 Confirmation of Retirement. The Executive confirms that he
--------------------------
has retired as an employee of the Company and all its Subsidiaries,
effective July 27, 1995.
3.2 Confirmation of Resignation of Offices. The Executive
--------------------------------------
confirms that he has, in a separate instrument, resigned as a director of
the Company and the Bank and confirms that he has resigned from all other
officer, director and other positions held by him in the Company or in any
Subsidiary, effective July 27, 1995,
3.3 Confidential Information. The Executive will not disclose
------------------------
to any other Person (except as required by applicable law or in connection
with the performance of his duties and responsibilities hereunder), or use
for the benefit or gain of himself or any other
<PAGE>
-5-
Person with which he may be associated in any way, any Confidential
Information obtained by him incident to his employment with the Company or
a Subsidiary.
3.4 Agreement Not to Compete. The Executive agrees that, through the
------------------------
Extension Date, the Executive shall not engage in competition with the
Company or any of its Subsidiaries anywhere in the six New England states,
as employee, director, consultant, agent, or otherwise, for (a) any bank or
other financial services institution, which together with its subsidiaries
and affiliates, is of comparable size to the Company or larger (whether
measured by assets or market capitalization) or (b) BayBanks, Inc. and its
subsidiaries and affiliates. The Executive may hold stock or a limited
partnership interest of 5% or less in any entity described in clauses (a)
and (b) of the preceding sentence without violating this Agreement.
3.5 Agreement Not to Solicit. The Executive shall not solicit any
------------------------
employee of the Company or a Subsidiary to leave such employment or to
provide services to the Executive or any business entity by which the
Executive is employed or in which the Executive has a material financial
interest or encourage any customer of the Company or a Subsidiary to
terminate its relationship with the Company or a Subsidiary. Soliciting a
former employee of the Company or a Subsidiary to provide such services
shall not be a violation of this Agreement.
3.6 Nondisparagement. The Executive has not disparaged and shall not
----------------
disparage the Company or any Subsidiary or the owners, officers, directors,
employees, or agents thereof with respect to any matter, including without
limitation the Company's or any Subsidiary's financial condition,
management, personnel, quality of service, quality of product, or past or
prospective performance.
3.7 Unique Nature of Agreement; Specific Enforcement. The Executive
------------------------------------------------
agrees and acknowledges that the rights and obligations contained in this
Section 3 are of a unique and special nature and that the Company and the
Bank are, therefore, without an adequate legal remedy in the event of the
Executive's violation of the covenants contained in this Section 3. The
Executive agrees that the covenants made by the Executive contained in this
Section 3 shall be specifically enforceable in equity, in addition to all
other rights and remedies, at law or in equity or otherwise, that may be
available to the Company or the Bank.
<PAGE>
-6-
3.8 Unenforceable Restrictions. In the event that any provision
--------------------------
contained in this Section 3 shall be deemed by any court to be
unenforceable by reason of the extent, duration or geographical scope or
other provisions hereof, then the parties hereto contemplate that the court
shall reduce such extent, duration, geographical scope or other provision
hereof and enforce this Section 3 in its reduced form for all purposes in
the manner contemplated hereby.
4. No Mitigation. The Executive is not required to seek other employment
-------------
or to attempt in any way to reduce any amounts payable to the Executive by the
Company or the Bank pursuant to Section 2. Further, the amount of any payment or
benefit provided for in Section 2 shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer or,
except as expressly provided in this Agreement, by retirement benefits.
5. Mutual Releases. Each of the Company and its Subsidiaries hereby
---------------
releases the Executive from all liabilities and obligations to them or any of
them known to them or any of them at the date of this Agreement, other than the
liabilities and obligations set forth in this Agreement, and the Executive
hereby releases the Company and all its Subsidiaries, senior executive officers,
and directors from all liabilities and obligations to him known to him at the
date of this Agreement, other than the liabilities and obligations set forth in
this Agreement.
6. Successors, Binding Agreement.
-----------------------------
6.1 In addition to any obligations imposed by law upon any successor
to the Company or the Bank, the Company or the Bank, as the case may be,
will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of its
business and/or assets to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company or the
Bank, as the case may be, would be required to perform it if no such
succession had taken place.
6.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
the Executive shall die while any amount would still be payable to the
Executive hereunder if the Executive had
<PAGE>
-7-
continued to live, payments of the types described in Schedule A shall be
paid in accordance with the terms of this Agreement to the executors,
personal representatives or administrators of the Executive's estate unless
otherwise provided herein.
7. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
actual receipt:
To the Company or the Bank:
Bank of Boston Corporation
100 Federal Street
Boston, MA 02110
Attention: Director, Human Resources
Copy to: General Counsel
To the Executive:
Mr. Ira Stepanian
300 Boylston Street
Boston, MA 02116
Copy to:
Richard R. Kelly, Esq.
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
8. Miscellaneous. No provision of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. Except as expressly provided herein, no waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall
<PAGE>
-8-
be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the Commonwealth of Massachusetts, and this
Agreement shall be an instrument under seal.
9. Withholding. All payments made by the Company or the Bank under this
-----------
Agreement shall be paid net of any applicable withholding required under
federal, state or local law and any additional withholding to which the
Executive has agreed.
10. Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
11. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
12. Settlement of Disputes. All claims by the Executive for benefits
----------------------
under this Agreement shall be in writing and shall be directed to and determined
by the Compensation Committee. Any denial by the Compensation Committee of a
claim for benefits under this Agreement shall be delivered to the Executive in
writing and shall set forth the specific reasons for the denial and the specific
provisions of this Agreement relied upon. Any further dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively
by a court of competent jurisdiction in Boston, Massachusetts. Any dispute
concerning rights under a plan maintained by the Company or the Bank shall be
settled in accordance with the terms of the plan.
13. Termination. This Agreement shall terminate upon the fulfillment of
-----------
the last commitment or obligation owing by any party.
14. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the meanings indicated below:
(A) "Board" shall mean the Board of Directors of the Company.
<PAGE>
-9-
(B) "Bonus SERP" shall mean The First National Bank of Boston Bonus
Supplemental Employee Retirement Plan.
(C) "Compensation Committee" shall mean the Compensation and
Nominating Committee of the Board.
(D) "Confidential Information" shall mean all information of the
Company, its Subsidiaries and its customers and prospective customers,
including without limitation financial information, business plans,
prospects and opportunities (such as financial projections and forecasts,
business and strategic plans, lending relationships, financial product
developments, or possible acquisitions or dispositions of businesses or
facilities), which has been discussed or considered by the employees,
management or the Board of the Company or a Subsidiary, but does not
include any information which has become part of the public domain or which
is generally known within the field or trade.
(E) "Deferral Plan" shall mean the Bank of Boston Corporation and its
Subsidiaries Deferred Compensation Plan.
(F) "Excess SERP" shall mean The First National Bank of Boston Excess
Benefit Supplemental Employee Retirement Plan.
(G) "Person" shall mean an individual, a corporation, an association,
a partnership, an estate, a trust and any other entity or organization.
(H) "Retirement Plan" shall mean the Retirement Plan of The First
National Bank of Boston and Certain Affiliated Companies.
(I) "Thrift Plan" shall mean the Thrift-Incentive Plan of The First
National Bank of Boston and Certain Affiliated Companies.
15. Discrimination Claim Release. The Executive hereby releases and
----------------------------
forever discharges the Company and its Subsidiaries from all claims under all
state and federal discrimination laws including but not limited to laws
prohibiting discrimination on the basis of age. The Executive shall have up to
twenty-one days from October 7, 1995 or until October 28, 1995, to execute this
Agreement. The Executive shall have an additional seven days to revoke this
Agreement after its execution by providing
<PAGE>
-10-
written notice of revocation to the Company. The Executive hereby agrees to
confer with his attorney prior to executing this Agreement.
IN WITNESS WHEREOF, the Company and the Bank, by their duly authorized
representative, and the Executive have signed and sealed this Agreement as of
the date first written above.
BANK OF BOSTON CORPORATION
BY: /s/ Helen G. Drinan
-------------------
Helen G. Drinan
Executive Director,
Human Resources
THE FIRST NATIONAL BANK OF
BOSTON
By: /s/ Helen G. Drinan
-------------------
Helen G. Drinan
Executive Director,
Human Resources
/s/ Ira Stepanian
-----------------
Ira Stepanian
<PAGE>
Schedule A
----------
Description Section Reference
Continuation Salary 2.1
Annual Bonus 2.2
Death Benefit Payment 2.6
Indemnification 2.10
Amounts Accrued or
Incurred Before Death Various
<PAGE>
Exhibit 11
BANK OF BOSTON CORPORATION
Computation of Per Share Earnings
(in millions, except per share amounts)
<TABLE>
<CAPTION>
EARNINGS Years Ended December 31
--------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
1. Net income $ 541 $ 435 $ 299
2. Less: Preferred dividends 37 37 35
------- ------- -------
3. Net income applicable to primary
earnings per common share 504 398 264
4. Add: Interest expense on convertible
debentures, net of tax 4 4
------- ------- -------
5. Net income applicable to fully diluted
earnings per common share $ 504 $ 402 $ 268
======= ======= =======
<CAPTION>
SHARES
------
<S> <C> <C> <C>
6. Weighted average number of common
shares outstanding 110,716 106,730 105,336
7. Incremental shares from assumed exercise
of dilutive stock options as of the
beginning of the period using the treasury
stock method 1,959 668 888
8. Incremental shares from assumed conversion
of debentures at date of issuance 885 4,029 4,034
------- ------- -------
9. Adjusted number of common shares 113,560 111,427 110,258
======= ======= =======
<CAPTION>
PER SHARE CALCULATION
---------------------
<S> <C> <C> <C>
10. Primary net income per common share $ 4.55 $ 3.73 $ 2.51
(Item 3 / Item 6); see note below
11. Fully diluted net income per common share $ 4.43 $ 3.61 $ 2.44
(Item 5 / Item 9); see note below
</TABLE>
Note - Income per common share before extraordinary item and cumulative effect
of changes in accounting principles, net of tax, on both a primary and fully
diluted basis for the years ended December 31, 1994 and 1993 is computed by
adding to the numerator the extraordinary loss from early extinguishment of
debt, net of tax, in 1994 of $7 million and subtracting from the numerator the
cumulative effect of accounting changes, net of tax, in 1993 of $24 million.
<PAGE>
EXHIBIT 12(a)
BANK OF BOSTON CORPORATION
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED
CHARGES
(Excluding Interest on Deposits)
The Corporation's ratios of earnings to fixed charges (excluding interest on
deposits) for the five years ended
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
(Dollars in millions)
1995 1994 1993 1992 1991
----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113)
Extraordinary items, net of 7 (73) (8)
tax
Cumulative effect of changes
in accounting principles, (24)
net of tax
Income tax expense (benefit) 444 349 215 153 (58)
----- ----- ---- ---- ----
Pretax earnings (loss) 985 791 490 359 (179
----- ----- ---- ---- ----
Fixed charges:
Portion of rental expense
(net of sublease
rental income) which
approximates the
interest factor 29 27 27 28 30
Interest on borrowed funds 1,021 998 378 345 362
----- ----- ---- ---- ----
Total fixed charges 1,050 1,025 405 373 392
----- ----- ---- ---- ----
Earnings (for ratio
calculation) $ 2,035 $ 1,816 $ 895 $ 732 $ 213
===== ===== ==== ==== ====
Total fixed charges $ 1,050 $ 1,025 $ 405 $ 373 $ 392
===== ===== ==== ==== ====
Ratio of earnings to fixed
charges 1.94 1.77 2.21 1.96 .54
===== ===== ==== ==== ====
</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. For the year ended
December 31, 1991, earnings were insufficient to cover fixed charges.
Additional earnings necessary to bring the ratio of earnings to fixed charges to
a one-to-one basis are $179 million.
<PAGE>
EXHIBIT 12(b)
BANK OF BOSTON CORPORATION
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
(Including Interest on Deposits)
The Corporation's ratios of earnings to fixed charges (including interest on
deposits) for the five years ended
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
(Dollars in millions)
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113)
Extraordinary items, net of tax 7 (73) (8)
Cumulative effect of changes
in accounting principles, net of tax (24)
Income tax expense (benefit) 444 349 215 153 (58)
----- ----- ----- ----- -----
Pretax earnings (loss) 985 791 490 359 (179)
----- ----- ----- ----- -----
Fixed charges:
Portion of rental expense
(net of sublease
rental income) which
approximates the
interest factor 29 27 27 28 30
Interest on borrowed funds 1,021 998 378 345 362
Interest on deposits 1,557 1,148 1,016 1,407 1,808
----- ----- ----- ----- -----
Total fixed charges 2,607 2,173 1,421 1,780 2,200
----- ----- ----- ----- -----
Earnings (for ratio calculation) $ 3,592 $ 2,964 $ 1,911 $ 2,139 $ 2,021
===== ===== ===== ===== =====
Total fixed charges $ 2,607 $ 2,173 $ 1,421 $ 1,780 $ 2,200
===== ===== ===== ===== =====
Ratio of earnings to fixed
charges 1.38 1.36 1.34 1.20 .92
===== ===== ===== ===== =====
</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. For the year ended
December 31, 1991, earnings were insufficient to cover fixed charges.
Additional earnings necessary to bring the ratio of earnings to fixed charges to
a one-to-one basis are $179 million.
<PAGE>
EXHIBIT 12(c)
BANK OF BOSTON CORPORATION
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(Excluding Interest on Deposits)
The Corporation's ratios of earnings to combined fixed charges and preferred
stock dividend requirements (excluding interest on deposits) for the five years
ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
(Dollars in millions)
1995 1994 1993 1992 1991
----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113)
Extraordinary items, net of 7 (73) (8)
tax
Cumulative effect of changes
in accounting principles, (24)
net of tax
Income tax expense (benefit) 444 349 215 153 (58)
----- ----- ---- ---- ----
Pretax earnings (loss) $ 985 $ 791 $ 490 $ 359 $ (179)
===== ===== ==== ==== ====
Fixed charges:
Portion of rental expense
(net of sublease
rental income) which
approximates the
interest factor $ 29 $ 27 $ 27 $ 28 $ 30
Interest on borrowed funds 1,021 998 378 345 362
----- ----- ---- ---- ----
Total fixed charges 1,050 1,025 405 373 392
Preferred stock dividend
requirements 68 67 61 33 13
----- ----- ---- ---- ----
Total combined fixed charges
and preferred stock dividend
requirements $ 1,118 $ 1,092 $ 466 $ 406 $ 405
===== ===== ==== ==== ====
Earnings (for ratio calculation)
(Pretax earnings (loss)
plus total fixed charges) $ 2,035 $ 1,816 $ 895 $ 732 $ 213
===== ===== ==== ==== ====
Ratio of earnings to combined
fixed charges and preferred
stock dividend requirements 1.82 1.66 1.92 1.80 .53
===== ===== ==== ==== ====
</TABLE>
For purposes of computing the consolidated ratio of earnings to combined fixed
charges and preferred stock dividend requirements "earnings" represent income
(loss)
<PAGE>
before extraordinary items and cumulative effect of changes in accounting
principles plus applicable income taxes and fixed charges. "Fixed charges"
include gross interest expense (excluding interest on deposits) and the
proportion deemed representative of the interest factor of rent expense, net of
income from subleases. Pretax earnings required for preferred stock dividends
were computed using tax rates for the applicable year. No tax adjustments were
made in loss years. For the year ended December 31, 1991, earnings were
insufficient to cover fixed charges. Additional earnings necessary to bring the
ratio of earnings to fixed charges to a one-to-one basis are $179 million.
<PAGE>
EXHIBIT 12(d)
BANK OF BOSTON CORPORATION
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
(Including Interest on Deposits)
The Corporation's ratios of earnings to combined fixed charges and preferred
stock dividend requirements (including interest on deposits) for the five years
ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
(Dollars in millions)
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 541 $ 435 $ 299 $ 279 $ (113)
Extraordinary items, net of tax 7 (73) (8)
Cumulative effect of changes
in accounting principles, net of tax (24)
Income tax expense (benefit) 444 349 215 153 (58)
----- ----- ----- ----- -----
Pretax earnings (loss) $ 985 $ 791 $ 490 $ 359 $ (179)
===== ===== ===== ===== =====
Fixed charges:
Portion of rental expense
(net of sublease
rental income) which
approximates the
interest factor $ 29 $ 27 $ 27 $ 28 $ 30
Interest on borrowed funds 1,021 998 378 345 362
Interest on deposits 1,557 1,148 1,016 1,407 1,808
----- ----- ----- ----- -----
Total fixed charges 2,607 2,173 1,421 1,780 2,200
Preferred stock dividend
requirements 68 67 61 33 13
----- ----- ----- ----- -----
Total combined fixed charges
and preferred stock dividend
requirements $ 2,675 $ 2,240 $ 1,482 $ 1,813 $ 2,213
===== ===== ===== ===== =====
Earnings (for ratio calculation)
(Pretax earnings (loss)
plus total fixed charges) $ 3,592 $ 2,964 $ 1,911 $ 2,139 $ 2,021
===== ===== ===== ===== =====
Ratio of earnings to combined
fixed charges and preferred
stock dividend requirements 1.34 1.32 1.29 1.18 .91
===== ===== ===== ===== =====
</TABLE>
<PAGE>
For purposes of computing the consolidated ratio of earnings to combined fixed
charges and preferred stock dividend requirements "earnings" represent income
(loss) before extraordinary items and cumulative effect of changes in accounting
principles plus applicable income taxes and fixed charges. "Fixed charges"
include gross interest expense (including interest on deposits) and the
proportion deemed representative of the interest factor of rent expense, net of
income from subleases. Pretax earnings required for preferred stock dividends
were computed using tax rates for the applicable year. No tax adjustments were
made in loss years. For the year ended December 31, 1991, earnings were
insufficient to cover fixed charges. Additional earnings necessary to bring the
ratio of earnings to fixed charges to a one-to-one basis are $179 million.
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
BANK OF BOSTON CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993 1992 1991 1990
(dollars in millions, except
per share amounts)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income............... $4,319 $3,718 $2,739 $3,007 $3,285 $4,235
Interest expense.............. 2,578 2,146 1,394 1,752 2,170 3,012
------- ------- ------- ------- ------ ------
Net interest revenue........ 1,741 1,572 1,345 1,255 1,115 1,223
Provision for credit losses... 250 130 70 181 519 764
------- ------- ------- ------- ------ ------
Net interest revenue after
provision for credit loss-
es......................... 1,491 1,442 1,275 1,074 596 459
Noninterest income............ 1,091 828 746 759 763 764
Noninterest expense(1)........ 1,597 1,479 1,531 1,474 1,538 1,732
------- ------- ------- ------- ------ ------
Income (Loss) before income
taxes, extraordinary items
and cumulative effect of
changes in accounting
principles................... 985 791 490 359 (179) (509)
Provision for (Benefit from)
income taxes............... 444 349 215 153 (58) 3
------- ------- ------- ------- ------ ------
Income (Loss) before extraor-
dinary items and cumulative
effect of changes in account-
ing principles............... 541 442 275 206 (121) (512)
Extraordinary items
Gains (losses) from early
extinguishment of debt,
net of tax................. (7) 8 44
Recognition of prior year
tax benefit carryforwards.. 73
Cumulative effect of changes
in accounting principles,
net(2)....................... 24
------- ------- ------- ------- ------ ------
Net income (loss)........... $541 $435 $299 $279 $(113) $(468)
======= ======= ======= ======= ====== ======
Net income (loss) applicable
to common stock............ $504 $398 $264 $259 $(126) $(482)
======= ======= ======= ======= ====== ======
Per common share
Income (Loss) before
extraordinary items and
cumulative effect of changes
in accounting principles
Primary..................... $4.55 $3.79 $2.28 $1.82 $(1.42) $(5.67)
Fully diluted............... 4.43 3.67 2.22 1.78 (1.42) (5.67)
Net income (loss)
Primary..................... 4.55 3.73 2.51 2.54 (1.33) (5.20)
Fully diluted............... 4.43 3.61 2.44 2.45 (1.33) (5.20)
Cash dividends declared...... 1.28 .93 .40 .10 .10 .82
Average number of common
shares (in thousands)
Primary...................... 110,716 106,730 105,336 101,977 94,730 92,634
Fully diluted................ 113,560 111,427 110,258 107,157 94,730 92,634
- -------------------------------------------------------------------------------
</TABLE>
(1) Includes, in 1995, $28 million in charges mainly related to exiting, reor-
ganizing and downsizing certain business and corporate staff units. In-
cludes, in 1994, costs of $21 million in connection with the Corporation's
acquisitions of BankWorcester Corporation and Pioneer Financial, A Co-oper-
ative Bank; and, in 1993, acquisition-related costs and reorganization
charges of $85 million, primarily in connection with the Corporation's
mergers with Society for Savings Bancorp, Inc. (Society) and Multibank Fi-
nancial Corp. (Multibank), as well as estimated costs of downsizing and
reconfiguring certain of the Corporation's business and corporate units.
Also includes reorganization charges of $54 million in 1991 and $139 mil-
lion in 1990, comprised of $7 million in 1991 and $89 million in 1990 in
connection with a Society reorganization plan, and $47 million in 1991 and
$50 million in 1990 in connection with the Corporation's plans for the con-
solidation and downsizing of various domestic and international operations
and facilities and staff reductions.
(2) Includes a cumulative benefit of $77 million resulting from the adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," and a cumulative charge of $53 million, net of taxes, relating to a
change in accounting principles pertaining to the valuation of purchased
mortgage servicing rights.
17
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF BOSTON CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993 1992 1991 1990
(dollars in millions,
except per share amounts)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED RATIOS
Return on average as-
sets..................... 1.21% 1.01% .78% .76% (.30)% (1.07)%
Return on average common
equity(3)................ 17.14 15.82 11.78 13.37 (7.28) (21.68)
Common dividend payout
ratio.................... 28.1 24.9 14.4 3.4 NM NM
Common equity to total
assets................... 6.8 5.9 5.9 5.7 4.5 4.7
Average total stockhold-
ers' equity to average
total assets............. 7.7 7.0 7.1 6.0 5.1 5.6
Risk-based capital ratios
Tier 1................. 8.0 7.0 7.2 7.1 5.2 5.3
Total.................. 12.8 12.2 12.4 12.0 9.3 9.4
Leverage ratio........... 7.4 6.5 6.8 6.6 4.6 4.5
Net credit losses to av-
erage loans and lease fi-
nancing.................. .54 .82 .84 1.22 1.87 2.50
Reserve for credit losses
to loans and lease fi-
nancing.................. 2.37 2.19 2.68 3.63 4.14 3.90
Reserve for credit losses
to nonaccrual loans and
lease financing.......... 238.29 186.22 139.69 118.51 69.48 53.93
Nonaccrual loans and OREO
as a percent of related
asset categories......... 1.2 1.4 2.3 3.7 7.2 8.1
Market value/book value.. 159.9 104.7 101.3 126.2 63.9 32.5
BALANCE SHEET DATA AT
DECEMBER 31
Loans and lease financ-
ing...................... $31,067 $31,005 $28,782 $25,399 $25,368 $26,220
Reserve for credit loss-
es....................... (736) (680) (770) (923) (1,051) (1,023)
Total assets............. 47,397 44,630 40,588 37,315 38,309 39,351
Deposits................. 30,948 31,356 29,614 29,102 29,291 31,813
Funds borrowed........... 8,763 6,360 4,975 2,947 4,634 2,704
Notes payable............ 2,139 2,169 1,973 1,686 1,419 1,536
Stockholders' equity..... 3,751 3,142 2,912 2,554 1,919 2,046
Common shares outstanding
(in thousands)........... 112,086 106,547 105,801 104,664 95,025 93,575
Common stockholders of
record(4)................ 21,962 23,005 23,633 25,263 27,665 27,414
Number of employees...... 17,881 18,355 18,644 19,459 18,752 20,339
Per common share
Book value.............. $28.93 $24.72 $22.71 $20.21 $18.00 $19.64
Market value............ 46 1/4 25 7/8 23 25 1/2 11 1/2 6 3/8
AVERAGE BALANCE SHEET
DATA
Loans and lease financ-
ing...................... $31,116 $29,790 $26,586 $25,330 $26,167 $28,949
Securities............... 4,724 3,510 3,624 4,704 5,098 4,509
Other earning assets..... 3,551 4,845 4,089 3,195 3,298 6,865
------- ------- ------- ------- ------- -------
Total earning assets... 39,391 38,145 34,299 33,229 34,563 40,323
------- ------- ------- ------- ------- -------
Cash and due from banks.. 1,924 2,071 1,790 1,596 1,485 1,780
Other assets............. 3,297 2,845 2,278 2,030 1,867 1,667
------- ------- ------- ------- ------- -------
Total average assets... $44,612 $43,061 $38,367 $36,855 $37,915 $43,770
======= ======= ======= ======= ======= =======
Deposits................. $29,301 $29,301 $28,539 $29,028 $29,861 $33,505
Funds borrowed........... 8,167 7,180 4,349 3,485 3,544 4,518
Other liabilities........ 1,606 1,488 1,017 919 1,014 1,218
Notes payable............ 2,092 2,069 1,743 1,197 1,552 2,098
Stockholders' equity..... 3,446 3,023 2,719 2,226 1,944 2,431
------- ------- ------- ------- ------- -------
Total average liabili-
ties and stockholders'
equity................. $44,612 $43,061 $38,367 $36,855 $37,915 $43,770
======= ======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------
</TABLE>
(3) For purposes of this ratio, preferred stock dividends have been deducted
from net income.
(4) The number of stockholders of record includes banks and brokers who act as
nominees, each of whom may represent more than one stockholder.
NM--Not meaningful.
18
<PAGE>
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- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Bank of Boston Corporation (the Corporation) is a registered bank holding com-
pany which, together with its subsidiaries, operates a network of 500 offices
across the U.S. and more than 100 offices in 23 countries in Latin America,
Europe and Asia. The Corporation's major banking subsidiaries are The First
National Bank of Boston (FNBB), Bank of Boston Connecticut and Rhode Island
Hospital Trust National Bank.
STRATEGIC INITIATIVES
The Corporation continues to take strategic initiatives focused on leveraging
its core competencies over attractive markets, including the expansion of its
domestic personal banking and global banking businesses, increasing the capi-
tal markets activities of its corporate banking business, the divestiture of
non-core business units and the formation of strategic alliances.
MERGER AGREEMENT WITH BAYBANKS
On December 12, 1995, the Corporation and BayBanks, Inc. (BayBanks) jointly
announced a definitive agreement under which the Corporation would acquire
BayBanks in a tax-free exchange of stock where the Corporation will exchange
2.2 shares of its common stock for each share of BayBanks common stock. The
transaction will be accounted for as a pooling of interests. The merger is ex-
pected to be completed by the middle of 1996, and is subject to a number of
conditions, including approval by federal and state bank regulators and the
stockholders of both companies. No assurance can be given that approvals of
the stockholders or the regulators will be obtained. The Corporation antici-
pates incurring merger and reorganization costs of approximately $140 million
(on a pre-tax basis) in connection with the merger. The combination of the two
Boston-based institutions will create a consumer and corporate banking leader
operating in 36 states and 24 countries, with approximately $60 billion in as-
sets and $40 billion in deposits.
OTHER ACQUISITIONS
During the past year, the Corporation conducted the following additional ac-
quisition activities:
. In February 1995, the Corporation completed its acquisition of Ganis Credit
Corporation (Ganis), which is headquartered in Newport Beach, California.
Ganis specializes in collateralized lending for recreational vehicles and
boats, and had approximately $540 million in consumer loans outstanding at
December 31, 1995.
. In July 1995, Fidelity Acceptance Corporation (FAC), the Corporation's na-
tional consumer finance company, completed the acquisition of approximately
$110 million in consumer loans and assumed 46 branches of Century Accept-
ance Corporation, a national consumer finance company based in Kansas City,
Missouri.
. In October 1995, the Corporation announced a definitive agreement to ac-
quire The Boston Bancorp (Bancorp), the holding company of South Boston
Savings Bank, a Massachusetts chartered savings bank with approximately
$1.3 billion in deposits. This transaction, which will be accounted for as
a purchase, is currently anticipated to close in the middle of 1996, sub-
ject to approval by federal and state bank regulators and the stockholders
of Bancorp.
DIVESTITURES
In 1995, the Corporation sold the following non-strategic business units:
. In the first quarter of 1995, following its strategy to focus on the south-
ern New England market, the Corporation completed the sales of its Vermont
and Maine banking subsidiaries, Bank of Vermont (Vermont) and Casco North-
ern Bank, N.A. (Casco), resulting in a pre-tax gain of approximately $75
million, or $30 million net of tax. Vermont and Casco combined had loans of
approximately $1.2 billion and deposits of approximately $1.3 billion at
December 31, 1994.
. In October 1995, the Corporation sold its corporate trust business, result-
ing in a net pre-tax gain of $20 million, or $12 million net of tax.
STRATEGIC ALLIANCES AND OTHER INITIATIVES
During 1995, the Corporation entered into the following strategic alliances,
and took the following other strategic initiatives, to improve efficiencies
and economies of scale of certain of its business units:
. Effective in October 1995, the Corporation formed a joint venture with Bos-
ton Financial Data Services (a joint venture of State Street Bank and Trust
Company and DST Systems, Inc.), which combined their respective stock
transfer businesses into a single entity that is 50 percent owned by each
party.
. In December 1995, the Corporation announced it would enter into a joint
venture with two equity investors, the Thomas H. Lee Company and Madison
Dearborn Partners, to form an independent mortgage company. The joint ven-
ture structure is expected to provide a means to achieve the growth and
scale deemed necessary to succeed in the mortgage banking industry. The
Corporation will
19
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
contribute its BancBoston Mortgage Corporation (BBMC) subsidiary in return for
cash and a minority equity interest in the newly formed entity. The transac-
tion is expected to be completed in the first half of 1996.
. During 1995, the Corporation initiated further expansion into consumer mar-
kets by placing new automatic teller machines (ATMs) in retail locations,
establishing in-store supermarket branches, introducing computer home bank-
ing and re-entering the domestic credit card business.
. In 1995, the Corporation continued to emphasize growth and improve efficien-
cies in its global banking business, particularly in Latin America. In this
regard, the Corporation established subsidiary banks in Colombia and Mexico
and a representative office in China, and announced the formation of a joint
venture in the Philippines. The Corporation realigned its European and cer-
tain other operations during 1995, including the announced closing of its
Luxembourg operations and the disposition of its Puerto Rican and Haitian
branches. The Corporation also introduced its Global Initiative program, an
export program designed to help small- to medium-sized companies, princi-
pally based in New England, conduct business in Latin America and other
parts of the world.
. The Corporation continued to expand its private equity investing and capital
markets activities as evidenced by the growth in profits from the equity and
mezzanine business and related corporate finance fee income. During the
year, the Corporation formed its Emerging Markets group, a global capital
markets unit which will link emerging markets sales and trading, treasury
risk-management products and Latin American/Asian investment banking. The
Corporation also reconfigured its corporate banking organization to link
closely all its relationship management units (domestic, international, spe-
cialized and middle market), to establish the key distribution channel for
its increasingly sophisticated array of capital markets and other products,
and to optimize customer service and delivery capabilities.
Additional information on certain of the transactions described above is in-
cluded in Note 2 to the Financial Statements.
20
<PAGE>
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- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
RESULTS OF OPERATIONS
The following is a discussion and analysis of the Corporation's consolidated
results of operations. In order to understand this section in context, it
should be read in conjunction with the Financial Statements included elsewhere
in this report.
OVERVIEW
Table 1 presents the Corporation's income before extraordinary item and cumula-
tive effect of changes in accounting principles and net income, as well as re-
lated primary and fully diluted earnings per common share amounts for 1995,
1994 and 1993. The Corporation's 1995 net income increased $106 million, or
24%, from the 1994 level. Net income per common share on a fully diluted basis
for 1995 increased $.82, or 23%, from the 1994 level.
TABLE 1 -- RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions, except per share amounts)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before extraordinary item and cumulative effect of
changes in accounting principles ............................ $ 541 $ 442 $ 275
Extraordinary loss from early extinguishment of debt, net of
tax.......................................................... (7)
Cumulative effect of changes in accounting principles, net of
tax(1)....................................................... 24
----- ----- -----
Net income.................................................... $ 541 $ 435 $ 299
===== ===== =====
Per common share
Income before extraordinary item and cumulative effect of
changes in accounting principles
Primary..................................................... $4.55 $3.79 $2.28
Fully diluted............................................... 4.43 3.67 2.22
Net income
Primary..................................................... 4.55 3.73 2.51
Fully diluted............................................... 4.43 3.61 2.44
</TABLE>
- --------------------------------------------------------------------------------
(1) Reflects a $77 million benefit as a result of adopting Statement of Finan-
cial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," as
of January 1, 1993, and a $53 million after-tax charge as a result of a
change in accounting with respect to the valuation of purchased mortgage
servicing rights (PMSR).
Chart 1 presents the Corporation's total revenues on a taxable equivalent ba-
sis, excluding gains from the sales of businesses, for each of the three years
in the period ended December 31, 1995. On this basis, revenues grew $367 mil-
lion, or over 15%, in 1995, and $281 million, or over 13%, in 1994. A detailed
discussion of the net interest revenue and noninterest income components of
revenue follows.
[BAR CHART 1 DESCRIPTION BELOW]
Bar Chart 1 entitled "Total Revenues Excluding Gains on Sales of Businesses"
- ----------------------------------------------------------------------------
The Corporation's total revenues (excluding gains on sales of businesses) for
the years ended December 31, 1995, 1994 and 1993, respectively, were as follows:
<TABLE>
<CAPTION>
(in millions) 1993 1994 1995
(fully taxable equivalent ------ ------ ----
basis)
<S> <C> <C> <C>
Net Interest Revenue $1,353 $1,579 $1,751
Noninterest income $746 $801 $996
------ ---- ----
Total $2,099 $2,380 $2,747
</TABLE>
NET INTEREST REVENUE
This discussion of net interest revenue should be read in conjunction with Av-
erage Balances and Interest Rates and Change in Net Interest Revenue -- Volume
and Rate Analysis, presented elsewhere in this report. Table 2 presents a sum-
mary of net interest revenue, related average earning assets and net interest
margin. For this review of net interest revenue, interest income that is either
exempt from federal income taxes or taxed at a preferential rate has been ad-
justed to a fully taxable equivalent basis. This adjustment has been calculated
using a federal income tax rate of 35%, plus applicable state and local taxes,
net of related federal tax benefits.
TABLE 2 -- NET INTEREST REVENUE, AVERAGE EARNING ASSETS AND NET INTEREST MARGIN
<TABLE>
<CAPTION>
Years Ended December 31
(dollars in millions) U.S. International Consolidated
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest revenue (fully taxable
equivalent basis)
1995.................................... $ 1,305 $ 446 $ 1,751
1994.................................... 1,231 348 1,579
1993.................................... 1,096 257 1,353
Average earning assets
1995.................................... $28,512 $10,879 $39,391
1994.................................... 28,339 9,806 38,145
1993.................................... 26,742 7,557 34,299
Net interest margin
1995.................................... 4.58% 4.10% 4.45%
1994.................................... 4.34% 3.54% 4.14%
1993.................................... 4.10% 3.40% 3.94%
</TABLE>
21
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
1995 VS. 1994
Both domestic and international operations contributed to the improvements in
net interest revenue and margin from 1994.
The domestic net interest revenue increase of $74 million resulted from both a
higher level of earning assets and wider spreads. Average earning assets in-
creased $173 million, reflecting a $162 million increase in average loan and
lease volume. Contributing to the loan volume increase was a higher level of
consumer-related loans, reflecting growth of FAC's portfolio, the full year ef-
fects of the 1994 acquisitions of Pioneer Financial, A Co-operative Bank (Pio-
neer) and BankWorcester Corporation (BankWorcester), and the effect of the
early 1995 acquisition of Ganis, partially offset by the impact of the 1995
Vermont and Casco sales and lower domestic commercial loans and residential
mortgages. Wider spreads mainly reflected the shift in the Corporation's aver-
age loan portfolio towards higher-yielding consumer-related loans, and earning
asset yield growth which generally outpaced rate increases on interest bearing
liabilities, particularly retail deposits, during the first half of the year.
The widening of spreads was also mainly responsible for the domestic net inter-
est margin increasing by 24 basis points compared with 1994. Information on the
Corporation's management of interest rate risk is discussed in the "Interest
Rate Risk Management" section.
The international net interest revenue increase of $98 million and the interna-
tional net interest margin increase of 56 basis points were primarily attribut-
able to the Corporation's operations in Latin America. These increases were due
to wider spreads as well as increases in average earning assets. The increase
in spreads was, in part, due to a shift in mix to higher-yielding loans from
lower-yielding treasury assets as well as the effects of asset and liability
positions taken by the Corporation in Latin America which enabled it to benefit
from prevailing interest rates. International volume growth included an in-
crease of over $600 million in average loans and leases in Argentina from 1994.
Consolidated net interest margin increased throughout 1994 to 4.39% in the
fourth quarter of 1994. The margin increased further to 4.56% in the first
quarter of 1995, and declined in each of the subsequent 1995 quarters, to 4.35%
in the fourth quarter. The declines in margin during 1995 reflected the nar-
rower domestic spreads being experienced by the industry as competitive rate
increases on interest bearing liabilities, particularly retail deposits, caught
up with yield growth on earning assets. In addition, international margin in-
creased in the first half of 1995, mainly as a result of widening spreads in
both Argentina and Brazil, which reflected the effects of government economic
measures and interest rate positions taken by the Corporation enabling it to
benefit from rising rates. Spreads generally narrowed in the second half of
1995, particularly in Argentina, as a result of declining interest rates stem-
ming from increasing economic stability in that country during this period. See
the "Emerging Markets Countries" section for further discussion.
The Corporation expects continued pressure on margin in the future. Future lev-
els of net interest revenue and margin will be affected by competitive pricing
pressure on retail deposits, loans and other products; the mix and volume of
assets and liabilities; the current interest rate environment; the economic and
political conditions in the countries where the Corporation does business; and
other factors.
NONINTEREST INCOME
The composition of noninterest income is presented in Table 3 and Chart 2:
TABLE 3 -- NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial service fees
Net mortgage servicing fees.................................. $ 163 $ 57 $ 6
Deposit fees................................................. 117 126 122
Loan-related fees............................................ 70 60 45
Letter of credit and acceptance fees......................... 69 61 58
Other financial service fees................................. 104 92 119
------ ---- ----
Total financial service fees................................ 523 396 350
Trust and agency fees......................................... 217 201 178
Net equity and mezzanine profits.............................. 110 30 38
Net foreign exchange trading profits.......................... 57 42 45
Trading profits and commissions............................... 22 16 24
Net securities gains.......................................... 9 14 32
Gains on sales of businesses.................................. 95 27
Other income.................................................. 58 102 79
------ ---- ----
Total....................................................... $1,091 $828 $746
====== ==== ====
</TABLE>
[BAR CHART 2 DESCRIPTION BELOW]
Bar Chart 2 entitled "NonInterest Income"
- -----------------------------------------
Chart 2 reports the Corporation's total noninterest income for the years ended
December 31, 1995, 1994 and 1993, respectively, as follows:
<TABLE>
<CAPTION>
(in millions) 1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Fees $528 $597 $740
Trading $101 $72 $88
Other $117 $159 $263
---- ---- ----
Total $746 $828 $1,091
</TABLE>
1995 VS. 1994
The $127 million increase in financial service fees reflected a significant in-
crease in net mortgage servicing fees as well as higher loan-related fees and
other financial service fees and higher letter of credit and acceptance fees,
partially offset by a decline in deposit fees. Net mortgage servicing fees in-
creased
22
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
$106 million compared with 1994. As a result of the declining interest rate en-
vironment in the fourth quarter of 1995, the Corporation recognized $67 million
of gains (net of increased servicing amortization) from the increase in market
value of contracts used to manage prepayment risk in the mortgage servicing
portfolio. See the "Interest Rate Risk Management" section for a further dis-
cussion of these contracts and their potential effect on income. Excluding
these gains, net mortgage servicing fees increased $39 million from 1994, re-
flecting the growth in the average servicing portfolio from $32 billion in 1994
to $40 billion in 1995. See the "Strategic Alliances and Other Initiatives"
section for further discussion of the announced joint venture involving the
Corporation's mortgage banking operations. The growth in loan-related and other
financial service fees was mainly due to higher syndication and advisory fees,
reflecting the Corporation's increased emphasis on its capital markets busi-
ness. Partially offsetting the increase in other financial service fees was the
absence of factoring fees in 1995, due to the sale of the Corporation's domes-
tic factoring business in 1994, which resulted in a pre-tax gain of $27 million
($15 million net of tax). Letter of credit and acceptance fees increased $8
million compared with 1994 due to a higher volume of business. Deposit fees de-
clined compared to 1994, mainly resulting from the $1.3 billion decline in de-
posits due to the 1995 sales of Vermont and Casco, which resulted in a pre-tax
gain of $75 million ($30 million net of tax).
Net equity and mezzanine profits improved $80 million from 1994, as a result of
a higher level of sales activity in 1995. The improvement in trust and agency
fees mainly reflected higher fees from the Brazilian mutual fund business, as
total funds under management increased to $2.5 billion at December 31, 1995,
from $1.7 billion a year ago, which was partially offset by the absence of cor-
porate trust and domestic stock transfer fees in the fourth quarter of 1995. As
previously discussed in the "Strategic Initiatives" section, the Corporation
sold its corporate trust business on October 1, 1995, which resulted in a net
pre-tax gain of $20 million ($12 million net of tax), and spun off its domestic
stock transfer business into a joint venture effective in October 1995. Foreign
exchange trading activities principally include trading of spot and forward
contracts in major foreign currencies. Net foreign exchange trading profits
were $15 million higher compared with 1994, as increases were posted by inter-
national and domestic treasury operations. Trading account profits increased
due to a higher level of profits from international securities trading during
the second half of 1995. Offsetting these improvements were declines in other
noninterest income and net securities gains. Other income declined, in part,
due to a loss of $17 million on the transfer of approximately $1.3 billion of
low-yielding residential mortgage loans into the held for sale account, sub-
stantially all of which were sold by December 31, 1995. Also contributing to
the decline in other income were $17 million of valuation-related charges asso-
ciated with certain investments and other assets, including assets being re-
tained by the Corporation in connection with the mortgage banking joint ven-
ture, and the absence of net gains recorded in the first quarter of 1994 from
the sale of securities originally acquired in connection with loan
restructurings. Partially offsetting these items was a net improvement in the
results of investments accounted for under the equity method. Other income in
1994 included $15 million of exchange-related profits arising from the
strengthening of Brazil's currency against the U.S. dollar subsequent to the
implementation of Brazil's new economic program in July 1994, and approximately
$15 million of charges associated with certain investments.
NONINTEREST EXPENSE
The composition of noninterest expense is presented in Table 4 and Chart 3:
TABLE 4 -- NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee costs............................................ $ 897 $ 813 $771
Occupancy and equipment................................... 240 231 224
FDIC insurance premiums................................... 24 51 62
Other..................................................... 399 341 345
------ ------ ------
Noninterest expense, excluding OREO costs and special
charges................................................. 1,560 1,436 1,402
OREO costs................................................ 9 22 44
Acquisition, divestiture and restructuring expense........ 28 21 85
------ ------ ------
Total................................................... $1,597 $1,479 $1,531
====== ====== ======
</TABLE>
[BAR CHART 3 DESCRIPTION BELOW]
Bar Chart 3 entitled "NonInterest Expense Excluding Oreo Costs and Special
- --------------------------------------------------------------------------
Charges"
- --------
Chart 3 reports the Corporation's total noninterest expense excluding Oreo costs
and special charges for the years ended December 31, 1995, 1994 and 1993,
respectively, as follows:
(in millions) 1993 1994 1995
------ ------ ------
Employee Costs $771 $813 $897
Occupancy/Equipment $224 $231 $240
Other $407 $392 $423
---- ---- ----
Total $1,402 $1,436 $1,560
23
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
1995 VS. 1994
The growth in noninterest expense before acquisition, divestiture and restruc-
turing expense and OREO costs reflected increases in the Corporation's Latin
American, personal banking and capital markets businesses which the Corporation
has been expanding. The increase in employee costs mainly included higher merit
increases and higher levels of incentive compensation, including stock awards
made to senior management under a plan tied to the Corporation's common stock
price. The $9 million increase in occupancy and equipment from 1994 was the re-
sult of higher expenses from international operations, mainly Latin America.
The $27 million decline in FDIC insurance premiums reflected a reduction in the
FDIC assessment rate effective in June 1995. Other expense increased from 1994
as a result of growth and business development in the Latin American and per-
sonal banking businesses. This increase included higher levels of advertising
and marketing expense, including increases related to new retail deposit prod-
ucts, the Corporation's re-entry into the domestic credit card business, the
introduction of a home banking product and customer surveys. In addition,
growth in travel, communications and software costs and increased goodwill am-
ortization contributed to the increase in other expenses. The decline in OREO
costs was primarily due to lower valuation adjustments.
During the fourth quarter of 1995, the Corporation recorded $28 million of
charges mainly related to exiting, reorganizing and downsizing certain business
and corporate staff units. Included within these charges were expenses related
to reorganizations underway in the European business, including the closing of
the Luxembourg operations, corporate banking, certain Asian operations and var-
ious other units. In addition, a charge was included for curtailment losses as
defined by SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," and SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Bene-
fits." The curtailment losses resulted from the announced joint venture of the
mortgage banking business which will remove mortgage banking employees from the
Corporation's postretirement and pension plans. Additional information on these
items is included in Note 17 to the Financial Statements.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $250 million in 1995, compared with $130
million in 1994 and $70 million in 1993. The provision for credit losses in
each year reflected management's assessment of the adequacy of the reserve for
credit losses, including the risk characteristics of the loan portfolio and
economic conditions. The 1995 provision for credit losses included special pro-
visions of $75 million reflecting management's intent to strengthen further the
Corporation's loan loss reserve (see further discussion in the "Reserve for
Credit Losses" section). The 1994 provision reflected the effect of transfer-
ring certain lower quality real estate exposures to an accelerated disposition
portfolio (ADP) (see further discussion in the "Accelerated Disposition Portfo-
lio" section). The amount of future provisions will be a function of the regu-
lar quarterly review of the reserve for credit losses, which considers the risk
characteristics of the loan portfolio and economic conditions existing at that
time.
PROVISION FOR INCOME TAXES
The 1995 income tax provision was $444 million, compared with $349 million for
1994 and $215 million for 1993. The 1995 provision included $45 million associ-
ated with the $75 million gain on the sales of Vermont and Casco. The high
level of tax associated with this gain reflected the lower tax bases in these
investments as a result of $35 million of non-tax deductible goodwill associ-
ated with these subsidiaries. Excluding the impact of these sales, the Corpora-
tion's effective tax rate in 1995 was 44%, the same rate as in 1994 and 1993.
During 1995, the Massachusetts Legislature enacted a bill to reduce the state
income tax rate for banks from 12.5% to 10.5% to be phased in over five years,
and to permit apportionment of a bank's taxable income. Additionally, in 1995,
the Corporation reached a favorable settlement of an outstanding Massachusetts
tax matter relating to income earned on certain securities. These items did not
have a significant effect on the Corporation's 1995 effective tax rate, since
the reduction in the current tax provision from the tax law changes and the
settlement were offset by the required reduction in FNBB's net deferred tax as-
sets resulting from the tax law changes. The changes in the Massachusetts tax
law are expected to have a favorable impact on the Corporation's effective tax
rate in 1996.
24
<PAGE>
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- --------------------------------------------------------------------------------
- ------------------------------------- ----------------------------------------
------------------------------------ ----------------------------------------
LINE OF BUSINESS RESULTS
The Corporation is managed through its Corporate Working Committee, which is
comprised of executives who are responsible for various revenue-generating
businesses and corporate support areas. For purposes of the line of business
presentation below, the Corporation has assigned each revenue-generating busi-
ness to one of three broad business lines: Personal, Corporate and Global Bank-
ing. Since synergies among these lines result in an overlap of certain activi-
ties among some of the underlying businesses, particularly among the capital
markets and corporate product areas, judgment was used in determining where a
business was assigned.
The line of business results reflect assignments and allocations of items made
within the Corporation's internal management reporting process. Most balance
sheet and income statement items are specifically attributed to individual
businesses. In measuring revenues and expenses of the individual businesses,
the management reporting process utilizes funds transfer pricing under a
matched funding concept for the purpose of allocating net interest revenue, and
applies various techniques for the purpose of allocating costs associated with
corporate support areas. The provision for credit losses is distributed based
on a judgmental process which takes into account various factors, including
loan levels, asset quality and credit loss experience. When current year
changes in organizational structure and/or the management reporting process oc-
cur, prior period information is restated to maintain comparability among peri-
ods.
Selected financial information for the Personal, Corporate and Global banking
lines for 1995 and 1994 is presented in Table 5.
TABLE 5 -- LINE OF BUSINESS SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
For The Years Ended December 31 Personal Corporate Global
(in millions) Banking Banking Banking Other Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues (fully taxable equivalent
basis)
1995................................... $1,065 $902 $747 $128 $2,842
1994................................... 956 823 581 47 2,407
Expenses (excluding OREO)
1995................................... 701 354 505 28 1,588
1994................................... 679 345 412 21 1,457
Credit provision and OREO
1995................................... 97 62 60 40 259
1994................................... 72 55 25 152
Pretax income
1995................................... 267 486 182 60 995
1994................................... 205 423 144 26 798
Net income
1995................................... 149 268 103 21 541
1994................................... 114 233 80 8 435
Average loans and leases
1995................................... 8,369 15,007 7,740 31,116
1994................................... 7,255 15,946 6,589 29,790
- --------------------------------------------------------------------------------
</TABLE>
PERSONAL BANKING
Personal Banking serves over 2 million households nationally and encompasses
the following individual businesses: Retail and Small Business Banking, Con-
sumer Lending, Private Banking and Mortgage Banking.
Within Retail and Small Business Banking, the Corporation operates 279 branches
throughout Massachusetts, Connecticut and Rhode Island and manages approxi-
mately $13 billion of deposits. Consumer Lending is a national franchise with a
portfolio of approximately $5 billion. In addition to providing its customers
with home equity loans and other products, the group operates two wholly owned
national consumer finance companies, Ganis and FAC, with a combined presence of
185 offices in 31 states. Ganis provides its customers with financing for rec-
reational vehicles and luxury boats, while FAC serves the needs of a sub-prime
customer base by providing financing for automobiles and other consumer prod-
ucts. Private Banking caters to customers with high net worth and offers in-
vestment management services, trust and estate planning, jumbo mortgages and
personal tax planning. The business has 13 offices located in southern New En-
gland and Florida and has $15 billion of assets under management. Mortgage
Banking operates through BBMC, with 32 offices located throughout the United
25
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
States. BBMC had a servicing portfolio of $42 billion at December 31, 1995,
ranking it among the top twenty mortgage companies in the country. As discussed
previously, the Corporation's mortgage banking business is expected to become
part of a new mortgage banking joint venture in 1996.
The announced acquisition of BayBanks, which had approximately $12 billion of
assets at December 31, 1995, is expected to enhance the Corporation's personal
banking capabilities and New England regional market share. Also during 1995,
the Corporation expanded its retail delivery channels, including in-store su-
permarket branches, remote ATMs and telebanking capacity, and became the first
New England bank to introduce a home banking product in conjunction with
Microsoft and Intuit. In addition, the Corporation re-entered the domestic
credit card business in 1995, and, by year-end, had approximately 102,000 ac-
counts with outstanding balances of approximately $124 million.
During 1995, pre-tax income from Personal Banking increased $62 million, or
30%, from 1994. This improvement was mainly due to higher revenue of $109 mil-
lion, which more than offset increases in expenses and credit costs. Revenue
growth was led by Consumer Lending which benefited from an increase in average
loans and leases of over $1 billion, most of which came from Ganis and FAC. In
addition, net mortgage servicing fees, excluding special items, increased $39
million, reflecting an $8 billion increase in average servicing volume. The $22
million increase in expenses was primarily due to growth in Retail Banking and
Consumer Lending, partly offset by lower FDIC expense. This reflects strategic
expansion in these areas which resulted in a higher volume of loans, the pur-
chase of Ganis in February 1995, the re-entry into the domestic credit card
business and the introduction of other new products. The increase in credit
costs is primarily a function of the higher level and mix of loans.
CORPORATE BANKING
Corporate Banking seeks preferred provider status with its customers by deliv-
ering relationship-driven financial solutions. Services provided include lend-
ing, corporate finance, equity and mezzanine financing, treasury, cash manage-
ment, leasing, trade financing and custody. The lending operation is national
in scope with a portfolio of approximately $15 billion. The client base ranges
from middle market businesses to large, multinational corporations. Included
within the lending operation are specialty areas such as media and communica-
tions, high technology, energy and utilities, real estate and environmental
services.
During 1995, the Corporation continued to focus on expanding its capital mar-
kets activities through syndications, private placements and public markets. In
addition, during 1995, the corporate trust business was sold, a joint venture
with Boston Financial Data Services related to the stock transfer business was
formed, and the Corporate Banking organization was realigned to enhance cus-
tomer service and delivery capabilities.
During 1995, pre-tax income from Corporate Banking increased $63 million, or
15%, from 1994. This improvement was primarily due to higher revenue of $79
million, reflecting the strong performance of its equity and mezzanine busi-
ness. The size of the equity and mezzanine portfolio was approximately $550
million at December 31, 1995. In addition, fees from the corporate finance
business grew during 1995, primarily resulting from a higher level of syndica-
tion activity. Partially offsetting these revenue improvements was a $939 mil-
lion decline in average loans and leases. This reflected the Corporation's ac-
tive management of its balance sheet, which resulted in a decline in lower-
yielding commercial loans, coupled with reductions in commercial loans as a re-
sult of the sales of Vermont and Casco in early 1995.
GLOBAL BANKING
Global Banking operates through a network of over 100 offices in more than 20
foreign countries. Individual businesses include Southern Cone (Argentina,
Chile and Uruguay), Brazil, Central America, Europe, Asia and International
Private Banking. In order to capitalize on its strong presence in these mar-
kets, the Corporation has been expanding its Emerging Markets sales, trading
and investment banking activities.
The Corporation's largest foreign operations are located in Argentina and Bra-
zil. The Corporation has operated in Argentina since 1917, has a network of
over 40 branches and is one of the largest foreign banks in the country. The
Corporation's Argentine operations offer a wide array of products concentrating
in the corporate, middle market, treasury and retail businesses. Products and
services offered include credit cards, residential mortgages, auto loans, mu-
tual funds, brokerage, custody and portfolio management. The Corporation also
participates in a pension company joint venture in Argentina. The Corporation
has operated in Brazil since 1946, has a network of nearly 30 branches and is
one of the largest foreign banks in the country. The principal businesses of
the Corporation's Brazilian operations include corporate lending, trade financ-
ing, treasury and fee-based activities, with particular emphasis on mutual
funds, custody and credit cards.
In Europe and Asia, the Corporation operates through offices in the United
Kingdom, France, Germany, Japan, South Korea, China, Taiwan, Hong Kong, Singa-
pore and Indonesia. These European and Asian offices represent multi-faceted
businesses which provide trade finance, foreign exchange and other services
while catering to the needs of U.S. multinational clients.
During 1995, the Corporation's Central American business was expanded through
the establishment of subsidiary banks in Colombia and Mexico. Also in 1995, the
Corporation established a representative office in China and announced the for-
mation of a joint venture in the Philippines. Other events in Global Bank-
26
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
ing in 1995 included the realignment of the Corporation's European operations,
the announced closing of its Luxembourg operations and the dispositions of its
Puerto Rican and Haitian branches.
During 1995, pre-tax income from Global Banking increased $38 million, or 26%,
from 1994. This improvement was mainly due to higher revenue of $166 million,
reflecting higher loan levels, wider spreads and a growth in noninterest income
in Argentina and Brazil. The increased noninterest income was largely the re-
sult of higher mutual fund and letter of credit fees in Brazil coupled with
higher revenues from the Argentine pension, retail and treasury businesses.
These revenue improvements were partially offset by a $93 million increase in
expenses and a $35 million increase in credit costs. The growth in expenses was
related to the cost of expanding the Argentine and Brazilian operations, while
the increased level of credit costs reflected a higher level of loans.
OTHER
Included in the Other category are items that the Corporation considers to be
outside its three business lines' normal and recurring operations, and, as
such, it did not assign them to any of the main businesses. In 1995, revenue
items included $95 million of gains on the sales of Vermont, Casco and the cor-
porate trust business; $67 million of gains (net of increased servicing amorti-
zation) in the fourth quarter from an increase in the market value of contracts
used to manage prepayment risk in the mortgage servicing portfolio; $17 million
of losses on the transfer and sale of residential mortgage loans; and $17 mil-
lion of valuation-related charges associated with certain investments and other
assets. Expense items in 1995 represented $28 million of expenses related to
the divestiture and reorganization of certain operations. In 1994, revenue
items included the $27 million gain on the sale of the domestic factoring busi-
ness and approximately $20 million in revenues recognized from the Corporation
positioning itself to take advantage of interest rate movements during the ini-
tial phase of Brazil's new economic program. Expense items in 1994 represented
$21 million of expenses in connection with the acquisitions of BankWorcester
and Pioneer.
27
<PAGE>
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- --------------------------------------------------------------------------------
- ------------------------------------- ----------------------------------------
------------------------------------ ----------------------------------------
FINANCIAL CONDITION
Credit, liquidity, interest rate and capital management are important elements
to be considered in understanding and assessing the Corporation's financial
condition. A discussion of these areas follows.
CREDIT MANAGEMENT
The Corporation employs a risk management process to manage all forms of credit
risk, including balance sheet and off-balance-sheet exposures. The Credit Pol-
icy Committee, on a corporate-wide basis, establishes all credit policies for
the Corporation, approves underwriting standards and concentration limits, and
grants credit approval authorities. An independent credit function monitors
compliance by individual units with the Corporation's credit policies, works to
ensure that credit due diligence and credit administration meet acceptable
standards, and is responsible for the effectiveness of the loan review process.
In addition, a credit information unit provides reports on credit exposures on
a corporate-wide basis. The independent credit function includes a staff of
credit officers, reporting directly to the Senior Credit Officer (SCO). These
credit officers are assigned to work with the various business units to ensure
the integrity of the credit process. Business unit management has the primary
responsibility to evaluate credit risk, ensure that each individual credit ex-
posure is appropriately risk rated, and monitor and manage credit risks within
policy and portfolio guidelines. A risk review unit, which reports indepen-
dently of both the business and credit units, audits the integrity of risk rat-
ings and the adequacy of the credit process for all units of the Corporation.
Through monthly meetings with the business unit heads and the frequent review
of credit quality information, senior management in Boston oversees the world-
wide credit activities of the Corporation, including both corporate and con-
sumer credit areas. The level of management needed to approve credit exposures
varies according to the size and level of risk of the credit. Corporate credits
meeting specified size and risk rating thresholds must be approved by the Se-
nior Credit Committee, which is chaired by the SCO and is composed of senior
credit officers and senior business unit managers on a rotating basis. Portfo-
lio limits and underwriting standards are established for both consumer and
commercial credit exposures with common risk characteristics, such as industry
or product type. An important aspect of the Corporation's portfolio management
process is the management of large, individual credits, which are governed by
relationship limits that are set according to risk rating. The Corporation has
also established target risk rating profiles for business units across the Cor-
poration. The Corporation also sets country limits on cross-border exposures to
borrowers and counterparties domiciled in other countries. All limits are re-
viewed regularly and adjusted based on the Corporation's assessment of relevant
conditions.
The Corporate Finance unit is integral to portfolio management and to enhancing
the liquidity of the wholesale loan portfolio. Corporate Finance is responsible
for arranging participations in loans where the Corporation is the lead bank.
This unit maintains contact with other institutional lenders and investors in
bank structured loans, maintains information on credit structure and pricing by
risk category, evaluates the market liquidity of facilities, and syndicates
Corporation-agented facilities to attain desired hold levels.
The Corporation employs a corporate-wide process to review individual credits
and identify emerging problems. Credits that deteriorate into certain defined
risk categories are managed by a separate loan review unit composed of profes-
sional asset recovery specialists who establish detailed asset management plans
designed to mitigate risk of credit loss to the Corporation.
The Corporation continually seeks to improve its credit culture to balance as-
sociated risks with its goal of optimizing its value to its stockholders and
customers. While sound credit policies serve to reduce the Corporation's expo-
sure to credit risks, they do not insulate the Corporation from losses.
28
<PAGE>
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- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
LOANS AND LEASES
Table 6 shows a breakdown of the portfolio for the last five years.
TABLE 6 -- LOANS AND LEASE FINANCING PORTFOLIO
<TABLE>
<CAPTION>
December 31 1995 1994 1993 1992 1991
(dollars in millions) BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES
Commercial, industrial and
financial................. $11,439 36.8% $11,805 38.1% $11,991 41.7% $10,329 40.7% $10,346 40.8%
Commercial real estate
Construction............ 336 1.1 354 1.1 617 2.1 854 3.4 1,028 4.1
Other................... 2,272 7.3 3,141 10.1 3,123 10.8 3,202 12.6 3,587 14.2
Consumer-related loans
Secured by 1-4 family
residential properties.. 3,861 12.4 5,004 16.1 4,159 14.5 3,630 14.3 3,884 15.3
Other................... 3,397 11.0 2,462 7.9 1,610 5.6 1,436 5.6 1,506 5.9
Lease financing........... 1,409 4.5 1,366 4.4 1,264 4.4 1,214 4.7 1,277 5.0
Unearned income........... (216) (.7) (216) (.7) (204) (.7) (205) (.8) (243) (1.0)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
22,498 72.4 23,916 77.0 22,560 78.4 20,460 80.5 21,385 84.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
INTERNATIONAL
Commercial and
industrial................ 6,398 20.6 5,136 16.6 4,650 16.2 3,646 14.4 2,928 11.5
Banks and other financial
institutions.............. 682 2.2 614 2.0 602 2.1 385 1.5 152 .6
Governments and official
institutions.............. 82 .3 33 .1 22 .1 54 .2 141 .6
Lease financing........... 285 .9 329 1.1 265 .9 218 .9 242 1.0
All other................. 1,159 3.7 1,053 3.4 791 2.7 721 2.8 609 2.4
Unearned income........... (37) (.1) (76) (.2) (108) (.4) (85) (.3) (89) (.4)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
8,569 27.6 7,089 23.0 6,222 21.6 4,939 19.5 3,983 15.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans and lease
financing................. $31,067 100.0% $31,005 100.0% $28,782 100.0% $25,399 100.0% $25,368 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Total loans and lease financing increased approximately $60 million from Decem-
ber 31, 1994, as the increase in international loans and leases more than off-
set the decline in domestic loans and leases. The decline in domestic loans
from December 31, 1994, reflected a $1.2 billion reduction from the sales of
Vermont and Casco in the first quarter of 1995, of which approximately $500
million was related to commercial real estate loans, and the transfer of ap-
proximately $1.3 billion of low-yielding residential mortgage loans into the
held for sale account in the fourth quarter of 1995, substantially all of which
were sold by December 31, 1995. The transfer and sale of these residential
mortgage loans were undertaken in connection with a program to remove low-re-
turn assets from the Corporation's balance sheet, which, in part, also accounts
for the decline in the commercial and industrial and real estate portfolios.
Excluding the sales of Vermont and Casco and the residential mortgage loans,
domestic loans and leases grew approximately $1.1 billion, primarily due to
higher levels of consumer-related loans, largely accomplished through the ac-
quisition of Ganis and its origination activities throughout the year, and
growth in the FAC loan portfolio by $250 million from December 31, 1994.
International loans increased to $8.6 billion at December 31, 1995, from $7.1
billion at December 31, 1994. This growth has primarily occurred in Latin Amer-
ica, particularly in the loan portfolios of Argentina and Brazil. Total loans
in these two countries have grown approximately $1.1 billion since December 31,
1994. Other countries contributing to the increase in international loans from
December 31, 1994 were Chile, Colombia and Mexico, with increases of approxi-
mately $210 million, $85 million and $60 million, respectively. A further dis-
cussion of these operations is included in the "Emerging Markets Countries"
section.
29
<PAGE>
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---------------------------- -------------------------------------------------
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DOMESTIC COMMERCIAL REAL ESTATE LOANS
Table 7 details domestic commercial real estate loans by geographic location as
of the last three year-ends. The portion attributable to other states at the
end of 1995 was dispersed among approximately 25 states.
TABLE 7 -- DOMESTIC COMMERCIAL REAL ESTATE LOANS
<TABLE>
<CAPTION>
Other
December 31 New Other
(in millions) MA CT England States Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995.......................................... $1,219 $302 $222 $ 865 $2,608
====== ==== ==== ====== ======
1994.......................................... $1,480 $411 $629 $ 975 $3,495
====== ==== ==== ====== ======
1993.......................................... $1,348 $578 $790 $1,024 $3,740
====== ==== ==== ====== ======
</TABLE>
A significant portion of the commercial real estate portfolio is comprised of
loans from which ultimate payment to the Corporation is expected to come from
the sale, operation or refinancing of the underlying property. The collateral
underlying substantially all of these loans is valued at least annually using
various real estate valuation techniques, including discounted cash flows and
appraisals. The remaining portfolio is primarily composed of outstandings se-
cured by real estate which is owner-occupied and where the underlying business
credit, rather than the property, is viewed as the principal source of repay-
ment. Overall, the level of commercial real estate loans to all geographic
areas declined during 1995, particularly in northern New England due to the
sales of Vermont and Casco.
HLTS
Included in commercial, industrial and financial loans are loans made by many
of the Corporation's lending businesses to finance transactions involving
leveraged buyouts, acquisitions, and recapitalizations. These loans are desig-
nated as highly leveraged transactions (HLTs), if, by the nature of the loan
terms and the profile of the customer, the transaction qualifies for this clas-
sification under the current bank regulatory definition of HLTs. Additionally,
the HLT definition encompasses other, more traditional credit arrangements,
where a high degree of leverage would be expected, such as asset-based lending
and lending to the communications industry, particularly cable, where equity is
traditionally low and cash flow is the predominant factor in assessing repay-
ment ability. Table 8 summarizes the Corporation's HLT portfolio for the last
three years.
TABLE 8 -- HIGHLY LEVERAGED TRANSACTION PORTFOLIO
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(dollars in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total loans.............................................. $1,342 $1,272 $1,304
Number of companies...................................... 101 84 75
Average loan size........................................ $ 13 $ 15 $ 17
Unused lending commitments............................... $ 639 $ 653 $ 540
Nonaccrual loans......................................... $ 1 $ 10
Net credit losses (recoveries)........................... $ (4) $ 6 $ 21
Equity and mezzanine investments......................... $ 144 $ 105 $ 121
</TABLE>
The Corporation's HLT portfolio is spread among a variety of industries. At De-
cember 31, 1995, the largest segments of the HLT portfolio by industry were as
follows: the transportation industry -- $177 million to 11 customers; the food,
beverage and tobacco industry -- $164 million to 14 customers; petroleum, chem-
icals, rubber and plastics -- $110 million to 8 customers; and the communica-
tions industry -- $108 million to 7 customers. Yields on HLT loans are gener-
ally higher than most other commercial loans. Typically, interest rates on new
HLTs range from 1.5% to 2.75% over the London Interbank Bank Offered Rate (LI-
BOR) and fees charged range from .75% to 1.5% of the principal amount commit-
ted. The Corporation has historically been involved in transactions that are
designated as HLTs, and it expects to continue to agent and participate in such
transactions in the future.
30
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NONACCRUAL LOANS AND LEASES AND OREO
Table 9 summarizes nonaccrual loans and leases by type and as a percentage of
the related consolidated loan category.
TABLE 9 -- NONACCRUAL LOANS AND LEASES AND OREO
<TABLE>
<CAPTION>
December 31 1995 1994 1993 1992 1991
Percent Percent Percent Percent Percent
Of Loan of Loan of Loan of Loan of Loan
(dollars in millions) Balance Category Balance Category Balance Category Balance Category Balance Category
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES
Commercial, industrial
and financial.......... $ 66 .6% $113 1.0% $120 .9% $203 1.8% $ 390 3.4%
Commercial real estate
Construction........... 24 7.1 13 3.7 30 4.9 81 9.5 123 11.9
Other.................. 78 3.4 106 3.4 230 7.4 345 10.8 740 20.6
Consumer-related loans
Secured by 1-4 family
residential
properties............. 43 1.1 44 .9 64 1.5 58 1.6 70 1.8
Other.................. 32 .9 24 1.0 10 .6 26 1.8 32 2.1
---- ---- ---- ---- ------
243 1.1 300 1.2 454 2.0 713 3.5 1,355 6.3
---- ---- ---- ---- ------
INTERNATIONAL
Commercial and industri-
al..................... 34 .5 17 .3 63 1.4 55 1.4 58 1.8
Banks and other
financial
institutions........... 1 .2 1 .2 2 1.5
Governments and official
institutions........... 3 11.8 4 8.0 53 37.5
All other............... 32 2.8 47 4.5 31 4.0 6 .8 45 7.4
---- ---- ---- ---- ------
66 .8 65 .9 97 1.6 66 1.3 158 4.0
---- ---- ---- ---- ------
Total nonaccrual loans
and leases............. 309 1.0 365 1.2 551 1.9 779 3.1 1,513 6.0
OREO.................... 50 76 108 170 326
---- ---- ---- ---- ------
Total................... $359 $441 $659 $949 $1,839
==== ==== ==== ==== ======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Total nonaccrual loans and leases and OREO declined $82 million to $359 million
at December 31, 1995, from $441 million at December 31, 1994. The decline from
December 31, 1994 included a $27 million reduction from the sales of Vermont
and Casco, and reflected the payoff of several domestic commercial loans and a
decrease in the inflow of new loans placed on nonaccrual.
The management of the Corporation's nonaccrual loans and leases and OREO is
discussed above in the "Credit Management" section.
Table 10 summarizes the changes in nonaccrual loans and leases and OREO that
have occurred during the last three years.
TABLE 10 -- CHANGES IN NONACCRUAL LOANS AND LEASES AND OREO
<TABLE>
<CAPTION>
(dollars in millions) 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1.......................................... $441 $659 $949
Assets from acquired entities............................... 20
Assets of entities sold..................................... (27)
Additions................................................... 496 610 486
Sales, restructurings, payments and other decreases......... (311) (380) (482)
Transfers to ADP............................................ (252)
Net credit losses and valuation adjustments, excluding
writedowns associated with transfers to ADP................. (240) (216) (294)
---- ---- ----
Balance, December 31........................................ $359 $441 $659
==== ==== ====
Ending balance as a percentage of related assets............ 1.2% 1.4% 2.3%
==== ==== ====
</TABLE>
31
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
The level of nonaccrual loans and leases and OREO is influenced by the economic
environment, interest rates and other internal and external factors. The ratio
of nonaccrual loans and OREO to related asset categories has declined to 1.2%
of related assets at December 31, 1995. No assurance can be given, however,
that this historically low level can be sustained by the Corporation. Informa-
tion on the Corporation's accounting policy for nonaccrual loans and leases is
included in Note 1 to the Financial Statements.
ACCELERATED DISPOSITION PORTFOLIO
During 1994, in order to expedite the disposition of problem real estate expo-
sures and to strengthen its balance sheet, the Corporation transferred certain
of its lower quality real estate exposures, including a portion which was on
nonaccrual status, to ADP. In connection with the transfer, the Corporation re-
corded credit losses of $119 million to reduce the carrying value of the expo-
sures to their estimated disposition value of $395 million at the date of
transfer. The Corporation had disposed of all its ADP assets at December 31,
1995, with minimal additional gains and losses on disposition. Remaining
off-balance-sheet commitments included in ADP are expected to be disposed of by
the middle of 1996.
RESERVE FOR CREDIT LOSSES
The Corporation determines the level of its reserve for credit losses consider-
ing evaluations of individual credits and concentrations of credit risks, net
losses charged to the reserve, changes in quality of the credit portfolio, lev-
els of nonaccrual loans and leases, current economic conditions, cross-border
risks, changes in size and character of the credit risks and other pertinent
factors. The amount of the reserve is reviewed by management quarterly.
The reserve for credit losses at December 31, 1995 was $736 million, or 2.37%
of outstanding loans and leases, compared with $680 million, or 2.19%, at De-
cember 31, 1994. The reserve for credit losses was 238% of nonaccrual loans and
leases at December 31, 1995, compared to 186% at December 31, 1994. In light of
the effect of economic events on Latin American economies in the early part of
1995, and the recent industry trends in consumer credit, combined with the
growth in the Corporation's Latin American lending and domestic consumer lend-
ing portfolios, the Corporation recorded special provisions for credit losses
totaling $75 million during 1995 ($50 million in the first quarter and $25 mil-
lion in the fourth quarter). The net increase in the reserve reflects the 1995
provision for credit losses of $250 million, including these special provi-
sions, partially offset by reductions from the sales of Vermont and Casco and
by net credit losses incurred during the year. The future level of the reserve
will continue to be a function of management's evaluation of the Corporation's
credit exposures existing at the time. Therefore, no assurance can be given re-
garding the future level of the reserve.
During the first quarter of 1995, the Corporation implemented SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and Dis-
closure." These standards affect the evaluation of the reserve for credit
losses and require that impaired loans be evaluated based on the present value
of expected future cash flows or the fair value of the collateral, as applica-
ble. The adoption of these new standards, which is more fully discussed in Note
7 to the Financial Statements, did not have a significant effect on the Corpo-
ration's financial statements and related financial information.
32
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
Table 11 presents a five-year analysis of the Corporation's reserve for credit
losses and related ratios.
TABLE 11 -- RESERVE FOR CREDIT LOSSES AND RELATED RATIOS
<TABLE>
<CAPTION>
(dollars in millions) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1................ $ 680 $ 770 $ 923 $ 1,051 $ 1,023
Provision......................... 250 130 70 181 519
Reserves of acquired entities..... 6 25
Reserves of entities sold......... (32)
Credit losses, excluding those
related to ADP.................... (230) (194) (273) (412) (598)
Recoveries........................ 62 68 50 103 107
------- ------- ------- ------- -------
Net credit losses................. (168) (126) (223) (309) (491)
Credit losses related to ADP...... (119)
------- ------- ------- ------- -------
Balance, December 31.............. $ 736 $ 680 $ 770 $ 923 $ 1,051
======= ======= ======= ======= =======
Loans and lease financing at
December 31....................... $31,067 $31,005 $28,782 $25,399 $25,368
Average loans and lease
financing......................... $31,116 $29,790 $26,586 $25,330 $26,167
Reserve for credit losses to total
loans and leases at December 31... 2.37% 2.19% 2.68% 3.63% 4.14%
Reserve for credit losses to
nonaccrual loans and leases at
December 31....................... 238% 186% 140% 119% 69%
Reserve for credit losses to
nonaccrual and renegotiated loans
and leases at December 31......... 219% 157% 99% 78% 56%
Net credit losses to average loans
and lease financing............... .54% .82% .84% 1.22% 1.87%
Net credit losses to provision for
credit losses..................... 67.31% 188.37% 317.95% 170.94% 94.49%
Total recoveries to total credit
losses............................ 26.83% 21.74% 18.36% 25.09% 17.94%
- --------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
As detailed in Table 12, net credit losses were $168 million in 1995, compared
to $126 million in 1994, excluding $119 million of writedowns in connection with
ADP. In 1995, the Corporation experienced higher international credit losses,
principally resulting from the Argentine consumer portfolio, and higher domestic
commercial and industrial and consumer-related credit losses. In addition, there
was a lower level of recoveries.
TABLE 12 -- NET CREDIT LOSSES
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993 1992 1991
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC CREDIT LOSSES
Commercial, industrial and financial........ $ (40) $ (28) $ (56) $ (99) $(166)
Commercial real estate
Construction............................... (7) (10) (19) (59) (108)
Other...................................... (39) (40) (63) (129) (188)
Consumer-related loans
Secured by 1-4 family residential
properties................................ (19) (14) (22) (24) (17)
Other...................................... (66) (54) (47) (46) (65)
----- ----- ----- ----- -----
(171) (146) (207) (357) (544)
INTERNATIONAL CREDIT LOSSES................. (59) (48) (66) (55) (54)
----- ----- ----- ----- -----
Credit losses, excluding those related to
exposures transferred to ADP............. (230) (194) (273) (412) (598)
DOMESTIC RECOVERIES
Commercial, industrial and financial........ 10 14 15 32 44
Commercial real estate
Construction............................... 1 4 2 4 4
Other...................................... 13 13 6 3 4
Consumer-related loans
Secured by 1-4 family residential
properties................................ 2 2 4 3 2
Other...................................... 21 17 17 19 18
----- ----- ----- ----- -----
47 50 44 61 72
INTERNATIONAL RECOVERIES.................... 15 18 6 42 35
----- ----- ----- ----- -----
Total recoveries.......................... 62 68 50 103 107
----- ----- ----- ----- -----
Net credit losses, excluding those related
to exposures transferred to ADP.......... (168) (126) (223) (309) (491)
Credit losses related to exposures
transferred to ADP......................... (119)
----- ----- ----- ----- -----
Total net credit losses................... $(168) $(245) $(223) $(309) $(491)
===== ===== ===== ===== =====
- -------------------------------------------------------------------------------
</TABLE>
The Corporation's ability and willingness to extend new credit is a function of
a variety of factors, including competition for customers' business; an analysis
of a loan's potential profitability and risk profile; acquisitions or
divestitures of companies or portfolios; and economic conditions in New England,
other parts of the United States and other countries where the Corporation does
business. In addition, certain segments of the loan portfolio may increase or
decrease from the December 31, 1995 level in accordance with strategic or credit
management decisions made by the Corporation. Given these factors, the rate of
change in the size and mix of the Corporation's loan portfolios experienced
during the past few years may not be indicative of future loan levels. Further
information on the Corporation's loans and lease financing portfolio can be
found in Note 6 to the Financial Statements.
34
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
CROSS-BORDER OUTSTANDINGS
At December 31, 1995, total cross-border outstandings represented 16% of con-
solidated total assets, compared with 15% at December 31, 1994 and 14% at De-
cember 31, 1993.
In accordance with bank regulatory rules, cross-border outstandings are:
. Amounts payable to the Corporation in U.S. dollars or other non-local cur-
rencies.
. Amounts payable in local currency but funded with U.S. dollars or other non-
local currencies.
Included in these outstandings are deposits in other banks, resale agreements,
trading securities, securities available for sale, securities held to maturity,
loans and lease financing, amounts due from customers on acceptances and ac-
crued interest receivable.
In addition to credit risk, cross-border outstandings have the risk that, as a
result of political or economic conditions in a country, borrowers are unable
to meet their contractual repayment obligations of principal and/or interest
when due because of the unavailability of, or restrictions on, foreign exchange
needed by borrowers to repay their obligations. The Corporation manages its
cross-border outstandings using country exposure limits as mentioned in the
"Credit Management" section.
Excluded from cross-border outstandings for a given country are:
. Local currency assets funded with U.S. dollars or other non-local currency
where the providers of funds agree that, in the event their claims cannot be
repaid in the designated currency due to currency exchange restrictions in a
given country, they may either accept payment in local currency or wait to
receive the non-local currency until such time as it becomes available in
the local market. At December 31, 1995, such outstandings related to emerg-
ing markets countries totaled $1.3 billion compared with $.9 billion at De-
cember 31, 1994.
. Local currency outstandings funded with local currency.
. U.S. dollar or other non-local currency outstandings reallocated as a result
of external guarantees or cash collateral.
. U.S. dollar or other non-local currency outstandings reallocated as a result
of insurance contracts, primarily issued by U.S. government agencies.
Table 13 details the Corporation's approximate cross-border outstandings in
countries which individually amounted to 1.0% or more of its consolidated total
assets at December 31, 1995, 1994 and 1993.
TABLE 13 -- CROSS-BORDER OUTSTANDINGS
<TABLE>
<CAPTION>
Percentage Of
(dollars in millions) Public Banks Other Total Total Assets Commitments(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995(1)
ARGENTINA............... $465 $ 50 $1,710 $2,225 4.7% $ 45
BRAZIL.................. 25 20 980 1,025 2.2 35
UNITED KINGDOM.......... 100 570 670 1.4 130
CHILE................... 150 125 365 640 1.4 15
December 31, 1994(1)
Argentina............... $305 $ 40 $1,525 $1,870 4.2% $ 95
Brazil.................. 5 795 800 1.8 30
United Kingdom.......... 5 595 600 1.3 115
Chile................... 115 90 290 495 1.1 35
December 31, 1993(1)
Argentina............... $255 $225 $1,025 $1,505 3.7% $ 40
Brazil.................. 110 695 805 2.0 20
United Kingdom.......... 15 565 580 1.4 145
- --------------------------------------------------------------------------------
</TABLE>
(1) Cross-border outstandings in countries which totaled between .75% and 1% of
consolidated total assets at December 31, 1995, 1994 and 1993 were approxi-
mately as follows: 1995--South Korea $365 million; 1994--None; 1993--Canada
$315 million, Chile $395 million and South Korea $310 million.
(2) Included within commitments are letters of credit, guarantees and the
undisbursed portion of loan commitments.
35
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
To comply with the regulatory definition of cross-border outstandings, the Cor-
poration included approximately $1.3 billion of Argendollar outstandings in its
cross-border total for Argentina at December 31, 1995, compared with approxi-
mately $1 billion at December 31, 1994 and $.7 billion at December 31, 1993.
These are outstandings payable to the Corporation in U.S. dollars, which are
funded entirely by dollars borrowed within Argentina.
EMERGING MARKETS COUNTRIES
At December 31, 1995, approximately $4.8 billion of the Corporation's cross-
border outstandings were to emerging markets countries, of which approximately
83% were loans. These cross-border outstandings were mainly comprised of short-
term trade credits, non-trade-related loans and leases not subject to country
debt rescheduling agreements, government securities and capital investments in
branches and subsidiaries.
At December 31, 1995, approximately $4.6 billion of the cross-border
outstandings to emerging markets countries were to countries in which the Cor-
poration maintains branch networks and/or subsidiaries.
ARGENTINA AND BRAZIL
The Corporation has a network of over 40 branches and is one of the largest
foreign banks in Argentina. The Corporation's Argentine operations offer a wide
array of products concentrating in the corporate, middle market, treasury and
retail businesses, including credit cards, residential mortgages and auto
loans. In addition, other products are offered, such as mutual funds, broker-
age, custody and portfolio management. The Corporation also participates in a
pension company joint venture.
During 1995, the Argentine financial system came under stress as a result of
Mexico's economic difficulties, referred to as the "Mexican Situation," which
resulted in a decrease in Argentine financial system liquidity as deposits left
the country, and which also contributed to some credit deterioration in the
Corporation's Argentine portfolio. In the third quarter, this trend began to
reverse and financial system liquidity has returned to pre-Mexican Situation
levels. Throughout this period the Corporation maintained, and at times in-
creased, its deposit levels. As noted, the Corporation had experienced some
credit deterioration due to the Mexican Situation (see Table 14), which con-
tributed to the $11 million increase in credit losses, principally in its Ar-
gentine retail portfolio. However, the improvement in the country's economic
situation, as evidenced by lower interest rates and stronger financial markets
performance from earlier in the year, has resulted in an improvement in the
Corporation's credit profile.
The Corporation's Argentine securities portfolio is utilized for both asset and
liability management and trading purposes. At December 31, 1995, the securities
portfolio, which includes available for sale and trading account securities,
amounted to $486 million, compared to $230 million at December 31, 1994. The
increase in the securities portfolio was due to a combination of factors, in-
cluding the purchase of $50 million of Argentine government bonds that were
part of the government's international funding arrangement, higher trading ac-
tivity and securities purchased to meet reserve requirements. The after-tax
unrealized loss in the available for sale portfolio was $6 million at December
31, 1995, compared to $30 million at December 31, 1994. The decline in the af-
ter-tax unrealized loss reflected an improvement in the Argentine financial
markets, particularly during the fourth quarter of 1995. Gains and losses from
sales of securities and trading account profits did not change significantly
from 1994.
The Corporation has a network of nearly 30 branches and is one of the largest
foreign banks in Brazil. The principal businesses of the Corporation's Brazil-
ian operations include corporate lending, trade financing, treasury, mutual
funds, custody and credit cards. During 1995, the Brazilian economy continued
to operate under the economic reforms begun in July 1994. Inflation for 1995
was approximately 23%, significantly less than recent levels. The government
also maintained a floating band exchange rate policy which resulted in gradual
devaluation of the Brazilian currency (Real, or Reais) relative to the U.S.
dollar. The exchange rate band is currently .97 to 1.06 Reais to the U.S. dol-
lar, and the exchange rate at December 31, 1995 was .97 Reais to the U.S. dol-
lar. The government also maintained a relatively high interest rate environ-
ment. Rates on short-term interbank deposits averaged approximately 3% per
month above the rate of inflation, or approximately 45% for the year. The rela-
tively stable Real and high interest environment benefited the Corporation's
net interest margin (see discussion in the "Net Interest Revenue" section).
The changing economic situation in Brazil resulted in customers moving their
funds to banks of higher quality, which contributed, in part, to the increase
in the Corporation's deposit and mutual funds levels. The Corporation's mutual
funds under management in Brazil amounted to $2.5 billion at December 31, 1995,
compared to $1.7 billion at December 31, 1994, making it the eighth largest mu-
tual fund manager in Brazil. Also, the Corporation increased its presence in
Brazil's global capital market activities, as evidenced by a $300 million in-
crease in custody volumes, which were $3.0 billion at December 31, 1995, com-
pared to $2.7 billion at December 31, 1994. In addition, the Corporation bene-
fited from the expanding Brazilian economy through increased large corporate
lending. The Corporation's Brazilian nonaccrual loans and net credit losses,
which are detailed in Table 14, have not changed significantly from 1994.
The Corporation continues to monitor and evaluate the evolving Argentine and
Brazilian economic programs, and will adjust its strategy as deemed appropri-
ate.
36
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
Table 14 shows changes in Argentine and Brazilian cross-border outstandings
from December 31, 1994, nonaccrual loans at December 31, 1995 and 1994, and net
credit losses for 1995 and 1994.
TABLE 14 -- CHANGES IN ARGENTINE AND BRAZILIAN CROSS-BORDER OUTSTANDINGS;
NONACCRUAL LOANS; NET CREDIT LOSSES
<TABLE>
<CAPTION>
(in millions) Argentina Brazil
- ------------------------------------------------------------------------------
<S> <C> <C>
Cross-border outstandings at December 31, 1994.............. $1,870 $ 800
Change in non-trade-related loans and leases not subject to
country debt rescheduling................................... 75 215
Net change in trade-related cross-border outstandings,
primarily short-term........................................ 105 30
Net change in investment and trading securities............. 183 (23)
Other....................................................... (8) 3
------ ------
CROSS-BORDER OUTSTANDINGS AT DECEMBER 31, 1995.............. $2,225 $1,025
====== ======
Nonaccrual loans
DECEMBER 31, 1995.......................................... $ 52 $ 8
December 31, 1994.......................................... 35 8
Net credit losses
1995....................................................... $ 33 $ 6
1994....................................................... 20
- ------------------------------------------------------------------------------
</TABLE>
OTHER EMERGING MARKETS COUNTRIES
Along with Argentina and Brazil, the Corporation maintains branch networks in
Chile and Uruguay of 10 and 12 branches, respectively. These operations offer a
wide array of banking services, including retail mortgage lending and invest-
ment banking. At December 31, 1995, cross-border outstandings were $640 million
to Chile and $225 million to Uruguay.
In addition, during 1995, the Corporation opened subsidiary banks in Colombia
and Mexico. These operations will enable the Corporation to expand its existing
activities in these countries, including local lending to multinational and
large, indigenous corporate customers. At December 31, 1995, cross-border
outstandings to Colombia and Mexico were $235 million and $210 million, respec-
tively. The Corporation's activities in Mexico, including its cross-border
outstandings, have not been significantly impacted by that country's economic
difficulties.
CURRENCY POSITIONS
When deemed appropriate, the Corporation will structure its balance sheet to
take positions in the currencies of emerging markets and other countries where
it operates. This usually occurs when the Corporation believes that it can max-
imize its spread from interest operations by funding local currency assets with
U.S. dollars rather than using local currency liabilities or by funding U.S.
dollar assets with local currency liabilities. Whenever these positions are
taken, they are subject to limits established by the Corporation's Asset and
Liability Management Committee (ALCO), with the amount of, and compliance with,
the limits subject to regular review.
Table 15 presents the Corporation's more significant currency positions in
emerging markets countries in 1995. These positions represent local currency
assets funded by U.S. dollars.
TABLE 15 -- SIGNIFICANT CURRENCY POSITIONS IN EMERGING MARKETS COUNTRIES
<TABLE>
<CAPTION>
December 31, Average Position for
(in millions) 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Argentina..................................... $ 82 $50
Brazil........................................ 132 11
Chile......................................... 7 11
Colombia...................................... 9 14
</TABLE>
In addition to the emerging markets countries above, the Corporation has main-
tained a currency position in its South Korean operation of $82 million at De-
cember 31, 1995, and an average position of $86 million during 1995. The Corpo-
ration is funding local currency assets with U.S. dollars to maximize spreads
from interest operations, as previously described.
These positions expose the Corporation to losses should the local currencies
weaken against the U.S. dollar at a rate greater than increases in local cur-
rency interest rates; such losses could be significant if a major unanticipated
devaluation occurs. To date, however, these positions have been liquid in na-
ture and local management has been able to close and re-open these positions as
necessary.
37
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
It is expected that the economic situation in Latin America, including the ef-
fect of world financial markets on these economies, will continue to be unset-
tled. The Corporation has not experienced any collection problems as a result
of currency restrictions or foreign exchange liquidity problems on its current
portfolio of cross-border outstandings to emerging markets countries. However,
if the actions implemented by Latin American governments do not remain effec-
tive over time, particularly with regard to liquidity, the Corporation's opera-
tions could experience adverse effects, including stress on local liquidity,
deterioration of credit quality, a decline in the value of its securities port-
folio and declines in loan and deposit levels. The Corporation will continue to
monitor the economies of Latin American countries in which it has local opera-
tions, cross-border outstandings and, where applicable, currency positions.
Each emerging markets country is at a different stage of development with a
unique set of economic fundamentals; therefore, it is not possible to predict
what developments will occur and what impact these developments will ultimately
have on the economies of these countries or on the Corporation's financial
statements.
LIQUIDITY MANAGEMENT
Liquidity is defined as the ability to meet known near-term and projected long-
term funding commitments, while supporting selective business expansion in ac-
cordance with the Corporation's strategic plan. The Corporation proactively
manages liquidity according to policy set by, and oversight provided by, ALCO
to ensure its ability to meet present and future funding needs in domestic and
overseas markets. U.S. dollar liquidity management is centralized in Boston,
with overseas operations managing all local currency positions. The Corpora-
tion's U.S. dollar liquidity is monitored on a daily basis and is reviewed
monthly by ALCO, which is chaired by the Treasury Group Executive. It is also
reviewed monthly by the Executive Committee of the Corporation's Board of Di-
rectors; a review by the full Board of Directors (the Board) occurs quarterly.
Available liquidity sources are measured against anticipated needs for the Cor-
poration as a whole, the parent company and each of the subsidiary banks. Al-
ternative funding strategies are reviewed, updated and implemented by ALCO as
considered necessary.
The Corporation's liquid assets consist primarily of interest bearing deposits
in other banks, federal funds sold and resale agreements, money market loans,
and unencumbered U.S. Treasury and U.S. government agency securities. Table 16
presents the levels of the Corporation's liquid assets as of each of the last
three year-ends.
TABLE 16 -- LIQUID ASSETS
<TABLE>
<CAPTION>
December 31 1995 1994 1993
(in billions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Liquid assets.................................................... $5.8 $4.6 $4.5
</TABLE>
Deposits are the principal source of the Corporation's funding. Table 17 in-
cludes information related to the Corporation's funding sources for the last
three years.
TABLE 17 -- FUNDING SOURCES
<TABLE>
<CAPTION>
December 31 1995 1994 1993
(dollars in billions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC
Interest bearing deposits................................. $16.6 $16.8 $17.5
Noninterest bearing deposits.............................. 4.8 4.9 5.0
----- ----- -----
Total deposits............................................ 21.4 21.7 22.5
Funds borrowed............................................ 7.7 5.3 4.2
Notes payable............................................. 1.7 2.0 1.9
----- ----- -----
$30.8 $29.0 $28.6
===== ===== =====
INTERNATIONAL
Interest bearing deposits................................. $ 9.0 $ 9.1 $ 6.6
Noninterest bearing deposits.............................. .6 .6 .5
----- ----- -----
Total deposits............................................ 9.6 9.7 7.1
Funds borrowed............................................ 1.1 1.1 .8
Notes payable............................................. .4 .2 .1
----- ----- -----
$11.1 $11.0 $ 8.0
===== ===== =====
CONSOLIDATED
Interest bearing deposits................................. $25.6 $25.9 $24.1
Noninterest bearing deposits.............................. 5.4 5.5 5.5
----- ----- -----
Total deposits............................................ 31.0 31.4 29.6
Funds borrowed............................................ 8.8 6.4 5.0
Notes payable............................................. 2.1 2.2 2.0
----- ----- -----
$41.9 $40.0 $36.6
===== ===== =====
Deposits as a percentage of
Loans...................................................... 100% 101% 103%
Total assets............................................... 65% 70% 73%
</TABLE>
Domestic deposits declined approximately $300 million from 1994, resulting from
a $1.3 billion decrease in deposits from the sales of Vermont and Casco and
other deposit outflows, replaced, in part, by new deposit inflows from a new
retail deposit product which was first offered in the second quarter of 1995.
Domestic funds borrowed increased approximately $2.4 billion from December 31,
1994, mainly as a result of increased borrowings of approximately $1.9 billion
under FNBB's medium-term bank note program and increased federal funds pur-
chased, partially offset by decreased securities sold under agreements to re-
purchase. The FNBB medium-term notes have a weighted average maturity of 258
days.
Notes payable declined slightly due to the conversion of $94 million of the
Corporation's subordinated debt into common stock during the first quarter of
1995, and the redemption of $150 million of its subordinated debt during the
third quarter of 1995, for the most part offset by new debt issued during the
year, primarily by the Corporation's Brazilian operations. In addition, the
Corporation has a shelf registration filed with the Securities and Exchange
Commission with a remaining availability of $1.2 billion at January 31, 1996,
which can be used for the issuance of equity or debt securities, including se-
curities issued under a medium-term note program established by the Corporation
in December 1994. Additional information on the Corporation's notes payable can
be found in Note 10 to the Financial Statements.
38
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
The Corporation continues to have access to funds at competitive rates, and,
during 1995, received upgrades from three major rating agencies. Based upon the
Corporation's liquid asset level and its ability to access the public markets
for additional funding when necessary, management considers overall liquidity
at December 31, 1995 adequate to meet current obligations, support expectations
for future changes in asset and liability levels and carry on normal opera-
tions.
INTEREST RATE RISK MANAGEMENT
Interest rate risk can be defined as the exposure of the Corporation's net in-
come or financial condition to adverse movements in interest rates. Interest
rate risk is managed within policies and limits established by ALCO and ap-
proved by the Board. ALCO issues strategic directives to specify the extent to
which Board-approved rate risk limits are utilized, taking into account the re-
sults of the rate risk modeling process as well as other internal and external
factors. The objective of ALCO's directives is to manage and control the ef-
fects of changes in interest rates on the Corporation's income statement and
financial condition. Management seeks to enhance earnings, principally net in-
terest revenue, and protect economic value, while ensuring that risks from ad-
verse movements in interest rates are in compliance with ALCO directives. This
objective is achieved through the development and implementation of interest
rate risk management strategies, including various balance sheet actions and
the use of interest rate derivatives.
Interest rate risk related to non-trading, U.S. dollar denominated positions,
which represented over 80% of the consolidated balance sheet at December 31,
1995, is managed centrally through the Boston Treasury group. Interest rate
risk associated with these positions is evaluated and managed through several
modeling methodologies. The two principal methodologies used are market value
sensitivity and net interest revenue at risk. The results of these models are
reviewed monthly with ALCO and at least quarterly with the Board.
MARKET VALUE SENSITIVITY is defined as the potential change in market value, or
the economic value, of the institution resulting from changes in interest
rates. Market value sensitivity is determined by calculating the effect on the
Corporation's existing assets, liabilities and off-balance-sheet positions
given an immediate rise or fall in interest rates (rate shock).
NET INTEREST REVENUE AT RISK is defined as the exposure of the Corporation's
net interest revenue over the next twelve months to an adverse movement in in-
terest rates. Net interest revenue at risk is modeled based on both an interest
rate shock scenario and a gradual change in interest rates over a period of
time. The simulated net interest revenue under these scenarios is used to eval-
uate how differences in asset, liability and off-balance-sheet repricing struc-
tures will be reflected in the next twelve months' results of operations.
The rate risk models consider such variables as:
. repricing characteristics of assets and liabilities;
. rate change differentials, such as federal funds rates versus savings ac-
count rates;
. maturity effects, such as calls on securities;
. rate barrier effects, such as caps and floors, on assets and liabilities;
and
. prepayment volatility on various fixed rate assets such as residential
mortgages, mortgage-backed securities and consumer loans.
Both of these models are designed to isolate the effects of market changes in
interest rates on the Corporation's existing positions, and they exclude other
factors such as competitive pricing considerations, future changes in the asset
and liability mix and other management actions, and, therefore, are not by
themselves measures of future levels of net interest revenue.
These two methodologies provide different but complementary measures of the
level of interest rate risk: the longer term view is modeled through market
value sensitivity, while the shorter term view is evaluated through net inter-
est revenue at risk over the next twelve months. Under current ALCO directives,
market value sensitivity cannot exceed 2 percent of risk-based capital and net
interest revenue at risk cannot exceed 2 percent of net interest revenue over
the next twelve-month period.
Table 18 illustrates the year-end and average positions for market value sensi-
tivity and net interest revenue at risk.
TABLE 18 -- MARKET VALUE SENSITIVITY AND NET INTEREST REVENUE AT RISK POSITIONS
<TABLE>
<CAPTION>
1995 1994
(dollars in millions) YEAR-END AVERAGE Year-end(3) Average
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Market Value Sensitivity (1)............... $87 $48 $11
% of risk-based capital.................... 1.6% 0.9% 0.2%
- --------------------------------------------------------------------------------
Net Interest Revenue at Risk (2)........... $24 $16 $11 $ 7
% of net interest revenue.................. 1.4% 1.0% 0.7% 0.5%
- --------------------------------------------------------------------------------
</TABLE>
(1) Based on a 100 basis point adverse interest rate shock.
(2) Based on the greater of a 100 basis point adverse interest rate shock or a
200 basis point adverse change in interest rates over the next twelve-month
period.
(3) The market value sensitivity position was negligible at December 31, 1994.
39
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At December 31, 1995, the Corporation's adverse market value sensitivity was to
rising interest rates. This exposure to rising interest rates increased gradu-
ally throughout 1995, as a result of changes in the balance sheet mix, includ-
ing a net increase in fixed rate consumer and commercial loans and securities,
and other management actions. Accordingly, the monthly market value sensitivity
positions ranged from 0.2% to 1.7% of risk-based capital, which were in compli-
ance with ALCO directives.
Included in the market value sensitivity model is the value of the Corpora-
tion's mortgage servicing assets and the interest rate contracts used to reduce
the exposure of these assets to declining interest rates. These assets are af-
fected by the level of prepayments made by mortgage holders resulting from de-
clines in mortgage rates. The Corporation manages such risk by entering into
short-term interest rate options on long-term U.S. Treasury securities. The
value of these contracts and related mortgage servicing assets will fluctuate
based on changes in long-term interest rates. For example, by late February
1996, as a result of an increase in long-term interest rates, the value of
these contracts had declined by approximately $110 million from December 31,
1995. Changes in the value of the contracts are recorded in current period in-
come as a component of net mortgage servicing fees. Concurrently, this interest
rate increase resulted in an increase in the value of the Corporation's mort-
gage servicing assets, which are carried at amortized cost. A loss, if any, re-
sulting from the contracts will be partially offset by the gain anticipated
upon consummation of the mortgage banking joint venture transaction, which gain
will be increased by the realization of a portion of the increased value of the
mortgage servicing assets. The impact on the Corporation's results of opera-
tions from such changes in value in 1995 is discussed further in the "Noninter-
est Income" section. The Corporation's accounting policies for mortgage servic-
ing assets and related interest rate contracts are included in Note 1 to the
Financial Statements.
In contrast to market value sensitivity, the Corporation's net interest revenue
at risk at December 31, 1995 is to declining interest rates over the next
twelve months. As a result, net interest revenue would be adversely affected by
a decline in interest rates. The risk position was neutral during the first
quarter of 1995, and trended upward during the remainder of the year, mainly
reflecting the change in the Corporation's retail deposit mix. The exposure was
managed through several actions, including the purchase of fixed-rate securi-
ties and the termination of $6 billion notional amount of a series of interest
rate futures contracts that were linked to the Corporation's short-term float-
ing rate wholesale funding. As a result, the monthly net interest revenue at
risk positions ranged from .1% to 1.7% of net interest revenue, which were in
compliance with ALCO directives.
The level of exposure maintained by the Corporation is a function of the market
environment and will change from period to period based on interest rate and
other economic expectations. As noted above, the market value sensitivity and
net interest revenue at risk models are complementary in nature. The Corpora-
tion's exposure to rising interest rates under the longer-term view, and to de-
clining interest rates under the shorter-term view, is managed simultaneously
in compliance with ALCO directives. The interest rate exposure for each model
is dependent on the balance sheet mix and the terms and pricing of balance
sheet and off-balance-sheet items at a specific point in time. Although changes
in balance sheet mix and other management actions affect each model different-
ly, the combined results indicate that interest rate risk is managed consistent
with ALCO directives. ALCO determines its interest rate risk management strat-
egy by considering the impact of changes in interest rates on each model, and,
hence, the short- and long-term effects on the Corporation's financial state-
ments.
NON-U.S. DOLLAR DENOMINATED INTEREST RATE RISK
Non-U.S. dollar denominated interest rate risk is managed by the Corporation's
overseas units, with oversight by the Boston Treasury group. The Corporation,
through ALCO, has established limits for its non-U.S. dollar denominated inter-
est rate risk using cumulative gap limits for each country in which the Corpo-
ration has local market interest rate risk. Gap is the difference between the
amount of assets and liabilities that mature or are repriced during a given pe-
riod of time. A "positive" gap results when more assets than liabilities mature
or are repriced in a given time frame. Conversely, a "negative" gap results
when there are more liabilities than assets maturing or being repriced during a
given time period. Gap limits are updated at least annually for current market
conditions, and consider what the impact of a particular interest rate movement
in the country would have on the cumulative gap position. The level of interest
rate risk positions taken by these units varies based on economic conditions in
the country at a particular point in time. The overseas units report compliance
with these limits to the Boston Treasury group on a regular basis. Derivatives
used by the international operations as part of their asset and liability man-
agement process are included in Tables 19 and 20. At December 31, 1995 and
1994, the level of such derivative activity was not significant. During 1995,
the cumulative gap positions in each country were within ALCO limits. For addi-
tional information related to the Corporation's international operations, see
discussions in the "Cross-Border Outstandings" and "Emerging Markets Countries"
sections.
DERIVATIVE FINANCIAL INSTRUMENTS
ASSET AND LIABILITY MANAGEMENT
Derivatives provide the Corporation with significant flexibility in managing
its interest rate risk exposure, enabling it to manage risk efficiently and re-
spond quickly to changing market conditions by minimizing the impact on balance
sheet leverage. The Corporation routinely uses non-leveraged rate-related de-
rivative instruments, primarily interest rate swaps and futures, as part of its
asset and liability management practices. All derivative activities are managed
on a comprehensive basis, are included in the overall net interest revenue and
market value at risk measures and limits described above, and are subject to
credit standards similar to those for balance sheet exposures.
40
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- ---------------------------------------- ------------------------------------
Table 19 summarizes the remaining maturity of interest rate derivative finan-
cial instruments entered into for asset and liability management purposes as of
December 31, 1995. The level and term of such contracts may be adjusted as nec-
essary, in response to balance sheet changes and other management actions, in
compliance with ALCO directives for market value sensitivity and net interest
revenue at risk.
TABLE 19 -- REMAINING MATURITY OF INTEREST RATE DERIVATIVES
<TABLE>
<CAPTION>
Remaining Maturity
1995 1994
(dollars in millions) 1996 1997 1998 1999 2000 2001+ Total Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
DOMESTIC
Receive fixed rate swaps (1)
Notional amount....... $ 402 $ 151 $ 60 $340 $1,500 $ 2,453 $ 2,461
Weighted average
receive rate......... 6.08% 8.94% 5.61% 5.50% 6.38% 6.35% 6.64%
Weighted average pay
rate................. 5.86% 5.93% 5.91% 5.80% 5.86% 5.86% 5.82%
Pay fixed rate swaps (1)
Notional amount....... $ 85 $ 39 $ 34 $ 44 $ 40 $ 59 $ 301 $ 638
Weighted average
receive rate......... 5.46% 5.96% 6.09% 5.85% 7.03% 7.12% 6.19% 6.02%
Weighted average pay
rate................. 6.92% 6.84% 8.70% 7.37% 5.85% 5.78% 6.81% 5.76%
Basis swaps (2)
Notional amount....... $ 1,249 $ 50 $ 300 $ 1,599 $ 171
Weighted average
receive rate......... 5.89% 5.88% 6.33% 5.97% 6.01%
Weighted average pay
rate................. 5.92% 5.63% 5.67% 5.86% 5.71%
TOTAL DOMESTIC INTEREST
RATE SWAPS
Notional amount....... $ 1,736 $ 190 $ 94 $ 44 $430 $1,859 $ 4,353 $ 3,270
Weighted average
receive rate (3)..... 5.91% 8.33% 5.79% 5.85% 5.69% 6.40% 6.20% 6.49%
Weighted average pay
rate (3)............. 5.96% 6.12% 6.93% 7.37% 5.78% 5.83% 5.93% 5.81%
TOTAL INTERNATIONAL
INTEREST RATE SWAPS
Notional amount (4)... $ 1,475 $ 1,475 $ 451
OTHER DERIVATIVE
PRODUCTS
Futures and forwards
(5).................... $10,218 $2,300 $12,518 $16,566
Interest rate options
(6)
Purchased............. 3,805 39 $ 81 $ 43 3,968 7,709
Written or sold....... 360 360 6,125
------- ------ ---- ----- ---- ------ ------- -------
TOTAL CONSOLIDATED
NOTIONAL AMOUNT........ $17,594 $2,529 $175 $ 87 $430 $1,859 $22,674 $34,121
======= ====== ==== ===== ==== ====== ======= =======
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Of the receive fixed rate swaps, approximately $1 billion are linked to
floating rate loans, and the remainder principally to fixed rate notes pay-
able. Of the swaps linked to notes payable, approximately $1 billion are
scheduled to mature in 2001 and thereafter. The majority of pay fixed rate
swaps are linked to fixed rate loans.
(2) Basis swaps represent swaps where both the pay rate and receive rate are
floating rates. All of the basis swaps are linked to floating rate mort-
gages and short-term bank notes.
(3) The majority of the Corporation's interest rate swaps accrue at LIBOR. In
arriving at the variable weighted average receive and pay rates, LIBOR
rates in effect as of December 31, 1995 have been implicitly assumed to re-
main constant throughout the terms of the swaps. Future changes in LIBOR
rates would affect the variable rate information disclosed.
(4) The majority of the international portfolio is comprised of swaps entered
into by the Corporation's Brazilian operation with a weighted average matu-
rity of less than 90 days. These swaps typically include the exchange of
floating rate indices that are limited to the Brazilian market.
(5) The majority of the futures used by the Corporation are linked to short-
term liabilities and are exchange-traded instruments. The reference instru-
ments for these contracts comprise the major types available, such as Euro-
dollar deposits and U.S. Treasury notes. The forwards are used to manage
the interest rate risk related to the Corporation's mortgages held for
sale. Average rates are not meaningful for these products.
(6) At December 31, 1995, primarily includes interest rate options used to man-
age prepayment risk related to the Corporation's mortgage servicing portfo-
lio.
41
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Table 20 summarizes the fair value and unrecognized gains (losses) of
derivatives used for asset and liability management purposes. Fair value
represents the amount at which a given instrument could be exchanged in an arm's
length transaction with a third party as of the balance sheet date. The increase
in fair value of interest rate derivative contracts, as reflected in the change
from a net unrecognized loss of $140 million at December 31, 1994 to a net
unrecognized gain of $15 million at December 31, 1995, was primarily due to the
change in market interest rates during 1995.
TABLE 20 -- FAIR VALUE AND UNRECOGNIZED GAINS (LOSSES)
<TABLE>
<CAPTION>
December 31 1995 1994
Fair Value (1) (2) Unrecognized Fair Value (1) (2) Unrecognized
(in millions) Asset Liability Gain (Loss) (3) Asset Liability Gain (Loss) (3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate contracts
Interest rate swaps... $ 92 $ 7 $102 $19 $ 225 $(208)
Futures and forwards.. 10 (89) 1 36
Interest rate
options.............. 119 34 2 39 19 32
--------- -------- ---- -------- --------- -----
$ 211 $ 51 $ 15 $ 59 $ 244 $(140)
========= ======== ==== ======== ========= =====
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) In certain cases, instruments such as futures are subject to daily cash
settlements; therefore, the fair value of these instruments is zero.
(2) Interest rate options include the fair value of options used to manage pre-
payment risk related to the Corporation's mortgage servicing portfolio.
(3) Unrecognized gain or loss is based upon fair values and represents the
amount of gain or loss that has not been recognized in the income statement
at the balance sheet date. These amounts are recognized in income as ad-
justments to yield over the period being managed.
The Corporation's utilization of derivative instruments is modified from time
to time in response to changing market conditions, as well as changes in the
characteristics and mix of the Corporation's related assets and liabilities. In
this respect, during 1995, the Corporation terminated $.7 billion notional
amount of interest rate swaps and $6 billion notional amount of interest rate
futures contracts. The futures contracts were part of a series of three-month
contracts that were linked to the Corporation's continuing need for short-term
wholesale funding. Included in unrecognized gains (losses) at December 31, 1995
were deferred gains of $32 million and deferred losses of $2 million related to
terminated contracts that are being amortized to net interest revenue over
weighted average periods of 32 months and 23 months, respectively. At December
31, 1994, unrecognized gains of $35 million related to terminated contracts
were being amortized to net interest revenue over a weighted average period of
14 months. The Corporation routinely reviews its asset and liability derivative
positions to determine that such instruments continue to function as effective
risk management tools.
DERIVATIVE AND FOREIGN EXCHANGE CONTRACT TRADING INSTRUMENTS
The primary focus of the Corporation's trading activities is to provide risk
management products to its customers. Market trading instruments include for-
eign exchange, interest rate and currency derivatives. The Corporation takes
modest risk positions in these instruments, all of which are subject to ALCO-
approved limits. Interest rate derivatives trading activities include interest
rate swaps and interest rate options, futures and forwards. Foreign exchange
trading activities principally include trading of spot and forward contracts in
major foreign currencies.
Additional information with respect to the Corporation's asset and liability
management and trading derivatives, including accounting policies, is included
in Notes 1 and 20 to the Financial Statements.
DERIVATIVE AND FOREIGN EXCHANGE CONTRACT CREDIT RISK
Credit risk arises from the possibility that a counterparty to a transaction,
as a result of financial difficulties, is unable to perform according to the
terms of the contract. At a given point in time, the credit risk exposure of
off-balance-sheet interest rate derivative and foreign exchange contracts is
equal to the fair value of contracts with a positive, or asset, value, which
would approximate the cost to replace these contracts at current market prices
if each counterparty defaulted. These credit risk exposures are managed as part
of the overall extension of credit to individual customer relationships and are
also considered in assessing the overall adequacy of the reserve for credit
losses. Gross credit-related losses relative to interest rate derivatives and
foreign exchange contracts have been negligible to date. Refer to Note 20 to
the Financial Statements for further discussion.
CAPITAL MANAGEMENT
At December 31, 1995, the Corporation had $3.8 billion in stockholders' equity,
compared with $3.1 billion at December 31, 1994 and $2.9 billion at December
31, 1993. The growth in stockholders' equity from the end of 1994 mainly re-
sulted from retention of earnings, net of the payment of dividends on common
and preferred stock, the conversion of $94 million of the Corporation's con-
vertible subordinated debt into
42
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common stock during the first quarter of 1995, and the increase in the fair
value of securities available for sale, net of tax.
The Corporation's quarterly dividend was increased 37 percent, from $.27 per
share in the first two quarters of 1995 to $.37 per share in the last two quar-
ters of 1995. The level of dividends paid on the Corporation's common stock is
determined by the Board based on the Corporation's liquidity, asset quality
profile, capital adequacy and recent earnings history, as well as economic con-
ditions and other factors deemed relevant by the Board, including the amount of
dividends paid to the Corporation by its subsidiaries.
A capital planning process is in place to assist the Corporation and its bank
subsidiaries in maintaining appropriate capital levels and ratios. ALCO is re-
sponsible for approving all major balance sheet initiatives and managing capi-
tal usage for the Corporation and its principal operating units. The Corpora-
tion's Boston Treasury group creates and maintains the capital plan, which is
focused on the attainment of the Corporation's strategic objectives. The Boston
Treasury group reports to ALCO monthly on the current and pro forma capital po-
sitions of the Corporation and each of its principal bank subsidiaries.
Regulatory risk-based capital requirements take into account the differing risk
profiles of banking organizations by assigning risk weights to both assets and
the credit equivalent amounts of off-balance-sheet exposures. Capital is di-
vided into two tiers. Tier 1 capital includes common stockholders' equity and
qualifying preferred stock, and Tier 2 capital includes, subject to certain
limitations, limited-life preferred stock, mandatory convertible securities,
subordinated debt and a portion of the reserve for credit losses.
Table 21 presents the Corporation's capital position and related ratios as of
the last three year-ends.
TABLE 21 -- CAPITAL POSITION
<TABLE>
<CAPTION>
Well
December 31 1995 1994 1993 Capitalized
(dollars in millions) Minimum*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-based capital ratios
Tier 1 capital ratio (Tier 1
capital/total risk-adjusted assets)... 8.0% 7.0% 7.2% 6.00%
Total capital ratio (Total
capital/total risk-adjusted assets)... 12.8% 12.2% 12.4% 10.00%
Leverage ratio (Tier 1 capital/adjusted
total average assets)................... 7.4% 6.5% 6.8% 5.00%
Tier 1 capital........................... $ 3,391 $ 2,874 $ 2,754
Tier 2 capital........................... $ 2,058 $ 2,100 $ 1,971
Total capital............................ $ 5,449 $ 4,974 $ 4,725
Total risk-adjusted assets............... $42,636 $40,786 $38,179
Common equity/assets ratio............... 6.8% 5.9% 5.9%
- --------------------------------------------------------------------------------
</TABLE>
* The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established minimum ratios for banks to be considered "well capitalized."
These ratios are determined solely for the purpose of applying FDICIA's pro-
visions and, accordingly, such capital categories may not constitute an accu-
rate representation of the overall financial condition or prospects of any
bank.
Compared to the prior year-end, the improvement in the Corporation's capital
ratios at December 31, 1995 reflected the impact of current year earnings and
the sales of Vermont and Casco, which resulted in a lower level of risk-ad-
justed assets and the removal of $35 million of goodwill from the Corporation's
balance sheet. In addition, the Corporation's Tier 1 capital ratio benefited
from the above-noted conversion of $94 million of convertible subordinated debt
into common stock. The redemption of $150 million of subordinated debt in the
third quarter of 1995, partially offset the improvement in the total capital
ratio. The conversion and redemption of subordinated debt are more fully dis-
cussed in Note 10 to the Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (the FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This standard requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amounts of these assets may not be recoverable.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." This standard amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities," to require that rights to service mortgage loans origi-
nated for sale be recognized as separate assets either upon origination (if a
definitive plan to sell the loans and retain the rights exists) or upon sale of
the loans based on the relative fair values of the rights and loans, similar to
PMSR. This standard also requires that mortgage servicing rights be assessed
for impairment based on the fair value of those rights. See the "Strategic Al-
liances and Other Initiatives" section for further discussion of the announced
joint venture of the Corporation's mortgage banking operations.
43
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In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Com-
pensation." This standard encourages, but does not require, adoption of a fair
value-based accounting method for stock-based compensation arrangements and
would supercede the provisions of Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees." An entity may con-
tinue to apply APB No. 25 provided the entity discloses its pro forma net in-
come and earnings per share as if the fair value-based method had been applied
in measuring compensation cost. The Corporation intends to continue applying
APB No. 25 and to disclose the pro forma information required by SFAS No. 123.
These standards are effective January 1, 1996. The Corporation does not expect
that, upon adoption, these standards will have a material effect on its finan-
cial statements.
1994 VS. 1993
NET INTEREST REVENUE
Domestic net interest revenue increased $135 million to $1,231 million, result-
ing from both a higher level of earning assets and wider spreads. Average earn-
ing assets increased $1.6 billion, reflecting a $2.0 billion increase in aver-
age loan volume offset by a $.4 billion decline in other earning assets, mainly
mortgages held for sale. Contributing to the loan volume increase was a higher
level of consumer-related loans, a portion of which came from the acquisitions
of BankWorcester and Pioneer. In addition, the Corporation's average volume of
domestic commercial loans increased, primarily from growth in some of the Cor-
poration's specialty lending areas and the New England commercial lending busi-
ness. The wider domestic spreads mainly reflected growth in earning asset
yields, which outpaced increases in rates paid on interest bearing liabilities
during 1994. The widening of spreads was also mainly responsible for the domes-
tic net interest margin increasing by 24 basis points compared with 1993.
The international net interest revenue increase of $91 million to $348 million
was primarily attributable to the Corporation's operations in Latin America,
two-thirds of which related to operations in Brazil. During the first half of
1994, Brazil's net interest revenue increased from 1993, as earning asset
growth more than offset narrower spreads. During the second half of 1994, after
the country's July 1994 economic program reduced inflation from approximately
50% to 1% per month, the Corporation maintained funding strategies which bene-
fited from these economic changes and resulted in wider spreads. An increase in
average Brazilian loan volume of $450 million from 1993 also contributed to the
improvement in net interest revenue. Brazil's second half performance was the
major factor behind the international margin improving 14 basis points compared
with 1993.
NONINTEREST INCOME
The $46 million increase in financial service fees to $396 million primarily
reflected improvements in net mortgage servicing fees and loan-related fees.
Net mortgage servicing fees increased $51 million compared with 1993, reflect-
ing a higher volume of servicing, as well as lower amortization of PMSR. Loan-
related fees improved $15 million, mainly reflecting growth in syndication ac-
tivity. The major factor offsetting these improvements was a decline of $20
million in factoring fees due to the sale of the Corporation's domestic factor-
ing business in the first quarter of 1994.
Trust and agency fees improved $23 million from the 1993 level of $178 million,
primarily as a result of increased volumes and new business in the domestic
stock transfer and Latin American mutual fund businesses. The $18 million de-
cline in net securities gains reflected a lower level of sales. In addition,
both trading account profits and net equity and mezzanine profits declined $8
million. Other income of $102 million in 1994, improved $23 million from 1993,
and included a $23 million gain recognized in the first quarter from the sale
of securities originally acquired in connection with loan restructurings.
NONINTEREST EXPENSE
Excluding acquisition, divestiture and restructuring expense and OREO costs,
noninterest expense increased $34 million, or 2%, from 1993. This growth is
primarily attributable to higher employee costs of $42 million, which reflected
a greater number of employees in Latin America, as the Corporation continued
its strategic expansion in this area; higher compensation rates, including nor-
mal salary and incentive compensation increases; and a decline in the amount of
loan origination costs deferred, reflecting a lower volume of originations in
1994. These increases were mitigated by a lower level of domestic employees.
Nonemployee costs declined $8 million, reflecting an $11 million decline in
FDIC insurance premiums, the result of lower assessment rates and a partial re-
fund of 1993's assessment, and lower legal fees. These declines were partially
offset by increases in various nonemployee cost categories from the 1994 acqui-
sitions of BankWorcester and Pioneer. The reduction in OREO costs from 1993
primarily reflected lower valuation adjustments on OREO properties.
During 1994, in connection with its acquisitions of BankWorcester and Pioneer,
the Corporation recorded acquisition-related costs of $21 million. During 1993,
the Corporation recorded acquisition-related costs of $68 million in connection
with its mergers with Society and Multibank, and reorganization charges of $17
million in connection with downsizing and reconfiguring certain of its business
and corporate units. Additional information on these items is included in Note
17 to the Financial Statements.
44
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BANK OF BOSTON CORPORATION
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
(dollars in millions) Year Ended December 31, 1995
- --------------------------------------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST(1) RATE
<S> <C> <C> <C>
ASSETS
Interest bearing deposits in other banks
U.S.............................................. $ 205 $ 11 5.60%
International.................................... 1,087 206 18.91
------- ------
Total........................................... 1,292 217 16.80
------- ------ -----
Federal funds sold and resale agreements
U.S.............................................. 374 22 5.91
International.................................... 649 271 41.77
------- ------
Total........................................... 1,023 293 28.65
------- ------ -----
Trading securities
U.S.............................................. 202 13 6.16
International.................................... 602 171 28.45
------- ------
Total........................................... 804 184 22.86
------- ------ -----
Loans held for sale
U.S.(2).......................................... 432 30 7.02
------- ------ -----
Securities
U.S.
Available for sale(3)........................... 2,488 176 7.08
Held to maturity................................ 1,611 107 6.69
International
Available for sale(3)........................... 422 64 13.36
Held to maturity................................ 203 16 7.66
------- ------
Total........................................... 4,724 363 7.69
------- ------ -----
Loans and lease financing
U.S.............................................. 23,200 2,064 8.90
International.................................... 7,916 1,178 14.88
------- ------
Total(4)........................................ 31,116 3,242 10.42
------- ------ -----
Total earning assets.............................. 39,391 4,329 10.99
------ -----
Nonearning assets................................. 5,221
-------
Total assets(5)................................. $44,612
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits................................ $ 8,963 $ 245 2.73%
Time deposits................................... 7,535 423 5.61
International
Banks in foreign countries...................... 2,257 145 6.42
Other foreign savings and time.................. 5,804 744 12.82
------- ------
Total........................................... 24,559 1,557 6.34
------- ------ -----
Federal funds purchased and repurchase agreements
U.S.............................................. 3,510 189 5.40
International.................................... 189 45 23.60
------- ------
Total........................................... 3,699 234 6.33
------- ------ -----
Other funds borrowed
U.S.............................................. 3,577 229 6.41
International.................................... 891 403 45.16
------- ------
Total........................................... 4,468 632 14.14
------- ------ -----
Notes payable
U.S.............................................. 1,882 132 7.04
International.................................... 210 23 10.87
------- ------
Total........................................... 2,092 155 7.42
------- ------ -----
Total interest bearing liabilities................ 34,818 2,578 7.40
------ -----
Demand deposits-U.S............................... 4,286
Demand deposits-International..................... 456
Other noninterest bearing liabilities............. 1,606
Stockholders' equity.............................. 3,446
-------
Total liabilities and stockholders' equity(5)... $44,612
=======
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE
INTEREST EARNING ASSETS
U.S.............................................. $28,512 $1,305 4.58%
International.................................... 10,879 446 4.10%
------- ------
Total........................................... $39,391 $1,751 4.45%
======= ======
- ------------------------------------------------------------------------------
</TABLE>
(1) Income is shown on a fully taxable equivalent basis.
(2) Amounts include the Corporation's accelerated disposition portfolio.
(3) Average rates for securities available for sale are based on the securi-
ties' amortized cost.
(4) Loans and lease financing includes nonaccrual and renegotiated balances.
Interest on loans and lease financing includes net fees of $56 million.
(5) As of December 31, 1995, average international assets and liabilities as a
percentage of total average consolidated assets and liabilities, respec-
tively, amounted to 28%.
45
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
BANK OF BOSTON CORPORATION
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
(dollars in millions) Year Ended December 31, 1994
- --------------------------------------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST(1) RATE
<S> <C> <C> <C>
ASSETS
Interest bearing deposits in other banks
U.S. ............................................ $ 181 $ 7 3.97%
International.................................... 864 109 12.54
------- ------
Total........................................... 1,045 116 11.06
------- ------ -----
Federal funds sold and resale agreements
U.S. ............................................ 1,301 53 4.05
International.................................... 1,255 547 43.62
------- ------
Total........................................... 2,556 600 23.47
------- ------ -----
Trading securities
U.S. ............................................ 160 8 5.34
International.................................... 398 105 26.26
------- ------
Total........................................... 558 113 20.27
------- ------ -----
Loans held for sale
U.S.(2).......................................... 686 43 6.30
------- ------ -----
Securities
U.S.
Available for sale(3)........................... 1,422 93 6.58
Held to maturity................................ 1,550 89 5.75
International
Available for sale(3)........................... 332 47 14.63
Held to maturity................................ 206 17 8.12
------- ------
Total........................................... 3,510 246 7.00
------- ------ -----
Loans and lease financing
U.S. ............................................ 23,038 1,788 7.76
International.................................... 6,752 819 12.14
------- ------
Total(4)........................................ 29,790 2,607 8.75
------- ------ -----
Total earning assets.............................. 38,145 3,725 9.77
------ -----
Nonearning assets................................. 4,916
-------
Total assets(5)................................. $43,061
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits................................ $ 9,585 $ 196 2.04%
Time deposits................................... 7,536 341 4.53
International
Banks in foreign countries...................... 2,118 277 13.09
Other foreign savings and time.................. 5,062 334 6.60
------- ------
Total........................................... 24,301 1,148 4.72
------- ------ -----
Federal funds purchased and repurchase agreements
U.S. ............................................ 3,470 132 3.80
International.................................... 203 65 31.96
------- ------
Total........................................... 3,673 197 5.36
------- ------ -----
Other funds borrowed
U.S. ............................................ 2,327 118 5.06
International.................................... 1,180 553 46.87
------- ------
Total........................................... 3,507 671 19.13
------- ------ -----
Notes payable
U.S. ............................................ 1,942 117 6.02
International.................................... 127 13 10.36
------- ------
Total........................................... 2,069 130 6.28
------- ------ -----
Total interest bearing liabilities................ 33,550 2,146 6.40
------ -----
Demand deposits-U.S............................... 4,553
Demand deposits-International..................... 447
Other noninterest bearing liabilities............. 1,488
Stockholders' equity.............................. 3,023
-------
Total liabilities and stockholders' equity(5)... $43,061
=======
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE
INTEREST EARNING ASSETS
U.S. ............................................ $28,339 $1,231 4.34%
International.................................... 9,806 348 3.54%
------- ------
Total........................................... $38,145 $1,579 4.14%
======= ======
- ------------------------------------------------------------------------------
</TABLE>
(1) Income is shown on a fully taxable equivalent basis.
(2) Amounts include the Corporation's accelerated disposition portfolio.
(3) Average rates for securities available for sale are based on the securi-
ties' amortized cost.
(4) Loans and lease financing includes nonaccrual and renegotiated balances.
Interest on loans and lease financing includes net fees of $52 million.
(5) As of December 31, 1994, average international assets and liabilities as a
percentage of total average consolidated assets and liabilities, respec-
tively, amounted to 26%.
46
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF BOSTON CORPORATION
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
(dollars in millions) Year Ended December 31, 1993
- --------------------------------------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST(1) RATE
<S> <C> <C> <C>
ASSETS
Interest bearing deposits in other banks
U.S. ............................................ $ 341 $ 11 3.22%
International.................................... 952 130 13.66
------- ------
Total........................................... 1,293 141 10.91
------- ------ -----
Federal funds sold and resale agreements
U.S. ............................................ 962 29 3.07
International.................................... 482 109 22.56
------- ------
Total........................................... 1,444 138 9.59
------- ------ -----
Trading securities
U.S. ............................................ 152 6 4.03
International.................................... 129 4 3.19
------- ------
Total........................................... 281 10 3.65
------- ------ -----
Loans held for sale
U.S. ............................................ 1,071 76 7.06
------- ------ -----
Securities(2)
U.S. ............................................ 3,153 188 5.95
International.................................... 471 77 16.35
------- ------
Total........................................... 3,624 265 7.30
------- ------ -----
Loans and lease financing
U.S. ............................................ 21,063 1,602 7.60
International.................................... 5,523 515 9.32
------- ------
Total(3)........................................ 26,586 2,117 7.96
------- ------ -----
Total earning assets.............................. 34,299 2,747 8.01
------ -----
Nonearning assets................................. 4,068
-------
Total assets(4)................................. $38,367
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits................................ $ 9,367 $ 212 2.30%
Time deposits................................... 9,199 425 4.62
International
Banks in foreign countries...................... 1,461 80 5.46
Other foreign savings and time.................. 3,657 299 8.18
------- ------
Total........................................... 23,684 1,016 4.29
------- ------ -----
Federal funds purchased and repurchase agreements
U.S.............................................. 2,697 81 3.02
International.................................... 119 19 15.80
------- ------
Total........................................... 2,816 100 3.57
------- ------ -----
Other funds borrowed
U.S.............................................. 879 49 5.59
International.................................... 654 115 17.54
------- ------
Total........................................... 1,533 164 10.69
------- ------ -----
Notes payable
U.S.............................................. 1,654 105 6.32
International.................................... 89 9 10.22
------- ------
Total........................................... 1,743 114 6.52
------- ------ -----
Total interest bearing liabilities................ 29,776 1,394 4.70
------ -----
Demand deposits-U.S............................... 4,470
Demand deposits-International..................... 385
Other noninterest bearing liabilities............. 1,017
Stockholders' equity.............................. 2,719
-------
Total liabilities and stockholders' equity(4)... $38,367
=======
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE
INTEREST EARNING ASSETS
U.S.............................................. $26,742 $1,096 4.10%
International.................................... 7,557 257 3.40%
------- ------
Total........................................... $34,299 $1,353 3.94%
======= ======
- ------------------------------------------------------------------------------
</TABLE>
(1) Income is shown on a fully taxable equivalent basis.
(2) Prior to January 1, 1994, average balances for securities available for
sale and securities held to maturity were not separately accumulated.
(3) Loans and lease financing includes nonaccrual and renegotiated balances.
Interest on loans and lease financing includes net fees of $56 million.
(4) As of December 31, 1993, average international assets and liabilities as a
percentage of total average consolidated assets and liabilities, respec-
tively, amounted to 23%.
47
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF BOSTON CORPORATION
CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS
The following tables present, on a fully taxable equivalent basis, an analysis
of the effect on net interest revenue of volume and rate changes for 1995 com-
pared with 1994, and 1994 compared with 1993. The change due to the volume/rate
variance has been allocated to volume.
<TABLE>
<CAPTION>
1995 Compared with 1994 1994 Compared with 1993
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
(in millions) Volume Rate Net Change Volume Rate Net Change
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Interest bearing
deposits in other banks
U.S.................... $ 1 $ 3 $ 4 $ (6) $ 2 $ (4)
International.......... 42 55 97 (11) (10) (21)
-------- -------
101 (25)
-------- -------
Federal funds sold and
resale agreements
U.S.................... (55) 24 (31) 14 10 24
International.......... (253) (23) (276) 337 101 438
-------- -------
(307) 462
-------- -------
Trading securities
U.S.................... 3 2 5 2 2
International.......... 58 8 66 71 30 101
-------- -------
71 103
-------- -------
Loans held for sale
U.S.................... (18) 5 (13) (25) (8) (33)
-------- -------
Securities
U.S.................... 78 23 101 (14) 8 (6)
International.......... 11 5 16 8 (21) (13)
-------- -------
117 (19)
-------- -------
Loans and lease
financing
U.S.................... 15 261 276 153 33 186
International.......... 173 186 359 149 155 304
-------- -------
635 490
-------- -------
Interest income......... 138 466 604 375 603 978
-------- -------
INTEREST BEARING
LIABILITIES
Deposits
U.S. savings........... (17) 66 49 7 (23) (16)
U.S. time.............. 1 81 82 (76) (8) (84)
International.......... 97 181 278 175 57 232
-------- -------
409 132
-------- -------
Federal funds purchased
and repurchase
agreements
U.S.................... 2 55 57 30 21 51
International.......... (3) (17) (20) 27 19 46
-------- -------
37 97
-------- -------
Other funds borrowed
U.S.................... 80 31 111 73 (4) 69
International.......... (130) (20) (150) 247 191 438
-------- -------
(39) 507
-------- -------
Notes payable
U.S.................... (4) 19 15 17 (5) 12
International.......... 9 1 10 4 4
-------- -------
25 16
-------- -------
Interest expense........ 82 350 432 216 536 752
-------- -------
Net interest revenue.... $ 172 $ 226
======== =======
</TABLE>
48
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
BANK OF BOSTON CORPORATION
SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA
<TABLE>
<CAPTION>
1995 1994
(dollars in millions, FOURTH THIRD SECOND FIRST Fourth Third Second First
except per share amounts) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income.......... $ 1,070 $ 1,113 $ 1,103 $ 1,033 $ 1,071 $ 1,083 $ 840 $ 724
Interest expense......... 628 674 669 607 638 659 466 383
------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue... 442 439 434 426 433 424 374 341
Provision for credit
losses.................. 75 45 40 90 35 25 25 45
------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue
after provision for
credit losses......... 367 394 394 336 398 399 349 296
Noninterest income(1).... 313 249 236 293 199 202 192 235
Noninterest expense(2)... 429 393 392 383 382 378 372 347
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes and extraordinary
item.................... 251 250 238 246 215 223 169 184
Provision for income
taxes................... 109 110 105 121 94 99 75 81
------- ------- ------- ------- ------- ------- ------- -------
Income before
extraordinary item...... 142 140 133 125 121 124 94 103
------- ------- ------- ------- ------- ------- ------- -------
Extraordinary loss from
early extinguishment of
debt, net of tax........ (7)
------- ------- ------- ------- ------- ------- ------- -------
Net income............... $ 142 $ 140 $ 133 $ 125 $ 121 $ 124 $ 94 $ 96
======= ======= ======= ======= ======= ======= ======= =======
AVERAGE BALANCE SHEET
DATA
Loans and lease
financing............... $31,763 $31,625 $30,928 $30,123 $31,076 $30,362 $29,105 $28,615
Securities............... 5,247 4,824 4,526 4,288 4,435 3,489 3,164 2,945
Other earning assets..... 3,697 3,418 3,516 3,576 3,838 4,995 5,613 4,942
------- ------- ------- ------- ------- ------- ------- -------
Total earning assets... 40,707 39,867 38,970 37,987 39,349 38,846 37,882 36,502
Cash and due from banks.. 1,350 1,249 1,309 1,262 2,178 2,116 1,828 2,157
Other assets............. 4,176 4,069 3,822 3,596 2,873 2,963 2,992 2,555
------- ------- ------- ------- ------- ------- ------- -------
Total average assets... $46,233 $45,185 $44,101 $42,845 $44,400 $43,925 $42,702 $41,214
======= ======= ======= ======= ======= ======= ======= =======
Deposits................. $30,303 $29,268 $28,807 $28,754 $30,445 $29,904 $28,232 $28,615
Funds borrowed........... 8,512 8,679 8,174 7,284 7,194 7,361 8,138 6,030
Other liabilities........ 1,647 1,643 1,661 1,467 1,491 1,625 1,404 1,433
Notes payable............ 2,109 2,065 2,062 2,133 2,141 1,987 1,957 2,194
Stockholders' equity..... 3,662 3,530 3,397 3,207 3,129 3,048 2,971 2,942
------- ------- ------- ------- ------- ------- ------- -------
Total average
liabilities and
stockholders' equity.. $46,233 $45,185 $44,101 $42,845 $44,400 $43,925 $42,702 $41,214
======= ======= ======= ======= ======= ======= ======= =======
PER COMMON SHARE
Income before
extraordinary item
Primary................ $ 1.18 $ 1.17 $ 1.11 $ 1.08 $ 1.04 $ 1.07 $ .80 $ .88
Fully diluted.......... 1.17 1.15 1.10 1.04 1.01 1.04 .77 .85
Net Income
Primary................ 1.18 1.17 1.11 1.08 1.04 1.07 .80 .82
Fully diluted.......... 1.17 1.15 1.10 1.04 1.01 1.04 .77 .79
Cash dividends declared.. .37 .37 .27 .27 .27 .22 .22 .22
Market value
High................... 49 3/8 47 5/8 38 1/4 30 3/8 29 1/8 27 3/8 28 1/2 25 5/8
Low.................... 43 5/8 36 3/4 29 3/8 25 5/8 24 5/8 24 3/8 23 1/8 22 5/8
AVERAGE NUMBER OF COMMON
SHARES (in thousands)
Primary................ 112,285 111,865 111,369 107,278 107,108 106,981 106,619 106,198
Fully diluted.......... 114,036 113,803 112,933 111,820 111,831 111,690 111,286 110,817
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a $20 million gain from the sale of the corporate trust business
in the fourth quarter of 1995, a $75 million gain from the sale of the Cor-
poration's Maine and Vermont banking subsidiaries in the first quarter of
1995, and a $27 million gain from the sale of the domestic factoring busi-
ness in the first quarter of 1994.
(2) Includes $28 million in charges mainly related to exiting, reorganizing and
downsizing certain business and corporate staff units in the fourth quarter
of 1995, and $5 million and $16 million of acquisition-related costs in the
third and second quarters of 1994, respectively, related to the Corpora-
tion's acquisitions of Pioneer Financial, A Co-operative Bank and
BankWorcester Corporation.
The common stock of the Corporation, which is the only class of its
securities entitled to vote at the Annual Meeting of Stockholders, is listed
and traded on the New York and Boston stock exchanges.
49
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders Bank of Boston Corporation:
We have audited the accompanying consolidated balance sheets of Bank of Boston
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 1995.
These financial statements are the responsibility of the Corporation's manage-
ment. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance as to whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bank of Boston
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consoli-
dated results of their operations and cash flows for each of the years in the
three year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Notes 1, 15 and 19 to the financial statements, the Corporation
has adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," Statement of Fi-
nancial Accounting Standards No. 109, "Accounting for Income Taxes," and
changed its method of accounting for purchased mortgage servicing rights, ef-
fective January 1, 1993; adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective December 31, 1993; and adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosure," effec-
tive January 1, 1995.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 18, 1996
51
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF BOSTON CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 1995 1994
(dollars in millions, except per share amounts)
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks....................................... $ 2,645 $ 2,317
Interest bearing deposits in other banks...................... 1,250 1,556
Federal funds sold and securities purchased under agreements
to resell..................................................... 1,350 1,232
Trading securities............................................ 1,109 553
Mortgages held for sale....................................... 889 183
Securities
Available for sale........................................... 5,014 2,997
Held to maturity (fair value of $620 in 1995 and $1,626 in
1994)........................................................ 613 1,703
Loans and lease financing (net of unearned income of $253 in
1995 and $292 in 1994)........................................ 31,067 31,005
Reserve for credit losses..................................... (736) (680)
------- -------
Net loans and lease financing................................ 30,331 30,325
Premises and equipment, net................................... 617 569
Due from customers on acceptances............................. 359 314
Accrued interest receivable................................... 456 355
Other assets.................................................. 2,764 2,526
------- -------
TOTAL ASSETS.................................................. $47,397 $44,630
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Domestic offices
Noninterest bearing......................................... $ 4,839 $ 4,900
Interest bearing............................................ 16,564 16,841
Overseas offices
Noninterest bearing......................................... 552 569
Interest bearing............................................ 8,993 9,046
------- -------
Total deposits.............................................. 30,948 31,356
Funds borrowed................................................ 8,763 6,360
Acceptances outstanding....................................... 359 316
Accrued expenses and other liabilities........................ 1,437 1,287
Notes payable................................................. 2,139 2,169
------- -------
Total liabilities............................................. 43,646 41,488
------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock without par value
Authorized shares--10,000,000
Issued shares--4,593,941.................................... 508 508
Common stock, par value $2.25
Authorized shares--200,000,000
Issued shares--112,571,508 in 1995 and 107,584,349 in 1994
Outstanding shares--112,086,150 in 1995 and 106,547,149 in
1994........................................................ 253 242
Surplus...................................................... 932 810
Retained earnings............................................ 2,020 1,655
Net unrealized gain (loss) on securities available for sale,
net of tax................................................... 64 (40)
Treasury stock, at cost (485,358 shares in 1995 and 1,037,200
shares in 1994).............................................. (22) (27)
Cumulative translation adjustments, net of tax............... (4) (6)
------- -------
Total stockholders' equity.................................... 3,751 3,142
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $47,397 $44,630
======= =======
- ---------------------------------------------------------------------------------
</TABLE>
The Accompanying Notes Are an Integral Part of These Financial Statements.
52
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
BANK OF BOSTON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and lease financing, including fees.............. $ 3,240 $ 2,606 $ 2,112
Securities............................................. 355 242 261
Trading securities..................................... 184 113 10
Mortgages held for sale................................ 30 41 76
Federal funds sold and securities purchased under
agreements to resell.................................. 293 600 139
Deposits in other banks................................ 217 116 141
------- ------- -------
Total interest income................................. 4,319 3,718 2,739
------- ------- -------
INTEREST EXPENSE
Deposits of domestic offices........................... 645 520 630
Deposits of overseas offices........................... 912 628 386
Funds borrowed......................................... 866 868 264
Notes payable.......................................... 155 130 114
------- ------- -------
Total interest expense................................ 2,578 2,146 1,394
------- ------- -------
Net interest revenue.................................. 1,741 1,572 1,345
Provision for credit losses............................ 250 130 70
------- ------- -------
Net interest revenue after provision for credit
losses............................................... 1,491 1,442 1,275
------- ------- -------
NONINTEREST INCOME
Financial service fees................................. 523 396 350
Trust and agency fees.................................. 217 201 178
Trading profits and commissions........................ 22 16 24
Net securities gains................................... 9 14 32
Other income........................................... 320 201 162
------- ------- -------
Total noninterest income.............................. 1,091 828 746
------- ------- -------
NONINTEREST EXPENSE
Salaries............................................... 736 665 635
Employee benefits...................................... 161 148 136
Occupancy expense...................................... 140 135 128
Equipment expense...................................... 100 96 96
Other real estate owned expense........................ 9 22 44
Acquisition, divestiture and restructuring expense..... 28 21 85
Other expense.......................................... 423 392 407
------- ------- -------
Total noninterest expense............................. 1,597 1,479 1,531
------- ------- -------
Income before income taxes, extraordinary item and
cumulative effect of changes in accounting
principles............................................ 985 791 490
Provision for income taxes............................. 444 349 215
------- ------- -------
Income before extraordinary item and cumulative effect
of changes in accounting principles................... 541 442 275
Extraordinary loss from early extinguishment of debt,
net of tax............................................ (7)
------- ------- -------
Income before cumulative effect of changes in
accounting principles................................. 541 435 275
Cumulative effect of changes in accounting principles,
net................................................... 24
------- ------- -------
NET INCOME............................................. $ 541 $ 435 $ 299
======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK.................. $ 504 $ 398 $ 264
======= ======= =======
PER COMMON SHARE
Income before extraordinary item and cumulative effect
of changes in accounting principles
Primary............................................... $ 4.55 $ 3.79 $ 2.28
Fully diluted......................................... 4.43 3.67 2.22
Net income
Primary............................................... 4.55 3.73 2.51
Fully diluted......................................... 4.43 3.61 2.44
Cash dividends declared................................ 1.28 .93 .40
AVERAGE NUMBER OF COMMON SHARES (in thousands)
Primary............................................... 110,716 106,730 105,336
Fully diluted......................................... 113,560 111,427 110,258
- --------------------------------------------------------------------------------
</TABLE>
The Accompanying Notes Are an Integral Part of These Financial Statements.
53
<PAGE>
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- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(dollars in millions, except per share amounts)
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<S> <C> <C> <C>
PREFERRED STOCK
Balance, January 1...................................... $ 508 $ 508 $ 438
Preferred stock issued--280,000 shares.................. 70
------ ------ ------
Balance, December 31.................................... 508 508 508
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COMMON STOCK
Balance, January 1...................................... 242 238 236
Common stock issued
Dividend reinvestment and common stock purchase plan--
861,235 shares in 1995, 1,103,539 shares in 1994 and
286,201 shares in 1993................................. 2 2 1
Exercise of stock options, net of surrendered shares--
627,478 shares in 1995, 305,918 shares in 1994 and
623,291 shares in 1993................................. 1 1 1
Conversion of subordinated convertible debentures--
3,477,792 shares in 1995............................... 8
Restricted stock grants, net of forfeitures--(11,610)
shares in 1995 and 252,363 shares in 1994.............. 1
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Balance, December 31.................................... 253 242 238
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SURPLUS
Balance, January 1...................................... 810 769 750
Dividend reinvestment and common stock purchase plan.... 33 25 6
Exercise of stock options............................... 15 5 11
Conversion of subordinated convertible debentures....... 71
Acquisition of Ganis Credit Corporation................. 1
Restricted stock........................................ 2 9 1
Other, principally employee benefit plans............... 2 3
Preferred stock issued, net of issuance costs........... (2)
------ ------ ------
Balance, December 31.................................... 932 810 769
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RETAINED EARNINGS
Balance, January 1...................................... 1,655 1,362 1,136
Net income.............................................. 541 435 299
Restricted stock........................................ 3 (6)
Cash dividends declared
Preferred stock........................................ (37) (37) (35)
Common stock--$1.28 per share in 1995, $.93 per share
in 1994 and $.40 per share in 1993..................... (142) (99) (38)
------ ------ ------
Balance, December 31.................................... 2,020 1,655 1,362
------ ------ ------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR
SALE
Balance, January 1...................................... (40) 43
Change in net unrealized gain (loss) on securities
available for sale, net of tax.......................... 104 (83) 43
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Balance, December 31.................................... 64 (40) 43
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TREASURY STOCK
Balance, January 1...................................... (27) (1)
Purchases of treasury stock--1,482,139 shares in 1995
and 1,037,200 shares in 1994............................ (50) (27)
Treasury stock reissued
Dividend reinvestment and common stock purchase plan--
331,782 shares in 1995................................. 9
Exercise of stock options--36,395 shares in 1995 and
104,398 shares in 1993................................. 1 1
Conversion of subordinated convertible debentures--
530,475 shares in 1995................................. 15
Acquisition of Ganis Credit Corporation--773,621 shares
in 1995................................................ 21
Restricted stock grants--255,520 shares in 1995........ 6
Other, principally employee benefit plans--106,188
shares in 1995......................................... 3
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Balance, December 31.................................... (22) (27)
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CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, January 1...................................... (6) (8) (5)
Translation adjustments, net of tax..................... 2 2 (3)
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Balance, December 31.................................... (4) (6) (8)
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TOTAL STOCKHOLDERS' EQUITY, DECEMBER 31................. $3,751 $3,142 $2,912
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</TABLE>
The Accompanying Notes Are an Integral Part of These Financial Statements.
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BANK OF BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
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<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 541 $ 435 $ 299
Reconciliation of net income to net cash provided
from (used for) operating activities
Cumulative effect of change in accounting for
income taxes...................................... (77)
Cumulative effect of change in accounting for
purchased mortgage servicing rights, net of tax... 53
Extraordinary loss from early extinguishment of
debt, net of tax.................................. 7
Provision for credit losses........................ 250 130 70
Depreciation and amortization...................... 210 177 175
Provision for deferred taxes....................... 37 70 119
Net gains on sales of securities available for sale
and other assets.................................. (208) (114) (68)
Change in trading securities....................... (556) (247) (114)
Change in mortgages held for sale.................. (706) 1,139 (399)
Change in securities available for sale, net of
transfers......................................... 992
Net change in interest receivables and payables.... (59) (162) 4
Other, net......................................... 120 (14) 133
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Net cash provided from (used for) operating
activities....................................... (371) 1,421 1,187
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided from (used for) interest bearing
deposits in other banks............................ 306 (565) 316
Net cash provided from (used for) federal funds sold
and securities purchased under agreements
to resell.......................................... (118) 223 (267)
Purchases of securities held to maturity............ (589) (1,373) (1,723)
Maturities of securities held to maturity........... 558 993 1,808
Purchase of securities available for sale........... (3,323) (4,294)
Sales of securities available for sale.............. 1,822 2,541
Maturities of securities available for sale......... 813 231
Dispositions of equity and mezzanine financing
investments........................................ 122 121 97
Loans and lease financing originated by nonbank
entities........................................... (7,107) (2,773) (3,589)
Loans and lease financing collected by nonbank
entities........................................... 5,632 2,814 3,365
Proceeds from sales of loan portfolios by bank
subsidiaries....................................... 1,439 76 171
Loan portfolios purchased by bank subsidiaries...... (44)
Net cash used for lending activities of bank
subsidiaries....................................... (256) (2,455) (3,394)
Lease financing originated by bank entities......... (11) (24) (50)
Lease financing collected by bank entities.......... 59 24 22
Proceeds from sales of other real estate owned...... 61 53 142
Expenditures for premises and equipment............. (198) (187) (97)
Proceeds from sales of business units, premises and
equipment.......................................... 166 159 8
Other, net.......................................... (554) (380) (168)
------- ------- -------
Net cash used for investing activities............ (1,178) (4,816) (3,403)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided from (used for) deposits.......... (408) 1,742 512
Net cash provided from funds borrowed............... 2,403 1,385 2,028
Net proceeds from issuance of notes payable......... 220 698 519
Repayments/repurchases of notes payable............. (155) (502) (231)
Net proceeds from issuance of common stock.......... 64 35 20
Net proceeds from issuance of preferred stock....... 68
Purchases of treasury stock......................... (50) (27)
Dividends paid...................................... (179) (136) (73)
------- ------- -------
Net cash provided from financing activities....... 1,895 3,195 2,843
------- ------- -------
Effect of foreign currency translation on cash...... (18) (22) (24)
------- ------- -------
Net change in cash and due from banks............... 328 (222) 603
Cash and due from banks at January 1................ 2,317 2,539 1,936
------- ------- -------
Cash and due from banks at December 31.............. $ 2,645 $ 2,317 $ 2,539
======= ======= =======
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</TABLE>
The Accompanying Notes Are an Integral Part of These Financial Statements.
55
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NOTES TO FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial reporting and accounting policies of Bank of Boston Corporation
(the Corporation) conform to generally accepted accounting principles. Certain
prior period amounts have been reclassified to conform with current financial
statement presentation. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make esti-
mates and assumptions that affect the amounts reported in the financial state-
ments and accompanying notes. Actual results could differ from those estimates.
The following is a summary of the significant accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the Corporation and its majority
owned subsidiaries, including its major banking subsidiaries: The First Na-
tional Bank of Boston (FNBB), Bank of Boston Connecticut and Rhode Island Hos-
pital Trust National Bank. All material intercompany accounts and transactions
have been eliminated in consolidation. Investments in 20% to 50%-owned compa-
nies are accounted for using the equity method. The equity interest in their
earnings is included in other income. The excess of cost over the assigned
value of the net assets of companies acquired, or goodwill, is included in
other assets and is amortized on a straight-line basis, generally over periods
ranging from ten to twenty-five years.
FOREIGN CURRENCY TRANSLATION
The Corporation translates the financial statements of its foreign operations
in accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation." Under the provisions of SFAS No. 52, a func-
tional currency is designated for each foreign unit, generally the currency of
the primary economic environment in which it operates. Where the functional
currency is not the U.S. dollar, assets and liabilities are translated into
U.S. dollars at period-end exchange rates, while income and expenses are trans-
lated using average rates for the period. The resulting translation adjustments
and any related hedge gains and losses are recorded, net of tax, as a separate
component of stockholders' equity.
For foreign units operating in highly inflationary economies, the functional
currency is the U.S. dollar. Their financial statements are translated into
U.S. dollars using period-end exchange rates for monetary assets and liabili-
ties, exchange rates in effect on the date of acquisition for premises and
equipment (and related depreciation) and certain investments, and the average
exchange rate during the period for income and expenses. The resulting transla-
tion adjustments and related hedge gains and losses for these units are re-
corded in current period income.
The Corporation hedges a portion of its exposure to translation gains and
losses in overseas branches and foreign subsidiaries through the purchase of
foreign exchange rate contracts and through investments in fixed assets and
certain securities.
TRADING SECURITIES
Trading securities comprise securities purchased in connection with the Corpo-
ration's trading activities and, as such, are expected to be sold in the near
term. The Corporation carries trading securities at fair value; realized and
unrealized gains and losses on trading securities are recorded currently in
trading profits and commissions, a component of noninterest income. Obligations
to deliver securities not yet purchased are carried at fair value in funds bor-
rowed.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Securities are accounted for in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which the Corporation
adopted effective December 31, 1993. All debt and equity securities that are
not purchased in connection with the Corporation's trading activities are clas-
sified as either securities held to maturity or securities available for sale.
Securities held to maturity are debt securities that the Corporation has the
positive intent and ability to hold to maturity. These securities are reported
at cost, adjusted for amortization of premium and accretion of discount. Secu-
rities available for sale are debt securities that the Corporation may not hold
to maturity, as well as equity securities. These securities include debt secu-
rities that are purchased in connection with the Corporation's asset/liability
risk management strategy and that may be sold in response to changes in inter-
est rates, resultant prepayment risk and other related factors; securities held
in connection with the Corporation's equity and mezzanine financing business;
and other securities that are intended to be held for indefinite periods of
time, but which may not be held to maturity. Within the available for sale cat-
egory, equity securities that have a readily determinable fair value and debt
securities are reported at fair value, with unrealized gains and losses record-
ed, net of tax, as a separate component of stockholders' equity. Equity securi-
ties that do not have a readily determinable fair value are reported at cost.
If a security available for sale or held to maturity has experienced a decline
in value that is deemed other than temporary, it is written down to its esti-
mated fair value through a charge to current period income. Realized gains and
losses with respect to securities, which are
56
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
generally computed on a specific identified cost basis, are included in net se-
curities gains, except for gains and losses with respect to equity and mezza-
nine securities, which are included in other income.
INTEREST RATE DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS
The Corporation enters into a variety of interest rate derivatives in connec-
tion with its trading activities, including providing these products to its
customers, and as part of its interest rate risk management strategy. Such de-
rivatives include interest rate futures and forwards, interest rate swaps and
interest rate options. Derivatives are included in either the trading portfolio
or the asset and liability management portfolio.
Derivatives included in the trading portfolio are carried at fair value. Real-
ized and unrealized changes in fair value are recognized in current period in-
come as a component of trading profits and commissions.
The asset and liability management portfolio is comprised of derivatives used
by the Corporation as part of its interest rate risk management strategy. When
derivatives are included in the asset and liability management portfolio, they
are linked to the related assets and/or liabilities. Income or loss on deriva-
tives are recognized on the same basis as the linked assets or liabilities. If
the related assets are carried at fair value or the lower of cost or fair val-
ue, the fair value of the derivatives are combined with the fair value of the
assets and are recognized in income based on the method of accounting used for
the linked assets. If the assets or liabilities are carried at cost, the deriv-
atives are either accounted for on the accrual basis, with income or expense
accrued over the life of the agreements as an adjustment to the yield of the
related assets or liabilities, or marked to fair value, with any gain or loss
deferred and amortized over the period being managed as an adjustment to the
yield of the related assets or liabilities. In this connection, interest rate
swaps, caps and floors are accounted for on the accrual basis and interest rate
futures, forwards and other option agreements are marked to fair value, with
gains and losses deferred and amortized over the period being managed. The Cor-
poration does not utilize written options as part of its interest rate risk
management strategy unless they are included as part of an overall option
strategy that effectively creates a net purchased option position. If a con-
tract is terminated, any remaining unrecognized gain or loss is deferred and
amortized as an adjustment to the yield of the related assets or liabilities
over the remainder of the period that is being managed. If the linked assets or
liabilities are disposed of prior to the end of the period being managed, the
related derivatives are marked to fair value, with any resulting gain or loss
recognized in current period income as an adjustment to the gain or loss on the
disposal of the related assets or liabilities.
Included in the asset and liability management portfolio are interest rate op-
tions used to manage prepayment risk resulting from a decline in interest rates
related to the Corporation's mortgage servicing portfolio. While the Corpora-
tion utilizes these contracts as part of a risk management strategy, the cur-
rent composition of the option portfolio has not been structured for economic
reasons to provide a sufficient expectation that the change in its value, re-
sulting from changes in interest rates, will substantially offset the change in
the value of the mortgage servicing rights to which it is linked. As a result,
these contracts are currently valued at fair value with the realized and
unrealized changes in fair value recorded in the statement of income as part of
net mortgage servicing fees, a component of financial service fees.
The Corporation also enters into foreign exchange contracts in connection with
its trading activities, including providing these products to its customers,
and to hedge a portion of its own foreign exchange risk, which is principally
related to foreign currency translation (see "Foreign Currency Translation"
above). The trading portfolio includes foreign currency spot, forward, future,
option and cross-currency interest rate swap contracts. Foreign exchange trad-
ing positions are valued at current market rates, with the net foreign exchange
trading gain or loss recorded in the statement of income as a component of
other income.
LOANS AND LEASE FINANCING
Loans are reported at their principal outstanding, net of charge-offs and un-
earned income, if any. Mortgages held for sale are reported separately at the
lower of aggregate cost or fair value.
Interest income on loans is accrued as earned. Unearned income on loans and
leases is recognized on a basis approximating a level rate of return over the
term of the loan. Loan origination fees and costs are accounted for in accor-
dance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases," which
requires the deferral of these fees and costs and subsequent amortization to
income over the life of the related credit or facility. Fees that adjust the
yield on the underlying credit are included in interest income on loans and
lease financing. Fees for credit-related services are included in financial
service fees, a component of noninterest income.
Lease financing receivables, including leveraged leases, are reported at the
aggregate of lease payments receivable and the estimated residual values, net
of unearned and deferred income, including unamortized investment credits.
Leveraged leases are reported net of nonrecourse debt. Unearned income is rec-
ognized to yield a level rate of return on the net investment in the leases.
57
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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The Corporation places loans and leases on nonaccrual status when any portion
of the principal or interest is ninety days past due, unless it is well secured
and in the process of collection, or earlier when concern exists as to the ul-
timate collectibility of principal or interest. Whenever a loan or lease is
placed on nonaccrual status, all other credit exposures to the same borrower
are also placed on nonaccrual status, except when it can be clearly demon-
strated that such credit exposures are well secured, fully performing and insu-
lated from the weakness surrounding the nonaccrual credit to which they relate.
When loans or leases are placed on nonaccrual status, the related interest re-
ceivable is reversed against interest income of the current period. Interest
payments received on nonaccrual loans and leases are applied as a reduction of
the principal balance when concern exists as to the ultimate collection of
principal; otherwise, such payments are recognized as interest income. Loans
and leases are removed from nonaccrual status when they become current as to
both principal and interest and concern no longer exists as to the ultimate
collectibility of principal or interest.
The Corporation may renegotiate the contractual terms of a loan because of a
deterioration in the financial condition of the borrower. The carrying value of
a renegotiated loan is reduced by the fair value of any asset or equity inter-
est received, and by the extent, if any, that future cash receipts required un-
der the new terms do not equal the loan balance at the time of renegotiation.
Renegotiated loans performing in accordance with their new terms are not re-
ported as nonaccrual loans unless concern exists as to the ultimate
collectibility of principal or interest under the new terms. Interest, if any,
is recognized in income to yield a level rate of return over the life of the
renegotiated loan.
RESERVE FOR CREDIT LOSSES AND PROVISION FOR CREDIT LOSSES
The reserve for credit losses is available for future charge-offs of extensions
of credit. The reserve is increased by the provision for credit losses and by
recoveries of items previously charged off, and is decreased as credits are
charged off. A charge-off occurs once a probability of loss has been deter-
mined, with consideration given to such factors as the customer's financial
condition, underlying collateral and guarantees.
The provision for credit losses is based upon management's estimate of the
amount necessary to maintain the reserve at an adequate level, considering
evaluations of individual credits and concentrations of credit risk, net losses
charged to the reserve, changes in quality of the credit portfolio, levels of
nonaccrual loans and leases, current economic conditions, cross-border risks,
changes in the size and character of the credit risks and other pertinent fac-
tors.
Effective January 1, 1995, the Corporation adopted, prospectively, SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure." These standards require that a loan be classified and accounted
for as an impaired loan when it is probable that the Corporation will be unable
to collect all principal and interest due on the loan in accordance with the
loan's original contractual terms. The Corporation uses the same criteria in
placing a loan on nonaccrual status. Accordingly, for purposes of applying
these standards, impaired loans have been defined as all nonaccrual loans, ex-
clusive of residential mortgage loans, consumer loans and leases.
Impaired loans are valued based on the fair value of the related collateral in
the case of commercial real estate loans and, for all other impaired loans,
based on the present value of expected future cash flows, using the interest
rate in effect at the time the loan was placed on nonaccrual status. A loan's
observable market value may be used as an alternate valuation technique. Im-
pairment exists when the recorded investment in a loan exceeds the value of the
loan measured using the above-mentioned valuation techniques. Such impairment
is recognized as a valuation reserve, which is included as a part of the Corpo-
ration's overall reserve for credit losses. The Corporation recognizes interest
income on impaired loans consistent with its nonaccrual policy.
The adoption of these new standards did not have a material impact on the Cor-
poration's overall reserve for credit losses, and did not affect its charge-off
or income recognition policies.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the estimated life of the improvement or the term of the lease.
PURCHASED AND EXCESS MORTGAGE SERVICING ASSETS
Purchased mortgage servicing rights (PMSR) represent the cost of purchasing the
right to service mortgage loans originated by others. Excess mortgage servicing
receivables (EMSR) represent the present value of the servicing fee income re-
tained in excess of a normal servicing fee rate when mortgage loans are sold.
PMSR and EMSR are reported as assets and are amortized as reductions of servic-
ing fee income, a component of noninterest income, over the estimated servicing
period in proportion to the estimated future net cash flows from the loans
serviced. Remaining PMSR asset balances are evaluated for impairment by deter-
mining their estimated aggregate recoverable amount through applying the dis-
count rate in effect at the time the servicing portfolios were purchased to the
58
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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estimated future net cash flows from servicing the underlying mortgages. The
carrying value is written down for any impairment; such writedowns are re-
corded as reductions of servicing fee income. Prior to 1993, this valuation
was performed on an undiscounted basis. EMSR is also evaluated for impairment
based on estimated future cash flows on a discounted basis.
Effective January 1, 1993, the Corporation elected to change its method of ac-
counting for PMSR to conform its financial reporting to regulatory accounting
rules adopted by the banking regulators in the first quarter of 1993. The cu-
mulative effect to January 1, 1993 of adopting this change in accounting prin-
ciple was a decrease in income of $53 million (net of taxes of $32 million),
or $.50 per common share on a primary basis and $.48 per common share on a
fully diluted basis.
In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights," was is-
sued. This standard, which is effective January 1, 1996, amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," to require that rights
to service mortgage loans originated for sale be recognized as separate assets
either upon origination (if a definitive plan to sell the loans and retain the
rights exists) or upon sale of the loans, based on the relative fair values of
the rights and loans. This standard also requires that mortgage servicing
rights be assessed for impairment based on the fair value of those rights, us-
ing a stratified method. The Corporation does not expect that adoption of this
standard will have a material impact on its financial statements.
ACCELERATED DISPOSITION PORTFOLIO
In 1994, the Corporation transferred certain lower quality real estate expo-
sures to an accelerated disposition portfolio (ADP), which was included in
other assets. The exposures were transferred at their estimated disposition
values, with the excess, if any, of the exposures over the disposition values
charged to the reserve for credit losses. Subsequent declines in disposition
value are recorded in noninterest income. Gains, if any, are not recognized
until realized. Income recognition is based upon existing policies for accru-
ing and nonaccrual loans and other real estate owned.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO), which is included in other assets, includes
properties on which the Corporation has foreclosed and taken title. OREO is
reported at the lower of the carrying value of the loan or the fair value of
the property obtained, less estimated selling costs. The excess, if any, of
the loan over the fair value of the property at the time of transfer from
loans to OREO is charged to the reserve for credit losses. Subsequent declines
in the fair value of the property and net operating results of the property
are recorded in noninterest expense.
INCOME TAXES
The Corporation accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Current tax liabilities or assets are recog-
nized, through charges or credits to the current tax provision, for the esti-
mated taxes payable or refundable for the current year. Net deferred tax lia-
bilities or assets are recognized, through charges or credits to the deferred
tax provision, for the estimated future tax effects, based on enacted tax
rates, attributable to temporary differences and tax benefit carryforwards.
Deferred tax liabilities are recognized for temporary differences that will
result in amounts taxable in the future, and deferred tax assets are recog-
nized for temporary differences and tax benefit carryforwards that will result
in amounts deductible or creditable in the future. The effect of enacted
changes in tax law, including changes in tax rates, on these deferred tax as-
sets and liabilities is recognized in income in the period that includes the
enactment date. A deferred tax valuation reserve is established if it is more
likely than not that all or a portion of the Corporation's deferred tax assets
will not be realized. Changes in the deferred tax valuation reserve are recog-
nized through charges or credits to the deferred tax provision. For financial
reporting purposes, investment tax credits received in connection with lease
financing are recognized as lease income over the investment life of the re-
lated asset.
PER SHARE CALCULATIONS
Primary net income per common share is computed by dividing net income, re-
duced by dividends on preferred stock, by the weighted average number of com-
mon shares outstanding for each period presented. For fully diluted net income
per common share, net income is reduced by preferred stock dividends and in-
creased by the interest, net of income tax benefit, recorded on the Corpora-
tion's convertible debentures. Such adjusted net income is divided by the
weighted average number of common shares outstanding for each period plus the
shares representing the dilutive effect of stock options outstanding and the
shares that would result from conversion of the Corporation's convertible de-
bentures. The effect of stock options and convertible debentures is excluded
from the computation of fully diluted net income per common share in periods
in which their effect would be anti-dilutive.
As described in Note 10, the Corporation's convertible debentures were con-
verted to common stock in March 1995.
2. MERGERS, ACQUISITIONS, JOINT VENTURES AND DIVESTITURES
In July 1993, the Corporation completed its mergers with Society for Savings,
Bancorp, Inc. (Society), a $2.4 billion registered bank holding company based
in Hartford, Connecticut, and Multibank Financial Corp. (Multibank), a $2.4
billion registered bank holding company based in Dedham, Massachusetts. In
connection with the merger with Society, the Corporation issued 9.6 million
shares of its common stock for all of the outstanding shares of Society common
stock by exchanging .80 of a share of its common stock for each outstanding
Society share. In connection with the merger with Multibank, the Corporation
issued 10.4 million shares of its common stock for all of the outstanding
shares of Multibank common stock by exchanging 1.125 shares of its common
stock for each
59
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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outstanding Multibank share. These mergers were accounted for as poolings of
interests and as such are reflected in the accompanying consolidated financial
statements as though the Corporation, Society and Multibank had been combined
as of the beginning of the earliest period presented.
In May 1994, the Corporation completed its acquisition of BankWorcester Corpo-
ration (BankWorcester), a $1.5 billion bank holding company based in Worcester,
Massachusetts. The total purchase price amounted to $243 million. In addition,
in August 1994, the Corporation completed its acquisition of Pioneer Financial,
A Co-operative Bank (Pioneer), a $.8 billion bank based in Middlesex County,
Massachusetts. The total purchase price amounted to $117 million. These acqui-
sitions were accounted for as purchases and, accordingly, the assets and lia-
bilities of each were recorded at their estimated fair values as of the acqui-
sition dates. Goodwill resulting from the acquisitions is being amortized over
a twenty-five year period for BankWorcester and a fifteen-year period for Pio-
neer. A core deposit intangible resulting from the BankWorcester acquisition is
being amortized over a seven-year period. Both acquisitions have been included
in the accompanying consolidated financial statements since their respective
acquisition dates. Pro forma results of operations including BankWorcester and
Pioneer for the years ended December 31, 1994 and 1993 are not presented, since
the results would not have been significantly different in relation to the Cor-
poration's results of operations.
In January 1995, the Corporation completed the sales of two of its affiliate
banks, Bank of Vermont and Casco Northern Bank, N.A. (Casco). The sales re-
sulted in a combined pre-tax gain of approximately $75 million, or $30 million
net of tax.
In February 1995, the Corporation completed its acquisition of Ganis Credit
Corporation (Ganis), a privately-held consumer finance company headquartered in
Newport Beach, California. The Corporation issued Ganis stockholders approxi-
mately $22 million in Corporation common stock, comprised of 773,621 shares of
its treasury stock previously purchased in the open market. In January 1996,
the Corporation issued Ganis stockholders an additional $7 million in its com-
mon stock, comprised of 153,741 shares of its treasury stock previously pur-
chased in the open market, as a result of the achievement by Ganis of certain
performance goals. The Corporation will issue Ganis stockholders up to an addi-
tional $7 million in common stock if Ganis achieves certain additional perfor-
mance goals over the next several years. The acquisition was accounted for as a
purchase and, accordingly, the assets and liabilities of Ganis were recorded at
their estimated fair values as of the acquisition date. Goodwill resulting from
the acquisition is being amortized over a fifteen-year period. The acquisition
has been included in the accompanying consolidated financial statements since
the acquisition date.
In October 1995, the Corporation announced a definitive agreement to acquire
The Boston Bancorp (Bancorp), the holding company of South Boston Savings Bank,
a Massachussetts chartered savings bank. Pursuant to the agreement, Bancorp
will convert most of its assets into cash equivalents, including its commercial
real estate loan portfolio and the majority of its investment securities, prior
to the closing of the transaction. The Corporation will assume all of Bancorp's
deposits, currently approximating $1.3 billion. The Corporation will acquire
Bancorp in exchange for shares of its common stock, which it anticipates it
will purchase in the open market. The transaction, which is subject to the ap-
proval of the shareholders of Bancorp and regulatory agencies, is expected to
close in the middle of 1996 and will be accounted for as a purchase.
Effective in October 1995, the Corporation formed a joint venture with Boston
Financial Data Services (a joint venture of State Street Bank and Trust Company
and DST Systems, Inc.), combining their respective stock transfer businesses
into a single entity which is 50 percent owned by each party. Additionally, in
October 1995, the Corporation completed the sale of its corporate trust busi-
ness. This sale resulted in a pre-tax gain of $20 million, or $12 million net
of tax.
In December 1995, the Corporation announced an agreement to form a joint ven-
ture to create an independent mortgage company based in Jacksonville, Florida.
The Corporation will contribute BancBoston Mortgage Corporation (BBMC) in ex-
change for cash and a minority equity interest in the new company. The transac-
tion is expected to close in the first half of 1996.
In addition, in December 1995, the Corporation announced an agreement to merge
with BayBanks, Inc. (BayBanks), a $12 billion bank holding company based in
Boston. The Corporation will exchange 2.2 shares of its common stock for each
share of BayBanks common stock. The merger is currently anticipated to be com-
pleted by the middle of 1996, and is subject to approval by federal and state
bank regulators and the stockholders of both companies. The transaction is ex-
pected to be accounted for as a pooling of interests.
3. STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash and due from banks are con-
sidered to be cash equivalents. Foreign currency cash flows are converted to
U.S. dollars using average rates for the period. During 1995, 1994 and 1993,
the Corporation paid interest of approximately $2.5 billion, $2.2 billion and
$2.8 billion, respectively. The Corporation paid income taxes of approximately
$467 million in 1995, $173 million in 1994 and $56 million in 1993. During
1995, 1994 and 1993, the Corporation transferred approximately $46 million, $74
million and $132 mil-
60
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------
lion, respectively, to OREO from loans. There were no loans made to facilitate
sales of OREO properties in 1995; such loans in 1994 and 1993 totaled approxi-
mately $2 million and $9 million, respectively. Non-cash transactions in 1995
included $94 million from the issuance of common stock in connection with the
redemption of the Corporation's convertible subordinated debentures due 2011,
which is more fully described in Note 10. In addition, $1.3 billion of securi-
ties held to maturity were transferred to securities available for sale in con-
nection with "A Guide to Implementation of Statement 115 on Accounting for Cer-
tain Investments in Debt and Equity Securities" (the Special Report), issued by
the Financial Accounting Standards Board (the FASB) in November 1995, which al-
lowed the Corporation to reassess the classification of securities held at that
time. This transfer is more fully described in Note 5. During 1994, the Corpo-
ration transferred a total of $387 million of lower quality real estate expo-
sure to ADP. During 1993, the Corporation transferred approximately $861 mil-
lion of securities held to maturity to securities available for sale, in con-
nection with the Corporation's mergers with Society and Multibank, as well as
the Corporation's adoption of SFAS No. 115. In accordance with the new stan-
dard, cash flows from purchases, sales and maturities of securities available
for sale in 1995 and 1994 were classified as investing activities in the accom-
panying consolidated statement of cash flows. For 1993, these cash flows were
classified as an operating activity and presented on a net basis.
4. RESERVE REQUIREMENTS, RESTRICTED DEPOSITS AND PLEDGED ASSETS
At December 31, 1995 and 1994, cash and due from banks included $876 million
and $818 million, respectively, to satisfy the reserve requirements of the Fed-
eral Reserve System and various foreign central banks. Interest bearing depos-
its in other banks held to satisfy foreign central bank reserve requirements
totaled $37 million and $30 million at December 31, 1995 and 1994, respective-
ly.
At December 31, 1995 and 1994, securities, loans and other assets with a book
value of $3.6 billion and $4.1 billion, respectively, were pledged to
collateralize repurchase agreements, public deposits and other items.
5. SECURITIES
A summary comparison of securities available for sale by type is as follows:
<TABLE>
<CAPTION>
Gross Gross
December 31, 1995 Unrealized Unrealized Carrying
(in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury........................... $ 660 $ 5 $ 665
U.S. government agencies and
corporations--Mortgage-backed
securities............................. 2,969 71 $ 3 3,037
States and political subdivisions....... 19 2 21
Foreign debt securities................. 698 5 18 685
Other debt securities................... 299 9 290
Marketable equity securities............ 100 52 152
Other equity securities................. 164 164
------ ---- --- ------
$4,909 $135 $30 $5,014
====== ==== === ======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
December 31, 1994 Unrealized Unrealized Carrying
(in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury........................... $1,500 $13 $1,487
U.S. government agencies and
corporations--Mortgage-backed
securities............................. 796 30 766
Foreign debt securities................. 432 $ 4 52 384
Other debt securities................... 142 142
Marketable equity securities............ 52 21 1 72
Other equity securities................. 146 146
------ --- --- ------
$3,068 $25 $96 $2,997
====== === === ======
</TABLE>
Other equity securities included in securities available for sale are not
traded on established exchanges and are carried at cost. However, in accordance
with SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
fair values were estimated for these securities. These fair values exceeded
cost by $76 million and $70 million at December 31, 1995 and 1994,
61
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
respectively. Further information with respect to the fair value of these secu-
rities is included in Note 26.
A summary comparison of securities held to maturity by type is as follows:
<TABLE>
<CAPTION>
Gross Gross
December 31, 1995 Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury........................... $ 4 $ 4
U.S. government agencies and
corporations--Mortgage-backed
securities.............................. 523 $ 8 $ 1 530
States and political subdivisions....... 5 5
Foreign debt securities................. 11 11
Other equity securities................. 70 70
---- --- --- ----
$613 $ 8 $ 1 $620
==== === === ====
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
December 31, 1994 Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury.......................... $ 12 $ 1 $ 11
U.S. government agencies and
corporations--Mortgage-backed
securities............................. 1,449 74 1,375
States and political subdivisions...... 30 30
Foreign debt securities................ 123 2 121
Other equity securities................ 89 89
------ --- ------
$1,703 $77 $1,626
====== === ======
</TABLE>
Other equity securities included in securities held to maturity represent secu-
rities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which
are not traded on established exchanges and have only redemption capabilities.
Fair values for such securities are considered to approximate cost.
The FASB Special Report, which provided guidance on the implementation of SFAS
No. 115, allowed companies, no later than December 31, 1995, to make a one-time
reassessment of the classification of their securities portfolios between
available for sale and held to maturity. As a result of this reassessment, the
Corporation transferred $1.3 billion of securities from held to maturity to
available for sale, with a net after-tax unrealized gain of $27 million re-
corded in stockholder's equity.
A summary comparison of debt securities available for sale by contractual matu-
rity is as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
FAIR Fair
(in millions) COST VALUE Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year.................................... $ 951 $ 953 $ 617 $ 615
After one but within five years.................... 1,348 1,362 1,502 1,475
After five but within ten years.................... 1,064 1,089 238 197
After ten years.................................... 1,282 1,294 513 492
------ ------ ------ ------
$4,645 $4,698 $2,870 $2,779
====== ====== ====== ======
</TABLE>
A summary comparison of debt securities held to maturity by contractual matu-
rity is as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
AMORTIZED FAIR Amortized Fair
(in millions) COST VALUE Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year................................ $ 11 $ 11 $ 41 $ 41
After one but within
five years..................................... 115 115 545 527
After five but within
ten years...................................... 200 208 304 293
After ten years................................ 217 216 724 676
---- ---- ------ ------
$543 $550 $1,614 $1,537
==== ==== ====== ======
</TABLE>
Certain securities, such as mortgage-backed securities, may not become due at a
single maturity date. Such securities have been classified within the category
that encompasses the due dates for the majority of the instrument.
Included in 1995's net securities gains were gross gains of $11 million and
gross losses of $2 million related to the sale of debt securities available for
sale. Total proceeds from such securities sales amounted to $1.3 billion. For
1994, net securities gains included gross gains of $23 million and gross losses
of $9 million related to the sale of debt securities available for sale. Total
proceeds from such securities sales in 1994 amounted to $2.2 billion. For 1993,
net securities gains included gross gains of $39 million and gross losses of $1
million related to the sale of debt securities available for sale. Total pro-
ceeds from such securities sales in 1993 amounted to $4.3 billion.
62
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS AND LEASE FINANCING
<TABLE>
<CAPTION>
December 31 1995 1994
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES
Commercial, industrial and financial.......................... $11,439 $11,805
Commercial real estate
Construction................................................. 336 354
Other........................................................ 2,272 3,141
Consumer-related loans
Secured by 1-4 family residential properties................. 3,861 5,004
Other........................................................ 3,397 2,462
Lease financing............................................... 1,409 1,366
Unearned income............................................... (216) (216)
------- -------
22,498 23,916
======= =======
INTERNATIONAL
Commercial and industrial..................................... 6,398 5,136
Banks and other financial institutions........................ 682 614
Governments and official institutions......................... 82 33
Lease financing............................................... 285 329
All other..................................................... 1,159 1,053
Unearned income............................................... (37) (76)
------- -------
8,569 7,089
------- -------
$31,067 $31,005
======= =======
</TABLE>
7. RESERVE FOR CREDIT LOSSES
An analysis of changes in the reserve for credit losses follows:
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1........................................ $ 680 $ 770 $ 923
Reserves of acquired entities............................. 6 25
Reserves of entities sold................................. (32)
Provision................................................. 250 130 70
Credit losses............................................. (230) (194) (273)
Recoveries................................................ 62 68 50
----- ----- -----
Net credit losses........................................ (168) (126) (223)
Credit losses related to exposures transferred to ADP..... (119)
----- ----- -----
BALANCE, DECEMBER 31...................................... $ 736 $ 680 $ 770
===== ===== =====
</TABLE>
As described in Note 1, the adoption of SFAS No. 114, as amended by SFAS No.
118, on January 1, 1995 did not have a material effect on the Corporation's fi-
nancial statements, and did not result in any additional provision for credit
losses as of January 1, 1995. At December 31, 1995, impaired loans in accor-
dance with these standards totaled $202 million, of which loans totaling $87
million required no valuation reserve and loans totaling $115 million required
a valuation reserve of $23 million. For the year ended December 31, 1995, aver-
age impaired loans were approximately $245 million. Interest recognized on im-
paired loans during the year ended December 31, 1995 was not material.
8. OTHER ASSETS
<TABLE>
<CAPTION>
December 31 1995 1994
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable.............................................. $ 393 $ 541
PMSR and EMSR.................................................... 548 428
Prepaid pension cost............................................. 174 174
Goodwill and other intangibles................................... 302 312
Precious metal assets............................................ 136 175
Investments in limited partnerships.............................. 183 148
Equity investments in affiliates................................. 145 109
ADP.............................................................. 118
OREO............................................................. 50 76
Refundable income taxes.......................................... 38 29
Equity investments from loan restructurings...................... 20 23
All other........................................................ 775 393
------ ------
$2,764 $2,526
====== ======
</TABLE>
9. FUNDS BORROWED
<TABLE>
<CAPTION>
December 31 1995 1994
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased.......................................... $1,675 $ 369
Term federal funds purchased..................................... 869 765
Securities sold under agreements to repurchase................... 1,226 1,883
Short-term bank notes............................................ 1,190 1,569
Medium-term bank notes........................................... 1,871
Demand notes issued to the U.S. Treasury......................... 304 389
All other........................................................ 1,628 1,385
------ ------
$8,763 $6,360
====== ======
</TABLE>
All other funds borrowed included borrowings with maturities of greater than
one year of $318 million at December 31, 1995 and $221 million at December 31,
1994. At December 31, 1995 and 1994, the Corporation had availability under
various bor-
63
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
rowing arrangements of $1.4 billion and $1.7 billion, respectively. The Corpo-
ration had no significant compensating balance arrangements at December 31,
1995 and 1994.
10.NOTES PAYABLE
<TABLE>
<CAPTION>
By Remaining Maturity
at December 31
Due
less than Due Due 1995 1994
(in millions) 1 year 1-5 years 6-10 years Total Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PARENT COMPANY
Senior notes..................... $100 $ 100 $ 100
Subordinated notes............... $235 $ 934 1,169 1,320
Convertible subordinated
debentures....................... 94
---- ---- ------ ------ ------
Subtotal......................... 100 235 934 1,269 1,514
SUBSIDIARIES
Senior notes..................... 27 274 157 458 243
Subordinated notes............... 15 397 412 412
---- ---- ------ ------ ------
Subtotal......................... 27 289 554 870 655
---- ---- ------ ------ ------
$127 $524 $1,488 $2,139 $2,169
==== ==== ====== ====== ======
</TABLE>
Notes payable are unsecured obligations of the Corporation or its subsidiaries.
Certain of the indentures under which these notes were issued prohibit the Cor-
poration from making any payment or other distribution in the stock of FNBB un-
less FNBB unconditionally guarantees payment of principal and interest on the
notes. The distribution shown above by remaining maturity is based on contrac-
tual maturity.
Notes payable at December 31, 1995 and 1994 include fixed rate notes of $1,659
million and $1,534 million, respectively, and variable rate notes of $480 mil-
lion and $635 million, respectively. Fixed rate notes outstanding at December
31, 1995 mature at various dates through 2005 at interest rates ranging from
6.63% to 10.50%. The consolidated weighted average interest rates on fixed rate
notes at December 31, 1995 and 1994 were 7.78% and 7.74%, respectively. The
Corporation has entered into interest rate swap agreements that have effec-
tively converted its fixed rate obligations to floating rate obligations. At
December 31, 1995, such interest rates ranged from 5.75% to 5.95%. Variable
rate notes outstanding, with interest rates ranging from 5.93% to 9.25% at De-
cember 31, 1995, mature at various dates through 2003. The consolidated
weighted average interest rates on variable rate notes at December 31, 1995 and
1994 were 6.71% and 7.24%, respectively.
During 1995, the Corporation called for redemption its 7.75% convertible subor-
dinated debentures due June 2011 at 100.78% of their principal amount plus ac-
crued interest to the date of redemption. Substantially all holders of the debt
opted to convert their bonds to common stock prior to redemption, resulting in
the issuance by the Corporation of approximately 4,008,000 shares of its common
stock. Of the total shares issued, approximately 530,000 shares were treasury
shares previously purchased by the Corporation in the open market. Primary
earnings per share for the year ended December 31, 1995 would have been $4.52
had the debentures been converted on January 1, 1995. Also during 1995, the
Corporation redeemed its 10.30% subordinated notes due September 2000 at their
$150 million principal amount plus accrued interest.
During 1994, the Corporation redeemed its floating rate notes due September
2000, with a carrying value of $179 million, at their principal amount plus ac-
crued interest, and a nonbanking subsidiary of the Corporation prepaid $186
million of its senior notes, with fixed interest rates ranging from 6.67% to
9.50%, at their principal amount plus accrued interest and a prepayment penal-
ty. The loss on these early extinguishments of debt amounted to $7 million, net
of tax, or $.06 per common share on both a primary and fully diluted basis, and
is presented as an extraordinary item in the accompanying consolidated state-
ment of income.
Notes payable maturing during the next five years amount to: $127 million in
1996, $404 million in 1997 and $120 million in 1998. There are no notes payable
maturing in 1999 and 2000.
11.PREFERRED STOCK
A summary of the Corporation's Adjustable Rate Cumulative Preferred Stock (Ad-
justable Rate Preferred Stock) issued and outstanding is as follows:
<TABLE>
<CAPTION>
Series A Series B Series C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 and 1994
Shares........................................... 1,044,843 1,574,315 774,783
Amount (in millions)............................. $ 52 $ 79 $ 77
Dividend rates
At December 31, 1995............................ 6.00% 6.00% 5.50%
Minimum......................................... 6.00% 6.00% 5.50%
Maximum......................................... 13.00% 13.00% 12.50%
Dividends per share
1995............................................ $ 3.06 $ 3.01 $ 5.50
1994............................................ $ 3.02 $ 3.02 $ 5.51
1993............................................ $ 3.01 $ 3.01 $ 5.51
Liquidation preference
per share........................................ $ 50 $ 50 $ 100
</TABLE>
64
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------
A summary of the Corporation's Fixed Rate Cumulative Preferred Stock (Fixed
Rate Preferred Stock) issued and outstanding is as follows:
<TABLE>
<CAPTION>
Series E Series F
- -------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 and 1994
Shares...................................................... 920,000 280,000
Amount (in millions)........................................ $ 230 $ 70
Dividend rate............................................... 8.60% 7.88%
Dividends per share......................................... $ 21.50 $ 19.69
Liquidation preference per share............................ $ 250 $ 250
</TABLE>
The Fixed Rate Preferred Stock is held by stockholders in the form of deposi-
tary shares, with each depositary share representing a one-tenth interest in a
share of the respective preferred stock, and entitles the holder to a propor-
tional interest in all rights and preferences of a share of Fixed Rate Pre-
ferred Stock, including dividend, voting, redemption and liquidation rights.
Dividends on all series of preferred stock are cumulative and, when declared,
are payable quarterly. The dividend rates for the Adjustable Rate Preferred
Stock are determined according to a formula based upon the highest of three in-
terest rate benchmarks. Neither the Adjustable Rate Preferred Stock nor the
Fixed Rate Preferred Stock have preemptive or general voting rights. The pre-
ferred stock is redeemable, in whole or in part, at the option of the Corpora-
tion as follows: Series A and B Preferred Stock are redeemable at $50 per share
and Series C Preferred Stock is redeemable at $100 per share. The Series E and
Series F Preferred Stock are redeemable on and after September 15, 1997 and
July 15, 1998, respectively, at $250 per share ($25 per depositary share).
12.STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors of the Corporation adopted a stockholder rights
plan. The plan provides for the distribution of one preferred stock purchase
right for each outstanding share of common stock of the Corporation. Each right
entitles the holder, following the occurrence of certain events, to purchase a
unit, consisting of one-thousandth of a share of Junior Participating Preferred
Stock, Series D, at a purchase price of $50 per unit, subject to adjustment.
The rights will not be exercisable or transferable apart from the common stock
except under certain circumstances in which a person or group of affiliated
persons acquires, or commences a tender offer to acquire, 15% or more of the
Corporation's common stock. Rights held by such an acquiring person or persons
may thereafter become void. Under certain circumstances, a right may become a
right to purchase common stock or assets of the Corporation or common stock of
an acquiring corporation at a substantial discount. Under certain circumstanc-
es, the Corporation may redeem the rights at $.01 per right. The rights will
expire in July 2000 unless earlier redeemed or exchanged by the Corporation.
As a result of the Corporation's agreement to merge with BayBanks, described in
Note 2, the plan was amended to exclude the transactions contemplated by that
agreement.
13.DIVIDENDS AND LOAN RESTRICTIONS
Bank regulations require the approval of bank regulatory authorities if the
dividends declared by a bank subsidiary exceed certain prescribed limits. For
1996, aggregate dividend declarations by the Corporation's bank subsidiaries
without prior regulatory approval are limited to approximately $697 million of
their undistributed earnings at December 31, 1995, plus an additional amount
equal to their net profits, as defined, for 1996 up to the date of any dividend
declaration. However, for any dividend declaration, the Corporation's subsidi-
aries, as well as the Corporation itself, must consider additional factors such
as the amount of current period net income, liquidity, asset quality, capital
adequacy and economic conditions. It is likely that these factors would further
limit the amount of dividends which the banking subsidiaries could declare. In
addition, bank regulators have the authority to prohibit banks and bank holding
companies from paying dividends if they deem such payment to be an unsafe or
unsound practice.
Each bank subsidiary is also prohibited by the bank regulatory authorities from
granting loans and advances to the Parent Company that exceed certain limits.
Assuming declaration of the maximum amount of dividends under the regulations
described above, any loans and advances would be limited to an aggregate of ap-
proximately $331 million and would be subject to specific collateral require-
ments.
Based on the foregoing limitations, an aggregate of approximately $2.7 billion
of the Parent Company's investment in bank subsidiaries of $3.7 billion, which
includes bank holding companies and their subsidiaries, was restricted from
transfer to the Parent Company at December 31, 1995.
14.OTHER INCOME
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net equity and mezzanine profits................................ $110 $ 30 $ 38
Net foreign exchange trading profits............................ 57 42 45
Precious metal income........................................... 16 13 9
Net gains from sales of mortgage inventories.................... 13 10
Gains from sales of mortgage servicing rights................... 10 11 1
Equity in undistributed earnings of affiliates.................. 18 1 16
Exchange-rate related profits from Brazil....................... 15
Gain on sale of domestic factoring business..................... 27
Gain on sale of Maine and Vermont bank subsidiaries............. 75
Gain on sale of corporate trust business........................ 20
All other....................................................... 14 49 43
---- ---- ----
$320 $201 $162
==== ==== ====
</TABLE>
65
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
15.EMPLOYEE BENEFITS
The Corporation maintains non-contributory defined benefit pension plans (the
Plans) covering substantially all domestic employees. The Corporation funds the
Plans in compliance with the requirements of the Employee Retirement Income Se-
curity Act of 1974 and the Internal Revenue Code of 1986, as amended.
The principal plan is an account balance defined benefit plan in which each el-
igible employee has an account to which amounts are allocated based on level of
pay and years of service, and which grows at a specified rate of interest. Ben-
efits accrued prior to 1989 are based on years of service, highest average com-
pensation and social security benefits.
Employee benefits expense (income) for the Plans included the following:
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost (benefits earned during the period)............ $ 18 $ 20 $ 17
Interest cost on projected benefit obligation............... 24 22 20
Return on plan assets
Actual..................................................... (113) 8 (43)
Actuarial deferral of gains (losses)....................... 73 (51) 4
Amortization
Unrecognized net asset..................................... (4) (4) (4)
Unrecognized prior service cost............................ 2 1 3
Other, net................................................. 1 1 (2)
----- ---- ----
Net pension expense (income)................................ $ 1 $ (3) $ (5)
===== ==== ====
- -------------------------------------------------------------------------------
</TABLE>
The following table sets forth the funded status of the Plans:
<TABLE>
<CAPTION>
December 31 1995 1994 1993
(dollars in millions)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Projected benefit obligation
Vested benefits........................................... $ 272 $215 $183
Nonvested benefits........................................ 33 32 29
----- ---- ----
Accumulated benefit obligation............................. 305 247 212
Effect of projected future compensation levels............. 56 60 62
----- ---- ----
Projected benefit obligation............................... $ 361 $307 $274
===== ==== ====
Plan assets at fair value (primarily listed stocks and
fixed income securities)................................... $ 521 $432 $444
===== ==== ====
Plan assets in excess of projected benefit obligation...... $ 160 $125 $170
Unrecognized net loss...................................... 14 50
Unrecognized prior service cost............................ 9 12 21
Unrecognized net asset..................................... (9) (13) (17)
----- ---- ----
Prepaid pension cost....................................... $ 174 $174 $174
===== ==== ====
Assumptions used in actuarial calculations are as follows:
Weighted average discount rate at December 31............. 7.25% 8.25% 7.5%
Rate of increase in future compensation levels at December
31........................................................ 4.5% 4.5% 4.5%
Account balance interest rate at December 31.............. 6.0% 6.5% 6.0%
Expected long-term rate of return on assets for the years
ended December 31......................................... 9.0% 9.5% 9.5%
- ------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation also maintains nonqualified deferred compensation and retire-
ment plans for certain officers. All benefits provided under these plans are
unfunded and any payments to plan participants are made by the Corporation. As
of December 31, 1995 and 1994, approximately $19 million and $17 million, re-
spectively, were included in accrued expenses and other liabilities for these
plans. For each of the years ended December 31, 1995 and 1994, expenses related
to these plans were $3 million. For the year ended December 31, 1993, the ex-
pense was $1 million.
The Corporation provides certain health and life insurance benefits for retired
domestic employees. Eligible employees currently receive credits of up to
$10,000 based on years of service, which are used to purchase postretirement
health care coverage through the Corporation. Life insurance coverage is depen-
dent on years of service at retirement. Pursuant to SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which was adopted
effective January 1, 1993, these postretirement benefits are recognized over
the service lives of the employees.
The components of postretirement benefits expense were as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost (benefits earned during the period)............... $ 1 $ 1 $ 1
Interest cost on projected benefit obligation.................. 5 5 6
Amortization
Unrecognized transition obligation............................ 4 4 4
Unrecognized net gain......................................... (1) (1)
--- --- ---
Net postretirement benefits expense............................ $ 9 $10 $10
=== === ===
</TABLE>
The following table sets forth the status of the Corporation's accumulated
postretirement benefit obligation:
<TABLE>
<CAPTION>
December 31 1995 1994 1993
(dollars in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation
Retirees............................ $ 48 $ 50 $ 62
Active employees--eligible to
retire............................. 6 7 5
Active employees--not eligible to
retire............................. 9 9 10
------------ ------------ ------------
Accumulated postretirement benefit
obligation.......................... 63 66 77
Unrecognized net gain................ 17 15 4
Unrecognized transition obligation... (60) (73) (77)
------------ ------------ ------------
Postretirement benefit liability..... $ 20 $ 8 $ 4
============ ============ ============
Assumptions used in actuarial
calculations are as follows:
Weighted average discount rate at
December 31........................ 7.25% 8.25% 7.50%
Rate of increase in future
compensation levels at December
31................................. 4.50% 4.50% 4.50%
Medical cost trend rate............. 8% 11% 12%
<CAPTION>
declining to declining to declining to
5% in the 5% in the 5% in the
year 1999 year 2001 year 2001
<S> <C> <C> <C>
Effect of 1% increase in medical cost
trend rate on
Accumulated postretirement benefit
obligation......................... 5.80% 5.90% 4.80%
Postretirement benefits expense..... 4.90% 4.90% 4.10%
- --------------------------------------------------------------------------------
</TABLE>
In 1995, the Corporation recognized curtailment losses in connection with its
pension and postretirement plans. These losses were primarily a result of the
anticipated contribution of BBMC to a new mortgage banking joint venture, and
represented the effect of expected employee reductions on the Corporation's
pension and postretirement plans. The BBMC curtailment losses are more fully
described in Note 17.
The Corporation maintains thrift incentive plans covering the majority of do-
mestic employees. Under these plans, employer contributions are generally based
on the amount of eligible employee contributions. The amounts charged to oper-
ating expense for these plans were $10 million, $12 million and $10 million in
the years ended December 31, 1995, 1994 and 1993, respectively.
67
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
16.STOCK OPTIONS AND AWARDS
The Corporation's stock incentive plans include the 1991 Long-Term Stock Incen-
tive Plan (the 1991 Plan), and the 1986 and 1982 Stock Option Plans (the 1986
and 1982 Plans). The 1991 Plan provides for the award of stock options, re-
stricted stock and stock appreciation rights (SARs) to key employees. Awards
may be made under the 1991 Plan until December 31, 1996. No additional grants
may be made under the 1986 and 1982 Plans. Shares issued under these plans may
be authorized but unissued shares, treasury shares or shares purchased in the
open market.
Options are granted at prices not less than the fair market value of the common
stock on the date of grant. Options granted under the 1991 plan generally have
been exercisable in equal installments on the date of grant and the first anni-
versary of the grant date. Under the 1986 Plan, options granted are generally
exercisable in equal installments on the date of grant and each of the three
anniversary dates thereafter. Options under the 1982 Plan are fully vested. All
options expire not later than 10 years after the date of grant. The 1986 Plan
allowed for the granting of rights to receive Tax Offset Payments with respect
to Non-Qualified Stock Options, which are intended to compensate the partici-
pant for the difference in tax treatment of Incentive Stock Options and Non-
Qualified Stock Options. At December 31, 1995, Tax Offset Payments with respect
to 78,334 options, granted in 1987, were outstanding. Compensation expense for
Tax Offset Payments for the year ended December 31, 1995 was $1 million. There
were 22,400 SARs, at a grant price of $28.63, outstanding at December 31, 1995.
Compensation expense associated with these awards was $.4 million for the year
ended December 31, 1995.
A total of 6,348,905 shares of common stock were reserved for issuance under
the above plans at December 31, 1995. Options outstanding at December 31, 1995
were at prices ranging from $6.10 to $47.88 per share.
The following is a summary of the changes in options outstanding:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, January 1................. 3,390,820 2,976,751 3,705,690
Granted ($24.38 to $47.88 per share)........... 1,118,662 927,489 445,103
Exercised ($5.63 to $30.50 per share).......... (861,567) (427,756) (800,524)
Canceled....................................... (23,749) (85,664) (373,518)
--------- --------- ---------
Options outstanding, December 31............... 3,624,166 3,390,820 2,976,751
========= ========= =========
Options exercisable, December 31............... 3,083,110 2,890,244 2,731,896
========= ========= =========
Shares available for future grants............. 2,724,739 3,929,107 5,087,600
========= ========= =========
</TABLE>
Under terms of restricted stock awards, employees are generally required to
maintain employment with the Corporation for a period of five years after the
award in order to become fully vested in the shares awarded. Performance-based
restricted stock has also been awarded, which vests if the market price of the
Corporation's common stock reaches certain stated levels within specified peri-
ods. During 1995, the common stock price levels for vesting of 180,200 shares
of performance restricted stock granted in 1994 were reached, and the shares
were released from forfeiture restriction. Restricted stock is recorded at the
fair market value of the common stock on the date of award or, if a perfor-
mance-based award, the value required for vesting. At the date of award, un-
earned compensation of the same amount is recorded as a reduction of retained
earnings and is amortized as compensation expense over the vesting period.
The following is a summary of the activity in restricted stock:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Share balance, January 1.......................... 683,264 509,490 496,425
Awards........................................... 255,520 282,200 111,100
Forfeitures...................................... (11,610) (29,837) (87,360)
Released from forfeiture restrictions............ (377,182) (78,589) (10,675)
-------- ------- -------
Share balance, December 31........................ 549,992 683,264 509,490
======== ======= =======
(in millions)
Unearned compensation at December 31 (a reduction
of retained earnings)............................. $ 8 $ 11 $ 5
Compensation expense.............................. $ 10 $ 4 $ 1
</TABLE>
In November 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued, and is effective January 1, 1996. This new standard requires either the
recording of compensation expense for all stock awards and stock option grants,
or significantly increased disclosures for such awards and grants made after
December 31, 1994. The Corporation intends to disclose the information required
by the standard.
17. ACQUISITION, DIVESTITURE AND RESTRUCTURING EXPENSE
During 1995, the Corporation recorded $28 million of charges mainly related to
exiting, reorganizing and downsizing certain business and corporate staff
units. These charges included expenses related to reorganizations underway in
the Corporation's European business, including the closing of the Luxembourg
operations, corporate banking and various other units, and the reorganization
of certain Asian operations. The charges
68
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
included $16 million, comprised of estimated costs of employee reduction of ap-
proximately 265, including executive, managerial and staff positions, and $4
million related to equipment and certain lease obligations. In addition, the
charges included $8 million of curtailment losses as defined by SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" and
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits." The curtailment losses re-
sulted from the announced joint venture of the mortgage banking business, which
is expected to remove mortgage banking employees from the Corporation's pension
and postretirement plans. The majority of the remaining reserve of $19 million
at December 31, 1995 is expected to be utilized in 1996.
During 1994, in connection with its acquisitions of BankWorcester and Pioneer,
the Corporation recorded acquisition-related costs of $21 million. Significant
components of the costs included $10 million for estimated costs of employee
reduction of 414, and $11 million for estimated conversion costs. These conver-
sions were completed in 1994, and consisted of costs to convert loans, deposits
and other computer systems to a common Corporation system, as well as costs of
replacing customers' checkbooks, automatic teller machine cards and other de-
posit documents. During 1994, the Corporation charged costs totaling $12 mil-
lion to the BankWorcester and Pioneer reserves. Substantially all of the re-
maining costs, principally comprised of the Corporation's liability for invol-
untary termination benefits, were paid during 1995.
During 1993, the Corporation recorded acquisition-related costs and reorganiza-
tion charges of $85 million, primarily in connection with its mergers with So-
ciety and Multibank. The costs also included the estimated costs of downsizing
and reconfiguring certain of the Corporation's business and corporate units.
Significant components of the acquisition-related costs included professional
fees; employee reduction costs, principally termination benefits paid to em-
ployees; conversion costs, including costs to convert loans, deposits and other
computer systems of the acquired banks to a common Corporation system and costs
to dispose of systems hardware and software of the acquired banks; and property
related costs, including costs related to the closing of 24 branches and the
disposition of other principal properties, such as post-closing lease payments
and other monthly costs. Components related to the downsizing and
reconfiguration plan included employee reduction costs and estimated costs re-
lated to the disposal of branches and other principal properties and exiting
operating leases. Total employee reduction related to both the mergers and the
downsizing and reconfiguration plan amounted to 950. During 1993, the Corpora-
tion charged costs totaling $40 million to the reserve created by the charges.
Charges to the reserve during 1994 totaled $35 million, and the remainder of
the costs were paid during 1995.
18.OTHER EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FDIC insurance premiums......................................... $ 24 $ 51 $ 62
Legal fees...................................................... 23 25 27
Consulting and other professional fees.......................... 26 29 29
Communications.................................................. 67 62 59
Advertising..................................................... 61 41 37
Forms and supplies.............................................. 26 23 24
Travel and customer contact..................................... 28 22 22
Software costs.................................................. 22 19 19
Other staff costs............................................... 20 17 15
Amortization of goodwill and other intangibles.................. 26 17 12
All other....................................................... 100 86 101
---- ---- ----
$423 $392 $407
==== ==== ====
</TABLE>
19.INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT TAX PROVISION
Federal..................................................... $236 $ 91 $ 16
Foreign
Based on income............................................ 91 48 27
Withheld on interest and dividends......................... 22 15 8
State and local............................................. 58 125 45
---- ---- ----
407 279 96
---- ---- ----
DEFERRED TAX PROVISION (BENEFIT)
Federal..................................................... (1) 115 107
State and local............................................. 38 (45) 12
---- ---- ----
37 70 119
---- ---- ----
Income tax provision before extraordinary item and
cumulative effect of changes in accounting principles...... 444 349 215
INCOME TAXES APPLICABLE TO EXTRAORDINARY ITEM AND CHANGES IN
ACCOUNTING PRINCIPLES
Loss from early extinguishment of debt...................... (4)
Change in accounting for income taxes....................... (77)
Change in accounting for PMSR............................... (32)
---- ---- ----
$444 $345 $106
==== ==== ====
</TABLE>
69
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
Excluded from the above table are tax effects related to certain items which
were recorded directly in stockholders' equity, including foreign currency
translation, market value adjustments related to securities available for sale,
stock options and restricted stock. Net tax effects recorded directly in stock-
holders' equity amounted to a $63 million charge in 1995, a $63 million benefit
in 1994 and a $26 million charge in 1993. The income tax provision included tax
provisions related to securities gains of $3 million in 1995, $6 million in
1994 and $13 million in 1993.
Effective January 1, 1993, the Corporation adopted, prospectively, SFAS No.
109, which principally affects accounting for deferred income taxes. The cumu-
lative effect to January 1, 1993 of adopting the standard was an increase to
net income of $77 million, or $.74 per common share on a primary basis and $.70
per common share on a fully diluted basis.
The following table reconciles the expected federal tax provision before ex-
traordinary item and cumulative effect of changes in accounting principles,
based on the federal statutory tax rate of 35% in 1995, 1994 and 1993, to the
actual consolidated tax provision before extraordinary item and cumulative ef-
fect of changes in accounting principles:
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax provision applicable to income before
extraordinary item and cumulative effect of changes in
accounting principles....................................... $345 $277 $171
Effect of
State and local income taxes, net of federal tax benefit... 63 52 37
Tax-exempt income.......................................... (3) (2) (3)
Non-creditable foreign taxes............................... 11 9 5
Non-deductible goodwill from sale of subsidiaries.......... 11
Other, net................................................. 17 13 5
---- ---- ----
Actual tax provision before extraordinary item and
cumulative effect of changes in accounting principles....... $444 $349 $215
==== ==== ====
</TABLE>
The components of the net deferred tax asset (liability) were as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Reserve for credit losses......................................... $ 294 $ 307
Foreign operations................................................ 63 30
Interest on nonaccrual loans...................................... 45 83
Mortgage servicing rights......................................... 39 33
Unrealized loss on securities available for sale.................. 32
Other............................................................. 72 87
----- -----
Deferred tax assets.............................................. 513 572
DEFERRED TAX LIABILITIES
Leasing operations................................................ (485) (474)
Pension obligations............................................... (65) (71)
Unrealized gain on securities available for sale.................. (42)
Other............................................................. (34) (26)
----- -----
Deferred tax liabilities......................................... (626) (571)
----- -----
Net deferred tax asset (liability)................................ $(113) $ 1
===== =====
</TABLE>
During 1994, the Corporation eliminated its deferred tax valuation reserve,
which was $56 million as of January 1, 1994, as a result of writing off certain
fully reserved state deferred tax assets, executing certain tax planning strat-
egies and partially settling an Internal Revenue Service (IRS) examination. The
execution of the tax planning strategies and the partial settlement of the IRS
examination resulted in the realization of deferred tax assets, some of which
had been partially reserved. The deferred tax provision was reduced by the re-
lease of these reserves; however, this reduction was offset by an increase in
the current tax provision from these events. Accordingly, there was no net ef-
fect on the Corporation's earnings.
During 1995, The Commonwealth of Massachusetts passed a law which reduces the
state income tax rate for financial institutions from 12.5% to 10.5% to be
phased in over five years, and permits apportionment of a bank's taxable in-
come. Additionally, in 1995, the Corporation reached a favorable settlement of
an outstanding Massachusetts tax matter relating to income earned on certain
securities. These items did not have a significant effect on the Corporation's
1995 effective tax rate, since the reduction in the current tax provision from
the tax law changes and the settlement were offset by the required reduction in
FNBB's net deferred tax assets resulting from the tax law changes.
70
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- -------------------------------------------
It is expected that the Corporation's deferred tax assets at December 31, 1995
will be realized from the reversal of existing deferred tax liabilities and
from the recognition of future taxable income, without relying on tax planning
strategies that the Corporation might not ordinarily follow.
Domestic pre-tax income was $756 million in 1995, $613 million in 1994 and $279
million in 1993. Foreign pre-tax income, defined as income generated from oper-
ations that are located outside the United States, was $229 million in 1995,
$178 million in 1994 and $125 million in 1993.
20. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments represent various degrees and types of
risk to the Corporation, including credit, interest rate, foreign exchange rate
and liquidity risk.
INTEREST RATE DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS
In the normal course of its business, the Corporation enters into a variety of
interest rate derivatives and foreign exchange contracts as part of its trading
activities, which primarily focus on providing these products to customers, and
in its interest rate and currency risk management strategy. These products in-
volve, to varying degrees, credit risk and market risk. Credit risk is the pos-
sibility that a loss may occur if a counterparty to a transaction fails to per-
form according to the terms of the contract. Market risk is the effect of a
change in interest rates or currency rates on the value of a financial instru-
ment. The notional amount of interest rate derivatives and foreign exchange
contracts is the amount upon which interest and other payments under the con-
tract are based. For interest rate derivatives, the notional amount is typi-
cally not exchanged. Therefore, the notional amounts should not be taken as the
measure of credit or market risk.
The Corporation controls credit risk arising from interest rate derivatives and
foreign exchange contracts using credit procedures similar to those used for
traditional lending activities. The Corporation believes that fair value, which
approximates the cost to replace the contract at the current market rates
should the counterparty default prior to settlement date, is generally repre-
sentative of credit exposure related to interest rate derivatives and foreign
exchange contracts at a point in time. Counterparty credit risk is also reduced
through the use of master netting agreements. Such agreements provide for the
offsetting of amounts receivable and payable under interest rate derivatives or
foreign exchange contracts with the same counterparty. The market risk associ-
ated with interest rate derivatives and foreign exchange contracts is managed
by establishing and monitoring limits as to the types and degree of risk that
may be undertaken.
Interest rate derivatives utilized by the Corporation include futures and for-
wards, interest rate swaps and interest rate options. Futures and forward con-
tracts generally are contracts for the delayed delivery of securities or money
market instruments in which the buyer agrees to purchase, and the seller agrees
to deliver, a specific instrument at a predetermined date for a specific price.
Risks on both types of agreements stem from market movements in the underlying
securities' values and interest rates and from the ability of the
counterparties to meet the terms of the contracts. The Corporation's
counterparty risk for futures is limited, as the majority of these transactions
are executed on organized exchanges that assume the obligations of
counterparties, and generally require margin collateral and daily settlement of
variation margins.
Interest rate swaps generally involve the exchange of fixed and variable rate
interest payments between two parties based on a common notional principal
amount and maturity date. The primary risks associated with interest rate swaps
are the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contracts.
Interest rate options are contracts that allow the holder of the option to re-
ceive cash, purchase, sell or enter into a financial instrument at a specified
price within a specified period of time. Options include interest rate caps and
floors, which are types of interest rate protection instruments involving the
potential payment between seller and buyer of an interest differential. In ad-
dition, other types of option products provide the holder with the right to en-
ter into interest rate swap, cap and floor agreements with the "writer." The
primary risks associated with all types of options are the exposure to current
and the possible future movements in interest rates and the ability of the
counterparties to meet the terms of the contracts.
Foreign exchange contracts include such commitments as foreign currency spot,
forward, futures, option and swap contracts. The primary risks in these trans-
actions arise from exposure to changes in foreign currency exchange rates and
the ability of the counterparties to meet the terms of the contract.
71
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
The following is a summary of the Corporation's notional amounts and fair val-
ues of interest rate derivatives and foreign exchange contracts included in its
trading and asset and liability management (ALM) portfolios.
<TABLE>
<CAPTION>
Trading Portfolio(1)(6) ALM Portfolio(1)
--------------------------------- ----------------------------------------------
December 31, 1995 Notional Fair Value (2)(3)(5) Notional Fair Value (2)(3) Unrecognized(4)
(in millions) Amount Asset Liability Amount Asset Liability Gain (Loss)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate contracts
Futures and forwards... $30,789 $12,518 $ 10 $ (89)
Interest rate swaps.... 9,169 $ 91 $ 80 5,828 $ 92 7 102
Interest rate options
Purchased............. 3,411 9 3,968 119 2
Written or sold....... 3,986 9 360 34
------- ---------- ---------- ------- -------- -------- -----
Total interest rate
contracts............... $47,355 $ 100 $ 89 $22,674 $ 211 $ 51 $ 15
======= ========== ========== ======= ======== ======== =====
Foreign exchange
contracts
Spot and forward
contracts.............. $13,072 $ 171 $ 167 $ 1,257 $ 3 $ 5 $ (2)
Options purchased...... 1,044 13
Options written or
sold................... 1,130 16
------- ---------- ---------- ------- -------- -------- -----
Total foreign exchange
contracts............... $15,246 $ 184 $ 183 $ 1,257 $ 3 $ 5 $ (2)
======= ========== ========== ======= ======== ======== =====
<CAPTION>
Trading Portfolio(1)(6) ALM Portfolio(1)
--------------------------------- ----------------------------------------------
December 31, 1994 Notional Fair Value (2)(3)(5) Notional Fair Value (2)(3) Unrecognized(4)
(in millions) Amount Asset Liability Amount Asset Liability Gain (Loss)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate contracts
Futures and forwards... $17,257 $16,566 $ 1 $ 36
Interest rate swaps.... 12,604 $ 75 $ 40 3,721 19 $ 225 (208)
Interest rate options
Purchased............. 4,251 55 7,709 39 49
Written or sold....... 5,639 36 6,125 19 (17)
------- ---------- ---------- ------- -------- -------- -----
Total interest rate
contracts............... $39,751 $ 130 $ 76 $34,121 $ 59 $ 244 $(140)
======= ========== ========== ======= ======== ======== =====
Foreign exchange
contracts
Spot and forward
contracts.............. $17,142 $ 172 $ 186 $ 604 $ 2 $ 5 $ (4)
Options purchased...... 811 8
Options written or
sold................... 753 9
------- ---------- ---------- ------- -------- -------- -----
Total foreign exchange
contracts............... $18,706 $ 180 $ 195 $ 604 $ 2 $ 5 $ (4)
======= ========== ========== ======= ======== ======== =====
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Contracts under master netting agreements are shown on a net basis for both
the trading and ALM portfolios.
(2) Fair value represents the amount at which a given instrument could be ex-
changed in an arm's length transaction with a third party as of the balance
sheet date. The fair value amounts of the trading portfolio are included in
other assets or other liabilities, as applicable. The majority of deriva-
tives that are part of the ALM portfolio are accounted for on the accrual
basis, and not carried at fair value. In certain cases, contracts, such as
futures, are subject to daily cash settlements; as such, the fair value of
these instruments is zero.
(3) The credit exposure of interest rate derivatives and foreign exchange con-
tracts is represented by the fair value of contracts reported in the "As-
set" column.
(4) Unrecognized gain or loss represents the amount of gain or loss, based on
fair value, that has not been recognized in the income statement at the
balance sheet date.This includes amounts related to contracts which have
been terminated. Such amounts are recognized as an adjustment of yield over
the period being managed. At December 31, 1995, there were $32 million of
unrecognized gains and $2 million of unrecognized losses related to termi-
nated contracts that are being amortized to net interest revenue over a
weighted average period of 32 months and 23 months, respectively. At Decem-
ber 31, 1994, unrecognized gains of $35 million related to terminated con-
tracts were being amortized to net interest revenue over a weighted average
period of 14 months.
(5) The average asset and liability fair value amounts for interest rate
contracts included in the trading portfolio for the years ended December
31, 1995 and 1994 were $99 million and $67 million, respectively, and $148
million and $83 million, respectively. The average asset and liability fair
value amounts for foreign exchange contracts included in the trading
portfolio were $313 million and $313 million, respectively, for the year
ended December 31, 1995, and $278 million and $283 million, respectively,
for the year ended December 31, 1994.
(6) Net trading gains or losses from interest rate derivatives and foreign ex-
change contracts are recorded in trading account profits and commissions
and other income, respectively. Net trading gains from interest rate deriv-
atives for the years ended December 31, 1995, 1994 and 1993 were $7 mil-
lion, $7 million and $5 million, respectively. Net trading gains from for-
eign exchange activities, which include foreign exchange spot, forward and
options contracts, for the years ended December 31, 1995, 1994 and 1993
were $57 million, $42 million and $45 million, respectively.
72
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CREDIT-RELATED FINANCIAL INSTRUMENTS
A commitment to extend credit is a legally binding agreement to lend to a cus-
tomer in the future that generally expires within a specified period of time.
The extension of a commitment, which is subject to the Corporation's credit re-
view and approval policies, gives rise to credit exposure when certain borrow-
ing conditions are met and it is drawn upon. Until such time, it represents
only potential exposure. In connection with entering into a commitment, the
Corporation may obtain collateral if deemed necessary, based upon the Corpora-
tion's credit evaluation. Such collateral varies but may include securities,
receivables, inventory, fixed assets, personal property and real estate. The
obligation to lend generally may be voided if the customer's financial condi-
tion deteriorates or if the customer fails to meet certain covenants. Commit-
ments to extend credit do not reflect the actual demand on liquidity that the
Corporation will be subjected to in the future, since historical experience
with loan commitments indicates that a large portion generally expire without
being drawn upon.
Standby letters of credit and foreign office guarantees are commitments that
are primarily issued to third parties to guarantee obligations of the Corpora-
tion's customers. Standby letters of credit may be issued as credit enhance-
ments for corporate customers' commercial paper, bond issuances by municipali-
ties or other debt obligations, and to guarantee other financial performance of
a customer. The Corporation has current exposure only to the extent that a cus-
tomer may default on the underlying transaction. The risks involved in the is-
suance of standby letters of credit and foreign office guarantees are primarily
credit risks. Again, the Corporation's credit review and approval policies and
practices are adhered to when evaluating issuances of standbys or guarantees
for customers. Similar to commitments to extend credit, the Corporation may ob-
tain various types of collateral, if deemed necessary, based upon the Corpora-
tion's credit evaluation.
The following table summarizes the Corporation's credit-related financial in-
struments:
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994
(in millions)
- ------------------------------------------------------------------------------
<S> <C> <C>
Fee-based or otherwise legally binding commitments to extend
credit(1).................................................... $19,935 $19,948
Standby letters of credit, foreign office guarantees and
similar instruments(2)....................................... $ 2,177 $ 2,157
Commercial letters of credit.................................. $ 1,381 $ 1,174
- ------------------------------------------------------------------------------
</TABLE>
(1) Net of participations conveyed to others of $233 million in 1995 and $324
million in 1994.
(2) Net of participations conveyed to others of $703 million in 1995 and $364
million in 1994.
21.CONCENTRATIONS OF CREDIT RISK
Credit risk associated with concentrations can arise when changes in economic,
industry or geographic factors affect groups of counterparties with similar
economic characteristics, whose aggregate credit exposure is significant to the
Corporation's total credit exposure. Consistent policies exist regarding the
requirement for collateral security on asset based and real estate credits. Ap-
proximately 40% and 50% of the Corporation's business activity in 1995 and
1994, respectively, was with customers located within New England. Information
with respect to the Corporation's overseas business activities and its geo-
graphic concentrations is included in Note 24. The Corporation's commitments to
lend and loans collateralized by domestic commercial real estate properties
were approximately $4 billion and $5 billion in 1995 and 1994, respectively, of
which 75%, in both years, was related to properties in New England. Also, com-
bined domestic credit exposure from consumer lending and credits secured by 1-4
family residential properties totaled $8 billion and $9 billion in 1995 and
1994, respectively. There were no other significant concentrations of credit
risk.
22.LEASE COMMITMENTS
Rental expense for leases of real estate and equipment is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental expense................................................... $96 $92 $94
Less sublease rental income...................................... 10 12 12
--- --- ---
Net rental expense............................................... $86 $80 $82
=== === ===
</TABLE>
The Corporation has obligations under noncancelable operating leases for real
estate and equipment which include renewal options and escalation clauses. The
Corporation's minimum future rentals under its leases, exclusive of executory
costs and net of sublease rental income, for the years 1996 through 2000 are
$82 million, $68 million, $66 million, $61 million and $57 million, respective-
ly, and $457 million for 2001 and later. Capital leases, the minimum rentals of
which are included in the preceding amounts, are not significant.
23.CONTINGENCIES
The Corporation and its subsidiaries are defendants in a number of legal pro-
ceedings arising in the normal course of business, including claims that bor-
rowers or others have been damaged as a result of the lending practices of the
Corporation's subsidiaries. Management, after reviewing all actions and pro-
ceedings pending against or involving the Corporation and its subsidiaries,
considers that the aggregate loss, if any, resulting from the final outcome of
these proceedings will not be material to the Corporation's financial state-
ments.
73
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
24.SEGMENT INFORMATION
The Corporation operates within the financial services industry. The geographic
segment information presented in the following table is provided to meet the
requirements of SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and differs from the information used by the Corporation to manage
its businesses and report its line of business results. Certain revenues and
expenses are allocated differently for this segment information than for the
Corporation's management reporting and line of business results. For example,
revenues and expenses herein are allocated based on the domicile of the cus-
tomer or service provider rather than to the business that earned or incurred
those revenues or expenses, and certain corporate overhead expenses, which are
allocated to business units, have not been allocated to the international seg-
ment for this presentation. This geographic segment information does not con-
sider other factors, such as method of funding (i.e., local vs. non-local cur-
rency) or location of any cash collateral or guarantees.
As a result of the inter-relationships that exist within the Corporation's
worldwide network, allocations of certain income and expense items are neces-
sarily based on assumptions and subjective criteria. Estimates of interest
costs charged to users of funds, stockholders' equity, and administrative and
other expenses incurred by one area on behalf of another are allocated utiliz-
ing internal methodologies. The information presented is based on reporting as-
sumptions in place at December 31, 1995.
<TABLE>
<CAPTION>
Period
Income End
Years Ended December 31 Total Total Before Net Total
(in millions) Revenue(1) Expense(1) Taxes(2) Income Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
INTERNATIONAL
LATIN AMERICA.................. $ 606 $ 433 $173 $ 98 $10,864
EUROPE......................... 91 62 29 17 1,891
ASIA/PACIFIC................... 65 36 29 16 1,095
ALL OTHER REGIONS.............. 2 7 (5) (3) 45
------ ------ ---- ---- -------
TOTAL INTERNATIONAL........... 764 538 226 128 13,895
DOMESTIC........................ 2,068 1,309 759 413 33,502
------ ------ ---- ---- -------
TOTAL......................... $2,832 $1,847 $985 $541 $47,397
====== ====== ==== ==== =======
1994
International
Latin America.................. $ 480 $ 331 $149 $ 83 $ 7,822
Europe......................... 72 40 32 18 1,776
Asia/Pacific................... 55 39 16 9 973
All other regions.............. 14 11 3 2 337
------ ------ ---- ---- -------
Total International........... 621 421 200 112 10,908
Domestic........................ 1,779 1,188 591 323 33,722
------ ------ ---- ---- -------
Total......................... $2,400 $1,609 $791 $435(3) $44,630
====== ====== ==== ==== =======
1993
International
Latin America.................. $ 364 $ 265 $ 99 $ 56 $ 6,630
Europe......................... 60 47 13 7 1,546
Asia/Pacific................... 49 51 (2) (1) 976
All other regions.............. 19 23 (4) (3) 234
------ ------ ---- ---- -------
Total International........... 492 386 106 59 9,386
Domestic........................ 1,599 1,215 384 240 31,202
------ ------ ---- ---- -------
Total......................... $2,091 $1,601 $490 $299(4) $40,588
====== ====== ==== ==== =======
- --------------------------------------------------------------------------------
</TABLE>
(1) Total revenue includes net interest revenue and noninterest income. Total
expense includes the provision for credit losses and noninterest expense.
(2) Excludes extraordinary item and cumulative effect of changes in accounting
principles.
(3) Includes a $7 million extraordinary loss, net of tax, from early extin-
guishment of debt that, for purposes of this analysis, has been allocated
to domestic.
(4) Includes a $24 million cumulative effect of a change in accounting, net of
tax, for PMSR and income taxes that, for purposes of this analysis, have
both been allocated to domestic.
74
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
25. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The following is a condensed balance sheet of the Corporation (Parent Company
only):
<TABLE>
<CAPTION>
December 31 1995 1994
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and short-term investments in bank subsidiary............... $ 119 $ 205
Advances to subsidiaries
Bank subsidiaries............................................... 19 36
Nonbank subsidiaries............................................ 437 217
Subordinated notes receivable from bank subsidiary............... 580 580
Investments in subsidiaries
Bank subsidiaries............................................... 3,684 3,461
Nonbank subsidiaries............................................ 161 137
Other assets..................................................... 47 43
------ ------
TOTAL ASSETS................................................... $5,047 $4,679
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................................... $1,269 $1,514
Other liabilities................................................ 27 23
------ ------
Total liabilities............................................... 1,296 1,537
------ ------
Total stockholders' equity...................................... 3,751 3,142
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $5,047 $4,679
====== ======
</TABLE>
The following is a condensed statement of income of the Corporation (Parent
Company only):
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiaries
Bank subsidiaries(1)......................................... $349 $ 95 $ 7
Nonbank subsidiaries......................................... 15 30
Interest from subsidiaries
Bank subsidiaries............................................ 59 46 37
Nonbank subsidiaries......................................... 25 9 3
Noninterest income............................................ 9
---- ---- ----
Total operating income...................................... 457 180 47
---- ---- ----
OPERATING EXPENSE
Interest expense.............................................. 92 79 51
Other expense, net............................................ 6 5 4
---- ---- ----
Total operating expense...................................... 98 84 55
---- ---- ----
Income (Loss) before income taxes, equity in undistributed net
income of subsidiaries and cumulative effect of change in
accounting principle......................................... 359 96 (8)
Provision for (Benefit from) income taxes..................... 2 (11) (6)
---- ---- ----
Income (Loss) before equity in undistributed net income of
subsidiaries and cumulative effect of change in accounting
principle.................................................... 357 107 (2)
Equity in undistributed net income of subsidiaries............ 184 328 303
---- ---- ----
Income before cumulative effect of change in accounting
principle.................................................... 541 435 301
Cumulative effect of change in accounting for income taxes.... (2)
---- ---- ----
NET INCOME.................................................... $541 $435 $299
==== ==== ====
- --------------------------------------------------------------------------------
</TABLE>
(1) Dividends in 1995 included $205 million from a subsidiary bank holding
company in connection with the sale of Casco.
75
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
The following is a condensed statement of cash flows of the Corporation (Parent
Company only):
<TABLE>
<CAPTION>
Years Ended December 31 1995 1994 1993
(in millions)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 541 $ 435 $ 299
Reconciliation of net income to net cash provided from
(used for) operating activities
Cumulative effect of change in accounting for income
taxes................................................... 2
Equity in undistributed net income of subsidiaries...... (184) (328) (303)
Gain on sale of subsidiary.............................. (8)
Other, net.............................................. 4 (10) (6)
----- ----- -----
Net cash provided from (used for) operating
activities............................................. 353 97 (8)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided from short-term investments in banking
subsidiary............................................... 86 1 81
Net cash provided from (used for) advances to
subsidiaries............................................. (203) 37 (149)
Investments in subsidiaries.............................. (12) (39) (299)
Proceeds on sale of subsidiary........................... 92
Purchase of subordinated note receivable from bank
subsidiary............................................... (180)
----- ----- -----
Net cash used for investing activities................. (37) (181) (367)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments/repurchases of notes payable.................. (150) (189) (88)
Net proceeds from issuance of notes payable.............. 400 449
Net proceeds from issuance of common stock............... 64 35 20
Net proceeds from issuance of preferred stock............ 68
Purchases of treasury stock.............................. (50) (27)
Dividends paid........................................... (179) (136) (73)
----- ----- -----
Net cash provided from (used for) financing
activities............................................. (315) 83 376
----- ----- -----
Net change in cash and due from banks.................... 1 (1) 1
Cash and due from banks at January 1..................... 1
----- ----- -----
Cash and due from banks at December 31................... $ 1 $ 1
===== ===== =====
Interest payments made................................... $ 90 $ 73 $ 46
Income tax payments made (refunds received).............. $ 5 $ (8) $ (2)
- ------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
26. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires that the Corporation disclose estimated fair values for
certain of its financial instruments. Financial instruments include such items
as loans, deposits, securities, interest rate and foreign exchange rate con-
tracts, swaps and other instruments as defined by the standard.
Fair value estimates are generally subjective in nature and are dependent upon
a number of significant assumptions associated with each instrument or group of
similar instruments, including estimates of discount rates, risks associated
with specific financial instruments, estimates of future cash flows and rele-
vant available market information. Fair value information is intended to repre-
sent an estimate of an amount at which a financial instrument could be ex-
changed in a current transaction between a willing buyer and seller engaging in
an exchange transaction. However, since there are no established trading mar-
kets for a significant portion of the Corporation's financial instruments, the
Corporation may not be able to settle its financial instruments immediately; as
such, the fair values are not necessarily indicative of the amounts that could
be realized through immediate settlement. In addition, the majority of the Cor-
poration's financial instruments, such as loans and deposits, are held to matu-
rity and are realized or paid according to the contractual agreement with the
customer.
Where available, quoted market prices are used to estimate fair values. Howev-
er, due to the nature of the Corporation's financial instruments, in many in-
stances quoted market prices are not available. Accordingly, the Corporation
has estimated fair values based on other valuation techniques, such as dis-
counting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. Fair values are estimated without regard
to any premium or discount that may result from concentrations of ownership of
a financial instrument, possible income tax ramifications or estimated transac-
tion costs. Fair values are also estimated at a specific point in time and are
based on interest rates and other assumptions at that date. As events change
the assumptions underlying these estimates, the fair values of financial in-
struments will change.
Disclosure of fair values is not required for certain items such as lease fi-
nancing, investments accounted for under the equity method of accounting, obli-
gations for pensions and other postretirement benefits, premises and equipment,
OREO, prepaid expenses, PMSR, core deposit intangibles and other customer rela-
tionships, other intangible assets and income tax assets and liabilities. Ac-
cordingly, the aggregate fair value amounts presented do not purport to repre-
sent, and should not be considered representative of, the underlying "market"
or franchise value of the Corporation.
Because the standard permits many alternative calculation techniques and be-
cause numerous assumptions have been used to estimate the Corporation's fair
values, reasonable comparisons of the Corporation's fair value information with
that of other financial institutions cannot necessarily be made.
The methods and assumptions used to estimate the fair values of each class of
financial instrument are as follows:
CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS IN OTHER BANKS, FEDERAL
FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, FUNDS BORROWED,
DUE FROM CUSTOMERS ON ACCEPTANCES AND ACCEPTANCES OUTSTANDING These items are
generally short-term in nature and, accordingly, the carrying amounts reported
in the balance sheet are reasonable approximations of their fair values.
TRADING SECURITIES Trading securities are carried at fair value in the balance
sheet. Such values are generally based on quoted market prices.
MORTGAGES HELD FOR SALE Fair values are based on the estimated value at which
the loans could be sold in the secondary market. The fair value of commitments
to issue mortgage loans, net of forward contracts to sell mortgage loans, is
included as part of the disclosure of off-balance-sheet financial instruments.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY Fair values are
principally based on quoted market prices. For certain debt and equity invest-
ments made in connection with the Corporation's equity and mezzanine financing
business that do not trade on established exchanges and for which markets do
not exist, estimates of fair value are based upon management's review of the
investee's financial results, condition and prospects.
LOANS The fair value of accruing consumer mortgage loans is estimated using
market quotes or by discounting contractual cash flows, adjusted for credit
risk and prepayment estimates. Discount rates are obtained from secondary mar-
ket sources. The fair value of accruing home equity loans is estimated using
comparable market information adjusted for credit and other relevant character-
istics. The fair value of all other accruing loans is estimated by discounting
cash flows, using interest rates that consider the credit and interest rate
risks inherent in the loans, and current economic and lending conditions. The
fair value of nonaccrual loans is primarily estimated by discounting manage-
ment's estimate of future cash flows using a rate commensurate with the risks
involved.
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS The carrying amount of accrued in-
terest receivable approximates its fair value. Financial instruments classified
as other assets sub-
77
<PAGE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------- -------------------------------------------------
---------------------------- -------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
ject to the disclosure requirements of the standard consist principally of ac-
counts receivable, EMSR, investments in limited partnerships and, in 1994, ADP.
The carrying amounts of short-term receivables are considered to approximate
their fair value. For longer-term receivables, fair value is estimated by dis-
counting expected future cash flows using a discount rate commensurate with the
risks involved. The fair value of EMSR is based on the present value of ex-
pected future cash flows and the estimated servicing life. Estimates of fair
value of investments in limited partnerships are based upon management's review
of the investee's financial results, condition and prospects. The carrying
amount of real estate assets held for accelerated disposition approximates fair
value, as such assets are carried at the lower of their value upon transfer to
the portfolio or their current estimated disposition value.
DEPOSITS The fair values of deposits subject to immediate withdrawal, such as
interest and noninterest bearing checking, passbook savings and money market
deposit accounts, are equal to their carrying amounts. The carrying amounts for
variable rate certificates of deposit and other time deposits approximate their
fair values at the reporting date. Fair values for fixed rate certificates of
deposit and other time deposits are estimated by discounting future cash flows
using interest rates currently offered on time deposits with similar remaining
maturities.
ACCRUED EXPENSES AND OTHER LIABILITIES Financial instruments classified as ac-
crued expenses and other liabilities subject to the disclosure requirements of
the standard consist principally of short-term liabilities; the carrying
amounts approximate their fair values.
NOTES PAYABLE The fair value of long-term borrowings is estimated using second-
ary market prices and does not include the fair values of related interest rate
swap agreements, which are presented separately.
FOREIGN EXCHANGE RATE AND INTEREST RATE FINANCIAL INSTRUMENTS The fair values
of foreign exchange rate and interest rate contracts, including contracts used
to manage interest rate, currency and market risks, are estimated based on mar-
ket information adjusted for credit and other relevant characteristics using
pricing models, including option models.
OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS The fair value of commitments to ex-
tend credit is estimated using the fees charged to enter into similar legally
binding agreements, taking into account the remaining terms of the agreements
and customers' credit ratings. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the com-
mitted rates. The fair values of foreign office guarantees and letters of
credit are based on fees charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
78
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------- -------------------------------------
- ---------------------------------------- ------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the estimated fair values of the Corporation's
financial instruments:
<TABLE>
<CAPTION>
December 31 1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 2,645 $ 2,645 $ 2,317 $ 2,317
Interest bearing deposits in other
banks................................... 1,250 1,250 1,556 1,556
Federal funds sold and securities
purchased under agreements to resell.... 1,350 1,350 1,232 1,232
Trading securities....................... 1,109 1,109 553 553
Mortgages held for sale.................. 889 898 183 184
Securities(1)
Available for sale...................... 5,014 5,090 2,997 3,067
Held to maturity........................ 613 620 1,703 1,626
Loans.................................... 29,373 29,310
Reserve for credit losses(2)............. (736) (680)
------- -------
28,637 29,539 28,630 29,200
Due from customers on acceptances........ 359 359 314 314
Accrued interest receivable.............. 456 456 355 355
Financial instruments included in other
assets.................................. 597 685 829 857
LIABILITIES
Deposits................................. 30,948 31,019 31,356 31,322
Funds borrowed........................... 8,763 8,763 6,360 6,360
Acceptances outstanding.................. 359 359 316 316
Financial instruments included in accrued
expenses and other liabilities.......... 463 463 595 595
Notes payable............................ 2,139 2,205 2,169 2,057
INTEREST RATE CONTRACTS(3)
Trading
Asset................................... 100 130
Liability............................... (89) (76)
Asset and liability management
Asset................................... 211 59
Liability............................... (51) (244)
FOREIGN EXCHANGE CONTRACTS(3)
Trading
Asset................................... 184 180
Liability............................... (183) (195)
Asset and liability management
Asset................................... 3 2
Liability............................... (5) (5)
OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS
Fee based or otherwise legally binding
commitments to extend credit............ (54) (33)
Standby and commercial letters of credit,
foreign office guarantees and similar
instruments............................. (32) (50)
- ----------------------------------------------------------------------------------
</TABLE>
(1) Securities include investments made in connection with the Corporation's
equity and mezzanine financing business that do not trade on established
exchanges, and for which no markets exist. At December 31, 1995 and 1994,
these investments were classified as securities available for sale, and
their estimated fair values exceeded the related carrying amounts by $76
million and $70 million, respectively.
(2) The reserve for credit losses is established for future charge-offs arising
from all extensions of credit. The Corporation has not made a specific al-
location of the reserve to other instruments such as leases, commitments to
extend credit, standby letters of credit and interest rate contracts. Ac-
cordingly, a separate determination of the reserve allocable to loans has
not been made.
(3) Additional information with respect to interest rate and foreign exchange
contracts can be found in Note 20 to the Financial Statements. The Corpora-
tion's accounting policy related to such instruments is discussed in Note 1
to the Financial Statements.
79
<PAGE>
Exhibit 21
List of Subsidiaries of Bank of Boston Corporation
There is no parent company of Bank of Boston Corporation (the
"Corporation"). The First National Bank of Boston (the "FNBB"), all of whose
voting securities (except for directors' qualifying shares) are owned directly
or indirectly by the Corporation, is the principal subsidiary of the
Corporation. Other major banking subsidiaries of the Corporation are Bank of
Boston Connecticut and Rhode Island Hospital Trust National Bank.
A number of entities which are owned wholly or in part, either directly or
indirectly, by the Corporation are not listed below. However, their assets if
considered in the aggregate as a single subsidiary would not constitute a
significant subsidiary of the Corporation.
<TABLE>
<CAPTION>
JURISDICTION
NAME OF SUBSIDIARY OF ORGANIZATION
<S> <C>
The First National Bank of Boston US
BancBoston Financial Company MA
Bank of Boston International US Edge Act Corp.
Boston Overseas Financial Corp. US Edge Act Corp.
Boston World Holding Corporation MA
BancBoston Leasing, Inc. MA
BancBoston Aircraft Leasing, Inc. MA
BancBoston Leasing Services, Inc. MA
HomeSide, Inc.(4) DE
BancBoston Services, Inc. MA
Boston EquiServe, L.P.(3) MA
BancBoston Ventures Inc. MA
Ganis Credit Corporation DE
1784 Investor Services, Inc. MA
BancBoston Capital Inc. MA
BancBoston Holdings, Inc. MA
Rhode Island Hospital Trust National Bank US
Bank of Boston Connecticut CT
Bank of Boston Florida, N.A. US
Bank of Boston (Maine), N.A. US
Bullfinch Indemnity Company, LTD VT
Thor Credit Corp. DE
RIHT Life Insurance Co. AZ
Colonial Bancorp, Inc. MA
Bank of Boston Connecticut CT
BancBoston Capital Inc. MA
Fidelity Acceptance Corporation MN
BancBoston Leasing Investments Inc. MA
BancBoston Trust Company of New York NY
BancBoston Investments Inc. MA
BancBoston Real Estate Capital Corporation MA
Boston International Holdings Corporation MA
Boston Overseas Holding Corporation MA
FSC Corp MA
Multibank Financial Corp. MA
- -----------------------------------------------------------------
</TABLE>
(1) Except as noted, each such business organization is directly or indirectly
owned by the Corporation.
(2) FNBB and certain other subsidiaries own a number of subsidiaries which hold
real property acquired in connection with certain loan workout situations.
If considered in the aggregate as a single subsidiary, they would not
constitute a significant subsidiary.
(3) Boston EquiServe, L.P. is 50% owned by Boston Financial Data Services,
which is a joint venture owned by State Street Bank and DST, Inc.
(4) HomeSide, Inc. is 55% owned by Thomas H. Lee Company and Madison Dearborn
Partners.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Bank of Boston Corporation
We consent to the incorporation by reference, in the registration statements of
Bank of Boston Corporation on Form S-4 (333-01559), Forms S-3 (Registration Nos.
33-29515, 33-52571, 33-57723, and 33-61721) and on Forms S-8 (Registration Nos.
333-00297, 33-1899, 33-11186, 33-64462, 33-65850 and 33-66012) of our report
dated January 18, 1996 on our audits of the consolidated financial statements of
Bank of Boston Corporation and Subsidiaries as of December 31, 1995 and 1994,
and for each of the three years in the period ended December 31, 1995, included
in the Corporation's 1995 Annual Report to Stockholders and in Exhibit 13 to the
Corporation's 1995 Annual Report on Form 10-K.
/S/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REPORT ON
FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,645
<INT-BEARING-DEPOSITS> 1,250
<FED-FUNDS-SOLD> 1,350
<TRADING-ASSETS> 1,109
<INVESTMENTS-HELD-FOR-SALE> 5,014
<INVESTMENTS-CARRYING> 613
<INVESTMENTS-MARKET> 620
<LOANS> 31,067
<ALLOWANCE> (736)
<TOTAL-ASSETS> 47,397
<DEPOSITS> 30,948
<SHORT-TERM> 6,573
<LIABILITIES-OTHER> 1,796
<LONG-TERM> 2,139
0
508
<COMMON> 253
<OTHER-SE> 2,990
<TOTAL-LIABILITIES-AND-EQUITY> 47,397
<INTEREST-LOAN> 3,240
<INTEREST-INVEST> 355
<INTEREST-OTHER> 724
<INTEREST-TOTAL> 4,319
<INTEREST-DEPOSIT> 1,557
<INTEREST-EXPENSE> 2,578
<INTEREST-INCOME-NET> 1,741
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 423
<INCOME-PRETAX> 985
<INCOME-PRE-EXTRAORDINARY> 541
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541
<EPS-PRIMARY> 4.55
<EPS-DILUTED> 4.43
<YIELD-ACTUAL> 4.45
<LOANS-NON> 309
<LOANS-PAST> 16
<LOANS-TROUBLED> 28
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 680
<CHARGE-OFFS> (230)
<RECOVERIES> 62
<ALLOWANCE-CLOSE> 736
<ALLOWANCE-DOMESTIC> 417
<ALLOWANCE-FOREIGN> 168
<ALLOWANCE-UNALLOCATED> 151
</TABLE>
