<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 1-6522
BANKBOSTON CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2471221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Federal Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (6l7) 434-2200
Securities registered pursuant to Section 12(b) of the Act:
-------------------------------------
Title of each class
- -------------
Common Stock, par value $1.00 per share
Preferred Stock Purchase Rights
Name of each exchange on which registered:
---------------------------
Each class is registered on the New York Stock Exchange and the Boston Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act: None
-------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of shares of common Number of shares of common
stock held by non-affiliates of stock outstanding as of
Registrant as of March 1, 1999 March 1, 1999
------------------------------ -------------
$12,027,433,486 296,482,247
Documents Incorporated by Reference:
- ----------------------
1. Pertinent extracts from Registrant's 1998 Annual Report to Stockholders
(Parts I, II and IV).
2. Pertinent extracts from Registrant's Proxy Statement in connection with the
Registrant's 1999 Annual Meeting of Stockholders (Part III).
<PAGE>
INDEX
<TABLE>
<CAPTION>
Name of Item Page
- ------------ ----
<S> <C> <C>
PART I
Item 1. Business..................................................... 3
Statistical Disclosure by Bank Holding Companies........... 13
Item 2. Properties................................................... 18
Item 3. Legal Proceedings............................................ 18
Item 3A. Executive Officers of the Corporation........................ 19
Item 4. Submission of Matters to a Vote of Security Holders.......... 20
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................ 20
Item 6. Selected Financial Data...................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 20
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk................................................ 20
Item 8. Financial Statements and Supplementary Data.................. 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 21
PART III
Item 10. Directors and Executive Officers of the Registrant........... 21
Item 11. Executive Compensation....................................... 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 21
Item 13. Certain Relationships and Related Transactions............... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 22
SIGNATURES
Signatures................................................... II-1
</TABLE>
-2-
<PAGE>
PART I
Item 1. Business.
THE CORPORATION
BankBoston 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 and, in
certain cases, joint ventures, is engaged in consumer, small business and
corporate banking in New England, delivers sophisticated financial solutions to
corporations and governments nationally and internationally, and provides full-
service banking in leading Latin American markets. As of December 31, 1998,
approximately 68% of the Corporation's total loan volume consisted of domestic
loans and leases, and the balance was overseas. As of December 31, 1998, the
Corporation's subsidiaries employed, in the aggregate, approximately 24,500
full-time equivalent employees in their domestic and foreign operations.
The Corporation's principal subsidiary is BankBoston, N.A. (the "Bank"), a
national bank with its headquarters in Massachusetts. The Bank maintains
branches in Massachusetts, Connecticut, Rhode Island and New Hampshire and,
through its subsidiaries, operates a network of offices across the United States
and in Latin America, and has a presence in Asia and Europe. During 1998, Rhode
Island Hospital Trust National Bank, a former banking subsidiary of the
Corporation, was merged into the Bank.
The executive office of the Corporation and the head office of the Bank
are located at 100 Federal Street, Boston, Massachusetts 02110
(Telephone (617) 434-2200).
BUSINESS OF THE CORPORATION
The Corporation is managed through the Office of the Chief Executive
Officer (the "OCEO"), which is the senior decision-making group of the
Corporation. The OCEO consists of five members, including Chairman and Chief
Executive Officer Charles K. Gifford, President and Chief Operating Officer
Henrique de Campos Meirelles, Vice Chairman, Chief Financial Officer and
Treasurer Susannah M. Swihart, Vice Chairman, Wholesale Banking, Paul F. Hogan
and Vice Chairman, Regional Banking, Bradford H. Warner. The OCEO meets
periodically to discuss strategy and to review the operating performance of the
Corporation's businesses. It maintains close contact with key administrative
heads and business managers throughout the Corporation, including the management
teams in Argentina and Brazil.
The Corporation groups its principal revenue-producing businesses into the
following major business lines: the Wholesale Bank, the Regional Bank, Argentina
and Brazil. For a description of these four business lines and other businesses
for 1998 and 1997, including their operating results and other key financial
measures, as well as discussions of the Corporation's business activities,
including its lending activities, its cross-border outstandings and its
management of off-balance-sheet exposure and of the risks inherent in its
businesses, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which is incorporated by reference from pages 23 through
54 of the Corporation's 1998 Annual Report to Stockholders (the "Annual
Report").
-3-
<PAGE>
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 on 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, net income and
assets attributable to its domestic and international operations, see "Business
Segment Information," which is incorporated by reference from Note 26 on pages
83 and 84, "Line of Business Information," which is incorporated by reference
from pages 28 through 34, and "Cross-Border Outstandings," which is incorporated
by reference from pages 44 through 47, of the Annual Report.
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
and other nonbank institutions, such as insurance companies, major retailers,
brokerage firms, and investment companies in New England, throughout the United
States and internationally. The principal methods of competing effectively in
the financial services industry include improving customer service through the
quality and range of services provided, improving efficiencies and pricing
services competitively.
One outgrowth of the competitive environment discussed above has been
significant consolidation within the financial services industry on a global,
national and regional level. The Corporation continues to implement strategic
initiatives focused on expanding its core businesses and to explore, on an
ongoing basis, acquisition, divestiture and joint venture opportunities. The
Corporation analyzes each of its businesses in the context of customer demands,
competitive advantages, industry dynamics and growth potential. Consistent with
this strategy, in 1998, the Corporation engaged in the following transactions
and other strategic initiatives:
Acquisitions and Business Expansions
During 1998, the Corporation further expanded its presence and distribution
capacity in Latin America, primarily through its branch expansion programs in
Argentina and Brazil; its acquisition in January 1998 of Deutsche Bank Argentina
S.A. ("Deutsche Argentina"), including approximately $1 billion in loans and
$1.5 billion in deposits; and its acquisition in July 1998 of the OCA Companies,
a credit card and consumer finance business in Uruguay with loans of
approximately $65 million at the date of acquisition.
In addition, the Corporation pursued initiatives to build various Wholesale
Bank businesses, including the expansion of its investment banking and other
capital markets-related capabilities. In August 1998, the Corporation acquired
the investment banking operations of Robertson Stephens from BankAmerica
Corporation for $400 million in cash. The Corporation merged the acquired
operations into its subsidiary, BancBoston Securities Inc., which was renamed
BancBoston Robertson Stephens Inc. ("BancBoston Robertson Stephens"). In
connection with the acquisition, the Corporation established a bonus pool based
on employee
-4-
<PAGE>
performance of approximately $400 million, consisting of $300 million in cash to
be paid over three and one-half years and stock options valued at $100 million,
which will vest over time. This acquisition combined the capital markets debt
products that had previously been offered by the Wholesale Bank with the equity
underwriting, distribution and research capability of Robertson Stephens.
Divestitures and Strategic Alliances
In November 1998, the Corporation sold its Berkshire County, Massachusetts,
franchise, including approximately $300 million in deposits and $1 billion of
Private Bank assets under management, for a pre-tax gain of approximately $51
million. In October 1998, the Corporation sold its domestic institutional
custody business for a pre-tax gain of approximately $38 million, and outsourced
the settlement and depository functions of its asset management business. In
February 1998, the Corporation completed the sale of its 26% ownership interest
in HomeSide, Inc. for a pre-tax gain of approximately $165 million. In January
1998, the Corporation completed an agreement to form a credit card venture,
under which it contributed its $1.2 billion national credit card portfolio in
exchange for cash, at par. The Corporation also received 19 percent of the
common stock and $50 million of the preferred stock of the new company and an
additional $5 million in cash.
Other Initiatives
In October 1997, the Corporation announced an initiative aimed at
redesigning the way it does business, with the goals of making the Corporation
more customer-focused and improving business retention. During 1998, the
Regional Bank introduced a number of organizational, strategic and personnel
changes in support of this initiative. Business functions across southern New
England have been integrated to better enable individual sub-businesses to
leverage from each other's strengths and increase cross-marketing opportunities.
Other actions, including the expansion of certain product lines and improving
the efficiency of certain delivery channels, are expected to be implemented
during 1999.
During 1998, the Corporation realigned its strategy in Asia to focus on
capital markets, including debt underwriting and trading, foreign exchange and
derivatives. The Corporation also continues to offer trade finance and cash
management services in Asia. In connection with this realignment, in October
1998, the Corporation announced the closing of its representative office in
India and its branch offices in Japan, the Philippines and Taiwan. In addition,
in January 1998, the Corporation announced its plan to restructure its European
operations by centralizing those operations in London. In connection with this
restructuring plan, in June 1998, the Corporation closed its offices in Paris
and Frankfurt.
The Corporation intends to continue to explore strategic opportunities as
they arise in order to expand its businesses in its selected markets, divest
non-strategic businesses and improve service to its customers.
Federal legislation was enacted in 1994 which permits certain interstate
banking transactions. This legislation has facilitated, and is expected to
continue to facilitate, consolidation within financial institutions that have
separate operations in two or more states and within the financial services
industry in general. See "Supervision and Regulation" for a discussion of the
impact of this legislation upon the Corporation and its subsidiaries.
-5-
<PAGE>
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 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 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 BHCA
requires the Corporation 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 performs periodic 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
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
banks. Prior approval of the Massachusetts Board of Bank Incorporation also may
be required before the Corporation may engage in certain acquisitions or other
business expansions. 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, federal or international banking
regulators. Massachusetts has an interstate bank acquisition law that permits
banking organizations outside Massachusetts to
-6-
<PAGE>
acquire Massachusetts banking organizations if the state law of the acquiror
permits acquisitions of banking organizations in that state by Massachusetts-
based banking organizations. In addition, federal interstate banking legislation
permits bank holding companies to acquire banks in any state and authorizes
interstate mergers by banks in any state. See "Legislation" below with respect
to federal interstate banking legislation.
Massachusetts has a business combinations law which provides that if any
acquiror 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 acquiror buys at least 90% of the target company's outstanding
stock in the transaction in which it crosses the 5% threshold or if the
acquiror, 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 acquiror. 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
acquiror 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 that 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 1990, the Board of Directors of the Corporation adopted a stockholder
rights plan and entered into a rights agreement (the "Rights Agreement") with
the Bank, as rights agent. Under the rights plan, each of the Corporation's
common stockholders received a dividend of one preferred stock purchase right (a
"Right") for each outstanding share of the Corporation's common stock that the
stockholder owned at the time of the Rights dividend. Each share of common stock
issued after stockholders received the Rights dividend has also received a
Right. As a result of the Corporation's two-for-one stock split in June 1998,
the Rights have been adjusted so that one-half of a Right is associated with
each currently outstanding share of the Corporation's common stock. Each newly
issued share of common stock will also have one-half of a Right associated with
it under the rights plan. The Rights trade automatically with shares of the
Corporation's common stock and become exercisable only under the circumstances
described below.
The purpose of the Rights is to encourage potential acquirors to negotiate
with the Corporation's Board of Directors prior to attempting a takeover bid 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. They should not, however, interfere with any merger or other business
combination approved by the Board of Directors.
In general, the Rights will become exercisable a number of days after a
person or group (i) acquires 15% or more of the Corporation's common stock or
(ii) commences a tender offer or exchange offer that would result in their
owning 15% or more of the Corporation's common
-7-
<PAGE>
stock. Once it becomes exercisable, each Right will entitle its holder (other
than the acquiring person or group) to buy a unit equal to one one-thousandth of
a share of the Corporation's Series D Junior Participating Preferred Stock at an
exercise price of $50 per unit, subject to adjustment. In general, if a person
or group acquires 15% or more of the Corporation's outstanding common stock,
each Right will then entitle its holder (other than the acquiring person or
group) to purchase additional shares of the Corporation's common stock at a
substantially reduced price. In addition, if the Corporation is acquired after
the Rights have become exercisable, each Right will entitle its holder (other
than the acquiring person or group) to purchase the acquiring company's common
stock at a substantially reduced price.
In December 1998, the Corporation's Board of Directors adopted a renewed
Rights Agreement. The terms of the renewed Rights Agreement are substantially
similar to those of the existing Rights Agreement. Under the renewed Rights
Agreement, however, the exercise price will be $160 per unit and the beneficial
ownership percentage relating to the exercisability of the Rights will be 10%.
New Rights will be issued under the renewed Rights Agreement upon the expiration
or earlier termination of the existing Rights.
The above description is intended to present a general overview of the
rights plan. For a full description of the rights plan, see the existing Rights
Agreement, as amended through December 12, 1995, and the renewed Rights
Agreement. The existing Rights Agreement is incorporated by reference from the
Corporation's Registration Statement on Form 8-A dated July 2, 1990 and from the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1995.
The renewed Rights Agreement is incorporated by reference from the Corporation's
Current Report on Form 8-K dated December 17, 1998.
The Corporation's Subsidiaries
General
The Corporation's bank subsidiaries are national banks subject to the
supervision of, and regularly examined by, the Office of the Comptroller of the
Currency (the "OCC"). The domestic deposits of the Corporation's subsidiary
banks are insured (to the extent allowed by law) by the Bank Insurance Fund (the
"BIF") of the Federal Deposit Insurance Corporation (the "FDIC") and,
accordingly, those banks are subject to certain FDIC regulations. As members of
the Federal Reserve System, the Corporation's bank subsidiaries are also subject
to regulation by the Federal Reserve 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.
-8-
<PAGE>
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 Tier 1 leverage 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, 1998, 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
BIF, and bases premiums on the probability of loss to the FDIC with respect to
each individual bank. During 1998, the assessment premiums for the BIF risk-
based system ranged from $0 to $.27 per $100 of insured deposits.
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 of those securities as collateral for an extension of
credit. The Corporation and all of its subsidiaries, including the Bank, are
also subject to certain restrictions with respect to engaging in the issue,
flotation, underwriting, public sale or distribution of certain types of
securities. The Federal Reserve Board permits subsidiaries of bank holding
companies to underwrite and deal in securities consistent with the provisions of
Section 20 of the Glass-Steagall Act of 1933. The Corporation's "Section 20"
subsidiary, BancBoston Robertson Stephens, offers corporate financing services
and investments, including underwriting and dealing in debt and equity
securities, loan syndications and private placements, as well as financial
advisory, research and other investment banking services. The activities of
BancBoston Robertson Stephens are subject to the rules and regulations of a
number of regulators, including the Securities and Exchange Commission, the
National Association of Securities Dealers, the New York Stock Exchange, the
Municipal Securities Rulemaking Board, the Federal Reserve Board and various
state securities commissions.
In addition, both the BHCA and regulations issued by the Federal Reserve
Board prohibit the Corporation and its subsidiaries 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
-9-
<PAGE>
operations in other countries, the Corporation and the Bank 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 limitations, 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 Corporation's Board of Directors determines the payment of dividends
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 1998, the Corporation declared aggregate dividends on its common and
preferred stock of approximately $350 million. In each quarter of 1998, the
Corporation declared and paid a dividend on its common stock of $.29 per share,
as adjusted for the Corporation's two-for-one stock split in June 1998. In the
first quarter of 1999, the Corporation declared and paid a dividend on its
common stock of $.32 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 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, the Federal Reserve Board expects a bank holding company to act as a
source of financial strength to its subsidiary banks.
Various 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. In
1998, the Corporation's subsidiaries declared and paid to the Corporation an
aggregate of approximately $.7 billion of dividends. 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 incorporated by reference
from Note 15 on page 74 of the Annual Report. See the related discussions set
forth below in "Capital" and "Legislation."
-10-
<PAGE>
Capital
Information concerning the Corporation and its bank subsidiaries with
respect to capital is incorporated by reference from Note 14 on page 73 and from
the section entitled "Capital Management" on page 53 of the Annual Report. 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. Subsequent banking
legislation, such as the Riegle Community Development and Regulatory Improvement
Act of 1994 and the Economic Growth and Regulatory Paperwork Reduction Act of
1996, have eased some of the regulatory burdens imposed on banks and bank
holding companies, including certain FDICIA requirements, and are intended to
make the bank regulatory system more efficient. Other legislation that 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. 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, 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 five
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, 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 Interstate Act has facilitated, and is expected to continue to
facilitate, consolidation within financial institutions that have separate
operations in two or more states and within the financial services industry.
Additional laws and regulations are considered from time to time that could
affect the business of the Corporation, including a number of significant
legislative proposals which, if adopted, would result in a fundamental
restructuring of the financial services industry. The effect of any such
legislation on the business of the Corporation and its subsidiaries cannot be
accurately predicted. See also "Supervision and Regulation -- The Corporation"
above.
-11-
<PAGE>
GOVERNMENTAL POLICIES AND ECONOMIC CONDITIONS
The U.S. economy is about to enter its ninth consecutive year of expansion.
In each of the past three years, U.S. output has grown well in excess of three
percent, a development that has lowered the nation's unemployment rate to about
4.5 percent. Moreover, contrary to most expectations and historical experience,
inflationary pressures have diminished. At about 1.5 percent, consumer prices
have advanced at a benign pace not seen since the 1960s.
While the U.S. economy is expected to remain firmly on an expansion path in
1999, it is likely that the pace of growth will slow in the year ahead. Consumer
spending has been growing well in excess of gains in income, and with the
savings rate recently at a negative level, consumers are expected to be turning
more cautious and conservative. Capital spending, rising at a double-digit pace
in recent years, is also expected to soften in the face of falling levels of
capacity utilization. Finally, recessions in Asia and Latin America are expected
to continue contributing to a deterioration in the U.S. trade position.
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 in the United States
and other countries where inflation has been low. Prospective domestic and
international economic and political conditions and the policies of the Federal
Reserve Board and the central banks of Argentina and Brazil, as well as other
domestic and international regulatory authorities, may affect the future
business and earnings of the Corporation.
During 1998, world financial markets experienced significant volatility due
to the Asian and Russian crises. These crises also impacted the economies of
Latin America and, in particular, contributed to the economic and political
instability recently experienced by Brazil. It is expected that the economic
situation in Latin America, including the effect of the world financial markets
on Latin American economies, will continue to be unsettled. 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 Latin
America, and will take certain actions as it deems appropriate. Additional
information with respect to the countries where the Corporation has local
operations or cross-border exposure is incorporated by reference from the
section entitled "Cross-Border Outstandings" on pages 44 through 47 of the
Annual Report.
This section should be read in conjunction with "Management's Discussion
and Analysis of Financial Conditions and Results of Operations," which is
incorporated by reference from pages 23 through 54 of the Annual Report.
-12-
<PAGE>
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The Corporation is providing the information set forth below in accordance
with Industry Guide 3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
Average Balances and Interest Rates
The information required by this item is incorporated by reference from
pages 55 and 56 of the Annual Report.
Change in Net Interest Revenue-Volume and Rate Analysis: 1998 compared with
1997, and 1997 compared with 1996
The information required by this item is incorporated by reference from
page 57 of the Annual Report.
Securities
The following table sets forth the carrying values of securities held to
maturity on the dates indicated:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
(in millions)
<S> <C> <C> <C>
U.S. Treasury $ 7 $ 6 $ 3
U.S. government agencies
and corporations -
mortgage-backed securities 439 520 535
States and political subdivisions 6
Foreign debt securities 13 11 11
----- ----- -----
$ 459 $ 537 $ 555
===== ===== =====
</TABLE>
The following table sets forth the carrying values of securities available for
sale on the dates indicated:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
(in millions)
<S> <C> <C> <C>
U.S. Treasury $ 711 $ 943 $1,675
U.S. government agencies
and corporations -
mortgage-backed securities 7,095 5,860 3,801
States and political subdivisions 34 54 173
Foreign debt securities 2,111 1,383 1,133
Other debt securities 1,145 887 256
Marketable equity securities 339 306 269
Other equity securities 640 513 622
------- ------ ------
$12,075 $9,946 $7,929
======= ====== ======
</TABLE>
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, 1998, 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 encompasses 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.
-13-
<PAGE>
<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 $ 225 6.8% $ 146 6.3% $ 340 5.0% $ 711 5.8%
U.S. government agencies
and corporations -
mortgage-backed
securities 52 7.0 415 5.8 $1,233 5.2% 5,395 6.4 7,095 6.1
States and political
subdivisions 30 3.3 3 2.5 1 5.5 34 3.3
Foreign debt securities 1,291 10.0 585 10.9 42 8.5 193 6.6 2,111 9.9
Other debt securities 13 9.8 227 11.7 304 6.7 601 7.2 1,145 8.0
------ ------ ------ ------ -------
Total carrying value $1,611 9.3% $1,376 9.0% $1,580 5.6% $6,529 6.4% $11,096 7.0%
====== ====== ====== ====== =======
<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 $ 7 4.2% $ 7 4.2%
U.S. government agencies
and corporations -
mortgage-backed
securities $ 110 6.5% $ 217 7.1% $ 112 6.5% 439 6.8
Foreign debt securities 4 7.2 9 6.8 13 6.9
------ ------ ------ ------ -------
Total carrying value $ 7 4.2% $ 114 6.5% $ 226 7.1% $ 112 6.5% $ 459 6.7%
====== ====== ====== ====== =======
</TABLE>
Loans and Leases
Except for the information presented below, the information required by this
item is incorporated by reference from page 38 of the Annual Report.
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, 1998,
exclusive of domestic office loans secured by 1-4 family residential properties,
domestic office loans to individuals and lease financing:
<TABLE>
<CAPTION>
After One
But
Within After
December 31, 1998 Within Five Five
(in millions) One Year Years Years Total
<S> <C> <C> <C> <C>
Commercial, industrial and financial $ 3,604 $ 9,125 $3,565 $16,294
Real estate
Construction 65 114 36 215
Other 1,066 2,471 334 3,871
Overseas offices 10,179 2,069 913 13,161
------- ------- ------ -------
$14,914 $13,779 $4,848 $33,541
======= ======= ====== =======
Loans with predetermined interest rates $ 6,059 $ 2,934 $1,307 $10,300
Loans with floating interest rates 8,855 10,845 3,541 23,241
------- ------- ------ -------
$14,914 $13,779 $4,848 $33,541
======= ======= ====== =======
</TABLE>
The Corporation does not have an automatic renewal policy for maturing loans.
Rather, the Corporation renews loans at the maturity date only at the request of
those customers who the Corporation deems to be creditworthy. Additionally, the
Corporation reviews such requests in
-14-
<PAGE>
substantially the same manner as applications by new customers for extensions of
credit. The Corporation bases the maturity dates and interest terms of renewed
loans, 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 that it may renew in the future.
Nonaccrual Loans and Leases
Except for the information presented below, the information required by this
item is incorporated by reference from page 40 of the Annual Report.
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 1998 1997 1996 1995 1994
(in millions)
<S> <C> <C> <C> <C> <C>
Loans and leases over ninety days past
due and on accrual status............... $ 41 $ 31 $ 41 $ 56 $ 49
===== ===== ===== ===== =====
</TABLE>
Renegotiated Loans
Renegotiated loans at the end of each of the last five years were as follows:
<TABLE>
<CAPTION>
December 31 1998 1997 1996 1995 1994
(in millions)
<S> <C> <C> <C> <C> <C>
Renegotiated loans....................... $ 0.3 $ 0.3 $ 8 $ 33 $ 82
===== ===== ===== ===== =====
</TABLE>
Cross-Border Outstandings
The information required by this item is incorporated by reference from pages 44
through 47 and pages 50 and 51 of the Annual Report.
Reserve for Credit Losses: Allocation of Reserve for Credit Losses and Analysis
of Reserve for Credit Losses
Except for the information presented below, the information required by this
item is incorporated by reference from pages 42 and 43 of the Annual Report.
Generally, the Corporation does not allocate its reserve for credit losses to
specific loan and lease categories, because management views the reserve as
being available for all categories of prospective loss. However, to be
responsive to the Securities and Exchange Commission's Guide for Statistical
Disclosure by Bank Holding Companies, the Corporation has allocated its year-
end reserve for credit losses to the major loan and lease categories.
The allocations result from giving consideration to management's evaluation of
risk in the portfolios, current economic conditions, recent years' loss
experience and levels of nonaccrual loans and leases. 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 incorporated
by reference from page 38 of the Annual Report.
-15-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997 1996 1995 1994
(dollars in millions) Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States
Commercial, industrial and
financial.................. $ 367 48.7% $ 228 32.0% $ 230 26.0% $221 24.8% $284 34.3%
Commercial real estate, including
construction............... 38 5.0 35 4.9 83 9.4 158 17.8 194 23.5
Consumer related loans
Secured by 1-4 family
residential properties..... 6 0.8 9 1.3 13 1.5 36 4.0 34 4.1
Other 73 9.7 99 13.9 193 21.9 131 14.7 104 12.6
Lease financing...................... 13 1.7 10 1.4 16 1.8 22 2.5 21 2.5
----- ----- ----- ----- ----- ----- ---- ----- ---- -----
497 65.9 381 53.5 535 60.6 568 63.8 637 77.0
international........................ 227 30.1 189 26.6 217 24.6 171 19.2 99 12.0
----- ----- ----- ----- ----- ----- ---- ----- ---- -----
724 96.0 570 80.1 752 85.2 739 83.0 736 89.0
Unallocated.......................... 30 4.0 142 19.9 131 14.8 151 17.0 91 11.0
----- ----- ----- ----- ----- ----- ---- ----- ---- -----
$ 754 100.0% $ 712 100.0% $ 883 100.0% $890 100.0% $827 100.0%
===== ===== ===== ===== ===== ===== ==== ===== ==== =====
</TABLE>
The allocation presented above reflects provisions for credit losses
attributable to international operations for the years ended December 31, 1998,
1997, 1996, 1995 and 1994 of $209 million, $23 million, $83 million, $116
million and $29 million, respectively. The provision for credit losses
attributable to international operations for 1998 was principally a result of
increases in international net credit losses, including Asian credit losses
resulting from the sustained economic crisis in that region; the charge-off of a
series of loans to related borrowers made by a former officer in the
International Private Bank; and increased credit losses from Argentina,
primarily a reflection of growth in the consumer-related portfolio and the
acquisition of Deutsche Argentina. In addition, in 1998, the Corporation's
acquisitions of Deutsche Argentina and the OCA Companies resulted in aggregate
additions to the overall reserve for credit losses of $26 million.
Deposits
Except for the information presented below, the information required by this
item is incorporated by reference from pages 55 and 56 of the Annual Report.
The aggregate amount of deposits by foreign depositors in domestic offices
averaged $1,660 in 1998, $1,580 million in 1997 and $1,412 million in 1996. 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, 1998:
<TABLE>
<CAPTION>
Certificates Time
of Deposit Deposits Total
<S> <C> <C> <C>
(in millions)
Maturing within three months $2,727 $ 26 $2,753
After three but within six months 561 24 585
After six but within twelve months 554 59 613
After twelve months 439 76 515
------ ---- ------
$4,281 $185 $4,466
====== ==== ======
</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 incorporated by reference from page 22
of the Annual Report.
-16-
<PAGE>
Short-Term Borrowings
The following table summarizes the Corporation's short-term borrowings for each
of the three years ended December 31, 1998, 1997 and 1996:
<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 Period Rate (1) Period Period Period
Borrowings
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1998
Federal funds purchased (2) $ 628 4.86% $2,168 $1,329 5.35%
Term federal funds purchased (2) 1,468 5.40 2,475 1,822 5.65
Securities sold under agreements to
repurchase (3) 3,145 4.67 5,285 3,052 4.93
Demand notes issued to the U.S.
Treasury (4) 2,303 824 5.41
Commercial paper (5) 94 5.19 94 22 5.32
All other (6) 4,246 7.66 6,670 5,934 8.24
For the Year Ended December 31, 1997
Federal funds purchased (2) $1,003 6.07% $2,184 $1,782 5.40%
Term federal funds purchased (2) 2,530 5.78 2,530 1,834 6.91
Securities sold under agreements to
repurchase (3) 1,789 5.25 2,872 2,401 5.31
Demand notes issued to the U.S.
Treasury (4) 1,495 533 5.39
All other (6) 6,090 7.59 6,233 5,000 8.52
For the Year Ended December 31, 1996
Federal funds purchased (2) $ 527 5.21% $2,523 $1,348 5.35%
Term federal funds purchased (2) 1,442 5.51 2,140 1,413 7.35
Securities sold under agreements to
repurchase (3) 2,034 5.06 2,236 1,848 5.28
Demand notes issued to the U.S.
Treasury (4) 704 6.01 1,183 390 5.37
All other (6) 3,801 10.93 3,801 2,372 12.65
</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 borrowings are subject to short-term fluctuations.
(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) The majority of securities sold under agreements to repurchase are by
domestic offices, mature within one year and are collateralized by U.S. Treasury
and U.S. government agency and corporate securities.
(4) 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 Board.
(5) Commercial paper represents unsecured obligations with maximum maturities of
nine months.
(6) The majority of all other short-term borrowings represent short-term and
medium-term bank notes issued by the Bank and secured and unsecured obligations
of the Corporation's overseas branches and subsidiaries.
-17-
<PAGE>
Item 2. Properties.
The head offices of the Corporation and the Bank are located in a 37-story
building at 100 Federal Street, Boston, Massachusetts. In 1998, the Bank leased
1.2 million of the building's approximately 1.3 million square feet. The Bank
also maintains headquarters for its regional operations in Rhode Island and
Connecticut at One BankBoston Plaza, Providence, Rhode Island, and 100 Pearl
Street, Hartford, Connecticut. In addition, the Bank maintains significant data
processing, record keeping and other operations centers in Boston, Canton,
Dedham and Waltham, Massachusetts, East Providence, Rhode Island and Windsor,
Connecticut.
Outside of the United States, the Bank maintains banking headquarters in
Buenos Aires, Argentina, and Sao Paulo, Brazil. The Bank's Argentine
headquarters are located in a 12-story building owned by the Bank, consisting of
approximately 256,000 square feet. The Bank's headquarters in Brazil are located
in three interconnected buildings, consisting of 126,000 square feet owned by
the Bank and 141,000 square feet of leased space. In 1997, the Bank entered into
a contract to construct a new headquarters building in Argentina of
approximately 500,000 square feet, to be located near the existing headquarters.
Construction began in the first quarter of 1998 and is expected to be completed
in the second quarter of 2000. In addition, in September 1998, the Bank acquired
a 172,000 square foot undeveloped site in Sao Paulo on which it will construct a
new corporate office building in Brazil.
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 were in 1998, 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, the Bank and the
Corporation's other subsidiaries, including the following matters:
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. In 1997, the Corporation sold
Fidelity Acceptance Corporation, its consumer lending subsidiary. At the time of
the sale, Fidelity Acceptance Corporation and/or certain of Fidelity Acceptance
Corporation's subsidiaries (collectively referred to as "FAC") were defendants
in class action and other lawsuits brought in various states by FAC borrowers.
These lawsuits, which include claims for punitive damages, often for large
dollar amounts, 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. Pursuant to the terms of the sale of FAC, the
Corporation has indemnified the buyer for various liabilities, including certain
losses arising from such litigation pending at the time of the sale and for
certain claims that may arise out of the operation of FAC prior to the sale.
-18-
<PAGE>
Robertson Stephens Litigation. As noted above, in August 1998, the
Corporation acquired the investment banking operations of Robertson Stephens
from BankAmerica Corporation. At the time of sale, Robertson Stephens was a
defendant in several lawsuits in various state and federal courts claiming
damages, some in large dollar amounts, arising out of Robertson Stephens'
actions in connection with the proposed or actual underwriting or placement of
securities. Pursuant to the terms of the sale, these lawsuits are now the
responsibility of the Corporation.
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.
Item 3A. Executive Officers of the Corporation.
Information with respect to the executive officers of the Corporation, as
of March 1, 1999, 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 the Bank.
<TABLE>
<CAPTION>
Executive Officer
-----------------
Name Age Current Position Since
---- --- ---------------- -----
<S> <C> <C>
Charles K. Gifford 56 Chairman and Chief
Executive Officer 1987
Henrique de Campos Meirelles 53 President and Chief
Operating Officer 1994
Susannah M. Swihart 43 Vice Chairman, Chief
Financial Officer and
Treasurer of the Corporation
and Vice Chairman and Chief
Financial Officer of the
Bank 1993
Paul F. Hogan 54 Vice Chairman, Wholesale
Banking 1993
Bradford H. Warner 47 Vice Chairman, Regional
Banking 1989
Edward J. Bayone 44 Executive Vice President
and Chief Credit Officer December 1998
Melville E. Blake III 44 Executive Director,
Strategic Planning 1993
Geraldo J. Carbone 42 Regional President, Brazil 1997
Helen G. Drinan 51 Executive Vice President,
Human Resources 1993
Pamela D. Gormley 50 Director, Financial
Accounting and Operations December 1998
Karen B. Green 53 Executive Vice President,
Corporate Marketing 1997
Ira A. Jackson 50 Executive Vice President,
Corporate & Community
Affairs 1987
Robert T. Jefferson 51 Comptroller 1993
John A. Kahwaty 48 Executive Director,
Investor Relations 1996
Lindsey C. Lawrence 61 Executive Vice President,
Electronic Banking 1996
Peter J. Manning 60 Executive Vice President,
Mergers & Acquisitions 1990
John L. Mastromarino 45 Executive Vice President,
Risk Management 1995
Kathleen M. McGillycuddy 49 Executive Vice President,
Global Markets 1996
Manuel R. Sacerdote 56 Regional President,
Southern Cone 1994
Erich Schumann 49 Executive Vice President,
Finance 1997
Gary A. Spiess 58 Executive Vice President,
General Counsel & Clerk of
the Corporation and
Executive Vice President,
General Counsel, Secretary
& Cashier of the Bank 1987
</TABLE>
-19-
<PAGE>
All of these individuals have been officers of the Corporation or one of
its subsidiaries for the past five years, except for Mss. Gormley, Green and
Lawrence and Mr. Mastromarino. Ms. Gormley came to the Corporation in September
1998 from KeyCorp, where she had served as Executive Vice President and Chief
Financial Officer, Corporate Banking, from 1997 to September 1998 and as
Executive Vice President and Chief Financial Officer of two KeyCorp
subsidiaries, Great Lakes Regional Bank (from 1995 through 1996) and Society
National Bank (from 1993 through 1994). Ms. Green joined the Corporation in 1996
and prior to that time had been Director of Consumer Marketing of BayBanks in
1996, Director of Marketing of BayBanks from 1995 to 1996 and Director of New
York Retail Marketing of Citibank from 1993 to 1995. Prior to assuming her
current position with the Corporation, Ms. Lawrence was employed by BayBank
Systems, Inc., a BayBanks subsidiary, as President and Chief Operating Officer
from 1988 to 1994 and as President and Chief Executive Officer from 1994 to
1996. Mr. Mastromarino came to 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 as the OCC's Examiner-in-Charge at the Bank from 1988 to 1993.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required by this Item is incorporated by reference from
pages 21, 22 and 58 of the Annual Report.
Item 6. Selected Financial Data.
The "Consolidated Selected Financial Data" of the Corporation for the six
years ended December 31, 1998 is incorporated by reference from pages 21 and 22
of the Annual Report.
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," which
is incorporated by reference from pages 23 through 54 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this Item is incorporated by reference from
pages 48 through 51 of the Annual Report.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this Item are
incorporated by reference from the pages of the Annual Report indicated below.
-20-
<PAGE>
<TABLE>
<CAPTION>
Page of 1998 Annual
Report to Stockholders
<S> <C>
Summary of Quarterly Consolidated Financial
Information and Common Stock Data................ 58
Report of Independent Accountants..................... 60
BankBoston Corporation:
Consolidated Balance Sheet as of December 31, 1998
and 1997......................................... 61
Consolidated Statement of Income for the years
ended December 31, 1998, 1997 and 1996........... 62
Consolidated Statement of Changes in Common
Stockholders' Equity for the three years
ended December 31, 1998.......................... 63
Consolidated Statement of Cash Flows for the years
ended December 31, 1998, 1997 and 1996........... 64
Notes to Financial Statements......................... 65 through 89
</TABLE>
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 incorporated by reference from Item 3A contained in
Part I of this Report. The information that responds to this Item with respect
to Directors is incorporated by reference from the section entitled "Election of
Directors" in the Corporation's definitive proxy statement for its 1999 Annual
Meeting of Stockholders, which is required to be filed pursuant to Regulation
14A under the Exchange Act and which will be filed with the Securities and
Exchange 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 incorporated by reference from the section entitled "Compliance
with Section 16(a) of the Exchange Act" in the Proxy Statement.
Item 11. Executive Compensation.
The information required in response to this Item is incorporated by
reference from the section entitled "Compensation of Executive Officers" in the
Proxy Statement (other than the subsection entitled "Compensation Committee
Report on Executive Compensation").
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required in response to this Item is incorporated by
reference from the sections entitled "Election of Directors," "Security
Ownership of Directors and Executive Officers" and "Security Ownership of
Certain Beneficial Owners" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required in response to this Item is incorporated by
reference from the section entitled "Interests of Directors and Executive
Officers in Certain Transactions" in the Proxy Statement.
-21-
<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
incorporated by reference from Item 8 of this Report.
(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, effective
as of November 18, 1998.
3(b) - By-Laws of the Corporation, as amended through January 1, 1998,
incorporated herein by reference to Exhibit 3(b) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-6522).
4(a) - There are no agreements with respect to the long-term debt of the
Corporation authorizing the issuance of securities in an amount
exceeding 10% of the total assets of the Corporation and its
subsidiaries on a consolidated basis. The Corporation agrees to
furnish a copy of any agreement defining the rights of the
holders of the Corporation's long-term debt to the Securities and
Exchange Commission upon request.
4(b) - Rights Agreement, as amended through December 12, 1995, between
the Corporation and the Bank, 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, Exhibit 1 to such registration statement and
Exhibit 4(g) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 1-6522).
4(c) - Renewed Rights Agreement, dated as of December 17, 1998, between
the Corporation and the Bank, as Rights Agent, incorporated
herein by reference to Exhibit 4 to the Corporation's Current
Report on Form 8-K dated December 17, 1998 (File No. 1-6522).
10(a) - BankBoston Corporation 1982 Stock Option Plan, as amended through
October 23, 1997, incorporated herein by reference to Exhibit
10(a) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997 (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.
-22-
<PAGE>
(a)(3) Exhibits (cont'd)
10(b) - BankBoston Corporation 1986 Stock Option Plan, as amended through
October 23, 1997, incorporated herein by reference to Exhibit
10(b) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-6522).*
10(c) - BankBoston Corporation 1991 Long-Term Stock Incentive Plan,
as amended through October 23, 1997, incorporated herein by
reference to Exhibit 10(c) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997 (File No.
1-6522).*
10(d) - BankBoston Corporation 1996 Long-Term Incentive Plan, as amended
through June 25, 1998.*
10(e) - BankBoston Corporation and its Subsidiaries Performance
Recognition Opportunity Plan, as amended effective June 9, 1998.*
10(f) - BankBoston 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(g) - BankBoston, N.A. 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(h) - 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(i) - BankBoston, N.A. Excess Benefit Supplemental Employee Retirement
Plan, as amended, effective June 23, 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).*
10(j) - BankBoston Corporation Relocation Policy, as amended effective
January 1, 1999.*
- -----------------------------------------------
* 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.
-23-
<PAGE>
(a)(3) Exhibits (cont'd)
10(k) - 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(l) - BankBoston Corporation's Director Stock Award Plan, as amended
effective July 1, 1998.*
10(m) - Form of Severance Agreement for members of the Office of the
Chief Executive Officer and certain other officers.*
10(n) - Form of Severance Agreement for other officers.*
10(o) - BankBoston 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(p) - BankBoston, N.A. 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(q) - BankBoston Corporation 1997 Stock Option Plan for Non-Employee
Directors, effective as of April 1, 1997, incorporated herein by
reference to Exhibit 10(q) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997 (File No.
1-6522).*
10(r) - Description of the Corporation's Director Retirement Benefits
Exchange Program, incorporated herein by reference to Exhibit
10(r) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-6522).*
10(s) - 1988 Stock Option Plan for Key Employees of BayBanks, Inc., and
Affiliates, as amended through October 23, 1987, incorporated
herein by reference to Exhibit 10.2 to BayBanks' Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994 (File
No. 0-959) and Exhibit 10(u) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1997 (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.
-24-
<PAGE>
(a)(3) Exhibits (cont'd)
10(t) - BayBanks Supplemental Executive Retirement Plan, as amended
through November 27, 1996, incorporated herein by reference to
Exhibit 19.6 to BayBanks' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991, Exhibit 10.8 to BayBanks' Annual
Report on Form 10-K for the year ended December 31, 1991, Exhibit
10.2 to BayBanks' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994 and Exhibit 10.8 to BayBanks' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994
(File No. 0-959) and to Exhibits 10(y) and 10(z) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-6522).*
10(u) - BayBanks Profit Sharing Excess Benefit Plan, as amended,
incorporated herein by reference to Exhibit 10.1 to BayBanks'
Quarterly Report on Form 10-Q for the quarter ended March 31,
1993 and Exhibit 10.1 to BayBanks' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994 (File No. 0-959).*
10(v) - BayBanks Deferred Payment Plans Trust Agreement, as amended
through October 27, 1994, incorporated herein by reference to
Exhibit 19 to BayBanks' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992 and Exhibit 10.10 to BayBanks'
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994 (File No. 0-959).*
10(w) - Consulting Agreement, dated as of December 30, 1997, between the
Corporation and William M. Crozier, Jr., incorporated herein by
reference to Exhibit 10(aa) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997 (File No.
1-6522).*
10(x) - Letter Agreement, dated as of August 15, 1997, between the
Corporation and Henrique de Campos Meirelles, incorporated herein
by reference to Exhibit 10(bb) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1997 (File No.
1-6522).*
10(y) - Lease, as amended through October 1, 1997, between BankBoston,
N.A. and 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, to Exhibits 10(gg), 10(hh), 10(ii), 10(jj) and
10(kk) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1996, and to Exhibits 10(cc), 10(dd),
10(ee), 10(ff) and 10(gg) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997 (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.
-25-
<PAGE>
(a)(3) Exhibits (cont'd)
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).
13 Pages 21 through 58 and 60 through 89 of the Corporation's 1998
Annual Report to Stockholders.
21 - List of subsidiaries of BankBoston 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 22,
1999, incorporated herein by reference to the Corporation's
filing under Regulation 14A of the Exchange Act (File No.
1-6522). 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 Securities and Exchange
Commission not later than 120 days after the end of the
Corporation's fiscal year.
(b) During the fourth quarter of 1998, the Corporation filed two Current
Reports on Form 8-K. The current reports, dated October 15, 1998 and
December 17, 1998, each contained information pursuant to items 5 and 7 of
Form 8-K. The Corporation also filed two Current Reports on Form 8-K,
dated January 21, 1999 and February 3, 1999, each of which contained
information pursuant to items 5 and 7 of Form 8-K.
-26-
<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 the Commonwealth of Massachusetts, on the 5th day of March, 1999.
BANKBOSTON CORPORATION
By: /s/ CHARLES K. GIFFORD
--------------------------
(Charles K. Gifford)
(Chairman 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, Henrique de Campos
Meirelles, Susannah M. Swihart, Erich Schumann, Robert T. Jefferson and Gary A.
Spiess, and each of them severally, or if more than one acts, a majority of
them, his or her true and lawful attorneys or attorney to execute in his or her
name, place and stead, in his or her capacity as a director or officer or both,
as the case may be, of the Corporation, any and all amendments to said report
and all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission. Each of said attorneys
shall have full power and authority to do and perform in the name and on behalf
of each of the undersigned, in any and all capacities, every act whatsoever
requisite or necessary to be done in the premises as fully and to all intents
and purposes as each of the undersigned might or could do in person, hereby
ratifying and approving the acts of said attorneys and each of them.
Signature Title Date
--------- ----- ----
/s/ CHARLES K. GIFFORD Chairman and Chief
- -------------------------------- Executive Officer and
(Charles K. Gifford) Director (Chief Executive
Officer) March 5, 1999
/s/ HENRIQUE DE CAMPOS MEIRELLES President and Chief
- -------------------------------- Operating Officer and
(Henrique de Campos Meirelles) Director March 5, 1999
/s/ SUSANNAH M. SWIHART Vice Chairman, Chief
- -------------------------------- Financial Officer and
(Susannah M. Swihart) Treasurer (Chief
Financial Officer) March 5, 1999
/s/ ROBERT T. JEFFERSON Comptroller
- -------------------------------- (Chief Accounting
(Robert T. Jefferson) Officer) March 5, 1999
II-1
<PAGE>
Signature Title Date
--------- ----- ----
/s/ WAYNE A. BUDD Director March 5, 1999
- --------------------------------
(Wayne A. Budd)
/s/ WILLIAM F. CONNELL Director March 5, 1999
- --------------------------------
(William F. Connell)
/s/ GARY L. COUNTRYMAN Director March 5, 1999
- --------------------------------
(Gary L. Countryman)
/s/ WILLIAM M. CROZIER, JR. Director March 5, 1999
- --------------------------------
(William M. Crozier, Jr.)
/s/ ALICE F. EMERSON Director March 5, 1999
- --------------------------------
(Alice F. Emerson)
/s/ THOMAS J. MAY Director March 5, 1999
- --------------------------------
(Thomas J. May)
/s/ DONALD F. MCHENRY Director March 5, 1999
- --------------------------------
(Donald F. McHenry)
/s/ PAUL C. O'BRIEN Director March 5, 1999
- --------------------------------
(Paul C. O'Brien)
/s/ THOMAS R. PIPER Director March 5, 1999
- --------------------------------
(Thomas R. Piper)
/s/ FRANCENE S. RODGERS Director March 5, 1999
- --------------------------------
(Francene S. Rodgers)
/s/ JOHN W. ROWE Director March 5, 1999
- --------------------------------
(John W. Rowe)
/s/ GLENN P. STREHLE Director March 5, 1999
- --------------------------------
(Glenn P. Strehle)
/s/ WILLIAM C. VAN FAASEN Director March 5, 1999
- --------------------------------
(William C. Van Faasen)
/s/ THOMAS B. WHEELER Director March 5, 1999
- --------------------------------
(Thomas B. Wheeler)
/s/ ALFRED M. ZEIEN Director March 5, 1999
- --------------------------------
(Alfred M. Zeien)
II-2
<PAGE>
EXHIBIT 3(A)
FEDERAL IDENTIFICATION
NO. 04-2471221
-------------------
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
We, Henrique de Campos Meirelles , President
---------------------------------------------------------------
and Michael R. Garfield , Assistant Clerk
----------------------------------------------------------
of BankBoston Corporation ,
----------------------------------------------------------------------------
(Exact name of corporation)
located at 100 Federal Street, Boston, MA 02110 ,
-------------------------------------------------------------------
(Street address of corporation in Massachusetts)
do hereby certify that the following Restatement of the Articles of Organization
was duly adopted at a meeting held on September 24, 1998 by a vote of the
directors.
ARTICLE I
The name of the Corporation is:
BankBoston Corporation
ARTICLE II
The purpose of the Corporation is to engage in the following business
activities:
To buy, sell, deal in, or hold securities of every kind and description; and in
general to carry on any business permitted to corporations organized under
Chapter 156B of the Massachusetts General Laws as now in force or hereafter
amended.
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue:
<TABLE>
<CAPTION>
- ----------------------------- -----------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- ----------------------------- -----------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ----------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 500,000,000 $1.00
- ----------------------------- -----------------------------------------
- ----------------------------- -----------------------------------------
Preferred: 10,000,000* Preferred:
- ----------------------------- -----------------------------------------
- ----------------------------- -----------------------------------------
</TABLE>
*200,000 shares of Junior Participating Preferred Stock, Series D
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
See Attachment A
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
None
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or any class of stockholders:
See Attachment B
<PAGE>
ATTACHMENT A
ARTICLE 4
(A) There shall be a class of common stock having a par value of $1.00 per
share consisting of 500,000,000 shares. The holders of record of such common
stock shall have one vote for each share of such common stock held by them,
respectively.
(B) There shall be a class of Preferred Stock consisting of 10,000,000 shares
without par value. The shares of the Preferred Stock are to be issuable at any
time or from time to time in one or more series as and when established by the
Board of Directors, each such series to have such designation or title as may be
fixed by the Directors prior to the issuance of any shares thereof, and each
such series may differ from every other series already outstanding as may be
determined by the Directors prior to the issuance of any shares thereof, in any
or all of the following, but in no other respects:
(a) the rate of dividend (cumulative or non-cumulative) to which holders of the
Preferred Stock of any such series shall be entitled;
(b) the terms and manner of the redemption by the corporation of the Preferred
Stock of any such series;
(c) the special or relative rights of the holders of the Preferred Stock of any
such series in the event of the voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding-up of the
corporation;
(d) the terms of the sinking fund or redemption or purchase account, if any, to
be provided for the Preferred Stock of any such series;
(e) the right, if any, of the holders of Preferred Stock of any such series to
convert the same into stock of any other class or classes or into other
securities of the corporation, and the terms and conditions of such
conversion; and
(f) the voting rights, if any, of the holders of Preferred Stock of any such
series.
(C) Preferred Stock, Series A: {Redeemed on July 13, 1998; no additional shares
of Preferred Stock may be issued as Series A Preferred Stock.}
(D) Preferred Stock, Series B: {Redeemed on July 13, 1998; no additional shares
of Preferred Stock may be issued as Series B Preferred Stock.}
(E) Preferred Stock, Series C: {Redeemed on July 13, 1998; no additional shares
of Preferred Stock may be issued as Series C Preferred Stock.}
(F) Preferred Stock, Series D
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as
"Junior Participating Preferred Stock, Series D" and the number of shares
constituting such series shall be 200,000.
<PAGE>
2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any shares of
any series of preferred stock ranking prior and superior to the shares of
Junior Participating Preferred Stock, Series D with respect to dividends,
the holders of shares of Junior Participating Preferred Stock, Series D
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the 15th day of March, June, September and
December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Junior Participating Preferred Stock, Series D, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $3.10 or (b)
subject to the provision for adjustment hereinafter set forth, 1,000 times
the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all noncash dividends or
other distributions other than a dividend payable in shares of common stock,
par value $2.25 per share, of the corporation (the "Common Stock") or a
subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock, since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of
a share of Junior Participating Preferred Stock, Series D. In the event the
corporation shall at any time after June 28, 1990 ( the "Rights Declaration
Date") (i) declare any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount to which holders of shares of Junior Participating Preferred
Stock, Series D were entitled immediately prior to such event under clause
(b) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The corporation shall declare a dividend or distribution on the Junior
Participating Preferred Stock, Series D as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $3.10 per
share on the Junior Participating Preferred Stock, Series D shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Junior Participating Preferred Stock, Series D from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of
Junior Participating Preferred Stock, Series D, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Junior Participating Preferred Stock,
Series D entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin
to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Junior Participating Preferred Stock, Series D in an amount less
than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of Junior Participating
Preferred Stock, Series D entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than 30
days prior to the date fixed for the payment thereof.
<PAGE>
3. VOTING RIGHTS. The holders of shares of Junior Participating Preferred
Stock, Series D shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Junior Participating Preferred Stock, Series D shall entitle the
holder thereof to 1,000 votes on all matters submitted to a vote of the
stockholders of the corporation. In the event the corporation shall at any
time after the Rights Declaration Date (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the number of votes per share to
which holders of shares of Junior Participating Preferred Stock, Series D
were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares of
Junior Participating Preferred Stock, Series D and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a
vote of stockholders of the corporation.
(C)(i) If at any time dividends on any Junior Participating Preferred Stock,
Series D shall be in arrears in an amount equal to the full accrued
dividends for six (6) or more quarterly dividends periods, whether or not
consecutive, shall not have been paid or declared and a sum sufficient for
the payment thereof irrevocably set aside in trust for the holders of all of
such shares, the Board of Directors of the corporation shall promptly take
all necessary actions to increase the authorized number of directors of the
corporation by one (1) and the holders of the shares of the Junior
Participating Preferred Stock, Series D then outstanding shall be entitled
(by series, voting as a single class) to elect one (1) person director to
the Board of Directors of the corporation (such right to elect one (1)
director being hereinafter sometimes referred to as the "special voting
rights"), each outstanding share having such right being entitled for such
purpose to one vote; provided, however, that at such time as the arrearage
in payment of dividends which gave rise to the exercise of the special
voting rights has been cured with regard to the Junior Participating
Preferred Stock, Series D by waiver or payment of all accrued dividends, the
right of the holders of such shares so to vote as provided in this paragraph
(C)(i) of this Section 3 shall cease (subject to renewal from time to time
upon the same terms and conditions) and the term of office of the person who
is at that time a director elected by such holders shall terminate and the
number of directors of the corporation shall be automatically reduced by one
(1).
(ii) At any time after the special voting rights shall have become vested in
the holders of the shares of the Junior Participating Preferred Stock,
Series D as provided in paragraph (C)(i) of this Section 3, the Clerk of the
corporation, as promptly as possible but in any event within twenty (20)
days after receipt of the written request of the holders of 10% of the
shares of the Junior Participating Preferred Stock, Series D then
outstanding, addressed to the corporation at its principal office, shall
call a special meeting of the holders of the shares of the Junior
Participating Preferred Stock, Series D for the purpose of electing such
additional director, such meeting to be held at any place as provided by the
Bylaws of the corporation for meetings of the corporation's stockholders,
and upon not less then ten (10) nor more than twenty (20) days notice. If
such meeting shall not be so called within twenty (20) days after receipt of
the request by the Clerk of the corporation, then the holders of 10% of the
shares of the Junior Participating Preferred Stock, Series D then
outstanding may, by written notice to the Clerk of the corporation,
designate any person to call such meeting, and the person so designated may
call such meeting, at any such place as provided above and upon not less
then ten (10) nor more than twenty (20) days notice and for that purpose
shall have access to the stockholder record books of the corporation. No
such special meeting of the holders of the shares of the Junior
Participating Preferred Stock, Series D and no adjournment thereof shall be
held on a date later than thirty (30) days before the annual meeting of
stockholders of the corporation. At any meeting so called or at any annual
meeting held at any time when the special voting rights are in effect, the
holders of a majority of the
<PAGE>
shares of the Junior Participating Preferred Stock, Series D then
outstanding, present in person or by proxy, shall be sufficient to
constitute a quorum for the election of such additional director, and such
additional director, together with any and all other directors who are then
members of the Board of Directors, shall constitute the duly elected
directors of the corporation.
(C)(iii) With respect to a vacancy arising in the directorship referred to
in paragraph (C)(i) of this Section 3 at any time when the special voting
rights are in effect pursuant to paragraph (C)(i) of this Section 3, upon
the written request of the holders of 10% of the shares of the Junior
Participating Preferred Stock, Series D then outstanding, addressed to the
corporation at its principal office, the Clerk of the corporation shall give
notice of a special meeting of holders of the shares of the Junior
Participating Preferred Stock, Series D of the election of a director to
fill such vacancy caused by death, resignation or other inability to serve
as a director elected by such holders, to be held not less than ten (10) nor
more than twenty (20) days following receipt by the Clerk of the corporation
of such written request. So long as special voting rights are in effect
pursuant to paragraph (i) of this Section 3(c), any director who shall have
been so elected by the holders of the Junior Participating Preferred Stock,
Series D may be removed at any time, either with or without cause, only by
the affirmative vote of the holders of the shares at the time entitled to
cast a majority of the votes entitled to be cast for the election of such
director at a special meeting of such holders called for that purpose, and
any vacancy thereby created may be filled by the vote of such holders.
(D) Except as set forth herein, holders of Junior Participating Preferred
Stock, Series D shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote with holders
of Common Stock as set forth herein) for taking any corporate action.
4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Junior Participating Preferred Stock, Series D as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Junior
Participating Preferred Stock, Series D outstanding shall have been paid in
full, the corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Junior Participating Preferred Stock,
Series D;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Junior Participating
Preferred Stock, Series D, except dividends paid ratably on the Junior
Participating Preferred Stock, Series D and all such parity stock on
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Junior Participating
Preferred Stock, Series D, provided that the corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Junior Participating Preferred Stock, Series D;
(iv) purchase or otherwise acquire for consideration any shares of
Junior Participating Preferred Stock, Series D, or any shares of stock
ranking on a parity with the Junior Participating Preferred Stock, Series
D, except pursuant to Section 8 or in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates
and other
<PAGE>
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment
among the respective series or classes.
The corporation shall not permit any subsidiary of the corporation to
purchase or otherwise acquire for consideration any shares of stock of the
corporation unless the corporation could, under paragraph (A) of this
Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. REACQUIRED SHARES. Any shares of Junior Participating Preferred Stock,
Series D purchased or otherwise acquired by the corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Junior Participating Preferred Stock,
Series D unless, prior thereto, the holders of shares of Junior
Participating Preferred Stock, Series D shall have received $1,000.00 per
share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment
(the "Series D Liquidation Preference"). Following the payment of the full
amount of the Series D Liquidation Preference, no additional distributions
shall be made to the holders of shares of Junior Participating Preferred
Stock, Series D unless, prior thereto, the holders of shares of Common
Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series D Liquidation
Preference by (ii) 1,000 (as appropriately adjusted as set forth in
subparagraph (C) below to reflect such events as stock splits, stock
dividends and recapitalizations with respect to the Common Stock) (such
number in clause (ii) immediately above being referred to as the
"Adjustment Number"). Following the payment of the full amount of the
Series D Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Junior Participating Preferred Stock, Series D and
Common Stock, respectively, holders of Junior Participating Preferred
Stock, Series D and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed
in the ratio of the Adjustment Number to one (1) with respect to such
Junior Participating Preferred Stock, Series D and Common Stock, on a per
share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series D Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Junior Participating Preferred Stock,
Series D, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common
Stock.
(C) In the event the corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then
in each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
7. CONSOLIDATION, MERGER, ETC. In case the corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or
<PAGE>
changed into other stock or securities, cash or any other property, then in any
such case the shares of Junior Participating Preferred Stock, Series D shall at
the same time be similarly exchanged or changed in an amount per share (subject
to the provision for adjustment hereinafter set forth) equal to 1000 times the
aggregate amount of stock, securities, cash or any other property (payable in
kind), as the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Junior Participating Preferred Stock, Series
D shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
8. REDEMPTION. The outstanding shares of Junior Participating Preferred Stock,
Series D may be redeemed at the option of the Board of Directors as a whole, but
not in part, at any time, or from time to time, at a cash price per share equal
to 100 percent of (i) the product of the Adjustment Number times the Average
Market Value (as such term is hereinafter defined) of the Common Stock, plus
(ii) all dividends which on the redemption date have accrued on the shares to be
redeemed and have not been paid, or declared and a sum sufficient for the
payment thereof set apart, without interest. The "Average Market Value" is the
average of the closing sale prices of the Common Stock during the 30 day period
immediately preceding the date before the redemption date on the Composite Tape
for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on
the Composite Tape, on the New York Stock Exchange, or, if such stock is not
listed on such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934, as amended, on which such
stock is listed, or, if such stock is not listed on any such exchange, the
average of the closing sale prices with respect to a share of Common Stock
during such 30 day period, as quoted on the National Association of Securities
Dealers, Inc. Automated Quotations System or any system then in use, or if no
such quotations are available, the fair market value of the Common Stock as
determined by the Board of Directors in good faith.
9. RANKING. The Junior Participating Preferred Stock, Series D shall rank
junior to all other series of the corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
10. AMENDMENT. At such time as shares of Junior Participating Preferred Stock,
Series D are outstanding, the Articles of Organization of the corporation shall
not be further amended in any manner which would materially alter or change the
powers, preferences or special rights of the Junior Participating Preferred
Stock, Series D so as to affect them adversely without the affirmative vote of
the holders of two-thirds or more of the outstanding shares of Junior
Participating Preferred Stock, Series D, voting separately as a class.
11. FRACTIONAL SHARES. Junior Participating Preferred Stock, Series D may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holders fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Junior Participating Preferred Stock, Series D.
12. CANCELLATION. Any shares of the Junior Participating Preferred Stock,
Series D redeemed, exchanged, or purchased or otherwise acquired by the
corporation in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof; all such shares shall upon their cancellation
become authorized but unissued shares of preferred stock.
(G) Preferred Stock, Series E: {Redeemed on September 15, 1997; no additional
shares of Preferred Stock may be issued as Series E Preferred Stock.}
<PAGE>
(H) Preferred Stock, Series F: {Redeemed on July 15, 1998; no additional shares
of Preferred Stock may be issued as Series F Preferred Stock.}
<PAGE>
ATTACHMENT B
ARTICLE 6
(A) The Directors may amend, add to or repeal the By-Laws in whole or in part
except with respect to any provision thereof which, by law or the By-Laws
requires action of the stockholders.
(B) Meetings of the stockholders may be held anywhere in the United States.
(C) The corporation may be a partner in any business enterprise which the
corporation would have the power to conduct by itself.
(D) No director shall be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
notwithstanding any provision of law imposing such liability; provided, however,
that this provision shall not eliminate the liability of a director, to the
extent that such liability is provided by applicable law, (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 61 or 62 (or successor provisions)
of Chapter 156B of the Massachusetts General Laws or (iv) for any transaction
from which the director derived an improper personal benefit. This provision
shall not eliminate the liability of a director for any act or omission
occurring prior to the date upon which this provision becomes effective. No
amendment to or repeal of this provision shall apply to or have any effect on
the liability or alleged liability of any director for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
<PAGE>
ATTACHMENT C
BANKBOSTON CORPORATION (FORMERLY BANK OF BOSTON CORPORATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFFICERS:
- --------
<S> <C>
Charles K. Gifford, Chairman and Blueberry Hill, Manchester, MA 01944
Chief Executive Officer
Henrique de Campos Meirelles, President and 381 Warren Street, Brookline, MA 02146
Chief Operating Officer
Susannah M. Swihart, Vice Chair, 17 Mayflower Terrace, Newton Highlands, MA 02161
Chief Financial Officer and Treasurer
Paul F. Hogan, Vice Chair 41 Windsor Road, Milton, MA 02186
Bradford H. Warner, Vice Chair 19 Kress Farm Road, Hingham, MA 02043
Gary A. Spiess, Clerk *2 Davis Road, Marblehead, MA 01945
*Address for service of process is: 100 Federal Street, Boston, MA 02110
DIRECTORS:
- ---------
Wayne A. Budd 460 Park Drive, Boston, MA 02215
William F. Connell 111 Ocean Avenue, Swampscott, MA 01907
Gary L. Countryman 111 Hager Street, Marlboro, MA 01752
William M. Crozier, Jr. 41 Ridge Hill Farm Road, Wellesley, MA 02181
Alice F. Emerson 39 New Street, P.O. Box 206, Siasconset, MA 02654
Charles K. Gifford Blueberry Hill, Manchester, MA 01944
Thomas J. May 22 Longmeadow Drive, Westwood, MA 02090
Donald F. McHenry 2746 Unicorn Lane, N.W., Washington, D.C. 20015
Henrique de Campos Meirelles 381 Warren Street, Brookline, MA 02146
Paul C. O'Brien 451 Wellesley Street, Weston, MA 02493
Thomas R. Piper 106 Lee Drive, Concord, MA 01742
Francene S. Rodgers 72 Evans Road, Brookline, MA 02146
John W. Rowe 950 N. Michigan Avenue, No. 3306, Chicago, IL 60611
Glenn P. Strehle 188 Country Drive, Weston, MA 02193
William C. Van Faasen 12 Proctor Street, Manchester, MA 01944
Thomas B. Wheeler 288 Park Drive, Springfield, MA 01106
Alfred M. Zeien 300 Boylston Street, Boston, MA 02116
</TABLE>
<PAGE>
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is:
100 Federal Street, Boston, MA 02110
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
President:
Treasurer: See Attachment C
Clerk:
Directors:
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day
of the month of: December
d. The name and address of the resident agent, if any, of the corporation is:
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendment s to the following articles. Briefly describe
amendments below:
This Restatement also reflects the deletion from Articles 3 and 4 of the
descriptions of the Series A,B,C,E and F Preferred Stock, which have been
redeemed, and the restoration of those shares to the status of authorized
but unissued shares of preferred stock in accordance with MGL C. 156B, Sec.
21A.
SIGNED UNDER THE PENALTIES OF PERJURY, this 24th day of September, 1998,
/s/ HENRIQUE DE CAMPOS MEIRELLES , President
- ------------------------------------------------------------
Henrique de Campos Meirelles
/s/ MICHAEL R. GARFIELD , Assistant Clerk
- --------------------------------------------------------------
Michael R. Garfield
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
_________________________________________________________________
I hereby approve the within Articles of Amendment and, the filing fee in
the amount of $400 having been paid, said articles are deemed to have
been filed with me this 18th day of November, 1998.
Effective date: ______________
/s/ WILLIAM FRANCIS GALVIN
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Donna M. Rowan
--------------------------------------------------
BankBoston Corporation
--------------------------------------------------
100 Federal Street, MA BOS 01-19-02
--------------------------------------------------
Telephone: Boston, MA 02110
--------------------------------------
617 434-5360
<PAGE>
EXHIBIT 10(D)
BANKBOSTON CORPORATION
1996 Long-Term Incentive Plan
(As amended through June 25, 1998)
1. Purpose.
-------
The BankBoston Corporation 1996 Long-Term Incentive Plan (the "Plan") has
been adopted to create and enhance significant ownership of the Common Stock of
the Corporation by key officers and employees of the Corporation and its
Affiliates. Additional purposes of the Plan include providing a meaningful
incentive to Participants to make substantial contributions to the Corporation's
future success, enhancing the Corporation's ability to attract and retain
persons who will make such contributions, and ensuring that the Corporation has
competitive compensation opportunities for such key officers and employees.
By furthering these objectives, the Plan is intended to benefit the interests
of the stockholders of the Corporation.
2. Definitions.
-----------
As used herein, the following words or terms have the meanings set forth
below:
2.1. "Affiliate" means (a) a corporation or other entity in which the
Corporation owns, directly or indirectly or has the power to vote or cause to be
voted, stock or other ownership interests representing more than 50% of the
total combined voting power of such entity or (b) any other entity in which the
Corporation has a significant equity interest, as determined by the Committee.
Except as determined by the Committee in particular cases, if an entity ceases
to be an Affiliate for any reason (a "disaffiliation"), the employment of each
individual who was employed by the entity shall be treated as having been
involuntarily terminated by the Corporation and its Affiliates effective upon
such disaffiliation, unless such individual thereafter continues to be employed
by the Corporation or another entity which remains an Affiliate.
2.2. "Award" means any Options, Stock Appreciation Rights, Restricted
Stock, Performance Shares or Other Awards granted under the Plan.
<PAGE>
-2-
2.3. "Award Documentation" means a writing delivered to a Participant
specifying the terms and conditions of an Award and containing such other terms
and conditions not inconsistent with the provisions of the Plan as the Committee
considers necessary or advisable.
2.4. "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under
the Exchange Act.
2.5. "Board" means the Board of Directors of the Corporation, except that,
whenever action is to be taken under the Plan with respect to a Reporting
Person, "Board" shall mean only such directors who are "disinterested persons"
or "non-employee directors," as applicable, within the meaning of Rule 16b-3
under the Exchange Act or any successor rule.
2.6. A "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:
2.6.1. There is an acquisition of control of the Corporation as
defined in Section 2(a)(2) of the Bank Holding Company Act of 1956, or any
similar successor provision, as in effect at the time of the acquisition; or
2.6.2. Continuing Directors constitute two-thirds (2/3) or less of
the membership of the Board, whether as the result of a proxy contest or for any
other reason or reasons; or
2.6.3. Any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing twenty-five percent
(25%) or more of the combined voting power of the Corporation's then outstanding
voting securities; or
2.6.4. There is consummated a merger or consolidation (or similar
transaction) of the Corporation or any direct or indirect subsidiary of the
Corporation with any other corporation, other than (A) a merger or consolidation
(or similar transaction) which would result in the voting securities of the
Corporation outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving or parent entity) directly or indirectly sixty percent (60%) or
more of the combined voting power of the voting securities (entitled to vote
generally for the election of directors) of the Corporation or such surviving or
parent entity outstanding immediately after such merger or consolidation and
which would result in those persons who
<PAGE>
-3-
are Continuing Directors immediately prior to such merger or consolidation
constituting more than two-thirds (2/3) of the membership of the Board or the
board of such surviving or parent entity immediately after, or subsequently at
any time as contemplated by or as a result of, such merger or consolidation (or
similar transaction) or (B) a merger or consolidation effected to implement a
recapitalization or restructuring of the Corporation or any of its subsidiaries
(or similar transaction) in which no Person acquired twenty-five percent (25%)
or more of the combined voting power of the Corporation's then outstanding
securities; or
2.6.5. The stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition by
the Corporation of all or substantially all of the Corporation's assets (or any
transaction having a similar effect), other than a sale or disposition by the
Corporation of all or substantially all of the Corporation's assets to an entity
in which the holders of the voting securities (entitled to vote generally for
the election of directors) of the Corporation immediately prior to such sale or
disposition continue to own proportionally and beneficially directly or
indirectly sixty percent (60%) or more of the combined voting power of the
voting securities (entitled to vote generally for the election of directors) of
such entity outstanding immediately after such sale or disposition and which
would result in those persons who are Continuing Directors immediately prior to
such sale or disposition constituting more than two-thirds () of the membership
of the Board or the board of such entity immediately after, or subsequently at
any time as contemplated by or as a result of such sale or disposition.
2.7. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute.
2.8. "Committee" means the committee appointed by the Board with authority
to administer the Plan. Membership of the Committee shall at all times be
constituted consistent with exemption under Rule 16b-3 under the Exchange Act
(or any successor rule) of those Awards that are intended to be so exempt and
with qualification under the Performance-Based Exception of those Awards that
are intended to so qualify. To the extent that the Committee delegates its
power to make Awards as permitted by
<PAGE>
-4-
Section 4.1, all references in the Plan to the Committee's authority to make
Awards and determinations with respect thereto shall be deemed to include the
Committee's delegate or delegates.
2.9. "Common Stock" or "Stock" means the Common Stock, par value $1.00 per
share, of the Corporation.
2.10. "Continuing Director" means any director (a) who has continuously been
a member of the Board since not later than the date of a Potential Change in
Control or (b) who is a successor of a director described in clause (a), if such
successor (and any intervening successor) shall have been recommended or elected
to succeed a Continuing Director by a majority of the then Continuing Directors.
2.11. "Corporation" means BankBoston Corporation, a corporation established
under the laws of the Commonwealth of Massachusetts.
2.12. "Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner acceptable to the Committee, to receive amounts due or
exercise rights of the Participant in the event of the Participant's death. In
the absence of an effective designation by a Participant, Designated Beneficiary
shall mean the Participant's estate.
2.13. "Disability" means a physical or mental condition of such a nature
that it would qualify a Participant for benefits under the long-term disability
insurance plan of BankBoston, N.A. or any successor plan. The Committee shall
have the authority to determine whether and when, consistent with the foregoing,
a Participant has suffered a Disability for purposes of the Plan.
2.14. "Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
2.15. "Fair Market Value," in the case of a share of Common Stock on a
particular day, means the closing price of the Common Stock for that day as
reported in the "NYSE-Composite Transactions" section of the Eastern Edition of
The Wall Street Journal, or if no prices are quoted for that day, for the last
preceding day on which such prices of Common Stock are so quoted. In the event
"NYSE-Composite Transactions" cease to be reported, the Committee shall adopt
some other appropriate method for determining Fair Market Value.
<PAGE>
-5-
2.16. "Freestanding SAR" means an SAR that is granted independently of any
Options.
2.17. "Incentive Stock Option" means an Option, granted to a Participant
pursuant to Section 8, which is intended to satisfy the requirements of Section
422(b) of the Code or any successor provision.
2.18. "Nonqualified Stock Option" means an Option, granted to a Participant
pursuant to Section 8, which is not intended to qualify as an Incentive Stock
Option.
2.19. "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
2.20. "Other Award" means an Award (other than an Option, SAR, Restricted
Stock or Performance Share) granted to a Participant pursuant to Section 12. An
Other Award may consist of Shares, fixed or variable units valued or based on
Common Stock, fixed or variable units valued or based on measures (including
performance measures) that are unrelated to Common Stock, or any combination of
the foregoing. An Other Award that consists of units other than Shares, whether
or not valued or based on Common Stock, may be made payable in cash or Shares or
a combination of cash and Shares.
2.21. "Participant" means an individual selected by the Committee to receive
an Award under the Plan.
2.22. "Performance-Based Exception" means the performance-based exception
from the deductibility limits set forth in Section 162(m) of the Code and the
Section 162(m) Regulations.
2.23. "Performance Goals" means, with respect to Awards that are intended to
qualify for the Performance-Based Exception, objectively determinable
performance goals established by the Committee within the time period specified
in the Section 162(m) Regulations and based on any of the following criteria:
(a) earnings, (b) return on equity, (c) return on assets, (d) return on
investment, (e) revenues, (f) expenses; (g) the operating ratio; (h) stock
price; (i) stockholder return; (j) market share; (k) charge-offs, (l) credit
quality, or (m) customer satisfaction measures. Such Performance Goals may be
particular to a Participant or the division, branch, line of business, Affiliate
or other unit in which the Participant works, or may be based on the performance
of the Corporation on a consolidated basis. Notwithstanding the
preestablishment of a Performance Goal with respect to an Award in accordance
with the Section 162(m) Regulations, nothing herein shall be construed as
limiting the Committee's ability to reduce the amount
<PAGE>
-6-
payable under the Award (including, for this purpose, reducing the amount of any
Award that would otherwise be granted, or reducing the portion of any Award that
would otherwise vest) upon attainment of such Performance Goal.
2.24. "Performance Period" means the period of time designated by the
Committee applicable to a Performance Stock Award during which specified
Performance Goals shall be measured.
2.25. "Performance Share" means an Award granted to a Participant pursuant
to Section 11.
2.26. "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however,
a Person shall not include (a) the Corporation or any of its subsidiaries, (b) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Corporation or any of its subsidiaries, (c) an underwriter temporarily
holding securities pursuant to a registered offering of such securities in
accordance with an agreement with the Corporation, or (d) a corporation owned,
directly or indirectly, by the stockholders of the Corporation in substantially
the same proportions as their ownership of stock of the Corporation.
2.27. "Potential Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:
2.27.1. the Corporation enters into any agreement, the consummation
of which would result in the occurrence of a Change in Control;
2.27.2. the Corporation or any Person publicly announces an intention
to take or to consider taking actions which, if consummated, would constitute a
Change in Control; or
2.27.3. any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing fifteen percent (15%)
or more of the combined voting power of the Corporation's then outstanding
securities (entitled to vote generally for the election of directors).
2.28. "Prior Plan" means the Corporation's 1991 Long-Term Stock Incentive
Plan.
2.29. "Reporting Person" means a person required to file reports under
Section 16(a) of the Exchange Act or any successor statute.
<PAGE>
-7-
2.30. "Restricted Period" means the period during which the transfer of
shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of Performance Goals or upon the occurrence of other events as
determined by the Committee), and the Shares are subject to a substantial risk
of forfeiture, as provided in Section 10.
2.31. "Restricted Stock" means an Award granted to a Participant pursuant to
Section 10.
2.32. "Retirement" means termination of employment with the Corporation or
any Affiliate if such termination of employment constitutes normal retirement,
early retirement, disability retirement or other retirement as provided for at
the time of such termination of employment under the applicable retirement
program then maintained by the Corporation or the Affiliate, provided that the
Participant does not continue in the employment of the Corporation or any
Affiliate and provided further that such termination does not constitute a
Termination for Cause.
2.33. "Section 162(m) Regulations" means the regulations promulgated under
Section 162(m) of the Code, as amended from time to time.
2.34 "Shares" means shares of Common Stock.
2.35. "Stock Appreciation Right" or "SAR" means an Award granted to a
Participant, alone or in connection with a related Option, pursuant to Section
9.
2.36. "Tandem SAR" means an SAR that is granted in connection with a related
Option, the exercise of which shall require forfeiture of the right to purchase
a share of Common Stock under the related Option (and when a share of Common
Stock is purchased under the related Option, the Tandem SAR shall similarly be
canceled).
2.37. "Termination for Cause" means the termination of a Participant's
employment due to any act which, in the discretionary judgment of the Committee,
is deemed inimical to the best interests of the Corporation or any Affiliate,
including, but not limited to: (a) willful and gross misconduct in respect of
the Participant's duties for the Corporation or the Affiliate, (b) conviction of
a felony or perpetration of a common law fraud, (c) willful failure to comply
with applicable laws or regulations with respect to the execution of the
Corporation's or the Affiliate's businesses or (d) theft, fraud, embezzlement,
dishonesty
<PAGE>
-8-
or other conduct which has resulted or is likely to result in material economic
or other damage to the Corporation or any Affiliate.
3. Effective Date and Term.
-----------------------
Subject to approval by the Corporation's stockholders, the Plan shall become
effective as of January 1, 1997, and Awards may be granted under the Plan from
and after that date. No Awards may be made under the Plan after December 31,
2006, but Awards theretofore granted may extend beyond that date.
Notwithstanding the foregoing, no Incentive Stock Options shall be granted after
December 20, 2005.
4. Administration.
--------------
4.1. The Plan shall be administered by the Committee. Subject to the
provisions set forth herein, the Committee shall have full authority to
determine the provisions of Awards, including, without limitation, vesting
schedules, price, performance standards (including Performance Goals), length of
relevant performance, restriction or option period, dividend rights, post-
retirement and termination rights, payment alternatives such as cash, stock,
contingent awards or other means of payment consistent with the purposes of the
Plan and individual Award Documentation. The Committee also shall have full
authority to interpret the terms of the Plan and of Awards made under the Plan,
to adopt, amend and rescind rules and guidelines for the administration of the
Plan and for its own acts and proceedings and to decide all questions and settle
all controversies and disputes which may arise in connection with the Plan. To
the extent permitted by applicable law, the Committee may delegate to one or
more executive officers who are also directors of the Corporation the power to
make Awards to Participants who are not Reporting Persons at the time of such
Awards and all determinations under the Plan with respect thereto, provided that
the Committee shall fix the maximum amount of Awards for such Participants as a
group.
4.2. Notwithstanding Section 4.1 and subject to the provisions set forth
herein, the Board shall approve or ratify Awards made under the Plan to any
executive officer who is also a director of the Corporation.
4.3. The decision of the Committee on any matter as to which it is given
authority under Section 4.1 above shall be final and binding on all persons
concerned.
<PAGE>
-9-
5. Shares Subject to the Plan.
--------------------------
5.1. Subject to adjustment in accordance with the provisions of Section
13.8 and subject to Section 5.4, (a) the total number of Shares available for
grants of Awards (including, without limitation, Awards of Restricted Stock and
Performance Shares) in any calendar year shall not exceed one and one-quarter
percent (1.25%) of the outstanding Common Stock as of the first business day of
such calendar year and (b) the total number of Shares available for grants of
Restricted Stock and Performance Shares in any calendar year shall not exceed
one-half of one percent (.5%) of the outstanding Common Stock as of the first
business day of such calendar year. Shares issued under the Plan may consist in
whole or in part of authorized but unissued Shares, Shares held as treasury
stock or previously issued Shares reacquired by the Corporation, including
Shares purchased on the open market. Notwithstanding the foregoing, the maximum
number of Shares that may be issued under Incentive Stock Options awarded under
the Plan, subject to adjustment in accordance with Section 13.8, shall be
10,000,000* Shares.
5.2. Subject to adjustment in accordance with Section 13.8, the total
number of Shares available for grants of Awards in any calendar year to any
Participant shall not exceed the lesser of (a) three-tenths of one percent (.3%)
of the outstanding Common Stock as of the first business day of such calendar
year or (b) 1,200,000* Shares.
5.3. For purposes of calculating the total number of Shares available for
grants of Awards, (a) the grant of a Performance Share shall be deemed to be
equal to the maximum number of Shares which may be issued upon payment of the
Performance Share and (b) where the value of an Award is variable on the date it
is granted, the value shall be deemed to be the maximum limitation of the Award.
Awards payable solely in cash shall not reduce the number of Shares available
for Awards granted under the Plan.
5.4. There shall be carried forward and available for Awards under the Plan
in each succeeding calendar year, in addition to Shares available for grant
under Section 5.1, all of the following: (a) any unused portion of the limit set
forth in Section 5.1 for any preceding calendar years; (b) Shares represented by
Awards which, during that calendar year or any preceding calendar years, have
been
______________
* As adjusted for the Corporation's two-for-one stock split, effective as of
June 22, 1998.
<PAGE>
-10-
canceled, forfeited, surrendered, terminated or expire unexercised (with the
exception of the termination of a Tandem SAR upon the exercise of the related
Option, or the termination of a related Option upon exercise of the
corresponding Tandem SAR), or which are settled in a manner that results in
fewer Shares outstanding than were initially awarded (including, without
limitation, the surrender of Shares as full or partial payment for the Award or
any tax obligation thereon); (c) the excess amount of variable Awards which
become fixed at less than their maximum limitations; (d) authorized Shares as to
which Options, SARs and Restricted Stock were not granted under the Prior Plan
as of December 31, 1996 and (e) Shares granted under the Prior Plan subject to
Options, SARs or Restricted Stock which, during that calendar year or any
preceding calendar years, have been canceled, forfeited, surrendered, terminated
or expire unexercised or which are settled in a manner that results in fewer
Shares outstanding than were initially awarded (including, without limitation,
the surrender of Shares as full or partial payment for the Award or any tax
obligation thereon).
6. Eligibility for Awards. Any officer or employee of the Corporation or its
----------------------
Affiliates who, in the opinion of the Committee, is in a position to have a
significant effect upon the Corporation's business and consolidated earnings,
shall be eligible to receive an Award under the Plan.
7. Grant of Awards. From time to time while the Plan is in effect, the
---------------
Committee may, in its absolute discretion, select from among the persons
eligible to receive Awards (including persons to whom Awards were previously
granted) those persons to whom Awards are to be granted. Such Awards may be
granted on a stand alone, combination or tandem basis. In addition to granting
Awards for purposes of incentive compensation, Awards may also be made in tandem
with or in lieu of other current or deferred employee compensation.
<PAGE>
-11-
8. Options.
-------
8.1. Grant of Options. Subject to the provisions of the Plan, the
----------------
Committee may award Options, alone or in combination with other Awards under the
Plan. Options granted under the Plan may be either Incentive Stock Options or
Nonqualified Stock Options. The terms and conditions of Incentive Stock Options
shall be subject to and comply with Section 422(b) of the Code or any successor
provision, and any regulations thereunder.
8.2. Option Price. The Option price per share of Common Stock, with
------------
respect to each Option, shall not be less than the Fair Market Value per share
at the time the Option is granted.
8.3. Period of Options. An Option shall be exercisable during such period
-----------------
of time as the Committee shall determine, subject, in the case of Incentive
Stock Options, to any limitation required by the Code. It is contemplated that
the Committee will provide that an Option shall not be exercisable after the
expiration of ten years from the date the Option is granted.
8.4. Exercise of Options. Each Option shall be made exercisable at such
-------------------
time or times, and shall be subject to such conditions or restrictions, as the
Committee shall determine. It is contemplated that the Committee will normally
provide that the right to exercise an Option will accrue on the first
anniversary of the date of grant with respect to 50 percent of the number of
shares of Common Stock subject to the Option and that the right to exercise the
Option with respect to the balance of the shares subject thereto will accrue on
the second anniversary of the date of grant. However, the Committee may, in its
discretion, in any case provide that the Option will be exercisable immediately
with respect to all of the shares of Common Stock subject to the Option or that
the right to exercise the Option will accrue in different installments and at
different times from those set forth above.
8.5. Payment for and Delivery of Stock. Payment of the Option exercise
---------------------------------
price may be made by any of the following methods, as determined by the
Committee at the time the Option is granted: (a) in cash or its equivalent (b)
by delivery of Shares already owned by the Participant, valued at their Fair
Market Value on the date of exercise (provided that any Shares so delivered
shall have been held by the Participant for such period, if any, as the
Committee shall determine), (c) subject to such guidelines as
<PAGE>
-12-
may be promulgated by the Committee, by delivery of a notice instructing the
Corporation to deliver the Shares being purchased to a broker, subject to the
broker's delivery of cash to the Corporation equal to the purchase price and any
applicable withholding taxes, (d) by delivery of such other lawful consideration
as the Committee may determine or (e) by any combination of the foregoing. The
Committee may provide for the automatic award of an Option upon the delivery of
Shares to the Corporation in payment of the exercise price of another Option for
up to the number of Shares delivered to the Corporation in payment of the
exercise price of such other Option.
8.6. Termination of Employment. Each Participant's Award Documentation
-------------------------
shall set forth the extent to which the Participant or the Participant's legal
representative, guardian or Designated Beneficiary shall have the right to
exercise an Option following the termination of the Participant's employment
with the Corporation and its Affiliates. Such provisions shall be determined in
the sole discretion of the Committee and may reflect distinctions based on the
reasons for termination of employment, including, without limitation,
termination of employment by reason of the Participant's death, Retirement or
Disability.
9. Stock Appreciation Rights.
-------------------------
9.1. Grant of SARs. Subject to the provisions of the Plan, the Committee
-------------
may award SARs alone or in combination with other Awards under the Plan.
9.2. Grant Price. The grant price of a Freestanding SAR shall not be less
-----------
than the Fair Market Value of the Common Stock at the time of grant of the SAR.
The grant price of a Tandem SAR shall not be less than the Option exercise price
of the related Option.
9.3. Term of SARs. An SAR shall be exercisable during such period of time
-------------
as the Committee shall determine. It is contemplated that the Committee will
provide that an SAR shall not be exercisable after the expiration of ten years
from the date the SAR is granted.
9.4. Exercise of Tandem SARs. Tandem SARs may be exercised for all or part
------------------------
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the
<PAGE>
-13-
related Option. A Tandem SAR may be exercised only with respect to the Shares
for which its related Option is then exercisable.
9.5. Exercise of Freestanding SARs. Freestanding SARs shall be made
------------------------------
exercisable at such time or times, and shall be subject to such conditions or
restrictions, as the Committee shall determine. It is contemplated that the
Committee will normally provide that the right to exercise 50 percent of any
Freestanding SARs granted hereunder will accrue on the first anniversary of the
date of grant and that the right to exercise the balance of such Freestanding
SARs will accrue on the second anniversary of the date of grant. However, the
Committee may, in its discretion, in any case provide that Freestanding SARs
will be exercisable immediately or that the right to exercise Freestanding SARs
will accrue in different installments and at different times from those set
forth above.
9.6. Payment of SARs. Upon exercise of an SAR, a Participant shall be
---------------
entitled to receive payment from the Corporation in an amount determined by
multiplying (a) the excess, if any, of the Fair Market Value of a share of
Common Stock on the date of exercise over the grant price by (b) the number of
Shares with respect to which the SAR is exercised. SARs may be payable in cash,
Shares or a combination of the two, as provided by the Committee. Shares issued
on the settlement of the exercise of SARs shall be valued at their Fair Market
Value on the date of exercise.
9.7. Termination of Employment. Each Participant's Award Documentation
-------------------------
shall set forth the extent to which the Participant or the Participant's legal
representative, guardian or Designated Beneficiary shall have the right to
exercise an SAR following the termination of the Participant's employment with
the Corporation and its Affiliates. Such provisions shall be determined in the
sole discretion of the Committee and may reflect distinctions based on the
reasons for termination of employment, including, without limitation,
termination of employment by reason of the Participant's death, Retirement or
Disability.
10. Restricted Stock.
----------------
10.1. Grant of Restricted Stock. Subject to the provisions of the Plan,
-------------------------
the Committee may award Restricted Stock alone or in combination with other
Awards under the Plan.
<PAGE>
-14-
10.2. Terms of Restricted Stock. The Restricted Period and other
--------------------------
provisions of each Restricted Stock Award shall be established by the Committee
and shall be set forth in the Participant's Award Documentation.
10.3. Nontransferability; Other Restrictions. Except as provided in this
---------------------------------------
Section 10, shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered during the Restricted Period. The Committee may
impose such other conditions and/or restrictions on any shares of Restricted
Stock granted under the Plan as it may deem advisable including, without
limitation, performance-based restrictions (whether or not based upon the
achievement of Performance Goals), employment-based restrictions and/or
restrictions under applicable federal or state securities laws.
10.4. Participants' Rights in Restricted Stock. Shares of Restricted
----------------------------------------
Stock shall be evidenced in such manner as the Committee may determine. Any
certificates issued in respect of Restricted Stock shall be registered in the
name of the Participant and, except as otherwise determined by the Committee,
shall be delivered to the Participant after the last day of the Restricted
Period. Except as otherwise provided by the Committee, during and after the
Restricted Period, dividends with respect to any Restricted Stock shall be paid
to, and voting rights with respect to any such Shares shall be vested in, the
Participant. To the extent provided by the Committee, Participants may defer
the receipt of any dividends payable during the Restricted Period with respect
to Restricted Stock.
10.5. Termination of Employment. Each Participant's Award Documentation
-------------------------
shall set forth the extent, if any, to which the Participant or the
Participant's legal representative, guardian or Designated Beneficiary shall
have the right to receive unvested shares of Restricted Stock following the
termination of the Participant's employment with the Corporation and its
Affiliates. Such provisions shall be determined in the sole discretion of the
Committee and may reflect distinctions based on the reasons for termination of
employment, including, without limitation, termination of employment by reason
of the Participant's death, Retirement or Disability.
10.6. Consideration for Restricted Stock. Restricted Stock shall be issued
----------------------------------
for no cash consideration or such minimum consideration as may be required under
applicable law.
<PAGE>
-15-
11. Performance Shares.
-------------------
11.1. Grant of Performance Shares. Subject to the provisions of the Plan,
---------------------------
the Committee may award Performance Shares alone or in combination with other
Awards under the Plan. The number and/or vesting of Performance Shares granted,
in the Committee's discretion, shall be contingent upon the degree of attainment
of the Performance Goals over the Performance Period.
11.2. Form and Timing of Payment of Performance Shares. During the course
-------------------------------------------------
of a Performance Period, the Committee shall determine the number of Performance
Shares as to which the Participant has earned the right to be paid based upon
the attainment of the applicable Performance Goals. The Committee shall pay any
earned Performance Shares as soon as practicable after they are earned in the
form of cash, Shares or a combination thereof (as determined by the Committee)
having an aggregate Fair Market Value equal to the number of Performance Shares
earned multiplied by the Fair Market Value of a share of Common Stock determined
as of the date such Performance Shares were earned. Any Shares used to pay out
earned Performance Shares may be granted subject to any restrictions deemed
appropriate by the Committee. To the extent provided by the Committee,
Participants may defer the receipt of payment of any Performance Shares or other
amounts (e.g., dividend equivalent rights) earned pursuant to the Award
Documentation.
11.3. Termination of Employment. Each Participant's Award Documentation
-------------------------
shall set forth the extent to which the Participant or the Participant's legal
representative, guardian or Designated Beneficiary shall have the right to
receive unearned Performance Shares following the termination of the
Participant's employment with the Corporation and its Affiliates. Such
provisions shall be determined in the sole discretion of the Committee and may
reflect distinctions based on the reasons for termination of employment,
including, without limitation, termination of employment by reason of the
Participant's death, Retirement or Disability.
12. Other Awards.
-------------
12.1. Grant of Other Awards. Subject to the provisions of the Plan, the
---------------------
Committee may award Other Awards alone or in combination with other Awards under
the Plan.
<PAGE>
-16-
12.2. Terms of Other Awards. The Committee shall determine the terms and
----------------------
provisions of Other Awards including, without limitation, any transfer
restrictions, vesting provisions, the value of such Awards and the form and
timing of payment of such Awards.
12.3. Termination of Employment. Each Participant's Award Documentation
-------------------------
shall set forth the extent to which the Participant or the Participant's legal
representative, guardian or Designated Beneficiary shall have the right to
exercise or receive Other Awards following the termination of the Participant's
employment with the Corporation and its Affiliates. Such provisions shall be
determined in the sole discretion of the Committee and may reflect distinctions
based on the reasons for termination of employment, including, without
limitation, termination of employment by reason of the Participant's death,
Retirement or Disability.
13. General Provisions Applicable to Awards.
---------------------------------------
13.1. Non-transferability of Awards. Subject to the provisions of this
-----------------------------
Section, (a) no Award under the Plan shall be transferable otherwise than by
will, by the laws of descent and distribution, or by operation of a "qualified
domestic relations order," as that term is defined in the Code, and (b) during
the lifetime of the Participant to whom an Award has been granted, rights under
the Award may be exercised only by the Participant, the Participant's guardian
or legal representative, or by the assignee of the Award under a "qualified
domestic relations order." Notwithstanding the foregoing, the Committee may
provide for greater transferability in the case of any Award, including, without
limitation, transfer to one or more members of the Participant's family or to a
partnership or trust established for the benefit of one or more members of the
Participant's family. In no event shall Incentive Stock Options awarded under
the Plan be transferable other than as permitted under the rules prescribed in
the Code for incentive stock options. An Award that is intended to be exempt
under Rule 16b-3 under the Exchange Act or any successor rule, or that is
intended to qualify for the Performance-Based Exception, shall be transferable
only to the extent consistent with such exemption or qualification. Nothing in
this Section shall be construed as restricting the transfer of Shares that have
become free of other transfer restrictions under the Plan or that were awarded
free of any such restrictions.
<PAGE>
-17-
13.3. Committee Discretion. Each type of Award may be made alone, in
--------------------
addition to or in relation to any other type of Award. The terms of each type
of Award need not be identical, and the Committee need not treat Participants
uniformly. Except as otherwise provided by the Plan or a particular Award, any
determination with respect to an Award may be made by the Committee at the time
of award or at any time thereafter. The Committee may grant Awards hereunder
that are intended to satisfy the Performance-Based Exception and Awards that are
not intended to satisfy that exception. Awards hereunder that are intended to
satisfy the Performance-Based Exception shall be subject to the limitations of
Section 5.2. In no event shall an Award hereunder which is not intended to
satisfy the Performance-Based Exception be conditioned upon an Award hereunder
(to the same Participant) which is intended to satisfy the Performance-Based
Exception.
13.4. Tax Withholding. The Committee shall require, on such terms as it
---------------
deems necessary, that the Participant pay to the Corporation, or make other
satisfactory provision for payment of, any federal, state or local taxes
required by law to be withheld in respect of Awards under the Plan. In the
Committee's discretion, a Participant may elect to satisfy all or a portion of
his or her federal, state and local tax withholding requirements or liability,
up to the amount calculated by applying the Participant's maximum marginal tax
rate, by having Shares withheld from the Shares otherwise issuable in connection
with the event creating the tax obligation, or by delivering to the Corporation
previously owned Shares, valued at their Fair Market Value on the date that
withholding taxes are determined. The Corporation and its Affiliates may, to
the extent permitted by law, deduct any such tax obligations from any payment of
any kind otherwise due to the Participant.
13.5. Foreign Nationals. Awards may be made to Participants who are
-----------------
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws. Notwithstanding the provisions of this Section 13.5, Awards to
any such individuals who are Reporting Persons shall be made in accordance with
the other provisions of the Plan, except as otherwise permitted by Rule 16b-3
under the Exchange Act or any successor rule.
<PAGE>
-18-
13.6. Amendment of Award. The Committee may amend, modify, terminate or
------------------
waive any condition or provision of any outstanding Award, including
substituting therefor another Award of the same or a different type, changing
the date of exercise or realization and converting an Incentive Stock Option to
a Nonqualified Stock Option; provided, however, that the Committee may not
(except in accordance with Section 13.8) increase the number of Shares subject
to any outstanding Award or decrease the Option or award price of the Award.
The Participant's consent to any such action shall be required unless the
Committee determines that the action, taking into account any related action,
would not materially and adversely affect the Participant.
13.7. Acceleration of Vesting; Waiver of Restrictions. Notwithstanding
------------------------------------------------
any provision of the Plan or any Award Documentation to the contrary, the
Committee, in its sole discretion, shall have the power at any time to (a)
accelerate the vesting or exercisability of any Award granted under the Plan,
including, without limitation, acceleration to such date that would result in
such Awards becoming immediately vested or exercisable, or (b) waive any
restrictions of any Award granted under the Plan.
13.8. Changes in Stock; Adjustment of Awards. In the event of a stock
--------------------------------------
dividend, stock split or other change in corporate structure or capitalization
affecting the Common Stock or any other transaction (including, without
limitation, an extraordinary cash dividend) which, in the determination of the
Committee, affects the Common Stock such that an adjustment is required in order
to preserve the benefits or potential benefits intended to be made available
under the Plan, then the Committee shall equitably adjust any or all of (a) the
number and kind of Shares in respect of which Awards may be made under the Plan,
(b) the number and kind of Shares subject to outstanding Awards, and (c) the
Option or grant price with respect to any of the foregoing, provided that the
number of Shares subject to any Award shall always be a whole number. In the
event of any merger, consolidation, dissolution or liquidation of the
Corporation, the Committee, in its sole discretion, may, as to any outstanding
Awards, make such substitution or adjustment in the aggregate number of Shares
reserved for issuance under the Plan and in the number and purchase price (if
any) of Shares subject to such Awards as it may determine, make outstanding
Awards fully exercisable, or amend or terminate such Awards upon such terms and
<PAGE>
-19-
conditions as it shall provide (which, in the case of the termination of the
vested portion of any Award, shall require payment or other consideration which
the Committee deems equitable in the circumstances). Notwithstanding the
foregoing, in the case of an Award intended to qualify as an Incentive Stock
Option or to qualify for the Performance-Based Exception, adjustment shall be
made under this Section 13.8 only to the extent, if any, consistent with
continued qualification of the Award as an Incentive Stock Option or continued
qualification of the award for the Performance-Based Exception, as the case may
be.
13.9. Change In Control. Unless otherwise provided in a Participant's
------------------
Award Documentation, upon the occurrence of a Change in Control of the
Corporation, (a) any and all Options and SARs granted hereunder shall become
immediately exercisable, and shall remain exercisable through their entire term;
(b) any Restricted Periods and restrictions imposed on Restricted Stock shall
lapse; and (c) the target payout opportunities attainable under all outstanding
Awards of Restricted Stock and Performance Shares shall be deemed to have been
fully earned for the entire Performance Period(s) as of the effective date of
the Change in Control, and the vesting of all Awards shall be accelerated as of
the effective date of the Change in Control.
13.10. Dividend Equivalent Rights. The Committee may, in its discretion,
---------------------------
provide that any dividends declared on Shares subject to an Award, and which
would have been paid with respect to such Shares had they been owned by a
Participant, be paid to the Participant in Shares, cash or a combination of cash
and Shares, as specified in the Award Documentation.
14. Miscellaneous.
-------------
14.1. No Right to Employment. No person shall have any claim or right to
----------------------
be granted an Award, and the grant of an Award shall not be construed as giving
a Participant the right to continued employment. The Corporation and its
Affiliates expressly reserve the right at any time to terminate the employment
of a Participant free from any liability or claim under the Plan, except as may
be expressly provided in the applicable Award. Except as specifically provided
by the Committee in any particular case, the loss of existing or potential
profit in Awards granted under the Plan shall not constitute an
<PAGE>
-20-
element of damages in the event of termination of employment of a Participant,
even if termination is in violation of an obligation of the Corporation or an
Affiliate to the Participant, by contract or otherwise.
14.2. No Rights as a Stockholder. Subject to the provisions of the
--------------------------
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any Shares to be distributed under the Plan
until he or she becomes the holder thereof. A Participant to whom Common Stock
is awarded shall be considered the holder of the stock at the time of the Award
except as otherwise provided in the applicable Award.
14.3. No Fractional Shares. No fractional Shares shall be issued under
--------------------
the Plan, and cash shall be paid in lieu of any fractional Shares in settlement.
14.4. Unfunded Plan. The Plan shall be unfunded, shall not create (or be
-------------
construed to create) a trust or a separate fund or funds, and shall not
establish any fiduciary relationship between the Corporation and any Participant
or other person.
14.5. Successors and Assigns. The Plan shall be binding on all successors
----------------------
and assigns of the Participant, including without limitation the Participant's
Designated Beneficiary or any receiver or trustee in bankruptcy or
representative of the Participant's creditors.
14.6. Amendment of Plan. The Board may amend, suspend or terminate the
-----------------
Plan or any portion thereof at any time; provided, however, that no amendment
which requires stockholder approval in order for those Awards that are intended
to be exempt under Rule 16b-3 under the Exchange Act (or any successor rule) to
be so exempt or for those Awards that are intended to qualify under the
Performance-Based Exception to so qualify shall be effective unless approved by
the requisite vote of the Corporation's stockholders. The Committee may make
non-material amendments to the Plan.
14.7. Governing Law. The provisions of the Plan shall be governed by and
-------------
interpreted in accordance with the laws of the Commonwealth of Massachusetts.
<PAGE>
EXHIBIT 10(E)
BANKBOSTON CORPORATION
AND ITS SUBSIDIARIES
PERFORMANCE RECOGNITION OPPORTUNITY PLAN
(as amended and restated effective February 24, 1997 and as further amended
through June 9, 1998)
1. Purpose. The purpose of the BankBoston Corporation and its Subsidiaries
Performance Recognition Opportunity Plan (the "Plan") described herein is to
establish a corporate-wide umbrella incentive/bonus plan for all non-base salary
compensation plans and awards and to reward exempt-level employees of BankBoston
Corporation (the "Company") and Participating Subsidiaries for job performance
during the year.
2. Definitions. Except where the context otherwise indicates, as used
herein:
2.1. BKB means BankBoston, N.A., a national banking association.
---
2.2. Board of Directors or Board shall mean the Board of Directors of the
---------------------------
Company.
2.3. Change in Control shall be deemed to have occurred if the conditions
-----------------
set forth in any one of the following paragraphs shall have been satisfied:
(I) There is an acquisition of control of the Company as defined in
Section 2(a)(2) of the Bank Holding Company Act of 1956, or any
similar successor provision, as in effect at the time of the
acquisition; or
(II) Continuing Directors constitute two-thirds or less of the
membership of the Board, whether as the result of a proxy
contest or for any other reason or reasons; or
(III) Any Person is or becomes the beneficial owner (as that term is
defined in Rule 13d-3 of the Securities Exchange Act of 1934, as
amended), directly or indirectly, of securities of the Company
representing twenty-five percent (25%) or more of the combined
voting power of the Company's then outstanding voting
securities; or
(IV) There is consummated a merger or consolidation (or similar
transaction) of the Company or any direct or indirect subsidiary
of the Company with any other company, other than (i) a merger
or consolidation (or similar transaction) which would result in
the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving or parent entity) directly or
1
<PAGE>
indirectly sixty percent (60%) or more of the combined voting
power of the voting securities (entitled to vote generally for
the election of directors) of the Company or such surviving or
parent entity outstanding immediately after such merger or
consolidation and which would result in those persons who are
Continuing Directors immediately prior to such merger or
consolidation constituting more than two-thirds (2/3) of the
membership of the Board or the board of such surviving or parent
entity immediately after, or subsequently at any time as
contemplated by or as a result of, such merger or consolidation
(or similar transaction) or (ii) a merger or consolidation
effected to implement a recapitalization or restructuring of the
Company or any of its subsidiaries (or similar transaction) in
which no Person acquired twenty-five percent (25%) or more the
combined voting power of the Company's then outstanding
securities; or
(V) The stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets (or any transaction having a similar effect),
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity in which
the holders of the voting securities (entitled to vote generally
for the election of directors) of the Company immediately prior
to such sale of disposition continue to own proportionally and
beneficially directly or indirectly sixty percent (60%) or more
of the combined voting power of the voting securities (entitled
to vote generally for the election of directors) of such entity
outstanding immediately after such sale or disposition and which
would result in those persons who are Continuing Directors
immediately prior to such sale or disposition constituting more
than two-thirds (2/3) of the membership of the Board or the board
of such entity immediately after, or subsequently at any time as
contemplated by or as a result of such sale or disposition.
2.4. Office of Chief Executive Officer ("OCEO") shall mean the Chairman,
------------------------------------------
President and any Vice Chairman of the Company and any other officer designated
by the Chairman or President from time to time as being a member of the OCEO.
The OCEO may act through such one or more of its members as the Chairman or
President may designate.
2.5. Committee means the Compensation Committee of the Board of Directors.
---------
2.6. Company shall mean BankBoston Corporation and (except in determining
-------
whether or not any Change in Control of the Company has occurred in connection
with such succession) any successor to its business and/or assets which assumes
or agrees to continue this Plan, by operation of law or otherwise.
2
<PAGE>
2.7. Comparable Banking Institutions are those companies designated on a
-------------------------------
schedule captioned "Table of Comparable Banking Institutions" as adopted by the
Committee as part of the Guidelines.
2.8. Continuing Director shall mean any director (i) who has continuously
-------------------
been a member of the Board of Directors of the Company since not later than the
date (1) the Company enters into any agreement, the consummation of which would
result in the occurrence of a Change in Control, (2) the Company or any Person
publicly announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control, or (3) any Person becomes the
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act, as
amended), directly or indirectly, of securities of the Company representing
fifteen percent (15%) or more of the combined voting power of the Company's then
outstanding securities (entitled to vote generally for the election of
directors), or (ii) who is a successor of a director described in clause (i), if
such successor (and any intervening successor) shall have recommended or elected
to succeed a Continuing Director by a majority of the then Continuing Directors.
2.9. Eligible Employee means, for a Performance Year, for Category III
-----------------
plans and awards, any exempt-level employee of the Company, BKB or any of the
Participating Subsidiaries who is determined to be eligible under the Plan by
the OCEO.
2.10. Guidelines means the general guidelines for interpreting and
----------
administering the Plan as approved from time to time by the Board of Directors,
the Committee, the OCEO, or Human Resources as the case may be.
2.11. Human Resources means the Human Resources function of BKB.
---------------
2.12. Participating Subsidiary means a corporation or other entity in which
------------------------
the Company owns, directly or indirectly or has the power to vote or cause to be
voted, stock or other ownership interests
3
<PAGE>
representing more than 50 percent of the total combined voting power and which
has been approved for participation in the Plan by the OCEO.
2.13. Performance Year means a fiscal year of the Company while the Plan
---------------
is in effect.
2.14. Person shall have the meaning given in Section 3(a)(9) of the
------
Securities Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof; however, a Person shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, (iii) an
underwriter temporarily holding securities pursuant to a registered offering of
such securities in accordance with an agreement with the Company, or (iv) a
company owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportion as their ownership of stock of the Company.
2.15. Pool Allocation Determination means the criteria by which the OCEO
-----------------------------
allocates amounts in the PRO Pool to the business or administrative groups of
Participating Subsidiaries.
2.16. PRO Pool means the pool established for a Performance Year pursuant
--------
to 5.3.2.
4
<PAGE>
3. Administration
--------------
3.1. Authority to-Interpret the Plan and Adopt Policy. The Plan shall be
------------------------------------------------
administered by Human Resources. The OCEO shall have the power to interpret the
Plan and adopt and amend rules and regulations thereto. Interpretations of the
OCEO, including, but not limited to the severability of any and all of the
provisions hereof shall be final, conclusive and binding on all Eligible
Employees and any person claiming under or through any Eligible Employee.
3.2. Approvals by the Board of Directors and the Committee. Any matter
-----------------------------------------------------
under the Plan which requires adoption or approval by the Board of Directors
shall generally be submitted to the Board of Directors after the approval of the
Committee. Recommendations concerning any such matters shall generally be made
to the Committee by the OCEO. Any matter under the Plan which requires
adoption or approval by the Committee shall generally be submitted to the
Committee after the approval of the OCEO upon the recommendation of Human
Resources.
4. Categories of Non-base -Salary Compensation Plans and Awards.
------------------------------------------------------------
4.1. Category I. Includes hiring bonuses, instant awards, and special
----------
short-term sales performance programs and contests.
4.2. Category II. Includes plans of fee based businesses, and formula
-----------
bonuses for sales and other revenue producing positions. For inclusion in this
category, plans must establish performance goals, must be reviewed prior to the
beginning of a Performance Year to determine appropriateness in light of
strategic plan goals, and must be reviewed quarterly against established goals
prior to pay out. These plans will be reviewed by the appropriate business
executive and Human Resources prior to implementation and approved by the OCEO.
4.3. Category III. Includes incentive/bonus plans funded by the PRO Pool
------------
and includes annual performance awards.
5
<PAGE>
5. Funding Mechanisms for each Category.
------------------------------------
5.1. Category I. The plans under this Category will be funded by
-----------
budgets proposed annually by the appropriate business executive and approved by
the OCEO.
5.2. Category II. The plans under this Category will be funded based
------------
upon the performance of each business unit covered and approved by the OCEO.
5.3. Category III. The plans and awards under this Category will be funded
------------
through the PRO Pool as determined in Sections 5.3.1 through 5.3.5.
5.3.1. Procedures Relating to Determination of the PRO Pool. The
----------------------------------------------------
following shall be adopted as part of the Guidelines:
(a) The OCEO, upon recommendation of Human Resources, shall adopt
and recommend to the Compensation Committee the appropriate
business targets and performance measures to be used to
determine the PRO Pool for a Performance Year, and
(b) The Committee shall adopt the Table of Comparable Banking
Institutions.
In general these items shall be adopted during or before the first quarter of
the Performance Year and may be changed by the Committee during the Performance
Year.
5.3.2. Determination of the PRO Pool. The PRO Pool available for a
-----------------------------
Performance Year shall be determined by Human Resources and approved by the
OCEO, giving due regard to the accomplishment of the business targets and
performance measures determined under 5.3.1(a) and the Company's performance in
relation to Comparable Banking Institutions.
5.3.3. Responsibilities of Finance. As soon as practicable after the
---------------------------
close of a Performance Year, the Finance Group of BKB will provide Human
Resources with an assessment of the Company's performance relative to the
business targets and performance measures determined under Section 5.3.1(a). The
Finance Group will also provide Human Resources with pertinent financial
6
<PAGE>
information (which may include calculations of earnings per share and return on
equity and information on capital adequacy, asset quality and market
perception) for the latest fiscal year for the Company and for each of the
banking institutions listed on the Table of Comparable Bank Institutions in
effect. Calculations and information with respect to Comparable Banking
Institutions will be based upon published financial data of such Comparable
Banking Institutions giving consideration to the appropriate treatment of
unusual or nonrecurring items of income or expense in making performance
comparisons under the Plan.
5.3.4. Responsibilities of Human Resources, the OCEO and the
-----------------------------------------------------
Committee. After receiving the information and calculations referred to in
- ---------
5.3.3., Human Resources will compare the Company's performance relative to the
achievement of the business targets and performance measures determined under
Section 5.3.1(a), and taking into account the Company's performance relative to
the Comparable Banking Institutions, as well as competitive bonus data from
market surveys, will determine the amount of PRO Pool for the Performance Year.
Human Resources will then present to the OCEO for their approval the
recommended amount of the PRO Pool, together with comparisons of the Company's
performance relative to Comparable Banking Institutions and the Company's
achievement of the business targets and performance measures under Section
5.3.1(a).
5.3.5. Allocation of the PRO Pool. The PRO Pool shall be allocated
--------------------------
to the business and administrative groups of the Participating Subsidiaries
pursuant to the OCEO's Pool Allocation Determination. Amounts so allocated shall
be used for the payment of any one or more types of bonus, incentive, commission
or similar non-base salary compensation made pursuant to plans established by
the various group or divisions of each Participating Subsidiary.
7
<PAGE>
6. Determination and Approval of Awards.
------------------------------------
6.1. Category I. The appropriate business executive, or the officer or
----------
committee designated in the plan, shall determine and approve awards and
payments made pursuant to plans under this Category.
6.2. Category II. The business executive, or the officer or committee
-----------
determined under the plan, shall determine and approve awards and payments made
pursuant to plans under this Category.
6.3. Category III. The determination and approval of awards under this
------------
Category shall be as set forth in Sections 6.3.1 through 6.3.5.
6.3.1. Determination of Performance Awards. During the first
-----------------------------------
quarter of a Performance Year, the OCEO, Human Resources and the business
executives will prepare a schedule indicating (i) the name of each Eligible
Employee proposed for an award and (ii) his or her Performance Award for the
previous Performance Year. In making a recommendation concerning whether an
Performance Award for a Performance Year will be made to an Eligible Employee,
and, if so, in determining the amount of such award, consideration shall be
given to one or more of the following factors: (i) the level of responsibility
of the Eligible Employee, (ii) the personal contribution to the Company and/or
the Participating Subsidiary made by the Eligible Employee, (iii) the
performance of the business group or unit in which the Eligible Employee works,
(iv) any minimum and average award guidelines established by Human Resources and
(v) market bonus levels for comparable positions. In making such
recommendations, the OCEO, Human Resources and the business executives shall
have discretion to allocate up to as much as all, and as little as none, of such
pool to any Eligible Employee.
6.3.2. Approval of Awards. After all the steps contemplated in 6.3.1
------------------
have been completed, the OCEO shall approve the schedule of Eligible Employees
receiving awards and the amount of awards for each, except that (i) the
Committee shall approve the amount of the awards, if any, for those senior
executives of the Participating Subsidiaries so designated by it from time to
time, and (ii) the Committee shall recommend to the Board of Directors for
approval the amount of award, if any, for any senior officer who is also a
director of the Company or such other officer or officers as the
8
<PAGE>
Committee may recommend and that the Board does so approve. Awards may be
approved by the OCEO, the Committee and the Board of Directors for up to as many
as all or as few as none of the persons listed on the schedule of Eligible
Employees and awards shall be in such amounts as the OCEO, the Committee and the
Board of Directors, respectively, approves.
6.3.3. Undistributed Amounts. The aggregate awards approved in a
---------------------
Performance Year may be less than all of the available PRO Pool for a
Performance Year. The undistributed amount in such pool shall be reallocated to
the general funds of the Company.
6.3.4. Announcement and Timing of Awards. Awards shall be announced
---------------------------------
in writing in the year following the Performance Year to which the awards relate
promptly after the amount of the awards have been approved by the OCEO, the
Committee or the Board of Directors, as the case may be. No Eligible Employee
shall be entitled to any award under the Plan unless and until the date on which
a written announcement of an award has been delivered to him or her or to his or
her beneficiary.
6.3.5. Awards Available Under Special Circumstances. Performance
--------------------------------------------
Awards may be made to an Eligible Employee (or his or her beneficiary in the
event of his or her death during a Performance Period) if the employee is an
Eligible Employee during a Performance Year and during that Performance Year:
(i) dies or becomes totally and permanently disabled; (ii) retires, including a
qualified early retirement, pursuant to the provisions of any pension or
retirement plan of the Company, BKB or any of the other Participating
Subsidiaries in which he or she is a participant; (iii) is on a leave of absence
from the Company, BKB or any of the other Participations Subsidiaries, which
leave is approved at any time by Human Resources for purposes of the Plan; or
(iv) terminates service, which termination is approved at any time by Human
Resources for purposes of the Plan. Under this provision, awards for the
Performance Year may be made in such amounts as the OCEO, the Committee or the
Board of Directors, as the case may be, deems appropriate under the
circumstances.
6.4. Awards Upon a Change in Control. Notwithstanding Section 6.3.4 or
-------------------------------
any other provision of the Plan, within 30 days following a Change in Control,
the Company, or any successor (whether
9
<PAGE>
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, shall pay to
each employee who was, immediately prior to such Change in Control, an Eligible
Employee, a lump sum amount, in cash, equal to the sum of:
(a) any unpaid incentive compensation, awards or bonuses awarded to
the Eligible Employee in accordance with the Company's then current award
determination process under the Plan, with respect to the completed
Performance Year preceding such Change in Control; and
(b) a pro rata portion to the date of such Change in Control of the
aggregate value of any unpaid incentive compensation, awards or bonuses
allocated to, or projected for, the Eligible Employee in accordance with
the Company's then current award determination process under the Plan, with
respect to the Performance Year in which such Change in Control occurs.
7. Modifications and Termination.
-----------------------------
7.1. In General. The Board of Directors may, generally upon the
----------
approval of the Committee and the recommendation of the OCEO, or the Committee
may, generally upon the recommendation of the OCEO, amend, modify, suspend or
terminate in whole or in part, and, if terminated, may reinstate, any or all of
the provisions of the Plan from time to time or repeal the Plan entirely or
direct the discontinuance of granting awards hereunder either temporarily or
permanently. Notwithstanding the foregoing, no such amendment, modification,
suspension or termination made after a Change in Control shall adversely affect,
with respect to such Change in Control, the amounts payable as set forth in
Section 6.4 or any other obligation, under the Plan, of the Company or any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company.
7.2. Effect on Previously Granted Awards. Amendment of the Plan shall
-----------------------------------
have
10
<PAGE>
no effect on the terms and conditions of awards outstanding for which a
Participant has received written notification for a Performance Year.
8. General Provisions.
------------------
8.1. Employment Rights. Neither the qualification or designation of any
-----------------
person as an Eligible Employee for a Performance Year nor the grant of an award
hereunder to any person shall give such person any right to be retained in the
employ of one or more of the Company, BKB or any of the other Participating
Subsidiaries or any rights with respect to any other Award Years.
8.2. Non-entitlement to an Award. The fact that a person is in a salary
---------------------------
grade of officers generally eligible for an award shall not constitute
entitlement to an award for any Performance Year.
8.3. Assignment, Pledge, etc, Prohibited. Except to the extent otherwise
-----------------------------------
specifically provided in the Plan, no payment of an award pursuant to the Plan,
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, hypothecation, encumbrance or charge, and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, hypothecate, encumber or
charge the same shall be void.
8.4. Other Plans Not Prohibited. The Plan is not intended to and shall not
--------------------------
preclude the establishment or operation by the Company, BKB or any of the other
Subsidiaries, or the grant, award or payment by the Company, BKB, or any of the
other Subsidiaries of any right, benefit or amount under, any thrift, savings,
investment, stock purchase, stock option, profit sharing, pension, retirement,
medical, life or other insurance, or other non-bonus benefit or incentive plan,
arrangement or award for any employee or employees, whether or not such officer
or officers are at the same time an Eligible Employee or Eligible Employees in
the Plan. Any such plan, arrangement or award, other than the Plan, referred to
in this section may be authorized and payments made thereunder independent of
and in addition to the Plan.
8.5. Awards Not Considered Salary. Unless such other plans provide to the
----------------------------
11
<PAGE>
contrary, the amounts of awards under the Plan shall not be included in
calculations of salary for the purpose of determining retirement or pension
benefits, insurance benefits or other benefit plan computations.
8.6. Governing Law. The Plan and all actions taken hereunder shall be
-------------
governed by the laws of the Commonwealth of Massachusetts.
12
<PAGE>
EXHIBIT 10(J)
DOMESTIC RELOCATION POLICY
--------------------------
EFFECTIVE DATE OF POLICY: JANUARY 1, 1999
THIS POLICY IS FOR INTERNAL USE ONLY AND IS NOT TO BE DISTRIBUTED EXTERNALLY.
It is the Policy of the bank to provide eligible employees with relocation
assistance provided they meet the following criteria:
. They are exempt internal transfers relocating at the Bank's request.
. They are exempt new hires relocating within the United States
at the Bank's request.
The various provisions of this Policy may be provided in whole or in part. The
granting of benefits in excess of the provisions of this Policy must be pre-
approved in writing as an exception by the appropriate Director of Employment.
DEFINITIONS
- -----------
. Temporary Relocation: The employee is expected to relocate back to the
place of origin or to another assignment within 1 year. No relocation
benefits will be granted for temporary relocatees without approval from a
Director of Employment.
. Long Term Relocation: The employee's new assignment is expected to last
longer than one year.
. Homeowner: A relocating employee owning his/her primary residence at the
time an offer is extended.
. Renter: A relocating employee who does not own his/her primary residence
when offer is extended.
ELIGIBILITY
- -----------
Relocation benefits may be provided if the distance between the new work
location and the former residence is 50 miles or greater than the distance
between the former residence and the former work location.
RESPONSIBILITY
- --------------
The Corporate Relocation Manager and the Human Resources Representative will
assist Managers in the development of a relocation package best-suited to an
employee's needs, according to the appropriate provisions by grade level and
homeowner/renter status. A formal commitment letter to the employee will be
generated and signed by the Human Resources Representative. A written package,
which includes cost estimates, will be prepared by the Corporate Relocation
Manager BEFORE a commitment is made to the relocating employee.
------
RELOCATION BENEFITS MAY NOT BE COMMUNICATED TO A RELOCATEE, BY ANY GRADE LEVEL
MANAGER, WITHOUT THE PRIOR APPROVAL OF THE APPROPRIATE HUMAN RESOURCES
REPRESENTATIVE AND THE CORPORATE RELOCATION MANAGER.
THE COST OF GRANTING RELOCATION BENEFITS CAN BE EXTREMELY HIGH AND PRIOR
APPROVAL IS ABSOLUTELY REQUIRED.
1
<PAGE>
Benefits may not be communicated which are not specifically stated in this
policy. It is the responsibility of the employee's supervisor to ensure that
expenses are in accordance with Policy and that proper receipts and
documentation accompany the appropriate reimbursement forms.
The Corporate Relocation Manager(CRM)is responsible for administering this
Policy and for providing estimated costs, advice and assistance to hiring
managers. The CRM is also responsible for approving the specific relocation
benefits granted to each relocating employee to ensure that proper approvals
have been obtained and that they are within policy.
Employees are expected to follow standards of reasonableness when incurring
relocation expenses and must report such expenses promptly and accurately.
INTERPRETATION, CANCELLATION OR AMENDMENT
- -----------------------------------------
The Bank retains the right to interpret or apply any provisions of this Policy
with respect to any situation and may at any time cancel in whole or in part or
amend any of its provisions.
EMERGENCY LEAVE
- ---------------
An employee on temporary relocation/assignment may be reimbursed by the Bank for
economy air fare for a trip due to the death of an immediate family member or
domestic partner. Extreme medical reasons may also be considered. Final approval
for such Bank-paid travel rests with the employee's Supervisor.
RESIGNATION
- -----------
If an employee voluntarily resigns from the Bank while in the process of
relocating or within one year of relocating to the new location, that employee
will forfeit the right to receive reimbursement from the Bank for expenses
incurred. The relocatee will be required to repay funds already received from
the Bank as reimbursement for relocation expenses and funds paid by the Bank to
home buying services on his/her behalf.
TERMINATION
- -----------
If an employee is involuntarily terminated by the Bank (other than for violation
of company policy), during the relocation process or on temporary assignment,
the Bank may pay actual expenses of returning family or domestic partner,
household goods and personal effects to point of origin, provided the move
occurs within sixty (60) days of termination. If moving to a location other
than point of origin, reimbursement of actual cost is not to exceed cost of
shipment to point of origin. No other expenses will be reimbursed. Employees
who do not ship their household possessions and personal effects do not receive
reimbursement in lieu of such shipments.
If an employee is terminated FOR CAUSE during the relocation process or on
---------
temporary assignment, the Bank will NOT pay expenses to return employee to point
---
of origin.
EXCLUSIONS
- ----------
This policy does not cover temporary training assignments of one year or less.
Staff members who seek another position through the job posting system requiring
relocation will not be eligible for Domestic Relocation benefits.
EXPIRATION
- ----------
Relocation benefits expire one year and one day from start date of new
assignment except for benefits for which other time frames are expressly stated.
2
<PAGE>
ADMINISTRATION
- --------------
The Corporate Relocation Manager(CRM)will provide consulting services to
Managers and Human Resources Representatives. The CRM will provide operational
details to relocating employees and the necessary forms and literature to be
used for third-party assistance and reimbursements. The CRM will also process
all benefits.
EXCEPTIONS
- ----------
Sections of this Policy clearly identify the organizational level required to
make exceptions. All other exceptions, including grade level eligibility, must
have written authorization from the Director of Employment. The Corporate
Relocation Manager must have written authorization to implement any exceptions
granted.
ALLOCATION OF COSTS
- -------------------
Costs incurred by the Bank under this Policy will be charged to the
Responsibility Center where the employee is to be assigned upon relocation.
REIMBURSABLE EXPENSES
- ---------------------
The Bank may reimburse the employee for expenses in accordance with the
agreement between the hiring Manager, Human Resources Representative, Corporate
Relocation Manager, and the employee. Reimbursable expenses are as follows:
3
<PAGE>
HOUSEHUNTING TRIP
- -----------------
ELIGIBILITY:
------------
EXEMPT GRADE HOMEOWNER RENTER
------------ --------- -------
MPP 8 Days Max 5 Days Max
30-32 8 Days Max 3 Days Max
26-29 5 Days Max 3 Days Max
Mgmt. Trainee - see separate section
The Bank may reimburse direct-route economy airfare or mileage and reasonable
expenses for meals, lodging, telephone and ground transportation for the
employee and spouse or domestic partner for ONE househunting trip to the new
---
location. Direct hotel billing to the Bank is limited to room and tax only.
Meals and other reimbursable expenses must be treated separately and cannot be
charged to the hotel bill. Reasonable baby-sitting and kenneling costs may also
be paid.
TRANSFER OF EMPLOYEE AND FAMILY
- -------------------------------
ELIGIBILITY: ALL EXEMPT EMPLOYEES
-----------
The Bank may reimburse reasonable expenses for meals, lodging and transportation
incurred by the employee and family or domestic partner when transferring from
the former to the new location. Such costs are paid not only for the employee's
spouse or domestic partner and children but also for other family members
normally residing in the employee's household. The Bank may pay direct-route
economy fares or, if using personal automobile, the standard Bank mileage
allowance for the most direct route.
EMPLOYEE DEPARTURE EXPENSES
- ---------------------------
ELIGIBILITY: ALL EXEMPT EMPLOYEES
-----------
Prior to departure from the former location, temporary housing will be provided
for up to two nights maximum.
NOTE: ALL TRAVEL ARRANGEMENTS, INCLUDING AIRLINE TICKETS, AUTO RENTALS AND
HOTEL RESERVATIONS MUST BE MADE THROUGH A TRAVEL COORDINATOR IN THE TRAVEL
DEPARTMENT AT THE HEAD OFFICE (617-434-2501).
TRANSPORTATION OF HOUSEHOLD POSSESSIONS
- ---------------------------------------
ELIGIBILITY:
-----------
EXEMPT GRADE
------------
MPP
30-32
26-29
Mgmt. Trainee - see separate section
The Bank may pay reasonable costs for packing, insuring and transporting the
employee's household possessions from the permanent residence at the former
location to EITHER a temporary or permanent residence at the new location. The
------
transportation cost of shipping household pets as accompanying baggage may also
be paid.
The Bank may pay for the transportation of bulky items such as those listed
below with approval of the Corporate Relocation Manager:
. Utility Sheds
. Garden Tractors
4
<PAGE>
. Pool Tables
. Riding Lawnmowers
THE BANK WILL NOT PAY FOR TRANSPORTATION OF FIREARMS, TRAILERS, BOATS, BUILDING
---
SUPPLIES, FARM IMPLEMENTS, HORSES/LIVESTOCK, SHRUBS/PLANTS, FIREWOOD, CAMPERS,
RECREATIONAL VEHICLES, FROZEN FOODS OR OTHER PERISHABLES.
STORAGE
- -------
ELIGIBILITY:
------------
EXEMPT GRADE HOMEOWNER RENTER
------------ --------- ------
MPP 60 Days 60 Days
30-32 60 Days 30 Days
26-29 30 Days N/A
Mgmt. Trainee - see separate section
The Bank may pay for storage of household effects, including all handling and
insurance, if required at the new location. The Bank may also pay for boarding
of household pets with approval of the Corporate Relocation Manager.
When temporarily relocated (for less than one year), household effects that are
not shipped and cannot be left in the home at the former location may be stored
for the period of assignment at Bank expense. Short term training assignments
do not qualify for storage of household goods. Exceptions for additional
storage time must be approved by the Corporate Relocation Manager.
NOTE: All arrangements for moving and storage of household possessions and
personal effects MUST BE MADE THROUGH THE RELOCATION DEPARTMENT AT THE HEAD
OFFICE (617-434-8632).
INSURANCE
- ---------
ELIGIBILITY:
-----------
EXEMPT GRADE
------------
MPP
30-32
26-29
Mgmt. Trainee - see separate section
If the transportation of household goods is approved, the Bank, along with the
carrier selected by the Relocation Department, will provide insurance protection
up to full replacement value for all shipment articles listed by the employee on
the carrier inventory. The Bank will not be responsible for items not listed on
the carrier inventory. Qualified appraisals must be provided to the carrier for
individual items valued in excess of $5,000.
Because of ICC regulations, the following items are EXCLUDED FROM COVERAGE:
DOCUMENTS, CASH, COLLECTIBLES, JEWELRY, WATCHES, AND PRECIOUS STONES.
AUTOMOBILES
- -----------
Eligibility:
-----------
EXEMPT GRADE
------------
MPP
30-32
26-29
Mgmt. Trainee - see separate section
5
<PAGE>
The Bank may pay the standard mileage allowance for driving a maximum of two
automobiles to the new location. In cases where the distance exceeds 500 miles
between the former and the new residence, the Bank may pay the cost of
transporting a maximum of two (2) automobiles to the new location.
TEMPORARY HOUSING
- -----------------
ELIGIBILITY:
------------
EXEMPT GRADE HOMEOWNER RENTER
------------ --------- ------
MPP 60 Days 60 Days
30-32 60 Days 30 Days
26-29 30 Days N/A
Mgmt. Trainee - see separate section
If the employee is required to report to the new assignment prior to finding
permanent housing, the Bank may provide temporary housing for the employee and
family or domestic partner. A corporate apartment may be provided if available.
However, if housed in a corporate apartment, expenses for food and laundry will
not be reimbursed. If a corporate apartment is unavailable, hotel
accommodations may be arranged and expenses for food and laundry will be
reimbursed. Temporary living expenses in accordance with IRS guidelines may
begin as of the date the employee reports to the new location.
Corporate apartments must be treated with the same respect as other Bank assets.
Willful damage may result in disciplinary action. Expenses for repair of
damages may be charged directly to the employee.
NOTE: All arrangements for temporary housing MUST BE MADE THROUGH THE
RELOCATION DEPARTMENT AT THE HEAD OFFICE (617-434-8632).
6
<PAGE>
TRIPS HOME
- ----------
ELIGIBILITY:
------------
EXEMPT GRADE HOMEOWNER
------------ ---------
MPP 4 Trips Max
30-32 4 Trips Max
26-29 2 Trips Max
Mgmt. Trainee - see separate section
Trips home may be authorized when an employee precedes his/her family or
domestic partner to the assignment location and the nature and location of the
assignment makes them feasible. Reasonable expenses, including economy air fare
incurred for visits home, are reimbursed and must be taken at intervals of not
less than every other week. The cost of a trip to conclude a home sale should
be coordinated with authorized trips home.
CLOSING COSTS NEW LOCATION/FORMER LOCATION
- ------------------------------------------
ELIGIBILITY:
------------
EXEMPT GRADE
------------
MPP
30-32
26-29
Mgmt. Trainee - see separate section
The Bank may pay reasonable expenses of certain closing costs for the purchase
of a primary residence at the new location and the sale of the current primary
residence, including: survey charges, title charges, reasonable attorney's
fees, home inspection, termite inspection, mortgage application fee, recording
and transfer charges, credit report and appraisal fee. The settlement statement
provided by the lender at the closing must be submitted for reimbursement of
closing costs.
DUPLICATE CARRYING CHARGES
- --------------------------
ELIGIBILITY:
------------
EXEMPT GRADE HOMEOWNER
------------ ---------
MPP 60 Days Max
30-32 60 Days Max
26-29 60 Days Max
Mgmt. Trainee - see separate section
The Bank may reimburse duplicate carrying charges up to a maximum of two months
on an unoccupied or unrented primary residence owned by the employee at the
former location, provided the employee has secured a permanent residence at the
new location, has legal possession of two residences and is incurring duplicate
housing expenses.
Carrying charges include: real estate taxes, property insurance, utilities and
the interest portion of the lesser of the two mortgages. Reimbursement of these
expenses will be pro-rated on a daily basis and will commence as of the date of
possession of a permanent residence at the new location. The Bank will not
reimburse the portion of the mortgage payment applied toward the principal or
the costs of maintenance, repairs, improvements or security.
7
<PAGE>
PRE-MARKETING ASSISTANCE
- ------------------------
ELIGIBILITY: ALL EXEMPT EMPLOYEES
------------
The Bank may provide pre-marketing consulting services through a Relocation
Management Consulting Company. This service is designed to reduce the length of
time the former residence is on the market and obtain the maximum sale price for
the employee. The Corporate Relocation Manager may make the necessary
arrangements.
HOME FINDING ASSISTANCE
- -----------------------
ELIGIBILITY: ALL EXEMPT EMPLOYEES
------------
The Corporate Relocation Manager may provide home finding assistance, when
necessary, to all relocating employees.
SALE OF PRIMARY RESIDENCE
- -------------------------
ELIGIBILITY: CONTACT THE CORPORATE RELOCATION MANAGER
------------
When an employee who owns their primary residence is relocated, the Bank may
provide home-sale assistance at the discretion of the Manager, Human Resources
Representative and the Corporate Relocation Manager. Primary residence is
defined as a private or semi-private dwelling, or a condominium, owned by the
employee. The Bank will not provide assistance in disposing of secondary tracts
of land, vacation homes or property held primarily for investment purposes.
RETAINED PRIMARY RESIDENCE
- --------------------------
ELIGIBILITY:
-----------
EXEMPT GRADE
------------
MPP only
Internal transfers on temporary assignment (under 1 year) who own their home at
the time of transfer are encouraged to retain their primary residence. If the
employee decides to lease the home, the Bank may reimburse for rental management
services for the duration of the temporary assignment and for reasonable
increases in insurance premiums resulting from tenant/vs. homeowner coverage
and/or occupied/vs. unoccupied coverage.
Such services do not include cost of property repair or maintenance. Should an
employee be unable to lease his/her primary residence before renting at the new
location, the Bank may reimburse the employee for a maximum of two months
commencing on the effective date of the lease at the new location or until the
employee leases the home (whichever occurs first).
BRIDGE LOAN
- -----------
ELIGIBILITY: CONTACT THE CORPORATE RELOCATION MANAGER
------------
If an employee buys a home at the new location before selling the home at the
former location, a bridge loan may be secured. BankBoston will obtain opinions
of value from at least two real estate brokers. A lender chosen by BankBoston
may then loan a percentage of the equity based on current market conditions.
However, if broker's opinion of the value is being used, BankBoston reserves the
right to negotiate the dollar amount of the bridge loan based on current local
practices.
The interest on these loans is charged to the appropriate Responsibility Center,
and the loans are to be repaid within 15 days after the sale of the home at the
former location. When the employee sells the former residence, the amount of
the bridge loan must be forwarded directly to the lender.
8
<PAGE>
The employee must complete an application (available from the Corporate
Relocation Manager and submit evidence of the current balance of the present
mortgage (including any liens or second mortgages).
LEASE CANCELLATION (RENTERS)
- ----------------------------
ELIGIBILITY:
------------
EXEMPT GRADE
------------
MPP
30-32
26-29
Mgmt. Trainee - see separate section
The employee is responsible for canceling any lease remaining at the former
location at the time of transfer and obtaining a written release from the lease
obligation. The Bank may pay reasonable costs of canceling leases equivalent to
a maximum of 2 MONTHS rent.
--------
FINDER'S FEE/DEPOSITS (RENTERS)
- -------------------------------
ELIGIBILITY:
------------
EXEMPT GRADE
------------
MPP
30-32
26-29
Mgmt. Trainee - see separate section
The Bank may reimburse reasonable finder's fee to secure rental housing.
Security deposits of up to 2 months rent may be advanced to the employee for a
period of up to one year. These advances must be repaid by the end of the first
year and may be provided interest free.
9
<PAGE>
RELOCATION ALLOWANCE
- --------------------
ELIGIBILITY:
------------
HOMEOWNER RENTER
--------- ------
$2,000 $1,000
When relocating at the Bank's request, the Bank may provide a relocation
allowance to defray miscellaneous expenses not specifically identified as
reimbursable under other provisions of this policy.
TAXES
- -----
ELIGIBILITY: ALL EXEMPT EMPLOYEES
------------
In order to be eligible for deductibility of moving expenses for tax purposes,
the employee must work full time for at least 39 weeks following the move.
Under present IRS regulations certain relocation expenses are considered income
to the employee and are subject to taxation. In order to compensate for
additional Federal and State taxes the Payroll Department will make appropriate
estimated adjustments at the time of payment.
10
<PAGE>
EXHIBIT 10 (L)
BANKBOSTON CORPORATION
DIRECTOR STOCK AWARD PLAN
(As amended, effective July 1, 1998)
1. Purpose.
The BankBoston Corporation Director Stock Award Plan (the "Plan") has been
adopted to assist in attracting and retaining non-employee members of the
Corporation's Board of Directors and to promote identification of their
interests with those of stockholders of the Corporation.
2. Definitions.
As used herein, the following words or terms have the meanings set forth
below:
2.1 "Affiliate" means any business entity that is directly or indirectly
controlled by the Corporation or any entity in which the Corporation has a
significant equity interest, as determined by the EVP, Human Resources.
2.2 "Annual Cash Retainer" means the annual cash retainer for Non-
Employee Directors, exclusive of meeting fees and committee retainers.
2.3 "Award" means the Shares awarded under the Plan.
2.4 "Award Date" means January 1 and July 1 of each year, commencing on
July 1, 1993.
2.5 "Award Period" means a six-month period immediately preceding each
Award Date; provided, however, that the initial Award Period under the Plan
shall begin on May 1, 1993 and shall end on June 30, 1993.
2.6 "Board of Directors" means the Board of Directors of the Corporation.
2.7 "Common Stock" means the Common Stock, par value $1.00 per share, of
the Corporation.
2.8 "Corporation" means BankBoston Corporation, a corporation established
under the laws of the Commonwealth of Massachusetts.
<PAGE>
-2-
2.9 "EVP, Human Resources" means the Executive Vice President, Human
Resources, of the Corporation.
2.10 "Fair Market Value," in the case of a share of Common Stock on a
particular day, means the closing price of the Common Stock for that day as
reported in the "New York Stock Exchange Composite Transactions" section of the
Eastern Edition of The Wall Street Journal, or if no prices are quoted for that
day, for the last preceding day on which such prices of Common Stock are so
quoted. In the event "New York Stock Exchange Composite Transactions" cease to
be reported, the EVP, Human Resources, shall adopt some other appropriate method
for determining Fair Market Value.
2.11 "Full Award" means a number of Shares (rounded to the nearest whole
share) having an aggregate Fair Market Value on the last business day of the
immediately preceding Award Period equal to 70% of the Annual Cash Retainer in
effect at the beginning of such Award Period.
2.12 "Non-Employee Director" means as of any date a person who on such
date is a director of the Corporation and is not an employee of the Corporation
or any Affiliate. A director of the Corporation who is also an employee of the
Corporation or any Affiliate shall become eligible to participate in the Plan
upon termination of such employment.
2.13 "Prorated Award" means a Full Award multiplied by a fraction, the
numerator of which is the number of days that a person served as a Non-Employee
Director during the immediately preceding Award Period and the denominator of
which is the total number of days in such Award Period.
2.14 "Shares" means shares of Common Stock.
3. Effective Date.
The Plan shall become effective on May 1, 1993, subject to the approval of
the Corporation's stockholders at the Corporation's 1993 Annual Meeting of
Stockholders.
<PAGE>
-3-
4. Administration.
4.1 The Plan shall be administered by the EVP, Human Resources. Subject
to the provisions set forth herein, the EVP, Human Resources, shall have full
authority to construe and interpret the terms of the Plan and to make all
determinations and take all other actions necessary or advisable for the
administration of the Plan, except that the persons entitled to receive Awards
and the dates and amounts of such Awards shall be determined as provided in
Article 7, and the EVP, Human Resources, shall have no discretion as to such
matters. The EVP, Human Resources, may delegate to one or more officers of the
Corporation or any Affiliate the authority to perform administrative functions
under the Plan.
4.2 Any determinations or actions made or taken by the EVP, Human
Resources, pursuant to this Article shall be binding and final.
5. Shares Available for Awards.
5.1 The maximum number of Shares that may be issued under the Plan shall
be 200,000*, subject to adjustment in accordance with the provisions of Section
5.2. Shares issued under the Plan may consist in whole or in part of authorized
but unissued shares or treasury shares.
5.2 In the event of any change in the outstanding shares of Common Stock
by reason of a stock dividend or distribution, stock split, recapitalization,
combination or exchange of shares, or by reason of any merger, consolidation,
spinoff or other corporate reorganization in which the Corporation is the
surviving corporation, the number and kind of Shares awarded thereafter in each
grant under the Plan and the total number and kind of Shares that may be issued
under the Plan shall be equitably adjusted by the Board of Directors, whose
determination shall be binding and final.
6. Eligibility.
Awards shall be made only to Non-Employee Directors, as provided in Article
7.
___________________
* As adjusted for the Corporation's two-for-one stock split, effective as of
June 22, 1998.
<PAGE>
-4-
7. Awards.
In consideration of past services rendered, on each Award Date, each person
who is then a Non-Employee Director shall, automatically and without necessity
of any action by the EVP, Human Resources, be entitled to receive (i) a Full
Award, in the case of a person who was a Non-Employee Director during all of the
immediately preceding Award Period or (ii) a Prorated Award, in the case of a
person who was a Non-Employee Director for less than all of such Award Period.
Stock certificates representing Awards shall be delivered to Non-Employee
Directors as soon as practicable following each Award Date, unless other
arrangements are made with the Corporation by the Non-Employee Director. In
lieu of receiving Shares following each Award Date, each Non-Employee Director
may elect to defer the receipt of his or her Shares under the Plan in accordance
with Section 8 below. Awards hereunder shall be in addition to, and not in lieu
of, the Non-Employee Director's Annual Cash Retainer, meeting fees and other
compensation payable to each Non-Employee Director as a result of his or her
service on the Board of Directors or any committee thereof.
8. Deferral of Awards.
8.1 Election of Deferral. A Non-Employee Director may elect to defer all
of his or her Awards otherwise payable in or for a calendar year, subject to
such conditions as the EVP, Human Resources, may prescribe prior to the start of
such calendar year. A Non-Employee Director's election of deferral shall be in
the form prescribed by the EVP, Human Resources, and must be filed prior to the
first day of the calendar year for which the Awards are earned. Each election
shall be binding with respect to the Awards for such calendar year and shall be
irrevocable after January 1 of the calendar year to which it applies. A new
Non-Employee Director must make an election of deferral within 30 days of the
date upon which he or she first becomes a director of the Corporation. A new
election of deferral must be filed for each calendar year.
<PAGE>
-5-
8.2 Share Deferral Account. The Corporation shall maintain a Share
Deferral Account on behalf of each Non-Employee Director who files an election
of deferral pursuant to Section 8.1. On each Award Date, the Corporation shall
credit to such Account the number of Shares otherwise payable to the Non-
Employee Director as a Full or Prorated Award, if not deferred.
8.3 Dividend Credits. As of each date a dividend is paid on the Common
Stock, the Corporation shall credit to each Non-Employee Director's Share
Deferral Account the number of Shares (rounded to the nearest thousandth of a
share) determined by multiplying the total number of Shares credited to such
account as of the dividend record date by the per share dividend amount, and
then dividing the product by the Fair Market Value of a share of Common Stock on
the dividend payment date.
8.4 Form and Timing of Distribution. Upon a Non-Employee Director's
ceasing to be a director of the Corporation, credits to such Non-Employee
Director's Share Deferral Account shall be distributed to him or her in whole
shares of Common Stock (together with cash in lieu of a fractional share) as
soon as practicable following his or her retirement or termination as a
director. If a Non-Employee Director dies before receiving distribution of his
or her Share Deferral Account, distribution shall be made to such Non-Employee
Director's designated beneficiary or, in the absence of a designated beneficiary
or if the designated beneficiary does not survive the Non-Employee Director,
distribution shall be made to such Non-Employee Director's estate.
9. General Provisions.
9.1 Non-Assignability. No right to receive an Award hereunder shall be
transferable or assignable by a Plan participant other than by will or the laws
of descent and distribution.
9.2 No Right to Service. Participating in the Plan does not constitute a
guarantee or contract of service as a director.
<PAGE>
-6-
9.3 Amendment and Termination. The Board of Directors may amend, suspend
or terminate the Plan or any portion thereof at any time; provided, however,
that the provisions of the Plan relating to the determination of persons
entitled to receive Awards pursuant to Article 7 and the dates and amounts of
such Awards shall not be amended more than once every six months, other than to
comport with changes in the Internal Revenue Code of 1986, as amended, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder.
9.4 Registration of Shares. Nothing in the Plan shall be construed to
require the Corporation to register under the Securities Act of 1933, as
amended, any Shares awarded under the Plan.
9.5 Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the Commonwealth of Massachusetts.
<PAGE>
EXHIBIT 10(M)
AGREEMENT
---------
THIS AGREEMENT dated as of , 1999, is made by and between BankBoston
Corporation, a Massachusetts corporation (the "Company"), and _________ (the
"Executive").
WHEREAS, the Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel;
and
WHEREAS, the Board of Directors of the Company (the "Board") recognizes
that, as is the case with many publicly held corporations, the possibility of a
Change in Control (as defined in the last Section hereof) exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties with the
Company and/or the Bank, as the case may be, without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change in
Control;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other valuable consideration, the Company and the
Executive hereby agree as follows:
1. Defined Terms. The definitions of capitalized terms used in this
-------------
Agreement are provided in the last Section hereof.
<PAGE>
2. Term of Agreement. This Agreement shall commence on the date hereof
-----------------
and shall continue in effect through [last day of month in which occurs 24/th/
month from effective date], 2001, provided that commencing on [following month]
1, 2000 and each [same] 1 thereafter, the term of this Agreement shall
automatically be extended for one additional year unless, not later than the
immediately preceding [3 mo prior to effective date month] 31, the Company or
the Executive shall have given notice not to extend this Agreement or a Change
in Control shall have occurred prior to such [month following effective date
month] 1. If a Change in Control shall have occurred during the term of this
Agreement, however, this Agreement shall continue in effect for a period of not
less than three (3) years beyond the last day of the month in which such Change
in Control occurred. Notwithstanding the foregoing provisions of this Section 2,
this Agreement shall terminate, unless earlier terminated in accordance with
this Agreement, (i) one (1) year after the Executive is notified in accordance
with Section 10 hereof that the Compensation Committee, upon recommendation of
the Company's chief executive officer, has voted to terminate this Agreement or
(ii) if earlier, immediately after the Executive is notified in accordance with
Section 10 hereof that the Compensation Committee has determined that the
Executive's level of responsibility (other than reporting responsibility) has
substantially changed from the Executive's current level of responsibility, in
either case only if the notification occurs prior to a Potential Change in
Control that results in a Change in Control. By way of illustration, if there
were a change in the nature of the Executive's responsibilities (e.g., from
technology to human resources) but the only change in the level of the
Executive's
2
<PAGE>
responsibilities were a change in reporting responsibilities, these changes
alone would not provide grounds for the Compensation Committee determination
referred to in clause (ii) above.
3. Company's Covenants Summarized. In order to induce the Executive to
------------------------------
remain in the employ of the Company or the Bank and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees, under
the conditions described herein, to pay the Executive the Severance Payments
described in Section 6.1 hereof and the other payments and benefits described
herein in the event the Executive's employment with the Company or the Bank is
terminated following a Change in Control and during the term of this Agreement.
No amount or benefit shall be payable under this Agreement unless there shall
have been (or, under the terms hereof, there shall be deemed to have been) a
termination of the Executive's employment with the Company or the Bank following
a Change in Control. This Agreement shall not be construed as creating an
express or implied contract of employment, and except as otherwise agreed in
writing between the Executive and the Company, the Executive shall not have any
right to be retained in the employ of the Company or the Bank.
4. Executive's Covenants.
---------------------
4.1 The Executive agrees that, subject to the terms and conditions of
this Agreement, in the event of a Potential Change in Control during the term of
this Agreement, the Executive will remain in the employ of the Company or the
Bank until the earliest of (i) a date which is six (6) months from the date of
such Potential Change of Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good
Reason (determined by treating the Potential Change in Control as a Change in
Control
3
<PAGE>
in applying the definition of Good Reason), by reason of death, or (iv) the
termination by the Company or the Bank of the Executive's employment for any
reason.
4.2 The Executive agrees that, during the term of this Agreement and for
a period ending on the third anniversary of the Date of Termination, he will not
make or publish any statement which is, or may reasonably be considered to be,
disparaging of the Company, its subsidiaries or affiliates, or directors,
officers, employees or the operations, products or services of the Company or
any of its subsidiaries or affiliates, except in connection with the performance
of his services hereunder to the extent the Executive makes the statement to
employees of the Company or its affiliates in good faith furtherance of the
Company's business. In the event of a claimed breach by the Company of the terms
of this Section 4.2, in addition to its right to institute legal proceedings to
obtain damages for such breach, the Company shall be entitled to enforce the
specific performance of this Section 4.2 and to enjoin any further violation of
this Section 4.2.
5. Compensation Other Than Severance Payments.
------------------------------------------
5.1 Following a Change in Control and during the term of this Agreement,
during any period that the Executive fails to perform the Executive's full-time
duties with the Company as a result of incapacity due to physical or mental
illness, the Company shall pay the Executive's full salary to the Executive at
the rate in effect at the commencement of any such period, together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
during such period, until the Executive becomes eligible for benefits at least
equal to those to which the Executive would have been entitled under
4
<PAGE>
the long-term disability insurance plan of the Company in effect immediately
prior to the Change in Control.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of any compensation or benefit
plan, program or arrangement maintained by the Company during such period.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay or make available to the Executive any rights, compensation and
benefits which are vested in the Executive or which the Executive has or is
otherwise entitled to receive under any plan or program of the Company
(including without limitation any retirement plan or any welfare plan providing
post-retirement benefits) to the Executive as such rights, compensation or
benefits become due. Such rights, compensation and benefits shall be determined
under, and paid or made available in accordance with, the Company's applicable
retirement, insurance and other compensation or benefit plans, programs and
arrangements.
6. Severance Payments.
------------------
6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive
the payments described in this Section 6.1 (the "Severance Payments") upon the
termination of the Executive's employment following a Change in Control and
during the term of this Agreement,
5
<PAGE>
in addition to the payments and benefits described in Section 5 hereof, unless
such termination is (i) by the Company or the Bank for Cause, (ii) by reason of
death, or (iii) by the Executive without Good Reason. The Executive's employment
shall be deemed to have been terminated following a Change in Control by the
Company without Cause or by the Executive with Good Reason if the (x)
Executive's employment is terminated prior to a Change in Control without Cause
at the direction of a Person who has entered into an agreement with the Company
the consummation of which will constitute a Change in Control, (y) Executive
terminates his employment with Good Reason prior to a Change in Control
(determined by treating a Potential Change in Control as a Change in Control in
applying the definition of Good Reason) if the circumstance or event which
constitutes Good Reason occurs at the direction of such Person, or (z) the
Executive's employment is terminated by the Company without Cause or by the
Executive for Good Reason and such termination or the circumstance or event
which constitutes Good Reason is otherwise in connection with or in anticipation
of a Change in Control; provided, however, in each such case, that a Change in
Control occurs.
(A) In lieu of any further salary payments to the Executive
for periods subsequent to the Date of Termination and in lieu of any
severance benefits otherwise payable to the Executive under any then
existing broad-based employee severance plan, the Company shall pay to the
Executive a lump sum severance payment, in cash, equal to three (3) times
the sum of (i) the higher of the Executive's annual base salary in effect
immediately prior to the occurrence of the event or circumstance upon which
the Notice of Termination is based or in effect immediately prior to the
Change in
6
<PAGE>
Control and (ii) the highest of the annual amounts paid to, or approved
for, the Executive pursuant to the Performance Recognition Opportunity
Plan, or any successor plan, with respect to the three (3) years (or the
number of years employed, if less) immediately preceding (a) the occurrence
of the event or circumstance upon which the Notice of Termination is based
or (b) the Change in Control.
(B) In lieu of any further life, disability, accident and
health insurance benefits otherwise due to the Executive, the Company shall
pay to the Executive a lump sum amount, in cash, equal to the cost to the
Company (as determined by the Company in good faith with reference to its
most recent actual experience) of providing such benefits, to the extent
that the Executive is eligible to receive such benefits immediately prior
to the Notice of Termination (without giving effect to any reduction in
such benefits subsequent to a Change in Control which reduction constitutes
Good Reason), for a period of three (3) years commencing on the Date of
Termination.
(C) The Executive shall continue to accrue service credit
for a period of three (3) years (for all purposes, including without
limitation benefit accrual and eligibility to receive matching
contributions) under the Pension Plan, Thrift Plan, the Bonus SERP, the
Excess SERP, the Deferred Compensation Plan or any successor plans thereto,
(i) with respect to matching contributions under any such Plan, based on
the highest level of contributions in effect under such Plan with respect
to the Executive during the plan year during which the occurrence of the
event or circumstance upon which the Notice of Termination is based or the
Change in Control occurs, whichever is
7
<PAGE>
higher, and (ii) for all other purposes under this Section 6.1(C), at the
compensation level equal to the amount determined in accordance with
Section 6.1(A) hereof. All payments made pursuant to this Section 6.1(C)
may be made, in the Company's discretion, out of the general funds of the
Company.
(D) Notwithstanding any provision of the Performance Recognition
Opportunity Plan or any other cash-based annual or long-term incentive plan
to the contrary, the Company shall pay to the Executive a lump sum amount,
in cash, equal to the sum of (i) any unpaid incentive compensation which
has been allocated or awarded to the Executive for a completed fiscal year
or other measuring period preceding the Date of Termination under any such
plan and which, as of the Date of Termination, is contingent only upon the
continued employment of the Executive to a subsequent date, and (ii) a pro
rata portion to the Date of Termination of the aggregate value of all
contingent incentive compensation awards to the Executive for all then
uncompleted periods under any such plan, calculated as to each such award
by multiplying the award that the Executive would have earned on the last
day of the performance award period, assuming the achievement, based on
performance year-to-date, of the individual and corporate performance goals
established with respect to such award, by the fraction obtained by
dividing the number of full months and any fractional portion of a month
during such performance award period through the Date of Termination by the
total number of months contained in such performance award period.
8
<PAGE>
(E) (i) All outstanding equity awards that (x) were granted to
the Executive prior to the date hereof and (y) are not vested and/or
exercisable, as the case may be, as of the Date of Termination shall become
fully vested and/or exercisable, as the case may be, as of the Date of
Termination and (ii) all outstanding equity awards that (x) were granted to
the Executive as of or following the date hereof and (y) are not vested
and/or exercisable, as the case may be, as of the Date of Termination shall
become fully vested and/or exercisable, as the case may be, as of the Date
of Termination or the date on which the Change in Control occurs, whichever
occurs later.
(F) The Company shall provide the Executive with outplacement
services suitable to the Executive's position for a period of three (3)
years or, if earlier, until the first acceptance by the Executive of an
offer of employment.
6.2 (A) Whether or not the Executive becomes entitled to the
Severance Payments, if any payment or benefit received or to be received by the
Executive in connection with a Change in Control or the termination of the
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, any Person whose actions
result in a Change in Control or any Person affiliated with the Company or such
Person) (all such payments and benefits, excluding the Gross-Up Payment, being
hereinafter called "Total Payments") will be subject (in whole or part) to any
excise tax imposed under section 4999 of the Code (the "Excise Tax"), then,
subject to the provisions of subsection (B) of this Section 6.2, the Company
shall pay to the Executive an additional amount (the "Gross-Up Payment") such
that the net amount retained by the Executive, after deduction of any
9
<PAGE>
Excise Tax on the Total Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the
Total Payments. For purposes of determining the amount of the Gross-Up Payment,
the Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at the highest
marginal rate of taxation on earned income in the state and locality of the
Executive's residence on the Date of Termination (or if there is no Date of
Termination, then the date on which the Gross-up Payment is calculated for
purposes of this Section 6.2), net of the maximum reduction in federal income
tax which could be obtained from deduction of such state and local taxes.
(B) In the event that, after giving effect to any redeterminations
described in subsection (D) of this Section 6.2, the sum of the Total Payments
and the Gross-Up Payment (in each case after deduction of the net amount of
federal, state and local income and employment taxes and the amount of Excise
Tax to which the Executive would be subject in respect of such Total Payments
and the Gross-Up Payment) does not equal or exceed 110% of the largest amount of
Total Payments that would result in no portion of the Total Payments being
subject to the Excise Tax (after deduction of the net amount of federal, state
and local income and employment taxes on such reduced Total Payments), then
subsection (A) of this Section 6.2 shall not apply and, to the extent necessary
to ensure that no portion of the Total Payments is subject to the Excise Tax,
the cash Severance Payments shall first be reduced (if necessary, to zero), and
the noncash Severance Benefits shall thereafter be reduced (if necessary, to
zero); provided,
--------
10
<PAGE>
however, that the Executive may elect to have the noncash Severance Payments
- -------
reduced (or eliminated) prior to any reduction of the cash Severance Payments.
(C) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the Total Payments shall be treated as "parachute payments" within the meaning
of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting
firm which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such other payments or benefits (in whole
or in part) do not constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(1) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of
the Base Amount allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, and (iii) the value of any noncash benefits or any
deferred payment or benefit shall be determined by the Auditor in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the
payment date set forth in Section 6.3 hereof, the Company shall provide the
Executive with its calculation of the amounts referred to in this Section 6.2(C)
and such supporting materials as are reasonably necessary for the Executive to
evaluate the Company's calculations. If the Executive disputes the Company's
calculations (in whole or in part), the opinion of Tax Counsel with respect to
the matter in dispute shall prevail.
11
<PAGE>
(D) In the event that (i) amounts are paid to the Executive pursuant
to subsection (A) of this Section 6.2, (ii) the Excise Tax is finally determined
to be less than the amount taken into account hereunder in calculating the
Gross-Up Payment, and (iii) after giving effect to such redetermination, the
Severance Payments are to be reduced pursuant to subsection (B) of this Section
6.2, the Executive shall repay to the Company, within five (5) business days
following the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such reduction
(plus that portion of the Gross-Up Payment attributable to the Excise Tax and
federal, state and local income and employment taxes imposed on the Gross-Up
Payment being repaid by the Executive), to the extent that such repayment
results in no portion of the Total Payments being subject to the Excise Tax plus
interest on the amount of such repayment at 120% of the rate provided in section
1274(b)(2)(B) of the Code. In the event that (x) the Excise Tax is determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment) and
(y) after giving effect to such redetermination, the Severance Payments should
not have been reduced pursuant to subsection (B) of this Section 6.2, the
Company shall make an additional Gross-Up Payment in respect of such excess and
in respect of any portion of the Excise Tax with respect to which the Company
had not previously made a Gross-Up Payment (plus any interest, penalties or
additions payable by the Executive with respect to such excess and such portion)
within five (5) business days following the time that the amount of such excess
is finally determined.
12
<PAGE>
6.3 The payments provided for in Section 6.1 and Section 6.2 hereof
shall be made not later than the fifth day following the Date of Termination or,
if later, the date on which the Change in Control occurs; however, if the
amounts of such payments, and the limitation on such payments set forth in
Section 6.2 hereof, cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined by the
Executive, of the minimum amount of such payments to which the Executive is
clearly entitled and shall pay the remainder of such payments (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as
the amount thereof can be determined but in no event later than the thirtieth
(30th) day after the Date of Termination. In the event that the amount of the
estimated payments exceeds the amount subsequently determined to have been due,
such excess shall constitute a loan by the Company to the Executive, payable on
the fifth (5th) business day after demand by the Company (together with interest
at the rate provided in section 1274(b)(2)(B) of the Code).
6.4 The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in seeking to obtain or enforce any benefit
or right provided by this Agreement, in accordance with Section 14 hereof
(including without limitation fees and expenses incurred in seeking to secure
the Executive's rights provided by Section 14 hereof). Such payments shall be
made within five (5) business days after delivery of the Executive's written
requests for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.
13
<PAGE>
7. Termination Procedures and Compensation During Dispute.
------------------------------------------------------
7.1 Notice of Termination. After a Change in Control and during the
---------------------
term of this Agreement, any purported termination of the Executive's employment
(other than by reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in accordance with
Section 10 hereof. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. Further, a Notice of Termination
for Cause is required to include a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters (3/4) of the entire membership
of the Board at a meeting of the Board which was called and held for the purpose
of considering such termination (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board) finding that, in the good faith opinion of the Board,
the Executive was guilty of conduct set forth in clause (i) or (ii) of the
definition of Cause herein, and specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination", with respect to any
-------------------
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean the date specified in the
Notice of Termination (which, in the case of a termination by the Company or the
Bank, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Executive, shall
not be
14
<PAGE>
less than fifteen (15) days nor more than sixty (60) days, respectively, from
the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15) days after
------------------------------
any Notice of Termination is given or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of a court of competent
jurisdiction provided that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
7.4 Compensation During Dispute. If a purported termination occurs
---------------------------
following a Change in Control and during the term of this Agreement, and such
termination is disputed in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including without limitation salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the dispute is finally resolved in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
15
<PAGE>
8. No Mitigation. If the Executive's employment by the Company or
-------------
the Bank is terminated during the term of this Agreement, 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 pursuant to Section 6 or Section 7.4
hereof. Further, the amount of any payment or benefit provided for in Section 6
or Section 7.4 hereof shall not be reduced by any compensation earned by the
Executive as the result of employment by another employer, by retirement
benefits, by offset against any amount claimed to be owed by the Executive to
the Company or the Bank, or otherwise.
9. Successors; Binding Agreement.
-----------------------------
9.1 In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
16
<PAGE>
9.2 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 (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
9.3 This Agreement supercedes all prior agreements between the
parties hereto with respect to the subject matter hereof.
10. 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:
BankBoston Corporation 100 Federal Street
Boston, MA 02110
Attention: Executive Vice President,
Human Resources
Copy to: General Counsel and Clerk
17
<PAGE>
To the Executive:
__________
__________
__________
11. 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 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. All
references to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments provided for
hereunder 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. The obligations of the Company and the Executive under
Sections 6, 7, 8 and 14 hereof shall survive the expiration of the term of this
Agreement.
18
<PAGE>
12. 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.
13. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration. All claims by the Executive
-----------------------------------
for benefits under this Agreement shall be directed to and determined by the
Board and shall be in writing. Any denial by the Board 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 arbitration in
Boston, Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. The Executive shall, however, be entitled to seek
specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
15. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the meanings indicated below:
19
<PAGE>
(A) "Bank" shall mean the Company's subsidiary, BankBoston, N.A., or
if applicable, any other direct or indirect subsidiary of the Company by which
the Executive is then employed during the term of this Agreement.
(B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3
under the Exchange Act.
(C) "Board" shall mean the Board of Directors of the Company.
(D) "Bonus SERP" shall mean BankBoston, N.A. Bonus Supplemental
Employee Retirement Plan.
(E) "Cause" for termination by the Company or the Bank of the
Executive's employment, after any Change in Control, shall mean (i) the willful
and continued failure by the Executive to substantially perform the Executive's
duties with the Company or the Bank (other than any such failure resulting from
the Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 7.1 hereof) after a written demand
for substantial performance is delivered to the Executive by the Board, which
demand specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties, or (ii) the
willful engaging by the Executive in gross misconduct which is demonstrably and
materially injurious to the Company or any of its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or
failure to act, on the Executive's part shall be deemed "willful" unless done,
or omitted to be done, by the Executive
20
<PAGE>
not in good faith and without reasonable belief that the Executive's act, or
failure to act, was in the best interest of the Company.
(F) A "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:
(I) There is an acquisition of control of the Company as
defined in Section 2(a)(2) of the Bank Holding Company Act of 1956, or
any similar successor provision, as in effect at the time of the
acquisition; or
(II) Continuing Directors constitute two-thirds (2/3) or
less of the membership of the Board, whether as the result of a proxy
contest or for any other reason or reasons; or
(III) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the
Company's then outstanding voting securities; or
(IV) There is consummated a merger or consolidation (or
similar transaction) of the Company or any direct or indirect
subsidiary of the Company with any other corporation, other than (i) a
merger or consolidation (or similar transaction) which would result in
the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving or parent
entity) directly or indirectly sixty percent (60%) or more of the
combined voting
21
<PAGE>
power of the voting securities (entitled to vote generally for the
election of directors) of the Company or such surviving or parent
entity outstanding immediately after such merger or consolidation and
which would result in those persons who are Continuing Directors
immediately prior to such merger or consolidation constituting more
than two-thirds (2/3) of the membership of the Board or the board of
such surviving or parent entity immediately after, or subsequently at
any time as contemplated by or as a result of, such merger or
consolidation (or similar transaction) or (ii) a merger or
consolidation effected to implement a recapitalization or
restructuring of the Company or any of its subsidiaries (or similar
transaction) in which no Person acquired twenty-five percent (25%) or
more of the combined voting power of the Company's then outstanding
securities; or
(V) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets (or any transaction having a similar effect), other
than a sale or disposition by the Company of all or substantially all
of the Company's assets to an entity in which the holders of the
voting securities (entitled to vote generally for the election of
directors) of the Company immediately prior to such sale or
disposition continue to own proportionally and beneficially directly
or indirectly sixty percent (60%) or more of the combined voting power
of the voting securities (entitled to vote generally
22
<PAGE>
for the election of directors) of such entity outstanding immediately
after such sale or disposition and which would result in those persons
who are Continuing Directors immediately prior to such sale or
disposition constituting more than two-thirds (2/3) of the membership
of the Board or the board of such entity immediately after, or
subsequently at any time as contemplated by or as a result of, such
sale or disposition.
(G) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(H) "Company" shall mean BankBoston Corporation and (except in
determining, under Section 15(F) hereof, whether or not any Change in Control of
the Company has occurred in connection with such succession) any successor to
its business and/or assets which assumes or agrees to perform this Agreement, by
operation of law or otherwise. Payments or benefits from the Company shall
include those from the Bank or other subsidiary of the Company.
(I) "Compensation Committee" shall mean the Compensation Committee of
the Board.
(J) "Continuing Director" shall mean any director (i) who has
continuously been a member of the Board since not later than the date of a
Potential Change in Control or (ii) who is a successor of a director described
in clause (i), if such successor (and any intervening successor) shall have been
recommended or elected to succeed a Continuing Director by a majority of the
then Continuing Directors.
(K) "Date of Termination" shall have the meaning stated in Section
7.2 hereof.
23
<PAGE>
(L) "Deferred Compensation Plan" shall mean the Company's Deferred
Compensation Plan.
(M) "Excess SERP" shall mean BankBoston, N.A. Excess Benefit
Supplemental Employee Retirement Plan.
(N) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(O) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(P) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) of any one of the following acts by the Company or the Bank, or
failures by the Company or the Bank to act, unless, in the case of any act or
failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or
failure to act is corrected prior to the Date of Termination specified in the
Notice of Termination given in respect thereof or, in the case of paragraph
(III) below, such act is not objected to in writing by the Executive within four
(4) months after notification by the Company to the Executive of the Company's
or the Bank's intention to take the action contemplated by such paragraph (III):
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive officer
of the Company or the Bank or a meaningful alteration, adverse to the
Executive, in the nature or status of the
24
<PAGE>
Executive's responsibilities (other than reporting responsibilities)
from those in effect immediately prior to the Change in Control;
(II) a reduction by the Company or the Bank in the
Executive's annual base salary as in effect on the date hereof or as
the same may be increased from time to time except for across-the-
board salary reductions similarly affecting all senior executives of
the Company or the Bank, as the case may be, and all senior executives
of any Person in control of the Company;
(III) the Company's or the Bank's requiring the Executive to
be based anywhere other than the Boston Metropolitan Area (or, if
different, the metropolitan area in which the Company's or the Bank's
principal executive offices are located immediately prior to the
Change in Control) except for required travel on Company or Bank
business to an extent substantially consistent with the Executive's
present business travel obligations;
(IV) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation, or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Company, within fourteen (14) days of the date such
compensation is due;
(V) the failure by the Company to continue in effect any
compensation plan in which the Executive participates immediately
prior to the Change in Control which is material to the Executive's
total compensation,
25
<PAGE>
including without limitation the Company's stock award, incentive
compensation and bonus plans, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made
with respect to such plan, or the failure by the Company to continue
the Executive's participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable, both in
terms of the amount of benefits provided and the level of the
Executive's participation relative to other participants, as existed
at the time of the Change in Control;
(VI) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Company's pension, life insurance, medical,
health and accident, or disability plans in which the Executive was
participating at the time of the Change in Control, the taking of any
action by the Company which would directly or indirectly materially
reduce any of such benefits or deprive the Executive of any material
fringe benefit enjoyed by the Executive at the time of the Change in
Control, or the failure by the Company to provide the Executive with
the number of paid vacation days to which the Executive is entitled on
the basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the Change
in Control;
(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the
26
<PAGE>
requirements of Section 9.1 hereof; for purposes of this Agreement, no
such purported termination shall be effective; or
(VIII) during the 30-day period following the first
anniversary of the consummation of a Change in Control, the Executive
makes a good faith determination that there has been an adverse change
in the nature, terms or conditions of his position with the Company as
a result of the Change in Control.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(Q) "Notice of Termination" shall have the meaning stated in Section
7.1 hereof.
(R) "Pension Plan" shall mean the BankBoston Cash Balance Retirement
Plan.
(S) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however,
a Person shall not include (i) the Company or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its subsidiaries, (iii) an underwriter temporarily holding
securities pursuant to a registered offering of such securities in accordance
with an agreement with the Company, or (iv) a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company.
27
<PAGE>
(T) "Potential Change in Control" shall be deemed to have occurred if
the conditions set forth in any one of the following paragraphs shall have been
satisfied:
(I) the Company enters into an agreement, the consummation
of which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated,
would constitute a Change in Control; or
(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing fifteen percent
(15%) or more of the combined voting power of the Company's then
outstanding securities (entitled to vote generally for the election of
directors).
(U) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.
(V) "Thrift Plan" shall mean the BankBoston Thrift-Incentive 401(k)
Plan.
(W) "Total Payments" shall mean those payments described in Section
6.2 hereof.
28
<PAGE>
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the
Company have executed this Agreement as of the date first written above.
BANKBOSTON CORPORATION
By: __________________________
Name: Helen G. Drinan
Title: Executive Vice President, Human Resources
__________________________
[Executive]
29
<PAGE>
EXHIBIT 10 (N)
AGREEMENT
---------
THIS AGREEMENT dated as of , 1999, is made by and between
BankBoston Corporation, a Massachusetts corporation (the "Company"), and
______________ (the "Executive").
WHEREAS, the Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel;
and
WHEREAS, the Board of Directors of the Company (the "Board") recognizes
that, as is the case with many publicly held corporations, the possibility of a
Change in Control (as defined in the last Section hereof) exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties with the
Company and/or the Bank, as the case may be, without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change in
Control;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other valuable consideration, the Company and the
Executive hereby agree as follows:
1. Defined Terms. The definitions of capitalized terms used in this
-------------
Agreement are provided in the last Section hereof.
<PAGE>
2. Term of Agreement. This Agreement shall commence on the date hereof
-----------------
and shall continue in effect through November 30, 2000, provided that commencing
on December 1, 1999 and each December 1 thereafter, the term of this Agreement
shall automatically be extended for one additional year unless, not later than
the immediately preceding August 31, the Company or the Executive shall have
given notice not to extend this Agreement or a Change in Control shall have
occurred prior to such December 1. If a Change in Control shall have occurred
during the term of this Agreement, however, this Agreement shall continue in
effect for a period of not less than two (2) years beyond the last day of the
month in which such Change in Control occurred. Notwithstanding the foregoing
provisions of this Section 2, this Agreement shall terminate, unless earlier
terminated in accordance with this Agreement, (i) one (1) year after the
Executive is notified in accordance with Section 10 hereof that the Compensation
Committee, upon recommendation of the Company's chief executive officer, has
voted to terminate this Agreement or (ii) if earlier, immediately after the
Executive is notified in accordance with Section 10 hereof that the Compensation
Committee has determined that the Executive's level of responsibility (other
than reporting responsibility) has substantially changed from the Executive's
current level of responsibility, in either case only if the notification occurs
prior to a Potential Change in Control that results in a Change in Control. By
way of illustration, if there were a change in the nature of the Executive's
responsibilities (e.g., from technology to human resources) but the only change
in the level of the Executive's responsibilities were a change in reporting
responsibilities, these changes alone would not provide grounds for the
Compensation Committee determination referred to in clause (ii) above.
2
<PAGE>
3. Company's Covenants Summarized. In order to induce the Executive to
------------------------------
remain in the employ of the Company or the Bank and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees, under
the conditions described herein, to pay the Executive the Severance Payments
described in Section 6.1 hereof and the other payments and benefits described
herein in the event the Executive's employment with the Company or the Bank is
terminated following a Change in Control and during the term of this Agreement.
No amount or benefit shall be payable under this Agreement unless there shall
have been (or, under the terms hereof, there shall be deemed to have been) a
termination of the Executive's employment with the Company or the Bank following
a Change in Control. This Agreement shall not be construed as creating an
express or implied contract of employment, and except as otherwise agreed in
writing between the Executive and the Company, the Executive shall not have any
right to be retained in the employ of the Company or the Bank.
4. Executive's Covenants.
---------------------
4.1 The Executive agrees that, subject to the terms and conditions of this
Agreement, in the event of a Potential Change in Control during the term of this
Agreement, the Executive will remain in the employ of the Company or the Bank
until the earliest of (i) a date which is six (6) months from the date of such
Potential Change of Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
Reason (determined by treating the Potential Change in Control as a Change in
Control in applying the definition of Good Reason), by reason of death, or (iv)
the termination by the Company or the Bank of the Executive's employment for any
reason.
3
<PAGE>
4.2 The Executive agrees that, during the term of this Agreement and for a
period ending on the third anniversary of the Date of Termination, he will not
make or publish any statement which is, or may reasonably be considered to be,
disparaging of the Company, its subsidiaries or affiliates, or directors,
officers, employees or the operations, products or services of the Company or
any of its subsidiaries or affiliates, except in connection with the performance
of his services hereunder to the extent the Executive makes the statement to
employees of the Company or its affiliates in good faith furtherance of the
Company's business. In the event of a claimed breach by the Company of the
terms of this Section 4.2, in addition to its right to institute legal
proceedings to obtain damages for such breach, the Company shall be entitled to
enforce the specific performance of this Section 4.2 and to enjoin any further
violation of this Section 4.2.
5. Compensation Other Than Severance Payments.
------------------------------------------
5.1 Following a Change in Control and during the term of this Agreement,
during any period that the Executive fails to perform the Executive's full-time
duties with the Company as a result of incapacity due to physical or mental
illness, the Company shall pay the Executive's full salary to the Executive at
the rate in effect at the commencement of any such period, together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefit plan, program or arrangement maintained by the Company
during such period, until the Executive becomes eligible for benefits at least
equal to those to which the Executive would have been entitled under the long-
term disability insurance plan of the Company in effect immediately prior to the
Change in Control.
4
<PAGE>
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of any compensation or benefit
plan, program or arrangement maintained by the Company during such period.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay or make available to the Executive any rights, compensation and
benefits which are vested in the Executive or which the Executive has or is
otherwise entitled to receive under any plan or program of the Company
(including without limitation any retirement plan or any welfare plan providing
post-retirement benefits) to the Executive as such rights, compensation or
benefits become due. Such rights, compensation and benefits shall be determined
under, and paid or made available in accordance with, the Company's applicable
retirement, insurance and other compensation or benefit plans, programs and
arrangements.
6. Severance Payments.
------------------
6.1 Subject to Section 6.2 hereof, the Company shall pay the Executive the
payments described in this Section 6.1 (the "Severance Payments") upon the
termination of the Executive's employment following a Change in Control and
during the term of this Agreement, in addition to the payments and benefits
described in Section 5 hereof, unless such termination is (i) by the Company or
the Bank for Cause, (ii) by reason of death, or (iii) by the Executive
5
<PAGE>
without Good Reason. The Executive's employment shall be deemed to have been
terminated following a Change in Control by the Company without Cause or by the
Executive with Good Reason if the (x) Executive's employment is terminated prior
to a Change in Control without Cause at the direction of a Person who has
entered into an agreement with the Company the consummation of which will
constitute a Change in Control, (y) Executive terminates his employment with
Good Reason prior to a Change in Control (determined by treating a Potential
Change in Control as a Change in Control in applying the definition of Good
Reason) if the circumstance or event which constitutes Good Reason occurs at the
direction of such Person, or (z) the Executive's employment is terminated by the
Company without Cause or by the Executive for Good Reason and such termination
or the circumstance or event which constitutes Good Reason is otherwise in
connection with or in anticipation of a Change in Control; provided, however, in
each such case, that a Change in Control occurs.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any severance
benefits otherwise payable to the Executive under any then existing broad-
based employee severance plan, the Company shall pay to the Executive a
lump sum severance payment, in cash, equal to two (2) times the sum of (i)
the higher of the Executive's annual base salary in effect immediately
prior to the occurrence of the event or circumstance upon which the Notice
of Termination is based or in effect immediately prior to the Change in
Control and (ii) the highest of the annual amounts paid to, or approved
for, the Executive pursuant to the Performance Recognition Opportunity
Plan, or any successor plan, with
6
<PAGE>
respect to the three (3) years (or the number of years employed, if less)
immediately preceding (a) the occurrence of the event or circumstance upon
which the Notice of Termination is based or (b) the Change in Control.
(B) In lieu of any further life, disability, accident and health
insurance benefits otherwise due to the Executive, the Company shall pay to
the Executive a lump sum amount, in cash, equal to the cost to the Company
(as determined by the Company in good faith with reference to its most
recent actual experience) of providing such benefits, to the extent that
the Executive is eligible to receive such benefits immediately prior to the
Notice of Termination (without giving effect to any reduction in such
benefits subsequent to a Change in Control which reduction constitutes Good
Reason), for a period of two (2) years commencing on the Date of
Termination.
(C) The Executive shall continue to accrue service credit for a
period of two (2) years (for all purposes, including without limitation
benefit accrual and eligibility to receive matching contributions) under
the Pension Plan, Thrift Plan, the Bonus SERP, the Excess SERP, the
Deferred Compensation Plan or any successor plans thereto, (i) with respect
to matching contributions under any such Plan, based on the highest level
of contributions in effect under such Plan with respect to the Executive
during the plan year during which the occurrence of the event or
circumstance upon which the Notice of Termination is based or the Change in
Control occurs, whichever is higher, and (ii) for all other purposes under
this Section 6.1(C), at the compensation level equal to the amount
determined in accordance with Section 6.1(A) hereof. All payments made
pursuant to
7
<PAGE>
this Section 6.1(C) may be made, in the Company's discretion, out of the
general funds of the Company.
(D) Notwithstanding any provision of the Performance Recognition
Opportunity Plan or any other cash-based annual or long-term incentive plan
to the contrary, the Company shall pay to the Executive a lump sum amount,
in cash, equal to the sum of (i) any unpaid incentive compensation which
has been allocated or awarded to the Executive for a completed fiscal year
or other measuring period preceding the Date of Termination under any such
plan and which, as of the Date of Termination, is contingent only upon the
continued employment of the Executive to a subsequent date, and (ii) a pro
rata portion to the Date of Termination of the aggregate value of all
contingent incentive compensation awards to the Executive for all then
uncompleted periods under any such plan, calculated as to each such award
by multiplying the award that the Executive would have earned on the last
day of the performance award period, assuming the achievement, based on
performance year-to-date, of the individual and corporate performance goals
established with respect to such award, by the fraction obtained by
dividing the number of full months and any fractional portion of a month
during such performance award period through the Date of Termination by the
total number of months contained in such performance award period.
(E) (i) All outstanding equity awards that (x) were granted to
the Executive prior to the date hereof and (y) are not vested and/or
exercisable, as the case may be, as of the Date of Termination shall become
fully vested and/or exercisable, as the
8
<PAGE>
case may be, as of the Date of Termination and (ii) all outstanding equity
awards that (x) were granted to the Executive as of or following the date
hereof and (y) are not vested and/or exercisable, as the case may be, as of
the Date of Termination shall become fully vested and/or exercisable, as
the case may be, as of the Date of Termination or the date on which the
Change in Control occurs, whichever occurs later.
(F) The Company shall provide the Executive with outplacement
services suitable to the Executive's position for a period of (2) two years
or, if earlier, until the first acceptance by the Executive of an offer of
employment.
6.2 (A) Whether or not the Executive becomes entitled to the Severance
Payments, if any payment or benefit received or to be received by the Executive
in connection with a Change in Control or the termination of the Executive's
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any Person whose actions result in a
Change in Control or any Person affiliated with the Company or such Person) (all
such payments and benefits, excluding the Gross-Up Payment, being hereinafter
called "Total Payments") will be subject (in whole or part) to any excise tax
imposed under section 4999 of the Code (the "Excise Tax"), then, subject to the
provisions of subsection (B) of this Section 6.2, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes and Excise
Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For
purposes of determining the amount of the Gross-Up Payment, the Executive shall
be deemed to pay
9
<PAGE>
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation on earned income in
the state and locality of the Executive's residence on the Date of Termination
(or if there is no Date of Termination, then the date on which the Gross-up
Payment is calculated for purposes of this Section 6.2), net of the maximum
reduction in federal income tax which could be obtained from deduction of such
state and local taxes.
(B) In the event that, after giving effect to any
redeterminations described in subsection (D) of this Section 6.2, the sum
of the Total Payments and the Gross-Up Payment (in each case after
deduction of the net amount of federal, state and local income and
employment taxes and the amount of Excise Tax to which the Executive would
be subject in respect of such Total Payments and the Gross-Up Payment) does
not equal or exceed 110% of the largest amount of Total Payments that would
result in no portion of the Total Payments being subject to the Excise Tax
(after deduction of the net amount of federal, state and local income and
employment taxes on such reduced Total Payments), then subsection (A) of
this Section 6.2 shall not apply and, to the extent necessary to ensure
that no portion of the Total Payments is subject to the Excise Tax, the
cash Severance Payments shall first be reduced (if necessary, to zero), and
the noncash Severance Benefits shall thereafter be reduced (if necessary,
to zero); provided, however, that the Executive may elect to have the
-------- -------
noncash Severance Payments reduced (or eliminated) prior to any reduction
of the cash Severance Payments.
(C) For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount of such Excise
Tax, (i) all of the Total Payments shall
10
<PAGE>
be treated as "parachute payments" within the meaning of section 280G(b)(2)
of the Code, unless in the opinion of tax counsel ("Tax Counsel")
reasonably acceptable to the Executive and selected by the accounting firm
which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such other payments or benefits (in
whole or in part) do not constitute parachute payments, including by reason
of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments"
within the meaning of section 280G(b)(l) of the Code shall be treated as
subject to the Excise Tax unless, in the opinion of Tax Counsel, such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered, within the meaning of section
280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such
reasonable compensation, or are otherwise not subject to the Excise Tax,
and (iii) the value of any noncash benefits or any deferred payment or
benefit shall be determined by the Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment
date set forth in Section 6.3 hereof, the Company shall provide the
Executive with its calculation of the amounts referred to in this Section
6.2(C) and such supporting materials as are reasonably necessary for the
Executive to evaluate the Company's calculations. If the Executive disputes
the Company's calculations (in whole or in part), the opinion of Tax
Counsel with respect to the matter in dispute shall prevail.
(D) In the event that (i) amounts are paid to the Executive
pursuant to subsection (A) of this Section 6.2, (ii) the Excise Tax is
finally determined to be less than the amount taken into account hereunder
in calculating the Gross-Up Payment, and (iii) after giving effect to such
redetermination, the Severance Payments are to be reduced pursuant to
subsection
11
<PAGE>
(B) of this Section 6.2, the Executive shall repay to the Company, within
five (5) business days following the time that the amount of such reduction
in Excise Tax is finally determined, the portion of the Gross-Up Payment
attributable to such reduction (plus that portion of the Gross-Up Payment
attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the
Executive), to the extent that such repayment results in no portion of the
Total Payments being subject to the Excise Tax plus interest on the amount
of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of
the Code. In the event that (x) the Excise Tax is determined to exceed the
amount taken into account hereunder at the time of the termination of the
Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment)
and (y) after giving effect to such redetermination, the Severance Payments
should not have been reduced pursuant to subsection (B) of this Section
6.2, the Company shall make an additional Gross-Up Payment in respect of
such excess and in respect of any portion of the Excise Tax with respect to
which the Company had not previously made a Gross-Up Payment (plus any
interest, penalties or additions payable by the Executive with respect to
such excess and such portion) within five (5) business days following the
time that the amount of such excess is finally determined.
6.3 The payments provided for in Section 6.1 and Section 6.2 hereof
shall be made not later than the fifth day following the Date of Termination or,
if later, the date on which the Change in Control occurs; however, if the
amounts of such payments, and the limitation on such payments set forth in
Section 6.2 hereof, cannot be finally determined on or before such
12
<PAGE>
day, the Company shall pay to the Executive on such day an estimate, as
determined by the Executive, of the minimum amount of such payments to which the
Executive is clearly entitled and shall pay the remainder of such payments
(together with interest at the rate provided in section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined but in no event later than
the thirtieth (30th) day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) business day after demand by the Company
(together with interest at the rate provided in section 1274(b)(2)(B) of the
Code).
6.4 The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in seeking to obtain or enforce any benefit
or right provided by this Agreement, in accordance with Section 14 hereof
(including without limitation fees and expenses incurred in seeking to secure
the Executive's rights provided by Section 14 hereof). Such payments shall be
made within five (5) business days after delivery of the Executive's written
requests for payment accompanied with such evidence of fees and expenses
incurred as the Company reasonably may require.
7. Termination Procedures and Compensation During Dispute.
------------------------------------------------------
7.1 Notice of Termination. After a Change in Control and during the term
---------------------
of this Agreement, any purported termination of the Executive's employment
(other than by reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in accordance with
Section 10 hereof. For purposes of this Agreement, a
13
<PAGE>
"Notice of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
Further, a Notice of Termination for Cause is required to include a copy of a
resolution duly adopted by the affirmative vote of not less than three quarters
(3/4) of the entire membership of the Board at a meeting of the Board which was
called and held for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty of
conduct set forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination", with respect to any
-------------------
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean the date specified in the
Notice of Termination (which, in the case of a termination by the Company or the
Bank, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Executive, shall
not be less than fifteen (15) days nor more than sixty (60) days, respectively,
from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15) days after any
------------------------------
Notice of Termination is given or, if later, prior to the Date of Termination
(as determined without regard to this Section 7.3), the party receiving such
Notice of Termination notifies the other party
14
<PAGE>
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally resolved, either by mutual written
agreement of the parties or by a final judgment, order or decree of a court of
competent jurisdiction provided that the Date of Termination shall be extended
by a notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence.
7.4 Compensation During Dispute. If a purported termination occurs
---------------------------
following a Change in Control and during the term of this Agreement, and such
termination is disputed in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including without limitation salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the dispute is finally resolved in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
8. No Mitigation. If the Executive's employment by the Company or the
-------------
Bank is terminated during the term of this Agreement, 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 pursuant to Section 6 or Section 7.4
hereof. Further, the amount of any payment or benefit provided for in Section 6
or Section 7.4 hereof shall not be reduced by any compensation earned by the
Executive as the result of employment by another employer, by retirement
benefits,
15
<PAGE>
by offset against any amount claimed to be owed by the Executive to the Company
or the Bank, or otherwise.
9. Successors; Binding Agreement.
-----------------------------
9.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after a
Change in Control, except that, for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date of
Termination.
9.2 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 (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless
16
<PAGE>
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
9.3 This Agreement supercedes all prior agreements between the parties
hereto with respect to the subject matter hereof.
10. 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:
BankBoston Corporation 100 Federal Street
Boston, MA 02110
Attention: Executive Vice President,
Human Resources
Copy to: General Counsel and Clerk
To the Executive:
________________
________________
________________
11. 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
17
<PAGE>
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 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. All references to sections
of the Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder 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. The obligations of
the Company and the Executive under Sections 6, 7, 8 and 14 hereof shall survive
the expiration of the term of this Agreement.
12. 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.
13. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
18
<PAGE>
14. Settlement of Disputes; Arbitration. All claims by the Executive for
-----------------------------------
benefits under this Agreement shall be directed to and determined by the Board
and shall be in writing. Any denial by the Board 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 arbitration in
Boston, Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. The Executive shall, however, be entitled to
seek specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
15. Definitions. For purposes of this Agreement, the following terms shall
-----------
have the meanings indicated below:
(A) "Bank" shall mean the Company's subsidiary, BankBoston, N.A., or
if applicable, any other direct or indirect subsidiary of the Company by which
the Executive is then employed during the term of this Agreement.
(B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under
the Exchange Act.
(C) "Board" shall mean the Board of Directors of the Company.
(D) "Bonus SERP" shall mean BankBoston, N.A. Bonus Supplemental Employee
Retirement Plan.
19
<PAGE>
(E) "Cause" for termination by the Company or the Bank of the Executive's
employment, after any Change in Control, shall mean (i) the willful and
continued failure by the Executive to substantially perform the Executive's
duties with the Company or the Bank (other than any such failure resulting from
the Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 7.1 hereof) after a written demand
for substantial performance is delivered to the Executive by the Board, which
demand specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties, or (ii) the
willful engaging by the Executive in gross misconduct which is demonstrably and
materially injurious to the Company or any of its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or
failure to act, on the Executive's part shall be deemed "willful" unless done,
or omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's act, or failure to act, was in the best interest of
the Company.
(F) A "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:
(I) There is an acquisition of control of the Company as defined
in Section 2(a)(2) of the Bank Holding Company Act of 1956, or any similar
successor provision, as in effect at the time of the acquisition; or
20
<PAGE>
(II) Continuing Directors constitute two-thirds (2/3) or
less of the membership of the Board, whether as the result of a proxy
contest or for any other reason or reasons; or
(III) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the
Company's then outstanding voting securities; or
(IV) There is consummated a merger or consolidation (or
similar transaction) of the Company or any direct or indirect
subsidiary of the Company with any other corporation, other than (i) a
merger or consolidation (or similar transaction) which would result in
the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving or parent
entity) directly or indirectly sixty percent (60%) or more of the
combined voting power of the voting securities (entitled to vote
generally for the election of directors) of the Company or such
surviving or parent entity outstanding immediately after such merger
or consolidation and which would result in those persons who are
Continuing Directors immediately prior to such merger or consolidation
constituting more than two-thirds (2/3) of the membership of the Board
or the board of such surviving or parent entity immediately after, or
subsequently at any time as contemplated by or as a result of, such
merger or
21
<PAGE>
consolidation (or similar transaction) or (ii) a merger or
consolidation effected to implement a recapitalization or
restructuring of the Company or any of its subsidiaries (or similar
transaction) in which no Person acquired twenty-five percent (25%) or
more of the combined voting power of the Company's then outstanding
securities; or
(V) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets (or any transaction having a similar effect), other
than a sale or disposition by the Company of all or substantially all
of the Company's assets to an entity in which the holders of the
voting securities (entitled to vote generally for the election of
directors) of the Company immediately prior to such sale or
disposition continue to own proportionally and beneficially directly
or indirectly sixty percent (60%) or more of the combined voting power
of the voting securities (entitled to vote generally for the election
of directors) of such entity outstanding immediately after such sale
or disposition and which would result in those persons who are
Continuing Directors immediately prior to such sale or disposition
constituting more than two-thirds (2/3) of the membership of the Board
or the board of such entity immediately after, or subsequently at any
time as contemplated by or as a result of, such sale or disposition.
22
<PAGE>
(G) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(H) "Company" shall mean BankBoston Corporation and (except in
determining, under Section 15(F) hereof, whether or not any Change in Control of
the Company has occurred in connection with such succession) any successor to
its business and/or assets which assumes or agrees to perform this Agreement, by
operation of law or otherwise. Payments or benefits from the Company shall
include those from the Bank or other subsidiary of the Company.
(I) "Compensation Committee" shall mean the Compensation Committee of
the Board.
(J) "Continuing Director" shall mean any director (i) who has
continuously been a member of the Board since not later than the date of a
Potential Change in Control or (ii) who is a successor of a director described
in clause (i), if such successor (and any intervening successor) shall have been
recommended or elected to succeed a Continuing Director by a majority of the
then Continuing Directors.
(K) "Date of Termination" shall have the meaning stated in Section
7.2 hereof.
(L) "Deferred Compensation Plan" shall mean the Company's Deferred
Compensation Plan.
(M) "Excess SERP" shall mean BankBoston, N.A. Excess Benefit
Supplemental Employee Retirement Plan.
(N) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
23
<PAGE>
(O) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(P) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) of any one of the following acts by the Company or the Bank, or
failures by the Company or the Bank to act, unless, in the case of any act or
failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or
failure to act is corrected prior to the Date of Termination specified in the
Notice of Termination given in respect thereof or, in the case of paragraph
(III) below, such act is not objected to in writing by the Executive within four
(4) months after notification by the Company to the Executive of the Company's
or the Bank's intention to take the action contemplated by such paragraph (III):
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive officer
of the Company or the Bank or a meaningful alteration, adverse to the
Executive, in the nature or status of the Executive's responsibilities
(other than reporting responsibilities) from those in effect
immediately prior to the Change in Control;
(II) a reduction by the Company or the Bank in the
Executive's annual base salary as in effect on the date hereof or as
the same may be increased from time to time except for across-the-
board salary reductions similarly affecting all senior executives of
the Company or the Bank, as the case may be, and all senior executives
of any Person in control of the Company;
24
<PAGE>
(III) the Company's or the Bank's requiring the Executive to
be based anywhere other than the Boston Metropolitan Area (or, if
different, the metropolitan area in which the Company's or the Bank's
principal executive offices are located immediately prior to the
Change in Control) except for required travel on Company or Bank
business to an extent substantially consistent with the Executive's
present business travel obligations;
(IV) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's
current compensation, or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Company, within fourteen (14) days of the date such
compensation is due;
(V) the failure by the Company to continue in effect any
compensation plan in which the Executive participates immediately
prior to the Change in Control which is material to the Executive's
total compensation, including without limitation the Company's stock
award, incentive compensation and bonus plans, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or the failure by the Company
to continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits provided and the
level of the Executive's
25
<PAGE>
participation relative to other participants, as existed at the time
of the Change in Control;
(VI) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Company's pension, life insurance, medical,
health and accident, or disability plans in which the Executive was
participating at the time of the Change in Control, the taking of any
action by the Company which would directly or indirectly materially
reduce any of such benefits or deprive the Executive of any material
fringe benefit enjoyed by the Executive at the time of the Change in
Control, or the failure by the Company to provide the Executive with
the number of paid vacation days to which the Executive is entitled on
the basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the Change
in Control; or
(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 9.1 hereof; for purposes of
this Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
26
<PAGE>
(Q) "Notice of Termination" shall have the meaning stated in Section
7.1 hereof.
(R) "Pension Plan" shall mean the BankBoston Cash Balance Retirement
Plan.
(S) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however,
a Person shall not include (i) the Company or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its subsidiaries, (iii) an underwriter temporarily holding
securities pursuant to a registered offering of such securities in accordance
with an agreement with the Company, or (iv) a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company.
(T) "Potential Change in Control" shall be deemed to have occurred if
the conditions set forth in any one of the following paragraphs shall have been
satisfied:
(I) the Company enters into an agreement, the consummation
of which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated,
would constitute a Change in Control; or
(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing fifteen percent
(15%) or more of the combined voting power of the Company's then
outstanding securities (entitled to vote generally for the election of
directors).
27
<PAGE>
(U) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.
(V) "Thrift Plan" shall mean the BankBoston Thrift-Incentive 401(k)
Plan.
(W) "Total Payments" shall mean those payments described in Section
6.2 hereof.
28
<PAGE>
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the Company
have executed this Agreement as of the date first written above.
BANKBOSTON CORPORATION
By: _______________________________
Name: Helen G. Drinan
Title: Executive Vice President, Human Resources
__________________________
[Executive]
29
<PAGE>
EXHIBIT 12(a)
BANKBOSTON 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, 1998 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(Dollars in millions)
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net income $ 792 $ 879 $ 650 $ 678 $ 542
Extraordinary item, net of tax 7
Income tax expense 477 589 483 529 422
------- ------- ------- ------- -------
Pretax earnings 1,269 1,468 1,133 1,207 971
------- ------- ------- ------- -------
Fixed charges:
Portion of rental expense
(net of sublease
rental income) which
approximates the
interest factor 42 39 40 38 35
Interest on borrowed funds 1,179 1,050 873 1,079 1,038
------- ------- ------- ------- -------
Total fixed charges 1,221 1,089 913 1,117 1,073
------- ------- ------- ------- -------
Earnings (for ratio calculation) $ 2,490 $ 2,557 $ 2,046 $ 2,324 $ 2,044
======= ======= ======= ======= =======
Total fixed charges $ 1,221 $ 1,089 $ 913 $ 1,117 $ 1,073
======= ======= ======= ======= =======
Ratio of earnings to fixed
charges 2.04 2.35 2.24 2.08 1.90
======= ======= ======= ======= =======
</TABLE>
For purposes of computing the consolidated ratio of earnings to fixed charges,
"earnings" represent income before extraordinary item 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.
<PAGE>
EXHIBIT 12(b)
BANKBOSTON 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, 1998 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(Dollars in millions)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income $ 792 $ 879 $ 650 $ 678 $ 542
Extraordinary item, net of tax 7
Income tax expense 477 589 483 529 422
-------- -------- -------- -------- --------
Pretax earnings 1,269 1,468 1,133 1,207 971
-------- -------- -------- -------- --------
Fixed charges:
Portion of rental expense
(net of sublease rental income)
which approximates the
interest factor 42 39 40 38 35
Interest on borrowed funds 1,179 1,050 873 1,079 1,038
Interest on deposits 1,871 1,685 1,680 1,791 1,301
-------- -------- -------- -------- --------
Total fixed charges 3,092 2,774 2,593 2,908 2,374
-------- -------- -------- -------- --------
Earnings (for ratio calculation) $ 4,361 $ 4,242 $ 3,726 $ 4,115 $ 3,345
======== ======== ======== ======== ========
Total fixed charges $ 3,092 $ 2,774 $ 2,593 $ 2,908 $ 2,374
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 1.41 1.53 1.44 1.42 1.41
======== ======== ======== ======== ========
</TABLE>
For purposes of computing the consolidated ratio of earnings to fixed charges,
"earnings" represent income before extraordinary item 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.
<PAGE>
EXHIBIT 13
BankBoston Corporation
Consolidated Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996 1995 1994 1993
(dollars in
millions, except per share amounts)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data(1)
Interest income........... $ 5,577 $ 5,164 $ 4,893 $ 5,119 $ 4,376 $ 3,330
Interest expense.......... 3,050 2,735 2,553 2,870 2,339 1,561
-------- -------- -------- -------- -------- --------
Net interest revenue.... 2,527 2,429 2,340 2,249 2,037 1,769
Provision for credit
losses................... 380 200 231 275 154 107
-------- -------- -------- -------- -------- --------
Net interest revenue
after provision for
credit losses.......... 2,147 2,229 2,109 1,974 1,883 1,662
Noninterest income........ 2,032 1,563 1,344 1,309 1,035 945
Noninterest expense....... 2,910 2,324 2,320 2,076 1,947 2,002
-------- -------- -------- -------- -------- --------
Income before income
taxes, extraordinary item
and cumulative effect of
changes in accounting
principles............... 1,269 1,468 1,133 1,207 971 605
Provision for income
taxes.................. 477 589 483 529 422 262
-------- -------- -------- -------- -------- --------
Income before
extraordinary item and
cumulative effect of
changes in accounting
principles............... 792 879 650 678 549 343
Extraordinary loss from
early extinguishment of
debt, net of tax......... (7)
Cumulative effect of
changes in accounting
principles, net of
tax(2)................... 24
-------- -------- -------- -------- -------- --------
Net income.............. $ 792 $ 879 $ 650 $ 678 $ 542 $ 367
======== ======== ======== ======== ======== ========
Net income applicable to
common stock........... $ 783 $ 848 $ 613 $ 641 $ 505 $ 332
======== ======== ======== ======== ======== ========
Per common share
Income before
extraordinary item and
cumulative effect of
changes in accounting
principles
Basic................... $ 2.66 $ 2.86 $ 2.00 $ 2.09 $ 1.72 $ 1.05
Diluted................. 2.64 2.82 1.96 2.05 1.68 1.03
Net income
Basic................... 2.66 2.86 2.00 2.09 1.70 1.13
Diluted................. 2.64 2.82 1.96 2.05 1.66 1.11
Cash dividends declared.. 1.16 .99 .85 .64 .47 .20
Average number of common
shares (in thousands)
Basic.................... 293,873 295,918 307,058 307,712 297,826 294,066
Diluted.................. 296,663 300,080 312,224 313,536 307,232 304,134
- -------------------------------------------------------------------------------------------
</TABLE>
(1) All per share and average share information has been adjusted to reflect
the Corporation's two-for-one stock split effected in 1998.
(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 tax, relating to a
change in accounting principles pertaining to the valuation of purchased
mortgage servicing rights.
- -------------------------------------- 21 --------------------------------------
<PAGE>
BankBoston Corporation
Consolidated Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996 1995 1994 1993
(dollars in millions,
except per share amounts)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selected Ratios
Return on average
assets.................. 1.10% 1.35% 1.09% 1.22% 1.01% .76%
Return on average common
equity(1)............... 16.91 20.05 14.47 16.86 15.50 11.39
Common dividend payout
ratio................... 43.5 34.3 40.4 28.1 24.9 14.4
Common equity to total
assets.................. 6.6 6.3 7.1 7.1 6.2 6.1
Average total
stockholders' equity to
average total assets.... 6.6 7.2 8.0 7.7 7.1 7.1
Risk-based capital ratios
Tier 1................. 7.1 8.0 9.2 8.5 7.7 7.7
Total.................. 11.7 12.1 13.6 12.8 12.7 12.4
Leverage ratio........... 6.7 7.4 8.2 7.4 6.7 6.9
Net credit losses to
average loans and lease
financing............... .81 .66 .57 .51 .81 .87
Reserve for credit losses
to loans and lease
financing............... 1.76 1.62 2.15 2.29 2.19 2.70
Reserve for credit losses
to nonaccrual loans and
lease financing......... 200.6 222.2 219.6 238.9 197.0 142.2
Nonaccrual loans and OREO
as a percent of related
asset categories........ .9 .8 1.1 1.1 1.5 2.5
Market value/book value.. 238.4 316.0 222.4 171.2 112.2 108.9
Balance Sheet Data at
December 31
Loans and lease
financing............... $42,806 $43,980 $41,061 $38,870 $37,708 $34,819
Reserve for credit
losses.................. (754) (712) (883) (890) (827) (941)
Total assets............. 73,513 69,268 62,306 59,423 55,411 50,711
Deposits................. 48,500 45,761 42,831 41,064 40,249 38,316
Funds borrowed........... 12,016 12,865 9,660 9,827 7,430 5,487
Notes payable............ 4,593 2,941 2,821 2,189 2,219 2,023
Guaranteed preferred
beneficial interests in
Corporation's junior
subordinated
debentures.............. 995 747 500
Stockholders' equity..... 4,817 4,610 4,934 4,702 3,931 3,615
Common shares outstanding
(in thousands).......... 294,972 145,707 153,173 155,296 148,343 147,036
Common stockholders of
record(2)............... 25,896 26,522 27,672 27,662 27,505 28,233
Number of employees...... 24,519 21,495 21,990 23,710 24,009 24,215
Per common share(3)
Book value.............. $ 16.33 $ 14.87 $ 14.45 $ 13.51 $ 11.54 $ 10.57
Market value............ 38 15/16 46 31/32 32 1/8 23 1/8 12 15/16 11 1/2
Average Balance Sheet
Data
Loans and lease
financing............... $44,683 $42,383 $40,589 $38,283 $36,017 $32,565
Securities............... 11,419 9,741 8,122 7,463 6,473 5,631
Other earning assets..... 6,290 5,584 4,699 3,821 5,027 4,684
-------- -------- ------- ------- -------- -------
Total earning assets... 62,392 57,708 53,410 49,567 47,517 42,880
-------- -------- ------- ------- -------- -------
Cash and due from banks.. 3,007 3,069 2,610 2,591 2,708 2,419
Other assets............. 6,801 4,486 3,503 3,586 3,164 2,638
-------- -------- ------- ------- -------- -------
Total average assets... $72,200 $65,263 $59,523 $55,744 $53,389 $47,937
======== ======== ======= ======= ======== =======
Deposits................. $45,778 $42,853 $41,603 $38,406 $37,919 $37,163
Funds borrowed........... 13,271 11,864 8,751 9,132 8,018 4,500
Other liabilities........ 3,676 2,497 1,759 1,760 1,563 1,087
Notes payable(4)......... 4,698 3,382 2,666 2,142 2,123 1,797
Stockholders' equity..... 4,777 4,667 4,744 4,304 3,766 3,390
-------- -------- ------- ------- -------- -------
Total average
liabilities and
stockholders' equity.. $72,200 $65,263 $59,523 $55,744 $53,389 $47,937
======== ======== ======= ======= ======== =======
- -----------------------------------------------------------------------------------
</TABLE>
(1) For purposes of this ratio, preferred stock dividends have been deducted
from net income.
(2) The number of stockholders of record includes banks and brokers who act as
nominees, each of whom may represent more than one stockholder.
(3) All per share information has been adjusted to reflect the Corporation's
two-for-one stock split effected in 1998.
(4) Averages for 1998, 1997 and 1996 include guaranteed preferred beneficial
interests in Corporation's junior subordinated debentures.
- -------------------------------------- 22 --------------------------------------
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Overview
BankBoston Corporation (the Corporation) is a registered bank holding company
which, together with its subsidiaries and, in certain cases, joint ventures,
operates through a network of offices across the U.S. and in Latin America,
Asia and Europe. The Corporation's major banking subsidiary is BankBoston, N.A.
(the Bank).
1998 Highlights
. The Corporation's net income for 1998 was $792 million, compared with $879
million for 1997. Net income per common share was $2.66 and diluted net in-
come per common share was $2.64 in 1998, compared with $2.86 and $2.82, re-
spectively, in 1997. All per common share amounts reflect the Corporation's
two-for-one stock split effected in June 1998.
. Return on average common equity was 16.91 percent, compared with 20.05 per-
cent in 1997. Return on average assets was 1.10 percent, compared with 1.35
percent in 1997.
. The Corporation further expanded its presence and distribution capacity in
Latin America, primarily through branch expansion programs in Argentina and
Brazil; the first quarter 1998 acquisition of Deutsche Bank Argentina S.A.
(Deutsche Argentina), including approximately $1 billion in loans and $1.5
billion in deposits; and the third quarter 1998 acquisition of the OCA Com-
panies (OCA), a credit card and consumer finance business in Uruguay with
approximately $65 million of loans at the date of acquisition. The Corpora-
tion's Brazilian operations reported record earnings in 1998, reflecting an
increase of 39 percent over net income in 1997. Likewise, the Corporation's
Argentine operations achieved record earnings, with growth of 17 percent
from the previous year.
. Initiatives to build various Wholesale Bank businesses continued in 1998,
including the expansion of its investment banking and other capital mar-
kets-related capabilities. In August 1998, the Corporation acquired the in-
vestment banking operations of Robertson Stephens from BankAmerica Corpora-
tion. This acquisition complemented the Wholesale Bank's other businesses
by adding equity underwriting, distribution and research capabilities to
the Corporation's range of products and services available to its corporate
customers.
. Taxable equivalent net interest revenue increased $97 million, or 4 per-
cent, from 1997. This increase was principally driven by growth in the Ar-
gentine and domestic commercial loan portfolios, combined with wider
spreads in Brazil arising from market volatility. This growth was partially
offset by the Corporation's divestiture of its national consumer businesses
in 1997 and early 1998.
. Noninterest income increased $469 million, or 30 percent, from 1997. This
increase resulted largely from higher fees and commissions, particularly
from Argentine and Brazilian operations and the acquisition of Robertson
Stephens, as well as a higher level of gains on sales of businesses. These
increases were offset, in part, by a lower level of trading income and net
securities gains.
. During 1998, the Corporation pursued a number of strategic divestitures,
which resulted in an aggregate pre-tax gain on sales of businesses of ap-
proximately $254 million. In the fourth quarter of 1998, the Corporation
sold its Berkshire County, Massachusetts franchise, including approximately
$300 million of deposits and $1 billion of Private Banking assets under
management, for a pre-tax gain of approximately $51 million. During the
same period, the Corporation also sold its domestic institutional custody
business for a pre-tax gain of approximately $38 million, and outsourced
the settlement and depository functions of its asset management business.
Additionally, in the first quarter of 1998, the Corporation sold its 26
percent interest in HomeSide, Inc. (HomeSide) for a pre-tax gain of $165
million.
. Trading profits and commissions decreased by $61 million compared with
1997. This decrease reflected significant volatility in world financial
markets during 1998. This volatility resulted in trading losses incurred by
the Corporation's Boston-based emerging markets and high yield units. The
impact of these losses was partially offset by higher trading profits from
Latin American operations as well as by improved performance from the Cor-
poration's derivatives unit. Additionally, the impact of these losses was
offset, in part, by a higher level of net foreign exchange profits.
. Noninterest expense increased $586 million, or 25 percent, from 1997. This
increase was primarily driven by the previously mentioned strategic
initiatives in Latin America and the various Wholesale Bank businesses, in-
cluding the acquisition of Robertson Stephens. Noninterest expense also re-
flected investments in the Corporation's Regional Bank and risk management
and technology operations, as well as the realignment and downsizing of
various businesses.
. The provision for credit losses was $380 million, compared with $200 mil-
lion in 1997. Net credit losses in 1998 were $364 million, compared with
$279 million in 1997. Net credit losses to average loans and lease financ-
ing was .81 percent, compared with .66 percent in the prior year.
. Total loans and lease financing decreased approximately $1.2 billion from
1997. This decrease was largely driven by the securitization of $2.2 bil-
lion of domestic commercial and industrial (C&I) loans in December 1998,
the Corporation's contribution of its $1.2 billion national credit card
portfolio to a joint venture in the first quarter of 1998, and
- -------------------------------------- 23 --------------------------------------
<PAGE>
the securitizations of $.8 billion of home equity loans during the year.
Lower levels of residential mortgage and indirect auto loans also contrib-
uted to the decrease. Offsetting the abovementioned declines, domestic loans
and lease financing increased approximately $3 billion from the prior year.
In addition, the international loan and lease financing portfolio grew by
approximately $1.1 billion, particularly from Argentine operations.
Additional information with respect to certain of the Corporation's acquisi-
tions and divestitures can be found in Note 2 to the Financial Statements.
Forward-Looking Statements
The Corporation may from time to time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private Secu-
rities Litigation Reform Act of 1995. Forward-looking statements may include
financial projections, statements of plans and objectives for future opera-
tions, estimates of future economic performance and assumptions relating there-
to.
The Corporation may include forward-looking statements in its filings with the
Securities and Exchange Commission, in its reports to stockholders, including
this Annual Report, in other written materials, and in statements made by se-
nior management to analysts, rating agencies, institutional investors, repre-
sentatives of the media and others.
By their very nature, forward-looking statements are subject to uncertainties,
both general and specific, and risk exists that predictions, forecasts, projec-
tions and other estimates contained in forward-looking statements will not be
achieved. The following factors, among others, could cause actual results to
differ materially from any forward-looking statements: significant changes and
developments in world financial markets, particularly in Latin America and
Asia; the ability of various countries in Asia and Latin America, particularly
in Brazil, to institute timely and effective economic policies; the uses of
monetary, fiscal and tax policy by various governments; political developments
in the United States and other countries; developments in general economic con-
ditions, both domestic and international, including interest rate and currency
fluctuations, market fluctuations and perceptions, and inflation; demand for
various forms of credit; legislative or regulatory developments, including
changes in laws concerning taxes, banking, securities, insurance and other as-
pects of the financial services industry; changes in the competitive environ-
ment for financial services organizations and the Corporation's responses to
those changes; the Corporation's ability and resources in both its domestic and
international operations to effectively execute its articulated business strat-
egies and manage risks associated with the integration of acquisitions and ex-
pansion plans; changes in technology and the successful allocation of technol-
ogy resources across multiple projects, including efforts to address the Year
2000 issue and demands for greater automation; and the ability of the Corpora-
tion's competitors, credit customers, wholesale fund providers, treasury and
capital markets counterparties and vendors and service providers to respond ef-
fectively to the Year 2000 issue. When relying on forward-looking statements to
make decisions with respect to the Corporation, investors and others are cau-
tioned to consider these and other risks and uncertainties.
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 Consolidated Financial Statements and
Notes to the Financial Statements included elsewhere in this report.
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 1 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 percent, plus applicable state and local
taxes, net of related federal tax benefits.
Table 1 -- 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)
1998...................................... $ 1,686 $ 864 $ 2,550
1997...................................... 1,822 631 2,453
1996...................................... 1,826 534 2,360
Average earning assets
1998...................................... $43,199 $19,193 $62,392
1997...................................... 41,849 15,859 57,708
1996...................................... 40,211 13,199 53,410
Net interest margin
1998...................................... 3.90% 4.50% 4.09%
1997...................................... 4.36 3.98 4.25
1996...................................... 4.54 4.05 4.42
</TABLE>
1998 Compared with 1997
Net interest revenue represents the difference between the interest earned on
certain of the Corporation's assets and the interest incurred on the liabili-
ties used to pay for these assets. On a consolidated basis, net interest reve-
nue increased approximately $97 million in 1998, compared with 1997. This im-
provement was primarily attributable to the Corporation's international op-
- -------------------------------------- 24 --------------------------------------
<PAGE>
erations, particularly in Brazil and Argentina. Specifically, these operations
were able to benefit from growth in average earning assets, particularly in Ar-
gentina, combined with wider interest rate spreads in Brazil arising from mar-
ket volatility. During the year, the Brazilian and Argentine loan and lease fi-
nancing portfolios experienced average growth of approximately $.6 billion and
$2.1 billion, respectively. Argentine growth included the acquisition of
Deutsche Argentina. The increase in consolidated net interest revenue also re-
flected growth in the domestic commercial portfolio. The improvement in net in-
terest revenue was partially offset by the Corporation's 1997 and 1998 divesti-
ture of its national consumer businesses, discussed below, which resulted in a
decline in average loans and lease financing of approximately $2 billion.
Net interest margin represents the relationship between net interest revenue
and average earning assets. Spread, another term used in this discussion, is
defined as the difference between the yield on the Corporation's earning assets
and the rate paid to fund those assets. Both margin and spread are affected by
strategic decisions and the mix of assets and liabilities on the Corporation's
balance sheet, as well as interest rate trends. The decline in margin from 1997
was primarily driven by the Corporation's divestiture of its national consumer
businesses, as well as costs incurred to fund noninterest earning activities.
In addition, the higher level of investment securities used to manage interest
rate risk also influenced the margin decline. As mentioned previously, the de-
cline in margin was partially mitigated by wider spreads in Brazil. In 1997,
the Corporation began the divestiture of its national consumer businesses, with
the sales of Ganis Credit Corporation (Ganis) and Fidelity Acceptance Corpora-
tion (FAC). This divestiture was completed with the first quarter 1998 contri-
bution of the national credit card portfolio to a joint venture. The aggregate
impact of this divestiture was to reduce margin by approximately 28 basis
points. Domestic margin was further reduced by the Corporation's investment, in
1998, in bank-owned life insurance. The revenue from these investments was re-
corded in noninterest income and, therefore, did not offset the cost of carry-
ing the assets, which is a component of net interest margin. In addition, do-
mestic margin was reduced due to new issuances of guaranteed preferred benefi-
cial interests in the Corporation's junior subordinated debentures, the cost of
which was included in interest expense. While resulting in higher interest ex-
pense, these issuances were used to fund the Corporation's redemption of its
preferred shares, eliminating the higher cost of preferred dividends. Refer to
the "Capital Management" section for further discussion of this strategy.
Future levels of net interest revenue and margin will be affected by competi-
tive pricing pressure on retail deposits, loans and other products; the mix and
volume of assets and liabilities; the interest rate environment; government
policies and the economic and political conditions in the countries where the
Corporation does business; and other factors. As such, there can be no assur-
ance as to the level of the Corporation's future net interest revenues or net
interest margins.
Noninterest Income
The composition of noninterest income is presented in Table 2.
Table 2 -- Noninterest Income
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial service fees and commissions
Deposit and ATM-related fees............................ $ 312 $ 259 $ 238
Investment banking fees................................. 179 57 23
Syndication and agent fees.............................. 68 95 58
Net mortgage servicing fees............................. (82)
Other financial service fees............................ 318 252 240
------ ------ ------
877 663 477
Trust and investment management fees..................... 326 283 246
Net securities gains..................................... 41 80 23
Trading profits and commissions.......................... (3) 58 76
Net foreign exchange profits............................. 127 88 54
Net equity and mezzanine profits......................... 233 221 209
Gains on sales of businesses............................. 254 68 153
Other income............................................. 177 102 106
------ ------ ------
$2,032 $1,563 $1,344
====== ====== ======
</TABLE>
1998 Compared with 1997
Financial Service Fees and Commissions
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Deposit and ATM-related fees
Service charges on deposits......................................... $248 $206
ATM-related fees.................................................... 64 53
---- ----
$312 $259
==== ====
</TABLE>
Service charges on deposits increased $42 million from 1997. This increase was
due, in part, to growth in Argentine operations, including the acquisition of
Deutsche Argentina. ATM-related fees increased $11 million from 1997, primarily
due to a higher level of domestic activity and the repricing of certain domes-
tic services.
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment banking fees
Advisory fees........................................................ $ 70 $28
Brokerage fees and commissions....................................... 62 11
Underwriting fees.................................................... 47 18
---- ---
$179 $57
==== ===
</TABLE>
Investment banking fees increased $122 million from 1997. The improvement in
each of these categories was primarily attributable to the acquisition of Rob-
ertson Stephens in August 1998, and, to a lesser extent, higher fees from the
Corporation's high yield unit.
- -------------------------------------- 25 --------------------------------------
<PAGE>
Syndication and agent fees decreased $27 million compared with 1997, primarily
due to a lower level of activity. During 1998, the Corporation completed 189
syndications, totaling $15.2 billion, compared with 207 transactions, totaling
$18.8 billion, in 1997.
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Other financial service fees
Letter of credit and acceptance fees................................ $ 77 $ 73
Credit card fees.................................................... 64 36
Other loan-related fees............................................. 45 39
Other............................................................... 132 104
---- ----
$318 $252
==== ====
</TABLE>
Compared with 1997, the $66 million increase in other financial service fees
was largely attributable to a $28 million increase in credit card fees and a
$28 million increase in other miscellaneous financial service fees. The im-
provement in credit card fees reflected approximately $25 million of fee growth
from the credit card portfolios in Argentina, Brazil and Uruguay, the latter
resulting from the acquisition of OCA. The increase in other miscellaneous fi-
nancial service fees also included a higher level of service fees from Argen-
tine operations due, in part, to insurance-related fees.
Trust and Investment Management Fees
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C>
Mutual fund fees..................................................... $132 $111
Personal trust fees.................................................. 162 145
Other agency fees.................................................... 32 27
---- ----
$326 $283
==== ====
</TABLE>
Mutual fund fees increased $21 million from 1997. This increase was attribut-
able, in part, to a $1.5 billion aggregate increase in assets under management
by the Brazilian and Argentine operations. The Corporation is the largest mu-
tual fund provider in Argentina and the fourth largest in Brazil. Additionally,
domestic mutual fund assets under management, excluding those related to the
Private Banking business, increased by approximately $1.5 billion, primarily as
a result of greater sales from cash management operations and the Regional
Bank. Personal trust fees are primarily based on assets managed by the Private
Banking business. These fees increased by $17 million, primarily due to a $1.7
billion increase in assets under management, prior to the sale of the Berkshire
County franchise in the fourth quarter of 1998, which had approximately $1 bil-
lion of assets under management. Other agency fees primarily relate to custody
operations. Although these fees increased modestly during the year, they are
expected to decline in the future as a result of the sale of the Corporation's
domestic institutional custody business in the fourth quarter of 1998.
Net Securities Gains
The $39 million decline in net securities gains mainly reflected the absence of
an approximately $20 million gain in 1997 from the Argentine available for sale
portfolio, combined with a $22 million loss in 1998 from the recognition of
other than temporary impairment related to certain available for sale securi-
ties held in the Corporation's Boston-based emerging markets portfolio.
Trading Profits and Commissions and Net Foreign Exchange Profits
The $61 million decline in trading profits and commissions was driven by losses
arising from the Boston-based emerging markets and high yield trading portfo-
lios, which generated combined trading losses in 1998 of approximately $105
million. The majority of these losses were incurred during the third quarter of
1998 when world financial markets experienced significant volatility due to the
escalation of economic crises in Asia and Russia and the spill-over effect that
these crises had on other markets, particularly emerging markets. The losses
were mostly offset by trading profits from Brazilian and Argentine operations
as well as a higher level of profits from the derivatives unit. Additionally,
net foreign exchange profits increased $39 million from 1997. These profits,
like derivatives profits, grew due to higher customer demand for risk manage-
ment products, arising from the same volatile conditions and market uncertain-
ties noted above.
Net Equity and Mezzanine Profits
Net equity and mezzanine profits mainly relate to the sale of investments made
by the Private Equity business. This income increased $12 million from 1997,
primarily as a result of a higher level of sales activity in the first half of
1998. At December 31, 1998, this portfolio had a carrying value of $1.3 bil-
lion, compared with $965 million at December 31, 1997.
Other
Gains on sales of businesses included a $165 million gain recorded in the first
quarter of 1998 from the sale of the Corporation's 26 percent interest in
HomeSide and gains of $51 million and $38 million related to the sales of the
Corporation's Berkshire County franchise and domestic institutional custody
business, respectively, in the fourth quarter of 1998. Additional information
on these transactions can be found in Note 2 to the Financial Statements. In
1997, the gains on sales of businesses related to the sale of FAC.
Other income increased $75 million compared with 1997. This improvement was
largely driven by earnings on the Corporation's investment in bank-owned life
insurance of approximately $47 million, the funding costs of which contributed
to a corresponding decline in net interest revenue and margin. Additionally,
the increase reflected a higher level of gains on the sale of loans, as well as
the absence of a 1997 charge related to interest rate futures contracts that
had been used to hedge the funding of FAC. These increases were partially off-
set by a $20 million charge in 1998 related to the Corporation's 17.5 percent
equity investment in Korean Merchant Banking Corporation (KMBC), reflecting de-
terioration of that company's financial condition.
* * *
- -------------------------------------- 26 --------------------------------------
<PAGE>
The Corporation's capital markets-related businesses, including activity from
its trading, investment banking and private equity businesses, are sensitive to
the volatile market and economic conditions, which continued into the first
quarter of 1999. As such, it is not possible to predict how the continued level
of volatility in world financial markets will affect these businesses and their
levels of revenues in the future.
Noninterest Expense
The composition of noninterest expense is presented in Table 3.
Table 3 -- Noninterest Expense
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee costs........................................... $1,630 $1,279 $1,178
Occupancy and equipment.................................. 398 350 341
Advertising and public relations......................... 109 107 108
Communications........................................... 132 112 101
Professional fees........................................ 111 61 56
Software costs........................................... 71 44 35
Amortization of goodwill ................................ 39 27 24
Other.................................................... 420 344 297
------ ------ ------
Noninterest expense before acquisition-related
restructuring costs..................................... 2,910 2,324 2,140
Aquisition-related restructuring costs................... 180
------ ------ ------
$2,910 $2,324 $2,320
====== ====== ======
</TABLE>
1998 Compared with 1997
Noninterest expense increased $586 million compared with the prior year. This
increase was primarily driven by growth and investment spending in Latin Ameri-
ca, including the acquisitions of Deutsche Argentina and OCA and the branch ex-
pansion programs in Brazil and Argentina; and ongoing initiatives to build the
Corporation's various Wholesale Bank businesses, including the acquisition of
Robertson Stephens and the expansion of other capital markets-related capabili-
ties. Although this investment spending affected all categories of noninterest
expense, it was most evident in the growth of employee costs, including sala-
ries, benefits and incentive compensation, as well as occupancy and equipment
costs, communication costs and amortization of goodwill.
At December 31, 1998, the number of full-time equivalent employees was approxi-
mately 24,500, reflecting growth of approximately 3,500 from December 31, 1997.
Almost all of this growth was attributable to the abovementioned areas of in-
vestment. This growth was partially offset by reductions in various support
functions as well as in the Regional Bank, reflecting, in part, the previously
mentioned sales of the Berkshire County franchise and the domestic institu-
tional custody business, as well as various branch closings during the year.
Higher incentive compensation, which included $94 million of bonus payments in
connection with the Robertson Stephens acquisition, also contributed to the in-
crease in employee costs. The increases in employee costs were partially offset
by the lower costs resulting from the Corporation's abovementioned divestiture
of its national consumer businesses.
In addition, noninterest expense increased over 1997 levels as a result of a
number of other initiatives undertaken by the Corporation. These initiatives
particularly contributed to the increases in professional fees and other ex-
penses. In the first quarter of 1998, the Corporation recorded charges related
to the realignments of its European operations and the Private Banking busi-
ness. During the third quarter of 1998, the Corporation recorded various costs
associated with a 25 percent reduction in staff of its Emerging Market Sales,
Trading and Research (EMSTR) unit, as well as a realignment of its Asian opera-
tions, including the closing of offices in India, Japan, the Philippines and
Taiwan. Specifically, these costs consisted of anticipated employee severance
costs, costs of terminating existing lease obligations and other business con-
tract losses. The annual comparison also included costs incurred in 1998 re-
lated to the Regional Bank, including the integration of Rhode Island Hospital
Trust National Bank into the Bank and the Corporation's redesign project, the
final results of which have been integrated into the Corporation's business
planning process. The Corporation also made various investments with respect to
risk management and technology, including its responses to the introduction of
the euro and to the Year 2000 issue. Additional information on the introduction
of the euro and the Year 2000 issue can be found in the "Risk Management" sec-
tion. In both comparisons, these expenses were offset partially by the Corpora-
tion's divestiture of its national consumer businesses, as well as the absence
of 1997 costs related to the integration of BayBanks, Inc. (BayBanks) and Bank
of Boston Connecticut into the Bank.
Provision for Credit Losses
The provision for credit losses was $380 million in 1998, compared with $200
million in 1997. The provision for credit losses reflects management's assess-
ment of the adequacy of the reserve for credit losses, considering the current
risk characteristics of the loan portfolio and economic conditions. In 1998,
the level of provision reflected a higher level of losses during the year. The
amount of future provisions will continue to be a function of management's as-
sessment of credit risk based upon its quarterly review of the reserve for
credit losses. These risk assessments include the potential impact of continued
economic instability in world financial markets and the status of economic pro-
grams in various countries. Due to this economic volatility, which has contin-
ued into the first quarter of 1999, particularly with respect to various emerg-
ing markets countries, management currently expects increased pressure on the
ability of certain customers to repay their debts to the Corporation. As such,
there can be no assurance as to the level of future provisions. Additional in-
formation on the reserve for credit losses and net credit losses can be found
in the "Reserve for Credit Losses" section and Note 7 to the Financial State-
ments.
Provision for Income Taxes
The 1998 provision for income taxes was $477 million, compared with $589 mil-
lion for 1997. The Corporation's effective tax rate was 38 percent in 1998,
compared with 40 percent in 1997. The reduction in the Corporation's effective
tax rate from 1997 was primarily due to a change in the mix of the Corpora-
tion's tax base.
- -------------------------------------- 27 --------------------------------------
<PAGE>
Line of Business Information
The Corporation is managed through the Office of the Chief Executive Officer
(the OCEO), which is the senior decision making group in the company. The OCEO
consists of five members, including the Chairman and Chief Executive Officer
(CEO), the President and Chief Operating Officer (COO), the Chief Financial
Officer, the head of the Regional Bank and the head of the Wholesale Bank. The
latter three individuals are also Vice Chairs of the Corporation. The OCEO
meets periodically to discuss important matters of strategy and review the op-
erating performance of the Corporation's businesses. The group maintains close
contact with key administrative heads and business managers throughout the
Corporation, including the management teams in Argentina and Brazil.
The COO has primary responsibility for the Corporation's revenue producing
businesses. In assessing the performance of the Corporation, the COO divides
the company into four major business lines: the Wholesale Bank, the Regional
Bank, Argentina and Brazil. The Wholesale and Regional Bank lines cover the
vast majority of the Corporation's domestic operations, while the Argentina
and Brazil lines cover the vast majority of the Corporation's international
operations. Operating results and other key financial measures of these four
major business lines for 1998, 1997 and 1996 are presented below. All other
businesses not encompassed in the four major lines have been combined and are
presented below in "Other Businesses". Certain revenue and expense items,
mainly of a nonrecurring nature, which were not considered by management in
the evaluation of a business unit's core operating results, are included in
"Corporate Adjustments" shown below. Information shown for 1997 and 1996 is
presented on a basis consistent with 1998 and, as such, has been restated for
changes in the Corporation's organizational structure and internal management
reporting methodologies implemented during 1998.
The line of business information shown below reflects assignments and alloca-
tions of items made within the Corporation's internal management reporting
process. Descriptions of individual items are as follows:
. Most balance sheet, as well as revenue and expense, items are derived from
the internal management reporting system, where they are specifically at-
tributable to individual business units.
. Net interest revenue is allocated to the business units using a funds
transfer pricing process, which incorporates a matched funding concept,
with the residual assigned to the Global Treasury group.
. Various techniques are employed to allocate certain costs associated with
corporate support areas, including the use of unit costs and service vol-
umes.
. The provision for credit losses is allocated to each line of business based
on actual net credit losses for consumer loans and on an "expected loss"
methodology for commercial loans. This applies to both domestic and inter-
national business units. Expected loss is determined under the
Corporation's risk adjusted return on equity (RAROE) methodology and is an
estimate of the average loss rate that individual credit portfolios will
experience over an economic cycle, based on the Corporation's historical
experiences and various market data. This method is different from the
method used to determine the Corporation's consolidated provision for
credit losses in any given period, which is based on an evaluation of the
adequacy of the reserve for credit losses considering the risk characteris-
tics in the credit portfolio at a point in time. Since this expected loss
methodology, which averages peaks and valleys of the credit cycle, is in-
tended to be a longer term view of the credit costs of a business, it would
be expected to result in a lower allocation in declining periods of a
credit cycle and a higher allocation in improving periods of a credit cy-
cle. The difference between the sum of the provisions for each line of
business determined using this methodology and the Corporation's consoli-
dated provision is included in Corporate Adjustments.
. The provision for income taxes applied to each business line reflects an
estimate of the actual effective tax rate related to each business line for
each year presented. These rates will vary due to a number of factors, in-
cluding differences in state tax rates, foreign tax issues and the tax ram-
ifications of certain transactions.
. The return on equity shown for each line of business is based upon the Cor-
poration's RAROE methodology. The amount of common equity allocated to each
business line is based on 1) an evaluation of the various risks associated
with the business, including credit, market, country and operating risk,
and 2) the amount of capital necessary to support other investments, such
as fixed assets and joint ventures. The amount of capital necessary to sup-
port goodwill is not allocated to individual businesses for RAROE purposes
and, accordingly, is included in Corporate Adjustments. The difference be-
tween the aggregate amount of capital allocated under this methodology, in-
cluding the amount related to goodwill, and the Corporation's total book
capital is essentially allocated to the business lines on a pro-rata basis.
Businesses are allocated goodwill when evaluated under an economic value
added approach, which is another analytical tool that the Corporation uses
to assess the performance of business units.
. Certain revenue and expense items, which are not included in the business
line results evaluated by management, are included in Corporate Adjust-
ments. The major source of revenue shown in Corporate Adjustments for each
year presented is gains on sales of businesses. In 1998, total revenue of
$212 million included $254 million of gains on sales of businesses, par-
tially offset by net funding costs for certain noninterest bearing assets
and liabilities. The components of revenue are also affected by transfers
between net interest revenue and noninterest income related to compensating
balance arrangements with certain customers. The expenses shown in Corpo-
rate Adjustments for all three years are primarily composed of three items:
amortization of goodwill; costs related to acquisitions or the realignment
and downsizing of certain businesses; and, in 1998, bonus payments due em-
ployees in connection with the Robertson Stephens acquisition.
- -------------------------------------- 28 --------------------------------------
<PAGE>
Selected financial information for the Corporation's lines of business for
1998, 1997 and 1996 is presented in Table 4 shown below. This financial infor-
mation is presented on a fully taxable equivalent basis. Further information on
the Corporation's line of business information can be found in Note 26 to the
Financial Statements.
Table 4 -- Line of Business Selected FInancial Information
<TABLE>
<CAPTION>
Wholesale Regional Other Corporate Consolidated
(dollars in millions) Bank Bank Argentina Brazil Businesses Adjustments Totals
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1998
Net interest revenue.... $ 618 $ 952 $ 332 $ 345 $ 234 $ 69 $ 2,550
Noninterest income...... 861 450 244 174 160 143 2,032
------- ------- ------ ------ ------- ------ -------
Total revenue........... 1,479 1,402 576 519 394 212 4,582
Noninterest expense..... 697 1,012 381 327 282 211 2,910
------- ------- ------ ------ ------- ------ -------
Operating income........ 782 390 195 192 112 1 1,672
Provision for credit
losses................. 118 78 64 24 46 50 380
------- ------- ------ ------ ------- ------ -------
Pre-tax income (loss)... 664 312 131 168 66 (49) 1,292
Income tax provision
(benefit).............. 273 119 57 69 5 (23) 500
------- ------- ------ ------ ------- ------ -------
Net income (loss)....... $ 391 $ 193 $ 74 $ 99 $ 61 $ (26) $ 792
======= ======= ====== ====== ======= ====== =======
Average loans and lease
financing.............. $23,641 $ 6,488 $5,640 $3,590 $ 5,482 $ (158) $44,683
Average assets.......... $29,365 $ 8,148 $8,227 $6,297 $18,394 $1,769 $72,200
Average deposits........ $ 5,301 $25,608 $4,495 $2,136 $ 8,111 $ 127 $45,778
RAROE................... 20% 23% 17% 27% 13% 17%
- --------------------------------------------------------------------------------------------------
Year Ended December 31,
1997
Net interest revenue.... $ 575 $ 954 $ 205 $ 265 $ 382 $ 72 $ 2,453
Noninterest income...... 710 406 145 138 181 (17) 1,563
------- ------- ------ ------ ------- ------ -------
Total revenue........... 1,285 1,360 350 403 563 55 4,016
Noninterest expense..... 502 979 217 260 312 54 2,324
------- ------- ------ ------ ------- ------ -------
Operating income........ 783 381 133 143 251 1 1,692
Provision for credit
losses................. 120 81 21 18 139 (179) 200
------- ------- ------ ------ ------- ------ -------
Pre-tax income.......... 663 300 112 125 112 180 1,492
Income tax provision.... 269 117 49 54 45 79 613
------- ------- ------ ------ ------- ------ -------
Net income.............. $ 394 $ 183 $ 63 $ 71 $ 67 $ 101 $ 879
======= ======= ====== ====== ======= ====== =======
Average loans and lease
financing.............. $21,074 $ 7,010 $3,552 $3,036 $ 7,562 $ 149 $42,383
Average assets.......... $25,131 $ 8,776 $5,160 $5,466 $19,698 $1,032 $65,263
Average deposits........ $ 5,306 $25,388 $2,576 $1,437 $ 7,969 $ 177 $42,853
RAROE................... 23% 21% 23% 24% 10% 20%
- --------------------------------------------------------------------------------------------------
Year Ended December 31,
1996
Net interest revenue.... $ 540 $ 914 $ 183 $ 213 $ 441 $ 69 $ 2,360
Noninterest income...... 552 407 108 105 206 (34) 1,344
------- ------- ------ ------ ------- ------ -------
Total revenue........... 1,092 1,321 291 318 647 35 3,704
Noninterest expense..... 419 939 173 199 358 232 2,320
------- ------- ------ ------ ------- ------ -------
Operating income........ 673 382 118 119 289 (197) 1,384
Provision for credit
losses................. 106 44 20 16 116 (71) 231
------- ------- ------ ------ ------- ------ -------
Pre-tax income (loss)... 567 338 98 103 173 (126) 1,153
Income tax provision
(benefit).............. 235 148 40 46 70 (36) 503
------- ------- ------ ------ ------- ------ -------
Net income (loss)....... $ 332 $ 190 $ 58 $ 57 $ 103 $ (90) $ 650
======= ======= ====== ====== ======= ====== =======
Average loans and lease
financing.............. $19,431 $ 6,428 $2,987 $2,480 $ 9,196 $ 67 $40,589
Average assets.......... $22,497 $ 8,149 $4,275 $4,616 $19,312 $ 674 $59,523
Average deposits........ $ 5,467 $25,192 $2,160 $1,060 $ 7,643 $ 81 $41,603
RAROE................... 20% 22% 19% 23% 12% 14%
</TABLE>
- -------------------------------------- 29 --------------------------------------
<PAGE>
Wholesale Bank
The Wholesale Bank provides a full range of commercial and investment banking
products to its predominately middle market, non-investment grade corporate
customer base. The geographic reach of this business is national in scope, with
approximately three-quarters of this business not dependent on the New England
economy. The Wholesale Bank seeks to establish and maintain lead bank status
with its clients by offering the following products and services, which cover
the full spectrum of a company's needs:
. Lending
. Leasing
. Cash Management Services
. Risk Management Products (foreign exchange and derivatives)
. Trade Services
. Loan Syndications
. Equity Underwriting
. High Yield Debt Underwriting
. Merger and Acquisition Advisory Services
. Private Placements
. Private Equity
Within the Wholesale Bank there are three major sub-businesses: the Commercial
Bank, the Investment Bank and Private Equity. Each of these sub-businesses
seeks to leverage the strengths of the other two in creating business opportu-
nities. They also look to leverage the Corporation's international franchise,
particularly in Latin America, to attract customers doing business abroad.
In 1998, a substantial portion of the Wholesale Bank's operating income came
from the Commercial Bank, with the remainder from Private Equity. In 1998, the
Investment Bank recorded a net loss in operating income of approximately
$50 million, due mainly to trading losses incurred by the high yield unit, as
liquidity in that market suffered greatly from turmoil in the global capital
markets during the last half of 1998.
The approximate revenue contribution made by each of the Wholesale Bank's sub-
businesses in 1998 is depicted in the chart shown below.
Chart 1 Wholesale Bank - Revenue
. Commercial Bank 77%
. Private Equity 14%
. Investment Bank* 9%
* It is expected that the relative contribution to revenue made by the Invest-
ment Bank will increase next year due, in part, to Robertson Stephens being
part of the Corporation for a full year in 1999, compared with four months in
1998.
The Commercial Bank has primary responsibility for managing individual customer
relationships. Historically, corporate customers have generally been brought
into the Bank through a lending transaction and the Commercial Bank's relation-
ship managers seek to expand the relationship into other products and services.
Major divisions of the Commercial Bank are New England Corporate Banking, Busi-
ness Credit, Leasing and additional lending groups which are organized along
specialized industry lines. The Corporation enjoys a national presence in many
of these specialized industry groups, including High Technology, Media, Con-
sumer and Specialty Retail, Transportation, Environmental Services, Real Es-
tate, Telecommunications, Restaurants, Energy and Utilities, Health Care, and
Financial Institutions. In addition, the Multinational and European divisions
provide support to the Wholesale Bank's multinational clients. Relationship
managers from all divisions offer customers loan syndication services and a
package of fee-generating products such as foreign exchange, derivatives, cash
management and trade services, while working closely with counterparts from the
Investment Bank in ensuring that all financing needs of their customers are
met. The compensation structure for employees in the Commercial and Investment
Banks incents them to produce cross-sell opportunities for each other's prod-
ucts.
The Investment Bank falls under the umbrella of BancBoston Robertson Stephens
Inc., which essentially combines the capital markets debt products that had
previously been offered by the Wholesale Bank with the equity underwriting,
distribution and research capabilities of Robertson Stephens, an investment
bank that was purchased by the Corporation during the third quarter of 1998.
The purchase of Robertson Stephens also enhanced the Wholesale Bank's advisory
and private placement capabilities. Strategically, the acquisition was designed
to preserve the Wholesale Bank's customer relationships by rounding out its
product set and providing customers with "one-stop shopping."
The Corporation has been in the Private Equity business for approximately 40
years and during that time has invested approximately $3 billion, including
committing over $650 million in 1998, to a wide range of companies. Private
Equity's portfolio, which had a carrying value of approximately $1.3 billion at
the
- -------------------------------------- 30 --------------------------------------
<PAGE>
end of 1998, is diversified as to industry, geography, maturity, investment
size and investment type. While most investments have been made in the U.S.
through the main office in Boston and another office in Palo Alto, Private Eq-
uity also has a strong global presence with offices in London, Hong Kong,
Buenos Aires and Sao Paulo, as well as strategic alliances worldwide. The busi-
ness provides a wide range of capital options, from early stage venture capital
for emerging growth companies in the health care and information technology
sectors to equity sponsorship, co-investment and mezzanine capital for buyouts,
recapitalizations and expansion of mid-size companies. Gains are realized
through a variety of channels including strategic or financial buyouts, recapi-
talizations, and public offerings. In addition, Private Equity has initiated a
new line of asset management products for institutions and high net worth indi-
viduals, including the successful closing of a $150 million "fund of funds" in
1998.
Net income from the Wholesale Bank in 1998 was essentially flat with 1997. The
comparison was affected by the previously discussed operating losses incurred
by the Investment Bank in 1998, stemming from trading losses in the high yield
unit. In addition, revenue from Private Equity slowed in the second half of
1998 due to market conditions, while expenses from this business were higher in
1998 due, in part, to higher incentive compensation and an increase in staff.
Net income from the Commercial Bank, however, increased approximately 13 per-
cent from 1997. Contributing to this improvement was higher net interest reve-
nue, reflecting a $2.5 billion increase in average loans and leases. This was
caused by growth in many of the Commercial Bank's lending divisions, including
Real Estate, Business Credit, Energy and Utilities, and Environmental Services,
as well as growth in the lease portfolio. In addition, an increase in profits
from the foreign exchange and derivatives areas, reflecting higher customer de-
mand for these risk management products, also contributed to the increase in
net income. Partially offsetting these revenue increases in the Commercial Bank
were higher expenses due, in part, to increased employee costs, including
higher levels of incentive compensation for those areas which produced improved
revenues.
Regional Bank
The Regional Bank is a New England-based business that provides for the finan-
cial services needs of its three major customer groups: consumers, high net
worth individuals and small businesses. The Regional Bank operates through
franchises in Massachusetts, Rhode Island, Connecticut and New Hampshire. The
Massachusetts banking franchise is the largest in that state.
The customer mix of the Regional Bank includes:
. Approximately 1.7 million consumer households
. Approximately 11,000 private banking clients, mainly high net worth indi-
viduals, served through 13 private banking offices in southern New England
and Florida
. Nearly 130,000 small business relationships
Customers are offered a wide array of lending, investment and deposit products,
and are served through a number of convenience distribution channels, as well
as traditional branch locations. A summary of the Regional Bank's distribution
system follows:
. Nearly 1,600 ATM locations with over three-quarters of these located in
Massachusetts
. Approximately 430 full service branches, of which approximately 20 percent
are located in stores or shopping malls
. Two major telebanking centers, which handle approximately 33 million calls
per year
. One of the most widely used home banking products in the country, with ap-
proximately 370,000 customers
Major product groups are as follows:
. Deposits totaling $26 billion, which provide other parts of the Corporation
with a major source of funding.
. A $6 billion loan portfolio, of which $5 billion are loans to consumers and
the remainder small business loans. The consumer loan products include home
equity, credit card, residential mortgage, automobile, education and other
types of installment loans.
. A family of 18 no-load mutual funds, known as the Boston 1784 Funds, which
have approximately $10 billion of assets under management. These funds are
managed by the Corporation's Global Treasury group.
. Approximately $23 billion of assets under management (including approxi-
mately $4 billion which are invested in the Boston 1784 Funds) in connec-
tion with wealth management and private banking services that are provided
for high net worth individuals.
The major sub-businesses of the Regional Bank are Consumer and Community Bank-
ing, Business Banking, and Private Banking. The estimated percentage contribu-
tion to operating income for each sub-business in 1998 follows.
Chart 2 Regional Bank - Operating Income
. Consumer and Community Banking 61%
. Private Banking 22%
. Business Banking 17%
In connection with an initiative first announced in October 1997, aimed at
redesigning the way in which it does business, the Regional Bank introduced
some major organizational, strategic and personnel changes in 1998. The goal of
this effort is to make the business more customer focused and improve business
retention by enhancing the customer's overall experience with the Bank. Busi-
ness functions across southern New England have been integrated to better ena-
ble individual sub-businesses to leverage from each other's strengths and in-
crease cross-marketing opportunities. In connection with this effort, the do-
mestic
- -------------------------------------- 31 --------------------------------------
<PAGE>
private banking unit was incorporated into the Regional Bank and small middle
market business relationships are being transferred from the Wholesale Bank.
Other actions which are scheduled to be implemented during 1999 include ex-
panding certain product lines, such as investment products (e.g. mutual funds),
and improving the efficiency of certain delivery channels, particularly home
banking through the Internet, telebanking and the branch network. Also, in
light of the rapidly changing consumer banking environment, a dedicated team
has been formed to create a range of products and services designed to generate
new revenue streams, especially associated with electronic commerce.
Net income from the Regional Bank increased $10 million, or 5 percent, from
1997. This increase was driven by a higher level of noninterest income, includ-
ing increases in personal trust, electronic banking and investment management
fees. Partially offsetting the growth in noninterest income was an increase in
noninterest expense related to various initiatives which resulted in higher
levels of employee costs, professional fees and software expenditures. This
growth was partially offset by cost savings from branch closings. Net interest
revenue was essentially flat with 1997, as narrower spreads caused by the low
rate environment and continued runoff of the indirect auto loan portfolio were
offset by improvements in spread from a favorable change in deposit mix and
higher revenue from other loan products reflecting improved volume, spreads and
fees. The declining volume of indirect auto loans reflects the Corporation's
strategic decision to allow this portfolio to run off due to the low returns
generated by this business.
Argentina
The Corporation has maintained a presence in Argentina since 1917. During the
1990s, Argentina, a country of approximately 35 million people, has enjoyed a
period of economic stability highlighted by a very low inflation rate, which
was 0.7 percent in 1998, and the establishment of the Convertibility Plan,
which has fixed the Argentine peso at a one-to-one exchange rate against the
U.S. dollar for most of the decade.
The Corporation operates in both the corporate and consumer banking sectors.
The corporate banking business caters to large corporations, middle market cus-
tomers and companies operating in a variety of specialized industries. Corpo-
rate customers are offered a full array of products, including traditional
lending services, cash management, trade services, foreign exchange, syndica-
tions, corporate finance and various investment banking services. On the con-
sumer side, in addition to offering various deposit and lending products, cus-
tomers are also provided access to mutual fund, insurance, credit card and pen-
sion management products.
As a result of the aforementioned economic stability, the Corporation expanded
its Argentine operations and now operates one of the largest banks in the coun-
try. Beginning in the fourth quarter of 1997 and extending through the first
half of 1998, the Corporation undertook a significant expansion of its Argen-
tine branch network, which included the acquisition of Deutsche Argentina and
the opening of 64 new branches in various parts of the country. As a result of
this expansion program, the Corporation now has 139 branches throughout the
country, compared with 43 prior to the program. The expansion effort is one of
the main reasons why the Corporation's total assets in Argentina have grown to
approximately $9 billion at the end of 1998, from less than $7 billion at the
end of 1997, including growth in the loan portfolio to approximately $6 billion
at the end of 1998, from less than $5 billion at the end of 1997. The major
components of the loan portfolio at the end of 1998 follow.
Chart 3 Argentina - Loans
. Large Corporate 55%
. Consumer* 32%
. Middle Market 13%
* Nearly three-quarters of the consumer portfolio is collateralized.
The Corporation's Argentine operations are comprised of three main sub-busi-
nesses: Corporate Banking, which includes Large Corporate and Middle Market,
Retail Banking and Treasury. Products and services of the Corporate and Retail
Banking sub-businesses are discussed above. The Treasury sub-business is mainly
responsible for asset and liability management and trading activities. The es-
timated percentage contribution to operating income for each sub-business in
1998 follows.
Chart 4 Argentina - Operating Income
. Retail Banking 39%
. Corporate Banking 30%
. Treasury 29%
. Other 2%
Net income from Argentine operations increased $11 million, or 17 percent, from
1997. This improvement was achieved despite net costs incurred in connection
with the previously discussed expansion efforts undertaken during the year,
which affected the earnings growth rate and contributed to a decline in RAROE
from 1997. Operating income increased $62 million on the strength of higher net
interest revenue, which was caused by an increase in average loans and leases
of approximately $2 billion; higher levels of deposit fees, as average deposits
grew by nearly $2 billion from 1997; increased credit card fees related to a 78
percent increase in the number of credit card holders; improved mutual fund
fees, as the Corporation maintained its status as the largest mutual fund pro-
vider in Argentina; and improved trading account and foreign exchange profits.
The
- -------------------------------------- 32 --------------------------------------
<PAGE>
improved revenue picture was partially offset by an increase in expenses and a
higher provision for credit losses. Much of the expense growth came from em-
ployee costs, due to a combination of expansion activities and higher incentive
compensation in line with the increased revenues. The Corporation employs ap-
proximately 3,600 people in Argentina, up over 1,000 from the end of 1997.
Other expense items, such as occupancy, equipment, telecommunications, travel
and advertising, increased due, in part, to expansion, which included integra-
tion expenses related to the Deutsche Argentina acquisition. The higher provi-
sion for credit losses mainly related to an increase in credit losses on con-
sumer loans due, in part, to growth in those loan portfolios. Consumer loans,
which more than doubled to approximately $1.8 billion by the end of 1998, gen-
erally carry wider spreads and a higher loss rate than loans in the commercial
portfolio. Total net credit losses from Argentine operations were $57 million
in 1998, compared with $23 million in 1997, with most of the increase related
to the consumer portfolio. In order to more fully understand how the Corpora-
tion manages its cross-border and other market risks in Argentina, you should
refer to the "Cross-Border Outstandings" and "Non-U.S. Dollar Denominated Risk
Management" sections.
Brazil
The Corporation has maintained a presence in Brazil since 1947. Like Argentina,
Brazil enjoyed a period of relative economic stability during a portion of the
1990s as a result of the Real Plan which was instituted in mid-1994. This plan,
which included a managed exchange rate policy, reduced inflation significantly
from hyperinflationary levels in the early 1990s to "deflation" (or negative
inflation) of 2 percent in 1998. As a result of pressure caused by economic
turmoil in other emerging markets countries during 1998 and Brazil's need to
reduce both its current account and fiscal deficits, the Brazilian government
decided to allow the local currency to float freely against the U.S. dollar be-
ginning in mid-January 1999. This action is expected to cause an economic con-
traction and a rise in inflation during 1999.
Brazil, a country of approximately 165 million people, has a much larger popu-
lation than Argentina; however, the Corporation's balance sheet in Brazil is
only about two-thirds the size of its balance sheet in Argentina and the branch
network is about half as large. This reflects the Corporation's Brazilian
strategy of operating in very focused and targeted up-tier markets, a strategy
that is not conducive to maintaining a large balance sheet. The Corporate Bank-
ing business principally focuses on large multinational and domestic companies,
offering them a full range of commercial and investment banking products. In
Retail Banking, the focus is on an upscale customer base, specifically the top
10 percent of the wage earners in the country. As with Corporate Banking, re-
tail customers are offered a full product set, including lending, credit cards,
mutual funds, deposit products, telebanking and home banking. To further pene-
trate its targeted customer base, the Corporation embarked on a branch expan-
sion program during 1998, which has nearly doubled the size of the branch net-
work to approximately 65 locations.
The Corporation's total assets in Brazil at the end of 1998 and 1997 were ap-
proximately $6 billion, which in both years included a loan portfolio of ap-
proximately $3 billion. The major components of the 1998 loan portfolio follow.
Chart 5 Brazil - Loans
. Corporate 87%
. Consumer* 9%
. Middle Market 4%
* Approximately two-thirds of the consumer portfolio is collateralized.
As noted in the chart, the substantial portion of loans are to large corpora-
tions, and approximately 90 percent of these loans are related to import/export
transactions. Given the nature of this loan portfolio, commercial loan net
credit losses have historically been minimal and totaled $1 million in 1998 and
$2 million in 1997. The consumer portfolio, which totals approximately $300
million, is made up of mortgages, auto loans, credit card receivables and over-
drafts. Net credit losses related to consumer loans were $13 million in 1998
and $7 million in 1997.
The Corporation's Brazilian operations consist of three main sub-businesses:
Corporate Banking, Retail Banking and Treasury. Products and services of the
Corporate and Retail Banking sub-businesses are discussed above. The Treasury
sub-business is mainly responsible for asset and liability management and trad-
ing activities. The estimated percentage contribution to operating income for
each sub-business in 1998 follows.
Chart 6 Brazil - Operating Income
. Corporate Banking 61%
. Treasury 22%
. Retail Banking 17%
Net income from Brazilian operations increased $28 million, or 39 percent, from
1997. This improvement was achieved despite costs incurred in 1998 to expand
the branch network, as previously discussed. Operating income increased $49
million on the strength of higher net interest revenue, due to wider spreads
and an increase in average earning assets; higher levels of mutual fund, depos-
it, credit card and letter of credit fees; and improved trading account prof-
its. The mutual fund business accounts for
- -------------------------------------- 33 --------------------------------------
<PAGE>
nearly 15 percent of the Brazilian operation's total revenue, reflecting its
status as the fourth largest mutual fund company in the country. An increase in
expenses partially offset the revenue improvements. Substantially all of the
increase in expenses came from the Retail Banking sub-business due, in large
part, to the branch expansion activities in 1998. This also had the effect of
lowering Retail Banking's contribution to operating income in 1998. In order to
more fully understand how the Corporation manages its cross-border and other
market risks in Brazil, you should refer to the "Cross-Border Outstandings" and
"Non-U.S. Dollar Denominated Risk Management" sections.
Other Businesses
The following is a listing of individual businesses that have been combined in
Other Businesses:
. Global Treasury This unit is primarily responsible for asset and liability
risk management (see the "Asset and Liability Management" section for a
further discussion of asset and liability risk management). Global Treasury
accounts for approximately $12 billion of the average assets shown in Other
Businesses, mainly related to securities portfolios used to manage the Cor-
poration's U.S. dollar interest rate risk exposure. In addition, operating
results from investments made in bank-owned life insurance are included in
Global Treasury's results.
. Other Latin America In addition to its major operations in Argentina and
Brazil, the Corporation also maintains a network of smaller offices
throughout Latin America which, in the aggregate, contribute approximately
$3 billion of the average assets shown in Other Businesses. These offices
are located in Chile, Uruguay, Mexico, Colombia, Panama and Peru.
. National Consumer During 1997, the Corporation sold two of its three na-
tional consumer businesses, FAC and Ganis. The remaining business, national
credit card, was contributed to a joint venture in January 1998.
. Remaining Businesses The remaining businesses include Asia, the Interna-
tional Private Bank and EMSTR. These businesses account for the remainder
of the average assets shown in Other Businesses. All of these areas have
undergone realignments during 1998, and asset levels in Asia and EMSTR have
declined. Also included in Other Businesses are the following joint ven-
tures: Argentine pension, domestic stock transfer, national credit card and
Mexican pension, the latter of which was sold during 1998.
Net income from Other Businesses declined $6 million from 1997, which included
a lower level of operating income, a decline in the provision for credit losses
and a decline in the effective tax rate. Operating income declined $139 million
as a result of EMSTR, mainly reflecting trading losses incurred in 1998, cou-
pled with the Corporation's exit from its national consumer businesses. These
declines were partially offset by a higher level of securities gains from
Global Treasury. The exit from the national consumer businesses was primarily
responsible for the $93 million decline in the provision for credit losses,
while the low effective tax rate in 1998 resulted from the tax treatment of
various Global Treasury investments.
Financial Condition
Risk Management
The Corporation's management of the risks inherent in its businesses is essen-
tial for understanding and assessing its financial performance and for creating
long-term value. Four of the Corporation's primary risk factors are credit
risk, market risk, operating risk and liquidity risk. All of these risks, if
not effectively managed, can result in a potential loss of earnings, both cur-
rent and future, erosion of capital and/or reputational harm. The Corporation
has a series of risk processes intended to identify, monitor and control these
risks. These processes are structured around certain fundamental building
blocks, including commitment from senior level management; business unit owner-
ship; clearly defined policies and procedures; training; independent oversight;
established approval processes; utilization of management information systems,
measurement and analytical tools; and capital allocation and other performance
evaluation processes. While sound risk management processes assist the Corpora-
tion in managing its risk exposures, they do not insulate the Corporation from
losses. Despite the Corporation's best efforts to control its risks, losses
can, and do, periodically result, particularly from fraud and collusion and un-
anticipated events that challenge the limits of these processes. As such, the
Corporation continually seeks to improve its risk management culture to better
balance associated risks with its goal of optimizing value to its stockholders
and customers while operating in a dynamic environment.
The Risk Management unit oversees the Corporation's worldwide risk management
processes, except for liquidity risk which is managed by Global Treasury (see
the "Liquidity Risk Management" section). The Risk Management unit is led by
the Executive Vice President of Risk Management, who reports directly to the
CEO, and is composed of credit risk, market risk and operating risk management
functions. It also has administrative responsibility for the global assurance
function that monitors compliance with regulatory and various operating poli-
cies. Oversight of these risk management processes is provided by a number of
cross-functional committees, including the Credit Policy Committee (CPC), the
Market Risk Committee (MRC) and the Operating Risk Committee (ORC), which are
chaired by the Executive Vice President of Risk Management or various senior
executives who report to him. Additional information on the Corporation's risk
management processes and the abovementioned committees can be found in the
"Credit Risk Management," "Market Risk Management" and "Operating Risk Manage-
ment" sections.
During 1998, the Corporation successfully managed the risks associated with the
introduction of the euro, a unified currency that was adopted by participating
European countries on January 4, 1999. One transitory item that continues to
impact all of the Corporation's primary risk factors is the Year 2000 issue. A
discussion of the Corporation's Year 2000 program follows.
- -------------------------------------- 34 --------------------------------------
<PAGE>
Year 2000
The following Year 2000 statements constitute a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
Because memory was expensive in the early days of computing, programmers cre-
ated a standard of storing data using two rather than four-digit years. Most
application software programs use this standard, and, unless it is corrected,
01/01/00 could be recognized as the first day of 1900 and not the beginning of
the year 2000. This error could force computers to shut down or lead to the
generation of inaccurate data. The Corporation has deployed a significant num-
ber of cross-functional resources with technical, business unit, legal and fi-
nancial expertise in order to achieve Year 2000 readiness.
The Corporation has an extensive worldwide program in place to address its ex-
posure to the Year 2000 issue. This program is designed to assess, correct,
monitor, report and minimize the Year 2000 risks associated with application
systems; technical infrastructure, including the hardware through which appli-
cations operate, networking services, telecommunications and desktop applica-
tion systems; facilities, including embedded chip technologies in facilities
equipment and environmental systems; credit customers; wholesale fund provid-
ers, including various governments; counterparties in treasury and capital mar-
kets contracts; vendors and service providers, including utilities and telecom-
munications suppliers and third party processing agents; and fiduciary activi-
ties related to the Corporation's asset management services.
In addition, the Corporation has an internal and external communications pro-
gram in place to educate interested parties about the Year 2000 issue. The Cor-
poration's employees receive information via a dedicated newsletter, the
intranet, email and an awareness video. The Corporation is also conducting an
external program of awareness education and support for its business partners,
merchants, vendors and credit customers. This program serves a dual purpose of
helping those who do business with the Corporation to understand the broad im-
plications of the Year 2000 problem and of minimizing the Corporation's expo-
sure to Year 2000 risks which are not under its direct control.
Information Technology
The information technology elements of the Corporation's Year 2000 program are
proceeding through the following phases:
. Awareness Phase -- the development of a comprehensive awareness strategy
and structure for managing the project.
. Inventory Phase -- the identification of a comprehensive inventory, includ-
ing mission critical application systems and technical infrastructure, that
could be impacted by the Year 2000 issue.
. Assessment Phase -- the creation of detailed action plans to mitigate Year
2000 risks associated with the inventoried items. These plans include time-
tables and resource requirements that reflect the items' potential impact
on the Corporation's businesses.
. Remediation Phase -- the execution of action plans that include code en-
hancements and changes in application design, as well as software and hard-
ware upgrades or replacements.
. Certification Phase -- the execution of pre-defined processes by cross-
functional teams, including business unit partners, in an effort to ensure
that application systems and technical infrastructure meet specific Year
2000 certification requirements.
. Readiness Testing Phase -- the testing of critical interdependencies be-
tween internal systems and business processes and third party technology
interfaces using defined plans in an effort to ensure that certain require-
ments are met for the Year 2000. Integration testing focuses on internally
dependent application systems, technology infrastructure and business
processes. External testing focuses on mission critical technology inter-
faces with external third parties.
The complexity and magnitude of the Year 2000 issue have required the
Corporation to adopt a dynamic approach that is tailored by the characteristics
of each mission critical element as well as by the dynamics of the affected
operations. Furthermore, the progress of mission critical elements is impacted
by resource prioritization within the program and across Year 2000 and other
business initiatives, as deemed appropriate, as well as by the level of Year
2000 awareness in various countries. Program status is tracked by mission
critical components, using completion percentages. The completion of phases is
designed to coincide with regulatory guidelines. The Awareness, Inventory and
Assessment phases were substantially completed by early 1998. As of December
31, 1998, the status of other information technology phases was as follows:
Remediation and Certification
Remediation of application systems was 100 percent complete across all of the
Corporation's operations. Certification was more than 90 percent complete for
domestic and Brazilian operations, and Argentine operations were approximately
40 percent certified. While Argentina is somewhat behind the other operations
due to recent acquisitions and other initiatives during the year, the Corpora-
tion anticipates that certification of application systems will be substan-
tially completed for all operations, including Argentina, by the end of the
first quarter of 1999.
With respect to technical infrastructure, remediation was over 70 percent com-
plete for domestic operations, over 75 percent complete for Brazilian opera-
tions and over 80 percent complete for Argentine operations. The Corporation
expects to substantially complete its remediation and certification of techni-
cal infrastructure for all operations by the end of the first quarter of 1999.
Desktop application systems are currently being tested using a standard
toolkit, and are scheduled to be completed by the end of the first quarter of
1999.
- -------------------------------------- 35 --------------------------------------
<PAGE>
Readiness Testing
The Readiness Testing phase began in the third quarter of 1998. While mission
critical readiness testing is expected to be substantially completed by mid-
1999, the Corporation anticipates that it will continue testing through the end
of 1999. To date, testing has focused on the internal dependencies between ap-
plication systems, technical infrastructure and internal business processes.
Mission critical applications have been categorized into five integrated test-
ing segments, of which two have been completed successfully. Testing with mis-
sion critical external parties with whom the Corporation exchanges data is ex-
pected to be substantially completed by the end of the first quarter of 1999;
however, the Corporation expects to continue this testing through the remainder
of 1999.
Non-Information Technology
Credit customers, wholesale fund providers and treasury and capital markets
counterparties have been assessed using structured questionnaires combined with
evaluations of potential monetary impact on the Corporation. Non-information
technology vendors and service providers are rated based on their importance to
mission critical processes. These processes are being identified in conjunction
with the Corporation's Year 2000 contingency planning efforts, a discussion of
which follows. As of December 31, 1998, the status of these non-information
technology components of the Corporation's program was as follows:
Facilities. In domestic operations, all sites and facilities vendors have been
inventoried and assessed for criticality. All critical sites are scheduled for
certification by mid-1999, after component testing and remediation as well as
site integration testing. Brazilian and Argentine operations currently antici-
pate that their mission critical facilities will be substantially remediated,
tested and certified by September 1999. The Corporation currently has business
resumption contingency plans in place that have been updated and tested annual-
ly, and will be revised to reflect considerations specific to the Year 2000 is-
sue.
Credit Customers. The Corporation has surveyed customers representing approxi-
mately 90 percent of the Corporation's total credit exposure. Of those sur-
veyed, the Corporation has received over 90 percent positive responses as to
Year 2000 readiness. The results of the Corporation's surveys have been incor-
porated into the Corporation's credit risk management processes, including cus-
tomer risk ratings. The Corporation will continue to monitor and assess,
throughout 1999, the potential impact of the Year 2000 issue on its loan port-
folio.
Wholesale Fund Providers. The Corporation has evaluated over 80 percent of its
mission critical and important funding sources, of which approximately 80 per-
cent have provided positive responses as to Year 2000 readiness. Additionally,
the Corporation has developed strategies to limit liquidity exposure around
critical dates and will continue to monitor and assess, throughout 1999, the
potential impact of the Year 2000 issue on its funding sources.
Treasury and Capital Markets Counterparties. The Corporation has surveyed
counterparties who comprise at least 90 percent of its counterparty exposures,
of which over 90 percent have provided positive responses as to Year 2000 read-
iness. The Corporation is currently developing action plans for high risk
counterparties, and will continue to monitor and assess, throughout 1999, the
impact of the Year 2000 issue on its critical counterparty exposures.
Non-Information Technology Vendors and Service Providers. The Corporation has a
program in place to assess non-information technology vendor, service provider
and product readiness. The level of assessment is dictated by the relative im-
portance of vendors, service providers and products to mission critical busi-
ness processes, as defined through Year 2000 contingency planning efforts. Man-
agement expects this element of the Corporation's Year 2000 program to remain
challenging due to the complexities of vendor and service provider management
and the scope of readiness efforts outside of the Corporation's control. Conse-
quently, the Corporation will continue to monitor and assess, throughout 1999,
the impact of the Year 2000 issue on its purchased products and services.
Fiduciary Activities. The Corporation has developed a strategy to monitor the
Year 2000 readiness of its significant investments made on behalf of its mutual
fund and private banking clients. These efforts will be performed throughout
1999, and will mainly include reviews of published materials, including regula-
tory filings and internet sites, as well as reviews of independent reports on
third party transfer, accounting and custodial agents.
Risks and Uncertainties
The Corporation expects to complete its Year 2000 program in a timely and ef-
fective manner that mitigates risk. However, the Corporation is subject to
risks and uncertainties due to the uniqueness of the Year 2000 issue; the sig-
nificant interdependencies in business and financial markets and the range of
activities and events outside of the Corporation's control; as well as the
challenges created by recent acquisitions (i.e. Deutsche Argentina, Robertson
Stephens and OCA), including the integration of acquired businesses into the
Corporation's Year 2000 program and the additional pressures placed on informa-
tion technology resources. As a result of the risks and uncertainties associ-
ated with the Year 2000 issue, particularly with respect to vendors and service
providers and other third parties, the Corporation is unable to predict with
any certainty the extent of potential Year 2000 failures that could result, nor
quantify the potential effect that such failures could have on the Corpora-
tion's results of operations and financial condition. However, these risks and
uncertainties could result in service delays, inaccurate and untimely informa-
tion processing, funding delays, contract settlement and counterparty failures,
increased credit losses and reputation risk.
- -------------------------------------- 36 --------------------------------------
<PAGE>
Final Readiness Efforts and Contingency Planning
The Corporation has developed a strategy to combine the various efforts within
the Year 2000 program, and assess and report upon the readiness of mission
critical components and processes of business units. This strategy includes ob-
taining validation from senior management of mission critical processes; link-
ing the interdependencies between application systems, technical infrastructure
and non-information technology elements, including vendors and service provid-
ers; identifying weak links; and planning around known and currently unknown
risks. In this regard, the Corporation is developing business resumption,
remediation, and event contingency plans to prepare for potential systems fail-
ures at critical dates, failures of critical third parties to effectively reme-
diate and certify their technologies, as well as other unanticipated events
that could arise with the date change. The development of these plans includes
the assessment of failure scenarios as well as the identification of mission
critical business processes. The Corporation expects that its contingency plan-
ning for the Year 2000 issue will be substantially completed by the end of June
1999. Additionally, as previously discussed, the Corporation will continue
readiness testing through 1999 in an effort to detect currently unknown risks.
Costs
The Corporation currently expects that its total incremental costs for its Year
2000 program, including costs already incurred, will be approximately $75 mil-
lion. It is estimated that these incremental costs represent slightly over 50
percent of the Corporation's total program costs, which also include the rede-
ployment of internal resources from many areas of the Corporation. Addition-
ally, the Corporation expects to incur capital expenditures of approximately
$20 million, including costs for accelerated and out of cycle replacements of
technology. As of December 31, 1998, the Corporation had incurred approximately
half of its expected Year 2000 costs. The Corporation has not incurred, and is
not likely to incur, incremental project costs that are material to any report-
ing period. The majority of remaining costs are expected to be directed to the
testing phase as well as final readiness efforts to mitigate both currently
known and subsequently discovered risks. Throughout the remainder of the proj-
ect, the Corporation will also continue to allocate internal resources to ad-
dress the Year 2000 issue.
***
The Corporation's estimated costs and expected timetables with respect to its
Year 2000 program represent forward-looking statements that could differ mate-
rially from actual results due to changes in assumptions as the program evolves
and new information becomes available; the impact of acquisitions; the Corpora-
tion's ability and resources to effectively execute its Year 2000 program; the
impact of external market pressures on technology resources; the status of ef-
forts by critical third parties to mitigate Year 2000 risks; and the extent to
which unanticipated issues arise late in the project.
Credit Risk Management
Credit risk is defined as the risk of loss arising from a counterparty's fail-
ure or inability to meet payment or performance terms of a contract with the
Corporation.
The Corporation's risk management processes are intended to address the manage-
ment of all forms of credit risk, including balance sheet and off-balance-sheet
exposures. The CPC, 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.
The credit function includes a staff of credit officers reporting directly to
the Chief Credit Officer (CCO). These credit officers are assigned to work with
the various business units to ensure the integrity of the credit process. Busi-
ness unit management has the primary responsibility to evaluate credit risk,
ensure that each individual credit exposure is appropriately risk rated, and
monitor and manage credit risks within policy and portfolio guidelines. In ad-
dition, a credit information unit provides reports on credit exposures on a
corporate-wide basis. A risk review unit, which reports independently of both
the business and credit units, audits the integrity of risk ratings and the ad-
equacy of the credit process for all units of the Corporation.
Senior management in Boston oversees the worldwide credit activities, both cor-
porate and consumer, of the Corporation. The level of management needed to ap-
prove credit exposures varies according to the size and level of perceived risk
of the credit. Corporate credits that meet specified size and risk rating
thresholds must be approved by the Senior Credit Committee, which is chaired by
the CCO and is composed of senior credit officers and senior business unit man-
agers on a rotating basis. Portfolio limits and underwriting standards are es-
tablished by the CPC for both consumer and commercial credit exposures with
common risk characteristics, such as industry or product type. An important as-
pect 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 CPC has also established target risk rating
profiles for the Corporation. All limits are reviewed regularly and adjusted
based on the CPC's assessment of relevant conditions. In addition, the Country
Exposure Committee, also chaired by the CCO, sets country limits on cross-bor-
der exposures to borrowers and counterparties domiciled in other countries.
The Corporation's loan syndications unit, which is part of the Wholesale Bank,
is integral to portfolio management by enhancing the liquidity of the wholesale
loan portfolio. Syndications 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.
- -------------------------------------- 37 --------------------------------------
<PAGE>
Loans and Lease Financing
Table 5 shows a breakdown of the portfolio for the last five years.
Table 5 -- Loans and Lease Financing Portfolio
<TABLE>
<CAPTION>
December 31 1998 1997 1996 1995 1994
(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.......... $16,294 38.1% $15,268 34.7% $13,162 32.0% $12,809 33.0% $13,122 34.8%
Commercial real estate
Construction........... 215 .5 271 .6 284 .7 386 1.0 391 1.0
Other.................. 3,871 9.0 4,211 9.6 3,240 7.9 3,393 8.7 4,065 10.8
Consumer-related
Secured by 1-4 family
residential
properties............ 4,329 10.1 5,393 12.3 6,062 14.8 6,697 17.2 7,079 18.8
Other.................. 2,936 6.9 4,712 10.7 6,898 16.8 5,554 14.3 4,559 12.1
Lease financing......... 1,801 4.2 1,938 4.4 1,816 4.4 1,564 4.0 1,482 3.9
Unearned income......... (275) (.6) (302) (.7) (287) (.7) (240) (.6) (239) (.6)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
29,171 68.2 31,491 71.6 31,175 75.9 30,163 77.6 30,459 80.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
International
Commercial and
industrial............. 9,295 21.7 8,826 20.1 6,946 16.9 6,422 16.5 5,161 13.6
Banks and other
financial
institutions........... 597 1.4 860 2.0 866 2.1 796 2.1 749 2.0
Governments and official
institutions........... 95 .2 95 .2 79 .2 82 .2 33 .1
Consumer-related
Residential mortgages.. 1,251 2.9 947 2.2 699 1.7 526 1.4 454 1.2
Other.................. 1,554 3.6 1,010 2.3 606 1.5 470 1.2 410 1.1
Lease financing......... 725 1.7 452 1.0 368 .9 285 .7 329 .9
All other............... 369 .9 378 .8 415 1.0 163 .4 189 .5
Unearned income......... (251) (.6) (79) (.2) (93) (.2) (37) (.1) (76) (.2)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
13,635 31.8 12,489 28.4 9,886 24.1 8,707 22.4 7,249 19.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$42,806 100.0% $43,980 100.0% $41,061 100.0% $38,870 100.0% $37,708 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- -------------------------------------- 38 --------------------------------------
<PAGE>
Total loans and lease financing decreased approximately $1.2 billion from De-
cember 31, 1997, reflecting a decrease in domestic loans and lease financing of
$2.3 billion, which was partially offset by a $1.1 billion increase in the in-
ternational portfolio. The decrease in the domestic loan and lease portfolio
was primarily driven by a $2.2 billion C&I loan securitization, as well as a
$2.8 billion decrease in consumer-related loans. The decrease in consumer-re-
lated loans included the Corporation's contribution of its national credit card
portfolio of approximately $1.2 billion to a joint venture, the securitizations
of $.8 billion of home equity loans and lower levels of residential mortgage
and indirect auto loans. Offsetting the abovementioned declines, domestic loans
and lease financing increased approximately $3 billion from the prior year.
This increase included growth in the Business Credit, Energy and Utilities, and
Environmental Services portfolios. Further information on the abovementioned
securitizations can be found in Note 6 to the Financial Statements.
The increase in international loans included a $.5 billion increase in C&I
loans and a $.8 billion increase in consumer-related loans. This increase was
primarily driven by growth in the Argentine portfolio, including the acquisi-
tion of Deutsche Argentina. A further discussion of the Corporation's Argentine
and Brazilian operations is included in the " Line of Business Information" and
"Cross-Border Outstandings" sections.
Highly Leveraged Transactions
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 6 summarizes the Corporation's HLT portfolio for the last
three years.
Table 6 -- HLT Portfolio
<TABLE>
<CAPTION>
December 31 1998 1997 1996
(dollars in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total loans............................................... $1,267 $1,551 $1,319
Number of companies....................................... 108 129 116
Average loan size......................................... $ 12 $ 12 $ 11
Unused lending commitments................................ $ 765 $1,191 $ 677
Equity and mezzanine investments.......................... $ 224 $ 235 $ 187
</TABLE>
The Corporation's HLT portfolio is spread among a variety of industries. At De-
cember 31, 1998, the largest segments of the HLT portfolio by industry were as
follows: media and communications -- $323 million to 19 customers; petroleum,
chemicals, rubbers and plastics -- $123 million to 11 customers; healthcare,
education and childcare -- $98 million to 5 customers; and leisure, amusement,
motion pictures and entertainment -- $95 million to 9 customers. Yields on HLT
loans are generally higher than on most other commercial loans. Typically, in-
terest rates on new HLTs range from 2.3 percent to 4.5 percent over the London
Interbank Offered Rate (LIBOR) and fees charged range from .25 percent to .65
percent of the principal amount committed. At December 31, 1998, the Corpora-
tion had one nonaccrual HLT loan of approximately $4 million. There were no
nonaccrual HLT loans at December 31, 1997. In addition, there were two net
credit losses, totaling approximately $9 million, in 1998, compared with no net
credit losses in 1997. The amount of unused commitments does not necessarily
represent the actual future funding requirements of the Corporation, since a
portion can be syndicated or assigned to others or may expire without being
drawn. The Corporation has historically been involved in transactions that meet
the regulatory definition of HLTs, and it expects to continue to agent and par-
ticipate in such transactions in the future.
- -------------------------------------- 39 --------------------------------------
<PAGE>
Nonaccrual Loans and Leases and OREO
Table 7 summarizes nonaccrual loans and leases by type and as a percentage of
the related consolidated loan category.
Table 7 -- Nonaccrual Loans and Leases and OREO
<TABLE>
<CAPTION>
December 31 1998 1997 1996 1995 1994
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.......... $ 86 .5% $ 59 .4% $ 82 .6% $ 88 .7% $130 1.0%
Commercial real estate
Construction........... 2 .9 3 1.1 6 2.1 25 6.5 13 3.3
Other.................. 19 .5 40 .9 67 2.1 103 3.0 133 3.3
Consumer-related
Secured by 1-4 family
residential
properties............ 53 1.2 64 1.2 80 1.3 56 .8 53 .7
Other.................. 26 .9 46 1.0 61 .9 35 .6 26 .6
---- ---- ---- ---- ----
186 .6 212 .7 296 1.0 307 1.0 355 1.2
---- ---- ---- ---- ----
International
Commercial and
industrial............. 76 .8 64 .7 74 1.1 34 .5 17 .3
Banks and other
financial
institutions........... 10 1.7 1 .1
Consumer-related
Residential mortgages.. 50 4.0 28 3.0 22 3.1 20 3.8 11 2.4
Other.................. 53 3.4 16 1.6 10 1.7 11 2.3 6 1.5
All other............... 1 .6 30 15.9
---- ---- ---- ---- ----
189 1.4 108 .9 106 1.1 66 .8 65 .9
---- ---- ---- ---- ----
Total nonaccrual loans
and leases........... 375 .9 320 .7 402 1.0 373 1.0 420 1.1
OREO.................... 27 36 50 69 143
---- ---- ---- ---- ----
$402 $356 $452 $442 $563
==== ==== ==== ==== ====
</TABLE>
- -------------------------------------- 40 --------------------------------------
<PAGE>
Total nonaccrual loans and leases and OREO increased $46 million from December
31, 1997, reflecting an increase in international nonaccrual loans of $81 mil-
lion, offset, in part, by a decrease in domestic nonaccrual loans of $26 mil-
lion. The increase in international nonaccrual loans was primarily related to
growth in Argentine and Asian nonaccrual loans of approximately $49 million and
$14 million, respectively. The increase in Argentine nonaccrual loans reflected
growth in Argentine loan portfolios, including the acquisition of Deutsche Ar-
gentina, and consisted primarily of consumer-related loans. The increase in
Asian nonaccrual loans was mainly related to Indonesia. The decrease in domes-
tic nonaccrual loans reflected decreases in the Consumer and Community Banking,
Real Estate and Multinational portfolios, offset, in part, by an increase in
the Business Credit portfolio. The decrease in domestic consumer-related
nonaccrual loans was due largely to the Corporation's divestiture of its na-
tional credit card portfolio in the first quarter of 1998.
The future level of nonaccrual loans and leases and OREO will be influenced by
the economic environment, interest rates and other internal and external fac-
tors existing at the time, including the effect, if any, of developments in
various emerging markets countries and the impact of sustained volatility in
world financial markets. In this regard, the Corporation is monitoring economic
events in Brazil, and the effect these events might have on the level of
nonaccrual loans and leases and OREO that could result in its Brazilian portfo-
lio, as well as the potential impact on other Latin American portfolios, espe-
cially in Argentina. As such, no assurance can be given as to future levels of
nonaccrual loans and leases and OREO, although a sustained regional economic
downturn could result in a higher level of nonaccrual loans and leases and
OREO. The management of, and the accounting policy for, the Corporation's
nonaccrual loans and leases and OREO is discussed above in the "Credit Risk
Management" section and in Note 1 to the Financial Statements, respectively.
Table 8 -- Changes in Nonaccrual Loans and Leases and OREO
<TABLE>
<CAPTION>
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1............................................ $356 $452 $442
Assets of entities acquired................................... 22
Assets of entities divested................................... (20) (27)
Additions..................................................... 705 527 618
Sales, payments and other decreases........................... (218) (225) (304)
Credit losses and valuation adjustments....................... (443) (371) (304)
---- ---- ----
Balance, December 31.......................................... $402 $356 $452
==== ==== ====
Ending balance as a percentage of related assets.............. 0.9% 0.8% 1.1%
</TABLE>
The $178 million increase in additions to nonaccrual loans in 1998 included ap-
proximately $70 million, largely from a series of loans in the International
Private Bank, discussed below in the "Reserve for Credit Losses" section, and
approximately $50 million of Asian additions, primarily from Indonesia, re-
flecting the continuing economic crisis in that country.
- -------------------------------------- 41 --------------------------------------
<PAGE>
Reserve for Credit Losses
The Corporation determines the level of its reserve for credit losses by as-
sessing a number of factors, including evaluations of individual credits and
concentrations of credit risks, net losses charged to the reserve, changes in
the quality of the credit portfolio, levels of nonaccrual loans and leases,
current economic conditions, cross-border risks, changes in the size and char-
acter of the credit risk and other pertinent factors. The credit risk of off-
balance-sheet exposures is managed as part of the overall extension of credit
to individual customers and is considered in assessing the overall adequacy of
the reserve for credit losses. The amount of the reserve for credit losses as-
sociated with off-balance-sheet exposures is not significant. The amount of the
reserve for credit losses is reviewed quarterly by management and the Corpora-
tion's Board of Directors (the Board). Refer to Notes 7 and 22 to the Financial
Statements for a further discussion of the reserve for credit losses and credit
risk related to off-balance-sheet exposures.
Table 9 presents a five-year analysis of the Corporation's reserve for credit
losses and related ratios.
Table 9 -- Reserve for Credit Losses and Related Ratios
<TABLE>
<CAPTION>
(dollars in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1................ $ 712 $ 883 $ 890 $ 827 $ 941
Provision......................... 380 200 231 275 154
Reserves of entities acquired..... 26 3 3 16 25
Reserves of entities divested..... (95) (11) (32)
Credit losses(1).................. (441) (366) (310) (282) (379)
Recoveries........................ 77 87 80 86 86
------- ------- ------- ------- -------
Net credit losses................. (364) (279) (230) (196) (293)
------- ------- ------- ------- -------
Balance, December 31.............. $ 754 $ 712 $ 883 $ 890 $ 827
======= ======= ======= ======= =======
Loans and lease financing at
December 31...................... $42,806 $43,980 $41,061 $38,870 $37,708
Average loans and lease
financing........................ $44,683 $42,383 $40,589 $38,283 $36,017
Reserve for credit losses to total
loans and leases at December 31.. 1.76% 1.62% 2.15% 2.29% 2.19%
Reserve for credit losses to
nonaccrual loans and leases at
December 31...................... 201% 222% 220% 239% 197%
Reserve for credit losses to
nonaccrual and renegotiated loans
and leases at December 31........ 201% 222% 215% 219% 165%
Net credit losses to average loans
and lease financing.............. .81% .66% .57% .51% .81%
Net credit losses to provision for
credit losses.................... 95.79% 139.50% 99.57% 71.27% 190.26%
Total recoveries to total credit
losses........................... 17.46% 23.77% 25.81% 30.50% 22.69%
- --------------------------------------------------------------------------------
</TABLE>
(1) For 1994, includes $119 million related to transferring certain lower qual-
ity real estate exposures to an accelerated disposition portfolio (ADP).
- -------------------------------------- 42 --------------------------------------
<PAGE>
The reserve for credit losses at December 31, 1998 was $754 million, or 1.76
percent of outstanding loans and leases, compared with $712 million, or 1.62
percent, at December 31, 1997. The reserve for credit losses was 201 percent of
nonaccrual loans and leases at December 31, 1998, compared with 222 percent at
December 31, 1997. The future level of the reserve for credit losses will con-
tinue to be a function of management's evaluation of the Corporation's credit
exposures existing at the time, which will be affected by future events and
general economic conditions in the United States, Latin America, Asia and vari-
ous other overseas markets; the impact of the Corporation's strategic decisions
on various credit portfolios; and the potential impact that the Year 2000 issue
could have on the Corporation's credit portfolios. While no assurance can be
given regarding the future level of the reserve, the above factors could result
in an increased level of reserve in the future.
Table 10 summarizes net credit losses by type for the last five years.
Table 10 -- Net Credit Losses
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996 1995 1994
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Credit Losses
Commercial, industrial and financial.... $ (75) $ (42) $ (21) $ (47) $ (38)
Commercial real estate
Construction........................... (6) (7) (10)
Other.................................. (7) (8) (39) (49) (62)
Consumer-related
Secured by 1-4 family residential
properties............................ (15) (18) (25) (26) (22)
Other.................................. (112) (222) (167) (94) (80)
----- ----- ----- ----- -----
(209) (290) (258) (223) (212)
International Credit Losses
Commercial.............................. (142) (38) (20) (24) (28)
Consumer................................ (90) (38) (32) (35) (20)
----- ----- ----- ----- -----
(232) (76) (52) (59) (48)
----- ----- ----- ----- -----
Total credit losses, excluding those
related to ADP....................... (441) (366) (310) (282) (260)
Domestic Recoveries
Commercial, industrial and financial.... 10 9 13 17 22
Commercial real estate
Construction........................... 5 1 4
Other.................................. 9 13 9 20 14
Consumer-related
Secured by 1-4 family residential
properties............................ 3 6 7 5 4
Other.................................. 20 34 31 28 24
----- ----- ----- ----- -----
42 62 65 71 68
International Recoveries
Commercial.............................. 12 12 4 7 13
Consumer................................ 23 13 11 8 5
----- ----- ----- ----- -----
35 25 15 15 18
----- ----- ----- ----- -----
Total recoveries...................... 77 87 80 86 86
----- ----- ----- ----- -----
Net credit losses, before credit
losses related to ADP................ (364) (279) (230) (196) (174)
Credit losses related to ADP............ (119)
----- ----- ----- ----- -----
$(364) $(279) $(230) $(196) $(293)
===== ===== ===== ===== =====
</TABLE>
- -------------------------------------- 43 --------------------------------------
<PAGE>
Net credit losses increased $85 million from 1997, reflecting a decline in do-
mestic net credit losses of $61 million and an increase in international net
credit losses of $146 million. The international increase was principally
driven by an increase in Asian net credit losses of $27 million, primarily from
Indonesian credits that had been adversely affected by the sustained economic
crisis in that region; and a charge-off of approximately $66 million related to
a series of loans to related borrowers that were initiated by a former officer
in the Corporation's International Private Bank. The Corporation has completed
its investigation of the circumstances surrounding the abovementioned series of
International Private Bank loans and has taken disciplinary action with respect
to a number of individuals. The Corporation is also actively pursuing collec-
tion of these loans. Further, the Corporation is vigorously pursuing claims un-
der its insurance coverage. In addition, net credit losses from the Argentine
portfolio increased $34 million from the prior year, primarily reflecting
growth in the consumer-related portfolio and the acquisition of Deutsche Argen-
tina.
The decrease in domestic net credit losses primarily reflected the Corpora-
tion's divestiture of its national consumer businesses, including the 1997
sales of FAC and Ganis as well as the Corporation's contribution of its na-
tional credit card portfolio to a joint venture in the first quarter of 1998.
For the years ended December 31, 1998 and 1997, aggregate net charge-offs from
these portfolios were approximately $16 million and $120 million, respectively.
During 1998, the reduction in domestic net credit losses was partially offset
by the charge-off of one large domestic commercial credit in the fourth quarter
of 1998.
The future level of net credit losses will be influenced by the economic envi-
ronment and other external factors, including the effect, if any, of develop-
ments in various emerging markets countries and the impact of sustained vola-
tility in world financial markets. In this regard, the Corporation is closely
monitoring economic events in Brazil, and the effect these events might have on
the level of credit losses that could result in its Brazilian portfolio, as
well as the potential impact on other Latin American portfolios, particularly
in Argentina. As such, no assurance can be given as to the future levels of net
charge-offs, although a sustained regional economic downturn could result in a
higher level of net charge-offs.
The Corporation's 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; and economic conditions in New
England, other parts of the United States and other countries where the Corpo-
ration does business. In addition, certain segments of the loan portfolio may
increase or decrease from the December 31, 1998 level in accordance with stra-
tegic or credit management decisions made by the Corporation, including the ac-
quisition or divestiture of companies or portfolios. Given these factors, the
rate of change in the size and mix of the Corporation's loan portfolios experi-
enced during the past few years may not be indicative of the future. The above
factors may also affect the levels of nonaccrual loans, net credit losses and
the reserve for credit losses. Further information on the Corporation's loan
and lease financing portfolio can be found in Note 6 to the Financial State-
ments.
Cross-Border Outstandings
In accordance with bank regulatory rules, cross-border outstandings are amounts
payable to the Corporation by residents of foreign countries, regardless of the
currency in which the claim is denominated, and local country claims in excess
of local country obligations. At December 31, 1998, total cross-border
outstandings were $8.7 billion, compared with $8.6 billion at December 31,
1997, which included $5.9 billion and $6.5 billion, respectively, of cross-bor-
der outstandings to emerging markets countries. Excluded from cross-border
outstandings are the following:
. Local country claims that are funded by local country obligations payable
only in the country where issued regardless of the currency in which the
claim or obligation is denominated.
. Local country claims funded by non-local country obligations (typically de-
nominated in 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 des-
ignated 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, 1998, such outstandings related to emerging markets
countries totaled $2.2 billion, compared with $2.8 billion at December 31,
1997.
. Claims reallocated as a result of external guarantees, cash collateral, or
insurance contracts issued primarily by U.S. government agencies.
Cross-border outstandings include 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, accrued
interest receivable and revaluation gains on trading derivatives.
In addition to credit risk, cross-border outstandings have the risk that, as a
result of political or economic conditions in a country, borrowers may be un-
able to meet their contractual repayment obligations of principal and/or inter-
est when due because of the unavailability of, or restrictions on, foreign ex-
change needed by borrowers to repay their obligations. The Corporation manages
its cross-border outstandings using country exposure limits as discussed in the
"Credit Risk Management" section.
- -------------------------------------- 44 --------------------------------------
<PAGE>
Table 11 details by country the Corporation's approximate cross-border
outstandings that individually amounted to 1 percent or more of its consoli-
dated total assets at December 31, 1998, 1997 and 1996.
Table 11 -- Significant Cross-Border Outstandings
<TABLE>
<CAPTION>
Percentage of
(dollars in millions) Public Banks Other Total Total Assets Commitments(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998(2)
Argentina............... $775 $ 50 $1,155 $1,980 2.7% $ 10
Brazil.................. 405 495 900 1.2 40
December 31, 1997(2)
Argentina............... $740 $ 5 $1,035 $1,780 2.6% $ 15
Brazil.................. 415 120 785 1,320 1.9 130
Chile................... 130 225 350 705 1.0 20
December 31, 1996(2)
Argentina............... $605 $ 15 $ 945 $1,565 2.5% $ 55
Brazil.................. 305 30 585 920 1.5 40
Chile................... 60 265 385 710 1.1 30
- --------------------------------------------------------------------------------
</TABLE>
(1) Included within commitments are letters of credit, guarantees and the
undisbursed portions of loan commitments.
(2) Cross-border outstandings in countries which totaled between .75% and 1% of
consolidated total assets at December 31, 1998, 1997 and 1996 were approxi-
mately as follows: 1998--Chile, $690 million, United Kingdom, $630 million;
1997--None; 1996--None.
Latin America
Total cross-border outstandings and commitments to Latin American countries are
presented below in Table 12. At December 31, 1998 and 1997, approximately 61
percent of total cross-border outstandings were to countries in Latin America.
The Corporation maintains branch networks and/or subsidiaries in each of the
individual countries named in the following table.
Table 12 -- Cross-Border Outstandings and Commitments to Latin America
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997
Cross-Border Cross-Border
(in millions) Outstandings Commitments Outstandings Commitments
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Argentina..................... $1,980 $ 10 $1,780 $ 15
Brazil........................ 900 40 1,320 130
Chile......................... 690 35 705 20
Mexico........................ 470 25 435 50
Uruguay....................... 300 10 200
Peru.......................... 290 10 190 20
Colombia...................... 245 5 255 5
Panama........................ 155 190
Other......................... 240 30 170 80
------ ---- ------ ----
$5,270 $165 $5,245 $320
====== ==== ====== ====
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------- 45 --------------------------------------
<PAGE>
The Corporation's total assets in Argentina at December 31, 1998 amounted to
approximately $9 billion, reflecting an increase of approximately $2 billion
from December 31, 1997. Included in these total assets were the Argentine
cross-border outstandings presented in the table above. At December 31, 1998
and 1997, Argentine loans and lease financing was $6.0 billion and $4.7 bil-
lion, respectively. These increases reflected the acquisition of Deutsche Ar-
gentina and the Argentine branch expansion program.
The Corporation's nonaccrual Argentine loans were $140 million at December 31,
1998, compared with $91 million at December 31, 1997. The increase in
nonaccrual loans was due primarily to growth in the Argentine portfolio, in-
cluding a higher level of consumer-related lending. The percentage of
nonaccrual loans to total Argentine loans and lease financing was 2.3 percent
at December 31, 1998, compared with 1.9 percent at December 31, 1997.
The Corporation's total assets in Brazil at December 31, 1998 and 1997 amounted
to approximately $6 billion. Included in these total assets were the Brazilian
cross-border outstandings presented in the table above. At December 31, 1998
and 1997, Brazilian loans and lease financing was approximately $3 billion.
The Corporation's nonaccrual Brazilian loans were $18 million at December 31,
1998, compared with $12 million at December 31, 1997. The percentage of
nonaccrual loans to total Brazilian loans and lease financing was .6 percent at
December 31, 1998, compared with .4 percent at December 31, 1997.
For additional information on Argentina and Brazil, see the "Line of Business
Information" section. For further discussion of the Corporation's nonaccrual
loans and net credit losses, see the "Nonaccrual Loans and Leases and OREO" and
"Reserve for Credit Losses" sections.
During 1998, world financial markets experienced significant volatility due to
the Asian and Russian crises. These crises also impacted the economies of Latin
America, and, in particular, contributed to the economic and political insta-
bility recently experienced by Brazil. The financial pressures created by the
Asian and Russian turmoil led to a significant deterioration in the level of
Brazil's foreign currency reserves starting in August 1998. The reduction in
foreign currency reserves and the Brazilian government's need to reduce both
its current account and fiscal deficits led the government to allow Brazil's
currency to float freely against the U.S. dollar beginning in mid-January 1999.
This resulted in a significant devaluation of the Real against the U.S. dollar.
The government's departure from the managed exchange rate policy, that was in-
stituted in July 1994, has led to an expectation that the Brazilian economy
will contract and inflation will rise during 1999. The government also has
passed a number of fiscal reforms aimed at controlling the public deficit and
to meet the requirements of its agreement with the International Monetary Fund.
In anticipation of a deterioration in the Brazilian financial markets, the Cor-
poration's Brazilian operations implemented a number of measures in December
and January to protect the Corporation in the event of a devaluation. These
measures are expected to benefit the Corporation's Brazilian unit in the first
quarter of 1999.
The Corporation has not experienced collection problems as a result of world
economic volatility, currency restrictions or foreign exchange liquidity prob-
lems in its current portfolio of cross-border outstandings to Latin America.
However, if actions implemented by the Brazilian government and other Latin
American governments are not effective over time, the Corporation's operations
could experience adverse effects. It is expected that the economic situation in
Latin America, including the effect of world financial markets on these econo-
mies, will continue to be unsettled. The impact that these events will ulti-
mately have on Latin American economies and, therefore, the Corporation's oper-
ations in that region, is uncertain. The Corporation will continue to monitor
the economies of the Latin American countries in which it has local operations
and cross-border outstandings, as well as the economies of other emerging mar-
kets which could impact the performance of the Corporation, and will take cer-
tain actions as it deems appropriate. 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 coun-
tries or on the Corporation's financial statements.
Asia
At December 31, 1998, the Corporation's total cross-border outstandings to
countries in Asia amounted to approximately $.8 billion, or 9 percent of total
cross-border outstandings, compared with $1.2 billion, or 14 percent, at Decem-
ber 31, 1997. The decrease in Asian cross-border outstandings reflected the
Corporation's efforts to actively manage and reduce its Asian exposure.
In 1998, the Corporation realigned its strategy in Asia to focus on capital
markets, including debt underwriting and trading, foreign exchange and deriva-
tives. The Corporation also conducts activities in trade finance and cash man-
agement. Credit-related services primarily support these capital markets and
trade activities. In addition, the Corporation announced the closing of its
representative office in India and branch offices in Japan, the Philippines and
Taiwan.
At December 31, 1998, the Corporation had Asian nonaccrual loans of $14 mil-
lion. During 1998, the Corporation charged off $27 million of Asian credits,
most of which related to Indonesia, and recorded a $20 million charge to nonin-
terest income related to its 17.5 percent equity investment in KMBC, reflecting
deterioration of that company's financial condition. In 1997, nonaccrual loans
and net credit losses were not significant.
- -------------------------------------- 46 --------------------------------------
<PAGE>
The Corporation continues to closely monitor the situation in Asian markets and
to manage its portfolio in order to maximize its future results, all within the
parameters of the Corporation's established risk management processes.
Liquidity Risk Management
Liquidity risk is defined as the risk of loss arising from the Corporation's
inability to meet known near-term and projected long-term funding commitments,
including supporting selective business expansion in accordance with the Corpo-
ration's strategic plan.
The Corporation manages liquidity risk according to policy set, and oversight
provided, by the Asset, Liability and Capital Committee (ALCCO), to ensure its
ability to meet present and future funding needs in domestic and overseas mar-
kets. U.S. dollar liquidity management is centralized in Boston, with overseas
operations managing their local currency liquidity requirements. The Corpora-
tion's U.S. dollar liquidity is monitored on a daily basis, and is reviewed
monthly by ALCCO and at least quarterly by the Board. Available liquidity
sources are measured against anticipated needs of the Corporation as a whole,
the parent company and each of the subsidiary banks. Alternative funding strat-
egies are reviewed, updated and implemented by ALCCO 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 13
presents the level of the Corporation's liquid assets at each of the last three
year ends.
Table 13 -- Liquid Assets
<TABLE>
<CAPTION>
December 31 1998 1997 1996
(in billions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Liquid assets.................................................... $8.7 $9.5 $7.3
</TABLE>
Deposits are the principal source of the Corporation's funding. Table 14 in-
cludes information related to the Corporation's funding sources for the last
three years. Certain prior year amounts have been reclassified for comparative
purposes.
Table 14 -- Funding Sources
<TABLE>
<CAPTION>
December 31 1998 1997 1996
(dollars in billions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic
Interest bearing deposits................................ $28.4 $25.1 $24.7
Noninterest bearing deposits............................. 6.6 8.5 8.3
----- ----- -----
Total deposits........................................... 35.0 33.6 33.0
Funds borrowed........................................... 10.0 10.9 8.1
Notes payable(1)......................................... 5.2 3.4 2.7
----- ----- -----
$50.2 $47.9 $43.8
===== ===== =====
International
Interest bearing deposits................................ $12.4 $11.1 $ 9.0
Noninterest bearing deposits............................. 1.1 1.1 .8
----- ----- -----
Total deposits........................................... 13.5 12.2 9.8
Funds borrowed........................................... 2.0 1.9 1.6
Notes payable............................................ .4 .3 .6
----- ----- -----
$15.9 $14.4 $12.0
===== ===== =====
Consolidated
Interest bearing deposits................................ $40.8 $36.2 $33.7
Noninterest bearing deposits............................. 7.7 9.6 9.1
----- ----- -----
Total deposits........................................... 48.5 45.8 42.8
Funds borrowed........................................... 12.0 12.8 9.7
Notes payable(1)......................................... 5.6 3.7 3.3
----- ----- -----
$66.1 $62.3 $55.8
===== ===== =====
Deposits as a percentage of
Loans.................................................... 113% 104% 104%
Total assets............................................. 66% 66% 69%
- --------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1998 and 1997, includes $1 billion and $.8 billion, respec-
tively, of Trust Securities (defined below).
Consolidated deposits increased approximately $2.7 billion compared with Decem-
ber 31, 1997, reflecting increases in both domestic and international deposits.
The increase in domestic deposits was mainly driven by growth in commercial de-
posits. The increase in international deposits mainly reflected deposit growth
in Argentina, including the acquisition of Deutsche Argentina.
Consolidated notes payable increased $1.9 billion compared with December 31,
1997, primarily due to issuances of $1.2 billion of senior medium-term notes by
the Corporation and $.8 billion of subordinated debt by the Bank. Additionally,
in June 1998, the Corporation issued $250 million of Trust Securities.
- -------------------------------------- 47 --------------------------------------
<PAGE>
The Corporation has established a number of trusts, the sole purpose of which
is to issue Trust Securities and invest the proceeds in junior subordinated de-
bentures issued by the Corporation. The Corporation has unconditionally guaran-
teed the trusts' obligations under the Trust Securities. The Trust Securities
are presented in the Corporation's Consolidated Balance Sheet as "Guaranteed
Preferred Beneficial Interests in Corporation's Junior Subordinated Deben-
tures." Additional information on the Corporation's notes payable and the Trust
Securities can be found in Notes 10 and 11 to the Financial Statements, respec-
tively.
Another source of medium-term funding is the securitization market. During the
second half of 1998, the Corporation securitized $2.2 billion of C&I loans and
$.8 billion of home equity loans. Additional information on these transactions
can be found in Note 6 to the Financial Statements. The Corporation also has in
place shelf registration statements with current availability of $1.75 billion,
which can be used for the issuance of debt or equity securities, including me-
dium-term notes and Trust Securities. At December 31, 1998, the Corporation
also had availability under various other borrowing arrangements of approxi-
mately $.9 billion.
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, 1998 adequate to meet current obligations,
support expectations for future changes in asset and liability levels and carry
on normal operations.
Market Risk Management
Market risk is defined as the risk of loss arising from adverse changes in mar-
ket prices, such as interest rates and foreign exchange rates, on financial in-
struments.
The Corporation's market risk management process includes the management of all
forms of market risk, including balance sheet and off-balance-sheet exposures.
Market risk is managed within policies and limits established by ALCCO and the
MRC and approved by the Board. ALCCO issues overall strategic directives to
specify the extent to which Board-approved risk limits are utilized, based on
the Corporation's willingness to accept market risk. The MRC, which is chaired
by the Chief Market Risk Officer (CMRO), is responsible for allocating the
overall market risk limits set by ALCCO to the Corporation's market risk-taking
activities, considering the results of the risk modeling process as well as
other internal and external factors. Market risk policies and limits are re-
viewed by ALCCO and the MRC at least annually, or more often if warranted by
current market, economic or business conditions.
The Corporation's independent capital markets risk management function monitors
compliance, by individual business unit, with the Corporation's market risk
policies and limits. The capital markets risk management function includes a
staff of capital markets risk officers reporting directly to the CMRO. These
capital markets risk officers are assigned to work with various business units
to ensure the integrity of the market risk management process. Business unit
management is primarily responsible for evaluating market risk, ensuring that
actual exposures are appropriately measured, and monitoring and managing market
risks within approved policies and limits. Through monthly meetings, senior
management oversees the worldwide market risks arising from the trading and as-
set and liability management activities of the Corporation.
The objective of the Corporation's market risk management process is to manage
and control the effects of changes in market prices, interest rates and foreign
exchange rates on the Corporation's results of operations and financial condi-
tion. Management seeks to limit the volatility of earnings and protect economic
value, as well as balance its level of market risk exposure with its objective
of optimizing value to its stockholders and customers. This is attained through
the development and implementation of market risk management strategies, in-
cluding various balance sheet actions and the use of securities and derivatives
and foreign exchange contracts, all within the limits discussed above. While
sound market risk policies, methodologies, strategies and infrastructure assist
the Corporation in managing its exposure to market risks, they do not insulate
the Corporation from losses, such as those experienced in the last half of 1998
due to the period of extreme volatility in various emerging markets countries
and the pressure placed on U.S. capital markets during this volatile period.
Trading Activities
The Corporation's trading activities involve providing risk management and cap-
ital markets products and services to its customers, including interest rate
derivatives, foreign exchange contracts and debt and equity underwriting and
distribution. Interest rate derivatives include interest rate swaps and inter-
est rate options, futures and forwards. Foreign exchange activities include
trading spot, forward and option contracts, primarily in major foreign curren-
cies. Additional information with respect to the Corporation's trading deriva-
tives, including accounting policies, is provided in Notes 1 and 22 to the Fi-
nancial Statements.
In addition, the Corporation takes proprietary trading positions, including po-
sitions in domestic equity securities, high yield and emerging markets fixed
income securities and local currency debt and equity securities and related de-
rivatives. These proprietary trading positions are intended to benefit from
short-term movements in the prices of securities and from inefficiencies among
various securities issued by the same country or entity. Domestic fixed income
trading activities also include trading of U.S. Treasury and U.S. government
agency securities. The risk positions taken by the Corporation in these finan-
cial instruments are subject to ALCCO and MRC approved limits.
The Corporation manages the market risk related to its trading businesses on a
daily basis using a Value-at-Risk (VAR) methodology. VAR is defined as the sta-
tistical estimate of the potential loss that the Corporation could incur from
an adverse movement in market prices. The Corporation uses a 99% confidence
level, which means that the Corporation would not expect to exceed the poten-
tial loss as calculated by VAR more than once out of every 100 trading days.
The VAR methodology requires a number of key assumptions including those relat-
ing to the time to liquidate positions, the confidence level for losses, the
number of days of price and rate history to be used, the impact of credit
spread risk, and the treatment of event risk.
- -------------------------------------- 48 --------------------------------------
<PAGE>
Table 15 presents VAR amounts for 1998 and 1997.
Table 15 -- Aggregate VAR for Trading Businesses
<TABLE>
<CAPTION>
(in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Year-end VAR.......................................................... $30 $35
Average VAR........................................................... 33 20
Year-end VAR Limit.................................................... 45 40
- --------------------------------------------------------------------------------
</TABLE>
The VAR calculations above include the effects of various interest rate and
foreign exchange rate risks. The 1998 aggregate year-end VAR and average VAR
associated with the Corporation's foreign exchange activities were both approx-
imately $7 million. In 1997, the aggregate year-end VAR and average VAR associ-
ated with the Corporation's foreign exchange activities were not significant.
The calculations do not take into account the potential diversification bene-
fits of the different positions taken across trading portfolios.
The 1998 increase in the Corporation's aggregate average VAR is due primarily
to the increase in market volatility during 1998. Volatility is a contributing
risk factor to the VAR calculation; therefore, the sudden market movements wit-
nessed during 1998 acted to increase the amount of related risk measured and
reported by the Corporation.
The validity of the VAR measurement is evaluated by routinely conducting
backtests, which compare the estimated VAR amount for trading positions against
the actual trading profits and losses of those positions. The chart below de-
picts the Corporation's daily aggregate trading VAR and its daily trading prof-
its and losses. Trading profits and losses include both the amounts recorded as
trading profits and commissions and net foreign exchange profits, a component
of other income, in the Corporation's income statement, as well as net interest
revenue from these trading positions.
Chart 7 - 1998 Combined Backtest Results
The daily trading profits and losses include daily trading profits and
commissions and net foreign exchange profits, as well as daily trading-related
net interest revenue. During 1998, the daily trading profits and losses ranged
from losses of $7 million per day to profits of $9 million per day. VAR includes
all trading portfolios and the foreign exchange portfolio. During 1998, VAR
ranged from $15 million per day to $32 million per day.
During 1998, cumulative trading losses of approximately $105 million (excluding
trading-related net interest revenue) were incurred in the Corporation's Bos-
ton-based emerging markets and high yield portfolios. The losses resulted from
the significant volatility in the world financial markets due to the escalation
of economic crises in Asia and Russia and the spill-over effect that these cri-
ses had on other markets, particularly in emerging markets. These trading
losses were offset by gains from other trading portfolios, as well as gains
from the Corporation's foreign exchange portfolio. See the "Results of Opera-
tions" section for additional discussion. Accordingly, as depicted by the chart
on backtest results, the Corporation's aggregate daily trading results were
within the estimated aggregate daily risk position throughout the year.
In addition to the VAR methodology, the Corporation employs other market risk
management tools to manage and evaluate market risk. These risk management
tools include loss limits and overall portfolio size limits, as well as monthly
stress tests and scenario analyses. Stress testing employs a VAR calculation
based on a ten standard deviation change in the prices of the underlying in-
struments. Scenario analyses apply actual market conditions observed during
past market events against current positions. While the VAR methodology and
supplementary risk management tools are effective for managing market risk,
they do not preclude the occurrence of trading losses during periods of extreme
volatility.
Asset and Liability Management (ALM)
U.S. Dollar Denominated Risk Management
The Corporation's U.S. dollar denominated assets and liabilities are exposed to
interest rate risk, which can be defined as the exposure of the Corporation's
net income or financial condition to adverse movements in interest rates. At
December 31, 1998, U.S. dollar denominated assets comprised the majority of the
Corporation's balance sheet. The Corporation's U.S. dollar denominated posi-
tions are evaluated and managed centrally through the Global Treasury group,
utilizing 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 ALCCO 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 Corporation 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 of
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 one that allows for a gradual change in interest rates
over a period of time. The simulated net interest revenue under these scenarios
is used to evaluate how differences in asset, liability and off-balance-sheet
repricing structures will be reflected in the next twelve months' results of
operations.
- -------------------------------------- 49 --------------------------------------
<PAGE>
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;
. rate barrier effects, such as caps and floors, on assets and liabilities;
and
. prepayment volatility on various fixed rate assets, such as residential
mortgages.
Both of these methodologies are designed to isolate the effects of market
changes in interest rates on the Corporation's existing positions, and they ex-
clude other factors such as competitive pricing considerations, future changes
in the asset and liability mix and other management actions. Therefore, they
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 ALCCO direc-
tives, market value sensitivity cannot exceed 3 percent of total risk-based
capital and net interest revenue at risk over the next twelve-month period can-
not exceed 2 percent of annual net interest revenue.
Table 16 illustrates the year-end and average U.S. dollar denominated positions
for market value sensitivity and net interest revenue at risk.
Table 16 -- Market Value Sensitivity and Net Interest Revenue at Risk Positions
- -- U.S. Dollar Denominated Positions
<TABLE>
<CAPTION>
1998 1997 (1)
(dollars in millions) Year end Average Year end Average
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Market value sensitivity(2)................... $145 $145 $154 $142
Percent of risk-based capital................. 1.8% 1.9% 2.2% 2.0%
Net interest revenue at risk(3)............... $ 21 $ 15 $ 9 $ 6
Percent of net interest revenue............... .9% .6% .4% .3%
- --------------------------------------------------------------------------------
</TABLE>
(1) December 31, 1997 amounts have been restated for comparative purposes.
(2) Based on a 100 basis point adverse interest rate shock. At December 31,
1998 and 1997, the Corporation's market value sensitivity was negatively
biased to rising interest rates.
(3) 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. At December 31, 1998, the adverse position was based on a 200 basis
point decline in interest rates over the next twelve-month period and at
December 31, 1997, the adverse position was based on a 100 basis point up-
ward interest rate shock.
During the second quarter of 1998, the Corporation implemented a new interest
rate risk model to measure the interest rate risk of its U.S. dollar denomi-
nated assets and liabilities. The model has various enhanced capabilities which
include more complete automatic data feeds, increased availability of data on a
transaction or account level, expanded scenario analysis, and automated recon-
ciliations. The new model generates more refined market value sensitivity and
net interest revenue at risk position calculations and provides for increased
efficiency in the risk measurement process.
The level of exposure maintained by the Corporation is a function of the market
environment and may 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 interest rate movements is managed in compliance with ALCCO
directives. ALCCO determines its interest rate risk management strategy by con-
sidering the impact of changes in interest rates on each model, and, hence, the
short- and long-term effects on the Corporation.
Non-U.S. Dollar Denominated Risk Management
The Corporation's non-U.S. dollar denominated assets and liabilities are ex-
posed to interest rate and foreign exchange rate risks. Non-U.S. dollar denomi-
nated interest rate and foreign exchange rate risks are managed by the Corpora-
tion's overseas units, with oversight by the Global Treasury group. ALCCO
establishes overall limits for each country in which the Corporation has local
market interest rate risk and foreign exchange rate risk. Limits are updated at
least annually for current market conditions, considering business and economic
conditions in the country at a particular point in time. The overseas units
report as to compliance with these limits on a regular basis.
The majority of the Corporation's non-U.S. dollar denominated interest rate and
foreign exchange rate risk exposure stems from its operations in Latin America,
primarily Argentina and Brazil. These countries maintain local market risk
functions, which independently manage local interest rate and foreign exchange
rate risks. The local asset and liability committees in Argentina and Brazil
are responsible for establishing market risk policies within the limit struc-
ture established by ALCCO and the MRC.
Each country has a local capital markets risk officer, who reports to the CMRO
and is responsible for ensuring the integrity of the market risk management
process.
Interest Rate Risk
The Corporation's Argentine balance sheet and off-balance-sheet ALM positions
primarily relate to its corporate lending and retail businesses. During most of
1998, the interest rate risk related to these ALM positions was managed using
cumulative gap limits. Gap is the difference between the amount of assets and
liabilities that mature or are repriced during a given period of time. In De-
cember 1998, the Corporation implemented a new interest rate risk model to im-
prove the measurement of local Argentine interest rate risk. In conjunction
with the implementation of the model, a new limit structure incorporating mar-
- -------------------------------------- 50 --------------------------------------
<PAGE>
ket value sensitivity and net interest revenue at risk was established. At De-
cember 31, 1998, the market value sensitivity and net interest revenue at risk
of the Corporation's Argentine non-U.S. dollar denominated ALM positions were
approximately $6 million and $5 million, respectively, and the limits were
$18 million and $22 million, respectively.
The Corporation's Brazilian balance sheet and off-balance-sheet ALM positions,
which are mostly short-term in nature, primarily relate to corporate lending,
trade financing and treasury activities. The interest rate risk related to
these ALM positions is managed using a VAR methodology, which methodology is
discussed above in the "Trading Activities" section. The VAR positions are cal-
culated on a daily basis. The VAR exposure for the Corporation's Brazilian non-
U.S. dollar denominated ALM positions was approximately $7 million at December
31, 1998, and the limit was $8 million. The Corporation's Brazilian operation
also utilizes other market risk management tools such as stress testing and
scenario analyses, and concentration and notional limits to manage the interest
rate exposure in its ALM portfolio.
Foreign Exchange Rate Risk
When deemed appropriate, the Corporation will take positions in certain curren-
cies with the intention of taking advantage of movements in currency and inter-
est rates. The Corporation takes currency positions by funding local currency
assets with dollars or by funding dollar assets with local currency liabili-
ties. Whenever these positions are taken, they are subject to limits estab-
lished by ALCCO and the MRC, as discussed above. Compliance with these limits
is reviewed regularly by the Corporation's independent capital markets risk
management function. The majority of the Corporation's foreign exchange risk is
generated by its operations in Argentina and Brazil, and is managed within the
overall currency positions. Table 17 represents the Corporation's currency po-
sitions in Argentina and Brazil for 1998 and 1997.
Table 17 -- Currency Positions
<TABLE>
<CAPTION>
1998 1997
(in millions) Year end Average Year end Average
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Argentina(1).................................. $421 $230 $368 $116
Brazil(2)..................................... 13 2 132 113
- --------------------------------------------------------------------------------
</TABLE>
(1) Positions represent local currency assets funded by U.S. dollars in both
periods presented.
(2) Positions represent dollar assets funded by local currency liabilities in
1998 and local currency assets funded by U.S. dollars in 1997.
Currency positions expose the Corporation to gains or losses when currency
price movements are greater or lower than the spread between the local currency
interest rate and the U.S. dollar interest rate. To date, the Corporation's
currency positions have been liquid in nature and management has been able to
close and re-open these positions as necessary.
For additional information related to the Corporation's international opera-
tions, see the "Line of Business Information" and "Cross-Border Outstandings"
sections.
Derivative Financial Instruments
Derivatives provide the Corporation with significant flexibility in managing
its interest rate risk and foreign exchange exposures, enabling it to manage
risk efficiently and respond quickly to changing market conditions while mini-
mizing the impact on balance sheet leverage. The Corporation routinely uses
non-leveraged rate-related derivative instruments, primarily interest rate
swaps, as part of its asset and liability management practices. The level and
term of such contracts may be modified as necessary, in response to balance
sheet changes and other management actions, while complying with ALCCO direc-
tives for market value sensitivity and net interest revenue at risk.
Table 18 summarizes the remaining maturity and notional amount of interest rate
derivatives as of December 31, 1998, and the notional amount of interest rate
derivatives as of December 31, 1997, entered into for asset and liability man-
agement purposes.
- -------------------------------------- 51 --------------------------------------
<PAGE>
Table 18 -- Remaining Maturity of Interest Rate Derivatives
<TABLE>
<CAPTION>
Remaining Maturity-Notional Amount
Less than 1-3 3-5 Greater than 1998 1997
(in millions) 1 year years years 5 years Total Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Futures and forwards(1)..... $ 734 $ 734 $ 3,947
Interest rate swaps(2)...... 4,495 $1,015 $313 $2,543 8,366 11,162
Interest rate options(3)
Purchased................. 2,411 2,411 2,765
Written or sold........... 1,911 1,911
------ ------ ---- ------ ------- -------
$9,551 $1,015 $313 $2,543 $13,422 $17,874
====== ====== ==== ====== ======= =======
- --------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1998 and 1997, represents contracts entered into by the
Corporation's Brazilian operations in the local market which are linked to
short-term interest bearing assets and liabilities.
(2) At December 31, 1998, includes $5.4 billion and $3 billion of interest rate
swap contracts entered into by the Corporation's domestic and international
operations, respectively. Of the domestic interest rate swaps, approxi-
mately $3.5 billion are linked to notes payable and $1.6 billion to loans.
Of the international interest rate swaps, approximately $2.8 billion were
entered into by the Brazilian operations and are scheduled to mature in
less than one year. The Brazilian interest rate swaps typically include the
exchange of floating rate indices that are indigenous to the Brazilian mar-
ket.
(3) At December 31, 1998 and 1997, includes equity contracts entered into by
the Corporation's Argentine operations. These contracts are linked to Ar-
gentine deposit products, where the holder receives payment based on
changes in the prices of underlying Argentine securities.
Table 19 summarizes the fair value and unrecognized gains (losses) of deriva-
tives 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.
Table 19 -- Fair Value and Unrecognized Gains (Losses) of Derivatives
<TABLE>
<CAPTION>
December 31 1998 1997
Fair Value(1) Unrecognized Fair Value(1) Unrecognized
(in millions) Notional Asset Liability Gain (Loss)(2) Notional Asset Liability Gain (Loss)(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Futures and forwards.... $ 734 $ (6) $ 3,947 $ 21 $ 11
Interest rate swaps..... 8,366 $219 $ 81 110 11,162 132 $11 96
Interest rate options
Purchased............. 2,411 89 89 2,765 13 2
Written or sold....... 1,911 66 (66)
------- ---- ---- ---- ------- ---- --- ----
$13,422 $308 $147 $127 $17,874 $166 $11 $109
======= ==== ==== ==== ======= ==== === ====
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) When certain instruments, such as futures, are subject to daily cash set-
tlements, the fair value of these instruments is zero.
(2) 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. This includes amounts related to contracts that
have been terminated.
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.
Included in unrecognized gains (losses) at December 31, 1998 were deferred
gains of $4 million related to terminated contracts that are being amortized to
net interest revenue over a weighted average period of 46 months. At December
31, 1997, unrecognized gains of $7 million related to terminated contracts were
being amortized to net interest revenue over a weighted average period of four-
teen months. The Corporation routinely reviews its asset and liability deriva-
tive positions to determine that such instruments continue to function as ef-
fective risk management tools. See Note 22 to the Financial Statements for ad-
ditional information on derivative financial instruments.
Operating Risk Management
Operating risk is defined by the Corporation as the risk of loss that can arise
from such factors as inadequate, incomplete or incorrect management informa-
tion; inadequate technology or infrastructure; deficient policies, processes,
procedures, supervision and controls; failures of vendors, service providers
and other external dependencies; unplanned events; and human error or dishones-
ty. In dynamic operating environments, companies must continue to monitor and
re-evaluate their risk management processes and culture.
During 1998, the Corporation formed the ORC which is responsible for the Corpo-
ration's operating risk management strategy and policies and for the monitoring
and assessment of critical operating risks throughout the Corporation. The ORC
is chaired
- -------------------------------------- 52 --------------------------------------
<PAGE>
by the Executive Vice President of Risk Management. This committee is comprised
of senior level executives from Risk Management, the Corporation's core busi-
nesses, as well as representatives from various support functions. Business
unit management is primarily accountable for maintaining strong control envi-
ronments in their areas of responsibility, including the identification and
evaluation of significant risk factors, the development and presentation of ac-
tion plans to mitigate these risk factors, and the performance of assurance ac-
tivities to test the effectiveness of their operating control environments. In
addition, senior operating risk officers of each key business serve as liaisons
between the business units and the operating risk management organization, im-
plement strategies tailored to their respective businesses and serve as members
of the ORC. Corporate Audit and Risk Review are responsible for executing inde-
pendent assurance procedures, in accordance with annual plans that are approved
by the Audit Committee of the Board.
Capital Management
At December 31, 1998, the Corporation had $4.8 billion in stockholders' equity,
compared with $4.6 billion at December 31, 1997. At the Corporation's annual
meeting held on April 23, 1998, the Corporation's stockholders approved an in-
crease in the number of authorized shares of common stock from 300 million
shares to 500 million shares. The stockholders also approved a change in the
par value of these common shares from $1.50 to $1.00 per share. On the same
day, the Corporation's Board approved a two-for-one stock split of the Corpora-
tion's common stock, executed in the form of a stock dividend of one share for
each share held, which dividend was paid in June 1998.
In July 1998, the Corporation redeemed all of its remaining preferred stock,
including its adjustable rate cumulative preferred stock, Series A, B and C,
and its fixed rate cumulative preferred stock, Series F, for a total redemption
value of $278 million, which equaled the aggregate carrying value of the pre-
ferred stock.
The Corporation's quarterly common stock dividend was $.29 per share during
1998 (as adjusted to reflect the impact of the stock split). In the first quar-
ter of 1999, the quarterly dividend was increased 10 percent, to $.32 per
share. The level of dividends paid on the Corporation's common stock is deter-
mined by the Board based on the Corporation's liquidity, asset quality profile,
capital adequacy and recent earnings history, as well as economic conditions
and other factors deemed relevant by the Board, including the amount of divi-
dends paid to the Corporation by its subsidiaries.
The Corporation has a capital planning process to determine the appropriate
level of capital required to support its various businesses and to ensure that
the Corporation maintains this level of capital. Included in the determination
of appropriate capital levels are the various capital requirements established
by the Corporation's principal regulatory agencies. The Global Treasury group
is responsible for developing capital plans for the Corporation and its banking
subsidiaries that support the Corporation's strategic objectives. These plans,
which are regularly reviewed and approved by ALCCO, include current and pro
forma capital positions that are measured using various capital ratios, includ-
ing tangible common equity and common equity, as well as three regulatory capi-
tal ratios: Tier 1, Total and Tier 1 leverage. At December 31, 1998, the Corpo-
ration and its bank subsidiaries met all regulatory capital adequacy require-
ments to which they are subject.
Table 20 presents the Corporation's capital ratios as of the last two year
ends.
Table 20 -- Capital Position
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Tangible common equity ratio (common equity minus
intangibles/total assets minus intangibles)...................... 5.5% 5.8%
Common equity ratio (common equity/total assets).................. 6.6% 6.3%
Regulatory capital ratios
Tier 1 capital ratio (Tier 1 capital/total risk-adjusted
assets)......................................................... 7.1% 8.0%
Total capital ratio (total capital/total risk-adjusted assets)... 11.7% 12.1%
Tier 1 leverage ratio (Tier 1
capital/adjusted total average assets).......................... 6.7% 7.4%
</TABLE>
Compared with the prior year end, the decrease in the Corporation's regulatory
capital ratios at December 31, 1998 reflected the Corporation's acquisitions of
Deutsche Argentina, OCA and Robertson Stephens during the year. Additional in-
formation on the Corporation's regulatory capital can be found in Note 14 to
the Financial Statements.
Recent Accounting and Regulatory Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Fi-
nancial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that all deriva-
tive instruments, including certain derivative instruments embedded in other
contracts, be recorded on the balance sheet, as either an asset or liability,
measured at its fair value. Changes in the derivative's fair value should be
recognized currently in earnings unless the derivative is designated as a
hedge. When designated as a hedge, the fair value should be recognized cur-
rently in earnings or in other nonowner changes in equity, depending on whether
such designation is as a fair value or as a cash flow hedge. With respect to
fair value hedges, the fair value of the derivative, as well as changes in the
fair value of the hedged item, are reported in the income statement. For cash
flow hedges, changes in the derivative's fair value are reported in other non-
owner changes in equity and reclassified to the income statement in periods in
which earnings are affected by the hedged variable cash flows or forecasted
transaction. SFAS No. 133 also requires a company to formally document, desig-
nate and assess the effectiveness of transactions that receive hedge accounting
treatment.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning af-
ter June 15, 1999, and cannot be applied retroactively. The Corporation intends
to adopt the Statement as of January 1, 2000; however, it has not yet
quantified the financial statement impact of adoption, nor determined the
method of adoption. The Corporation anticipates that adoption could
- -------------------------------------- 53 --------------------------------------
<PAGE>
increase volatility in earnings and other nonowner changes in equity, and could
result in certain modifications to systems and hedging methodologies.
1997 Compared With 1996
Net Interest Revenue
Consolidated net interest revenue in 1997 increased $93 million over 1996. A 17
basis point decline in consolidated net interest margin was more than offset by
a $4.3 billion increase in average earning assets. The decrease in net interest
margin was primarily due to the sale of FAC in 1997, as well as narrower
spreads from Argentine operations. These declines in net interest margin were
partially offset by wider spreads in Brazil arising from higher interest rates
due to fourth quarter of 1997 market volatility. The increase in average earn-
ing assets was driven by an increase of approximately $1.9 billion in trading
and available for sale securities, due to growth in domestic-based capital mar-
kets-related businesses and balance sheet positioning, as well as an increase
in average C&I loans from international operations, particularly in Argentina
and Brazil, of approximately $1.7 billion. Average loans and lease volume in
domestic operations was relatively unchanged from 1996. A $1.6 billion increase
in commercial, industrial and financial loans and commercial real estate loans
was offset by a $1.7 billion decrease in consumer-related loans, reflecting the
1997 sales of FAC and Ganis and a lower level of residential mortgages.
Noninterest Income
Excluding net mortgage servicing fees, financial service fees increased $104
million compared with 1996. The improvement was due to an increase in syndica-
tion and agent fees, reflecting a higher volume of transactions generated by
the Corporation's loan syndications business; an increase in deposit and ATM-
related fees due to repricing of certain domestic products; and an increase in
investment banking fees resulting from increased underwriting and financial ad-
visory activities in the Corporation's capital markets-related businesses.
Net mortgage servicing fees in 1996 included $111 million of pre-tax losses
from risk management activities, net of decreased mortgage servicing amortiza-
tion. These losses resulted from the decline in market value of contracts used
to manage prepayment risk in the mortgage servicing portfolio which, in turn,
protected the economic value of the Corporation's mortgage banking subsidiary
pending the completion of its sale to HomeSide. Concurrently, the market value
of the mortgage servicing assets increased, resulting in a pre-tax gain of $106
million upon the sale of the mortgage banking subsidiary, which substantially
offset the losses from risk management activities. The pre-tax gain is included
in gains on sales of businesses.
Trust and investment management fees increased $37 million, primarily due to
higher fees from the Corporation's Argentine mutual fund and Private Banking
businesses, reflecting growth in assets under management by these respective
businesses. Compared with 1996, trading profits and commissions decreased $18
million. This decrease included losses incurred by the Boston-based emerging
markets and high yield units as a result of volatility caused by the emergence,
in the fourth quarter of 1997, of the Asian economic crisis. These losses were
partially offset by higher net foreign exchange profits arising from growth in
the business and an increase in customer demand due to market volatility. The
$57 million increase in net securities gains in 1997 mainly reflected net gains
related to securities sales in the emerging markets business in the fourth
quarter of 1997, and the sale of certain securities in the Argentine available
for sale portfolio. Net equity and mezzanine profits increased $12 million over
1996, reflecting continued gains in the Private Equity business.
Gains on sales of businesses in 1997 was composed of a $68 million pre-tax gain
from the sale of FAC, and, in 1996, a $106 million pre-tax gain from the sale
of the Corporation's mortgage banking subsidiary discussed above and a $47 mil-
lion pre-tax gain from the sale of branches. The $4 million decrease in other
noninterest income included an $11 million loss, recognized in connection with
the sale of FAC, on interest rate futures contracts that had been used to hedge
the funding of this subsidiary.
Noninterest Expense
Noninterest expense before acqusition-related restructuring costs increased
$184 million compared with 1996. The increase was primarily driven by invest-
ment spending in Argentina and Brazil, including the opening of seventeen new
branches in Argentina and ten new branches in Brazil; the growth of the Corpo-
ration's capital markets-related businesses, including the hiring of additional
sales and trading professionals, the opening of the Corporation's Section 20
subsidiary and the formation of a high yield unit; and increased incentive com-
pensation related to improved business performance and higher merit increases.
In addition, during 1997, the Corporation incurred additional conversion costs
associated with its Regional Bank, costs related to the unveiling of the new
BankBoston brand in Latin America, and costs in connection with its Year 2000
project. These costs are the principal components of the increase in other non-
interest expense. The additional conversion costs included integrating teller,
ATM and other back-office systems; additional part-time and temporary help re-
lated to the integration of BayBanks; and costs related to the planned closing
of additional branches. Also included are costs associated with the extension
of the new products set to the Corporation's Connecticut operations in conjunc-
tion with the merger of Bank of Boston Connecticut into the Bank, which oc-
curred in October 1997. These increases were offset, in part, by lower operat-
ing expenses of FAC and Ganis, due to their disposition during 1997, and cost
savings related to the integration of BayBanks.
In 1996, the Corporation recorded acquisition-related restructuring costs of
$180 million in connection with its acquisition of BayBanks. The charges in-
cluded severance costs, facility costs, including consolidations of branch and
back office operations, and professional fees and other costs of effecting the
acquisition. Also included are systems and other conversion costs which were
incurred at the time of the acquisition.
- -------------------------------------- 54 --------------------------------------
<PAGE>
BankBoston Corporation
Average Balances and Interest Rates, Taxable Equivalent Basis
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997
Average Average Average Average
(dollars in millions) Balance Interest(1) Rate Balance Interest(1) Rate
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing
deposits in other banks
U.S.................... $ 142 $ 8 5.77% $ 319 $ 18 5.78%
International.......... 1,070 109 10.18 1,462 126 8.61
------- ------ ------- ------
Total................ 1,212 117 9.66 1,781 144 8.11
------- ------ ----- ------- ------ -----
Federal funds sold and
resale agreements
U.S.................... 1,735 90 5.19 635 35 5.43
International.......... 1,451 219 15.09 1,471 215 14.65
------- ------ ------- ------
Total................ 3,186 309 9.70 2,106 250 11.87
------- ------ ----- ------- ------ -----
Trading assets
U.S.................... 1,099 63 5.71 969 60 6.19
International.......... 793 49 6.22 728 51 7.08
------- ------ ------- ------
Total................ 1,892 112 5.93 1,697 111 6.57
------- ------ ----- ------- ------ -----
Securities
U.S.
Available for
sale(2)............. 8,986 583 6.55 7,766 518 6.74
Held to maturity..... 598 37 6.15 658 42 6.34
International
Available for
sale(2)............. 1,835 178 9.48 1,317 159 12.27
------- ------ ------- ------
Total................ 11,419 798 6.99 9,741 719 7.38
------- ------ ----- ------- ------ -----
Loans and lease
financing
U.S.................... 30,639 2,554 8.34 31,502 2,716 8.62
International.......... 14,044 1,710 12.18 10,881 1,248 11.46
------- ------ ------- ------
Total(3)............. 44,683 4,264 9.54 42,383 3,964 9.35
------- ------ ----- ------- ------ -----
Total earning assets.... 62,392 5,600 8.98 57,708 5,188 8.99
------ ----- ------ -----
Nonearning assets....... 9,808 7,555
------- -------
Total assets(4)...... $72,200 $65,263
======= =======
Liabilities and
Stockholders' Equity
Deposits
U.S.
Savings deposits..... $15,792 $ 404 2.56% $14,690 $ 397 2.70%
Time deposits........ 10,752 589 5.48 10,014 560 5.59
International
Banks in foreign
countries........... 2,302 145 6.28 2,200 131 5.97
Other foreign savings
and time............ 9,217 733 7.95 8,018 597 7.44
------- ------ ------- ------
Total................ 38,063 1,871 4.92 34,922 1,685 4.82
------- ------ ----- ------- ------ -----
Federal funds purchased
and repurchase
agreements
U.S.................... 6,035 316 5.24 5,842 333 5.71
International.......... 168 9 5.09 175 17 9.46
------- ------ ------- ------
Total................ 6,203 325 5.23 6,017 350 5.82
------- ------ ----- ------- ------ -----
Other funds borrowed
U.S.................... 5,312 312 5.87 4,365 262 6.01
International.......... 1,756 222 12.68 1,482 193 13.02
------- ------ ------- ------
Total................ 7,068 534 7.56 5,847 455 7.78
------- ------ ----- ------- ------ -----
Notes payable
U.S.(5)................ 4,320 286 6.62 2,909 201 6.91
International.......... 378 34 8.93 473 44 9.37
------- ------ ------- ------
Total................ 4,698 320 6.80 3,382 245 7.25
------- ------ ----- ------- ------ -----
Total interest bearing
liabilities............ 56,032 3,050 5.44 50,168 2,735 5.45
------ ----- ------ -----
Demand deposits --
U.S................... 6,610 7,226
Demand deposits --
International......... 1,105 705
Other noninterest
bearing liabilities.... 3,676 2,497
Stockholders' equity.... 4,777 4,667
------- -------
Total liabilities and
stockholders'
equity(4)........... $72,200 $65,263
======= =======
Net Interest Revenue as
a Percentage of Average
Interest Earning Assets
U.S.................... $43,199 $1,686 3.90% $41,849 $1,822 4.36%
International.......... 19,193 864 4.50% 15,859 631 3.98%
------- ------ ------- ------
Total................ $62,392 $2,550 4.09% $57,708 $2,453 4.25%
======= ====== ======= ======
- ---------------------------------------------------------------------------------
</TABLE>
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the securi-
ties' amortized cost.
(3) Loans and lease financing includes nonaccrual balances.
(4) As of December 31, 1998 and 1997, average international assets and liabili-
ties as a percentage of total average consolidated assets and liabilities,
each amounted to 30% and 27%, respectively.
(5) Amounts include guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures.
- -------------------------------------- 55 --------------------------------------
<PAGE>
BankBoston Corporation
Average Balances and Interest Rates, Taxable Equivalent Basis
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Average Average
(dollars in millions) Balance Interest(1) Rate
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest bearing deposits in other banks
U.S. ................................................ $ 192 $ 12 5.96%
International........................................ 1,136 91 8.01
------- ------
Total.............................................. 1,328 103 7.71
------- ------ -----
Federal funds sold and resale agreements
U.S. ................................................ 474 25 5.24
International........................................ 1,203 178 14.78
------- ------
Total.............................................. 1,677 203 12.08
------- ------ -----
Trading assets
U.S. ................................................ 552 31 5.76
International........................................ 870 124 14.30
------- ------
Total.............................................. 1,422 155 10.99
------- ------ -----
Loans held for sale
U.S. ................................................ 260 18 6.88
International........................................ 12 1 6.12
------- ------
Total.............................................. 272 19 6.84
------- ------ -----
Securities
U.S.
Available for sale(2).............................. 6,577 423 6.48
Held to maturity................................... 684 42 6.15
International
Available for sale(2).............................. 832 114 14.13
Held to maturity................................... 29 5 16.53
------- ------
Total.............................................. 8,122 584 7.19
------- ------ -----
Loans and lease financing
U.S. ................................................ 31,472 2,714 8.62
International........................................ 9,117 1,135 12.44
------- ------
Total(3)........................................... 40,589 3,849 9.48
------- ------ -----
Total earning assets.................................. 53,410 4,913 9.20
------ -----
Nonearning assets..................................... 6,113
-------
Total assets(4).................................... $59,523
=======
Liabilities and Stockholders' Equity
Deposits
U.S.
Savings deposits................................... $14,918 $ 401 2.69%
Time deposits...................................... 10,310 581 5.64
International
Banks in foreign countries......................... 2,883 163 5.64
Other foreign savings and time..................... 6,380 535 8.37
------- ------
Total.............................................. 34,491 1,680 4.87
------- ------ -----
Federal funds purchased and repurchase agreements
U.S. ................................................ 4,500 259 5.77
International........................................ 109 14 12.80
------- ------
Total.............................................. 4,609 273 5.93
------- ------ -----
Other funds borrowed
U.S. ................................................ 3,140 186 5.92
International........................................ 1,002 220 21.91
------- ------
Total.............................................. 4,142 406 9.79
------- ------ -----
Notes payable
U.S.(5).............................................. 2,119 140 6.59
International........................................ 547 54 9.99
------- ------
Total.............................................. 2,666 194 7.29
------- ------ -----
Total interest bearing liabilities.................... 45,908 2,553 5.56
------ -----
Demand deposits -- U.S................................ 6,635
Demand deposits -- International...................... 477
Other noninterest bearing liabilities................. 1,759
Stockholders' equity.................................. 4,744
-------
Total liabilities and stockholders' equity(4)...... $59,523
=======
Net Interest Revenue as a Percentage of Average
Interest Earning Assets
U.S. ................................................ $40,211 $1,826 4.54%
International........................................ 13,199 534 4.05%
------- ------
Total.............................................. $53,410 $2,360 4.42%
======= ======
- ----------------------------------------------------------------------------------
</TABLE>
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the securi-
ties' amortized cost.
(3) Loans and lease financing includes nonaccrual balances.
(4) As of December 31, 1996, average international assets and liabilities as a
percentage of total average consolidated assets and liabilities, respec-
tively, amounted to 25%.
(5) Amounts include guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures.
- -------------------------------------- 56 --------------------------------------
<PAGE>
BankBoston Corporation
Change in Net Interest Revenue -- Volume and Rate Analysis
The following table presents, on a fully taxable equivalent basis, an analysis
of the effect on net interest revenue of volume and rate changes for 1998 com-
pared with 1997, and 1997 compared with 1996. The change due to the volume/rate
variance has been allocated to volume and the change due to the difference in
the number of days in the periods has been allocated to rate.
<TABLE>
<CAPTION>
1998 Compared with 1997 1997 Compared with 1996
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................... $ (10) $ (10) $ 6 $ 6
International......... (40) $ 23 (17) 28 $ 7 35
-------- ----
(27) 41
-------- ----
Federal funds sold and
resale agreements
U.S................... 57 (2) 55 9 1 10
International......... (3) 7 4 39 (2) 37
-------- ----
59 47
-------- ----
Trading assets
U.S................... 8 (5) 3 26 3 29
International......... 4 (6) (2) (10) (63) (73)
-------- ----
1 (44)
-------- ----
Securities
U.S................... 80 (20) 60 77 18 95
International......... 46 (27) 19 53 (13) 40
-------- ----
79 135
-------- ----
Loans and lease
financing
U.S................... (72) (90) (162) (20) 3 (17)
International......... 385 77 462 202 (89) 113
-------- ----
300 96
-------- ----
Interest income......... 421 (9) 412 386 (111) 275
-------- ----
Interest Bearing
Liabilities
Deposits
U.S. savings.......... 28 (21) 7 (6) 2 (4)
U.S. time............. 40 (11) 29 (16) (5) (21)
International......... 99 51 150 68 (38) 30
-------- ----
186 5
-------- ----
Federal funds purchased
and repurchase
agreements
U.S................... 10 (27) (17) 77 (3) 74
International......... (8) (8) 6 (3) 3
-------- ----
(25) 77
-------- ----
Other funds borrowed
U.S................... 56 (6) 50 73 3 76
International......... 34 (5) 29 62 (89) (27)
-------- ----
79 49
-------- ----
Notes payable
U.S................... 93 (8) 85 54 7 61
International......... (8) (2) (10) (7) (3) (10)
-------- ----
75 51
-------- ----
Interest expense........ 229 86 315 203 (21) 182
-------- ----
Net interest revenue.... $189 $(92) $ 97 $ 184 $ (91) $ 93
======== ====
</TABLE>
- -------------------------------------- 57 --------------------------------------
<PAGE>
BankBoston Corporation
Summary of Quarterly Consolidated Financial Information and
Common Stock Data
<TABLE>
<CAPTION>
1998 1997
(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.......... $ 1,440 $ 1,410 $ 1,390 $ 1,337 $ 1,342 $ 1,267 $ 1,281 $ 1,275
Interest expense......... 781 785 750 734 720 696 665 655
------- -------- -------- -------- -------- ------- -------- --------
Net interest revenue... 659 625 640 603 622 571 616 620
Provision for credit
losses.................. 120 60 60 140 40 40 60 60
------- -------- -------- -------- -------- ------- -------- --------
Net interest revenue
after provision for
credit losses......... 539 565 580 463 582 531 556 560
Noninterest income....... 601 385 457 589 408 448 377 330
Noninterest expense...... 816 786 647 661 600 601 578 544
------- -------- -------- -------- -------- ------- -------- --------
Income before income
taxes................... 324 164 390 391 390 378 355 346
Provision for income
taxes................... 117 59 148 153 155 152 143 139
------- -------- -------- -------- -------- ------- -------- --------
Net income............... $ 207 $ 105 $ 242 $ 238 $ 235 $ 226 $ 212 $ 207
======= ======== ======== ======== ======== ======= ======== ========
Net income applicable to
common stock............ $ 207 $ 104 $ 238 $ 234 $ 230 $ 217 $ 203 $ 198
======= ======== ======== ======== ======== ======= ======== ========
Average Balance Sheet
Data
Loans and lease
financing............... $45,731 $45,069 $44,196 $43,706 $43,242 $42,429 $42,112 $41,732
Securities............... 12,171 11,692 11,188 10,606 10,538 9,661 9,488 9,261
Other earning assets..... 6,302 6,108 6,577 6,175 5,774 5,679 5,234 5,648
------- -------- -------- -------- -------- ------- -------- --------
Total earning assets... 64,204 62,869 61,961 60,487 59,554 57,769 56,834 56,641
Cash and due from banks.. 2,870 2,930 3,013 3,221 3,398 3,194 2,976 2,698
Other assets............. 8,257 6,702 6,262 6,002 5,140 4,741 4,136 3,885
------- -------- -------- -------- -------- ------- -------- --------
Total average assets... $75,331 $72,501 $71,236 $69,710 $68,092 $65,704 $63,946 $63,224
======= ======== ======== ======== ======== ======= ======== ========
Deposits................. $47,389 $44,539 $45,404 $45,774 $44,252 $42,989 $42,246 $41,899
Funds borrowed........... 13,279 14,423 13,054 12,309 12,730 12,367 11,466 10,866
Other liabilities........ 4,417 3,618 3,508 3,148 3,106 2,464 2,216 2,191
Notes payable(1)......... 5,477 5,149 4,392 3,749 3,524 3,336 3,351 3,316
Stockholders' equity..... 4,769 4,772 4,878 4,730 4,480 4,548 4,667 4,952
------- -------- -------- -------- -------- ------- -------- --------
Total average
liabilities and
stockholders' equity.. $75,331 $72,501 $71,236 $69,710 $68,092 $65,704 $63,946 $63,224
======= ======== ======== ======== ======== ======= ======== ========
Per Common Share(2)
Net income
Basic................... $ .70 $ .35 $ .81 $ .80 $ .79 $ .75 $ .68 $ .64
Diluted................. .70 .35 .80 .79 .78 .73 .68 .63
Cash dividends declared.. .29 .29 .29 .29 .26 .26 .26 .22
Market value
High.................... 44 1/4 58 11/16 58 55 15/16 48 27/32 45 7/8 38 7/16 39 3/8
Low..................... 27 5/8 33 51 15/16 43 15/16 38 17/32 36 9/16 31 13/16 31 15/16
Average Number of Common
Shares(2)
(in thousands)
Basic................... 294,774 294,379 293,769 292,542 290,482 290,766 295,820 306,842
Diluted................. 296,755 296,361 298,275 296,840 294,618 295,684 299,574 311,184
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts include guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures.
(2) All per share and average share information has been adjusted to reflect
the Corporation's two-for-one stock split effected in June 1998.
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.
- -------------------------------------- 58 --------------------------------------
<PAGE>
[LOGO FOR PRICEWATERHOUSECOOPERS LETTERHEAD APPEARS HERE]
Report of Independent Accountants
To the Board of Directors and Stockholders of
BankBoston Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in common stockholders' equity
and of cash flows present fairly, in all material respects, the financial posi-
tion of BankBoston Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the responsibil-
ity of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
January 21, 1999 /s/ PricewaterhouseCoopers LLP
- -------------------------------------- 60 --------------------------------------
<PAGE>
BankBoston Corporation
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 1998 1997
(dollars in millions, except per share amounts)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks......................................... $ 3,773 $ 4,006
Interest bearing deposits in other banks........................ 1,533 1,592
Federal funds sold and securities purchased under agreements to
resell......................................................... 2,463 2,017
Trading assets.................................................. 3,802 2,947
Securities
Available for sale............................................. 12,075 9,946
Held to maturity (fair value of $464 in 1998 and $540 in
1997)......................................................... 459 537
Loans and lease financing (net of unearned income of $526 in
1998 and $381 in 1997)......................................... 42,806 43,980
Reserve for credit losses....................................... (754) (712)
Premises and equipment, net..................................... 1,319 1,042
Due from customers on acceptances............................... 338 462
Accrued interest receivable..................................... 561 552
Other assets.................................................... 5,138 2,899
------- -------
Total Assets.................................................... $73,513 $69,268
======= =======
Liabilities and Stockholders' Equity
Deposits
Domestic offices
Noninterest bearing........................................... $ 6,554 $ 8,507
Interest bearing.............................................. 28,371 25,104
Overseas offices
Noninterest bearing........................................... 1,144 1,085
Interest bearing.............................................. 12,431 11,065
------- -------
Total deposits.............................................. 48,500 45,761
Funds borrowed.................................................. 12,016 12,865
Acceptances outstanding......................................... 338 460
Accrued expenses and other liabilities.......................... 2,254 1,884
Notes payable................................................... 4,593 2,941
Guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures................................. 995 747
------- -------
Total liabilities............................................... 68,696 64,658
------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock without par value
Authorized shares -- 10,000,000
Issued shares -- 3,673,941 in 1997............................ 278
Common stockholders' equity
Common stock, par value $1.00 in 1998 and $1.50 in 1997
Authorized shares -- 500,000,000 in 1998 and 300,000,000 in
1997
Issued shares -- 307,317,780 in 1998 and 154,002,254 in 1997
Outstanding shares -- 294,971,900 in 1998 and 145,706,594 in
1997........................................................ 307 231
Surplus....................................................... 1,118 1,219
Retained earnings............................................. 3,895 3,472
Accumulated other nonowner changes in equity
Net unrealized gain (loss) on securities available for sale,
net of tax.................................................. (19) 53
Cumulative translation adjustments, net of tax............... (14) (11)
Treasury stock, at cost -- 12,345,880 shares in 1998 and
8,295,660 shares in 1997..................................... (470) (632)
------- -------
Total common stockholders' equity.............................. 4,817 4,332
------- -------
Total stockholders' equity...................................... 4,817 4,610
------- -------
Total Liabilities and Stockholders' Equity...................... $73,513 $69,268
======= =======
- ----------------------------------------------------------------------------------
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- -------------------------------------- 61 --------------------------------------
<PAGE>
BankBoston Corporation
Consolidated Statement of Income
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans and lease financing, including fees.......... $ 4,259 $ 3,954 $ 3,863
Securities......................................... 780 698 569
Trading assets..................................... 112 111 155
Federal funds sold and securities purchased under
agreements to resell.............................. 309 257 203
Deposits in other banks............................ 117 144 103
-------- -------- --------
Total interest income............................ 5,577 5,164 4,893
-------- -------- --------
Interest Expense
Deposits of domestic offices....................... 962 940 944
Deposits of overseas offices....................... 909 745 736
Funds borrowed..................................... 859 805 679
Notes payable...................................... 320 245 194
-------- -------- --------
Total interest expense........................... 3,050 2,735 2,553
-------- -------- --------
Net interest revenue............................. 2,527 2,429 2,340
Provision for credit losses........................ 380 200 231
-------- -------- --------
Net interest revenue after provision for credit
losses.......................................... 2,147 2,229 2,109
-------- -------- --------
Noninterest Income
Financial service fees and commissions............. 877 663 477
Trust and investment management fees............... 326 283 246
Trading profits and commissions.................... (3) 58 76
Net securities gains............................... 41 80 23
Other income....................................... 791 479 522
-------- -------- --------
Total noninterest income......................... 2,032 1,563 1,344
-------- -------- --------
Noninterest Expense
Salaries........................................... 1,373 1,065 983
Employee benefits.................................. 257 214 195
Occupancy expense.................................. 231 204 203
Equipment expense.................................. 167 146 138
Acquisition-related restructuring expense.......... 180
Other expense...................................... 882 695 621
-------- -------- --------
Total noninterest expense........................ 2,910 2,324 2,320
-------- -------- --------
Income before income taxes......................... 1,269 1,468 1,133
Provision for income taxes......................... 477 589 483
-------- -------- --------
Net Income......................................... $ 792 $ 879 $ 650
======== ======== ========
Net Income Applicable to Common Stock.............. $ 783 $ 848 $ 613
======== ======== ========
Per Common Share
Net income
Basic............................................. $ 2.66 $ 2.86 $ 2.00
Diluted........................................... 2.64 2.82 1.96
Cash dividends declared............................ 1.16 .99 .85
Average Number of Common Shares
(in thousands)
Basic............................................. 293,873 295,918 307,058
Diluted........................................... 296,663 300,080 312,224
- -------------------------------------------------------------------------------
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- -------------------------------------- 62 --------------------------------------
<PAGE>
BankBoston Corporation
Consolidated Statement of Changes in Common Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Three Years Ended December Other
31, 1998 Nonowner
(dollars in millions, except Common Retained Changes Treasury
per share amounts) Stock Surplus Earnings In Equity Stock Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996.... $ 350 $1,240 $2,548 $ 78 $ (22) $4,194
Net income -- 1996.......... 650 650
Change in net unrealized
gain on securities
available for sale, net of
tax and reclassification
adjustment................. (6) (6)
Change in translation
adjustments, net of tax.... (3) (3)
------
Total nonowner changes in
equity -- 1996........... 641
Change in par value......... (118) 118
Common stock issued in
connection with
Dividend reinvestment and
common stock purchase
plan --817,863 shares..... 1 18 23 42
Exercise of stock options,
net of surrendered
shares --2,123,434
shares.................... 3 (31) 52 24
Business combinations, net
of treasury stock
retired --4,765,908
shares.................... (6) (178) 420 236
Restricted stock grants,
net of forfeitures --
221,843 shares........... 9 5 10 24
Other, principally employee
benefit plans -- 143,574
shares.................... 26 6 7 39
Cash dividends declared on
preferred stock............ (37) (37)
Cash dividends declared on
common stock -- $.85 per
share...................... (247) (247)
Purchases of treasury
stock -- 10,220,789
shares..................... (490) (490)
----- ------ ------ ---- ----- ------
Balance, December 31, 1996.. 230 1,202 2,925 69 4,426
Net income -- 1997.......... 879 879
Change in net unrealized
gain on securities
available for sale, net of
tax and reclassification
adjustment................. (23) (23)
Change in translation
adjustments, net of tax.... (4) (4)
------
Total nonowner changes in
equity -- 1997........... 852
Common stock issued in
connection with
Dividend reinvestment and
common stock purchase
plan --269,470 shares..... 6 16 22
Exercise of stock options,
net of surrendered
shares --1,919,646
shares.................... 1 (53) 113 61
Business combinations --
386,370 shares........... 8 21 29
Restricted stock grants,
net of forfeitures --
246,319 shares........... 17 (10) 1 8
Other, principally employee
benefit plans -- 11,050
shares.................... 39 1 40
Cash dividends declared on
preferred stock............ (31) (31)
Cash dividends declared on
common stock -- $.99 per
share...................... (291) (291)
Purchases of treasury
stock -- 10,300,000
shares..................... (784) (784)
----- ------ ------ ---- ----- ------
Balance, December 31, 1997.. 231 1,219 3,472 42 (632) 4,332
Net income -- 1998.......... 792 792
Change in net unrealized
gain (loss) on securities
available for sale, net of
tax and reclassification
adjustment................. (72) (72)
Change in translation
adjustments, net of tax.... (3) (3)
------
Total nonowner changes in
equity -- 1998........... 717
Change in par value......... (77) 77
Two-for-one stock split --
153,728,260 shares........ 154 (154)
Common stock issued in
connection with
Dividend reinvestment and
common stock purchase
plan --381,385 shares..... 4 19 23
Exercise of stock options,
net of surrendered
shares --1,447,235
shares.................... (1) (62) 104 41
Restricted stock grants,
net of forfeitures --
282,934 shares........... 6 (19) 33 20
Other, principally employee
benefit plans -- 170,398
shares.................... 28 6 34
Cash dividends declared on
preferred stock............ (9) (9)
Cash dividends declared on
common stock -- $1.16 per
share...................... (341) (341)
----- ------ ------ ---- ----- ------
Balance, December 31, 1998.. $307 $1,118 $3,895 $(33) $(470) $4,817
===== ====== ====== ==== ===== ======
- ------------------------------------------------------------------------------------
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- -------------------------------------- 63 --------------------------------------
<PAGE>
BankBoston Corporation
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income....................................... $ 792 $ 879 $ 650
Reconciliation of net income to net cash provided
from operating activities
Provision for credit losses..................... 380 200 231
Depreciation and amortization................... 194 157 150
Provision for deferred taxes.................... 33 255 2
Net gains on sales of securities available for
sale and other assets.......................... (503) (361) (368)
Change in trading assets........................ 95 (595) (356)
Change in mortgages held for sale............... 269
Net change in interest receivable and payable... 24 63 72
Other, net...................................... (286) 191 (122)
-------- -------- -------
Net cash provided from operating activities.... 729 789 528
-------- -------- -------
Cash Flows From Investing Activities
Net cash provided from (used for) interest
bearing deposits in other banks................. 59 42 (278)
Net cash used for federal funds sold and
securities purchased under agreements to
resell.......................................... (446) (160) (309)
Securities available for sale
Sales........................................... 11,867 5,359 5,827
Maturities...................................... 2,722 2,902 4,288
Purchases....................................... (16,758) (10,313) (9,624)
Securities held to maturity
Maturities...................................... 142 120 55
Purchases....................................... (58) (64) (76)
Net cash used for lending and leasing activities
of nonbank entities............................. (1,560) (418) (1,229)
Proceeds from sale of loan portfolios by bank
subsidiaries.................................... 4,981 1,295 1,270
Net cash used for lending and leasing activities
of bank subsidiaries............................ (1,845) (3,979) (2,710)
Proceeds from sale of other real estate owned.... 43 50 45
Expenditures for premises and equipment.......... (502) (324) (237)
Proceeds from sale of businesses and premises and
equipment....................................... 374 110 264
Payment for purchase business combinations, net
of cash acquired................................ (606)
Purchase of investment in bank-owned life
insurance....................................... (800) (400)
Other, net....................................... 382 107 (72)
-------- -------- -------
Net cash used for investing activities......... (2,005) (5,673) (2,786)
-------- -------- -------
Cash Flows From Financing Activities
Net cash provided from deposits.................. 1,563 2,930 1,767
Net cash provided from (used for) funds
borrowed........................................ (1,856) 2,565 768
Net proceeds from issuance of notes payable...... 2,127 1,275 921
Repayment/repurchase of notes payable............ (476) (1,155) (289)
Net proceeds from issuance of guaranteed
preferred beneficial interests in Corporation's
junior subordinated debentures.................. 248 247 500
Net proceeds from issuance of common stock....... 94 108 92
Redemption of preferred stock.................... (278) (230)
Purchase of treasury stock....................... (784) (490)
Dividends paid................................... (350) (322) (284)
-------- -------- -------
Net cash provided from financing activities.... 1,072 4,634 2,985
-------- -------- -------
Effect of foreign currency translation on cash... (29) ( 17) (15)
-------- -------- -------
Net change in cash and due from banks............ (233) (267) 712
Cash and due from banks at January 1............. 4,006 4,273 3,561
-------- -------- -------
Cash and due from banks at December 31........... $ 3,773 $ 4,006 $ 4,273
======== ======== =======
- -------------------------------------------------------------------------------
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
- -------------------------------------- 64 --------------------------------------
<PAGE>
Notes to Financial Statements
1. Summary of Significant Accounting Policies
The financial reporting and accounting policies of BankBoston Corporation (the
Corporation) conform to generally accepted accounting principles. Certain prior
period amounts have been reclassified to conform with current financial state-
ment presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
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 subsidiary, BankBoston, N.A.
(the Bank). All material intercompany accounts and transactions have been elim-
inated in consolidation. Investments in 20% to 50%-owned companies are ac-
counted 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 for which the functional currency is the U.S. dollar, includ-
ing units that operate in a hyperinflationary environment, the financial state-
ments are translated into U.S. dollars using period-end exchange rates for mon-
etary assets and liabilities, exchange rates in effect on the date of acquisi-
tion for premises and equipment (and related depreciation), and the average ex-
change 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 se-
curities.
Trading Assets
Trading assets include securities held in anticipation of short-term market
movements and for resale to customers. The Corporation values trading securi-
ties at fair value and records gains and losses, both realized and unrealized,
in trading profits and commissions, a component of noninterest income. Obliga-
tions to deliver securities not yet purchased are carried at fair value in
funds borrowed.
Trading assets also include off-balance sheet financial instruments, primarily
interest rate derivatives and foreign exchange products. Derivative trading po-
sitions are carried at fair value, with realized and unrealized gains and
losses recorded in trading profits and commissions. Interest rate derivatives
include futures and forwards, interest rate swaps and interest rate options.
Quoted market prices, when available, are used to determine fair value for
trading securities and derivative trading positions. If quoted market prices
are not available, the fair value is estimated by using pricing models, quoted
prices of instruments with similar characteristics or discounted cash flows.
Foreign exchange positions are valued at prevailing market rates on a present
value basis, and the resulting realized and unrealized gains and losses are re-
corded in net foreign exchange profits, a component of other income.
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." All debt and equity securi-
ties that are not purchased in connection with the Corporation's trading activ-
ities are classified as either securities held to maturity or securities avail-
able for sale. Securities held to maturity are debt securities that the Corpo-
ration has the positive intent and ability to hold to maturity. These securi-
ties are reported at cost, adjusted for amortization of premium and accretion
of discount. Securities available for sale are debt securities that the Corpo-
ration may not hold to maturity, as well as equity securities. These securities
include debt securities that are purchased in connection with the Corporation's
asset and liability management activities and that may be sold in response to
changes in interest rates and other related factors; securities held in connec-
tion with the Corporation's Private Equity and capital markets-related busi-
nesses; and other securities that are intended to be held for indefinite peri-
ods of time, but which may not be held to maturity. Within the available for
sale category, equity securities that have a readily determinable fair value
and debt securities are reported at fair value, with unrealized gains and
losses recorded, net of tax, as a separate component of stockholders' equity.
Equity securities that do not have a readily determinable fair value are re-
ported at cost. If a security available for sale or held to maturity has expe-
rienced a decline in value that is deemed other than temporary, it is written
down to its estimated fair value through a charge to current period income. Re-
alized gains and losses with respect to
- -------------------------------------- 65 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
securities, which are generally computed on a specific identified cost basis,
are included in net securities gains, except for gains and losses with respect
to equity and mezzanine securities, which are included in other income.
Derivatives Used in Asset and Liability Management Activities
As part of the Corporation's asset and liability management (ALM) activities,
derivative products, including interest rate swaps, futures, forwards and op-
tion contracts (including interest rate caps and floors), are used to hedge
exposures or modify the interest rate characteristics of related balance sheet
instruments. In order for a derivative to be included in the ALM portfolio,
there must be a high correlation between the derivative contract and the item
being hedged, both at inception and throughout the hedge period.
Derivatives included in the ALM portfolio are linked to specific assets or li-
abilities or groups of similar assets or liabilities. Income or loss on the
derivatives is recognized on the same basis as that used for the linked assets
or liabilities. If the related assets are carried at fair value or the lower
of cost or fair value, the fair values of the derivatives are combined with
the fair values of the assets and are recognized in income using the same
method of accounting as that used for the linked assets. If the assets or lia-
bilities are carried at cost, the derivatives 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 liabili-
ties. 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 amor-
tized over the period being managed. The Corporation 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 contract is terminated, any remaining unrecog-
nized 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 be-
ing 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 li-
abilities.
The Corporation also enters into foreign exchange contracts to hedge a portion
of its own foreign exchange exposure, including foreign currency translation.
(See "Foreign Currency Translation" above.) Such contracts are revalued at the
spot rate, with any forward premium or discount recognized over the life of
the contract in net interest revenue.
Loans and Lease Financing
Loans are reported at their principal outstanding, net of charge-offs and un-
earned income, if any. 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 ac-
counted for in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases," which requires the deferral of these fees and costs and sub-
sequent amortization to income over the life of the related credit or facili-
ty. Fees that adjust the yield on the underlying credit are included in inter-
est income on loans and lease financing. Fees for credit-related services are
included in financial service fees and commissions, a component of noninterest
income.
Lease financing receivables, including leveraged leases, are reported at the
aggregate of lease payments receivable and 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.
The Corporation generally places loans and leases on nonaccrual status when
any portion of the principal or interest is 90 days past due or, in the case
of certain domestic consumer loans, 120 days past due, unless the loan or
lease is well secured and in the process of collection, or earlier, when con-
cern exists as to the ultimate collectibility of principal or interest. When-
ever a loan or lease is placed on nonaccrual status, all other credit expo-
sures to the same borrower are also placed on nonaccrual status, except when
it can be clearly demonstrated that such credit exposures are well secured,
fully performing and insulated from the weakness surrounding the nonaccrual
credit to which they relate. When loans or leases are placed on nonaccrual
status, the related interest receivable is reversed against interest income of
the current period. Interest payments received on nonaccrual loans and leases
are applied as a reduction of the principal balance when concern exists as to
the ultimate collection of principal; otherwise, such payments are recognized
as interest income. Loans and leases are removed from nonaccrual status when
they become current as to both principal and interest and concern no longer
exists as to the ultimate collectibility of principal or interest.
Reserve for Credit Losses and Provision for Credit Losses
The reserve for credit losses is available for future charge-offs of existing
extensions of credit. The reserve is increased by the provision for credit
losses and by recoveries of items previously charged off, and is decreased as
credits are charged off. A charge-off occurs once a probability of loss has
been determined, with consideration given to such factors as the customer's
financial condition, underlying collateral and guarantees.
- ------------------------------------- 66 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
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 the 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 perti-
nent factors.
Impaired loans are accounted for in accordance with 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."
Loans are classified and accounted for as impaired loans when it is probable
that the Corporation will be unable to collect all principal and interest due
on the loan in accordance with the original contractual terms. The Corporation
uses the same criteria in placing a loan on nonaccrual status. Accordingly, im-
paired loans are defined as all nonaccrual loans, exclusive 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, on the present value of expected fu-
ture 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. Impairment exists when the recorded investment
in a loan exceeds the value of the loan measured using the above-mentioned val-
uation techniques. Such impairment is recognized as a valuation reserve, which
is included as a part of the Corporation's overall reserve for credit losses.
The Corporation recognizes interest income on impaired loans consistent with
its nonaccrual policy.
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.
Other Real Estate Owned
Other real estate owned (OREO), which is included in other assets, primarily
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 de-
clines in the fair value of the property and net operating results of the prop-
erty are recorded in noninterest expense.
Income Taxes
The Corporation accounts for income taxes in accordance with SFAS No. 109, "Ac-
counting for Income Taxes." Current tax liabilities or assets are recognized,
through charges or credits to the current tax provision, for the estimated
taxes payable or refundable for the current year. Net deferred tax liabilities
or assets are recognized, through charges or credits to the deferred tax provi-
sion, for the estimated future tax effects, based on enacted tax rates, attrib-
utable to temporary differences and tax benefit carryforwards. Deferred tax li-
abilities are recognized for temporary differences that will result in amounts
taxable in the future, and deferred tax assets are recognized for temporary
differences and tax benefit carryforwards that will result in amounts deduct-
ible or creditable in the future. The effect of enacted changes in tax law, in-
cluding changes in tax rates, on these deferred tax assets 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 recognized through charges or
credits to the deferred tax provision. For financial reporting purposes, in-
vestment tax credits received in connection with lease financing are recognized
as lease income over the investment life of the related asset.
Per Share Calculations
The Corporation reports earnings per share pursuant to SFAS No. 128, "Earnings
per Share." In accordance with this standard, basic net income per common share
is computed by dividing net income, reduced by dividends on preferred stock, by
the weighted average number of common shares outstanding for each period pre-
sented. For the computation of diluted net income per common share, net income
is reduced by preferred stock dividends, and such adjusted net income is di-
vided by the aggregate of the weighted average number of common shares out-
standing for each period and the shares representing the dilutive effect of
stock options outstanding. The effect of stock options is excluded from the
computation of diluted net income per common share in periods in which the ef-
fect would be anti-dilutive.
Nonowner Changes in Equity
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income." Under this standard, the Corporation is required to re-
port as comprehensive income, or nonowner changes in equity, all changes to
stockholders' equity that result from transactions and other economic events
during the reporting period, other than transactions with stockholders in their
capacity as owners. For the Corporation, such nonowner changes in equity con-
sist of net income and other nonowner changes, composed of unrealized gains and
losses on securities available for sale and foreign currency translation ad-
justments.
- -------------------------------------- 67 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
2. Acquisitions, Joint Ventures and Divestitures
In November 1998, the Corporation sold its Berkshire County, Massachusetts
franchise, including approximately $300 million in deposits and $1 billion of
Private Banking assets under management, resulting in a gain of approximately
$51 million. In October 1998, the Corporation sold its domestic institutional
custody business, resulting in a gain of approximately $38 million.
In August 1998, the Corporation completed its acquisition of the investment
banking operations of BancAmerica Robertson Stephens from BankAmerica Corpora-
tion for $400 million in cash. The acquired operations were merged into the
Corporation's Section 20 subsidiary, BancBoston Securities Inc., which was re-
named BancBoston Robertson Stephens Inc. In connection with the acquisition
and in addition to the purchase price, the Corporation agreed to pay $400 mil-
lion, composed of stock options with an estimated value of approximately $100
million and approximately $300 million in cash compensation, to employees of
the acquired operations over the next three and one-half years. In connection
with this agreement, compensation expense of $94 million was recorded in 1998.
The acquisition was accounted for as a purchase and, accordingly, the assets
and liabilities of the acquired operations were recorded at their estimated
fair values as of the acquisition date. Goodwill resulting from the acquisi-
tion is being amortized over a twenty-five year period. The acquisition has
been included in the accompanying consolidated financial statements since the
acquisition date. Pro forma results of operations, including the acquisition,
for the years ended December 31, 1998 and 1997 are not presented, since the
results would not have been significantly different in relation to the Corpo-
ration's results of operations.
In February 1998, the Corporation completed the sale of its 26 percent minor-
ity interest in HomeSide, Inc. (HomeSide). The sale of the minority interest
in HomeSide, an independent mortgage banking company formed in 1996 in connec-
tion with the Corporation's sale of its mortgage banking subsidiary, resulted
in a gain of approximately $165 million.
In January 1998, the Corporation completed its acquisition of Deutsche Bank
Argentina, S.A. (Deutsche Argentina), a full service bank with approximately
$1 billion of loans and $1.5 billion of deposits, for approximately $255 mil-
lion in cash. The acquisition, which excluded Deutsche Argentina's pension
fund, insurance and investment banking businesses, was accounted for as a pur-
chase and, accordingly, the assets and liabilities of Deutsche Argentina 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. Pro forma results of operations, in-
cluding the acquisition, for the years ended December 31, 1998 and 1997 are
not presented, since the results would not have been significantly different
in relation to the Corporation's results of operations.
In January 1998, the Corporation completed a credit card venture agreement,
under which it contributed its $1.2 billion national credit card portfolio in
exchange for cash, at par. The Corporation also received 19 percent of the
common stock and $50 million of preferred stock of the new company, as well as
$5 million in cash.
In October 1997, the Corporation completed its acquisition of Pacific National
Corporation (Pacific), the holding company of Pacific National Bank of Nan-
tucket, located on the island of Nantucket, Massachusetts. The Corporation ex-
changed approximately 279,000 shares of its common stock, valued at approxi-
mately $22 million, for all of the outstanding common stock of Pacific. At the
time of acquisition, Pacific had loans of $98 million and deposits of $108
million. The acquisition was accounted for as a purchase and, accordingly, the
assets and liabilities of Pacific 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 September 1997, the Corporation completed the sale of Fidelity Acceptance
Corporation (FAC), a consumer finance subsidiary with assets of $1.1 billion.
The sale resulted in a gain of approximately $68 million. The Corporation also
incurred a loss of $11 million in connection with interest rate futures con-
tracts that had been used to hedge the funding of FAC.
In July 1996, the Corporation completed its acquisition of BayBanks, Inc.
(BayBanks). The Corporation issued approximately 43.6 million shares of its
common stock in exchange for substantially all of the outstanding shares of
BayBanks common stock. The acquisition was accounted for as a pooling of in-
terests and, accordingly, the historical book values of the assets and liabil-
ities of BayBanks were carried over onto the Corporation's consolidated bal-
ance sheet, and no goodwill or other intangible assets were created. The ac-
quisition is reflected in the accompanying consolidated financial statements
as though the Corporation and BayBanks had operated as a combined entity for
all periods presented. In connection with the acquisition, the Corporation re-
corded acquisition-related restructuring expense of $180 million. In addition,
in connection with regulatory approval of the transaction, in 1996, the Corpo-
ration sold 20 branches of the resulting combined entity, comprising a total
of approximately $500 million of loans and $700 million of deposits, and re-
corded a gain of approximately $47 million.
In June 1996, the Corporation completed its acquisition of The Boston Bancorp
(Bancorp). The Corporation exchanged approximately 4.6 million shares of its
common stock, with a value of approximately $229 million, for all of the out-
standing common stock of Bancorp. The acquisition, which was accounted for as
a purchase, has been included in the accompanying consolidated financial
statements since the acquisition date. Goodwill resulting from the transaction
is being amortized over a ten-year period.
- -------------------------------------- 68--------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
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 1998, 1997 and 1996,
the Corporation paid interest of approximately $3 billion, $2.7 billion and
$2.5 billion, respectively. The Corporation paid income taxes of approximately
$230 million in 1998, $358 million in 1997 and $401 million in 1996. During
1998, 1997 and 1996, the Corporation transferred approximately $17 million, $21
million and $42 million, respectively, to OREO from loans. Loans made to facil-
itate sales of OREO properties were not significant in 1998, 1997 or 1996.
4. Reserve Requirements, Restricted Deposits and Pledged Assets
At both December 31, 1998 and 1997, cash and due from banks included $1.5 bil-
lion to satisfy the reserve requirements of the Federal Reserve System and var-
ious foreign central banks. Interest bearing deposits in other banks held to
satisfy foreign central bank reserve requirements totaled $3 million at both
December 31, 1998 and 1997.
At December 31, 1998 and 1997, securities, loans and other assets with a book
value of $3.1 billion and $3.5 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
Unrealized Unrealized Carrying
(in millions) Cost Gains Losses Value
- -------------------------------------------------------
<S> <C> <C> <C> <C>
December 31,
1998
U.S. Treasury... $ 704 $ 7 $ 711
U.S. government
agencies and
corporations--
mortgage-backed
securities..... 7,065 66 $ 36 7,095
States and
political
subdivisions... 34 34
Foreign debt
securities..... 2,184 12 85 2,111
Other debt
securities..... 1,135 13 3 1,145
Marketable
equity
securities..... 346 7 14 339
Other equity
securities..... 640 640
------- ---- ---- -------
$12,108 $105 $138 $12,075
======= ==== ==== =======
<CAPTION>
December 31,
1997
<S> <C> <C> <C> <C>
U.S. Treasury... $ 936 $ 7 $ 943
U.S. government
agencies and
corporations --
mortgage-backed
securities..... 5,798 65 $ 3 5,860
States and
political
subdivisions... 54 54
Foreign debt
securities..... 1,399 8 24 1,383
Other debt
securities..... 882 5 887
Marketable
equity
securities..... 277 35 6 306
Other equity
securities..... 513 513
------- ---- ---- -------
$ 9,859 $120 $ 33 $9,946
======= ==== ==== =======
</TABLE>
Other equity securities include securities which 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 es-
timated for these securities. These fair values exceeded cost by $216 million
and $154 million at December 31, 1998 and 1997, respectively. Further informa-
tion with respect to the fair value of these securities is included in Note 28.
- -------------------------------------- 69 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
A summary comparison of securities held to maturity by type is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury....................... $ 7 $ 7
U.S. government agencies and
corporations -- mortgage-backed
securities......................... 439 $ 5 444
Foreign debt securities............. 13 13
---- --- ----
$459 $ 5 $464
==== === ====
<CAPTION>
December 31, 1997
<S> <C> <C> <C> <C> <C>
U.S. Treasury....................... $ 6 $ 6
U.S. government agencies and
corporations --mortgage-backed
securities......................... 520 $ 4 $ 1 523
Foreign debt securities............. 11 11
---- --- --- ----
$537 $ 4 $ 1 $540
==== === === ====
</TABLE>
A summary comparison of debt securities by contractual maturity is as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
Fair Fair
(in millions) Cost Value Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
Within one year.................................. $ 1,623 $ 1,611 $1,219 $1,224
After one but within five years.................. 1,365 1,376 2,030 2,029
After five but within ten years.................. 1,565 1,580 1,787 1,851
After ten years.................................. 6,569 6,529 4,033 4,023
------- ------- ------ ------
$11,122 $11,096 $9,069 $9,127
======= ======= ====== ======
Held to Maturity
Within one year.................................. $ 7 $ 7 $ 8 $ 8
After one but within five years.................. 114 113 124 124
After five but within ten years.................. 226 231 242 246
After ten years.................................. 112 113 163 162
------- ------- ------ ------
$ 459 $ 464 $ 537 $ 540
======= ======= ====== ======
</TABLE>
Certain securities, such as mortgage-backed securities, may not become due at
a single maturity date. Such securities have been classified within the cate-
gory that encompasses the due dates for the majority of the instrument.
In 1998, the Corporation realized gross gains of $82 million and gross losses
of $19 million from the sale of securities available for sale. Total proceeds
from such securities sales in 1998 amounted to approximately $11 billion. In
addition, the Corporation recognized a loss of $22 million in 1998 resulting
from the writedown of certain securities available for sale which experienced
a decline in value that was deemed other than temporary. In 1997, the Corpora-
tion realized gross gains of $98 million and gross losses of $18 million from
the sale of securities available for sale. Total proceeds from such securities
sales in 1997 amounted to approximately $5 billion. In 1996, the Corporation
realized gross gains of $44 million and gross losses of $21 million from the
sale of securities available for sale. Total proceeds from such securities
sales in 1996 amounted to approximately $5 billion. The above amounts for each
year exclude equity and mezzanine profits, which are included in other income.
6. Loans and Lease Financing
<TABLE>
<CAPTION>
December 31 1998 1997
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C>
United States
Commercial, industrial and financial.......................... $16,294 $15,268
Commercial real estate
Construction................................................. 215 271
Other........................................................ 3,871 4,211
Consumer-related
Residential mortgages........................................ 2,035 2,570
Home equity.................................................. 2,294 2,823
Credit card.................................................. 404 1,756
Other........................................................ 2,532 2,956
Lease financing............................................... 1,801 1,938
Unearned income............................................... (275) (302)
------- -------
29,171 31,491
------- -------
International
Commercial and industrial..................................... 9,295 8,826
Banks and other financial institutions........................ 597 860
Governments and official institutions......................... 95 95
Consumer-related
Residential mortgages........................................ 1,251 947
Credit card.................................................. 362 182
Other........................................................ 1,192 828
Lease financing............................................... 725 452
All other..................................................... 369 378
Unearned income............................................... (251) (79)
------- -------
13,635 12,489
------- -------
$42,806 $43,980
======= =======
</TABLE>
- -------------------------------------- 70 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
In 1998, the Corporation sold $2.2 billion of commercial and industrial loans
in a securitization transaction, and a total of $.8 billion of home equity
loans in two securitization transactions. In 1997, the Corporation sold $1.3
billion of consumer-related loans in securitization-related transactions. Gen-
erally, under the terms of the securitization transactions, the Corporation
sold the assets to be securitized to a trust or other special purpose entity,
which issued securities to investors. The investors will be repaid as to both
principal and interest from the cash received through collection of the loans.
In all of the securitization transactions entered into in 1998 and 1997, the
Corporation retained servicing responsibilities and subordinated interests.
These retained interests were valued at fair value as of the date of the
securitization, and will be accounted for like securities available for sale.
The Corporation will receive annual servicing fees approximating .1 percent
(for commercial and industrial loans) and .5 percent (for the home equity and
consumer-related loans) of the outstanding balance, and the rights to future
cash flows in excess of amounts required to be paid to investors under the
terms of the respective transaction. The investors and the securitization vehi-
cles have no recourse to the Corporation's assets for failure of borrowers to
pay when due. However, most of the Corporation's retained interests are gener-
ally restricted until investors have been fully paid, and these interests are
subordinate to investors' interests. The value of the Corporation's retained
interests is subject to substantial credit, prepayment and interest rate risk
related to the transferred assets.
In 1998, cash proceeds from the securitization of commercial and industrial and
home equity loans totaled $3 billion, with the recognition of gains of approxi-
mately $12 million, substantially related to the securitizations of the home
equity loans. In 1997, cash proceeds from the sale of the consumer-related
loans totaled $1.3 billion, and the Corporation recognized a gain of approxi-
mately $7 million.
7. Reserve for Credit Losses
An analysis of changes in the reserve for credit losses follows:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1......................................... $ 712 $ 883 $ 890
Reserves of entities acquired.............................. 26 3 3
Reserves of entities divested.............................. (95) (11)
Provision.................................................. 380 200 231
Credit losses.............................................. (441) (366) (310)
Recoveries................................................. 77 87 80
----- ----- -----
Net credit losses......................................... (364) (279) (230)
----- ----- -----
Balance, December 31....................................... $ 754 $ 712 $ 883
===== ===== =====
</TABLE>
The portion of the reserve for credit losses associated with off-balance-sheet
exposures is not significant.
At December 31, 1998, impaired loans totaled $191 million, of which loans to-
taling $15 million required no valuation reserve and loans totaling $176 mil-
lion required a valuation reserve of $40 million. For the year ended December
31, 1998, average impaired loans were approximately $191 million. At
December 31, 1997, impaired loans totaled $166 million, of which loans totaling
$34 million required no valuation reserve and loans totaling $132 million re-
quired a valuation reserve of $40 million. For the year ended December 31,
1997, average impaired loans were approximately $184 million. Interest recog-
nized on impaired loans during the years ended December 31, 1998, 1997 and 1996
was not significant.
8. Other Assets
<TABLE>
<CAPTION>
December 31 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment in bank-owned life insurance........................ $1,247 $ 400
Investment in limited partnerships............................. 792 488
Goodwill and other intangibles................................. 787 329
Accounts receivable............................................ 713 530
Equity investments in affiliates............................... 621 275
Prepaid pension cost........................................... 190 180
OREO........................................................... 27 36
All other...................................................... 761 661
------- -------
$5,138 $2,899
======= =======
9. Funds Borrowed
<CAPTION>
December 31 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased........................................ $ 628 $ 1,003
Term federal funds purchased................................... 1,468 2,530
Securities sold under agreements to repurchase................. 3,145 1,789
Short-term bank notes.......................................... 652 2,679
Medium-term bank notes......................................... 1,850 1,633
All other...................................................... 4,273 3,231
------- -------
$12,016 $12,865
======= =======
</TABLE>
Medium-term bank notes included borrowings with maturities of greater than one
year of $185 million at December 31, 1998 and $150 million at December 31,
1997. All other funds borrowed included borrowings with maturities of greater
than one year of $101 million at December 31, 1998 and $161 million at December
31, 1997. At December 31, 1998 and 1997, the Corporation had availability under
various borrowing arrangements of $.9 billion and $1.3 billion, respectively.
The Corporation had no significant compensating balance arrangements at
December 31, 1998 and 1997.
- -------------------------------------- 71 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
10. Notes Payable
<TABLE>
<CAPTION>
By Remaining Maturity
at December 31
Due
less than Due Due 1998 1997
(in millions) 1 year 1-5 years 6-10 years Total Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Parent Company
Senior notes....................... $315 $1,075 $ 150 $1,540 $ 575
Subordinated notes................. 286 648 934 1,041
---- ------ ------ ------ ------
315 1,361 798 2,474 1,616
---- ------ ------ ------ ------
Subsidiaries
Senior notes....................... 45 146 184 375 318
Subordinated notes................. 200 1,544 1,744 1,007
---- ------ ------ ------ ------
45 346 1,728 2,119 1,325
---- ------ ------ ------ ------
$360 $1,707 $2,526 $4,593 $2,941
==== ====== ====== ====== ======
</TABLE>
Notes payable are unsecured obligations of the Corporation or its subsidiar-
ies. Certain of the indentures under which these notes were issued prohibit
the Corporation from making any payment or other distribution in the stock of
the Bank unless the Bank unconditionally guarantees payment of principal and
interest on the notes. The distribution shown above by remaining maturity is
based on contractual maturity.
Notes payable at December 31, 1998 and 1997 include fixed rate notes of $2,819
million and $1,943 million, respectively, and variable rate notes of $1,774
million and $998 million, respectively. Fixed rate notes outstanding at Decem-
ber 31, 1998 mature at various dates through 2008 and have interest rates
ranging from 5.49% to 10.88%. The consolidated weighted average interest rates
on fixed rate notes at December 31, 1998 and 1997 were 7.07% and 7.38%, re-
spectively. The Corporation has entered into interest rate swap agreements
that have effectively converted a portion of its fixed rate obligations to
floating rate obligations. At December 31, 1998, such interest rates ranged
from 5.26% to 5.75%. Variable rate notes outstanding, with interest rates
ranging from 5.17% to 9.25% at December 31, 1998, mature at various dates
through 2005. The consolidated weighted average interest rates on variable
rate notes at December 31, 1998 and 1997 were 5.62% and 6.48%, respectively.
During 1998, the Corporation issued $1,215 million of senior floating and
fixed rate medium-term notes, due in 1999 through 2005; $250 million of previ-
ously issued medium-term notes matured; and $107 million of previously issued
subordinated notes matured. During 1998, the Bank issued $750 million of 6.38%
subordinated notes due in 2008. In addition, $161 million of senior floating
and fixed rate medium-term notes were issued by a Brazilian subsidiary of the
Bank, and $105 million of this subsidiary's previously issued medium-term
notes matured.
Notes payable maturing during the next five years amount to $360 million in
1999, $273 million in 2000, $677 million in 2001, $308 in 2002 and $449 mil-
lion in 2003.
11. Guaranteed Preferred Beneficial Interests in Corporation's Junior
Subordinated Debentures
Since November 1996, the Corporation has formed five wholly-owned grantor
trusts, BankBoston Capital Trust I, II, III, IV and V (collectively, the
Trusts), for the exclusive purpose of issuing capital securities (Trust
Securities) and investing the proceeds from the sale of such securities in ju
nior subordinated debentures issued by the Corporation. The aggregate amount of
such debentures outstanding totaled $995 million and $747 million at December
31, 1998 and 1997, respectively.
There have been no issuances of Trust Securities by BankBoston Capital Trust V.
A summary of the Trust Securities issued and out-standing, net of discount, is
as follows:
<TABLE>
<CAPTION>
BankBoston BankBoston BankBoston BankBoston
Capital Trust I Capital Trust II Capital Trust III Capital Trust IV
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amount outstanding (in
millions).............. $250 $250 $248 $247
Original issue date..... 11/26/96 12/10/96 6/4/97 6/8/98
Rate.................... 8.25% 7.75% Libor + .75% Libor + .60%
Earliest prepayment
option date............ 12/15/2006 12/15/2006 06/15/2007 06/08/2003
Stated maturity......... 12/15/2026 12/15/2026 06/15/2027 06/08/2028
Distribution payment
frequency.............. semi-annually semi-annually quarterly quarterly
Liquidation preference
per Trust Security..... $1,000 $1,000 $1,000 $1,000
</TABLE>
- -------------------------------------- 72 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
All of the Trust Securities may be prepaid at the option of the Trusts, in
whole or in part, on or after the prepayment option dates listed above. At De-
cember 31, 1998, the interest rates on the Capital Trust III and IV floating
rate Trust Securities were 5.97% and 5.82%, respectively. The Corporation's
guarantees of the Trust Securities, together with the other obligations of the
Corporation with respect to the Trust Securities, constitute a full and uncon-
ditional guarantee by the Corporation of all of the Trusts' obligations under
the Trust Securities.
The Corporation owns all of the common securities of the Trusts, the sole as-
sets of which are their respective subordinated debentures. The principal
amount of subordinated debentures held by each Trust equals the aggregate liq-
uidation amount of its Trust Securities and its common securities (see Note 27
for the aggregate amount of subordinated debentures currently outstanding). The
subordinated debentures bear interest at the same rate, and will mature on the
same date, as the corresponding Trust Securities.
12. Preferred Stock
In July 1998, the Corporation redeemed all of the outstanding shares of its Ad-
justable Rate Cumulative Preferred Stock, Series A, B and C, and its Fixed Rate
Cumulative Preferred Stock, Series F, at their total aggregate carrying value
of $278 million. In 1997, the Corporation redeemed all of the outstanding
shares of its Fixed Rate Cumulative Preferred Stock, Series E, at its aggregate
carrying value of $230 million.
13. Stockholder Rights Plan
In 1990, the Board of Directors of the Corporation adopted a stockholder rights
plan. The plan provided for the distribution of one preferred stock purchase
right for each outstanding share of common stock of the Corporation. As a re-
sult of the Corporation's two-for-one stock split effected in June 1998, the
rights have been adjusted so that one-half of a right is associated with each
outstanding share of the Corporation's common stock. Each right entitles the
holder, following the occurrence of certain events, to purchase a unit, con-
sisting 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 ex-
cept under certain circumstances in which a person or group of affiliated per-
sons acquires, or commences a tender offer to acquire, 15% or more of the Cor-
poration'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 ac-
quiring corporation at a substantial discount. Under certain circumstances, the
Corporation may redeem the rights at $.01 per right. The rights will expire in
July 2000 unless earlier redeemed or exchanged by the Corporation.
In December 1998, the Board of Directors adopted a renewed rights plan, which
will become effective upon the expiration or earlier termination of the exist-
ing rights plan. Except for differences in the purchase price, which will be
$160 per unit, and in the beneficial ownership percentage relating to the
exercisability of the rights, which will be 10%, the provisions of the renewed
rights plan are substantially similar to those of the existing rights plan.
14. Capital Adequacy
A summary of the Corporation's regulatory capital position and related ratios
follows:
<TABLE>
<CAPTION>
Well
December 31 1998 1997 Capitalized
(dollars in millions) Minimum
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-based capital ratios
Tier 1 capital ratio............................. 7.1% 8.0% 6.0%
Total capital ratio.............................. 11.7% 12.1% 10.0%
Tier 1 leverage ratio............................. 6.7% 7.4% 5.0%
Tier 1 capital.................................... $ 5,021 $ 4,971
Tier 2 capital.................................... $ 3,218 $ 2,548
Total capital..................................... $ 8,239 $ 7,519
Total risk-adjusted assets........................ $70,377 $62,216
Adjusted total average assets..................... $74,568 $67,661
</TABLE>
The Corporation is subject to quantitative regulatory capital adequacy require-
ments which take into account the differing risk profiles of banking organiza-
tions by assigning risk weights to both assets and the risk asset equivalent
amounts of off-balance-sheet exposures. The Corporation and each of its bank
subsidiaries are required to maintain minimum ratios of Tier 1 and total capi-
tal to total risk-adjusted assets, and of Tier 1 capital to adjusted total av-
erage assets. Tier 1 capital includes common stockholders' equity and qualify-
ing preferred stock (including the Trust Securities described in Note 11). To-
tal capital includes Tier 1 capital and, subject to certain limitations, limit-
ed-life preferred stock, mandatory convertible securities, eligible subordi-
nated debt and the reserve for credit losses.
Under the regulatory framework for prompt corrective action established by The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the
Corporation and each of its bank subsidiaries must meet specific guidelines
that involve quantitative measures of the Corporation's and each of its bank
subsidiaries' assets, liabilities and certain off-balance-sheet exposures as
calculated under regulatory accounting practices. The Corporation's and each of
its bank subsidiaries' capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. As of December 31, 1998, each of the Corporation's bank subsidi-
aries satisfied the requirements of the "well capitalized" category under the
regulatory framework for prompt corrective action. The capital categories of
each 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.
- -------------------------------------- 73 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
15. 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
1999, aggregate dividend declarations by the Corporation's bank subsidiaries
without prior regulatory approval are limited to approximately $448 million of
their undistributed earnings at December 31, 1998, plus an additional amount
equal to their net profits, as defined, for 1999 up to the date of any divi-
dend declaration. However, for any dividend declaration, the Corporation's
subsidiaries, as well as the Corporation itself, must consider additional fac-
tors such as the amount of current period net income, liquidity, asset quali-
ty, capital adequacy and economic conditions. It is likely that these factors
would further limit the amount of dividends that the bank 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 reg-
ulations described above, any loans and advances would be limited to an aggre-
gate of approximately $482 million at December 31, 1998, and would be subject
to specific collateral requirements.
Based on the foregoing limitations, an aggregate of approximately $4.1 billion
of the Parent Company's investment in bank subsidiaries of $5 billion, which
includes bank holding companies and their subsidiaries, was restricted from
transfer to the Parent Company at December 31, 1998.
16. Other Income
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Gains on sales of businesses.................................... $254 $ 68 $153
Net equity and mezzanine profits................................ 233 221 209
Net foreign exchange profits.................................... 127 88 54
All other....................................................... 177 102 106
---- ---- ----
$791 $479 $522
==== ==== ====
</TABLE>
17. Employee Benefits
The Corporation maintains a qualified noncontributory defined benefit pension
plan covering substantially all domestic employees, as well as nonqualified
noncontributory defined benefit pension plans for certain executives. The
qualified plan is funded in compliance with the requirements of the Employee
Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986,
as amended. The nonqualified plans are unfunded.
The Corporation also provides certain unfunded postretirement health and life
insurance benefits for eligible retired domestic employees. Postretirement
health benefits are contributory, and life insurance benefits are noncontribu-
tory. Postretirement benefits are accrued over the service lives of the em-
ployees.
The following tables summarize benefit obligation and plan asset activity for
the plans:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
Years Ended December 31 1998 1997 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation, January 1.................... $592 $516 $ 68 $ 63
Service cost..................................... 24 21 2 1
Interest cost.................................... 40 40 4 5
Effect of plan amendments........................ (18) 4
Actuarial loss................................... 14 96 2
Divestitures..................................... (2)
Special termination benefits..................... 1 5
Benefit payments................................. (44) (66) (4) (5)
---- ---- ------- -------
Benefit obligation, December 31.................. $627 $592 $ 72 $ 68
==== ==== ======= =======
Fair value of plan assets, January 1............. $832 $752
Actual return on plan assets..................... 117 147
Divestitures..................................... (3)
Employer contributions........................... 3 2 $ 4 $ 5
Participant contributions........................ 3 3
Benefit payments................................. (44) (66) (7) (8)
---- ---- ------- -------
Fair value of plan assets, December 31........... $908 $832
==== ==== ======= =======
An analysis of the funded status, or difference between the fair value of plan
assets and the respective plan's benefit obligation, and the net amount recog-
nized in the Corporation's consolidated balance sheet, as well as a summary of
the components of this net amount, follows:
<CAPTION>
Other
Pension Postretirement
Benefits Benefits
December 31 1998 1997 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status.................................... $281 $240 $ (72) $ (68)
Unrecognized transition (asset) obligation....... (4) (6) 51 55
Unrecognized prior service cost.................. (2) (2) 3 3
Unrecognized actuarial gain...................... (126) (90) (18) (22)
---- ---- ------- -------
Net amount recognized............................ $149 $142 $ (36) $ (32)
==== ==== ======= =======
Prepaid pension cost............................. $190 $180
Accrued benefit liability........................ (41) (38) $ (36) $ (32)
---- ---- ------- -------
Net amount recognized............................ $149 $142 $ (36) $ (32)
==== ==== ======= =======
</TABLE>
- -------------------------------------- 74 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
An analysis of the components of periodic benefits expense (income) for the
plans follows:
<TABLE>
<CAPTION>
Other
Pension Postretirement
Years Ended Benefits Benefits
December 31 1998 1997 1996 1998 1997 1996
(in millions)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost............................... $ 24 $ 21 $ 20 $ 2 $ 1 $ 1
Interest cost.............................. 40 40 27 4 5 4
Expected return on plan assets............. (66) (60) (43)
Amortization of transition (asset)
obligation................................ (2) (5) (4) 4 4 4
Amortization of prior service cost......... 2
Recognized actuarial (gain) loss........... 1 1 4 (2) (2) (1)
---- ---- ---- --- --- ---
Net benefits expense (income).............. $ (3) $ (3) $ 6 $ 8 $ 8 $ 8
==== ==== ==== === === ===
</TABLE>
In 1998, $1 million of special termination benefits were provided in connection
with the Corporation's sales of its Berkshire County, Massachusetts franchise
and domestic institutional custody business, both of which are described in
Note 2. In 1997, special termination benefits of $5 million were provided re-
lating to the Corporation's 1996 acquisition of BayBanks. In 1996, certain en-
hanced retirement benefits were offered to eligible employees as part of an
early retirement program in connection with the acquisition of BayBanks, com-
posed of $26 million resulting from pension enhancements and $4 million result-
ing from postretirement benefit enhancements. These 1996 benefits were charged
to acquisition-related restructuring expense.
Weighted average assumptions used in actuarial calculations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate at December 31................................ 6.75% 7.25% 7.75%
Expected return on plan assets for the years ended December
31......................................................... 9% 9% 9%
Rate of compensation increase at December 31................ 4.50% 4.50% 4.50%
Initial health care cost trend rate......................... 8% 6% 7%
Health care cost trend rate declining to 5% in the year..... 2005 1999 1999
</TABLE>
A 1% increase or decrease in the health care cost trend rate assumption does
not have a significant effect on postretirement benefit obligation or expense.
The nonqualified pension plans, which are unfunded, had projected benefit obli-
gations of $65 million and $51 million and accumulated benefit obligations of
$48 million and $42 million at December 31, 1998 and 1997, respectively.
The Corporation maintains a defined contribution thrift incentive plan covering
the majority of domestic employees. Employer contributions to this plan are
based on a percentage of employee contributions. Prior to 1997, BayBanks had a
profit sharing and savings plan which was associated with an employee stock
ownership plan. Amounts charged to operations for these plans were $20 million,
$19 million and $11 million in 1998, 1997 and 1996, respectively.
18. Stock Options and Awards
All share and per share information in this footnote has been adjusted to re-
flect the Corporation's two-for-one stock split effected in June 1998.
The Corporation maintains stock incentive plans for key employees and for non-
employee directors. Shares of common stock issued under these plans may be au-
thorized but unissued shares, treasury shares or shares purchased in the open
market. The plans provide for the grant of stock options and, for certain
plans, restricted stock, stock appreciation rights (SARs) and other awards. A
total of 29,266,739 shares of common stock, which includes shares related to
the Corporation's Shared Opportunities Programs discussed below, was reserved
for issuance under the Corporation's plans at December 31, 1998, including
4,077,760 shares available for future grants.
Options are granted at prices which are not less than the fair market value of
the common stock on the date of grant. Options granted to key employees gener-
ally are exercisable in equal installments on the first and second anniversary
dates of the grant. Options granted to directors generally vest on the date of
grant. All options expire not later than 10 years after the date of grant.
There were 22,400 SARs at a grant price of $14.31 outstanding at December 31,
1998. Compensation expense (income) associated with SARs was $(.2) million in
1998 and $.3 million in each of 1997 and 1996.
- -------------------------------------- 75 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
The following is a summary of the changes in options outstanding under the
Corporation's stock incentive plans:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
January 1 ($3.13 to
$48.13 per share)...... 6,900,726 $24.46 7,166,462 $15.82 9,528,364 $11.16
Granted ($21.88 to
$58.38 per share)...... 12,449,331 $39.02 3,007,038 $35.62 2,708,818 $22.46
Exercised ($3.13 to
$44.25 per share)...... (1,849,495) $21.65 (3,066,968) $14.80 (5,014,074) $10.49
Canceled ($12.75 to
57.38 per share)....... (681,623) $40.08 (205,806) $30.62 (56,646) $21.45
---------- ---------- ----------
Options outstanding,
December 31 ($3.13 to
$58.38 per share)...... 16,818,939 $34.92 6,900,726 $24.46 7,166,462 $15.82
========== ========== ==========
Options exercisable,
December 31............ 4,140,020 $24.49 3,074,784 $15.54 4,920,962 $12.81
========== ========== ==========
</TABLE>
- -------------------------------------------------------------------------------
The following is a summary of outstanding and exercisable options under the
Corporation's stock incentive plans at December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
<CAPTION>
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Number Contractual Exercise Number Contractual Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Life Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$3.13 to $15.00 per
share.................. 1,534,460 4.0 years $11.40 1,534,460 4.0 years $11.40
$15.01 to $30.00 per
share.................. 1,087,582 7.0 years $22.69 1,087,582 7.0 years $22.69
$30.01 to $40.00 per
share.................. 10,091,199 9.3 years $35.54 1,055,510 7.9 years $35.04
$40.01 to $50.00 per
share.................. 3,768,240 8.8 years $44.55 271,860 5.8 years $43.91
$50.01 to $58.38 per
share.................. 337,458 8.4 years $55.23 190,608 7.5 years $54.06
</TABLE>
- -------------------------------------------------------------------------------
Under terms of the Corporation's restricted stock awards, employees are gener-
ally required to continue employment with the Corporation for a stated period
after the award in order to become fully vested in the shares awarded. Perfor-
mance-based restricted stock, for which vesting is contingent or accelerates
upon the price of the Corporation's common stock or earnings per share reach-
ing certain stated levels, has also been awarded.
Restricted stock is recorded at the fair market value of the common stock on
the date of award or, if solely a performance-based award, the value required
for vesting. At the date of award, unearned compensation of the same amount is
recorded as a reduction of retained earnings and is amortized as compensation
expense over the estimated vesting period.
The following is a summary of the activity in restricted stock and the
weighted average price at the time of grant:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Share balance, January
1...................... 1,060,390 $24.99 907,290 $15.77 2,016,250 $11.44
Awards................. 858,420 $44.77 595,360 $34.91 498,860 $26.23
Forfeitures............ (151,040) $32.89 (65,758) $24.20 (55,774) $10.41
Released from
forfeiture
restrictions.......... (231,152) $14.44 (376,502) $14.10 (1,552,046) $13.40
--------- --------- ----------
Share balance, December
31..................... 1,536,618 $36.81 1,060,390 $24.99 907,290 $15.77
========= ========= ==========
(in millions)
Unearned compensation at
December 31 (a
reduction of retained
earnings).............. $ 34 $ 16 $ 8
Compensation expense.... $ 23 $ 13 $ 17
</TABLE>
- -------------------------------------- 76 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
The following is a summary of outstanding restricted stock at December 31,
1998:
<TABLE>
<CAPTION>
Weighted
Average
Restricted Weighted Average Price at
Range of Market Value of Shares Remaining Time of
Common Stock at Time of Grant Outstanding Contractual Life Grant
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$12.75 to $30.00 per share................ 241,438 0.5 years $14.05
$30.01 to $40.00 per share................ 490,860 2.1 years $34.84
$40.01 to $50.00 per share................ 781,820 3.1 years $44.59
$50.01 to $55.63 per share................ 22,500 3.3 years $53.49
</TABLE>
In addition to the plans described above, on October 1, 1996, the Corporation
granted options to substantially all employees worldwide, under its 1996 Shared
Opportunities program. Options under this grant vested and became exercisable
in 1997, and will expire on October 1, 2002. Under a similar program, on Sep-
tember 24, 1998, the Corporation made an additional grant of options to sub-
stantially all employees worldwide. These options will vest in 2003 or earlier
if the price of the Corporation's common stock reaches certain levels, subject
to a minimum two-year vesting period. Unexercised options will expire on Sep-
tember 24, 2004.
The following table summarizes the activity related to the Shared Opportunities
programs:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Options granted in 1996.................................... 4,304,000 $29.00
----------
Options outstanding, December 31, 1996..................... 4,304,000 $29.00
Exercised.................................................. (1,533,038) $29.00
Canceled................................................... (544,550) $29.00
----------
Options outstanding, December 31, 1997..................... 2,226,412 $29.00
Options granted in 1998.................................... 7,341,356 $35.81
Exercised.................................................. (880,094) $29.00
Canceled................................................... (317,634) $31.23
----------
Options outstanding, December 31, 1998..................... 8,370,040 $34.77
==========
</TABLE>
There are 1,280,873 options exercisable under the Shared Opportunities programs
at a price of $29.00 per option at December 31, 1998.
In 1998, the Corporation implemented an employee stock purchase plan, which al-
lows eligible employees to authorize payroll deductions up to certain limits
for the purchase of the Corporation's common stock. The stock is purchased at
the lesser of its fair market value at the beginning of the specified offering
period or 85% of its fair market value at the end of such offering period. In
1998, 178,601 shares of common stock were issued under the plan at a price of
$41.12.
Effective January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." As permitted by that standard, the Corporation
elected not to adopt the fair value accounting provisions of the standard and
to continue to apply the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in accounting for its stock op-
tions and awards. Had compensation expense for the Corporation's stock options
and awards been determined in accordance with the fair value accounting provi-
sions of SFAS No. 123, the Corporation's net income and basic and diluted earn-
ings per share would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock (in millions)
As reported................................................. $ 783 $ 848 $ 613
Pro forma................................................... $ 762 $ 836 $ 612
Basic earnings per share
As reported................................................. $2.66 $2.86 $2.00
Pro forma................................................... $2.59 $2.82 $1.99
Diluted earnings per share
As reported................................................. $2.64 $2.82 $1.96
Pro forma................................................... $2.56 $2.78 $1.95
</TABLE>
Solely for purposes of providing the disclosures required by SFAS No. 123, the
fair value of each stock option and stock award was estimated on the date of
grant using the Black-Scholes option-pricing model, with the following weighted
average assumptions used for grants of stock options and stock awards:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield................................................ 3.1% 2.7% 3.1%
Volatility.................................................... 28% 24% 24%
Risk-free interest rate....................................... 5.4% 5.3% 5.9%
Expected option life in years................................. 4 4 4
</TABLE>
The estimated weighted average grant date fair values per share of stock op-
tions granted and restricted stock granted were as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock options.............................................. $ 9.13 $ 7.34 $ 5.06
Restricted stock........................................... $31.84 $26.60 $15.40
</TABLE>
- -------------------------------------- 77 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
19. Other Expense
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Communications.................................................. $132 $112 $101
Professional fees............................................... 111 61 56
Advertising and public relations................................ 109 107 108
Software costs.................................................. 71 44 35
Amortization of goodwill........................................ 39 27 24
All other....................................................... 420 344 297
---- ---- ----
$882 $695 $621
==== ==== ====
</TABLE>
20. Income Taxes
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Tax Provision
Federal......................................................... $224 $164 $219
Foreign
Based on income................................................ 106 67 130
Withheld on interest and dividends............................. 60 38 36
State and local................................................. 54 65 96
---- ---- ----
444 334 481
---- ---- ----
Deferred Tax Provision (Benefit)
Federal......................................................... 20 225 (4)
State and local................................................. 13 30 6
---- ---- ----
33 255 2
---- ---- ----
$477 $589 $483
==== ==== ====
</TABLE>
Excluded from the above table are tax effects related to certain items that
were recorded directly in stockholders' equity, including foreign currency
translation, market value adjustments related to securities available for
sale, stock options and restricted stock. Net tax effects recorded directly in
stockholders' equity amounted to tax benefits of $74 million, $53 million and
$40 million in 1998, 1997 and 1996, respectively.
The Corporation has reported other nonowner changes in equity for the years
ended 1998, 1997 and 1996 in the accompanying consolidated statement of
changes in common stockholder's equity on a net-of-tax basis. The changes in
unrealized gain (loss) on securities available for sale have also been pre-
sented net of reclassification adjustments related to net securities gains
that were realized from sales and writedowns of such securities during the re-
spective periods. These gains, on an after-tax basis, amounted to $26 million,
$49 million and $13 million for the years ended December 31, 1998, 1997 and
1996, respectively. Income taxes related to other nonowner changes in equity
for the years ended December 31, 1998, 1997 and 1996 were as follows: tax ben-
efits related to change in unrealized gain (loss) on securities available for
sale of $48 million, $14 million and $6 million, respectively, which includes
tax benefits related to reclassification adjustments of $15 million, $31 mil-
lion and $10 million, respectively; and tax benefits related to change in for-
eign currency translation of $2 million, $3 million and $2 million, respective-
ly.
The following table reconciles the expected federal tax provision, based on
the federal statutory tax rate of 35%, to the actual consolidated tax provi-
sion for the periods presented:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax provision applicable to income................... $444 $514 $397
Effect of
State and local income taxes, net of federal tax benefit..... 44 62 66
Non-creditable foreign taxes................................. 18 21 15
Dividends received deduction................................. (7) (9) (6)
Tax-exempt income............................................ (2) (4) (6)
Other, net................................................... (20) 5 17
---- ---- ----
Actual tax provision.......................................... $477 $589 $483
==== ==== ====
</TABLE>
The components of the net deferred tax liability were as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Reserve for credit losses........................................ $ 302 $ 280
Accrued expenses not currently deductible........................ 68 45
Deferred compensation............................................ 66 39
Interest on nonaccrual loans..................................... 44 48
Unrealized loss on securities available for sale................. 14
Other............................................................ 84 47
----- -----
578 459
----- -----
Deferred Tax Liabilities
Leasing operations............................................... (646) (553)
Foreign operations............................................... (92) (17)
Pension obligations.............................................. (74) (71)
Unrealized gain on securities available for sale................. (34)
Other............................................................ (26) (54)
----- -----
(838) (729)
----- -----
Net deferred tax liability....................................... $(260) $(270)
===== =====
</TABLE>
It is expected that the Corporation's deferred tax assets at December 31, 1998
will be realized from the reversal of existing deferred tax liabilities and
from the recognition of future taxable income, without reliance on tax plan-
ning strategies that the Corporation might not ordinarily follow.
- -------------------------------------- 78 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
Domestic pre-tax income was $919 million in 1998, $999 million in 1997 and $755
million in 1996. Foreign pre-tax income, defined as income generated from oper-
ations that are located outside the United States, was $350 million in 1998,
$469 million in 1997 and $378 million in 1996.
21. Common Stock and Earnings per Common Share
In April 1998, stockholders of the Corporation approved an increase in the num-
ber of authorized shares of common stock from 300 million shares to 500 million
shares, and a change in the par value of such stock from $1.50 per share to
$1.00 per share. In addition, the Corporation announced the approval by its
Board of Directors of a two-for-one split of the Corporation's common stock,
executed in the form of a stock dividend of one share for every share held. The
stock dividend was paid in June 1998. Average common shares outstanding, per
common share data and stock options for all periods shown have been adjusted to
reflect the effect of the stock split.
A summary of the Corporation's calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Net income............................................. $ 792 $ 879 $ 650
Less preferred dividends............................... 9 31 37
------- ------- -------
Net income applicable to common stock.................. $ 783 $ 848 $ 613
======= ======= =======
(in thousands)
Weighted average number of common shares outstanding
used in calculation of basic earnings per share....... 293,873 295,918 307,058
Incremental shares from the assumed exercise of
dilutive stock options as of the beginning of the
period................................................ 2,790 4,162 5,166
------- ------- -------
Weighted average number of common shares outstanding
used in calculation of diluted earnings per share..... 296,663 300,080 312,224
======= ======= =======
- -------------------------------------------------------------------------------
Earnings per share
Basic................................................. $ 2.66 $ 2.86 $ 2.00
Diluted............................................... $ 2.64 $ 2.82 $ 1.96
- -------------------------------------------------------------------------------
</TABLE>
22. 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, implied volatility 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 adverse effect
of a change in interest rates, currency rates or implied volatility rates on
the value of a financial instrument. The notional amount of interest rate de-
rivatives and foreign exchange contracts is the amount upon which interest and
other payments under the contract are based. For interest rate derivatives, the
notional amount is typically not exchanged. Therefore, notional amounts should
not be taken as the measure of credit or market risk as they tend to greatly
overstate the true economic risks of these contracts.
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 current market rates should
the counterparty default prior to settlement date, is generally representative
of credit exposure related to interest rate derivatives and foreign exchange
contracts at a point in time. Credit exposure on derivatives and foreign ex-
change contracts is measured by the Corporation by aggregating current credit
exposure and potential future exposure. Collateral and master netting agree-
ments, which are used by the Corporation to reduce individual counterparty
credit risk, are incorporated into the measurement of credit exposure. Master
netting agreements provide for the offsetting of amounts receivable and payable
under derivatives or foreign exchange contracts with the same counterparty.
Current credit exposure is represented by the positive fair value of deriva-
tives and foreign exchange contracts at December 31, 1998. The potential future
exposure on derivatives and foreign exchange contracts represents the potential
increase in the replacement cost of the contracts over their remaining term as
market rates and other relevant factors change. The Corporation determines po-
tential future exposure based on statistical analyses of variables, including
market values of underlying instruments, estimates of future volatility, inter-
est rates, exchange rates and the remaining time to maturity or settlement of
the contracts.
- -------------------------------------- 79 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
The market risk associated with interest rate derivatives and foreign exchange
contracts is managed by establishing and monitoring limits as to the types and
degrees of risk that may be undertaken and is measured using the Corporation's
value-at-risk methodology.
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 spe-
cific price. Market risks on both types of agreements stem from market move-
ments in the underlying securities' values, interest rates or implied volatil-
ity rates. Credit risk stems from the ability of the counterparties to meet
the terms of the contracts. The Corporation's counterparty credit risk for
futures is limited, as the majority of these transactions are executed on or-
ganized 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
addition, other types of option products provide the holder with the right to
enter into interest rate swap, cap and floor agreements with the writer. The
primary risks associated with interest rate options are the exposure to cur-
rent and 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 contracts.
- -------------------------------------- 80 --------------------------------------
<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 ALM portfolios.
<TABLE>
<CAPTION>
Trading Portfolio(1) ALM Portfolio(1)
------------------------------ ---------------------------------------------
Notional Fair Value(2)(3)(4) Notional Fair Value(2)(3) Unrecognized
(in millions) Amount Asset Liability Amount Asset Liability Gain (Loss)(5)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
Interest rate contracts
Futures and forwards.... $ 4,037 $ 2 $ 734 $ (6)
Interest rate swaps..... 29,164 471 $ 470 8,366 $ 219 $ 81 110
Interest rate options
Purchased(6)........... 32,640 191 2,411 89 89
Written or sold(6)..... 24,199 200 1,911 66 (66)
------- --------- --------- ------- -------- -------- ----
$90,040 $ 664 $ 670 $13,422 $308 $147 $127
======= ========= ========= ======= ======== ======== ====
Foreign exchange
contracts
Spot and forward
contracts.............. $48,206 $1,221 $1,274 $ 3,469 $ 35 $ 22 $ 13
Options purchased....... 3,581 68 68
Options written or
sold................... 3,711 54
------- --------- --------- ------- -------- -------- ----
$55,498 $1,289 $1,328 $ 3,537 $ 35 $ 22 $ 13
======= ========= ========= ======= ======== ======== ====
- -----------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate contracts
Futures and forwards.... $42,842 $ 36 $ 69 $ 3,947 $ 21 $ 11
Interest rate swaps..... 20,451 113 160 11,162 132 $ 11 96
Interest rate options
Purchased(6)........... 23,231 56 2,765 13 2
Written or sold........ 12,716 53
------- --------- --------- ------- -------- -------- ----
$99,240 $ 205 $ 282 $17,874 $166 $ 11 $109
======= ========= ========= ======= ======== ======== ====
Foreign exchange
contracts
Spot and forward
contracts.............. $25,793 $ 476 $ 442 $ 2,430 $ 36 $ 41 $ (5)
Options written or
sold................... 6,692 107
------- --------- --------- ------- -------- -------- ----
Options purchased....... 5,428 115
$37,913 $ 591 $ 549 $ 2,430 $ 36 $ 41 $ (5)
======= ========= ========= ======= ======== ======== ====
- -----------------------------------------------------------------------------------------------------
</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
trading assets or funds borrowed, as applicable. The majority of deriva-
tives that are part of the ALM portfolio are accounted for on the accrual
basis, and are not carried at fair value. When certain contracts, such as
futures, are subject to daily cash settlements, the fair value of these in-
struments is zero.
(3) The current credit exposure from interest rate derivatives and foreign ex-
change contracts at December 31 is represented by the fair value of con-
tracts reported in the "Asset" column.
(4) The average asset and liability fair value amounts for interest rate deriv-
atives included in the trading portfolio for the years ended December 31,
1998 and 1997 were approximately $389 million and $443 million, respective-
ly, and $158 million and $185 million, respectively. The average asset and
liability fair value amounts for foreign exchange contracts included in the
trading portfolio were approximately $775 million and $760 million, respec-
tively, for the year ended December 31, 1998, and $435 million and $484
million, respectively, for the year ended December 31, 1997.
(5) Unrecognized gain or loss represents the amount of gain or loss, based on
fair value, that has not been recognized in the income statement as of the
balance sheet date. This includes amounts related to contracts that have
been terminated. Such amounts are recognized as an adjustment of yield over
the period being managed. At December 31, 1998, there were $4 million of
unrecognized gains related to terminated contracts that are being amortized
to net interest revenue over a weighted average period of 46 months. At De-
cember 31, 1997, there were $7 million of unrecognized gains related to
terminated contracts that are being amortized to net interest revenue over
a weighted average period of 14 months.
(6) The ALM portfolio includes equity contracts entered into by the Corpora-
tion's Argentine operations. These contracts are linked to Argentine de-
posit products, where the holder receives payment based on changes in the
prices of underlying Argentine securities.
- -------------------------------------- 81 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
Net trading gains or losses from interest rate derivatives are recorded in
trading profits and commissions. The Corporation's interest rate derivative
trading activities primarily include providing risk management products to
customers. Derivatives are also used to manage risk in other trading portfo-
lios, such as emerging markets securities. The results of these derivative ac-
tivities are combined with the results of the respective trading portfolio to
determine the overall performance of the trading business and, as such, are
not included in the results of derivative trading activities. Net trading
gains from interest rate derivative trading were $29 million for the year
ended December 31, 1998, $19 million for the year ended December 31, 1997 and
$4 million for the year ended December 31, 1996.
Net trading gains from foreign exchange activities, which include foreign ex-
change spot, forward and options contracts, for the years ended December 31,
1998, 1997 and 1996 were $127 million, $88 million and $54 million,
respectively, and are recorded in other income.
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
review and approval policies, gives rise to credit exposure when certain bor-
rowing 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 Corpo-
ration'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
customer may default on the underlying transaction. The risks involved in the
issuance of standby letters of credit and foreign office guarantees are pri-
marily credit risks. Again, the Corporation's credit review and approval poli-
cies and practices are adhered to when evaluating issuances of standby letters
of credit or guarantees for customers. Similar to commitments to extend cred-
it, the Corporation may obtain various types of collateral, if deemed neces-
sary, based upon the Corporation's credit evaluation.
The following table summarizes the Corporation's credit-related financial in-
struments:
<TABLE>
<CAPTION>
December 31 1998 1997
(in millions)
- ------------------------------------------------------------------------------
<S> <C> <C>
Fee-based or otherwise legally binding commitments to extend
credit....................................................... $31,975 $31,845
Standby letters of credit, foreign office guarantees and
similar instruments(1)....................................... $ 4,473 $ 4,202
Commercial letters of credit.................................. $ 1,673 $ 1,587
- ------------------------------------------------------------------------------
</TABLE>
(1) Net of participations conveyed to others of $1,518 million in 1998 and
$1,283 million in 1997.
23. 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
risk characteristics, whose aggregate credit exposure is significant to the
Corporation's total credit exposure. The Corporation's loans and leases and
commitments to lend to borrowers in Latin American countries were approxi-
mately $12.6 billion and $10.9 billion at December 31, 1998 and 1997, respec-
tively. Included in these outstandings and commitments were exposures to bor-
rowers in Argentina and Brazil of $6.6 billion and $3.4 billion, respectively
atDecember 31, 1998 and $5.2 billion and $3.2 billion, respectively, at Decem-
ber 31, 1997. Information with respect to the Corporation's overseas business
activities and its geographic concentrations is included in Note 26.
24. Lease Commitments
The following table summarizes rental expense for leases of real estate and
equipment:
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental expense.................................................. $139 $130 $132
Less sublease rental income..................................... 12 12 13
---- ---- ----
Net rental expense.............................................. $127 $118 $119
==== ==== ====
</TABLE>
The Corporation has obligations under noncancelable operating leases for real
estate and equipment that 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 1999 through 2003 are
$127 million, $118 million, $106 million, $93 million and $77 million, respec-
tively, and $309 million for 2004 and later. Capital leases, the minimum rent-
als of which are included in the preceding amounts, are not significant.
- -------------------------------------- 82 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
25. 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 should not be material to the Corporation's financial condi-
tion or results of operations.
26. Business Segment Information
Effective December 31, 1998, the Corporation adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This new standard re-
quires disclosure of financial and descriptive information about an entity's
reportable operating segments. Such information is required to be reported on
the basis that is reviewed by the Office of the Chief Executive Officer (the
OCEO), which is the senior decision making group for the Corporation, to evalu-
ate performance and allocate resources. In accordance with the new standard,
the Corporation has presented financial and descriptive information for four
principal operating segments -- the Wholesale Bank, the Regional Bank, Argen-
tina and Brazil.
The Wholesale Bank provides a full range of commercial and investment banking
services to a predominately middle market, non-investment grade corporate cus-
tomer base. The Regional Bank is a New England-based business, which provides
for the financial service needs of its three major customer groups: consumers,
high net worth individuals and small businesses. The Corporation maintains a
significant presence in Argentina and Brazil with services to large corporate,
consumer and middle market customers. All other individual businesses have been
included in "Other Businesses," and include the Global Treasury group, other
Latin American units, the Corporation's national consumer businesses (which the
Corporation sold in 1997 and 1998), Asia, the International Private Bank and
the Emerging Markets, Sales, Trading and Research unit.
The information presented in the following table is consistent with the Corpo-
ration's significant accounting policies, except for the following:
. Average assets and revenue and expense items are derived from the internal
management reporting system, where they are specifically attributable to
individual business units.
. Net interest revenue is allocated to the business lines using a funds
transfer pricing process, which incorporates a matched funding concept,
with the residual assigned to the Global Treasury group.
. The provision for credit losses is allocated based on actual net credit
losses for consumer loans and on an "'expected loss" basis for commercial
loans. Expected loss is determined under the Corporation's risk adjusted
return on equity methodology, and is an estimate of the average loss rate
that individual credit portfolios will experience over an economic cycle.
. Various techniques are employed to allocate certain costs associated with
corporate support areas, including the use of unit costs and service vol-
umes.
. The provision for income taxes applied to each business line reflects an
estimate of the actual effective tax rate related to each segment, which
varies due to a number of factors, including state and foreign tax rates,
foreign tax issues and tax ramifications of certain transactions.
- -------------------------------------- 83 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
The following table presents selected financial information for the Corpora-
tion's lines of business for 1998, 1997 and 1996, on a fully taxable equivalent
basis. Consolidated net interest revenue and income tax provision include tax-
equivalent adjustments of $23 million, $24 million and $20 million for 1998,
1997 and 1996, respectively. Information provided for 1997 and 1996 is pre-
sented on a basis consistent with 1998 and, as such, has been restated for
changes in the Corporation's organizational structure and internal management
reporting methodologies implemented during 1998.
<TABLE>
<CAPTION>
Wholesale Regional Other Corporate Consolidated
(in millions) Bank Bank Argentina Brazil Businesses Adjustments Totals
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1998
Net interest revenue.... $ 618 $ 952 $ 332 $ 345 $ 234 $ 69 $ 2,550
Noninterest income...... 861 450 244 174 160 143 2,032
Noninterest expense..... 697 1,012 381 327 282 211 2,910
Provision for credit
losses................. 118 78 64 24 46 50 380
------- ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes........... 664 312 131 168 66 (49) 1,292
Income tax provision
(benefit).............. 273 119 57 69 5 (23) 500
------- ------ ------ ------ ------- ------ -------
Net income (loss)....... $ 391 $ 193 $ 74 $ 99 $ 61 $ (26) $ 792
======= ====== ====== ====== ======= ====== =======
Average assets.......... $29,365 $8,148 $8,227 $6,297 $18,394 $1,769 $72,200
- ------------------------------------------------------------------------------------------------
Year Ended December 31,
1997
Net interest revenue.... $ 575 $ 954 $ 205 $ 265 $ 382 $ 72 $ 2,453
Noninterest income...... 710 406 145 138 181 (17) 1,563
Noninterest expense..... 502 979 217 260 312 54 2,324
Provision for credit
losses................. 120 81 21 18 139 (179) 200
------- ------ ------ ------ ------- ------ -------
Income before income
taxes.................. 663 300 112 125 112 180 1,492
Income tax provision.... 269 117 49 54 45 79 613
------- ------ ------ ------ ------- ------ -------
Net income.............. $ 394 $ 183 $ 63 $ 71 $ 67 $ 101 $ 879
======= ====== ====== ====== ======= ====== =======
Average assets.......... $25,131 $8,776 $5,160 $5,466 $19,698 $1,032 $65,263
- ------------------------------------------------------------------------------------------------
Year Ended December 31,
1996
Net interest revenue.... $ 540 $ 914 $ 183 $ 213 $ 441 $ 69 $ 2,360
Noninterest income...... 552 407 108 105 206 (34) 1,344
Noninterest expense..... 419 939 173 199 358 232 2,320
Provision for credit
losses................. 106 44 20 16 116 (71) 231
------- ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes........... 567 338 98 103 173 (126) 1,153
Income tax provision
(benefit).............. 235 148 40 46 70 (36) 503
------- ------ ------ ------ ------- ------ -------
Net income (loss)....... $ 332 $ 190 $ 58 $ 57 $ 103 $ (90) $ 650
======= ====== ====== ====== ======= ====== =======
Average assets.......... $22,497 $8,149 $4,275 $4,616 $19,312 $ 674 $59,523
</TABLE>
Corporate adjustments for all three years are primarily composed of the follow-
ing items: gains on sales of businesses; net funding costs for certain nonin-
terest bearing assets and liabilities; transfers between noninterest income and
net interest revenue related to certain compensating balance arrangements; am-
ortization of goodwill; acquisition-related restructuring expense and costs re-
lated to the realignment and downsizing of certain businesses; and bonus pay-
ments due employees in connection with the acquisition of the investment bank-
ing operations of BancAmerica Robertson Stephens.
Total revenue from international operations included in Other Businesses to-
taled $210 million, $249 million and $239 million for 1998, 1997 and 1996, re-
spectively. Intersegment revenue and expense for 1998, 1997 and 1996 were not
significant.
- -------------------------------------- 84 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
27. Parent Company Condensed Financial Statements
The following is a condensed balance sheet of the Corporation (Parent Company
only):
<TABLE>
<CAPTION>
December 31 1998 1997
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term investments in bank subsidiary............... $ 591 $ 290
Advances to nonbank subsidiaries ................................ 1,781 1,080
Subordinated notes receivable from bank subsidiary............... 330 330
Investments in subsidiaries
Bank subsidiaries............................................... 4,959 4,838
Nonbank subsidiaries............................................ 709 413
Other assets..................................................... 108 99
------ ------
Total Assets.................................................. $8,478 $7,050
====== ======
Liabilities and Stockholders' Equity
Notes payable.................................................... $2,474 $1,616
Other liabilities................................................ 158 51
Junior subordinated debt payable to subsidiary trusts............ 1,029 773
------ ------
Total liabilities................................................ 3,661 2,440
------ ------
Total stockholders' equity....................................... 4,817 4,610
------ ------
Total Liabilities and Stockholders' Equity.................... $8,478 $7,050
====== ======
</TABLE>
The following is a condensed statement of income of the Corporation (Parent
Company only):
<TABLE>
<CAPTION>
Years Ended December 31 1998 1997 1996
(in millions)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income
Dividends from subsidiaries
Bank subsidiaries........................................ $474 $1,079 $537
Nonbank subsidiaries..................................... 180 11 23
Interest from subsidiaries
Bank subsidiaries........................................ 42 39 50
Nonbank subsidiaries..................................... 130 79 41
Noninterest income........................................ 2 2
---- ------ ----
Total operating income.................................. 828 1,210 651
---- ------ ----
Operating Expense
Interest expense.......................................... 192 146 95
Other expense, net........................................ 9 8 14
---- ------ ----
Total operating expense................................. 201 154 109
---- ------ ----
Income before income taxes and equity in undistributed net
income of subsidiaries................................... 627 1,056 542
Benefit from income taxes................................. (8) (10) (6)
---- ------ ----
Income before equity in undistributed net income of
subsidiaries............................................. 635 1,066 548
Equity in undistributed net income of subsidiaries........ 157 (187) 102
---- ------ ----
Net Income................................................ $792 $ 879 $650
==== ====== ====
</TABLE>
- -------------------------------------- 85 --------------------------------------
<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 1998 1997 1996
(in millions)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income............................................. $ 792 $ 879 $ 650
Reconciliation of net income to net cash provided from
operating activities
Equity in undistributed net income of subsidiaries.... (157) 187 (102)
Other, net............................................ 79 (32) (52)
------ ------ -----
Net cash provided from operating activities.......... 714 1,034 496
------ ------ -----
Cash Flows From Investing Activities
Net cash provided from (used for) short-term
investments in bank subsidiary........................ (302) 448 (600)
Net cash used for advances to subsidiaries............. (701) (361) (263)
Investments in subsidiaries............................ (305) (183) (16)
Proceeds from liquidation of subsidiary................ 14
Repayment of subordinated note receivable by bank
subsidiary............................................ 250
------ ------ -----
Net cash used for investing activities............... (1,294) (96) (629)
------ ------ -----
Cash Flows From Financing Activities
Repayment/repurchase of notes payable.................. (357) (404) (100)
Net proceeds from issuance of notes payable............ 1,215 450 400
Net proceeds from issuance of junior subordinated
debentures............................................ 255 258 515
Net proceeds from issuance of common stock............. 94 108 92
Redemption of preferred stock.......................... (278) (230)
Purchase of treasury stock............................. (784) (490)
Dividends paid......................................... (350) (322) (284)
------ ------ -----
Net cash provided from (used for) financing
activities.......................................... 579 (924) 133
------ ------ -----
Net change in cash and due from banks.................. (1) 14
Cash and due from banks at January 1................... 15 1 1
------ ------ -----
Cash and due from banks at December 31................. $ 14 $ 15 $ 1
====== ====== =====
Interest payments...................................... $ 186 $ 150 $ 95
Income tax payments.................................... $ 11 $ 7 $ 6
- ------------------------------------------------------------------------------
</TABLE>
- -------------------------------------- 86 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
28. 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 contracts,
swaps and other instruments as defined by the standard.
Fair value estimates are generally subjective in nature and are dependent upon
a number of significant assumptions associated with each instrument or group of
similar instruments, including estimates of discount rates, risks associated
with specific financial instruments, estimates of future cash flows and 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 pension and other postretirement benefits, premises and equipment,
OREO, prepaid expenses, core deposit intangibles and other customer relation-
ships, other intangible assets and income tax assets and liabilities. Accord-
ingly, the aggregate fair value amounts presented do not purport to represent,
and should not be considered representative of, the underlying "market" or
franchise value of the Corporation.
Because the standard permits many alternative calculation techniques and 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, Due from Cus-
tomers on Acceptances, Funds Borrowed, and Acceptances Outstanding These items
are generally short-term in nature and, accordingly, the carrying amounts re-
ported in the balance sheet are reasonable approximations of their fair values.
Trading Assets Trading assets are carried at fair value in the balance sheet.
Values for trading securities are generally based on quoted, or other indepen-
dent, market prices. Values for interest rate and foreign exchange products are
based on quoted, or other independent, market prices, or are estimated using
pricing models or discounted cash flows.
Securities Available for Sale and Securities Held to Maturity Fair values are
principally based on quoted, or other independent, market prices. For certain
debt and equity investments made in connection with the Corporation's Private
Equity business that do not trade on established exchanges, and for which mar-
kets 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 subject to the disclosure requirements of the standard consist
principally of accounts receivable and investments in limited partnerships. The
carrying amounts of short-term receivables are considered to approximate their
fair value. For longer-term receivables, fair value is estimated by discounting
expected future cash flows using a discount rate commensurate with the risks
involved. Estimates of fair value of investments in limited partnerships are
based upon management's review of the investee's financial results, condition
and prospects.
Deposits The fair values of deposits subject to immediate withdrawal, such as
interest and noninterest bearing checking and money market deposit accounts,
are, by definition, equal to their carrying amounts. The carrying amounts for
variable rate certificates of deposit and other time deposits approximate their
- -------------------------------------- 87 --------------------------------------
<PAGE>
Notes to Financial Statements -- (Continued)
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 sec-
ondary market prices and does not include the fair values of related interest
rate swap agreements, which are presented separately.
Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated
Debentures The fair value is estimated using secondary market prices.
Interest Rate and Foreign Exchange Financial Instruments The fair values of
interest rate and foreign exchange contracts used to manage interest rate,
currency and market risks are estimated based on market information 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
committed rates. The fair values of foreign office guarantees and letters of
credit are based on fees charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
- -------------------------------------- 88 --------------------------------------
<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 1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks.................. $3,773 $3,773 $4,006 $4,006
Interest bearing deposits in other
banks................................... 1,533 1,533 1,592 1,592
Federal funds sold and securities
purchased under agreements to resell.... 2,463 2,463 2,017 2,017
Trading assets(1)........................ 3,802 3,802 2,947 2,947
Securities
Available for sale(2)................... 12,075 12,291 9,946 10,100
Held to maturity........................ 459 464 537 540
Loans.................................... 40,280 41,590
Reserve for credit losses(3)............. (754) (712)
------ ------
39,526 40,324 40,878 41,673
Due from customers on acceptances........ 338 338 462 462
Accrued interest receivable.............. 561 561 552 552
Financial instruments included in other
assets.................................. 1,506 1,599 1,021 1,087
Liabilities
Deposits................................. 48,500 48,641 45,761 45,793
Funds borrowed(1)........................ 12,016 12,016 12,865 12,865
Acceptances outstanding.................. 338 338 460 460
Financial instruments included in accrued
expenses and other liabilities.......... 1,294 1,294 1,225 1,225
Notes payable............................ 4,593 4,648 2,941 3,003
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
debentures.............................. 995 980 747 765
Interest Rate Contracts(4)
Asset and liability management
Asset................................... 308 166
Liability............................... (147) (11)
Foreign Exchange Contracts(4)
Asset and liability management
Asset................................... 35 36
Liability............................... (22) (41)
Other Unrecognized Financial Instruments
Fee-based or otherwise legally binding
commitments to extend credit............ (73) (62)
Standby and commercial letters of credit,
foreign office guarantees and similar
instruments............................. (13) (11)
- --------------------------------------------------------------------------------
</TABLE>
(1) Trading assets and funds borrowed include the fair value of derivative
trading positions.
(2) Securities available for sale include investments made in connection with
the Corporation's Private Equity business that do not trade on established
exchanges, and for which no markets exist. At December 31, 1998 and 1997,
their estimated fair values exceeded the related carrying amounts by $216
million and $154 million, respectively.
(3) The reserve for credit losses is established for future charge-offs arising
from all extensions of credit. The amount of the reserve associated with
instruments other than loans, such as leases, commitments to extend credit,
standby letters of credit and interest rate contracts, is not material. Ac-
cordingly, a separate determination of the reserve allocable to such in-
struments has not been made.
(4) Additional information with respect to interest rate and foreign exchange
contracts can be found in Note 22. The Corporation's accounting policy re-
lated to such instruments is discussed in Note 1.
- -------------------------------------- 89 --------------------------------------
<PAGE>
Exhibit 21
List of Subsidiaries of BankBoston Corporation
Information reflected is as of December 31, 1998 except where noted. There
is no parent company of BankBoston Corporation (the "Corporation"). BankBoston,
N.A. ("BKB"), all of whose voting securities are owned indirectly by the
Corporation, is the principal subsidiary of the Corporation.
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 as of December 31, 1998.
<TABLE>
<CAPTION>
JURISDICTION
NAME OF SUBSIDIARY (1) (2) OF ORGANIZATION
- -------------------------- ---------------
<S> <C>
BankBoston, N.A. (3) US
BancBoston Aircraft Leasing Inc. MA
BancBoston Insurance Agency, Inc. MA
BancBoston Insurance Agency of Rhode Island, Inc. RI
BancBoston International Leasing LLC DE
BancBoston Leasing Inc. MA
BancBoston Transport Leasing Inc. MA
BancBoston Leasing Services Inc. MA
BancBoston Services, Inc. MA
BancBoston Ventures Inc. MA
BankBoston Commerical Loan Funding LLC DE
BankBoston Commerical Loan Master LLC DE
BankBoston Credit Corporation MA
BankBoston Development Company, L.L.C. (4) MA
BankBoston International US Edge Act Corp.
BankBoston Investor Services, Inc. MA
BankBoston Retail Finance Inc. DE
BayBanks Finance & Leasing Co., Inc. MA
BayBanks Investment Management, Inc. MA
BayBanks Credit Corp. MA
BayBanks Systems, Inc. MA
Boston Bancorp Securities Inc. MA
Boston World Holding Corporation MA
Boston Overseas Financial Corporation US Edge Act Corp.
Equiserve Limited Partnership (5) MA
Multibank Service Corp. MA
</TABLE>
<PAGE>
<TABLE>
<S> <C>
RV Marine Funding Corporation DE
West Broadway Security Corp. MA
BancBoston Investments Inc. MA
BancBoston Capital, Inc. MA
BancBoston Leasing Investments Inc. MA
BancBoston Real Estate Capital Corporation MA
BancBoston Robertson Stephens Inc. MA
BancBoston Robertson Stephens International Ltd. U.K.
BankBoston (NH), N.A. US
Bank of Boston Florida, N.A. US
BankBoston Capital Trust I DE
BankBoston Capital Trust II DE
BankBoston Capital Trust III DE
BankBoston Capital Trust IV DE
BankBoston Maine, N.A. US
Boston International Holdings Corporation MA
Boston Overseas Holding Corp. MA
Bulfinch Indemnity Company, Ltd. VT
FSC Corp. MA
Pacific National Corporation MA
RIHT Life Insurance Co. AZ
Back Bay Capital LLC DE
</TABLE>
- ----------------------
(1) Except as noted, each such business organization is directly or indirectly
owned by the Corporation.
(2) BKB 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) 99.72% owned by BankBoston Corporation. and .28% owned by Pacific National
Corporation.
(4) 99% owned by BankBoston, N.A. and 1% owned by BancBoston Investments Inc.
(5) Joint venture in which an interest of.5% is held by BancBoston Services and
a 24.5% limited partnership interest is held by BankBoston, N.A.
<PAGE>
EXHIBIT 23
PRICEWATERHOUSECOOPERS
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
BankBoston Corporation
We consent to the incorporation by reference, in the registration statements of
BankBoston Corporation on Form S-3 (Registration Nos. 333-13697, 333-38135, 333-
47125, 333-47125-01, 333-47125-02 and 333-67383) and Form S-8 (Registration Nos.
33-1899, 33-11186, 33-64462, 333-00297, 333-07329, 333-09041, 333-12851, 333-
18999, 333-24199, 333-41589 and 333-71867) of our report dated January 21, 1999
on our audits of the consolidated financial statements of BankBoston Corporation
and subsidiaries as of December 31, 1998 and 1997, and for each of the years in
the three-year period ended December 31, 1998 included in the Corporation's
1998 Annual Report to Stockholders and in Exhibit 13 to the Corporation's 1998
Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,773
<INT-BEARING-DEPOSITS> 1,533
<FED-FUNDS-SOLD> 2,463
<TRADING-ASSETS> 3,802
<INVESTMENTS-HELD-FOR-SALE> 12,075
<INVESTMENTS-CARRYING> 459
<INVESTMENTS-MARKET> 464
<LOANS> 42,806
<ALLOWANCE> (754)
<TOTAL-ASSETS> 73,513
<DEPOSITS> 48,500
<SHORT-TERM> 9,581
<LIABILITIES-OTHER> 2,254
<LONG-TERM> 5,874<F1>
0
0
<COMMON> 307
<OTHER-SE> 4,510
<TOTAL-LIABILITIES-AND-EQUITY> 73,513
<INTEREST-LOAN> 4,259
<INTEREST-INVEST> 780
<INTEREST-OTHER> 538
<INTEREST-TOTAL> 5,577
<INTEREST-DEPOSIT> 1,871
<INTEREST-EXPENSE> 3,050
<INTEREST-INCOME-NET> 2,527
<LOAN-LOSSES> 380
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 882
<INCOME-PRETAX> 1,269
<INCOME-PRE-EXTRAORDINARY> 1,269
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.64
<YIELD-ACTUAL> 4.09
<LOANS-NON> 375
<LOANS-PAST> 41
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 712
<CHARGE-OFFS> (441)
<RECOVERIES> 77
<ALLOWANCE-CLOSE> 754
<ALLOWANCE-DOMESTIC> 497
<ALLOWANCE-FOREIGN> 227
<ALLOWANCE-UNALLOCATED> 30
<FN>
<F1>INCLUDES GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR
SUBORDINATED DEBENTURES.
</FN>
</TABLE>
