- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-6522
BANK OF BOSTON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2471221
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 FEDERAL STREET, 02110
BOSTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 434-2200
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT: NOT APPLICABLE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of July 31, 1996:
Common Stock, $1.50 par value ................................. 152,243,874
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BANK OF BOSTON CORPORATION
TABLE OF CONTENTS
PAGE
----
CONSOLIDATED SELECTED FINANCIAL DATA........................................................... 3
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Bank of Boston Corporation and Subsidiaries:
Consolidated Balance Sheet............................................................. 4
Consolidated Statement of Income....................................................... 6
Consolidated Statement of Changes in Stockholders' Equity.............................. 7
Consolidated Statement of Cash Flows................................................... 8
Notes to Financial Statements.......................................................... 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................................... 39
ITEM 5. Other Information...................................................................... 39
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 39
SIGNATURES..................................................................................... 40
LIST OF TABLES
Consolidated Average Balance Sheet--Nine Quarters............................................ 32
Consolidated Statement of Income--Nine Quarters.............................................. 33
Average Balances and Interest Rates--Quarter................................................. 34
Average Balances and Interest Rates--First Half.............................................. 36
Change in Net Interest Revenue--Volume and Rate Analysis..................................... 38
2
BANK OF BOSTON CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1996 1995
QUARTERS ENDED JUNE 30 ------- -------
INCOME STATEMENT DATA:
Net interest revenue............................. $ 438 $ 434
Provision for credit losses...................... 50 40
Noninterest income............................... 324 236
Noninterest expense.............................. 406 392
Net income....................................... 178 133
Per common share:
Primary........................................ 1.54 1.11
Fully diluted.................................. 1.52 1.10
Market value per common share:
High........................................... 51 1/2 38 1/4
Low............................................ 46 29 3/8
SIX MONTHS ENDED JUNE 30
INCOME STATEMENT DATA:
Net interest revenue............................. $ 872 $ 860
Provision for credit losses...................... 100 130
Noninterest income............................... 550 529
Noninterest expense.............................. 811 775
Net income....................................... 295 259
Per common share:
Primary........................................ 2.50 2.19
Fully diluted.................................. 2.46 2.14
Market value per common share:
High........................................... 51 1/2 38 1/4
Low............................................ 41 5/8 25 5/8
AT JUNE 30
BALANCE SHEET DATA:
Loans and lease financing........................ $32,885 $31,388
Total assets..................................... 50,830 45,254
Deposits......................................... 33,305 29,121
Total stockholders' equity....................... 3,960 3,465
Book value per common share...................... 30.50 26.49
Regulatory capital ratios:
Risk-based capital ratios:
Tier 1....................................... 7.9% 7.7%
Total........................................ 12.5 13.0
Leverage ratio................................. 7.6 7.3
3
BANK OF BOSTON CORPORATION
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30 DECEMBER 31
1996 1995
------- -----------
ASSETS
Cash and due from banks.................................... $ 2,351 $ 2,645
Interest bearing deposits in other banks................... 1,191 1,250
Federal funds sold and securities purchased under agree-
ments to resell........................................... 2,166 1,350
Trading securities......................................... 1,649 1,109
Mortgages held for sale.................................... 889
Securities
Available for sale....................................... 6,430 5,014
Held to maturity (fair value of $616 in 1996 and $620 in
1995)................................................... 633 613
Loans and lease financing
United States Operations................................. 23,743 22,498
International Operations................................. 9,142 8,569
------- -------
Total loans and lease financing (net of unearned income
of $275 in 1996 and $253 in 1995)..................... 32,885 31,067
Reserve for credit losses.................................. (744) (736)
------- -------
Net loans and lease financing............................ 32,141 30,331
Premises and equipment, net................................ 647 617
Due from customers on acceptances.......................... 472 359
Accrued interest receivable................................ 475 456
Other assets............................................... 2,675 2,764
------- -------
TOTAL ASSETS............................................... $50,830 $47,397
======= =======
The accompanying notes are an integral part of these financial statements.
4
BANK OF BOSTON CORPORATION
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
JUNE 30 DECEMBER 31
1996 1995
------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Domestic offices
Noninterest bearing................................... $ 4,620 $ 4,839
Interest bearing...................................... 17,358 16,564
Overseas offices
Noninterest bearing................................... 617 552
Interest bearing...................................... 10,710 8,993
------- -------
Total deposits...................................... 33,305 30,948
Funds borrowed
Federal funds purchased................................. 1,758 1,675
Term federal funds purchased............................ 1,254 869
Securities sold under agreements to repurchase.......... 1,881 1,226
Other funds borrowed.................................... 3,963 4,993
Acceptances outstanding................................... 472 359
Accrued expenses and other liabilities.................... 1,605 1,437
Notes payable............................................. 2,632 2,139
------- -------
TOTAL LIABILITIES......................................... 46,870 43,646
------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock without par value
Authorized shares--10,000,000
Issued and outstanding shares--4,593,941.............. 508 508
Common stock, par value $1.50 in 1996 and $2.25 in 1995
Authorized shares--300,000,000 in 1996 and 200,000,000
in 1995
Issued shares--113,182,698 in 1996 and 112,571,508 in
1995
Outstanding shares--113,182,698 in 1996 and
112,086,150 in 1995.................................. 170 253
Surplus................................................. 1,043 932
Retained earnings....................................... 2,198 2,020
Net unrealized gain on securities available for sale,
net of tax............................................. 47 64
Treasury stock, at cost (485,358 shares in 1995)........ (22)
Cumulative translation adjustments, net of tax.......... (6) (4)
------- -------
TOTAL STOCKHOLDERS' EQUITY................................ 3,960 3,751
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $50,830 $47,397
======= =======
The accompanying notes are an integral part of these financial statements.
5
BANK OF BOSTON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED SIX MONTHS
JUNE 30 ENDED JUNE 30
----------------- -----------------
1996 1995 1996 1995
-------- -------- -------- --------
INTEREST INCOME
Loans and lease financing, including
fees.................................... $ 770 $ 808 $ 1,580 $ 1,554
Securities............................... 110 87 213 162
Trading securities....................... 51 43 92 84
Mortgages held for sale.................. 5 17 9
Federal funds sold and securities
purchased under agreements to resell.... 42 93 83 196
Deposits in other banks.................. 28 67 51 132
-------- -------- -------- --------
Total interest income.................. 1,001 1,103 2,036 2,137
-------- -------- -------- --------
INTEREST EXPENSE
Deposits of domestic offices............. 164 159 333 298
Deposits of overseas offices............. 198 257 385 479
Funds borrowed........................... 155 215 357 422
Notes payable............................ 46 38 89 78
-------- -------- -------- --------
Total interest expense................. 563 669 1,164 1,277
-------- -------- -------- --------
NET INTEREST REVENUE..................... 438 434 872 860
Provision for credit losses.............. 50 40 100 130
-------- -------- -------- --------
Net interest revenue after provision for
credit losses........................... 388 394 772 730
-------- -------- -------- --------
NONINTEREST INCOME
Financial service fees................... 89 113 96 219
Trust and agency fees.................... 55 57 106 110
Trading profits and commissions.......... 24 6 37 7
Net securities gains..................... 4 17 6
Other income............................. 152 60 294 187
-------- -------- -------- --------
Total noninterest income............... 324 236 550 529
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries................................. 185 179 372 356
Employee benefits........................ 42 41 84 81
Occupancy expense........................ 37 34 74 69
Equipment expense........................ 25 26 51 50
Other expense............................ 117 112 230 219
-------- -------- -------- --------
Total noninterest expense.............. 406 392 811 775
-------- -------- -------- --------
Income before income taxes................. 306 238 511 484
Provision for income taxes................. 128 105 216 225
-------- -------- -------- --------
NET INCOME................................. $ 178 $ 133 $ 295 $ 259
======== ======== ======== ========
NET INCOME APPLICABLE TO COMMON STOCK...... $ 169 $ 124 $ 276 $ 240
======== ======== ======== ========
PER COMMON SHARE
Net income
Primary.................................. $ 1.54 $ 1.11 $ 2.50 $ 2.19
Fully diluted............................ $ 1.52 $ 1.10 $ 2.46 $ 2.14
Dividends declared......................... $ .44 $ .27 $ .81 $ .54
AVERAGE NUMBER OF COMMON SHARES (IN
THOUSANDS)
Primary.................................. 109,725 111,369 110,380 109,335
Fully diluted............................ 111,253 112,933 112,064 112,718
The accompanying notes are an integral part of these financial statements.
6
BANK OF BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
1996 1995
SIX MONTHS ENDED JUNE 30 ------ ------
PREFERRED STOCK
Balance, January 1............................................ $ 508 $ 508
------ ------
Balance, June 30.............................................. 508 508
------ ------
COMMON STOCK
Balance, January 1............................................ 253 242
Change in par value........................................... (84)
Common stock issued
Exercise of stock options.................................... 1
Conversion of subordinated convertible debentures............ 8
Acquisition of The Boston Bancorp............................ 1
------ ------
Balance, June 30.............................................. 170 251
------ ------
SURPLUS
Balance, January 1............................................ 932 810
Change in par value........................................... 84
Dividend reinvestment and stock purchase plan................. 9
Exercise of stock options..................................... (24) 5
Conversion of subordinated debentures......................... 71
Acquisition of Ganis Credit Corporation....................... 1
Restricted stock grants, net of forfeitures................... 3 1
Acquisition of The Boston Bancorp............................. 47
Other, principally employee benefit plans..................... 1 3
------ ------
Balance, June 30.............................................. 1,043 900
------ ------
RETAINED EARNINGS
Balance, January 1............................................ 2,020 1,655
Net income.................................................... 295 259
Restricted stock grants, net of forfeitures................... (8) (5)
Cash dividends declared
Preferred stock.............................................. (19) (19)
Common stock................................................. (90) (59)
------ ------
Balance, June 30.............................................. 2,198 1,831
------ ------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
Balance, January 1............................................ 64 (40)
Change in net unrealized gain (loss) on securities available
for sale, net of tax......................................... (17) 17
------ ------
Balance, June 30.............................................. 47 (23)
------ ------
TREASURY STOCK
Balance, January 1............................................ (22) (27)
Purchases of treasury stock--5,405,000 shares in 1996......... (255) (28)
Treasury stock reissued
Dividend reinvestment and stock purchase plan--491,586 shares
in 1996..................................................... 23 9
Exercise of stock options--1,132,988 shares in 1996.......... 51 1
Conversion of subordinated debentures........................ 15
Acquisition of The Boston Bancorp--3,751,091 shares in 1996.. 181
Acquisition of Ganis Credit Corporation--153,741 shares in
1996........................................................ 7 21
Restricted stock grants--222,410 shares in 1996.............. 10 7
Other, principally employee benefit plans--138,542 shares in
1996........................................................ 5 2
------ ------
Balance, June 30..............................................
------ ------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, January 1............................................ (4) (6)
Translation adjustments, net of tax........................... (2) 4
------ ------
Balance, June 30.............................................. (6) (2)
------ ------
Total Stockholders' Equity, June 30........................... $3,960 $3,465
====== ======
The accompanying notes are an integral part of these financial statements.
7
BANK OF BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
1996 1995
SIX MONTHS ENDED JUNE 30 ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 295 $ 259
Reconciliation of net income to net cash used for operating
activities:
Provision for credit losses............................... 100 130
Depreciation and amortization............................. 54 108
Provision for deferred taxes.............................. 60 20
Net gains on sales of securities and other assets......... (229) (131)
Change in trading securities.............................. (540) (278)
Change in mortgages held for sale, net.................... 247 (196)
Net change in interest receivables and payables........... (22) 21
Other, net................................................ (37) (289)
------- -------
Net cash used for operating activities................... (72) (356)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided from interest bearing deposits in other
banks...................................................... 59 39
Net cash provided from (used for) federal funds sold and
securities purchased under agreements to resell............ (816) 427
Purchases of securities held to maturity.................... (50) (416)
Purchases of securities available for sale.................. (3,556) (1,781)
Sales of securities available for sale...................... 1,509 1,311
Maturities of securities held to maturity................... 25 287
Maturities of securities available for sale................. 603 468
Dispositions of venture capital investments................. 92 65
Loans and lease financing originated by nonbank entities.... (7,327) (3,669)
Loans and lease financing collected by nonbank entities..... 6,414 3,124
Proceeds from sales of loan portfolios by bank
subsidiaries............................................... 1,429
Net cash used for lending activities of bank subsidiaries... (1,002) (1,406)
Lease financing originated by bank entities................. (2) (2)
Lease financing collected by bank entities.................. 12 10
Proceeds from sales of other real estate owned.............. 15 23
Expenditures for premises and equipment..................... (104) (82)
Proceeds from sales of business units, premises and
equipment.................................................. 184 122
Other, net.................................................. (19) (65)
------- -------
Net cash used for investing activities.................. (3,963) (116)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided from (used for) deposits.................. 2,357 (2,235)
Net cash provided from funds borrowed, net.................. 1,206 2,685
Net repayments of notes payable............................. (122) (4)
Net proceeds from issuance of notes payable................. 615 40
Net proceeds from issuance of common stock.................. 56 28
Purchases of treasury stock................................. (255) (28)
Dividends paid.............................................. (109) (78)
------- -------
Net cash provided from financing activities............. 3,748 408
Effect of foreign currency translation on cash.............. (7) (1)
------- -------
Net change in cash and due from banks....................... (294) (65)
CASH AND DUE FROM BANKS AT JANUARY 1........................ 2,645 2,317
------- -------
CASH AND DUE FROM BANKS AT JUNE 30.......................... $ 2,351 $ 2,252
======= =======
Interest payments made...................................... $ 1,168 $ 1,243
Income tax payments made.................................... $ 156 $ 302
The accompanying notes are an integral part of these financial statements.
8
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. The accompanying interim consolidated financial statements of Bank of
Boston Corporation (the Corporation) are unaudited. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information contained herein have
been made. Certain amounts reported in prior periods have been reclassified
for comparative purposes. This information should be read in conjunction with
the Corporation's 1995 Annual Report on Form 10-K.
2. ACQUISITIONS AND DIVESTITURES:
In March 1996, the Corporation recognized a gain of $60 million, or $39
million net of tax, from the first phase of the sale of its mortgage banking
subsidiary to a newly formed independent mortgage company, HomeSide, Inc.
(HomeSide). The Corporation retained a 45% interest in the new company, and
two equity investment firms held the remaining interest. In May 1996, in the
second phase of the transaction, Barnett Mortgage Company was acquired by
HomeSide, resulting in an additional gain of $46 million, or $28 million net
of tax. As a result of these transactions, the Corporation, Barnett Banks and
the two equity investment firms each hold an approximate one-third interest in
HomeSide.
On June 28, 1996, the Corporation completed its acquisition of The Boston
Bancorp, the holding company of South Boston Savings Bank, a Massachusetts
chartered savings bank with $1.3 billion of deposits at June 30, 1996. The
Corporation exchanged 4.6 million shares of its common stock, with a value of
approximately $229 million, for all of the outstanding common stock of
Bancorp. The Corporation has purchased an equivalent amount of shares in the
open market for this transaction. The acquisition was accounted for as a
purchase and, accordingly, the assets and liabilities of Bancorp were recorded
at their estimated fair values as of the acquisition date. Goodwill resulting
from the transaction is being amortized over a ten-year period. The
acquisition has been included in the accompanying consolidated financial
statements since the acquisition date. Pro forma results of operations
including Bancorp for the six months ended June 30, 1996 and 1995 are not
presented since the results would not have been significantly different in
relation to the Corporation's results of operations.
On July 29, 1996, the Corporation completed its merger transaction with
BayBanks, Inc. (BayBanks). The Corporation issued 43.6 million shares of its
common stock in exchange for substantially all of the outstanding shares of
BayBanks common stock by exchanging 2.2 shares of its common stock for each
outstanding BayBanks share. The transaction was accounted for under the
pooling of interests method of accounting. Under this method, the historical
assets, liabilities and results of operations of BayBanks, as reported in its
consolidated financial statements, will be combined with the Corporation's
consolidated financial statements, for all periods presented, after
reclassifications are made to conform BayBanks classifications to those of the
Corporation, as if the Corporation and BayBanks had always operated as a
combined entity. The transaction is not reflected in the accompanying
consolidated financial statements since the merger occurred after the date of
such financial statements. In connection with the approval of the transaction
by regulatory authorities, the Corporation agreed to sell 20 branches of the
resulting combined entity, comprising a total of approximately $860 million in
deposits. The sale of these branches is expected to be completed in
approximately six months.
The following tables present supplemental condensed combined financial
information for the Corporation, giving effect to the BayBanks merger as a
pooling of interests as though the Corporation and BayBanks had been combined
as of the beginning of the earliest period presented. Certain historical data
of BayBanks have been reclassified to conform to the Corporation's
classifications. The supplemental condensed combined financial information
does not reflect anticipated merger and restructuring costs expected to be
incurred in connection with the merger, or the expected sale of branches
discussed above. The merger and restructuring costs, which were originally
estimated to be approximately $140 million ($83 million after-tax), continue
to be evaluated along with the estimated cost savings expected to result from
the integration of these two institutions, both of which are likely to
increase upon finalization of the integration plan. The supplemental condensed
combined financial information is not necessarily indicative of actual
financial position that may exist, or of actual results that may be obtained
in the future.
9
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED):
SUPPLEMENTAL CONDENSED COMBINED BALANCE SHEET
(IN MILLIONS)
JUNE 30 DECEMBER 31
1996 1995
------- -----------
ASSETS
Cash and due from banks.................................. $ 3,307 $ 3,561
Interest bearing deposits in other banks................. 1,192 1,356
Federal funds sold and securities purchased under
agreements to resell.................................... 2,516 1,548
Trading account securities............................... 1,732 1,159
Mortgages held for sale.................................. 23 910
Securities available for sale............................ 8,459 7,582
Securities held to maturity.............................. 686 660
Loans and leases......................................... 40,653 38,870
Reserve for credit losses................................ (894) (890)
Premises and equipment, net ............................. 856 832
Due from customers on acceptances........................ 473 360
Accrued interest receivable.............................. 555 554
Other assets............................................. 2,829 2,921
------- -------
TOTAL ASSETS............................................. $62,387 $59,423
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................. $43,494 $41,064
Funds borrowed........................................... 9,215 9,503
Acceptances outstanding.................................. 473 360
Accrued expenses and other liabilities................... 1,611 1,605
Notes payable............................................ 2,632 2,189
------- -------
TOTAL LIABILITIES........................................ 57,425 54,721
------- -------
Stockholders' equity:
Preferred stock......................................... 508 508
Common stock............................................ 235 350
Surplus................................................. 1,389 1,235
Retained earnings....................................... 2,785 2,553
Net unrealized gain on securities available for sale,
net of tax............................................. 51 82
Treasury stock, at cost................................. (22)
Cumulative translation adjustments, net of tax.......... (6) (4)
------- -------
TOTAL STOCKHOLDERS' EQUITY............................... 4,962 4,702
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $62,387 $59,423
======= =======
10
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED):
SUPPLEMENTAL CONDENSED COMBINED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------- -----------------
1996 1995 1996 1995
------- ------- -------- --------
INTEREST INCOME
Loans and lease financing, including fees.. $ 937 $ 962 $ 1,915 $ 1,857
Securities................................. 139 124 277 238
Trading securities......................... 52 44 93 85
Mortgages held for sale.................... 1 5 18 9
Federal funds sold and securities purchased
under agreements to resell................ 45 95 88 199
Deposits in other banks.................... 28 67 52 132
------- ------- -------- --------
Total interest income.................... 1,202 1,297 2,443 2,520
------- ------- -------- --------
INTEREST EXPENSE
Deposits of domestic offices............... 228 214 461 404
Deposits of overseas offices............... 198 258 385 479
Funds borrowed............................. 159 229 370 452
Notes payable.............................. 46 39 90 79
------- ------- -------- --------
Total interest expense................... 631 740 1,306 1,414
------- ------- -------- --------
NET INTEREST REVENUE......................... 571 557 1,137 1,106
Provision for credit losses.................. 57 46 114 143
------- ------- -------- --------
Net interest revenue after provision for
credit losses............................... 514 511 1,023 963
------- ------- -------- --------
NONINTEREST INCOME
Financial service fees..................... 134 155 185 301
Trust and agency fees...................... 62 63 119 121
Trading profits and commissions............ 25 7 38 9
Net securities gains....................... 4 17 6
Other income............................... 157 66 307 198
------- ------- -------- --------
Total noninterest income................. 382 291 666 635
------- ------- -------- --------
NONINTEREST EXPENSE
Salaries................................... 244 231 485 458
Employee benefits.......................... 49 51 101 101
Occupancy expense.......................... 50 47 101 94
Equipment expense.......................... 34 33 68 66
Other expense.............................. 154 149 302 292
------- ------- -------- --------
Total noninterest expense................ 531 511 1,057 1,011
------- ------- -------- --------
Income before income taxes................... 365 291 632 587
Provision for income taxes................... 151 123 263 264
------- ------- -------- --------
NET INCOME................................... $ 214 $ 168 $ 369 $ 323
======= ======= ======== ========
NET INCOME APPLICABLE TO COMMON STOCK........ $ 205 $ 159 $ 350 $ 304
======= ======= ======== ========
PER COMMON SHARE
Net income
Primary.................................... $ 1.33 $ 1.03 $ 2.27 $ 2.01
Fully diluted.............................. $ 1.32 $ 1.02 $ 2.24 $ 1.96
Dividends declared(1)........................ $ .44 $ .27 $ .81 $ .54
AVERAGE NUMBER OF COMMON SHARES (IN
THOUSANDS)
Primary.................................... 153,650 153,877 154,318 151,777
Fully diluted.............................. 155,183 155,529 156,018 155,248
- --------
(1) Combined dividends declared represent the historical cash dividends of the
Corporation
11
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES:
A summary comparison of securities available for sale by type is as follows:
JUNE 30, 1996 DECEMBER 31, 1995
--------------- -------------------
CARRYING CARRYING
COST VALUE COST VALUE
------ -------- -------- ----------
(IN MILLIONS)
U.S. Treasury.............................. $1,252 $1,243 $ 660 $ 665
U.S. government agencies and corporations--
Mortgage-backed securities................ 3,532 3,518 2,969 3,037
States and political subdivisions.......... 15 15 19 21
Foreign debt securities.................... 694 716 698 685
Other debt securities...................... 525 522 299 290
Marketable equity securities............... 157 234 100 152
Other equity securities.................... 182 182 164 164
------ ------ -------- --------
$6,357 $6,430 $ 4,909 $ 5,014
====== ====== ======== ========
Other equity securities included in securities available for sale are not
traded on established exchanges and are carried at cost.
A summary comparison of securities held to maturity by type is as follows:
JUNE 30, 1996 DECEMBER 31, 1995
-------------------- --------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(IN MILLIONS)
U.S. Treasury....................... $ 3 $ 3 $ 4 $ 4
U.S. government agencies and
corporations--Mortgage-backed
securities......................... 549 532 523 530
States and political subdivisions... 4 4 5 5
Foreign debt securities............. 11 11 11 11
Other equity securities............. 66 66 70 70
---- ---- ---- ----
$633 $616 $613 $620
==== ==== ==== ====
Other equity securities included in securities held to maturity represent
securities, such as Federal Reserve Bank and Federal Home Loan Bank stock,
which are not traded on established exchanges and have only redemption
capabilities. Fair values for such securities are considered to approximate
cost.
12
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LOANS AND LEASE FINANCING:
The following are the details of loan and lease financing balances:
JUNE 30 DECEMBER 31
1996 1995
------- -----------
(IN MILLIONS)
UNITED STATES OPERATIONS:
Commercial, industrial and financial.................. $11,682 $11,439
Commercial real estate:
Construction.......................................... 352 336
Other commercial...................................... 2,192 2,272
Consumer-related loans:
Residential mortgages................................. 1,978 2,105
Home equity loans..................................... 1,998 1,756
Other................................................. 4,299 3,397
Lease financing......................................... 1,461 1,409
Unearned income......................................... (219) (216)
------- -------
23,743 22,498
------- -------
INTERNATIONAL OPERATIONS:
Loans and lease financing............................. 9,198 8,606
Unearned income....................................... (56) (37)
------- -------
9,142 8,569
------- -------
$32,885 $31,067
======= =======
5. RESERVE FOR CREDIT LOSSES:
An analysis of the reserve for credit losses is as follows:
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------- ------------------
1996 1995 1996 1995
------- ------- -------- --------
(IN MILLIONS)
BALANCE, BEGINNING OF PERIOD............... $ 732 $ 696 $ 735 $ 680
Provision.................................. 50 40 100 130
Reserves of entities sold.................. (11) (32)
Reserve of acquired bank................... 2 2
Domestic credit losses:
Commercial, industrial and financial..... (6) (12) (10) (22)
Commercial real estate................... (3) (17) (16) (24)
Consumer-related loans:
Residential mortgages.................... (1) (2) (6) (6)
Home equity loans........................ (1) (2) (4) (4)
Other.................................... (28) (15) (52) (28)
International credit losses................ (14) (10) (23) (28)
------- ------- -------- -------
Total credit losses.................... (53) (58) (111) (112)
------- ------- -------- -------
Domestic recoveries:
Commercial, industrial and financial..... 2 3 6 4
Commercial real estate................... 2 3 3 4
Consumer-related loans:
Residential mortgages.................... 1
Home equity loans........................ 1 1 2
Other.................................... 5 5 10 11
International recoveries................... 4 2 8 5
------- ------- -------- -------
Total recoveries....................... 13 14 29 26
------- ------- -------- -------
Net credit losses.......................... (40) (44) (82) (86)
------- ------- -------- -------
BALANCE, END OF PERIOD..................... $ 744 $ 692 $ 744 $ 692
======= ======= ======== =======
13
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RESERVE FOR CREDIT LOSSES (CONTINUED):
At June 30, 1996, loans for which impairment has been recognized in
accordance with SFAS No. 114 totaled $253 million, of which $67 million
related to loans with no valuation reserve and $186 million related to loans
with a valuation reserve of $44 million. For the quarter and six months ended
June 30, 1996, average impaired loans were approximately $230 million and $218
million, respectively. Interest recognized on impaired loans during the second
quarter and six months ended June 30, 1996 was not material.
6. NOTES PAYABLE:
During the first quarter of 1996, the Corporation issued $125 million in
senior floating rate medium-term notes, due 1997, and $75 million in senior
floating rate medium-term notes, due 1999. During the second quarter of 1996,
the Corporation issued $150 million in senior floating rate medium-term notes,
due 1997, and $50 million in senior floating rate medium-term notes, due 1998.
The rates on these notes ranged from 5.41% to 5.66% at June 30, 1996. In June
1996, the Corporation's $100 million floating rate senior notes, issued in
1994, matured.
7. CONTINGENCIES:
The Corporation and its subsidiaries are defendants in a number of legal
proceedings arising in the normal course of business. Management, after
reviewing all actions and proceedings pending against or involving the
Corporation and its subsidiaries, considers that the aggregate loss, if any,
resulting from the final outcome of these proceedings should not be material
to the Corporation's financial statements.
8. CAPITAL CHANGES:
In April 1996, stockholders of the Corporation authorized an increase in the
authorized shares of the Corporation's common stock from 200 million shares,
par value $2.25 per share, to 300 million shares, par value $1.50 per share.
This change in par value resulted in the transfer of $84 million from common
stock to surplus in the accompanying consolidated balance sheet.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Corporation's net income for the quarter ended June 30, 1996 was $178
million, compared with net income of $133 million for the same period in 1995.
Net income per common share was $1.54 on a primary basis and $1.52 on a fully
diluted basis for the second quarter of 1996, compared with net income per
common share of $1.11 on a primary basis and $1.10 on a fully diluted basis
for the second quarter of 1995. Net income for the first half of 1996 was $295
million compared with $259 million for the first half of 1995. Net income per
common share was $2.50 on a primary basis and $2.46 on a fully diluted basis
for the first half of 1996, compared with $2.19 on a primary basis and $2.14
on a fully diluted basis for the first half of 1995.
On March 15, 1996, the Corporation completed its previously announced
transaction with two equity investment firms, in which the Corporation's
mortgage banking subsidiary, BancBoston Mortgage Corporation (BBMC), was sold
to a newly formed independent mortgage company, HomeSide, Inc. (HomeSide),
with the Corporation retaining a 45 percent interest in HomeSide. The second
phase of this transaction, in which Barnett Mortgage Company was acquired by
HomeSide, was completed during the second quarter of 1996, upon which the
Corporation, Barnett Bank and the equity investment firms now each hold an
approximate one-third interest in HomeSide. Under the agreement relating to
the sale of BBMC, the Corporation agreed to receive a fixed price of $225
million and maintain a risk management program designed to protect the
enterprise value of BBMC. Upon closing the first phase of the transaction in
the first quarter of 1996, the Corporation realized a gain of $60 million ($39
million after-tax). An additional gain of $46 million ($28 million after-tax)
was recognized in the second quarter of 1996 upon the closing of the second
phase of the transaction. The combined first and second quarter gains were
offset by an after-tax loss related to risk management activities of $111
million ($70 million after-tax) recorded in the first quarter of 1996 (see
"Noninterest Income" section).
On June 28, 1996, the Corporation completed its previously announced
acquisition of The Boston Bancorp (Bancorp), the holding company of South
Boston Savings Bank, a Massachusetts chartered savings bank with approximately
$1.3 billion in deposits. The Corporation exchanged 4.6 million shares of its
common stock, with a value of approximately $229 million, for all the
outstanding common stock of Bancorp. The Corporation has purchased an
equivalent amount of shares in the open market for this transaction. Since the
transaction was completed at the end of the second quarter and was accounted
for as a purchase, it had no effect on quarterly earnings.
On July 29, 1996, the Corporation completed its previously announced
acquisition of BayBanks, Inc. (BayBanks), a $12 billion bank holding company
based in Boston, in a tax-free exchange of stock, whereby the Corporation
exchanged 2.2 shares of its common stock for each share of BayBanks common
stock. The transaction was accounted for as a pooling of interests. To address
competitive issues raised by the Department of Justice and the Massachusetts
Attorney General in connection with this transaction, the Corporation agreed
to sell 20 branches having aggregate deposits of approximately $860 million,
which represented approximately 3 percent of the combined institutions'
Massachusetts deposits. The combination of the two Boston-based institutions
created a consumer and corporate banking entity operating in 36 states and 25
countries, with over $60 billion in assets and $40 billion in deposits.
Additional information on certain of these transactions can be found in Note
2 to the Financial Statements.
15
NET INTEREST REVENUE--(FULLY TAXABLE EQUIVALENT BASIS)
The discussion of net interest revenue should be read in conjunction with
Average Balances and Interest Rates and Change in Net Interest Revenue--Volume
and Rate Analysis appearing elsewhere in this report. For this review,
interest income that is either exempt from federal income taxes or taxed at a
preferential rate has been adjusted to a fully taxable equivalent basis. This
adjustment has been calculated using a federal income tax rate of 35 percent,
plus applicable state and local taxes, net of related federal tax benefits.
The following tables present summaries of net interest revenue, on a fully
taxable equivalent basis, and related average loans and lease financing and
average earning asset balances and net interest margin for United States and
International Operations:
CHANGE
1996 1995 AMOUNT
QUARTERS ENDED JUNE 30 ------- ------- ------
(DOLLARS IN MILLIONS)
United States Operations:
Net interest revenue................................. $ 308 $ 322 $ (14)
Average loans and lease financing.................... 23,416 23,099 317
Average earning assets............................... 29,708 28,471 1,237
Net interest margin.................................. 4.16% 4.54% (.38)%
International Operations:
Net interest revenue................................. $ 132 $ 114 $ 18
Average loans and lease financing.................... 8,856 7,829 1,027
Average earning assets............................... 12,732 10,499 2,233
Net interest margin.................................. 4.18% 4.35% (.17)%
Consolidated:
Net interest revenue................................. $ 440 $ 436 $ 4
Average loans and lease financing.................... 32,272 30,928 1,344
Average earning assets............................... 42,440 38,970 3,470
Net interest margin.................................. 4.17% 4.49% (.32)%
CHANGE
1996 1995 AMOUNT
SIX MONTHS SIX ENDED JUNE 30 ------- ------- ------
(DOLLARS IN MILLIONS)
United States Operations:
Net interest revenue................................. $ 619 $ 652 $ (33)
Average loans and lease financing.................... 23,013 22,923 90
Average earning assets............................... 29,425 28,063 1,362
Net interest margin.................................. 4.23% 4.69% (.46)%
International Operations:
Net interest revenue................................. $ 256 $ 211 $ 45
Average loans and lease financing.................... 8,802 7,605 1,197
Average earning assets............................... 12,597 10,420 2,177
Net interest margin.................................. 4.09% 4.08% .01%
Consolidated:
Net interest revenue................................. $ 875 $ 863 $ 12
Average loans and lease financing.................... 31,815 30,528 1,287
Average earning assets............................... 42,022 38,483 3,539
Net interest margin.................................. 4.19% 4.52% (.33)%
Domestic net interest revenue and margin decreased in both the quarterly and
six-month comparisons due to narrower spreads, in part, caused by the
aggressive marketing of a new higher-rate savings product which was first
introduced during the second quarter of 1995, the introduction of a
promotional-rate credit card product in the latter part of 1995, and lower
loan fees. Partially offsetting the decrease in net interest revenue was an
16
increase in average earning assets from the 1995 periods, including a change
in the mix of average earning assets consisting of loan and lease financing
growth coupled with even higher growth of other earning assets. The growth in
other average earning assets principally reflected increased securities
available for sale, mainly for asset and liability management purposes, and
increased trading securities resulting from the Corporation's Emerging Markets
business activities, which was partially offset by decreased mortgages held
for sale in the quarterly comparison as a result of the sale of the
Corporation's mortgage banking business. Since securities available for sale
and trading securities generally have lower yields than loans, the mix change
also contributed to the decline in domestic margin from the 1995 periods.
Internationally, the growth in net interest revenue of $18 million in the
quarterly comparison and $45 million in the six-month comparison was primarily
driven by the Corporation's Latin American operations. These increases
reflected an increase in average earning assets of $2.2 billion over the 1995
periods, including $1.0 billion and $1.2 billion increases in average loans
and lease financing in the quarterly and six-month comparisons, respectively.
International volume growth included approximately $600 million and $700
million in average loans and leases in Brazil in the quarterly and six-month
comparisons, respectively, and over $400 million and $100 million in average
loans and leases in Argentina and Chile, respectively, in both comparisons.
For both the quarterly and six-month comparisons, the impact of these volume
increases on net interest revenue was partially offset by lower Argentine net
interest margin, reflecting lower interest rates stemming from increasing
economic stability in that country, and mix changes in Argentina's average
earnings assets. The decline in interest rates and changes in mix in Argentina
were primarily responsible for the decrease in international margin in the
quarterly comparison; the impact of these factors on international margin in
the six-month comparison was offset by wider Brazilian and Chilean spreads, as
well as favorable mix changes in Brazil during the first quarter of 1996.
When compared to the first quarter of 1996, consolidated net interest
revenue increased $3 million and margin declined 4 basis points. The increase
in net interest revenue from the prior quarter reflected a higher volume of
average earning assets and a higher international margin, partially offset by
lower spreads from domestic operations. The latter reflected a lower level of
loan fees, which was mainly responsible for the modest decline in consolidated
margin from the first quarter.
The level of net interest revenue and margin reported for the quarter ended
June 30, 1996 is not necessarily indicative of future results. The Corporation
has experienced and could continue to experience pressure on its margin in the
future. Future levels of net interest revenue and margin will be affected by
competitive pricing pressure on retail deposits, loans and other products; the
mix and volume of assets and liabilities; the interest rate environment; the
economic and political situations in countries where the Corporation does
business; and other factors.
PROVISION FOR CREDIT LOSSES
The provision for credit losses in each quarter reflected management's
assessment of the adequacy of the reserve for credit losses, considering the
current risk characteristics of the loan portfolio and economic conditions.
The provision for credit losses was $50 million for the quarter ended June
30, 1996, compared with $40 million for the same period in 1995. For the six
months of 1996, the provision for credit losses was $100 million compared with
$130 million for the first six months of 1995, including a special provision
of $50 million in the first quarter of 1995 reflecting management's intent to
strengthen further the Corporation's loan loss reserve. The special provision
of $50 million recorded in the first quarter of 1995 related to the
uncertainty caused by economic events impacting the Argentine and Mexican
economies in the early part of 1995, and industry trends in consumer credit,
combined with the growth in the Corporation's Latin American lending and
domestic consumer lending portfolios.
The amount of future provisions will continue to be a function of the
regular quarterly review of the reserve for credit losses, based upon
management's assessment of risk at that time, and, as such, there can be no
assurance as to the level of future provisions.
17
NONINTEREST INCOME
The following table sets forth the components of noninterest income.
SECOND QUARTER SIX MONTHS
---------------- -----------------
1996 1995 CHANGE 1996 1995 CHANGE
---- ---- ------ ---- ---- ------
(IN MILLIONS)
Financial service fees
Deposit fees.............................. $ 29 $ 29 $ 60 $ 59 $ 1
Letter of credit and acceptance fees...... 15 16 $ (1) 31 35 (4)
Net mortgage servicing fees............... 27 (27) (91) 48 (139)
Loan-related fees......................... 20 17 3 40 30 10
Other financial service fees.............. 25 24 1 56 47 9
---- ---- ---- ---- ---- -----
Total financial service fees............ 89 113 (24) 96 219 (123)
Trust and agency fees....................... 55 57 (2) 106 110 (4)
Trading profits and commissions............. 24 6 18 37 7 30
Net securities gains........................ 4 4 17 6 11
Net equity and mezzanine profits............ 77 23 54 114 39 75
Net foreign exchange trading profits........ 11 16 (5) 23 28 (5)
Other income................................ 18 21 (3) 51 45 6
Gain (loss) on sales of businesses.......... 46 46 106 75 31
---- ---- ---- ---- ---- -----
Total................................... $324 $236 $ 88 $550 $529 $ 21
==== ==== ==== ==== ==== =====
Lower financial service fees during the first six months of 1996 reflected
$111 million of pre-tax losses ($70 million after-tax) from BBMC's risk
management activities, net of decreased mortgage servicing amortization,
recorded during the first quarter of 1996. These losses resulted from the
change in market value of contracts used to manage prepayment risk in the
mortgage servicing portfolio which, in turn, protected the economic value of
BBMC pending the completion of its sale to HomeSide. The value of mortgage
servicing rights is affected by the expected level of prepayments made by
mortgage holders resulting from changes in mortgage rates. The value of the
contracts purchased to manage this risk fluctuates inversely with the value of
the mortgage servicing assets. Due to the sharp increase in long-term interest
rates during the first quarter of 1996, the value of these contracts declined.
Concurrently, the value of the mortgage servicing assets and the amount of
gain to be recognized by the Corporation on the disposition of BBMC increased.
As a result, the losses from risk management activities were substantially
offset by the combined first and second quarter pre-tax gains of $106 million
($67 million after-tax) realized on the sale of BBMC, which are included in
gains on sales of businesses. Lower financial service fees also reflected a
reduction in net mortgage servicing fees of approximately $27 million due to
the sale of BBMC in March 1996.
Excluding net mortgage servicing fees, financial service fees increased $3
million in the quarterly comparison and $16 million in the six-month
comparison. These increases in financial service fees were primarily due to
increased loan-related fees in both the quarterly and six-month comparisons,
reflecting higher syndication fees generated by the Corporation's Global
Capital Markets business. Also, in the six-month comparison, higher advisory
and Latin American credit card fees generated the increase in other financial
service fees. Letter of credit and acceptance fees declined from the first
half of 1995 due to lower fees in Brazil, Asia and Europe.
Net equity and mezzanine profits increased significantly compared with the
prior year periods due to a higher level of gains realized on the dispositions
of investments primarily as a result of a seasoning of the portfolio and
favorable market conditions. The portfolio has been steadily growing and is
diversified as to industry, geography and type of investment. The lower trust
and agency fees reflected the Corporation's sale of its corporate trust
business and joint venture of its stock transfer business in the fourth
quarter of 1995. Excluding
18
the effects of these transactions, trust and agency fees increased by $10
million from the second quarter of 1995 and $19 million from the first half of
1995, mainly due to higher fees from the Corporation's Brazilian mutual fund
and domestic private banking businesses. Both of these areas are generating
higher volumes with mutual funds in Brazil growing to over $3.0 billion and
domestic personal assets under management now totaling approximately $17
billion. Compared to prior year periods, trading account profits and
commissions improved mainly due to increases from the Corporation's Global
Capital Markets and Latin American units. Net securities gains increased from
the prior year periods as certain domestic securities were sold as part of a
repositioning of the available for sale securities portfolio. Net foreign
exchange trading profits declined from the prior year periods reflecting lower
profits from Latin America and Asia.
The gain on sales of businesses in 1996 reflected the gain on the sale of
BBMC as discussed above, and, in 1995, reflected the sale of the Corporation's
Maine and Vermont banking subsidiaries for a gain of $75 million ($30 million
after-tax).
NONINTEREST EXPENSE
The following table sets forth the components of noninterest expense.
Information on the change in noninterest expense follows the table.
SECOND QUARTER SIX MONTHS
---------------- ----------------
1996 1995 CHANGE 1996 1995 CHANGE
---- ---- ------ ---- ---- ------
(IN MILLIONS)
Employee costs............................... $227 $220 $ 7 $456 $437 $19
Occupancy and equipment...................... 62 60 2 125 119 6
Other........................................ 116 109 7 227 214 13
---- ---- --- ---- ---- ---
Noninterest expense before OREO costs........ 405 389 16 808 770 38
OREO costs................................. 1 3 (2) 3 5 (2)
---- ---- --- ---- ---- ---
Total.................................... $406 $392 $14 $811 $775 $36
==== ==== === ==== ==== ===
The increase in noninterest expense came from ongoing expansion and
investment spending in several of the Corporation's growth businesses, mainly
Latin America, Global Capital Markets and Consumer Finance. Initiatives in
these units included: branch expansion and growth in fee-based businesses in
Latin America; the hiring of sales and trading professionals in all the Global
Capital Markets businesses, including the start-up of a high-yield debt unit;
and marketing campaigns related to credit card, home equity and other products
in Consumer Finance. Second quarter 1996 expense levels also included higher
incentive compensation costs related to improved business unit performance
along with higher litigation costs.
The comparisons of noninterest expense with the 1995 periods are affected by
the elimination of FDIC insurance premiums in 1996, which amounted to $11
million in the second quarter of 1995 and $23 million in the first half of
1995, and the absence of operating expenses associated with disposed
businesses, including BBMC and the corporate trust and stock transfer
businesses. Total staff levels declined by about 5 percent, or 900, from June
1995, principally due to the sale of BBMC and the joint venture of the stock
transfer business.
PROVISION FOR INCOME TAXES
The Corporation's tax provision was $128 million in the second quarter of
1996, compared with $105 million in the second quarter of 1995. For the first
six months of 1996, the Corporation's provision for income taxes was $216
million, compared with $225 million for the first six months of 1995,
including $45 million associated with the $75 million pre-tax gain on the
sales of its Maine and Vermont banking subsidiaries during the first quarter
of 1995. The high level of tax associated with this gain reflected the lower
tax bases in these
19
investments as a result of $35 million of non-tax deductible goodwill
associated with these subsidiaries. Excluding this gain and related tax
provision, the Corporation's effective tax rate in the first six months of
1995 was 44 percent, compared to an effective tax rate of 42 percent in the
first six months of 1996, the same rates as in the respective second quarters
of 1995 and 1996. The reduction in the effective tax rate reflected the effect
of mid-1995 changes in Massachusetts tax law which permit apportionment of a
bank's taxable income and reduce the state income tax rate for banks from 12.5
percent to 10.5 percent to be phased in over five years.
FINANCIAL CONDITION
CONSOLIDATED BALANCE SHEET
At June 30, 1996, the Corporation's total assets were $50.8 billion compared
with $47.4 billion at December 31, 1995. The $3.4 billion increase was due to
a higher level of earning assets, mainly loans and securities (see "Credit
Profile" below for a further discussion of loans). Contributing to this
increase was the Corporation's acquisition of Bancorp, which added $1.3
billion in domestic deposit liabilities and a comparable level of liquid
assets, primarily securities available for sale, to the June 30 balance sheet.
The increase in other earning assets of $400 million was primarily
attributable to an increase in overnight federal funds at June 30, and an
increase in trading securities, mainly in Brazil, partially offset by a
reduction in mortgages held for sale resulting from the sale of BBMC. The
decline in other assets reflected the removal of over $500 million of mortgage
servicing rights from the Corporation's balance sheet due to the sale of BBMC.
The Corporation's deposit levels increased $2.4 billion reflecting the
addition of $1.3 billion in deposits from the acquisition of Bancorp as well
as increases in wholesale deposit funding. The increase in wholesale deposit
funding was partially offset by declines in wholesale funding from FNBB's note
program. Notes payable increased approximately $500 million from December 31,
1995, mainly due to the issuance of medium-term notes by the Corporation and
additional subscriptions of Brazilian debt, partially offset by the maturity
of the Corporation's senior notes.
CREDIT PROFILE
A discussion of the Corporation's credit management policies is included on
page 28 of its 1995 Annual Report to Stockholders, which is incorporated by
reference into its 1995 Annual Report on Form 10-K.
The segments of the lending portfolio are as follows:
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30
1996 1996 1995 1995 1995
------- -------- ------- -------- -------
(IN MILLIONS)
United States Operations:
Commercial, industrial and
financial.................. $11,682 $11,361 $11,439 $11,789 $11,907
Commercial real estate:
Construction.............. 352 323 336 412 327
Other commercial.......... 2,192 2,096 2,272 2,303 2,489
Consumer-related loans:
Residential mortgages..... 1,978 2,109 2,105 3,333 3,243
Home equity loans......... 1,998 1,867 1,756 1,645 1,509
Other..................... 4,299 3,843 3,397 3,131 2,834
Lease financing............. 1,461 1,414 1,409 1,373 1,356
Unearned income............. (219) (217) (216) (216) (211)
------- ------- ------- ------- -------
23,743 22,796 22,498 23,770 23,454
------- ------- ------- ------- -------
International Operations:
Loans and lease financing,
net of unearned income..... 9,142 8,606 8,569 7,921 7,934
------- ------- ------- ------- -------
Total loan and lease fi-
nancing.................. $32,885 $31,402 $31,067 $31,691 $31,388
======= ======= ======= ======= =======
20
The $1.8 billion increase in loans and lease financing since December 31,
1995, reflected higher consumer-related loans, mainly credit card and home
equity loans, as well as higher commercial and industrial loans and
international loans, partially offset by declines in the residential mortgages
and commercial real estate loans. The $1.2 billion increase in domestic loans
primarily reflects the Corporation's reentry into the domestic credit card
business during the latter part of 1995, as well as the origination activities
of its home equity lending business and national consumer finance franchise.
The growth in commercial and industrial loans occurred in various regional and
national portfolios; loan levels are also affected by the timing of
syndication activity. The decline in residential mortgage loans reflected the
sale of approximately $300 million of loans in connection with the
Corporation's program to remove low-return assets from the balance sheet,
partially offset by the addition of residential mortgages to the balance sheet
upon completion of the Bancorp acquisition in late June. The increase in
international loans and lease financing reflected ongoing growth in the Latin
American portfolios, primarily those of Argentina and Brazil. A further
discussion of the Argentine and Brazilian operations is included in the
"Cross-Border Outstandings" section.
Approximately 65 percent of domestic commercial real estate loans were
located in New England at June 30, 1996, compared with approximately 70
percent at December 31, 1995. The portion of domestic commercial real estate
loans located outside of New England was dispersed among 22 and 25 states at
June 30, 1996 and December 31, 1995, respectively.
The Corporation's total loan portfolio at June 30, 1996 and December 31,
1995, included $1.3 billion of highly leveraged transaction (HLT) loans to 103
and 101 customers, respectively. The average HLT loan size at June 30, 1996
and December 31, 1995, was $13 million. The amount of unused commitments for
HLTs at June 30, 1996 was $697 million, compared with $639 million at December
31, 1995. The amount of unused commitments does not necessarily represent the
actual future funding requirements of the Corporation, since a portion can be
syndicated or assigned to others or may expire without being drawn upon. At
June 30, 1996 and December 31, 1995, there were no nonaccrual HLT loans. There
were no credit losses from HLT loans during the first half of 1996. The
Corporation does not currently anticipate a substantial increase in HLT
lending over the June 30, 1996 level.
A discussion of the Corporation's real estate and HLT lending activities,
policies and the effect of these activities on results of operations is
included on page 30 of its 1995 Annual Report to Stockholders, which is
incorporated by reference into its 1995 Annual Report on Form 10-K.
21
NONACCRUAL LOANS AND OREO
The details of consolidated nonaccrual loans and OREO are as follows:
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30
1996 1996 1995 1995 1995
------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
United States:
Commercial, industrial and fi-
nancial...................... $128 $ 79 $ 66 $105 $106
Commercial real estate:
Construction.................. 9 21 24 23 16
Other......................... 61 74 78 82 85
Consumer-related loans:
Residential mortgages......... 32 32 29 30 31
Home equity loans............. 19 15 14 16 14
Other......................... 37 39 32 30 21
---- ---- ---- ---- ----
286 260 243 286 273
---- ---- ---- ---- ----
International................... 57 63 66 69 66
---- ---- ---- ---- ----
Total nonaccrual loans...... 343 323 309 355 339
OREO............................ 44 48 50 62 78
---- ---- ---- ---- ----
Total....................... $387 $371 $359 $417 $417
==== ==== ==== ==== ====
Nonaccrual loans and OREO as a
percent of related asset
categories..................... 1.2% 1.2% 1.2% 1.3% 1.3%
The increase in nonaccrual loans and OREO from December 31, 1995, included
an increase in commercial and industrial nonaccrual loans, reflecting higher
nonaccrual loans in various portfolios, including the diversified, asset-based
and specialized finance portfolios as well as the New England corporate
banking portfolio. This increase was partially offset by continuing decreases
in commercial real estate nonaccrual loans and OREO. The level of nonaccrual
loans and OREO is influenced by the economic environment, interest rates, the
regulatory environment and other internal and external factors. The
Corporation expects that it will experience additional increases in its
nonaccrual loans; however, it believes that the level of its nonaccrual loans
and leases and OREO will remain within a reasonable range relative to its
asset levels.
RESERVE FOR CREDIT LOSSES
The reserve for credit losses at June 30, 1996 was $744 million, or 2.26
percent of outstanding loans and leases, compared with $736 million, or 2.37
percent, at December 31, 1995, and $692 million, or 2.20 percent at June 30,
1995. The reserve for credit losses was 217 percent of nonaccrual loans and
leases at June 30, 1996, compared with 238 percent at December 31, 1995, and
204 percent at June 30, 1995.
Net credit losses were $40 million for the second quarter of 1996, and $82
million for the first half of 1996. This compares with $44 million for the
second quarter of 1995, and $86 million for the first half of 1995. During the
second quarter and first six months of 1996, lower net credit losses from the
commercial real estate and commercial and industrial portfolios as well as
higher overall recoveries were offset, in part, by higher net credit losses
from the other consumer-related portfolio. Net credit losses from the other
consumer-related portfolio amounted to $23 million in the second quarter of
1996, compared to $20 million in the first quarter of 1996, and $10 million in
the second quarter of 1995. The increases in the quarterly and six-month
comparisons were principally due to higher net credit losses from the national
consumer finance portfolio. While international net credit losses increased in
the quarterly comparison, primarily due to higher net credit losses from the
Brazilian consumer loan portfolio, the decrease in international net credit
losses in the six-month comparison reflected lower net credit losses from the
loan portfolios in Argentina and Uruguay. As a percentage of average loans and
22
leases on an annualized basis, net credit losses were .50 percent in the
second quarter of 1996, compared with .54 percent for the first quarter of
1996, and .57 percent for the second quarter of 1995.
Net credit losses are as follows:
SECOND QUARTER SIX MONTHS
---------------- ------------
1996 1995 1996 1995
------- ------- ----- -----
(IN MILLIONS)
United States Operations:
Commercial, industrial and finan-
cial............................ $ 4 $ 9 $ 4 $ 18
Commercial real estate........... 1 14 13 20
Consumer-related loans:
Residential mortgages............ 1 2 5 6
Home equities.................... 1 1 3 2
Other............................ 23 10 42 17
------- ------- ----- -----
30 36 67 63
International Operations........... 10 8 15 23
------- ------- ----- -----
Total.......................... $ 40 $ 44 $ 82 $ 86
======= ======= ===== =====
CROSS-BORDER OUTSTANDINGS
At June 30, 1996 and December 31, 1995, total cross-border outstandings
represented 15 percent and 16 percent of consolidated total assets,
respectively. In accordance with the bank regulatory rules, cross-border
outstandings are:
.Amounts payable to the Corporation in U.S. dollars or other non-local
currencies.
.Amounts payable in local currency but funded with U.S. dollars or other
non-local currencies.
Included in these outstandings are deposits in other banks, resale
agreements, trading securities, securities available for sale, securities held
to maturity, loans and lease financing, amounts due from customers on
acceptances and accrued interest receivable.
In addition to credit risk, cross-border outstandings have the risk that, as
a result of political or economic conditions in a country, borrowers are
unable to meet their contractual payment obligations of principal and/or
interest when due because of the unavailability of, or restrictions on,
foreign exchange needed by borrowers to repay their obligations. The
Corporation manages its cross-border outstandings using country exposure
limits. A discussion of the Corporation's credit management policies is
included on page 28 of its 1995 Annual Report to Stockholders, which is
incorporated by reference into its 1995 Annual Report on Form 10-K.
Excluded from cross-border outstandings for a given country are:
. Local currency assets funded with U.S. dollars or other non-local
currency where the providers of funds agree that, in the event their
claims cannot be repaid in the designated currency due to currency
exchange restrictions in a given country, they may either accept payment
in local currency or wait to receive the non-local currency until such
time as it becomes available in the local market. At June 30, 1996, such
transactions related to emerging markets countries totaled $1.8 billion
compared with $1.3 billion at December 31, 1995.
. Local currency outstandings funded with local currency.
. U.S. dollar or other non-local currency outstandings reallocated as a
result of external guarantees or cash collateral.
. U.S. dollar or other non-local currency outstandings reallocated as a
result of insurance contracts, primarily issued by U.S. government
agencies.
23
Cross-border outstandings in countries which individually amounted to 1.0
percent or more of consolidated total assets at June 30, 1996 and December 31,
1995 were approximately as follows:
CONSOLIDATED PERCENTAGE OF
PUBLIC BANKS OTHER TOTAL TOTAL ASSETS COMMITMENTS (2)
------ ----- ------ ------------ ------------- ---------------
(DOLLARS IN MILLIONS)
June 30, 1996(1)
Argentina............. $610 $15 $1,810 $2,435 4.8% $35
Brazil................ 15 70 745 830 1.6 30
Chile................. 140 195 270 605 1.2 25
December 31, 1995(1)
Argentina............. $465 $50 $1,710 $2,225 4.7% $45
Brazil................ 25 20 980 1,025 2.2 35
Chile................. 150 125 365 640 1.4 15
United Kingdom........ 100 570 670 1.4 130
- --------
(1) Cross-border outstandings in countries which fell within .75 percent and 1
percent of consolidated total assets at June 30, 1996 and December 31,
1995, were approximately as follows: United Kingdom $415 million at June
30, 1996; South Korea $395 million at June 30, 1996 and $365 million at
December 31, 1995.
(2) Included within commitments are letters of credit, guarantees and the
undisbursed portion of loan commitments.
To comply with the regulatory definition of cross-border outstandings, the
Corporation included approximately $1.2 billion and $1.3 billion of
Argendollar outstandings in its cross-border totals for Argentina at June 30,
1996 and December 31, 1995, respectively. These outstandings are payable to
the Corporation in U.S. dollars, which are funded entirely by dollars borrowed
within Argentina.
EMERGING MARKETS COUNTRIES
At June 30, 1996, approximately $4.8 billion of the Corporation's cross-
border outstandings, or approximately 9.4 percent of total assets, were to
emerging markets countries, of which $4.6 billion were to countries in which
the Corporation maintains a branch network and/or subsidiaries. Total cross-
border outstandings at December 31, 1995 were $4.6 billion. These cross-border
outstandings, of which approximately 78 percent were loans at June 30, 1996,
were mainly comprised of short-term trade credits, non-trade-related loans and
leases not subject to country debt rescheduling agreements, government
securities and capital investments in branches and subsidiaries.
ARGENTINA AND BRAZIL
During the first half of 1996, the Argentine economy continued to improve
slowly with the government's announcement of a series of political and
economic measures aimed at stimulating growth. Total deposits in the country's
financial system have grown by an average of approximately 16 percent in the
first six months of 1996, while loans are recovering more gradually. The
Corporation's Argentine deposits increased approximately $225 million from
December 31, 1995, and its loans increased by approximately $300 million from
December 31, 1995, including increases in both commercial and consumer
lending. The level of Argentine nonaccrual loans declined from $52 million at
December 31, 1995, to $41 million at June 30, 1996, and net credit losses also
declined from $13 million in the first six months of 1995, to $9 million in
the first six months of 1996.
In July 1996, Argentine Economic Minister Cavallo resigned and was replaced
by a newly appointed Economic Minister, Mr. Roque Fernandez, who very recently
announced a series of new economic measures designed to reduce the country's
fiscal deficit through increased fuel prices and taxes, and reductions in
24
government spending. The Corporation plans to monitor and assess any future
impact that these measures may have on the Argentine economy and banking
system.
During the second quarter of 1996, Brazil's inflation averaged 1.3 percent
per month compared with .5 percent per month during the first quarter of 1996.
However, average monthly inflation during the first six months of 1996
compares favorably to average monthly inflation of 1.9 percent in 1995. The
Brazilian government continues to manage closely the country's exchange rate
policy. The exchange rate at June 30, 1996 was 1 Real to the U.S. dollar.
Certain local Brazilian banks experienced liquidity and other problems in
1995, which continued into the first half of 1996. This has generally resulted
in customers moving their funds to banks perceived to have more stability,
contributing, in part, to the increases in the Corporation's deposit and
mutual funds levels. The Corporation's deposit levels in Brazil increased from
December 31, 1995 by over $400 million, or 50 percent, to approximately $850
million at June 30, 1996. Additionally, the Corporation's mutual funds under
management in Brazil increased by approximately $800 million from December 31,
1995, to $3.3 billion at June 30, 1996.
The Corporation's loan level in Brazil increased by approximately $270
million from December 31, 1995, to $2.5 billion at June 30, 1996, including
increases from various segments of the loan portfolio. Net credit losses
increased from $1 million in the first quarter of 1996, to $4 million in the
second quarter of 1996, reflecting higher credit losses from the consumer
portfolio. Nonaccrual loans and OREO remained flat with the first quarter of
1996 at $12 million, which compared to $8 million for the fourth quarter of
1995.
During the second quarter of 1996, the Corporation's Argentine and Brazilian
operations continued to structure their balance sheets to take positions in
their local currencies as deemed appropriate. Such positions are taken when
the Corporation believes that it can maximize its spread from interest
operations by funding local currency assets with U.S. dollars rather than
using local currency liabilities or by funding U.S. dollar assets with local
currency liabilities. The average currency positions for Argentina and Brazil
during the second quarter of 1996 were $112 million and $32 million,
respectively, compared to $56 million and $112 million, respectively, in the
first quarter of 1996. Additionally, the Corporation maintained average
positions in Chile and Korea of $23 million and $101 million, respectively,
during the second quarter of 1996, which compared to $13 million and $92
million, respectively, during the first quarter of 1996. Currency positions
are actively managed and, therefore, it is not unusual for levels to fluctuate
from period to period. To date, these positions have been liquid in nature and
local management has been able to close and re-open these positions as
necessary. For additional information related to the Corporation's currency
positions, see page 37 of the Corporation's 1995 Annual Report to
Stockholders, which is incorporated by reference into its 1995 Annual Report
on Form 10-K.
The economic situation in Latin America can be volatile, including the
effect of world financial markets on these economies. As such, changes in the
economies of the Latin American countries in which the Corporation does
business could have an impact on the Corporation in the future. The
Corporation has not experienced any collection problems as a result of
currency restrictions or foreign exchange liquidity problems on its current
portfolio of cross-border outstandings to emerging markets countries. However,
if actions implemented by Latin American governments do not remain effective
over time, particularly with regard to liquidity, the Corporation's operations
could experience adverse effects, including stress on liquidity, deterioration
of credit quality, a decline in the value of its securities portfolio and
declines in loan and deposit levels. The Corporation will continue to monitor
the economies of Latin American countries in which it has local operations,
cross-border outstandings and/or currency positions. Each emerging markets
country is at a different stage of development with a unique set of economic
fundamentals; therefore, it is not possible to predict what developments will
occur and what impact these developments will ultimately have on the economies
of these countries or on the Corporation's financial statements. For
additional information related to the Corporation's Latin American cross-
border outstandings, see pages 35 through 38 of the Corporation's 1995 Annual
Report to Stockholders, which is incorporated by reference into its 1995
Annual Report on Form 10-K.
25
LIQUIDITY MANAGEMENT
The Corporation's liquid assets, which consist primarily of interest bearing
deposits in other banks, federal funds sold and resale agreements, money
market loans and unencumbered U.S. Treasury and government agency securities,
stood at $6.6 billion at June 30, 1996, compared with $5.8 billion at December
31, 1995. Also, the Corporation has access to additional funding through the
public markets. Management considers overall liquidity at June 30, 1996 to be
adequate to meet current obligations, support expectations for future changes
in asset and liability levels and carry on normal operations. For additional
information related to the Corporation's liquidity management, see pages 38
and 39 of the Corporation's 1995 Annual Report to Stockholders, which is
incorporated by reference into its 1995 Annual Report on Form 10-K.
INTEREST RATE RISK
Interest rate risk is defined as the exposure of the Corporation's net
income or financial position to adverse movements in interest rates. The
Corporation manages its interest rate risk within policies and limits
established by the Asset and Liability Management Committee (ALCO) and
approved by the Board of Directors (Board). ALCO issues strategic directives
to specify the extent to which Board-approved rate risk limits are utilized,
taking into account the results of the rate risk modeling process as well as
other internal and external factors.
Interest rate risk related to non-trading, U.S. dollar denominated
positions, which represents a significant portion of the consolidated balance
sheet at June 30, 1996, is managed centrally through the Boston Treasury
Group. Interest rate risk associated with these positions is evaluated and
managed through several modeling methodologies. The two principal
methodologies used are market value sensitivity and net interest revenue at
risk. The results of these models are reviewed monthly with ALCO and at least
quarterly with the Board.
These methodologies are designed to isolate the effects of market changes in
interest rates on the Corporation's existing positions, and they exclude other
factors, such as competitive pricing considerations, future changes in asset
and liability mix and other management actions and, therefore, are not by
themselves measures of future levels of net interest revenue.
These two methodologies provide different but complementary measures of the
level of interest rate risk: the longer term view is modeled through market
value sensitivity, while the shorter term view is evaluated through net
interest revenue at risk over the next twelve months. Under current ALCO
directives, market value sensitivity cannot exceed 4 percent of risk-based
capital and net interest revenue at risk cannot exceed 2 percent of net
interest revenue over the next twelve-month period. The ALCO market value
sensitivity directive was increased during the current quarter from 3 percent
of risk-based capital at March 31, 1996. The following table shows the
Corporation's market value sensitivity and net interest revenue at risk
positions at June 30, 1996 and December 31, 1995, respectively.
MARKET VALUE SENSITIVITY AND NET INTEREST REVENUE AT RISK POSITIONS
JUNE 30, 1996 DECEMBER 31, 1995
--------------------- ---------------------
QUARTERLY QUARTERLY
QUARTER-END AVERAGE QUARTER-END AVERAGE
----------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
Market Value Sensitivity
(1)...................... $146 $160 $87 $84
% of risk-based capital.. 2.7% 3.0% 1.6% 1.6%
- -------------------------------------------------------------------------------
Net Interest Revenue at
Risk (2)................. $ 20 $ 22 $24 $21
% of net interest reve-
nue...................... 1.1% 1.3% 1.4% 1.2%
26
- --------
(1) Based on a 100 basis point adverse interest rate shock.
(2) Based on the greater of a 100 basis point adverse interest rate shock or a
200 basis point adverse change in interest rates over the next twelve-
month period. At June 30, 1996, the adverse position was based upon a 100
basis point upward interest rate shock. At December 31, 1995, the adverse
position was based upon a 200 basis point decline in interest rates over
the next twelve-month period. See further discussion below.
At June 30, 1996, the Corporation's adverse market value sensitivity was to
rising interest rates. The increase in the market value sensitivity position
since December 31, 1995, was primarily due to an increase in fixed rate assets
and, therefore, lengthening asset durations, and the termination of $8.2
billion of a series of interest rate futures contracts during the first
quarter of 1996 that were linked to the Corporation's short-term floating rate
wholesale funding.
The Corporation's adverse net interest revenue at risk position was to
rising interest rates at June 30, 1996, and to declining rates at December 31,
1995. The change in exposure is primarily due to changes in the terms and
repricing characteristics of balance sheet and off-balance sheet items at a
specific point in time, including the termination of the series of futures
contracts discussed above, which resulted in an increase in floating rate
liabilities.
The market value sensitivity and the net interest revenue at risk positions
were in compliance with ALCO directives during the quarter ended June 30,
1996. The level of exposure maintained by the Corporation is a function of the
market environment and will change from period to period based on interest
rate and other economic expectations.
Non-U.S. dollar denominated interest rate risk is managed by the
Corporation's overseas units, with oversight by the Treasury group in Boston.
The Corporation, through ALCO, has established limits for its non-U.S. dollar
denominated interest rate risk using cumulative gap limits for each country in
which the Corporation has local market interest rate risk. During the second
quarter of 1996, the cumulative gap positions in each country were within ALCO
limits. The level of interest rate risk positions taken by the overseas units
varies based on economic conditions in the country at the particular point in
time.
Additional information with respect to the Corporation's management of
interest rate risk is included on pages 39 to 43 of the Corporation's 1995
Annual Report to Stockholders which is incorporated by reference in its 1995
Annual Report on Form 10-K.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation utilizes a variety of financial instruments to manage
interest rate risk, including derivatives and securities. Derivatives provide
the Corporation with significant flexibility in managing its interest rate
risk exposure, enabling it to manage risk efficiently and respond quickly to
changing market conditions by minimizing the impact on balance sheet leverage.
The Corporation routinely uses non-leveraged rate-related derivative
instruments, primarily interest rate swaps and futures, as part of its asset
and liability management practices. All derivative activities are managed on a
comprehensive basis, are included in the overall market value sensitivity and
net interest revenue at risk measures and limits described above, and are
subject to credit standards similar to those for balance sheet exposures.
27
The following table summarizes the notional amounts and fair values of
interest rate derivatives and foreign exchange contracts included in the
Corporation's asset and liability management portfolio.
JUNE 30, 1996 (1) DECEMBER 31, 1995 (1)
----------------------------------------------- ------------------------------------------------
FAIR VALUE (2)(3) FAIR VALUE (2)(3)
NOTIONAL -------------------- UNRECOGNIZED (4) NOTIONAL --------------------- UNRECOGNIZED (4)
AMOUNT ASSET LIABILITY GAIN (LOSS) AMOUNT ASSET LIABILITY GAIN (LOSS)
-------- -------- ---------- ---------------- -------- --------- ---------- ----------------
(DOLLARS IN MILLIONS)
Interest rate contracts
Futures and forwards.. $ 2,846 $ 6 $(69) $12,518 $ 10 $(89)
Interest rate swaps... 7,037 28 63 (21) 5,828 92 7 102
Interest rate options
Purchased............. 277 (3) 3,968 119 2
Written or sold....... 360 34
------- -------- -------- ---- ------- --------- -------- ----
Total interest rate con-
tracts................. $10,160 $ 28 $ 69 $(93) $22,674 $ 211 $ 51 $ 15
======= ======== ======== ==== ======= ========= ======== ====
Foreign exchange spot
and forward contracts
(5).................... $ 1,218 $ 9 $ 2 $ 7 $ 1,257 $ 3 $ 5 $ (2)
------- -------- -------- ---- ------- --------- -------- ----
Total foreign exchange
contracts.............. $ 1,218 $ 9 $ 2 $ 7 $ 1,257 $ 3 $ 5 $ (2)
======= ======== ======== ==== ======= ========= ======== ====
- --------
(1) Contracts under master netting agreements are shown on a net basis.
(2) Fair value represents the amount at which a given instrument could be
exchanged in an arms length transaction with a third party as of the
balance sheet date. The majority of derivatives that are part of the ALM
portfolio are accounted for on the accrual basis, and not carried at fair
value. In certain cases, contracts, such as futures, are subject to daily
cash settlements; as such, the fair value of these instruments is zero.
(3) The credit exposure of interest rate derivatives and foreign exchange
contracts at June 30, 1996 and December 31, 1995, is represented by the
fair value of contracts reported in the "Asset" column.
(4) Unrecognized gain or loss represents the amount of gain or loss, based on
fair value, that has not been recognized in the income statement at the
balance sheet date. This includes amounts related to contracts which have
been terminated. Such amounts are recognized as an adjustment of yield of
the linked assets or liabilities over the period being managed. At June
30, 1996, there were $23 million of unrecognized gains and $49 million of
unrecognized losses related to terminated contracts that are being
amortized as an adjustment of the yield of the assets or liabilities to
which they were linked over a weighted average period of 31 months and 18
months, respectively. At December 31, 1995, unrecognized gains of $32
million and unrecognized losses of $2 million related to terminated
contracts were being amortized over weighted average periods of 32 months
and 23 months, respectively.
(5) Foreign exchange spot and forward contracts are used to manage the risk
related to foreign exchange transactions in the Corporation's overseas
operations.
The decrease in fair value of interest rate derivative contracts, as
reflected in the change from a net unrecognized gain of $15 million at
December 31, 1995, to a net unrecognized loss of $93 million at June 30, 1996,
was primarily due to an increase in long-term interest rates during the first
and second quarters, which principally impacted the receive fixed interest
rate swap portfolio and resulted in a decline in its fair value.
The Corporation's utilization of derivative instruments is modified from
time to time in response to changing market conditions, as well as changes in
the characteristics and mix of the Corporation's related assets and
liabilities. In this respect, during the first quarter the Corporation
terminated $8.2 billion of a series of interest rate futures contracts that
were linked to the Corporation's continuing need for short-term wholesale
funding. The remaining unrecognized loss of $48 million at June 30, 1996
related to the terminated futures contracts is being amortized to net interest
revenue as an adjustment of the yield of the short-term liabilities to which
they were linked over the remainder of the period that was being managed.
28
The following table summarizes the remaining maturity of interest rate
derivative financial instruments entered into for asset and liability
management purposes as of June 30, 1996.
REMAINING MATURITY
--------------------------------------------------------------
JUNE 30, DECEMBER 31,
1996 1995
1996 1997 1998 1999 2000 2001+ TOTAL TOTAL
------ ---- ---- ---- ---- ------ -------- ------------
(DOLLARS IN MILLIONS)
INTEREST RATE SWAPS
Domestic
Receive fixed rate
swaps(1)
Notional amount........ $ 172 $201 $ 60 $340 $1,500 $ 2,273 $ 2,453
Weighted average
receive rate.......... 5.91% 8.20% 5.60% 5.50% 6.38% 6.35% 6.35%
Weighted average pay
rate.................. 5.48% 5.51% 5.40% 5.52% 5.51% 5.51% 5.86%
Pay fixed rate swaps(1)
Notional amount........ $ 53 $ 3 $ 32 $ 2 $ 42 $ 36 $ 168 $ 301
Weighted average
receive rate.......... 5.41% 6.07% 5.75% 5.12% 5.52% 5.57% 5.54% 6.19%
Weighted average pay
rate.................. 5.74% 7.36% 8.71% 7.15% 7.11% 7.08% 6.98% 6.81%
Basis swaps(2)
Notional amount........ $ 471 $ 75 $ 50 $ 50 $ 297 $ 943 $ 1,599
Weighted average
receive rate.......... 5.49% 5.60 5.53 5.83% 5.89% 5.65% 5.97%
Weighted average pay
rate.................. 5.46% 5.52 5.47 5.58% 5.67% 5.54% 5.86%
Total Domestic Interest
Rate Swaps
Notional amount........ $ 696 $279 $142 $ 2 $432 $1,833 $ 3,384 $ 4,353
Weighted average
receive rate(3)....... 5.59% 7.48% 5.61% 5.12% 5.54% 6.28% 6.12% 6.20%
Weighted average pay
rate(3)............... 5.49% 5.53% 6.17% 7.15% 5.68% 5.57% 5.59% 5.93%
Total International
Interest Rate Swaps
Notional Amount(4)..... $3,653 $ 3,653 $ 1,475
OTHER DERIVATIVE
PRODUCTS
Futures and
forwards(5)........... $2,846 $ 2,846 $12,518
Interest rate
options(6)
Purchased............. 277 277 3,968
Written or sold....... 360
------ ---- ---- ---- ---- ------ ------- -------
Total Consolidated
Notional Amount........ $7,472 $279 $142 $ 2 $432 $1,833 $10,160 $22,674
====== ==== ==== ==== ==== ====== ======= =======
- --------
(1) Of the receive fixed rate swaps, $1 billion were linked to floating rate
loans, and the remainder principally to fixed rate notes payable. Of the
swaps linked to notes payable, approximately $1 billion are scheduled to
mature in 2001 and thereafter. The majority of pay fixed rate swaps are
linked to fixed rate securities and short-term bank notes.
(2) Basis swaps represent swaps where both the pay rate and receive rate are
floating rates. The majority of basis swaps are linked to short-term bank
notes and floating rate mortgages.
(3) The majority of the Corporation's interest rate swaps accrue at LIBOR
(London Interbank Offered Rate). In arriving at the variable weighted
average receive and pay rates, LIBOR rates in effect as of June 30, 1996
have been implicitly assumed to remain constant throughout the terms of
the swaps. Future changes in LIBOR rates would affect the variable rate
information disclosed.
(4) The majority of the international portfolio is comprised of swaps entered
into by the Corporation's Brazilian operation with a weighted average
maturity of less than 90 days. These swaps typically include the exchange
of floating rate indices that are limited to the Brazilian market.
(5) At December 31, 1995, the majority of the futures used by the Corporation
were linked to short-term liabilities and were exchange-traded
instruments. The reference instruments for these contracts comprise the
major types available, such as Eurodollar deposits and U.S. Treasury
notes. During the first quarter of 1996, the Corporation terminated a
series of futures contracts which accounts for the majority of the decline
from December 31, 1995 (see discussion above). The majority of the futures
contracts at June 30, 1996 were entered into by the Corporation's
Brazilian operation and are linked to short-term interest bearing assets
and liabilities. Average rates are not meaningful for these products.
(6) At December 31, 1995, primarily includes interest rate options used to
manage prepayment risk related to the mortgage servicing portfolio of the
Corporation's mortgage banking subsidiary which was sold in the first
quarter of 1996.
29
Derivatives not used for asset and liability management are included in the
derivatives trading portfolio. The primary focus of the Corporation's
derivatives trading activities is related to providing risk management
products to its customers.
The following table summarizes the notional amounts and fair values of
interest rate derivatives and foreign exchange contracts included in the
Corporation's trading portfolio.
JUNE 30, 1996 (1) DECEMBER 31, 1995 (1)
------------------------ ------------------------
FAIR FAIR
VALUE (2)(3)(4) VALUE (2)(3)(4)
NOTIONAL --------------- NOTIONAL ---------------
AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY
-------- ----- --------- -------- ----- ---------
(DOLLARS IN MILLIONS)
Interest rate contracts
Futures and forwards....... $46,415 $ 45 $ 47 $30,789
Interest rate swaps........ 8,214 49 65 9,169 $ 91 $ 80
Interest rate options
Purchased................. 5,287 10 3,411 9
Written or sold........... 6,210 11 3,986 9
------- ---- ---- ------- ---- ----
Total interest rate con-
tracts.................. $66,126 $104 $123 $47,355 $100 $ 89
======= ==== ==== ======= ==== ====
Foreign exchange contracts
Spot and forward
contracts................. $17,510 $177 $179 $13,072 $171 $167
Options purchased.......... 895 17 1,044 13
Options written or sold.... 831 16 1,130 16
------- ---- ---- ------- ---- ----
Total foreign exchange
contracts............... $19,236 $194 $195 $15,246 $184 $183
======= ==== ==== ======= ==== ====
- --------
(1) Contracts under master netting agreements are shown on a net basis.
(2) Fair value represents the amount at which a given instrument could be
exchanged in an arms length transaction with a third party as of the
balance sheet date. The fair value amounts of the trading portfolio are
included in other assets or other liabilities, as applicable. In certain
cases, contracts, such as futures, are subject to daily cash settlements;
as such, the fair value of these instruments is zero.
(3) The credit exposure of interest rate derivatives and foreign exchange
contracts at June 30, 1996 and December 31, 1995 is represented by the
fair value of contracts reported in the "Asset" column.
(4) The average asset and liability fair value amounts for interest rate
contracts included in the trading portfolio for the quarters ended June
30, 1996 and December 31, 1995 were $113 million and $123 million,
respectively, and $89 million and $71 million, respectively. The average
asset and liability fair value amounts for foreign exchange contracts
included in the trading portfolio were $185 million and $186 million,
respectively, for the quarter ended June 30, 1996, and $233 million and
$222 million, respectively, for the quarter-ended December 31, 1995.
Net trading gains from interest rate derivatives for the quarter and six
months ended June 30, 1996 were $2 million and $7 million, respectively, and
for the quarter and six months ended June 30, 1995 were $3 million and $4
million, respectively. Net trading gains from foreign exchange activities,
which include foreign exchange spot, forward and option contracts, for the
quarter and six months ended June 30, 1996 were $11 million and $23 million,
respectively, and for the quarter and six months ended June 30, 1995 were $16
million and $28 million, respectively.
Additional information on the Corporation's derivative products, including
accounting policies, is included on pages 40 to 42 of, and in Notes 1 and 20
to the Financial Statements in, the Corporation's 1995 Annual Report to
Stockholders, which is incorporated by reference in its 1995 Annual Report on
Form 10-K.
30
CAPITAL
The Corporation's Tier 1 and total capital ratios were 7.9 percent and 12.5
percent, respectively, at June 30, 1996, compared with 8.0 percent and 12.8
percent, respectively, at December 31, 1995. The Corporation's leverage ratio
at June 30, 1996 was 7.6 percent compared with 7.4 percent at December 31,
1995.
As of June 30, 1996, the capital ratios of the Corporation and all of its
banking subsidiaries exceeded the minimum capital ratio requirements of the
"well capitalized" category under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). The capital categories of the Corporation's
banking subsidiaries are determined solely for purposes of applying FDICIA's
provisions and, accordingly, such capital categories may not constitute an
accurate representation of the overall financial condition or prospects of any
of the Corporation's banking subsidiaries.
At June 30, 1996, total stockholders' equity stood at $4.0 billion, which
compared to $3.8 billion at December 31, 1995. The increase in stockholders'
equity primarily reflects the Corporation's retention of earnings during the
first half of 1996. During the first six months of 1996, the Corporation
purchased 5.4 million shares of its common stock in the open market, all of
which were reissued at June 30, 1996. In addition, during July the Corporation
repurchased shares on the open market equal to the amount issued in the
Bancorp acquisition, after which the Board voted to terminate any remaining
authority for the Corporation to buyback its shares.
In July 1996, the Board declared a quarterly common stock dividend of $.44
per share, payable on August 30, 1996, to stockholders of record on August 5,
1996. The payment and level of future common dividends will continue to be
determined by the Board based on the Corporation's financial condition, recent
earnings history and other factors.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This standard is based on a financial-
components approach under which an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred as a result
of a transfer of financial assets, and derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
This standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and must be
applied prospectively. The Corporation does not expect that, upon adoption,
this standard will have a material effect on its consolidated financial
statements.
31
CONSOLIDATED BALANCE SHEET AVERAGES BY QUARTER
LAST NINE QUARTERS
1994 1995 1996
----------------------- ------------------------------- ---------------
2 3 4 1 2 3 4 1 2
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS)
ASSETS
Interest bearing
deposits in other
banks.................. $ 902 $ 1,131 $ 1,062 $ 1,262 $ 1,309 $ 1,249 $ 1,350 $ 1,309 $ 1,312
Federal funds sold and
securities purchased
under agreements to
resell................. 3,485 2,595 1,711 1,364 1,166 824 746 1,249 1,341
Trading securities...... 402 618 750 694 787 867 864 1,107 1,569
Mortgages held for
sale................... 824 651 315 256 254 478 737 930 31
Securities.............. 3,164 3,489 4,435 4,288 4,526 4,824 5,247 5,653 5,915
Loans and lease
financing.............. 29,105 30,362 31,076 30,123 30,928 31,625 31,763 31,357 32,272
------- ------- ------- ------- ------- ------- ------- ------- -------
Total earning
assets.............. 37,882 38,846 39,349 37,987 38,970 39,867 40,707 41,605 42,440
Other assets............ 4,820 5,079 5,051 4,858 5,131 5,318 5,526 5,409 4,647
------- ------- ------- ------- ------- ------- ------- ------- -------
Total assets......... $42,702 $43,925 $44,400 $42,845 $44,101 $45,185 $46,233 $47,014 $47,087
======= ======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Domestic offices:
Noninterest bearing.... $ 4,403 $ 4,477 $ 4,701 $ 4,194 $ 4,196 $ 4,291 $ 4,457 $ 4,519 $ 4,278
Interest bearing....... 16,672 17,309 17,388 15,827 16,228 16,686 17,152 17,107 17,084
Overseas offices:
Noninterest bearing.... 393 415 481 415 416 501 492 499 465
Interest bearing....... 6,764 7,703 7,875 8,318 7,967 7,790 8,202 8,698 9,302
------- ------- ------- ------- ------- ------- ------- ------- -------
Total deposits....... 28,232 29,904 30,445 28,754 28,807 29,268 30,303 30,823 31,129
Federal funds purchased
and repurchase
agreements............. 4,014 3,728 3,333 3,699 3,896 3,310 3,892 3,417 4,324
Other funds borrowed.... 4,124 3,633 3,861 3,585 4,278 5,369 4,620 5,010 3,655
Notes payable........... 1,957 1,987 2,141 2,133 2,062 2,065 2,109 2,374 2,584
Other liabilities....... 1,404 1,625 1,491 1,467 1,661 1,643 1,647 1,647 1,692
Stockholders' equity.... 2,971 3,048 3,129 3,207 3,397 3,530 3,662 3,743 3,703
------- ------- ------- ------- ------- ------- ------- ------- -------
Total liabilities and
stockholders'
equity.............. $42,702 $43,925 $44,400 $42,845 $44,101 $45,185 $46,233 $47,014 $47,087
======= ======= ======= ======= ======= ======= ======= ======= =======
32
CONSOLIDATED STATEMENT OF INCOME BY QUARTER--TAXABLE EQUIVALENT BASIS
LAST NINE QUARTERS
1994 1995 1996
-------------------- --------------------------- -------------
2 3 4 1 2 3 4 1 2
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NET INTEREST REVENUE: $374.5 $423.9 $433.4 $425.9 $434.1 $439.4 $441.8 $433.6 $438.0
Taxable equivalent
adjustment............ 1.5 1.3 2.7 1.4 1.9 1.5 5.0 2.2 1.5
------ ------ ------ ------ ------ ------ ------ ------ ------
Total net interest
revenue................ 376.0 425.2 436.1 427.3 436.0 440.9 446.8 435.8 439.5
Provision for credit
losses................. 25.0 25.0 35.0 90.0 40.0 45.0 75.0 50.0 50.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Net interest revenue
after provision for
credit losses.......... 351.0 400.2 401.1 337.3 396.0 395.9 371.8 385.8 389.5
------ ------ ------ ------ ------ ------ ------ ------ ------
NONINTEREST INCOME:
Financial service
fees.................. 93.9 104.3 105.5 105.6 113.3 117.6 186.2 6.8 89.1
Trust and agency
fees.................. 50.3 50.6 53.1 52.7 57.2 58.2 48.9 51.0 55.2
Trading profits and
commissions........... 1.2 10.9 (.1) 1.1 6.1 6.6 8.3 12.3 24.3
Net securities gains... 5.9 1.3 2.5 6.1 .2 .8 1.9 13.4 3.5
Other income........... 41.0 35.1 37.6 127.7 59.3 65.4 67.9 142.7 151.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Total noninterest
income.............. 192.3 202.2 198.6 293.2 236.1 248.6 313.2 226.2 323.8
------ ------ ------ ------ ------ ------ ------ ------ ------
NONINTEREST EXPENSE:
Salaries............... 161.5 168.1 177.8 176.4 179.6 191.1 188.8 186.5 185.3
Employee benefits...... 37.0 38.6 35.1 40.4 40.9 41.5 38.6 42.6 41.9
Occupancy expense...... 33.1 35.2 34.4 34.9 34.4 35.6 35.3 37.0 36.8
Equipment expense...... 23.4 24.2 24.9 24.1 25.7 25.2 25.4 26.2 25.4
Acquisition,
divestiture and
restructuring
expenses.............. 16.4 5.0 28.2
Other expense.......... 101.0 107.2 109.7 107.4 111.5 99.8 112.9 112.2 117.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Total noninterest
expense............. 372.4 378.3 381.9 383.2 392.1 393.2 429.2 404.5 406.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 170.9 224.1 217.8 247.3 240.0 251.3 255.8 207.5 306.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Provision for income
taxes.................. 74.9 98.8 94.3 120.6 104.8 109.9 108.4 88.8 127.3
Taxable equivalent
adjustment............. 1.5 1.3 2.7 1.4 1.9 1.5 5.0 2.2 1.5
------ ------ ------ ------ ------ ------ ------ ------ ------
76.4 100.1 97.0 122.0 106.7 111.4 113.4 91.0 128.8
------ ------ ------ ------ ------ ------ ------ ------ ------
NET INCOME.............. $ 94.5 $124.0 $120.8 $125.3 $133.3 $139.9 $142.4 $116.5 $178.1
====== ====== ====== ====== ====== ====== ====== ====== ======
PER COMMON SHARE:
Net Income:
Primary................ $ .80 $ 1.07 $ 1.04 $ 1.08 $ 1.11 $ 1.17 $ 1.18 $ .97 $ 1.54
Fully diluted.......... .77 1.04 1.01 1.04 1.10 1.15 1.17 .95 1.52
Cash dividends
declared............... .22 .22 .27 .27 .27 .37 .37 .37 .44
33
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED JUNE 30, 1996
---------------------------
AVERAGE AVERAGE
VOLUME INTEREST(1) RATE
ASSETS ------- ----------- -------
(DOLLARS IN MILLIONS)
Interest Bearing Deposits with Other Banks
U.S. ............................................. $ 225 $ 4 6.31%
International..................................... 1,087 24 8.95
------- ------
Total............................................ 1,312 28 8.50
------- ------ -----
Federal Funds Sold and Resale Agreements
U.S. ............................................. 343 4 5.07
International..................................... 998 38 15.31
------- ------
Total............................................ 1,341 42 12.70
------- ------ -----
Trading Securities
U.S. ............................................. 502 6 5.10
International..................................... 1,067 45 16.97
------- ------
Total............................................ 1,569 51 13.17
------- ------ -----
Mortgages Held for Sale
U.S. ............................................. 19 3.25
International..................................... 12 5.83
-------
Total............................................ 31 4.21
------- -----
Securities.........................................
U.S. .............................................
Available for sale(3)............................. 4,564 74 6.50
Held to maturity.................................. 639 10 6.38
International
Available for sale(3)............................. 696 26 14.99
Held to maturity.................................. 16 1 19.80
------- ------
Total............................................ 5,915 111 7.52
------- ------ -----
Loans and Leases (Net of Unearned Income)
U.S. ............................................. 23,416 494
International..................................... 8,856 277 12.56
------- ------
Total loans and lease financing(2)............... 32,272 771 9.60
------- ------ -----
Earning assets.................................... 42,440 1,003 9.50
------- ------ -----
Nonearning assets................................. 4,647
-------
Total Assets..................................... $47,087
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits...........................................
U.S.
Savings deposits.................................. $ 8,931 $ 62 2.81%
Time deposits..................................... 8,153 114 5.63
International..................................... 9,302 186 8.03
------- ------
Total............................................ 26,386 362 5.52
------- ------ -----
Federal Funds Purchased and Repurchase Agreements
U.S. ............................................. 4,213 59 5.66
International..................................... 111 5 16.89
------- ------
Total............................................ 4,324 64 5.95
------- ------ -----
Other Funds Borrowed
U.S............................................... 2,869 42 5.83
International..................................... 786 49 25.19
------- ------
Total............................................ 3,655 91 10.00
------- ------ -----
Notes Payable
U.S. ............................................. 2,023 32 6.47
International..................................... 561 14 9.99
------- ------
Total............................................ 2,584 46 7.23
------- ------ -----
Total interest bearing liabilities............... 36,949 563 6.13
------- ------ -----
Demand deposits U.S................................ 4,278
Demand deposits International...................... 465
Other noninterest bearing liabilities.............. 1,692
Total Stockholders' Equity....................... 3,703
-------
Total Liabilities and Stockholders' Equity....... $47,087
=======
Net Interest Revenue As a Percentage of Average
Interest Earning Assets
U.S. ............................................. $29,708 $ 308 4.16%
International..................................... 12,732 132 4.18
------- ------
Total............................................ $42,440 $ 440 4.17
======= ======
- --------
(1)Income is shown on a fully taxable equivalent basis.
(2)Loans and lease financing includes nonaccrual and renegotiated balances.
(3)Average rates for securities available for sale are based on the securities'
amortized cost.
34
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
QUARTER ENDED JUNE 30,
1995
---------------------------
AVERAGE AVERAGE
VOLUME INTEREST(1) RATE
ASSETS ------- ---------- -------
(DOLLARS IN MILLIONS)
Interest Bearing Deposits with Other Banks
U.S. ............................................. $ 362 $ 3 3.62%
International..................................... 947 64 26.91
------- ------
Total............................................ 1,309 67 20.49
------- ------ -----
Federal Funds Sold and Resale Agreements
U.S. ............................................. 598 9 5.96
International..................................... 568 84 59.61
------- ------
Total............................................ 1,166 93 32.10
------- ------ -----
Trading Securities
U.S. ............................................. 227 3 6.35
International..................................... 560 40 28.50
------- ------
Total............................................ 787 43 22.10
------- ------ -----
Mortgages Held for Sale
U.S. ............................................. 254 5 7.62
------- ------ -----
Securities
U.S.
Available for sale(3)............................. 2,210 38 6.82
Held to maturity.................................. 1,721 29 6.88
International
Available for sale(3)............................. 387 15 13.40
Held to maturity.................................. 208 6 12.15
------- ------
Total............................................ 4,526 88 7.80
------- ------ -----
Loans and Leases (Net of Unearned Income)
U.S. ............................................. 23,099 507 8.81
International..................................... 7,829 302 15.45
------- ------
Total loans and lease financing (2).............. 30,928 809 10.49
------- ------ -----
Earning assets.................................... 38,970 1,105 11.38
------- ------ -----
Nonearning assets................................. 5,131
-------
Total Assets..................................... $44,101
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits.................................. $ 8,640 $ 56 2.61%
Time deposits..................................... 7,588 106 5.60
International..................................... 7,967 254 12.79
------- ------
Total............................................ 24,195 416 6.90
------- ------ -----
Federal Funds Purchased and Repurchase Agreements
U.S. ............................................. 3,740 45 4.77
International..................................... 156 12 31.10
------- ------
Total............................................ 3,896 57 5.82
------- ------ -----
Other Funds Borrowed
U.S............................................... 3,448 55 6.44
International..................................... 830 103 49.76
------- ------
Total............................................ 4,278 158 14.84
------- ------ -----
Notes Payable
U.S. ............................................. 1,911 35 7.27
International..................................... 151 3 9.56
------- ------
Total............................................ 2,062 38 7.44
------- ------ -----
Total interest bearing liabilities............... 34,431 669 7.80
------- ------ -----
Demand deposits U.S............................... 4,196
Demand deposits International..................... 416
Other noninterest bearing liabilities............. 1,661
Total Stockholders' Equity....................... 3,397
-------
Total Liabilities and Stockholders' Equity....... $44,101
=======
Net Interest Revenue As a Percentage of Average
Interest Earning Assets
U.S. ............................................. $28,471 $ 322 4.54%
International..................................... 10,499 114 4.35
------- ------
Total............................................ $38,970 $ 436 4.49
======= ======
- --------
(1)Income is shown on a fully taxable equivalent basis.
(2)Loans and lease financing includes nonaccrual and renegotiated balances.
(3)Average rates for securities available for sale are based on the securities'
amortized cost.
35
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
SIX MONTHS ENDED JUNE
30, 1996
---------------------------
AVERAGE AVERAGE
VOLUME INTEREST(1) RATE
ASSETS ------- ---------- -------
(DOLLARS IN MILLIONS)
Interest Bearing Deposits with Other Banks
U.S. ............................................. $ 210 $ 6 6.07%
International..................................... 1,100 45 8.26
------- ------
Total............................................ 1,310 51 7.90
------- ------ -----
Federal Funds Sold and Resale Agreements
U.S. ............................................. 266 7 5.09
International..................................... 1,029 76 14.97
------- ------
Total............................................ 1,295 83 12.94
------- ------ -----
Trading Securities
U.S. ............................................. 422 11 5.31
International..................................... 916 81 17.73
------- ------
Total............................................ 1,338 92 13.81
------- ------ -----
Mortgages Held for Sale
U.S. ............................................. 455 16 7.06
International..................................... 25 1 6.07
------- ------
Total............................................ 480 17 7.00
------- ------ -----
Securities
U.S.
Available for sale(3)............................. 4,426 145 6.57
Held to maturity.................................. 633 20 6.33
International
Available for sale(3)............................. 670 46 13.94
Held to maturity.................................. 55 4 15.89
------- ------
Total............................................ 5,784 215 7.22
------- ------ -----
Loans and Leases (Net of Unearned Income)
U.S. ............................................. 23,013 984 8.60
International..................................... 8,802 597 13.64
------- ------
Total loans and lease financing(2)............... 31,815 1,581 9.99
------- ------ -----
Earning assets.................................... 42,022 2,039 9.76
------- ------ -----
Nonearning assets................................. 5,033
-------
Total Assets..................................... $47,055
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S. .............................................
Savings deposits.................................. $ 9,192 $ 128 2.80%
Time deposits..................................... 7,903 223 5.69
International..................................... 9,000 367 8.19
------- ------
Total............................................ 26,095 718 5.53
------- ------ -----
Federal Funds Purchased and Repurchase Agreements
U.S. ............................................. 3,766 108 5.73
International..................................... 105 7 13.75
------- ------
Total............................................ 3,871 115 5.95
------- ------ -----
Other Funds Borrowed
U.S. ............................................. 3,405 103 6.10
International..................................... 928 139 30.25
------- ------
Total............................................ 4,333 242 11.27
------- ------ -----
Notes Payable
U.S. ............................................. 1,966 64 6.55
International..................................... 513 25 9.95
------- ------
Total............................................ 2,479 89 7.25
------- ------ -----
Total interest bearing liabilities............... 36,778 1,164 6.37
------- ------ -----
Demand deposits U.S............................... 4,398
Demand deposits International..................... 482
Other noninterest bearing liabilities............. 1,673
Total Stockholders' Equity....................... 3,724
-------
Total Liabilities and Stockholders' Equity....... $47,055
=======
Net Interest Revenue As a Percentage of Average
Interest Earning Assets
U.S. ............................................. $29,425 $ 619 4.23%
International..................................... 12,597 256 4.09
------- ------
Total............................................ $42,022 $ 875 4.19
======= ======
- --------
(1)Income is shown on a fully taxable equivalent basis.
(2)Loans and lease financing includes nonaccrual and renegotiated balances.
(3)Average rates for securities available for sale are based on the securities'
amortized cost.
36
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
SIX MONTHS ENDED JUNE 30,
1995
---------------------------
AVERAGE AVERAGE
VOLUME INTEREST(1) RATE
ASSETS ------- ---------- -------
(DOLLARS IN MILLIONS)
Interest Bearing Deposits with Other Banks
U.S. ............................................. $ 245 $ 5 4.57%
International..................................... 1,041 127 24.49
------- ------
Total............................................ 1,286 132 20.70
------- ------ -----
Federal Funds Sold and Resale Agreements
U.S. ............................................. 563 17 5.99
International..................................... 702 179 51.40
------- ------
Total............................................ 1,265 196 31.18
------- ------ -----
Trading Securities
U.S. ............................................. 211 7 6.43
International..................................... 530 77 29.48
------- ------
Total............................................ 741 84 22.92
------- ------ -----
Mortgages Held for Sale
U.S. ............................................. 255 9 6.79
------- ------ -----
Securities
U.S.
Available for sale(3)............................. 2,210 74 6.73
Held to maturity.................................. 1,656 56 6.81
International
Available for sale(3)............................. 343 24 12.40
Held to maturity.................................. 199 10 10.13
------- ------
Total............................................ 4,408 164 7.52
------- ------ -----
Loans and Leases (Net of Unearned Income)
U.S. ............................................. 22,923 1,006 8.85
International..................................... 7,605 549 14.55
------- ------
Total loans and lease financing(2)............... 30,528 1,555 10.27
------- ------ -----
Earning assets.................................... 38,483 2,140 11.21
------ -----
Nonearning assets................................. 4,990
-------
Total Assets..................................... $43,473
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits.................................. $ 8,669 $ 107 2.52%
Time deposits..................................... 7,359 198 5.41
International..................................... 8,142 472 11.69
------- ------
Total............................................ 24,170 777 6.49
------- ------ -----
Federal Funds Purchased and Repurchase Agreements
U.S. ............................................. 3,636 88 4.91
International..................................... 163 26 32.02
------- ------
Total............................................ 3,799 114 6.07
------- ------ -----
Other Funds Borrowed
U.S. ............................................. 3,037 96 6.33
International..................................... 897 212 47.61
------- ------
Total............................................ 3,934 308 15.74
------- ------ -----
Notes Payable
U.S. ............................................. 1,954 69 7.11
International..................................... 144 9 11.96
------- ------
Total............................................ 2,098 78 7.44
------- ------ -----
Total interest bearing liabilities............... 34,001 1,277 7.57
------- ------ -----
Demand deposits U.S................................ 4,195
Demand deposits International...................... 416
Other noninterest bearing liabilities.............. 1,563
Total Stockholders' Equity....................... 3,298
-------
Total Liabilities and Stockholders' Equity....... $43,473
=======
Net Interest Revenue as a Percentage of Average
Interest Earning Assets
U.S. ............................................. $28,063 $ 652 4.69%
International..................................... 10,420 211 4.08
------- ------
Total............................................ $38,483 $ 863 4.52
======= ======
- --------
(1)Income is shown on a fully taxable equivalent basis.
(2)Loans and lease financing includes nonaccrual and renegotiated balances.
(3)Average rates for securities available for sale are based on the securities'
amortized cost.
37
CHANGE IN NET INTEREST REVENUE--VOLUME AND RATE ANALYSIS
SECOND QUARTER 1996 COMPARED WITH SECOND QUARTER 1995
The following table presents, on a fully taxable equivalent basis, an
analysis of the effect on net interest revenue of volume and rate changes. The
change due to the volume/rate variance has been allocated to volume, and the
change because of the difference in the number of days in the periods has been
allocated to rate.
INCREASE (DECREASE)
DUE TO CHANGE IN
--------------------- NET
VOLUME RATE CHANGE
---------- ---------- ------
(IN MILLIONS)
Interest income:
Loans and lease financing.......... U.S. $ 7 $ (20) $ (13)
International 32 (57) (25)
-----
(38)
-----
Other earning assets............... U.S. 15 (4) 11
International 42 (117) (75)
-----
(64)
-----
Total interest income.............. 82 (184) (102)
Total interest expense............. 46 (152) (106)
-----
Net interest revenue............... $ 4
=====
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
The following table presents, on a fully taxable equivalent basis, an
analysis of the effect on net interest revenue of volume and rate changes. The
change due to the volume/rate variance has been allocated to volume, and the
change because of the difference in the number of days in the periods has been
allocated to rate.
INCREASE (DECREASE)
DUE TO CHANGE IN
--------------------- NET
VOLUME RATE CHANGE
---------- ---------- ------
(IN MILLIONS)
Interest income:
Loans and lease financing.......... U.S. $ 4 $ (26) $ (22)
International 81 (33) 48
-----
26
-----
Other earning assets............... U.S. 41 (4) 37
International 66 (230) (164)
-----
(127)
-----
Total interest income.............. 172 (273) (101)
Total interest expense............. 98 (211) (113)
-----
Net interest revenue............... $ 12
=====
38
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported, in March 1993, a complaint was filed in Delaware
Chancery Court against the Corporation, Society for Savings Bancorp, Inc.
("Society") and certain Society directors. The action was brought by a Society
stockholder, individually and as a class action on behalf of all Society
stockholders of record on the date the Corporation's proposed acquisition of
Society was announced, and sought an injunction with respect to the
acquisition and damages in an unspecified amount. In May 1993, the Chancery
Court denied the plaintiff's motion for a preliminary injunction and in July
1993, the Corporation acquired Society. On January 23, 1995, the defendants
filed a motion for summary judgment with the Chancery Court and on June 15,
1995, the Court granted summary judgment in favor of the defendants on all
claims except for an aiding and abetting claim against the Corporation on
which no summary judgment motion has yet been filed. The Chancery Court also
denied plaintiff's motion for rehearing. Following the entry of an Order of
Final Judgment by the Chancery Court, the plaintiff appealed the June 15, 1995
opinion to the Delaware Supreme Court. On June 25, 1996, the Supreme Court
affirmed the Chancery Court's decision in its entirety, and remanded the case
on the sole remaining claim for aiding and abetting.
ITEM 5. OTHER INFORMATION
On July 25, 1996, J. Donald Monan retired from the class of directors whose
term expires in 1997, and Henrique de Campos Meirellas was appointed to fill
the vacancy in that class. On July 29, 1996, immediately following the
effective time of the Corporation's acquisition of BayBanks (the
"Acquisition"), the Corporation's Board of Directors was expanded by four
members to a total of eighteen members, and John A. Cervieri Jr., William M.
Crozier, Jr., Thomas R. Piper and Glenn P. Strehle became members of the
Board. Messrs. Crozier and Strehle were each assigned to the class of
directors whose term expires in 1999, and Messrs. Cervieri and Piper were
assigned to the class of directors whose term expires in 1998 and 1997,
respectively. In order to keep the three classes of directors as nearly equal
in number as possible, John W. Rowe resigned from the class of directors whose
term expires in 1999 and was elected to the class of directors whose term
expires in 1997.
In addition, as previously disclosed, immediately following the effective
time of the Acquisition, Mr. Crozier became Chairman of the Board, with
Charles K. Gifford and Mr. Meirellas continuing to serve as Chief Executive
Officer and President, respectively, of the Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3 --By-Laws of the Corporation, as amended through July 25, 1996.
11 --Computation of Earnings Per Share.
12(a) --Computation of the Corporation's Consolidated Ratio of Earnings to
Fixed Charges (excluding interest on deposits).
12(b) --Computation of the Corporation's Consolidated Ratio of Earnings to
Fixed Charges (including interest on deposits).
27 --Financial Data Schedule
(b) Current Reports on Form 8-K.
During the second quarter of 1996, the Corporation filed two Current Reports
on Form 8-K. The current reports, dated April 18, 1996 and May 16, 1996,
contained information pursuant to Items 5 and 7 of Form 8-K. The Corporation
also filed Current Reports on Form 8-K, dated July 18, 1996 and July 25, 1996,
which contained information pursuant to Items 5 and 7 and Items 2, 5 and 7,
respectively, of Form 8-K.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK OF BOSTON CORPORATION
/s/ Charles K. Gifford
-------------------------------------
Charles K. Gifford
Chief Executive Officer
/s/ William J. Shea
-------------------------------------
William J. Shea
Vice Chairman, Chief Financial
Officer and Treasurer
Date: August 14, 1996
40