FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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, BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 434-2200
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT: NOT APPLICABLE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 31, 1996:
Common Stock, $1.50 par value 152,967,802
BANK OF BOSTON CORPORATION
--------------------------
TABLE OF CONTENTS
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PAGE
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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 14
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 38
ITEM 6. Exhibits and Reports on Form 8-K 38
SIGNATURES 39
LIST OF TABLES
Consolidated Average Balance Sheet - Nine Quarters 31
Consolidated Statement of Income - Nine Quarters 32
Average Balances and Interest Rates - Quarter 33
Average Balances and Interest Rates - Nine Months 35
Change in Net Interest Revenue - Volume and Rate Analysis 37
2
BANK OF BOSTON CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED SEPTEMBER 30 1996 1995
---- ----
INCOME STATEMENT DATA
Net interest revenue $ 591 $ 570
Provision for credit losses 57 51
Noninterest income 337 305
Noninterest expense (1) 713 518
Net income (1) 80 175
Per common share
Primary (1) .46 1.06
Fully diluted (1) .45 1.05
Market value per common share
High 57 7/8 47 5/8
Low 50 1/8 36 3/4
NINE MONTH ENDED SEPTEMBER 30
INCOME STATEMENT DATA
Net interest revenue $ 1,728 $ 1,676
Provision for credit losses 171 194
Noninterest income 1,005 942
Noninterest expense (1) 1,772 1,531
Net income (1) 449 498
Per common share
Primary (1) 2.74 3.07
Fully diluted (1) 2.69 3.00
Market value per common share
High 57 7/8 47 5/8
Low 41 5/8 25 5/8
AT SEPTEMBER 30
BALANCE SHEET DATA
Loans and lease financing $ 42,053 $ 39,188
Total assets 61,963 57,559
Deposits 43,328 39,624
Total stockholders' equity 4,754 4,499
Book value per common share 27.81 25.69
Regulatory capital ratios
Risk-based capital ratios
Tier 1 8.3% 8.4%
Total 12.7 12.8
Leverage ratio 7.2 7.4
(1) Reflects, in 1996, $180 million ($117 million after-tax, or $.76 per share
on a primary and fully diluted basis) of restructuring and merger-related
charges, recorded in connection with the Corporation's acquisition of
BayBanks, Inc. completed on July 29, 1996.
3
BANK OF BOSTON CORPORATION
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS SEPTEMBER 30 DECEMBER 31
1996 1995
---------- ---------
Cash and due from banks $ 3,755 $ 3,561
Interest bearing deposits in other banks 1,251 1,356
Federal funds sold and securities purchased under agreements to resell 1,680 1,548
Trading securities 1,549 1,159
Mortgages held for sale 33 910
Securities
Available for sale 7,413 7,582
Held to maturity (fair value of $672 in 1996 and $667 in 1995) 685 660
Loans and lease financing
United States Operations 32,552 30,163
International Operations 9,501 8,707
------ ------
Total loans and lease financing (net of unearned income of $356 in
1996 and $277 in 1995) 42,053 38,870
Reserve for credit losses (897) (890)
------ ------
Net loans and lease financing 41,156 37,980
Premises and equipment, net 876 832
Due from customers on acceptances 486 360
Accrued interest receivable 519 554
Other assets 2,560 2,921
------ ------
TOTAL ASSETS $ 61,963 $ 59,423
====== ======
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)
LIABILITIES AND STOCKHOLDERS' EQUITY SEPTEMBER 30 DECEMBER 31
1996 1995
---------- ---------
Deposits
Domestic offices
Noninterest bearing $ 7,416 $ 7,127
Interest bearing 24,970 24,392
Overseas offices
Noninterest bearing 935 552
Interest bearing 10,007 8,993
------ ------
Total deposits 43,328 41,064
Funds borrowed
Federal funds purchased 636 1,869
Term federal funds purchased 1,626 870
Securities sold under agreements to repurchase 1,939 1,688
Other funds borrowed 5,049 5,076
Acceptances outstanding 487 360
Accrued expenses and other liabilities 1,298 1,605
Notes payable 2,846 2,189
------ ------
TOTAL LIABILITIES 57,209 54,721
------ ------
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 -152,634,188 in 1996 and 155,785,611 in 1995
Outstanding shares -152,634,188 in 1996 and 155,296,203 in 1995 229 350
Surplus 1,181 1,240
Retained earnings 2,789 2,548
Net unrealized gain on securities available for sale, net of tax 53 82
Treasury stock, at cost (489,408 shares in 1995) (22)
Cumulative translation adjustments, net of tax (6) (4)
------ ------
TOTAL STOCKHOLDERS' EQUITY 4,754 4,702
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,963 $ 59,423
====== ======
The accompanying notes are an integral part of the financial statements.
5
BANK OF BOSTON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
INTEREST INCOME
Loans and lease financing, including fees $ 944 $ 1,006 $ 2,860 $ 2,863
Securities 146 124 423 362
Trading securities 36 61 129 146
Mortgages held for sale 9 18 17
Federal funds sold and securities
purchased under agreements to resell 50 74 138 274
Deposits in other banks 23 46 74 178
------- ------- ------- -------
Total interest income 1,199 1,320 3,642 3,840
------- ------- ------- -------
INTEREST EXPENSE
Deposits of domestic offices 242 235 704 640
Deposits of overseas offices 173 229 558 708
Funds borrowed 143 246 513 698
Notes payable 50 40 139 118
------- ------- ------- -------
Total interest expense 608 750 1,914 2,164
------- ------- ------- -------
NET INTEREST REVENUE 591 570 1,728 1,676
Provision for credit losses 57 51 171 194
------- ------- ------- -------
Net interest revenue after provision for
credit losses 534 519 1,557 1,482
------- ------- ------- -------
NONINTEREST INCOME
Financial service fees 140 162 327 465
Trust and agency fees 62 65 181 186
Trading profits and commissions 21 7 59 16
Net securities gains 7 1 24 7
Other income 107 71 414 268
------- ------- ------- -------
Total noninterest income 337 306 1,005 942
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 244 246 729 704
Employee benefits 49 52 150 153
Occupancy expense 51 48 152 143
Equipment expense 34 34 102 99
Restructuring and merger-related costs 180 180
Other expense 155 138 459 432
------- ------- ------- -------
Total noninterest expense 713 518 1,772 1,531
------- ------- ------- -------
Income before income taxes 158 307 790 893
Provision for income taxes 78 132 341 395
------- ------- ------- -------
NET INCOME $ 80 $ 175 $ 449 $ 498
======= ======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 71 $ 166 $ 421 $ 470
======= ======= ======= =======
PER COMMON SHARE
Net income
Primary $ .46 $ 1.06 $ 2.74 $ 3.07
Fully diluted $ .45 $ 1.05 $ 2.69 $ 3.00
Dividends declared $ .44 $ .37 $ 1.25 $ .91
AVERAGE NUMBER OF COMMON SHARES (IN THOUSANDS)
Primary 153,103 155,660 153,715 153,086
Fully diluted 155,183 157,599 156,300 156,407
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
NINE MONTHS ENDED SEPTEMBER 30
PREFERRED STOCK
Balance, January 1 $ 508 $ 508
-------- --------
Balance, September 30 508 508
-------- --------
COMMON STOCK
Balance, January 1 350 336
Change in par value (118)
Common stock issued
Dividend reinvestment and stock purchase plan 1
Exercise of stock options 3 2
Conversion of subordinated debentures 8
Acquisition of The Boston Bancorp 1
Acquisition of NFS Financial Corporation 2
Acquisition of BayBanks, Inc. (7)
-------- --------
Balance, September 30 229 349
-------- --------
SURPLUS
Balance, January 1 1,240 1,075
Change in par value 118
Dividend reinvestment and stock purchase plan 13 20
Exercise of stock options (25) 13
Acquisition of Ganis Credit Corporation 1
Conversion of subordinated debentures 71
Restricted stock grants, net of forfeitures 12 2
Acquisition of The Boston Bancorp 47
Acquisition of NFS Financial Corporation 37
Acquisition of BayBanks, Inc. (225)
Other, principally employee benefit plans 1 4
-------- --------
Balance, September 30 1,181 1,223
-------- --------
RETAINED EARNINGS
Balance, January 1 2,548 2,085
Net income 449 498
Restricted stock grants, net of forfeitures (3) 1
Payment on ESOP loan 3 3
Cash dividends declared
Preferred stock (28) (28)
Common stock (180) (130)
-------- --------
Balance, September 30 2,789 2,429
-------- --------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
Balance, January 1 82 (40)
Change in net unrealized gain (loss) on securities available for sale, net of tax (29) 34
-------- --------
Balance, September 30 53 (6)
-------- --------
TREASURY STOCK
Balance, January 1 (22) (27)
Purchases of treasury stock (490) (28)
Treasury stock reissued
Dividend reinvestment and stock purchase plan 23 9
Exercise of stock options 52 1
Restricted stock grants, net of forfeitures 10 7
Conversion of subordinated debentures 15
Acquisition of The Boston Bancorp 181
Acquisition of BayBanks, Inc. 232
Acquisition of Ganis Credit Corporation 7 21
Other, principally employee benefit plans 7 2
-------- --------
Balance,September 30
-------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, January 1 (4) (6)
Change in translation adjustments, net of tax (2) 2
-------- --------
Balance, September 30 (6) (4)
-------- --------
TOTAL STOCKHOLDERS' EQUITY, SEPTEMBER 30 $4,754 $4,499
======== ========
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
-------- -------
NINE MONTHS ENDED SEPTEMBER 30
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 449 $ 498
Reconciliation of net income to net cash
provided from (used for) operating activities
Provision for credit losses 171 194
Depreciation and amortization 111 170
Provision for deferred taxes 17 57
Net gains on sales of securities and other assets (292) (160)
Change in trading securities (666) (99)
Net change in mortgages held for sale 235 (394)
Net change in interest receivables and payables 23 (20)
Other, net (229) (198)
------- ------
Net cash provided from (used for) operating activities (181) 48
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided from interest bearing deposits in other banks 105 204
Net cash used for federal funds sold and securities
purchased under agreements to resell (132) (82)
Purchases of securities held to maturity (67) (2,239)
Purchases of securities available for sale (6,459) (2,663)
Sales of securities available for sale 3,340 1,708
Maturities of securities held to maturity 37 2,524
Maturities of securities available for sale 3,649 736
Loans and lease financing originated by nonbank entities (13,493) (5,599)
Loans and lease financing collected by nonbank entities 12,233 4,533
Proceeds from sales of loan portfolios by bank subsidiaries 142 131
Net cash used for lending activities of bank subsidiaries (2,178) (774)
Lease financing originated by bank entities (5) (3)
Lease financing collected by bank entities 16 44
Proceeds from sales of other real estate owned 32 61
Expenditures for premises and equipment (171) (164)
Proceeds from sales of business units, premises and equipment 203 130
Other, net (24) (257)
------- ------
Net cash used for investing activities (2,772) (1,710)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided from (used for) deposits 2,264 (624)
Net cash provided from funds borrowed 859 2,256
Net repayments of notes payable (256) (154)
Net proceeds from issuance of notes payable 913 138
Net proceeds from issuance of common stock 74 50
Purchases of treasury stock (490) (28)
Dividends paid (208) (158)
------- ------
Net cash provided from financing activities 3,156 1,480
Effect of foreign currency translation on cash (9) (6)
------- ------
NET CHANGE IN CASH AND DUE FROM BANKS 194 (188)
CASH AND DUE FROM BANKS AT JANUARY 1 3,561 3,146
------- ------
CASH AND DUE FROM BANKS AT SEPTEMBER 30 $ 3,755 $ 2,958
======= ======
Interest payments made $ 1,926 $ 2,124
Income tax payments made $ 343 $ 430
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. The financial statements reflect the acquisition of
BayBanks, Inc. (BayBanks), which occurred on July 29, 1996. The acquisition
was accounted for as a pooling of interests and, accordingly, the
information included in the accompanying financial statements and notes
presents the combined financial position and results of operations of the
Corporation and BayBanks as if they had operated as a combined entity for
all periods presented. 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 and its
Current Report on Form 8-K dated September 6, 1996.
2. ACQUISITIONS AND DIVESTITURES:
During the first six months of 1996, the Corporation completed a
transaction with two equity investment firms in which its mortgage banking
subsidiary was sold to a newly formed independent mortgage company,
HomeSide, Inc. (HomeSide), and in the second phase of the transaction,
Barnett Mortgage Company was acquired by HomeSide. As a result of both
phases of the transaction, the Corporation realized gains of $106 million,
or $67 million after-tax. Under the sale agreement, the Corporation agreed
to maintain a risk management program designed to protect the enterprise
value of its mortgage banking subsidiary. The above-mentioned gains were
offset by $111 million of losses, or $70 million after-tax, net of
decreased servicing amortization, from the change in market value of
contracts used to manage the prepayment risk in the mortgage servicing
portfolio and the economic value of the mortgage banking subsidiary pending
the completion of the sale to HomeSide.
On June 28, 1996, the Corporation completed its acquisition of The Boston
Bancorp (Bancorp), the holding company of South Boston Savings Bank, a
Massachusetts chartered savings bank with $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 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 nine months ended September 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 acquisition of 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 book values of the
assets and liabilities of BayBanks, as reported in its consolidated balance
sheet, are carried over onto the Corporation's consolidated balance sheet,
and no goodwill or other intangible assets are created. 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 the fourth quarter of 1996. Information with
respect to restructuring and merger-related costs recorded upon completion
of the acquisition is included in Note 9.
The following tables set forth the results of operations of BayBanks and
the Corporation for the six months ended June 30, 1996. These six month
results are included in the results of operations for the nine months ended
September 30, 1996 presented in the accompanying consolidated statement of
income.
SIX MONTHS ENDED JUNE 30, 1996
(in millions, except per share amounts)
BAYBANKS CORPORATION COMBINED
-------- ----------- --------
Net interest revenue $ 265 $ 872 $ 1,137
Noninterest income $ 118 $ 550 $ 668
Net income $ 74 $ 295 $ 369
Net income per common share
Primary $ 3.71 $ 2.50 $ 2.27
Fully diluted $ 3.71 $ 2.46 $ 2.24
9
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED):
The following table reconciles the revenue and net income previously
reported by the Corporation with the combined amounts presented in the
accompanying consolidated statements of income for the quarter and nine
months ended September 30, 1995.
QUARTER ENDED SEPTEMBER 30, 1995
(in millions, except per share amounts)
BAYBANKS CORPORATION COMBINED
-------- ----------- --------
Net interest revenue $ 131 $ 439 $ 570
Noninterest income $ 57 $ 249 $ 306
Net income $ 35 $ 140 $ 175
Net income per share
Primary $ 1.74 $ 1.17 $ 1.06
Fully diluted $ 1.74 $ 1.15 $ 1.05
NINE MONTHS ENDED SEPTEMBER 30, 1995
(in millions, except per share amounts)
BAYBANKS CORPORATION COMBINED
-------- ----------- --------
Net interest revenue $ 377 $ 1,299 $ 1,676
Noninterest income $ 164 $ 778 $ 942
Net income $ 99 $ 399 $ 498
Net income per share
Primary $ 5.11 $ 3.36 $ 3.07
Fully diluted $ 5.10 $ 3.27 $ 3.00
10
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES:
A summary comparison of securities available for sale by type is as
follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
-------------------------- ---------------------------
(in millions) COST CARRYING COST CARRYING
------- -------- -------- --------
VALUE VALUE
----- -----
U.S. Treasury $ 1,760 $ 1,760 $ 2,556 $ 2,591
U.S. government
agencies and corporations -
Mortgage-backed securities 3,388 3,378 2,969 3,037
States and political subdivisions 157 157 245 248
Foreign debt securities 1,046 1,076 698 685
Other debt securities 335 331 343 334
Marketable equity
securities 169 240 170 222
Other equity securities 471 471 465 465
----- ----- ----- -----
$ 7,326 $ 7,413 $ 7,446 $ 7,582
===== ===== ===== =====
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:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
AMORTIZED AMORTIZED
(in millions) COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
U.S. Treasury $ 1 $ 1 $ 4 $ 4
U.S. government
agencies and corporations -
Mortgage-backed securities 542 529 523 530
States and political subdivisions 6 6 5 5
Foreign debt securities 11 11 11 11
Other equity securities 125 125 117 117
--- --- --- ---
$ 685 $ 672 $ 660 $ 667
=== === === ===
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.
11
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:
SEPT. 30 DECEMBER 31
1996 1995
---------- ----------
(in millions)
UNITED STATES OPERATIONS
Commercial, industrial and financial $ 13,828 $ 12,809
Commercial real estate
Construction 323 386
Other 3,228 3,393
Consumer-related loans
Residential mortgages 4,156 4,141
Home equity loans 2,842 2,556
Credit card loans 1,320 495
Other 5,349 5,059
Lease financing 1,778 1,564
Unearned income (272) (240)
--------- ---------
32,552 30,163
--------- ---------
INTERNATIONAL OPERATIONS
Loans and lease financing 9,585 8,744
Unearned income (84) (37)
--------- ---------
9,501 8,707
--------- ---------
$ 42,053 $ 38,870
========= =========
5. RESERVE FOR CREDIT LOSSES:
An analysis of the reserve for credit losses is as follows:
QUARTERS ENDED NINE MONTHS ENDED
SEPT. 30 SEPT. 30
-------- --------
1996 1995 1996 1995
---- ----- ---- ----
(in millions)
BALANCE, BEGINNING OF PERIOD $ 895 $ 838 $ 890 $ 827
Provision 57 51 171 194
Reserves of entities sold (11) (32)
Reserve of acquired bank 14 2 14
Domestic credit losses
Commercial, industrial
and financial (3) (10) (16) (36)
Commercial real estate (3) (12) (23) (43)
Consumer-related loans
Residential mortgages (2) (6) (12) (16)
Credit card loans (7) (3) (16) (9)
Home equity loans (2) (3) (6) (7)
Other (42) (18) (103) (53)
International credit losses (14) (15) (36) (43)
------ ------ -------- -------
Total credit losses (73) (67) (212) (207)
------ ------ ------- -------
Domestic recoveries
Commercial, industrial
and financial 3 4 11 12
Commercial real estate 2 8 8 16
Consumer-related loans
Residential mortgages 1 3 2
Credit card loans 2 1
Home equity loans 2 2 3
Other 7 6 20 20
International recoveries 4 3 11 8
------ ------ ------- -------
Total recoveries 18 22 57 62
------ ------ ------- -------
Net credit losses (55) (45) (155) (145)
------ ------ ------- -------
BALANCE, END OF PERIOD $ 897 $ 858 $ 897 $ 858
====== ======= ======= ========
12
BANK OF BOSTON CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RESERVE FOR CREDIT LOSSES (CONTINUED):
At September 30, 1996, loans for which impairment has been recognized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," totaled $320 million,
of which $53 million related to loans with no valuation reserve and $267
million related to loans with a valuation reserve of $72 million. For the
quarter and nine months ended September 30, 1996, average impaired loans
were approximately $293 million and $275 million, respectively. Interest
recognized on impaired loans during the third quarter and nine months ended
September 30, 1996 was not material.
6. NOTES PAYABLE:
During the first nine months of 1996, the Corporation issued $400 million
in senior floating and fixed rate medium-term notes. These notes, which
mature in 1997 through 1999, had weighted average interest rates of 5.66%
during the third quarter of 1996. The Corporation entered into interest
rate swap agreements that effectively converted the fixed rate obligations
to floating rate obligations. In June 1996, the Corporation's $100 million
floating rate senior notes, issued in 1994, matured. In September 1996, The
First National Bank of Boston (FNBB), a major banking subsidiary of the
Corporation, issued $200 million of 7 3/8% Subordinated Notes due 2006.
When the notes were issued, FNBB entered into an interest rate swap
agreement that effectively converted the fixed rate obligation to a
floating rate obligation. Such interest rate was 6.15% at September 30,
1996. The subordinated notes are not subject to redemption prior to
maturity.
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 $118
million from common stock to surplus in the accompanying consolidated
balance sheet.
9. RESTRUCTURING AND MERGER-RELATED COSTS:
During the third quarter of 1996, the Corporation recorded restructuring
and merger-related costs of $180 million ($117 million after-tax) in
connection with the BayBanks acquisition. Included in these costs were
employee-related severance and property related costs; professional fees
and other costs of effecting the acquisition; and systems and other
conversion costs which were incurred during the third quarter. Significant
components of the costs were as follows:
(in millions)
Personnel costs $ 81
Facility costs 50
Other costs 49
----
Total $180
----
Personnel costs relate primarily to the Corporation's plan to eliminate
approximately 2,100 executive, managerial and staff positions through
attrition, enhanced retirement plans and terminations. These costs include
severance and retirement plan costs as well as employee assistance costs
for separated employees. During the third quarter approximately 600
employees were either terminated or left the Corporation through enhanced
retirement plans. Facility costs relate to branch and back office
consolidations, and include lease termination costs and writedowns of bank
owned properties and other facility related costs. Other costs principally
consist of transaction related costs, such as professional fees and stock
registration costs, as well as systems costs and other costs of effecting
the acquisition which were incurred during the third quarter. Cash outlays
during the quarter amounted to $39 million, including $5 million of
termination benefits and $34 million of transaction, facility and systems
and other conversion costs. The remaining reserves and other liabilities of
$141 million at September 30, 1996 include expected cash outlays of $101
million and expected noncash costs of $40 million. Cash outlays are
expected to occur throughout the integration process, which the Corporation
expects to complete by the middle of 1997.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
---------------------
GENERAL
On July 29, 1996, Bank of Boston Corporation (the Corporation) completed its
acquisition of BayBanks, Inc. (BayBanks). The Corporation acquired BayBanks in
a tax-free exchange of stock, whereby the Corporation exchanged 2.2 shares of
its common stock for each outstanding share of BayBanks common stock. Refer to
Note 2 to the Financial Statements for further discussion of this transaction.
The acquisition was accounted for as a pooling of interests and, accordingly,
the information included in this discussion presents the combined results of
BayBanks and the Corporation as if the Corporation and BayBanks had operated as
a combined entity for all periods presented. The combination of the two Boston-
based institutions created a consumer and corporate banking entity, with over
$60 billion in assets and $40 billion in deposits.
The Corporation's net income for the quarter ended September 30, 1996 was $80
million, compared with net income of $175 million for the same period in 1995.
Net income per common share was $.46 on a primary basis and $.45 on a fully
diluted basis for the third quarter of 1996, compared with net income per common
share of $1.06 on a primary basis and $1.05 on a fully diluted basis for the
third quarter of 1995. In the third quarter of 1996, the Corporation recorded
restructuring and merger-related charges of $180 million ($117 million after-
tax), or $.76 per share on a fully diluted basis, in connection with its
acquisition of BayBanks. Excluding the effects of the restructuring and merger-
related charges, net income for the third quarter of 1996 was $197 million, or
$1.21 per share on a fully diluted basis, compared to $175 million, or $1.05 per
share, in the third quarter of 1995. The Corporation expects to achieve total
annualized cost savings in connection with the integration of BayBanks of $230
million. The major systems and branch conversions are expected to be completed
by the middle of 1997, resulting in the full realization of these savings
occurring in the latter half of 1997. The Corporation's expectations with
respect to potential cost savings are forward-looking statements. Readers are
cautioned that many factors could affect the Corporation's future financial
performance and cause actual cost savings to differ materially from expected
amounts. These factors, some of which are beyond the control of the
Corporation, include, but are not limited to, the regulatory environment,
regional and national economic conditions, inflation, competition, changes in
integration plans, interest rate fluctuations and unanticipated changes in
business conditions. Therefore, the ultimate level of such expected cost
savings and the period within which such cost savings may be realized or
achieved cannot be predicted with certainty.
Net income for the first nine months of 1996 was $449 million, compared with
$498 million for the first nine months of 1995. Net income per common share was
$2.74 on a primary basis and $2.69 on a fully diluted basis for the first nine
months of 1996, compared with $3.07 on a primary basis and $3.00 on a fully
diluted basis for the first nine months of 1995. Excluding the effects of
restructuring and merger-related charges, net income for the first nine months
of 1996 was $566 million, or $3.44 per share on a fully diluted basis, compared
to $498 million, or $3.00 per share, for the 1995 nine-month period.
In connection with the BayBanks acquisition, and specifically to address
competitive issues raised by the Department of Justice and the Massachusetts
Attorney General relative to the transaction, the Corporation agreed to sell 20
branches having aggregate deposits of approximately $860 million. The
transaction is expected to be completed in the fourth quarter of 1996.
All comparisons are affected by the sale of the Corporation's corporate trust
business and the joint venture of its stock transfer business in the fourth
quarter of 1995, the acquisition of The Boston Bancorp (Bancorp) at the end of
the second quarter of 1996, and the sale of the Corporation's mortgage banking
subsidiary in the first half of 1996.
Additional information on certain of these transactions can be found in Note 2
to the Financial Statements.
The Corporation continues to explore, on an ongoing basis, acquisition and joint
venture opportunities, as well as analyze each of its businesses in the context
of competitive advantages, industry dynamics and growth potential, such as the
assignment in September of 1996 of two senior executives to evaluate the
Corporation's national consumer specialty businesses.
14
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:
QUARTERS ENDED SEPTEMBER 30 Change
- --------------------------- 1996 1995 Amount
(dollars in millions) ----- ------ ------
UNITED STATES OPERATIONS:
Net interest revenue $ 459 $ 456 $ 3
Average loans and lease financing 31,961 31,138 823
Average earning assets 40,477 39,286 1,191
Net interest margin 4.51% 4.60% (.09)%
INTERNATIONAL OPERATIONS:
Net interest revenue $ 137 $ 118 $ 19
Average loans and lease financing 9,262 7,895 1,367
Average earning assets 13,447 10,979 2,468
Net interest margin 4.07% 4.27% (.20)%
CONSOLIDATED:
Net interest revenue $ 596 $ 574 $ 22
Average loans and lease financing 41,223 39,033 2,190
Average earning assets 53,924 50,265 3,659
Net interest margin 4.40% 4.53% (.13)%
NINE MONTHS ENDED SEPTEMBER 30 Change
- ------------------------------ 1996 1995 Amount
(dollars in millions) ----- ------ ------
UNITED STATES OPERATIONS:
Net interest revenue $ 1,349 $ 1,360 $ (11)
Average loans and lease financing 31,220 30,218 1,002
Average earning assets 40,061 38,377 1,684
Net interest margin 4.50% 4.74% (.24)%
INTERNATIONAL OPERATIONS:
Net interest revenue $ 394 $ 329 $ 65
Average loans and lease financing 8,956 7,702 1,254
Average earning assets 12,880 10,608 2,272
Net interest margin 4.08% 4.15% (.07)%
CONSOLIDATED:
Net interest revenue $ 1,743 $ 1,689 $ 54
Average loans and lease financing 40,176 37,920 2,256
Average earning assets 52,941 48,985 3,956
Net interest margin 4.40% 4.61% (.21)%
15
Domestic net interest revenue increased $3 million, while net interest margin
decreased 9 basis points, in the quarterly comparison. The increase in net
interest revenue was primarily driven by an increase in average earning assets,
including growth in consumer-related loans and other average earning assets, and
a higher level of interest recoveries on loans. The growth in other average
earning assets principally reflected increased securities available for sale,
mainly for asset and liability management purposes, which were partially offset
by decreased mortgages held for sale, resulting from the sale of the mortgage
banking business. The impact of volume increases was partially offset by a
decrease in net interest margin, caused by narrower spreads, which were
mitigated by the addition of $1.3 billion of retail deposits from the June 28
acquisition of Bancorp, which replaced more expensive wholesale funding. In the
nine-month comparison, domestic net interest revenue decreased $11 million and
net interest margin decreased 24 basis points. The decrease in net interest
revenue was due to lower net interest margin, resulting from narrower spreads,
including competitive pricing pressures, and the aggressive marketing of a new
higher-rate savings product introduced during the second quarter of 1995.
Partially offsetting the decrease in net interest revenue was an increase in
average earning assets, as discussed above.
Internationally, the increase in net interest revenue of $19 million in the
quarterly comparison and $65 million in the nine-month comparison was primarily
driven by increases in average earning assets of $2.5 billion and $2.3 billion
in the quarterly and nine-month comparisons, respectively, reflecting increases
in the Corporation's Latin American operations, primarily Brazil and Argentina.
The increases in average earning assets included $1.4 billion and $1.3 billion
increases in average loans and lease financing and $1.1 billion and $.9 billion
in average treasury assets for the quarterly and nine-month comparisons,
respectively. Volume increases included approximately $700 million of average
loans and leases in Brazil for both comparisons, as well as $620 million and
$380 million in treasury assets in the quarterly and nine-month comparisons,
respectively. Average loans and leases in Argentina increased approximately $520
million and $450 million, and average treasury assets increased $490 million and
$510 million in the quarterly and nine-month comparisons, respectively. For both
the quarterly and nine-month comparisons, the impact of these volume increases
on net interest revenue was partially offset by tighter Brazilian and Argentine
net interest margins, reflecting lower interest rate spreads stemming from
increasing economic stability in these countries, and mix changes in Argentine
average earning assets. The decrease in interest rate spreads in Argentina and
Brazil and the changes in mix in Argentina were primarily responsible for the
decrease in international margin in the quarterly and nine-month comparisons.
The level of net interest revenue and margin reported for the quarter ended
September 30, 1996 is not necessarily indicative of future results. The
Corporation has experienced and could experience continued pressure on 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 current 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 was $57 million for the quarter ended September
30, 1996, compared with $51 million for the same period in 1995. For the first
nine months of 1996, the provision for credit losses was $171 million, compared
with $194 million for the first nine 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. This was due
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 provision for credit losses in each quarter reflects 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 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.
16
NONINTEREST INCOME
The following table sets forth the components of noninterest income.
Third Quarter Nine Months
------------- -----------
1996 1995 Change 1996 1995 Change
---- ---- ------ ---- ---- ------
Financial service fees
Deposit and ATM-related fees $ 61 $ 58 $ 3 $ 180 $ 173 $ 7
Letter of credit and acceptance fees 18 18 51 55 (4)
Syndication and agent fees 14 12 2 36 26 10
Other loan-related fees 9 8 1 28 25 3
Net mortgage servicing fees 3 25 (22) (82) 76 (158)
Other financial service fees 35 41 (6) 114 110 4
--- --- --- ----- --- ----
Total financial service fees 140 162 (22) 327 465 (138)
Mutual fund fees 24 18 6 69 48 21
Personal trust fees 32 29 3 97 84 13
Other trust and agency fees 6 18 (12) 15 54 (39)
Trading profits and commissions 21 7 14 59 16 43
Securities portfolio gains, net 7 1 6 24 7 17
Net equity and mezzanine profits 51 25 26 165 65 100
Net foreign exchange trading profits 13 16 (3) 37 45 (8)
Gain on sale of mortgage servicing 13 6 7 13 10 3
Other income 30 24 6 93 73 20
Gains on sales of businesses 106 75 31
--- --- --- ----- --- ----
Total $ 337 $ 306 $ 31 $ 1,005 $ 942 $ 63
=== === === ===== === ====
Lower financial service fees during the first nine months of 1996 reflected $111
million of pre-tax losses ($70 million after-tax) from risk management
activities, net of decreased mortgage servicing amortization, recorded during
the first quarter of 1996 by BancBoston Mortgage Corporation (BBMC), the
Corporation's mortgage banking subsidiary. 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, Inc. 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 pre-tax gain of $106 million ($67 million after-tax) realized on the sale of
BBMC, which is included in gain on sales of businesses. Lower financial service
fees also reflected a reduction in net mortgage servicing fees of approximately
$22 million and $47 million in the quarterly and nine-month comparisons,
respectively, principally due to the sale of BBMC in March 1996.
Excluding the above-noted effects of BBMC, financial service fees were
relatively flat in the quarterly comparison and increased $20 million in the
nine-month comparison. The increase was primarily due to increases in deposit
and ATM-related fees, and syndication and agent fees, reflecting a higher volume
of transactions generated by the Corporation's Corporate Finance business.
Net equity and mezzanine profits increased significantly compared with the prior
year periods due to a higher level of gains realized on 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 level of net profits from
the equity and mezzanine business is impacted by market and economic conditions,
and, as such, fluctuates from period to period. Mutual fund fees increased in
the quarterly and nine-month comparisons primarily due to higher fees from the
Corporation's Brazilian mutual fund business, reflecting growth in these funds
to $3.5 billion at September 30, 1996, from $2.1 billion at September 30, 1995.
Lower other trust and agency fees reflected the Corporation's sale of its
corporate trust business and the joint venture of its stock transfer business in
17
the fourth quarter of 1995. Compared to prior year periods, trading profits and
commissions increased, mainly due to increases from the Corporation's Global
Capital Markets and Latin American units. Net securities portfolio 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 decreased from the prior year periods
reflecting lower profits from Asia. The $13 million gain on the sale of
mortgage servicing in the third quarter of 1996 resulted from the sale of
BayBank's $4 billion mortgage servicing portfolio.
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.
Third Quarter Nine Months
------------- -----------
1996 1995 Change 1996 1995 Change
---- ---- ------ ---- ---- ------
Employee costs $ 293 $ 298 $ (5) $ 879 $ 857 $ 22
Occupancy and equipment 85 82 3 254 242 12
Professional fees 15 17 (2) 42 50 (8)
Advertising and public relations 26 19 7 84 60 24
Communications 24 24 74 66 8
Goodwill amortization 7 5 2 17 13 4
FDIC insurance premiums 3 (3) 1 36 (35)
Other 78 68 10 234 199 35
---- ---- ---- ----- --- ----
Noninterest expense before
restructuring and merger-
related costs and OREO costs 528 516 12 1,585 1,523 62
Restructuring and merger-
related costs 180 180 180 180
OREO costs 5 2 3 7 8 (1)
---- ---- ---- ----- ------ ----
Total $ 713 $ 518 $ 195 $ 1,772 $ 1,531 $ 241
==== ==== ==== ====== ====== ====
The increase in noninterest expense before restructuring and merger-related
costs and OREO of $12 million in the quarterly comparison and $62 million in the
nine-month comparison is primarily due to 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. The current period expense levels also included higher incentive
compensation costs related to improved business unit performance, and the
effects of the June 28, 1996 acquisition of Bancorp. These increases were
partially offset by cost savings related to the integration of BayBanks, the
elimination of FDIC insurance premiums in 1996, which amounted to $3 million in
the third quarter of 1995 and $36 million in the first nine months 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
decreased by about 7 percent, or 1,600, from September 1995, principally due to
the absence of the above businesses, and the BayBanks integration.
Legislation was passed at the end of the third quarter of 1996 to resolve issues
with respect to capitalization of the Savings Association Insurance Fund (SAIF).
The Corporation does not expect this legislation to have a material impact on
its results of operations.
In the third quarter of 1996, the Corporation recorded restructuring and merger-
related charges of $180 million in connection with its acquisition of BayBanks.
The charges included severance costs, primarily related to separation programs
and employee assistance costs,
18
related to the Corporation's plan to eliminate approximately 2,100 positions;
facility costs and other restructuring and merger-related costs, including
consolidations of branch and back office operations, resulting in lease
termination costs and writedowns of bank owned property and equipment; and
professional fees and other costs of effecting the merger; as well as systems
and other conversion costs, which were incurred during the third quarter. (See
Note 9 to the Financial Statements for further discussion.)
OREO expense increased in the quarterly comparison due to a writedown on one
property.
PROVISION FOR INCOME TAXES
The Corporation's tax provision was $78 million in the third quarter of 1996,
compared with $132 million in the third quarter of 1995. Included in the third
quarter of 1996 is a tax benefit of $63 million related to the $180 million
restructuring and merger-related charges recorded in connection with the
acquisition of BayBanks. The low level of tax benefit associated with the
charge reflects the effect of certain non tax deductible costs associated with
the acquisition. For the first nine months of 1996, the provision for income
taxes was $341 million, compared with $395 million for the first nine months of
1995, including $45 million associated with the $75 million pre-tax gain on the
sales of the Corporation's 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 investments as a result of $35 million of
non-tax deductible goodwill associated with these subsidiaries. Excluding the
effects of the restructuring and merger-related charges and the gains on the
sales of the banking subsidiaries, the Corporation's effective tax rate was 42
percent for the third quarter and first nine-months of 1996, compared to an
effective tax rate of 43 percent for the third quarter and first nine-months of
1995. The reduction in the effective tax rate from 1995 periods is due to 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 September 30, 1996, the Corporation's total assets were $62.0 billion
compared with $59.4 billion at December 31, 1995. The $2.6 billion increase was
due to a higher level of earning assets, mainly loans and trading securities,
with the increases partially offset by a reduction in mortgages held for sale
resulting from the sale of BBMC (see "Credit Profile" below for a further
discussion of loans). 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. Domestic deposits increased approximately $.9 billion,
reflecting the addition of $1.3 billion of deposits from the acquisition of
Bancorp, partially offset by a decline in certain savings accounts. Deposits
overseas also increased $1.4 billion from December 31, 1995, primarily from the
Corporation's Latin American operations. Notes payable increased approximately
$660 million from December 31, 1995, mainly due to the issuance of medium-term
notes by the Corporation and additional issuances of Brazilian debt, partially
offset by the maturity of certain senior notes of the Corporation.
19
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 and its Current Report on Form 8-K
dated September 6, 1996.
The segments of the lending portfolio are as follows:
Sept. 30 June 30 March 31 Dec. 31 Sept. 30
1996 1996 1996 1995 1995
--------- -------- ------- -------- ---------
United States Operations
Commercial, industrial and financial $ 13,828 $ 12,915 $ 12,677 $ 12,809 $ 13,162
Commercial real estate
Construction 323 410 383 386 460
Other 3,228 3,326 3,242 3,393 3,340
Consumer-related loans
Residential mortgages 4,156 4,133 4,218 4,141 5,244
Home equity loans 2,842 2,775 2,644 2,556 2,455
Credit card 1,320 1,223 810 495 369
Other 5,349 5,218 5,200 5,059 4,820
Lease financing 1,778 1,627 1,565 1,564 1,510
Unearned income (272) (245) (240) (240) (238)
------ ------ ------ ------ ------
32,552 31,382 30,499 30,163 31,122
------ ------ ------ ------ ------
International Operations
Loans and lease financing, net of
unearned income 9,501 9,271 8,769 8,707 8,066
------ ------ ------ ------ ------
------
Total loan and lease financing $ 42,053 $ 40,653 $ 39,268 $ 38,870 $ 39,188
====== ====== ====== ====== ======
The $3.2 billion increase in loans and lease financing since December 31, 1995
reflects a $2.4 billion increase in domestic loans, including increases in both
consumer-related and commercial, industrial and financial loans, and a $.8
billion increase in international loans. Domestic consumer-related loans
increased $1.4 billion, primarily reflecting the Corporation's re-entry 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 $1.0 billion increase in commercial and industrial loans
occurred in various regional and national portfolios, including specialized
industries, New England corporate banking and asset based lending; loan levels
are also affected by the timing of syndication activity. The $.8 billion
increase in international loans and lease financing since December 31, 1995,
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 74 percent of domestic commercial real estate loans were located
in New England at September 30, 1996, compared with approximately 76 percent at
December 31, 1995. The portion of domestic commercial real estate loans located
outside of New England was dispersed among 27 and 28 states at September 30,
1996 and December 31, 1995, respectively.
The Corporation's total loan portfolio at September 30, 1996 and December 31,
1995, included $1.6 billion and $1.3 billion of highly leveraged transaction
(HLT) loans to 129 and 101 customers, respectively. The average HLT loan size
at September 30, 1996 and December 31, 1995, was $12 million and $13 million,
respectively. The amount of unused commitments for HLTs at September 30, 1996
was $614 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 September 30, 1996 and
December 31, 1995, there were no nonaccrual HLT loans. Credit losses from HLT
loans were $1.2 million in the first nine months of 1996. The Corporation does
not currently anticipate a substantial increase in HLT lending over the
September 30, 1996 level.
20
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 and its Current Report on
Form 8-K dated September 6, 1996.
NONACCRUAL LOANS AND OREO
The details of consolidated nonaccrual loans and OREO are as follows:
Sept. 30 June 30 March 31 Dec. 31 Sept. 30
(dollars in millions) 1996 1996 1996 1995 1995
-------- ------- -------- ------- --------
United States
Commercial, industrial and financial $ 114 $ 140 $ 93 $ 88 $ 120
Commercial real estate
Construction 9 10 22 25 23
Other 84 86 102 103 110
Consumer-related loans
Residential mortgages 60 45 46 42 43
Home equity loans 22 20 16 14 17
Credit card 5 2
Other 44 38 42 35 31
---- ---- ---- ---- ----
338 341 321 307 344
---- ---- ---- ---- ----
International 106 57 63 66 69
---- ---- ---- ---- ----
Total nonaccrual loans 444 398 384 373 413
OREO 52 62 65 69 81
---- ---- ---- ---- ----
Total $ 496 $ 460 $ 449 $ 442 $ 494
==== ==== ==== ==== ====
Nonaccrual loans and OREO as a
percent of related asset categories 1.2% 1.1% 1.1% 1.1% 1.3 %
Nonaccrual loans and OREO at September 30, 1996 increased $54 million from
December 31, 1995, and $36 million from June 30, 1996. The increase from June
30, 1996 reflected the placement of a large international loan on nonaccrual
status, and additional increases in domestic consumer-related non-accrual loans,
about half of which resulted from conforming BayBanks consumer loan nonaccrual
policies to those of the Corporation. These increases were partially offset by
decreases in the domestic commercial loan portfolio as well as the commercial
real estate loan and OREO portfolios. The level of nonaccrual loans and OREO is
influenced by the economic environment, interest rates, and other internal and
external factors. As such, no assurance can be given as to future levels of
nonaccrual loans and leases and OREO.
RESERVE FOR CREDIT LOSSES
The reserve for credit losses at September 30, 1996 was $897 million, or 2.13
percent of outstanding loans and leases, compared with $895 million, or 2.20
percent, at June 30, 1996, and $858 million, or 2.19 percent at September 30,
1995. The reserve for credit losses was 202 percent of nonaccrual loans and
leases at September 30, 1996, compared with 225 percent at June 30, 1996, and
208 percent at September 30, 1995.
Net credit losses were $55 million for the third quarter of 1996, and $155
million for the first nine months of 1996. This compares with $45 million for
the third quarter of 1995, and $145 million for the first nine months of 1995.
Higher net credit losses for both the quarter and nine-month comparisons were
primarily driven by the increase in consumer-related loan net credit losses,
which was partially offset by lower net credit losses from the commercial real
estate and commercial and industrial portfolios. Net credit losses from the
consumer-related portfolio amounted to $44 million in the third quarter of
1996, compared to $23 million in the third quarter of 1995, and $110 million in
21
the 1996 nine-month period, compared to $59 million in the 1995 nine-month
period. The increases in the quarterly and nine-month comparisons were
principally due to higher net credit losses from the national consumer finance
portfolios, principally Fidelity Acceptance Corporation, reflecting the
continuing upward trend of net credit losses in these portfolios. International
net credit losses decreased in both the quarterly and nine-month comparisons,
primarily due to lower net credit losses from the loan portfolios in Argentina
and Uruguay, partially offset by higher net credit losses in the Brazilian
consumer loan portfolio. As a percentage of average loans and leases on an
annualized basis, net credit losses were .53 percent in the third quarter of
1996, compared with .49 percent for the second quarter of 1996, and .46 percent
for the third quarter of 1995.
Net credit losses are as follows:
Third Quarter Nine Months
(in millions) 1996 1995 1996 1995
---- ---- ---- ----
United States Operations
Commercial, industrial and financial $ 6 $ 5 $ 24
Commercial real estate $ 1 4 15 27
Consumer-related loans
Residential mortgages 2 5 9 14
Credit card 7 3 14 8
Home equity loans 3 4 4
Other 35 12 83 33
---- ---- ---- ----
45 33 130 110
International Operations 10 12 25 35
---- ---- ---- ----
Total $ 55 $ 45 $ 155 $ 145
==== ==== ==== ====
CROSS-BORDER OUTSTANDINGS
At September 30, 1996 and December 31, 1995, total cross-border outstandings
represented 13 percent and 14 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 to the Corporation 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 and its Current Report on Form 8-K dated September 6, 1996.
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
September 30, 1996, such transactions related to emerging markets
countries totaled $1.9 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.
22
Cross-border outstandings in countries which individually amounted to 1.0
percent or more of consolidated total assets at September 30, 1996 and December
31, 1995 were approximately as follows:
Consolidated Percentage of
Public Banks Other Total Total Assets Commitments (2)
-------- ------- ------- --------------- -------------- ---------------
(dollars in millions)
September 30, 1996 (1)
Argentina $490 $ 40 $1,940 $2,470 4.0% $ 65
Brazil 10 45 940 995 1.6 80
Chile 165 235 285 685 1.1 20
December 31, 1995 (1)
Argentina $465 $ 50 $1,710 $2,225 3.7% $ 45
Brazil 25 60 980 1,065 1.8 35
United Kingdom 125 570 695 1.1 130
Chile 150 140 365 655 1.1 15
(1) There were no countries where cross-border outstandings fell within .75
percent and 1 percent of consolidated total assets at September 30, 1996 and
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 $1.5 billion and $1.3 billion of Argendollar
outstandings in its cross-border totals for Argentina at September 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 September 30, 1996, approximately $5.2 billion of the Corporation's cross-
border outstandings, or approximately 8.4 percent of total assets, were to
emerging markets countries, of which most were to countries in which the
Corporation maintains a branch network and/or subsidiaries, compared to $4.9
billion at December 31, 1995. These cross-border outstandings, of which
approximately 78 percent were loans at September 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 nine months of 1996, the Argentine government announced a
series of political and economic actions aimed at stimulating growth. The
government continues to propose measures to reduce both the fiscal deficit and
unemployment. The government has expressed expectations for continued low
inflation, which amounted to zero percent during the first nine months of 1996,
and an increase in credit activity, accompanied by declining interest rates.
Total deposits in the country's financial system, which have grown by
approximately 18 percent in the first nine months of 1996, remained steady
during the quarter. The Corporation's Argentine deposits increased by
approximately $400 million from December 31, 1995, and its loans increased by
approximately $420 million from December 31, 1995, including increases in both
commercial and consumer lending. The level of Argentine nonaccrual loans
increased from $52 million at December 31, 1995, to $82 million at September 30,
1996, due to the placement of one large international loan on nonaccrual status,
which was partially offset by decreases in other nonaccrual loans. Net credit
losses declined from $23 million in the first nine months of 1995, to $14
million in the first nine months of 1996.
Brazil's inflation rate of 8.5 percent for the first nine months of 1996
compares favorably to the inflation rate of 17.2 percent for the first nine
months of 1995. During the third quarter of 1996, Brazil's inflation averaged
.6 percent per month compared with 2.0
23
percent per month during the third quarter of 1995. The government continued to
maintain a floating band exchange rate policy, which currently stands at 1.00 to
1.04 Reais to the U.S. dollar. The exchange rate at September 30, 1996 was 1.02
Reais to the U.S. dollar.
Certain local Brazilian banks experienced liquidity and other problems in 1995,
which continued into 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
approximately $600 million, to approximately $1 billion at September 30, 1996.
Additionally, the Corporation's mutual funds under management in Brazil
increased approximately $1 billion from December 31, 1995, to $3.5 billion at
September 30, 1996.
The Corporation's loan level in Brazil increased approximately $500 million
from December 31, 1995, to $2.7 billion at September 30, 1996, which included
increases from various segments of the loan portfolio. Net credit losses were
$4 million in both the third quarter and second quarter of 1996, primarily due
to higher credit losses from the consumer portfolio. Nonaccrual loans and OREO
increased from $12 million at the end of the second quarter of 1996 to $20
million at the end of the third quarter of 1996.
During the third 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 third quarter
of 1996 were $117 million and $105 million, respectively, compared to $112
million and $32 million, respectively, in the second quarter of 1996.
Additionally, the Corporation maintained average positions in Chile and Korea of
$42 million and $49 million, respectively, during the third quarter of 1996,
which compared to $23 million and $101 million, respectively, during the second
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 and its Current Report on Form 8-K dated September 6,
1996.
The economic situation in Latin American countries 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 economic actions
implemented by Latin American governments do not remain effective over time, 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 and its Current Report on Form 8-K dated
September 6, 1996.
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
$6.4 billion at September 30, 1996, compared with $7.4 billion at December 31,
1995. Also, the Corporation has access to additional funding through the public
markets. Management considers overall liquidity at September 30, 1996 to be
adequate to meet current obligations, to support expectations for future changes
in asset and liability levels and to 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 and its
Current report on Form 8-K dated September 6, 1996.
24
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
September 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 3 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 from 2 percent of risk-based capital at December 31, 1995. The
following table shows the Corporation's market value sensitivity and net
interest revenue at risk positions at September 30, 1996 and December 31, 1995,
respectively.
MARKET VALUE SENSITIVITY AND NET
INTEREST REVENUE AT RISK POSITIONS
September 30, 1996 December 31, 1995 (3)
------------------ ---------------------
Quarterly Quarterly
(dollars in millions) Quarter-end Average Quarter-end Average
- --------------------------------------------------------------------------------
Market Value
Sensitivity (1)......... $142 $145 $ 87 $ 84
% of risk-based capital 2.1% 2.4% 1.6% 1.6%
- --------------------------------------------------------------------------------
Net Interest Revenue
at Risk (2)............. $ 29 $ 25 $ 24 $ 21
% of net interest revenue 1.3% 1.2% 1.4% 1.2%
- --------------------------------------------------------------------------------
(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 September 30, 1996 and 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.
(3) December 31, 1995 amounts were not restated for the acquisition of BayBanks
due to the use of different interest rate risk modeling techniques by
BayBanks; consequently, restatement was impractical.
At September 30, 1996, and December 31, 1995, 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, the
25
lengthening of 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 declining
interest rates at September 30, 1996 and December 31, 1995.
Non-U.S. dollar denominated interest rate risk is managed by the Corporation's
overseas units, with oversight by the Boston Treasury group. The Corporation,
through ALCO, has established limits for its non-U.S. dollar denominated
interest rate risk using cumulative gap limits for each country in which the
Corporation has local market interest rate risk.
The level of U.S. dollar and Non-U.S. dollar interest rate 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 conditions at a
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 into its 1995 Annual Report
on Form 10-K and its Current Report on Form 8-K dated September 6, 1996.
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.
26
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 (ALM) portfolio.
September 30, 1996 (1) December 31, 1995 (1)
---------------------------------------------------------------------------------------------------
Notional Fair Value (2)(3) Unrecognized(4) NOTIONAL FAIR VALUE (2)(3) UNRECOGNIZED (4)
(DOLLARS IN MILLION) AMOUNT ASSET LIABILITY GAIN (LOSS) AMOUNT ASSET LIABILITY GAIN (LOSS)
- ----------------------- ---------------------------------------------- -------------------------------------------------
Interest rate contracts
Futures and forwards $3,458 $1 $(55) $12,558 $10 $(89)
Interest rate swaps 6,984 4 73 (54) 5,852 $93 8 102
Interest rate options
Purchased 3,968 119 2
Written or sold 360 34
---------------------------------------------- ---------------------------------------------
Total interest rate contracts $10,442 $4 $74 $(109) $22,738 $212 $52 $15
============================================== =============================================
Foreign exchange spot and
forward contracts (5) $1,132 $6 $5 $1 $1,258 $3 $5 $(2)
---------------------------------------------- ---------------------------------------------
Total foreign exchange contracts $1,132 $6 $5 $1 $1,258 $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 arm's 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 derivative and foreign exchange
contracts at September 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
September 30, 1996, there were $20 million of unrecognized gains and $41
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 29 months and
16 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 $109 million at September 30, 1996, was primarily
due to an increase in long-term interest rates during the first three quarters
of 1996, 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 of 1996, 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 $40 million at September 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.
27
The following table summarizes the remaining maturity of interest rate
derivative financial instruments entered into for asset and liability management
purposes as of September 30, 1996.
Remaining Maturity
--------------------------------------------------------------------
1996 1997 1998 1999
----------- ------------ ---------- ------------
(dollars in millions)
INTEREST RATE SWAPS
Domestic
Receive fixed rate swaps (1)
Notional amount $ 37 $ 201 $ 60
Weighted average receive rate 6.28% 8.20% 5.60%
Weighted average pay rate 5.59% 5.53% 5.81%
Pay fixed rate swaps (1)
Notional amount $ 28 $ 3 $ 32 $ 2
Weighted average receive rate 5.44% 5.83% 5.82% 5.66%
Weighted average pay rate 5.83% 7.36% 8.71% 7.15%
Basis swaps (2)
Notional amount $ 135 $ 75 $ 50
Weighted average receive rate 5.54% 5.57% 5.54%
Weighted average par rate 5.44% 5.56% 5.48%
Total Domestic Interest Rate Swaps
Notional amount $ 200 $ 279 $ 142 $ 2
Weighted average receive rate (3) 5.66% 7.47% 5.63% 5.66%
Weighted average pay rate (3) 5.52% 5.56% 6.35% 7.155
Total International Interest Rate Swaps
Notional Amount (4) $ 2,631 $ 1,272
OTHER DERIVATIVE PRODUCTS
Futures and forwards (5) $ 3,458
Interest rate options (6)
Purchased
Written or sold
--------- -------- ------ --------
Total Consolidated Notional Amount $ 6,289 $ 1,551 $ 142 $ 2
========= ======== ====== ========
Remaining Maturity
---------------------------------------------------------------------
Sept. 30, 1996 Dec. 31, 1995
2000 2001+ Total Total
----------- ------------ ---------- -------------
(dollars in millions)
INTEREST RATE SWAPS
Domestic
Receive fixed rate swaps (1)
Notional amount $ 340 $ 1,700 $ 2,338 $ 2,463
Weighted average receive rate 5.50% 6.46% 6.45% 6.36%
Weighted average pay rate 5.70% 5.75% 5.72% 5.87%
Pay fixed rate swaps (1)
Notional amount $ 39 $ 34 $ 138 $ 315
Weighted average receive rate 5.61% 5.75% 5.67% 6.25%
Weighted average pay rate 7.13% 7.11% 7.23% 6.91%
Basis swaps (2)
Notional amount $ 50 $ 295 $ 605 $ 1,599
Weighted average receive rate 5.88% 5.92% 5.76% 5.97%
Weighted average par rate 5.63% 5.67% 5.59% 5.86%
Total Domestic Interest Rate Swaps
Notional amount $ 429 $ 2,029 $ 3,081 $ 4,377
Weighted average receive rate (3) 5.55% 6.37% 6.28% 6.21%
Weighted average pay rate (3) 5.82% 5.76% 5.76% 5.94%
Total International Interest Rate Swaps
Notional Amount (4) $ 3,903 $ 1,475
OTHER DERIVATIVE PRODUCTS
Futures and forwards (5) $ 3,458 $ 12,558
Interest rate options (6)
Purchased 3,968
Written or sold 360
------- -------- ---------- ---------
Total Consolidated Notional Amount $ 429 $ 2,029 $ 10,442 $ 22,738
======= ======== ========== =========
(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 Corporations'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 September 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. These swaps are short-term
and 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
September 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.
28
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.
September 30, 1996 (1) December 31, 1995 (1)
----------------------------------- -------------------------------------
Notional Fair Value (2)(3)(4) NOTIONAL FAIR VALUE (2)(3)(4)
(DOLLARS IN MILLIONS) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY
- ------------------------------------------------------------------------------ -------------------------------------
Interest rate contracts
Futures and forwards $50,044 $58 $61 $30,821
Interest rate swaps 7,521 58 45 9,169 $91 $80
Interest rate options
Purchased 6,478 20 3,411 9
Written or sold 4,504 20 3,986 9
----------------------------------- -------------------------------------
Total interest rate contracts $68,547 $136 $126 $47,387 $100 $ 89
=================================== =====================================
Foreign exchange contracts
Spot and forward contracts $20,691 $182 $180 $13,254 $172 $167
Options purchased 2,050 29 1,044 13
Options written or sold 1,738 25 1,130 16
----------------------------------- -------------------------------------
Total foreign exchange contracts $24,479 $211 $205 $15,428 $185 $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 arm's length transaction with a third party as of the
balance sheet date. The fair value amounts of the trading portfolio are
included in other assets or other liabilities, as applicable. 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 derivative and foreign exchange
contracts at September 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
September 30, 1996 and December 31, 1995 were $121 million and $125
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 $202 million and $200
million, respectively, for the quarter ended September 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 nine months
ended September 30, 1996 were $.7 million and $7.8 million, respectively, and
for the quarter and nine months ended September 30, 1995 were ($.3) million and
$3.3 million, respectively. Net trading gains from foreign exchange activities,
which include foreign exchange spot, forward and option contracts, for the
quarter and nine months ended September 30, 1996 were $13 million and $37
million, respectively, and for the quarter and nine months ended September 30,
1995 were $16 million and $45 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 into its 1995 Annual Report on
Form 10-K and its Current Report on Form 8-K dated September 6, 1996.
29
CAPITAL
The Corporation's Tier 1 and total capital ratios were 8.3 percent and 12.7
percent, respectively, at September 30, 1996, compared with 8.5 percent and 12.8
percent, respectively, at December 31, 1995. The Corporation's leverage ratio
at September 30, 1996 was 7.2 percent compared with 7.4 percent at December 31,
1995.
As of September 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.
In October 1996, the Board declared a quarterly common stock dividend of $.44
per share, payable on November 29, 1996, to stockholders of record on November
4, 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 (the FASB) issued SFAS
No. 125, ''Accounting for Transfer 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.
30
Consolidated Balance Sheet Averages by Quarter
Last Nine Quarters
(in millions)
1994 1995 1996
--------------------------------------------------------------------------------------------------
3 4 1 2 3 4 1 2 3
------- ------- ------- ------- ------- ------- ------- ------- -------
ASSETS
Interest bearing deposits in
other banks $ 1,133 $ 1,065 $ 1,262 $ 1,310 $ 1,332 $ 1,454 $ 1,338 $ 1,313 $ 1,256
Federal funds sold and
securities purchased under
agreements to resell 2,691 1,807 1,482 1,294 1,004 972 1,416 1,532 1,708
Trading securities 636 768 721 815 922 929 1,136 1,624 1,467
Loans held for sale 681 345 258 262 506 760 960 69 21
Securities 6,753 7,478 7,218 7,335 7,468 7,823 8,143 8,065 8,249
Loans and lease financing 36,589 37,606 36,894 37,811 39,033 39,357 39,179 40,114 41,223
------- ------- ------- ------- ------- ------- ------- ------ -------
Total earning assets 48,483 49,069 47,835 48,827 50,265 51,295 52,172 52,717 53,924
Other assets 6,055 6,036 5,722 6,034 6,447 6,506 6,415 5,664 6,125
------- ------- ------- ------- ------- ------- ------- ------ -------
TOTAL ASSETS $ 54,538 $ 55,105 $ 53,557 $ 54,861 $ 56,712 $ 57,801 $ 58,587 $ 58,381 $ 60,049
======= ======= ======= ======= ======= ======= ======= ====== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Domestic offices:
Noninterest bearing $ 6,469 $ 6,738 $ 6,079 $ 6,091 $ 6,285 $ 6,509 $ 6,586 $ 6,420 $ 6,694
Interest bearing 23,960 24,034 22,530 23,108 24,190 24,700 24,849 24,931 26,003
Overseas offices:
Noninterest bearing 415 481 415 416 501 492 499 465 491
Interest bearing 7,703 7,875 8,318 7,967 7,790 8,202 8,698 9,302 9,429
------ ------ ------ ------ ------ ------ ------- ------- ------
Total deposits 38,547 39,128 37,342 37,582 38,766 39,903 40,632 41,118 42,617
Federal funds purchased and
repurchase agreements 4,721 4,388 4,723 4,696 3,959 4,672 3,959 4,561 4,739
Other funds borrowed 3,726 3,913 3,684 4,432 5,661 4,683 5,102 3,721 3,562
Notes payable 2,041 2,192 2,183 2,112 2,115 2,159 2,421 2,584 2,674
Other liabilities 1,702 1,580 1,618 1,818 1,790 1,806 1,767 1,709 1,698
Stockholders' equity 3,801 3,904 4,007 4,221 4,421 4,578 4,706 4,688 4,759
------ ------ ------ ------ ------ ------ ------- ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 54,538 $ 55,105 $ 53,557 $ 54,861 $ 56,712 $ 57,801 $ 58,587 $ 58,381 $ 60,049
====== ====== ====== ====== ====== ====== ======= ======= ======
31
Consolidated Statement of Income by Quarter - Taxable Equivalent Basis
Last Nine Quarters
(in millions, except per share amounts)
1994 1995 1996
3 4 1 2 3 4 1 2 3
----- ----- ----- ----- ----- ----- ----- ----- -----
NET INTEREST REVENUE: $ 543.9 $ 556.9 $ 549.0 $ 557.3 $ 569.6 $ 572.9 $ 565.5 $ 571.5 $ 591.4
Taxable equivalent adjustment 3.2 4.1 4.2 4.9 4.4 8.4 5.5 4.7 5.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Total net interest revenue 547.1 561.0 553.2 562.2 574.0 581.3 571.0 576.2 596.4
Provision for credit losses 31.0 41.0 96.5 46.5 51.0 81.0 56.9 57.1 57.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Net interest revenue after
provision for credit losses 516.1 520.0 456.7 515.7 523.0 500.3 514.1 519.1 539.4
----- ----- ----- ----- ----- ----- ----- ----- -----
NONINTEREST INCOME:
Financial service fees 148.4 148.6 146.7 155.9 162.2 230.6 51.6 135.3 140.4
Trust and agency fees 56.0 58.5 58.3 63.0 64.4 54.8 57.4 61.9 61.6
Trading profits and commissions 11.4 .5 1.8 6.8 7.2 9.1 12.9 25.0 20.7
Net securities gains 1.3 2.5 6.1 .2 .8 1.9 13.4 3.4 7.1
Other income 37.6 39.2 131.6 65.8 71.2 71.3 149.9 157.3 106.7
----- ----- ----- ----- ----- ----- ----- ----- -----
Total noninterest income 254.7 249.3 344.5 291.7 305.8 367.7 285.2 382.9 336.5
----- ----- ----- ----- ----- ----- ----- ----- -----
NONINTEREST EXPENSE:
Salaries 218.8 227.8 227.0 230.7 245.9 243.2 240.8 239.9 244.2
Employee benefits 47.0 43.8 50.0 51.0 52.2 45.8 52.2 49.0 49.1
Occupancy expense 47.9 46.6 47.3 46.8 48.3 48.6 51.1 49.7 51.1
Equipment expense 31.5 31.4 32.2 33.6 33.5 33.8 34.3 33.9 34.2
Acquisition, divestiture and
restructuring expenses 5.0 28.2 180.0
Other expense 145.2 149.4 144.2 149.7 138.0 146.1 148.5 159.7 153.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total noninterest expense 495.4 499.0 500.7 511.8 517.9 545.7 526.9 532.2 712.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 275.4 270.3 300.5 295.6 310.9 322.3 272.4 369.8 163.5
Provision for income taxes 119.2 114.7 140.5 123.0 132.0 133.6 112.0 151.3 78.5
Taxable equivalent adjustment 3.2 4.1 4.2 4.9 4.4 8.4 5.5 4.7 5.0
----- ----- ----- ----- ----- ----- ----- ----- -----
122.4 118.8 144.7 127.9 136.4 142.0 117.5 156.0 83.5
----- ----- ----- ----- ----- ----- ----- ----- -----
NET INCOME $ 153.0 $ 151.5 $ 155.8 $ 167.7 $ 174.5 $ 180.3 $ 154.9 $ 213.8 $ 80.0
===== ===== ===== ===== ===== ===== ===== ===== =====
PER COMMON SHARE:
Net Income:
Primary $ .96 $ .95 $ .98 $ 1.03 $ 1.06 $ 1.09 $ .94 $ 1.33 $ .46
Fully diluted .94 .92 .95 1.02 1.05 1.08 .93 1.32 .45
Cash dividends declared .22 .27 .27 .27 .37 .37 .37 .44 .44
32
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
Quarter Ended September 30, 1996
(dollars In millions)
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
ASSETS VOLUME INTEREST(1) RATE
------------------------------------
INTEREST BEARING DEPOSITS WITH
OTHER BANKS U.S. $ 173 $ 2 4.99%
International 1,083 21 7.44
------ -----
Total 1,256 23 7.10
------ ----- ----
FEDERAL FUNDS SOLD AND RESALE
AGREEMENTS U.S. 480 7 5.52
International 1,228 43 13.98
------ -----
Total 1,708 50 11.60
------ ----- -----
TRADING SECURITIES U.S. 470 7 6.13
International 997 29 11.67
------ -----
Total 1,467 36 9.89
------ ----- -----
MORTGAGES HELD FOR SAlE U.S. 21 8.74
------ -----
SECURITIES U.S.
Available for sale (2) 6,686 109 6.51
Held to maturity 686 10 6.06
International
Available for sale (2) 871 30 14.11
Held to maturity 6 1 31.12
------ -----
Total 8,249 150 7.23
------ ----- -----
LOANS AND LEASE FINANCING
(NET OF UNEARNED INCOME) U.S. 31,961 687 8.55
International 9,262 258 11.08
------ -----
Total loans and lease financing (3) 41,223 945 9.12
------ ----- -----
Earning assets 53,924 1,204 8.89
------ ----- -----
Nonearning assets 6,125
------
TOTAL ASSETS $ 60,049
======
---------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
DEPOSITS U.S.
Savings deposits $ 15,001 $ 102 2.70%
Time deposits 11,002 153 5.55
International 9,429 160 6.76
------ -----
Total 35,432 415 4.67
------ ----- -----
FEDERAL FUNDS PURCHASED
AND REPURCHASE AGREEMENTS U.S. 4,643 68 5.85
International 96 3 11.07
------ -----
Total 4,739 71 5.95
------ ----- -----
OTHER FUNDS BORROWED U.S. 2,580 37 5.74
International 982 35 14.22
------ -----
Total 3,562 72 8.08
------ ----- -----
NOTES PAYABLE U.S. 2,087 35 6.55
International 587 15 10.14
------ -----
Total 2,674 50 7.34
------ ----- -----
Total interest bearing liabilities 46,407 608 5.21
----- -----
Demand deposits U.S. 6,694
Demand deposits International 491
Other noninterest bearing liabilities 1,698
Total Stockholders' Equity 4,759
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,049
======
---------------------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 40,477 $ 459 4.51%
International 13,447 137 4.07
------ -----
Total $ 53,924 $ 596 4.40%
====== =====
---------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the securities'
amortized cost.
(3) Loans and lease financing includes nonaccrual and renegotiated balances.
33
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
Quarter Ended September 30, 1995
(dollars In millions)
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
ASSETS VOLUME INTEREST(1) RATE
------------------------------------
INTEREST BEARING DEPOSITS WITH
OTHER BANKS U.S. $ 238 $ 4 6.40%
International 1,094 42 15.19
------ -----
Total 1,332 46 13.63
------ ----- -----
FEDERAL FUNDS SOLD AND RESALE
AGREEMENTS U.S. 413 6 5.91
International 591 68 45.62
------ -----
Total 1,004 74 29.31
------ ----- -----
TRADING SECURITIES U.S. 209 3 6.07
International 713 59 32.41
------ -----
Total 922 62 26.45
------ ----- -----
MORTGAGES HELD FOR SALE U.S. 506 9 7.03
------ ----- -----
SECURITIES U.S.
Available for sale (2) 2,903 47 6.46
Held to maturity 3,879 59 6.05
International
Available for sale (2) 462 15 14.28
Held to maturity 224 6 9.70
------ -----
Total 7,468 127 6.77
------ ----- -----
LOANS AND LEASE FINANCING
(NET OF UNEARNED INCOME) U.S. 31,138 690 8.79
International 7,895 316 15.90
------ -----
Total loans and lease
financing (3) 39,033 1,006 10.23
------ ----- -----
Earning assets 50,265 1,324 10.45
----- -----
Nonearning assets 6,447
------
TOTAL ASSETS $ 56,712
======
-------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
DEPOSITS U.S.
Savings deposits $ 14,606 $ 100 2.76%
Time deposits 9,584 139 5.74
International 7,790 225 11.44
------ -----
Total 31,980 464 5.77
------ ----- -----
FEDERAL FUNDS PURCHASED
AND REPURCHASE AGREEMENTS U.S. 3,799 46 4.81
International 160 10 24.40
------ -----
Total 3,959 56 5.60
------ ----- -----
OTHER FUNDS BORROWED U.S. 4,831 74 6.05
International 830 116 55.70
------ -----
Total 5,661 190 13.33
------ ----- -----
NOTES PAYABLE U.S. 1,912 34 7.06
International 203 6 11.00
------ -----
Total 2,115 40 7.44
------ ----- -----
Total interest bearing
liabilities 43,715 750 6.81
----- -----
Demand deposits U.S. 6,285
Demand deposits International 501
Other noninterest bearing
liabilities 1,790
Total Stockholders' Equity 4,421
------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 56,712
======
-------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 39,286 $ 456 4.60%
International 10,979 118 4.27
------ -----
Total $ 50,265 $ 574 4.53%
====== =====
----------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the
securities' amortized cost.
(3) Loans and lease financing includes nonaccrual and renegotiated balances.
34
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
Nine Months Ended September 30, 1996
(dollars In millions)
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
VOLUME INTEREST(1) RATE
----------------------------------
ASSETS
INTEREST BEARING DEPOSITS WITH
OTHER BANKS U.S. $ 211 $ 9 5.67%
International 1,091 65 8.01
------ -----
Total 1,302 74 7.63
------ ----- -----
FEDERAL FUNDS SOLD AND RESALE
AGREEMENTS U.S. 456 18 5.33
International 1,096 120 14.60
------ -----
Total 1,552 138 11.87
------ ----- -----
TRADING SECURITIES U.S. 466 20 5.62
International 943 110 15.58
------ -----
Total 1,409 130 12.29
------ ----- -----
MORTGAGES HELD FOR SALE U.S. 332 17 7.00
International 17 1 6.11
------ -----
Total 349 18 6.96
------ ----- -----
SECURITIES U.S.
Available for sale (2) 6,692 321 6.42
Held to maturity 684 31 6.08
International
Available for sale (2) 738 77 13.89
Held to maturity 39 5 16.60
------ -----
Total 8,153 434 6.98
------ ----- -----
LOANS AND LEASE FINANCING
(NET OF UNEARNED INCOME) U.S. 31,220 2,008 8.59
International 8,956 855 12.75
------ -----
Total loans and lease
financing (3) 40,176 2,863 9.52
------ ----- -----
Earning assets 52,941 3,657 9.23
----- -----
Nonearning assets 6,069
------
TOTAL ASSETS $ 59,010
======
-------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
DEPOSITS U.S.
Savings deposits $ 14,938 $ 300 2.69%
Time deposits 10,325 435 5.62
International 9,145 527 7.69
------ -----
Total 34,408 1,262 4.90
------ ----- -----
FEDERAL FUNDS PURCHASED
AND REPURCHASE AGREEMENTS U.S. 4,319 186 5.75
International 102 10 12.90
------ -----
Total 4,421 196 5.91
------ ----- -----
OTHER FUNDS BORROWED U.S. 3,180 142 5.98
International 946 175 24.66
------ -----
Total 4,126 317 10.26
------ ----- -----
NOTES PAYABLE U.S. 2,022 99 6.55
International 538 40 10.02
------ -----
Total 2,560 139 7.28
------ ----- -----
Total interest bearing
liabilities 45,515 1,914 5.62
----- -----
Demand deposits U.S. 6,567
Demand deposits International 485
Other noninterest bearing
liabilities 1,725
Total Stockholders' Equity 4,718
------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 59,010
======
-------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 40,061 $ 1,349 4.50%
International 12,880 394 4.08
------ -----
Total $ 52,941 $ 1,743 4.40%
====== =====
-------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the
securities' amortized cost.
(3) Loans and lease financing includes nonaccrual and renegotiated balances.
35
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
Nine Months Ended September 30, 1995
(dollars In millions)
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
VOLUME INTEREST (1) RATE
------------------------------------
ASSETS
INTEREST BEARING DEPOSITS WITH
OTHER BANKS U.S. $ 243 $ 9 5.16%
International 1,059 169 21.26
------ -----
Total 1,302 178 18.26
------ ----- -----
FEDERAL FUNDS SOLD AND RESALE
AGREEMENTS U.S. 593 27 5.98
International 665 247 49.66
------ -----
Total 1,258 274 29.05
------ ----- -----
TRADING SECURITIES U.S. 229 10 6.37
International 591 136 30.67
------ -----
Total 820 146 23.90
------ ----- -----
MORTGAGES HELD FOR SALE U.S. 343 17 6.89
------ ----- -----
SECURITIES U.S.
Available for sale (2) 2,616 131 6.71
Held to maturity 4,135 186 6.02
International
Available for sale (2) 381 40 14.04
Held to maturity 210 15 9.55
------ -----
Total 7,342 372 6.77
------ ----- -----
LOANS AND LEASE FINANCING
(NET OF UNEARNED INCOME) U.S. 30,218 2,001 8.85
International 7,702 865 15.02
------ -----
Total loans and lease
financing (3) 37,920 2,866 10.11
------ ----- -----
Earning assets 48,985 3,853 10.52
----- -----
Nonearning assets 6,068
------
TOTAL ASSETS $ 55,053
======
-------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
DEPOSITS U.S.
Savings deposits $ 14,191 $ 276 2.60%
Time deposits 9,090 375 5.52
International 8,024 697 11.60
------ -----
Total 31,305 1,348 5.75
------ ----- -----
FEDERAL FUNDS PURCHASED
AND REPURCHASE AGREEMENTS U.S. 4,294 161 5.03
International 162 36 29.47
------ -----
Total 4,456 197 5.92
------ ----- -----
OTHER FUNDS BORROWED U.S. 3,725 172 6.20
International 875 329 50.17
------ -----
Total 4,600 501 14.56
------ ----- -----
NOTES PAYABLE U.S. 1,973 104 7.08
International 164 14 11.56
------ -----
Total 2,137 118 7.43
------ ----- -----
Total interest bearing
liabilities 42,498 2,164 6.81
----- -----
Demand deposits U.S. 6,153
Demand deposits International 444
Other noninterest bearing
liabilities 1,742
Total Stockholders' Equity 4,216
------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 55,053
======
-------------------------------------------------------------------
NET INTEREST REVENUE
AS A PERCENTAGE OF
AVERAGE INTEREST
EARNING ASSETS U.S. $ 38,377 $ 1,360 4.74%
International 10,608 329 4.15
------ -----
Total $ 48,985 $ 1,689 4.61%
====== =====
-------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the
securities' amortized cost.
(3) Loans and lease financing includes nonaccrual and renegotiated balances.
36
CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS
Third Quarter 1996 Compared With Third 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
----------------
(IN MILLIONS) VOLUME RATE NET CHANGE
------ ---- ----------
INTEREST INCOME
LOANS AND LEASE FINANCING U.S. $ 18 $ (21) $ (3)
International 38 (96) (58)
---------
(61)
---------
OTHER EARNING ASSETS U.S. 6 1 7
International 32 (98) (66)
---------
(59)
---------
TOTAL INTEREST INCOME 82 (202) (120)
TOTAL INTEREST EXPENSE 41 (183) (142)
---------
NET INTEREST REVENUE $ 22
=========
Nine Months Ended September 30, 1996 Compared With Nine Months Ended September
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
----------------
(IN MILLIONS) VOLUME RATE NET CHANGE
------ ---- ----------
INTEREST INCOME
LOANS AND LEASE FINANCING U.S. $ 64 $ (57) $ (7)
International 120 (130) (10)
---------
(3)
---------
OTHER EARNING ASSETS U.S. 32 4 36
International 98 (327) (229)
---------
(193)
---------
TOTAL INTEREST INCOME 273 (469) (196)
TOTAL INTEREST EXPENSE 144 (394) (250)
---------
NET INTEREST REVENUE $ 54
=========
37
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 judgement
motion was 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. While vigorously denying any wrongdoing of any kind,
including the claim that it aided and abetted any breach of fiduciary duty, the
Corporation agreed on September 20, 1996 to settle the lawsuit in order to avoid
the substantial expense and distraction associated with continued litigation.
The Chancery Court approved the settlement on November 6, 1996. The settlement
provides for payment by the Corporation of $5 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 - By-Laws of the Corporation, as amended through October 24, 1996
11 - Computation of Earnings Per Common Share
12(a) - Computation of the Corporation's Consolidated Ratio of Earnings
to Fixed Charges (excluding interest on deposits)
12(b) - Computation of the Corporation's Consolidated Ratio of Earnings
to Fixed Charges (including interest on deposits)
27.1 - Financial Data Schedule
27.2 - Restated Financial Data Schedule for the nine months ended
September 30, 1995
(b) Current Reports on Form 8-K
During the third quarter of 1996, the Corporation filed three Current
Reports on Form 8-K. The current reports, dated July 18, 1996, July 25, 1996
and September 6, 1996, contained information pursuant to Items 5 and 7,
Items 2, 5 and 7 and Items 5 and 7, respectively, of Form 8-K. The
Corporation also filed a Current Report on Form 8-K, dated October 17, 1996,
which contained information pursuant to Items 5 and 7 of Form 8-K.
38
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: November 14, 1996
39