EXHIBIT 13
BANKBOSTON CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1997 1996 1995 1994 1993 1992
(dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Interest income................. $ 5,164 $ 4,893 $ 5,119 $ 4,376 $ 3,330 $ 3,664
Interest expense................ 2,735 2,553 2,870 2,339 1,561 1,992
------- ------- ------- ------- ------- -------
Net interest revenue.......... 2,429 2,340 2,249 2,037 1,769 1,672
Provision for credit losses..... 200 231 275 154 107 288
------- ------- ------- ------- ------- -------
Net interest revenue after
provision for credit losses.. 2,229 2,109 1,974 1,883 1,662 1,384
Noninterest income.............. 1,563 1,344 1,309 1,035 945 1,020
Noninterest expense(1).......... 2,324 2,320 2,076 1,947 2,002 1,949
------- ------- ------- ------- ------- -------
Income before income taxes,
extraordinary items and
cumulative effect of changes in
accounting principles.......... 1,468 1,133 1,207 971 605 455
Provision for income taxes.... 589 483 529 422 262 190
------- ------- ------- ------- ------- -------
Income before extraordinary
items and cumulative effect of
changes in accounting
principles..................... 879 650 678 549 343 265
Extraordinary items
Loss from early extinguishment
of debt, net of tax........... (7)
Recognition of prior year tax
benefit carryforwards......... 73
Cumulative effect of changes in
accounting principles, net of
tax(2)......................... 24
------- ------- ------- ------- ------- -------
Net income.................... $ 879 $ 650 $ 678 $ 542 $ 367 $ 338
======= ======= ======= ======= ======= =======
Net income applicable to
common stock................. $ 848 $ 613 $ 641 $ 505 $ 332 $ 318
======= ======= ======= ======= ======= =======
Per common share
Income before extraordinary
items and cumulative effect of
changes in accounting
principles
Basic......................... $ 5.73 $ 3.99 $ 4.17 $ 3.44 $ 2.09 $ 1.77
Diluted....................... 5.65 3.93 4.09 3.36 2.05 1.73
Net income
Basic......................... 5.73 3.99 4.17 3.39 2.26 2.30
Diluted....................... 5.65 3.93 4.09 3.31 2.21 2.24
Cash dividends declared........ 1.97 1.69 1.28 .93 .40 .10
Average number of common shares
(in thousands)
Basic.......................... 147,959 153,529 153,856 148,913 147,033 138,444
Diluted........................ 150,040 156,112 156,768 153,616 152,067 144,044
- -------------------------------------------------------------------------------------------------
(1) Includes: in 1996, $180 million of charges primarily composed of employee
severance and property-related costs recorded in connection with the Corpo-
ration's acquisition of BayBanks, Inc.; in 1995, $28 million of charges
mainly related to exiting, reorganizing and downsizing certain business and
corporate staff units; in 1994, costs of $21 million recorded in connection
with the Corporation's acquisitions of BankWorcester Corporation and Pio-
neer Financial, A Co-operative Bank; and, in 1993, acquisition-related
costs and reorganization charges of $85 million recorded primarily in con-
nection with the Corporation's acquisitions of Society for Savings Bancorp,
Inc. and Multibank Financial Corp., as well as estimated costs of downsiz-
ing and reconfiguring certain of the Corporation's business and corporate
units.
(2) Includes a cumulative benefit of $77 million resulting from the adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," and a cumulative charge of $53 million, net of tax, relating to a
change in accounting principles pertaining to the valuation of purchased
mortgage servicing rights.
27
BANKBOSTON CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
Years Ended December 31 1997 1996 1995 1994 1993 1992
(dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average assets.. 1.35% 1.09% 1.22% 1.01% .76% .73%
Return on average common
equity(1)................. 20.05 14.47 16.86 15.50 11.39 12.86
Common dividend payout
ratio..................... 34.3 40.4 28.1 24.9 14.4 3.4
Common equity to total
assets.................... 6.3 7.1 7.1 6.2 6.1 5.9
Average total
stockholders' equity to
average total assets...... 7.2 8.0 7.7 7.1 7.1 6.0
Risk-based capital ratios
Tier 1.................. 8.0 9.2 8.5 7.7 7.7 7.4
Total................... 12.1 13.6 12.8 12.7 12.4 11.8
Leverage ratio............ 7.4 8.2 7.4 6.7 6.9 6.6
Net credit losses to
average loans and lease
financing................. .66 .57 .51 .81 .87 1.38
Reserve for credit losses
to loans and lease
financing................. 1.62 2.15 2.29 2.19 2.70 3.57
Reserve for credit losses
to nonaccrual loans and
lease financing........... 222.2 219.6 238.9 197.0 142.2 116.3
Nonaccrual loans and OREO
as a percent of related
asset categories.......... .8 1.1 1.1 1.5 2.5 4.2
Market value/book value... 316.0 222.4 171.2 112.2 108.9 134.4
BALANCE SHEET DATA AT
DECEMBER 31
Loans and lease
financing................. $ 43,980 $41,061 $38,870 $37,708 $34,819 $31,240
Reserve for credit
losses.................... (712) (883) (890) (827) (941) (1,116)
Total assets.............. 69,268 62,306 59,423 55,411 50,711 47,222
Deposits.................. 45,761 42,831 41,064 40,249 38,316 38,097
Funds borrowed............ 11,723 9,158 9,503 7,211 5,487 3,092
Notes payable............. 2,941 2,821 2,189 2,219 2,023 1,736
Stockholders' equity...... 4,610 4,934 4,702 3,931 3,615 3,198
Common shares outstanding
(in thousands)............ 145,707 153,173 155,296 148,343 147,036 145,379
Common stockholders of
record(2)................. 26,522 27,672 27,662 27,505 28,233 30,163
Number of employees....... 21,495 21,990 23,710 24,009 24,215 24,986
Per common share
Book value............... $ 29.73 $ 28.89 $ 27.01 $ 23.07 $ 21.13 $ 18.98
Market value............. 93 15/16 64 1/4 46 1/4 25 7/8 23 25 1/2
AVERAGE BALANCE SHEET DATA
Loans and lease
financing................. $ 42,383 $40,589 $38,283 $36,017 $32,565 $31,568
Securities................ 9,741 8,122 7,463 6,473 5,631 6,272
Other earning assets...... 5,584 4,699 3,821 5,027 4,684 3,818
-------- ------- ------- ------- ------- -------
Total earning assets.... 57,708 53,410 49,567 47,517 42,880 41,658
-------- ------- ------- ------- ------- -------
Cash and due from banks... 3,069 2,610 2,591 2,708 2,419 2,200
Other assets.............. 4,486 3,503 3,586 3,164 2,638 2,432
-------- ------- ------- ------- ------- -------
Total average assets.... $ 65,263 $59,523 $55,744 $53,389 $47,937 $46,290
======== ======= ======= ======= ======= =======
Deposits.................. $ 42,853 $41,603 $38,406 $37,919 $37,163 $37,643
Funds borrowed............ 11,864 8,751 9,132 8,018 4,500 3,633
Other liabilities......... 2,497 1,759 1,760 1,563 1,087 1,000
Notes payable(3).......... 3,382 2,666 2,142 2,123 1,797 1,252
Stockholders' equity...... 4,667 4,744 4,304 3,766 3,390 2,762
-------- ------- ------- ------- ------- -------
Total average
liabilities and
stockholders' equity.... $ 65,263 $59,523 $55,744 $53,389 $47,937 $46,290
======== ======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------
(1) For purposes of this ratio, preferred stock dividends have been deducted
from net income.
(2) The number of stockholders of record includes banks and brokers who act as
nominees, each of whom may represent more than one stockholder.
(3) Averages for 1997 and 1996 include guaranteed preferred beneficial inter-
ests in Corporation's junior subordinated debentures.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
BankBoston Corporation (the Corporation) is a registered bank holding company
which, together with its subsidiaries, operates through a network of offices
across the U.S. and has more than 100 offices in 23 countries in Latin America,
Asia, Europe and Africa. The Corporation's major banking subsidiaries are
BankBoston, N.A. (the Bank) and Rhode Island Hospital Trust National Bank.
The Corporation may from time to time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private Secu-
rities Litigation Reform Act of 1995. Forward-looking statements may include
financial projections, statements of plans and objectives for future opera-
tions, estimates of future economic performance, and assumptions relating
thereto.
The Corporation may include forward-looking statements in its filings with the
Securities and Exchange Commission, in its reports to stockholders, including
this Annual Report, in other written materials, and in statements made by se-
nior management to analysts, rating agencies, institutional investors, repre-
sentatives of the media and others.
By their very nature, forward-looking statements are subject to uncertainties,
both general and specific, and risks exist that predictions, forecasts, projec-
tions and other forward-looking statements will not be achieved. The following
factors, among others, could cause actual results to differ materially from any
forward-looking statements: technological changes, including the timely devel-
opment by the Corporation of technology enhancements for its products and oper-
ating systems; the effects of competition by other financial services organiza-
tions; legislative or regulatory developments, including changes in laws con-
cerning taxes, banking, securities and insurance; changes in fiscal, monetary
and tax policies of the United States, foreign governments and international
agencies; political or social developments; the possibility of foreign exchange
controls in countries in which the Corporation conducts business; general eco-
nomic conditions, both domestic and international, including inflation, inter-
est rates, market and monetary fluctuations and the state of the securities and
capital markets, including changes in market perception; the demand for credit;
currency fluctuations; tight labor markets; and acquisitions and integrations
of acquired businesses. When relying on forward-looking statements to make de-
cisions with respect to the Corporation, investors and others are cautioned to
consider these and other uncertainties and events, whether or not the state-
ments are described as forward-looking.
STRATEGIC INITIATIVES
The Corporation continues to undertake strategic initiatives focused on
leveraging its core competencies over attractive markets, and continues to ex-
plore, on an ongoing basis, acquisition, divestiture and joint venture opportu-
nities, as well as analyze each of its businesses in the context of competitive
advantages, industry dynamics and growth potential.
ACQUISITIONS AND BUSINESS EXPANSIONS
During 1997, the Corporation announced its intention to expand its retail dis-
tribution capacity in Argentina and to strengthen its presence in that country.
In connection with this expansion program, the Corporation opened seventeen
branches in Argentina during 1997, and expects to open approximately 50 more
branches during 1998. In addition, in January 1998, the Corporation completed
its acquisition of Deutsche Bank Argentina S.A. (Deutsche Argentina), a subsid-
iary of Deutsche Bank A.G., for approximately $255 million in cash. In connec-
tion with this transaction, the Corporation acquired approximately $1.3 billion
of loans and $1.5 billion of deposits. The Corporation expects to consolidate
some overlapping Deutsche Argentina branches with existing or planned branch
locations.
The Corporation is also expanding its retail distribution capacity in Brazil.
In connection with this expansion program, the Corporation opened ten branches
during 1997, and expects to open 32 more branches during 1998.
During 1997, the Corporation continued to expand its Global Capital Markets
business. This expansion included the hiring of additional sales and trading
professionals, the opening of BancBoston Securities Inc. (BSI), the Corpora-
tion's Section 20 subsidiary, and the formation of a high yield securities
unit. As part of this expansion effort, in early 1998, the Corporation rea-
ligned its operations in Asia to focus on capital markets, including debt un-
derwriting and trading, foreign exchange and derivatives, as well as on trade
services.
In October 1997, the Corporation completed its acquisition of Pacific National
Corporation, the parent of Pacific National Bank of Nantucket, located on the
island of Nantucket, Massachusetts, in exchange for approximately 279,000
shares of the Corporation's common stock, valued at approximately $22 million.
Pacific National Corporation had loans of $98 million, primarily residential
and commercial real estate loans, and deposits of $108 million at the time of
acquisition.
In July 1996, the Corporation completed its acquisition of BayBanks, Inc.
(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. In connection with regulatory approval for its acquisition of BayBanks,
the Corporation, in the fourth quarter of 1996, sold 20 branches of the com-
bined entity, having aggregate deposits of approximately $700 million and loans
of approximately $500 million, resulting in a pre-tax gain of approximately $47
million.
In June 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 approximately $1.3 billion in deposits. The Corpo-
ration exchanged 4.6 million shares of its common stock, with a value of ap-
proximately $229 million, for all of the outstanding common stock of Bancorp.
The Corporation purchased an equivalent amount of shares in the open market for
this transaction.
29
DIVESTITURES AND STRATEGIC ALLIANCES
The Corporation implemented its previously announced strategic initiative to
downsize its national consumer lending business as follows:
. During 1997, the Corporation sold its two national consumer lending subsid-
iaries, Fidelity Acceptance Corporation (FAC) and Ganis Credit Corporation
(Ganis). The Corporation sold FAC during the third quarter of 1997, result-
ing in a pre-tax gain of $68 million. In March 1997, the Corporation sold
approximately $950 million of Ganis loans for a pre-tax gain of $7.5 mil-
lion, and completed the sale of Ganis in June 1997.
. In January 1998, the Corporation consummated its agreement with Bank of
Montreal and its Chicago-based U.S. subsidiary, Harris Trust and Savings
Bank, and First Annapolis Consulting, Inc. to form a national credit card
venture. Under the terms of the agreement, which was announced in September
1997, the Corporation contributed its national credit card portfolio of ap-
proximately $1.2 billion in receivables in exchange for cash, at par. The
Corporation also received 19 percent of the common stock and $50 million of
preferred stock of the new company and an additional $5 million in cash.
The Corporation has retained its regional credit card portfolio of approxi-
mately $500 million in receivables.
In February 1998, the Corporation sold its 26 percent ownership interest in
HomeSide, Inc. (HomeSide) to National Australia Bank Ltd. The sale was in con-
nection with National Australia Bank Ltd.'s acquisition of 100 percent of
HomeSide. The transaction will result in a pre-tax gain of approximately $165
million. HomeSide was formed in the first half of 1996, when the Corporation
joined with two equity investment firms and Barnett Banks, Inc. (Barnett) to
form this independent mortgage company, to which the Corporation and Barnett
sold their mortgage banking subsidiaries, BancBoston Mortgage Corporation and
Barnett Mortgage Company, respectively. The Corporation, Barnett and the two
equity investment firms each initially held an approximate one-third interest
in HomeSide. The Corporation recognized a pre-tax gain of $106 million relat-
ing to this transaction, which was offset by a pre-tax loss of $111 million
related to mortgage prepayment risk management activities (see the "Noninter-
est Income" section). In January 1997, as a result of HomeSide's initial pub-
lic offering, the Corporation's one-third interest was reduced to 26 percent
for a net pre-tax gain of $3 million.
In September 1997, the Corporation announced its intention to exit its indi-
rect auto loan business. At December 31, 1997, the indirect loan portfolio
amounted to approximately $1.3 billion.
OTHER
In October 1997, the Corporation announced a new initiative to redesign the
way it does business, examining existing processes and activities with the
goal of enhancing efficiency and of transforming and improving its customers'
experience with the Corporation. This initiative will primarily focus on proc-
ess-intensive businesses in the U.S., including, among others, the New England
regional consumer business. The internal analysis and design phase is expected
to be completed in mid-1998.
In January 1998, the Corporation announced its plan to restructure its Euro-
pean operations by centralizing its operations in London. This restructuring
plan anticipates closing the Corporation's offices in Paris and Frankfurt dur-
ing 1998.
Additional information with regard to certain of these transactions is in-
cluded in Note 2 to the Financial Statements.
30
RESULTS OF OPERATIONS
The following is a discussion and analysis of the Corporation's consolidated
results of operations. In order to understand this section in context, it
should be read in conjunction with the Consolidated Financial Statements in-
cluded elsewhere in this report.
OVERVIEW
The Corporation's net income for 1997 was $879 million, compared with $650 mil-
lion for 1996. Basic net income per common share was $5.73 and diluted net in-
come per common share was $5.65 in 1997, compared with $3.99 and $3.93, respec-
tively, in 1996. In 1996, the Corporation recorded restructuring and merger-re-
lated costs of $180 million ($117 million after-tax) in connection with its ac-
quisition of BayBanks. See the "Noninterest Expense" section and Note 19 to the
Financial Statements for a further discussion of restructuring and merger-re-
lated costs. Excluding the effects of these restructuring and merger-related
costs, as well as other charges related to the BayBanks acquisition and items
related to the sale of the Corporation's mortgage banking subsidiary, 1996 net
income was $773 million, or $4.71 per common share on a diluted basis. The Cor-
poration's 1997 net income and net income per common share on a diluted basis
increased 14 percent and 20 percent, respectively, from the 1996 levels, ex-
cluding the above mentioned items.
NET INTEREST REVENUE
This discussion of net interest revenue should be read in conjunction with Av-
erage Balances and Interest Rates and Change in Net Interest Revenue -- Volume
and Rate Analysis, presented elsewhere in this report. Table 1 presents a sum-
mary of net interest revenue, related average earning assets and net interest
margin. For this review of net interest revenue, interest income that is either
exempt from federal income taxes or taxed at a preferential rate has been ad-
justed to a fully taxable equivalent basis. This adjustment has been calculated
using a federal income tax rate of 35 percent, plus applicable state and local
taxes, net of related federal tax benefits.
TABLE 1 -- NET INTEREST REVENUE, AVERAGE EARNING ASSETS AND NET INTEREST MARGIN
Years Ended December 31
(dollars in millions) U.S. International Consolidated
- ------------------------------------------------------------------------------
Net interest revenue (fully taxable
equivalent basis)
1997..................................... $ 1,822 $ 631 $ 2,453
1996..................................... 1,826 534 2,360
1995..................................... 1,825 446 2,271
Average earning assets
1997..................................... $41,849 $15,859 $57,708
1996..................................... 40,211 13,199 53,410
1995..................................... 38,688 10,879 49,567
Net interest margin
1997..................................... 4.36% 3.98% 4.25%
1996..................................... 4.54 4.05 4.42
1995..................................... 4.72 4.10 4.58
1997 COMPARED WITH 1996
The improvement in consolidated net interest revenue of $93 million was primar-
ily driven by an increase in average earning assets, while the decrease in con-
solidated net interest margin of 17 basis points was primarily due to the sale
of FAC.
Domestic net interest revenue decreased from 1996 to 1997 due to a decrease in
net interest margin of 18 basis points, partially offset by an increase in av-
erage earning assets of $1.6 billion. The decrease in net interest margin was
primarily due to the sale of FAC in 1997. The increase in trading and available
for sale securities, due to growth in the Global Capital Markets business and
risk management activities, was mainly responsible for the increase in average
earning assets. Information with respect to the Corporation's management of in-
terest rate risk is discussed in the "Asset and Liability Management" section.
Average loans and lease volume was relatively unchanged from 1996. The $1.6
billion increase in commercial, industrial and financial loans and commercial
real estate loans was offset by a $1.7 billion decrease in consumer-related
loans, including lower residential mortgages and lower FAC and Ganis loans. As
noted above, the Corporation sold FAC and Ganis during 1997.
International net interest revenue rose $97 million due to increases in average
earning assets, reflecting increases in average loans and leases of $1.7 bil-
lion, primarily commercial and industrial loans, and a $1 billion increase in
other average earning assets, mainly available for sale securities, due from
banks and securities purchased under agreements to resell. These increases pri-
marily occurred in the Corporation's operations in Latin America, mainly Argen-
tina and Brazil. The effect of the higher level of average earning assets was
partially offset by a 7 basis point decline in net interest margin, reflecting
narrower spreads, primarily in Argentina, partially offset by wider spreads in
Brazil as a result of an increase in Brazilian interest rates.
The Corporation expects continued pressure on margin in the future. Future lev-
els of net interest revenue and margin will be affected by competitive pricing
pressure on retail deposits, loans and other products; the mix and volume of
assets and liabilities; the current interest rate environment; the economic and
political conditions in the countries where the Corporation does business; and
other factors, such as the Corporation's strategic initiatives.
31
NONINTEREST INCOME
The composition of noninterest income is presented in Table 2.
TABLE 2 -- NONINTEREST INCOME
Years Ended December 31 1997 1996 1995
(in millions)
- -------------------------------------------------------------------------------
Financial service fees
Deposit and ATM-related fees............................ $ 259 $ 238 $ 231
Letter of credit and acceptance fees.................... 73 68 72
Syndication and agent fees.............................. 95 58 38
Other loan-related fees................................. 39 38 34
Net mortgage servicing fees............................. (82) 172
Other financial service fees............................ 189 154 148
------ ------ ------
Total financial service fees........................... 655 474 695
Mutual fund fees......................................... 111 94 67
Personal trust fees...................................... 145 131 112
Other trust and agency fees.............................. 27 21 61
Trading profits and commissions.......................... 58 76 25
Securities portfolio gains, net.......................... 80 23 9
Net equity and mezzanine profits......................... 221 209 110
Net foreign exchange trading profits..................... 88 54 60
Gains on sales of mortgage servicing..................... 13 10
Gains on sales of businesses............................. 68 153 95
Other income............................................. 110 96 65
------ ------ ------
Total.................................................. $1,563 $1,344 $1,309
====== ====== ======
1997 COMPARED WITH 1996
Excluding net mortgage servicing fees, financial service fees increased $99
million compared with 1996. The improvement was due to an increase in syndica-
tion and agent fees, reflecting a higher volume of transactions generated by
the Corporation's loan syndications business; an increase in deposit and ATM-
related fees due to repricing of certain domestic products; and an increase in
other financial service fees resulting from increased underwriting and finan-
cial advisory fees in the Corporation's Global Capital Markets business.
Net mortgage servicing fees in 1996 included $111 million of pre-tax losses
from risk management activities, net of decreased mortgage servicing amortiza-
tion. These losses resulted from the decline in market value of contracts used
to manage prepayment risk in the mortgage servicing portfolio which, in turn,
protected the economic value of the Corporation's mortgage banking subsidiary
pending the completion of its sale to HomeSide. Concurrently, the market value
of the mortgage servicing assets increased, resulting in a pre-tax gain of $106
million upon the sale of the mortgage banking subsidiary, which substantially
offset the losses from risk management activities. The pre-tax gain is included
in gains on sales of businesses. As discussed in the "Strategic Initiatives"
section above, in February 1998, the Corporation sold its interest in HomeSide,
and will record a pre-tax gain of approximately $165 million.
Mutual fund fees increased $17 million, primarily due to higher fees from the
Corporation's Argentine mutual fund business, reflecting growth in these funds
of approximately $700 million during 1997, to $1.2 billion at December 31,
1997. The $14 million increase in 1997 in personal trust fees was due to an in-
crease in domestic assets under management.
Compared with 1996, trading profits and commissions decreased $18 million,
mainly due to losses incurred in the Corporation's trading securities portfo-
lios, primarily in the emerging markets and high yield securities businesses,
in the fourth quarter of 1997. The decrease was partially offset by trading
gains in other trading portfolios, primarily in the derivatives trading busi-
ness. The $57 million increase in net securities portfolio gains in 1997 mainly
reflected net gains related to securities sales in the emerging markets busi-
ness in the fourth quarter of 1997, and the sale of certain securities in the
Argentine available for sale portfolio. Net foreign exchange trading profits
increased $34 million in 1997, due to growth of this business and favorable
market conditions during the year, particularly in the fourth quarter. The
trading and securities portfolio activities were affected by the Asian economic
crisis. See the "Emerging Markets Countries" section for a further discussion
of recent market events in Asia. The levels of profits from the Corporation's
trading businesses and other capital markets businesses are also influenced by
market and economic conditions and, as such, there can be no assurance as to
the future levels of profits from these businesses.
Net equity and mezzanine profits increased $12 million over 1996, reflecting
continued gains in the Private Equity Investing business. The level of these
profits is also affected by market and economic conditions.
Gains on sales of businesses in 1997 is composed of a $68 million pre-tax gain
from the sale of FAC, and, in 1996, a $106 million pre-tax gain from the sale
of the Corporation's mortgage banking subsidiary discussed above and a $47 mil-
lion pre-tax gain from the sale of branches. See the "Strategic Initiatives"
section for a further discussion of these transactions.
The $14 million increase in other noninterest income included higher gains on
sales of loans, partially offset by an $11 million loss, recognized in connec-
tion with the sale of FAC, on interest rate futures contracts that had been
used to hedge the funding of this subsidiary.
32
NONINTEREST EXPENSE
The composition of noninterest expense is presented in Table 3.
TABLE 3 -- NONINTEREST EXPENSE
Years Ended December 31 1997 1996 1995
(in millions)
- -------------------------------------------------------------------------------
Employee costs............................................ $1,279 $1,178 $1,146
Occupancy and equipment................................... 350 341 324
Advertising and public relations.......................... 107 108 87
Communications............................................ 112 101 90
Professional fees......................................... 61 56 65
Amortization of goodwill and other intangibles............ 37 34 28
Other..................................................... 374 313 299
------ ------ ------
Noninterest expense before acquisition, divestiture, and
restructuring expense and OREO........................... 2,320 2,131 2,039
Acquisition, divestiture and restructuring expense........ 180 28
OREO...................................................... 4 9 9
------ ------ ------
Total.................................................... $2,324 $2,320 $2,076
====== ====== ======
1997 COMPARED WITH 1996
Noninterest expense before acquisition, divestiture and restructuring expense
and other real estate owned (OREO) increased $189 million compared with the
prior year. The increase was primarily driven by investment spending in Argen-
tina and Brazil, including the opening of seventeen new branches in Argentina
and ten new branches in Brazil; the continued growth of the Corporation's
Global Capital Markets businesses, including the hiring of additional sales and
trading professionals, the opening of BSI and the formation of a high yield se-
curities unit; and increased incentive compensation related to improved busi-
ness performance, and higher merit increases.
In addition, during 1997, the Corporation incurred additional conversion costs
associated with the regional consumer business, costs related to the unveiling
of the new BankBoston brand in Latin America, and costs in connection with its
Year 2000 project. See the "Risk Management" section for a discussion of the
Corporation's Year 2000 project. These costs are the principal components of
the increase in other noninterest expense. The additional conversion costs in-
cluded integrating teller, ATM and other back-office systems; additional part-
time and temporary help related to the integration; and costs related to the
planned closing of additional branches. Also included are costs associated with
the extension of the new products set to the Corporation's Connecticut opera-
tions in conjunction with the merger of Bank of Boston Connecticut into the
Bank, which occurred in October 1997.
The increase in noninterest expense before acquisition, divestiture and re-
structuring expense and OREO was offset, in part, by lower operating expenses
of FAC and Ganis, due to their disposition during 1997, and cost savings re-
lated to the integration of BayBanks.
In the third quarter of 1996, the Corporation recorded restructuring and merg-
er-related costs of $180 million in connection with its acquisition of
BayBanks. The charges included severance costs, facility costs, including con-
solidations of branch and back office operations, and professional fees and
other costs of effecting the merger. Also included are systems and other con-
version costs which were incurred at the time of the merger. See Note 19 to the
Financial Statements for a further discussion of acquisition, divestiture and
restructuring expense.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $200 million in 1997, compared with $231
million in 1996. See the "Reserve for Credit Losses" section and Note 7 to the
Financial Statements for a further discussion of the provision for credit loss-
es. The provision for credit losses reflects management's assessment of the ad-
equacy of the reserve for credit losses, considering the current risk charac-
teristics of the loan portfolio and economic conditions. It also reflected the
actions taken by the Corporation to exit its national consumer lending busi-
ness, a business that generated significant chargeoffs. The amount of future
provisions will be a function of the regular quarterly review of the reserve
for credit losses, based upon management's assessment of risk at the time, and,
as such, there can be no assurance as to the level of future provisions.
PROVISION FOR INCOME TAXES
The 1997 income tax provision was $589 million, compared with $483 million for
1996. Included in the 1996 provision is a tax benefit of $63 million related to
the $180 million of restructuring and merger-related costs recorded in connec-
tion with the acquisition of BayBanks. The low level of tax benefit associated
with the charge reflects the effect of certain non-tax deductible costs associ-
ated with the acquisition.
The Corporation's effective tax rate was 40 percent in 1997, compared with 42
percent in 1996, excluding the impact of restructuring and merger-related
costs. The reduction in the Corporation's effective tax rate from 1996 was pri-
marily due to reductions in the rates of state tax to which the Corporation's
operations were subject.
33
LINE OF BUSINESS RESULTS
The Corporation is managed through its Policy Council, which is the senior de-
cision making group of the institution. The Policy Council is comprised of
eleven members, including the Chairman and Chief Executive Officer, the Presi-
dent and Chief Operating Officer and the Chief Financial Officer. The remaining
members of the Policy Council include six executives who manage certain key
businesses, and the chairs of the corporate-wide Risk Management and Human Re-
sources committees.
Management has grouped its principal revenue producing areas into the following
major business lines: Corporate Banking and Global Capital Markets, Regional
Consumer and Small Business, Argentina, Brazil, and the Global Private Bank.
The operating results and other key financial measures of these five business
lines for 1997 and 1996 are presented below. Information related to the Corpo-
ration's remaining businesses, various central functions and other corporate
items has been aggregated and is included below in "Other Businesses and Corpo-
rate." This includes the Global Treasury group; the national consumer business-
es, including FAC and Ganis, which were sold in 1997, and the national credit
card portfolio, which was contributed to a newly formed venture in the first
quarter of 1998; and other international businesses and joint ventures. Infor-
mation shown for 1996 is presented on a basis consistent with 1997 and, as
such, has been restated for changes in the Corporation's organization and in-
ternal management reporting methodologies.
The line of business information shown below reflects assignments and alloca-
tions of items made within the Corporation's internal management reporting
process. Descriptions of individual items are as follows:
. Most balance sheet, revenue and expense items are derived from the internal
management reporting system, where they are specifically attributable to
individual businesses.
. Net interest revenue is allocated to the business lines using a funds
transfer pricing process, which incorporates a matched funding concept,
with the residual assigned to the Global Treasury group.
. Various techniques are employed to allocate certain costs associated with
corporate support areas, including the use of unit costs and service vol-
umes.
. The provision for credit losses is allocated to each line of business based
on "expected loss" as determined under the Corporation's risk adjusted re-
turn on equity (RAROE) methodology, which is an estimate of the average
loss rate that individual credit portfolios will experience over their life
cycle, based on the Corporation's historical experiences and various market
data. This method is different than the method used to determine the Corpo-
ration's consolidated provision for credit losses, which is based on an
evaluation of the adequacy of the reserve for credit losses, considering
the risk characteristics in the credit portfolio at a point in time. Since
the "expected loss" methodology, which averages peaks and valleys of the
credit cycle, is intended to be a longer term view of credit costs for a
business, it would be expected to result in a lower allocation in the worst
periods of a credit cycle and higher allocations in the best periods of a
credit cycle. The difference between the sum of the expected loss for each
line of business and the Corporation's provision is included in "Other
Businesses and Corporate."
. The effective tax rate applied to each business line reflects the Corpora-
tion's consolidated effective tax rate, excluding, in 1996, certain corpo-
rate items.
. The return on equity shown for each line of business is based upon the Cor-
poration's RAROE methodology. The amount of common equity allocated to each
business line is based on 1) an evaluation of the various risks associated
with the business, including credit, market, country and operational risk,
and 2) the amount necessary to support other investments, such as fixed as-
sets, goodwill and joint ventures. The difference between the aggregate
capital allocated under this methodology and total consolidated common eq-
uity is allocated to the business lines on a pro-rata basis.
Selected financial information for the Corporation's lines of business for 1997
and 1996 is presented in Table 4. The financial information is presented on a
fully taxable equivalent basis.
TABLE 4 -- LINE OF BUSINESS SELECTED FINANCIAL INFORMATION
Corporate
Banking and Global Regional Consumer Global
Capital Markets and Small Business Argentina Brazil Private Bank
Years Ended December 31 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------
Operating
revenues....... $ 1,372 $ 1,197 $ 1,132 $ 1,135 $ 357 $ 303 $ 406 $ 324 $ 264 $ 246
Operating
expenses....... 599 512 819 825 226 180 273 206 176 176
--------- --------- --------- --------- ------ ------ ------ ------ ------ ------
Operating
income......... 773 685 313 310 131 123 133 118 88 70
Acquisition,
divestiture and
restructuring
expense........
Credit costs
(provision and
OREO).......... 101 110 35 38 22 20 18 14 2 1
--------- --------- --------- --------- ------ ------ ------ ------ ------ ------
Pre-tax income.. 672 575 278 272 109 103 115 104 86 69
Taxes........... 276 244 114 115 45 44 47 44 35 29
--------- --------- --------- --------- ------ ------ ------ ------ ------ ------
Net income...... $ 396 $ 331 $ 164 $ 157 $ 64 $ 59 $ 68 $ 60 $ 51 $ 40
========= ========= ========= ========= ====== ====== ====== ====== ====== ======
Average assets.. $ 26,797 $ 23,106 $ 7,402 $ 7,332 $5,044 $4,136 $5,418 $4,570 $1,353 $1,185
Average
deposits....... $ 6,061 $ 6,195 $ 24,193 $ 24,099 $2,576 $2,160 $1,437 $1,060 $2,677 $2,532
Return on
average common
equity......... 22% 19% 18% 17% 24% 19% 24% 24% 37% 26%
- --------------------------------------------------------------------------------------------------------------------
Other Businesses
and Corporate Total
Years Ended December 31 1997 1996 1997 1996
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------
Operating
revenues....... $ 485 $ 499 $ 4,016 $ 3,704
Operating
expenses....... 227 232 2,320 2,131
-------- -------- -------- --------
Operating
income......... 258 267 1,696 1,573
Acquisition,
divestiture and
restructuring
expense........ 180 180
Credit costs
(provision and
OREO).......... 26 57 204 240
-------- -------- -------- --------
Pre-tax income.. 232 30 1,492 1,153
Taxes........... 96 27 613 503
-------- -------- -------- --------
Net income...... $ 136 $ 3 $ 879 $ 650
======== ======== ======== ========
Average assets.. $ 19,249 $ 19,194 $65,263 $59,523
Average
deposits....... $ 5,909 $ 5,557 $42,853 $41,603
Return on
average common
equity......... 20% 14%
- --------------------------------------------------------------------------------------------------------------------
34
CORPORATE BANKING AND GLOBAL CAPITAL MARKETS
Corporate Banking includes the Corporation's Relationship Bank, the Investment
Bank, and the Private Equity Investing business. Global Capital Markets in-
cludes the Emerging Markets Sales, Trading & Research (EMSTR) and High Yield
Securities Group (HYSG) businesses, as well as various other trading business-
es, such as foreign exchange and derivatives.
The national and regional Relationship Bank manages a $21 billion portfolio of
loans and leases spread over a variety of lending units, which include Media
and Communications, High Technology, Transportation, Environmental Services,
Real Estate, New England Corporate Banking, Large Corporate, Asset Based Fi-
nance, Diversified Finance, Multinational, Financial Institutions and Leasing.
These lending units seek to establish relationships with customers and deliver
relationship-driven financial solutions through traditional credit products,
cash management, and trade services. The creation and organization of the Cor-
poration's Investment Banking function is in response to marketplace competi-
tion, and reflects the convergence of investment and commercial banking. The
Corporation is building this capability around its powerful loan syndications
business. Investment bankers will partner with line officers in delivering ad-
visory services and capital markets solutions to appropriate customers. This
action builds upon existing strong corporate relationships developed and main-
tained by our relationship manager organization.
The Global Capital Markets area is a vital link between issuing and investing
clients. Working closely with the commercial lending, loan syndications, and
investment banking functions, business customers have access to domestic and
cross-border loan syndication, private placement, asset securitization, under-
writing and strategic advisory services. In addition, Global Capital Markets
provides a full array of capital markets products to its customers, including
risk management products, such as derivatives and foreign exchange contracts.
In early 1997, the Corporation opened BSI to provide customers with access to
domestic bond underwriting, and, in conjunction with this opening, formed HYSG.
In addition, the Corporation provides underwriting services to international
markets through its EMSTR area.
The Private Equity Investing business operates from offices in the United
States, Europe, Latin America and Asia. It invests in early stage companies and
other special situations with the expectation of realizing returns on these in-
vestments within a four- to six-year timeframe. The portfolio, with a cost ba-
sis of approximately $1 billion at December 31, 1997, is diversified as to as-
set class, risk and industry. Gains are realized from multiple exit channels
including initial public offerings, recapitalizations and financial and strate-
gic buyouts.
Net income from Corporate Banking and Global Capital Markets increased $65 mil-
lion from 1996. The 15 percent improvement in revenue was primarily driven by
an increase in net interest revenue, reflecting an increase of approximately
$1.6 billion in commercial loans, and an increase in noninterest income, re-
flecting growth in loan syndication, advisory and underwriting fees, higher net
securities portfolio gains from the EMSTR business, and higher net foreign ex-
change trading profits. These increases were offset, in part, by lower trading
account profits, which were affected by losses experienced in the fourth quar-
ter of 1997 as a result of the Asian economic crisis. See the "Emerging Markets
Countries" section for a further discussion of the Asian crisis. Higher equity
and mezzanine profits and gains from sales of loans also contributed to the
revenue growth. The increase in operating expenses was primarily due to the
Corporation's continued expansion of its Corporate and Global Capital Markets
businesses, including the opening of BSI and the formation of a high yield se-
curities unit, and increased incentive compensation related to improved busi-
ness performance.
REGIONAL CONSUMER AND SMALL BUSINESS
Regional Consumer and Small Business serves the deposit, credit and investment
needs of approximately two million households and approximately 120,000 small
businesses through 468 branches, including traditional and in-store branches
and mall locations, spanning Massachusetts, Rhode Island, Connecticut and New
Hampshire. With over $24 billion of deposits, the business also functions as a
major funding source for the Corporation's domestic operations. Approximately
three-quarters of the branches are located in Massachusetts, where the Corpora-
tion is ranked first in deposit market share.
In addition to offering traditional branch banking, the Corporation also pro-
vides its customers an expanding array of 24-hour banking choices:
. Approximately 1,500 ATMs provide customers with 24 hour access to their ac-
counts.
. Approximately 260,000 customers have availed themselves of home banking
services through the use of their personal computers.
. Complete telephone banking services are provided through two state-of-the-
art call centers in Massachusetts and Rhode Island that handle 40 million
calls annually.
. Included in the 468 branches are 68 in-store branches and fifteen regional
mall locations, which provide convenient banking services to customers
where they shop.
Regional Consumer and Small Business manages a $6 billion loan portfolio, of
which $5 billion is consumer loans and $1 billion is small business loans. A
variety of loan products, including home equity, residential mortgage, automo-
bile, education, credit card and other installment loans are offered to consum-
ers in the region. Through the small business banking area, the Corporation of-
fers complete banking and related services to commercial customers with annual
revenues of up to $10 million, and is ranked as the top Small Business Adminis-
tration lender in Massachusetts.
Net income from Regional Consumer and Small Business increased $7 million from
1996, due to lower expenses and credit costs, partially offset by lower reve-
nues. The decrease in operating expenses was due to cost savings related to the
BayBanks integration, partially offset by incremental costs incurred to execute
the merger, as well as additional costs to improve electronic delivery systems
and to expand the Corporation's in-store branch network. The decrease in oper-
ating revenues was largely due to a refocusing of the mortgage origination
business, as well as the sale and closure of branches in connection with the
BayBanks acquisition.
ARGENTINA
The Corporation has operated in Argentina since 1917, and is one of the largest
banks in the country. The Corporation's Argentine operations offer a wide array
of products within the large corporate, special industries, middle market and
retail businesses. Products and services offered include commercial and invest-
ment banking, credit cards, residential mortgages, automobile loans, mutual
funds, brokerage, custody and portfolio management.
During 1997, the Corporation announced its intention to expand its retail dis-
tribution capacity in Argentina and to strengthen its presence
35
in that country. In connection with this expansion program, the Corporation
opened seventeen new branches in Argentina during 1997, and expects to open ap-
proximately 50 additional branches during 1998. In addition, in January 1998,
the Corporation completed its acquisition of Deutsche Argentina and acquired
approximately $1.3 billion of loans and $1.5 billion of deposits. See the
"Strategic Initiatives" section for additional information regarding this ac-
quisition. The expansion program and the Deutsche Argentina acquisition are ex-
pected to result in the Corporation's Argentine branch network expanding from
43 in mid-1997 to approximately 140 by mid-1998.
Net income from Argentina increased $5 million, or 8 percent, from 1996. The
improvement in operating revenues was due to higher levels of net interest rev-
enue, reflecting an increase in average earning assets, mainly loans, and
higher levels of noninterest income. The increase in noninterest income in-
cluded higher securities gains from the sale of certain securities in the Ar-
gentine available for sale portfolio. Mutual fund fees increased as a result of
mutual funds under management increasing approximately $700 million from Decem-
ber 31, 1996. These revenue improvements were partially offset by an increase
in expenses, including costs related to expanding the Argentine operations.
For additional information on Argentina, see the "Cross-Border Outstandings"
and "Emerging Markets Countries" sections.
BRAZIL
The Corporation has operated in Brazil since 1947 and is one of the largest
foreign banks in the country. The principal businesses of the Corporation's
Brazilian operations include corporate lending, trade financing, treasury and
fee-based activities, with particular emphasis on mutual funds, custody and
credit cards. The Corporation's mutual funds under management in Brazil
amounted to approximately $4.9 billion at December 31, 1997, compared with $3.7
billion at December 31, 1996, making it the seventh largest mutual fund manager
in Brazil and one of the largest banking participants in this business. Also,
the Corporation continued to increase its presence in Brazil's global capital
markets activities. In addition, custody volumes increased by $1.4 billion, to
$6.4 billion at December 31, 1997, compared with $5 billion at December 31,
1996. The Corporation plans to expand its retail distribution capacity in Bra-
zil. In connection with this expansion program, the Corporation opened ten new
branches during 1997, and expects to open an additional 32 branches during
1998, thereby creating a 66 branch network.
Net income from Brazil increased $8 million, or 13 percent, from 1996. This im-
provement was mainly due to higher levels of net interest revenue, reflecting
an increase in average earning assets, including loans; wider spreads in Brazil
as a result of an increase in Brazilian interest rates, particularly in the
fourth quarter of 1997; and growth in noninterest income. The increase in Bra-
zilian interest rates was the result of government intervention to protect the
Brazilian currency in response to the Asian economic crisis. See the "Emerging
Markets Countries" section for a further discussion of the Asian economic cri-
sis. The increase in noninterest income was largely the result of higher finan-
cial service fees, including letter of credit and acceptance fees, investment
banking and advisory fees. These revenue improvements were partially offset by
an increase in expenses, including those related to the cost of expanding the
Brazilian operations.
For additional information on Brazil, see the "Cross-Border Outstandings" and
"Emerging Markets Countries" sections.
GLOBAL PRIVATE BANK
The Global Private Bank, which has over $23 billion of assets under management
and maintains fourteen domestic offices in southern New England, New York and
Florida, as well as an office in the Bahamas, serves 10,000 primary clients and
25,000 trust beneficiaries.
The U.S. Private Bank and International Private Bank provide wealth management
services to a significant multi-generational client base, with a specialized
focus on the needs of principals and executives of small to mid-sized compa-
nies, as well as others with substantial illiquid assets. Asset management,
trust, tax and estate planning, insurance, lending and deposit services are de-
livered using comprehensive solutions, which address the combined business,
personal and retirement needs of wealthy clients.
The Institutional Advisors group provides customized, niche services for mid-
sized companies, foundations, endowments, municipalities and governmental agen-
cies, including investment management for employee benefit plans, liquid funds
management, custody, trustee services and administration, as well as a multi-
fund-family proprietary 401(k) product.
The Global Private Bank, with its three core business units, is strategically
aligned to leverage the Corporation's strength in Argentina, Brazil, Corporate
Banking and Global Capital Markets, and Regional Consumer and Small Business.
Net income from the Global Private Bank increased $11 million from 1996. Oper-
ating revenues improved mainly as a result of higher levels of personal trust
and mutual fund fees, which reflected an increase in assets under management of
approximately $4.3 billion during 1997. Expenses remained flat from 1996, pri-
marily due to the positive effect of BayBanks synergies.
OTHER BUSINESSES AND CORPORATE
Included in Other Businesses and Corporate are the following items:
. Global Treasury, which is primarily responsible for asset and liability risk
management. See the "Asset and Liability Management" section for a further
discussion of asset and liability risk management. In addition, Global Trea-
sury manages approximately $8 billion of Boston 1784 Funds, a family of six-
teen no-load mutual funds. The high level of assets in Other Businesses and
Corporate mainly relates to securities portfolios maintained by Global Trea-
sury and used to manage the Corporation's interest rate risk exposure.
. The National Consumer business, including FAC and Ganis, which were sold
during 1997, and the national credit card business, which was contributed to
a newly formed venture in January 1998.
. Other International businesses, including the Corporation's operations in
Latin America, other than Argentina and Brazil, and Asia/Pacific.
. Joint ventures, including the Argentine and Mexican pension joint ventures,
the stock transfer joint venture and the mortgage banking business (which
was sold in the first quarter of 1998).
. Certain corporate income and expense items of a nonrecurring nature, such as
charges related to the BayBanks acquisition, items related to the sale of
FAC and the mortgage banking subsidiary, as well as branch sales, business
reorganization costs and costs relating to the valuation or disposition of
certain assets.
. The difference between the sum of the provisions for credit losses for each
line of business and the Corporation's provision, resulting from the method-
ology differences described above.
36
FINANCIAL CONDITION
RISK MANAGEMENT
The Corporation's management of the risk inherent in its businesses is essen-
tial in understanding and assessing its financial performance and in creating
long-term value. Three of the Corporation's primary risk factors are credit
risk, liquidity risk and market risk, which includes interest rate risk and
foreign exchange rate risk. Credit risk is the risk of loss from a
counterparty's failure or inability to meet the payment or performance terms of
any contract with the Corporation. Liquidity risk is the risk of loss from the
Corporation's inability to meet its obligations when they come due, without in-
curring unacceptable costs. Market risk is the risk of loss related to adverse
changes in market prices, such as interest rates and foreign exchange rates.
The Corporation has a risk management process for the identification, measure-
ment, monitoring and control of these and other risk exposures, such as trans-
action, compliance, strategic, reputation, and transfer risks.
A transitory risk that impacts the primary risk factors discussed above is the
Corporation's exposure to the Year 2000 issue, which stems from the use of a
two-digit format to define the year in certain of the Corporation's date-sensi-
tive application systems rather than the use of a four-digit format. As a re-
sult, the Corporation's date-sensitive software programs could recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in ma-
jor systems or process failures or the generation of erroneous data, which
would lead to disruptions in the Corporation's business operations.
The Corporation has made an assessment of its own systems relative to the Year
2000 issue, including an analysis of system code changes required for both in-
ternal and vendor supplied applications. In addition, the Corporation has an
action plan in place as well as resources dedicated to the modification proc-
ess, and expects work to be completed in 1999, including application design,
development and testing.
Due to the significant interdependencies of businesses, governmental agencies
and other entities with which the Corporation does business, the Corporation
has initiated programs to educate vendors and customers regarding the Year 2000
issue and to assess their action plans and their potential effect on the Corpo-
ration. This includes discussions regarding this issue by relationship managers
with their customers, and the completion of questionnaires relative to the cus-
tomers' ability to convert their systems. The results of these efforts will be
incorporated into the Corporation's risk management processes, including cus-
tomer risk ratings and credit action plans.
The Corporation expects that it will successfully complete its Year 2000 action
plan in a timely and effective manner, and that its programs will result in the
effective management of these risks. However, there can be no assurance that
conversion failures will not occur, and that such failures will not have an ad-
verse impact on the Corporation's results of operations and financial condi-
tion. In addition, the Corporation's programs with its vendors and customers
are subject to more uncertainty because they are beyond the direct control of
the Corporation.
The Corporation has incurred, and expects to continue to incur, costs to modify
its computer application systems for the Year 2000 and costs to carry out other
programs to mitigate the risk associated with the Year 2000 issue. The Corpora-
tion expects that the total cost of managing its Year 2000 risk, including
costs already incurred, will be between $50 million and $75 million. However,
at present it does not anticipate that material incremental costs will be in-
curred in any single period, as most of the costs incurred will result from a
reallocation of the Corporation's current technology resources.
CREDIT RISK MANAGEMENT
The Corporation's risk management process includes the management of all forms
of credit risk, including balance sheet and off-balance-sheet exposures. The
Credit Policy Committee (CPC), on a corporate-wide basis, establishes all
credit policies for the Corporation, approves underwriting standards and con-
centration limits, and grants credit approval authorities. An independent
credit function monitors compliance by individual units with the Corporation's
credit policies, works to ensure that credit due diligence and credit adminis-
tration meet acceptable standards, and is responsible for the effectiveness of
the loan review process. The credit function includes a staff of credit offi-
cers, reporting directly to the Chief Credit Officer (CCO). These credit offi-
cers are assigned to work with the various business units to ensure the integ-
rity of the credit process. Business unit management has the primary responsi-
bility to evaluate credit risk, ensure that each individual credit exposure is
appropriately risk rated, and monitor and manage credit risks within policy and
portfolio guidelines. In addition, a credit information unit provides reports
on credit exposures on a corporate-wide basis. A risk review unit, which re-
ports independently of both the business and credit units, audits the integrity
of risk ratings and the adequacy of the credit process for all units of the
Corporation.
Through monthly meetings with the business unit heads and the frequent review
of credit quality information, senior management in Boston oversees the world-
wide credit activities, both corporate and consumer, of the Corporation. The
level of management needed to approve credit exposures varies according to the
size and level of risk of the credit. Corporate credits that meet specified
size and risk rating thresholds must be approved by the Senior Credit Commit-
tee, which is chaired by the CCO and is composed of senior credit officers and
senior business unit managers on a rotating basis. Portfolio limits and under-
writing standards are established by the CPC for both consumer and commercial
credit exposures with common risk characteristics, such as industry or product
type. An important aspect of the Corporation's portfolio management process is
the management of large, individual credits, which are governed by relationship
limits that are set according to risk rating. The CPC has also established tar-
get risk rating profiles for the Corporation. All limits are reviewed regularly
and adjusted based on the CPC's assessment of relevant conditions. In addition,
the Country Exposure Committee, also chaired by the CCO, sets country limits on
cross-border exposures to borrowers and counterparties domiciled in other coun-
tries.
The Corporation's loan syndications unit is integral to portfolio management by
enhancing the liquidity of the wholesale loan portfolio. Syndications is re-
sponsible for arranging participations in loans where the Corporation is the
lead bank. This unit maintains contact with other institutional lenders and in-
vestors in bank structured loans, maintains information on credit structure and
pricing by risk category, evaluates the market liquidity of facilities, and
syndicates Corporation- agented facilities to attain desired hold levels.
The Corporation employs a corporate-wide process to review individual credits
and identify emerging problems. Credits that deteriorate into certain defined
risk categories are managed by a separate loan review unit composed of profes-
sional asset recovery specialists who establish detailed asset management plans
designed to mitigate risk of credit loss to the Corporation.
37
The Corporation continually seeks to improve its credit culture to better bal-
ance associated risks with its goal of optimizing value to its stockholders and
customers. While sound credit policies assist the Corporation in managing expo-
sure to credit risks, they do not insulate the Corporation from losses.
LOANS AND LEASE FINANCING
Table 5 shows a breakdown of the portfolio for the last five years.
TABLE 5 -- LOANS AND LEASE FINANCING PORTFOLIO
December 31 1997 1996 1995 1994 1993
(dollars in millions) BALANCE PERCENT Balance Percent Balance Percent Balance Percent Balance Percent
- --------------------------------------------------------------------------------------------------------------
UNITED STATES
Commercial, industrial
and financial........... $15,268 34.7% $13,162 32.0% $12,809 33.0% $13,122 34.8% $13,199 37.9%
Commercial real estate
Construction........... 271 .6 284 .7 386 1.0 391 1.0 675 1.9
Other.................. 4,211 9.6 3,240 7.9 3,393 8.7 4,065 10.8 4,003 11.5
Consumer-related
Secured by 1-4 family
residential
properties............. 5,393 12.3 6,062 14.8 6,697 17.2 7,079 18.8 5,969 17.1
Other.................. 4,712 10.7 6,898 16.8 5,554 14.3 4,559 12.1 3,524 10.1
Lease financing......... 1,938 4.4 1,816 4.4 1,564 4.0 1,482 3.9 1,367 3.9
Unearned income......... (302) (.7) (287) (.7) (240) (.6) (239) (.6) (228) (.7)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
31,491 71.6 31,175 75.9 30,163 77.6 30,459 80.8 28,509 81.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
INTERNATIONAL
Commercial and
industrial.............. 8,826 20.1 6,946 16.9 6,422 16.5 5,161 13.6 4,650 13.4
Banks and other
financial institutions.. 860 2.0 866 2.1 796 2.1 749 2.0 690 2.0
Governments and official
institutions............ 95 .2 79 .2 82 .2 33 .1 22 .1
Consumer-related
Residential mortgages.. 947 2.2 699 1.7 526 1.4 454 1.2 232 .7
Other.................. 1,010 2.3 606 1.5 470 1.2 410 1.1 318 .9
Lease financing......... 452 1.0 368 .9 285 .7 329 .9 265 .8
All other............... 378 .8 415 1.0 163 .4 189 .5 241 .7
Unearned income......... (79) (.2) (93) (.2) (37) (.1) (76) (.2) (108) (.3)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
12,489 28.4 9,886 24.1 8,707 22.4 7,249 19.2 6,310 18.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans and lease
financing............... $43,980 100.0% $41,061 100.0% $38,870 100.0% $37,708 100.0% $34,819 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- --------------------------------------------------------------------------------------------------------------
Total loans and lease financing increased approximately $2.9 billion from De-
cember 31, 1996, reflecting an increase in domestic loans of $316 million and
an increase of $2.6 billion in international loans. The increase in domestic
loans from December 31, 1996 reflected a $2.1 billion increase in commercial,
industrial and financial loans, and a $971 million increase in other commercial
real estate loans, partially offset by a $2.8 billion decrease in consumer-re-
lated loans. The increases in commercial, industrial and financial loans re-
sulted from increases in various loan portfolios, including Asset Based Finance
and Diversified Finance. The increase in commercial real estate loans reflected
increased lending to real estate investment trusts. Loan levels are also af-
fected by the timing of loan syndication activity. Consumer-related loans de-
creased due to the sales of FAC and Ganis during 1997, as well as a $615 mil-
lion decrease in residential mortgages, offset, in part, by a $360 million in-
crease in credit card loans.
As noted above, in January 1998, the Corporation consummated its agreement with
Bank of Montreal and its Chicago-based U.S. subsidiary, Harris Trust and Sav-
ings Bank, and First Annapolis Consulting, Inc. to form a new national credit
card venture, to which the Corporation contributed its national credit card
portfolio of approximately $1.2 billion. At December 31, 1997, national credit
card loans represented approximately 12 percent of domestic consumer-related
loans.
The increase in international loans included a $1.9 billion increase in commer-
cial and industrial loans and a $650 million increase in consumer-related
loans. This growth has occurred in Latin America, particularly in the loan
portfolios of Argentina and Brazil. Total loans in these two countries have
grown approximately $1.6 billion since December 31, 1996. Commercial loans in-
creased approximately $800 million and $200 million in Argentina and Brazil,
respectively, and consumer loans increased approximately $500 million and $100
million, respectively. A further discussion of the Corporation's Argentine and
Brazilian operations is included in the "Line of Business Results," "Cross-Bor-
der Outstandings" and "Emerging Markets Countries" sections.
38
DOMESTIC COMMERCIAL REAL ESTATE LOANS
Table 6 details domestic commercial real estate loans by geographic location as
of the last three year ends. The portion attributable to other states at the
end of 1997 was dispersed among approximately 30 states.
TABLE 6 -- DOMESTIC COMMERCIAL REAL ESTATE LOANS
Other
December 31 New Other
(in millions) MA CT England States Total
- --------------------------------------------------------------------------------
1997.......................................... $1,508 $260 $279 $2,435 $4,482
1996.......................................... $1,885 $282 $309 $1,048 $3,524
1995.......................................... $2,220 $318 $351 $ 890 $3,779
A significant portion of the commercial real estate portfolio is composed of
loans from which ultimate payment to the Corporation is expected to come from
the sale, operation or refinancing of the underlying property. The decline in
loans in Massachusetts was the result of loan sales in the first quarter of
1997. The increase in loans in other states reflected growth in the real estate
investment trust portfolio of approximately $1.1 billion, approximately half of
which is expected to be sold through the Corporation's loan syndications unit.
HIGHLY LEVERAGED TRANSACTIONS
Included in commercial, industrial and financial loans are loans made by many
of the Corporation's lending businesses to finance transactions involving
leveraged buyouts, acquisitions, and recapitalizations. These loans are desig-
nated as highly leveraged transactions (HLTs) if, by the nature of the loan
terms and the profile of the customer, the transaction qualifies for this clas-
sification under the current bank regulatory definition of HLTs. Additionally,
the HLT definition encompasses other more traditional credit arrangements,
where a high degree of leverage would be expected, such as asset-based lending
and lending to the communications industry, particularly cable, where equity is
traditionally low and cash flow is the predominant factor in assessing repay-
ment ability. Table 7 summarizes the Corporation's HLT portfolio for the last
three years.
TABLE 7 -- HIGHLY LEVERAGED TRANSACTIONS PORTFOLIO
December 31 1997 1996 1995
(dollars in millions)
- -------------------------------------------------------------------------------
Total loans.............................................. $1,551 $1,319 $1,342
Number of companies...................................... 129 116 101
Average loan size........................................ $ 12 $ 11 $ 13
Unused lending commitments............................... $1,191 $ 677 $ 639
Net credit recoveries for year........................... $ (4)
Equity and mezzanine investments......................... $ 235 $ 187 $ 144
The Corporation's HLT portfolio is spread among a variety of industries. At De-
cember 31, 1997, the largest segments of the HLT portfolio by industry were as
follows: media and communications -- $401 million to 24 customers; food, bever-
age and tobacco -- $146 million to 12 customers; petroleum, chemicals, rubber
and plastics -- $115 million to 8 customers; and transportation -- $94 million
to 7 customers. Yields on HLT loans are generally higher than on most other
commercial loans. Typically, interest rates on new HLTs range from 2.3 percent
to 4 percent over the London Interbank Offered Rate (LIBOR) and fees charged
range from .38 percent to .50 percent of the principal amount committed. The
amount of unused commitments does not necessarily represent the actual future
funding requirements of the Corporation, since a portion can be syndicated or
assigned to others or may expire without being drawn. The Corporation has his-
torically been involved in transactions that meet the regulatory definition of
HLTs, and it expects to continue to agent and participate in such transactions
in the future.
39
NONACCRUAL LOANS AND LEASES AND OREO
Table 8 summarizes nonaccrual loans and leases by type and as a percentage of
the related consolidated loan category.
TABLE 8 -- NONACCRUAL LOANS AND LEASES AND OREO
December 31 1997 1996 1995 1994 1993
PERCENT Percent Percent Percent Percent
OF LOAN of Loan of Loan of Loan of Loan
(dollars in millions) BALANCE CATEGORY Balance Category Balance Category Balance Category Balance Category
- --------------------------------------------------------------------------------------------------------------
UNITED STATES
Commercial, industrial
and financial........... $ 59 .4% $ 82 .6% $ 88 .7% $130 1.0% $168 1.3%
Commercial real estate
Construction........... 3 1.1 6 2.1 25 6.5 13 3.3 32 4.7
Other.................. 40 .9 67 2.1 103 3.0 133 3.3 277 6.9
Consumer-related
Secured by 1-4 family
residential
properties............. 64 1.2 80 1.3 56 .8 53 .7 75 1.3
Other.................. 46 1.0 61 .9 35 .6 26 .6 12 .3
---- ---- ---- ---- ----
212 .7 296 1.0 307 1.0 355 1.2 564 2.0
---- ---- ---- ---- ----
INTERNATIONAL
Commercial and
industrial.............. 64 .7 74 1.1 34 .5 17 .3 63 1.4
Banks and other
financial institutions.. 1 .1
Governments and official
institutions............ 3 13.6
Consumer-related
Residential mortgages.. 28 3.0 22 3.1 20 3.8 11 2.4 3 1.3
Other.................. 16 1.6 10 1.7 11 2.3 6 1.5 6 1.9
All other............... 1 .6 30 15.9 22 9.1
---- ---- ---- ---- ----
108 .9 106 1.1 66 .8 65 .9 97 1.5
---- ---- ---- ---- ----
Total nonaccrual loans
and leases.............. 320 .7 402 1.0 373 1.0 420 1.1 661 1.9
OREO.................... 36 50 69 143 222
---- ---- ---- ---- ----
Total................... $356 $452 $442 $563 $883
==== ==== ==== ==== ====
- --------------------------------------------------------------------------------------------------------------
Total nonaccrual loans and leases and OREO decreased $96 million from December
31, 1996, reflecting an $84 million decrease in domestic nonaccrual loans, a
$14 million decrease in OREO and a $2 million increase in international
nonaccrual loans. The decrease in domestic commercial, industrial and financial
nonaccrual loans reflects decreases in various portfolios, including Diversi-
fied Finance, New England Corporate Banking and Asset Based Finance. Domestic
consumer-related nonaccrual loans decreased mainly due to the sale of FAC in
the third quarter of 1997, as well as decreases in residential mortgage and
home equity nonaccrual loans, offset, in part, by increases in credit card
nonaccrual loans. In January 1998, the Corporation contributed its national
credit card portfolio of approximately $1.2 billion to a newly formed national
credit card venture. At December 31, 1997, total national credit card
nonaccrual loans were approximately $20 million.
In addition, the Corporation holds in available for sale securities approxi-
mately $50 million of commercial paper of an international customer, on which
earnings are not being recognized.
The current level of nonaccrual loans and leases and OREO, which as a percent
of related assets is historically low for the Corporation, is due, in part, to
the current strong economic environment. The future level will be influenced by
the economic environment, interest rates and other internal and external fac-
tors existing at that time, including the effect, if any, of developments in
various emerging markets countries, including those in Asia. As such, no assur-
ance can be given as to future levels of nonaccrual loans and leases and OREO.
The management of, and the accounting policy for, the Corporation's nonaccrual
loans and leases and OREO is discussed above in the "Credit Risk Management"
section and in Note 1 to the Financial Statements, respectively.
Table 9 summarizes the changes in nonaccrual loans and leases and OREO that
have occurred during the last three years.
TABLE 9 -- CHANGES IN NONACCRUAL LOANS AND LEASES AND OREO
(dollars in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Balance, January 1......................................... $ 452 $ 442 $ 563
Assets of entities acquired................................ 8
Assets of entities sold.................................... (27) (27)
Additions.................................................. 527 618 554
Sales, restructurings, payments and other decreases........ (225) (304) (396)
Credit losses and valuation adjustments.................... (371) (304) (260)
----- ----- -----
Balance, December 31....................................... $ 356 $ 452 $ 442
===== ===== =====
Ending balance as a percentage of related assets........... 0.8% 1.1% 1.1%
40
RESERVE FOR CREDIT LOSSES
The Corporation determines the level of its reserve for credit losses by as-
sessing a number of factors, including evaluations of individual credits and
concentrations of credit risks, net losses charged to the reserve, changes in
quality of the credit portfolio, levels of nonaccrual loans and leases, current
economic conditions, cross-border risks, changes in the size and character of
the credit risks and other pertinent factors. The credit risk of off-balance-
sheet exposures is managed as part of the overall extension of credit to indi-
vidual customers and is considered in assessing the overall adequacy of the re-
serve for credit losses. The amount of the reserve for credit losses associated
with off-balance-sheet exposures is not significant. The amount of the reserve
for credit losses is reviewed by management quarterly. Refer to Notes 7 and 23
to the Financial Statements for a further discussion of the reserve for credit
losses and credit risk related to off-balance-sheet contracts.
Table 10 presents a five-year analysis of the Corporation's reserve for credit
losses and related ratios.
TABLE 10 -- RESERVE FOR CREDIT LOSSES AND RELATED RATIOS
(dollars in millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Balance, January 1................ $ 883 $ 890 $ 827 $ 941 $ 1,116
Provision......................... 200 231 275 154 107
Reserves of entities acquired..... 3 3 16 25
Reserves of entities sold......... (95) (11) (32)
Credit losses(1).................. (366) (310) (282) (379) (353)
Recoveries........................ 87 80 86 86 71
------- ------- ------- ------- -------
Net credit losses................. (279) (230) (196) (293) (282)
------- ------- ------- ------- -------
Balance, December 31.............. $ 712 $ 883 $ 890 $ 827 $ 941
======= ======= ======= ======= =======
Loans and lease financing at
December 31...................... $43,980 $41,061 $38,870 $37,708 $34,819
Average loans and lease
financing........................ $42,383 $40,589 $38,283 $36,017 $32,565
Reserve for credit losses to total
loans and leases at December 31.. 1.62% 2.15% 2.29% 2.19% 2.70%
Reserve for credit losses to
nonaccrual loans and leases at
December 31...................... 222% 220% 239% 197% 142%
Reserve for credit losses to
nonaccrual and renegotiated loans
and leases at December 31........ 222% 215% 219% 165% 104%
Net credit losses to average loans
and lease financing.............. .66% .57% .51% .81% .87%
Net credit losses to provision for
credit losses.................... 139.50% 99.57% 71.27% 190.26% 263.55%
Total recoveries to total credit
losses........................... 23.77% 25.81% 30.50% 22.69% 20.11%
- --------------------------------------------------------------------------------
(1) For 1994, includes $119 million related to transferring certain lower qual-
ity real estate exposures to an accelerated disposition portfolio (ADP).
The reserve for credit losses at December 31, 1997 was $712 million, or 1.62
percent of outstanding loans and leases, compared with $883 million, or 2.15
percent, at December 31, 1996. The reserve for credit losses was 222 percent of
nonaccrual loans and leases at December 31, 1997, compared with 220 percent at
December 31, 1996. The decrease in the reserve reflects the Corporation's ac-
tions taken to exit the national consumer lending business. The future level of
the reserve for credit losses will continue to be a function of management's
evaluation of the Corporation's credit exposures existing at the time, includ-
ing the future impact that recent events in Asia may have on its credit portfo-
lios, both in Asia and other areas of the world, particularly Latin America;
the potential impact that the Year 2000 issue could have on the Corporation's
credit portfolios; as well as general economic conditions. While, no assurance
can be given regarding the future level of the reserve, the above factors could
result in an increased level of reserve in the future.
41
Table 11 summarizes net credit losses by type for the last five years.
TABLE 11 -- NET CREDIT LOSSES
Years Ended December 31 1997 1996 1995 1994 1993
(in millions)
- -------------------------------------------------------------------------------
DOMESTIC CREDIT LOSSES
Commercial, industrial and financial........ $ (42) $ (21) $ (47) $ (38) $ (80)
Commercial real estate
Construction............................... (6) (7) (10) (19)
Other...................................... (8) (39) (49) (62) (79)
Consumer-related
Secured by 1-4 family residential
properties................................. (18) (25) (26) (22) (33)
Other...................................... (222) (167) (94) (80) (76)
----- ----- ----- ----- -----
(290) (258) (223) (212) (287)
INTERNATIONAL CREDIT LOSSES
Commercial.................................. (38) (20) (24) (28) (53)
Consumer.................................... (38) (32) (35) (20) (13)
----- ----- ----- ----- -----
Credit losses, excluding those related to
ADP........................................ (366) (310) (282) (260) (353)
DOMESTIC RECOVERIES
Commercial, industrial and financial........ 9 13 17 22 26
Commercial real estate
Construction............................... 5 1 4 3
Other...................................... 13 9 20 14 7
Consumer-related
Secured by 1-4 family residential
properties................................. 6 7 5 4 6
Other...................................... 34 31 28 24 23
----- ----- ----- ----- -----
62 65 71 68 65
INTERNATIONAL RECOVERIES
Commercial.................................. 12 4 7 13 4
Consumer.................................... 13 11 8 5 2
----- ----- ----- ----- -----
Total recoveries........................... 87 80 86 86 71
----- ----- ----- ----- -----
Net credit losses, before credit losses
related to ADP............................. (279) (230) (196) (174) (282)
Credit losses related to ADP................ (119)
----- ----- ----- ----- -----
Total net credit losses.................... $(279) $(230) $(196) $(293) $(282)
===== ===== ===== ===== =====
- -------------------------------------------------------------------------------
Net credit losses were $279 million in 1997, compared with $230 million in
1996. In 1997, the Corporation experienced higher domestic credit losses, prin-
cipally driven by increases in net credit losses in the consumer loan portfo-
lio, mainly the credit card portfolio, partially offset by the impact of the
sale of FAC. FAC's net credit losses were $44 million in 1997 and $77 million
in 1996. The increase in commercial, industrial and financial net credit losses
was more than offset by lower net credit losses in the commercial real estate
portfolio. The amount of domestic commercial chargeoffs is at a low level, and
is not expected to be sustainable over time. International net credit losses
increased from the 1996 period, reflecting increased losses due to one large
commercial credit in the international loan portfolio.
In January 1998, the Corporation contributed its national credit card portfolio
to a newly formed national credit card venture. Net credit losses in the na-
tional credit card portfolio for the years ended December 31, 1997 and 1996
were approximately $75 million and $11 million, respectively.
The Corporation's ability and willingness to extend new credit is a function of
a variety of factors, including competition for customers' business; an analy-
sis of a loan's potential profitability and risk profile; and economic condi-
tions in New England, other parts of the United States and other countries
where the Corporation does business. In addition, certain segments of the loan
portfolio may increase or decrease from the December 31, 1997 level in accor-
dance with strategic or credit management decisions made by the Corporation,
such as the acquisition or divestiture of companies or portfolios. Given these
factors, the rate of change in the size and mix of the Corporation's loan port-
folios experienced during the past few years may not be indicative of the fu-
ture. The above factors may also affect the levels of nonaccrual loans, net
credit losses and the reserve for credit losses. Further information on the
Corporation's loan and lease financing portfolio can be found in Note 6 to the
Financial Statements.
42
CROSS-BORDER OUTSTANDINGS
In accordance with bank regulatory rules, cross-border outstandings are amounts
payable to the Corporation by residents of foreign countries regardless of the
currency in which the claim is denominated and local country claims in excess
of local country obligations. Excluded from cross-border outstandings are the
following:
. Local country claims that are funded by local country obligations payable
only in the country where issued. In the first quarter of 1997, the Corpo-
ration adopted the new country exposure reporting rules issued by the Fed-
eral Financial Institutions Examination Council. One of the changes result-
ing from the new rules is the exclusion from cross-border outstandings of
local country claims funded by obligations of the local country, regardless
of the currency in which the claim or obligation is denominated. The most
significant impact of this change on the Corporation's cross-border
outstandings was the exclusion of Argendollars. Argendollars are
outstandings payable to the Corporation in U.S. dollars in Argentina which
are funded entirely by dollars borrowed within Argentina.
. Local country claims funded by non-local country obligations (typically
U.S. dollars or other non-local currency) where the providers of funds
agree that, in the event their claims cannot be repaid in the designated
currency due to currency exchange restrictions in a given country, they may
either accept payment in local currency or wait to receive the non-local
currency until such time as it becomes available in the local market. At
December 31, 1997, such outstandings related to emerging markets countries
totaled $2.8 billion, compared with $2.3 billion at December 31, 1996.
. Claims reallocated as a result of external guarantees, cash collateral, or
insurance contracts issued primarily by U.S. government agencies.
Cross-border outstandings include deposits in other banks, resale agreements,
trading securities, securities available for sale, securities held to maturity,
loans and lease financing, amounts due from customers on acceptances, accrued
interest receivable and revaluation gains on trading derivatives.
In addition to credit risk, cross-border outstandings have the risk that, as a
result of political or economic conditions in a country, borrowers are unable
to meet their contractual repayment obligations of principal and/or interest
when due because of the unavailability of, or restrictions on, foreign exchange
needed by borrowers to repay their obligations. The Corporation manages its
cross-border outstandings using country exposure limits as discussed in the
"Credit Risk Management" section.
Table 12 details by country the Corporation's approximate cross-border
outstandings that individually amounted to 1 percent or more of its consoli-
dated total assets at December 31, 1997, 1996 and 1995. Certain amounts at De-
cember 31, 1996 and 1995 have been restated to reflect the above-mentioned
changes in the country exposure reporting rules.
TABLE 12 -- SIGNIFICANT CROSS-BORDER OUTSTANDINGS
Percentage of
(dollars in millions) Public Banks Other Total Total Assets Commitments(1)
- --------------------------------------------------------------------------------
December 31, 1997(2)
Argentina............... $ 740 $ 5 $1,035 $1,780 2.6% $ 15
Brazil.................. 415 120 785 1,320 1.9 130
Chile................... 130 225 350 705 1.0 20
December 31, 1996(2)
Argentina(3)............ $ 605 $ 15 $ 945 $1,565 2.5% $ 55
Brazil.................. 305 30 585 920 1.5 40
Chile................... 60 265 385 710 1.1 30
December 31, 1995(2)
Argentina(3)............ $ 465 $ 50 $ 410 $ 925 1.6% $ 45
Brazil.................. 25 20 980 1,025 1.8 35
United Kingdom.......... 100 570 670 1.2 130
Chile................... 150 125 365 640 1.1 15
- --------------------------------------------------------------------------------
(1) Included within commitments are letters of credit, guarantees and the
undisbursed portions of loan commitments.
(2) There were no cross-border outstandings in countries which totaled between
.75% and 1% of consolidated total assets at December 31, 1997, 1996 and
1995.
(3) Amounts have been restated for comparative purposes to exclude Argendollar
outstandings of approximately $1.3 billion at both December 31, 1996 and
1995.
43
EMERGING MARKETS COUNTRIES
At December 31, 1997, approximately $6.5 billion of the Corporation's cross-
border outstandings were to emerging markets countries, primarily in Latin
America. These cross-border outstandings, of which approximately 83 percent
were loans, were mainly composed of short-term trade credits, non-trade-related
loans and leases, government securities, capital investments in branches and
subsidiaries and trading positions managed by the Corporation's EMSTR business.
LATIN AMERICA
As shown in Table 13, at December 31, 1997, approximately $5.2 billion, or 80
percent, of the cross-border outstandings to emerging markets countries were to
countries in Latin America. The Corporation maintains branch networks and/or
subsidiaries in each of the individual countries named.
TABLE 13 -- CROSS-BORDER OUTSTANDINGS TO LATIN AMERICA
December 31 1997 1996
(in millions)
- --------------------------------------------------------------------------------
Argentina......................................................... $1,780 $1,565
Brazil............................................................ 1,320 920
Chile............................................................. 705 710
Mexico............................................................ 435 405
Colombia.......................................................... 255 200
Uruguay........................................................... 200 250
Peru.............................................................. 190 65
Panama............................................................ 190 110
Other............................................................. 170 130
------ ------
$5,245 $4,355
====== ======
During the fourth quarter of 1997, the Asian economic crisis created increased
volatility in the Latin American financial markets, particularly in Brazil.
Certain Latin American financial markets experienced a sharp increase in inter-
est rates and a drop in the local and international stock and bond markets. The
Brazilian government implemented a series of measures to insure that its local
currency remained within its exchange rate band. As a result of the conditions
in the financial markets, the Corporation's Brazilian unit implemented a number
of measures in response to the economic events, which resulted in increased
revenues from higher interest spreads. These events also affected the Corpora-
tion's Argentine unit's available for sale securities portfolio, which declined
in value at the beginning of the fourth quarter, but has since partially recov-
ered.
The following provides additional information related to the Corporation's Ar-
gentine and Brazilian operations.
Table 14 shows changes in Argentine and Brazilian cross-border outstandings
from December 31, 1996.
TABLE 14 -- CHANGES IN ARGENTINE AND BRAZILIAN CROSS-BORDER OUTSTANDINGS
(in millions) Argentina Brazil
- ------------------------------------------------------------------------------
Cross-border outstandings at December 31, 1996.............. $ 1,565 $ 920
Change in non-trade-related loans and leases................ 470 195
Net change in trade-related cross-border outstandings, pri-
marily short-term........................................... 85 140
Net change in investment and trading securities............. (330) 90
Net change in placements.................................... (10) (25)
------- ------
Cross-border outstandings at December 31, 1997.............. $ 1,780 $1,320
======= ======
44
The Corporation's Argentine assets amounted to approximately $6.6 billion at
December 31, 1997, compared with approximately $4.8 billion at December 31,
1996. Included in these assets are cross-border outstandings of $1.8 billion
and $1.6 billion at December 31, 1997 and 1996, respectively. Loans increased
approximately $1.3 billion to $4.7 billion at December 31, 1997, reflecting an
$800 million increase in commercial loans and a $500 million increase in con-
sumer loans. At December 31, 1997, the Corporation's Argentine securities port-
folio, which included trading and available for sale securities, amounted to
$801 million, compared with $621 million at December 31, 1996.
The Corporation's nonaccrual Argentine loans were $91 million at December 31,
1997, compared with $85 million at December 31, 1996. Net credit losses were
$39 million in 1997 and $20 million in 1996. The increase in net credit losses
of $19 million from 1996 was due to a chargeoff of one large commercial credit.
The Corporation's Brazilian assets amounted to approximately $6.2 billion at
December 31, 1997, compared with approximately $5 billion at December 31, 1996.
Included in these assets are cross-border outstandings of $1.3 billion and $.9
billion at December 31, 1997 and 1996, respectively. The increase in total as-
sets was primarily due to a $730 million increase in resale agreements and de-
posits in other banks. Loans amounted to approximately $3 billion at December
31, 1997, compared with approximately $2.7 billion at December 31, 1996. The
Corporation's Brazilian securities portfolio, consisting of trading and avail-
able for sale securities, was approximately $950 million at December 31, 1997
and $565 million at December 31, 1996.
The Corporation's nonaccrual Brazilian loans were $12 million at December 31,
1997, compared with $14 million at December 31, 1996. Net credit losses were
$12 million in 1997 and $14 million in 1996.
For further discussion of the Corporation's nonaccrual loans and net credit
losses, see the "Nonaccrual Loans and Leases and OREO" and "Reserve for Credit
Losses" sections. For additional information on Argentina and Brazil, see the
"Line of Business Results" section.
The Corporation's Argentine and Brazilian operations maintained currency posi-
tions both at December 31, 1997 and throughout the year. For further discussion
of currency positions, see the "Asset and Liability Management" section.
It is expected that the economic situation in Latin America, including the ef-
fect of world financial markets on these economies, will continue to evolve and
be influenced by economic developments in other areas of the world, including
Asia. In addition, the individual economies in Latin American can be influenced
by events in other Latin American countries. The Corporation has not experi-
enced any collection problems as a result of currency restrictions or foreign
exchange liquidity problems on its current portfolio of cross-border
outstandings to Latin America. However, if the actions implemented by Latin
American governments do not remain effective over time, the Corporation's oper-
ations could experience adverse effects, including deterioration of credit
quality, a decline in the value of its trading and available for sale securi-
ties portfolios and declines in loan and deposit levels. Each of these coun-
tries is at a different stage of development with a unique set of economic fun-
damentals; therefore, it is not possible to predict what developments will oc-
cur and what impact these developments will ultimately have on the economies of
these countries or on the Corporation's financial condition and results of op-
erations.
45
ASIA
In 1997, the Corporation's business in Asia consisted primarily of trade serv-
ices, foreign exchange trading and servicing corporate customers. In early
1998, the Corporation announced that its strategic focus in Asia will be on
capital markets, including debt underwriting and trading, foreign exchange and
derivatives. The Corporation will also target activities in trade services,
trade finance and cash management. Credit related services will be to support
these capital markets and trade activities.
During the fourth quarter of 1997 and continuing into the first quarter of
1998, certain Asian countries experienced an economic and financial crisis, in-
cluding major devaluations of currencies, erosion of investor confidence and
overcapacity across various industries. These events led to financial and cor-
porate sector bankruptcies, which resulted in a high level of volatility in
world financial markets. The International Monetary Fund (IMF) has established
reform programs with Indonesia and Thailand, and agreed in principle on a pro-
gram with South Korea, to improve economic efficiency, competitiveness and
financial stability.
Table 15 presents a summary of the Corporation's cross-border outstandings in
Asia as of December 31, 1997. The Corporation has representative offices,
branches and/or subsidiaries, in each of the countries listed, except Thailand,
as well as in Singapore and India.
TABLE 15 -- CROSS-BORDER OUTSTANDINGS TO ASIA
December 31, 1997 CROSS-BORDER
(in millions) OUTSTANDINGS(1) COMMITMENTS(2)
- --------------------------------------------------------------------------------
South Korea(3)............................... $ 515 $ 35
Indonesia.................................... 200 15
Japan(4)..................................... 150
China........................................ 145 35
Thailand..................................... 90 5
Taiwan(4).................................... 50 5
Philippines.................................. 45 10
Other........................................ 25 10
------ ----
$1,220 $115
====== ====
- --------------------------------------------------------------------------------
(1) Cross-border outstandings primarily consisted of loans and leases, deposits
in other banks, due from customers on acceptances and derivatives.
(2) Included within commitments are letters of credit, guarantees and the
undisbursed portions of loan commitments.
(3) Includes the Corporation's 17.5% ownership interest in Korean Merchant
Banking Corporation.
(4) Outstandings for Japan and Taiwan are not included in total emerging mar-
kets countries outstandings.
The Corporation has implemented exposure reduction and contingency plans in
certain Asian countries, particularly South Korea and Indonesia. At December
31, 1997, the Corporation's South Korean exposure was primarily to major corpo-
rate entities in the country and certain top-tier local banks. Subsequent run-
off has eliminated substantially all of the bank outstandings. None of the Cor-
poration's cross-border outstandings were subject to the recently announced
debt rescheduling accord reached between South Korea and its international
creditors.
In Indonesia, specific action plans and risk assessments for each customer are
being updated or established. While the Corporation is assessing its customers'
ability to meet their obligations in this volatile environment, all customer
credit lines have been frozen and any rollovers of maturing trade obligations
are being reviewed on a case by case basis. Approximately half of the Corpora-
tion's exposure consists of short-term trade credits to major exporting corpo-
rate groups. The remaining exposure is to financial institutions, and is in a
collection mode until a turnaround is evident.
In Thailand, which is currently meeting IMF targets, the Corporation's exposure
is to major banks. The exposure is limited to short-term trade finance and for-
eign exchange lines.
To date, the Corporation has not experienced any significant nonaccrual loans
or chargeoffs in Asia. However, as discussed in the "Line of Business Results"
and "Latin America" sections, the Asian situation has caused market volatility
in Argentina and Brazil.
The ultimate impact of the Asian crisis on the Corporation's financial condi-
tion and results of operations cannot be predicted at this time, and will be
dependent on future events, including the success of the established IMF pro-
grams, the level of volatility in the various markets, the duration of these
unsettled market conditions and the state of the underlying economies in the
affected countries. Nevertheless, it is currently anticipated that these condi-
tions will result in the Corporation experiencing an increase in nonaccrual
loans and chargeoffs in its Asian portfolios. These conditions could also im-
pact the Corporation's operations in other countries, particularly in Argenti-
na, Brazil and other Latin American countries, as well as the financial results
of the Corporation's domestic commercial businesses. Management will continue
to monitor these markets closely and manage its portfolio in order to maximize
its future results, all within the parameters of the Corporation's established
risk management processes.
46
LIQUIDITY RISK MANAGEMENT
Liquidity is defined as the ability to meet known near-term and projected long-
term funding commitments, while supporting selective business expansion in ac-
cordance with the Corporation's strategic plan. The Corporation manages liquid-
ity risk according to policy set, and oversight provided, by the Asset, Liabil-
ity and Capital Committee (ALCCO), to ensure its ability to meet present and
future funding needs in domestic and overseas markets. U.S. dollar liquidity
management is centralized in Boston, with overseas operations managing their
local currency liquidity requirements. The Corporation's U.S. dollar liquidity
is monitored on a daily basis, and is reviewed monthly by ALCCO and at least
quarterly by the Board of Directors (the Board). Available liquidity sources
are measured against anticipated needs of the Corporation as a whole, the par-
ent company and each of the subsidiary banks. Alternative funding strategies
are reviewed, updated and implemented by ALCCO as considered necessary.
The Corporation's liquid assets consist primarily of interest bearing deposits
in other banks, federal funds sold and resale agreements, money market loans,
and unencumbered U.S. Treasury and U.S. government agency securities. Table 16
presents the level of the Corporation's liquid assets at each of the last three
year ends.
TABLE 16 -- LIQUID ASSETS
December 31 1997 1996 1995
(in billions)
- --------------------------------------------------------------------------------
Liquid assets.................................................... $9.5 $7.3 $7.4
Deposits are the principal source of the Corporation's funding. Table 17 in-
cludes information related to the Corporation's funding sources for the last
three years.
TABLE 17 -- FUNDING SOURCES
December 31 1997 1996 1995
(dollars in billions)
- --------------------------------------------------------------------------------
DOMESTIC
Interest bearing deposits................................. $25.1 $24.7 $24.4
Noninterest bearing deposits.............................. 8.5 8.3 7.1
----- ----- -----
Total deposits............................................ 33.6 33.0 31.5
Funds borrowed............................................ 10.1 7.8 8.4
Notes payable(1).......................................... 3.4 2.7 1.8
----- ----- -----
$47.1 $43.5 $41.7
===== ===== =====
INTERNATIONAL
Interest bearing deposits................................. $11.1 $ 9.0 $ 9.0
Noninterest bearing deposits.............................. 1.1 .8 .6
----- ----- -----
Total deposits............................................ 12.2 9.8 9.6
Funds borrowed............................................ 1.6 1.4 1.1
Notes payable............................................. .3 .6 .4
----- ----- -----
$14.1 $11.8 $11.1
===== ===== =====
CONSOLIDATED
Interest bearing deposits................................. $36.2 $33.7 $33.4
Noninterest bearing deposits.............................. 9.6 9.1 7.7
----- ----- -----
Total deposits............................................ 45.8 42.8 41.1
Funds borrowed............................................ 11.7 9.2 9.5
Notes payable(1).......................................... 3.7 3.3 2.2
----- ----- -----
$61.2 $55.3 $52.8
===== ===== =====
Deposits as a percentage of
Loans..................................................... 104% 104% 106%
Total assets.............................................. 66% 69% 69%
- --------------------------------------------------------------------------------
(1) At December 31, 1997 and 1996, includes $.8 billion and $.5 billion, re-
spectively, of Trust Securities (defined below).
47
Consolidated deposits increased approximately $3 billion compared with 1996,
mainly due to increases in international deposits. The $2.4 billion increase in
international deposits included deposit growth in Argentina and Brazil. Domes-
tic funds borrowed increased approximately $2.3 billion from December 31, 1996,
mainly as a result of increased borrowings under the Bank's bank note program
and increased federal funds purchased, partially offset by decreased securities
sold under agreements to repurchase. In addition, at December 31, 1997, the
Corporation had availability under various borrowing arrangements of $1.3 bil-
lion.
Consolidated notes payable increased from 1996, primarily due to aggregate is-
suances of $450 million of senior medium-term debt by the Corporation, $400
million of subordinated debt by the Bank, $250 million of Trust Securities (de-
fined below) and $405 million of Brazilian medium-term debt. These issuances
were offset by maturities of $275 million of senior medium-term debt, $129 mil-
lion of subordinated debt and $670 million of Brazilian medium-term debt, as
well as the elimination of $80 million of FAC notes payable resulting from the
sale of that entity. The Corporation has an effective shelf registration state-
ment with a current availability of $1.5 billion, which can be used for the is-
suance of equity or debt securities, including medium-term notes.
In June 1997, the Corporation established BankBoston Capital Trust III, and in
1996 established BankBoston Capital Trust I and BankBoston Capital Trust II.
The exclusive purpose of each trust is the issuance of capital securities
(Trust Securities), representing preferred beneficial interests in the trusts,
the common securities of which are owned by the Corporation. In the second
quarter of 1997 and the fourth quarter of 1996, $250 million and $500 million,
respectively, of such Trust Securities were issued and the proceeds were in-
vested in junior subordinated debentures issued by the Corporation. The Corpo-
ration has unconditionally guaranteed the Trust Securities, which are presented
in the Corporation's consolidated balance sheet as guaranteed preferred benefi-
cial interests in the Corporation's junior subordinated debentures.
Additional information on the Corporation's notes payable and the Trust Securi-
ties can be found in Notes 10 and 11 to the Financial Statements.
Based upon the Corporation's liquid asset level and its ability to access the
public markets for additional funding when necessary, management considers
overall liquidity at December 31, 1997 adequate to meet current obligations,
support expectations for future changes in asset and liability levels and carry
on normal operations.
MARKET RISK MANAGEMENT
Market risk is defined as the risk of loss related to adverse changes in market
prices, such as interest rates and foreign exchange rates, of financial instru-
ments. The Corporation's market risk management process includes the management
of all forms of market risk, including balance sheet and off-balance-sheet ex-
posures. Market risk is managed within policies and limits established by ALCCO
and the Market Risk Committee (MRC) and approved by the Board. Market risk pol-
icies and limits are reviewed at least annually, or more often if warranted by
current market, economic or business conditions. ALCCO issues overall strategic
directives to specify the extent to which Board-approved risk limits are uti-
lized, based on the Corporation's willingness to accept market risk. The MRC,
which is chaired by the Senior Market Risk Officer (SMRO), is responsible for
allocating the overall market risk limits set by ALCCO to the Corporation's
market risk-taking activities, considering the results of the risk modeling
process as well as other internal and external factors.
The Corporation's independent market risk function monitors compliance, by in-
dividual business unit, with the Corporation's market risk policies. The market
risk function includes a staff of market risk officers reporting directly to
the SMRO. These market risk officers are assigned to work with various business
units to ensure the integrity of the market risk management process. Business
unit management is primarily responsible for evaluating market risk, ensuring
that actual exposures are appropriately measured, and monitoring and managing
market risks within approved policies and limits. Through monthly meetings, se-
nior management oversees the world-wide market risk trading activities of the
Corporation.
The objective of the Corporation's market risk management process is to manage
and control the effects of changes in market prices and interest and foreign
exchange rates on the Corporation's results of operations and financial condi-
tion. Management seeks to limit the volatility of earnings and protect economic
value, while ensuring that risks from adverse movements in market prices are
managed in compliance with the above-mentioned limits. In addition, the Corpo-
ration continually seeks to improve its risk management culture to better bal-
ance associated risks with its goal of optimizing value to its stockholders and
customers. This objective is achieved through the development and implementa-
tion of market risk management strategies, including various balance sheet ac-
tions and the use of securities and derivatives and foreign exchange contracts.
While sound market risk policies, methodologies, strategies and infrastructure
assist the Corporation in managing its exposure to market risks, they do not
insulate the Corporation from losses.
48
TRADING ACTIVITIES
The Corporation's trading activities involve providing risk management and cap-
ital markets products and services to its customers, including interest rate
derivatives and foreign exchange contracts and debt underwriting and distribu-
tion. Interest rate derivatives include interest rate swaps and interest rate
options, futures and forwards. Foreign exchange activities include trading
spot, forward and option contracts, primarily in major foreign currencies. Ad-
ditional information with respect to the Corporation's trading derivatives, in-
cluding accounting policies, is provided in Notes 1 and 23 to the Financial
Statements.
In addition, the Corporation takes proprietary trading positions, including
high yield and emerging markets fixed income securities and local currency debt
and equity securities. These proprietary trading positions are designed to gen-
erate gains from short-term movements in the prices of securities of emerging
markets public and private sector issues, and from positions which benefit from
inefficiencies among various securities issued by the same country. Domestic
fixed income trading activities primarily include trading U.S. Treasury and
government agency securities.
The risk positions taken by the Corporation in these financial instruments are
subject to ALCCO and MRC approved limits. The Corporation manages the market
risk related to its trading portfolios on a daily basis using a Value-at-Risk
(VAR) methodology. VAR is defined as the statistical estimate of the potential
loss amount that the Corporation could incur from an adverse movement in market
prices. The Corporation uses a 99% confidence level, which means that the Cor-
poration would not expect to exceed the potential loss amount as calculated by
VAR more than once out of every 100 trading days. The VAR methodology requires
a number of key assumptions including confidence level for losses, number of
days of price history and the treatment of risks outside the VAR methodology,
including event risk and liquidity risk. The VAR calculations include the ef-
fects of both interest rate and foreign exchange rate risks. The VAR associated
with the Corporation's foreign exchange trading activities is not significant.
The calculations do not take into account the potential diversification bene-
fits of the different positions across trading portfolios. At December 31,
1997, the aggregate VAR limit for the Corporation's trading portfolios was ap-
proximately $40 million and the aggregate VAR exposure was approximately $35
million. The aggregate average VAR exposure for 1997 was approximately $20 mil-
lion.
In addition to VAR, the Corporation employs other market risk management tools
in order to obtain a comprehensive profile of market risk. These risk manage-
ment tools include stress testing, which simulates severe changes in market
rates, tenor limits, concentration limits, stop loss limits and notional lim-
its.
The Asian economic crisis has negatively impacted world-wide financial markets,
including those for several emerging markets countries in which the Corporation
operates, including Brazil and Argentina, as well as the Corporation's EMSTR
business. During the early part of the fourth quarter of 1997, the Corporation
experienced $20 million of net trading losses as a result of this volatility;
however, these losses were offset by trading and securities gains in the latter
half of the quarter.
ASSET AND LIABILITY MANAGEMENT
U.S. DOLLAR DENOMINATED INTEREST RATE RISK MANAGEMENT
The Corporation's U.S. dollar denominated assets and liabilities are exposed to
interest rate risk, which can be defined as the exposure of the Corporation's
net income or financial condition to adverse movements in interest rates. At
December 31, 1997, U.S. dollar denominated assets comprised the majority of the
Corporation's balance sheet. The Corporation's U.S. dollar denominated posi-
tions are evaluated and managed centrally through the Global Treasury group,
utilizing several modeling methodologies. The two principal methodologies used
are market value sensitivity and net interest revenue at risk. The results of
these models are reviewed monthly with ALCCO and at least quarterly with the
Board.
MARKET VALUE SENSITIVITY is defined as the potential change in market value, or
the economic value, of the Corporation resulting from changes in interest
rates. Market value sensitivity is determined by calculating the effect on the
Corporation's existing assets, liabilities and off-balance-sheet positions of
an immediate rise or fall in interest rates (rate shock).
NET INTEREST REVENUE AT RISK is defined as the exposure of the Corporation's
net interest revenue over the next twelve months to an adverse movement in in-
terest rates. Net interest revenue at risk is modeled based on both an interest
rate shock scenario and one that allows for a gradual change in interest rates
over a period of time. The simulated net interest revenue under these scenarios
is used to evaluate how differences in asset, liability and off-balance-sheet
repricing structures will be reflected in the next twelve months' results of
operations.
The rate risk models consider such variables as:
. repricing characteristics of assets and liabilities;
. rate change differentials, such as federal funds rates versus savings ac-
count rates;
. maturity effects;
. rate barrier effects, such as caps and floors, on assets and liabilities;
and
. prepayment volatility on various fixed rate assets, such as residential
mortgages.
Both of these models are designed to isolate the effects of market changes in
interest rates on the Corporation's existing positions, and they exclude other
factors such as competitive pricing considerations, future changes in the asset
and liability mix and other management actions, and, therefore, are not by
themselves measures of future levels of net interest revenue.
These two methodologies provide different but complementary measures of the
level of interest rate risk; the longer-term view is modeled through market
value sensitivity, while the shorter-term view is evaluated through net inter-
est revenue at risk over the next twelve months. Under current ALCCO direc-
tives, market value sensitivity cannot exceed 3 percent of total risk-based
capital and net interest revenue at risk over the next twelve-month period can-
not exceed 2 percent of net interest revenue.
49
Table 18 illustrates the year-end and average positions for market value sensi-
tivity and net interest revenue at risk.
TABLE 18 -- MARKET VALUE SENSITIVITY AND NET INTEREST REVENUE AT RISK
POSITIONS -- U.S. DOLLAR DENOMINATED POSITIONS
1997 1996
(dollars in millions) YEAR-END AVERAGE Year-end Average
- -----------------------------------------------------------------------------------
Market value sensitivity(1)(2)......................$190 $182 $162 $144
Percent of risk-based capital.................... 2.7% 2.6% 2.4% 2.5%
- -----------------------------------------------------------------------------------
Net interest revenue at risk(3).....................$ 16 $ 26 $ 30 $ 24
Percent of net interest revenue.................. .7% 1.1% 1.3% 1.2%
- -----------------------------------------------------------------------------------
(1) Based on a 100 basis point adverse interest rate shock.
(2) December 31, 1996 amounts have been restated for comparability.
(3) Based on the greater of a 100 basis point adverse interest rate shock or a
200 basis point adverse change in interest rates over the next twelve-month
period. At December 31, 1997, the adverse position was based on a 100 basis
point upward interest rate shock and at December 31, 1996, the adverse po-
sition was based on a 200 basis point decline in interest rates over the
next twelve-month period.
At December 31, 1997 and 1996, the Corporation's market value sensitivity was
negatively biased to rising interest rates. The increase in the exposure was
due to an increase in fixed rate assets, mainly available for sale securities,
partially offset by the sales of FAC and Ganis, which resulted in a decrease in
fixed rate loans. The Corporation's net interest revenue at risk over the next
twelve months was negatively biased to rising interest rates at December 31,
1997, and to declining interest rates at December 31, 1996. However, the Corpo-
ration considers the level of its net interest revenue at risk to be a rela-
tively neutral position at the end of each period.
The level of exposure maintained by the Corporation is a function of the market
environment and may change from period to period based on interest rate and
other economic expectations. As noted above, the market value sensitivity and
net interest revenue at risk models are complementary in nature. The Corpora-
tion's exposure to interest rates is managed in compliance with ALCCO direc-
tives. ALCCO determines its interest rate risk management strategy by consider-
ing the impact of changes in interest rates on each model, and, hence, the
short- and long-term effects on the Corporation.
NON-U.S. DOLLAR DENOMINATED RISK MANAGEMENT
INTEREST RATE RISK MANAGEMENT
Non-U.S. dollar denominated interest rate risk is managed by the Corporation's
overseas units, with oversight by the Global Treasury group. ALCCO establishes
overall limits for its non-U.S. dollar denominated interest rate risk using a
combination of market value risk analysis and cumulative gap limits for each
country in which the Corporation has local market interest rate risk. Gap is
the difference between the amount of assets and liabilities that mature or are
repriced during a given period of time. A "positive" gap results when more as-
sets than liabilities mature or are repriced within a given time period. Con-
versely, a "negative" gap results when there are more liabilities than assets
maturing or being repriced during a given time period. Limits are updated at
least annually for current market conditions, considering business and economic
conditions in the country at a particular point in time. The overseas units re-
port as to compliance with these limits on a regular basis.
CURRENCY POSITIONS
When deemed appropriate, the Corporation will structure its balance sheet to
take positions in the currencies of emerging markets and other countries where
it operates. This usually occurs when the Corporation believes that it can max-
imize its spread from interest operations by funding local currency assets with
U.S. dollars rather than using local currency liabilities or by funding U.S.
dollar assets with local currency liabilities. Whenever these positions are
taken, they are subject to limits established by ALCCO and are subject to regu-
lar review. Table 19 presents the Corporation's more significant currency posi-
tions for 1997 and 1996. These positions represent local currency assets funded
by U.S. dollars.
TABLE 19 -- SIGNIFICANT CURRENCY POSITIONS
1997 1996
(in millions) YEAR-END AVERAGE Year-end Average
- --------------------------------------------------------------------------------
Argentina..................................... $368 $116 $174 $98
Brazil........................................ 132 113 140 87
Chile......................................... 36 84 32
South Korea................................... 28 50 73
These positions expose the Corporation to losses should the local currencies
weaken against the U.S. dollar at a rate greater than the spread of the local
currency interest rate over the U.S. dollar interest rate; such losses could be
significant if a major unanticipated devaluation occurs. To date, however,
these positions have been liquid in nature and management has been able to
close and re-open these positions as necessary.
The estimated VAR exposure for the overseas units' non-U.S. dollar denominated
interest rate risk and currency positions at December 31, 1997 was not signifi-
cant.
For additional information related to the Corporation's international opera-
tions, see the "Line of Business Results," "Cross-Border Outstandings" and
"Emerging Markets Countries" sections.
50
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives provide the Corporation with significant flexibility in managing
its interest rate risk and foreign exchange exposures, enabling it to manage
risk efficiently and respond quickly to changing market conditions while mini-
mizing the impact on balance sheet leverage. The Corporation routinely uses
non-leveraged rate-related derivative instruments, primarily interest rate
swaps and futures, as part of its asset and liability management practices.
Table 20 summarizes the remaining maturity of interest rate derivative finan-
cial instruments entered into for asset and liability management purposes as of
December 31, 1997. The level and term of such contracts may be modified as nec-
essary, in response to balance sheet changes and other management actions,
within ALCCO directives for market value sensitivity and net interest revenue
at risk.
TABLE 20 -- REMAINING MATURITY OF INTEREST RATE DERIVATIVES
Remaining Maturity
1997 1996
(dollars in millions) 1998 1999 2000 2001 2002 2003+ TOTAL Total
- -------------------------------------------------------------------------------------
INTEREST RATE SWAPS
Domestic
Receive fixed rate
swaps(1)
Notional amount........ $ 1,323 $ 170 $495 $350 $170 $2,191 $ 4,699 $ 2,826
Weighted average
receive rate.......... 6.05% 6.37% 5.77% 6.16% 6.60% 6.47% 6.26% 6.38%
Weighted average pay
rate.................. 5.78% 5.84% 5.89% 5.71% 5.85% 5.88% 5.84% 5.67%
Pay fixed rate swaps(1)
Notional amount........ $ 95 $ 249 $ 344 $ 83
Weighted average
receive rate.......... 5.81% 5.86% 5.85% 5.88%
Weighted average pay
rate.................. 6.82% 5.73% 6.03% 7.61%
Basis swaps(2)
Notional amount........ $ 265 $ 410 $ 50 $ 725 $ 468
Weighted average
receive rate.......... 6.31% 8.50% 6.06% 7.53% 5.90%
Weighted average pay
rate.................. 6.32% 5.78% 5.81% 5.98% 5.64%
Total Domestic Interest
Rate Swaps
Notional amount........ $ 1,683 $ 580 $545 $350 $170 $2,440 $ 5,768 $ 3,377
Weighted average
receive rate(3)....... 6.08% 7.88% 5.80% 6.16% 6.60% 6.41% 6.39% 6.31%
Weighted average pay
rate(3)............... 5.92% 5.80% 5.88% 5.71% 5.85% 5.86% 5.87% 5.71%
Total International
Interest Rate Swaps
Notional Amount(4)..... $ 5,378 $ 16 $ 5,394 $ 3,598
OTHER DERIVATIVE
PRODUCTS
Futures and
forwards(5)............ $ 3,947 $ 3,947 $ 3,382
Interest rate options
purchased(6)........... $ 500 $2,265 $ 2,765
------- ------ ---- ---- ---- ------ ------- -------
Total Consolidated
Notional Amount........ $11,508 $2,845 $561 $350 $170 $2,440 $17,874 $10,357
======= ====== ==== ==== ==== ====== ======= =======
- -------------------------------------------------------------------------------------
(1) Of the receive fixed rate swaps, approximately $2.2 billion are linked to
floating rate loans, and the remainder principally to fixed rate notes pay-
able. Of the swaps linked to notes payable, approximately $1.1 billion are
scheduled to mature in 2003 and thereafter. The majority of pay fixed rate
swaps are linked to available for sale securities.
(2) Basis swaps represent swaps where both the pay rate and receive rate are
floating rates. All of the basis swaps are linked to bank notes and float-
ing rate loans.
(3) The majority of the Corporation's interest rate swaps accrue at LIBOR. In
arriving at the variable weighted average receive and pay rates, LIBOR
rates in effect as of December 31, 1997 have been implicitly assumed to re-
main constant throughout the terms of the swaps. Future changes in LIBOR
rates would affect the variable rate information disclosed.
(4) At December 31, 1997 and 1996, the majority of the international portfolio
is comprised of swaps entered into by the Corporation's Brazilian opera-
tions. These swaps typically include the exchange of floating rate indices
that are limited to the Brazilian market.
(5) At December 31, 1997 and 1996, represent contracts entered into by the Cor-
poration's Brazilian operations in the local market which are linked to
short-term interest bearing assets and liabilities.
(6) At December 31, 1997, includes equity contracts entered into by the Corpo-
ration's Argentine operations. These contracts are linked to Argentine de-
posit products, where the holder receives payment based on changes in the
prices of underlying Argentine securities.
51
Table 21 summarizes the fair value and unrecognized gains (losses) of deriva-
tives used for asset and liability management purposes. Fair value represents
the amount at which a given instrument could be exchanged in an arm's length
transaction with a third party as of the balance sheet date. The increase in
fair value of $170 million compared with 1996 was due to lower domestic long-
term interest rates during 1997, which resulted in an increase in the fair
value of the domestic receive fixed interest rate swap portfolio. In addition,
the fair value of the international swap portfolio, which primarily consisted
of swaps entered into by the Corporation's Brazilian operations, increased due
to higher Brazilian interest rates in 1997 due, in part, to the Asian crisis.
TABLE 21 -- FAIR VALUE AND UNRECOGNIZED GAINS (LOSSES)
December 31 1997 1996
FAIR VALUE(1) UNRECOGNIZED Fair Value(1) Unrecognized
(in millions) NOTIONAL ASSET LIABILITY GAIN (LOSS)(2) Notional Asset Liability Gain (Loss)(2)
- --------------------------------------------------------------------------------------------------------
Interest rate contracts
Interest rate swaps.... $11,162 $132 $11 $ 96 $ 6,975 $25 $40 $(11)
Futures and forwards... 3,947 21 11 3,382 (45)
Interest rate options
purchased.............. 2,765 13 2
------- ---- --- ---- ------- --- --- ----
$17,874 $166 $11 $109 $10,357 $25 $40 $(56)
======= ==== === ==== ======= === === ====
- --------------------------------------------------------------------------------------------------------
(1) In certain cases, instruments such as futures are subject to daily cash
settlements; therefore, the fair value of these instruments is zero.
(2) Unrecognized gain or loss is based upon fair values and represents the
amount of gain or loss that has not been recognized in the income statement
at the balance sheet date. This includes amounts related to contracts that
have been terminated.
The Corporation's utilization of derivative instruments is modified from time
to time in response to changing market conditions, as well as changes in the
characteristics and mix of the Corporation's related assets and liabilities.
Included in unrecognized gains (losses) at December 31, 1997 were deferred
gains of $7 million related to terminated contracts that are being amortized to
net interest revenue over a weighted average period of fourteen months. At De-
cember 31, 1996, unrecognized gains of $16 million and unrecognized losses of
$33
million related to terminated contracts were being amortized to net interest
revenue over weighted average periods of 26 months and thirteen months, respec-
tively. The Corporation routinely reviews its asset and liability derivative
positions to determine that such instruments continue to function as effective
risk management tools. See Note 23 to the Financial Statements for additional
information on derivative financial instruments.
52
CAPITAL MANAGEMENT
At December 31, 1997, the Corporation had $4.6 billion in stockholders' equity,
compared with $4.9 billion at December 31, 1996. In the first quarter of 1997,
the Board approved a 12 million share common stock repurchase program. The Cor-
poration purchased 10.3 million shares during 1997, at a cost of $784 million.
In September 1997, the Corporation redeemed all of the outstanding shares of
its Series E Preferred Stock at its aggregate liquidation preference of $230
million.
The Corporation's quarterly dividend was $.44 per share in the first quarter of
1997 and $.51 per share in each of the last three quarters of 1997. In the
first quarter of 1998, the quarterly dividend was increased 14 percent, to $.58
per share. The level of dividends paid on the Corporation's common stock is de-
termined by the Board based on the Corporation's liquidity, asset quality pro-
file, capital adequacy and recent earnings history, as well as economic condi-
tions and other factors deemed relevant by the Board, including the amount of
dividends paid to the Corporation by its subsidiaries.
The Corporation has a capital planning process to determine the appropriate
level of capital required to support its various businesses and to ensure that
the Corporation maintains this level of capital. Included in the determination
of appropriate capital levels are the various capital requirements established
by the Corporation's principle regulatory agencies. The Global Treasury group
is responsible for developing capital plans for the Corporation and each of its
banking subsidiaries that support the Corporation's strategic objectives. These
plans, which are regularly reviewed and approved by ALCCO, include current and
pro-forma capital positions that are measured using various capital ratios, in-
cluding tangible common equity and common equity, as well as three regulatory
capital ratios: Tier 1, total and Tier 1 leverage. At December 31, 1997, the
Corporation and its bank subsidiaries met all regulatory capital adequacy re-
quirements to which they are subject.
Table 22 presents the Corporation's capital ratios as of the last two year
ends.
TABLE 22 -- CAPITAL POSITION
December 31 1997 1996
- ------------------------------------------------------------------------------
Tangible common equity ratio (common equity minus
intangibles/total assets minus intangibles)...................... 5.8% 6.5%
Common equity ratio (common equity/total assets) ................. 6.3% 7.1%
Regulatory capital ratios
Tier 1 capital ratio (Tier 1 capital/total
risk-adjusted assets)........................................... 8.0% 9.2%
Total capital ratio (total capital/total
risk-adjusted assets)........................................... 12.1% 13.6%
Tier 1 leverage ratio (Tier 1 capital/adjusted total average
assets)......................................................... 7.4% 8.2%
Compared with the prior year end, the decrease in the Corporation's capital ra-
tios at December 31, 1997 reflected growth in the Corporation's assets, mainly
loans and leases and available for sale securities, as well as a decrease in
stockholders' equity resulting from the repurchase of common stock and the re-
demption of Series E Preferred Stock, discussed above.
See Note 14 to the Financial Statements for additional information on the Cor-
poration's regulatory capital.
RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." This standard deferred for one year the effective date of
certain provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," relating to secured
borrowings, repurchase agreements and securities lending. SFAS No. 127 is ef-
fective for certain transactions occurring after December 31, 1997, and must be
applied prospectively. The Corporation does not expect that adoption of this
standard will have a material impact on its consolidated financial condition or
results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This standard requires that comprehensive income and its components be reported
in a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income, as well as cer-
tain items that are recorded directly in stockholders' equity, such as foreign
currency translation and unrealized gains and losses on securities available
for sale. This standard is effective for years beginning after December 15,
1997, and will have no impact on the Corporation's financial condition or re-
sults of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard requires disclosure of fi-
nancial and descriptive information about an entity's reportable operating seg-
ments. Segments are defined by the standard as components of an entity that en-
gage in business activities that generate revenues and expenses, and for which
separate financial information is available that is reviewed regularly by se-
nior management to evaluate performance and allocate resources. Such financial
information should be reported on the basis that is used internally for senior
management review. This standard is effective for financial statements for pe-
riods beginning after December 15, 1997, with restatement of comparative infor-
mation for prior periods. This standard will change the method under which the
Corporation reports its segment information, which information will be more
consistent with the Corporation's Line of Business information.
Effective January 1, 1998, the Office of the Comptroller of the Currency, the
Federal Reserve Board and the Federal Deposit Insurance Corporation amended
their risk-based capital standards to require the Corporation to measure and
hold capital to cover its exposure to market risk in its trading account and
foreign exchange positions. The amendment requires the Corporation to measure
its exposure to market risk using a VAR methodology given certain assumptions.
The amendment also requires the Corporation to backtest the daily net trading
gains and losses for the last 250 business days, beginning one year after
amendment adoption, by comparing the daily results to the corresponding VAR
measure. The Corporation has adopted this amendment as of January 1, 1998 and
does not expect that the impact on its risk-based capital ratios will be mate-
rial.
53
1996 COMPARED WITH 1995
NET INTEREST REVENUE
Domestic net interest revenue was relatively unchanged from 1995 to 1996. Aver-
age earning assets increased $1.5 billion, including a $1.1 billion increase in
average loan and lease volume. Contributing to the average loan volume increase
was a higher level of consumer-related loans, reflecting growth in the credit
card, home equity and installment loan portfolios, with such growth partially
offset by lower domestic commercial real estate loans and residential mort-
gages. The 18 basis point decrease in net interest margin was due to narrower
spreads, resulting from the full year effect of a new higher rate savings prod-
uct introduced in the second quarter of 1995, low introductory credit card
rates and a change in the mix of average earning assets.
The increase in international net interest revenue of $88 million was attribut-
able to increases in average earning assets reflecting increases in the Corpo-
ration's operations in Latin America, mainly Argentina and Brazil. The in-
creases in average earning assets included increases of $650 million and $450
million in average loans and leases from 1995 in Brazil and Argentina, respec-
tively, and increases in other average earning assets of $470 million and $400
million, respectively, in these countries. Net interest margin decreased 5 ba-
sis points reflecting narrower spreads, primarily in Argentina as a result of
less volatile markets as the economy rebounded from the effects of the 1995
Mexican economic crisis.
NONINTEREST INCOME
The $221 million decrease in financial service fees primarily reflected a $254
million decline in net mortgage servicing fees. This resulted, in part, from
$111 million of pre-tax losses from risk management activities, net of de-
creased mortgage servicing amortization, recorded in the first quarter of 1996.
These losses resulted from the change in market value of contracts used to man-
age prepayment risk in the mortgage servicing portfolio which, in turn, pro-
tected the economic value of the mortgage banking subsidiary pending the com-
pletion of its sale to HomeSide. The losses from risk management activities
were substantially offset by the pre-tax gain of $106 million realized on the
sale of the mortgage banking subsidiary, which is included in gains on sales of
businesses. The decline in net mortgage servicing fees also reflected the ab-
sence of $67 million of pre-tax gains on contracts used to manage prepayment
risk in the mortgage servicing portfolio in 1995, as well as a reduction aris-
ing from the sale of the mortgage banking subsidiary in 1996. Excluding net
mortgage servicing fees, financial service fees increased $33 million compared
with 1995, primarily due to increases in syndication and agent fees, reflecting
a higher volume of transactions generated by the Corporation's loan syndica-
tions business.
Net equity and mezzanine profits increased $99 million from 1995 due to a
higher level of gains realized on dispositions of investments. The portfolio
amounted to over $700 million at December 31, 1996 and is diversified as to in-
dustry, geography and asset class. Mutual fund fees improved $27 million from
the 1995 level, primarily due to higher fees from the Brazilian mutual fund
business. The decrease in other trust and agency fees was due to the Corpora-
tion's sale of its Corporate Trust business and the contribution of its Stock
Transfer business to a joint venture in the fourth quarter of 1995. The $51
million increase in trading profits and commissions was mainly due to increases
in the Corporation's emerging markets business and its Brazilian operations.
The $31 million increase in other income was due, in part, to increased equity
earnings related to the Corporation's mortgage banking, shareholder services
and Argentine pension fund joint ventures.
Gains on sales of businesses in 1996 reflected a pre-tax gain of $106 million
on the sale of the Corporation's mortgage banking subsidiary, as discussed
above, and a pre-tax gain of $47 million resulting from the sale of 20 branches
in connection with the Corporation's acquisition of BayBanks. In 1995, the Cor-
poration sold its Vermont and Maine bank subsidiaries for a pre-tax gain of $75
million, and its Corporate Trust business for a pre-tax gain of $20 million.
NONINTEREST EXPENSE
Excluding acquisition, divestiture and restructuring expense and OREO, nonin-
terest expense increased $92 million, reflecting ongoing expansion and invest-
ment spending in the Corporation's Latin American, Global Capital Markets and
Consumer Banking businesses. This increase was partially offset by cost savings
resulting from the integration of BayBanks, the substantial elimination of FDIC
insurance premiums in 1996, and the absence of operating expenses associated
with disposed businesses, including the mortgage banking subsidiary, the Corpo-
rate Trust business and the Stock Transfer business.
The $32 million increase in employee costs mainly included higher merit in-
creases, higher levels of incentive compensation, costs related to the hiring
of sales and trading professionals in the Global Capital Markets businesses and
the effects of the June 1996 acquisition of Bancorp. Occupancy and equipment
expenses increased $17 million due to branch expansion, mainly in Latin Ameri-
ca. The $21 million increase in advertising and public relations was due to di-
rect marketing and promotional campaigns relating to credit card, home equity
and other products in Consumer Banking. Communications expense increased $11
million as a result of expansion in Regional Consumer and Latin America. The
$53 million increase in other expense included increases in travel expenses and
software costs, which were primarily related to the maintenance of the Corpora-
tion's banking systems, including money and wire transfer and electronic bank-
ing.
In the third quarter of 1996, the Corporation recorded restructuring and merg-
er-related costs of $180 million in connection with its acquisition of
BayBanks. The charges included severance costs, primarily related to the Corpo-
ration's plans to eliminate approximately 2,000 positions; property-related and
other merger-related costs, including lease termination costs and writedowns of
bank owned property; and professional fees and other costs of effecting the
merger; as well as systems and other conversion costs which were incurred at
the time of the merger. The restructuring and merger-related charge does not
include costs related to the conversion of systems and other integration re-
lated activities. These costs were recorded as they were incurred during the
integration process.
During the fourth quarter of 1995, the Corporation recorded $28 million of
charges related to exiting, reorganizing and downsizing certain businesses and
corporate staff units, including the reorganization of the European business
and certain Asia/Pacific operations.
54
BANKBOSTON CORPORATION
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
Year Ended December 31,
(dollars in millions) 1997
- -------------------------------------------------------------------------------
Average Average
Balance Interest(1) Rate
ASSETS
Interest bearing deposits in other banks
U.S............................................... $ 319 $ 18 5.78%
International..................................... 1,462 126 8.61
------- ------
Total............................................ 1,781 144 8.11
------- ------ -----
Federal funds sold and resale agreements
U.S............................................... 635 35 5.43
International..................................... 1,471 215 14.65
------- ------
Total............................................ 2,106 250 11.87
------- ------ -----
Trading securities
U.S............................................... 969 60 6.19
International..................................... 728 51 7.08
------- ------
Total............................................ 1,697 111 6.57
------- ------ -----
Securities
U.S.
Available for sale(2)............................ 7,766 518 6.74
Held to maturity................................. 658 42 6.34
International
Available for sale(2)............................ 1,317 159 12.27
------- ------
Total............................................ 9,741 719 7.38
------- ------ -----
Loans and lease financing
U.S............................................... 31,502 2,716 8.62
International..................................... 10,881 1,248 11.46
------- ------
Total(3)......................................... 42,383 3,964 9.35
------- ------ -----
Total earning assets............................... 57,708 5,188 8.99
------ -----
Nonearning assets.................................. 7,555
-------
Total assets(4).................................. $65,263
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits................................. $14,690 $ 397 2.70%
Time deposits.................................... 10,014 560 5.59
International
Banks in foreign countries....................... 2,200 131 5.97
Other foreign savings and time................... 8,018 597 7.44
------- ------
Total............................................ 34,922 1,685 4.82
------- ------ -----
Federal funds purchased and repurchase agreements
U.S............................................... 5,842 333 5.71
International..................................... 175 17 9.46
------- ------
Total............................................ 6,017 350 5.82
------- ------ -----
Other funds borrowed
U.S............................................... 4,365 262 6.01
International..................................... 1,482 193 13.02
------- ------
Total............................................ 5,847 455 7.78
------- ------ -----
Notes payable
U.S.(5)........................................... 2,909 201 6.91
International..................................... 473 44 9.37
------- ------
Total............................................ 3,382 245 7.25
------- ------ -----
Total interest bearing liabilities................. 50,168 2,735 5.45
------ -----
Demand deposits -- U.S............................ 7,226
Demand deposits -- International................... 705
Other noninterest bearing liabilities.............. 2,497
Stockholders' equity............................... 4,667
-------
Total liabilities and stockholders' equity(4).... $65,263
=======
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE INTEREST EARNING ASSETS
U.S............................................... $41,849 $1,822 4.36%
International..................................... 15,859 631 3.98%
------- ------
Total............................................ $57,708 $2,453 4.25%
======= ======
- -------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the securi-
ties' average amortized cost.
(3) Loans and lease financing includes nonaccrual and renegotiated balances.
Interest on loans and lease financing includes net fees of $55 million.
(4) As of December 31, 1997, average international assets and liabilities as a
percentage of total average consolidated assets and liabilities, respec-
tively, amounted to 27%.
(5) Amounts include guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures.
55
BANKBOSTON CORPORATION
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1996
- -----------------------------------------------------------------------------
Average Average
Balance Interest(1) Rate
ASSETS
Interest bearing deposits in other banks
U.S. .......................................... $ 192 $ 12 5.96%
International.................................. 1,136 91 8.01
------- ------
Total......................................... 1,328 103 7.71
------- ------ -----
Federal funds sold and resale agreements
U.S. .......................................... 474 25 5.24
International.................................. 1,203 178 14.78
------- ------
Total......................................... 1,677 203 12.08
------- ------ -----
Trading securities
U.S. .......................................... 552 31 5.76
International.................................. 870 124 14.30
------- ------
Total......................................... 1,422 155 10.99
------- ------ -----
Loans held for sale
U.S. .......................................... 260 18 6.88
International.................................. 12 1 6.12
------- ------
Total......................................... 272 19 6.84
------- ------ -----
Securities
U.S.
Available for sale(2)......................... 6,577 423 6.48
Held to maturity.............................. 684 42 6.15
International
Available for sale(2)......................... 832 114 14.13
Held to maturity.............................. 29 5 16.53
------- ------
Total......................................... 8,122 584 7.19
------- ------ -----
Loans and lease financing
U.S. .......................................... 31,472 2,714 8.62
International.................................. 9,117 1,135 12.44
------- ------
Total(3)...................................... 40,589 3,849 9.48
------- ------ -----
Total earning assets............................ 53,410 4,913 9.20
------ -----
Nonearning assets............................... 6,113
-------
Total assets(4)............................... $59,523
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits.............................. $14,918 $ 401 2.69%
Time deposits................................. 10,310 581 5.64
International
Banks in foreign countries.................... 2,883 163 5.64
Other foreign savings and time................ 6,380 535 8.37
------- ------
Total......................................... 34,491 1,680 4.87
------- ------ -----
Federal funds purchased and repurchase
agreements
U.S. .......................................... 4,500 259 5.77
International.................................. 109 14 12.80
------- ------
Total......................................... 4,609 273 5.93
------- ------ -----
Other funds borrowed
U.S. .......................................... 3,140 186 5.92
International.................................. 1,002 220 21.91
------- ------
Total......................................... 4,142 406 9.79
------- ------ -----
Notes payable
U.S.(5)........................................ 2,119 140 6.59
International.................................. 547 54 9.99
------- ------
Total......................................... 2,666 194 7.29
------- ------ -----
Total interest bearing liabilities.............. 45,908 2,553 5.56
------ -----
Demand deposits -- U.S.......................... 6,635
Demand deposits -- International................ 477
Other noninterest bearing liabilities........... 1,759
Stockholders' equity............................ 4,744
-------
Total liabilities and stockholders'
equity(4)..................................... $59,523
=======
NET INTEREST REVENUE AS A PERCENTAGE OF AVERAGE
INTEREST EARNING ASSETS
U.S. .......................................... $40,211 $1,826 4.54%
International.................................. 13,199 534 4.05%
------- ------
Total......................................... $53,410 $2,360 4.42%
======= ======
- -----------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis.
(2) Average rates for securities available for sale are based on the securi-
ties' average amortized cost.
(3) Loans and lease financing includes nonaccrual and renegotiated balances.
Interest on loans and lease financing includes net fees of $52 million.
(4) As of December 31, 1996, average international assets and liabilities as a
percentage of total average consolidated assets and liabilities, respectively,
amounted to 25%.
(5) Amounts include guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures.
56
BANKBOSTON CORPORATION
AVERAGE BALANCES AND INTEREST RATES, TAXABLE EQUIVALENT BASIS
(dollars in millions) Year Ended December 31, 1995
- ------------------------------------------------------------------------------
Average Average
Balance Interest(1) Rate
ASSETS
Interest bearing deposits in other banks
U.S....................................... $ 253 $ 15 5.98%
International............................. 1,087 206 18.91
---------- ---------
Total.................................... 1,340 221 16.48
---------- --------- --------
Federal funds sold and resale agreements
U.S....................................... 537 32 5.89
International............................. 649 271 41.77
---------- ---------
Total.................................... 1,186 303 25.51
---------- --------- --------
Trading securities
U.S....................................... 245 15 5.85
International............................. 602 171 28.45
---------- ---------
Total.................................... 847 186 21.91
---------- --------- --------
Loans held for sale
U.S.(2)................................... 448 31 6.98
---------- --------- --------
Securities
U.S.
Available for sale(3).................... 3,002 211 7.07
Held to maturity......................... 3,836 230 5.99
International
Available for sale(3).................... 422 64 13.36
Held to maturity......................... 203 16 7.66
---------- ---------
Total.................................... 7,463 521 6.98
---------- --------- --------
Loans and lease financing
U.S....................................... 30,367 2,701 8.90
International............................. 7,916 1,178 14.88
---------- ---------
Total(4)................................. 38,283 3,879 10.13
---------- --------- --------
Total earning assets....................... 49,567 5,141 10.37
--------- --------
Nonearning assets.......................... 6,177
----------
Total assets(5).......................... $ 55,744
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
U.S.
Savings deposits......................... $ 14,359 $ 382 2.66%
Time deposits............................ 9,288 520 5.60
International
Banks in foreign countries............... 2,257 145 6.42
Other foreign savings and time........... 5,804 744 12.82
---------- ---------
Total.................................... 31,708 1,791 5.65
---------- --------- --------
Federal funds purchased and repurchase
agreements
U.S....................................... 4,322 237 5.48
International............................. 189 45 23.60
---------- ---------
Total.................................... 4,511 282 6.24
---------- --------- --------
Other funds borrowed
U.S....................................... 3,730 236 6.34
International............................. 891 403 45.16
---------- ---------
Total.................................... 4,621 639 13.83
---------- --------- --------
Notes payable
U.S....................................... 1,932 135 7.02
International............................. 210 23 10.87
---------- ---------
Total.................................... 2,142 158 7.40
---------- --------- --------
Total interest bearing liabilities......... 42,982 2,870 6.68
--------- --------
Demand deposits -- U.S..................... 6,242
Demand deposits -- International........... 456
Other noninterest bearing liabilities...... 1,760
Stockholders' equity....................... 4,304
----------
Total liabilities and stockholders'
equity(5)............................... $ 55,744
==========
NET INTEREST REVENUE AS A PERCENTAGE OF
AVERAGE INTEREST EARNING ASSETS
U.S....................................... $ 38,688 $ 1,825 4.72%
International............................. 10,879 446 4.10%
---------- ---------
Total.................................... $ 49,567 $ 2,271 4.58%
========== =========
- ------------------------------------------------------------------------------
(1) Income is shown on a fully taxable equivalent basis.
(2) Amounts include the Corporation's accelerated disposition portfolio.
(3) Average rates for securities available for sale are based on the securi-
ties' average amortized cost.
(4) Loans and lease financing includes nonaccrual and renegotiated balances.
Interest on loans and lease financing includes net fees of $62 million.
(5) As of December 31, 1995, average international assets and liabilities as a
percentage of total average consolidated assets and liabilities, respec-
tively, amounted to 22%.
57
BANKBOSTON CORPORATION
CHANGE IN NET INTEREST REVENUE -- VOLUME AND RATE ANALYSIS
The following table presents, on a fully taxable equivalent basis, an analysis
of the effect on net interest revenue of volume and rate changes for 1997 com-
pared with 1996, and 1996 compared with 1995. The change due to the volume/rate
variance has been allocated to volume and the change due to the difference in
the number of days in the periods has been allocated to rate.
1997 Compared with 1996 1996 Compared with 1995
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
(in millions) Volume Rate Net Change Volume Rate Net Change
- -----------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing
deposits in other banks
U.S. .................. $ 6 $ 6 $ (3) $ (3)
International.......... 28 $ 7 35 4 $ (119) (115)
---- -----
41 (118)
---- -----
Federal funds sold and
resale agreements
U.S. .................. 9 1 10 (3) (4) (7)
International.......... 39 (2) 37 82 (175) (93)
---- -----
47 (100)
---- -----
Trading securities
U.S. .................. 26 3 29 16 16
International.......... (10) (63) (73) 38 (85) (47)
---- -----
(44) (31)
---- -----
Loans held for sale
U.S. .................. (18) (18) (13) (13)
International.......... (1) (1) 1 1
---- -----
(19) (12)
---- -----
Securities
U.S. .................. 77 18 95 25 (1) 24
International.......... 53 (13) 40 32 7 39
---- -----
135 63
---- -----
Loans and lease
financing
U.S. .................. 3 (1) 2 95 (82) 13
International.......... 202 (89) 113 150 (193) (43)
---- -----
115 (30)
---- -----
Interest income......... 386 (111) 275 352 (580) (228)
---- -----
INTEREST BEARING LIABIL-
ITIES
Deposits
U.S. savings........... (6) 2 (4) 15 4 19
U.S. time.............. (16) (5) (21) 57 4 61
International.......... 68 (38) 30 91 (282) (191)
---- -----
5 (111)
---- -----
Federal funds purchased
and repurchase
agreements
U.S. .................. 77 (3) 74 10 12 22
International.......... 6 (3) 3 (10) (21) (31)
---- -----
77 (9)
---- -----
Other funds borrowed
U.S. .................. 73 3 76 (35) (15) (50)
International.......... 62 (89) (27) 24 (207) (183)
---- -----
49 (233)
---- -----
Notes payable
U.S. .................. 54 7 61 13 (8) 5
International.......... (7) (3) (10) 33 (2) 31
---- -----
51 36
---- -----
Interest expense........ 203 (21) 182 184 (501) (317)
---- -----
Net interest revenue.... $ 93 $ 89
==== =====
58
BANKBOSTON CORPORATION
SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND
COMMON STOCK DATA
1997 1996
(dollars in millions, FOURTH THIRD SECOND FIRST Fourth Third Second First
except per share amounts) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Interest income.......... $ 1,342 $ 1,267 $ 1,281 $ 1,275 $ 1,250 $ 1,199 $ 1,202 $ 1,240
Interest expense......... 720 696 665 655 639 608 631 674
------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue.... 622 571 616 620 611 591 571 566
Provision for credit
losses.................. 40 40 60 60 60 57 57 57
------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue
after provision for
credit losses ......... 582 531 556 560 551 534 514 509
Noninterest income....... 408 448 377 330 340 337 383 285
Noninterest expense...... 600 601 578 544 548 713 532 527
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax-
es...................... 390 378 355 346 343 158 365 267
Provision for income tax-
es...................... 155 152 143 139 141 78 151 112
------- ------- ------- ------- ------- ------- ------- -------
Net income............... $ 235 $ 226 $ 212 $ 207 $ 202 $ 80 $ 214 $ 155
======= ======= ======= ======= ======= ======= ======= =======
AVERAGE BALANCE SHEET
DATA
Loans and lease financ-
ing..................... $43,242 $42,429 $42,112 $41,732 $41,835 $41,223 $40,114 $39,179
Securities............... 10,538 9,661 9,488 9,261 8,029 8,249 8,065 8,143
Other earning assets..... 5,774 5,679 5,234 5,648 4,955 4,452 4,538 4,850
------- ------- ------- ------- ------- ------- ------- -------
Total earning assets.... 59,554 57,769 56,834 56,641 54,819 53,924 52,717 52,172
Cash and due from banks.. 3,398 3,194 2,976 2,698 2,750 2,447 2,534 2,710
Other assets............. 5,140 4,741 4,136 3,885 3,487 3,678 3,130 3,705
------- ------- ------- ------- ------- ------- ------- -------
Total average assets.... $68,092 $65,704 $63,946 $63,224 $61,056 $60,049 $58,381 $58,587
======= ======= ======= ======= ======= ======= ======= =======
Deposits................. $44,252 $42,989 $42,246 $41,899 $42,031 $42,617 $41,118 $40,632
Funds borrowed........... 12,730 12,367 11,466 10,866 9,357 8,301 8,282 9,061
Other liabilities........ 3,106 2,464 2,216 2,191 1,860 1,698 1,709 1,767
Notes payable............ 3,524 3,336 3,351 3,316 2,983 2,674 2,584 2,421
Stockholders' equity..... 4,480 4,548 4,667 4,952 4,825 4,759 4,688 4,706
------- ------- ------- ------- ------- ------- ------- -------
Total average
liabilities and
stockholders' equity... $68,092 $65,704 $63,946 $63,224 $61,056 $60,049 $58,381 $58,587
======= ======= ======= ======= ======= ======= ======= =======
PER COMMON SHARE
Net income
Basic................... $ 1.59 $ 1.49 $ 1.37 $ 1.29 $ 1.26 $ .46 $ 1.33 $ .94
Diluted................. 1.56 1.47 1.35 1.27 1.24 .45 1.32 .93
Cash dividends declared.. .51 .51 .51 .44 .44 .44 .44 .37
Market value
High.................... 97 11/16 91 3/4 76 7/8 78 3/4 70 57 7/8 51 1/2 50
Low..................... 77 1/16 73 1/8 63 5/8 63 7/8 58 50 1/8 46 41 5/8
AVERAGE NUMBER OF COMMON
SHARES
(in thousands)
Basic................... 145,241 145,383 147,910 153,421 152,975 153,103 153,650 154,988
Diluted................. 147,309 147,842 149,787 155,592 155,157 155,183 155,183 156,844
- -----------------------------------------------------------------------------------------------------------------
The common stock of the Corporation, which is the only class of its
securities entitled to vote at the Annual Meeting of Stockholders, is listed
and traded on the New York and Boston stock exchanges.
59
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
BankBoston Corporation:
We have audited the accompanying consolidated balance sheets of BankBoston Cor-
poration and Subsidiaries as of December 31, 1997 and 1996 and the related con-
solidated statements of income, changes in stockholders' equity and cash flows
for each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance as to whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BankBoston Corpo-
ration and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and cash flows for each of the years in the three
year period ended December 31, 1997 in conformity with generally accepted ac-
counting principles.
The consolidated financial statements of BayBanks, Inc., for the year ended De-
cember 31, 1995, prior to the restatement for the 1996 pooling of interests,
included in the 1995 restated consolidated financial statements were audited by
other auditors whose reports expressed unqualified opinions on those financial
statements. We audited the combination of the accompanying consolidated state-
ments of income, changes in stockholders' equity and cash flows for the year
ended December 31, 1995, after restatement for the 1996 pooling of interests;
in our opinion, such consolidated financial statements have been properly com-
bined on the basis described in Note 2 to the financial statements.
Boston, Massachusetts
January 15, 1998 /s/ Coopers & Lybrand L.L.P.
61
BANKBOSTON CORPORATION
CONSOLIDATED BALANCE SHEET
December 31 1997 1996
(dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks...................................... $ 4,006 $ 4,273
Interest bearing deposits in other banks..................... 1,592 1,634
Federal funds sold and securities purchased under agreements
to resell.................................................... 2,017 1,857
Trading securities........................................... 1,833 1,238
Securities
Available for sale.......................................... 9,847 7,804
Held to maturity (fair value of $639 in 1997 and $675 in
1996)....................................................... 636 680
Loans and lease financing (net of unearned income of $381 in
1997 and $380 in 1996)....................................... 43,980 41,061
Reserve for credit losses.................................... (712) (883)
------- -------
Net loans and lease financing............................... 43,268 40,178
Premises and equipment, net.................................. 1,042 894
Due from customers on acceptances............................ 462 438
Accrued interest receivable.................................. 552 546
Other assets................................................. 4,013 2,764
------- -------
Total Assets................................................. $69,268 $62,306
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Domestic offices
Noninterest bearing........................................ $ 8,507 $ 8,340
Interest bearing........................................... 25,104 24,709
Overseas offices
Noninterest bearing........................................ 1,085 751
Interest bearing........................................... 11,065 9,031
------- -------
Total deposits............................................ 45,761 42,831
Funds borrowed............................................... 11,723 9,158
Acceptances outstanding...................................... 460 448
Accrued expenses and other liabilities....................... 3,026 1,614
Notes payable................................................ 2,941 2,821
Guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures............................... 747 500
------- -------
Total liabilities............................................ 64,658 57,372
------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock without par value
Authorized shares -- 10,000,000
Issued shares -- 3,673,941 in 1997 and 4,593,941 in 1996.... 278 508
Common stock, par value $1.50
Authorized shares -- 300,000,000
Issued shares -- 154,002,254 in 1997 and 153,172,672 in 1996
Outstanding shares -- 145,706,594 in 1997 and 153,172,672 in
1996........................................................ 231 230
Surplus..................................................... 1,219 1,202
Retained earnings........................................... 3,472 2,925
Net unrealized gain on securities available for sale, net of
tax......................................................... 53 76
Treasury stock, at cost (8,295,660 shares in 1997).......... (632)
Cumulative translation adjustments, net of tax.............. (11) (7)
------- -------
Total stockholders' equity................................... 4,610 4,934
------- -------
Total Liabilities and Stockholders' Equity................... $69,268 $62,306
======= =======
- -------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements.
62
BANKBOSTON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31 1997 1996 1995
(dollars in millions, except per share amounts)
- ---------------------------------------------------------------------------------
INTEREST INCOME
Loans and lease financing, including fees............... $ 3,954 $ 3,844 $ 3,876
Securities.............................................. 698 569 503
Trading securities...................................... 111 155 186
Mortgages held for sale................................. 19 31
Federal funds sold and securities purchased under agree-
ments to resell........................................ 257 203 303
Deposits in other banks................................. 144 103 220
------- ------- -------
Total interest income.................................. 5,164 4,893 5,119
------- ------- -------
INTEREST EXPENSE
Deposits of domestic offices............................ 940 944 879
Deposits of overseas offices............................ 745 736 912
Funds borrowed.......................................... 805 679 921
Notes payable........................................... 245 194 158
------- ------- -------
Total interest expense................................. 2,735 2,553 2,870
------- ------- -------
Net interest revenue................................... 2,429 2,340 2,249
Provision for credit losses............................. 200 231 275
------- ------- -------
Net interest revenue after provision for credit loss-
es.................................................... 2,229 2,109 1,974
------- ------- -------
NONINTEREST INCOME
Financial service fees.................................. 655 474 695
Trust and agency fees................................... 283 246 240
Trading profits and commissions......................... 58 76 25
Net securities gains.................................... 80 23 9
Other income............................................ 487 525 340
------- ------- -------
Total noninterest income............................... 1,563 1,344 1,309
------- ------- -------
NONINTEREST EXPENSE
Salaries................................................ 1,065 983 947
Employee benefits....................................... 214 195 199
Occupancy expense....................................... 204 203 191
Equipment expense....................................... 146 138 133
Acquisition, divestiture and restructuring expense...... 180 28
Other expense........................................... 695 621 578
------- ------- -------
Total noninterest expense.............................. 2,324 2,320 2,076
------- ------- -------
Income before income taxes.............................. 1,468 1,133 1,207
Provision for income taxes.............................. 589 483 529
------- ------- -------
NET INCOME.............................................. $ 879 $ 650 $ 678
======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK................... $ 848 $ 613 $ 641
======= ======= =======
PER COMMON SHARE
Net income
Basic.................................................. $ 5.73 $ 3.99 $ 4.17
Diluted................................................ 5.65 3.93 4.09
Cash dividends declared................................. 1.97 1.69 1.28
AVERAGE NUMBER OF COMMON SHARES
(in thousands)
Basic.................................................. 147,959 153,529 153,856
Diluted................................................ 150,040 156,112 156,768
- ---------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements.
63
BANKBOSTON CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31 1997 1996 1995
(dollars in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance, January 1................................................................. $ 508 $ 508 $ 508
Redemption of Series E............................................................. (230)
------ ------ ------
Balance, December 31............................................................... 278 508 508
------ ------ ------
COMMON STOCK
Balance, January 1................................................................. 230 350 336
Change in par value................................................................ (118)
Common stock issued
Dividend reinvestment and common stock purchase plan -- 60,559 shares in 1997,
326,277 shares in 1996 and 861,235 shares in 1995................................. 1 2
Exercise of stock options, net of surrendered shares -- 422,830 shares in 1997,
771,353 shares in 1996 and 905,653 shares in 1995................................. 1 3 2
Conversion of subordinated debentures -- 3,477,792 shares in 1995................. 8
Business combinations, net of treasury stock retired -- 107,794 shares in 1997,
(3,733,533) shares in 1996 and 1,071,987 shares in 1995........................... (6) 2
Restricted stock grants, net of forfeitures -- 237,332 shares in 1997, (1,672)
shares in 1996 and 43,062 shares in 1995..........................................
------ ------ ------
Balance, December 31............................................................... 231 230 350
------ ------ ------
SURPLUS
Balance, January 1................................................................. 1,202 1,240 1,069
Change in par value................................................................ 118
Dividend reinvestment and common stock purchase plan............................... 6 18 33
Exercise of stock options.......................................................... (53) (31) 16
Conversion of subordinated debentures.............................................. 71
Business combinations, net of treasury stock retired............................... 8 (178) 38
Restricted stock................................................................... 17 9 7
Other, principally employee benefit plans.......................................... 39 26 6
------ ------ ------
Balance, December 31............................................................... 1,219 1,202 1,240
------ ------ ------
RETAINED EARNINGS
Balance, January 1................................................................. 2,925 2,548 2,091
Net income......................................................................... 879 650 678
Restricted stock................................................................... (10) 5 (2)
Payment on Employee Stock Ownership Plan loan...................................... 6 2
Cash dividends declared
Preferred stock................................................................... (31) (37) (37)
Common stock -- $1.97 per share in 1997, $1.69 per share in 1996 and $1.28 per
share in 1995..................................................................... (291) (247) (184)
------ ------ ------
Balance, December 31............................................................... 3,472 2,925 2,548
------ ------ ------
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
Balance, January 1................................................................. 76 82 (40)
Change in net unrealized gain (loss) on securities available for sale, net of tax.. (23) (6) 122
------ ------ ------
Balance, December 31............................................................... 53 76 82
------ ------ ------
TREASURY STOCK
Balance, January 1................................................................. (22) (27)
Purchases of treasury stock -- 10,300,000 shares in 1997, 10,220,789 shares in 1996
and 1,594,016 shares in 1995....................................................... (784) (490) (53)
Treasury stock reissued
Dividend reinvestment and common stock purchase plan -- 208,911 shares in 1997,
491,586 shares in 1996 and 331,782 shares in 1995................................. 16 23 9
Exercise of stock options -- 1,496,816 shares in 1997, 1,352,081 shares in 1996
and 147,370 shares in 1995........................................................ 113 52 4
Conversion of subordinated debentures -- 530,475 shares in 1995................... 15
Business combinations -- 278,576 shares in 1997, 8,499,441 shares in 1996 and
773,621 shares in 1995............................................................ 21 420 21
Restricted stock grants -- 8,987 shares in 1997, 223,515 shares in 1996 and
255,520 shares in 1995............................................................ 1 10 6
Other, principally employee benefit plans -- 11,050 shares in 1997, 143,574 shares
in 1996 and 106,188 shares in 1995................................................ 1 7 3
------ ------ ------
Balance, December 31............................................................... (632) (22)
------ ------ ------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, January 1................................................................. (7) (4) (6)
Change in translation adjustments, net of tax...................................... (4) (3) 2
------ ------ ------
Balance, December 31............................................................... (11) (7) (4)
------ ------ ------
Total Stockholders' Equity, December 31............................................ $4,610 $4,934 $4,702
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements.
64
BANKBOSTON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31 1997 1996 1995
(in millions)
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 879 $ 650 $ 678
Reconciliation of net income to net cash provided
from (used for) operating activities
Provision for credit losses....................... 200 231 275
Depreciation and amortization..................... 157 150 239
Provision for deferred taxes...................... 255 2 39
Net gains on sales of securities available for
sale and other assets............................ (361) (368) (210)
Change in trading securities...................... (595) (356) (588)
Change in mortgages held for sale................. 269 (722)
Net change in interest receivables and payables... 63 72 (66)
Other, net........................................ (209) (122) 163
-------- ------- -------
Net cash provided from (used for) operating ac-
tivities........................................ 389 528 (192)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided from (used for) interest bearing
deposits in other banks........................... 42 (278) 203
Net cash used for federal funds sold and securities
purchased under agreements to resell.............. (160) (309) (225)
Securities available for sale
Sales............................................. 5,359 5,827 2,101
Maturities........................................ 2,902 4,288 1,439
Purchases......................................... (10,295) (9,624) (4,382)
Securities held to maturity
Maturities........................................ 120 55 2,994
Purchases......................................... (82) (76) (2,531)
Net cash used for lending and lease activities of
nonbank entities.................................. (418) (1,229) (1,475)
Proceeds from sales of loan portfolios by bank sub-
sidiaries......................................... 1,295 1,270 1,575
Net cash used for lending and lease activities of
bank subsidiaries................................. (3,979) (2,710) (1,445)
Proceeds from sales of other real estate owned..... 50 45 84
Expenditures for premises and equipment............ (324) (237) (246)
Proceeds from sales of business units, premises and
equipment......................................... 110 264 169
Other, net......................................... 107 (72) (604)
-------- ------- -------
Net cash used for investing activities........... (5,273) (2,786) (2,343)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided from deposits.................... 2,930 1,767 815
Net cash provided from funds borrowed.............. 2,565 768 2,292
Net proceeds from issuance of notes payable........ 1,275 921 220
Repayments/repurchases of notes payable............ (1,155) (289) (155)
Net proceeds from issuance of guaranteed preferred
beneficial interests in Corporation's junior
subordinated debentures........................... 247 500
Net proceeds from issuance of common stock......... 108 92 70
Redemption of preferred stock...................... (230)
Purchases of treasury stock........................ (784) (490) (53)
Dividends paid..................................... (322) (284) (221)
-------- ------- -------
Net cash provided from financing activities...... 4,634 2,985 2,968
-------- ------- -------
Effect of foreign currency translation on cash..... ( 17) (15) (18)
-------- ------- -------
Net change in cash and due from banks.............. (267) 712 415
Cash and due from banks at January 1............... 4,273 3,561 3,146
-------- ------- -------
Cash and due from banks at December 31............. $ 4,006 $ 4,273 $ 3,561
======== ======= =======
- --------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Financial Statements.
65
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial reporting and accounting policies of BankBoston Corporation (the
Corporation) conform to generally accepted accounting principles. Certain prior
period amounts have been reclassified to conform with current financial state-
ment presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates. The
following is a summary of the significant accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the Corporation and its majority
owned subsidiaries, including its major banking subsidiaries, BankBoston, N.A.
(the Bank) and Rhode Island Hospital Trust National Bank. All material
intercompany accounts and transactions have been eliminated in consolidation.
Investments in 20% to 50%-owned companies are accounted for using the equity
method. The equity interest in their earnings is included in other income. The
excess of cost over the assigned value of the net assets of companies acquired,
or goodwill, is included in other assets and is amortized on a straight-line
basis, generally over periods ranging from ten to twenty-five years.
FOREIGN CURRENCY TRANSLATION
The Corporation translates the financial statements of its foreign operations
in accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation." Under the provisions of SFAS No. 52, a func-
tional currency is designated for each foreign unit, generally the currency of
the primary economic environment in which it operates. Where the functional
currency is not the U.S. dollar, assets and liabilities are translated into
U.S. dollars at period-end exchange rates, while income and expenses are trans-
lated using average rates for the period. The resulting translation adjustments
and any related hedge gains and losses are recorded, net of tax, as a separate
component of stockholders' equity.
For foreign units for which the functional currency is the U.S. dollar, includ-
ing units that operate in a hyperinflationary environment, the financial state-
ments are translated into U.S. dollars using period-end exchange rates for mon-
etary assets and liabilities, exchange rates in effect on the date of acquisi-
tion for premises and equipment (and related depreciation), and the average ex-
change rate during the period for income and expenses. The resulting transla-
tion adjustments and related hedge gains and losses for these units are re-
corded in current period income.
The Corporation hedges a portion of its exposure to translation gains and
losses in overseas branches and foreign subsidiaries through the purchase of
foreign exchange rate contracts and through investments in fixed assets and se-
curities.
TRADING ACTIVITIES
Trading activities include securities held in anticipation of short-term market
movements and for resale to customers. The Corporation values trading securi-
ties at fair value and records gains and losses, both realized and unrealized,
in trading profits and commissions, a component of noninterest income. Obliga-
tions to deliver securities not yet purchased are carried at fair value in
funds borrowed.
Trading activities also include derivative and foreign exchange products. De-
rivative trading positions are carried at fair value, with realized and
unrealized gains and losses recorded in trading profits and commissions. Deriv-
ative trading positions primarily include interest rate futures and forwards,
interest rate swaps and interest rate options. Foreign exchange trading posi-
tions are valued at prevailing market rates on a present value basis, and the
resulting realized and unrealized gains and losses are recorded in net foreign
exchange trading profits, a component of other income.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Securities are accounted for in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." All debt and equity securi-
ties that are not purchased in connection with the Corporation's trading activ-
ities are classified as either securities held to maturity or securities avail-
able for sale. Securities held to maturity are debt securities that the Corpo-
ration has the positive intent and ability to hold to maturity. These securi-
ties are reported at cost, adjusted for amortization of premium and accretion
of discount. Securities available for sale are debt securities that the Corpo-
ration may not hold to maturity, as well as equity securities. These securities
include debt securities that are purchased in connection with the Corporation's
asset and liability risk management activities and that may be sold in response
to changes in interest rates and other related factors; securities held in con-
nection with the Corporation's Private Equity Investing and Capital Markets
businesses; and other securities that are intended to be held for indefinite
periods of time, but which may not be held to maturity. Within the available
for sale category, equity securities that have a readily determinable fair
value and debt securities are reported at fair value, with unrealized gains and
losses recorded, net of tax, as a separate component of stockholders' equity.
Equity securities that do not have a readily determinable fair value are re-
ported at cost. If a security available for sale or held to maturity has expe-
rienced a decline in value that is deemed other than temporary, it is written
down to its estimated fair value through a charge to current period income. Re-
alized gains and losses with respect to securities, which are generally com-
puted on a specific identified cost basis, are included in net securities
gains, except for gains and losses with respect to equity and mezzanine securi-
ties, which are included in other income.
66
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVES USED IN ASSET AND LIABILITY MANAGEMENT ACTIVITIES
As part of the Corporation's asset and liability management (ALM) activities,
derivative products, including interest rate swaps, futures, forwards and op-
tion contracts (including interest rate caps and floors), are used to hedge ex-
posures or modify the interest rate characteristics of related balance sheet
instruments. In order for a derivative to be included in the ALM portfolio,
there must be a high correlation between the derivative contract and the item
being hedged, both at inception and throughout the hedge period.
Derivatives included in the ALM portfolio are linked to specific assets or lia-
bilities or groups of similar assets or liabilities. Income or loss on the de-
rivatives is recognized on the same basis as that used for the linked assets or
liabilities. If the related assets are carried at fair value or the lower of
cost or fair value, the fair values of the derivatives are combined with the
fair values of the assets and are recognized in income using the same method of
accounting as that used for the linked assets. If the assets or liabilities are
carried at cost, the derivatives are either accounted for on the accrual basis,
with income or expense accrued over the life of the agreements as an adjustment
to the yield of the related assets or liabilities, or marked to fair value,
with any gain or loss deferred and amortized over the period being managed as
an adjustment to the yield of the related assets or liabilities. In this con-
nection, interest rate swaps, caps and floors are accounted for on the accrual
basis and interest rate futures, forwards and other option agreements are
marked to fair value, with gains and losses deferred and amortized over the pe-
riod being managed. The Corporation does not utilize written options as part of
its interest rate risk management strategy unless they are included as part of
an overall option strategy that effectively creates a net purchased option po-
sition. If a contract is terminated, any remaining unrecognized gain or loss is
deferred and amortized as an adjustment to the yield of the related assets or
liabilities over the remainder of the period that is being managed. If the
linked assets or liabilities are disposed of prior to the end of the period be-
ing managed, the related derivatives are marked to fair value, with any result-
ing gain or loss recognized in current period income as an adjustment to the
gain or loss on the disposal of the related assets or liabilities.
The Corporation also enters into foreign exchange contracts to hedge a portion
of its own foreign exchange exposure, including foreign currency translation.
(See "Foreign Currency Translation" above.) Such contracts are revalued at the
spot rate, with any forward premium or discount recognized over the life of the
contract in net interest revenue.
LOANS AND LEASE FINANCING
Loans are reported at their principal outstanding, net of charge-offs and un-
earned income, if any. Interest income on loans is accrued as earned. Unearned
income on loans and leases is recognized on a basis approximating a level rate
of return over the term of the loan. Loan origination fees and costs are ac-
counted for in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases," which requires the deferral of these fees and costs and sub-
sequent amortization to income over the life of the related credit or facility.
Fees that adjust the yield on the underlying credit are included in interest
income on loans and lease financing. Fees for credit-related services are in-
cluded in financial service fees, a component of noninterest income.
Lease financing receivables, including leveraged leases, are reported at the
aggregate of lease payments receivable and estimated residual values, net of
unearned and deferred income, including unamortized investment credits.
Leveraged leases are reported net of nonrecourse debt. Unearned income is rec-
ognized to yield a level rate of return on the net investment in the leases.
The Corporation generally places loans and leases on nonaccrual status when any
portion of the principal or interest is 90 days past due or, in the case of
certain consumer loans, 120 days past due, unless the loan or lease is well se-
cured and in the process of collection, or earlier, when concern exists as to
the ultimate collectibility of principal or interest. Whenever a loan or lease
is placed on nonaccrual status, all other credit exposures to the same borrower
are also placed on nonaccrual status, except when it can be clearly demon-
strated that such credit exposures are well secured, fully performing and insu-
lated from the weakness surrounding the nonaccrual credit to which they relate.
When loans or leases are placed on nonaccrual status, the related interest re-
ceivable is reversed against interest income of the current period. Interest
payments received on nonaccrual loans and leases are applied as a reduction of
the principal balance when concern exists as to the ultimate collection of
principal; otherwise, such payments are recognized as interest income. Loans
and leases are removed from nonaccrual status when they become current as to
both principal and interest and concern no longer exists as to the ultimate
collectibility of principal or interest.
67
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RESERVE FOR CREDIT LOSSES AND PROVISION FOR CREDIT LOSSES
The reserve for credit losses is available for future charge-offs of existing
extensions of credit. The reserve is increased by the provision for credit
losses and by recoveries of items previously charged off, and is decreased as
credits are charged off. A charge-off occurs once a probability of loss has
been determined, with consideration given to such factors as the customer's fi-
nancial condition, underlying collateral and guarantees.
The provision for credit losses is based upon management's estimate of the
amount necessary to maintain the reserve at an adequate level, considering
evaluations of individual credits and concentrations of credit risk, net losses
charged to the reserve, changes in the quality of the credit portfolio, levels
of nonaccrual loans and leases, current economic conditions, cross-border
risks, changes in the size and character of the credit risks and other perti-
nent factors.
Impaired loans are accounted for in accordance with SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosure."
Loans are classified and accounted for as impaired loans when it is probable
that the Corporation will be unable to collect all principal and interest due
on the loan in accordance with the original contractual terms. The Corporation
uses the same criteria in placing a loan on nonaccrual status. Accordingly, im-
paired loans are defined as all nonaccrual loans, exclusive of residential
mortgage loans, consumer loans and leases. Impaired loans are valued based on
the fair value of the related collateral in the case of commercial real estate
loans and, for all other impaired loans, on the present value of expected fu-
ture cash flows, using the interest rate in effect at the time the loan was
placed on nonaccrual status. A loan's observable market value may be used as an
alternate valuation technique. Impairment exists when the recorded investment
in a loan exceeds the value of the loan measured using the above-mentioned val-
uation techniques. Such impairment is recognized as a valuation reserve, which
is included as a part of the Corporation's overall reserve for credit losses.
The Corporation recognizes interest income on impaired loans consistent with
its nonaccrual policy.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the estimated life of the improvement or the term of the lease.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO), which is included in other assets, includes
properties on which the Corporation has foreclosed and taken title. OREO is re-
ported at the lower of the carrying value of the loan or the fair value of the
property obtained, less estimated selling costs. The excess, if any, of the
loan over the fair value of the property at the time of transfer from loans to
OREO is charged to the reserve for credit losses. Subsequent declines in the
fair value of the property and net operating results of the property are re-
corded in noninterest expense.
INCOME TAXES
The Corporation accounts for income taxes in accordance with SFAS No. 109, "Ac-
counting for Income Taxes." Current tax liabilities or assets are recognized,
through charges or credits to the current tax provision, for the estimated
taxes payable or refundable for the current year. Net deferred tax liabilities
or assets are recognized, through charges or credits to the deferred tax provi-
sion, for the estimated future tax effects, based on enacted tax rates, attrib-
utable to temporary differences and tax benefit carryforwards. Deferred tax li-
abilities are recognized for temporary differences that will result in amounts
taxable in the future, and deferred tax assets are recognized for temporary
differences and tax benefit carryforwards that will result in amounts deduct-
ible or creditable in the future. The effect of enacted changes in tax law, in-
cluding changes in tax rates, on these deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date. A deferred
tax valuation reserve is established if it is more likely than not that all or
a portion of the Corporation's deferred tax assets will not be realized.
Changes in the deferred tax valuation reserve are recognized through charges or
credits to the deferred tax provision. For financial reporting purposes, in-
vestment tax credits received in connection with lease financing are recognized
as lease income over the investment life of the related asset.
PER SHARE CALCULATIONS
Effective December 31, 1997, the Corporation adopted SFAS No. 128, "Earnings
per Share." In accordance with this new standard, basic net income per common
share is computed by dividing net income, reduced by dividends on preferred
stock, by the weighted average number of common shares outstanding for each pe-
riod presented. For the computation of diluted net income per common share, net
income is reduced by preferred stock dividends, and such adjusted net income is
divided by the aggregate of the weighted average number of common shares out-
standing for each period and the shares representing the dilutive effect of
stock options outstanding. The effect of stock options is excluded from the
computation of diluted net income per common share in periods in which the ef-
fect would be anti-dilutive. See Note 22 for additional disclosures related to
this new standard.
68
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGERS, ACQUISITIONS, JOINT VENTURES AND DIVESTITURES
In October 1997, the Corporation completed its acquisition of Pacific National
Corporation (Pacific), the holding company of Pacific National Bank of Nantuck-
et, located on the island of Nantucket, Massachusetts. The Corporation ex-
changed approximately 279,000 shares of its common stock, valued at approxi-
mately $22 million, for all of the outstanding common stock of Pacific. At the
time of acquisition, Pacific had loans of $98 million and deposits of $108 mil-
lion. The acquisition was accounted for as a purchase and accordingly, the as-
sets and liabilities of Pacific were recorded at their estimated fair values as
of the acquisition date. Goodwill resulting from the acquisition is being amor-
tized over a fifteen-year period. The acquisition has been included in the ac-
companying consolidated financial statements since the acquisition date.
In September 1997, the Corporation completed the sale of Fidelity Acceptance
Corporation (FAC), a consumer finance subsidiary with assets of $1.1 billion.
The sale resulted in a gain of approximately $68 million. The Corporation also
incurred a loss of $11 million in connection with interest rate futures con-
tracts that had been used to hedge the funding of FAC.
In September 1997, the Corporation announced a credit card joint venture agree-
ment, under which it will contribute its $1.2 billion national credit card
portfolio in exchange for cash and a minority interest in the new company. The
transaction will be completed in the first quarter of 1998.
In September 1997, the Corporation announced an agreement to acquire Deutsche
Bank Argentina, S.A. (Deutsche Argentina), a subsidiary of Deutsche Bank A.G.,
for approximately $255 million in cash. The acquisition of Deutsche Argentina,
a full service bank with approximately $1.3 billion of loans and $1.5 billion
of deposits, will be accounted for as a purchase. The transaction will be com-
pleted in the first quarter of 1998.
In October 1997, the Corporation announced an agreement to sell its minority
interest in HomeSide, Inc. (HomeSide). The sale of the interest in HomeSide, an
independent mortgage banking company formed in 1996 in connection with the Cor-
poration's sale of its mortgage banking subsidiary discussed below, will be
completed in the first quarter of 1998, and will result in a gain of approxi-
mately $165 million.
HomeSide was created during the first six months of 1996, when the Corporation
completed a transaction with two equity investment firms and Barnett Banks,
Inc. (Barnett), in which its mortgage banking subsidiary, BancBoston Mortgage
Corporation (BBMC), and Barnett's mortgage subsidiary were sold to HomeSide, a
newly formed independent mortgage company. As a result of this transaction, the
Corporation realized a gain of $106 million, and held a one-third interest in
HomeSide. Under the sale agreement, the Corporation agreed to maintain a risk
management program designed to protect the enterprise value of BBMC through the
date of the sale. The above-mentioned gain was offset in 1996 by $111 million
of losses, net of decreased servicing amortization, from the change in market
value of the contracts used to manage the prepayment risk in the mortgage ser-
vicing portfolio and the economic value of BBMC pending the completion of the
sale to HomeSide.
In July 1996, the Corporation completed its acquisition of BayBanks, Inc.
(BayBanks). The Corporation issued 43.6 million shares of its common stock in
exchange for substantially all of the outstanding shares of BayBanks common
stock by exchanging 2.2 shares of its common stock for each outstanding
BayBanks share. The acquisition was accounted for as a pooling of interests
and, accordingly, the historical book values of the assets and liabilities of
BayBanks were carried over onto the Corporation's consolidated balance sheet,
and no goodwill or other intangible assets were created. The acquisition is re-
flected in the accompanying consolidated financial statements as though the
Corporation and BayBanks had operated as a combined entity for all periods pre-
sented. In connection with the acquisition, the Corporation recorded restruc-
turing and merger-related costs of $180 million. These costs are more fully
discussed in Note 19. In connection with regulatory approval of the transac-
tion, during the fourth quarter of 1996, the Corporation sold 20 branches of
the resulting combined entity, comprising a total of approximately $500 million
of loans and $700 million of deposits, at a gain of approximately $47 million.
In June 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 of deposits. The Corporation exchanged
4.6 million shares of its common stock, with a value of approximately $229 mil-
lion, for all of the outstanding common stock of Bancorp. The acquisition,
which was accounted for as a purchase, has been included in the accompanying
consolidated financial statements since the acquisition date. Goodwill result-
ing from the transaction is being amortized over a ten-year period.
In January 1995, the Corporation completed the sales of two of its affiliate
banks, Bank of Vermont and Casco Northern Bank, N.A. The sales resulted in a
combined gain of approximately $75 million.
69
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3.STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash and due from banks are con-
sidered to be cash equivalents. Foreign currency cash flows are converted to
U.S. dollars using average rates for the period. During 1997, 1996 and 1995,
the Corporation paid interest of approximately $2.7 billion, $2.5 billion and
$2.8 billion, respectively. The Corporation paid income taxes of approximately
$358 million in 1997, $401 million in 1996 and $565 million in 1995. During
1997, 1996 and 1995, the Corporation transferred approximately $21 million, $42
million and $49 million, respectively, to OREO from loans. Loans made to facil-
itate sales of OREO properties were not significant in 1997, 1996 or 1995. Non-
cash transactions in 1995 included $94 million from the issuance of common
stock in connection with the Corporation's redemption of its convertible subor-
dinated debentures due 2011, and the transfer of $3.3 billion of securities
held to maturity to securities available for sale in response to the issuance,
in November 1995, of "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities," by the Financial Ac-
counting Standards Board (the FASB), which allowed the Corporation to reassess
the appropriateness of the classification of securities held at that time.
4. RESERVE REQUIREMENTS, RESTRICTED DEPOSITS AND PLEDGED ASSETS
At December 31, 1997 and 1996, cash and due from banks included $1.5 billion
and $1 billion, respectively, to satisfy the reserve requirements of the Fed-
eral Reserve System and various foreign central banks. Interest bearing depos-
its in other banks held to satisfy foreign central bank reserve requirements
totaled $3 million and $2 million at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, securities, loans and other assets with a book
value of $3.5 billion and $3.7 billion, respectively, were pledged to
collateralize repurchase agreements, public deposits and other items.
5. SECURITIES
A summary comparison of securities available for sale by type is as follows:
GROSS GROSS
December 31, 1997 UNREALIZED UNREALIZED CARRYING
(in millions) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
U.S. Treasury........................... $ 936 $ 7 $ 943
U.S. government agencies and
corporations --mortgage-backed
securities............................. 5,798 65 $ 3 5,860
States and political subdivisions....... 54 54
Foreign debt securities................. 1,391 8 24 1,375
Other debt securities................... 872 5 877
Marketable equity securities............ 187 35 6 216
Other equity securities................. 522 522
------ ---- --- ------
$9,760 $120 $33 $9,847
====== ==== === ======
Gross Gross
December 31, 1996 Unrealized Unrealized Carrying
(in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury........................... $1,669 $ 12 $ 6 $1,675
U.S. government agencies and
corporations --mortgage-backed
securities............................. 3,789 31 19 3,801
States and political subdivisions....... 172 1 173
Foreign debt securities................. 1,095 48 10 1,133
Other debt securities................... 250 7 1 256
Marketable equity securities............ 156 62 1 217
Other equity securities................. 549 549
------ ---- --- ------
$7,680 $161 $37 $7,804
====== ==== === ======
Other equity securities included in securities available for sale are not
traded on established exchanges and are carried at cost. However, in accordance
with SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
fair values were estimated for these securities. These fair values exceeded
cost by $154 million and $152 million at December 31, 1997 and 1996, respec-
tively. Further information with respect to the fair value of these securities
is included in Note 29.
70
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary comparison of securities held to maturity by type is as follows:
GROSS GROSS
December 31, 1997 AMORTIZED UNREALIZED UNREALIZED FAIR
(in millions) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
U.S. Treasury........................... $ 6 $ 6
U.S. government agencies and
corporations --mortgage-backed
securities............................. 538 $4 $1 541
Foreign debt securities................. 11 11
Other equity securities................. 81 81
---- --- --- ----
$636 $4 $1 $639
==== === === ====
Gross Gross
December 31, 1996 Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury........................... $ 3 $ 3
U.S. government agencies and
corporations --mortgage-backed
securities............................. 535 $2 $7 530
States and political subdivisions....... 6 6
Foreign debt securities................. 11 11
Other equity securities................. 125 125
---- --- --- ----
$680 $2 $7 $675
==== === === ====
Other equity securities included in securities held to maturity represent secu-
rities, such as Federal Reserve Bank and Federal Home Loan Bank stock, which
are not traded on established exchanges and have only redemption capabilities.
Fair values for such securities are considered to approximate cost.
A summary comparison of debt securities available for sale by contractual matu-
rity is as follows:
December 31 1997 1996
FAIR Fair
(in millions) COST VALUE Cost Value
- -------------------------------------------------------------------------------
Within one year.................................... $1,219 $1,224 $1,345 $1,340
After one but within five years.................... 2,030 2,029 2,565 2,607
After five but within ten years.................... 1,787 1,851 1,412 1,432
After ten years.................................... 4,015 4,005 1,653 1,659
------ ------ ------ ------
$9,051 $9,109 $6,975 $7,038
====== ====== ====== ======
A summary comparison of debt securities held to maturity by contractual matu-
rity is as follows:
December 31 1997 1996
AMORTIZED FAIR Amortized Fair
(in millions) COST VALUE Cost Value
- --------------------------------------------------------------------------------
Within one year................................. $ 8 $ 8 $ 11 $ 11
After one but within five years................. 124 124 114 113
After five but within ten years................. 242 246 241 241
After ten years................................. 181 180 189 185
---- ---- ---- ----
$555 $558 $555 $550
==== ==== ==== ====
Certain securities, such as mortgage-backed securities, may not become due at a
single maturity date. Such securities have been classified within the category
that encompasses the due dates for the majority of the instrument.
In 1997, the Corporation realized gross gains of $98 million and gross losses
of $18 million from the sale of securities available for sale. Total proceeds
from such securities sales in 1997 amounted to $5 billion. In 1996, the Corpo-
ration realized gross gains of $44 million and gross losses of $21 million from
the sale of securities available for sale. Total proceeds from such securities
sales in 1996 amounted to $4.7 billion. In 1995, the Corporation realized gross
gains of $11 million and gross losses of $2 million from the sale of securities
available for sale. Total proceeds from such securities sales in 1995 amounted
to $1.4 billion. The above amounts exclude equity and mezzanine profits, which
are included in other income.
71
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6.LOANS AND LEASE FINANCING
December 31 1997 1996
(in millions)
- --------------------------------------------------------------------------------
UNITED STATES
Commercial, industrial and financial.......................... $15,268 $13,162
Commercial real estate
Construction................................................. 271 284
Other........................................................ 4,211 3,240
Consumer-related
Residential mortgages........................................ 2,570 3,184
Home equity.................................................. 2,823 2,878
Credit card.................................................. 1,756 1,395
Other........................................................ 2,956 5,503
Lease financing............................................... 1,938 1,816
Unearned income............................................... (302) (287)
------- -------
31,491 31,175
------- -------
INTERNATIONAL
Commercial and industrial..................................... 8,826 6,946
Banks and other financial institutions........................ 860 866
Governments and official institutions......................... 95 79
Consumer-related
Residential mortgages........................................ 947 699
Credit card.................................................. 182 145
Other........................................................ 828 461
Lease financing............................................... 452 368
All other..................................................... 378 415
Unearned income............................................... (79) (93)
------- -------
12,489 9,886
------- -------
$43,980 $41,061
======= =======
7.RESERVE FOR CREDIT LOSSES
An analysis of changes in the reserve for credit losses follows:
Years Ended December 31 1997 1996 1995
(in millions)
- --------------------------------------------------------------------------------
Balance, January 1............................................ $883 $890 $827
Reserves of entities acquired................................. 3 3 16
Reserves of entities sold..................................... (95) (11) (32)
Provision..................................................... 200 231 275
Credit losses................................................. (366) (310) (282)
Recoveries.................................................... 87 80 86
---- ---- ----
Net credit losses............................................ (279) (230) (196)
---- ---- ----
Balance, December 31.......................................... $712 $883 $890
==== ==== ====
The portion of the reserve for credit losses associated with off-balance-sheet
exposures is not material.
At December 31, 1997, impaired loans totaled $166 million, of which loans to-
taling $34 million required no valuation reserve and loans totaling $132 mil-
lion required a valuation reserve of $40 million. For the year ended December
31, 1997, average impaired loans were approximately $184 million. At December
31, 1996, impaired loans totaled $260 million, of which loans totaling $38 mil-
lion required no valuation reserve and loans totaling $222 million required a
valuation reserve of $65 million. For the year ended December 31, 1996, average
impaired loans were approximately $277 million. Interest recognized on impaired
loans during the years ended December 31, 1997, 1996 and 1995 was not material.
8.OTHER ASSETS
December 31 1997 1996
(in millions)
- -------------------------------------------------------------------------------
Accounts receivable.............................................. $ 530 $ 457
Investments in limited partnerships.............................. 488 400
Bank-owned life insurance........................................ 400
Goodwill and other intangibles................................... 329 403
Equity investments in affiliates................................. 275 281
Prepaid pension cost............................................. 180 160
OREO............................................................. 36 50
All other........................................................ 1,775 1,013
------ ------
$4,013 $2,764
====== ======
72
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9.FUNDS BORROWED
December 31 1997 1996
(in millions)
- -------------------------------------------------------------------------------
Federal funds purchased......................................... $ 1,003 $ 527
Term federal funds purchased.................................... 2,530 1,442
Securities sold under agreements to repurchase.................. 1,789 2,034
Short-term bank notes........................................... 2,679 1,507
Medium-term bank notes.......................................... 1,633 396
Demand notes issued to the U.S. Treasury........................ 704
All other....................................................... 2,089 2,548
------- ------
$11,723 $9,158
======= ======
Medium-term bank notes included borrowings with maturities of greater than one
year of $150 million at December 31, 1997 and $115 million at December 31,
1996. All other funds borrowed included borrowings with maturities of greater
than one year of $161 million at December 31, 1997 and $535 million at December
31, 1996. At December 31, 1997 and 1996, the Corporation had availability under
various borrowing arrangements of $1.3 billion and $1.8 billion, respectively.
The Corporation had no significant compensating balance arrangements at Decem-
ber 31, 1997 and 1996.
10.NOTES PAYABLE
By Remaining Maturity
at December 31
DUE
LESS THAN DUE DUE 1997 1996
(in millions) 1 YEAR 1-5 YEARS 6-10 YEARS TOTAL Total
- --------------------------------------------------------------------------------
PARENT COMPANY
Senior notes...................... $250 $325 $ 575 $ 400
Subordinated notes................ 107 186 $ 748 1,041 1,170
---- ---- ------ ------ ------
Subtotal......................... 357 511 748 1,616 1,570
SUBSIDIARIES
Senior notes...................... 70 36 212 318 640
Subordinated notes................ 12 199 796 1,007 611
---- ---- ------ ------ ------
Subtotal......................... 82 235 1,008 1,325 1,251
---- ---- ------ ------ ------
$439 $746 $1,756 $2,941 $2,821
==== ==== ====== ====== ======
Notes payable are unsecured obligations of the Corporation or its subsidiaries.
Certain of the indentures under which these notes were issued prohibit the Cor-
poration from making any payment or other distribution in the stock of the Bank
unless the Bank unconditionally guarantees payment of principal and interest on
the notes. The distribution shown above by remaining maturity is based on con-
tractual maturity.
Notes payable at December 31, 1997 and 1996 include fixed rate notes of $1,943
million and $1,962 million, respectively, and variable rate notes of $998 mil-
lion and $859 million, respectively. Fixed rate notes outstanding at December
31, 1997 mature at various dates through 2007 at interest rates ranging from
6.29% to 15.13%. The consolidated weighted average interest rates on fixed rate
notes at December 31, 1997 and 1996 were 7.38% and 7.69%, respectively. The
Corporation has entered into interest rate swap agreements that have effec-
tively converted a portion of its fixed rate obligations to floating rate obli-
gations. At December 31, 1997, such interest rates ranged from 5.59% to 5.88%.
Variable rate notes outstanding, with interest rates ranging from 5.74% to
9.53% at December 31, 1997, mature at various dates through 2004. The consoli-
dated weighted average interest rates on variable rate notes at December 31,
1997 and 1996 were 6.48% and 6.46%, respectively.
During 1997, the Corporation issued $450 million of senior floating and fixed
rate medium-term notes, due in 1998 through 2002, and $275 million of previ-
ously issued medium-term notes matured. During 1997, the Bank issued $200 mil-
lion of 7.0% subordinated notes and $200 million of 6 1/2% subordinated notes,
each due in 2007. In addition, $405 million of senior floating and fixed rate
medium-term notes were issued by a Brazilian subsidiary of the Bank, and $670
million of previously issued medium-term notes matured. Also in 1997, $129 mil-
lion of the Corporation's fixed rate subordinated notes matured.
Notes payable maturing during the next five years amount to $439 million in
1998, $115 million in 1999, $138 million in 2000, $186 in 2001 and $307 million
in 2002.
73
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEBENTURES
In 1996, BankBoston Capital Trust I and BankBoston Capital Trust II, and, in
June 1997, BankBoston Capital Trust III (collectively, the Trusts), were formed
by the Corporation for the exclusive purpose of issuing capital securities
(Trust Securities) and investing the proceeds from the sale of such securities
in junior subordinated debentures issued by the Corporation.
In the fourth quarter of 1996, $500 million of Trust Securities were issued,
consisting of $250 million of 8 1/4% Trust Securities issued by BankBoston Cap-
ital Trust I and $250 million of 7 3/4% Trust Securities issued by BankBoston
Capital Trust II. Both issues of Trust Securities have a liquidation preference
of $1,000 per Trust Security, pay distributions semiannually, can be prepaid at
the option of the Trusts, in whole or in part, on or after December 15, 2006,
and are scheduled to mature on December 15, 2026. In addition, in June 1997,
$250 million of floating rate Trust Securities were issued by BankBoston Capi-
tal Trust III. These Trust Securities have a liquidation preference of $1,000
per Trust Security, pay distributions quarterly at LIBOR plus .75%, can be pre-
paid at the option of the Trust, in whole or in part, on or after June 15,
2007, and are scheduled to mature on June 15, 2027. At December 31, 1997, the
interest rate on the floating rate Trust Securities was 6 11/16%. The Corpora-
tion has fully, irrevocably and unconditionally guaranteed all of the Trusts'
obligations under the Trust Securities.
The Corporation owns all of the common securities of the Trusts, the sole as-
sets of which are their respective subordinated debentures. The principal
amount of subordinated debentures held by each Trust equals the aggregate liq-
uidation amount of its Trust Securities and its common securities (see Note 28
for the aggregate principal amount of subordinated debentures currently out-
standing). The subordinated debentures bear interest at the same rate, and will
mature on the same date, as the corresponding Trust Securities.
12.PREFERRED STOCK
A summary of the Corporation's Adjustable Rate Cumulative Preferred Stock (Ad-
justable Rate Preferred Stock) issued and outstanding is as follows:
Series A Series B Series C
- -------------------------------------------------------------------------------
Outstanding at December 31, 1997 and 1996
Shares.......................................... 1,044,843 1,574,315 774,783
Amount (in millions)............................ $ 52 $ 79 $ 77
Dividend rates
At December 31, 1997........................... 6.00% 6.00% 5.50%
Minimum........................................ 6.00% 6.00% 5.50%
Maximum........................................ 13.00% 13.00% 12.50%
Dividends per share
1997........................................... $ 3.00 $ 3.01 $ 5.50
1996........................................... $ 3.00 $ 3.00 $ 5.50
1995........................................... $ 3.06 $ 3.01 $ 5.50
Liquidation preference per share................ $ 50 $ 50 $ 100
A summary of the Corporation's Fixed Rate Cumulative Preferred Stock Series F
issued and outstanding is as follows:
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 and 1996
Shares................................................................. 280,000
Amount (in millions)................................................... $ 70
Dividend rate.......................................................... 7.88%
Dividends per share.................................................... $ 19.69
Liquidation preference per share....................................... $ 250
The Fixed Rate Cumulative Preferred Stock Series F (Series F Preferred Stock)
is held by stockholders in the form of depositary shares, with each depositary
share representing a one-tenth interest in a share of Series F Preferred Stock,
and entitles the holder to a proportional interest in all rights and prefer-
ences of a share of Series F Preferred Stock, including dividend, voting, re-
demption and liquidation rights.
The Corporation had Fixed Rate Cumulative Preferred Stock Series E issued and
outstanding at December 31, 1996, composed of 920,000 shares (9,200,000 deposi-
tary shares) at a liquidation preference of $250 per share ($25 per depositary
share), with a dividend rate of 8.60%, or $21.50 per share. In September 1997,
the Corporation redeemed the Series E Preferred Stock at its aggregate liquida-
tion preference totaling $230 million.
Dividends on all series of preferred stock are cumulative and, when declared,
are payable quarterly. The dividend rates for the Adjustable Rate Preferred
Stock are determined according to a formula based upon the highest of three in-
terest rate benchmarks. Neither the Adjustable Rate Preferred Stock nor the Se-
ries F Preferred Stock have preemptive or general voting rights. The preferred
stock is redeemable, in whole or in part, at the option of the Corporation as
follows: Series A and B Preferred Stock are redeemable at $50 per share and Se-
ries C Preferred Stock is redeemable at $100 per share. The Series F Preferred
Stock is redeemable on and after July 15, 1998, at $250 per share ($25 per de-
positary share).
74
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13.STOCKHOLDER RIGHTS PLAN
In 1990, the Board of Directors of the Corporation adopted a stockholder rights
plan. The plan provides for the distribution of one preferred stock purchase
right for each outstanding share of common stock of the Corporation. Each right
entitles the holder, following the occurrence of certain events, to purchase a
unit, consisting of one-thousandth of a share of Junior Participating Preferred
Stock, Series D, at a purchase price of $50 per unit, subject to adjustment.
The rights will not be exercisable or transferable apart from the common stock
except under certain circumstances in which a person or group of affiliated
persons acquires, or commences a tender offer to acquire, 15% or more of the
Corporation's common stock. Rights held by such an acquiring person or persons
may thereafter become void. Under certain circumstances, a right may become a
right to purchase common stock or assets of the Corporation or common stock of
an acquiring corporation at a substantial discount. Under certain circumstanc-
es, the Corporation may redeem the rights at $.01 per right. The rights will
expire in July 2000 unless earlier redeemed or exchanged by the Corporation.
14.CAPITAL ADEQUACY
A summary of the Corporation's regulatory capital position and related ratios
follows:
Well
December 31 1997 1996 Capitalized
(dollars in millions) Minimum
- --------------------------------------------------------------------------------
Risk-based capital ratios
Tier 1 capital ratio............................. 8.0% 9.2% 6.0%
Total capital ratio.............................. 12.1% 13.6% 10.0%
Tier 1 leverage ratio............................. 7.4% 8.2% 5.0%
Tier 1 capital.................................... $ 4,971 $ 4,954
Tier 2 capital.................................... $ 2,548 $ 2,337
Total capital..................................... $ 7,519 $ 7,291
Total risk-adjusted assets........................ $62,216 $53,583
Adjusted total average assets..................... $67,661 $60,537
The Corporation is subject to quantitative regulatory capital adequacy require-
ments which take into account the differing risk profiles of banking organiza-
tions by assigning risk weights to both assets and the credit equivalent
amounts of off-balance-sheet exposures. The Corporation and each of its bank
subsidiaries are required to maintain minimum ratios of Tier 1 and total capi-
tal to total risk-adjusted assets, and of Tier 1 leverage capital to adjusted
total average assets. Tier 1 capital includes common stockholders' equity and
qualifying preferred stock (including the Trust Securities described in Note
11). Total capital includes Tier 1 capital and, subject to certain limitations,
limited-life preferred stock, mandatory convertible securities, subordinated
debt and the reserve for credit losses.
Under the regulatory framework for prompt corrective action established by The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the
Corporation and each of its bank subsidiaries must meet specific guidelines
that involve quantitative measures of the Corporation's and each of its bank
subsidiaries' assets, liabilities and certain off-balance-sheet exposures as
calculated under regulatory accounting practices. The Corporation's and each of
its bank subsidiaries' capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. As of December 31, 1997, each of the Corporation's bank subsidi-
aries satisfied the requirements of the "well capitalized" category under the
regulatory framework for prompt corrective action. The capital categories of
each of the Corporation's bank subsidiaries are determined solely for purposes
of applying FDICIA's provisions, and such capital categories may not constitute
an accurate representation of the overall financial condition or prospects of
any of the Corporation's bank subsidiaries.
15.DIVIDENDS AND LOAN RESTRICTIONS
Bank regulations require the approval of bank regulatory authorities if the
dividends declared by a bank subsidiary exceed certain prescribed limits. For
1998, aggregate dividend declarations by the Corporation's bank subsidiaries
without prior regulatory approval are limited to their net profits, as defined,
for 1998 up to the date of any dividend declaration. However, for any dividend
declaration, the Corporation's subsidiaries, as well as the Corporation itself,
must consider additional factors such as the amount of current period net in-
come, liquidity, asset quality, capital adequacy and economic conditions. It is
likely that these factors would further limit the amount of dividends that the
bank subsidiaries could declare. In addition, bank regulators have the author-
ity to prohibit banks and bank holding companies from paying dividends if they
deem such payment to be an unsafe or unsound practice.
Each bank subsidiary is also prohibited by the bank regulatory authorities from
granting loans and advances to the Parent Company that exceed certain limits.
Assuming declaration of the maximum amount of dividends under the regulations
described above, any loans and advances would be limited to an aggregate of ap-
proximately $511 million at December 31, 1997, and would be subject to specific
collateral requirements.
Based on the foregoing limitations, an aggregate of approximately $4.4 billion
of the Parent Company's investment in bank subsidiaries of $4.9 billion, which
includes bank holding companies and their subsidiaries, was restricted from
transfer to the Parent Company at December 31, 1997.
16.OTHER INCOME
Years Ended December 31 1997 1996 1995
(in millions)
- -------------------------------------------------------------------------------
Net equity and mezzanine profits................................ $221 $209 $110
Net foreign exchange trading profits............................ 88 54 60
Gains on sales of branches/subsidiaries......................... 68 153 75
Equity in undistributed earnings of affiliates.................. 33 35 18
Gains from sales of mortgage servicing rights................... 13 10
All other....................................................... 77 61 67
---- ---- ----
$487 $525 $340
==== ==== ====
75
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
17.EMPLOYEE BENEFITS
The Corporation maintains qualified non-contributory defined benefit pension
plans (the Plans) covering substantially all domestic employees. The Corpora-
tion funds the Plans in compliance with the requirements of the Employee Re-
tirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as
amended.
The principal plan, which covers most domestic employees, is an account balance
defined benefit plan in which each eligible employee has an account to which
amounts are allocated based on level of pay, years of service and a specified
rate of interest. Plans other than the principal plan have benefit provisions
based on length of service and qualifying compensation in the final years of
employment. On January 1, 1997, BayBanks' pension plan was merged into the
principal plan.
Employee benefits expense (income) for the Plans included the following:
Years Ended December 31 1997 1996 1995
(in millions)
- ------------------------------------------------------------------------------
Service cost (benefits earned during the
period).................................. $ 20 $ 26 $ 22
Interest cost on projected benefit obli-
gation................................... 37 34 32
Return on plan assets
Actual.................................. (147) (111) (161)
Actuarial deferral of gains............. 87 54 110
Amortization
Unrecognized net asset.................. (5) (6) (6)
Unrecognized prior service cost......... 3 2
Other, net.............................. 3 2
----- ----- -----
Net pension expense (income)............. $ (8) $ 3 $ 1
===== ===== =====
- ------------------------------------------------------------------------------
The following table sets forth the funded status of the Plans:
December 31 1997 1996 1995
(dollars in millions)
- ------------------------------------------------------------------------------
Projected benefit obligation
Vested benefits......................... $ 437 $ 372 $ 368
Nonvested benefits...................... 24 32 35
----- ----- ----
Accumulated benefit obligation........... 461 404 403
Effect of projected future compensation
levels................................... 79 75 79
----- ----- -----
Projected benefit obligation............. $ 540 $ 479 $ 482
===== ===== =====
Plan assets at fair value (primarily
listed stocks and fixed income
securities).............................. $ 832 $ 752 $ 688
===== ===== =====
Plan assets in excess of projected
benefit obligation....................... $ 292 $ 273 $ 206
Unrecognized net gain.................... (103) (114) (15)
Unrecognized prior service cost.......... (3) 13 14
Unrecognized net asset................... (6) (12) (18)
----- ----- -----
Prepaid pension cost..................... $ 180 $ 160 $ 187
===== ===== =====
Assumptions used in actuarial calculations are as follows:
Weighted average discount rate at
December 31............................. 7.25% 7.75% 7.25%
Rate of increase in future compensation
levels at December 31................... 4.5% 4.5% 4.45% to 4.5%
Account balance interest rate at
December 31............................. 6.0% 6.0% 6.0%
Expected long-term rate of return on
assets for the years ended December 31.. 9.0% 9.0% to 10.0% 9.0%
- ------------------------------------------------------------------------------
76
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation also maintains unfunded nonqualified defined benefit plans for
certain executives. At December 31, 1997, 1996 and 1995, $43 million, $26 mil-
lion and $25 million, respectively, was included in accrued expenses and lia-
bilities for these plans. Charges to operations related to the plans were $5
million in each of 1997 and 1996 and $4 million in 1995. Benefit payments under
these unfunded plans are made by the Corporation, except that certain nonquali-
fied benefits are paid from a grantor trust funded by BayBanks in 1996. The
fair value of the trust assets was $17 million and $16 million at December 31,
1997 and 1996, respectively.
The Corporation provides certain health and life insurance benefits for retired
employees. Most domestic employees of the Corporation currently receive credits
of up to $10,000 based on years of service, which are used to purchase
postretirement health care coverage through the Corporation. Life insurance
coverage is dependent on years of service at retirement. BayBanks employees who
retired prior to 1997 generally pay the full cost of postretirement life insur-
ance and medical insurance premiums at the Corporation's rates. Pursuant to
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," these postretirement benefits are recognized over the service lives
of the employees.
The components of postretirement benefits expense were as follows:
Years Ended December 31 1997 1996 1995
(in millions)
- --------------------------------------------------------------------------------
Service cost (benefits earned during
the period)......................... $ 1 $ 1 $ 1
Interest cost on projected benefit
obligation.......................... 5 4 5
Amortization
Unrecognized transition obligation.. 4 4 4
Unrecognized net gain............... (2) (1) (1)
---- ---- ----
Net postretirement benefits expense.. $ 8 $ 8 $ 9
==== ==== ====
- --------------------------------------------------------------------------------
The following table sets forth the funded status of the Corporation's accumu-
lated postretirement benefit obligation:
December 31 1997 1996 1995
(dollars in millions)
- --------------------------------------------------------------------------------
Accumulated benefit obligation
Retirees............................ $ 45 $ 44 $ 51
Active employees -- eligible to re-
tire............................... 4 10 6
Active employees -- not eligible to
retire............................. 19 9 9
---- ---- ----
Accumulated postretirement benefit
obligation.......................... 68 63 66
Unrecognized prior service cost...... (4)
Unrecognized net gain................ 22 24 17
Unrecognized transition obligation... (55) (58) (62)
---- ---- ----
Postretirement benefit liability..... $ 31 $ 29 $ 21
==== ==== ====
Assumptions used in actuarial calcu-
lations are as follows:
Weighted average discount rate at
December 31........................ 7.25% 7.75% 7.25%
Rate of increase in future compensa-
tion levels at December 31......... 4.5% 4.5% 4.5%
Medical cost trend rate............. 6% 7% 8%
DECLINING TO declining to declining to
5% IN THE 5% in the 5% in the
YEAR 1999 year 1999 year 1999
Effect of 1% increase in medical cost
trend rate on
Accumulated postretirement benefit
obligation......................... 2.8% 3.6% 5.8%
Postretirement benefits expense..... 2.2% 2.9% 4.9%
- --------------------------------------------------------------------------------
77
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, in connection with the acquisition of BayBanks, certain enhanced re-
tirement benefits were offered to individuals meeting certain eligibility re-
quirements as part of an early retirement program. Charges to operations in
1996 resulting from pension plan enhancements were $26 million; such charges
resulting from enhancements to postretirement benefits were $4 million. In
1995, the Corporation recognized curtailment losses of $8 million in connection
with its pension and postretirement plans, primarily as a result of the sale of
BBMC to HomeSide. These 1996 and 1995 charges were included in acquisition, di-
vestiture and restructuring expense, which is more fully described in Note 19.
The Corporation maintains a defined contribution thrift incentive plan covering
the majority of domestic employees. Under this plan, employer contributions are
made based on a percentage of employee contributions. Prior to 1997, BayBanks
had a profit sharing and savings plan which was associated with an employee
stock ownership plan (ESOP). Benefits under the BayBanks plans were based on
BayBanks' financial performance. The savings and profit sharing plan was merged
into, and participant balances in the ESOP were transferred to, the Corpora-
tion's thrift incentive plan on January 1, 1997. Amounts charged to operations
for these plans were $19 million, $11 million and $10 million in 1997, 1996 and
1995, respectively.
18.STOCK OPTIONS AND AWARDS
The Corporation's principal stock incentive plans (the Plans) include the 1997
Stock Option Plan for Non-Employee Directors (the Director Plan), the 1996
Long-Term Incentive Plan (the 1996 Plan), the 1991 Long-Term Stock Incentive
Plan (the 1991 Plan), the 1986 and 1982 Stock Option Plans and the 1978 and
1988 BayBanks Stock Option Plans. Shares of common stock issued under these
plans may be authorized but unissued shares, treasury shares or shares pur-
chased in the open market. The 1996 Plan provides for the grant of stock op-
tions, restricted stock, stock appreciation rights (SARs) and other awards to
key employees. Since December 31, 1996, no additional grants may be made under
the 1991 or earlier Plans. A total of 5,586,878 shares of common stock were re-
served for issuance under the Plans at December 31, 1997, including 2,136,515
shares available for future grants.
Options are granted at prices which are not less than the fair market value of
the common stock on the date of grant. Options granted under the 1996 Plan (and
options granted in 1996 under the 1991 Plan) generally are exercisable in equal
installments on the first and second anniversary dates of the grant. Outstand-
ing options granted under the Director Plan, the 1991 Plan (prior to 1996) and
earlier Plans are fully vested. All options expire not later than 10 years af-
ter the date of grant. There were 11,200 SARs at a grant price of $28.63 out-
standing at December 31, 1997. Compensation expense associated with SARs was
$.3 million in each of 1997 and 1996 and $.4 million in 1995.
The following is a summary of the changes in options outstanding under the
Plans:
1997 1996 1995
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------
Options outstanding,
January 1............... 3,583,231 $31.64 4,764,182 $22.31 4,744,473 $19.53
Granted ($28.41 to
$96.25 per share)....... 1,503,519 $71.23 1,354,409 $44.91 1,294,174 $28.84
Exercised ($6.01 to
$75.00 per share)....... (1,533,484) $29.59 (2,507,037) $20.97 (1,250,716) $18.42
Canceled................ (102,903) $61.23 (28,323) $42.90 (23,749) $27.01
---------- ---------- ----------
Options outstanding, De-
cember 31 ($6.25 to
$96.25 per share)....... 3,450,363 $48.92 3,583,231 $31.64 4,764,182 $22.31
========== ========== ==========
Options exercisable, De-
cember 31............... 1,537,392 $31.07 2,460,481 $25.62 3,871,117 $23.13
========== ========== ==========
- ----------------------------------------------------------------------------------------------------------
78
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of outstanding and exercisable options under the
Plans at December 31, 1997:
Options Outstanding Options Exercisable
Weighted Average Weighted Weighted Average Weighted
Range of Number Remaining Average Number Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------------------------
$6.25 to $30.00 per
share................... 1,096,969 4.9 years $22.90 1,096,969 4.9 years $22.90
$30.01 to $60.00 per
share................... 914,463 8.1 years $44.98 361,388 8.1 years $45.34
$60.01 to $80.00 per
share................... 1,328,724 9.1 years $69.84 40,245 9.2 years $70.72
$80.01 to $96.25 per
share................... 110,207 9.7 years $88.16 38,790 9.7 years $88.34
- ----------------------------------------------------------------------------------------------------------------
Under terms of the Corporation's restricted stock awards, employees are gener-
ally required to continue employment with the Corporation for a stated period
after the award in order to become fully vested in the shares awarded. Perfor-
mance-based restricted stock, for which vesting is contingent or accelerates
upon the price of the Corporation's common stock reaching certain stated lev-
els, has also been awarded.
Restricted stock is recorded at the fair market value of the common stock on
the date of award or, if solely a performance-based award, the value required
for vesting. At the date of award, unearned compensation of the same amount is
recorded as a reduction of retained earnings and is amortized as compensation
expense over the estimated vesting period.
The following is a summary of the activity in restricted stock and the weighted
average price at the time of grant:
1997 1996 1995
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES PRICE Shares Price Shares Price
- ------------------------------------------------------------------------------------
Share balance, January
1....................... 453,645 $31.53 1,008,125 $22.88 1,205,859 $21.94
Awards................. 297,680 $69.81 249,430 $52.45 316,570 $29.44
Forfeitures............ (32,879) $48.40 (27,887) $20.81 (17,988) $24.97
Released from
forfeiture
restrictions........... (188,251) $28.20 (776,023) $26.79 (496,316) $24.70
-------- --------- ---------
Share balance, December
31...................... 530,195 $49.98 453,645 $31.53 1,008,125 $22.88
======== ========= =========
(in millions)
Unearned compensation at
December 31
(a reduction of retained
earnings)............... $ 16 $ 8 $ 13
Compensation expense.... $ 13 $ 17 $ 13
- ------------------------------------------------------------------------------------
79
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of outstanding restricted stock at December 31,
1997:
Weighted
Range of Average
Market Value of Restricted Shares Weighted Average Price at
Common Stock at Outstanding at Remaining Time of
Time of Grant December 31, 1997 Contractual Life Grant
- --------------------------------------------------------------------------------
$25.50 to $60.00 per share.......... 250,265 1.7 years $27.79
$60.01 to $80.00 per share.......... 277,430 2.6 years $69.66
$80.01 to $91.19 per share.......... 2,500 7.9 years $87.24
In addition to options granted under the Plans described above, the Corporation
granted 2,152,000 stock options on October 1, 1996 to substantially all employ-
ees world-wide at an exercise price of $58.00 per option, the fair value of the
Corporation's common stock on the grant date. The number of options granted to
an employee was based on the employee's salary on the grant date, subject to a
minimum of 100 options for a full-time employee and 50 options for a part-time
employee. Based on the price of the Corporation's common stock having reached
specified levels as of February 13, 1997, these options became exercisable on
October 1, 1997. Unexercised options will expire on October 1, 2002. In 1997,
766,519 options were exercised and 272,275 options were cancelled. As of Decem-
ber 31, 1997, 1,113,206 options were outstanding and exercisable.
Effective January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." As permitted by that standard, the Corporation
elected not to adopt the fair value accounting provisions of the standard and
to continue to apply the provisions of Accounting Principles Board (APB) Opin-
ion No. 25, "Accounting for Stock Issued to Employees," in accounting for its
stock options and awards. Had compensation expense for the Corporation's stock
options and awards been determined in accordance with the fair value accounting
provisions of SFAS No. 123, the Corporation's net income, basic and diluted
earnings per share would have been as follows:
Years Ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------
Net income applicable to common stock
(in millions)
As reported............................................... $ 848 $ 613 $ 641
Pro forma................................................. $ 836 $ 612 $ 637
Basic earnings per share
As reported............................................... $5.73 $3.99 $4.17
Pro forma................................................. $5.65 $3.98 $4.13
Diluted earnings per share
As reported............................................... $5.65 $3.93 $4.09
Pro forma................................................. $5.56 $3.90 $4.05
Solely for purposes of providing the disclosures required by SFAS No. 123, the
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted average assump-
tions used for grants of options and restricted stock:
Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
Dividend yield............................................... 2.7% 3.2% 4.2%
Volatility................................................... 24% 26% 35%
Risk-free interest rate...................................... 5.3% 5.3% 7.5%
Expected option life in years................................ 4 4 4
The estimated weighted average grant date fair values per share of stock op-
tions granted (other than the world-wide option grant) and restricted stock
granted were as follows:
Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Stock options............................................. $14.68 $ 9.40 $ 7.80
Restricted stock.......................................... $53.20 $30.80 $24.20
Assumptions for the 1996 world-wide option grant were: dividend yield -- 3.0
percent; volatility -- 23 percent; risk-free interest rate --6.2 percent; and
expected option life -- 3 years. The weighted average grant date fair value for
the world-wide option grant was $10.50 per share.
Due to the inclusion of only 1995, 1996 and 1997 stock option and restricted
stock awards, the effects of applying SFAS No. 123 in 1997, 1996 and 1995 may
not be representative of the pro forma impact in future years.
80
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
19. ACQUISITION, DIVESTITURE AND RESTRUCTURING EXPENSE
During 1996, the Corporation recorded $180 million of restructuring and merger-
related costs in connection with its acquisition of BayBanks. Included in these
costs were employee severance and property-related costs; professional fees and
other costs of effecting the acquisition; and systems and other conversion
costs incurred during the period.
Employee severance costs were related primarily to the Corporation's plan to
eliminate approximately 2,000 executive, managerial and staff positions through
attrition, enhanced retirement plans and terminations. These costs included
severance and retirement plan costs as well as employee assistance costs for
separated employees. As of December 31, 1997, approximately 1,960 employees had
either been terminated or had left the Corporation through enhanced retirement
plans. Property-related costs were related to branch and back office consolida-
tions, and included lease termination costs and writedowns of bank owned prop-
erties and other facility-related costs. Professional fees and other costs
principally consisted of transaction-related costs, such as legal and account-
ing fees and stock registration costs, as well as systems costs and other costs
of effecting the acquisition. Cash outlays in 1997 amounted to $74 million, in-
cluding $59 million of termination benefits and $15 million of facility-related
and other costs. Cash outlays in 1996 amounted to $54 million, including $17
million of termination benefits and $37 million of transaction, facility and
systems and other conversion costs. The remaining reserves of $34 million at
December 31, 1997 consisted primarily of expected cash outlays related to em-
ployee severance and property-related costs.
During 1995, the Corporation recorded $28 million of charges mainly related to
exiting, reorganizing and downsizing certain business and corporate staff
units. These charges were composed of estimated costs of employee reduction,
equipment writeoffs and exiting certain lease obligations. In addition, the
charges included $8 million of benefit plan curtailment losses that resulted
from the sale of BBMC, which removed mortgage banking employees from the Corpo-
ration's pension and postretirement plans. Cash outlays of $3 million and $10
million in 1997 and 1996, respectively, consisted primarily of employee sever-
ance costs. The remaining reserves of $4 million at December 31, 1997 consisted
primarily of expected cash outlays related to employee severance and property-
related costs.
20.OTHER EXPENSE
Years Ended December 31 1997 1996 1995
(in millions)
- -------------------------------------------------------------------------------
Communications.................................................. $112 $101 $90
Advertising and public relations................................ 107 108 87
Professional fees............................................... 61 56 65
Software costs.................................................. 44 35 27
Amortization of goodwill and other intangibles.................. 37 34 28
All other....................................................... 334 287 281
---- ---- ----
$695 $621 $578
==== ==== ====
21.INCOME TAXES
The components of the provision for income taxes were as follows:
Years Ended December 31 1997 1996 1995
(in millions)
- --------------------------------------------------------------------------------
CURRENT TAX PROVISION
Federal........................................................ $164 $219 $297
Foreign
Based on income............................................... 67 130 91
Withheld on interest and dividends............................ 38 36 22
State and local................................................ 65 96 80
---- ---- ----
334 481 490
---- ---- ----
DEFERRED TAX PROVISION
Federal........................................................ 225 (4) (1)
State and local................................................ 30 6 40
---- ---- ----
255 2 39
---- ---- ----
$589 $483 $529
==== ==== ====
Excluded from the above table are tax effects related to certain items that
were recorded directly in stockholders' equity, including foreign currency
translation, market value adjustments related to securities available for sale,
stock options and restricted stock. Net tax effects recorded directly in stock-
holders' equity amounted to a $53 million
81
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
benefit in 1997, a $40 million benefit in 1996 and a $74 million charge in
1995. The income tax provision included tax provisions related to securities
gains of $31 million in 1997, $10 million in 1996 and $3 million in 1995.
The following table reconciles the expected federal tax provision, based on the
federal statutory tax rate of 35%, to the actual consolidated tax provision for
the periods presented:
Years Ended December 31 1997 1996 1995
(in millions)
- --------------------------------------------------------------------------------
Expected tax provision applicable to income................... $514 $397 $423
Effect of
State and local income taxes, net of federal tax benefit..... 62 66 81
Non-creditable foreign taxes................................. 21 15 11
Tax-exempt income............................................ (4) (6) (8)
Non-deductible goodwill from sale of subsidiaries............ 11
Other, net................................................... (4) 11 11
---- ---- ----
Actual tax provision.......................................... $589 $483 $529
==== ==== ====
The components of the net deferred tax liability were as follows:
December 31 1997 1996
(in millions)
- -------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Reserve for credit losses......................................... $ 280 $354
Interest on nonaccrual loans...................................... 48 40
Foreign operations................................................ 86
Other............................................................. 131 145
----- ----
Deferred tax assets.............................................. 459 625
----- ----
DEFERRED TAX LIABILITIES
Leasing operations................................................ (553) (505)
Pension obligations............................................... (71) (69)
Unrealized gain on securities available for sale.................. (35) (49)
Foreign operations................................................ (17)
Other............................................................. (53) (46)
----- ----
Deferred tax liabilities......................................... (729) (669)
----- ----
Net deferred tax liability........................................ $(270) $(44)
===== ====
During 1995, The Commonwealth of Massachusetts passed a law which reduced the
state income tax rate for financial institutions from 12.5% to 10.5%, to be
phased in over five years, and permitted apportionment of a bank's taxable in-
come. Additionally, in 1995, the Corporation reached a favorable settlement of
an outstanding Massachusetts tax matter relating to income earned on certain
securities. These items did not have a significant impact on the Corporation's
1995 effective tax rate, because reductions in the current tax provision from
the tax law changes and the settlement were offset by the required reduction in
the Bank's net deferred tax assets resulting from the tax law changes.
It is expected that the Corporation's deferred tax assets at December 31, 1997
will be realized from the reversal of existing deferred tax liabilities and
from the recognition of future taxable income, without relying on tax planning
strategies that the Corporation might not ordinarily follow.
Domestic pre-tax income was $999 million in 1997, $755 million in 1996 and $978
million in 1995. Foreign pre-tax income, defined as income generated from oper-
ations that are located outside the United States, was $469 million in 1997,
$378 million in 1996 and $229 million in 1995.
82
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
22.EARNINGS PER SHARE
Effective December 31, 1997, the Corporation adopted SFAS No. 128. Under the
new standard, primary and fully diluted earnings per share were replaced with
basic and diluted earnings per share, and several provisions of APB Opinion No.
15, "Earnings per Share," which was replaced by the new standard, were elimi-
nated, in an effort to simplify the calculations and conform such calculations
to methods used internationally. The new standard did not change the Corpora-
tion's earnings per share reported for prior periods.
A summary of the Corporation's calculation of earnings per share is as follows:
Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
(in millions)
Net income.......................................... $ 879 $ 650 $ 678
Less: preferred dividends........................... 31 37 37
-------- -------- --------
Net income applicable to common stock............... $ 848 $ 613 $ 641
======== ======== ========
(in thousands)
Weighted average number of common shares outstanding
used in calculation of
basic earnings per share........................... 147,959 153,529 153,856
Incremental shares from the assumed exercise of
dilutive stock options as of the beginning of the
period............................................. 2,081 2,583 2,912
-------- -------- --------
Weighted average number of common shares outstanding
used in calculation of
diluted earnings per share......................... 150,040 156,112 156,768
======== ======== ========
- --------------------------------------------------------------------------------
Earnings per share
Basic.............................................. $ 5.73 $ 3.99 $ 4.17
======== ======== ========
Diluted............................................ $ 5.65 $ 3.93 $ 4.09
======== ======== ========
- --------------------------------------------------------------------------------
83
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments represent various degrees and types of
risk to the Corporation, including credit, interest rate, foreign exchange
rate, implied volatility rate and liquidity risk.
INTEREST RATE DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS
In the normal course of its business, the Corporation enters into a variety of
interest rate derivatives and foreign exchange contracts as part of its trading
activities, which primarily focus on providing these products to customers, and
in its interest rate and currency risk management strategy. These products in-
volve, to varying degrees, credit risk and market risk. Credit risk is the pos-
sibility that a loss may occur if a counterparty to a transaction fails to per-
form according to the terms of the contract. Market risk is the adverse effect
of a change in interest rates, currency rates or implied volatility rates on
the value of a financial instrument. The notional amount of interest rate de-
rivatives and foreign exchange contracts is the amount upon which interest and
other payments under the contract are based. For interest rate derivatives, the
notional amount is typically not exchanged. Therefore, notional amounts should
not be taken as the measure of credit or market risk as they tend to greatly
overstate the true economic risks of these contracts.
The Corporation controls credit risk arising from interest rate derivatives and
foreign exchange contracts using credit procedures similar to those used for
traditional lending activities. The Corporation believes that fair value, which
approximates the cost to replace the contract at current market rates should
the counterparty default prior to settlement date, is generally representative
of credit exposure related to interest rate derivatives and foreign exchange
contracts at a point in time. Counterparty credit risk is also reduced through
the use of master netting agreements. Such agreements provide for the offset-
ting of amounts receivable and payable under interest rate derivatives or for-
eign exchange contracts with the same counterparty. The market risk associated
with interest rate derivatives and foreign exchange contracts is managed by es-
tablishing and monitoring limits as to the types and degree of risk that may be
undertaken and is measured using a value-at-risk methodology.
Interest rate derivatives utilized by the Corporation include futures and for-
wards, interest rate swaps and interest rate options. Futures and forward con-
tracts generally are contracts for the delayed delivery of securities or money
market instruments in which the buyer agrees to purchase, and the seller agrees
to deliver, a specific instrument at a predetermined date for a specific price.
Market risks on both types of agreements stem from market movements in the un-
derlying securities' values, interest rates or implied volatility rates. Credit
risk stems from the ability of the counterparties to meet the terms of the con-
tracts. The Corporation's counterparty risk for futures is limited, as the ma-
jority of these transactions are executed on organized exchanges that assume
the obligations of counterparties, and generally require margin collateral and
daily settlement of variation margins.
Interest rate swaps generally involve the exchange of fixed and variable rate
interest payments between two parties based on a common notional principal
amount and maturity date. The primary risks associated with interest rate swaps
are the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contracts.
Interest rate options are contracts that allow the holder of the option to re-
ceive cash, purchase, sell or enter into a financial instrument at a specified
price within a specified period of time. Options include interest rate caps and
floors, which are types of interest rate protection instruments involving the
potential payment between seller and buyer of an interest differential. In ad-
dition, other types of option products provide the holder with the right to en-
ter into interest rate swap, cap and floor agreements with the writer. The pri-
mary risks associated with interest rate options are the exposure to current
and possible future movements in interest rates and the ability of the
counterparties to meet the terms of the contracts.
Foreign exchange contracts include such commitments as foreign currency spot,
forward, futures, option and swap contracts. The primary risks in these trans-
actions arise from exposure to changes in foreign currency exchange rates and
the ability of the counterparties to meet the terms of the contracts.
84
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the Corporation's notional amounts and fair val-
ues of interest rate derivatives and foreign exchange contracts included in its
trading and ALM portfolios.
TRADING PORTFOLIO(1) ALM PORTFOLIO(1)
------------------------------- --------------------------------------------
December 31, 1997 NOTIONAL FAIR VALUE(2)(3)(4) NOTIONAL FAIR VALUE(2)(3) UNRECOGNIZED
(in millions) AMOUNT ASSET LIABILITY AMOUNT ASSET LIABILITY GAIN (LOSS)(5)
- -------------------------------------------------------------------------------------------------------
Interest rate contracts
Futures and forwards... $42,842 $ 36 $ 69 $ 3,947 $ 21 $ 11
Interest rate swaps.... 20,451 113 160 11,162 132 $ 11 96
Interest rate options
Purchased(6).......... 23,231 56 2,765 13 2
Written or sold....... 12,716 53
------- --------- --------- ------- -------- ------- ----
Total interest rate con-
tracts................. $99,240 $ 205 $ 282 $17,874 $ 166 $ 11 $109
======= ========= ========= ======= ======== ======= ====
Foreign exchange con-
tracts
Spot and forward con-
tracts................ $25,793 $ 476 $ 442 $ 2,430 $ 36 $ 41 $ (5)
Options purchased...... 5,428 115
Options written or
sold.................. 6,692 107
------- --------- --------- ------- -------- ------- ----
Total foreign exchange
contracts.............. $37,913 $ 591 $ 549 $ 2,430 $ 36 $ 41 $ (5)
======= ========= ========= ======= ======== ======= ====
- -------------------------------------------------------------------------------------------------------
Trading Portfolio(1) ALM Portfolio(1)
------------------------------- --------------------------------------------
December 31, 1996 Notional Fair Value(2)(3)(4) Notional Fair Value(2)(3) Unrecognized
(in millions) Amount Asset Liability Amount Asset Liability Gain (Loss)(5)
- -------------------------------------------------------------------------------------------------------
Interest rate contracts
Futures and forwards... $47,927 $ 65 $ 64 $ 3,382 $(45)
Interest rate swaps.... 9,332 58 54 6,975 $ 25 $ 40 (11)
Interest rate options
Purchased............. 6,471 14
Written or sold....... 4,593 13
------- --------- --------- ------- -------- ------- ----
Total interest rate con-
tracts................. $68,323 $ 137 $ 131 $10,357 $ 25 $ 40 $(56)
======= ========= ========= ======= ======== ======= ====
Foreign exchange con-
tracts
Spot and forward con-
tracts................ $20,224 $ 313 $ 348 $ 1,755 $ 11 $ 9 $ 2
Options purchased...... 2,529 42
Options written or
sold.................. 2,434 37
------- --------- --------- ------- -------- ------- ----
Total foreign exchange
contracts.............. $25,187 $ 355 $ 385 $ 1,755 $ 11 $ 9 $ 2
======= ========= ========= ======= ======== ======= ====
- -------------------------------------------------------------------------------------------------------
(1) Contracts under master netting agreements are shown on a net basis for both
the trading and ALM portfolios.
(2) Fair value represents the amount at which a given instrument could be ex-
changed in an arm's length transaction with a third party as of the balance
sheet date. The fair value amounts of the trading portfolio are included in
other assets or other liabilities, as applicable. The majority of deriva-
tives that are part of the ALM portfolio are accounted for on the accrual
basis, and are not carried at fair value. In certain cases, contracts, such
as futures, are subject to daily cash settlements; as such, the fair value
of these instruments is zero.
(3) The credit exposure of interest rate derivatives and foreign exchange con-
tracts at December 31 is represented by the fair value of contracts re-
ported in the "Asset" column.
(4) The average asset and liability fair value amounts for interest rate con-
tracts included in the trading portfolio for the years ended December 31,
1997 and 1996 were approximately $158 million and $185 million, respective-
ly, and $130 million and $129 million, respectively. The average asset and
liability fair value amounts for foreign exchange contracts included in the
trading portfolio were approximately $435 million and $484 million, respec-
tively, for the year ended December 31, 1997, and $224 million and $229
million, respectively, for the year ended December 31, 1996.
(5) Unrecognized gain or loss represents the amount of gain or loss, based on
fair value, that has not been recognized in the income statement at the
balance sheet date. This includes amounts related to contracts that have
been terminated. Such amounts are recognized as an adjustment of yield over
the period being managed. At December 31, 1997, there were $7 million of
unrecognized gains related to terminated contracts that are being amortized
to net interest revenue over a weighted average period of 14 months. At De-
cember 31, 1996, there were $16 million of unrecognized gains and $33 mil-
lion of unrecognized losses related to terminated contracts that were being
amortized to net interest revenue over weighted average periods of 26
months and 13 months, respectively.
(6) At December 31, 1997, the ALM portfolio included equity contracts entered
into by the Corporation's Argentine operations. These contracts are linked
to Argentine deposit products, where the holder receives payment based on
changes in the prices of underlying Argentine securities.
85
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net trading gains or losses from interest rate derivatives are recorded in
trading account profits and commissions. The Corporation's interest rate deriv-
ative trading activities primarily include providing risk management products
to its customers. Derivatives are also used to manage risk in other trading
portfolios, such as emerging markets securities. The results of these deriva-
tive activities are combined with the results of the respective trading portfo-
lio to determine the overall performance of the trading business and, as such,
are not included in the results of derivative trading activities. Net trading
gains from interest rate derivative trading were $19 million for the year ended
December 31, 1997, $4 million for the year ended December 31, 1996 and $7 mil-
lion for the year ended December 31, 1995.
Net trading gains from foreign exchange contracts are recorded in other income.
Net trading gains from foreign exchange activities, which include foreign ex-
change spot, forward and options contracts, for the years ended December 31,
1997, 1996 and 1995 were $88 million, $54 million and $60 million, respective-
ly.
CREDIT-RELATED FINANCIAL INSTRUMENTS
A commitment to extend credit is a legally binding agreement to lend to a cus-
tomer in the future that generally expires within a specified period of time.
The extension of a commitment, which is subject to the Corporation's credit re-
view and approval policies, gives rise to credit exposure when certain borrow-
ing conditions are met and it is drawn upon. Until such time, it represents
only potential exposure. In connection with entering into a commitment, the
Corporation may obtain collateral if deemed necessary, based upon the Corpora-
tion's credit evaluation. Such collateral varies but may include securities,
receivables, inventory, fixed assets, personal property and real estate. The
obligation to lend generally may be voided if the customer's financial condi-
tion deteriorates or if the customer fails to meet certain covenants. Commit-
ments to extend credit do not reflect the actual demand on liquidity that the
Corporation will be subjected to in the future, since historical experience
with loan commitments indicates that a large portion generally expire without
being drawn upon.
Standby letters of credit and foreign office guarantees are commitments that
are primarily issued to third parties to guarantee obligations of the Corpora-
tion's customers. Standby letters of credit may be issued as credit enhance-
ments for corporate customers' commercial paper, bond issuances by municipali-
ties or other debt obligations, and to guarantee other financial performance of
a customer. The Corporation has current exposure only to the extent that a cus-
tomer may default on the underlying transaction. The risks involved in the is-
suance of standby letters of credit and foreign office guarantees are primarily
credit risks. Again, the Corporation's credit review and approval policies and
practices are adhered to when evaluating issuances of standbys or guarantees
for customers. Similar to commitments to extend credit, the Corporation may ob-
tain various types of collateral, if deemed necessary, based upon the Corpora-
tion's credit evaluation.
The following table summarizes the Corporation's credit-related financial in-
struments:
December 31 1997 1996
(in millions)
- ------------------------------------------------------------------------------
Fee-based or otherwise legally binding commitments to extend
credit(1).................................................... $31,845 $26,742
Standby letters of credit, foreign office guarantees and
similar instruments(2)....................................... $ 2,919 $ 2,508
Commercial letters of credit.................................. $ 1,587 $ 1,582
- ------------------------------------------------------------------------------
(1) Net of participations conveyed to others of zero in 1997 and $17 million in
1996.
(2) Net of participations conveyed to others of $1,283 million in 1997 and $814
million in 1996.
86
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
24.CONCENTRATIONS OF CREDIT RISK
Credit risk associated with concentrations can arise when changes in economic,
industry or geographic factors affect groups of counterparties with similar
economic characteristics, whose aggregate credit exposure is significant to the
Corporation's total credit exposure. Consistent policies exist regarding the
requirement for collateral security on asset based and real estate credits. Ap-
proximately 40% and 50% of the Corporation's business activity in 1997 and
1996, respectively, was with customers located within New England. Information
with respect to the Corporation's overseas business activities and its geo-
graphic concentrations is included in Note 27. The Corporation's commitments to
lend against, and loans collateralized by, domestic commercial real estate
properties were approximately $6 billion in 1997 and $5 billion in 1996, of
which 46% in 1997 and 70% in 1996 related to properties in New England. Also,
combined domestic credit exposure from consumer lending and credits secured by
1-4 family residential properties totaled $12 billion in 1997 and $17 billion
in 1996. There were no other significant concentrations of credit risk.
25.LEASE COMMITMENTS
Rental expense for leases of real estate and equipment is summarized below:
Years Ended December 31 1997 1996 1995
(in millions)
- -------------------------------------------------------------------------------
Rental expense.................................................. $130 $132 $125
Less sublease rental income..................................... 12 13 11
---- ---- ----
Net rental expense.............................................. $118 $119 $114
==== ==== ====
The Corporation has obligations under noncancelable operating leases for real
estate and equipment that include renewal options and escalation clauses. The
Corporation's minimum future rentals under its leases, exclusive of executory
costs and net of sublease rental income, for the years 1998 through 2002 are
$95 million, $88 million, $82 million, $72 million and $66 million, respective-
ly, and $360 million for 2003 and later. Capital leases, the minimum rentals of
which are included in the preceding amounts, are not significant.
26.CONTINGENCIES
The Corporation and its subsidiaries are defendants in a number of legal pro-
ceedings arising in the normal course of business, including claims that bor-
rowers or others have been damaged as a result of the lending practices of the
Corporation's subsidiaries. Management, after reviewing all actions and pro-
ceedings pending against or involving the Corporation and its subsidiaries,
considers that the aggregate loss, if any, resulting from the final outcome of
these proceedings should not be material to the Corporation's financial condi-
tion or results of operations.
87
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
27.SEGMENT INFORMATION
The Corporation operates within the financial services industry. This geo-
graphic segment information is presented to meet the requirements of SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," and differs
from the information used by the Corporation to manage its businesses. Certain
revenues and expenses are allocated differently for this segment information
than for the Corporation's internal management reporting process. For example,
revenues and expenses herein are allocated based on the domicile of the cus-
tomer or service provider rather than to the business unit that earned or in-
curred those revenues or expenses, and certain corporate overhead expenses,
which are allocated to business units, have not been allocated to the interna-
tional segment for this presentation. This geographic segment information does
not consider other factors, such as method of funding (i.e., local vs. non-lo-
cal currency) or location of any cash collateral or guarantees.
As a result of the inter-relationships that exist within the Corporation's
world-wide network, allocations of certain income and expense items are neces-
sarily based on assumptions and subjective criteria. Estimates of interest
costs charged to users of funds, stockholders' equity, and administrative and
other expenses incurred by one area on behalf of another are allocated utiliz-
ing various methodologies. The information presented is based on reporting as-
sumptions in place at December 31, 1997.
The following table presents the Corporation's geographic segment information
in accordance with SFAS No. 14, which information differs from the Corpora-
tion's Line of Business information used to manage its businesses.
Income
Years Ended December 31 Total Total Before Net Period End
(in millions) Revenue(1) Expense(1) Taxes Income Total Assets
- --------------------------------------------------------------------------------
1997
International
Latin America................ $ 922 $ 639 $ 283 $170 $16,842
Europe....................... 68 39 29 17 1,621
Asia/Pacific................. 60 54 6 4 1,109
All other regions............ 2 (2) 4 2 312
------ ------ ------ ---- -------
Total International......... 1,052 730 322 193 19,884
Domestic...................... 2,940 1,794 1,146 686 49,384
------ ------ ------ ---- -------
Total....................... $3,992 $2,524 $1,468 $879 $69,268
====== ====== ====== ==== =======
1996
International
Latin America................ $ 745 $ 495 $ 250 $143 $13,023
Europe....................... 103 40 63 37 1,626
Asia/Pacific................. 59 45 14 8 1,216
All other regions............ 2 (2) 4 2 100
------ ------ ------ ---- -------
Total International......... 909 578 331 190 15,965
Domestic...................... 2,775 1,973 802 460 46,341
------ ------ ------ ---- -------
Total....................... $3,684 $2,551 $1,133 $650 $62,306
====== ====== ====== ==== =======
1995
International
Latin America................ $ 606 $ 433 $ 173 $ 98 $10,864
Europe....................... 91 62 29 17 1,891
Asia/Pacific................. 65 36 29 16 1,095
All other regions............ 2 7 (5) (3) 45
------ ------ ------ ---- -------
Total International......... 764 538 226 128 13,895
Domestic...................... 2,794 1,813 981 550 45,528
------ ------ ------ ---- -------
Total....................... $3,558 $2,351 $1,207 $678 $59,423
====== ====== ====== ==== =======
- --------------------------------------------------------------------------------
(1) Total revenue includes net interest revenue and noninterest income. Total
expense includes the provision for credit losses and noninterest expense.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard requires disclosure of fi-
nancial and descriptive information about an entity's reportable operating seg-
ments, which are defined by the standard as components of an entity that engage
in business activities that generate revenues and expenses, and for which sepa-
rate financial information is available that is reviewed regularly by senior
management to evaluate performance and allocate resources. Such financial
information should be reported on the basis that is used internally for senior
management review. This standard is effective for financial statements for an-
nual periods beginning after December 15, 1997, with restatement of comparative
information for prior periods. This standard will change the method under which
the Corporation reports its segment information, which information will be more
consistent with the Corporation's Line of Business information.
88
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
28. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The following is a condensed balance sheet of the Corporation (Parent Company
only):
December 31 1997 1996
(in millions)
- -------------------------------------------------------------------------------
ASSETS
Cash and short-term investments in bank subsidiary............... $ 290 $ 723
Advances to subsidiaries
Bank subsidiaries............................................... 1
Nonbank subsidiaries............................................ 1,080 718
Subordinated notes receivable from bank subsidiary............... 330 332
Investments in subsidiaries
Bank subsidiaries............................................... 4,838 4,949
Nonbank subsidiaries............................................ 413 219
Other assets..................................................... 99 115
------ ------
Total Assets................................................... $7,050 $7,057
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................................... $1,616 $1,570
Other liabilities................................................ 51 38
Junior subordinated debt payable to subsidiary trusts............ 773 515
------ ------
Total liabilities............................................... 2,440 2,123
------ ------
Total stockholders' equity...................................... 4,610 4,934
------ ------
Total Liabilities and Stockholders' Equity..................... $7,050 $7,057
====== ======
The following is a condensed statement of income of the Corporation (Parent
Company only):
Years Ended December 31 1997 1996 1995
(in millions)
- ------------------------------------------------------------------------------
OPERATING INCOME
Dividends from subsidiaries
Bank subsidiaries......................................... $1,079 $537 $391
Nonbank subsidiaries...................................... 11 23 15
Interest from subsidiaries
Bank subsidiaries......................................... 39 50 59
Nonbank subsidiaries...................................... 79 41 25
Noninterest income......................................... 2 9
------ ---- ----
Total operating income.................................... 1,210 651 499
------ ---- ----
OPERATING EXPENSE
Interest expense........................................... 146 95 92
Other expense, net......................................... 8 14 6
------ ---- ----
Total operating expense................................... 154 109 98
------ ---- ----
Income before income taxes and equity in undistributed net
income of subsidiaries.................................... 1,056 542 401
Provision for (Benefit from) income taxes.................. (10) (6) 2
------ ---- ----
Income before equity in undistributed net income of
subsidiaries.............................................. 1,066 548 399
Equity in undistributed net income of subsidiaries......... (187) 102 279
------ ---- ----
Net Income................................................. $ 879 $650 $678
====== ==== ====
89
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a condensed statement of cash flows of the Corporation (Parent
Company only):
Years Ended December 31 1997 1996 1995
(in millions)
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 879 $ 650 $ 678
Reconciliation of net income to net cash provided from
operating activities
Equity in undistributed net income of subsidiaries...... 187 (102) (279)
Gain on sale of subsidiary.............................. (8)
Other, net.............................................. (32) (52) 1
----- ----- -----
Net cash provided from operating activities............ 1,034 496 392
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash provided from (used for) short-term investments
in bank subsidiary...................................... 448 (600) 86
Net cash used for advances to subsidiaries............... (361) (263) (203)
Investments in subsidiaries.............................. (183) (16) (12)
Proceeds from sale of subsidiary......................... 92
Repayment of subordinated note receivable by bank
subsidiary.............................................. 250
----- ----- -----
Net cash used for investing activities................. (96) (629) (37)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments/repurchases of notes payable.................. (404) (100) (150)
Net proceeds from issuance of notes payable.............. 450 400
Net proceeds from issuance of junior subordinated
debentures.............................................. 258 515
Net proceeds from issuance of common stock............... 108 92 70
Redemption of preferred stock............................ (230)
Purchases of treasury stock.............................. (784) (490) (53)
Dividends paid........................................... (322) (284) (221)
----- ----- -----
Net cash provided from (used for) financing
activities............................................ (924) 133 (354)
----- ----- -----
Net change in cash and due from banks.................... 14 1
Cash and due from banks at January 1..................... 1 1
----- ----- -----
Cash and due from banks at December 31................... $ 15 $ 1 $ 1
===== ===== =====
Interest payments made................................... $ 150 $ 95 $ 90
Income tax payments made................................. $ 7 $ 6 $ 5
- ------------------------------------------------------------------------------
90
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
29.FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires that the Corporation disclose estimated fair values for
certain of its financial instruments. Financial instruments include such items
as loans, deposits, securities, interest rate and foreign exchange rate con-
tracts, swaps and other instruments as defined by the standard.
Fair value estimates are generally subjective in nature and are dependent upon
a number of significant assumptions associated with each instrument or group of
similar instruments, including estimates of discount rates, risks associated
with specific financial instruments, estimates of future cash flows and rele-
vant available market information. Fair value information is intended to repre-
sent an estimate of an amount at which a financial instrument could be ex-
changed in a current transaction between a willing buyer and seller engaging in
an exchange transaction. However, since there are no established trading mar-
kets for a significant portion of the Corporation's financial instruments, the
Corporation may not be able to settle its financial instruments immediately; as
such, the fair values are not necessarily indicative of the amounts that could
be realized through immediate settlement. In addition, the majority of the Cor-
poration's financial instruments, such as loans and deposits, are held to matu-
rity and are realized or paid according to the contractual agreement with the
customer.
Where available, quoted market prices are used to estimate fair values. Howev-
er, due to the nature of the Corporation's financial instruments, in many in-
stances quoted market prices are not available. Accordingly, the Corporation
has estimated fair values based on other valuation techniques, such as dis-
counting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. Fair values are estimated without regard
to any premium or discount that may result from concentrations of ownership of
a financial instrument, possible income tax ramifications or estimated transac-
tion costs. Fair values are also estimated at a specific point in time and are
based on interest rates and other assumptions at that date. As events change
the assumptions underlying these estimates, the fair values of financial in-
struments will change.
Disclosure of fair values is not required for certain items such as lease fi-
nancing, investments accounted for under the equity method of accounting, obli-
gations for pension and other postretirement benefits, premises and equipment,
OREO, prepaid expenses, core deposit intangibles and other customer relation-
ships, other intangible assets and income tax assets and liabilities. Accord-
ingly, the aggregate fair value amounts presented do not purport to represent,
and should not be considered representative of, the underlying "market" or
franchise value of the Corporation.
Because the standard permits many alternative calculation techniques and be-
cause numerous assumptions have been used to estimate the Corporation's fair
values, reasonable comparisons of the Corporation's fair value information with
that of other financial institutions cannot necessarily be made.
The methods and assumptions used to estimate the fair values of each class of
financial instrument are as follows:
CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS IN OTHER BANKS, FEDERAL
FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, DUE FROM CUS-
TOMERS ON ACCEPTANCES, FUNDS BORROWED, AND ACCEPTANCES OUTSTANDING These items
are generally short-term in nature and, accordingly, the carrying amounts re-
ported in the balance sheet are reasonable approximations of their fair values.
TRADING SECURITIES Trading securities are carried at fair value in the balance
sheet. Such values are generally based on quoted, or other independent, market
prices.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY Fair values are
principally based on quoted, or other independent, market prices. For certain
debt and equity investments made in connection with the Corporation's Private
Equity Investing business that do not trade on established exchanges, and for
which markets do not exist, estimates of fair value are based upon management's
review of the investee's financial results, condition and prospects.
91
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LOANS The fair value of accruing consumer mortgage loans is estimated using
market quotes or by discounting contractual cash flows, adjusted for credit
risk and prepayment estimates. Discount rates are obtained from secondary mar-
ket sources. The fair value of accruing home equity loans is estimated using
comparable market information adjusted for credit and other relevant character-
istics. The fair value of all other accruing loans is estimated by discounting
cash flows, using interest rates that consider the credit and interest rate
risks inherent in the loans, and current economic and lending conditions. The
fair value of nonaccrual loans is primarily estimated by discounting manage-
ment's estimate of future cash flows using a rate commensurate with the risks
involved.
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS The carrying amount of accrued
interest receivable approximates its fair value. Financial instruments classi-
fied as other assets subject to the disclosure requirements of the standard
consist principally of accounts receivable and investments in limited partner-
ships. The carrying amounts of short-term receivables are considered to approx-
imate their fair value. For longer-term receivables, fair value is estimated by
discounting expected future cash flows using a discount rate commensurate with
the risks involved. Estimates of fair value of investments in limited partner-
ships are based upon management's review of the investee's financial results,
condition and prospects.
DEPOSITS The fair values of deposits subject to immediate withdrawal, such as
interest and noninterest bearing checking, passbook savings and money market
deposit accounts, are, by definition, equal to their carrying amounts. The car-
rying amounts for variable rate certificates of deposit and other time deposits
approximate their fair values at the reporting date. Fair values for fixed rate
certificates of deposit and other time deposits are estimated by discounting
future cash flows using interest rates currently offered on time deposits with
similar remaining maturities.
ACCRUED EXPENSES AND OTHER LIABILITIES Financial instruments classified as ac-
crued expenses and other liabilities subject to the disclosure requirements of
the standard consist principally of short-term liabilities; the carrying
amounts approximate their fair values.
NOTES PAYABLE The fair value of long-term borrowings is estimated using second-
ary market prices and does not include the fair values of related interest rate
swap agreements, which are presented separately.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED
DEBENTURES The fair value is estimated using secondary market prices.
FOREIGN EXCHANGE RATE AND INTEREST RATE FINANCIAL INSTRUMENTS The fair values
of foreign exchange rate and interest rate contracts, including contracts used
to manage interest rate, currency and market risks, are estimated based on mar-
ket information and other relevant characteristics using pricing models, in-
cluding option models.
OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS The fair value of commitments to ex-
tend credit is estimated using the fees charged to enter into similar legally
binding agreements, taking into account the remaining terms of the agreements
and customers' credit ratings. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the com-
mitted rates. The fair values of foreign office guarantees and letters of
credit are based on fees charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
92
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the estimated fair values of the Corporation's
financial instruments:
DECEMBER 31 1997 1996
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
(in millions) AMOUNT VALUE Amount Value
- ----------------------------------------------------------------------------------
ASSETS
Cash and due from banks.................. $ 4,006 $ 4,006 $ 4,273 $ 4,273
Interest bearing deposits in other
banks................................... 1,592 1,592 1,634 1,634
Federal funds sold and securities
purchased under agreements to resell.... 2,017 2,017 1,857 1,857
Trading securities....................... 1,833 1,833 1,238 1,238
Securities(1)
Available for sale...................... 9,847 10,001 7,804 7,956
Held to maturity........................ 636 639 680 675
Loans.................................... 41,590 38,877
Reserve for credit losses(2)............. (712) (883)
------- -------
40,878 41,673 37,994 39,062
Due from customers on acceptances........ 462 462 438 438
Accrued interest receivable.............. 552 552 546 546
Financial instruments included in other
assets.................................. 1,021 1,087 860 916
LIABILITIES
Deposits................................. 45,761 45,793 42,831 42,916
Funds borrowed........................... 11,723 11,723 9,158 9,158
Acceptances outstanding.................. 460 460 448 448
Financial instruments included in accrued
expenses and other liabilities.......... 1,225 1,225 630 630
Notes payable............................ 2,941 3,003 2,821 2,828
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
debentures.............................. 747 765 500 497
INTEREST RATE CONTRACTS(3)
Trading
Asset................................... 205 137
Liability............................... (282) (131)
Asset and liability management
Asset................................... 166 25
Liability............................... (11) (40)
FOREIGN EXCHANGE CONTRACTS(3)
Trading
Asset................................... 591 355
Liability............................... (549) (385)
Asset and liability management
Asset................................... 36 11
Liability............................... (41) (9)
OTHER UNRECOGNIZED FINANCIAL INSTRUMENTS
Fee-based or otherwise legally binding
commitments to extend credit............ (62) (65)
Standby and commercial letters of credit,
foreign office guarantees and similar
instruments............................. (11) (12)
- ----------------------------------------------------------------------------------
(1) Securities include investments made in connection with the Corporation's
Private Equity Investing business that do not trade on established ex-
changes, and for which no markets exist. At December 31, 1997 and 1996,
these investments were classified as securities available for sale, and
their estimated fair values exceeded the related carrying amounts by $154
million and $152 million, respectively.
(2) The reserve for credit losses is established for future charge-offs aris-
ing from all extensions of credit. The amount of the reserve associated
with instruments other than loans, such as leases, commitments to extend
credit, standby letters of credit and interest rate contracts, is not ma-
terial. Accordingly, a separate determination of the reserve allocable to
such instruments has not been made.
(3) Additional information with respect to interest rate and foreign exchange
contracts can be found in Note 23. The Corporation's accounting policy re-
lated to such instruments is discussed in Note 1.
93