-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Aaam96UorCRjvyhiF0tmPUTyahDhT3VxdwAnK/DdxxJRB5h9LkBVMoMqUP+LzfcY CczT5PDMw1u+r+45Szg2lA== 0000950135-94-000203.txt : 19940331 0000950135-94-000203.hdr.sgml : 19940331 ACCESSION NUMBER: 0000950135-94-000203 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAYBANKS INC CENTRAL INDEX KEY: 0000010497 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 042008039 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-00959 FILM NUMBER: 94518407 BUSINESS ADDRESS: STREET 1: 175 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174821040 FORMER COMPANY: FORMER CONFORMED NAME: BAYSTATE CORP DATE OF NAME CHANGE: 19760602 10-K 1 BAYBANKS, INC. FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 0-959 BAYBANKS, INC. (REGISTRANT) MASSACHUSETTS 04-2008039 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
175 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 482-1040 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $2.00 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant as of March 10, 1994: COMMON STOCK, $2.00 PAR -- $1,015,129,206 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 10, 1994: COMMON STOCK, $2.00 PAR -- 18,798,689 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the 1993 Annual Report to stockholders are incorporated by reference in Parts I and II. Portions of the proxy statement for the annual meeting of stockholders to be held on April 28, 1994 are incorporated by reference in Part III. The list of exhibits to this report appears on pages 17 and 18. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL COMPANY INFORMATION As used herein, the "Company" means BayBanks, Inc. alone or BayBanks, Inc. together with its consolidated subsidiaries, depending on the context, and the "BayBanks" means the Company's three bank subsidiaries. BayBanks, Inc., established in 1928, is one of the largest bank holding companies in Massachusetts and is headquartered in Boston, Massachusetts. At December 31, 1993, the Company had total assets of $10.1 billion, total deposits of $8.8 billion, total stockholders' equity of $703 million, and 5,571 full-time equivalent employees. The Company's largest subsidiary is BayBank, a Massachusetts commercial bank based in Burlington, Massachusetts, that had total assets of $9.2 billion at December 31, 1993. BayBank Boston, N.A. is based in the Company's headquarter's city and BayBank Connecticut, N.A. is located in Hartford, Connecticut. The Company also maintains a loan production office in Portland, Maine. The Company has an extensive banking network with 201 full-service offices and 356 automated banking facilities serving 156 cities and towns in Massachusetts and two in Connecticut. The Company uses state-of-the-art computer and telecommunications technology to process customer transactions, provide customer information, and increase the efficiency of its data processing activities. BayBank Systems, Inc., a nonbank subsidiary of the Company, engages in data processing, product and systems development, and other technologically oriented operations, principally for the Company but also for franchisees and correspondents. In particular, BayBank Systems, Inc., operates the Company's proprietary X-Press 24(R) automated teller machine ("ATM") network. BayBanks Credit Corp. (a subsidiary of BayBank Systems, Inc.) and BayBanks Mortgage Corp. (a subsidiary of BayBank) provide instalment loan, credit card, and mortgage loan operations and services, and BayBanks Mortgage Corp. also services approximately $2.0 billion of residential mortgage loans originated by the BayBanks and placed in the secondary market. Other subsidiaries provide brokerage, investment management, and general management services to the BayBanks and other affiliates. The following presents selected financial information for the Company's three banking subsidiaries:
AT DECEMBER 31 --------------------------------------------- CONNECTICUT MASSACHUSETTS ----------- ------------------------------- BAYBANK BAYBANK BAYBANK BOSTON CONNECTICUT ----------------- ----------- ----------- 1993 1992 1993 1992 1993 1992 ------ ------ ---- ---- ---- ---- (IN MILLIONS) Interest-bearing deposits and other short-term investments................... $ 785 $1,092 $ 55 $ 88 $ 2 $ 2 Securities portfolios...................... 2,132 1,592 42 34 1 1 Total loans................................ 5,479 5,373 586 521 75 93 Total earning assets....................... 8,396 8,057 684 643 79 96 Total assets............................... 9,179 8,905 896 835 86 105 Total deposits............................. 8,077 8,278 764 680 59 55 Subordinated debt.......................... 47 47 5 5 -- -- Stockholders' equity....................... 542 482 55 48 10 10
GENERAL BANKING BUSINESS The Company provides a complete range of banking and related financial services, with particular emphasis on retail and middle market business customers. In addition to its normal deposit and lending activities, the Company aggressively pursues fee income opportunities, both in traditional and automated banking services and in the investment field, including acting as investment adviser and shareholder servicing agent for BayFunds(R), a proprietary mutual fund family. 1 3 Retail Banking The Company -- a recognized leader in consumer banking -- has the largest retail market share in Massachusetts. More households in Massachusetts do business with the BayBanks than with any other banking organization. The Company offers a wide variety of retail banking products, including FDIC-insured checking, money market, savings, and time deposit accounts; credit cards; home mortgages and home equity financing; instalment loans; and trust and private banking services. The Company's proprietary X-Press 24 network, the 11th largest ATM network in the country, operates over 1,000 ATMs in Massachusetts and Connecticut and produces approximately 11 million transactions per month; the Company has approximately 1 million ATM cards in use. In addition, the BayBank X-Press 24 Cash(R) network operates cash machines located in major retail stores in Massachusetts. Approximately 88 nonaffiliated financial institutions are X-Press 24 network members. X-Press 24 cardholders can perform automated banking transactions at over 65,000 CIRRUS(R) and NYCE(R) terminals worldwide. Qualifying cardholders can also use their cards to make point-of-sale purchases at retail establishments worldwide, including Mobil(R) stations, grocery stores and, through BayBank X-Press Check(R), anywhere MasterCard(R) is accepted. The Company provides a broad range of support and maintenance services to the X-Press 24 network member institutions. In addition to its branch and ATM networks, the Company operates a customer service center twenty-four hours a day, seven days a week, that provides customer service and product information, opens consumer banking accounts, and fills customer orders, including those from its catalog of banking services. Corporate Banking The Company provides a comprehensive range of cash management, credit, deposit, international banking, and related services to businesses, hospitals, educational institutions, and local governments, with particular emphasis on the Massachusetts middle market. Specialized products available to BayBanks' business and governmental customers include personal computer-based cash management services with which a customer may perform a range of deposit account transactions; X-Press Trade(R), offering automated international letter of credit services; BayBank X-Press Tax(R) for automated payroll tax depositing; a Collateralized Municipal Money Market Account; and the Escrow Client Account Service. BayBank also acts as corporate trustee for bond offerings and as trustee or custodian for employee benefit and pension plans. Specific lending groups focus on healthcare and educational institutions, municipalities, retailers, automobile dealers, and emerging technology companies. The Company also provides secured financing, in the form of asset-based lending, leasing, and real estate lending, for commercial customers. The Company's general corporate lending activities are directed toward small and middle market companies in the New England region, with a primary emphasis on Massachusetts enterprises. Investment Services The Company's subsidiaries offer a wide range of investment services to individuals and business customers. The government and municipal securities dealerships at BayBank Boston, N.A., participate in the underwriting of Massachusetts municipal obligations and engage in private placement activities. BayBanks Brokerage Services, Inc., provides retail brokerage services. BayBanks Investment Management, Inc., a registered investment adviser, provides portfolio advice and asset management for individuals and businesses and manages the BayBank trust department's common and collective trust funds. As of December 31, 1993, the BayBank trust department had total assets of $5.2 billion under management or in custody. BayBanks Investment Management, Inc., acts as investment adviser to several portfolios of BayFunds, a proprietary mutual fund family, and BayBank Boston, N.A. acts as investment adviser to one other BayFunds portfolio. BayFunds added equity and bond portfolios to its existing money market portfolio during the first quarter of 1993. 2 4 COMPETITION The BayBanks operate in a highly competitive banking market. All of the banks compete with other commercial banks in their respective service areas, with several large commercial banks located in the City of Boston, and with a number of large regional and national commercial banks located throughout the country. Legislation enacted in recent years and changing regulatory interpretations have substantially increased the geographic and product competition among commercial banks, thrift institutions, mortgage companies, leasing companies, credit unions, finance companies, and nonbanking institutions, including mutual funds, insurance companies, brokerage firms, investment banks, and a variety of financial services and advisory companies. In the international business, the BayBanks compete with other domestic banks having foreign operations and with major foreign banks and other financial institutions. GOVERNMENT MONETARY POLICY The earnings and growth of the banking industry in general are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). An important function of the Federal Reserve Board is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are open market operations in U.S. Government securities, changes in the discount rates on member bank borrowings, and changes in amount or methods of calculating reserve requirements against member banks' deposits. These means, used in varying combinations, influence the overall growth of bank loans, investments, and deposits as well as the rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future. The effect of such policies upon the future business and earnings of the Company cannot be predicted. GENERAL BANKING REGULATION The Company is a bank holding company subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. As a bank holding company, the activities of the Company and its bank and nonbank subsidiaries are limited to the business of banking and activities closely related or incidental to banking. The Company may not acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. The Company is also subject to the Massachusetts and Connecticut bank holding company laws that, respectively require the Company to obtain the prior approval of the Massachusetts Board of Bank Incorporation and the Connecticut Banking Commissioner for holding company mergers and bank acquisitions. The Company's largest subsidiary bank, BayBank, is subject to supervision and examination by the Federal Deposit Insurance Corporation ("FDIC") and the Commissioner of Banks of the Commonwealth of Massachusetts ("Bank Commissioner"). BayBank Boston, N.A. and BayBank Connecticut, N.A., are national banking associations subject to supervision and examination by the Office of the Comptroller of the Currency ("OCC"). All of the Company's subsidiary banks are insured by and subject to certain regulations of the FDIC. They are also subject to various requirements and restrictions under federal and state law, which include requirements to obtain regulatory approval of certain business transactions, including establishing and closing bank branches; requirements to maintain reserves against deposits; restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon; and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Company's subsidiary banks. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. Because the Company is a holding company, its right to participate in the assets of any 3 5 subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of bank subsidiaries), except to the extent that the Company may itself be a creditor with recognized claims against the subsidiary. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provided for increased funding for FDIC deposit insurance and for expanded regulation of the banking industry. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital ratio categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. The critical capital level must be a level of tangible equity equal to at least 2% of total assets, but may be fixed at a higher level by regulation. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating and may be reclassified to a lower category by action based on other supervisory criteria. For an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized it must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage ratio of at least 4% (3% in some cases). FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to increased regulatory monitoring and growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount needed to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. Each of the bank subsidiaries of the Company exceeds current minimum regulatory capital requirements and qualify as well capitalized under the regulations relating to prompt corrective action (see "Regulatory Capital Requirements"). The FDIC has adopted regulations governing the receipt of brokered deposits that require certain banks, depending on their capital ratios and other factors, to obtain a waiver from the FDIC before they may accept brokered deposits, and that limit the interest rates certain banks can offer on deposits. Although the Company does not solicit brokered deposits, all of its bank subsidiaries are free to do so without restraint under the regulation. Under FDIC's risk-based deposit insurance premium system for the Bank Insurance Fund ("BIF"), which went into effect on January 1, 1993, banks currently pay within a range of 23 cents per $100 of domestic deposits (the prior rate for all institutions) to 31 cents per $100 of domestic deposits, depending on their risk classification. To arrive at a risk-based assessment for each bank, the FDIC places the bank in one of nine risk categories, using a two-step process based first on capital ratios and then on other relevant supervisory information. Each institution is assigned to one of three groups (well capitalized, adequately capitalized, or undercapitalized) based on its capital ratios. For these purposes, a well capitalized institution is one that has at 4 6 least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, and a 5% Tier 1 leverage capital ratio. An adequately capitalized institution must have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio, and a 4% Tier 1 leverage capital ratio. An undercapitalized institution is one that does not meet either of the foregoing definitions. Each institution is also assigned to one of three supervisory subgroups based on an evaluation of the risk posed by the institution to the BIF. Well capitalized banks presenting the lowest risk to the BIF pay the lowest assessment rate, while undercapitalized banks presenting the highest risk pay the highest rate. The BayBanks' capital ratios at December 31, 1993, placed them in the well capitalized category for assessment purposes. The assessment will depend upon the level of deposit balances and the BayBanks' applicable risk categories (see "Regulatory Capital Requirements"). Other significant provisions of FDICIA require federal banking regulators to draft standards in a number of areas to assure bank safety and soundness, including internal controls; credit underwriting; asset growth; management compensation; ratios of classified assets to capital; and earnings. The legislation also contains provisions that require the adoption of capital guidelines applicable to interest rate risks; tighten independent auditing requirements; restrict the activities and investments of state-chartered insured banks; strengthen various consumer banking laws; limit the ability of undercapitalized banks to borrow from the Federal Reserve's discount window; and require regulators to perform annual on-site bank examinations and set standards for real estate lending. The full impact of FDICIA will not be completely known until the adoption by the various federal banking agencies of all of the implementing regulations. However, FDICIA has resulted in increased costs for the banking industry due to higher FDIC assessments and increased compliance burdens. Otherwise, FDICIA has not had an adverse effect on the Company's operations. REGULATORY CAPITAL REQUIREMENTS Under the three federal banking regulators' risk-based capital measures for banks and bank holding companies a banking organization's reported balance sheet is converted to risk-based amounts by assigning each asset to a risk category, which is then multiplied by the risk weight for that category. Off-balance sheet exposures are converted to risk-based amounts through a two-step process. First, off-balance sheet assets and credit equivalent amounts (e.g., interest rate swaps) are multiplied by a credit conversion factor depending on the defined categorization of the particular item. Then the converted items are assigned to a risk category that weights the items according to their relative risk. The total of the risk-weighted on-and off-balance sheet amounts represents a banking organization's risk-adjusted assets for purposes of determining capital ratios under the risk-based guidelines. Risk-adjusted assets can either exceed or be less than reported assets, depending on the risk profile of the banking organization. Risk-adjusted assets for institutions such as the Company will generally be less than reported assets because retail banking activities include proportionally more residential real estate loans with a lower risk rating and a relatively small off-balance sheet position. A banking organization's total qualifying capital includes two components, core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common stockholders' equity, qualifying perpetual preferred stock, and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, certain other capital instruments, and term subordinated debt, which is discounted at 20% a year during its final five years of maturity. The Company's major capital components include stockholders' equity in core capital, and the allowance for loan losses and grandfathered floating rate notes, subject to a 40% discounting in the fourth quarter of 1993, in supplementary capital. At December 31, 1993, the minimum risk-based capital requirements were 4.00% for core capital and 8.00% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter. The minimum leverage ratio is 3.00%, although banking organizations are expected to exceed that amount by 100 or 200 basis points or more, depending upon their circumstances. 5 7 At December 31, 1993, the Company's consolidated risk-based capital ratios were 10.68% for core capital and 12.40% for total capital, and at December 31, 1992, were 10.37% and 12.30%, respectively. The Company's consolidated leverage ratio was 7.26% at December 31, 1993, and 6.79% at December 31, 1992. These ratios exceeded the minimum regulatory guidelines. During the fourth quarter of 1992, the Company completed a public offering of 2.3 million shares of common stock that raised $79.3 million in capital. The Company contributed $8 million in capital to its subsidiaries during 1992 and $22 million during 1993, with the remaining funds held in the parent company's cash and securities portfolios. The Company reinstated its quarterly cash dividend in the first quarter of 1993 at an initial rate of $.20 per share; an equal amount was paid in the second quarter. In the third quarter of 1993, the Company increased its quarterly cash dividend to $.25 per share, which dividend was also paid in the fourth quarter. Total dividends declared for 1993 were $.90 per share. On January 27, 1994, the Board of Directors raised the quarterly dividend amount when it declared a dividend of $.35 per share paid on March 1, 1994. The following table presents the risk-based and leverage capital ratios required for depository institutions to be considered well capitalized under applicable federal regulations and the reported capital ratios of the Company and its bank subsidiaries at December 31, 1993:
RISK-BASED RATIOS ------------------------------------------------------------- TIER 1 CAPITAL TOTAL CAPITAL LEVERAGE RATIO ----------------------------- ----------------------------- ----------------------------- REQUIRED TO BE REQUIRED TO BE REQUIRED TO BE WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED ------------------- -------- ------------------- -------- ------------------- -------- BayBanks, Inc.......... n/a% 10.68% n/a% 12.40% n/a% 7.26% BayBank........ 6.00 8.99 10.00 10.72 5.00 6.18 BayBank Boston, N.A.......... 6.00 10.24 10.00 12.19 5.00 6.14 BayBank Connecticut, N.A.......... 6.00 14.05 10.00 15.34 5.00 9.83
- --------------- (1) Under Federal Prompt Corrective Action and Risk-based Deposit Insurance Assessment Regulations. n/a -- not applicable The Company and its bank subsidiaries are not subject to any agreements or understandings with their regulatory authorities and all prior regulatory commitments made have been fulfilled. STATISTICAL DISCLOSURES Securities Act Guide 3, Statistical Disclosure by Bank Holding Companies, requires certain statistical disclosures. The statistical information required is either incorporated by reference from the Company's 1993 Annual Report as indicated in the index below, presented in statistical tables within this section, or is not applicable. This information should be read in conjunction with the Financial Review incorporated by reference in Item 7 and the consolidated financial statements and related notes incorporated by reference in Item 8 in this report.
PAGE OF 1993 ANNUAL REPORT INCORPORATED BY PAGE IN REFERENCE THIS REPORT --------------- ----------- Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential Average balances....................................................... 34 -- Summary of operations*................................................. 35 -- Average yields and rates paid.......................................... 36 -- - --------------- * The caption "Dividends paid per share" in the Summary of operations should read "Dividends declared per share."
6 8
PAGE OF 1993 ANNUAL REPORT INCORPORATED BY PAGE IN REFERENCE THIS REPORT --------------- ----------- Analysis of net interest income........................................ -- 8 Securities Portfolios Book value by security type............................................ -- 9 Year-end maturities and yields of principal debt securities............ 25 -- Securities of an issuer in excess of 10% of stockholders' equity....... -- n/a Loan Portfolio Distribution of loans.................................................. 37 -- Maturity distribution of commercial and commercial real estate loans... -- 9 Nonperforming assets and accruing loans 90 days or more past due....... 37 -- Policy for placing loans on nonaccrual status.......................... 24 -- Interest income which would have been recorded on nonperforming loans had they performed in accordance with their original terms vs. interest income actually recorded on nonperforming loans............... 24 -- Foreign outstandings................................................... -- n/a Loan concentrations.................................................... -- n/a Other interest-bearing assets.......................................... -- n/a Summary of Loan Loss Experience Summary of loan loss experience........................................ -- 10 Discussion of additions to the allowance............................... 14-15 -- Distribution of allowance for loan losses.............................. -- 10 Deposits Average balances of deposit categories................................. 34 -- Rates paid............................................................. 36 -- Foreign deposits in domestic offices................................... -- n/a Remaining maturities of time deposits -- $100,000 or more.............. -- 11 Amount outstanding of time deposits -- $100,000 or more, issued by a foreign office........................................................ -- n/a Return on Equity and Assets Return on average stockholders' equity................................. 35 -- Return on average total assets......................................... 35 -- Dividend payout ratio.................................................. -- * Average equity to average assets ratio................................. -- ** Short-Term Borrowings...................................................... -- 11
- --------------- n/a -- not applicable * The dividend payout ratio was 25.2% in 1993 and 45.6% in 1989; the dividend payout ratio was not meaningful in 1990. There were no dividends paid in 1991 or 1992. ** The average equity to average assets ratio was 7.01% in 1993, 5.67% in 1992, 5.10% in 1991, 5.55% in 1990, and 6.05% in 1989. 7 9 ANALYSIS OF NET INTEREST INCOME
CHANGE DUE TO: -------------------------- CHANGE LOWER INCREASE IN INTEREST (DECREASE) BALANCES RATES --------- -------- --------- (IN THOUSANDS ON A TAX EQUIVALENT BASIS) 1993 COMPARED WITH 1992(1) Short-term investments........................... $ (2,994) $ (1,002) $ (1,992) Securities portfolios(2)......................... (1,871) 10,670 (12,541) Loans(3)......................................... (59,980) (12,128) (47,852) --------- -------- --------- Total.......................................... (64,845) (2,460) (62,385) --------- -------- --------- NOW & savings accounts........................... (15,264) 5,591 (20,855) Money market deposit accounts.................... (31,255) (3,896) (27,359) Consumer time.................................... (25,113) (9,876) (15,237) Time--$100,000 or more........................... (1,162) (644) (518) Short-term borrowings & long-term debt........... (567) 44 (611) --------- -------- --------- Total.......................................... (73,361) (8,781) (64,580) --------- -------- --------- Net interest income.............................. $ 8,516 $ 6,321 $ 2,195 --------- -------- --------- --------- -------- --------- 1992 COMPARED WITH 1991 Short-term investments........................... $ (17,094) $ (3,105) $ (13,989) Securities portfolios(2)......................... (13,392) 14,151 (27,543) Loans(3)......................................... (126,652) (57,696) (68,956) --------- -------- --------- Total.......................................... (157,138) (46,650) (110,488) --------- -------- --------- NOW & savings accounts........................... (27,240) 19,085 (46,325) Money market deposit accounts.................... (76,137) (12,008) (64,129) Consumer time.................................... (48,241) (22,273) (25,968) Time--$100,000 or more........................... (9,308) (7,871) (1,437) Short-term borrowings and long-term debt......... (17,027) (12,214) (4,813) --------- -------- --------- Total.......................................... (177,953) (35,281) (142,672) --------- -------- --------- Net interest income.............................. $ 20,815 $(11,369) $ 32,184 --------- -------- --------- --------- -------- ---------
- --------------- (1) The rate/volume variance is allocated to the average balance category. (2) Presented on a tax equivalent basis at the combined effective federal and state tax rate of 43.2% for 1993 and 42.3% for 1992. (3) Loan income includes loan fees, primarily related to commercial and residential real estate loans, of $6.2 million in 1993, $6.8 million in 1992, and $7.4 million in 1991. Nonperforming loans (nonaccrual loans) are included in average loan balances. Interest income is recorded on an accrual basis. Thus, nonperforming loans do not contribute to net interest income and affect the net interest margin. 8 10 SECURITIES AVAILABLE FOR SALE (1) AT DECEMBER 31
1993 1992 ----------------------- ----------------------- ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) U.S. Government............ $ 322,707 $ 325,984 $1,433,945 $1,440,821 State and local governments.............. 18,964 18,968 -- -- Corporate and other........ 256,500 256,500 -- -- Mortgage-backed securities............... 30,832 31,994 88,932 90,096 ---------- ---------- ---------- ---------- $ 629,003 $ 633,446 $1,522,877 $1,530,917 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- --------------- (1) There were no securities available for sale as of December 31, 1991. INVESTMENT SECURITIES AT DECEMBER 31
1993 1992 1991 --------------------- ----------------------- ----------------------- ESTIMATED ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE COST VALUE --------- --------- ---------- ---------- ---------- ---------- (IN THOUSANDS) U.S. Government............ $1,203,315 $1,209,703 $ -- $ -- $ 627,050 $ 657,249 State and local governments.............. 128,997 129,352 37,869 38,401 25,547 26,258 Mortgage-backed securities............... -- -- -- -- 651,381 679,224 Asset-backed securities.... 204,798 204,086 -- -- -- -- Industrial revenue bonds... 59,958 59,958 75,938 75,938 91,345 91,345 Corporate and other........ 1,992 1,992 42,685 42,685 2,038 2,038 --------- --------- ---------- ---------- ---------- ---------- $1,599,060 $1,605,091 $ 156,492 $ 157,024 $1,397,361 $1,456,114 --------- --------- ---------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- ----------
MATURITY DISTRIBUTION OF COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS AT DECEMBER 31, 1993
AFTER ONE OVER ONE YEAR BUT WITHIN FIVE OR LESS FIVE YEARS(1) YEARS(1) TOTAL(2) ---------- ------------- ---------- ---------- (IN THOUSANDS) Commercial..................................... $ 837,203 $ 401,474 $ 38,540 $1,277,217 Commercial real estate......................... 216,486 512,733 157,238 886,457 ---------- ------------- ---------- ---------- $1,053,689 $ 914,207 $195,778 $2,163,674 ---------- ------------- ---------- ---------- ---------- ------------- ---------- ----------
- --------------- (1) Of the total commercial and commercial real estate loans above with remaining maturities in excess of one year, 50% have adjustable rates of interest. (2) Excludes $47,751 of commercial and $49,014 of commercial real estate nonperforming loans. 9 11 SUMMARY OF LOAN LOSS EXPERIENCE
1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Loans outstanding at December 31..... $6,103,170 $5,937,999 $6,353,034 $7,130,341 $8,012,894 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average loans........................ $5,910,489 $6,152,838 $6,735,040 $7,456,250 $7,816,071 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allowance for Loan Losses Beginning balance at January 1..... $ 192,700 $ 212,500 $ 214,203 $ 84,732 $ 52,732 Loans charged off: Commercial...................... 24,231 62,437 73,833 57,735 24,158 Commercial real estate.......... 15,513 29,237 48,885 74,116 9,799 Residential mortgage............ 11,203 12,861 17,250 5,680 -- Instalment...................... 29,016 36,255 35,686 28,015 11,888 ---------- ---------- ---------- ---------- ---------- Total loans charged off.... 79,963 140,790 175,654 165,546 45,845 ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial...................... 11,778 6,660 2,254 1,081 990 Commercial real estate.......... 2,339 778 965 71 -- Residential mortgage............ 2,062 974 79 -- -- Instalment...................... 6,080 5,742 5,253 3,907 1,855 ---------- ---------- ---------- ---------- ---------- Total recoveries........... 22,259 14,154 8,551 5,059 2,845 ---------- ---------- ---------- ---------- ---------- Net loans charged off.............. 57,704 126,636 167,103 160,487 43,000 Provision for loan losses.......... 36,500 106,836 165,400 289,958 75,000 ---------- ---------- ---------- ---------- ---------- Balance at December 31............. $ 171,496 $ 192,700 $ 212,500 $ 214,203 $ 84,732 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Ratio of net loans charged off during period to average loans outstanding........................ 0.98% 2.06% 2.48% 2.15% 0.55%
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (1)
COMMERCIAL RESIDENTIAL COMMERCIAL REAL ESTATE MORTGAGE INSTALMENT LOANS LOANS LOANS LOANS TOTAL ---------- ----------- ----------- ---------- -------- (DOLLARS IN THOUSANDS) December 31, 1993 Allowance amount.............. $ 47,298 $66,455 $21,621 $ 36,122 $171,496 Loan category to total loans...................... 21.7% 15.3% 20.4% 42.6% 100.0% December 31, 1992 Allowance amount.............. $ 67,800 $73,707 $22,060 $ 29,133 $192,700 Loan category to total loans...................... 23.8% 17.2% 21.0% 38.0% 100.0% December 31, 1991 Allowance amount.............. $ 90,444 $68,670 $22,641 $ 30,745 $212,500 Loan category to total loans...................... 26.0% 19.1% 20.1% 34.8% 100.0% December 31, 1990 Allowance amount.............. $ 96,499 $84,016 $ 9,712 $ 23,976 $214,203 Loan category to total loans...................... 28.6% 19.9% 20.3% 31.2% 100.0% December 31, 1989 Allowance amount.............. $ 30,909 $36,823 $ 2,000 $ 15,000 $ 84,732 Loan category to total loans...................... 31.1% 19.8% 23.4% 25.7% 100.0%
- --------------- (1) The distribution of the allowance for loan losses is based on an assessment of an aggregate potential for future losses in the respective year-end loan portfolios. While the allowance has been distributed to individual loan categories, it is available to absorb losses in the total portfolio. The distribution of the allowance includes both allocations assigned to specifically identified problem loans and unallocated amounts that are not specifically identified as to any individual loan. The unallocated amounts related to commercial and commercial real estate loans were $85 million as of December 31, 1993, as described in the CREDIT QUALITY section incorporated by reference in Item 7 (see 1993 Annual Report, "Allowance for Loan Losses," page 15). 10 12 REMAINING MATURITIES OF TIME DEPOSITS -- $100,000 OR MORE AT DECEMBER 31, 1993
TOTAL TIME DEPOSITS-- $100,000 OR MORE -------------------- (IN THOUSANDS) 90 days or less....................................................... $ 53,563 91-180 days........................................................... 9,030 181-365 days.......................................................... 7,296 Over one year......................................................... 10,201 ---------- Total....................................................... $ 80,090(1) ---------- ----------
- --------------- (1) Included in this amount are $35 million of large certificates of deposits and $45 million of consumer certificates of deposit of $100,000 or more. SHORT-TERM BORROWINGS
MAXIMUM AMOUNT AVERAGE WEIGHTED WEIGHTED BALANCE OUTSTANDING OUTSTANDING AVERAGE AVERAGE OUTSTANDING AT DURING INTEREST RATE INTEREST RATE AT DECEMBER 31 ANY MONTH-END THE YEAR AT YEAR-END DURING THE YEAR -------------- ------------- ----------- ------------- --------------- (DOLLARS IN THOUSANDS) 1993........ $507,820 $ 507,820 $ 150,608 3.10% 2.72% 1992........ 139,969 267,225 147,856 2.43 2.90 1991........ 122,829 553,744 367,934 3.91 5.44
11 13 ITEM 2. PROPERTIES. BayBanks, Inc., and its subsidiaries occupy both owned and leased premises. The offices occupied by the Company in Boston, Massachusetts, include its principal executive offices and are leased from nonaffiliated companies. Property occupied by the three subsidiary banks represents the majority of the Company's property, and is generally considered to be in good condition and adequate for the purpose for which it is used. Bank properties include bank buildings and branches, and free-standing automated banking facilities. The Company owns the 11-story 208,000 square foot headquarters building of BayBank, its principal bank subsidiary, of which 5% is leased to nonaffiliates. Of the 201 branch offices of the subsidiary banks at December 31, 1993, 98 were located in owned buildings and 103 were located in leased buildings. In addition, the Company leases sites for 356 automated banking facilities. In 1992, BayBank Systems, Inc., the Company's principal nonbank subsidiary, occupied a new $38 million, 185,000 square foot owned technology center that enabled the Company to consolidate personnel located in various leased and owned locations, thereby increasing operating efficiency. Also during 1992, BayBank Systems updated an adjoining 121,000 square foot owned facility that houses its principal data processing equipment. At December 31, 1993, there was an aggregate $38 million mortgage on these facilities to an affiliated bank at market terms and in conformity with banking regulations that cover transactions between affiliated parties. ITEM 3. LEGAL PROCEEDINGS. There were no material pending legal proceedings other than ordinary routine litigation incidental to the conduct of the Company's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1993. 12 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The stock of BayBanks, Inc. is traded over the counter through the NASDAQ National Market System under the symbol BBNK. The Quarterly Share Data information that appears on page 38 in the Company's 1993 Annual Report is incorporated herein by reference. (b) As of March 10, 1994, there were approximately 4,500 holders of record of the Company's common stock. (c) The Company paid dividends of $.90 per share during 1993. The Company paid a dividend quarterly from 1928 through 1990. During 1991 and 1992, the Company did not pay any dividends. For additional information on dividend payments, reference is made to the CAPITAL AND DIVIDENDS section that is incorporated by reference from pages 15 and 16 of the Company's 1993 Annual Report, and Note 1 to the consolidated financial statements, incorporated by reference under Item 8. ITEM 6. SELECTED FINANCIAL DATA. The Average Balances and Summary of Operations* appearing on pages 34 and 35 of the Company's 1993 Annual Report are incorporated herein by reference. * The caption "Dividends paid per share" in the Summary of operations should read "Dividends declared per share." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. The Financial Review appearing on pages 4 through 16 of the Company's 1993 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements and notes thereto of the Company and its subsidiaries appearing on pages 17 through 32 of the Company's 1993 Annual Report are incorporated herein by reference:
PAGE OF 1993 ANNUAL REPORT ------------ Independent Auditors' Report............................................. 17 Consolidated Balance Sheet -- December 31, 1993 and 1992................. 18 Consolidated Statement of Income -- Years Ended December 31, 1993, 1992, and 1991............................................................... 19 Consolidated Statement of Changes in Stockholders' Equity -- Years Ended December 31, 1993, 1992, and 1991...................................... 20 Consolidated Statement of Cash Flows -- Years Ended December 31, 1993, 1992, and 1991......................................................... 21 Notes to Financial Statements............................................ 22-32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in or matters of disagreement on accounting and financial disclosure with the Company's independent auditors. 13 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning directors on pages 1 through 4 of the Company's proxy statement dated March 21, 1994, is incorporated herein by reference. The following are the executive officers of the registrant as of March 15, 1994:
AGE TITLE --- William M. Crozier, Jr... 61 Chairman and President John J. Arena............ 56 Vice Chairman Donald L. Isaacs......... 46 Vice Chairman Richard F. Pollard....... 61 Vice Chairman Ilene Beal............... 48 Executive Vice President Michael W. Vasily........ 49 Executive Vice President and Chief Financial Officer Joan E. Tonra............ 47 Senior Vice President and Controller
Mr. Crozier has been an officer of BayBanks, Inc. since 1967 and was elected Chairman of the Board and Director in 1974. In 1977, Mr. Crozier was elected to the additional post of President. Mr. Arena has been a director since 1977 and was elected Vice Chairman in 1992 when he joined the Company to head its investment, private banking, and personal trust services activities. Prior to joining the Company, Mr. Arena was an independent investment management consultant from 1990 to 1992 and a trustee of an investment management firm from 1987 to 1990. Mr. Isaacs was elected Vice Chairman in 1992, Executive Vice President in 1985, Senior Vice President in 1979, and Vice President in 1978, and joined the Company in 1974. Mr. Isaacs is also the Chairman and CEO of BayBank Systems, Inc., the Company's technology subsidiary. Mr. Pollard was elected Vice Chairman and Director in 1983 and Executive Vice President in 1979 and had been a Senior Vice President since 1976. Mr. Pollard is also President and CEO of BayBank Boston, N.A., and is the senior lending officer of the Company. Ms. Beal was elected Executive Vice President in 1985, Senior Vice President in 1979, and Vice President in 1977, and has been with the Company since 1972. Mr. Vasily was elected Chief Financial Officer in 1991, Executive Vice President in 1987, Senior Vice President in 1980, and Vice President upon joining the Company in 1978, and was the Controller of the Company from 1983 to 1989. Ms. Tonra was elected Senior Vice President of BayBanks, Inc., in 1985 and Controller in 1989, and joined the Company in 1985. She is the Principal Accounting Officer of the Company. Information concerning reports of transactions in BayBanks, Inc. stock on page 12 of the Company's proxy statement dated March 21, 1994 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information concerning management remuneration and transactions on pages 5 through 7 of the Company's proxy statement dated March 21, 1994, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information concerning securities ownership of management on pages 1 and 2, and concerning securities ownership of certain beneficial owners on page 12, of the Company's proxy statement dated March 21, 1994, is incorporated herein by reference. 14 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information concerning relationships and transactions of the Company's executive officers and directors on page 4 of the Company's proxy statement dated March 21, 1994, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements The following financial statements of the Company and its subsidiaries included in its 1993 Annual Report are incorporated by reference in Item 8: Independent Auditors' Report Consolidated Balance Sheet-December 31, 1993 and 1992 Consolidated Statement of Income-Years Ended December 31, 1993, 1992, and 1991 Consolidated Statement of Changes in Stockholders' Equity-Years Ended December 31, 1993, 1992, and 1991 Consolidated Statement of Cash Flows-Years Ended December 31, 1993, 1992, and 1991 Notes to Financial Statements 2. Financial Statement Schedules All schedules are omitted because either the required information is shown in the financial statements or notes incorporated by reference, or they are not applicable, or the data is not significant. 3. Appendix containing narrative descriptions of graphical and image material omitted from text of Form 10-K and from Exhibit 13 thereto. 4. Exhibits See the Exhibit List and Index on pages 17 and 18. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1993. 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BAYBANKS, INC. (Registrant) By: /s/ MICHAEL W. VASILY MICHAEL W. VASILY Executive Vice President March 24, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 24, 1994, by the following persons on behalf of the registrant and in the capacities indicated. /s/ WILLIAM M. CROZIER, JR. /s/ MICHAEL W. VASILY WILLIAM M. CROZIER, JR. MICHAEL W. VASILY Chairman of the Board, Executive Vice President and President, and Director Chief Financial Officer (Principal Executive Officer) (Principal Financial Officer) /s/ JOHN J. ARENA /s/ JOAN E> TONRA JOHN J. ARENA JOAN E. TONRA Vice Chairman of the Board and Director Senior Vice President and Controller (Principal Accounting Officer) /s/ DONALD L. ISAACS /s/ RICHARD F. POLLARD DONALD L. ISAACS RICHARD F. POLLARD Vice Chairman of the Board and Director Vice Chairman of the Board and Director /s/ JOHN A. CERVIERI JR. /s/ THOMAS R. PIPER JOHN A. CERVIERI JR. THOMAS R. PIPER Director Director /s/ SAMUEL J. GERSON /s/ GLENN P. STREHLE SAMUEL J. GERSON GLENN P. STREHLE Director Director /s/ NORMAN E. MACNEIL /s/ JOSEPH H. TORRAS NORMAN E. MACNEIL JOSEPH H. TORRAS Director Director
16 18 BAYBANKS, INC. EXHIBIT LIST AND INDEX
EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------ ARTICLES OF INCORPORATION AND BY-LAWS 3.1(a)* -- Articles of Organization as amended, through June 28, 1988 (Exhibit 4 to Registration Statement No. 33-22834). (b) -- Certificate of Vote of Directors Establishing a Series of a Class of Stock filed March 10, 1989. (c)* -- Certificate of Vote of Directors adopted July 26, 1990, electing to have certain Massachusetts legislation concerning the classification of boards of directors apply to the Corporation (Exhibit 4.1(d) to June 30, 1990 Form 10-Q). 3.2* -- By-Laws as amended through August 24, 1989 (Exhibit 4 to September 30, 1989 Form 10-Q). INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1* -- Indenture dated as of January 15, 1969 (Exhibit 4(c) to Registration Statement No. 2-31176). 4.2* -- Indenture dated as of September 15, 1985 (Exhibit 4.1 to Registration Statement No. 33-00130). 4.3* -- Rights Agreement dated December 23, 1988 (Exhibit 1 to Registration Statement on Form 8-A filed December 23, 1988). 4.4* -- Specimen Common Stock Certificate (Exhibit 4.5 of Registration Statement No. 33-50558). 4.5* -- The Registrant has certain long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instruments to the Commission upon request. MATERIAL CONTRACTS-EXECUTIVE COMPENSATION PLANS 10.1* -- 1978 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended (Exhibit 10.1 to 1991 Form 10-K). 10.2* -- 1988 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended. (Exhibit 10.2 to 1992 Form 10-K). 10.3* -- BayBanks, Inc., Incentive Compensation Plan, as amended (Exhibit 19.4 to June 30, 1991 Form 10-Q). 10.4* -- BayBanks, Inc., Compensation Plan for Directors, as amended (Exhibit 19.5 to June 30, 1991 Form 10-Q). 10.5* -- 1990 Stock Plan for Directors as amended, renamed, and restated (Exhibit 19.1 to March 31, 1991 Form 10-Q). 10.6* -- 1982 Restricted Stock Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended (Exhibit 10.1 to June 30, 1993 Form 10-Q). 10.7 -- BayBanks Inc., 1994 Restricted Stock Plan. 10.8* -- BayBanks Supplemental Executive Retirement Plan (Exhibit 19.6 to June 30, 1991 Form 10-Q). 10.9* -- First Amendment dated February 26, 1992, to BayBanks Supplemental Executive Retirement Plan (Exhibit 10.8 to 1991 Form 10-K).
17 19
EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------ 10.10* -- BayBanks Profit Sharing Excess Benefit Plan (Exhibit 10.1 to March 31, 1993 Form 10-Q). 10.11* -- BayBanks, Inc., Severance Benefits Plan, as amended and renamed (Exhibit 10.2 to June 30, 1993 Form 10-Q). 10.12* -- BayBanks Deferred Payment Plans Trust Agreement (Exhibit 19 to June 30, 1992 Form 10-Q). MATERIAL CONTRACTS -- OTHER 10.13* -- ESOP Stock Purchase Agreement dated as of January 22, 1990, between the Company and Marine Midland Bank, N.A., as Co-Trustee of the Savings, Profit Sharing and Stock Ownership Plan for Employees of BayBanks, Inc., and Affiliated Companies (Exhibit 10.8 to 1989 Form 10-K). MISCELLANEOUS 11 -- Computation of Primary and Fully Diluted Earnings Per Share. See Page 19. 13 -- Portions of BayBanks, Inc., 1993 Annual Report to Stockholders. 22 -- Subsidiaries of the Registrant. See Page 20. 23 -- Consent of Independent Auditors. See Page 21. 99 -- Earnings Statement required by Section 11(a) of the Securities Act of 1933: Consolidated Statement of Income for the year ended December 31, 1993 included in Exhibit 13.
- --------------- * Incorporated by reference to the document indicated in parentheses. 18 EX-3.1B 2 CERTIFICATE OF VOTE OF DIRECTORS 1 EXHIBIT 3.1(b) THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL JOSEPH CONNOLLY, SECRETARY ONE ASHBURTON PLACE, BOSTON, MASS. 02108 FEDERAL IDENTIFICATION 04-2008039 NO. __________________ CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK General Laws, Chapter 156B, Section 26 ----------- We, William M. Crozier, Jr., President and John P. Weitzel, Clerk of BayBanks, Inc. (Name of Corporation) located at 175 Federal Street, Boston, Massachusetts 02110 do hereby certify that at a meeting of the directors of the corporation held on December 15, 1988, the following vote establishing and designating a series of a class of stock and determining the relative rights and preferences thereof was duly adopted: See Continuation Sheets 1A to 1H, inclusive. Note: Votes for which the space provided above is not sufficient should be set out on continuation sheets to be numbered 2A, 2B, etc. Continuation sheets must have a left hand margin 1 inch wide for binding and shall be 8.5" x 11". Only one side should be used. ========== 2 CONTINUATION SHEET TO CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK OF BAYBANKS, INC. ADOPTED DECEMBER 15, 1988 VOTED, that pursuant to the authority vested in the Board of Directors of the Corporation by the Articles of Organization, the Board of Directors does hereby provide for the issue of a series of Junior Participating Preferred Stock, $10.00 par value, of the Corporation, to be designated "Series A Junior Participating Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock"), initially consisting of 200,000 shares, and to the extent that the designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of the Series A Preferred Stock are not stated and expressed in the Articles of Organization, does hereby fix and herein state express such designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions thereof, as follows (all terms used herein which are defined in the Articles of Organization shall be deemed to have the meanings provided therein): "Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 200,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. DIVIDENDS AND DISTRIBUTIONS. (a) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the prupose, quarterly dividends payable in cash on the 1st day of February, May, August and November in each year. 1A 3 IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this ninth day of March in the year 1989. William M. Crozier, Jr. , President - ------------------------------------------------------ John P. Weitzel , Clerk - ------------------------------------------------------ 4 THE COMMONWEALTH OF MASSACHUSETTS CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK (General Laws, Chapter 156B, Section 26) I hereby approve the within certificate and, the filing fee in the amount of $100.00 having been paid, said ceritficate is hereby filed this 10th day of March 1989. Michael J. Connolly Michael Joseph Connolly Secretary of State TO BE FILED IN BY CORPORATION PHOTO COPY OF CERTIFICATE TO BE SENT TO: John P. Weitzel Palmer & Dodge ------------------------------------------- One Beacon Street ------------------------------------------- Boston, MA 02108 ------------------------------------------- Telephone (617) 573-0301 --------------------------------- Copy Mailed 5 (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, $2.00 par value per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after December 15, 1988 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (a) above immediately after it delcares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, subject to the requirements of applicable law and the Articles of Organization, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. 1B 6 (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Partcipating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. Section 3. VOTING RIGHTS. The holders of shares of Series A Junior Partcipating Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 1C 7 (b) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares 1D 8 of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received $100 per share, plus an amount equal to accrued and 1E 9 unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (c) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (b) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (c) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 1F 10 Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. NO REDEMPTION. The shares of Series A Junior Participating Preferred Stock shall not be redeemable. Section 9. RANKING. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. AMENDMENT. The Articles of Organization of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 1G 11 Section 11. FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock." 1H EX-10.7 3 1994 RESTRICTED STOCK PLAN 1 EXHIBIT 10.7 1994 RESTRICTED STOCK PLAN 1. PURPOSE. The purpose of this Restricted Stock Plan (the "Plan") is to attract, motivate, and retain outstanding individuals as employees of BayBanks, Inc. (the "Corporation") and its Subsidiaries, as hereinafter defined, to align their future interests with those of the Corporation's stockholders, and to reward appropriately those who make substantial contributions to the success and welfare of the Corporation. 2. STOCK SUBJECT TO THE PLAN. The stock that may be granted under the Plan shall be the Common Stock, $2.00 par value, of the Corporation. The maximum total number of shares of such stock that may be issued under the Plan shall be 500,000 shares (except as such amount may be adjusted in accordance with the provisions of Section 9 hereof). Such shares may be either unissued shares or reacquired shares. If previously awarded shares are forfeited to the Corporation by reason of termination of employment during the applicable Restriction Period, or for any other reason, such shares shall not again be awarded under the Plan unless the respective grant recipient has not had the benefits of ownership thereof (other than voting rights). In the event the Corporation acquires or merges or consolidates with another company, Common Stock issuable under the Plan as a result of the Corporation's assumption of outstanding awards from such other company or the substitution of grants under the Plan for outstanding awards of such other company shall not reduce the shares available for grant under the Plan. 3. ELIGIBILITY AND PARTICIPATION. Individuals eligible to receive grants of Restricted Stock, as hereinafter defined, under the Plan shall be those employees of the Corporation and its Subsidiaries selected from time to time by the Plan's administrative committee, provided, however, that each grant recipient must have been employed by the Corporation or a Subsidiary for a period of at least six months immediately preceding the date of grant. No person who is not an officer or salaried employee of the Corporation or a Subsidiary shall be eligible to receive a grant under the Plan. Grants made under the Plan in any year shall neither preclude nor require selection of a grantee to receive future grants or require that the grantee receive the same type or amount of award as at any other time, or as may be received by any other grant recipient at any time. Neither the Plan nor any action taken under the Plan shall be construed as giving any grantee the right to be retained in the employ of the Corporation or a Subsidiary. 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a Committee (the "Committee") appointed by, and to serve at the pleasure of, the Board of Directors of the Corporation and consisting of three or more directors, each of whom is a "disinterested person" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, or any successor provision, as applicable to the Corporation at the time. Until the Board of Directors shall otherwise determine, that Committee shall be the Corporate Compensation Committee. Subject to the express provisions hereof, the Committee shall have sole and complete authority to make grants of Restricted Stock. Such authority shall include, but not be limited to, selecting individuals to receive grants under the Plan, determining the number of shares of Common Stock (subject to the limitations in Section 2 hereof) to be awarded to each grant recipient under the Plan and the terms and conditions under which such grants shall be made, and determining the duration and terms of each Restriction Period. The Committee also shall have authority to adopt rules and regulations for carrying out the Plan and to interpret, construe, implement, and otherwise administer the provisions of the Plan. Decisions of the Committee shall be final. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present (or acts approved in writing by a majority of the Committee) shall be the acts of the Committee. The Committee shall keep minutes of its proceedings and from time to time make such reports to the Board of Directors as the Board shall direct. 1 2 5. EFFECTIVE DATE. The Effective Date of the Plan shall be the date upon which the Plan is adopted by the Board of Directors of the Corporation. The Plan shall terminate if it is not approved within twelve months after the Effective Date by vote of the holders of a majority of the stock of the Corporation present in person or by proxy and entitled to vote at a special or annual meeting of the stockholders of the Corporation. 6. TERMS AND CONDITIONS OF GRANTS. 6.1 Grants under the Plan shall consist of Restricted Stock, which shall be shares of Common Stock of the Corporation transferred to grant recipients in furtherance of the purposes of the Plan without, unless otherwise provided, other payment and subject to the restrictions referred to in this Section 6. All shares of Restricted Stock granted under the Plan shall be so granted for, and in consideration of, past services rendered to the Corporation or a Subsidiary and shall be subject to the following terms and conditions and to such other terms and conditions, not inconsistent with the Plan, as shall be prescribed by the Committee in its sole discretion and as shall be contained in the Agreement referred to in Section 6.1(d) hereof. (a) At the time of a grant of shares of Restricted Stock, the Committee shall establish for all such shares received by a grantee (or, if it is the intent that the total of such shares shall be divided into separate parts, for each part of such total) a period of time (the "Restriction Period") commencing with the date of the grant of such shares during which time the shares may not be sold, assigned, transferred, pledged, or otherwise encumbered, except as herein provided. Different Restriction Periods may be fixed for different parts of the shares that are being granted to a recipient, and the Restriction Period for one grant may differ from the Restriction Period for other grants. Except for such restrictions, unless otherwise determined by the Committee, the grant recipient as owner of such Restricted Stock shall have all the rights of a stockholder, including but not limited to the right to receive all dividends paid on such Restricted Stock and the right to vote such Restricted Stock. Unless otherwise determined by the Committee, the restrictions shall terminate upon the earliest to occur of the expiration of the Restriction Period or the grantee's death, disability, or retirement, or in any other circumstances determined by the Committee at the time of the grant or at any time thereafter. (b) If a grant recipient ceases to be an employee of the Corporation or a Subsidiary, all shares of Restricted Stock theretofore granted to him as to which the restrictions imposed under this Section 6 have not terminated or do not thereby terminate shall, except as provided in Section 7 hereof, upon such cessation of employment be forfeited and returned to the Corporation unless the Committee, in its discretion, otherwise determines. (c) Each certificate issued in respect of shares of Restricted Stock granted under the Plan shall be registered in the name of the grantee and deposited by him, together with a stock power endorsed in blank, with the Corporation and shall bear the following (or a similar) legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms, conditions and restrictions (including forfeiture) contained in a Plan and an Agreement between the registered owner and BayBanks, Inc. A copy of such Plan and Agreement will be furnished to the holder of this certificate upon written request and without charge." 2 3 (d) The grant recipient shall enter into an Agreement with the Corporation, in a form not inconsistent with the Plan, agreeing to the terms and conditions of the grant and such other matters as the Committee shall in its sole discretion determine. The Agreement may be amended by the Committee at any time to modify the Restriction Period with respect to any shares of Restricted Stock the restrictions on which have not then lapsed or in any other respect; provided that, except as provided in Section 12, no amendment shall adversely affect the terms and conditions of an outstanding grant without the written consent of the grant recipient. (e) Upon the termination of the restrictions imposed under this Section 6, the Corporation shall return to the grantee (or his legal representative, beneficiary, or heir) certificates, without a legend, for the shares of Common Stock deposited with it pursuant to subsection (c) hereof. 6.2 The Corporation or a Subsidiary, as the case may be, shall have the right to deduct from amounts payable to the grantee, or to require the grantee to pay, any taxes required by law to be withheld with respect to such Restricted Stock. In the Committee's discretion such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the grant creating the tax obligation, valued at their fair market value on the date of delivery. 6.3 No rights or interests of a grant recipient under the Plan may be assigned, encumbered, or transferred except by will or the laws of descent and distribution. 7. CHANGE IN CONTROL. In order to preserve the rights of a grant recipient in the event of a merger or consolidation of the Corporation with another corporation or of a Change in Control of the Corporation, the Committee may in its discretion include in the grant Agreement or in any amendment thereto (subject to the proviso of Section 6.1(d)) provisions: (i) permitting restrictions on Restricted Stock to lapse, in whole or in part, immediately prior to such event, (ii) adjusting the terms of a grant in a manner determined by the Committee to reflect the Change in Control, (iii) causing a grant to be assumed, or new rights substituted therefor, by another entity, and/or (iv) making such other provision as the Committee may consider equitable and in the best interests of the Corporation. After a Change in Control of the Corporation, the Corporation shall pay all reasonable legal fees, costs, and other expenses incurred by any grantee in enforcing rights under this Plan or the grant Agreement. The term "Change in Control" shall have such meaning with respect to any grant of Restricted Stock as the Committee determines and is specified in the Agreement for such grant. 3 4 8. SECURITIES AND OTHER LAWS. In any case where in the opinion of the Committee, the issue and/or delivery of shares of Common Stock under the Plan would violate requirements of Federal or state securities or other laws, or the requirements of any exchange on which the securities are listed, the Corporation shall be entitled to postpone such issue and/or delivery until such requirements have been met. The Committee may require representations and agreements from any grant recipient in order to ensure compliance with Federal or state securities or other laws. 9. ADJUSTMENT IN NUMBER OF SHARES. In the event that there are any changes in the outstanding Common Stock of the Corporation by reason of stock dividends, stock splits, or recapitalizations (whether by way of mergers, consolidations, combinations, or exchanges of shares or the like) the aggregate number and kind of shares available under the Plan shall be appropriately adjusted by the Committee, if necessary, to reflect equitably such change or changes. Any shares of stock or other securities received by a grant recipient with respect to shares still subject to the restrictions imposed by Section 6 will be subject to the same restrictions and shall be deposited with the Corporation in accordance with Section 6. 10. NOTICE OF ELECTION UNDER SECTION 83(B). Each grant recipient making an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations and rulings promulgated thereunder, will provide a copy thereof to the Corporation within thirty days of the filing of such election with the Internal Revenue Service and the Agreement referred to in Section 6 shall so provide. 11. TERM OF PLAN. Unless sooner terminated the Plan shall terminate ten years from the Effective Date and no Restricted Stock shall be granted thereafter. 12. AMENDMENTS AND TERMINATION. The Plan or any portion hereof may be amended at any time and from time to time or terminated by the Board of Directors, subject to such approval of the stockholders as the Board of Directors shall deem necessary or advisable. No amendment or termination shall adversely affect the terms and conditions of outstanding grants without the written consent of the grantee, except that the Plan and any Agreement may be amended without the consent of any grant recipient in order to conform to restrictions or limitations imposed by securities or tax laws or regulations, or any other laws or regulations deemed by the Corporation to be binding upon it. 4 5 13. MISCELLANEOUS. 13.1 Transfer of Employment. The transfer of employment of an employee from the Corporation to a Subsidiary or from a Subsidiary to the Corporation or to another Subsidiary shall not constitute a termination of employment for the purposes of the Plan. 13.2 Definition of Subsidiary. For all purposes of the Plan, the term "Subsidiary" means any corporation of which the Corporation owns or controls more than 50% of the outstanding shares of capital stock entitled ordinarily (rather than in some contingency) to vote for the election of directors (counting shares owned or controlled by a Subsidiary within this definition as being owned or controlled by the Corporation). 5 EX-11 4 COMPUTATION OF EARNINGS 1 EXHIBIT 11 BAYBANKS, INC. COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1993 1992 ----------- ----------- Primary: Weighted average shares........................................... 18,671,222 16,425,440 Common stock equivalents (CSE): Stock options................................................... 282,175 150,328 ----------- ----------- Primary weighted average shares................................... 18,953,397 16,575,768 ----------- ----------- ----------- ----------- Net income........................................................ $ 67,651 $ 59,237 ----------- ----------- ----------- ----------- Earnings per share................................................ $ 3.57 $ 3.57 ----------- ----------- ----------- ----------- Fully diluted: Weighted average shares........................................... 18,671,222 16,425,440 Common stock equivalents (CSE): Stock options................................................... 282,175 150,328 Additional stock options.......................................... 47,283 89,183 5% convertible debentures......................................... 3,709(1) 102,182(2) ----------- ----------- Fully diluted weighted average shares............................. 19,004,389 16,767,133 ----------- ----------- ----------- ----------- Net income........................................................ $ 67,651 $ 59,237 5% debentures interest expense -- net of tax...................... 2 41 ----------- ----------- Net income -- fully diluted basis................................. $ 67,653 $ 59,278 ----------- ----------- ----------- ----------- Fully diluted earnings per share.................................. $ 3.56 $ 3.54 ----------- ----------- ----------- -----------
- --------------- (1) $51 convertible at $13.75 per share. (2) $1,405 convertible at $13.75 per share. 19 EX-13 5 PORTIONS OF ANNUAL REPORT 1 PORTIONS OF 1993 ANNUAL REPORT EXHIBIT 13 FINANCIAL REVIEW PERFORMANCE OVERVIEW BayBanks' net income was $67.7 million in 1993, or $3.57 per share, up significantly from 1992 after excluding the effect of securities gains. Net income for 1992, which included after-tax securities gains of $44.4 million, or $2.67 per share, was $59.2 million, also $3.57 per share. Securities gains for 1993 were only $234 thousand (after-tax), or $.01 per share. Earnings per share in 1993 also reflected a 14% increase in average shares outstanding, primarily as a result of BayBanks' 2.3 million common share offering in the fourth quarter of 1992. Net income in 1991 was $9.7 million, or $.60 per share, including after-tax securities gains of $23.7 million, or $1.48 per share. The key factors that affected net income were as follows: o Operating income (as defined below) was $181.0 million in 1993, compared with $175.2 million in 1992 and $171.2 million in 1991. o There were virtually no securities gains in 1993, compared with $76.9 million in 1992 and $41.0 million in 1991. o Credit provisions (the provision for loan losses and net additions to the other real estate owned reserve) declined by $91.0 million, from $152.3 million in 1992 to $61.3 million in 1993. Credit provisions were $192.9 million in 1991. o The lower credit provisions were due to the significant improvement in credit quality over the past three years. Nonperforming assets declined 41% to $224 million at year-end 1993 from $376 million at year-end 1992 and $469 million at year-end 1991. Most importantly, BayBanks' quarterly dividend was reinstated in the first quarter of 1993 and has been increased twice since that time. For the first two quarters of 1993, a dividend was paid at a rate of $.20 per share, increasing to $.25 per share during the third and fourth quarters of the year. The full-year dividend was $.90 per share. On January 27, 1994, the Board of Directors raised the quarterly dividend to $.35 per share payable March 1, 1994. EARNINGS ANALYSIS Operating Income Operating income includes net interest income (on a tax equivalent basis) and noninterest income and is after operating expenses, but excludes net securities gains, the provision for loan losses, and net additions to the other real estate owned (OREO) reserve and is before income taxes. Operating income (TABLE A) was $181.0 million in 1993, up from $175.2 million in 1992 and $171.2 million in 1991. In 1993, higher noninterest income and net interest
TABLE A - ---------------------------------------------------------------------------------------------------------------------------- Summary of Operations Tax equivalent basis (Dollars in thousands except per share amounts) INCREASE (DECREASE) INCREASE (DECREASE) 1993 FROM 1992 1992 FROM 1991 1991 --------- ------------------ --------- -------------------- --------- Income on earning assets . . . . . . $ 595,829 $ (64,845) (10)% $ 660,674 $(157,138) (19)% $ 817,812 Interest on deposits and borrowings . 166,648 (73,361) (31) 240,009 (177,953) (43) 417,962 --------- --------- --------- --------- --------- Net interest income . . . . . . . . . 429,181 8,516 2 420,665 20,815 5 399,850 Noninterest income . . . . . . . . . 198,524 14,643 8 183,881 14,128 8 169,753 --------- --------- --------- --------- --------- Total income from operations . . . . 627,705 23,159 4 604,546 34,943 6 569,603 Operating expenses . . . . . . . . . 446,705 17,389 4 429,316 30,957 8 398,359 --------- --------- --------- --------- --------- OPERATING INCOME BEFORE NET SECURITIES GAINS AND PROVISION FOR LOAN LOSSES AND OREO RESERVE . . . 181,000 5,770 3 175,230 3,986 2 171,244 --------- --------- --------- --------- --------- Net securities gains . . . . . . . . 411 (76,518) (99) 76,929 35,966 88 40,963 --------- --------- --------- --------- --------- Provision for loan losses . . . . . . 36,500 (70,336) (66) 106,836 (58,564) (35) 165,400 Provision for OREO reserve, net . . . 24,830 (20,652) (45) 45,482 18,032 66 27,450 --------- --------- --------- --------- --------- Total credit provisions . . . . . . . 61,330 (90,988) (60) 152,318 (40,532) (21) 192,850 --------- --------- --------- --------- --------- Pre-tax income . . . . . . . . . . . 120,081 20,240 99,841 80,484 19,357 Less tax equivalent adjustment included above . . . . . . . . . . 5,358 1,205 4,153 1,199 2,954 --------- --------- --------- --------- --------- Income before taxes . . . . . . . . . 114,723 19,035 95,688 79,285 16,403 Income taxes . . . . . . . . . . . . 47,072 10,621 36,451 29,703 6,748 --------- --------- --------- --------- --------- NET INCOME . . . . . . . . . . . . . $ 67,651 $ 8,414 $ 59,237 $ 49,582 $ 9,655 ========= ========= ========= ========= ========= EARNINGS PER SHARE . . . . . . . . . $ 3.57 $ -- $ 3.57 $ 2.97 $ 0.60 ========= ========= ========= ========= =========
4 2 income were partially offset by expenses associated with the introduction of BayFunds in the first quarter of the year, increased personnel required to process higher levels of consumer lending (primarily automobile finance and residential mortgage volumes), and additional sales staff in the Customer Sales and Service Center due to increasing sales activity. Net Interest Income (tax equivalent basis) Net interest income, the primary contributor to operating income, is affected by many factors, including the volume, interest rates, and relative mix of both earning assets and interest-bearing and noninterest-bearing sources of funds. These factors also affect the net interest margin, as does the size of the balance sheet. Net interest income increased in 1993 as consumer credit balances grew, deposit rates declined, and the mix of deposits shifted to lower-cost categories. Net interest income increased to $429.2 million in 1993 from $420.7 million in 1992 and $399.9 million in 1991 (TABLE B). The increase in net interest income in 1993 from 1992 was primarily attributed to lower deposit costs, increased instalment lending activities, principally automobile lending, and increased average securities portfolios balances and was partially offset by lower overall earning asset yields. During the first half of 1993, net interest income was below prior year levels due to a 1992 fourth quarter securities portfolio repositioning. That action, which resulted in a $41.1 million gain from the sale of $1.1 billion in securities, nevertheless led to the reinvestment of sale proceeds in securities with shorter maturities and lower yields, thus lowering interest income on securities beginning in the fourth quarter of 1992. In the second half of 1993, [FIGURE 1] The lower income from securities was offset by higher interest income from growth in consumer loans, declining deposit costs, and a shift to lower-cost deposit categories. BayBanks' funding costs have continued to decline as deposit rates have fallen and customers' liquidity preferences have resulted in a shift to lower-rate NOW and savings accounts. From 1992 to 1993, the cost of interest-bearing liabilities (as a percentage of average earning assets) declined 91 basis points, while earning assets yields declined 90 basis points due to a lower overall rate structure and the impact of the repositioning of BayBanks' securities portfolios in the fourth quarter of 1992. Thus, the 1993 net interest margin of 5.00%, which compares favorably to industry margins (FIGURE 1), ended the year one basis point above the net TABLE B - --------------------------------------------------------------------------------------------------------------------------------- Analysis of Net Interest Income (In thousands on a tax equivalent basis)
NET INTEREST INTEREST INTEREST INCOME EXPENSE INCOME ---------- ---------- ---------- 1991 AS REPORTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 817,812 $ 417,962 $ 399,850 1992 increase (decrease) due to: Changes in balances . . . . . . . . . . . . . . . . . . . . . . . . . . (46,650) (35,281) (11,369) Lower interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . (110,488) (142,672) 32,184 ---------- ---------- ---------- (157,138) (177,953) 20,815 ---------- ---------- ---------- 1992 AS REPORTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,674 240,009 420,665 1993 increase (decrease) due to: Changes in balances . . . . . . . . . . . . . . . . . . . . . . . . . . (2,460) (8,781) 6,321 Lower interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . (62,385) (64,580) 2,195 ---------- ---------- ---------- (64,845) (73,361) 8,516 ---------- ---------- ---------- 1993 AS REPORTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 595,829 $ 166,648 $ 429,181 ========== ========== ==========
5 3 interest margin for 1992; the margin was 5.08% in the fourth quarter of 1993, compared with 4.85% in the same quarter in 1992. The net interest margin was 4.57% in 1991. Fees, Service Charges, and Other Noninterest Income Noninterest income consists primarily of service charges on deposit accounts and fees from credit and non-credit services and is well diversified among consumer, corporate and small business, and investment services activities. Noninterest income (TABLE C) increased 8% to $198.5 million in 1993 from $183.9 million in 1992; noninterest income was $169.8 million in 1991. Service charges and fees on deposit accounts, contributing over one-half of noninterest income, increased 9% to $105.2 million in 1993 from $96.7 million in 1992. This increase was attributable to higher sales levels due in large part to the growing contribution by BayBanks' state-of-the-art Customer Sales and Service Center and selective repricing of consumer and corporate payment and cash management products. Credit card fees were $18.9 million in 1993, compared with $19.4 million in 1992. This slight decline in fees was due to slightly lower transaction volumes and promotions that included selected annual fee waivers. Trust fees were $14.6 million in 1993 and $14.8 million in 1992. The decline in trust fees in 1993 was due to the decrease in income from the management of corporate employee benefit plan assets, which are now invested in BayFunds. Investment management and brokerage fees increased 56% to $6.6 million in 1993 from $4.2 million in 1992. Increases were attributed to stronger sales through the Company's discount brokerage and increased sales of BayFunds, for which affiliates of the Company act as advisors for a fee based on balances in the funds. Processing fees increased due to higher income from non-BayBank cardholders using BayBank ATMs and BayBank cardholders using network ATMs. Mortgage banking fees were $12.0 million in 1993, compared with $10.2 million in 1992, due to continued strong refinancing volumes. International fees reflected a slightly lower volume of letter of credit fees. BayBanks periodically sells student loans when these loans reach a stage when processing can be more efficiently handled by agencies set up for that purpose. During 1993, student loan sales gains were $1.8 million, compared with $1.0 million in 1992 and $1.2 million in 1991. Operating Expenses The operating expense analysis, presented in TABLE D (page 7), separates expense categories of a more recurring nature from OREO and legal expenses related to the workout of problem assets. Operating expenses, excluding OREO and legal expenses, were $429.2 million in 1993, compared with $410.9 million in 1992 and $381.1 million in 1991. The more significant changes in operating expenses are discussed below. Salaries and benefits increased in 1993 to accommodate expanded business opportunities. Furthermore, prior to the first quarter launch of BayFunds, a qualified professional sales staff was recruited and trained. Mortgage staff was added to handle the strong mortgage refinancing volume in 1993, and additional personnel were necessary to handle higher consumer lending activities, primarily automobile lending. Additional professional staff was also required to accommodate higher sales volumes through BayBanks' Customer Sales and Service Center. In addition, salaries and benefits included normal salary increases and higher employee benefit costs.
TABLE C - ---------------------------------------------------------------------------------------------------------------------------------- Noninterest Income (Dollars in thousands) % INCREASE (DECREASE) ----------------------------- 1993 1992 1991 1993 VS. 1992 1992 VS. 1991 ---------- ----------- ----------- ------------- ------------- Service charges and fees on deposit accounts . . . $ 105,211 $ 96,671 $ 88,533 9% 9% Credit card fees . . . . . . . . . . . . . . . . . 18,892 19,398 19,354 (3) -- Trust fees . . . . . . . . . . . . . . . . . . . . 14,559 14,810 14,891 (2) (1) Processing fees . . . . . . . . . . . . . . . . . . 13,788 12,624 12,220 9 3 Mortgage banking fees . . . . . . . . . . . . . . . 11,972 10,207 6,035 17 69 Investment management and brokerage fees . . . . . 6,561 4,197 1,949 56 115 International fees . . . . . . . . . . . . . . . . 5,845 6,035 5,890 (3) 2 All other fees . . . . . . . . . . . . . . . . . . 14,676 13,517 12,756 9 6 Student loan sales gains . . . . . . . . . . . . . 1,762 997 1,208 77 (17) Other noninterest income . . . . . . . . . . . . . 5,258 5,425 6,917 (3) (22) ---------- ---------- ---------- Total noninterest income . . . . . . . . . . . . $ 198,524 $ 183,881 $ 169,753 8 8 ========== ========== ==========
6 4 Occupancy and equipment expenses declined due to reduced rent from favorable lease renegotiations and expirations, lower telephone expenses due to prior year realignments, and reduced equipment maintenance expenses. The increase in FDIC insurance expense in 1993 and 1992 was due to an increase in FDIC insurance rates and an increased level of deposits. Marketing and public relations expense increased in 1993 from 1992 due to higher promotional activities associated with the launch of BayFunds and increased advertising of consumer credit products. Service bureau and other data processing expense increased due to increased processing volumes, and professional services reflected a decline in general legal costs in 1993, which had increased in 1992 from 1991 levels. The expense of administering, managing, and disposing of OREO properties was $17.5 million in 1993, down from $18.5 million in 1992, as a result of a reduction in legal expenses and the number of properties owned. Provisions for Loan Losses and the OREO Reserve The provisions for loan losses and the OREO reserve (credit provisions) declined substantially in 1993 from 1992 due to the continued improvement in BayBanks' credit quality. Credit provisions were $61.3 million in 1993, down $91 million, or 60%, from $152.3 million in 1992; credit provisions were $192.9 million in 1991. The decline in the provision for loan losses from $106.8 million in 1992 to $36.5 million in 1993 accounted for the largest portion of the reduction. The OREO provision was $24.8 million in 1993, down from $45.5 million in 1992. The OREO provisions were net of gains from the sale of properties of $7.6 million in 1993 and $54 thousand in 1992. Income Taxes The effective income tax rates for 1993 and 1992 were 41.0% and 38.1%, respectively. BayBanks' current combined federal and state statutory tax rate is approximately 43%. The lower rate in 1992 was affected by a federal alternative minimum tax credit. The 1993 provision included a higher marginal state tax rate for the Company due to proportionately higher Massachusetts bank income in 1993, which is taxed at 12.54%, compared with 9.5% for nonbank income, and also reflected the increase in the federal income tax rate from 34% to 35%. During 1993, the Internal Revenue Service (IRS) completed a review of the Company's tax returns for the years 1986 through 1990 and has proposed certain adjustments, primarily related to the timing of income and expense recognition, that could result in additional taxes and interest payments. Should the IRS prevail, a majority of the proposed adjustments would result in shifting tax deductions from prior years to 1991 and 1992. The Company believes it has strong support for its positions and has filed an appeal of the proposed adjustments. The Company does not believe that future interest or tax payments related to the proposed adjustments, if any, would have a material impact on its results of operations or financial condition. Also during 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as described in Note 2 to the financial statements. Adoption of Statement No. 109 did not have a material effect on the Company's results of operations or financial condition.
TABLE D - ---------------------------------------------------------------------------------------------------------------------------------- Operating Expenses (Dollars in thousands) % INCREASE (DECREASE) --------------------------- 1993 1992 1991 1993 VS. 1992 1992 VS. 1991 ----------- ---------- ---------- ------------- ------------- Salaries and benefits . . . . . . . . . . . . . . . $ 212,954 $ 199,604 $ 184,399 7% 8% Occupancy and equipment . . . . . . . . . . . . . . 87,116 88,950 85,465 (2) 4 FDIC insurance . . . . . . . . . . . . . . . . . . 21,949 19,289 18,329 14 5 Marketing and public relations . . . . . . . . . . 21,341 17,033 13,466 25 26 Service bureau and other data processing . . . . . 16,538 15,602 13,444 6 16 Professional services . . . . . . . . . . . . . . . 13,744 12,482 8,577 10 46 Printing and supplies . . . . . . . . . . . . . . . 12,997 12,557 11,879 4 6 Postage . . . . . . . . . . . . . . . . . . . . . . 8,290 8,201 8,213 1 -- Travel and courier . . . . . . . . . . . . . . . . 7,748 7,649 7,273 1 5 Legal and consulting . . . . . . . . . . . . . . . 6,609 9,763 7,933 (32) 23 Insurance . . . . . . . . . . . . . . . . . . . . . 4,367 5,161 5,306 (15) (3) Other . . . . . . . . . . . . . . . . . . . . . . . 15,584 14,575 16,829 7 (13) ----------- ---------- ---------- Total operating expenses excluding OREO expenses . 429,237 410,866 381,113 4 8 OREO and legal expenses related to workout . . . . 17,468 18,450 17,246 (5) 7 ----------- ---------- ---------- Total operating expenses . . . . . . . . . . . . . $ 446,705 $ 429,316 $ 398,359 4 8 =========== =========== ==========
7 5 [FIGURE 2] [FIGURE 3] BALANCE SHEET REVIEW Trends in Earning Assets Average earning assets increased to $8.6 billion in 1993 from $8.4 billion in 1992. During 1993, the mix of average earning assets reflected the smallest shift from loans to securities since 1989 (FIGURE 2). For 1993, average loans were $5.9 billion, compared with $6.2 billion in 1992 (FIGURE 3). However, average loan balances rose during the year, for a total average increase of $106 million from the first to the fourth quarter of the year, and at year-end 1993, total loans were $6.1 billion, up from $5.9 billion at year-end 1992. Average securities portfolios increased from $2.3 billion in 1992 to $2.7 billion in 1993. Loan Portfolio The Company maintains a diversified loan portfolio, with the consumer portfolios representing 63% of the 1993 year-end portfolio, up from 59% at 1992 year-end. The commercial portfolios, commercial and commercial real estate loans, account for the remaining 37% of the portfolio, compared with 41% in 1992. At December 31, 1993, the consumer portfolios included $2.6 billion in instalment loans and $1.2 billion in residential mortgage loans. The majority of the Company's commercial loans are to New England-based companies, primarily local middle-market companies and small businesses in Massachusetts. Instalment loans were the source of BayBanks' loan portfolio growth during 1993. Instalment lending benefited from increased promotional activities and BayBanks' Customer Sales and Service Center, which operates 24 hours a day, seven days a week, all year. The majority of residential real estate loans are sold to the secondary market. Fixed-rate residential mortgage loans, approximately 75% of total loan originations in 1993, are generally securitized and sold with servicing rights retained. Floating-rate residential real estate mortgage loans and some selected 10- and 15-year fixed-rate loans are held in the residential real estate loan portfolio or may be securitized and transferred to the securities available for sale portfolio. From 1992 to 1993, loan portfolio net business volume increased from $708 million to $1.2 billion (TABLE E, page 9). During 1993, the increase in instalment loan net business volume was $441 million, up substantially from $145 million in 1992, led by gains in indirect automobile lending, where BayBanks has a very strong market position. Student loan activity also increased, from $118 million in 1992 to $135 million in 1993. Home equity lending had a net business volume change of $104 million as the decline in 1992 reversed to a small increase in 1993. The majority of the growth in residential mortgage loan portfolio net business volume was in fixed-rate refinancings sold to the secondary market. Commercial loan volumes fluctuated somewhat during 1993 due to selected overnight money market-priced loans, international trade finance activities, principally with Mexican banks (approximately $85 million at 1993 year-end compared 8 6 with $45 million a year ago), and payments on nonperforming loans. However, the rate of decline in the commercial loan portfolio slowed from $165 million in 1992 to $53 million in 1993 as Massachusetts businesses showed some signs of recovery. Commercial real estate balances continued to reflect payments on nonperforming loans and scheduled amortization that exceeded new loan volume. Securities Portfolios TABLE F presents the securities portfolios, which are comprised of short-term investments, securities available for sale, and investment securities. The total portfolio increased to $3.0 billion at December 31, 1993, from $2.8 billion at year-end 1992 and $2.0 billion at year-end 1991. During the past three years, BayBanks has shortened the
TABLE E - --------------------------------------------------------------------------------------------------------------------------------- Changes in the Loan Portfolio At Year-End -- 1993 vs. 1992 (In thousands) ANALYSIS OF CHANGE IN LOAN CATEGORIES --1993 ---------------------------------------------- 1992 DECEMBER 31 GROSS TRANSFERS NET NET ------------------------- INCREASE CHARGE- TO SALES AND BUSINESS BUSINESS 1993 1992 (DECREASE) OFFS OREO SECURITIZATION VOLUME VOLUME ---------- ------------ ---------- --------- --------- -------------- ---------- ---------- Commercial . . . . . . . . . $1,324,968 $ 1,411,120 $ (86,152) $ (24,231) $ (9,018) $ -- $ (52,903) $ (165,162) Commercial real estate . . . 935,471 1,022,515 (87,044) (15,513) (11,751) -- (59,780) (108,818) Residential mortgage . . . . 1,242,597* 1,247,633* (5,036) (11,203) (18,821) (815,722) 840,710 836,753 Instalment loans Automobile and other. . . . 1,200,596 928,461 272,135 (9,403) -- -- 281,538 77,195 Home equity . . . . . . . 673,409 669,969 3,440 (2,987) (870) -- 7,297 (96,828) Credit card . . . . . . . 325,794 332,351 (6,557) (11,316) -- -- 4,759 38,778 Student loans . . . . . . 276,923 209,539 67,384 (245) -- (67,363) 134,992 117,572 Reserve credit . . . . . . 123,412 116,411 7,001 (5,065) -- -- 12,066 8,552 ---------- ------------ --------- --------- --------- ---------- ---------- ---------- Total instalment loans 2,600,134 2,256,731 343,403 (29,016) (870) (67,363) 440,652 145,269 ---------- ------------ --------- --------- --------- ---------- ---------- ---------- Total loans . . . . . . . . . $6,103,170 $ 5,937,999 $ 165,171 $ (79,963) $ (40,460) $ (883,085) $1,168,679 $ 708,042 ========== ============ ========= ========= ========= ========== ========== ==========
* Includes residential mortgage loans held for sale of $138 million in 1993 and $186 million in 1992.
TABLE F - ----------------------------------------------------------------------------------------------------------------------- Securities Portfolios At December 31 (Dollars in thousands) 1993 1992 1991 ---------- ---------- ---------- Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . $ 803,068 $1,091,985 $ 579,912 ---------- ---------- ---------- Securities available for sale U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322,707 1,433,945 -- U.S. Agency mortgage-backed securities . . . . . . . . . . . . . . . . 30,832 88,932 -- State and local governments . . . . . . . . . . . . . . . . . . . . . 18,964 -- -- Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . 256,500 -- -- ---------- ---------- ---------- 629,003 1,522,877 -- ---------- ---------- ---------- Investment securities U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,203,315 -- 627,050 Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . 204,798 -- 651,381 State and local governments . . . . . . . . . . . . . . . . . . . . . 128,997 37,869 25,547 Industrial revenue bonds . . . . . . . . . . . . . . . . . . . . . . . 59,958 75,938 91,345 Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . 1,992 42,685 2,038 ---------- ---------- ---------- 1,599,060 156,492 1,397,361 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,031,131 $2,771,354 $1,977,273 ========== ========== ========== Weighted average maturity of securities available for sale and investment securities in years* . . . . . . . . . . . . . . . . . 1.1 1.5 5.2 Weighted average maturity of total securities in years * . . . . . . . . 0.8 1.0 3.8
* The weighted average maturity calculation excludes amortizing IRBs and reflects estimated prepayments for mortgage-backed securities. 9 7 weighted average maturity of its securities portfolios in conjunction with the portfolio repositioning previously discussed in the Net Interest Income section, thus increasing its liquidity and responsiveness to potential changes in interest rates. The weighted average maturity of the securities available for sale and investment securities declined to 1.1 years at year-end 1993 from 1.5 years at year-end 1992. When short-term investments are included, the weighted average maturity declined to .8 years at year-end 1993. Since the repositioning reduced the average maturity of the securities portfolios, the yields on these portfolios were also reduced. Short-term investments were $803 million at December 31, 1993, compared with $1.1 billion at December 31, 1992. The decline in the balance of short-term investments reflects the reinvestment of certain proceeds from maturing short-term investments into the securities available for sale and investment securities portfolios during 1993. Securities available for sale, consisting primarily of debt securities, are stated at the lower of aggregate cost or market value. Decisions to purchase or sell these securities are part of the Company's asset and liability management process and are based on the assessment of changes in economic and financial market conditions, interest rate environments, the Company's balance sheet structure, interest sensitivity position, liquidity, and capital. Securities available for sale were $629 million at December 31, 1993, compared with $1.5 billion at year-end 1992 as maturities were reinvested in the investment securities portfolio. At December 31, 1993, securities available for sale had gross unrealized gains of $4 million and gross unrealized losses of $5 thousand. The investment securities portfolio, principally debt securities, is stated at amortized cost. This basis for valuation reflects management's intention and ability to hold these securities until maturity. The Company's investment securities portfolio was $1.6 billion at December 31, 1993, compared with $156 million at December 31, 1992. During 1993, investment securities increased due to purchases and the transfer of $495 million in securities available for sale to this category. These securities were transferred at amortized cost since they had an unrealized gain. At December 31, 1993, gross unrealized gains in the investment securities portfolio were $7 million, and gross unrealized losses were $911 thousand. BayBanks' investment securities portfolio includes U.S. Treasury and Agency securities, as well as state and [FIGURE 4] local government securities (principally tax anticipation notes) and industrial revenue bonds. State and local government securities totaled $129 million at December 31, 1993, with the single largest issue being under $7 million. Of this total portfolio, $113 million were securities rated investment grade and $16 million were unrated. All municipal securities are subject to an internal credit review process that assigns a rating to the securities. Industrial revenue bonds, $60 million at December 31, 1993, are also subject to an internal credit review process. While there is no ready market for the Company's holdings of industrial revenue bonds, management has determined that, based on periodic private placement quotes, their amortized cost is a reasonable estimate of market value. Trading account securities, consisting of debt securities, are recorded at market value, which was $15 million at December 31, 1993. Trading account gains were $2.3 million in 1993 and $2.2 million in 1992. Deposits and Other Sources of Funds The Company's extensive banking system includes 201 full-service offices and 356 automated banking facilities, with a total of 1,009 ATMs that generate significant core deposits, which accounted for over 99% of total average deposits in 1993 and 1992. Contributing to this strong core deposit position is BayBanks' state-of-the-art Customer Sales and Service Center. Core deposits include transaction accounts (demand, NOW, and savings accounts), money market deposit accounts (MMDA), and consumer time certificates (FIGURE 4). 10 8 Average core deposits were $8.6 billion in 1993. Within the core deposit categories, there has been a shift in mix to lower-cost transaction accounts, with average balances increasing $464 million in 1993 to $4.6 billion, which had a positive effect on the Company's net interest margin. Higher-cost MMDA accounts and consumer certificates of deposit declined by $431 million in 1993. Average MMDAs declined $169 million to $2.9 billion in 1993 from 1992, and average consumer time deposits declined $262 million to $1.1 billion. In addition, average certificates of deposit in excess of $100 thousand (CDs) remain at relatively low levels, $33 million in 1993, compared with $58 million in 1992. In addition, BayFunds, the Company's family of six mutual funds, extends BayBanks' product lines and provides additional balance sheet flexibility and fee income. At December 31, 1993, BayFunds had increased by $390 million to $1.1 billion (from initial fund balances that were converted to BayFunds). The conversion included three employee benefit plan funds, and a corporate cash management product that includes a corporate sweep feature, that with an existing money market fund aggregated $730 million at the date of transfer. Cash management balances fluctuated during 1993 according to the liquidity preferences of BayBanks' business customers, while consumer accounts have grown steadily. Purchased funds increased to $508 million at December 31, 1993, from $140 million a year ago as the Company increased its short-term investments late in the fourth quarter. The Company may continue to maintain this slightly higher shorter-term investment position funded by purchased funds as a way of taking advantage of its strong capital position. While net interest income should increase, the net interest margin may decline somewhat, reflecting lower spreads on these additional investments. Interest Rate Risk Management and Liquidity BayBanks' Capital Markets Committee closely monitors and manages the overall on- and off-balance sheet interest sensitivity position, short-term investments and the securities portfolios, funding, and liquidity. Interest sensitivity, as measured by the Company's gap position, is affected by the level and direction of interest rates and current liquidity preferences of its customers. These factors, as well as projected balance sheet growth, current and potential pricing actions, competitive influences, national monetary and fiscal policy, the national and regional economic environment, and current and expected behavior of financial and capital markets, are considered in the asset and liability management decision process. The Company's interest sensitivity gap position in TABLE G is first presented based on contractual maturities and repricing opportunities. In a period of rising or falling interest rates this basis of presentation does not reflect lags that may occur in the repricing of certain loans and deposits. For example, certain interest-bearing core deposit categories may lag changes in market interest rates, although the Company contractually could change the rates at any time. A management adjustment provides for these expected repricing lags. The management adjustment also recognizes that interest rate changes in these core deposit categories are not as sensitive to changes in market interest rates. In addition to the gap analysis presented in the table, the Company also uses a simulation model under varying interest rate scenarios, including the effect of rapid changes (both increases and decreases up to 200 basis points) in interest rates on its net interest income and net interest margin. The Company's policy is to minimize volatility in its net interest income and net interest margin. TABLE G - ------------------------------------------------------------------------------------------------------------------------ Interest Rate Sensitivity Position At December 31, 1993 (In millions)
0-30 31-90 91-180 TOTAL WITHIN 181-365 TOTAL WITHIN DAYS DAYS DAYS 180 DAYS DAYS ONE YEAR -------- -------- ------- -------- ------- -------- Total assets . . . . . . . . . . . . . . . . . $ 3,697 $ 604 $ 544 $ 4,845 $ 1,147 $ 5,992 Total liabilities . . . . . . . . . . . . . . . 6,490 210 263 6,963 201 7,164 -------- -------- ------- -------- ------- -------- Net contractual gap position . . . . . . . . . (2,793) 394 281 (2,118) 946 (1,172) Net interest rate swaps . . . . . . . . . . . . -- 8 -- 8 -- 8 -------- -------- ------- -------- ------- -------- Net gap position including interest rate swaps at December 31, 1993 . . . . . . $ (2,793) $ 402 $ 281 $ (2,110) $ 946 $ (1,164) Management adjustment . . . . . . . . . . . . . 5,418 (2,727) (465) 2,226 (930) 1,296 -------- -------- ------- -------- ------- -------- Management-adjusted gap at December 31, 1993 . . . . . . . . . . . . . $ 2,625 $ (2,325) $ (184) $ 116 $ 16 $ 132 ======== ======== ======= ======== ======= ======== Management-adjusted gap at December 31, 1992 . . . . . . . . . . . . . $ 2,517 $ (2,643) $ (178) $ (304) $ (54) $ (358) ======== ======== ======= ======== ======= ========
11 9 [FIGURE 5] At December 31, 1993, the Company's adjusted gap for the total within-180-day period decreased from a negative gap of $304 million at December 31, 1992, to a positive gap of $116 million at December 31, 1993, primarily as the result of the continued shortening of the securities portfolio during 1992. The total within-one-year gap reflected similar changes, moving from negative $358 million to a positive $132 million. The Company believes its overall management-adjusted gap is essentially neutral, and therefore the effect of a change in market interest rates on net interest income should not be significant. Liquidity, for commercial banking activities, is the ability to respond to maturing obligations, deposit withdrawals, and loan demand. The liquidity positions of the Company's bank subsidiaries are closely monitored by the Company's Capital Markets Committee. BayBanks' retail network provides a stable base of in-market core deposits and limits the need to raise funds from the national market. The Company's net liquidity position (short-term investments, securities available for sale, and investment securities, less pledged securities, large CDs, and federal funds purchased) continues to be strong and was $2.3 billion at December 31, 1993 and 1992 (FIGURE 5). The Company has additional liquidity flexibility due to the relatively short average maturity of less than one year of its combined short-term investments and securities portfolios. This substantial liquidity position enabled BayBanks to increase its investment securities portfolio during 1993 as described above. An analysis of the changes in cash flows provides additional information on liquidity. The statement of cash flows presented elsewhere in this report includes operating, investing, and financing categories. Operating activities included $67.7 million in net income for 1993, before adjustments for noncash items. Investing activities are primarily comprised of both proceeds from and purchases of securities, short-term investment activity, and net loan originations. Financing activities present the net change in the Company's various deposit accounts, short-term borrowings, and dividends paid. Cash and cash equivalents were $734 million on January 1, 1993. During 1993, net cash provided by operating activities was $284 million, net cash used by investing activities totaled $529 million, and net cash provided by financing activities was $144 million. Cash and cash equivalents were $633 million at December 31, 1993. The parent company's primary sources of liquidity are dividend and interest income received from its subsidiaries. The most significant uses of the parent company's resources are capital contributions to subsidiaries when appropriate and dividends paid to stockholders. In managing liquidity, regulatory limitations on the extent to which bank subsidiaries can pay dividends or supply funds to the parent company are taken into account, as discussed in Note 1 to the financial statements. During 1993, the parent company provided $22 million in capital to its subsidiaries. During 1993, the parent company received a total of $17 million in dividends from its subsidiaries, of which $10 million was from a banking subsidiary and $7 million was from a nonbank subsidiary, and paid $17 million in dividends to its stockholders. At December 31, 1993, the parent company had approximately $69 million in cash, short-term investments, and other securities. The parent company does not sell commercial paper and does not have any revolving credit lines or short-term debt outstanding. CREDIT QUALITY REVIEW Overview The Company continually monitors its loan portfolios. Employing a standard system for grading loans, individual account officers are responsible for assigning their loans a grade and, if necessary, a specific loan loss reserve. An independent Loan Review Department reviews loan grades and specific reserves. Any loan or portion of a loan determined to be uncollectible is charged off. On a quarterly basis, senior management reviews the loan portfolio, with particular emphasis on higher-risk loans, 12 10 to assess the quality and loss potential inherent in the portfolio, considering the Company's market and economic conditions in general. Also considered in this review are historic loan loss experience, delinquency trends, and other factors. The size of the allowance for loan losses and the related provision for loan losses reflect this analysis. Nonperforming assets (which exclude restructured, accruing loans and accruing loans 90 days or more past due) include nonperforming loans and OREO and were $224 million at December 31, 1993, a 41% decrease from $376 million at December 31, 1992. Nonperforming assets continued the downward trend that began in 1991 (FIGURE 6). While the Company expects to experience continued improvement in nonperforming assets, the pace of that improvement will depend on many factors, including the national and regional economy and local real estate market conditions. During 1993, the decline in nonperforming assets (TABLE H) was attributed to continued successful workout activities that included an increase in property sales, payments on nonperforming loans, and loans that qualified for return to accrual status. These favorable resolutions climbed to $181 million in 1993 from $138 million in 1992, while at the same time there has been a reduction in net [FIGURE 6] new nonperforming assets, which were down from $181 million in 1992 to $106 million in 1993. The combination of these two favorable trends resulted in a net outflow of nonperforming assets of $75 million in 1993, compared with a net inflow of $43 million in 1992.
TABLE H - ----------------------------------------------------------------------------------------------------------------------- Changes in Asset Quality (In thousands) SIX MONTHS ENDED SIX MONTHS ENDED ---------------------- ----------------------- 1993 12/31/93 6/30/93 1992 12/31/92 6/30/92 ---------- ---------- --------- ---------- ---------- ---------- Nonperforming assets* . . . . . . . . . . $ 223,680 $ 223,680 $ 308,374 $ 376,166 $ 376,166 $ 426,758 ========== ========== ========= ========== ========== ========== Nonperforming asset activity: Additions . . . . . . . . . . . . . . $ 106,205 $ 41,786 $ 64,419 $ 181,253 $ 66,568 $ 114,685 ---------- ---------- --------- ---------- ---------- ---------- Payments . . . . . . . . . . . . . . . (66,934) (25,347) (41,587) (39,879) (25,201) (14,678) Return to accrual . . . . . . . . . . (24,004) (17,566) (6,438) (19,992) (7,246) (12,746) OREO sales . . . . . . . . . . . . . . (90,066) (48,165) (41,901) (78,589) (39,836) (38,753) ---------- ---------- --------- ---------- ---------- ---------- Total improvements . . . . . . . . . . (181,004) (91,078) (89,926) (138,460) (72,283) (66,177) ---------- ---------- --------- ---------- ---------- ---------- Net (outflow) inflow . . . . . . . . . (74,799) (49,292) (25,507) 42,793 (5,715) 48,508 ---------- ---------- --------- ---------- ---------- ---------- Charge-offs . . . . . . . . . . . . . . . (55,744) (28,101) (27,643) (127,320) (39,111) (88,209) Change in OREO reserve . . . . . . . . . (21,943) (7,301) (14,642) (7,833) (5,766) (2,067) ---------- ---------- --------- ---------- ---------- ---------- Total decrease in nonperforming assets . $ (152,486) $ (84,694) $ (67,792) $ (92,360) $ (50,592) $ (41,768) ========== ========== ========= ========== ========== ==========
* Nonperforming assets include nonperforming loans and OREO and exclude restructured, accruing loans and accruing loans 90 days or more past due.
TABLE I - ------------------------------------------------------------------------------------------------------------------------ Nonperforming Loans At December 31 (Dollars in thousands) 1993 1992 1991 ---------------------- ----------------------- ----------------------- Commercial . . . . . . . . . . . . . . . $ 47,751 43% $ 82,110 46% $ 109,710 49% Commercial real estate . . . . . . . . . 49,014 45 79,144 44 98,214 44 Residential mortgage . . . . . . . . . . 11,473 10 14,889 8 10,254 5 Instalment . . . . . . . . . . . . . . . 1,763 2 4,437 2 4,547 2 ---------- --- ---------- --- ---------- --- Total nonperforming loans . . . . . . $ 110,001 100% $ 180,580 100% $ 222,725 100% ========== === ========== === ========== ===
13 11 Nonperforming Loans Nonperforming loans (TABLE I, page 13) declined 39% to $110 million at December 31, 1993, from $181 million at December 31, 1992; nonperforming commercial loans decreased 42% to $48 million while nonperforming commercial real estate loans declined 38% to $49 million during this period. Trends in nonperforming consumer portfolios (residential mortgage and instalment loans) were also positive, as they declined 32% to $13 million during the year. Other Real Estate Owned (OREO) OREO consists of foreclosed properties and in-substance foreclosures. Foreclosed properties are being prepared for sale or are currently listed for sale. The Company is also involved in managing in-substance foreclosures, taking operating control to stabilize values while the properties are being prepared for sale, or working closely with borrowers to obtain new equity. OREO (net of a valuation reserve) declined by $82 million, or 42%, from $196 million at December 31, 1992, to $114 million at December 31, 1993, primarily due to property sales. OREO declined in all major property types. The five largest properties ranged from $5 million down to $3 million, with the majority of OREO comprised of smaller dollar properties. Restructured, Accruing Loans The Company restructures credits with troubled borrowers if such arrangements are likely to minimize losses the Company may incur on a particular credit. Loans that have been restructured remain on nonaccrual status until the borrower has demonstrated a period of performance under the new contractual terms. The restructured, accruing category is reported as a separate component of the Company's credit quality information, and income on restructured loans is recognized in interest income based upon the restructured terms. Restructured, accruing loans were $18 million at year-end 1993, compared with $12 million at year-end 1992. Accruing Loans 90 Days or More Past Due Accruing loans 90 days or more past due (TABLE J) were $52 million at December 31, 1993, compared with $92 million at December 31, 1992. Of the $52 million in accruing loans past due 90 days or more at December 31, 1993, $21 million were residential mortgages and $22 million were instalment loans; these consumer portfolios together represented 83% of the total. Of the $21 million in residential mortgages, $17 million were in owner-occupied properties. Residential mortgages and instalment loans by their nature include a large number of smaller loans. Commercial and commercial real estate accruing loans 90 days or more past due at December 31, 1993, declined significantly from December 31, 1992, from $36 million to $9 million. Allowance for Loan Losses The allowance for loan losses is increased by the provision for loan losses and is reduced by net loans charged off. Net loans charged off were $58 million in 1993, compared with $127 million in 1992. Most of the reduction in charge-offs was in commercial and commercial real estate loans. The provision for loan losses was $36.5 million in 1993, compared with $106.8 million in 1992. Since older problem assets are being resolved and the rate of emerging problem assets continued to decline, the allowance for loan losses was not replenished to the full extent of net charge-offs. The allowance for loan losses was $171 million at December 31, 1993, and $193 million at December 31, 1992. While the overall allowance declined, its coverage of nonperforming loans increased to 156% at December 31, 1993, from 107% at December 31, 1992, and 95% at December 31, 1991.
TABLE J - ----------------------------------------------------------------------------------------------------------------------- Accruing Loans 90 Days or More Past Due At December 31 (Dollars in thousands) 1993 1992 1991 -------------------- ------------------- -------------------- Commercial . . . . . . . . . . . . . . . $ 3,558 7% $ 11,480 12% $ 20,237 17% Commercial real estate . . . . . . . . . 5,093 10 24,824 27 14,895 13 Residential mortgage . . . . . . . . . . 20,698 40 28,914 32 39,963 34 Instalment . . . . . . . . . . . . . . . 22,400 43 26,677 29 41,719 36 --------- --- --------- --- ---------- --- Total . . . . . . . . . . . . . . . . $ 51,749 100% $ 91,895 100% $ 116,814 100% ========= === ========= === ========== ===
14 12
TABLE K - ------------------------------------------------------------------------------------------------------------------------- Allocation of the Allowance for Loan Losses At December 31, 1993 (Dollars in thousands) SPECIFIC LOAN CATEGORY ALLOCATIONS UNALLOCATED TOTAL ------------ ----------- ----------- Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,012 $ 31,286 $ 47,298 Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . 13,162 53,293 66,455 ------------ ---------- ----------- Total corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,174 84,579 113,753 Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . -- 21,621 21,621 Instalment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 36,122 36,122 ------------ ---------- ----------- Total allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,174 $ 142,322 $ 171,496 ============ ========== =========== Percentage of total allowance . . . . . . . . . . . . . . . . . . . . 17% 83% 100% ============ ========== ===========
The allowance for loan losses consists of both allocated and unallocated portions. The allocated portion represents amounts within the total allowance assigned to specifically identified problem loans. The unallocated portion is the amount set aside to cover the risk of loss that is not specifically identified as to any individual loan, but that is inherent in any loan portfolio. The unallocated allowance is calculated by migrating each loan category by that category's recent loan loss experience. The process involves analysis of loan grade loss histories and trends for each type of loan. Economic factors and trends are also considered when determining the total unallocated portion of the allowance. Statistical modeling is the primary methodology for determining the amount of the allowance apportioned to the consumer portfolios (residential and instalment loans). However, it is considered unallocated in nature. TABLE K presents the allocation of the allowance for loan losses at December 31, 1993. CAPITAL AND DIVIDENDS BayBanks' consolidated risk-based capital ratios were 12.40% for total capital and 10.68% for core capital at December 31, 1993, compared with 12.30% and 10.37% at December 31, 1992 (FIGURE 7). The leverage ratio was 7.26% at December 31, 1993, compared with 6.79% at December 31, 1992. These ratios exceeded regulatory capital guidelines. During 1992, the Company completed a public offering of 2.3 million shares of common stock that raised $79 million in capital. The Company contributed $22 million in capital to its subsidiaries during 1993 and $8 million in 1992. The remaining funds were held by the parent company in cash and securities portfolios at December 31, 1993. The parent company from time to time may contribute additional capital to its subsidiaries. The Company reinstated its quarterly cash dividend in the first quarter of 1993 at an initial rate of $.20 per share; an equal amount was paid in the second quarter. In the third quarter of 1993, the Company increased its quarterly cash dividend to $.25 per share, which dividend was also paid in the fourth quarter. Total dividends declared for 1993 were $.90. On January 27, 1994, the Board of Directors raised the quarterly dividend amount when it declared a dividend of $.35 per [FIGURE 7] 15 13 [FIGURE 8] share payable on March 1, 1994. BayBanks' stock performance for the last three years is presented in FIGURE 8. The closing price on December 31, 1993, was $50.75. IMPENDING ACCOUNTING CHANGES In 1992, the Financial Accounting Standards Board (FASB) issued Statement No. 112, "Employers' Accounting for Postemployment Benefits." Statement No. 112 is effective for fiscal years beginning after December 15, 1993. In management's opinion, the adoption of Statement No. 112, as further described in Note 11 to the financial statements, will not have a material effect on the Company's results of operations or financial condition. In May 1993, the FASB issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan." This statement is effective for fiscal years beginning after December 15, 1994. Adoption of Statement No. 114 will require changes in the disclosure of nonperforming assets. Loans currently being reported as nonperforming and in-substance foreclosures will be reported as impaired loans in a note to the financial statements. Restructured loans, reported as troubled debt restructuring prior to the adoption of Statement No. 114, will not be regarded as impaired loans when the statement is adopted if they are performing under the restructured terms. Troubled debt restructurings entered into after the adoption of Statement No. 114 will be accounted for as impaired loans. The amount of impairment will be determined by the difference between the present value of the expected cash flows related to the loan using the contract rate and its recorded value, or in the case of collateralized loans, the difference between the appraised value of the collateral and the recorded amount of the loan. Any additional impairment will be recorded as an adjustment to the existing allowance for loan losses account. The adoption of Statement No. 114 is not expected to have a material effect on the Company's results of operations or financial condition. In May of 1993, the FASB issued Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement is effective for fiscal years beginning after December 15, 1993. The adoption of Statement No. 115 requires securities available for sale to be recorded at fair value. Changes in the fair value of securities available for sale will be recorded in a valuation account in the stockholders' equity section of the balance sheet, net of tax. The adoption of Statement No. 115 is expected to have an effect on the Company's financial condition, as changes in the fair value of securities available for sale will occur and will be reflected in stockholders' equity. If Statement No. 115 had been adopted as of December 31, 1993, the estimated after-tax effect on the Company's stockholders' equity for the unrealized gain on the securities available for sale portfolio would have been to increase the stockholders' equity account by approximately $2.5 million. 16 14
FINANCIAL STATEMENTS - --------------------------------------------------------- Auditors' Report . . . . . . . . . . . . . . . . . . 17 Consolidated Balance Sheet . . . . . . . . . . . . . 18 Consolidated Statement of Income . . . . . . . . . . 19 Consolidated Statement of Changes in Stockholders' Equity . . . . . . . . . . . . . . . 20 Consolidated Statement of Cash Flows . . . . . . . . 21 Notes to Financial Statements . . . . . . . . . . . . 22
[LOGO] KPMG PEAT MARWICK Certified Public Accountants One Boston Place Boston, MA 02108 To the Board of Directors and Stockholders of BayBanks, Inc.: We have audited the accompanying consolidated balance sheets of BayBanks, Inc., and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company'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 standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and 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 presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BayBanks, Inc., and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK January 24, 1994 17 15
CONSOLIDATED BALANCE SHEET (In thousands except share amounts) BAYBANKS, INC. - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31 ---------------------------- 1993 1992 ------------ ----------- ASSETS Cash and due from banks (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 632,985 $ 733,726 Interest-bearing deposits and other short-term investments (Note 2) . . . . . . . . . . . . . . . 803,068 1,091,985 Trading accounts (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,595 74,694 Securities available for sale--market value $633,446 in 1993 and $1,530,917 in 1992 (Notes 2 and 4) 629,003 1,522,877 Investment securities--market value $1,605,091 in 1993 and $157,024 in 1992 (Notes 2 and 4) . . 1,599,060 156,492 Loans--net of unearned income and fees (Notes 2 and 5) Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,324,968 1,411,120 Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,471 1,022,515 Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,242,597 1,247,633 Instalment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,134 2,256,731 ----------- ----------- 6,103,170 5,937,999 Less allowance for loan losses (Notes 2 and 6) . . . . . . . . . . . . . . . . . . . . . . . . 171,496 192,700 ----------- ----------- 5,931,674 5,745,299 Premises and equipment, net (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,554 198,430 Customers' acceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,467 11,778 Other real estate owned and in-substance foreclosures, net (Notes 2 and 6) . . . . . . . . . . . 113,679 195,586 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,499 165,419 ----------- ----------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,110,584 $ 9,896,286 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,077,206 $ 1,978,102 NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,481,859 1,442,820 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,459,134 1,320,633 Money market deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,731,720 2,967,291 Consumer time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993,945 1,234,747 Time--$100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,957 38,955 ----------- ----------- 8,778,821 8,982,548 Federal funds purchased and other short-term borrowings (Note 8) . . . . . . . . . . . . . . . . 507,820 139,969 Acceptances outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,467 11,778 Accrued expenses and other accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,485 48,111 Long-term debt (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,488 55,188 Guarantee of ESOP indebtedness (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,241 14,473 Stockholders' equity (Notes 1 and 10): Common stock: par value $2.00 per share Shares authorized--50,000,000 Shares issued--18,742,934 in 1993 and 18,507,952 in 1992 . . . . . . . . . . . . . . . . . . 37,486 37,016 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,355 304,890 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,662 316,812 ----------- ----------- 715,503 658,718 Less treasury stock at cost--950 shares in 1992 . . . . . . . . . . . . . . . . . . . . . . . -- 26 Less guarantee of ESOP indebtedness (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . 12,241 14,473 ----------- ----------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703,262 644,219 ----------- ----------- Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $10,110,584 $ 9,896,286 =========== =========== - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 18 16
CONSOLIDATED STATEMENT OF INCOME (In thousands except share amounts) BAYBANKS, INC. - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 -------------------------------------------- 1993 1992 1991 ------------ ------------ ------------ Income on interest-bearing deposits and other short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,002 $ 22,416 $ 39,937 Interest on securities portfolios Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,510 86,304 95,542 Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,301 7,163 12,089 Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . 480,658 540,638 667,290 ------------ ------------ ------------ Total income on earning assets . . . . . . . . . . . . . . . . . . . . . . . . 590,471 656,521 814,858 Interest expense on deposits and borrowings Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,441 233,235 394,161 Short-term borrowings (Note 8) . . . . . . . . . . . . . . . . . . . . . . . 4,098 4,285 19,941 Long-term debt (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,109 2,489 3,860 ------------ ------------ ------------ Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,648 240,009 417,962 ------------ ------------ ------------ Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423,823 416,512 396,896 Provision for loan losses (Note 6) . . . . . . . . . . . . . . . . . . . . . . 36,500 106,836 165,400 ------------ ------------ ------------ Net interest income after provision for loan losses . . . . . . . . . . . . . . 387,323 309,676 231,496 Noninterest income Service charges and fees on deposit accounts . . . . . . . . . . . . . . . . 105,211 96,671 88,533 Other noninterest income (Note 12) . . . . . . . . . . . . . . . . . . . . . 93,313 87,210 81,220 ------------ ------------ ------------ Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,524 183,881 169,753 Net securities gains (Notes 2 and 4) . . . . . . . . . . . . . . . . . . . . . 411 76,929 40,963 Operating expenses Salaries and benefits (Notes 10 and 11) . . . . . . . . . . . . . . . . . . . 212,954 199,604 184,399 Occupancy and equipment (Note 7) . . . . . . . . . . . . . . . . . . . . . . 87,116 88,950 85,465 Other operating expenses (Note 13) . . . . . . . . . . . . . . . . . . . . . 146,635 140,762 128,495 ------------ ------------ ------------ Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 446,705 429,316 398,359 Provision for OREO reserve, net (Notes 2 and 6) . . . . . . . . . . . . . . . . 24,830 45,482 27,450 ------------ ------------ ------------ Total operating expenses after OREO provision . . . . . . . . . . . . . . . . . 471,535 474,798 425,809 ------------ ------------ ------------ Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,723 95,688 16,403 Provision for income taxes (Notes 2 and 14) . . . . . . . . . . . . . . . . . . 47,072 36,451 6,748 ------------ ------------ ------------ NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655 ============ ============ ============ EARNINGS PER SHARE (NOTE 2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.57 $ 3.57 $ 0.60 Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 18,953,397 16,575,768 16,021,645 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 19 17
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands except share amounts) BAYBANKS, INC. - ---------------------------------------------------------------------------------------------------------------------------- COMMON RETAINED TREASURY STOCK SURPLUS EARNINGS STOCK --------- --------- ---------- ---------- BALANCE AS OF DECEMBER 31, 1990 . . . . . . . . . . . . . . . . . . $ 32,046 $ 227,100 $ 246,564 $ (264) Net income--1991 . . . . . . . . . . . . . . . . . . . . . . . 9,655 Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . Stock issued (1,091 shares) in conversion of debentures . . . . . . . . . . . . . . . . . . . . . . . . . 2 13 Stock issued (8,577 shares) in payment of fees . . . . . . . . 4 (144) 264 Deferred compensation expense recorded for stock issued (1,000 shares) in connection with restricted stock plan . . . . . . . . . . . . . . . . . . . . . . . . . 2 (2) Amortization of deferred compensation expense (Note 10) . . . . 1,170 Recognition of prior unrealized loss on equity security held for investment . . . . . . . . . . . . . . . . 1,356 Treasury shares acquired (9,000 shares) . . . . . . . . . . . . (319) --------- --------- --------- ---------- BALANCE AS OF DECEMBER 31, 1991 . . . . . . . . . . . . . . . . . . 32,054 228,137 257,575 (319) Net income--1992 . . . . . . . . . . . . . . . . . . . . . . . 59,237 Proceeds from common stock offering, net of issuance costs of $3,494 (2,300,000 shares) . . . . . . . . . . . . . 4,600 74,706 Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . Exercise of stock options (20,336 shares) . . . . . . . . . . . 8 (170) 520 Stock issued (3,360 shares) in payment of fees . . . . . . . . 7 94 Deferred compensation expense recorded for stock issued (173,700 shares) in connection with restricted stock plan . . . . . . . . . . . . . . . . . . . . . . . . . 347 (347) Amortization of deferred compensation expense (Note 10) . . . . 2,332 Treasury shares acquired (8,500 shares) . . . . . . . . . . . . 138 (227) --------- --------- --------- ---------- BALANCE AS OF DECEMBER 31, 1992 . . . . . . . . . . . . . . . . . . 37,016 304,890 316,812 (26) Net income--1993 . . . . . . . . . . . . . . . . . . . . . . . 67,651 Cash dividends declared ($0.90 per share) . . . . . . . . . . . (16,801) Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . Exercise of stock options (157,414 shares) . . . . . . . . . . 269 2,706 940 Stock issued (98,471 shares) in conversion of debentures . . . . 197 1,156 Stock issued (2,156 shares) in payment of fees . . . . . . . . 4 101 Amortization of deferred compensation expense (Note 10) . . . . 1,364 Treasury shares acquired (22,109 shares) . . . . . . . . . . . 138 (914) --------- --------- --------- ---------- BALANCE AS OF DECEMBER 31, 1993 . . . . . . . . . . . . . . . . . . $ 37,486 $ 310,355 $ 367,662 $ -- ========= ========= ========= ==========
ESOP Loan Guarantee Total ---------- --------- BALANCE AS OF DECEMBER 31, 1990 . . . . . . . . . . . . . . . . . . $ (17,170) $ 488,276 Net income--1991 . . . . . . . . . . . . . . . . . . . . . . . 9,655 Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . 1,023 1,023 Stock issued (1,091 shares) in conversion of debentures . . . . . . . . . . . . . . . . . . . . . . . . . 15 Stock issued (8,577 shares) in payment of fees . . . . . . . . 124 Deferred compensation expense recorded for stock issued (1,000 shares) in connection with restricted stock plan . . . . . . . . . . . . . . . . . . . . . . . . . -- Amortization of deferred compensation expense (Note 10) . . . . 1,170 Recognition of prior unrealized loss on equity security held for investment . . . . . . . . . . . . . . . . 1,356 Treasury shares acquired (9,000 shares) . . . . . . . . . . . . (319) ---------- --------- BALANCE AS OF DECEMBER 31, 1991 . . . . . . . . . . . . . . . . . . (16,147) 501,300 Net income--1992 . . . . . . . . . . . . . . . . . . . . . . . 59,237 Proceeds from common stock offering, net of issuance costs of $3,494 (2,300,000 shares) . . . . . . . . . . . . . 79,306 Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . 1,674 1,674 Exercise of stock options (20,336 shares) . . . . . . . . . . . 358 Stock issued (3,360 shares) in payment of fees . . . . . . . . 101 Deferred compensation expense recorded for stock issued (173,700 shares) in connection with restricted stock plan . . . . . . . . . . . . . . . . . . . . . . . . . -- Amortization of deferred compensation expense (Note 10) . . . . 2,332 Treasury shares acquired (8,500 shares) . . . . . . . . . . . . (89) ---------- --------- BALANCE AS OF DECEMBER 31, 1992 . . . . . . . . . . . . . . . . . . (14,473) 644,219 Net income--1993 . . . . . . . . . . . . . . . . . . . . . . . 67,651 Cash dividends declared ($0.90 per share) . . . . . . . . . . . (16,801) Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . 2,232 2,232 Exercise of stock options (157,414 shares) . . . . . . . . . . 3,915 Stock issued (98,471 shares) in conversion of debentures . . . . 1,353 Stock issued (2,156 shares) in payment of fees . . . . . . . . 105 Amortization of deferred compensation expense (Note 10) . . . . 1,364 Treasury shares acquired (22,109 shares) . . . . . . . . . . . (776) ---------- --------- BALANCE AS OF DECEMBER 31, 1993 . . . . . . . . . . . . . . . . . . $ (12,241) $ 703,262 ========== ========= - ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 20 18
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) BAYBANKS, INC. - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 -------------------------------------- OPERATING ACTIVITIES 1993 1992 1991 ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655 Adjustments to reconcile net income to net cash provided by operating activities: Fixed-rate mortgages sold . . . . . . . . . . . . . . . . . 815,722 779,000 295,000 Fixed-rate mortgages originated for sale . . . . . . . . . . (783,000) (906,000) (346,000) Student loans transferred from portfolio and sold . . . . . 67,363 53,827 106,091 Proceeds from sales and maturities of trading account assets 1,863,350 659,000 702,000 Purchases of trading account assets . . . . . . . . . . . . (1,803,249) (694,000) (704,000) Provision for loan losses . . . . . . . . . . . . . . . . . 36,500 106,836 165,400 Amortization (accretion) of security premium (discount) . . (7,149) 18,073 -- Provision for OREO reserve, net . . . . . . . . . . . . . . 24,830 45,482 27,450 Deferred income taxes . . . . . . . . . . . . . . . . . . . 2,675 (1,839) (1,259) Depreciation and amortization of premises and equipment . . 24,218 24,246 23,599 Net securities gains . . . . . . . . . . . . . . . . . . . . (411) (76,929) (40,963) Change in other assets . . . . . . . . . . . . . . . . . . . (23,184) 14,379 22,655 Change in accrued expenses . . . . . . . . . . . . . . . . . 6,411 9,263 9,085 Change in interest receivable . . . . . . . . . . . . . . . (3,573) 6,871 15,599 Change in interest payable . . . . . . . . . . . . . . . . . (3,673) (10,072) (17,105) ---------- ---------- ---------- Net cash provided by operating activities . . . . . . . . 284,481 87,374 267,207 ---------- ---------- ---------- INVESTING ACTIVITIES Proceeds from sales of securities . . . . . . . . . . . . . . . 331,550 2,453,685 1,710,102 Proceeds from maturities of securities . . . . . . . . . . . . 792,843 74,989 165,000 Purchases of securities . . . . . . . . . . . . . . . . . . . . (1,665,527) (2,703,169) (1,461,472) Net cash provided (used) by: Short-term investments . . . . . . . . . . . . . . . . . . . 288,917 (512,073) (471,556) Loans (2)(3)(4) . . . . . . . . . . . . . . . . . . . . . . (333,598) 249,442 232,857 Customer acceptances . . . . . . . . . . . . . . . . . . . . 7,311 (528) 110 Net purchases of premises and equipment . . . . . . . . . . . . (18,342) (26,017) (35,933) Deposits assumed from a thrift institution (5) . . . . . . . . -- 254,372 52,817 Proceeds from sales of OREO (3) . . . . . . . . . . . . . . . . 67,715 54,808 43,863 ---------- ---------- ---------- Net cash (used) provided by investing activities . . . . . (529,131) (154,491) 235,788 ---------- ---------- ---------- FINANCING ACTIVITIES Net cash provided (used) by: Demand deposits, NOW, and savings accounts . . . . . . . . 276,644 648,095 417,899 Money market deposits . . . . . . . . . . . . . . . . . . . (235,571) (186,194) (135,232) Consumer time deposits . . . . . . . . . . . . . . . . . . . (240,802) (415,086) (315,959) Time deposits greater than $100,000 . . . . . . . . . . . . (3,998) (65,964) (222,265) Short-term borrowings . . . . . . . . . . . . . . . . . . . 367,851 17,140 (366,434) Customer acceptances . . . . . . . . . . . . . . . . . . . . (7,311) 528 (110) Long-term debt . . . . . . . . . . . . . . . . . . . . . . . (700) (81) 266 Net proceeds from common stock offering . . . . . . . . . . . -- 79,306 -- Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (16,801) -- -- Other equity transactions . . . . . . . . . . . . . . . . . . 4,597 285 (988) ---------- ---------- ---------- Net cash provided (used) by financing activities . . . . . 143,909 78,029 (622,823) ---------- ---------- ---------- Net change in cash and cash equivalents . . . . . . . . . . . (100,741) 10,912 (119,828) Cash and cash equivalents at beginning of year (1) . . . . . . 733,726 722,814 842,642 ---------- ---------- ---------- Cash and cash equivalents at end of year (1) . . . . . . . . . $ 632,985 $ 733,726 $ 722,814 ========== ========== ========== Supplemental disclosure of cash flow information Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ 170,321 $ 250,081 $ 435,067 Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . 58,026 20,551 12,818 - ---------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. (1) Cash and cash equivalents consist of cash on hand and due from banks. (2) Excludes transfers of loans to the other real estate owned category of $40.5 million, $89.7 million, and $153.7 million in 1993, 1992, and 1991, respectively. (3) Excludes loan originations in conjunction with OREO sales of $22.4 million, $23.8 million, and $14.0 million in 1993, 1992, and 1991, respectively. (4) Excludes transfers of securitized residential mortgage loans to the investment securities portfolio of $50.0 million in 1992 and $182.4 million in 1991. (5) Deposits assumed from failed thrift institutions are net of cash paid, which was an immaterial amount in each case. The Company did not assume any material assets or liabilities in conjunction with these transactions.
21 19 NOTES TO FINANCIAL STATEMENTS NOTE 1. CONDENSED FINANCIAL INFORMATION OF THE PARENT The condensed balance sheet is presented for 1993 and 1992, and a statement of income and statement of cash flows are presented for the years 1991 through 1993, for BayBanks, Inc. (the parent company).
BALANCE SHEET DECEMBER 31 --------------------------- (In thousands except share amounts) 1993 1992 ---------- ---------- ASSETS Cash and short-term investments . . . . . . . $ 15,865 $ 36,289 Securities available for sale market value $30,000 in 1993 and $9,858 in 1992 . . . . . . . . . . . . 30,000 9,858 Investment securities market value $22,790 in 1993 and $40,100 in 1992 . . . . . . . . . . . 22,758 40,100 Investment in capital stock of subsidiaries Banking subsidiaries . . . . . . . . . . 605,488 538,452 Nonbank subsidiaries . . . . . . . . . . 37,356 32,976 ---------- ---------- 642,844 571,428 ---------- ---------- Notes and advances due from subsidiaries . . . . . . . . . . . . . . . 52,600 51,600 Other assets . . . . . . . . . . . . . . . . 2,305 1,704 ---------- ---------- Total assets . . . . . . . . . . . . . . . $ 766,372 $ 710,979 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other accounts payable . . . . . . . . . . $ 818 $ 882 Long-term debt . . . . . . . . . . . . . . . 50,051 51,405 Guarantee of ESOP indebtedness . . . . . . . 12,241 14,473 Stockholders' equity . . . . . . . . . . . . 715,503 658,718 Less treasury stock at cost 950 shares in 1992 . . . . . . . . . . . -- 26 Less guarantee of ESOP indebtedness . . . . . . . . . . . . . . . 12,241 14,473 ---------- ---------- Total stockholders' equity . . . . . . . . 703,262 644,219 ---------- ---------- Total liabilities and stockholders' equity . . . . . . . . . . $ 766,372 $ 710,979 ========== ==========
NOTE 1. (CONTINUED)
STATEMENT OF INCOME YEAR ENDED DECEMBER 31 ------------------------------------------- (In thousands) 1993 1992 1991 ---------- ---------- ---------- Income: Dividends from subsidiaries Banking subsidiaries . . . . . . . . . . $ 10,000 $ -- $ 903 Nonbank subsidiaries . . . . . . . . . . 6,500 1,400 2,950 ---------- ---------- ---------- 16,500 1,400 3,853 ---------- ---------- ---------- Fee income from subsidiaries . . . . . . . . . . . 547 416 304 Interest from subsidiaries . . . . . . . . . . . . . . 1,775 2,137 3,388 Interest on short-term investments . . . . . . . . . . . . . . 443 551 454 Interest and dividends on securities portfolios . . . . . . . . . 1,271 91 -- Writedown of marketable equity security held for investment . . . . . . . . . . . . . -- -- (1,392) Other income . . . . . . . . . . . . . . . -- 2 44 ---------- ---------- ---------- Total income . . . . . . . . . . . . . . 20,536 4,597 6,651 ---------- ---------- ---------- Expenses: Interest on debentures and notes payable . . . . . . . . . . . 1,743 2,166 3,393 General and administrative . . . . . . . . . . . . . 700 791 668 ---------- ---------- ---------- Total expenses . . . . . . . . . . . . . 2,443 2,957 4,061 ---------- ---------- ---------- Income before income taxes and equity in undistributed income of subsidiaries . . . . . . . . . . 18,093 1,640 2,590 Income tax expense . . . . . . . . . . . . . 358 145 65 ---------- ---------- ---------- Income before equity in undistributed income of subsidiaries . . . . . . . . . . . . . 17,735 1,495 2,525 Equity in subsidiaries' undistributed income . . . . . . . . . . . 49,916 57,742 7,130 ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655 ========== ========== ==========
STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31 ------------------------------------------- (In thousands) 1993 1992 1991 ---------- ---------- ---------- OPERATING ACTIVITIES Dividends from subsidiaries Banking subsidiaries . . . . . . . . . . $ 10,000 $ -- $ 903 Nonbank subsidiaries . . . . . . . . . . 6,500 1,400 2,950 ---------- ---------- ---------- 16,500 1,400 3,853 ---------- ---------- ---------- Fees from subsidiaries . . . . . . . . . . 547 416 400 Interest received . . . . . . . . . . . . 3,323 2,700 3,842 Interest paid . . . . . . . . . . . . . . (1,779) (2,193) (3,437) Operating expenditures . . . . . . . . . . (814) (474) (3,826) Income tax expense . . . . . . . . . . . . (463) (135) (377) ---------- ---------- ---------- Net cash provided by operating activities . . . . . . . . . . 17,314 1,714 455 ---------- ---------- ----------
(Statement of Cash Flows continued next page) 22 20 NOTE 1. (CONTINUED) STATEMENT OF CASH FLOWS (CONT.)
YEAR ENDED DECEMBER 31 ------------------------------------- 1993 1992 1991 --------- ------------ ---------- INVESTING ACTIVITIES Purchases of securities . . . . . . (166,082) (49,958) -- Sales and maturities of securities . . . . . . . . . . . 163,355 -- -- Sale of premises and equipment to subsidiaries . . . . . . . . . . -- -- 2,110 Net advances (to) from subsidiaries . . . . . . . . . . (1,000) (600) 6,000 Investments in subsidiaries . . . . . . . . . . (21,500) (8,000) (5,500) --------- ----------- ----------- Net cash flow (used) provided by investing activities (25,227) (58,558) 2,610 --------- ----------- ----------- FINANCING ACTIVITIES Dividends paid . . . . . . . . . . (16,801) -- -- Net proceeds from common stock offering -- 79,306 -- Proceeds from exercise of stock options . . . . . . . . . 3,296 358 -- Proceeds from affiliates for stock compensation plan . . . . . . . . . . . . . . 1,099 2,230 1,095 Deferred payment plan (105) (642) -- --------- ----------- ----------- Net cash flow (used) provided by financing activities (12,511) 81,252 1,095 --------- ----------- ----------- Net change in cash and cash equivalents . . . . . . . . (20,424) 24,408 4,160 Cash and cash equivalents at beginning of year 36,289 11,881 7,721 --------- ----------- ----------- Cash and cash equivalents at end of year . . . . . . . . . $ 15,865 $ 36,289 $ 11,881 ========= =========== =========== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655 Adjustments to reconcile net income to net cash provided by operating activities: Equity in subsidiaries' undistributed income (49,916) (57,742) (7,130) Net change in accrued expenses . . . . . . . . . . . . . (340) 176 (2,927) Net change in accrued income taxes . . . . . . . . . . . (105) 10 (312) Writedown of marketable equity security . . . . . . . . . . -- -- 1,392 All other . . . . . . . . . . . . . . 24 33 (223) --------- ----------- ----------- Total adjustments . . . . . . . . . (50,337) (57,523) (9,200) --------- ----------- ----------- Net cash provided by operating activities $ 17,314 $ 1,714 $ 455 ========= =========== ===========
NOTE 1. (CONTINUED) BayBanks, Inc., the parent company, has not sold commercial paper and does not have any revolving credit lines or other short-term debt outstanding that relies on credit ratings from public rating agencies. A significant source of funds used by the parent company for operating activities and the payment of dividends to shareholders is dividends received from its banking and other subsidiaries. The payment of dividends by national and state banks is generally limited by statute to their retained earnings, after deducting losses and statutorily defined bad debts in excess of established allowances for loan losses. The payment of dividends by national banks is further limited by statute to the current year's net income plus the undistributed net income of the two preceding years. The Company's bank subsidiaries are also required to achieve and maintain certain minimum capital ratios under applicable regulatory guidelines. Banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem payment to be an unsafe or unsound practice. As of December 31, 1993, the Company's bank subsidiaries could have declared dividends of approximately $53 million while remaining in compliance with the foregoing statutory limitations and remaining "well capitalized" under regulatory capital guidelines. Any decision to declare a dividend by the Company or any of its subsidiaries must also consider additional factors, including the amount of current period net income, liquidity, asset quality, and economic conditions and trends. Federal law also imposes limitations on the extent to which the Company's bank subsidiaries may finance or otherwise supply funds to the Company and its nonbank subsidiaries. Such transactions with the Company and each of its nonbank subsidiaries are limited to 10% of each subsidiary bank's capital and surplus. There is also a 20% limit on each bank's aggregate covered transactions with the Company and all of its nonbank subsidiaries. At December 31, 1993, the Company had no borrowings outstanding from any of its subsidiaries, and one of the Company's nonbank subsidiaries had a secured loan of $38,021,000 outstanding from a bank subsidiary, representing 6.3% of the aggregate capital and surplus of the bank subsidiaries. The Company has a Stockholders Rights Plan under which stock purchase rights have been distributed to the Company's stockholders. The rights may become exercisable in the event of certain unsolicited attempts to acquire the Company. The rights, which expire in December 1998, become exercisable 10 business days after a person, including a group, acquires 20% or more of the Company's outstanding common stock or commences a tender offer that would result in such person owning 25% or more of such stock or the Board of Directors determines that a person owning 10% or more of such stock is an "adverse person." If any person becomes the owner of 25% or more of the outstanding common stock or the Board determines that a person is an adverse person, the rights of holders other than such owner or adverse person become rights to buy shares of common stock of the Company (or of the acquiring company if the Company is acquired in certain mergers or other business combinations) having a market value of twice the exercise price of each right, with the result that such owner's or adverse person's interest in the Company would be substantially diluted. The Company may redeem the right, at a price of $.01 per right, until 10 business days after a person acquires 20% or more of the outstanding common stock or the Board has determined that a person is an adverse person. 23 21 NOTE 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements of the Company and its subsidiaries follow generally accepted accounting principles and reporting practices applicable to the banking industry. Material intercompany transactions have been eliminated. Certain prior years' amounts have been reclassified to conform with the current year presentation. INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS - Consists of federal funds sold and securities purchased under resale agreements of $541,260,000 in 1993 and $368,750,000 in 1992, respectively, and debt securities with maturities of less than 90 days. Debt securities are reported at amortized cost, which approximates market value. TRADING ACCOUNT SECURITIES - Consists primarily of municipal securities held for resale to customers. These securities are recorded at market value. SECURITIES - Securities available for sale, consisting principally of debt securities, are stated at the lower of aggregate amortized cost or market value. Decisions to purchase or sell these securities as part of the Company's ongoing asset and liability management process are based on management's assessment of changes in economic and financial market conditions, interest rate environments, the Company's balance sheet and its interest sensitivity position, liquidity, and capital. The cost of securities sold is determined by the specific identification method. The investment securities portfolio, principally debt securities, is stated at cost, adjusted for amortization of premium and accretion of discount using a level yield method. This basis for valuation reflects management's intention and ability to hold these securities until maturity. INTEREST RATE SWAP AGREEMENTS - The Company uses interest rate swap agreements to manage its interest rate exposure. Income or expense on these agreements is recorded as an adjustment to the yield on the underlying asset or liability. LOANS - Interest income on most loans is accrued on the principal amount of loans outstanding. Unearned income on leases and loans made on a discount basis, $24,248,000 at year-end 1993 and $25,819,000 at year-end 1992, is credited to interest income on a basis that results in approximately level rates of return over the term of the lease or loan. Certain loan fees and credit card fees, net of qualifying origination costs, are deferred and amortized over the life of the related loan or commitment period. Deferred loan and credit card fees, included in unearned income, were $11,353,000 and $10,577,000 at year-end 1993 and 1992, respectively. The Company engages in certain mortgage banking activities through a mortgage subsidiary. Mortgage loans originated and held for sale are carried at the lower of aggregate cost or market value, and gains and losses are determined using the specific identification method. Loans sold with servicing retained may give rise to a mortgage servicing asset that is amortized over the period during which the servicing income is expected to be earned. Prepayment assumptions that affect the determination of mortgage servicing rights are reviewed periodically, and the amortization is adjusted to reflect current circumstances. At December 31, 1993, mortgage loans held for sale were $138,376,000, loans serviced for others were $2.0 billion, and excess mortgage servicing rights were $4,213,000. Loans are placed on nonaccrual and are considered nonperforming when payment of principal or interest is considered to be in doubt. In addition, all loans past due 90 days or more as to principal or interest are placed on nonaccrual status except for certain consumer loans and those loans which, in management's judgment, are adequately secured and for which collection is probable. Previously accrued income that has not been collected is NOTE 2. (CONTINUED) reversed from current income, and subsequent cash receipts are applied to reduce the unpaid principal balance. Loans are returned to accrual status when collection of all contractual principal and interest is reasonably assured and there has been sustained repayment performance. Nonperforming loans were $110,001,000 at year-end 1993 and $180,580,000 at year-end 1992. Interest income earned during the year on year-end nonperforming loans was approximately $960,000; if these loans had been performing under contractual terms, interest would have been approximately $8,300,000. In 1992, these amounts were $4,300,000 and $14,900,000, respectively. Loans are classified as restructured, accruing loans when the Company has granted, for economic or legal reasons related to the borrower's financial difficulties, a concession to the customer that the Company would not otherwise consider. Such concessions can be any one or a combination of the following modifications to the terms of the debt: the reduction of the stated interest rate for the remaining original life of the debt; extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk; reduction of the face amount or maturity amount of the debt as stated in the debt instrument; and reduction of accrued interest. Restructured, accruing loans were $18,398,000 and $12,084,000 at December 31, 1993 and 1992, respectively. During 1993 and 1992, interest income recorded on these loans approximated a market interest rate and in the aggregate was not significantly different had these loans performed according to their original terms. There are no commitments to lend additional funds to these borrowers. ALLOWANCE FOR LOAN LOSSES - Loans considered to be uncollectible are charged to the allowance for loan losses. Additions to the allowance are provided by recoveries of previously charged-off loans and by the provision for loan losses in amounts sufficient to maintain the adequacy of the allowance. The adequacy is determined by management's evaluation of potential losses in the portfolio, economic conditions, historical net charge-offs, and anticipated portfolio growth. Included in the allowance are amounts allocated to specific loans, amounts allocated to other loans that may become uncollectible but cannot be individually identified, and unallocated amounts. Management believes that the allowance for loan losses is adequate. Various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses of the Company's subsidiaries. Such agencies can require the Company to recognize additions to the allowance based on regulatory judgments of information available at the time of their examination. OTHER REAL ESTATE OWNED - Other real estate owned (OREO) consists of foreclosed properties and in-substance foreclosures. Loans are classified as in-substance foreclosures under the following circumstances: when the debtor has little or no equity in the collateral, considering the current fair value of the collateral; and when proceeds for repayment of the loan can be expected to come only from the operation or sale of the collateral; and when the debtor has either formally or effectively abandoned control of the collateral to the creditor or retained control of the collateral, but, because of the current financial condition of the debtor, or the economic prospects for the debtor and/or the collateral in the foreseeable future, it is doubtful that the debtor will be able to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. Other real estate owned is recorded at the lower of the book value of the loan or the fair value of the asset acquired, less estimated disposition costs. The excess, if any, of the loan amount over the fair value of the asset acquired is charged off against the allowance for loan losses. Pursuant to the adoption of accounting Statement 24 22 NOTE 2. (CONTINUED) of Position (SOP) 92-3, "Accounting for Foreclosed Assets," which became effective for periods ending after December 15, 1992, subsequent changes in the value of OREO (including in-substance foreclosures) are recorded directly to an OREO reserve. These changes in the OREO reserve are included in total operating expenses. Proceeds in excess of the carrying value at the time of sale are recorded as a reduction in the provision for the OREO reserve. Prior to the adoption of SOP 92-3 at December 31, 1992, changes in the value of OREO were recorded directly to the value of the property. Expenses to administer these properties are charged to operating expense as incurred. INCOME TAXES - In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," effective January 1, 1993. The Company adopted Statement No. 109 as of January 1, 1993. Statement No. 109 changed the Company's method of accounting for income taxes from the deferred method to the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance, if necessary, is established to provide for NOTE 2. (CONTINUED) deferred tax assets that are not expected to be realized. Adoption of Statement No. 109 did not have a material effect on the Company's results of operations or financial condition. Prior to adoption of Statement No. 109, the Company accounted for income taxes under Accounting Principles Board (APB) Opinion No. 11. Under APB Opinion No. 11, deferred taxes were provided for all significant items of income and expense that were recognized in different periods for financial reporting and income tax purposes. EARNINGS PER SHARE - Earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding and dilutive common stock equivalents (stock options) for each period presented. Average dilutive common stock equivalents were 282,175 for 1993 and 150,328 for 1992. The dual presentation of primary and fully diluted earnings per common share is not presented, since the difference from earnings per share is less than 3%. NOTE 3. FEDERAL RESERVE ACCOUNT BALANCES The Company's banks are required to maintain average reserve balances with the Federal Reserve Bank. These balances can be either in the form of vault cash or funds left on deposit with the Federal Reserve Bank. The average amount of these balances was $305,379,000 for 1993 and $290,287,000 for 1992. NOTE 4. SECURITIES PORTFOLIOS The amortized cost, estimated market values, and yields of the following securities portfolios by maturity (excluding interest-bearing deposits and other short-term investments) were:
YEAR-END SECURITIES PORTFOLIOS -------------------------------------------------------------- GROSS GROSS WEIGHTED DECEMBER 31, 1993 CARRYING UNREALIZED UNREALIZED MARKET AVERAGE (Dollars in thousands on a tax equivalent basis) VALUE GAINS LOSSES VALUE YIELD ----- ----- ------ ----- ----- SECURITIES AVAILABLE FOR SALE U.S. Government securities, maturing Within 1 year . . . . . . . . . . . . . . . $ 322,707 $ 3,280 $ (3) $ 325,984 4.91% ----------- ---------- -------- ----------- 322,707 3,280 (3) 325,984 4.91 ----------- ---------- -------- ----------- State and local governments, maturing Within 1 year . . . . . . . . . . . . . . . 18,944 6 (2) 18,948 3.92 After 1 year but within 5 years . . . . . . 20 -- -- 20 7.39 ----------- ---------- -------- ----------- 18,964 6 (2) 18,968 3.92 ----------- ---------- -------- ----------- CORPORATE AND OTHER, MATURING Within 1 year . . . . . . . . . . . . . . . 256,500 -- -- 256,500 4.02 ----------- ---------- -------- ----------- 256,500 -- -- 256,500 4.02 ----------- ---------- -------- ----------- Mortgage-backed securities . . . . . . . . . . 30,832 1,162 -- 31,994 6.32 ----------- ---------- -------- ----------- Total securities available for sale . . . . $ 629,003 $ 4,448 $ (5) $ 633,446 4.59% =========== ========== ======== =========== INVESTMENT SECURITIES U.S. Government securities, maturing Within 1 year . . . . . . . . . . . . . . . $ 464,118 $ 3,026 $ -- $ 467,144 4.32% After 1 year but within 5 years . . . . . . 739,197 3,421 (59) 742,559 4.34 ----------- ---------- -------- ---------- 1,203,315 6,447 (59) 1,209,703 4.33 ----------- ---------- -------- ---------- State and local governments, maturing Within 1 year . . . . . . . . . . . . . . . 112,576 98 (9) 112,665 4.20 After 1 year but within 5 years . . . . . . 12,755 209 (12) 12,952 6.77 After 5 years but within 10 years . . . . . 3,666 73 (4) 3,735 7.17 ----------- ---------- -------- ---------- 128,997 380 (25) 129,352 4.54 ----------- ---------- -------- ---------- Asset-backed securities . . . . . . . . . . . . 204,798 115 (827) 204,086 4.33 Industrial revenue bonds . . . . . . . . . . . 59,958 -- -- 59,958 5.34 Corporate and other . . . . . . . . . . . . . . 1,992 -- -- 1,992 -- ----------- ---------- -------- ---------- Total investment securities . . . . . . . . $ 1,599,060 $ 6,942 $ (911) $1,605,091 4.38% =========== ========== ======== ==========
(Note 4 continued next page) 25 23 NOTE 4. (CONTINUED)
YEAR-END SECURITIES PORTFOLIOS ------------------------------------------------------------- GROSS GROSS DECEMBER 31, 1992 CARRYING UNREALIZED UNREALIZED MARKET (In Thousands) VALUE GAINS LOSSES VALUE ------------- ------------ ------------ --------------- SECURITIES AVAILABLE FOR SALE U.S. Government securities . . . . . . . . $ 1,433,945 $ 9,074 $ (2,198) $ 1,440,821 Mortgage-backed securities . . . . . . . . 88,932 1,164 -- 90,096 ------------- ------------ ------------ --------------- Total securities available for sale . . . $ 1,522,877 $ 10,238 $ (2,198) $ 1,530,917 ============= ============ ============ =============== INVESTMENT SECURITIES State and local governments . . . . . . . . $ 37,869 $ 532 $ -- $ 38,401 Industrial revenue bonds . . . . . . . . . 75,938 -- -- 75,938 Corporate and other . . . . . . . . . . . . 42,685 -- -- 42,685 ------------- ------------ ------------ --------------- Total investment securities . . . . . . . $ 156,492 $ 532 $ -- $ 157,024 ============= ============ ============ ===============
The year-end maturity distribution excludes industrial revenue bonds, which are not regarded as principal debt securities, and mortgage-backed and asset-backed securities. The book value of securities pledged to secure public and trust deposits and repurchase agreements, and to meet other legal requirements was $676,934,000 at December 31, 1993. During 1993, proceeds from sales of securities available for sale were $331,550,000, resulting in realized gains of $439,000. There were $28,000 in realized losses from the sales of these securities. During 1992, proceeds from sales of securities available for sale were $1,192,000,000, and proceeds from sales of investment securities were $1,262,000,000, resulting in realized gains of $41,123,000 and $37,506,000, respectively. There were $1,700,000 in realized losses from the sales of investment securities. In 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Statement No. 115, which will be effective in 1994, changes the accounting for short-term investments and the securities portfolios. The Company's current balance sheet classifications conform with Statement No. 115. However, beginning in 1994, changes in the fair value of the securities available for sale portfolio will be recorded directly to a separate category of stockholders' equity. Currently, securities available for sale are valued at the lower of aggregate cost or market, and changes therein are recorded directly to earnings. At December 31, 1993, the fair value of the securities available for sale exceeded their cost by $4,443,000, or $2,526,000 on an after-tax basis, and thus, stockholders' equity would have increased by that amount if Statement No. 115 had been in effect at year-end. NOTE 5. LOANS TO RELATED PARTIES Loans outstanding to executive officers and directors of the Company and its principal subsidiaries consist primarily of loans made to executive officers and related business interests of certain directors; these loans were $32,193,000 and $20,954,000 at December 31, 1993, and December 31, 1992, respectively. An analysis of the activity during the year for loans outstanding at year-end is as follows: NOTE 5. (CONTINUED)
(In thousands) 1993 -------- Balance, January 1 . . . . . . . . . . . . . $ 20,954 Additions during the year . . . . . . . . . 21,188 Reductions during the year . . . . . . . . . (9,949) -------- Balance, December 31 . . . . . . . . . . . . $ 32,193 ========
These loans were made in the ordinary course of business under normal credit terms, including interest rates and collateralization prevailing at the time for comparable transactions with other persons, and do not represent more than a normal risk of collection. NOTE 6. ALLOWANCE FOR LOAN LOSSES AND OREO RESERVE Activity in the allowance for loan loss account was:
(In thousands) 1993 1992 1991 ---------- ---------- ---------- Balance, January 1 . . . . . . . . . . . . $ 192,700 $ 212,500 $ 214,203 Provision . . . . . . . . . . . . . . . . . 36,500 106,836 165,400 Loan losses charged off . . . . . . . . . . (79,963) (140,790) (175,654) Less recoveries . . . . . . . . . . . 22,259 14,154 8,551 ---------- ---------- ---------- Net charge-offs . . . . . . . . . . . . . . (57,704) (126,636) (167,103) ---------- ---------- ---------- Balance, December 31 . . . . . . . . . . . $ 171,496 $ 192,700 $ 212,500 ========== ========== ==========
Activity in the other real estate owned reserve was:
1993 ---------- Balance, January 1 . . . . . . . . . . . . $ 7,833 Additions to the OREO reserve . . . . . . . 32,471 Reductions related to sales . . . . . . . . (10,528) ---------- Balance, December 31 . . . . . . . . . . . $ 29,776 ==========
NOTE 7. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation on buildings is computed primarily on a straight-line basis with estimated lives ranging from 25 to 50 years. Furniture and equipment useful lives generally range from 3 to 10 years. Leasehold improvements are amortized over their useful life or lease term, whichever is shorter. 26 24 NOTE 7. (CONTINUED) Premises and equipment were comprised of the following:
(In thousands) 1993 1992 ---------- ---------- Buildings . . . . . . . . . . . . . . . . . $ 160,770 $ 155,513 Land . . . . . . . . . . . . . . . . . . . 15,694 15,770 Equipment . . . . . . . . . . . . . . . . . 233,393 222,841 ---------- ---------- 409,857 394,124 Accumulated depreciation . . . . . . . . . . . . . . 217,303 195,694 ---------- ---------- Net premises and equipment . . . . . . . . . . . . . . $ 192,554 $ 198,430 ========== ==========
Depreciation and amortization expense of premises, equipment, and leasehold improvements was $24,218,000 in 1993, $24,246,000 in 1992, and $23,599,000 in 1991. Total rental expense was $26,346,000 in 1993, $27,367,000 in 1992, and $28,180,000 in 1991, net of $1,705,000, $2,232,000, and $2,496,000 in rental income from subleases, respectively. Contingent rentals were negligible. As of December 31, 1993, the Company and its subsidiaries were obligated, under non-cancelable operating leases (primarily for premises), for minimum rentals in future periods as follows:
(In thousands) TOTAL RENTAL NET OBLIGATION INCOME OBLIGATION ---------- --------- ----------- 1994 . . . . . . . . . . . $ 11,619 $ 1,118 $ 10,501 1995 . . . . . . . . . . . 11,583 1,012 10,571 1996 . . . . . . . . . . . 10,673 899 9,774 1997 . . . . . . . . . . . 9,785 776 9,009 1998 . . . . . . . . . . . 7,346 688 6,658 Thereafter . . . . . . . . 17,559 2,074 15,485
Most leases contain escalation of rent clauses based on increases in real estate taxes or equipment usage. Many leases include renewal provisions. NOTE 8. FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS Balances outstanding as of December 31, 1993 and 1992, consisted of the following:
(Dollars in thousands) FEDERAL U.S. FUNDS REPURCHASE TREASURY TOTAL PURCHASED AGREEMENTS AND OTHER ---------- ---------- ----------- ---------- 1993 Year-end balance . . . . . . . . . $ 507,820 $ 54,235 $ 448,182 $ 5,403 Maximum month-end balance . . . . . . . . . 507,820 88,620 448,182 7,058 Average daily balance . . . . . . . . 150,608 71,770 74,654 4,184 Weighted average interest rates: As of year-end . . . . . . . 3.10% 2.78% 3.18% - During the year . . . . . . . 2.72 2.79 2.81 -
Note 8. (Continued)
(Dollars in thousands) FEDERAL U.S. FUNDS REPURCHASE TREASURY TOTAL PURCHASED AGREEMENTS AND OTHER ---------- ---------- ----------- ---------- 1992 Year-end balance . . . . . . . . . $ 139,969 $ 91,655 $ 41,019 $ 7,295 Maximum month-end balance . . . . . . . . . 267,225 97,407 196,357 7,295 Average daily balance . . . . . . . . . 147,856 84,639 61,221 1,996 Weighted average interest rates: As of year-end . . . . . . . 2.43% 2.72% 2.13% -- During the year . . . . . . . 2.90 3.29 2.44 --
NOTE 9. LONG-TERM DEBT In September 1985, the Company issued $50,000,000 in floating-rate notes. The notes will mature on September 30, 1997, and pay interest at a rate, adjusted quarterly, of 1/8 of 1% above the London Interbank Offered Rate (LIBOR) for three-month Eurodollar deposits. During 1993 the weighted average rate paid was 3.43%, and at December 31, 1993, the rate was 3.44%. The proceeds were used in the funding of the affiliate banks on identical terms. The notes may be redeemed by the Company in whole or in part at any time at 100% of the principal amount plus accrued interest. The Company's 5% debentures, due January 15, 1994, were convertible into common stock of the Company at $13.75 per share, for which purpose 3,709 shares were reserved at December 31, 1993, and were redeemable at the option of the Company at 100% of the principal amount. At December 31, 1993, the debentures totaled $51,000. The debentures were paid in full at maturity. The balance of long-term debt at December 31, 1993, includes mortgage debt at two subsidiaries totaling $4,097,000. The monthly payment amounts of the mortgages totaled $40,000 in 1993 with final maturities from 1994 to 2013. Obligations on capitalized leases totaled $340,000 at December 31, 1993. NOTE 10. EMPLOYEE STOCK OPTION PLANS The Company offers shares of common stock to key employees under stock option plans. Options are awarded by a committee of the Board of Directors. The following is a summary of the changes in options outstanding for the last three years:
1993 1992 1991 -------- ------- ------- Options outstanding at the beginning of the year . . . . . . . . 916,348 817,684 729,184 Options granted . . . . . . . . . . . . . . 97,500 182,000 176,500 Options exercised . . . . . . . . . . . . . (157,414) (20,336) -- Options forfeited . . . . . . . . . . . . . (26,000) (63,000) (88,000) -------- ------- ------- Options outstanding at the end of the year . . . . . . . . . . . 830,434 916,348 817,684 ======== ======= =======
27 25 NOTE 10. (CONTINUED) Prices of shares under option at December 31, 1993, ranged from $13.75 to $45.00, and options for 426,228 shares were exercisable. Unless exercised, the options will expire at varying dates through 2003. There was no compensation expense recorded in the years presented related to stock options. In addition to the above, the Company had a restricted stock plan, which expired in 1992. As of December 31, 1993, 400,000 shares had been awarded. Certificates for shares awarded were issued in the name of the employee, who has all the rights of a shareholder, with the shares subject to certain restrictions. At December 31, 1993, such restrictions remained on 181,395 shares outstanding. The certificates are held by the Company until the restrictions lapse or the shares are forfeited. Restriction periods vary from 1 to 10 years from the date of grant. During 1993, restrictions on 59,328 shares lapsed, and 11,446 shares were forfeited. The fair market value of awarded shares was previously recorded as deferred compensation as a segregation of surplus that is amortized to benefits expense over the restriction period. The unamortized amounts were $1,451,000 at December 31, 1993, $2,952,000 at December 31, 1992, and $1,337,000 at December 31, 1991. Compensation expense related to restricted stock grants, net of forfeitures, was $1,099,000 in 1993, $2,232,000 in 1992, and $860,000 in 1991. NOTE 11. BENEFITS The Company and its subsidiaries provide a noncontributory defined benefit pension plan that covers substantially all employees. Benefits are based upon length of service and qualifying compensation during the final years of employment. Contributions are made to the plan as costs are accrued. Assets held by the plan consist primarily of government securities and common stock. The table below sets forth the plan's funded status and amounts recognized at December 31, 1993, 1992, and 1991.
(In thousands) December 31 ------------------------------------ 1993 1992 1991 ---------- ---------- ---------- Actuarial present value of benefit obligations: Vested benefit obligations . . . . . . . . . . . . . . . $ 69,418 $ 54,765 $ 44,093 ========== ========== ========== Accumulated benefit obligations . . . . . . . . . . . . . . . $ 71,160 $ 56,479 $ 45,636 ========== ========== ========== Projected benefit obligations . . . . . . . . . . . . . . . $ 91,816 $ 78,667 $ 64,267 Plan assets (primarily marketable securities) at market value . . . . . . . . . . . . . 120,041 111,021 97,202 ---------- ---------- ---------- Net assets in excess of projected benefit obligations . . . . . . . . . . . . . . . 28,225 32,354 32,935 Unrecognized experience gain . . . . . . . . . . . . . . . . . . (5,316) (7,988) (7,288) Unrecognized prior service cost . . . . . . . . . . . . . . . . . . 1,831 2,112 2,392 Unamortized net excess pension assets at transition recognized over 15 years . . . . . . . . . . . . . . (11,809) (13,286) (14,761) ---------- ---------- ---------- Prepaid pension cost recorded in other assets . . . . . . . . . . . . . . $ 12,931 $ 13,192 $ 13,278 ========== ========== ==========
NOTE 11. (CONTINUED) Assumptions used in determining the actuarial present value of the projected benefit obligation as of December 31 are as follows:
1993 1992 1991 ---------- ---------- ---------- Discount rate . . . . . . . . . . . . . . . 7.25% 8.00% 9.00% Rate of increase in future compensation levels . . . . . . . . . . . 4.70 5.20 6.20
Net periodic pension expense (credit) consisted of the following:
(In thousands) 1993 1992 1991 --------- --------- --------- Service costs earned during period . . . . . . . . . . . . . . . . . $ 4,083 $ 3,724 $ 3,615 Interest cost on projected benefit obligation . . . . . . . . . . . . . . 6,304 6,071 5,314 Actual return on plan assets . . . . . . . . . . . . . . . . . (11,113) (15,382) (18,631) Net amortization and deferral. . . . . . . . . . . . . . . 987 5,673 9,584 --------- --------- --------- Net pension expense (credit) . . . . . . . . . . . . . . . . $ 261 $ 86 $ (118) ========= ========= =========
Assumptions used in determining the net pension expense (credit) were as follows:
1993 1992 1991 --------- --------- --------- Rate of return on plan assets . . . . . . . 9.00% 9.50% 9.50% Discount rate . . . . . . . . . . . . . . . 8.00 9.00 9.00 Rate of increase in future compensation levels . . . . . . . . . . . 5.20 6.20 6.20
In addition to the above, the Company provides supplemental retirement benefits, the cost of which was $480,969 in 1993, $419,250 in 1992, and $376,000 in 1991. The Company has a savings and profit sharing plan that is interrelated with an employee stock ownership plan (ESOP). Under these plans, employees of the Company and its subsidiaries are eligible to receive benefits upon completion of certain service requirements, with a portion of such benefits payable under the ESOP in shares of the Company's common stock. In 1989, the ESOP borrowed $18,600,000 from a third party to purchase 800,000 shares of the Company's common stock. This loan, unconditionally guaranteed by the Company, is payable in eight increasing instalments that began on January 31, 1990. At December 31, 1993, the balance of the ESOP loan was $12,241,000, and unallocated ESOP shares were 526,495. During 1993, ESOP expense of $2,566,000 included an accrual to cover the loan payment due on January 31, 1994, and interest expense on the ESOP loan of $455,000. The amount of dividends used to service the debt, which were paid on shares held by the ESOP, was $697,000 in 1993; there were no dividends paid in 1992 and 1991. Apart from the contributions to the ESOP, the Company made no contributions to the savings and profit sharing plan in 1993, 1992, or 1991. As of December 31, 1993, accumulated ESOP benefits totaling $2,647,000 will reduce future contributions to the savings and profit sharing plan. 28 26 NOTE 11. (CONTINUED) The Company has a plan providing severance benefits for certain employees of the Company and its subsidiaries with respect to certain terminations of employment within two years after a change in control of the Company. Approximately 3,500 employees are potentially eligible for benefits under the plan. Existing compensation and benefit plans have been amended to protect previously earned compensation and future benefits in the event of a change in control of the Company. The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" as of January 1, 1993. Statement No. 106 requires a calculation of the present value of expected benefits to be paid to employees after their retirement and an allocation of those benefits to the periods in which employees render service to earn the benefits. For employees retiring prior to December 31, 1993, the Company provided $5,000 of life insurance and a Medicare premium supplement and permitted those under 65 to participate in the Company's medical plan by paying the full group rate; full-time employees pay approximately 25% of the group rate. Those retiring after December 31, 1993, will not receive the Medicare supplement and will pay premiums for life and medical insurance reflecting the Company's full cost of coverage for retirees. The initial transition obligation associated with the adoption of Statement No. 106 was $3,600,000. In accordance with the statement, the Company will recognize this liability over the remaining service periods of plan participants. Since eligibility for these Company-subsidized benefits ceased at December 31, 1993, this period ranges from approximately five years for the medical insurance to thirteen years for the life insurance and Medicare supplements. The table below sets forth the plan's funded status and amounts recognized at December 31, 1993. Accumulated Postretirement Benefit Obligation:
(In thousands) Life insurance . . . . . . . . . . . . . . $ (2,445) Early retirement medical . . . . . . . . . (244) Medicare supplement . . . . . . . . . . . . (908) --------- Total . . . . . . . . . . . . . . . . . . $ (3,597) ========= Plan assets . . . . . . . . . . . . . . . . $ -- ========= Accumulated postretirement benefit obligation in excess of assets . . . . . . . . . . . . . . . . . $ (3,597) Unrecognized net loss . . . . . . . . . . . 186 Unrecognized prior service cost . . . . . . -- Unrecognized net transition obligation . . . . . . . . . . . . . . . 3,152 --------- Net postretirement benefit liability. . . . $ (259) =========
Postretirement benefit expense was $619,000 in 1993. In 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." Statement No. 112, which will be effective in 1994, covers all postemployment benefits not already covered by the two prior accounting pronouncements. Adoption of Statement No. 112 will result in an additional accrual of postemployment benefits of $1,600,000, of which the after-tax amount of approximately $1,000,000 will be recorded in the first quarter of 1994. The recurring annual cost of postemployment benefits to former employees is estimated at approximately $250,000. This amount is comparable to the annual cost incurred in 1993. NOTE 12. OTHER NONINTEREST INCOME The major components of other noninterest income were:
YEAR ENDED --------------------------------------------------- (In thousands) 1993 1992 1991 -------- -------- --------- Credit card fees . . . . . . . . . $ 18,892 $ 19,398 $ 19,354 Trust fees . . . . . . . . . . . . 14,559 14,810 14,891 Processing fees . . . . . . . . . . 13,788 12,624 12,220 Mortgage banking fees . . . . . . . 11,972 10,207 6,035 Investment management and brokerage fees . . . . . . . 6,561 4,197 1,949 International fees . . . . . . . . 5,845 6,035 5,890 Other noninterest income . . . . . . . . . . . . . 21,696 19,939 20,881 -------- -------- -------- $ 93,313 $ 87,210 $ 81,220 ======== ======== ========
NOTE 13. OTHER OPERATING EXPENSES The major components of other operating expenses were:
YEAR ENDED DECEMBER 31 ---------------------------------------------------- (In thousands) 1993 1992 1991 --------- --------- ---------- FDIC insurance . . . . . $ 21,949 $ 19,289 $ 18,329 Marketing and public relations . . . . . . . 21,341 17,033 13,466 Service bureau and other data processing . 16,538 15,602 13,444 Professional services . . 13,744 12,482 8,577 Printing and supplies . . 12,997 12,557 11,879 Postage . . . . . . . . . 8,290 8,201 8,213 Legal and consulting . . 6,609 9,763 7,933 Other operating expenses. 27,699 27,385 29,408 --------- --------- --------- 129,167 122,312 111,249 OREO and legal expenses related to workout. . . 17,468 18,450 17,246 --------- --------- --------- $ 146,635 $ 140,762 $ 128,495 ========= ========= =========
NOTE 14. INCOME TAXES The provision for income taxes was comprised of the following:
(In thousands) 1993 1992 1991 --------- --------- --------- Provision for: Federal income tax . . . . . . . $ 32,254 $ 25,101 $ 2,720 State income tax . . . . . . . 14,818 11,350 4,028 --------- --------- --------- $ 47,072 $ 36,451 $ 6,748 ========= ========= =========
The current and deferred components of the provision were as follows:
(In thousands) Current taxes payable: Federal . . . . . . . . . . . . . $ 31,084 $ 26,940 $ 3,743 State . . . . . . . . . . . . . . 13,313 11,350 4,264 --------- --------- --------- $ 44,397 $ 38,290 $ 8,007 ========= ========= ========= Deferred taxes (benefit): Federal . . . . . . . . . . . . . $ 1,170 $ (1,839) $ (1,023) State . . . . . . . . . . . . . . 1,505 -- (236) --------- --------- --------- $ 2,675 $ (1,839) $ (1,259) ========= ========= =========
29 27 NOTE 14. (CONTINUED) The major components of deferred income tax expense (benefit) were as follows:
(In thousands) 1993 1992 1991 --------- --------- ---------- Loan losses . . . . . . . $ 9,360 $ 6,628 $ 907 Depreciation . . . . . . (1,859) (1,408) (1,004) Loan fees, net . . . . . (348) (211) 644 Pension credit . . . . . (360) (31) 33 Lease financing . . . . . (2,973) (439) 543 Provision for OREO reserve, net . . . . . (3,300) (4,947) (3,046) Other, net . . . . . . . 2,155 (1,431) 664 --------- --------- --------- $ 2,675 $ (1,839) $ (1,259) ========= ========= =========
The differences between the effective income tax rate and the nominal federal tax rate on income before taxes are reconciled as follows:
1993 1992 1991 --------- --------- ---------- Nominal federal tax rate 35.0% 34.0% 34.0% State tax rate, net of federal tax benefit . . 8.4 7.8 16.2 Tax-exempt income . . . . (2.3) (2.6) (24.3) Alternative minimum tax . - (1.4) 8.1 Non-deductible goodwill . .2 0.6 4.4 Other . . . . . . . . . . (.3) (0.3) 2.7 ----------- ----------- ----------- 41.0% 38.1% 41.1% =========== =========== ===========
At December 31, 1993, and January 1, 1993, the Company had gross deferred tax assets and gross deferred tax liabilities as follows:
DECEMBER 31 JANUARY 1 (In thousands) 1993 1993 --------- ---------- Deferred tax assets: Loan losses . . . . . . . . . . . . . . $ 73,900 $ 83,260 OREO reserve . . . . . . . . . . . . . 12,972 9,672 Loan fees, net . . . . . . . . . . . . 5,128 4,780 Other, net . . . . . . . . . . . . . . 3,859 4,448 --------- --------- 95,859 102,160 --------- --------- Deferred tax liabilities: Lease financing . . . . . . . . . . . . 13,365 16,338 Depreciation . . . . . . . . . . . . . 8,928 10,787 Pension credit . . . . . . . . . . . . 5,575 5,935 Other, net . . . . . . . . . . . . . . 2,606 1,040 --------- --------- 30,474 34,100 --------- --------- Net deferred tax asset . . . . . . . $ 65,385 $ 68,060 ========= =========
NOTE 15. FINANCIAL INSTRUMENTS WITH CREDIT RISK AND OFF-BALANCE SHEET RISK CONCENTRATION OF CREDIT RISK - The Company is a commercial banking organization, providing diversified financial services to individuals, businesses, governmental units, and other banks. The Company provides a comprehensive range of credit, non-credit, and international banking products and services to the New England region, with particular emphasis in the Commonwealth of Massachusetts, and accordingly is affected by general economic conditions in the region. OFF-BALANCE SHEET RISK - In the normal course of business, the Company uses various off-balance sheet commitments and financial NOTE 15. (CONTINUED) instruments for interest rate risk management purposes and to accommodate certain financing requirements of customers. These commitments and financial instruments may include loan commitments, interest rate swaps, standby letters of credit, loans sold with recourse, letters of credit, forward contracts, interest rate caps, and interest rate floors. These instruments involve varying degrees of credit and market risk in excess of the amounts included in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company's involvement in each particular class of financial instrument. The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees under recourse arrangements is represented by the contractual amount of those instruments. The Company uses the same credit policies in extending commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate swaps, caps, and floors, the contract or notional amounts do not represent an exposure to credit loss. The Company controls the credit risk of its interest rate swap agreements through credit approvals, limits, and monitoring procedures in conjunction with its interest rate risk management activities. Unless otherwise noted, the Company does not require collateral or other security to support financial instruments with credit risk. Off-balance sheet financial instruments at December 31, 1993 and 1992, were as follows:
CONTRACT OR NOTIONAL AMOUNT ---------------------------------- (In thousands) 1993 1992 ----------- ----------- Loan commitments . . . . . . . . . . . . $ 2,763,000 $ 2,810,000 Standby letters of credit . . . . . . . . 164,000 172,000 Forward commitments . . . . . . . . . . . 163,000 244,000 Loans sold with recourse . . . . . . . . 46,000 68,000 Foreign exchange commitment contracts . . . . . . . . . 44,000 37,000 Letters of credit . . . . . . . . . . . . 15,000 25,000 Interest rate swaps . . . . . . . . . . . 8,000 21,000 Securities purchase and sell commitments . . . . . . . . . . . . . . -- 1,000
LOAN COMMITMENTS, LETTERS OF CREDIT, AND STANDBY LETTERS OF CREDIT - Loan commitments and letters of credit are granted under the same credit policies used for on-balance sheet outstandings. Commitments are subject to various terms and conditions that have to be met before being drawn upon and have a fixed expiration date. The nature of many commitments is such that they are expected to expire without being drawn upon, thus not requiring future funding by the Company. Letters of credit are documents, principally related to export and import trade transactions, issued by the Company on behalf of its customers in favor of third parties, who can present demands on the Company within specified terms and conditions. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. FORWARD COMMITMENTS - The Company enters into forward contract commitments to reduce the market risk associated with originating residential mortgage loans for sale. Contractual terms of forward commitments specify the aggregate amount of contract, the interest rate or prices at which loans are to be delivered, and the period covered. The market risk to the Company is the potential inability to originate loans at prices specified in the contract within 30 28 NOTE 15. (CONTINUED) the commitment period, thus resulting in a potential difference between loan origination requirements under contract terms and those loans acquired at market prices to fulfill the commitment. LOANS SOLD WITH RECOURSE - The Company sells residential mortgage loans to the secondary market in connection with its mortgage banking business. While the majority of these loans are sold on a nonrecourse basis, there is a nominal amount of recourse loans. All residential mortgage loans are subject to the same credit policies, and off-balance sheet loans with recourse have the same credit risk as on-balance sheet loans. If a borrower defaults on a loan sold with recourse, it is sold back to the Company to initiate normal collection efforts. FOREIGN EXCHANGE COMMITMENT CONTRACTS - The Company periodically enters into offsetting agreements to purchase foreign currency and, in turn, to sell it to customers. Credit risk exists because in the event the customer fails to take delivery of the foreign currency, the Company is thus required to resell it to the market. INTEREST RATE SWAPS - The Company uses interest rate swap contracts in conjunction with asset and liability management activities and to adjust interest rate risk associated with specific customer transactions. These contracts allow the Company to exchange fixed or variable interest rate payment amounts on existing assets or liabilities without changing the terms or amount of the underlying principal. Interest rate swaps are stated in notional terms, which represent the aggregate amount of the specific asset or liability being hedged by the interest rate swap transaction. However, the actual exposure to credit risk is the stream of interest payments under the contractual terms of the swap, not the notional amount. The Company manages the credit risk by entering into interest rate swap agreements only with highly regarded counterparties after a credit review process. SECURITIES PURCHASE AND SELL COMMITMENTS - In connection with its capital markets activities, the Company regularly commits to purchase and sell securities issued by the U.S. Government and its agencies and by municipalities. NOTE 16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Under the provisions of Statement of Financial Accounting Standards No. 107, "Disclosures about the Fair Value of Financial Instruments," the Company is required to estimate and disclose the fair value of certain of its on- and off-balance sheet financial instruments. Statement No. 107 defines what constitutes a financial instrument and recommends general methodologies to determine fair value. The fair value of a financial instrument as defined in Statement No. 107 is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices are used to establish fair value when they are available for a particular financial instrument, and present value and other valuation techniques are utilized to estimate the fair value of financial instruments that do not have quoted market prices. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which disclosure is required by Statement No. 107. CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS - The current fair value of these financial instruments is defined as the amount recorded in the balance sheet categories. SECURITIES PORTFOLIOS - Securities available for sale, investment securities, and trading account securities are financial instruments NOTE 16. (CONTINUED) that are usually traded in broad markets. Fair values are based upon market prices and dealer quotes. If a quoted market price is not available for a particular security, the fair value is determined by reference to quoted market prices for securities with similar characteristics. LOANS - For certain homogeneous categories of instalment loans, including student loans and credit card receivables, fair value has been estimated using quoted market prices for similar loans. The fair value of other instalment loans, including automobile financing, was determined by discounted cash flow techniques using interest rates for similar loans at December 31, 1993. Credit risk factors were incorporated in the discount rates used for these loans and reflected in the market prices obtained for homogeneous loans. The fair value of residential mortgage loans, including ARMs and fixed-rate loans, was determined using discounted cash flow techniques with year-end interest rates, and by comparison with quoted market prices for mortgage-backed securities with similar interest rates and terms. The analysis also reflected estimated prepayment factors. The fair value of both fixed- and variable-rate commercial and commercial real estate loans was determined by discounted cash flow techniques. Year-end 1993 interest rates were used that incorporated the risk of credit loss associated with each type of loan, based on an evaluation performed as of December 31, 1993. DEPOSITS - The fair value of demand deposits, NOW and savings accounts, and money market deposits is defined by Statement No. 107 as the amount payable on demand at the reporting date. Therefore, for these financial instruments, the amounts recorded in the balance sheet are also reported as their fair value under the provisions of the statement, and no core deposit value was derived for fair value disclosure purposes. The fair value of certificates of deposit with fixed interest rates is estimated by the use of present value techniques. These techniques considered the cash flow related to these certificates, year-end interest rates at which similar certificates were issued with similar remaining maturities, and the probability of early withdrawal if interest rates were to rise. SHORT-TERM BORROWINGS - The carrying amounts of federal funds purchased and other short-term borrowings are defined to approximate their fair values. LONG-TERM DEBT - The fair value of long-term debt was established by market prices of the debt and present value techniques that consider the debt's remaining maturity and yield and the current credit ratings of the Company. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - These financial instruments generally are not sold or traded, and there is no standard methodology for determining their fair values. The Company's loan commitments are not beyond normal market terms and do not include fees or conditions other than those associated with customary market practices. The fair value of loan commitments was calculated by determining the discounted present value of the remaining contractual fees over the unexpired commitment period, generally not more than one year. The fair value of securities purchase and sell commitments was determined by reference to the price of the underlying securities. The fair value of standby letters of credit was determined by reference to the current fees charged to issue similar letters of credit. The fair value of forward commitments and interest rate swaps was determined by reference to the market for similar instruments. 31 29 NOTE 16. (CONTINUED) At December 31, 1993, the estimated fair values of off-balance sheet financial instruments, consisting primarily of loan commitments, were not considered to be material. The fair value of the financial instruments presented, and as determined under the guidelines established by Statement No. 107 as previously described, depend highly on assumptions as they existed as of December 31, 1993 and 1992, and on the related methodologies applied and do not purport to represent actual economic value in a bona fide transaction with a legitimate buyer under normal market conditions. It should also be noted that different financial institutions will use different assumptions and methodologies in determining fair values such that comparisons between institutions may be difficult. The Company did not attempt to determine the fair value of its substantial base of core deposits, as their disclosure is not required and due to the lack of generally accepted, industry-wide methodology for determining such values. With that understanding, the financial statement amounts and estimated fair values of financial instruments at December 31, 1993 and 1992, were as follows:
1993 1992 -------------------------- ------------------------- FINANCIAL FAIR FINANCIAL FAIR STATEMENT VALUE STATEMENT VALUE ----------- ----------- ------------- ---------- Financial assets Cash and due from banks . . . . . $ 632,985 $ 632,985 $ 733,726 $ 733,726 Interest-bearing deposits and other short-term investments . . . . 803,068 803,068 1,091,985 1,091,985 Trading accounts . . 14,595 14,595 74,694 74,694 Securities portfolios . . . . . 2,228,063 2,238,537 1,679,369 1,687,941 Loans (net of allowance): . . . . . Commercial and commercial real estate . . . . 2,146,686 2,210,000 2,292,128 2,345,000 Consumer . . . . . . 3,784,988 3,980,000 3,453,171 3,676,000 ----------- ----------- ----------- ---------- 5,931,674 6,190,000 5,745,299 6,021,000 Financial liabilities Deposits: Demand, NOW, savings, and money market deposit accounts . . . . . . $ 7,749,919 $ 7,749,919 $ 7,708,846 $7,708,846 Consumer time . . . . 993,945 1,003,000 1,234,747 1,250,000 Time - $100,000 or more . . . . . . . 34,957 34,957 38,955 38,955 Federal funds purchased and other short-term borrowings . . . . . 507,820 507,820 139,969 139,969 Long-term debt . . . 54,488 54,000 55,188 52,000
NOTE 17. CONTINGENCIES The Company and its subsidiaries are involved in a number of legal proceedings arising in the normal course of business. After reviewing such matters, the Company believes that their resolution will not materially affect its results of operations or financial position. NOTE 18. QUARTERLY DATA (UNAUDITED) Summarized quarterly financial data for years 1991 through 1993 are as follows:
(In thousands except for share amounts) YEAR ENDED DECEMBER 31 ------------------------------------------- 1993 1992 1991 ---------- ----------- ---------- Net interest income First Quarter . . . . $ 101,528 $ 101,271 $ 97,303 Second Quarter . . . . 104,917 104,548 98,799 Third Quarter . . . . 108,282 107,428 98,477 Fourth Quarter . . . . 109,096 103,265 102,317 --------- --------- ---------- $ 423,823 $ 416,512 $ 396,896 ========= ========= ========== Noninterest income First Quarter . . . . $ 46,896 $ 43,309 $ 40,339 Second Quarter . . . . 48,751 46,484 42,142 Third Quarter . . . . 51,904 46,801 43,832 Fourth Quarter . . . . 50,973 47,287 43,440 --------- --------- ---------- $ 198,524 $ 183,881 $ 169,753 ========= ========= ========== Net securities gains First Quarter . . . . $ -- $ 35,413 $ 228 Second Quarter . . . . 358 393 2,357 Third Quarter . . . . 49 -- 8,988 Fourth Quarter . . . . 4 41,123 29,390 --------- --------- ---------- $ 411 $ 76,929 $ 40,963 ========= ========= ========== Provision for loan losses and OREO reserve First Quarter . . . . $ 18,500 $ 60,210 $ 34,914 Second Quarter . . . . 16,892 38,619 42,646 Third Quarter . . . . 16,800 27,754 49,786 Fourth Quarter . . . . 9,138 25,735 65,504 --------- --------- ---------- $ 61,330 $ 152,318 $ 192,850 ========= ========= ========== Net income First Quarter . . . . $ 12,761 $ 8,229 $ 1,001 Second Quarter . . . . 14,207 6,515 1,124 Third Quarter . . . . 18,001 10,436 1,063 Fourth Quarter . . . . 22,682 34,057 6,467 --------- --------- ---------- $ 67,651 $ 59,237 $ 9,655 ========= ========= ========== Earnings per share First Quarter . . . . $ .68 $ .51 $ .06 Second Quarter . . . . .75 .40 .07 Third Quarter . . . . .95 .64 .07 Fourth Quarter . . . . 1.19 1.97 .40 --------- --------- ---------- $ 3.57 $ 3.57* $ 0.60 ========= ========= ==========
* The sum of the quarters' earnings per share for 1992 does not equal the full-year amount due to the effect of the issuance of additional common stock in the fourth quarter of 1992. 32 30
HISTORICAL FINANCIAL AND STATISTICAL INFORMATION - ------------------------------------------------ Average Balances . . . . . . . . . . . . . . . . . . . 34 Summary of Operations . . . . . . . . . . . . . . . . . 35 Average Yields, Rates Paid, and Net Interest Margin . . 36 Distribution of Loans . . . . . . . . . . . . . . . . . 37 Credit Quality . . . . . . . . . . . . . . . . . . . . 37 Other Data . . . . . . . . . . . . . . . . . . . . . . 38 Quarterly Share Data . . . . . . . . . . . . . . . . . 38
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Average Balances BAYBANKS, INC. - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share amounts) (1) 1993 1992 1991 1990 1989 1988 ---------- ---------- ---------- ---------- ---------- ---------- Assets Interest-bearing deposits and other short-term investments (2) . . . . . $ 593,317 $ 623,200 $ 675,655 $ 436,888 $ 120,583 $ 22,065 Securities available for sale U.S. Government . . . . . . . . . . . . . . 1,158,347 303,306 -- -- -- -- Corporate and other . . . . . . . . . . . . 83,424 15,344 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- 1,241,771 318,650 -- -- -- -- Investment securities U.S. Government . . . . . . . . . . . . . . 622,387 782,293 536,255 327,103 342,587 182,191 Mortgage-backed securities . . . . . . . . -- 412,396 623,476 567,500 149,320 135,846 Asset-backed securities . . . . . . . . . . 67,130 -- -- -- -- -- State and local governments . . . . . . . . 74,190 50,192 87,792 142,117 154,759 290,246 Industrial revenue bonds . . . . . . . . . 68,921 84,757 98,644 114,042 129,245 151,007 Corporate and other . . . . . . . . . . . . 1,976 4,917 1,886 13,528 113,606 125,090 ---------- ---------- ---------- ---------- ---------- ---------- 834,604 1,334,555 1,348,053 1,164,290 889,517 884,380 Loans (3) Commercial . . . . . . . . . . . . . . . . 1,364,807 1,553,643 1,849,960 2,251,316 2,495,733 2,250,770 Commercial real estate . . . . . . . . . . 956,991 1,117,933 1,343,300 1,545,502 1,551,012 1,327,703 Residential mortgage . . . . . . . . . . . 1,171,044 1,256,553 1,357,703 1,549,862 1,790,472 1,540,256 Instalment . . . . . . . . . . . . . . . . 2,417,647 2,224,709 2,184,077 2,109,570 1,978,854 1,817,261 ---------- ---------- ---------- ---------- ---------- ---------- 5,910,489 6,152,838 6,735,040 7,456,250 7,816,071 6,935,990 Less allowance for loan losses . . . . . . 188,191 213,949 228,192 139,603 61,070 49,865 ---------- ---------- ---------- ---------- ---------- ---------- 5,722,298 5,938,889 6,506,848 7,316,647 7,755,001 6,886,125 ---------- ---------- ---------- ---------- ---------- ---------- Total earning assets . . . . . . . . . . . 8,580,181 8,429,243 8,758,748 9,057,428 8,826,171 7,842,435 Cash and due from banks . . . . . . . . . . . 629,428 604,115 553,945 570,755 565,418 567,519 Other assets . . . . . . . . . . . . . . . . 548,223 615,396 590,896 443,036 356,241 319,692 ---------- ---------- ---------- ---------- ---------- ---------- Total assets . . . . . . . . . . . . . . . $9,569,641 $9,434,805 $9,675,397 $9,931,616 $9,686,760 $8,679,781 ========== ========== ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand . . . . . . . . . . . . . . . . . . $1,886,914 $1,717,345 $1,501,448 $1,481,019 $1,491,246 $1,543,244 NOW accounts . . . . . . . . . . . . . . . 1,336,270 1,218,252 1,038,135 932,851 869,409 860,662 Savings . . . . . . . . . . . . . . . . . 1,399,886 1,223,626 993,305 919,678 972,190 1,116,344 Money market deposit accounts . . . . . . 2,865,209 3,034,586 3,260,294 3,184,659 2,577,672 2,041,353 Consumer time . . . . . . . . . . . . . . 1,102,025 1,363,997 1,692,020 1,821,337 1,857,656 1,241,756 Time - $100,000 or more . . . . . . . . . 33,322 57,547 187,863 407,320 471,424 528,552 ---------- ---------- ---------- ---------- ---------- ---------- 8,623,626 8,615,353 8,673,065 8,746,864 8,239,597 7,331,911 Federal funds purchased and other short-term borrowings (4) . . . . . . . . 150,608 147,856 366,262 474,026 658,100 629,867 Long-term debt . . . . . . . . . . . . . . . 54,437 55,226 55,052 53,691 53,372 51,757 ---------- ---------- ---------- ---------- ---------- ---------- Total deposits and borrowings . . . . . . 8,828,671 8,818,435 9,094,379 9,274,581 8,951,069 8,013,535 Other liabilities (5) . . . . . . . . . . . . 69,937 81,366 87,381 106,033 149,957 132,067 Stockholders' equity . . . . . . . . . . . . 671,033 535,004 493,637 551,002 585,734 534,179 ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity $9,569,641 $9,434,805 $9,675,397 $9,931,616 $9,686,760 $8,679,781 ========== ========== ========== ========== ========== ========== CAPITAL RATIOS Risk-based (6) Core (minimum regulatory standard - 4.00%) 10.68% 10.37% 7.28% 6.40% n/a n/a Total (minimum regulatory standard - 8.00%) 12.40 12.30 9.29 8.33 n/a n/a Leverage ratio (6) . . . . . . . . . . . . . 7.26 6.79 5.38 4.83 n/a n/a Prior measures (6) Primary . . . . . . . . . . . . . . . . . n/a n/a n/a 6.80 6.60 6.50 Total . . . . . . . . . . . . . . . . . . n/a n/a n/a 7.30 7.10 7.00 Year-end book value per share . . . . . . . . $ 37.52 $ 34.81 $ 31.30 $ 30.49 $ 37.67 $ 35.43 - ---------------------------------------------------------------------------------------------------------------------------- (1) Substantially all balances are derived from daily averages. In certain instances, a method approximating daily averages was used. (2) Includes interest-bearing deposits in other banks, federal funds sold, securities purchased under agreement to resell, bankers' acceptances purchased, and trading account assets. (3) Nonperforming loans are included in the average balances. Interest income is recorded on an accrual basis. Thus, loans that are nonperforming do not contribute to net interest income and affect the net interest margin. (4) Includes federal funds purchased, securities sold under agreement to repurchase, and demand notes issued to the U.S. Treasury. (5) Other liabilities include guarantee of ESOP indebtedness in 1993, 1992, 1991, and 1990. (6) The risk-based capital ratios and the leverage capital ratio were phased in December 31, 1990.
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SUMMARY OF OPERATIONS BAYBANKS, INC. - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands on a tax equivalent basis 1993 1992 1991 1990 1989 1988 except share amounts) (7) ---------- ---------- ---------- ---------- ---------- ---------- Income on interest-bearing deposits and other short-term investments . . . . . . . . . $ 19,931 $ 22,925 $ 40,019 $ 35,879 $ 11,334 $ 1,679 Interest on securities portfolios Taxable . . . . . . . . . . . . . . . . . 84,510 86,304 95,542 81,417 44,117 26,367 Tax-exempt . . . . . . . . . . . . . . . . 10,730 10,807 14,961 27,686 42,304 53,697 ---------- ---------- ---------- ---------- ---------- ---------- 95,240 97,111 110,503 109,103 86,421 80,064 ---------- ---------- ---------- ---------- ---------- ---------- Interest and fees on loans Commercial (8) . . . . . . . . . . . . . . 89,383 109,048 161,156 231,046 281,336 230,023 Commercial real estate . . . . . . . . . . 74,353 92,548 122,519 146,705 173,229 141,131 Residential mortgage . . . . . . . . . . . 92,451 111,390 132,725 155,384 178,470 148,096 Instalment . . . . . . . . . . . . . . . . 224,471 227,652 250,890 256,015 242,005 204,430 ---------- ---------- ---------- ---------- ---------- ---------- 480,658 540,638 667,290 789,150 875,040 723,680 ---------- ---------- ---------- ---------- ---------- ---------- Total income on earning assets . . . . . . . 595,829 660,674 817,812 934,132 972,795 805,423 Interest expense on deposits and borrowings NOW and savings accounts . . . . . . . . . 52,040 67,304 94,544 96,926 97,143 102,690 Money market deposit accounts . . . . . . 66,001 97,256 173,393 223,861 201,878 132,566 Consumer time . . . . . . . . . . . . . . 41,514 66,627 114,868 147,752 163,986 101,103 Time - $100,000 or more . . . . . . . . . 886 2,048 11,356 32,804 42,189 40,627 Short-term borrowings . . . . . . . . . . 4,098 4,285 19,941 36,477 59,180 46,026 Long-term debt . . . . . . . . . . . . . . 2,109 2,489 3,860 4,622 5,059 4,130 ---------- ---------- ---------- ---------- ---------- ---------- Total interest expense . . . . . . . . . . . 166,648 240,009 417,962 542,442 569,435 427,142 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income . . . . . . . . . . . . 429,181 420,665 399,850 391,690 403,360 378,281 Noninterest income (8) Service charges and fees on deposit accounts 105,211 96,671 88,533 70,823 64,200 53,842 Other noninterest income . . . . . . . . . 93,313 87,210 81,220 84,988 76,837 79,977 ---------- ---------- ---------- ---------- ---------- ---------- Total noninterest income (8) . . . . . . . 198,524 183,881 169,753 155,811 141,037 133,819 ---------- ---------- ---------- ---------- ---------- ---------- Total income from operations . . . . . . . . 627,705 604,546 569,603 547,501 544,397 512,100 Operating expenses Salaries and benefits . . . . . . . . . . 212,954 199,604 184,399 179,723 178,630 165,440 Occupancy and equipment . . . . . . . . . 87,116 88,950 85,465 87,326 85,305 78,174 Other operating expenses . . . . . . . . . 146,635 140,762 128,495 111,454 107,320 99,500 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses . . . . . . . . . 446,705 429,316 398,359 378,503 371,255 343,114 ---------- ---------- ---------- ---------- ---------- ---------- Operating Income before Net Securities Gains and Provisions for Loan Losses and OREO Reserve . . . . . . . . . . . . . . . . . 181,000 175,230 171,244 168,998 173,142 168,986 ---------- ---------- ---------- ---------- ---------- ---------- Net securities gains . . . . . . . . . . . . 411 76,929 40,963 19,582 10,878 254 ---------- ---------- ---------- ---------- ---------- ---------- Provision for loan losses . . . . . . . . . . 36,500 106,836 165,400 289,958 75,000 16,600 Provision for OREO reserve, net . . . . . . . 24,830 45,482 27,450 14,582 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total credit provisions . . . . . . . . . . . 61,330 152,318 192,850 304,540 75,000 16,600 ---------- ---------- ---------- ---------- ---------- ---------- Pre-tax income (loss) . . . . . . . . . . . . 120,081 99,841 19,357 (115,960) 109,020 152,640 Less tax equivalent adjustment included above . . . . . . . . . . . . . 5,358 4,153 2,954 9,058 13,703 17,287 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before taxes . . . . . . . . . 114,723 95,688 16,403 (125,018) 95,317 135,353 Provision for income taxes (benefit) . . . . 47,072 36,451 6,748 (55,216) 32,173 46,819 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655 $ (69,802) $ 63,144 $ 88,534 ========== ========== ========== ========== ========== ========== EARNINGS (LOSS) PER SHARE (9) . . . . . . . . $ 3.57 $ 3.57 $ 0.60 $ (4.37) $ 3.95 $ 5.57 Dividends Paid Per Share . . . . . . . . . . 0.90 - - 1.05 1.80 1.60 PERFORMANCE RATIOS Operating profit margin . . . . . . . . . . . 28.8% 29.0% 30.1% 30.9% 31.8% 33.0% Return on average stockholders' equity . . . 10.1 11.1 2.0 (12.7) 10.8 16.6 Return on average total assets . . . . . . . 0.71 0.63 0.10 (0.70) 0.65 1.02 - ---------------------------------------------------------------------------------------------------------------------------- (7) Certain items in the summary that are tax-exempt have been restated to include the federal tax benefit derived from income on obligations of state and local governments, industrial revenue bonds, and certain other securities, thus facilitating the comparison between returns on alternative types of earning assets and between totals that contain varying mixtures of fully taxable and federal tax-exempt income. Because of the interplay of federal and Massachusetts income taxes, $1.00 of federal tax-exempt income was the fully taxable equivalent of $1.55 in 1993. (8) There were no significant items (excluding net securities gains) considered by management to be of a nonrecurring nature included in the Summary of Operations above for 1991-1993. In 1990, the Company recognized a $4.8 million pension settlement gain and a $1.2 million gain from the sale of its payroll processing service. In 1989, the Company recognized a $2.5 million gain from liquidation of loans acquired at a discount in 1987. In 1988, the Company also recognized a gain of $7.4 million from liquidation of these loans, $4.2 million in gains from property sales, and a gain of $4.0 million from the sale of the Company's investment in the CIRRUS(R) automated teller network. (9) For 1988-1993, the difference between earnings (loss) per share as reported and fully diluted was less than 3%.
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AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN (Tax equivalent basis) BAYBANKS, INC. - ----------------------------------------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 1988 ---- ---- ---- ---- ---- ---- Interest-bearing deposits and other short-term investments 3.36% 3.68% 5.92% 8.21% 9.40% 7.61% Securities available for sale . . . . . . . . . . . . . 4.48% 4.79% --% --% --% --% U.S. Government . . . . . . . . . . . . . . . . . 4.54 4.70 -- -- -- -- Corporate and other. . . . . . . . . . . . . . . . 3.73 6.45 -- -- -- -- Investment securities . . . . . . . . . . . . . . . . . 4.74% 6.13% 8.20% 9.37% 9.72% 9.05% U.S. Government . . . . . . . . . . . . . . . . . 4.29 5.65 7.47 8.52 9.24 8.54 Mortgage-backed securities . . . . . . . . . . . . -- 6.46 8.88 9.44 8.35 7.95 Asset-backed securities . . . . . . . . . . . . . 4.44 -- -- -- -- -- State and local governments . . . . . . . . . . . 5.53 7.16 7.51 9.29 9.42 8.90 Industrial revenue bonds . . . . . . . . . . . . . 8.26 8.49 8.48 11.44 12.45 10.93 Corporate and other . . . . . . . . . . . . . . . 6.22 4.33 5.67 10.64 10.25 9.09 Loans . . . . . . . . . . . . . . . . . . . . . . . . . 8.13% 8.79% 9.91% 10.58% 11.20% 10.43% Commercial . . . . . . . . . . . . . . . . . . . 6.55 7.02 8.71 10.26 11.27 10.22 Commercial real estate . . . . . . . . . . . . . . 7.77 8.28 9.12 9.49 11.17 10.63 Residential mortgage . . . . . . . . . . . . . . . 7.89 8.86 9.78 10.03 9.97 9.62 Instalment . . . . . . . . . . . . . . . . . . . . 9.28 10.23 11.49 12.14 12.23 11.25 Total earning assets . . . . . . . . . . . . . . . . . 6.94% 7.84% 9.34% 10.31% 11.02% 10.27% Interest-bearing funds . . . . . . . . . . . . . . . . 2.40% 3.38% 5.50% 6.96% 7.63% 6.60% NOW and savings accounts . . . . . . . . . . . . . 1.90 2.76 4.65 5.23 5.28 5.18 Money market deposit accounts . . . . . . . . . . 2.30 3.20 5.32 7.03 7.83 6.49 Consumer time . . . . . . . . . . . . . . . . . . 3.77 4.88 6.79 8.11 8.83 8.14 Time - $100,000 or more . . . . . . . . . . . . . 2.66 3.56 6.04 8.05 8.95 7.69 Short-term borrowings (4) . . . . . . . . . . . . 2.72 2.90 5.44 7.70 8.99 7.31 Long-term debt . . . . . . . . . . . . . . . . . . 3.87 4.51 7.01 8.60 9.48 7.98 Interest expense as a percentage of average earning assets . . . . . . . . . . . . . . . . . . 1.94% 2.85% 4.77% 5.99% 6.45% 5.45% Net interest margin . . . . . . . . . . . . . . . . . . 5.00% 4.99% 4.57% 4.32% 4.57% 4.82%
36 34
DISTRIBUTION OF LOANS BAYBANKS, INC. - --------------------------------------------------------------------------------------------------------------------------------- (In thousands) 1993 1992 1991 1990 1989 1988 ---------- ---------- ---------- ---------- --------- ----------- Commercial . . . . . . . . . . . . . . . $ 1,324,968 $ 1,411,120 $ 1,654,118 $ 2,036,426 $ 2,489,158 $ 2,413,693 Commercial real estate Commercial mortgages . . . . . . . . . 877,834 965,134 1,132,466 1,172,848 1,173,877 1,008,024 Construction loans . . . . . . . . . . 57,637 57,381 79,483 247,025 410,649 477,722 ----------- ----------- ------------ ----------- ----------- ------------ Total commercial real estate . . . . . 935,471 1,022,515 1,211,949 1,419,873 1,584,526 1,485,746 Residential mortgage . . . . . . . . . . 1,242,597 1,247,633 1,274,591 1,447,043 1,878,335 1,719,049 Instalment . . . . . . . . . . . . . . . 2,600,134 2,256,731 2,212,376 2,226,999 2,060,875 1,950,200 ----------- ----------- ------------ ----------- ----------- ------------ Total loans . . . . . . . . . . . . . . . $ 6,103,170 $ 5,937,999 $ 6,353,034 $ 7,130,341 $ 8,012,894 $ 7,568,688 =========== =========== ============ =========== =========== ============
CREDIT QUALITY - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 1988 ---------- --------- --------- --------- --------- -------- Nonperforming Assets; Restructured, Accruing Loans; and Accruing Loans 90 Days or More Past Due Nonperforming loans . . . . . . . . . . . . . $ 110,001 $ 180,580 $ 222,725 $ 365,261 $ 146,669 $ 53,839 Other real estate owned In-substance foreclosures . . . . . . . . 72,505 100,669 146,638 143,301 -- -- Foreclosed property . . . . . . . . . . . 70,950 102,750 99,163 34,005 8,588 2,348 ---------- --------- --------- --------- --------- -------- 143,455 203,419 245,801 177,306 8,588 2,348 Less OREO reserve . . . . . . . . . . . . 29,776 7,833 -- -- -- -- ---------- --------- --------- --------- --------- -------- OREO, net of reserve . . . . . . . . . . . 113,679 195,586 245,801 177,306 8,588 2,348 ---------- --------- --------- --------- --------- -------- Total nonperforming assets . . . . . . . . . $ 223,680 $ 376,166 $ 468,526 $ 542,567 $ 155,257 $ 56,187 ========== ========= ========= ========= ========= ======== Restructured, accruing loans . . . . . . . . $ 18,398 $ 12,084 $ 39,066 $ 467 $ 543 $ 518 ========== ========= ========= ========= ========= ======== Accruing loans 90 days or more past due . . . $ 51,749 $ 91,895 $ 116,814 $ 99,348 $ 114,434 $ 41,114 ========== ========= ========= ========= ========= ======== Nonperforming assets as a percentage of loans and OREO . . . . . . . . . . . . 3.6% 6.1% 7.1% 7.4% 1.9% 0.7% Nonperforming assets as a percentage of total assets . . . . . . . . . . . . . 2.2 3.8 4.9 5.4 1.6 0.6 Allowance for loan losses as a percentage of year-end loans . . . . . . . . . 2.8 3.2 3.3 3.0 1.1 0.7 Allowance for loan losses as a percentage of nonperforming loans . . . . . . . . . . 155.9 106.7 95.4 58.6 57.8 97.9 Allowance for loan losses and OREO reserve as a percentage of nonperforming loans and OREO . . . . . . . . . . . . . . 79.4 52.2 45.4 39.5 54.6 93.9 Allowance for loan losses as a percentage of nonperforming loans; restructured, accruing loans; and accruing loans past due 90 days or more . . . . . . . . . . . 95.2 67.7 56.1 46.1 32.4 55.2
37 35
OTHER DATA BAYBANKS, INC. - ----------------------------------------------------------------------------------------------- 1993 1992 1991 ------------ ------------ ----------- Average number of common shares outstanding . . . . . . . . . . 18,953,397 16,575,768 16,021,645 Range of BayBanks, Inc., common stock - last sale price . . . . $52 1/8-38 1/4 $40 3/4-18 3/4 $19 1/2-9 5/8 Number of common stockholders of record (approximate) . . . . . . . 4,600 4,900 5,300 Number of full-time equivalent employees at year-end (approximate) . 5,571 5,527 5,531 Number of full-service offices at year-end . . . . . . . . . . . . . 201 204 211 Number of automated banking facilities at year-end . . . . . . . . 356 349 339 Number of automated teller machines at year-end . . . . . . . . . 1,009 994 991 Book value of trust assets at year-end (in thousands) . . . . . . . . . . . . $5,195,741 $4,483,643 $3,784,282
Other Data BAYBANKS, INC. - -------------------------------------------------------------------------------------------- 1990 1989 1988 ---------- ------------ ---------- Average number of common shares outstanding . . . . . . . . . . 15,965,653 15,929,658 15,892,306 Range of BayBanks, Inc., common stock - last sale price . . . . $32-11 3/8 $46 1/4-26 1/4 $48-36 Number of common stockholders of record (approximate) . . . . . . . 5,800 6,000 5,700 Number of full-time equivalent employees at year-end (approximate) . 5,733 5,748 5,665 Number of full-service offices at year-end . . . . . . . . . . . . . 228 225 229 Number of automated banking facilities at year-end . . . . . . . . 331 302 270 Number of automated teller machines at year-end . . . . . . . . . 991 972 919 Book value of trust assets at year-end (in thousands) . . . . . . . . . . . . $3,599,402 $3,290,090 $2,587,797
QUARTERLY SHARE DATA - --------------------------------------------------------------------------------------------------------------------------------- Average number of outstanding shares 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER ----------- ----------- ----------- ----------- 1993 . . . . . . . . . . . . . . . . . . . . . . . . 19,004,540 19,000,208 18,937,724 18,871,018 1992 . . . . . . . . . . . . . . . . . . . . . . . . 17,329,351 16,204,906 16,203,022 16,137,694 1991 . . . . . . . . . . . . . . . . . . . . . . . . 16,022,503 16,025,342 16,022,188 16,016,439 Net income 1993 . . . . . . . . . . . . . . . . . . . . . . . . $1.19 $0.95 $0.75 $0.68 1992 . . . . . . . . . . . . . . . . . . . . . . . . 1.97 0.64 0.40 0.51 1991 . . . . . . . . . . . . . . . . . . . . . . . . 0.40 0.07 0.07 0.06 Dividends declared 1993 . . . . . . . . . . . . . . . . . . . . . . . . $0.25 $0.25 $0.20 $0.20 1992 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 1991 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- Dividends paid 1993 . . . . . . . . . . . . . . . . . . . . . . . . $0.25 $0.25 $0.20 $0.20 1992 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 1991 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- Range of BayBanks, Inc., common stock - last sale price 1993 . . . . . . . . . . . . . . . . . . . . . . . . $50 3/4 - 43 1/4 $50 1/2 - 43 1/4 $51 1/4 - 38 1/4 $52 1/8 - 38 3/4 1992 . . . . . . . . . . . . . . . . . . . . . . . . 40 3/4 - 30 1/8 36 1/2 - 28 3/4 36 7/8 - 26 3/4 31 1/4 - 18 3/4 1991 . . . . . . . . . . . . . . . . . . . . . . . . 19 1/2 - 16 1/8 19 1/2 - 12 3/4 18 3/4 - 13 19 1/2 - 9 5/8
38 36 APPENDIX Narrative descriptions of graphical image material omitted from text of Form 10-K and from Exhibit 13, portions of the BayBanks, Inc. 1993 Annual Report to Stockholders. Annual Report Figure 1 - Net Interest Margin Figure 1 compares the Company's net interest margin from 1988 through 1993 to the net interest margin of the Keefe, Bruyette and Woods, Inc., Bank Index for banks with assets ranging from $10-25 billion. The graph is a line graph with the following data points:
Keefe, Bruyette and BayBanks, Inc. Woods, Inc. Bank Index -------------- ---------------------- 1988 4.82% 4.50% 1989 4.57 4.46 1990 4.32 4.13 1991 4.57 4.33 1992 4.99 4.57 1993 5.00 4.70
The y-axis of the graph ranges from 4.00% to 5.00% in .10% intervals. The information on this graph is shown on a tax equivalent basis. Annual Report Figure 2 - Average Earning Assets Figure 2 is a bar graph comparing the Company's mix of average earning assets from 1989 through 1993. The graph shows the amounts of securities available for sale, short-term investments, investment securities, and loans. The data points are as follows:
(In millions) 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- Securities available for sale $ ---- $ ---- $ ---- $ 319 $1,242 Short-term investments 121 437 676 623 593 Investment securities 890 1,164 1,348 1,335 835 Loans 7,816 7,456 6,735 6,153 5,910 ------ ------ ------ ------ ------ Total $8,580 $8,429 $8,759 $9,057 $8,826 ====== ====== ====== ====== ======
37 The y-axis ranges from $0 to $10,000 million in intervals of $1,000 million. The data points for each year are stacked on top of each other to come to a bar the height of the total as shown above. Annual Report Figure 3 - Average Loans Figure 3 shows a bar for each of the years 1989 through 1993. The bars are split horizontally to depict the mix in average loans among commercial, commercial real estate, residential mortgage, and instalment loans. The data points are as follows:
(In millions) 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- Commercial $2,496 $2,251 $1,850 $1,554 $1,365 Commercial real estate 1,551 1,546 1,343 1,118 960 Residential mortgage 1,790 1,550 1,358 1,257 1,171 Instalment 1,979 2,110 2,184 2,225 2,418 ------ ------ ------ ------ ------ Total loans $7,816 $7,456 $6,735 $6,153 $5,910 ====== ====== ====== ====== ======
The data points for each year are stacked on top of each other to come to a bar the height of the total as shown above. The y-axis ranges from $0 to $8,000 million in intervals of $1,000 million. 38 Annual Report Figure 4 - Average Core Deposits and Borrowings Figure 4 is a bar graph with a bar for each year from 1989 through 1993. Each bar is made up of the following components: Debt, Large CDs and other borrowings, MMDA and consumer time, and demand, NOW and savings. The height of each bar is the average core deposits and borrowings for that year. The data points are as follows:
(In millions) 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- Debt $ 53 $ 54 $ 55 $ 55 $ 54 Large CDs and other borrowings 1,130 881 554 205 184 MMDA and consumer time 4,435 5,006 4,952 4,399 3,967 Demand, NOW, and savings 3,333 3,334 3,533 4,159 4,623 ------ ------ ------ ------ ------ Total $8,951 $9,275 $9,094 $8,818 $8,829 ====== ====== ====== ====== ======
The data points for each year are stacked on top of each other to come to a bar height equal to the totals shown above.The y-axis ranges from $0 to $10,000 million in intervals of $1,000 million. Annual Report Figure 5 - Short-term Investments and Securities Portfolios Compared with Non-Core Funding Figure 5 is a combination bar and line graph with a bar for each of the years from 1991 through 1993. The height of the bars is the total of the year-end short-term investments and securities portfolios, net of pledged securities amounts, for each year. The bars are split horizontally between year-end short-term investments and year-end securities available for sale and investment securities, net of pledged amounts. The line runs through the data points representing year-end federal funds purchased and large CDs for each year. 39 The data points are as follows:
(In millions) 1991 1992 1993 ---- ---- ---- Short-term investments $ 580 $1,092 $ 803 Securities available for sale and investment securities* 1,033 1,293 1,551 ------ ------ ----- 1,613 2,385 2,354 Federal funds purchased and large CDs 154 131 89
* Net of pledged securities. The y-axis ranges from $0 to $2,500 million in intervals of $500 million. Annual Report Figure 6 - Nonperforming Assets Figure 6 is a bar graph showing nonperforming assets for each of the years from 1991 through 1993. The height of the bars is the total nonperforming assets for each year-end. The bars are split horizontally showing the mix of OREO and nonperforming loans for each year. The data points are as follows:
(In millions) 1991 1992 1993 ---- ---- ---- OREO $ 246 $ 195 $ 114 Nonperforming loans 223 181 110 ----- ------ ----- Total $ 469 $ 376 $ 224 ===== ====== =====
The y-axis ranges from $0 to $500 million in intervals of $100 million. Annual Report Figure 7 - Capital Ratios Figure 7 is a bar graph showing capital ratios with three bars side by side for each year from 1991 through 1993. The first bar in each year is the height of the leverage ratio at year-end; the second bar is the height of the core risk-based capital ratio at year-end, and the third bar is the height of the total risk-based capital ratio at year-end. The data points are as follows:
1991 1992 1993 ---- ---- ---- Leverage 5.38% 6.79% 7.26% Core risk-based 7.28 10.37 10.68 Total risk-based 9.29 12.30 12.40
The y-axis ranges from 0-15% in intervals of 5%. 40 Annual Report Figure 8 - Stock Performance Figure 8 is a bar graph showing the range of the last sale price of the Company's common stock for each of the years from 1991 through 1993. The bar height is the difference between the high last sale price and the low last sale price for each year. The bars begin at the low last sale price and end at the high last sale price. There is a line going through each bar at the position of the closing price as of December 31 for each year. The data points are as follows:
1991 1992 1993 ---- ---- ---- High last sale price $19.50 $40.75 $52.13 Low last sale price 9.63 18.75 38.25 Closing price 19.13 40.75 50.75
The y-axis ranges from $0 to $60 in intervals of $10. EX-22 6 SUBSIDARIES OF THE REGISTRANT 1 EXHIBIT 22 BAYBANKS, INC. SUBSIDIARIES OF THE REGISTRANT BayBanks, Inc..................................................... Massachusetts BayBank........................................................... Massachusetts BayBanks Mortgage Corp. ........................................ Massachusetts BayBanks Finance & Leasing Co., Inc. ........................... Massachusetts X-Press 24, Inc. ............................................... Massachusetts BayBank Boston, N.A............................................... United States of America BayBanks Brokerage Services, Inc................................ Massachusetts BayBank Connecticut, N.A. ........................................ United States of America BayBank Systems, Inc. ............................................ Massachusetts BayBanks Credit Corp. .......................................... Massachusetts BayBanks Investment Management, Inc. ............................. Massachusetts BayBanks Life Insurance Company................................... Arizona
All such subsidiaries are included in the consolidated financial statements filed as part of this report. Certain other subsidiaries have been omitted above, since considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. 20 EX-23 7 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors BayBanks, Inc.: We consent to incorporation by reference in Registration Statements Nos. 2-38598, 2-63815, 2-82945, 2-89461, 33-6964, and 33-22834 on Forms S-8 of BayBanks, Inc. of our report dated January 24, 1994, relating to the consolidated balance sheets of BayBanks, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993 which report is incorporated by reference in the December 31, 1993 Annual Report on Form 10-K of BayBanks, Inc. /S/ KPMG PEAT MARWICK BOSTON, MASSACHUSETTS MARCH 24, 1994 21 -----END PRIVACY-ENHANCED MESSAGE-----