-----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, bgis114qNgPTRZM2EPvFG0ZWWMgZOyVLrhw6KfNVd3l8FXCavxL1d++Zg1bUAazW 4fcNx9LXL5xDMoyRCuaHcg== 0000950135-94-000346.txt : 19940519 0000950135-94-000346.hdr.sgml : 19940519 ACCESSION NUMBER: 0000950135-94-000346 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940513 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00959 FILM NUMBER: 94527936 BUSINESS ADDRESS: STREET 1: 175 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174821040 MAIL ADDRESS: STREET 1: 175 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: BAYSTATE CORP DATE OF NAME CHANGE: 19760602 10-Q 1 BAYBANKS, INC. FORM 10-Q 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1994 Commission File No. 0-959
------------------------ BAYBANKS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MASSACHUSETTS 04-2008039 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 175 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 482-1040 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 twelve months and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of April 29, 1994, 18,817,366 shares of the registrant's common stock, $2.00 par value, were outstanding. The list of exhibits to this report appears on page 25. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 PART I -- FINANCIAL INFORMATION ITEM 1. -- FINANCIAL STATEMENTS BAYBANKS, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS EXCEPT SHARE AMOUNTS)
MARCH 31 DECEMBER 31 MARCH 31 1994 1993 1993 ----------- ----------- ---------- ASSETS Cash and due from banks.......................................... $ 575,551 $ 632,985 $ 638,135 Interest-bearing deposits and other short-term investments....... 390,948 803,068 791,066 Trading accounts................................................. 21,974 14,595 34,579 Securities available for sale -- market value $628,263 at March 31, 1994, $633,446 at December 31, 1993, and $1,793,924 at March 31, 1993 (Note 2)........................................ 628,263 629,003 1,773,747 Investment securities -- market value $2,236,417 at March 31, 1994, $1,605,091 at December 31, 1993, and $131,255 at March 31, 1993 (Note 2).............................................. 2,255,736 1,599,060 130,774 Loans -- net of unearned income and fees Commercial..................................................... 1,324,429 1,324,968 1,403,193 Commercial real estate......................................... 919,664 935,471 967,151 Residential mortgage........................................... 1,182,028 1,242,597 1,117,568 Instalment..................................................... 2,626,014 2,600,134 2,319,377 ----------- ----------- ---------- 6,052,135 6,103,170 5,807,289 Less allowance for loan losses................................. 165,221 171,496 188,237 ----------- ----------- ---------- 5,886,914 5,931,674 5,619,052 Premises and equipment, net...................................... 192,604 192,554 196,681 Customers' acceptances........................................... 914 4,467 11,202 Other real estate owned and in-substance foreclosures, net....... 99,139 113,679 176,425 Other assets..................................................... 187,253 189,499 185,458 ----------- ----------- ---------- Total assets............................................ $10,239,296 $10,110,584 $9,557,119 ----------- ----------- ---------- ----------- ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand......................................................... $ 2,022,422 $ 2,077,206 $1,778,089 NOW accounts................................................... 1,424,830 1,481,859 1,329,581 Savings........................................................ 1,520,999 1,459,134 1,386,924 Money market deposit accounts.................................. 2,721,482 2,731,720 2,955,553 Consumer time.................................................. 956,006 993,945 1,169,612 Time -- $100,000 or more....................................... 40,123 34,957 35,478 ----------- ----------- ---------- 8,685,862 8,778,821 8,655,237 Federal funds purchased and other short-term borrowings.......... 714,975 507,820 120,005 Acceptances outstanding.......................................... 914 4,467 11,202 Accrued expenses and other accounts payable...................... 50,159 49,485 45,770 Long-term debt................................................... 54,038 54,488 53,824 Guarantee of ESOP indebtedness................................... 9,451 12,241 12,241 Stockholders' equity: Common stock, par value $2.00 per share Shares authorized -- 50,000,000 Shares issued -- 18,800,354 at March 31, 1994, 18,742,934 at December 31, 1993 and 18,666,843 at March 31, 1993......... 37,601 37,486 37,334 Surplus.......................................................... 311,646 310,355 307,877 Retained earnings................................................ 384,138 367,662 325,870 ----------- ----------- ---------- 733,385 715,503 671,081 Less treasury stock at cost -- 665 shares at March 31,1994....... 37 -- -- Less guarantee of ESOP indebtedness.............................. 9,451 12,241 12,241 ----------- ----------- ---------- Total stockholders' equity.............................. 723,897 703,262 658,840 ----------- ----------- ---------- Total liabilities and stockholders' equity.............. $10,239,296 $10,110,584 $9,557,119 ----------- ----------- ---------- ----------- ----------- ----------
2 3 BAYBANKS, INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS EXCEPT SHARE AMOUNTS)
FIRST QUARTER ENDED MARCH 31 ----------------------- 1994 1993 -------- -------- Income on interest-bearing deposits and other short-term investments........................................................ $ 2,485 $ 7,483 Interest on securities portfolios.................................... 26,990 19,919 Interest and fees on loans........................................... 117,010 121,495 -------- -------- Total income on earning assets....................................... 146,485 148,897 Interest expense on deposits and borrowings Deposits........................................................... 33,878 46,159 Short-term borrowings.............................................. 3,416 662 Long-term debt..................................................... 524 548 -------- -------- Total interest expense............................................... 37,818 47,369 -------- -------- Net interest income.................................................. 108,667 101,528 Provision for loan losses............................................ 6,000 11,500 -------- -------- Net interest income after provision for loan losses.................. 102,667 90,028 Noninterest income Service charges and fees on deposit accounts....................... 26,258 24,944 Other noninterest income........................................... 23,457 21,952 -------- -------- Total noninterest income............................................. 49,715 46,896 Net securities gains................................................. 39 -- Operating expenses Salaries and benefits.............................................. 56,383 51,607 Occupancy and equipment............................................ 22,487 22,424 Other operating expenses........................................... 33,325 35,129 -------- -------- Total operating expenses............................................. 112,195 109,160 Provision for OREO reserve, net...................................... 2,937 7,000 -------- -------- Total operating expenses and OREO provision.......................... 115,132 116,160 -------- -------- Income before taxes and cumulative effect of accounting change....... 37,289 20,764 Provision for income taxes........................................... 15,078 8,003 -------- -------- Income before cumulative effect of accounting change................. 22,211 12,761 Less cumulative effect of accounting change (net of tax benefit of $683) (Note 3)..................................................... 932 -- -------- -------- NET INCOME........................................................... $ 21,279 $ 12,761 -------- -------- -------- -------- Earnings Per Share: Income before accounting change.................................... $ 1.16 $ 0.68 Less cumulative effect of accounting change (Note 3)............... .05 -- -------- -------- Net Income......................................................... $ 1.11 $ 0.68 -------- -------- -------- -------- Average shares outstanding........................................... 19,093,447 18,871,018
3 4 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE AMOUNTS)
COMMON RETAINED TREASURY ESOP LOAN STOCK SURPLUS EARNINGS STOCK GUARANTEE TOTAL ------- -------- -------- -------- --------- -------- BALANCE AS OF DECEMBER 31, 1992......................... $37,016 $304,890 $316,812 $(26) $(14,473) $644,219 Net income -- First Quarter 1993...................... 12,761 12,761 Cash dividends declared ($0.20 per share)......... (3,703) (3,703) Other equity transactions.... 318 2,987 26 2,232 5,563 ------- -------- -------- -------- --------- -------- BALANCE AS OF MARCH 31, 1993... $37,334 $307,877* $325,870 $ -- $(12,241) $658,840 ======= ======== ======== ======== ========= ======== BALANCE AS OF DECEMBER 31, 1993......................... $37,486 $310,355 $367,662 $ -- $(12,241) $703,262 Net income -- First Quarter 1994...................... 21,279 21,279 Cash dividends declared ($0.35 per share)......... (6,576) (6,576) Change in valuation reserve related to securities available for sale portfolio (Note 2)........ 1,773 1,773 Other equity transactions.... 115 1,291 (37) 2,790 4,159 ------- -------- -------- -------- --------- -------- BALANCE AS OF MARCH 31, 1994... $37,601 $311,646* $384,138 $(37) $ (9,451) $723,897 ======= ======== ======== ======== ========= ======== - - --------------- * Net of unamortized deferred compensation expense of $1,223 and $2,952 at March 31, 1994 and 1993, respectively.
4 5 BAYBANKS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FIRST QUARTER ENDED MARCH 31 ----------------------- 1994 1993 --------- --------- OPERATING ACTIVITIES Net income................................................................... $ 21,279 $ 12,761 Adjustments to reconcile net income to net cash provided by operating activities: Fixed-rate mortgages sold.................................................. 171,363 265,548 Fixed-rate mortgages originated for sale................................... (86,179) (158,298) Student loans transferred from portfolio and sold.......................... 333 7,687 Proceeds from sales and maturities of trading account assets............... 592,246 397,906 Purchases of trading account assets........................................ (601,901) (357,148) Provision for loan losses.................................................. 6,000 11,500 Amortization of security premium........................................... 6,847 1,589 Provision for OREO reserve, net............................................ 2,937 7,000 Deferred income taxes...................................................... 6,476 (1,023) Depreciation and amortization of premises and equipment.................... 6,376 6,260 Net securities gains....................................................... (39) -- Change in other assets..................................................... 1,380 (20,501) Change in accrued expenses................................................. 1,087 (743) Change in interest receivable.............................................. (6,040) 234 Change in interest payable................................................. (212) (1,234) --------- --------- Net cash provided by operating activities................................ 121,953 171,538 --------- --------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale......................... 41,772 -- Proceeds from maturities of securities available for sale.................... 1,011 1,540 Purchases of securities available for sale................................... (39,675) (210,454) Proceeds from maturities of investment securities............................ 63,471 56,259 Purchases of investment securities........................................... (726,617) (74,086) Net cash provided (used) by: Short-term investments..................................................... 412,120 300,919 Loans(1)(2)................................................................ (54,512) (6,729) Customer acceptances....................................................... 3,553 576 Net purchases of premises and equipment...................................... (6,426) (4,511) Proceeds from sales of OREO(2)............................................... 19,358 17,149 --------- --------- Net cash (used) provided by investing activities........................... (285,945) 80,663 --------- --------- FINANCING ACTIVITIES Net cash provided (used) by: Demand deposits, NOW, and savings accounts................................. (49,948) (244,802) Money market deposits...................................................... (10,238) (11,738) Consumer time deposits..................................................... (37,939) (65,135) Time deposits greater than $100,000........................................ 5,166 (3,477) Short-term borrowings...................................................... 207,155 (19,964) Customer acceptances....................................................... (3,553) (576) Long-term debt............................................................. (450) (1,364) Dividends paid............................................................... (6,576) (3,703) Other equity transactions.................................................... 2,941 2,967 --------- --------- Net cash provided (used) by financing activities........................... 106,558 (347,792) --------- --------- Net change in cash and cash equivalents...................................... (57,434) (95,591) Cash and cash equivalents at beginning of year(3)............................ 632,985 733,726 --------- --------- Cash and cash equivalents at end of period(3)................................ $ 575,551 $ 638,135 --------- --------- --------- --------- Supplemental disclosure of cash flow information Interest paid.............................................................. $ 38,030 $ 48,337 Taxes paid................................................................. 5,364 19,837 - - --------------- (1) Excludes transfers of loans to the other real estate owned category of $8.9 million and $12.1 million in 1994, and 1993, respectively. (2) Excludes loan originations in conjunction with OREO sales of $2.1 million and $3.8 million in 1994 and 1993, respectively. (3) Cash and cash equivalents consist of cash on hand, cash items in process of collection, and due from banks.
5 6 BAYBANKS, INC. NOTE 1. ACCOUNTING ADJUSTMENTS In the opinion of management, all of the adjustments (consisting of normal recurring accruals unless otherwise indicated) necessary for a fair statement of the results of operations have been included in the accompanying financial statements. Certain 1993 amounts have been reclassified to conform with the 1994 presentation. NOTE 2. SECURITIES PORTFOLIOS Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Statement No. 115 addresses the accounting and reporting for certain investments in debt and marketable equity securities. Statement No. 115 requires changes in the fair value of the securities available for sale portfolio be recorded directly to a separate category of stockholders' equity. Previously, securities available for sale were valued at the lower of aggregate cost or market, and changes therein were recorded directly to earnings. At adoption the fair value of the securities available for sale exceeded their amortized cost by $4,443,000 or $2,500,000 on an after-tax basis, and thus stockholders' equity was increased by that amount. At March 31, 1994 the fair value of the securities available for sale exceeded their amortized cost by $3,104,000, or $1,773,000 on an after-tax basis. The following table provides the amortized cost, estimated market values, and yields of the securities portfolios by maturity.
PERIOD-END SECURITIES PORTFOLIOS ------------------------------------------------------------ GROSS GROSS WEIGHTED AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE COST GAINS LOSSES VALUE YIELD* ---------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) MARCH 31, 1994 SECURITIES AVAILABLE FOR SALE U.S. Government securities, maturing Within 1 year........................... $ 320,602 $ 1,437 $ (6) $ 322,033 4.91% ---------- --------- --------- ---------- 320,602 1,437 (6) 322,033 4.91 ---------- --------- --------- ---------- State and local governments, maturing Within 1 year........................... 6,578 -- (1) 6,577 4.06 ---------- --------- --------- ---------- 6,578 -- (1) 6,577 4.06 ---------- --------- --------- ---------- Corporate and other, maturing Within 1 year........................... 269,477 781 -- 270,258 4.03 ---------- ---------- ---------- ---------- 269,477 781 -- 270,258 4.03 ---------- ---------- ---------- ---------- Mortgage-backed securities................ 28,502 893 -- 29,395 6.12 ---------- ---------- ---------- ---------- Total Securities Available for Sale.......................... $ 625,159 $ 3,111 $ (7) $ 628,263 4.58% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- INVESTMENT SECURITIES U.S. Government securities, maturing Within 1 year........................... $ 563,923 $ 904 $ (513) $ 564,314 4.27% After 1 year but within 5 years......... 1,204,358 380 (16,207) 1,188,531 4.50 ---------- ---------- ---------- ---------- 1,768,281 1,284 (16,720) 1,752,845 4.43 ---------- ---------- ---------- ---------- State and local governments, maturing Within 1 year........................... 145,212 34 (90) 145,156 4.21 After 1 year but within 5 years......... 23,298 82 (387) 22,993 6.09 After 5 years but within 10 years....... 5,030 35 (192) 4,873 6.95 ---------- ---------- ---------- ---------- 173,540 151 (669) 173,022 4.54 ---------- ---------- ---------- ---------- Asset-backed securities................... $ 204,235 -- (2,750) 201,485 4.33% Mortgage-backed securities................ 49,457 -- (615) 48,842 5.14 Industrial revenue bonds.................. 58,365 -- -- 58,365 5.45 Corporate and other....................... 1,858 -- -- 1,858 ---------- ---------- ---------- ---------- Total Investment Securities..... $2,255,736 $ 1,435 $ (20,754) $2,236,417 4.47% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- * Tax equivalent basis.
6 7 BAYBANKS, INC. NOTE 2. SECURITIES PORTFOLIOS (CONTINUED)
PERIOD-END SECURITIES PORTFOLIOS ------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) DECEMBER 31, 1993 SECURITIES AVAILABLE FOR SALE U.S. Government securities................ $322,707 $3,280 $(3) $325,984 State and local governments............... 18,964 6 (2) 18,968 Mortgage-backed securities................ 30,832 1,162 -- 31,994 Corporate and other....................... 256,500 -- -- 256,500 ---------- ---------- ---------- ---------- Total Securities Available for Sale....... $629,003 $4,448 $(5) $633,446 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- INVESTMENT SECURITIES U.S. Government securities................ $1,203,315 $ 6,447 $ (59) $1,209,703 State and local governments............... 128,997 380 (25) 129,352 Asset-backed securities................... 204,798 115 (827) 204,086 Industrial revenue bonds.................. 59,958 -- -- 59,958 Corporate and other....................... 1,992 -- -- 1,992 ---------- ---------- ---------- ---------- Total Investment Securities..... $1,599,060 $ 6,942 $ (911) $1,605,091 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- MARCH 31, 1993 SECURITIES AVAILABLE FOR SALE U.S. Government securities................ $1,626,692 $ 19,126 $ -- $1,645,818 Mortgage-backed securities................ 87,805 1,051 -- 88,856 Corporate and other....................... 59,250 -- -- 59,250 ---------- ---------- ---------- ---------- Total Securities Available for Sale.......................... $1,773,747 $ 20,177 $ -- $1,793,924 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- INVESTMENT SECURITIES State and local governments............... $ 55,987 $ 489 $ (8) $ 56,468 Industrial revenue bonds.................. 72,801 -- -- 72,801 Corporate and other....................... 1,986 -- -- 1,986 ---------- ---------- ---------- ---------- Total Investment Securities..... $ 130,774 $ 489 $ (8) $ 131,255 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- * Tax equivalent basis.
NOTE 3. POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standard No. 112, "Employers Accounting for Postemployment Benefits." Statement No. 112 covers all postemployment benefits not already covered by two prior accounting pronouncements. The adoption of Statement No. 112 resulted in an additional accrual of postemployment benefits of $1,615,000, or $932,000 on an after-tax basis 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. 7 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS PERFORMANCE OVERVIEW BayBanks' net income was $21.3 million for the first quarter of 1994, or $1.11 per share, compared with net income of $12.8 million, or $.68 per share, for the first quarter of 1993. The major factors that contributed to the increase in net income were as follows: - Operating income (defined below) increased by 19% in the first quarter of 1994, compared with that of the first quarter of 1993, as a result of an 8% increase in net interest income and a 6% increase in noninterest income, which was partially offset by a 3% growth in expenses. - Asset quality continued to improve; nonperforming assets were reduced to $204 million, a 9% decrease from December 31, 1993, and a 40% decrease from March 31, 1993. As a consequence the combined provision for loan losses and the other real estate owned (OREO) reserve decreased 52% to $8.9 million in the first quarter of 1994 from $18.5 million in the first quarter of 1993. - Net income for the first quarter of 1994 included an after tax charge of $932 thousand, or $.05 per share, reflecting the cumulative effect of the Company's adoption of Statement of Financial Accounting Standards, No. 112, "Employers' Accounting for Postemployment Benefits." EARNINGS ANALYSIS Operating Income Operating income, presented in TABLE A, is on a tax equivalent basis; excludes net securities gains, the provisions for loan losses and the OREO reserve, and nonrecurring items; and is before income taxes. For the first quarter of 1994, total income from operations was $160.4 million compared with $149.5 million in the first quarter of 1993 as a result of an 8% increase in net interest income and a 6% growth in noninterest income, which was partially offset by a 3% growth in operating expenses. TABLE A SUMMARY OF OPERATIONS FOR THE FIRST QUARTER ENDED MARCH 31 TAX EQUIVALENT BASIS (IN THOUSANDS EXCEPT SHARE AMOUNTS)
1994 1993 -------- -------- Income on earning assets..................................... $148,458 $150,012 Interest on deposits and borrowings.......................... 37,818 47,369 -------- -------- Net interest income.......................................... 110,640 102,643 Noninterest income........................................... 49,715 46,896 -------- -------- Total income from operations................................. 160,355 149,539 Operating expenses........................................... 112,195 109,160 -------- -------- Operating Income before Net Securities Gains and Provisions for Loan Losses and OREO Reserve........................... 48,160 40,379 -------- -------- Net securities gains......................................... 39 -- -------- -------- Provision for loan losses.................................... 6,000 11,500 Provision for OREO reserve, net.............................. 2,937 7,000 -------- -------- Total credit provisions...................................... 8,937 18,500 -------- -------- Income before taxes and cumulative effect of accounting change..................................................... 39,262 21,879 Income taxes and tax equivalent adjustment................... 17,051 9,118 -------- -------- Income before cumulative effect of accounting change......... 22,211 12,761 Less cumulative effect of accounting change (net of tax benefit)................................................... 932 -- -------- -------- Net Income................................................... $ 21,279 $ 12,761 -------- -------- -------- -------- Earnings Per Share: Income before accounting change......................... $ 1.16 $ .68 Less cumulative effect of accounting change............. .05 -- -------- -------- Net income.............................................. $ 1.11 $ .68 -------- -------- -------- --------
8 9 Net Interest Income (tax equivalent basis) Net interest income was $110.6 million in the first quarter of 1994, compared with $102.6 million in the first quarter of 1993. The net interest margin in the first quarter of 1994 was 5.00%, compared with 4.83% in the first quarter of 1993. The net interest margin was 5.08% in the fourth quarter of 1993. Net interest income and the net interest margin are affected by the mix of interest-bearing assets and liabilities, movements in interest rates and the level of nonperforming assets. Since the first quarter of 1993 the funding costs of the Company have declined as deposit rates fell sharply and customers' preferences have emphasized lower-rate NOW and savings accounts. The cost of total interest-bearing liabilities fell 59 basis points to 2.16% in the first quarter of 1994 from 2.75% in the first quarter of 1993. The yield on earning assets fell by 36 basis points to 6.72% in the first quarter of 1994, compared with 7.08% in the first quarter of 1993, due to a decrease in the loan portfolio yield from 8.37% to 7.81%, as certain maturing loans with higher yields are replaced with new business at somewhat lower rates. 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 banking activities. Noninterest income (TABLE B) increased 6% to $49.7 million in the first quarter of 1994, compared with $46.9 million in the first quarter of 1993. Service charges on deposit accounts continued to contribute over one half of noninterest income. Total service charges on deposits increased 5% to $26.3 million in the first quarter of 1994, compared with $24.9 million in the first quarter of 1993. The increase is attributable to higher fees and service charges on consumer accounts and increased usage of corporate transaction services. Credit card fees increased 13% to $5.1 million in the first quarter of 1994 from $4.5 million in the first quarter of 1993 due to higher merchant volume. Mortgage banking fees decreased 18% to $2.3 million in the first quarter of 1994 from $2.8 million in the first quarter of 1993 due to a lower level of secondary market activity resulting from a decrease in refinance volumes. Trust fees were $3.8 million in the first quarter of 1994, compared with $3.6 million in the first quarter of 1993 due to the increase in corporate trust assets. Investment management and brokerage fees increased 52% to $2.1 million in the first quarter of 1994 from $1.4 million in the first quarter of 1993 due to increases in brokerage fees for retail transactions, mutual fund sales fees, and investment advisory fees from BayFunds(R). Total assets under management in BayFunds were $1.2 billion at March 31, 1994, compared to $808 million at March 31, 1993. Processing fees increased due to higher income from non-BayBank cardholders using BayBank ATMs. TABLE B NONINTEREST INCOME FOR THE FIRST QUARTER ENDED MARCH 31 (IN THOUSANDS)
1994 1993 CHANGE ------- ------- ------ Service charges and fees on deposit accounts........... $26,258 $24,944 $1,314 Credit card fees....................................... 5,075 4,500 575 Trust fees............................................. 3,773 3,630 143 Processing fees........................................ 3,380 3,235 145 Mortgage banking fees.................................. 2,297 2,801 (504) Investment management and brokerage fees............... 2,067 1,362 705 International fees..................................... 1,226 1,349 (123) Other noninterest income............................... 5,639 5,075 564 ------- ------- ------ Total noninterest income.......................... $49,715 $46,896 $2,819 ------- ------- ------ ------- ------- ------
9 10 There were no net securities gains in the first quarter of 1993 and securities gains were nominal at $39 thousand for the first quarter of 1994. Operating Expenses The operating expense analysis presented in TABLE C 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 related to workouts (as well as writedowns and reserves related to OREO), were $108.6 million in the first quarter of 1994, compared with $104.1 million in the first quarter of 1993. Salaries and benefits were $56.4 million in the first quarter of 1994, compared with $51.6 million in the first quarter of 1993. The increase resulted from normal salary increases, including the timing of such increases, and the additional staffing required by certain expanding product lines such as BayFunds, consumer credit, and mortgage lending. FDIC insurance was $5.5 million in the first quarter of 1994 compared with $6.2 million in the first quarter of 1993. The first quarter of 1993 amount was prior to the FDIC retroactively giving banks the benefit of higher capital ratios, achieved in the second half of 1992. A refund of $1.3 million, related to the first six months of 1993, was received in the second quarter of 1993. Marketing and public relations expenses were $5.1 million in the first quarter of 1994, compared with $4.7 million in the first quarter of 1993, as the result of the timing of such programs. Other operating expenses were $14.3 million in the first quarter of 1994, compared with $14.5 million in the first quarter of 1993, primarily the result of lower legal expenses. The cost of administering, managing, and disposing of OREO properties and related legal expenses was $3.6 million in the first quarter of 1994, compared with $5.0 million in the first quarter of 1993, reflecting the continued disposition of OREO. TABLE C OPERATING EXPENSE FOR THE FIRST QUARTER ENDED MARCH 31 (IN THOUSANDS)
1994 1993 CHANGE -------- -------- ------- Salaries and benefits....................................... $ 56,383 $ 51,607 $ 4,776 Occupancy and equipment..................................... 22,487 22,424 63 FDIC insurance.............................................. 5,451 6,162 (711) Marketing and public relations.............................. 5,117 4,689 428 Postage and supplies........................................ 4,838 4,788 50 Other....................................................... 14,344 14,474 (130) -------- -------- ------- Operating expenses excluding OREO expenses.................. 108,620 104,144 4,476 OREO and legal expenses related to workout.................. 3,575 5,016 (1,441) -------- -------- ------- Total operating expenses.......................... $112,195 $109,160 $ 3,035 -------- -------- ------- -------- -------- -------
Provision for Loan Losses and Other Real Estate Owned Reserve Due to the continued improvement in BayBanks' credit quality, the provision for loan losses and the OREO reserve (credit provisions) declined substantially in the first quarter of 1994 to $8.9 million compared with $18.5 million in the first quarter of 1993. The provision for loan losses was $6.0 million in the first quarter of 1994, compared with $11.5 million in the first quarter of 1993. The provision for the OREO reserve was $2.9 million in the first quarter of 1994, compared with $7.0 million in the first quarter of 1993. The OREO provision was net of gains on sales of properties of $563 thousand in the first quarter of 1994 and $1.1 million in the first quarter of 1993. 10 11 Income Taxes The Company reported a provision for income taxes of $15.1 million in the first quarter of 1994, compared with $8.0 million in the first quarter of 1993. The effective tax rate in the first quarter of 1994 was 40.4%, compared with 38.5% in the first quarter of 1993. The increase in the effective tax rate reflected the higher federal tax rate enacted in the second quarter of 1993, a lower relative amount of tax exempt income in 1994, and higher state income taxes due to a higher proportion of income from bank subsidiaries which are taxed at a higher rate than nonbank subsidiaries. BALANCE SHEET REVIEW Trends in Earning Assets Average earning assets increased to $8.9 billion during the first quarter of 1994, compared with $8.5 billion in the first quarter of 1993, due to the increase in average short-term investments and securities portfolios to $2.9 billion in the first quarter of 1994 from $2.7 billion in the first quarter of 1993 and the increase in the average loan portfolio to $6.0 billion in the first quarter of 1994 from $5.9 billion in the first quarter of 1993. Consumer loan categories grew while the commercial categories declined. Loan Portfolio The loan portfolios of the Company are diversified (TABLE D). Consumer loans represent 63% of the quarter-end loan portfolio, with $1.2 billion in residential loan balances and $2.6 billion in various types of instalment loan balances. The consumer lending activities of the Company are focused primarily on the Massachusetts market. The remaining 37% of the loan portfolio is commercial and commercial real estate 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. The Company originates fixed-and adjustable-rate residential mortgage loans. Generally fixed-rate residential real estate loan originations are securitized and sold to the secondary market with servicing retained, while floating-rate residential real estate loan originations are held in the loan portfolio or may be securitized and transferred to the securities available for sale portfolio. An analysis of changes in major loan categories from December 31, 1993, to March 31, 1994, is presented in TABLE D. Net business volume was $146 million compared with $175 million in the first quarter of 1993. Residential real estate loan volume was principally due to refinancing activity, although there was an increase in loans for purchases. The Company sold $171 million of fixed-rate residential real estate loans during the first quarter of 1994, compared with $266 million in the first quarter of 1993. At March 31, 1994, loans held for resale were $40.0 million, compared with $79 million at March 31, 1993. Instalment net loan business volume was $33 million, compared with $79 million in the first quarter of 1993. Automobile lending totals are down when compared with 1993's first quarter due to an exceptionally strong performance in 1993 and somewhat adverse weather conditions in 1994. Credit card business volumes decreased, reflecting a seasonal decline in these balances, while student loan volumes continued to be strong. Outflows in the commercial real estate portfolio declined from $46 million during the first quarter of 1993 to $6 million in the first quarter of 1994. Commercial loan volumes continued to fluctuate due to selected overnight money market-priced loans, international trade finance activities principally with Mexican banks, and continuing pay downs on loans to certain industries where the Company is no longer active. 11 12 TABLE D CHANGES IN THE LOAN PORTFOLIO (IN THOUSANDS)
ANALYSIS OF CHANGE IN LOAN CATEGORIES ------------------------------------------- NET CHANGE IN BUSINESS VOLUME-- GROSS TRANSFERS FIRST QUARTER MARCH 31 DECEMBER 31 INCREASE CHARGE- TO --------------------- 1994 1993 (DECREASE) OFFS OREO SALES 1994 1993 ---------- ------------ ---------- -------- --------- --------- -------- -------- Commercial.................. $1,324,429 $1,324,968 $ (539) $ (1,448) $(1,094) $ -- $ 2,003 $ (2,941) Commercial real estate............... 919,664 935,471 (15,807) (6,051) (4,015) -- (5,741) (45,988) Residential mortgages....... 1,182,028* 1,242,597* (60,569) (1,787) (3,792) (171,363) 116,373 144,731 Instalment loans Automobile and other................... 1,185,353 1,173,950 11,403 (1,984) -- -- 13,387 65,276 Home equity............... 693,500 700,055 (6,555) (545) -- -- (6,010) (24,537) Credit card............... 297,355 325,794 (28,439) (2,981) -- -- (25,458) (7,539) Student loans............. 327,767 276,923 50,844 (24) -- (333) 51,201 45,393 Reserve credit............ 122,039 123,412 (1,373) (1,471) -- -- 98 213 ---------- ------------ ---------- -------- --------- --------- -------- -------- Total instalment loans.... $2,626,014 $2,600,134 $ 25,880 $ (7,005) $ -- $ (333) $ 33,218 $ 78,806 ---------- ------------ ---------- -------- --------- --------- -------- -------- Total loans................. $6,052,135 $6,103,170 $(51,035) $(16,291) $(8,901) $(171,696) $145,853 $174,608 ---------- ------------ ---------- -------- --------- --------- -------- -------- ---------- ------------ ---------- -------- --------- --------- -------- -------- - - --------------- * Includes residential mortgage loans held for sale of $40 million at March 31, 1994, and $138 million at December 31, 1993.
Securities Portfolios The securities portfolios are presented in TABLE E and consist of short-term investments, securities available for sale, and investment securities. The securities portfolio was $3.3 billion at March 31, 1994, $3.0 billion at December 31, 1993, and $2.7 billion at March 31, 1993. The weighted average maturity of the securities portfolio was 1.1 years at March 31, 1994, compared with .8 years at December 31, 1993 and March 31, 1993. During the first quarter of 1994, the average maturity of the securities portfolio was lengthened, thus the yields on the portfolios also increased. Short-term investments were $391 million at March 31, 1994 compared with $803 million at December 31, 1993, and $791 million at March 31, 1993. The decline in the balance reflects the reinvestment of certain proceeds from maturing short-term investments into the securities available for sale and investment securities portfolios. Securities available for sale, consisting of debt securities, are stated at market value in 1994, and at the lower or aggregate cost or market for previous periods. 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. At March 31, 1994, securities available for sale had gross unrealized gains of $3 million and gross unrealized losses of $7 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 $2.3 billion at March 31, 1994, and $131 million at March 31, 1993. The aggregate market value of the investment securities portfolio was $2.2 billion and $131 million at March 31, 1994 and 1993, respectively. The maturity of the investment securities portfolio was extended to 1.5 years at March 31, 1994, compared with 1.3 years at December 31, 1993, and .7 years at March 31, 1993. At March 31, 1994, gross unrealized gains were $1 million and gross unrealized losses were $21 million. The Company's investment securities portfolio contains state and local government securities, asset-backed securities, industrial revenue bonds, U.S. government securities and corporate securities. The total state and local government portfolio was $174 million at March 31, 1994, with the single largest issue being 12 13 approximately $7 million. Of this total, $134 million were securities rated investment grade and $40 million were unrated. All municipal securities are subject to an internal review process that assigns a rating to the securities. In the case of rated securities, the process verifies or adjusts the independent rating. In the case of unrated securities only securities determined to be equivalent to investment grade are purchased. Industrial revenue bonds are also subject to a 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. Trading account gains were $465 thousand in the first quarter of 1994 compared with $633 thousand in the first quarter of 1993. TABLE E SECURITIES PORTFOLIOS AT PERIOD-END (DOLLARS IN THOUSANDS)
DECEMBER MARCH 31 31 MARCH 31 1994 1993 1993 ---------- ---------- ---------- Short-term investments................................. $ 390,948 $ 803,068 $ 791,066 ---------- ---------- ---------- Securities available for sale U.S. Treasury........................................ 322,033 322,707 1,626,692 U.S. Agency mortgage-backed securities............... 29,395 30,832 87,805 State and local governments.......................... 6,577 18,964 -- Corporate and other.................................. 270,258 256,500 59,250 ---------- ---------- ---------- 628,263 629,003 1,773,747 ---------- ---------- ---------- Investment securities U.S. Treasury........................................ 1,768,281 1,203,315 -- Asset-backed securities.............................. 204,235 204,798 -- State and local governments.......................... 173,540 128,997 55,987 Industrial revenue bonds............................. 58,365 59,958 72,801 U.S. Agency mortgage-backed securities............... 49,457 -- -- Corporate and other.................................. 1,858 1,992 1,986 ---------- ---------- ---------- 2,255,736 1,599,060 130,774 ---------- ---------- ---------- Total........................................ $3,274,947 $3,031,131 $2,695,587 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average maturity of securities available for sale and investment securities in years*............. 1.3 1.1 1.1 Weighted average maturity of total securities in years*............................................... 1.1 0.8 0.8 - - --------------- * The weighted average maturity calculation excludes amortizing IRBs and reflects estimated prepayments for mortgage-backed securities.
Deposits and Other Sources of Funds The Company's attractive product line and extensive banking network of 202 full-service offices and 355 automated banking facilities generate significant core deposits, which accounted for over 99% of total average deposits during the first quarters of 1994 and 1993. Core deposits include transaction accounts (demand, NOW, and savings accounts), money market deposit accounts, and consumer time certificates. Average core deposits were $8.5 billion in the first quarter of 1994, compared with $8.6 billion in the first quarter of 1993. Average transaction accounts (demand, NOW accounts, and savings) were $4.8 billion in the first quarter of 1994, compared with $4.4 billion in the first 13 14 quarter of 1993 and $4.8 billion in the fourth quarter of 1993, reflecting customers' preferences to maintain significant balances in lower-yielding transaction accounts, thus having a positive impact on the Company's net interest margin. Average money market deposit and consumer certificates of deposit balances were $3.7 billion during the first quarter of 1994, compared with $4.2 billion the first quarter of 1993 and $3.8 billion in the fourth quarter of 1993. Average corporate certificates of deposit in excess of $100 thousand (CDs), which represent a small portion of the Company's total funding, were $37 million in the first quarter of 1994, compared with $39 million in the first quarter of 1993. Purchased funds increased to $715 million at March 31, 1994, from $508 million at December 31, 1993, and $120 million at March 31, 1993, as the securities portfolio position was enhanced. This increased securities position may be continued to take advantage of the Company's strong capital position. While the effect of these actions increased net interest income, the net interest margin decreased somewhat, reflecting the lower net interest spread on these investment and funding actions. Interest Rate Risk Management and Liquidity BayBanks' Capital Markets Committee 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, and the national and regional economic environment, are considered in the asset and liability management decision process. The Company's interest sensitivity gap position in TABLE F 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, the cost of certain interest-bearing core deposit categories may lag changes in market interest rates, although the Company contractually could change the interest rates on these deposits at any time. A management adjustment provides for the 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. At March 31, 1994, the Company's adjusted gap position for the total within-180-day period decreased from a positive gap position of $116 million at December 31, 1993, to a negative gap position of $2 million at March 31, 1994. The total within-one-year gap moved from a positive $132 million at December 31, 1993, to a negative $61 million at March 31, 1994. 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. 14 15 TABLE F INTEREST RATE SENSITIVITY POSITION AT PERIOD-END (IN MILLIONS)
0-30 31-90 91-180 TOTAL WITHIN 181-365 TOTAL WITHIN DAYS DAYS DAYS 180 DAYS DAYS ONE YEAR ------- ------- ----- ------------ ------- ------------ March 31, 1994 Total assets...................... $ 3,524 $ 522 $ 808 $ 4,854 $1,053 $ 5,907 Total liabilities................. 6,821 187 156 7,164 182 7,346 ------- ------- ----- ------- ------ ------- Net contractual gap position...... (3,297) 335 652 (2,310) 871 (1,439) Net interest rate swaps........... -- 8 -- 8 -- 8 ------- ------- ----- ------- ------ ------- Net gap position including interest rate swaps at March 31, 1994....................... $(3,297) $ 343 $ 652 $(2,302) $ 871 $(1,431) Management adjustment............. 5,486 (2,721) (465) 2,300 (930) 1,370 ------- ------- ----- ------- ------ ------- Management adjusted gap at March 31, 1994.................... $ 2,189 $(2,378) $ 187 $ (2) $ (59) $ (61) ------- ------- ----- ------- ------ ------- ------- ------- ----- ------- ------ ------- Management adjusted gap at December 31, 1993.......................... $ 2,625 $(2,325) $(184) $ 116 $ 16 $ 132 ------- ------- ----- ------- ------ ------- ------- ------- ----- ------- ------ ------- Management adjusted gap at March 31, 1993.................... $ 3,159 $(2,975) $ 49 $ 233 $ (26) $ 207 ------- ------- ----- ------- ------ ------- ------- ------- ----- ------- ------ -------
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 purchased funds) increased to $2.3 billion, or 25% of total deposits and borrowings, at March 31, 1994, compared with $2.2 billion, also 25% of total deposits and borrowing at March 31, 1993. The Company also has additional liquidity flexibility due to the relatively short average maturity (1.1 years) of its combined short-term and securities available for sale portfolio. The statement of cash flows provides additional information on liquidity. The statement of cash flows includes operating, investing, and financing categories. Operating activities included $21.3 million in net income for the first quarter of 1994, before adjustment of noncash items. Investing activities are primarily comprised of both proceeds from sales and purchases of short-term investments and securities 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 $633 million at December 31, 1993. During the first quarter of 1994, net cash provided by operating activities was $122 million, net cash used in investing activities totaled $286 million, and net cash provided by financing activities was $107 million. Cash and cash equivalents were $576 million at March 31, 1994. The parent company's 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 banking 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. During the first quarter of 1994 the parent company did not provide any capital to its subsidiaries. Dividends received from bank subsidiaries were $6.1 million, while no dividends were received from nonbank subsidiaries. The parent company paid $6.6 million in dividends to its stockholders. At March 31, 1994 the parent company had $70.4 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. 15 16 CREDIT QUALITY REVIEW Overview The Company continually monitors its loan portfolio. Employing a standard system for grading loans, individual account officers assign their loans a grade, or risk rating, and, if necessary, a specific loan loss reserve. An independent Loan Review Department then 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, to assess the quality and loss potential inherent in the portfolio. Also considered in this review are delinquency trends and the adequacy of reserves. The size of the allowance for loan losses, the related provision, as well as the adequacy of OREO reserves reflect this analysis. Nonperforming assets, presented in TABLE G (which exclude restructured, accruing loans, and accruing loans 90 days or more past due), include nonperforming loans and OREO and were $204 million at March 31, 1994, a 9% decrease from $224 million at December 31, 1993, and a 40% decrease from $338 million at March 31, 1993. Nonperforming assets have continued the downward trend that began in the first quarter of 1991. While the Company expects to experience continued improvement in nonperforming assets, the pace of that improvement will depend on many factors, including national and regional economic conditions. TABLE G NONPERFORMING ASSETS, RESTRUCTURED, ACCRUING LOANS AND ACCRUING LOANS 90 DAYS OR MORE PAST DUE AT PERIOD-END (DOLLARS IN THOUSANDS)
MARCH 31 DECEMBER 31 MARCH 31 1994 1993 1993 -------- ----------- -------- Nonperforming loans....................................... $104,605 $110,001 $162,053 Other real estate owned In-substance foreclosures............................... 62,163 72,505 87,192 Foreclosed property..................................... 63,944 70,950 104,747 -------- -------- -------- 126,107 143,455 191,939 Less OREO reserve....................................... 26,968 29,776 15,514 -------- -------- -------- OREO, net of reserve.................................... 99,139 113,679 176,425 -------- -------- -------- Total nonperforming assets................................ $203,744 $223,680 $338,478 -------- -------- -------- -------- -------- -------- Restructured, accruing loans.............................. $ 12,878 $ 18,398 $ 11,586 -------- -------- -------- -------- -------- -------- Accruing loans 90 days or more past due................... $ 49,130 $ 51,749 $ 80,251 -------- -------- -------- -------- -------- -------- Nonperforming assets as a percentage of loans and OREO.... 3.3% 3.6% 5.7% Nonperforming assets as a percentage of total assets...... 2.0 2.2 3.5
The decline in nonperforming assets, presented in TABLE H (which exclude restructured, accruing loans and accruing loans 90 days or more past due), is affected by successful workout activities that include property sales, payments on nonperforming loans, and loans that qualify for return to accrual status. These favorable resolutions were $34 million in the first quarter of 1994, or 15% of the beginning of the period balance. During the first quarter of 1994 additions to nonperforming assets were $21 million; additions to nonperforming assets in the first quarter of 1993 were $31 million. 16 17 TABLE H CHANGE IN ASSET QUALITY (IN THOUSANDS)
1994 1993 -------- ----------------------------------------------- FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- -------- Nonperforming assets................ $203,744 $223,680 $272,396 $308,374 $338,478 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Nonperforming asset activity: Additions......................... $ 20,656 $ 14,752 $ 27,034 $ 33,135 $ 31,284 -------- -------- -------- -------- -------- Payments.......................... (8,070) (9,832) (15,515) (16,239) (25,348) Returns to accrual................ (4,349) (9,545) (8,021) (6,126) (312) OREO sales........................ (21,477) (27,514) (20,651) (19,861) (22,040) -------- -------- -------- -------- -------- Total improvements............. (33,896) (46,891) (44,187) (42,226) (47,700) -------- -------- -------- -------- -------- Net outflow.................... (13,240) (32,139) (17,153) (9,091) (16,416) -------- -------- -------- -------- -------- Charge-offs......................... (9,504) (16,135) (11,967) (14,051) (13,592) Change in OREO reserve.............. 2,808 (442) (6,858) (6,962) (7,680) -------- -------- -------- -------- -------- Total decrease in nonperforming assets............................ $(19,936) $(48,716) $(35,978) $(30,104) $(37,688) -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Nonperforming Loans Total nonperforming loans, TABLE I (which exclude restructured, accruing loans and accruing loans 90 days or more past due), declined 5% during the first quarter of 1994 to $105 million at March 31, 1994, compared with $110 million at December 31, 1993. Nonperforming commercial loans decreased 12% to $42 million during the first quarter of 1994, compared with $48 million at December 31, 1993. Commercial real estate nonperforming loans declined 2% during the first quarter of 1994 to $48 million at March 31, 1994, compared with $49 million at December 31, 1993. Consumer nonperforming loans, including residential mortgages and instalment loans, increased 10% during the first quarter of 1994 to $15 million, compared with $13 million at December 31, 1993. TABLE I NONPERFORMING LOANS AT PERIOD-END (DOLLARS IN THOUSANDS)
DECEMBER 31, MARCH 31, 1994 1993 MARCH 31, 1993 ---------------- ---------------- ---------------- Commercial........................ $ 42,223 40% $ 47,751 43% $ 83,636 52% Commercial real estate............ 47,855 46 49,014 45 62,142 38 Residential mortgage.............. 12,681 12 11,473 10 12,574 8 Instalment........................ 1,846 2 1,763 2 3,701 2 -------- --- -------- --- -------- --- Total nonperforming loans................. $104,605 100% $110,001 100% $162,053 100% -------- --- -------- --- -------- --- -------- --- -------- --- -------- ---
Other Real Estate Owned 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 13% during the first quarter of 1993 to $99 million. The decline was primarily due to property sales of $21.5 million in the first quarter of 1994; property sales in the 17 18 OREO (net of a valuation reserve) declined by 13% during the first quarter of 1993 to $99 million. The decline was primarily due to property sales of $21.5 million in the first quarter of 1994; property sales in the first quarter of 1993 were $22.0 million. The five largest OREO properties at March 31, 1994, ranged from $5.2 million down to $3.2 million, with the majority of OREO comprised of smaller value properties. Restructured, Accruing Loans The Company restructures credits with troubled borrowers if such arrangements are likely to minimize losses the Company may otherwise incur on a particular credit. Loans that have been restructured generally remain on nonaccrual status until the customer has demonstrated a period of performance under new contractual terms. Restructured, accruing loans were $13 million at March 31, 1994, compared with $12 million at March 31, 1993. Accruing Loans 90 Days or More Past Due Accruing loans 90 days or more past due declined 5% to $49 million at March 31, 1994, from $52 million at December 31, 1993, and 39% from $80 million at March 31, 1993 presented (TABLE J). Of the $49 million in accruing loans past due 90 days or more at March 31, 1994, $18 million were residential real estate loans and $21 million were instalment loans, which together represented 80% of the total. Residential real estate and instalment loans by their nature include a large number of smaller loans. Of the $18 million in such residential real estate loans, $15 million were in owner-occupied properties. Commercial and commercial real estate accruing loans 90 days or more past due at March 31, 1994, were $10 million, compared with $28 million at March 31, 1993. TABLE J ACCRUING LOANS 90 DAYS OR MORE PAST DUE AT PERIOD-END (DOLLARS IN THOUSANDS)
DECEMBER 31, MARCH 31, 1994 1993 MARCH 31, 1993 --------------- --------------- --------------- Commercial............................... $ 3,811 8% $ 3,558 7% $11,671 14% Commercial real estate................... 6,109 12 5,093 10 16,685 21 Residential mortgage..................... 17,715 36 20,698 40 28,911 36 Instalment............................... 21,495 44 22,400 43 22,984 29 ------- --- ------- --- ------- --- Total.......................... $49,130 100% $51,749 100% $80,251 100% ------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
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 (TABLE K). Net loans charged off were $12.3 million in the first quarter of 1994, compared with $16.0 million in the first quarter of 1993. The provision for loan losses was $6.0 million in the first quarter of 1994, compared with $11.5 million in the first quarter of 1993. 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 charge-offs. The allowance for loan losses was $165 million at March 31, 1994, and $188 million at March 31, 1993. While the overall allowance declined, its coverage of nonperforming loans increased to 158% at March 31, 1994, from 116% at March 31, 1993. 18 19 TABLE K SUMMARY OF LOAN LOSS EXPERIENCE (DOLLARS IN THOUSANDS)
FIRST QUARTER ------------------------- 1994 1993 ---------- ---------- Loans outstanding at March 31....................................... $6,052,135 $5,807,289 ---------- ---------- ---------- ---------- Average Loans....................................................... $6,042,316 $5,856,381 ---------- ---------- ---------- ---------- Allowance for loan losses: Balance at beginning of period...................................... $ 171,496 $ 192,700 Loans charged off Commercial..................................................... 1,448 4,565 Commercial real estate......................................... 6,051 4,168 Residential mortgage........................................... 1,787 3,238 Instalment..................................................... 7,005 8,001 ---------- ---------- Total loans charged off................................... 16,291 19,972 ---------- ---------- Recoveries Commercial..................................................... 1,680 1,927 Commercial real estate......................................... 242 184 Residential mortgage........................................... 672 435 Instalment..................................................... 1,422 1,463 ---------- ---------- Total recoveries............................................... 4,016 4,009 ---------- ---------- Net loans charged off.......................................... 12,275 15,963 Provision for loan losses........................................... 6,000 11,500 ---------- ---------- Balance at March 31................................................. $ 165,221 $ 188,237 ---------- ---------- ---------- ---------- Annualized net charge-offs as a percentage of average period-to-date loans............................................................. 0.8% 1.1% Allowance for possible loan losses as a percentage of period-end loans............................................................. 2.7 3.2 Allowance for loan losses as a percentage of nonperforming loans.... 157.9 116.2 Allowance for loan losses as a percentage of nonperforming loans, restructured, accruing loans, and accruing loans past due 90 days or more........................................................... 99.2 74.1
CAPITAL AND DIVIDENDS BayBanks' consolidated risk-based capital ratios were 13.06% for total capital and 11.32% for core capital at March 31, 1994, compared with 12.76% and 10.83%, respectively, at March 31, 1993. At December 31, 1993, the consolidated risk-based capital ratios were 12.40% for total capital and 10.68% for core capital. The consolidated leverage ratio was 7.33%, 7.26%, and 6.99% at March 31, 1994, December 31, 1993, and March 31, 1993, respectively. (TABLE L). 19 20 TABLE L CAPITAL RATIOS MARCH 31, 1994
RISK-BASED RATIOS ------------------------------------------------------------ TIER 1 CAPITAL TOTAL CAPITAL LEVERAGE RATIO(1) ----------------------------- ----------------------------- ----------------------------- 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% 11.32% n/a% 13.06% n/a% 7.33% BayBank..................... 6.00 9.53 10.00 11.28 5.00 6.18 BayBank Boston, N.A. ....... 6.00 10.62 10.00 12.57 5.00 6.50 BayBank Connecticut, N.A. ..................... 6.00 13.70 10.00 14.98 5.00 10.71 - - --------------- (1) Under Federal Prompt Corrective Action and Risk-based Deposit Insurance Assessment Regulations. n/a - not applicable
BayBanks paid a dividend in the first quarter of 1994 of $.35 per share. BayBanks had 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 of 1993. In the third quarter of 1993, BayBanks increased its quarterly cash dividend to $.25 per share, which was also paid in the fourth quarter of 1993. On April 28, 1994, BayBanks declared its second quarter dividend at $.35 per share payable June 1, 1994. IMPENDING ACCOUNTING CHANGE 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 reported as nonperforming and in-substance foreclosures will be reported as impaired loans in a note to the financial statements. Restructured loans, reported as restructured, accruing loans 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. Restructured, accruing loans 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 as a practical expedient 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. 20 21 BAYBANKS, INC. AVERAGE BALANCES AND CAPITAL RATIOS (DOLLARS IN MILLIONS)
1994 1993 ------- ---------------------------------------- FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ASSETS Interest-bearing deposits and other short-term investments..................................... $ 315 $ 420 $ 412 $ 651 $ 897 Securities available for sale, at cost............ 618 831 974 1,504 1,670 Investment securities, at cost.................... 1,938 1,469 1,201 526 123 Loans* Commercial...................................... 1,294 1,288 1,371 1,414 1,388 Commercial real estate.......................... 926 930 945 960 994 Residential mortgage............................ 1,209 1,194 1,178 1,128 1,183 Instalment...................................... 2,613 2,550 2,461 2,388 2,291 ------- ------- ------- ------- ------- 6,042 5,962 5,955 5,890 5,856 Less allowance for loan losses.................. 172 184 185 190 195 ------- ------- ------- ------- ------- 5,870 5,778 5,770 5,700 5,661 ------- ------- ------- ------- ------- Total earning assets.................... 8,913 8,682 8,542 8,571 8,546 Cash and due from banks........................... 602 659 630 628 600 Other assets...................................... 495 519 539 566 575 ------- ------- ------- ------- ------- Total assets............................ $ 9,838 $ 9,676 $ 9,526 $ 9,575 $ 9,526 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand.......................................... $ 1,955 $ 2,031 $ 1,914 $ 1,826 $ 1,795 NOW accounts.................................... 1,391 1,372 1,338 1,331 1,303 Savings......................................... 1,481 1,443 1,422 1,390 1,344 Money market deposit accounts................... 2,742 2,758 2,823 2,926 2,956 Consumer time................................... 975 1,016 1,069 1,130 1,196 Time -- $100,000 or more........................ 37 30 29 35 39 ------- ------- ------- ------- ------- 8,581 8,650 8,595 8,638 8,633 Federal funds purchased and other short-term borrowings...................................... 425 209 139 148 106 Long-term debt.................................... 54 55 54 54 54 ------- ------- ------- ------- ------- Total deposits and borrowings........... 9,060 8,914 8,788 8,840 8,793 Other liabilities**............................... 66 70 61 72 82 Stockholders' equity.............................. 712 692 677 663 651 ------- ------- ------- ------- ------- Total liabilities and stockholders' equity................................ $ 9,838 $ 9,676 $ 9,526 $ 9,575 $ 9,526 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- CAPITAL RATIOS Risk-Based Core (Min. regulatory standard-4.00%)........... 11.32% 10.68% 11.14% 11.05% 10.83% Total (Min. regulatory standard-8.00%).......... 13.06 12.40 13.06 12.98 12.76 Leverage.......................................... 7.33 7.26 7.26 7.07 6.99 - - --------------- * Nonperforming loans are included in the average balances. ** Includes guarantee of ESOP indebtedness.
21 22 BAYBANKS, INC. SUMMARY OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1994 1993 -------- ----------------------------------------- FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- -------- Income on earning assets (tax equivalent basis).................................... $148,458 $148,393 $148,539 $148,885 $150,012 Interest expense on deposits and borrowings................................ 37,818 37,636 38,856 42,787 47,369 -------- -------- -------- -------- -------- Net interest income......................... 110,640 110,757 109,683 106,098 102,643 Noninterest income.......................... 49,715 50,973 51,904 48,751 46,896 -------- -------- -------- -------- -------- Total income from operations................ 160,355 161,730 161,587 154,849 149,539 Operating expenses.......................... 112,195 112,282 112,224 113,039 109,160 -------- -------- -------- -------- -------- Operating Income before Net Securities Gains and Provisions for Loan Losses and OREO Reserve................................... 48,160 49,448 49,363 41,810 40,379 Net securities gains........................ 39 4 49 358 -- Provision for loan losses................... 6,000 7,000 9,000 9,000 11,500 Provision for OREO reserve, net............. 2,937 2,138 7,800 7,892 7,000 -------- -------- -------- -------- -------- Total credit provisions..................... 8,937 9,138 16,800 16,892 18,500 -------- -------- -------- -------- -------- Pre-tax income.............................. 39,262 40,314 32,612 25,276 21,879 Less tax equivalent adjustment included above..................................... 1,973 1,661 1,401 1,181 1,115 -------- -------- -------- -------- -------- Income before taxes and cumulative effect of accounting change......................... 37,289 38,653 31,211 24,095 20,764 Provision for income taxes.................. 15,078 15,971 13,210 9,888 8,003 -------- -------- -------- -------- -------- Income before cumulative effect of accounting change......................... 22,211 22,682 18,001 14,207 12,761 Less cumulative effect of accounting change (net of tax benefit of $683).............. 932 -- -- -- -- -------- -------- -------- -------- -------- Net Income.................................. $ 21,279 $ 22,682 $ 18,001 $ 14,207 $ 12,761 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Earnings Per Share: Income before accounting change........... $ 1.16 $ 1.19 $ 0.95 $ 0.75 $ 0.68 Less cumulative effect of accounting change................................. 0.05 -- -- -- -- -------- -------- -------- -------- -------- Net Income................................ $ 1.11 $ 1.19 $ 0.95 $ 0.75 $ 0.68 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Dividends Paid Per Share.................... 0.35 0.25 0.25 0.20 0.20 Financial Ratios Return on average equity.................... 12.1% 13.0% 10.5% 8.6% 7.9% Return on average assets.................... 0.88 0.93 0.75 0.60 0.54 Common Stock Data Period-end book value per share............. $ 38.51 $ 37.52 $ 36.56 $ 35.85 $ 35.29 Dividend payout ratio....................... 31.5% 21.0% 26.3% 26.7% 29.4% Range of BayBanks, Inc., last sale price High...................................... $ 57.25 $ 50.75 $ 50.50 $ 51.25 $ 52.13 Low....................................... 50.00 43.25 43.25 38.25 38.75 Close..................................... 54.50 50.75 48.75 43.00 50.13
22 23 BAYBANKS, INC. AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN*
1994 1993 ------- ------------------------------------------- FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- Interest-bearing deposits and other short-term investments.................................. 3.32% 3.24% 3.28% 3.23% 3.43% Securities available for sale**................ 4.64 4.70 4.40 4.39 4.50 Investment securities**........................ 4.55 4.52 4.67 4.93 7.48 Loans.......................................... 7.81 7.90 8.03 8.20 8.37 Commercial................................... 6.57 6.48 6.50 6.57 6.63 Commercial real estate....................... 7.58 7.74 7.73 7.90 7.70 Residential mortgage......................... 7.35 7.51 7.74 8.08 8.27 Instalment................................... 8.71 8.86 9.14 9.36 9.76 Total earning assets................. 6.72% 6.80% 6.91% 6.96% 7.08% Interest-bearing funds......................... 2.16% 2.16% 2.24% 2.45% 2.75% NOW accounts................................. 1.33 1.42 1.54 1.80 2.03 Savings...................................... 1.90 1.92 1.96 2.16 2.40 Money market deposit accounts................ 2.04 2.08 2.13 2.32 2.67 Consumer time................................ 3.45 3.52 3.65 3.80 4.06 Time -- $100,000 or more..................... 2.91 2.63 2.57 2.66 2.75 Short-term borrowings........................ 3.21 2.86 2.60 2.65 2.50 Long-term debt............................... 3.88 3.75 3.83 3.69 4.05 Interest expense as a percentage of average earning assets............................... 1.72% 1.72% 1.80% 2.00% 2.25% Net interest margin............................ 5.00% 5.08% 5.11% 4.96% 4.83% - - --------------- * Tax equivalent basis. ** Yields based on average cost.
PART II -- OTHER INFORMATION ---------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) See Exhibit List and Index on page 25. (b) No report on Form 8-K was filed during the first quarter ended March 31, 1994. 23 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BayBanks, Inc. -------------------------------- (Registrant) By: /s/ MICHAEL W. VASILY -------------------------------- Michael W. Vasily Executive Vice President and Chief Financial Officer (Duly Authorized and Principal Financial Officer) Date: May 12, 1994 24 25 BAYBANKS, INC. EXHIBIT LIST AND INDEX
EXHIBIT NO. DESCRIPTION - - ----------- ----------- 11.1 -- Computation of Primary and Fully Diluted Earnings Per Share
25 EX-11.1 2 COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS 1 EXHIBIT 11.1 BAYBANKS, INC. COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE FOR THE QUARTERS ENDED MARCH 31 (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1994 1993 ----------- ----------- Primary: Weighted average shares........................................... 18,778,400 18,561,082 Common Stock Equivalents (CSE): Stock options................................................... 315,047 309,936 ----------- ----------- Primary weighted average shares................................... 19,093,447 18,871,018 ----------- ----------- ----------- ----------- Income before cumulative effect of accounting change.............. $ 22,211 $ 12,761 Less cumulative effect of accounting change....................... 932 -- ----------- ----------- Net Income........................................................ $ 21,279 $ 12,761 ----------- ----------- ----------- ----------- Primary earnings per share: Income before cumulative effect of accounting change............ $ 1.16 $ 0.68 Less cumulative effect of accounting change..................... .05 -- ----------- ----------- Net Income...................................................... $ 1.11 $ 0.68 ----------- ----------- ----------- ----------- Fully Diluted: Weighted average shares........................................... 18,778,400 18,561,082 Common Stock Equivalents (CSE): Stock options................................................... 315,047 309,936 Stock options not CSE............................................. 9,958 66,120 5% convertible debentures......................................... -- 4,655(1) ----------- ----------- Fully diluted weighted average shares............................. 19,103,405 18,941,793 ----------- ----------- ----------- ----------- Income before cumulative effect of accounting change.............. $ 22,211 $ 12,761 Less cumulative effect of accounting change....................... 932 -- ----------- ----------- Net Income........................................................ $ 21,279 $ 12,761 5% debentures interest expense -- net of tax...................... -- 6 ----------- ----------- Net Income -- fully diluted basis................................. $ 21,279 $ 12,767 ----------- ----------- ----------- ----------- Fully diluted earnings per share: Income before cumulative effect of accounting change............ $ 1.16 $ 0.67 Less cumulative effect of accounting change..................... .05 -- ----------- ----------- Net Income...................................................... $ 1.11 $ 0.67 ----------- ----------- ----------- ----------- - - --------------- (1) $64 convertible at $13.75 per share.
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