-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WdIgJTi57hrByZPcCN/uiuHky8aRGRo83qKN5W2weMKwIj5hqpNNlqunFptyBVhh 9KThTYeEEpJYZwvO0sUxGw== 0000950135-96-000128.txt : 19960118 0000950135-96-000128.hdr.sgml : 19960118 ACCESSION NUMBER: 0000950135-96-000128 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960116 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960117 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF BOSTON CORP CENTRAL INDEX KEY: 0000036672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 042471221 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06522 FILM NUMBER: 96504313 BUSINESS ADDRESS: STREET 1: 100 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174342200 FORMER COMPANY: FORMER CONFORMED NAME: FIRST NATIONAL BOSTON CORP DATE OF NAME CHANGE: 19830414 8-K 1 BANK OF BOSTON 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): JANUARY 16, 1996 BANK OF BOSTON CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 1-6522 04-2471221 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.)
100 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 434-2200 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 -2- ITEM 5. OTHER EVENTS. - ---------------------- As previously reported in its Current Report on Form 8-K dated December 12, 1995, Bank of Boston Corporation ("Bank of Boston") has entered into an agreement to acquire BayBanks, Inc. ("BayBanks"). The financial statements attached as Exhibits hereto, and which are incorporated herein by reference, present (i) pro forma combined financial information for Bank of Boston and BayBanks and (ii) BayBanks historical consolidated financial information. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. - ------------------------------------------- (c) Exhibits. 23 Consent of KPMG Peat Marwick LLP (with respect to report on consolidated financial statements of BayBanks, Inc.). 99(a) Pro Forma Combined Balance Sheet for Bank of Boston and BayBanks at September 30, 1995 and Pro Forma Combined Statements of Income for the Nine Months Ended September 30, 1995 and the Years Ended December 31, 1994, 1993 and 1992 (and the Notes to Pro Forma Combined Financial Information). 99(b) BayBanks Consolidated Balance Sheets at September 30, 1995 and 1994 and at December 31, 1994 and 1993; Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1995 and 1994 and for the Years Ended December 31, 1994, 1993 and 1992; Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 1995 and 1994 and for the Years Ended December 31, 1994, 1993 and 1992; and Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994 and for the Years Ended December 31, 1994, 1993 and 1992 (and the Notes to Consolidated Financial Statements). 99(c) Report of KPMG Peat Marwick LLP dated January 24, 1995 (with respect to the consolidated financial statements of BayBanks, Inc. and subsidiaries as of December 31, 1994 and 1993 and for each of the years in the three-year period ended December 31, 1994). 3 -3- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BANK OF BOSTON CORPORATION Dated: January 16, 1996 /s/ William J. Shea ------------------- William J. Shea Vice Chairman, Chief Financial Officer and Treasurer EX-23 2 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23 ---------- Consent of Independent Auditors ------------------------------- To the Board of Directors of BayBanks, Inc.: We consent to the inclusion in the Form 8-K dated January 16, 1996, and to the incorporation by reference in the registration statements (Nos. 33-29515, 33-52571, 33-61721 and 33-57723) on Forms S-3 and in the registration statements (Nos. 33-23407, 33-1899, 33-11186, 33-64462, 33-65850 and 33-66012) on Forms S-8 of Bank of Boston Corporation of our report dated January 24, 1995, with respect to the consolidated balance sheets of BayBanks, Inc. and subsidiaries as of December 31, 1994, and 1993, 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, 1994. /s/ KPMG PEAT MARWICK LLP Boston, Massachusetts January 11, 1996 EX-99.A 3 PRO FORMA COMBINED FINANCIAL INFORMATION 1 EXHIBIT 99a ----------- UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following Unaudited Pro Forma Combined Financial Information combines the historical Consolidated Financial Statements of Bank of Boston and BayBanks giving effect to the proposed merger of Bank of Boston and BayBanks, as if it had been effective on September 30, 1995, with regard to the Pro Forma Combined Balance Sheet, and as of the beginning of the periods indicated herein, with regard to the Pro Forma Combined Statements of Income. The proposed merger will be accounted for as a pooling of interests. This information should be read in conjunction with the historical consolidated financial statements of Bank of Boston and BayBanks, including their respective notes thereto. The effect of estimated acquisition and restructuring costs has been reflected in the pro forma combined balance sheet; however, since the estimated costs are nonrecurring, they have not been reflected in the pro forma combined statements of income. The pro forma combined financial information does not give effect to any anticipated cost savings in connection with the proposed merger. The pro forma combined balance sheet is not necessarily indicative of the actual financial position that would have existed had the proposed merger with BayBanks been consummated on September 30, 1995 or that may exist in the future. The pro forma combined statements of income are not necessarily indicative of the results that would have occurred had the proposed merger been consummated on the dates indicated or that may be achieved in the future. UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AT SEPTEMBER 30, 1995 (IN MILLIONS) BANK OF PRO FORMA PRO FORMA BOSTON BAYBANKS(1) ADJUSTMENTS(1) COMBINED ------ ----------- -------------- -------- ASSETS Cash and due from banks $ 2,208 $ 750 $ 2,958 Interest bearing deposits in other banks 1,249 160 1,409 Federal funds sold and securities purchased under agreements to resell 1,236 189 1,425 Securities held to maturity 1,765 2,190 3,955 Securities available for sale 3,277 318 3,595 Trading account securities 594 77 671 Mortgages held for sale 558 558 Loans and leases 31,691 7,476 39,167 Reserve for credit losses (704) (154) (858) Premises and equipment 589 205 794 Due from customers on acceptances 381 1 382 Other assets 3,239 313 3,552 ------- ------- -------- ------- Total assets $46,083 $11,525 $57,608 ======= ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $30,009 $ 9,724 $39,733 Funds borrowed 8,720 732 9,452 Acceptances outstanding 381 1 382 Other liabilities 1,321 97 $ 83 (2) 1,501 Notes payable 2,059 65 2,124 ------- ------- -------- ------- Total liabilities 42,490 10,619 83 53,192 ------- ------- -------- ------- Stockholders'equity: Preferred stock 508 508 Common stock 252 39 58 (3) 349 Surplus 916 359 (58) (3) 1,217 Retained earnings 1,927 508 (83) (2) 2,352 Net unrealized loss on securities available for sale, net of tax (6) (6) Cumulative translation adjustments (4) (4) ------- ------- -------- ------- Total stockholders' equity 3,593 906 (83) 4,416 ------- ------- -------- ------- Total liabilities and stockholders' equity $46,083 $11,525 $57,608 ======= ======= ======== =======
See Notes to Unaudited Pro Forma Combined Financial Information 2 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME SUMMARY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NINE MONTHS YEARS ENDED DECEMBER 31, ENDED ------------------------ SEPT. 30, 1995 1994 1993 1992 -------------- ---- ---- ---- INTEREST INCOME: Loans and lease financing, including fees $ 2,860 $ 3,114 $ 2,584 $ 2,823 Securities 507 495 362 485 Mortgages held for sale 18 43 85 67 Federal funds sold and securities purchased under agreements to resell 273 605 147 98 Deposits in other banks 182 119 152 191 ------- ------- ------- ------- Total interest income 3,840 4,376 3,330 3,664 ------- ------- ------- ------- INTEREST EXPENSE: Deposits 1,348 1,301 1,177 1,640 Funds borrowed 698 906 268 275 Notes payable 119 132 116 77 ------- ------- ------- ------- Total interest expense 2,165 2,339 1,561 1,992 ------- ------- ------- ------- Net interest revenue 1,675 2,037 1,769 1,672 Provision for credit losses 194 154 107 288 ------- ------- ------- ------- Net interest revenue after provision for credit losses 1,481 1,883 1,662 1,384 ------- ------- ------- ------- NONINTEREST INCOME: Financial service fees 480 580 529 519 Trust and agency fees 179 215 193 181 Trading profits and commissions 16 18 26 18 Securities gains 7 14 32 116 Other income 260 208 165 186 ------- ------- ------- ------- Total noninterest income 942 1,035 945 1,020 ------- ------- ------- ------- NONINTEREST EXPENSE: Salaries and employee benefits 857 1,043 984 926 Occupancy and equipment expense 248 317 312 317 Other real estate owned expense 7 38 82 172 Acquisition and restructuring expense 21 85 Other expense 418 526 539 534 ------- ------- ------- ------- Total noninterest expense 1,530 1,945 2,002 1,949 ------- ------- ------- ------- Income before income taxes, extraordinary item and cumulative effect of accounting change 893 973 605 455 Provision for income taxes 395 423 262 190 ------- ------- ------- ------- INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 498 $ 550 $ 343 $ 265 ======= ======= ======= ======= PER COMMON SHARE: Income before extraordinary item and cumulative effect of accounting change: Primary $ 3.07 $ 3.44 $ 2.09 $ 1.77 Fully diluted 3.00 3.37 2.05 1.73 Average number of common shares (in thousands): Primary 153,086 148,913 147,033 138,444 Fully diluted 156,409 153,619 152,067 144,044
See Notes to Unaudited Pro Forma Combined Financial Information 3 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) BANK OF PRO FORMA PRO FORMA BOSTON BAYBANKS(1) ADJUSTMENTS(1) COMBINED ------ ----------- ------------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 2,394 $ 466 $ 2,860 Securities 395 112 507 Mortgages held for sale 17 1 18 Federal funds sold and securities purchased under agreements to resell 267 6 273 Deposits in other banks 177 5 182 ------- ------ ------- Total interest income 3,250 590 3,840 ------- ------ ------- INTEREST EXPENSE: Deposits 1,179 169 1,348 Funds borrowed 656 42 698 Notes payable 116 3 119 ------- ------ ------- Total interest expense 1,951 214 2,165 ------- ------ ------- Net interest revenue 1,299 376 1,675 Provision for credit losses 175 19 194 ------- ------ ------- Net interest revenue after provision for credit losses 1,124 357 1,481 ------- ------ ------- NONINTEREST INCOME: Financial service fees 337 143 480 Trust and agency fees 168 11 179 Trading profits and commissions 14 2 16 Securities gains 7 7 Other income 252 8 260 ------- ------ ------- Total noninterest income 778 164 942 ------- ------ ------- NONINTEREST EXPENSE: Salaries and employee benefits 670 187 857 Occupancy and equipment expense 180 68 248 Other real estate owned expense 6 1 7 Other expense 312 106 418 ------- ------ ------- Total noninterest expense 1,168 362 1,530 ------- ------ ------- Income before income taxes 734 159 893 Provision for income taxes 335 60 395 ------- ------ ------- ------- NET INCOME $ 399 $ 99 $ 498 ======= ====== ======= ======= PER COMMON SHARE: Net income: Primary $ 3.36 $ 5.11 $ 3.07 Fully diluted 3.27 5.10 3.00 Average number of common shares (in thousands): Primary 110,188 19,499 153,086 Fully diluted 113,458 19,523 156,409
See Notes to Unaudited Pro Forma Combined Financial Information 4 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) BANK OF PRO FORMA PRO FORMA BOSTON BAYBANKS(1) ADJUSTMENTS(1) COMBINED ------ ----------- ----------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 2,606 $ 508 $ 3,114 Securities 355 140 495 Mortgages held for sale 41 2 43 Federal funds sold and securities purchased under agreements to resell 600 5 605 Deposits in other banks 116 3 119 ------- ------ ------- Total interest income 3,718 658 4,376 ------- ------ ------- INTEREST EXPENSE: Deposits 1,148 153 1,301 Funds borrowed 868 38 906 Notes payable 130 2 132 ------- ------ ------- Total interest expense 2,146 193 2,339 ------- ------ ------- Net interest revenue 1,572 465 2,037 Provision for credit losses 130 24 154 ------- ------ ------- Net interest revenue after provision for credit losses 1,442 441 1,883 ------- ------ ------- NONINTEREST INCOME: Financial service fees 396 184 580 Trust and agency fees 201 14 215 Trading profits and commissions 16 2 18 Securities gains 14 14 Other income 201 7 208 ------- ------ ------- Total noninterest income 828 207 1,035 ------- ------ ------- NONINTEREST EXPENSE: Salaries and employee benefits 813 230 1,043 Occupancy and equipment expense 231 86 317 Other real estate owned expense 22 16 38 Acquisition and restructuring expense 21 21 Other expense 392 134 526 ------- ------ ------- Total noninterest expense 1,479 466 1,945 ------- ------ ------- Income before income taxes, extraordinary item and cumulative effect of of accounting change 791 182 973 Provision for income taxes 349 74 423 ------- ------ ------- ------- INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 442 $ 108 $ 550 ======= ====== ======= ======= PER COMMON SHARE: Income before extraordinary item and cumulative effect of accounting change: Primary $ 3.79 $ 5.65 $ 3.44 Fully diluted 3.67 5.65 3.37 Average number of common shares (in thousands): Primary 106,730 19,174 148,913 Fully diluted 111,427 19,177 153,619
See Notes to Unaudited Pro Forma Combined Financial Information 5 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) BANK OF PRO FORMA PRO FORMA BOSTON BAYBANKS(1) ADJUSTMENTS(1) COMBINED ------ ----------- ----------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 2,112 $ 472 $ 2,584 Securities 271 91 362 Mortgages held for sale 76 9 85 Federal funds sold and securities purchased under agreements to resell 139 8 147 Deposits in other banks 141 11 152 ------- ------ ------- Total interest income 2,739 591 3,330 ------- ------ ------- INTEREST EXPENSE: Deposits 1,016 161 1,177 Funds borrowed 264 4 268 Notes payable 114 2 116 ------- ------ ------- Total interest expense 1,394 167 1,561 ------- ------ ------- Net interest revenue 1,345 424 1,769 Provision for credit losses 70 37 107 ------- ------ ------- Net interest revenue after provision for credit losses 1,275 387 1,662 ------- ------ ------- NONINTEREST INCOME: Financial service fees 350 179 529 Trust and agency fees 178 15 193 Trading profits and commissions 24 2 26 Securities gains 32 32 Other income 162 3 165 ------- ------ ------- Total noninterest income 746 199 945 ------- ------ ------- NONINTEREST EXPENSE: Salaries and employee benefits 771 213 984 Occupancy and equipment expense 224 88 312 Other real estate owned expense 44 38 82 Acquisition and restructuring expense 85 85 Other expense 407 132 539 ------- ------ ------- Total noninterest expense 1,531 471 2,002 ------- ------ ------- Income before income taxes and cumulative effect of accounting change 490 115 605 Provision for income taxes 215 47 262 ------- ------ ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 275 $ 68 $ 343 ======= ====== ======= ======= PER COMMON SHARE: Income before cumulative effect of accounting change: Primary $ 2.28 $ 3.57 $ 2.09 Fully diluted 2.22 3.56 2.05 Average number of common shares (in thousands): Primary 105,336 18,953 147,033 Fully diluted 110,258 19,004 152,067
See Notes to Unaudited Pro Forma Combined Financial Information 6 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) BANK OF PRO FORMA PRO FORMA BOSTON BAYBANKS(1) ADJUSTMENTS(1) COMBINED ------ ----------- ----------- -------- INTEREST INCOME: Loans and lease financing, including fees $ 2,291 $ 532 $ 2,823 Securities 391 94 485 Mortgages held for sale 58 9 67 Federal funds sold and securities purchased under agreements to resell 81 17 98 Deposits in other banks 186 5 191 ------- ------ ------- Total interest income 3,007 657 3,664 ------- ------ ------- INTEREST EXPENSE: Deposits 1,407 233 1,640 Funds borrowed 271 4 275 Notes payable 74 3 77 ------- ------ ------- Total interest expense 1,752 240 1,992 ------- ------ ------- Net interest revenue 1,255 417 1,672 Provision for credit losses 181 107 288 ------- ------ ------- Net interest revenue after provision for credit losses 1,074 310 1,384 ------- ------ ------- NONINTEREST INCOME: Financial service fees 355 164 519 Trust and agency fees 166 15 181 Trading profits and commissions 16 2 18 Securities gains 39 77 116 Other income 183 3 186 ------- ------ ------- Total noninterest income 759 261 1,020 ------- ------ ------- NONINTEREST EXPENSE: Salaries and employee benefits 726 200 926 Occupancy and equipment expense 227 90 317 Other real estate owned expense 113 59 172 Other expense 408 126 534 ------- ------ ------- Total noninterest expense 1,474 475 1,949 ------- ------ ------- Income before income taxes and extraordinary item 359 96 455 Provision for income taxes 153 37 190 ------- ------ ------- ------- INCOME BEFORE EXTRAORDINARY ITEM $ 206 $ 59 $ 265 ======= ====== ======= ======= PER COMMON SHARE: Income before extraordinary item: Primary $ 1.82 $ 3.57 $ 1.77 Fully diluted 1.78 3.54 1.73 Average number of common shares (in thousands): Primary 101,977 16,576 138,444 Fully diluted 107,157 16,767 144,044
See Notes to Unaudited Pro Forma Combined Financial Information 7 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (1) Certain historical data of BayBanks have been reclassified on a pro forma basis to conform to Bank of Boston's classifications. Transactions between Bank of Boston and BayBanks are not material in relation to the pro forma combined financial statements, and have not been eliminated from the pro forma combined amounts. (2) Reflects preliminary estimated acquisition and restructuring costs of $140 million ($83 million net of taxes). Such costs include estimated investment banking and other professional fees, stock issuance costs and other expenses associated with the proposed merger and estimated facilities and operations consolidation and involuntary termination costs associated with expected reorganizations following the proposed merger. (3) Reflects the conversion of BayBanks Common Stock into Bank of Boston Common Stock. Pursuant to the agreement with BayBanks, each outstanding share (19,622,393 shares at September 30, 1995) of BayBanks Common Stock will be converted into 2.2 shares of Bank of Boston Common Stock, subject to adjustment in certain circumstances. (4) In connection with its proposed merger with BayBanks, Bank of Boston will file a Registration Statement on Form S-4 with the Securities and Exchange Commission (the "Commission") registering Bank of Boston Common Stock to be issued in connection therewith. This registration statement, which will be subject to review and comment by the Staff of the Commission, will include pro forma financial information for Bank of Boston and BayBanks. Such pro forma financial information may differ from the pro forma financial information included herein. EX-99.B 4 BAYBANKS CONSOLIDATED FINANCIAL STATEMENTS W/NOTES 1 EXHIBIT 99b ----------- BAYBANKS, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30 1995 1994 1994 ------------ ----------- ------------ ASSETS Cash and due from banks..................................................... $ 749,763 $ 829,170 $ 658,070 Trading accounts............................................................ 77,076 27,416 21,521 Securities portfolios Interest-bearing deposits and other short-term investments................ 349,310 166,286 155,503 Securities available for sale -- amortized cost $316,939 at September 30, 1995, $220,132 at December 31, 1994, and $140,599 at September 30, 1994.................................................................... 317,664 220,602 141,406 Investment securities -- market value $2,199,459 at September 30, 1995, $2,481,584 at December 31, 1994, and $2,842,806 at September 30, 1994... 2,190,033 2,556,249 2,892,584 ----------- ----------- ----------- 2,857,007 2,943,137 3,189,493 Loans, net of unearned income and fees Commercial................................................................ 1,594,045 1,528,265 1,421,961 Commercial real estate.................................................... 1,081,386 956,596 910,185 Residential mortgage...................................................... 1,944,293 1,335,466 1,283,960 Instalment................................................................ 2,856,772 2,828,193 2,736,869 ----------- ----------- ----------- 7,476,496 6,648,520 6,352,975 Less allowance for loan losses............................................ 153,808 146,835 150,614 ----------- ----------- ----------- 7,322,688 6,501,685 6,202,361 Premises and equipment, net................................................. 204,614 195,430 191,629 Other real estate owned and in-substance foreclosures, net.................. 18,703 67,399 77,566 Goodwill and other intangibles.............................................. 47,857 4,421 3,330 Other assets................................................................ 247,062 202,289 192,967 ----------- ----------- ----------- Total assets....................................................... $11,524,770 $10,770,947 $10,536,937 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand.................................................................... $ 2,190,591 $ 2,214,761 $ 2,063,635 NOW accounts.............................................................. 1,481,047 1,491,694 1,415,506 Savings................................................................... 1,466,976 1,462,459 1,486,199 Money market deposit accounts............................................. 2,545,710 2,560,425 2,602,956 Consumer time............................................................. 1,819,229 1,095,357 1,014,838 Time -- $100,000 or more.................................................. 219,808 175,663 112,932 ----------- ----------- ----------- 9,723,361 9,000,359 8,696,066 Federal funds purchased and other short-term borrowings..................... 731,979 849,517 951,037 Accrued expenses and other accounts payable................................. 92,157 71,854 60,653 Long-term debt.............................................................. 64,829 51,154 54,009 Guarantee of ESOP indebtedness.............................................. 6,289 9,451 9,451 Stockholders' equity: Common stock, par value $2.00 per share Shares authorized -- 50,000,000 Shares issued -- 19,622,393 at September 30, 1995, 18,999,354 at December 31, 1994, and 18,999,093 at September 30, 1994................ 39,245 37,999 37,998 Surplus................................................................... 359,102 314,924 313,968 Retained earnings......................................................... 514,097 445,167 423,206 ----------- ----------- ----------- 912,444 798,090 775,172 Less treasury stock at cost -- 1,431 shares at December 31, 1994............ -- 27 -- Less guarantee of ESOP indebtedness......................................... 6,289 9,451 9,451 ----------- ----------- ----------- Total stockholders' equity......................................... 906,155 788,612 765,721 ----------- ----------- ----------- Total liabilities and stockholders' equity......................... $11,524,770 $10,770,947 $10,536,937 =========== =========== ===========
2 2 BAYBANKS, INC. CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THIRD QUARTER NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------------ ------------------------ 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Income on interest-bearing deposits and other short-term investments............................... $ 5,140 $ 1,822 $ 11,144 $ 6,232 Interest on securities available for sale and investment securities........................................... 36,513 40,754 112,220 101,299 Interest and fees on loans............................. 165,282 130,240 467,057 368,008 ---------- ---------- ---------- ---------- Total income on earning assets......................... 206,935 172,816 590,421 475,539 Interest expense on deposits and borrowings Deposits............................................. 63,910 39,640 168,949 109,027 Short-term borrowings................................ 11,794 12,475 42,418 23,199 Long-term debt....................................... 1,034 697 2,686 1,827 ---------- ---------- ---------- ---------- Total interest expense................................. 76,738 52,812 214,053 134,053 ---------- ---------- ---------- ---------- Net interest income.................................... 130,197 120,004 376,368 341,486 Provision for loan losses.............................. 6,000 6,000 19,000 18,000 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses.... 124,197 114,004 357,368 323,486 Noninterest income Service charges and fees on deposit accounts......... 28,030 28,176 82,313 82,218 Other noninterest income............................. 29,314 24,381 82,224 74,085 ---------- ---------- ---------- ---------- Total noninterest income............................... 57,344 52,557 164,537 156,303 Net securities gains................................... 42 -- 43 475 Operating expenses Salaries and benefits................................ 65,128 58,264 186,863 172,081 Occupancy and equipment.............................. 23,272 21,897 68,286 66,091 Other operating expenses............................. 36,709 34,545 106,438 103,441 ---------- ---------- ---------- ---------- Total operating expenses............................... 125,109 114,706 361,587 341,613 Provision for OREO reserve, net........................ (229) 2,415 771 7,852 ---------- ---------- ---------- ---------- Total operating expenses after OREO provision.......... 124,880 117,121 362,358 349,465 ---------- ---------- ---------- ---------- Income before taxes and cumulative effect of accounting change............................................... 56,703 49,440 159,590 130,799 Provision for income taxes............................. 21,984 20,407 60,038 53,133 ---------- ---------- ---------- ---------- Income before cumulative effect of accounting change... 34,719 29,033 99,552 77,666 Less cumulative effect of accounting change (net of tax benefit of $683 in 1994)............................. -- -- -- 932 ---------- ---------- ---------- ---------- NET INCOME............................................. $ 34,719 $ 29,033 $ 99,552 $ 76,734 ========== ========== ========== ========== Earnings Per Share Income before accounting change...................... $ 1.74 $ 1.51 $ 5.11 $ 4.06 Less cumulative effect of accounting change.......... -- -- -- 0.05 ---------- ---------- ---------- ---------- Net Income........................................... $ 1.74 $ 1.51 $ 5.11 $ 4.01 ========== ========== ========== ========== Average shares outstanding............................. 19,907,015 19,187,890 19,499,181 19,145,704
3 3 BAYBANKS, INC. 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, 1993............ $37,486 $310,355 $367,662 $ -- $(12,241) $703,262 Net income -- Nine months ended September 30, 1994............................... 76,734 76,734 Cash dividends declared ($1.15 per share)................................. (21,659) (21,659) Net change in valuation reserve related to securities available for sale portfolio, net of deferred income taxes.................................. 469 469 Other, principally employee benefit plans.................................. 512 3,613 -- 2,790 6,915 ------- -------- -------- -------- -------- -------- BALANCE AS OF SEPTEMBER 30, 1994........... $37,998 $313,968* $423,206 $ -- $ (9,451) $765,721 ======= ======== ======== ======== ======== ======== BALANCE AS OF DECEMBER 31, 1994............ $37,999 $314,924* $445,167 $ (27) $ (9,451) $788,612 Net income -- Nine months ended September 30, 1995............................... 99,552 99,552 Stock issued in acquisition of NFS Financial Corp. (NFS) (487,267 shares)................................ 975 37,641 38,616 Options issued in acquisition of NFS (29,778 options)....................... 1,504 1,504 Cash dividends declared ($1.60 per share)................................. (30,773) (30,773) Net change in valuation reserve related to securities available for sale portfolio, net of deferred income taxes.................................. 151 151 Other, principally employee benefit plans.................................. 271 5,033 27 3,162 8,493 ------- -------- -------- -------- -------- -------- BALANCE AS OF SEPTEMBER 30, 1995........... $39,245 $359,102* $514,097 $ -- $ (6,289) $906,155 ======= ======== ======== ======== ======== ========= - --------------- * Net of unamortized restricted stock compensation expense of $5,856, $6,150, and $6,844 at September 30, 1995, December 31, 1994, and September 30, 1994, respectively.
4 4 BAYBANKS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 ----------------------------- 1995 1994 ----------- ----------- OPERATING ACTIVITIES Net income.......................................................................... $ 99,552 $ 76,734 Adjustments to reconcile net income to net cash provided by operating activities: Proceeds from sales and maturities of trading account assets(1)................... 1,716,437 1,927,406 Purchases of trading account assets............................................... (1,774,781) (1,949,810) Amortization of security premium.................................................. 10,338 19,100 Net securities gains.............................................................. (43) (475) Fixed-rate mortgages sold......................................................... 79,535 255,043 Fixed-rate mortgages originated for sale, net of principal payments............... (98,629) (149,286) Student loans transferred from portfolio and sold................................. 130,732 127,013 Provision for loan losses......................................................... 19,000 18,000 Amortization of goodwill and other intangibles.................................... 1,243 419 Depreciation and amortization of premises and equipment........................... 20,032 19,131 Gain on sales of premises and equipment........................................... (1,756) (903) Provision for OREO reserve, net................................................... 771 7,852 Deferred income taxes............................................................. 4,009 13,243 Change in other assets............................................................ (41,148) (2,148) Change in interest receivable..................................................... (10,401) (13,987) Change in accrued expenses and other accounts payable............................. 7,922 6,540 Change in interest payable........................................................ 9,921 1,255 ----------- ----------- Net cash provided by operating activities..................................... 172,734 355,127 ----------- ----------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale................................ 110,348 264,758 Proceeds from maturities of securities available for sale........................... 39,996 329,197 Purchases of securities available for sale(1)....................................... (102,430) (95,655) Proceeds from maturities of investment securities................................... 2,053,958 496,191 Purchases of investment securities.................................................. (1,698,366) (1,802,954) Net cash provided (used) by: Short-term investments............................................................ (163,441) 647,565 Loans(2)(3)(4).................................................................... (483,477) (541,480) Proceeds from sales of premises and equipment....................................... 2,585 1,469 Purchases of premises and equipment................................................. (21,762) (18,772) Proceeds from sales and payments related to OREO(3)(4).............................. 20,241 48,284 Purchase of NFS, net of cash acquired............................................... (40,056) -- ----------- ----------- Net cash used by investing activities......................................... (282,404) (671,397) ----------- ----------- FINANCING ACTIVITIES Net cash provided (used) by: Demand deposits, NOW, and savings accounts........................................ (186,855) (52,859) Money market deposits............................................................. (108,377) (128,764) Consumer time deposits............................................................ 444,916 20,893 Time -- $100,000 or more.......................................................... 43,753 77,975 Short-term borrowings............................................................. (129,989) 443,217 Long-term debt.................................................................... (4,471) (438) Dividends paid...................................................................... (30,773) (21,659) Other equity transactions........................................................... 2,059 2,990 ----------- ----------- Net cash provided by financing activities..................................... 30,263 341,355 ----------- ----------- Net change in cash and cash equivalents............................................... (79,407) 25,085 Cash and cash equivalents at beginning of year(5)..................................... 829,170 632,985 ----------- ----------- Cash and cash equivalents at September 30(5).......................................... $ 749,763 $ 658,070 =========== =========== Supplemental disclosure of cash flow information Interest paid....................................................................... $ 204,132 $ 132,798 Taxes paid, net of refunds.......................................................... 68,128 37,584 - --------------- (1) Excludes transfers of trading account assets to the securities available for sale portfolio of $8.8 million and $15.5 million in 1995 and 1994, respectively. (2) Excludes transfers of loans to the other real estate owned category of $2.8 million and $27.2 million in 1995 and 1994, respectively. (3) Excludes loan originations in conjunction with OREO sales of $6.3 million and $7.2 million in 1995 and 1994, respectively. (4) Excludes $33.2 million of in-substance foreclosures and related reserves of $8.7 million reclassified to loans and the allowance for loan losses, respectively, as a result of the adoption of SFAS No. 114 on January 1, 1995. (5) Cash and cash equivalents consist of cash on hand and due from banks.
5 5 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, prepared in accordance with generally accepted accounting principles. Certain 1994 amounts have been reclassified to conform with the 1995 presentation. These financial statements are unaudited. NOTE 2. SECURITIES PORTFOLIOS
GROSS GROSS WEIGHTED AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE COST GAINS LOSSES VALUE YIELD(1) ---------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) SEPTEMBER 30, 1995(2) SECURITIES AVAILABLE FOR SALE U.S. Government securities, maturing Within 1 year........................... $ 23,028 $ 19 $ (1) $ 23,046 5.93% After 1 year but within 5 years......... 3,014 1 -- 3,015 5.94 ---------- ------- ------- ---------- 26,042 20 (1) 26,061 5.93 ---------- ------- ------- ---------- State and local government securities, maturing Within 1 year........................... 10,604 2 (9) 10,597 6.45 Corporate, maturing Within 1 year........................... 195,197 25 -- 195,222 6.13 Mortgage-backed securities................ 52,473 48 (88) 52,433 6.36 Other(3).................................. 32,623 728 -- 33,351 6.78 ---------- ------- ------- ---------- Total securities available for sale.......................... $ 316,939 $ 823 $ (98) $ 317,664 6.23% ========== ======= ======= ========== ===== INVESTMENT SECURITIES U.S. Government securities, maturing Within 1 year........................... $ 613,946 $ 3 $(3,667) $ 610,282 4.62% After 1 year but within 5 years......... 1,149,278 16,938 (3,376) 1,162,840 6.35 ---------- ------- ------- ---------- 1,763,224 16,941 (7,043) 1,773,122 5.75 ---------- ------- -------- ---------- State and local government securities, maturing Within 1 year........................... 137,121 54 (13) 137,162 6.56 After 1 year but within 5 years......... 43,964 430 (148) 44,246 6.89 After 5 years but within 10 years....... 36,945 623 (86) 37,482 7.49 After 10 years.......................... 150 1 -- 151 7.73 ---------- ------- ------- ---------- 218,180 1,108 (247) 219,041 6.78 ---------- ------- ------- ---------- Asset-backed securities................... 113,098 -- (738) 112,360 4.32 Mortgage-backed securities................ 49,806 -- (595) 49,211 4.90 Industrial revenue bonds.................. 43,540 -- -- 43,540 10.95 Corporate and other....................... 2,185 -- -- 2,185 -- ---------- ------- ------- ---------- Total investment securities..... $2,190,033 $18,049 $(8,623) $2,199,459 5.86% ========== ======= ======= ========== ===== - --------------- (1) Tax equivalent basis. (2) The period-end maturity distribution excludes industrial revenue bonds, which are not regarded as principal debt securities, asset-backed securities, mortgage-backed securities, and other securities that do not have a stated maturity. (3) BayBank, the Company's principal bank subsidiary, and BayBank FSB, the Company's New Hampshire bank subsidiary, are members of the Federal Home Loan Bank (FHLB). As of September 30, 1995, $32.2 million in stock of the FHLB is included in the Securities Available for Sale portfolio in the Other category at cost, which approximates market value. As of September 30, 1995, total advances of $18.7 million were outstanding from the FHLB at an average interest rate of 5.14% and with an average maturity of 1.88 years. These outstanding advances are included on the consolidated balance sheet in the other short-term borrowings and long-term debt categories.
6 6 NOTE 2. SECURITIES PORTFOLIOS (CONTINUED)
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1994 SECURITIES AVAILABLE FOR SALE State and local government securities.............. $ 8,578 $ -- $ (14) $ 8,564 Corporate.......................................... 183,900 -- -- 183,900 Other(1)........................................... 27,654 484 -- 28,138 ---------- ---- -------- ---------- Total securities available for sale...... $ 220,132 $484 $ (14) $ 220,602 ========== ==== ======== ========== INVESTMENT SECURITIES U.S. Government securities......................... $2,083,519 $ 10 $(65,101) $2,018,428 State and local government securities.............. 171,436 89 (1,250) 170,275 Asset-backed securities............................ 200,386 -- (5,652) 194,734 Mortgage-backed securities......................... 49,503 -- (2,761) 46,742 Industrial revenue bonds........................... 49,548 -- -- 49,548 Other.............................................. 1,857 -- -- 1,857 ---------- ---- -------- ---------- Total investment securities.............. $2,556,249 $ 99 $(74,764) $2,481,584 ========== ==== ======== ========== SEPTEMBER 30, 1994 SECURITIES AVAILABLE FOR SALE U.S. Government securities......................... $ 24,741 $ -- $ (3) $ 24,738 State and local government securities.............. 5,029 -- (3) 5,026 Mortgage-backed securities......................... 25,075 328 -- 25,403 Corporate.......................................... 58,100 -- -- 58,100 Other(1)........................................... 27,654 485 -- 28,139 ---------- ---- -------- ---------- Total securities available for sale...... $ 140,599 $813 $ (6) $ 141,406 ========== ==== ======== ========== INVESTMENT SECURITIES U.S. Government securities......................... $2,426,683 $ 9 $(43,386) $2,383,306 State and local government securities.............. 159,815 109 (667) 159,257 Asset-backed securities............................ 203,089 -- (4,097) 198,992 Mortgage-backed securities......................... 49,488 -- (1,746) 47,742 Industrial revenue bonds........................... 51,652 -- -- 51,652 Other.............................................. 1,857 -- -- 1,857 ---------- ---- -------- ---------- Total investment securities.............. $2,892,584 $118 $(49,896) $2,842,806 ========== ==== ======== ========== - --------------- (1) As of December 31, 1994, and September 30, 1994, $27.6 million in stock of the FHLB is included in the Securities Available for Sale portfolio in the Other category at cost, which approximates market value.
NOTE 3. ACQUISITION OF FINANCIAL INSTITUTIONS The Company's acquisition of the southern New Hampshire-based holding company, NFS Financial Corp. (NFS), parent company of NFS Savings Bank, FSB, and Plaistow Cooperative Bank, FSB, became effective after the close of business on June 30, 1995. The stockholders of NFS received $20.15 in cash and .1696 shares of BayBanks, Inc. common stock for each share of NFS common stock held, an aggregate of $58.1 million in cash and 487,267 shares of BayBanks, Inc. common stock which were issued at a value of $38.6 million. In addition, outstanding options to purchase NFS common stock were converted into options to purchase an aggregate of 29,778 shares of BayBanks, Inc. common stock. The options issued were valued at $1.5 million. At June 30, 1995, NFS had total assets of $625 million. Following the acquisition, NFS Savings Bank, FSB and Plaistow Cooperative Bank, FSB were merged and are operating as BayBank FSB. In addition, 7 7 the name of the holding company was changed from NFS to BayBank New Hampshire, Inc. (BBNH). In September of 1995, BBNH was merged into BayBanks, Inc. This acquisition was accounted for as a purchase. Accordingly, the results of operations of BayBank FSB have been included with those of the Company since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. Goodwill (the excess of the purchase price over the fair value of the net assets acquired) of $37 million was created in the acquisition. Goodwill is being amortized in other operating expenses on a straight-line basis over 15 years. The unaudited pro forma consolidated results of operations for the nine months ended September 30, 1995 and 1994, assuming the acquisition of NFS had occurred as of January 1, 1995 and 1994, respectively, are as follows:
PRO FORMA RESULTS ----------------------- NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1995 1994 ---------- ---------- (IN THOUSANDS EXCEPT SHARE AMOUNTS) Net interest income................................................... $ 387,975 $ 355,965 Noninterest income.................................................... 166,423 158,661 Income before cumulative effect of accounting change.................. 100,911 78,671 Net income............................................................ 100,911 77,739 Income before accounting change per share............................. 5.09 4.01 Net income per share.................................................. 5.09 3.96 Average common shares outstanding..................................... 19,824,026 19,632,971
On March 24, 1995, the Company announced that it had agreed to acquire Cornerstone Financial Corporation (Cornerstone), parent company of Cornerstone Bank of Derry, NH. The stockholders of Cornerstone will receive $8.80 in cash for each outstanding share of common stock held, an aggregate of approximately $18.6 million. The acquisition is expected to close later this year. Cornerstone had total assets of $141 million at September 30, 1995. The acquisition will be accounted for as a purchase. 8 BAYBANKS, INC. CONSOLIDATED BALANCE SHEET
DECEMBER 31 ----------------------------- 1994 1993 ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Cash and due from banks (Note 3)................................ $ 829,170 $ 632,985 Trading accounts (Note 2)....................................... 27,416 14,595 Securities portfolios Interest-bearing deposits and other short-term investments (Note 2)................................................... 166,286 803,068 Securities available for sale -- amortized cost $220,132 in 1994 and market value $633,446 in 1993 (Notes 2 and 4)..... 220,602 629,003 Investment securities -- market value $2,481,584 in 1994 and $1,605,091 in 1993 (Notes 2 and 4)......................... 2,556,249 1,599,060 ----------- ----------- 2,943,137 3,031,131 Loans -- net of unearned income and fees (Notes 2 and 5) Commercial.................................................... 1,528,265 1,324,968 Commercial real estate........................................ 956,596 935,471 Residential mortgage.......................................... 1,335,466 1,242,597 Instalment.................................................... 2,828,193 2,600,134 ----------- ----------- 6,648,520 6,103,170 Less allowance for loan losses (Notes 2 and 6)................ 146,835 171,496 ----------- ----------- 6,501,685 5,931,674 Premises and equipment, net (Note 7)............................ 195,430 192,554 Other real estate owned and in-substance foreclosures, net (Notes 2 and 6)............................................... 67,399 113,679 Other assets.................................................... 206,710 193,966 ----------- ----------- Total assets.......................................... $10,770,947 $10,110,584 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand........................................................ $ 2,214,761 $ 2,077,206 NOW accounts.................................................. 1,491,694 1,481,859 Savings....................................................... 1,462,459 1,459,134 Money market deposit accounts................................. 2,560,425 2,731,720 Consumer time................................................. 1,095,357 993,945 Time -- $100,000 or more...................................... 175,663 34,957 ----------- ----------- 9,000,359 8,778,821 Federal funds purchased and other short-term borrowings (Note 8)............................................................ 849,517 507,820 Accrued expenses and other accounts payable..................... 71,854 53,952 Long-term debt (Note 9)......................................... 51,154 54,488 Guarantee of ESOP indebtedness (Note 11)........................ 9,451 12,241 Stockholders' equity (Notes 1 and 10): Common stock: par value $2.00 per share Shares authorized -- 50,000,000 Shares issued -- 18,999,354 in 1994 and 18,742,934 in 1993....................................................... 37,999 37,486 Surplus....................................................... 314,924 310,355 Retained earnings............................................. 445,167 367,662 ----------- ----------- 798,090 715,503 Less treasury stock at cost -- 1,431 shares in 1994........... 27 -- Less guarantee of ESOP indebtedness (Note 11)................. 9,451 12,241 ----------- ----------- Total stockholders' equity............................ 788,612 703,262 ----------- ----------- Total liabilities and stockholders' equity............ $10,770,947 $10,110,584 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 31 9 BAYBANKS, INC. CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 ------------------------------------------- 1994 1993 1992 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Income on interest-bearing deposits and other short-term investments............................ $ 8,467 $ 19,002 $ 22,416 Interest on securities portfolios Taxable........................................... 125,096 82,343 86,304 Tax-exempt........................................ 14,734 8,468 7,163 Interest and fees on loans.......................... 509,503 480,658 540,638 ---------- ---------- ---------- Total income on earning assets...................... 657,800 590,471 656,521 Interest expense on deposits and borrowings Deposits.......................................... 152,567 160,441 233,235 Short-term borrowings (Note 8).................... 37,739 4,098 4,285 Long-term debt (Note 9)........................... 2,552 2,109 2,489 ---------- ---------- ---------- Total interest expense.............................. 192,858 166,648 240,009 ---------- ---------- ---------- Net interest income................................. 464,942 423,823 416,512 Provision for loan losses (Note 6).................. 24,000 36,500 106,836 ---------- ---------- ---------- Net interest income after provision for loan losses............................................ 440,942 387,323 309,676 Noninterest income Service charges and fees on deposit accounts...... 109,918 105,211 96,671 Other noninterest income (Note 12)................ 97,370 93,313 87,210 ---------- ---------- ---------- Total noninterest income............................ 207,288 198,524 183,881 Net securities gains (Notes 2 and 4)................ 203 411 76,929 Operating expenses Salaries and benefits (Notes 10 and 11)........... 229,572 212,954 199,604 Occupancy and equipment (Note 7).................. 86,570 87,116 88,950 Other operating expenses (Note 13)................ 141,028 146,635 140,762 ---------- ---------- ---------- Total operating expenses............................ 457,170 446,705 429,316 Provision for OREO reserve, net (Notes 2 and 6)..... 9,372 24,830 45,482 ---------- ---------- ---------- Total operating expenses after OREO provision....... 466,542 471,535 474,798 ---------- ---------- ---------- Income before taxes and cumulative effect of accounting change................................. 181,891 114,723 95,688 Provision for income taxes (Notes 2 and 14)......... 73,522 47,072 36,451 ---------- ---------- ---------- Income before cumulative effect of accounting change............................................ 108,369 67,651 59,237 Less cumulative effect of accounting change (net of tax benefit of $683) (Note 11).................... 932 -- -- ---------- ---------- ---------- Net Income.......................................... $ 107,437 $ 67,651 $ 59,237 ========== ========== ========== Earnings Per Share (Note 2) Income before accounting change................... $ 5.65 $ 3.57 $ 3.57 Less cumulative effect of accounting change....... 0.05 -- -- ---------- ---------- ---------- Net income........................................ $ 5.60 $ 3.57 $ 3.57 ========== ========== ========== Average shares outstanding.......................... 19,173,524 18,953,397 16,575,768
The accompanying notes are an integral part of these consolidated financial statements. 32 10 BAYBANKS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON RETAINED TREASURY ESOP LOAN STOCK SURPLUS EARNINGS STOCK GUARANTEE TOTAL ------- -------- --------- -------- --------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) BALANCE AS OF DECEMBER 31, 1991.......... $32,054 $228,137 $257,575 $ (319) $(16,147) $501,300 Net income -- 1992..................... 59,237 59,237 Proceeds from common stock offering, net of issuance costs of $3,494 (2,300,000 shares)................... 4,600 74,706 79,306 Payment on ESOP note................... 1,674 1,674 Exercise of stock options (20,336 shares).............................. 8 (170) 520 358 Stock issued (3,360 shares) in payment of fees.............................. 7 94 101 Stock issued (173,700 shares) in connection with restricted stock plan................................. 347 (347) -- Treasury shares acquired (8,500 shares).............................. 138 (227) (89) Other, principally employee benefit plans (Note 10)...................... 2,332 2,332 ------- -------- -------- ------ -------- -------- BALANCE AS OF DECEMBER 31, 1992.......... 37,016 304,890 316,812 (26) (14,473) 644,219 Net income -- 1993..................... 67,651 67,651 Cash dividends declared ($0.90 per share)............................... (16,801) (16,801) Payment on ESOP note................... 2,232 2,232 Exercise of stock options (157,414 shares).............................. 269 2,706 940 3,915 Stock issued (98,471 shares) in conversion of debentures............. 197 1,156 1,353 Stock issued (2,156 shares) in payment of fees.............................. 4 101 105 Treasury shares acquired (22,109 shares).............................. 138 (914) (776) Other, principally employee benefit plans (Note 10)...................... 1,364 1,364 ------- -------- -------- ------ -------- -------- BALANCE AS OF DECEMBER 31, 1993.......... 37,486 310,355 367,662 -- (12,241) 703,262 Net income -- 1994..................... 107,437 107,437 Cash dividends declared ($1.60 per share)............................... (30,208) (30,208) Payment on ESOP note................... 2,790 2,790 Net change in valuation reserve related to securities available for sale portfolio, net of deferred income taxes (Note 2)....................... 276 276 Exercise of stock options (171,303 shares).............................. 279 2,663 1,700 4,642 Stock issued (2,980 shares) in conversion of debentures............. 6 35 41 Stock issued (2,088 shares) in payment of fees.............................. 4 109 113 Stock issued (112,000 shares) in connection with restricted stock plan................................. 224 (224) -- Treasury shares acquired (33,382 shares).............................. 48 (1,727) (1,679) Other, principally employee benefit plans (Note 10)...................... 1,938 1,938 ------- -------- -------- ------ -------- -------- BALANCE AS OF DECEMBER 31, 1994.......... $37,999 $314,924 $445,167 $ (27) $ (9,451) $788,612 ======= ======== ======== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 33 11 BAYBANKS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 ---------------------------------------- 1994 1993 1992 ---------- ---------- ---------- (IN THOUSANDS) OPERATING ACTIVITIES Net income................................................................. $ 107,437 $ 67,651 $ 59,237 Adjustments to reconcile net income to net cash provided by operating activities: Proceeds from sales and maturities of trading account assets............. 2,493,752 1,832,047 659,000 Purchases of trading account assets...................................... (2,530,409) (1,803,249) (694,000) Amortization of security premium......................................... 22,084 10,842 18,073 Net securities gains..................................................... (203) (411) (76,929) Fixed-rate mortgages sold................................................ 269,995 815,722 779,000 Fixed-rate mortgages originated for sale, net of principal payments...... (123,289) (775,749) (904,318) Student loans transferred from portfolio and sold........................ 134,107 67,363 53,827 Provision for loan losses................................................ 24,000 36,500 106,836 Depreciation and amortization of premises and equipment.......................................................... 24,365 24,218 24,246 Gain on sales of premises and equipment.................................. (934) -- (66) Provision for OREO reserve, net.......................................... 9,372 24,830 45,482 Deferred income taxes.................................................... 9,216 2,675 (1,839) Change in other assets................................................... (1,281) (26,539) 14,379 Change in interest receivable............................................ (22,997) (107) 6,871 Change in accrued expenses and other accounts payable.................... 17,467 6,163 9,263 Change in interest payable............................................... 4,483 (3,320) (10,072) ---------- ---------- ---------- Net cash provided by operating activities............................ 437,165 278,636 88,990 ---------- ---------- ---------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale....................... 313,796 449,217 1,191,607 Proceeds from maturities of securities available for sale.................. 360,199 605,245 -- Purchases of securities available for sale................................. (246,555) (651,384) (512,095) Proceeds from sales of investment securities............................... -- -- 1,262,000 Proceeds from maturities of investment securities.......................... 1,006,045 184,280 75,067 Purchases of investment securities......................................... (1,979,848) (1,115,180) (2,191,074) Net cash provided (used) by: Short-term investments................................................... 636,782 288,917 (512,073) Loans(1)(2)(3)........................................................... (897,746) (348,318) 247,760 Customer acceptances..................................................... 2,291 7,311 (528) Proceeds from sales of premises and equipment.............................. 1,703 125 467 Purchases of premises and equipment........................................ (28,010) (18,467) (26,418) Proceeds from sales and payments related to OREO(2)........................ 59,830 75,184 54,808 Deposits assumed from a thrift institution(4).............................. -- -- 254,372 ---------- ---------- ---------- Net cash used by investing activities................................ (771,513) (523,070) (156,107) ---------- ---------- ---------- FINANCING ACTIVITIES Net cash provided (used) by: Demand deposits, NOW, and savings accounts............................... 150,715 276,644 648,095 Money market deposits.................................................... (171,295) (235,571) (186,194) Consumer time deposits................................................... 101,412 (240,802) (415,086) Time -- $100,000 or more................................................. 140,706 (3,998) (65,964) Short-term borrowings.................................................... 341,697 367,851 17,140 Customer acceptances..................................................... (2,291) (7,311) 528 Long-term debt........................................................... (3,293) 653 (81) Net proceeds from common stock offering.................................... -- -- 79,306 Dividends paid............................................................. (30,208) (16,801) -- Other equity transactions.................................................. 3,090 3,028 285 ---------- ---------- ---------- Net cash provided by financing activities............................ 530,533 143,693 78,029 ---------- ---------- ---------- Net change in cash and cash equivalents.................................... 196,185 (100,741) 10,912 Cash and cash equivalents at beginning of year(5).......................... 632,985 733,726 722,814 ---------- ---------- ---------- Cash and cash equivalents at end of year(5)................................ $ 829,170 $ 632,985 $ 733,726 ========== ========== ========== Supplemental disclosure of cash flow information Interest paid............................................................ $ 188,375 $ 169,968 $ 250,081 Taxes paid............................................................... 64,463 58,026 20,551 - --------------- (1) Excludes transfers of loans to the other real estate owned category of $30.7 million, $40.5 million, and $89.7 million in 1994, 1993, and 1992, respectively. (2) Excludes loan originations in conjunction with OREO sales of $7.8 million, $22.4 million, and $23.8 million in 1994, 1993, and 1992, respectively. (3) Excludes transfers of securitized residential mortgage loans to the investment securities portfolio of $50.0 million in 1992. (4) Deposits assumed from a failed thrift institution are net of cash paid, which was an immaterial amount. The Company did not assume any material assets or liabilities in conjunction with this transaction. (5) Cash and cash equivalents consist of cash on hand and due from banks.
The accompanying notes are an integral part of these consolidated financial statements. 34 12 NOTES TO FINANCIAL STATEMENTS NOTE 1. CONDENSED FINANCIAL INFORMATION OF THE PARENT The condensed balance sheet is presented for 1994 and 1993, and a statement of income and statement of cash flows are presented for the years 1992 through 1994, for BayBanks, Inc. (the parent company). BALANCE SHEET
DECEMBER 31 --------------------- 1994 1993 -------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Cash and short-term investments........................................ $ 15,472 $ 15,865 Securities available for sale -- amortized cost $2 in 1994 and market value $30,000 in 1993......................................... 6 30,000 Investment securities -- market value $66,842 in 1994 and $22,790 in 1993................................................................. 66,882 22,758 Investment in capital stock of subsidiaries Bank subsidiaries.................................................... 675,451 605,488 Nonbank subsidiaries................................................. 38,490 37,356 -------- -------- 713,941 642,844 Notes and advances due from subsidiaries............................... 52,600 52,600 Other assets........................................................... 1,311 2,305 -------- -------- Total assets................................................. $850,212 $766,372 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other accounts payable............................ $ 2,149 $ 818 Long-term debt......................................................... 50,000 50,051 Guarantee of ESOP indebtedness......................................... 9,451 12,241 Stockholders' equity................................................... 798,090 715,503 Less treasury stock at cost -- 1,431 shares in 1994.................. 27 -- Less guarantee of ESOP indebtedness.................................. 9,451 12,241 -------- -------- Total stockholders' equity................................... 788,612 703,262 -------- -------- Total liabilities and stockholders' equity................... $850,212 $766,372 ======== ========
35 13 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 -------------------------------- 1994 1993 1992 -------- ------- ------- (IN THOUSANDS) Income: Dividends from subsidiaries Bank subsidiaries....................................... $ 25,440 $10,000 $ -- Nonbank subsidiaries.................................... 10,000 6,500 1,400 -------- ------- ------- 35,440 16,500 1,400 Interest from subsidiaries................................. 2,297 1,775 2,137 Interest on short-term investments......................... 504 443 551 Interest and dividends on securities portfolios............ 2,162 1,271 91 Other income............................................... 631 547 418 -------- ------- ------- Total income....................................... 41,034 20,536 4,597 -------- ------- ------- Expenses: Interest on debentures and notes payable................... 2,251 1,743 2,166 General and administrative................................. 2,344 700 791 -------- ------- ------- Total expenses..................................... 4,595 2,443 2,957 -------- ------- ------- Income before income taxes and equity in undistributed income of subsidiaries..................................... 36,439 18,093 1,640 Income tax expense........................................... 77 358 145 -------- ------- ------- Income before equity in undistributed income of subsidiaries............................................... 36,362 17,735 1,495 Equity in subsidiaries' undistributed income................. 71,075 49,916 57,742 -------- ------- ------- Net income................................................... $107,437 $67,651 $59,237 ======== ======= =======
36 14 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------------ 1994 1993 1992 --------- --------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Dividends from subsidiaries Bank subsidiaries................................... $ 25,440 $ 10,000 $ -- Nonbank subsidiaries................................ 10,000 6,500 1,400 --------- --------- -------- 35,440 16,500 1,400 Interest received...................................... 3,715 3,323 2,700 Other income........................................... 631 547 416 Interest paid.......................................... (2,218) (1,779) (2,193) Operating expenditures................................. (1,945) (814) (474) Income taxes (paid) received........................... 1,965 (463) (135) --------- --------- -------- Net cash provided by operating activities.............. 37,588 17,314 1,714 --------- --------- -------- INVESTING ACTIVITIES Purchases of securities................................ (181,086) (166,082) (49,958) Sales and maturities of securities..................... 168,692 163,355 -- Net advances to subsidiaries........................... -- (1,000) (600) Investments in subsidiaries............................ -- (21,500) (8,000) --------- --------- -------- Net cash flow used by investing activities............. (12,394) (25,227) (58,558) --------- --------- -------- FINANCING ACTIVITIES Dividends paid......................................... (30,208) (16,801) -- Payment of debt........................................ (10) -- -- Net proceeds from common stock offering................ -- -- 79,306 Proceeds from exercise of stock options................ 3,197 3,296 358 Proceeds from affiliates for stock compensation plan... 1,552 1,099 2,230 Deferred payment plan.................................. (118) (105) (642) --------- --------- -------- Net cash flow (used) provided by financing activities.......................................... (25,587) (12,511) 81,252 --------- --------- -------- Net change in cash and cash equivalents................ (393) (20,424) 24,408 Cash and cash equivalents at beginning of year......... 15,865 36,289 11,881 --------- --------- -------- Cash and cash equivalents at end of year............... $ 15,472 $ 15,865 $ 36,289 ========= ========= ======== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income............................................. $ 107,437 $ 67,651 $ 59,237 Adjustments to reconcile net income to net cash provided by operating activities: Equity in subsidiaries' undistributed income........ (71,075) (49,916) (57,742) Net change in accrued expenses...................... 374 (340) 176 Net change in accrued income taxes.................. 2,042 (105) 10 All other........................................... (1,190) 24 33 --------- --------- -------- Total adjustments.............................. (69,849) (50,337) (57,523) --------- --------- -------- Net cash provided by operating activities.............. $ 37,588 $ 17,314 $ 1,714 ========= ========= ========
37 15 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A significant source of funds used by BayBanks, Inc., the parent company, for 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 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, 1994, the Company's bank subsidiaries could have declared additional dividends of approximately $91 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 also considers additional factors, including the amount of current period net income, liquidity, asset quality, and economic conditions and trends. Federal law 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, 1994, the Company had no borrowings outstanding from any of its subsidiaries, and one of the Company's nonbank subsidiaries had a secured loan of $37,549,000 outstanding from a bank subsidiary, representing 5.6% of the aggregate capital and surplus of the bank subsidiaries. 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. 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. 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 $89,216,000 and $541,260,000 in 1994 and 1993, respectively, and money market mutual funds and other short-term deposits. 38 16 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) TRADING ACCOUNT SECURITIES -- Consists primarily of municipal securities held for resale to customers. These securities are recorded at market value; realized and unrealized gains and losses on trading securities are recorded in the current period in noninterest income. SECURITIES -- Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that changes in the market value of the securities available for sale portfolio be recorded directly to a separate category of stockholders' equity, net of deferred income taxes. Prior to the adoption of SFAS No. 115, securities available for sale were valued at the lower of aggregate cost or market value, and changes therein were recorded directly to earnings, net of income taxes. At adoption, the market value of the securities available for sale portfolio exceeded its amortized cost by $4,443,000, or $2,500,000 on an after-tax basis. At December 31, 1994, the market value of the securities available for sale portfolio exceeded its amortized cost by $470,000, or $276,000 on an after-tax basis, reflected in stockholders' equity. 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 occasionally uses interest rate swap agreements to manage its interest rate exposure. The net differential paid or received on the swaps is accounted for as an adjustment to the yield on the item hedged. LOANS -- Interest income on most loans is accrued on the principal amount of loans outstanding. Unearned income on leases and loans, $24,717,000 at year-end 1994 and $24,086,000 at year-end 1993, 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 certain 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 $9,861,000 and $11,353,000 at year-end 1994 and 1993, 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. Gains and losses on loans sold are determined using the specific identification method. Gains and losses on loans sold with servicing rights retained are adjusted to reflect the difference between the present value of future service fee income and a normal service fee. The resulting excess mortgage servicing rights are amortized using the level yield method as a reduction of service fee income over the remaining lives of the loans. Actual prepayment experience is reviewed periodically, and the excess mortgage servicing rights are adjusted accordingly to reflect current circumstances. At December 31, 1994 and 1993, mortgage loans held for sale were $4,571,000 and $138,764,000, respectively; excess mortgage servicing rights were $3,610,000 and $4,213,000, respectively. Loans serviced for others were $1.9 billion, $2.0 billion, and $1.8 billion at December 31, 1994, 1993, and 1992, respectively. 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 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 $54,627,000 at year-end 1994 and $110,001,000 at year-end 1993. Interest income earned during the year on year-end nonperforming loans was approximately $568,000; if these loans had been performing under 39 17 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) contractual terms, interest would have been approximately $4,485,000. In 1993, these amounts were $960,000 and $8,300,000, respectively. Loans are classified as restructured, accruing loans, after a period of performance, 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. In accordance with guidance issued by banking regulators, restructured, accruing loans that are performing in accordance with the restructured terms and bear a market rate of interest at the time of restructure are removed from the disclosure in years subsequent to the restructure. Restructured, accruing loans were $13,537,000 and $18,398,000 at December 31, 1994 and 1993, respectively. During 1994 and 1993, 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. On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." These statements specify certain methods for calculating the allowance related to impaired loans. A loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The adoption of these statements, which will be accounted for prospectively, is not expected to change the overall amount of the allowance for loan losses and the other real estate owned reserve and is not expected to have a material effect on the Company's reported results of operations or financial condition. 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. The adoption of SFAS No. 114 impacts the accounting for in-substance foreclosures beginning January 1, 1995. SFAS No. 114 has narrowed the definition of in-substance foreclosures to assets for which the Company has received physical possession of the collateral. Upon adoption of this statement on January 1, 1995, the Company reclassified $33,173,000 of in-substance foreclosures and $8,669,000 of related reserves to loans and the allowance for loan losses, respectively. 40 18 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) OREO 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 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, 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 -- Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS 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 deferred tax assets that are not expected to be realized. Adoption of SFAS No. 109 did not have a material effect on the Company's results of operations or financial condition. Prior to adoption of SFAS 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 303,286 for 1994 and 282,175 for 1993. The dual presentation of primary and fully diluted earnings per common share is not presented, since the difference in 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 in the form of either vault cash or funds left on deposit with the Federal Reserve Bank. The average amount of these balances was $309,821,000 for 1994 and $305,379,000 for 1993. 41 19 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. SECURITIES PORTFOLIOS The amortized cost, gross unrealized gains and losses, market values, and weighted average yields of the following securities portfolios by maturity (excluding interest-bearing deposits and other short-term investments) were:
DECEMBER 31, 1994 ---------------------------------------------------------------- GROSS GROSS WEIGHTED AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE COST GAINS LOSSES VALUE YIELD ---------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS, ON A TAX EQUIVALENT BASIS) SECURITIES AVAILABLE FOR SALE State and local government securities, maturing within 1 year.............. $ 8,578 $ -- $ (14) $ 8,564 6.21% Corporate, maturing within 1 year..... 183,900 -- -- 183,900 6.76 Other................................. 27,654 484 -- 28,138 8.32 ---------- ---- -------- ---------- Total securities available for sale.................. $ 220,132 $484 $ (14) $ 220,602 6.94% ========== ==== ======== ========== ===== INVESTMENT SECURITIES U.S. Government securities, maturing Within 1 year....................... $ 640,370 $ 10 $ (6,683) $ 633,697 4.56% After 1 year but within 5 years..... 1,443,149 -- (58,418) 1,384,731 5.58 ---------- ---- -------- ---------- 2,083,519 10 (65,101) 2,018,428 5.27 ---------- ---- -------- ---------- State and local government securities, maturing Within 1 year....................... 128,924 25 (151) 128,798 6.44 After 1 year but within 5 years..... 33,200 47 (742) 32,505 6.75 After 5 years but within 10 years... 9,312 17 (357) 8,972 7.79 ---------- ---- -------- ---------- 171,436 89 (1,250) 170,275 6.58 ---------- ---- -------- ---------- Asset-backed securities............... 200,386 -- (5,652) 194,734 4.33 Mortgage-backed securities............ 49,503 -- (2,761) 46,742 5.14 Industrial revenue bonds.............. 49,548 -- -- 49,548 10.83 Corporate and other................... 1,857 -- -- 1,857 -- ---------- ---- -------- ---------- Total investment securities................ $2,556,249 $ 99 $(74,764) $2,481,584 5.39% ========== ==== ======== ========== =====
42 20 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 ------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) SECURITIES AVAILABLE FOR SALE U.S. Government securities................... $ 322,707 $3,280 $ (3) $ 325,984 Mortgage-backed securities................... 30,832 1,162 -- 31,994 State and local government securities........ 18,964 6 (2) 18,968 Corporate.................................... 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 Asset-backed securities...................... 204,798 115 (827) 204,086 State and local government securities........ 128,997 380 (25) 129,352 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 ========== ====== ===== ==========
The year-end maturity distribution excludes industrial revenue bonds, which are not regarded as principal debt securities, mortgage-backed securities, asset-backed securities, and other securities that do not have a stated maturity. The book value of securities pledged to secure public and trust deposits and to meet other legal requirements was $1,137,115 at December 31, 1994. During 1994, proceeds from sales of securities available for sale were $313,796,000, resulting in gross realized gains of $518,000. There was $3,000 in gross realized losses from the sales of these securities. Proceeds from sales of investment securities within 90 days of maturity, regarded as maturities in accordance with generally accepted accounting principles, were $313,459,000, resulting in gross realized losses of $312,000. During 1993, proceeds from sales of securities available for sale were $449,217,000, resulting in gross realized gains of $439,000. There was $28,000 in gross 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 gross realized gains of $41,123,000 and $37,506,000, respectively. There was $1,700,000 in gross realized losses from the sales of investment securities. During 1994, BayBank, the Company's principal bank subsidiary, became a member of the Federal Home Loan Bank of Boston (FHLB). As a member of the FHLB, BayBank is required to invest in the stock of the FHLB in an amount equal to the greater of 1% of residential mortgage loans or 3/10 of 1% of total assets. As of December 31, 1994, $27,556,000 in the stock of the FHLB is included in the securities available for sale portfolio in the other category at cost, which approximates market value. On January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as more fully discussed in Note 2. 43 21 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. LOANS TO RELATED PARTIES Loans outstanding to related parties of the Company and its principal subsidiaries consist primarily of loans made to executive officers and business interests related to certain directors; these loans totaled $18,899,000 and $32,045,000 at December 31, 1994, and December 31, 1993, respectively. Activity during the year on loans outstanding at year-end was as follows:
1994 -------------- (IN THOUSANDS) Balance, January 1............................................. $ 32,045 Additions during the year...................................... 41,198 Reductions during the year..................................... (54,344) -------- Balance, December 31........................................... $ 18,899 ========
These loans were made in the ordinary course of business under normal credit terms, including collateralization and interest rates 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:
1994 1993 1992 -------- -------- --------- (IN THOUSANDS) Balance, January 1................................ $171,496 $192,700 $ 212,500 Provision......................................... 24,000 36,500 106,836 Loan losses charged off........................... (66,594) (79,963) (140,790) Less recoveries................................. 17,933 22,259 14,154 -------- -------- --------- Net charge-offs................................... (48,661) (57,704) (126,636) -------- -------- --------- Balance, December 31.............................. $146,835 $171,496 $ 192,700 ======== ======== =========
Activity in the OREO reserve account was:
1994 1993 -------- -------- (IN THOUSANDS) Balance, January 1............................................. $ 29,776 $ 7,833 Additions to the OREO reserve.................................. 15,639 32,471 Reductions related to sales.................................... (20,444) (10,528) -------- -------- Balance, December 31........................................... $ 24,971 $ 29,776 ======== ========
44 22 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 lives or lease terms, whichever is shorter. Premises and equipment were comprised of the following:
1994 1993 -------- -------- (IN THOUSANDS) Buildings...................................................... $161,598 $160,770 Leasehold improvements......................................... 59,596 54,807 Land........................................................... 16,974 16,125 Equipment...................................................... 197,818 178,155 -------- -------- 435,986 409,857 Less accumulated depreciation.................................. 240,556 217,303 -------- -------- Premises and equipment, net.................................... $195,430 $192,554 ======== ========
Depreciation and amortization expense of premises, equipment, and leasehold improvements was $24,365,000 in 1994, $24,218,000 in 1993, and $24,246,000 in 1992. Total rental expense was $24,967,000 in 1994, $26,346,000 in 1993, and $27,367,000 in 1992, net of $1,473,000, $1,705,000, and $2,232,000 in rental income from subleases, respectively. Contingent rentals were negligible. As of December 31, 1994, the Company and its subsidiaries were obligated, under noncancelable operating leases (primarily for premises), for minimum rentals in future periods as follows:
TOTAL RENTAL NET OBLIGATION INCOME OBLIGATION ---------- ------- ---------- (IN THOUSANDS) 1995.................................................. $11,620 $1,152 $10,468 1996.................................................. 10,598 1,028 9,570 1997.................................................. 9,708 786 8,922 1998.................................................. 7,186 646 6,540 1999.................................................. 5,164 609 4,555 Thereafter............................................ 12,002 1,063 10,939
Most leases contain escalation of rent clauses based on increases in real estate taxes or equipment usage. Many leases include renewal provisions. 45 23 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS Balances outstanding as of December 31, 1994 and 1993, consisted of the following:
FEDERAL FEDERAL HOME U.S. FUNDS REPURCHASE LOAN BANK TREASURY TOTAL PURCHASED AGREEMENTS BORROWINGS AND OTHER ---------- --------- ---------- ------------ --------- (DOLLARS IN THOUSANDS) 1994 Year-end balance................ $ 849,517 $ 46,800 $ 797,333 $ -- $5,384 Maximum month-end balance....... 1,137,318 109,390 1,066,905 100,000 9,720 Average daily balance........... 839,070 75,405 729,406 29,521 4,738 Weighted average interest rates: As of year-end................ 5.81% 6.11% 5.80% --% --% During the year............... 4.50 4.18 4.55 4.71 -- 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 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 1994 the weighted average rate paid was 4.44%, and at December 31, 1994, the rate was 6.44%. 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 balance of long-term debt at December 31, 1994, includes mortgage debt at two subsidiaries totaling $823,000. The monthly payment amounts of the mortgages totaled $7,000 in 1994 with final maturities from 1997 to 2013. Obligations on capitalized leases totaled $331,000 at December 31, 1994. 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:
1994 1993 1992 -------- -------- -------- Options outstanding at the beginning of the year........... 830,434 916,348 817,684 Options granted............................................ -- 97,500 182,000 Options exercised.......................................... (171,303) (157,414) (20,336) Options forfeited.......................................... (43,834) (26,000) (63,000) -------- -------- ------- Options outstanding at the end of the year................. 615,297 830,434 916,348 ======== ======== =======
Prices of shares under option at December 31, 1994, ranged from $13.75 to $45.00, and options for 362,584 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. 46 24 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In addition to the above, the Company has a restricted stock plan that was adopted in 1994. A total of 500,000 shares may be awarded under the plan, which expires in 2004. As of December 31, 1994, 112,000 shares had been awarded. The Company also had a restricted stock plan that expired in 1992. Under this plan, 400,000 shares were awarded. Certificates for shares awarded are 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, 1994, such restrictions remained on 237,543 shares outstanding from these plans. 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 1994, restrictions on 50,652 shares lapsed, and 5,200 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 $6,150,000 at December 31, 1994, $1,451,000 at December 31, 1993, and $2,952,000 at December 31, 1992. Compensation expense related to restricted stock grants, net of forfeitures, was $1,553,000 in 1994, $1,099,000 in 1993, and $2,243,000 in 1992. 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:
1994 1993 1992 -------- -------- -------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligations............................... $ 67,099 $ 69,418 $ 54,765 ======== ======== ======== Accumulated benefit obligations.......................... $ 68,259 $ 71,160 $ 56,479 ======== ======== ======== Projected benefit obligations............................ $ 85,586 $ 91,816 $ 78,667 Plan assets (primarily marketable securities) at market value.................................................... 120,358 120,041 111,021 -------- -------- -------- Net assets in excess of projected benefit obligations...... 34,772 28,225 32,354 Unrecognized experience gain............................... (12,294) (5,316) (7,988) Unrecognized prior service cost............................ 573 1,831 2,112 Unamortized net excess pension assets at transition recognized over 15 years............................................ (10,333) (11,809) (13,286) -------- -------- -------- Prepaid pension cost recorded in other assets.............. $ 12,718 $ 12,931 $ 13,192 ======== ======== ========
Assumptions used in determining the actuarial present value of the projected benefit obligation as of December 31 are as follows:
1994 1993 1992 -------- -------- -------- Discount rate.............................................. 8.50% 7.25% 8.00% Rate of increase in future compensation levels............. 5.25 4.70 5.20
47 25 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension expense consisted of the following:
1994 1993 1992 ------- -------- -------- (IN THOUSANDS) Service costs earned during period.......................... $ 4,551 $ 4,083 $ 3,724 Interest cost on projected benefit obligation............... 6,943 6,304 6,071 Actual return on plan assets................................ (3,290) (11,113) (15,382) Net amortization and deferral............................... (7,991) 987 5,673 ------- -------- -------- Net pension expense......................................... $ 213 $ 261 $ 86 ======= ======== ========
In addition to the above, the Company maintains a nonqualified, supplemental retirement plan for certain officers. The benefits provided under this plan are unfunded, and any payments to plan participants are made by the Company. As of December 31, 1994 and 1993, $4,269,000 and $1,962,000, respectively, were included in accrued expense and other liabilities for this plan. The expense associated with this plan as of December 31 was as follows:
1994 1993 1992 ------ ---- ---- (IN THOUSANDS) Service costs earned during period.......................... $ 346 $ 79 $ 67 Interest cost on projected benefit obligation............... 400 240 206 Actual return on plan assets................................ -- -- -- Net amortization and deferral............................... 330 162 146 ------ ---- ---- Supplemental retirement expense............................. $1,076 $481 $419 ====== ==== ====
Assumptions used in determining the net pension expense and supplemental retirement expense were as follows:
1994 1993 1992 ---- ---- ---- Rate of return on plan assets.................................. 9.00% 9.00% 9.50% Discount rate.................................................. 7.25 8.00 9.00 Rate of increase in future compensation levels................. 4.70 5.20 6.20
The Company has a savings and profit sharing plan that is interrelated with an employee stock ownership plan (ESOP). Employees are eligible to participate in these plans if they meet certain service requirements. Benefits are based on the Company's financial performance. A portion of these benefits is payable under the ESOP in shares of the Company's common stock. In 1990, 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, bears interest at a rate equal to Reserve Adjusted LIBOR plus .35% and is payable in eight annual instalments ending January 31, 1997. At December 31, 1994, the balance of the ESOP loan was $9,451,000 at an interest rate of 6.54%, and unallocated ESOP shares were 406,495. During 1994, ESOP expense included an accrual of $2,450,000 to cover the loan payment due on January 31, 1995, and interest expense, net of dividends, on the ESOP loan of $473,000. The dividends used to service the ESOP debt, which were paid on shares held by the ESOP, were $1,188,000 in 1994 and $697,000 in 1993; there were no dividends in 1992. The Company accrued additional contributions to the savings and profit sharing plan of $2,100,000 in 1994; the Company accrued no such additional contributions in 1993 or 1992. 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 3,800 employees are potentially eligible for benefits under the plan. Existing 48 26 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" as of January 1, 1993. SFAS 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 SFAS 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 three years for the medical insurance to thirteen years for the life insurance and Medicare supplements. The table below sets forth the status of the Company's accumulated postretirement benefit obligation, which was unfunded as of December 31: Accumulated Postretirement Benefit Obligation:
1994 1993 ------- ------- (IN THOUSANDS) Accumulated postretirement benefit obligation............................ $(3,086) $(3,597) Unrecognized net (gain) loss............................................. (273) 186 Unrecognized prior service cost.......................................... -- -- Unrecognized net transition obligation................................... 2,801 3,152 ------- ------- Net postretirement benefit liability..................................... $ (558) $ (259) ======= =======
Postretirement benefit expense was $613,000 in 1994 and $619,000 in 1993. Increasing the health care cost trend by 1% in each year would not materially affect the accumulated postretirement benefit obligation as of December 31, 1994, or the aggregate of the service and interest components of the net periodic postretirement benefit cost for the twelve months ended December 31, 1994. The present value of the accumulated benefit obligation assumed a 8.50% discount rate compounded annually. Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 covers all postemployment benefits not already covered by the two prior accounting pronouncements. Adoption of SFAS No. 112 resulted in additional postemployment benefits of $1,615,000, which were recorded in the first quarter of 1994 at $932,000 on an after-tax basis. The annual cost of postemployment benefits to former employees for 1994 was $1,851,000. 49 27 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12. OTHER NONINTEREST INCOME The major components of other noninterest income were:
YEAR ENDED DECEMBER 31 1994 1993 1992 ------- ------- ------- (IN THOUSANDS) Credit card fees.............................................. $19,549 $18,892 $19,398 Processing fees............................................... 16,174 13,788 12,624 Trust fees.................................................... 14,127 14,559 14,810 Investment management and brokerage fees...................... 8,293 6,318 4,197 Mortgage banking fees......................................... 7,152 11,972 10,207 International fees............................................ 6,344 5,845 6,035 Other noninterest income...................................... 25,731 21,939 19,939 ------- ------- ------- $97,370 $93,313 $87,210 ======= ======= =======
NOTE 13. OTHER OPERATING EXPENSES The major components of other operating expenses were:
YEAR ENDED DECEMBER 31 1994 1993 1992 -------- -------- -------- (IN THOUSANDS) Marketing and public relations............................. $ 22,726 $ 21,341 $ 17,033 FDIC insurance............................................. 21,708 21,949 19,289 Service bureau and other data processing................... 17,443 16,538 15,602 Printing and supplies...................................... 12,767 12,997 12,557 Professional services...................................... 10,807 13,744 12,482 Postage.................................................... 8,711 8,290 8,201 Legal and consulting....................................... 8,516 6,609 9,763 Other operating expenses................................... 28,512 27,699 27,385 -------- -------- -------- 131,190 129,167 122,312 OREO and legal expenses related to workout................. 9,838 17,468 18,450 -------- -------- -------- $141,028 $146,635 $140,762 ======== ======== ========
NOTE 14. INCOME TAXES The provision for income taxes was comprised of the following:
YEAR ENDED DECEMBER 31 1994 1993 1992 ------- ------- ------- (IN THOUSANDS) Provision for: Federal income tax....................................... $50,449 $32,254 $25,101 State income tax......................................... 23,073 14,818 11,350 ------- ------- ------- $73,522 $47,072 $36,451 ======= ======= =======
50 28 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The current and deferred components of the provision were as follows:
YEAR ENDED DECEMBER 31 1994 1993 1992 ------- ------- ------- (IN THOUSANDS) Current taxes payable: Federal.................................................. $44,370 $31,084 $26,940 State.................................................... 19,936 13,313 11,350 ------- ------- ------- $64,306 $44,397 $38,290 ======= ======= ======= Deferred taxes (benefit): Federal.................................................. $ 6,079 $ 1,170 $(1,839) State.................................................... 3,137 1,505 -- ------- ------- ------- $ 9,216 $ 2,675 $(1,839) ======= ======= =======
The major components of deferred income tax expense (benefit) were as follows:
YEAR ENDED DECEMBER 31 1994 1993 1992 ------- ------- ------- (IN THOUSANDS) Loan losses................................................... $10,689 $ 9,360 $ 6,628 Depreciation.................................................. (1,879) (1,859) (1,408) Loan fees, net................................................ 1,918 (348) (211) Pension credit................................................ 23 (360) (31) Lease financing............................................... (2,891) (2,973) (439) Provision for OREO reserve, net............................... 5,607 (3,300) (4,947) Deferred compensation......................................... (1,811) 518 (981) Other, net.................................................... (2,440) 1,637 (450) ------- ------- ------- $ 9,216 $ 2,675 $(1,839) ======= ======= =======
The differences between the effective income tax rate and the nominal federal tax rate on income before taxes are reconciled as follows:
1994 1993 1992 ---- ---- ---- Nominal federal tax rate........................................... 35.0% 35.0% 34.0% State tax rate, net of federal tax benefit......................... 8.2 8.4 7.8 Tax-exempt income.................................................. (1.7) (2.3) (2.6) Alternative minimum tax............................................ -- -- (1.4) Non-deductible goodwill............................................ .1 .2 .6 Utilization of tax credits......................................... (.7) (.4) (.1) Other.............................................................. (.5) .1 (.2) ---- ---- ---- 40.4% 41.0% 38.1% ==== ==== ====
51 29 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1994 and 1993, and January 1, 1993, the Company had gross deferred tax assets and gross deferred tax liabilities as follows:
DECEMBER 31, DECEMBER 31, JANUARY 1, 1994 1993 1993 ------------ ------------ ---------- (IN THOUSANDS) Deferred income tax assets: Loan losses.......................................... $63,211 $73,900 $ 83,260 OREO reserve......................................... 7,365 12,972 9,672 Loan fees, net....................................... 3,210 5,128 4,780 Deferred compensation................................ 5,447 3,636 4,154 Other, net........................................... 2,754 223 294 ------- ------- -------- 81,987 95,859 102,160 ======= ======= ======== Deferred income tax liabilities: Lease financing...................................... 10,474 13,365 16,338 Depreciation......................................... 7,049 8,928 10,787 Pension credit....................................... 5,598 5,575 5,935 Other, net........................................... 2,890 2,606 1,040 ------- ------- -------- 26,011 30,474 34,100 ------- ------- -------- Net deferred income tax asset..................... $55,976 $65,385 $ 68,060 ======= ======= ========
It is expected that the existing net deductible temporary differences, which give rise to the net deferred tax asset, will be realized. NOTE 15. FINANCIAL INSTRUMENTS WITH CREDIT RISK AND OFF-BALANCE SHEET RISK AND DERIVATIVE FINANCIAL INSTRUMENTS 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 occasionally uses various off-balance sheet commitments and financial 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 and options, 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. 52 30 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS -- The Company has only limited involvement with derivative financial instruments for interest rate risk management and trading purposes. Off-balance sheet and derivative financial instruments at December 31, 1994 and 1993, were as follows:
CONTRACT OR NOTIONAL AMOUNT ------------------------- 1994 1993 ---------- ---------- (IN THOUSANDS) Loan commitments.................................................... $3,065,000 $2,763,000 Standby letters of credit........................................... 146,000 164,000 Foreign exchange contracts.......................................... 99,000 44,000 Loans sold with recourse............................................ 38,000 46,000 Forward commitments................................................. 23,000 134,000 Securities purchase and sell commitments............................ 15,000 29,000 Interest rate swaps and options..................................... 14,000 8,000 Letters of credit................................................... 14,000 15,000 Municipal note purchase agreements.................................. 2,000 4,000
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. The fair value of loan commitments was $3,500,000 and $2,100,000 at December 31, 1994 and 1993, respectively. 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. The fair value of letters of credit was $177,000 and $175,000 at December 31, 1994 and 1993, respectively. FOREIGN EXCHANGE CONTRACTS -- The Company enters into offsetting agreements to purchase foreign currency and, in turn, to sell it to customers. Credit risk exists because in the event that a customer fails to take delivery of the foreign currency, the Company is required to resell it to the market. The fair value of foreign exchange contracts was $780,000 and $552,000 at December 31, 1994 and 1993, respectively. 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 dollar 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. 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 the 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 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. The Company also enters into a limited number of forward rate options with commercial customers, which in turn are hedged in their entirety. SECURITIES PURCHASE AND SELL COMMITMENTS -- In connection with its capital markets activities, the Company regularly commits to purchase and sell securities. 53 31 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INTEREST RATE SWAPS AND OPTIONS -- The Company uses interest rate swap contracts and options in conjunction with asset and liability management activities and to adjust interest rate risk associated with specific customer transactions. These agreements 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. MUNICIPAL NOTE PURCHASE AGREEMENTS -- In connection with its capital markets activities, the Company has committed to purchase certain municipal securities from investors in the event that the issuing municipality fails to pay principal or interest when due. NOTE 16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Under the provisions of SFAS 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. SFAS 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 SFAS 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 SFAS 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 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, 1994 and 1993. Credit risk factors were incorporated in the discount rates used for these loans and are 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 1994 and 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, 1994 and 1993. OTHER ASSETS -- Financial instruments classified as other assets that are subject to the disclosure requirements of SFAS No. 107 consist principally of interest receivable, excess mortgage servicing rights, and required 54 32 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) investments in low-income housing limited partnerships. The carrying amounts of these financial instruments approximate their fair value. DEPOSITS -- The fair value of demand deposits, NOW and savings accounts, and money market deposits is defined by SFAS 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 was estimated by the use of present value techniques. These techniques consider 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. ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE -- Financial instruments included in accrued expenses and other accounts payable that are subject to the disclosure requirements of SFAS No. 107 consist principally of interest payable. The carrying value of interest payable approximates its fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- The estimated fair values of loan commitments, standby letters of credit, and foreign exchange contracts are disclosed in Note 15. The fair values of all other off-balance sheet financial instruments were not considered to be material. 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, foreign exchange contracts, and interest rate swaps was determined by reference to the market for similar instruments. The fair values of the financial instruments presented, and as determined under the guidelines established by SFAS No. 107 as previously described, depend highly on assumptions as they existed as of December 31, 1994 and 1993, 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 understand- 55 33 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) ing, the financial statement amounts and estimated fair values of financial instruments at December 31, 1994 and 1993, were as follows:
1994 1993 ------------------------- ------------------------- FINANCIAL FAIR FINANCIAL FAIR STATEMENT VALUE STATEMENT VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) Financial assets Cash and due from banks................. $ 829,170 $ 829,170 $ 632,985 $ 632,985 Interest-bearing deposits and other short-term investments................ 166,286 166,286 803,068 803,068 Trading accounts........................ 27,416 27,416 14,595 14,595 Securities portfolios................... 2,776,851 2,702,186 2,228,063 2,238,537 Loans (net of allowance): Commercial and commercial real estate... 2,382,321 2,425,000 2,146,686 2,210,000 Consumer................................ 4,119,364 4,182,000 3,784,988 3,980,000 ---------- ---------- ---------- ---------- 6,501,685 6,607,000 5,931,674 6,190,000 Financial liabilities Deposits: Demand, NOW, savings, and money market deposit accounts............... $7,729,339 $7,729,339 $7,749,919 $7,749,919 Consumer time........................... 1,095,357 1,087,000 993,945 1,003,000 Time -- $100,000 or more................ 175,663 175,663 34,957 34,957 Federal funds purchased and other short-term borrowings................. 849,517 849,517 507,820 507,820 Long-term debt.......................... 51,154 51,000 54,488 54,000
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 1992 through 1994 are as follows:
YEAR ENDED DECEMBER 31 ---------------------------------------- 1994 1993 1992 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net interest income First Quarter................................. $108,667 $101,528 $101,271 Second Quarter................................ 112,815 104,917 104,548 Third Quarter................................. 120,004 108,282 107,428 Fourth Quarter................................ 123,456 109,096 103,265 -------- -------- -------- $464,942 $423,823 $416,512 ======== ======== ========
56 34 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31 ---------------------------------------- 1994 1993 1992 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Noninterest income First Quarter................................. $ 49,715 $ 46,896 $ 43,309 Second Quarter................................ 54,031 48,751 46,484 Third Quarter................................. 52,557 51,904 46,801 Fourth Quarter................................ 50,985 50,973 47,287 ---------- ---------- ---------- $ 207,288 $ 198,524 $ 183,881 ========== ========== ========== Net securities gains First Quarter................................. $ 39 $ -- $ 35,413 Second Quarter................................ 436 358 393 Third Quarter................................. -- 49 -- Fourth Quarter................................ (272) 4 41,123 ---------- ---------- ---------- $ 203 $ 411 $ 76,929 ========== ========== ========== Provision for loan losses and OREO reserve First Quarter................................. $ 8,937 $ 18,500 $ 60,210 Second Quarter................................ 8,500 16,892 38,619 Third Quarter................................. 8,415 16,800 27,754 Fourth Quarter................................ 7,520 9,138 25,735 ---------- ---------- ---------- $ 33,372 $ 61,330 $ 152,318 ========== ========== ========== Net income First Quarter................................. $ 21,279 $ 12,761 $ 8,229 Second Quarter................................ 26,422 14,207 6,515 Third Quarter................................. 29,033 18,001 10,436 Fourth Quarter................................ 30,703 22,682 34,057 ---------- ---------- ---------- $ 107,437 $ 67,651 $ 59,237 ========== ========== ========== Average number of outstanding shares First Quarter................................. 19,093,447 18,871,018 16,137,694 Second Quarter................................ 19,154,620 18,937,724 16,203,022 Third Quarter................................. 19,187,890 19,000,208 16,204,906 Fourth Quarter................................ 19,255,579 19,004,540 17,329,351 Earnings per share First Quarter................................. $ 1.11 $ .68 $ .51 Second Quarter................................ 1.38 .75 .40 Third Quarter................................. 1.51 .95 .64 Fourth Quarter................................ 1.59 1.19 1.97 ---------- ---------- ---------- $ 5.60* $ 3.57 $ 3.57* ========== ========== ========== Dividends declared First Quarter................................. $ 0.35 $ 0.20 -- Second Quarter................................ 0.35 0.20 -- Third Quarter................................. 0.45 0.25 -- Fourth Quarter................................ 0.45 0.25 --
57 35 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31 ------------------------------------------- 1994 1993 1992 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Dividends paid First Quarter................................. $ 0.35 $ 0.20 -- Second Quarter................................ 0.35 0.20 -- Third Quarter................................. 0.45 0.25 -- Fourth Quarter................................ 0.45 0.25 -- Range of BayBanks, Inc., common stock -- last sale price First Quarter................................. $57 1/4-50 $52 1/8-38 3/4 $31 1/4-18 3/4 Second Quarter................................ 64 1/8-54 1/2 51 1/4-38 1/4 36 7/8-26 3/4 Third Quarter................................. 63 -54 1/4 50 1/2-43 1/4 36 1/2-28 3/4 Fourth Quarter................................ 59 1/2-51 50 3/4-43 1/4 40 3/4-30 1/8 - --------------- * The sum of the quarters' earnings per share for 1994 and 1992 does not equal the full-year amount due to the effect of the issuance of common stock.
NOTE 19. PENDING ACQUISITION OF A FINANCIAL INSTITUTION On December 23, 1994, the Company announced that it had agreed to acquire the southern New Hampshire-based holding company NFS Financial Corp. (NFS), parent company of NFS Savings Bank, FSB and Plaistow Cooperative Bank, FSB. The stockholders of NFS will receive $20.15 in cash and .2038 shares of BayBanks, Inc., common stock for each share of NFS common stock held. The merger consideration is subject to adjustment under certain circumstances if the market value of the Company's stock at the closing date is less than $43.50 or more than $63.00 per share. The acquisition, approved by the boards of directors of both companies, is subject to approval by the stockholders of NFS and various federal and state regulatory agencies. NFS had total assets of approximately $619,000,000 at December 31, 1994. The acquisition will be accounted for as a purchase. 58 EX-99.C 5 REPORT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 99c ----------- INDEPENDENT AUDITORS' REPORT ---------------------------- KPMG Peat Marwick LLP Certified Public Accountants 99 High Street Boston, MA 02110 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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP January 24, 1995 -----END PRIVACY-ENHANCED MESSAGE-----