1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1994 Commission File No. 0-959
------------------------
BAYBANKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2008039
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
175 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 482-1040
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of April 29, 1994, 18,817,366 shares of the registrant's common stock,
$2.00 par value, were outstanding.
The list of exhibits to this report appears on page 25.
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2
PART I -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
BAYBANKS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
MARCH 31 DECEMBER 31 MARCH 31
1994 1993 1993
----------- ----------- ----------
ASSETS
Cash and due from banks.......................................... $ 575,551 $ 632,985 $ 638,135
Interest-bearing deposits and other short-term investments....... 390,948 803,068 791,066
Trading accounts................................................. 21,974 14,595 34,579
Securities available for sale -- market value $628,263 at March
31, 1994, $633,446 at December 31, 1993, and $1,793,924 at
March 31, 1993 (Note 2)........................................ 628,263 629,003 1,773,747
Investment securities -- market value $2,236,417 at March 31,
1994, $1,605,091 at December 31, 1993, and $131,255 at March
31, 1993 (Note 2).............................................. 2,255,736 1,599,060 130,774
Loans -- net of unearned income and fees
Commercial..................................................... 1,324,429 1,324,968 1,403,193
Commercial real estate......................................... 919,664 935,471 967,151
Residential mortgage........................................... 1,182,028 1,242,597 1,117,568
Instalment..................................................... 2,626,014 2,600,134 2,319,377
----------- ----------- ----------
6,052,135 6,103,170 5,807,289
Less allowance for loan losses................................. 165,221 171,496 188,237
----------- ----------- ----------
5,886,914 5,931,674 5,619,052
Premises and equipment, net...................................... 192,604 192,554 196,681
Customers' acceptances........................................... 914 4,467 11,202
Other real estate owned and in-substance foreclosures, net....... 99,139 113,679 176,425
Other assets..................................................... 187,253 189,499 185,458
----------- ----------- ----------
Total assets............................................ $10,239,296 $10,110,584 $9,557,119
----------- ----------- ----------
----------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand......................................................... $ 2,022,422 $ 2,077,206 $1,778,089
NOW accounts................................................... 1,424,830 1,481,859 1,329,581
Savings........................................................ 1,520,999 1,459,134 1,386,924
Money market deposit accounts.................................. 2,721,482 2,731,720 2,955,553
Consumer time.................................................. 956,006 993,945 1,169,612
Time -- $100,000 or more....................................... 40,123 34,957 35,478
----------- ----------- ----------
8,685,862 8,778,821 8,655,237
Federal funds purchased and other short-term borrowings.......... 714,975 507,820 120,005
Acceptances outstanding.......................................... 914 4,467 11,202
Accrued expenses and other accounts payable...................... 50,159 49,485 45,770
Long-term debt................................................... 54,038 54,488 53,824
Guarantee of ESOP indebtedness................................... 9,451 12,241 12,241
Stockholders' equity:
Common stock, par value $2.00 per share
Shares authorized -- 50,000,000
Shares issued -- 18,800,354 at March 31, 1994, 18,742,934 at
December 31, 1993 and 18,666,843 at March 31, 1993......... 37,601 37,486 37,334
Surplus.......................................................... 311,646 310,355 307,877
Retained earnings................................................ 384,138 367,662 325,870
----------- ----------- ----------
733,385 715,503 671,081
Less treasury stock at cost -- 665 shares at March 31,1994....... 37 -- --
Less guarantee of ESOP indebtedness.............................. 9,451 12,241 12,241
----------- ----------- ----------
Total stockholders' equity.............................. 723,897 703,262 658,840
----------- ----------- ----------
Total liabilities and stockholders' equity.............. $10,239,296 $10,110,584 $9,557,119
----------- ----------- ----------
----------- ----------- ----------
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BAYBANKS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
FIRST QUARTER
ENDED MARCH 31
-----------------------
1994 1993
-------- --------
Income on interest-bearing deposits and other short-term
investments........................................................ $ 2,485 $ 7,483
Interest on securities portfolios.................................... 26,990 19,919
Interest and fees on loans........................................... 117,010 121,495
-------- --------
Total income on earning assets....................................... 146,485 148,897
Interest expense on deposits and borrowings
Deposits........................................................... 33,878 46,159
Short-term borrowings.............................................. 3,416 662
Long-term debt..................................................... 524 548
-------- --------
Total interest expense............................................... 37,818 47,369
-------- --------
Net interest income.................................................. 108,667 101,528
Provision for loan losses............................................ 6,000 11,500
-------- --------
Net interest income after provision for loan losses.................. 102,667 90,028
Noninterest income
Service charges and fees on deposit accounts....................... 26,258 24,944
Other noninterest income........................................... 23,457 21,952
-------- --------
Total noninterest income............................................. 49,715 46,896
Net securities gains................................................. 39 --
Operating expenses
Salaries and benefits.............................................. 56,383 51,607
Occupancy and equipment............................................ 22,487 22,424
Other operating expenses........................................... 33,325 35,129
-------- --------
Total operating expenses............................................. 112,195 109,160
Provision for OREO reserve, net...................................... 2,937 7,000
-------- --------
Total operating expenses and OREO provision.......................... 115,132 116,160
-------- --------
Income before taxes and cumulative effect of accounting change....... 37,289 20,764
Provision for income taxes........................................... 15,078 8,003
-------- --------
Income before cumulative effect of accounting change................. 22,211 12,761
Less cumulative effect of accounting change (net of tax benefit of
$683) (Note 3)..................................................... 932 --
-------- --------
NET INCOME........................................................... $ 21,279 $ 12,761
-------- --------
-------- --------
Earnings Per Share:
Income before accounting change.................................... $ 1.16 $ 0.68
Less cumulative effect of accounting change (Note 3)............... .05 --
-------- --------
Net Income......................................................... $ 1.11 $ 0.68
-------- --------
-------- --------
Average shares outstanding........................................... 19,093,447 18,871,018
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
COMMON RETAINED TREASURY ESOP LOAN
STOCK SURPLUS EARNINGS STOCK GUARANTEE TOTAL
------- -------- -------- -------- --------- --------
BALANCE AS OF DECEMBER 31,
1992......................... $37,016 $304,890 $316,812 $(26) $(14,473) $644,219
Net income -- First Quarter
1993...................... 12,761 12,761
Cash dividends declared
($0.20 per share)......... (3,703) (3,703)
Other equity transactions.... 318 2,987 26 2,232 5,563
------- -------- -------- -------- --------- --------
BALANCE AS OF MARCH 31, 1993... $37,334 $307,877* $325,870 $ -- $(12,241) $658,840
======= ======== ======== ======== ========= ========
BALANCE AS OF DECEMBER 31,
1993......................... $37,486 $310,355 $367,662 $ -- $(12,241) $703,262
Net income -- First Quarter
1994...................... 21,279 21,279
Cash dividends declared
($0.35 per share)......... (6,576) (6,576)
Change in valuation reserve
related to securities
available for sale
portfolio (Note 2)........ 1,773 1,773
Other equity transactions.... 115 1,291 (37) 2,790 4,159
------- -------- -------- -------- --------- --------
BALANCE AS OF MARCH 31, 1994... $37,601 $311,646* $384,138 $(37) $ (9,451) $723,897
======= ======== ======== ======== ========= ========
<FN>
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* Net of unamortized deferred compensation expense of $1,223 and $2,952 at March
31, 1994 and 1993, respectively.
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BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FIRST QUARTER
ENDED MARCH 31
-----------------------
1994 1993
--------- ---------
OPERATING ACTIVITIES
Net income................................................................... $ 21,279 $ 12,761
Adjustments to reconcile net income to net cash provided by operating
activities:
Fixed-rate mortgages sold.................................................. 171,363 265,548
Fixed-rate mortgages originated for sale................................... (86,179) (158,298)
Student loans transferred from portfolio and sold.......................... 333 7,687
Proceeds from sales and maturities of trading account assets............... 592,246 397,906
Purchases of trading account assets........................................ (601,901) (357,148)
Provision for loan losses.................................................. 6,000 11,500
Amortization of security premium........................................... 6,847 1,589
Provision for OREO reserve, net............................................ 2,937 7,000
Deferred income taxes...................................................... 6,476 (1,023)
Depreciation and amortization of premises and equipment.................... 6,376 6,260
Net securities gains....................................................... (39) --
Change in other assets..................................................... 1,380 (20,501)
Change in accrued expenses................................................. 1,087 (743)
Change in interest receivable.............................................. (6,040) 234
Change in interest payable................................................. (212) (1,234)
--------- ---------
Net cash provided by operating activities................................ 121,953 171,538
--------- ---------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale......................... 41,772 --
Proceeds from maturities of securities available for sale.................... 1,011 1,540
Purchases of securities available for sale................................... (39,675) (210,454)
Proceeds from maturities of investment securities............................ 63,471 56,259
Purchases of investment securities........................................... (726,617) (74,086)
Net cash provided (used) by:
Short-term investments..................................................... 412,120 300,919
Loans(1)(2)................................................................ (54,512) (6,729)
Customer acceptances....................................................... 3,553 576
Net purchases of premises and equipment...................................... (6,426) (4,511)
Proceeds from sales of OREO(2)............................................... 19,358 17,149
--------- ---------
Net cash (used) provided by investing activities........................... (285,945) 80,663
--------- ---------
FINANCING ACTIVITIES
Net cash provided (used) by:
Demand deposits, NOW, and savings accounts................................. (49,948) (244,802)
Money market deposits...................................................... (10,238) (11,738)
Consumer time deposits..................................................... (37,939) (65,135)
Time deposits greater than $100,000........................................ 5,166 (3,477)
Short-term borrowings...................................................... 207,155 (19,964)
Customer acceptances....................................................... (3,553) (576)
Long-term debt............................................................. (450) (1,364)
Dividends paid............................................................... (6,576) (3,703)
Other equity transactions.................................................... 2,941 2,967
--------- ---------
Net cash provided (used) by financing activities........................... 106,558 (347,792)
--------- ---------
Net change in cash and cash equivalents...................................... (57,434) (95,591)
Cash and cash equivalents at beginning of year(3)............................ 632,985 733,726
--------- ---------
Cash and cash equivalents at end of period(3)................................ $ 575,551 $ 638,135
--------- ---------
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Supplemental disclosure of cash flow information
Interest paid.............................................................. $ 38,030 $ 48,337
Taxes paid................................................................. 5,364 19,837
<FN>
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(1) Excludes transfers of loans to the other real estate owned category of $8.9
million and $12.1 million in 1994, and 1993, respectively.
(2) Excludes loan originations in conjunction with OREO sales of $2.1 million
and $3.8 million in 1994 and 1993, respectively.
(3) Cash and cash equivalents consist of cash on hand, cash items in process of
collection, and due from banks.
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BAYBANKS, INC.
NOTE 1. ACCOUNTING ADJUSTMENTS
In the opinion of management, all of the adjustments (consisting of normal
recurring accruals unless otherwise indicated) necessary for a fair statement of
the results of operations have been included in the accompanying financial
statements. Certain 1993 amounts have been reclassified to conform with the 1994
presentation.
NOTE 2. SECURITIES PORTFOLIOS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Statement No. 115 addresses the accounting and reporting for
certain investments in debt and marketable equity securities. Statement No. 115
requires changes in the fair value of the securities available for sale
portfolio be recorded directly to a separate category of stockholders' equity.
Previously, securities available for sale were valued at the lower of aggregate
cost or market, and changes therein were recorded directly to earnings. At
adoption the fair value of the securities available for sale exceeded their
amortized cost by $4,443,000 or $2,500,000 on an after-tax basis, and thus
stockholders' equity was increased by that amount. At March 31, 1994 the fair
value of the securities available for sale exceeded their amortized cost by
$3,104,000, or $1,773,000 on an after-tax basis.
The following table provides the amortized cost, estimated market values,
and yields of the securities portfolios by maturity.
PERIOD-END SECURITIES PORTFOLIOS
------------------------------------------------------------
GROSS GROSS WEIGHTED
AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
COST GAINS LOSSES VALUE YIELD*
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
MARCH 31, 1994
SECURITIES AVAILABLE FOR SALE
U.S. Government securities, maturing
Within 1 year........................... $ 320,602 $ 1,437 $ (6) $ 322,033 4.91%
---------- --------- --------- ----------
320,602 1,437 (6) 322,033 4.91
---------- --------- --------- ----------
State and local governments, maturing
Within 1 year........................... 6,578 -- (1) 6,577 4.06
---------- --------- --------- ----------
6,578 -- (1) 6,577 4.06
---------- --------- --------- ----------
Corporate and other, maturing
Within 1 year........................... 269,477 781 -- 270,258 4.03
---------- ---------- ---------- ----------
269,477 781 -- 270,258 4.03
---------- ---------- ---------- ----------
Mortgage-backed securities................ 28,502 893 -- 29,395 6.12
---------- ---------- ---------- ----------
Total Securities Available for
Sale.......................... $ 625,159 $ 3,111 $ (7) $ 628,263 4.58%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
INVESTMENT SECURITIES
U.S. Government securities, maturing
Within 1 year........................... $ 563,923 $ 904 $ (513) $ 564,314 4.27%
After 1 year but within 5 years......... 1,204,358 380 (16,207) 1,188,531 4.50
---------- ---------- ---------- ----------
1,768,281 1,284 (16,720) 1,752,845 4.43
---------- ---------- ---------- ----------
State and local governments, maturing
Within 1 year........................... 145,212 34 (90) 145,156 4.21
After 1 year but within 5 years......... 23,298 82 (387) 22,993 6.09
After 5 years but within 10 years....... 5,030 35 (192) 4,873 6.95
---------- ---------- ---------- ----------
173,540 151 (669) 173,022 4.54
---------- ---------- ---------- ----------
Asset-backed securities................... $ 204,235 -- (2,750) 201,485 4.33%
Mortgage-backed securities................ 49,457 -- (615) 48,842 5.14
Industrial revenue bonds.................. 58,365 -- -- 58,365 5.45
Corporate and other....................... 1,858 -- -- 1,858
---------- ---------- ---------- ----------
Total Investment Securities..... $2,255,736 $ 1,435 $ (20,754) $2,236,417 4.47%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
* Tax equivalent basis.
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BAYBANKS, INC.
NOTE 2. SECURITIES PORTFOLIOS (CONTINUED)
PERIOD-END SECURITIES PORTFOLIOS
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1993
SECURITIES AVAILABLE FOR SALE
U.S. Government securities................ $322,707 $3,280 $(3) $325,984
State and local governments............... 18,964 6 (2) 18,968
Mortgage-backed securities................ 30,832 1,162 -- 31,994
Corporate and other....................... 256,500 -- -- 256,500
---------- ---------- ---------- ----------
Total Securities Available for Sale....... $629,003 $4,448 $(5) $633,446
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
INVESTMENT SECURITIES
U.S. Government securities................ $1,203,315 $ 6,447 $ (59) $1,209,703
State and local governments............... 128,997 380 (25) 129,352
Asset-backed securities................... 204,798 115 (827) 204,086
Industrial revenue bonds.................. 59,958 -- -- 59,958
Corporate and other....................... 1,992 -- -- 1,992
---------- ---------- ---------- ----------
Total Investment Securities..... $1,599,060 $ 6,942 $ (911) $1,605,091
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
MARCH 31, 1993
SECURITIES AVAILABLE FOR SALE
U.S. Government securities................ $1,626,692 $ 19,126 $ -- $1,645,818
Mortgage-backed securities................ 87,805 1,051 -- 88,856
Corporate and other....................... 59,250 -- -- 59,250
---------- ---------- ---------- ----------
Total Securities Available for
Sale.......................... $1,773,747 $ 20,177 $ -- $1,793,924
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
INVESTMENT SECURITIES
State and local governments............... $ 55,987 $ 489 $ (8) $ 56,468
Industrial revenue bonds.................. 72,801 -- -- 72,801
Corporate and other....................... 1,986 -- -- 1,986
---------- ---------- ---------- ----------
Total Investment Securities..... $ 130,774 $ 489 $ (8) $ 131,255
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
* Tax equivalent basis.
NOTE 3. POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standard No. 112, "Employers Accounting for Postemployment Benefits."
Statement No. 112 covers all postemployment benefits not already covered by two
prior accounting pronouncements. The adoption of Statement No. 112 resulted in
an additional accrual of postemployment benefits of $1,615,000, or $932,000 on
an after-tax basis in the first quarter of 1994. The recurring annual cost of
postemployment benefits to former employees is estimated at approximately
$250,000. This amount is comparable to the annual cost incurred in 1993.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE OVERVIEW
BayBanks' net income was $21.3 million for the first quarter of 1994, or
$1.11 per share, compared with net income of $12.8 million, or $.68 per share,
for the first quarter of 1993. The major factors that contributed to the
increase in net income were as follows:
- Operating income (defined below) increased by 19% in the first quarter of
1994, compared with that of the first quarter of 1993, as a result of an
8% increase in net interest income and a 6% increase in noninterest
income, which was partially offset by a 3% growth in expenses.
- Asset quality continued to improve; nonperforming assets were reduced to
$204 million, a 9% decrease from December 31, 1993, and a 40% decrease
from March 31, 1993. As a consequence the combined provision for loan
losses and the other real estate owned (OREO) reserve decreased 52% to
$8.9 million in the first quarter of 1994 from $18.5 million in the first
quarter of 1993.
- Net income for the first quarter of 1994 included an after tax charge of
$932 thousand, or $.05 per share, reflecting the cumulative effect of the
Company's adoption of Statement of Financial Accounting Standards, No.
112, "Employers' Accounting for Postemployment Benefits."
EARNINGS ANALYSIS
Operating Income
Operating income, presented in TABLE A, is on a tax equivalent basis;
excludes net securities gains, the provisions for loan losses and the OREO
reserve, and nonrecurring items; and is before income taxes. For the first
quarter of 1994, total income from operations was $160.4 million compared with
$149.5 million in the first quarter of 1993 as a result of an 8% increase in net
interest income and a 6% growth in noninterest income, which was partially
offset by a 3% growth in operating expenses.
TABLE A
SUMMARY OF OPERATIONS
FOR THE FIRST QUARTER ENDED MARCH 31
TAX EQUIVALENT BASIS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1994 1993
-------- --------
Income on earning assets..................................... $148,458 $150,012
Interest on deposits and borrowings.......................... 37,818 47,369
-------- --------
Net interest income.......................................... 110,640 102,643
Noninterest income........................................... 49,715 46,896
-------- --------
Total income from operations................................. 160,355 149,539
Operating expenses........................................... 112,195 109,160
-------- --------
Operating Income before Net Securities Gains and Provisions
for Loan Losses and OREO Reserve........................... 48,160 40,379
-------- --------
Net securities gains......................................... 39 --
-------- --------
Provision for loan losses.................................... 6,000 11,500
Provision for OREO reserve, net.............................. 2,937 7,000
-------- --------
Total credit provisions...................................... 8,937 18,500
-------- --------
Income before taxes and cumulative effect of accounting
change..................................................... 39,262 21,879
Income taxes and tax equivalent adjustment................... 17,051 9,118
-------- --------
Income before cumulative effect of accounting change......... 22,211 12,761
Less cumulative effect of accounting change (net of tax
benefit)................................................... 932 --
-------- --------
Net Income................................................... $ 21,279 $ 12,761
-------- --------
-------- --------
Earnings Per Share:
Income before accounting change......................... $ 1.16 $ .68
Less cumulative effect of accounting change............. .05 --
-------- --------
Net income.............................................. $ 1.11 $ .68
-------- --------
-------- --------
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Net Interest Income (tax equivalent basis)
Net interest income was $110.6 million in the first quarter of 1994,
compared with $102.6 million in the first quarter of 1993. The net interest
margin in the first quarter of 1994 was 5.00%, compared with 4.83% in the first
quarter of 1993. The net interest margin was 5.08% in the fourth quarter of
1993. Net interest income and the net interest margin are affected by the mix of
interest-bearing assets and liabilities, movements in interest rates and the
level of nonperforming assets. Since the first quarter of 1993 the funding costs
of the Company have declined as deposit rates fell sharply and customers'
preferences have emphasized lower-rate NOW and savings accounts.
The cost of total interest-bearing liabilities fell 59 basis points to
2.16% in the first quarter of 1994 from 2.75% in the first quarter of 1993. The
yield on earning assets fell by 36 basis points to 6.72% in the first quarter of
1994, compared with 7.08% in the first quarter of 1993, due to a decrease in the
loan portfolio yield from 8.37% to 7.81%, as certain maturing loans with higher
yields are replaced with new business at somewhat lower rates.
Fees, Service Charges, and Other Noninterest Income
Noninterest income consists primarily of service charges on deposit
accounts and fees from credit and non-credit services and is well diversified
among consumer, corporate, and small business banking activities.
Noninterest income (TABLE B) increased 6% to $49.7 million in the first
quarter of 1994, compared with $46.9 million in the first quarter of 1993.
Service charges on deposit accounts continued to contribute over one half
of noninterest income. Total service charges on deposits increased 5% to $26.3
million in the first quarter of 1994, compared with $24.9 million in the first
quarter of 1993. The increase is attributable to higher fees and service charges
on consumer accounts and increased usage of corporate transaction services.
Credit card fees increased 13% to $5.1 million in the first quarter of 1994
from $4.5 million in the first quarter of 1993 due to higher merchant volume.
Mortgage banking fees decreased 18% to $2.3 million in the first quarter of
1994 from $2.8 million in the first quarter of 1993 due to a lower level of
secondary market activity resulting from a decrease in refinance volumes.
Trust fees were $3.8 million in the first quarter of 1994, compared with
$3.6 million in the first quarter of 1993 due to the increase in corporate trust
assets. Investment management and brokerage fees increased 52% to $2.1 million
in the first quarter of 1994 from $1.4 million in the first quarter of 1993 due
to increases in brokerage fees for retail transactions, mutual fund sales fees,
and investment advisory fees from BayFunds(R). Total assets under management in
BayFunds were $1.2 billion at March 31, 1994, compared to $808 million at March
31, 1993.
Processing fees increased due to higher income from non-BayBank cardholders
using BayBank ATMs.
TABLE B
NONINTEREST INCOME
FOR THE FIRST QUARTER ENDED MARCH 31
(IN THOUSANDS)
1994 1993 CHANGE
------- ------- ------
Service charges and fees on deposit accounts........... $26,258 $24,944 $1,314
Credit card fees....................................... 5,075 4,500 575
Trust fees............................................. 3,773 3,630 143
Processing fees........................................ 3,380 3,235 145
Mortgage banking fees.................................. 2,297 2,801 (504)
Investment management and brokerage fees............... 2,067 1,362 705
International fees..................................... 1,226 1,349 (123)
Other noninterest income............................... 5,639 5,075 564
------- ------- ------
Total noninterest income.......................... $49,715 $46,896 $2,819
------- ------- ------
------- ------- ------
9
10
There were no net securities gains in the first quarter of 1993 and
securities gains were nominal at $39 thousand for the first quarter of 1994.
Operating Expenses
The operating expense analysis presented in TABLE C separates expense
categories of a more recurring nature from OREO and legal expenses related to
the workout of problem assets. Operating expenses, excluding OREO and legal
expenses related to workouts (as well as writedowns and reserves related to
OREO), were $108.6 million in the first quarter of 1994, compared with $104.1
million in the first quarter of 1993.
Salaries and benefits were $56.4 million in the first quarter of 1994,
compared with $51.6 million in the first quarter of 1993. The increase resulted
from normal salary increases, including the timing of such increases, and the
additional staffing required by certain expanding product lines such as
BayFunds, consumer credit, and mortgage lending.
FDIC insurance was $5.5 million in the first quarter of 1994 compared with
$6.2 million in the first quarter of 1993. The first quarter of 1993 amount was
prior to the FDIC retroactively giving banks the benefit of higher capital
ratios, achieved in the second half of 1992. A refund of $1.3 million, related
to the first six months of 1993, was received in the second quarter of 1993.
Marketing and public relations expenses were $5.1 million in the first
quarter of 1994, compared with $4.7 million in the first quarter of 1993, as the
result of the timing of such programs.
Other operating expenses were $14.3 million in the first quarter of 1994,
compared with $14.5 million in the first quarter of 1993, primarily the result
of lower legal expenses.
The cost of administering, managing, and disposing of OREO properties and
related legal expenses was $3.6 million in the first quarter of 1994, compared
with $5.0 million in the first quarter of 1993, reflecting the continued
disposition of OREO.
TABLE C
OPERATING EXPENSE
FOR THE FIRST QUARTER ENDED MARCH 31
(IN THOUSANDS)
1994 1993 CHANGE
-------- -------- -------
Salaries and benefits....................................... $ 56,383 $ 51,607 $ 4,776
Occupancy and equipment..................................... 22,487 22,424 63
FDIC insurance.............................................. 5,451 6,162 (711)
Marketing and public relations.............................. 5,117 4,689 428
Postage and supplies........................................ 4,838 4,788 50
Other....................................................... 14,344 14,474 (130)
-------- -------- -------
Operating expenses excluding OREO expenses.................. 108,620 104,144 4,476
OREO and legal expenses related to workout.................. 3,575 5,016 (1,441)
-------- -------- -------
Total operating expenses.......................... $112,195 $109,160 $ 3,035
-------- -------- -------
-------- -------- -------
Provision for Loan Losses and Other Real Estate Owned Reserve
Due to the continued improvement in BayBanks' credit quality, the provision
for loan losses and the OREO reserve (credit provisions) declined substantially
in the first quarter of 1994 to $8.9 million compared with $18.5 million in the
first quarter of 1993. The provision for loan losses was $6.0 million in the
first quarter of 1994, compared with $11.5 million in the first quarter of 1993.
The provision for the OREO reserve was $2.9 million in the first quarter of
1994, compared with $7.0 million in the first quarter of 1993. The OREO
provision was net of gains on sales of properties of $563 thousand in the first
quarter of 1994 and $1.1 million in the first quarter of 1993.
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11
Income Taxes
The Company reported a provision for income taxes of $15.1 million in the
first quarter of 1994, compared with $8.0 million in the first quarter of 1993.
The effective tax rate in the first quarter of 1994 was 40.4%, compared with
38.5% in the first quarter of 1993. The increase in the effective tax rate
reflected the higher federal tax rate enacted in the second quarter of 1993, a
lower relative amount of tax exempt income in 1994, and higher state income
taxes due to a higher proportion of income from bank subsidiaries which are
taxed at a higher rate than nonbank subsidiaries.
BALANCE SHEET REVIEW
Trends in Earning Assets
Average earning assets increased to $8.9 billion during the first quarter
of 1994, compared with $8.5 billion in the first quarter of 1993, due to the
increase in average short-term investments and securities portfolios to $2.9
billion in the first quarter of 1994 from $2.7 billion in the first quarter of
1993 and the increase in the average loan portfolio to $6.0 billion in the first
quarter of 1994 from $5.9 billion in the first quarter of 1993. Consumer loan
categories grew while the commercial categories declined.
Loan Portfolio
The loan portfolios of the Company are diversified (TABLE D). Consumer
loans represent 63% of the quarter-end loan portfolio, with $1.2 billion in
residential loan balances and $2.6 billion in various types of instalment loan
balances. The consumer lending activities of the Company are focused primarily
on the Massachusetts market. The remaining 37% of the loan portfolio is
commercial and commercial real estate loans. The majority of the Company's
commercial loans are to New England-based companies, primarily local
middle-market companies and small businesses in Massachusetts.
The Company originates fixed-and adjustable-rate residential mortgage
loans. Generally fixed-rate residential real estate loan originations are
securitized and sold to the secondary market with servicing retained, while
floating-rate residential real estate loan originations are held in the loan
portfolio or may be securitized and transferred to the securities available for
sale portfolio.
An analysis of changes in major loan categories from December 31, 1993, to
March 31, 1994, is presented in TABLE D. Net business volume was $146 million
compared with $175 million in the first quarter of 1993. Residential real estate
loan volume was principally due to refinancing activity, although there was an
increase in loans for purchases. The Company sold $171 million of fixed-rate
residential real estate loans during the first quarter of 1994, compared with
$266 million in the first quarter of 1993. At March 31, 1994, loans held for
resale were $40.0 million, compared with $79 million at March 31, 1993.
Instalment net loan business volume was $33 million, compared with $79 million
in the first quarter of 1993. Automobile lending totals are down when compared
with 1993's first quarter due to an exceptionally strong performance in 1993 and
somewhat adverse weather conditions in 1994. Credit card business volumes
decreased, reflecting a seasonal decline in these balances, while student loan
volumes continued to be strong. Outflows in the commercial real estate portfolio
declined from $46 million during the first quarter of 1993 to $6 million in the
first quarter of 1994. Commercial loan volumes continued to fluctuate due to
selected overnight money market-priced loans, international trade finance
activities principally with Mexican banks, and continuing pay downs on loans to
certain industries where the Company is no longer active.
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12
TABLE D
CHANGES IN THE LOAN PORTFOLIO
(IN THOUSANDS)
ANALYSIS OF CHANGE IN LOAN CATEGORIES
-------------------------------------------
NET CHANGE IN
BUSINESS VOLUME--
GROSS TRANSFERS FIRST QUARTER
MARCH 31 DECEMBER 31 INCREASE CHARGE- TO ---------------------
1994 1993 (DECREASE) OFFS OREO SALES 1994 1993
---------- ------------ ---------- -------- --------- --------- -------- --------
Commercial.................. $1,324,429 $1,324,968 $ (539) $ (1,448) $(1,094) $ -- $ 2,003 $ (2,941)
Commercial
real estate............... 919,664 935,471 (15,807) (6,051) (4,015) -- (5,741) (45,988)
Residential mortgages....... 1,182,028* 1,242,597* (60,569) (1,787) (3,792) (171,363) 116,373 144,731
Instalment loans
Automobile and
other................... 1,185,353 1,173,950 11,403 (1,984) -- -- 13,387 65,276
Home equity............... 693,500 700,055 (6,555) (545) -- -- (6,010) (24,537)
Credit card............... 297,355 325,794 (28,439) (2,981) -- -- (25,458) (7,539)
Student loans............. 327,767 276,923 50,844 (24) -- (333) 51,201 45,393
Reserve credit............ 122,039 123,412 (1,373) (1,471) -- -- 98 213
---------- ------------ ---------- -------- --------- --------- -------- --------
Total instalment loans.... $2,626,014 $2,600,134 $ 25,880 $ (7,005) $ -- $ (333) $ 33,218 $ 78,806
---------- ------------ ---------- -------- --------- --------- -------- --------
Total loans................. $6,052,135 $6,103,170 $(51,035) $(16,291) $(8,901) $(171,696) $145,853 $174,608
---------- ------------ ---------- -------- --------- --------- -------- --------
---------- ------------ ---------- -------- --------- --------- -------- --------
<FN>
- - ---------------
* Includes residential mortgage loans held for sale of $40 million at March 31,
1994, and $138 million at December 31, 1993.
Securities Portfolios
The securities portfolios are presented in TABLE E and consist of
short-term investments, securities available for sale, and investment
securities. The securities portfolio was $3.3 billion at March 31, 1994, $3.0
billion at December 31, 1993, and $2.7 billion at March 31, 1993. The weighted
average maturity of the securities portfolio was 1.1 years at March 31, 1994,
compared with .8 years at December 31, 1993 and March 31, 1993. During the first
quarter of 1994, the average maturity of the securities portfolio was
lengthened, thus the yields on the portfolios also increased.
Short-term investments were $391 million at March 31, 1994 compared with
$803 million at December 31, 1993, and $791 million at March 31, 1993. The
decline in the balance reflects the reinvestment of certain proceeds from
maturing short-term investments into the securities available for sale and
investment securities portfolios.
Securities available for sale, consisting of debt securities, are stated at
market value in 1994, and at the lower or aggregate cost or market for previous
periods. Decisions to purchase or sell these securities as part of the Company's
ongoing asset and liability management process are based on management's
assessment of changes in economic and financial market conditions, interest rate
environments, the Company's balance sheet and its interest sensitivity position,
liquidity, and capital. At March 31, 1994, securities available for sale had
gross unrealized gains of $3 million and gross unrealized losses of $7 thousand.
The investment securities portfolio, principally debt securities, is stated
at amortized cost. This basis for valuation reflects management's intention and
ability to hold these securities until maturity. The Company's investment
securities portfolio was $2.3 billion at March 31, 1994, and $131 million at
March 31, 1993. The aggregate market value of the investment securities
portfolio was $2.2 billion and $131 million at March 31, 1994 and 1993,
respectively. The maturity of the investment securities portfolio was extended
to 1.5 years at March 31, 1994, compared with 1.3 years at December 31, 1993,
and .7 years at March 31, 1993. At March 31, 1994, gross unrealized gains were
$1 million and gross unrealized losses were $21 million.
The Company's investment securities portfolio contains state and local
government securities, asset-backed securities, industrial revenue bonds, U.S.
government securities and corporate securities. The total state and local
government portfolio was $174 million at March 31, 1994, with the single largest
issue being
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13
approximately $7 million. Of this total, $134 million were securities rated
investment grade and $40 million were unrated. All municipal securities are
subject to an internal review process that assigns a rating to the securities.
In the case of rated securities, the process verifies or adjusts the independent
rating. In the case of unrated securities only securities determined to be
equivalent to investment grade are purchased. Industrial revenue bonds are also
subject to a credit review process. While there is no ready market for the
Company's holdings of industrial revenue bonds, management has determined that,
based on periodic private placement quotes, their amortized cost is a reasonable
estimate of market value.
Trading account securities, consisting of debt securities, are recorded at
market value. Trading account gains were $465 thousand in the first quarter of
1994 compared with $633 thousand in the first quarter of 1993.
TABLE E
SECURITIES PORTFOLIOS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
DECEMBER
MARCH 31 31 MARCH 31
1994 1993 1993
---------- ---------- ----------
Short-term investments................................. $ 390,948 $ 803,068 $ 791,066
---------- ---------- ----------
Securities available for sale
U.S. Treasury........................................ 322,033 322,707 1,626,692
U.S. Agency mortgage-backed securities............... 29,395 30,832 87,805
State and local governments.......................... 6,577 18,964 --
Corporate and other.................................. 270,258 256,500 59,250
---------- ---------- ----------
628,263 629,003 1,773,747
---------- ---------- ----------
Investment securities
U.S. Treasury........................................ 1,768,281 1,203,315 --
Asset-backed securities.............................. 204,235 204,798 --
State and local governments.......................... 173,540 128,997 55,987
Industrial revenue bonds............................. 58,365 59,958 72,801
U.S. Agency mortgage-backed securities............... 49,457 -- --
Corporate and other.................................. 1,858 1,992 1,986
---------- ---------- ----------
2,255,736 1,599,060 130,774
---------- ---------- ----------
Total........................................ $3,274,947 $3,031,131 $2,695,587
---------- ---------- ----------
---------- ---------- ----------
Weighted average maturity of securities available for
sale and investment securities in years*............. 1.3 1.1 1.1
Weighted average maturity of total securities in
years*............................................... 1.1 0.8 0.8
<FN>
- - ---------------
* The weighted average maturity calculation excludes amortizing IRBs and
reflects estimated prepayments for mortgage-backed securities.
Deposits and Other Sources of Funds
The Company's attractive product line and extensive banking network of 202
full-service offices and 355 automated banking facilities generate significant
core deposits, which accounted for over 99% of total average deposits during the
first quarters of 1994 and 1993.
Core deposits include transaction accounts (demand, NOW, and savings
accounts), money market deposit accounts, and consumer time certificates.
Average core deposits were $8.5 billion in the first quarter of 1994, compared
with $8.6 billion in the first quarter of 1993. Average transaction accounts
(demand, NOW accounts, and savings) were $4.8 billion in the first quarter of
1994, compared with $4.4 billion in the first
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14
quarter of 1993 and $4.8 billion in the fourth quarter of 1993, reflecting
customers' preferences to maintain significant balances in lower-yielding
transaction accounts, thus having a positive impact on the Company's net
interest margin.
Average money market deposit and consumer certificates of deposit balances
were $3.7 billion during the first quarter of 1994, compared with $4.2 billion
the first quarter of 1993 and $3.8 billion in the fourth quarter of 1993.
Average corporate certificates of deposit in excess of $100 thousand (CDs),
which represent a small portion of the Company's total funding, were $37 million
in the first quarter of 1994, compared with $39 million in the first quarter of
1993.
Purchased funds increased to $715 million at March 31, 1994, from $508
million at December 31, 1993, and $120 million at March 31, 1993, as the
securities portfolio position was enhanced. This increased securities position
may be continued to take advantage of the Company's strong capital position.
While the effect of these actions increased net interest income, the net
interest margin decreased somewhat, reflecting the lower net interest spread on
these investment and funding actions.
Interest Rate Risk Management and Liquidity
BayBanks' Capital Markets Committee monitors and manages the overall on-and
off-balance sheet interest sensitivity position, short-term investments, and the
securities portfolios, funding, and liquidity. Interest sensitivity, as measured
by the Company's gap position, is affected by the level and direction of
interest rates and current liquidity preferences of its customers. These
factors, as well as projected balance sheet growth, current and potential
pricing actions, competitive influences, national monetary and fiscal policy,
and the national and regional economic environment, are considered in the asset
and liability management decision process.
The Company's interest sensitivity gap position in TABLE F is first
presented based on contractual maturities and repricing opportunities. In a
period of rising or falling interest rates this basis of presentation does not
reflect lags that may occur in the repricing of certain loans and deposits. For
example, the cost of certain interest-bearing core deposit categories may lag
changes in market interest rates, although the Company contractually could
change the interest rates on these deposits at any time. A management adjustment
provides for the expected repricing lags. The management adjustment also
recognizes that interest rate changes in these core deposit categories are not
as sensitive to changes in market interest rates.
In addition to the gap analysis presented in the table, the Company also
uses a simulation model under varying interest rate scenarios, including the
effect of rapid changes (both increases and decreases up to 200 basis points) in
interest rates on its net interest income and net interest margin. The Company's
policy is to minimize volatility in its net interest income and net interest
margin.
At March 31, 1994, the Company's adjusted gap position for the total
within-180-day period decreased from a positive gap position of $116 million at
December 31, 1993, to a negative gap position of $2 million at March 31, 1994.
The total within-one-year gap moved from a positive $132 million at December 31,
1993, to a negative $61 million at March 31, 1994. The Company believes its
overall management-adjusted gap is essentially neutral, and therefore the effect
of a change in market interest rates on net interest income should not be
significant.
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15
TABLE F
INTEREST RATE SENSITIVITY POSITION
AT PERIOD-END
(IN MILLIONS)
0-30 31-90 91-180 TOTAL WITHIN 181-365 TOTAL WITHIN
DAYS DAYS DAYS 180 DAYS DAYS ONE YEAR
------- ------- ----- ------------ ------- ------------
March 31, 1994
Total assets...................... $ 3,524 $ 522 $ 808 $ 4,854 $1,053 $ 5,907
Total liabilities................. 6,821 187 156 7,164 182 7,346
------- ------- ----- ------- ------ -------
Net contractual gap position...... (3,297) 335 652 (2,310) 871 (1,439)
Net interest rate swaps........... -- 8 -- 8 -- 8
------- ------- ----- ------- ------ -------
Net gap position including
interest rate swaps at March
31, 1994....................... $(3,297) $ 343 $ 652 $(2,302) $ 871 $(1,431)
Management adjustment............. 5,486 (2,721) (465) 2,300 (930) 1,370
------- ------- ----- ------- ------ -------
Management adjusted gap at
March 31, 1994.................... $ 2,189 $(2,378) $ 187 $ (2) $ (59) $ (61)
------- ------- ----- ------- ------ -------
------- ------- ----- ------- ------ -------
Management adjusted gap at December
31, 1993.......................... $ 2,625 $(2,325) $(184) $ 116 $ 16 $ 132
------- ------- ----- ------- ------ -------
------- ------- ----- ------- ------ -------
Management adjusted gap at
March 31, 1993.................... $ 3,159 $(2,975) $ 49 $ 233 $ (26) $ 207
------- ------- ----- ------- ------ -------
------- ------- ----- ------- ------ -------
Liquidity, for commercial banking activities, is the ability to respond to
maturing obligations, deposit withdrawals, and loan demand. The liquidity
positions of the Company's bank subsidiaries are closely monitored by the
Company's Capital Markets Committee. BayBanks' retail network provides a stable
base of in-market core deposits and limits the need to raise funds from the
national market.
The Company's net liquidity position (short-term investments, securities
available for sale, and investment securities, less pledged securities, large
CDs, and purchased funds) increased to $2.3 billion, or 25% of total deposits
and borrowings, at March 31, 1994, compared with $2.2 billion, also 25% of total
deposits and borrowing at March 31, 1993. The Company also has additional
liquidity flexibility due to the relatively short average maturity (1.1 years)
of its combined short-term and securities available for sale portfolio.
The statement of cash flows provides additional information on liquidity.
The statement of cash flows includes operating, investing, and financing
categories. Operating activities included $21.3 million in net income for the
first quarter of 1994, before adjustment of noncash items. Investing activities
are primarily comprised of both proceeds from sales and purchases of short-term
investments and securities and net loan originations. Financing activities
present the net change in the Company's various deposit accounts, short-term
borrowings, and dividends paid.
Cash and cash equivalents were $633 million at December 31, 1993. During
the first quarter of 1994, net cash provided by operating activities was $122
million, net cash used in investing activities totaled $286 million, and net
cash provided by financing activities was $107 million. Cash and cash
equivalents were $576 million at March 31, 1994.
The parent company's sources of liquidity are dividend and interest income
received from its subsidiaries. The most significant uses of the parent
company's resources are capital contributions to banking subsidiaries when
appropriate and dividends paid to stockholders. In managing liquidity,
regulatory limitations on the extent to which bank subsidiaries can pay
dividends or supply funds to the parent company are taken into account. During
the first quarter of 1994 the parent company did not provide any capital to its
subsidiaries. Dividends received from bank subsidiaries were $6.1 million, while
no dividends were received from nonbank subsidiaries. The parent company paid
$6.6 million in dividends to its stockholders. At March 31, 1994 the parent
company had $70.4 million in cash, short-term investments, and other securities.
The parent company does not sell commercial paper and does not have any
revolving credit lines or short-term debt outstanding.
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CREDIT QUALITY REVIEW
Overview
The Company continually monitors its loan portfolio. Employing a standard
system for grading loans, individual account officers assign their loans a
grade, or risk rating, and, if necessary, a specific loan loss reserve. An
independent Loan Review Department then reviews loan grades and specific
reserves. Any loan or portion of a loan determined to be uncollectible is
charged off. On a quarterly basis, senior management reviews the loan portfolio,
with particular emphasis on higher-risk loans, to assess the quality and loss
potential inherent in the portfolio. Also considered in this review are
delinquency trends and the adequacy of reserves. The size of the allowance for
loan losses, the related provision, as well as the adequacy of OREO reserves
reflect this analysis.
Nonperforming assets, presented in TABLE G (which exclude restructured,
accruing loans, and accruing loans 90 days or more past due), include
nonperforming loans and OREO and were $204 million at March 31, 1994, a 9%
decrease from $224 million at December 31, 1993, and a 40% decrease from $338
million at March 31, 1993. Nonperforming assets have continued the downward
trend that began in the first quarter of 1991. While the Company expects to
experience continued improvement in nonperforming assets, the pace of that
improvement will depend on many factors, including national and regional
economic conditions.
TABLE G
NONPERFORMING ASSETS, RESTRUCTURED, ACCRUING LOANS AND
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT PERIOD-END
(DOLLARS IN THOUSANDS)
MARCH 31 DECEMBER 31 MARCH 31
1994 1993 1993
-------- ----------- --------
Nonperforming loans....................................... $104,605 $110,001 $162,053
Other real estate owned
In-substance foreclosures............................... 62,163 72,505 87,192
Foreclosed property..................................... 63,944 70,950 104,747
-------- -------- --------
126,107 143,455 191,939
Less OREO reserve....................................... 26,968 29,776 15,514
-------- -------- --------
OREO, net of reserve.................................... 99,139 113,679 176,425
-------- -------- --------
Total nonperforming assets................................ $203,744 $223,680 $338,478
-------- -------- --------
-------- -------- --------
Restructured, accruing loans.............................. $ 12,878 $ 18,398 $ 11,586
-------- -------- --------
-------- -------- --------
Accruing loans 90 days or more past due................... $ 49,130 $ 51,749 $ 80,251
-------- -------- --------
-------- -------- --------
Nonperforming assets as a percentage of loans and OREO.... 3.3% 3.6% 5.7%
Nonperforming assets as a percentage of total assets...... 2.0 2.2 3.5
The decline in nonperforming assets, presented in TABLE H (which exclude
restructured, accruing loans and accruing loans 90 days or more past due), is
affected by successful workout activities that include property sales, payments
on nonperforming loans, and loans that qualify for return to accrual status.
These favorable resolutions were $34 million in the first quarter of 1994, or
15% of the beginning of the period balance. During the first quarter of 1994
additions to nonperforming assets were $21 million; additions to nonperforming
assets in the first quarter of 1993 were $31 million.
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17
TABLE H
CHANGE IN ASSET QUALITY
(IN THOUSANDS)
1994 1993
-------- -----------------------------------------------
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- --------
Nonperforming assets................ $203,744 $223,680 $272,396 $308,374 $338,478
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Nonperforming asset activity:
Additions......................... $ 20,656 $ 14,752 $ 27,034 $ 33,135 $ 31,284
-------- -------- -------- -------- --------
Payments.......................... (8,070) (9,832) (15,515) (16,239) (25,348)
Returns to accrual................ (4,349) (9,545) (8,021) (6,126) (312)
OREO sales........................ (21,477) (27,514) (20,651) (19,861) (22,040)
-------- -------- -------- -------- --------
Total improvements............. (33,896) (46,891) (44,187) (42,226) (47,700)
-------- -------- -------- -------- --------
Net outflow.................... (13,240) (32,139) (17,153) (9,091) (16,416)
-------- -------- -------- -------- --------
Charge-offs......................... (9,504) (16,135) (11,967) (14,051) (13,592)
Change in OREO reserve.............. 2,808 (442) (6,858) (6,962) (7,680)
-------- -------- -------- -------- --------
Total decrease in nonperforming
assets............................ $(19,936) $(48,716) $(35,978) $(30,104) $(37,688)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Nonperforming Loans
Total nonperforming loans, TABLE I (which exclude restructured, accruing
loans and accruing loans 90 days or more past due), declined 5% during the first
quarter of 1994 to $105 million at March 31, 1994, compared with $110 million at
December 31, 1993. Nonperforming commercial loans decreased 12% to $42 million
during the first quarter of 1994, compared with $48 million at December 31,
1993. Commercial real estate nonperforming loans declined 2% during the first
quarter of 1994 to $48 million at March 31, 1994, compared with $49 million at
December 31, 1993. Consumer nonperforming loans, including residential mortgages
and instalment loans, increased 10% during the first quarter of 1994 to $15
million, compared with $13 million at December 31, 1993.
TABLE I
NONPERFORMING LOANS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
DECEMBER 31,
MARCH 31, 1994 1993 MARCH 31, 1993
---------------- ---------------- ----------------
Commercial........................ $ 42,223 40% $ 47,751 43% $ 83,636 52%
Commercial real estate............ 47,855 46 49,014 45 62,142 38
Residential mortgage.............. 12,681 12 11,473 10 12,574 8
Instalment........................ 1,846 2 1,763 2 3,701 2
-------- --- -------- --- -------- ---
Total nonperforming
loans................. $104,605 100% $110,001 100% $162,053 100%
-------- --- -------- --- -------- ---
-------- --- -------- --- -------- ---
Other Real Estate Owned
OREO consists of foreclosed properties and in-substance foreclosures.
Foreclosed properties are being prepared for sale or are currently listed for
sale. The Company is also involved in managing in-substance foreclosures, taking
operating control to stabilize values while the properties are being prepared
for sale, or working closely with borrowers to obtain new equity.
OREO (net of a valuation reserve) declined by 13% during the first quarter
of 1993 to $99 million. The decline was primarily due to property sales of $21.5
million in the first quarter of 1994; property sales in the
17
18
OREO (net of a valuation reserve) declined by 13% during the first quarter
of 1993 to $99 million. The decline was primarily due to property sales of $21.5
million in the first quarter of 1994; property sales in the first quarter of
1993 were $22.0 million. The five largest OREO properties at March 31, 1994,
ranged from $5.2 million down to $3.2 million, with the majority of OREO
comprised of smaller value properties.
Restructured, Accruing Loans
The Company restructures credits with troubled borrowers if such
arrangements are likely to minimize losses the Company may otherwise incur on a
particular credit. Loans that have been restructured generally remain on
nonaccrual status until the customer has demonstrated a period of performance
under new contractual terms. Restructured, accruing loans were $13 million at
March 31, 1994, compared with $12 million at March 31, 1993.
Accruing Loans 90 Days or More Past Due
Accruing loans 90 days or more past due declined 5% to $49 million at March
31, 1994, from $52 million at December 31, 1993, and 39% from $80 million at
March 31, 1993 presented (TABLE J).
Of the $49 million in accruing loans past due 90 days or more at March 31,
1994, $18 million were residential real estate loans and $21 million were
instalment loans, which together represented 80% of the total. Residential real
estate and instalment loans by their nature include a large number of smaller
loans. Of the $18 million in such residential real estate loans, $15 million
were in owner-occupied properties. Commercial and commercial real estate
accruing loans 90 days or more past due at March 31, 1994, were $10 million,
compared with $28 million at March 31, 1993.
TABLE J
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT PERIOD-END
(DOLLARS IN THOUSANDS)
DECEMBER 31,
MARCH 31, 1994 1993 MARCH 31, 1993
--------------- --------------- ---------------
Commercial............................... $ 3,811 8% $ 3,558 7% $11,671 14%
Commercial real estate................... 6,109 12 5,093 10 16,685 21
Residential mortgage..................... 17,715 36 20,698 40 28,911 36
Instalment............................... 21,495 44 22,400 43 22,984 29
------- --- ------- --- ------- ---
Total.......................... $49,130 100% $51,749 100% $80,251 100%
------- --- ------- --- ------- ---
------- --- ------- --- ------- ---
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan losses
and is reduced by net loans charged off (TABLE K). Net loans charged off were
$12.3 million in the first quarter of 1994, compared with $16.0 million in the
first quarter of 1993. The provision for loan losses was $6.0 million in the
first quarter of 1994, compared with $11.5 million in the first quarter of 1993.
Since older problem assets are being resolved and the rate of emerging problem
assets continued to decline, the allowance for loan losses was not replenished
to the full extent of charge-offs. The allowance for loan losses was $165
million at March 31, 1994, and $188 million at March 31, 1993. While the overall
allowance declined, its coverage of nonperforming loans increased to 158% at
March 31, 1994, from 116% at March 31, 1993.
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19
TABLE K
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
FIRST QUARTER
-------------------------
1994 1993
---------- ----------
Loans outstanding at March 31....................................... $6,052,135 $5,807,289
---------- ----------
---------- ----------
Average Loans....................................................... $6,042,316 $5,856,381
---------- ----------
---------- ----------
Allowance for loan losses:
Balance at beginning of period...................................... $ 171,496 $ 192,700
Loans charged off
Commercial..................................................... 1,448 4,565
Commercial real estate......................................... 6,051 4,168
Residential mortgage........................................... 1,787 3,238
Instalment..................................................... 7,005 8,001
---------- ----------
Total loans charged off................................... 16,291 19,972
---------- ----------
Recoveries
Commercial..................................................... 1,680 1,927
Commercial real estate......................................... 242 184
Residential mortgage........................................... 672 435
Instalment..................................................... 1,422 1,463
---------- ----------
Total recoveries............................................... 4,016 4,009
---------- ----------
Net loans charged off.......................................... 12,275 15,963
Provision for loan losses........................................... 6,000 11,500
---------- ----------
Balance at March 31................................................. $ 165,221 $ 188,237
---------- ----------
---------- ----------
Annualized net charge-offs as a percentage of average period-to-date
loans............................................................. 0.8% 1.1%
Allowance for possible loan losses as a percentage of period-end
loans............................................................. 2.7 3.2
Allowance for loan losses as a percentage of nonperforming loans.... 157.9 116.2
Allowance for loan losses as a percentage of nonperforming loans,
restructured, accruing loans, and accruing loans past due 90 days
or more........................................................... 99.2 74.1
CAPITAL AND DIVIDENDS
BayBanks' consolidated risk-based capital ratios were 13.06% for total
capital and 11.32% for core capital at March 31, 1994, compared with 12.76% and
10.83%, respectively, at March 31, 1993. At December 31, 1993, the consolidated
risk-based capital ratios were 12.40% for total capital and 10.68% for core
capital. The consolidated leverage ratio was 7.33%, 7.26%, and 6.99% at March
31, 1994, December 31, 1993, and March 31, 1993, respectively. (TABLE L).
19
20
TABLE L
CAPITAL RATIOS
MARCH 31, 1994
RISK-BASED RATIOS
------------------------------------------------------------
TIER 1 CAPITAL TOTAL CAPITAL LEVERAGE RATIO(1)
----------------------------- ----------------------------- -----------------------------
REQUIRED TO BE REQUIRED TO BE REQUIRED TO BE
WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED
------------------- -------- ------------------- -------- ------------------- --------
BayBanks, Inc. ............. n/a% 11.32% n/a% 13.06% n/a% 7.33%
BayBank..................... 6.00 9.53 10.00 11.28 5.00 6.18
BayBank Boston, N.A. ....... 6.00 10.62 10.00 12.57 5.00 6.50
BayBank Connecticut,
N.A. ..................... 6.00 13.70 10.00 14.98 5.00 10.71
<FN>
- - ---------------
(1) Under Federal Prompt Corrective Action and Risk-based Deposit Insurance
Assessment Regulations.
n/a - not applicable
BayBanks paid a dividend in the first quarter of 1994 of $.35 per share.
BayBanks had reinstated its quarterly cash dividend in the first quarter of
1993, at an initial rate of $.20 per share; an equal amount was paid in the
second quarter of 1993. In the third quarter of 1993, BayBanks increased its
quarterly cash dividend to $.25 per share, which was also paid in the fourth
quarter of 1993. On April 28, 1994, BayBanks declared its second quarter
dividend at $.35 per share payable June 1, 1994.
IMPENDING ACCOUNTING CHANGE
In May 1993, the FASB issued Statement No. 114, "Accounting by Creditors
for Impairment of a Loan." This statement is effective for fiscal years
beginning after December 15, 1994. Adoption of Statement No. 114 will require
changes in the disclosure of nonperforming assets. Loans currently reported as
nonperforming and in-substance foreclosures will be reported as impaired loans
in a note to the financial statements. Restructured loans, reported as
restructured, accruing loans prior to the adoption of Statement No. 114, will
not be regarded as impaired loans when the statement is adopted if they are
performing under the restructured terms. Restructured, accruing loans entered
into after the adoption of Statement No. 114 will be accounted for as impaired
loans. The amount of impairment will be determined by the difference between the
present value of the expected cash flows related to the loan using the contract
rate and its recorded value, or as a practical expedient in the case of
collateralized loans, the difference between the appraised value of the
collateral and the recorded amount of the loan. Any additional impairment will
be recorded as an adjustment to the existing allowance for loan losses account.
The adoption of Statement No. 114 is not expected to have a material effect on
the Company's results of operations or financial condition.
20
21
BAYBANKS, INC.
AVERAGE BALANCES AND CAPITAL RATIOS
(DOLLARS IN MILLIONS)
1994 1993
------- ----------------------------------------
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
ASSETS
Interest-bearing deposits and other short-term
investments..................................... $ 315 $ 420 $ 412 $ 651 $ 897
Securities available for sale, at cost............ 618 831 974 1,504 1,670
Investment securities, at cost.................... 1,938 1,469 1,201 526 123
Loans*
Commercial...................................... 1,294 1,288 1,371 1,414 1,388
Commercial real estate.......................... 926 930 945 960 994
Residential mortgage............................ 1,209 1,194 1,178 1,128 1,183
Instalment...................................... 2,613 2,550 2,461 2,388 2,291
------- ------- ------- ------- -------
6,042 5,962 5,955 5,890 5,856
Less allowance for loan losses.................. 172 184 185 190 195
------- ------- ------- ------- -------
5,870 5,778 5,770 5,700 5,661
------- ------- ------- ------- -------
Total earning assets.................... 8,913 8,682 8,542 8,571 8,546
Cash and due from banks........................... 602 659 630 628 600
Other assets...................................... 495 519 539 566 575
------- ------- ------- ------- -------
Total assets............................ $ 9,838 $ 9,676 $ 9,526 $ 9,575 $ 9,526
------- ------- ------- ------- -------
------- ------- ------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand.......................................... $ 1,955 $ 2,031 $ 1,914 $ 1,826 $ 1,795
NOW accounts.................................... 1,391 1,372 1,338 1,331 1,303
Savings......................................... 1,481 1,443 1,422 1,390 1,344
Money market deposit accounts................... 2,742 2,758 2,823 2,926 2,956
Consumer time................................... 975 1,016 1,069 1,130 1,196
Time -- $100,000 or more........................ 37 30 29 35 39
------- ------- ------- ------- -------
8,581 8,650 8,595 8,638 8,633
Federal funds purchased and other short-term
borrowings...................................... 425 209 139 148 106
Long-term debt.................................... 54 55 54 54 54
------- ------- ------- ------- -------
Total deposits and borrowings........... 9,060 8,914 8,788 8,840 8,793
Other liabilities**............................... 66 70 61 72 82
Stockholders' equity.............................. 712 692 677 663 651
------- ------- ------- ------- -------
Total liabilities and stockholders'
equity................................ $ 9,838 $ 9,676 $ 9,526 $ 9,575 $ 9,526
------- ------- ------- ------- -------
------- ------- ------- ------- -------
CAPITAL RATIOS
Risk-Based
Core (Min. regulatory standard-4.00%)........... 11.32% 10.68% 11.14% 11.05% 10.83%
Total (Min. regulatory standard-8.00%).......... 13.06 12.40 13.06 12.98 12.76
Leverage.......................................... 7.33 7.26 7.26 7.07 6.99
<FN>
- - ---------------
* Nonperforming loans are included in the average balances.
** Includes guarantee of ESOP indebtedness.
21
22
BAYBANKS, INC.
SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1994 1993
-------- -----------------------------------------
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- --------
Income on earning assets (tax equivalent
basis).................................... $148,458 $148,393 $148,539 $148,885 $150,012
Interest expense on deposits and
borrowings................................ 37,818 37,636 38,856 42,787 47,369
-------- -------- -------- -------- --------
Net interest income......................... 110,640 110,757 109,683 106,098 102,643
Noninterest income.......................... 49,715 50,973 51,904 48,751 46,896
-------- -------- -------- -------- --------
Total income from operations................ 160,355 161,730 161,587 154,849 149,539
Operating expenses.......................... 112,195 112,282 112,224 113,039 109,160
-------- -------- -------- -------- --------
Operating Income before Net Securities Gains
and Provisions for Loan Losses and OREO
Reserve................................... 48,160 49,448 49,363 41,810 40,379
Net securities gains........................ 39 4 49 358 --
Provision for loan losses................... 6,000 7,000 9,000 9,000 11,500
Provision for OREO reserve, net............. 2,937 2,138 7,800 7,892 7,000
-------- -------- -------- -------- --------
Total credit provisions..................... 8,937 9,138 16,800 16,892 18,500
-------- -------- -------- -------- --------
Pre-tax income.............................. 39,262 40,314 32,612 25,276 21,879
Less tax equivalent adjustment included
above..................................... 1,973 1,661 1,401 1,181 1,115
-------- -------- -------- -------- --------
Income before taxes and cumulative effect of
accounting change......................... 37,289 38,653 31,211 24,095 20,764
Provision for income taxes.................. 15,078 15,971 13,210 9,888 8,003
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting change......................... 22,211 22,682 18,001 14,207 12,761
Less cumulative effect of accounting change
(net of tax benefit of $683).............. 932 -- -- -- --
-------- -------- -------- -------- --------
Net Income.................................. $ 21,279 $ 22,682 $ 18,001 $ 14,207 $ 12,761
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings Per Share:
Income before accounting change........... $ 1.16 $ 1.19 $ 0.95 $ 0.75 $ 0.68
Less cumulative effect of accounting
change................................. 0.05 -- -- -- --
-------- -------- -------- -------- --------
Net Income................................ $ 1.11 $ 1.19 $ 0.95 $ 0.75 $ 0.68
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Dividends Paid Per Share.................... 0.35 0.25 0.25 0.20 0.20
Financial Ratios
Return on average equity.................... 12.1% 13.0% 10.5% 8.6% 7.9%
Return on average assets.................... 0.88 0.93 0.75 0.60 0.54
Common Stock Data
Period-end book value per share............. $ 38.51 $ 37.52 $ 36.56 $ 35.85 $ 35.29
Dividend payout ratio....................... 31.5% 21.0% 26.3% 26.7% 29.4%
Range of BayBanks, Inc., last sale price
High...................................... $ 57.25 $ 50.75 $ 50.50 $ 51.25 $ 52.13
Low....................................... 50.00 43.25 43.25 38.25 38.75
Close..................................... 54.50 50.75 48.75 43.00 50.13
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23
BAYBANKS, INC.
AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN*
1994 1993
------- -------------------------------------------
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
Interest-bearing deposits and other short-term
investments.................................. 3.32% 3.24% 3.28% 3.23% 3.43%
Securities available for sale**................ 4.64 4.70 4.40 4.39 4.50
Investment securities**........................ 4.55 4.52 4.67 4.93 7.48
Loans.......................................... 7.81 7.90 8.03 8.20 8.37
Commercial................................... 6.57 6.48 6.50 6.57 6.63
Commercial real estate....................... 7.58 7.74 7.73 7.90 7.70
Residential mortgage......................... 7.35 7.51 7.74 8.08 8.27
Instalment................................... 8.71 8.86 9.14 9.36 9.76
Total earning assets................. 6.72% 6.80% 6.91% 6.96% 7.08%
Interest-bearing funds......................... 2.16% 2.16% 2.24% 2.45% 2.75%
NOW accounts................................. 1.33 1.42 1.54 1.80 2.03
Savings...................................... 1.90 1.92 1.96 2.16 2.40
Money market deposit accounts................ 2.04 2.08 2.13 2.32 2.67
Consumer time................................ 3.45 3.52 3.65 3.80 4.06
Time -- $100,000 or more..................... 2.91 2.63 2.57 2.66 2.75
Short-term borrowings........................ 3.21 2.86 2.60 2.65 2.50
Long-term debt............................... 3.88 3.75 3.83 3.69 4.05
Interest expense as a percentage of average
earning assets............................... 1.72% 1.72% 1.80% 2.00% 2.25%
Net interest margin............................ 5.00% 5.08% 5.11% 4.96% 4.83%
<FN>
- - ---------------
* Tax equivalent basis.
** Yields based on average cost.
PART II -- OTHER INFORMATION
----------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Exhibit List and Index on page 25.
(b) No report on Form 8-K was filed during the first quarter ended March 31,
1994.
23
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BayBanks, Inc.
--------------------------------
(Registrant)
By: /s/ MICHAEL W. VASILY
--------------------------------
Michael W. Vasily
Executive Vice President
and Chief Financial Officer
(Duly Authorized and
Principal Financial Officer)
Date: May 12, 1994
24
25
BAYBANKS, INC.
EXHIBIT LIST AND INDEX
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
11.1 -- Computation of Primary and Fully Diluted Earnings Per Share
25