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
======= ======== ======== ======== ======== =========
<FN>
- ---------------
* 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
<FN>
- ---------------
(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%
========== ======= ======= ========== =====
<FN>
- ---------------
(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
========== ==== ======== ==========
<FN>
- ---------------
(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
<FN>
- ---------------
(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
<FN>
- ---------------
* 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