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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-959
BAYBANKS, INC.
(REGISTRANT)
MASSACHUSETTS 04-2008039
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
175 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 482-1040
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2.00 PAR VALUE
(TITLE OF CLASS)
RIGHTS TO PURCHASE SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 29, 1996:
COMMON STOCK, $2.00 PAR -- $2,027,790,210
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 29, 1996:
COMMON STOCK, $2.00 PAR -- 19,707,874
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the annual meeting of stockholders to
be held on April 25, 1996 are incorporated by reference in Part III.
The list of exhibits to this report appears on pages 70 through 72.
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PART I
ITEM 1. BUSINESS
GENERAL COMPANY INFORMATION
As used herein, the "Company" means BayBanks, Inc. alone or BayBanks, Inc.
together with its consolidated subsidiaries, depending on the context, and the
"BayBanks" means the Company's three banking subsidiaries.
BayBanks, Inc., established in 1928, is a registered bank holding company
and savings and loan holding company and is headquartered in Boston,
Massachusetts. At December 31, 1995, the Company had total assets of $12.1
billion, total deposits of $10.2 billion, total stockholders' equity of $951
million, and 5,829 full-time equivalent employees. The Company's largest
subsidiary is BayBank, N.A., a national bank based in Boston, with branches in
Massachusetts and Connecticut. BayBank, N.A. had total assets of $11.1 billion
at December 31, 1995. BayBank FSB, a federally chartered savings association, is
based in Nashua, New Hampshire, and BayBank NH, a New Hampshire commercial bank,
is based in Derry, New Hampshire. The Company also maintains a loan production
office in Portland, Maine.
The Company has entered into an Agreement and Plan of Merger dated December
12, 1995 with Bank of Boston Corporation ("Bank of Boston"). Under the Merger
Agreement, at the effective time of the merger, each outstanding share of the
common stock of the Company will be converted into the right to receive 2.2
newly issued shares of Bank of Boston common stock. The merger is subject to the
approval of the stockholders of the Company and of the stockholders of Bank of
Boston, to federal and state regulatory approvals, and to other conditions.
Current plans call for the merger to be completed by the middle of 1996. After
completion of the merger the principal banking subsidiary of Bank of Boston will
operate as BayBank of Boston, N.A. See Note 20 to the consolidated financial
statements under Item 8 for further discussion of the pending merger. The
discussion in this Form 10-K does not give effect to the merger.
In connection with the Merger Agreement, the Company granted to Bank of
Boston a conditional option to purchase shares of common stock of the Company
equal to 19.9% of the Company's outstanding shares at a price of $83.75 per
share. This option is exercisable only in certain events related to a possible
acquisition of the Company by another party and may have the effect of
discouraging such an acquisition. In certain circumstances, the Company also may
be required to repurchase the option and any shares issued thereunder.
The Company has an extensive banking network with 237 full-service offices
and 453 automated banking facilities serving 174 cities and towns in
Massachusetts, fourteen in New Hampshire, and two in Connecticut. The Company is
best known for its use of advanced banking technology, featuring
state-of-the-art computer and telecommunications technology to process customer
transactions, provide customer information, and increase the efficiency of its
data processing activities. BayBank Systems, Inc., a nonbank subsidiary of
BayBank, N.A., engages in data processing, product and systems development, and
other technologically oriented operations, principally for the Company but also
for franchisees and correspondents. In particular, BayBank Systems, Inc.,
operates the proprietary X-Press 24(R) and X-Press 24 Cash(R) automated teller
machine ("ATM") networks. BayBanks Credit Corp. and BayBanks Mortgage Corp.
(subsidiaries of BayBank, N.A.) provide instalment loan, credit card, and
mortgage loan operations and services. BayBanks Mortgage Corp. also services
approximately $2.0 billion of residential mortgage loans originated by the
BayBanks that have been placed in the secondary market. Other subsidiaries
provide brokerage and investment management services to the BayBanks and others.
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The following presents selected financial information for the Company's
three banking subsidiaries:
AT DECEMBER 31
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MASSACHUSETTS
AND CONNECTICUT NEW HAMPSHIRE
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BAYBANK BAYBANK
BAYBANK, N.A. FSB NH
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1995 1994(1) 1995 1994(2) 1995 1994(2)
------- ------- ----- ------- ---- -------
(IN MILLIONS)
Securities portfolios................ $ 2,731 $ 2,889 $ 85 n/a $ 72 n/a
Total loans.......................... 7,194 6,649 521 n/a 56 n/a
Total earning assets................. 9,925 9,538 606 n/a 128 n/a
Total assets......................... 11,127 10,689 659 n/a 147 n/a
Total deposits....................... 9,575 9,001 518 n/a 125 n/a
Subordinated debt.................... -- 52 -- n/a -- n/a
Stockholders' equity................. 734 714 89 n/a 21 n/a
<FN>
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(1) During 1995 the Company's Massachusetts and Connecticut banking
subsidiaries, BayBank Boston, N.A., BayBank, and BayBank Connecticut, N.A.,
were merged into one entity, BayBank, N.A. The 1994 pro forma information
assumes the merger was effective as of December 31, 1994.
(2) As discussed more fully on page 3, BayBank FSB and BayBank NH are the
subsidiaries resulting from the 1995 acquisitions of two New Hampshire
banking organizations.
GENERAL BANKING BUSINESS
The Company provides a complete range of banking, investment, and
related financial services, with particular emphasis on consumer and middle
market business customers. In addition to its normal deposit and lending
activities, the Company aggressively pursues fee income opportunities, both in
traditional and automated banking services and in the investment field,
including acting as investment adviser and shareholder servicing agent for
BayFunds[REGISTERED TRADEMARK], a proprietary mutual fund family.
Consumer Banking
The Company is a recognized leader in consumer banking, with the largest
consumer market share in Massachusetts. More households in Massachusetts do
business with the BayBanks than with any other banking organization. The Company
offers a wide variety of consumer banking products, including FDIC-insured
checking, money market, savings, and time deposit accounts; credit cards; home
mortgages and home equity financing; instalment loans; and trust and private
banking services.
The Company's proprietary X-Press 24 Network operates over 1,300 ATMs in
Massachusetts, New Hampshire, and Connecticut, including 200 cash machines
located in retail stores, and processes approximately 11 million transactions
per month; the Company has over 1 million ATM cards in use. Approximately 90
nonaffiliated financial institutions represent 238 of the ATMs in the X-Press 24
network. X-Press 24 cardholders can perform automated banking transactions at
over 215,000 CIRRUS[REGISTERED TRADEMARK] and NYCE[REGISTERED TRADEMARK]
terminals worldwide. BayBank cardholders can also use their cards to make
point-of-sale purchases at retail establishments worldwide, including grocery
stores, automobile service stations and, through BayBank X-Press
Check[REGISTERED TRADEMARK], anywhere a MasterCard[REGISTERED TRADEMARK] is
accepted. The Company provides a broad range of support and maintenance services
to the X-Press 24 network member institutions. In addition to its branch and ATM
networks, the Company operates a state-of-the-art customer sales and service
center twenty-four hours a day, seven days a week, that provides customer
service and product information, opens consumer bank accounts, and arranges
consumer loans. In 1996 the Company plans to introduce HomeLink[REGISTERED
TRADEMARK], a new home banking service for the consumer market.
Corporate Banking
The Company provides a comprehensive range of cash management, credit,
deposit, international banking, and related services to businesses, hospitals,
educational institutions, and local governments, with
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particular emphasis on the middle market. Specialized products available to
BayBanks' business and governmental customers include personal computer-based
cash management services with which a customer may perform a range of deposit
account transactions; X-Press Trade[registered trademark], offering automated
international letter of credit services; BayBank X-Press Tax[registered
trademark] for automated payroll tax depositing; a Collateralized Municipal
Money Market Account; and the Escrow Client Account Service. BayBank, N.A.
also acts as trustee or custodian for employee benefit and pension plans.
Specific lending groups focus on healthcare and educational institutions,
municipalities, automobile dealers, construction and contracting companies,
retailers, emerging technology companies, and international trade finance. The
Company also provides secured financing, in the form of asset-based lending,
leasing, and real estate lending, for commercial customers. The Company's
general corporate lending activities are directed toward small and middle market
companies in the New England region, with a primary emphasis on Massachusetts
and southern New Hampshire enterprises.
Investment Services
The Company's subsidiaries offer a wide range of fiduciary and investment
services to individual, trust, and business customers. The municipal securities
dealership at BayBank, N.A. is a significant participant in the underwriting of
Massachusetts municipal obligations and engages in private placement activities.
BayBanks Brokerage Services, Inc., provides retail brokerage services. BayBanks
Investment Management, Inc., a registered investment adviser, provides portfolio
advice and asset management for individuals and businesses and manages the
BayBank, N.A. trust department's common trust funds. As of December 31, 1995,
the BayBank, N.A. trust department had total assets with a book value of $4.6
billion under management or in custody. BayBanks Investment Management, Inc.,
and BayBank, N.A. act as investment advisers to BayFunds, which consists of
money market, equity, and bond portfolios with aggregate assets of approximately
than $1.6 billion at year-end 1995.
ACQUISITIONS AND CONSOLIDATION OF BANK SUBSIDIARIES
The Company's acquisition of NFS Financial Corp. ("NFS"), parent company of
NFS Savings Bank, FSB, Nashua, New Hampshire, and Plaistow Cooperative Bank,
FSB, Plaistow, New Hampshire, became effective after the close of business on
June 30, 1995. As of the date of acquisition, 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,
the name of the parent company was changed from NFS to BayBank New Hampshire
("BBNH"). In September of 1995, BBNH was merged into BayBanks, Inc.
The Company acquired Cornerstone Financial Corporation ("Cornerstone"),
parent company of Cornerstone Bank of Derry, New Hampshire, after the close of
business on November 30, 1995. At the date of acquisition, Cornerstone had total
assets of $143 million. Following the acquisition, Cornerstone Bank began
operating as BayBank NH. In addition, the name of the parent company was changed
from Cornerstone to BayBanks, Inc. (a New Hampshire corporation). In December of
1995, BayBanks, Inc. (a New Hampshire corporation) was merged into BayBanks,
Inc.
During 1995, the Company merged BayBank Connecticut, N.A. into BayBank
Boston, N.A. Subsequently, the Company's lead bank, BayBank, was converted to a
national bank (BayBank, N.A.) and BayBank Boston, N.A. was merged into BayBank,
N.A., now headquartered in Boston. The Company has filed applications to convert
BayBank FSB and BayBank NH to nationally chartered banks, to merge BayBank NH
into BayBank FSB (after conversion of charters) and to merge the surviving New
Hampshire national bank into BayBank, N.A.
COMPETITION
The BayBanks operate in a highly competitive banking market. The banking
subsidiaries compete with other banks in their respective service areas, with
several large commercial banks located in the City of Boston, and with a number
of large regional and national commercial banks located throughout the country.
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Legislation enacted in recent years and changing regulatory interpretations have
substantially increased the geographic and product competition among commercial
banks, thrift institutions, mortgage companies, leasing companies, credit
unions, finance companies, and nonbanking institutions, including mutual funds,
insurance companies, brokerage firms, investment banks, and a variety of
financial services and advisory companies. In the international business, the
BayBanks compete with other domestic banks having foreign operations and with
major foreign banks and other financial institutions.
GOVERNMENT MONETARY POLICY
The earnings and growth of the banking industry in general are affected by
the policies of regulatory authorities, including the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). An important function of the
Federal Reserve Board is to regulate the national money supply. Among the
instruments of monetary policy used by the Federal Reserve Board to implement
its objectives are open market operations in U.S. Government securities, changes
in the discount rates on member bank borrowings, and changes in amount or
methods of calculating reserve requirements against member banks' deposits.
These means, used in varying combinations, influence the overall growth of bank
loans, investments, and deposits as well as the rates charged on loans or paid
for deposits. The monetary policies of the Federal Reserve Board have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to have such an effect in the future. The effect of
such policies upon the future business and earnings of the Company cannot be
predicted.
GENERAL BANKING REGULATION
The Company is a bank holding company and a savings and loan holding
company subject to supervision and regulation by the Federal Reserve Board under
the Bank Holding Company Act of 1956 and the Office of Thift Supervision ("OTS")
under the Home Owner's Loan Act, respectively. As a bank holding company, the
activities of the Company and its banking and nonbank subsidiaries are limited
to the business of banking and activities closely related or incidental to
banking. The Company may not acquire the ownership or control of more than 5% of
any class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the Federal Reserve Board. The
Company is also subject to the Massachusetts bank holding company law that
requires the Company to obtain the prior approval of the Massachusetts Board of
Bank Incorporation for holding company mergers and bank acquisitions.
The Company's largest subsidiary bank, BayBank N.A., is a national banking
association subject to supervision and examination by the Office of the
Comptroller of the Currency ("OCC"). BayBank FSB is a federal savings bank
subject to supervision and examination by the OTS. BayBank NH is subject to
supervision and examination by the Federal Deposit Insurance Corporation
("FDIC") and the New Hampshire Bank Commissioner ("Bank Commissioner"). All of
the Company's banking subsidiaries are insured by and subject to certain
regulations of the FDIC. They are also subject to various requirements and
restrictions under federal and state law, which include requirements to obtain
regulatory approval of certain business transactions, including establishing and
closing bank branches; requirements to maintain reserves against deposits;
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon; and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the
Company's banking subsidiaries.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989, a depository institution insured by the FDIC can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default. Because the Company is
a holding company, its right to participate in the assets of any subsidiary upon
the latter's liquidation or reorganization will be subject to the prior claims
of the subsidiary's creditors (including depositors in the case of banking
subsidiaries), except to the extent that the Company may itself be a creditor
with recognized claims against the subsidiary.
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The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provided for increased funding for FDIC deposit insurance and for
expanded regulation of the banking industry.
Among other things, FDICIA required the federal banking regulators to take
prompt corrective action with respect to depository institutions that do not
meet minimum capital requirements. FDICIA established five capital ratio
categories: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
A depository institution is well capitalized if it significantly exceeds
the minimum level required by regulation for each relevant capital measure,
adequately capitalized if it meets each such measure, undercapitalized if it
fails to meet any such measure, significantly undercapitalized if it is
significantly below any such measure, and critically undercapitalized if it
fails to meet any critical capital level set forth in the regulations. The
critical capital level must be a level of tangible equity equal to at least 2%
of total assets, but may be fixed at a higher level by regulation. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating and may be reclassified to a lower category by action based
on other supervisory criteria. For an institution to be well capitalized it must
have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based
capital ratio of at least 6%, and a leverage ratio of at least 5% and not be
subject to any specific capital order or directive. For an institution to be
adequately capitalized it must have a total risk-based capital ratio of at least
8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage ratio of at
least 4% (3% in some cases).
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
increased regulatory monitoring and growth limitations and are required to
submit capital restoration plans. A depository institution's holding company
must guarantee the capital plan, up to an amount equal to the lesser of 5% of
the depository institution's assets at the time it becomes undercapitalized or
the amount needed to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
The FDIC has adopted regulations governing the receipt of brokered deposits
that require certain banks, depending on their capital ratios and other factors,
to obtain a waiver from the FDIC before they may accept brokered deposits, and
that limit the interest rates certain banks can offer on deposits. Although the
Company does not solicit brokered deposits, all of its banking subsidiaries are
free to do so without restraint under the regulation.
Under FDIC's risk-based deposit insurance premium system for the Bank
Insurance Fund ("BIF"), banks currently pay within a range of a $2,000 statutory
minimum assessment to 27 cents per $100 of domestic deposits, depending on their
risk classification. Under the FDIC's risk-based deposit insurance premium
system for the Savings Association Insurance Fund ("SAIF"), thrifts currently
pay within a range of 23 cents per $100 of domestic deposits to 31 cents per
$100 of domestic deposits, depending on their risk classification. To arrive at
a risk-based assessment for each bank or thrift, the FDIC places the bank or
thrift in one of nine risk categories, using a two-step process based first on
capital ratios and then on other relevant supervisory information. Each
institution is assigned to one of three groups (well capitalized, adequately
capitalized, or undercapitalized) based on its capital ratios. For these
purposes, a well capitalized institution is one that has at least a 10% total
risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, and a 5% Tier 1
leverage capital ratio. An adequately capitalized institution must have at least
an 8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio, and
a 4% Tier 1 leverage capital ratio. An undercapitalized institution is one that
does not meet either of the foregoing definitions. Each institution is also
assigned to one of three supervisory subgroups based on an evaluation of the
risk posed by the institution to the BIF or SAIF. Well capitalized
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banks and thrifts presenting the lowest risk to the BIF or SAIF pay the lowest
assessment rate, while undercapitalized banks and thrifts presenting the highest
risk pay the highest rate. The BayBanks' capital ratios at December 31, 1995,
placed all of them in the well capitalized category for assessment purposes (see
"Regulatory Capital Requirements"). The assessment will depend on the level of
deposit balances and the BayBanks' respective applicable risk categories.
Other significant provisions of FDICIA required federal banking regulators
to establish standards in a number of areas to assure bank safety and soundness,
including internal controls; credit underwriting; asset growth; management
compensation; ratios of classified assets to capital; and earnings. The
legislation also contained provisions that require the adoption of capital
guidelines applicable to interest rate risks; tighten independent auditing
requirements; restrict the activities and investments of state-chartered insured
banks; strengthen various consumer banking laws; limit the ability of
undercapitalized banks to borrow from the Federal Reserve's discount window; and
require regulators to perform annual on-site bank examinations and set standards
for real estate lending.
REGULATORY CAPITAL REQUIREMENTS
Under the risk-based capital measures for banks, thrifts, and bank holding
companies, a banking organization's reported balance sheet is converted to
risk-based amounts by assigning each asset to a risk category, which is then
multiplied by the risk weight for that category. Off-balance sheet exposures are
converted to risk-based amounts through a two-step process. First, off-balance
sheet assets and credit equivalent amounts (e.g., interest rate swaps) are
multiplied by a credit conversion factor depending on the defined categorization
of the particular item. Then the converted items are assigned to a risk category
that weights the items according to their relative risk.
The total of the risk-weighted on-and off-balance sheet amounts represents
a banking organization's risk-adjusted assets for purposes of determining
capital ratios under the risk-based guidelines. Risk-adjusted assets can either
exceed or be less than reported assets, depending on the risk profile of the
banking organization. Risk-adjusted assets for institutions such as the Company
will generally be less than reported assets because retail banking activities
include proportionally more residential real estate loans with a lower risk
rating and a relatively small off-balance sheet position.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
stockholders' equity, qualifying perpetual preferred stock, and minority
interests, less goodwill and other intangible assets. Supplementary capital
includes the allowance for loan losses (subject to certain limitations), other
perpetual preferred stock, certain other capital instruments, and term
subordinated debt, which is discounted at 20% a year during its final five years
of maturity. The Company's major capital components include stockholders' equity
in core capital, and the allowance for loan losses and grandfathered floating
rate notes (subject to an 80% discount) in supplementary capital.
At December 31, 1995, the minimum risk-based capital requirements were
4.00% for core capital and 8.00% for total capital. Federal banking regulators
have also adopted leverage capital guidelines to supplement the risk-based
measures. The leverage ratio is determined by dividing Tier 1 capital as defined
under the risk-based guidelines by average total assets (not risk-adjusted) for
the preceding quarter for banks and by period-end total assets for thrifts. The
minimum leverage ratio is 3.00%, although banking organizations are expected to
exceed that amount by 100 or 200 basis points or more, depending upon their
circumstances.
At December 31, 1995, the Company's consolidated risk-based capital ratios
were 11.41% for core capital and 12.80% for total capital, and at December 31,
1994, were 11.51% and 13.06%, respectively. The Company's consolidated leverage
ratio was 7.66% at December 31, 1995, and 7.35% at December 31, 1994. These
ratios exceeded the minimum regulatory guidelines.
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The following table presents the risk-based and leverage capital ratios
required for depository institutions to be considered well capitalized under
applicable federal regulations and the reported capital ratios of the Company
and its bank and thrift subsidiaries at December 31, 1995:
RISK-BASED RATIOS
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TIER 1 CAPITAL TOTAL CAPITAL LEVERAGE RATIO
----------------------------- ----------------------------- -----------------------------
REQUIRED TO BE REQUIRED TO BE REQUIRED TO BE
WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED
------------------- -------- ------------------- -------- ------------------- --------
BayBanks, Inc........... n/a 11.41% n/a 12.80% n/a 7.66%
BayBank, N.A. (Note).... 6.00% 9.75 10.00% 11.01 5.00% 6.56
BayBank FSB (Note)...... 6.00 12.68 10.00 13.94 5.00 7.66
BayBank NH (Note)....... 6.00 21.34 10.00 22.61 5.00 9.94
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BayBank, N.A.
(Pro Forma) (Note).... 6.00 10.00 10.00 11.26 5.00 6.78
<FN>
(1) Under Federal Prompt Corrective Action and Risk-based Deposit Insurance
Assessment Regulations.
n/a -- not applicable
Note: BayBanks has filed applications to convert BayBank FSB and BayBank NH
to nationally chartered banks, to merge BayBank NH into BayBank FSB
(after conversion of charters) and to merge the surviving New
Hampshire national bank into BayBank, N.A. The Pro Forma BayBank, N.A.
capital ratios assume these mergers were effective as of December 31,
1995.
The Company increased its quarterly dividend in 1995 following a trend that
began with the reinstatement of the quarterly dividend in the first quarter of
1993. For the first and second quarters of 1995, a dividend of $.50 per share
was paid. The quarterly dividend was increased to $.60 per share for the third
and fourth quarters of 1995. On January 25, 1996, the Board of Directors
declared a first quarter dividend of $.60 per share, payable on March 1, 1996.
Under its agreement and plan of merger with Bank of Boston, the Company's
quarterly dividend may be increased further only with the approval of Bank of
Boston.
STATISTICAL DISCLOSURES
Securities Act Guide 3, Statistical Disclosure by Bank Holding Companies,
requires certain statistical disclosures. The statistical information required
is either presented in statistical tables within this section, presented
elsewhere in this report, or is not applicable. This information should be read
in conjunction with the Financial Review under Item 7 and the consolidated
financial statements and related notes under Item 8 in this report.
PAGE IN
THIS REPORT
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Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates
and Interest Differential
Average balances............................................................ 16
Summary of operations....................................................... 17
Average yields and rates paid............................................... 9
Analysis of net interest income............................................. 10
Securities Portfolios
Book value by security type................................................. 11
Year-end maturities and yields of principal debt securities................. 49
Securities of an issue in excess of 10% of stockholders' equity............. n/a
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PAGE IN
THIS REPORT
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Loan Portfolio
Distribution of loans....................................................... 12
Maturity distribution of commercial and commercial real estate loans........ 12
Nonperforming assets; restructured, accruing loans; and accruing loans 90
days or more past due...................................................... 12
Policy for placing loans on nonaccrual status............................... 46-47
Interest income which would have been recorded on nonperforming loans had
they performed in accordance with their original terms vs. interest income
actually recorded on nonperforming loans................................... 47
Foreign outstandings........................................................ n/a
Loan concentrations......................................................... n/a
Other interest-bearing assets............................................... n/a
Summary of Loan Loss Experience
Summary of loan loss experience............................................. 13
Discussion of additions to the allowance.................................... 47
Distribution of allowance for loan losses................................... 13
Deposits
Average balances of deposit categories...................................... 16
Average rates paid.......................................................... 9
Foreign deposits in domestic offices........................................ n/a
Remaining maturities of time deposits -- $100,000 or more................... 14
Amount outstanding of time deposits -- $100,000 or more; issued by a
foreign office............................................................. n/a
Return on Equity and Assets
Return on average stockholders' equity...................................... 17
Return on average total assets.............................................. 17
Dividend payout ratio....................................................... *
Average equity to average assets ratio...................................... **
Short-Term Borrowings............................................................ 14
<FN>
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n/a -- not applicable
* The dividend payout ratio was 31.4% in 1995, 28.6% in 1994, and 25.2% in
1993; there were no dividends paid in 1992 or 1991.
** The average equity to average assets ratio was 7.70% in 1995, 7.20% in 1994,
7.01% in 1993, 5.67% in 1992, and 5.10% in 1991.
8
10
AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN
(TAX EQUIVALENT BASIS)
1995 1994 1993 1992 1991 1990
----- ---- ---- ----- ----- -----
Interest-bearing deposits and other
short-term investments..................... 5.90% 4.13% 3.36% 3.68% 5.92% 8.21%
Securities available for sale(1)............. 6.15% 5.10% 4.48% 4.79% --% --%
U.S. Government securities................. 5.49 5.27 4.54 4.70 -- --
Mortgage-backed securities................. 9.89 -- -- -- -- --
Asset-backed securities.................... 5.64 -- -- -- -- --
State and local government securities...... 5.80 -- -- -- -- --
Corporate and other........................ 6.42 4.91 3.73 6.45 -- --
Investment securities........................ 5.72% 4.97% 4.74% 6.13% 8.20% 9.37%
U.S. Government securities................. 5.60 4.88 4.29 5.65 7.47 8.52
Mortgage-backed securities................. 5.54 4.88 -- 6.46 8.88 9.44
Asset-backed securities.................... 4.16 4.48 4.44 -- -- --
State and local government securities...... 6.66 5.23 5.53 7.16 7.51 9.29
Industrial revenue bonds................... 11.18 9.60 8.26 8.49 8.48 11.44
Corporate and other........................ 5.92 5.99 6.22 4.33 5.67 10.64
Loans(2)..................................... 8.92% 8.21% 8.13% 8.79% 9.91% 10.58%
Commercial................................. 8.76 7.54 6.55 7.02 8.71 10.26
Commercial real estate..................... 9.27 8.39 7.77 8.28 9.12 9.49
Residential mortgage....................... 7.65 7.39 7.89 8.86 9.78 10.03
Instalment................................. 9.62 8.89 9.28 10.23 11.49 12.14
Total earnings assets........................ 7.99% 7.10% 6.94% 7.84% 9.34% 10.31%
Interest-bearing funds....................... 3.59% 2.56% 2.40% 3.38% 5.50% 6.96%
NOW and savings accounts................... 1.83 1.68 1.90 2.76 4.65 5.23
Money market deposit accounts.............. 3.38 2.36 2.30 3.20 5.32 7.03
Consumer time.............................. 5.45 3.75 3.77 4.88 6.79 8.11
Time -- $100,000 or more................... 5.71 4.35 2.66 3.56 6.04 8.05
Short-term borrowings...................... 5.91 4.50 2.72 2.90 5.44 7.70
Long-term debt............................. 6.34 4.79 3.87 4.51 7.01 8.60
Interest expense as a percentage of average
earning assets............................. 2.88% 2.06% 1.94% 2.85% 4.77% 5.99%
Net interest margin.......................... 5.11% 5.04% 5.00% 4.99% 4.57% 4.32%
<FN>
- ---------------
(1) Yields based on average amortized cost.
(2) Nonperforming loans (nonaccrual loans) are included in average loan
balances. Interest income is recorded on an accrual basis. Thus,
nonperforming loans do not contribute to net interest income and affect the
net interest margin.
9
11
ANALYSIS OF NET INTEREST INCOME
(IN THOUSANDS, ON A TAX EQUIVALENT BASIS)
CHANGE DUE TO:
---------------------
CHANGE
CHANGE IN
INCREASE IN INTEREST
(DECREASE) BALANCES RATES
---------- -------- --------
1995 COMPARED WITH 1994(1)(2)
Short-term investments..................................... $ 9,054 $ 5,204 $ 3,850
Securities portfolios...................................... 10,785 (11,524) 22,309
Loans(3)................................................... 125,833 77,195 48,638
-------- -------- -------
Total.................................................... 145,672 70,875 74,797
-------- -------- -------
NOW & savings accounts..................................... 4,185 (121) 4,306
Money market deposit accounts.............................. 21,999 (5,148) 27,147
Consumer time.............................................. 47,711 30,878 16,833
Time--$100,000 or more..................................... 7,726 6,493 1,233
Short-term borrowings & long-term debt..................... 17,519 4,832 12,687
-------- -------- -------
Total.................................................... 99,140 36,934 62,206
-------- -------- -------
Net interest income........................................ $ 46,532 $ 33,941 $12,591
======== ======== =======
1994 COMPARED WITH 1993(1)(2)
Short-term investments..................................... $(10,965) $(15,535) $ 4,570
Securities portfolios...................................... 52,073 39,997 12,076
Loans(3)................................................... 28,845 22,756 6,089
-------- -------- -------
Total.................................................... 69,953 47,218 22,735
-------- -------- -------
NOW & savings accounts..................................... (3,516) 2,523 (6,039)
Money market deposit accounts.............................. (2,987) (4,652) 1,665
Consumer time.............................................. (4,434) (4,200) (234)
Time--$100,000 or more..................................... 3,063 2,500 563
Short-term borrowings & long-term debt..................... 34,084 30,912 3,172
-------- -------- -------
Total.................................................... 26,210 27,083 (873)
-------- -------- -------
Net interest income........................................ $ 43,743 $ 20,135 $23,608
======== ======== =======
<FN>
- ---------------
(1) The rate/volume variance is allocated to the Change in Balances category.
(2) Presented on a tax equivalent basis at the combined effective federal and
state tax rate of 42.9% in 1995, and 43.2% for 1994.
(3) Loan income includes loan fees, primarily related to commercial and
residential real estate loans, of $6.6 million in 1995, $6.3 million in
1994, and $6.2 million in 1993.
10
12
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31
1995 (NOTE) 1994 1993
------------------------ -------------------- --------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE* COST VALUE* COST* VALUE
----------- ----------- --------- --------- --------- ---------
(IN THOUSANDS)
U.S. Government securities.... $1,798,465 $1,828,408 $ -- $ -- $322,707 $325,984
State and local government
securities.................. 225,954 227,499 8,578 8,564 18,964 18,968
U.S Agency mortgage-backed
securities.................. 98,120 97,799 -- -- 30,832 31,994
Asset-backed securities....... 44,051 43,754 -- -- -- --
Corporate and other........... 351,609 351,667 211,554 212,038 256,500 256,500
---------- ---------- -------- -------- -------- --------
$2,518,199 $2,549,127 $220,132 $220,602 $629,003 $633,446
========== ========== ======== ======== ======== ========
<FN>
- ---------------
* Balance sheet carrying value.
INVESTMENT SECURITIES
AT DECEMBER 31
1995 (NOTE) 1994 1993
------------------------ ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST* VALUE COST* VALUE COST* VALUE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
U.S. Government
securities............ $ -- $ -- $2,083,519 $2,018,428 $1,203,315 $1,209,703
Asset-backed
securities............ -- -- 200,386 194,734 204,798 204,086
State and local
government
securities............ -- -- 171,436 170,275 128,997 129,352
Industrial revenue
bonds................. 41,544 41,544 49,548 49,548 59,958 59,958
U.S. Agency mortgage-
backed securities..... -- -- 49,503 46,742 -- --
Corporate and other..... 12,854 12,854 1,857 1,857 1,992 1,992
------- ------- ---------- ---------- ---------- ----------
$54,398 $54,398 $2,556,249 $2,481,584 $1,599,060 $1,605,091
======= ======= ========== ========== ========== ==========
<FN>
- ---------------
* Balance sheet carrying value.
Note: During 1995 the Financial Accounting Standards Board allowed a one-time
reassessment of the classification of securities, and the Company reclassified
$2.0 billion from investment securities to securities available for sale.
11
13
DISTRIBUTION OF LOANS
AT DECEMBER 31
1995 1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Commercial............... $ 1,604,031 $ 1,528,265 $ 1,324,968 $ 1,411,120 $ 1,654,118 $ 2,036,426
Commercial real estate
Commercial mortgages... 1,117,110 919,271 877,834 965,134 1,132,466 1,172,848
Construction loans..... 49,933 37,325 57,637 57,381 79,483 247,025
----------- ----------- ----------- ----------- ----------- -----------
Total commercial
real estate....... 1,167,043 956,596 935,471 1,022,515 1,211,949 1,419,873
Residential real
estate................. 2,053,635 1,335,466 1,242,597 1,247,633 1,274,591 1,447,043
Instalment............... 2,946,384 2,828,193 2,600,134 2,256,731 2,212,376 2,226,999
----------- ----------- ----------- ----------- ----------- -----------
Total loans.............. $ 7,771,093 $ 6,648,520 $ 6,103,170 $ 5,937,999 $ 6,353,034 $ 7,130,341
========= ========= ========= ========= ========= =========
MATURITY DISTRIBUTION OF COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS
AT DECEMBER 31, 1995
AFTER
ONE
BUT
WITHIN OVER
ONE YEAR FIVE FIVE
OR LESS YEARS(1) YEARS(1) TOTAL(2)
---------- -------- -------- ----------
(IN THOUSANDS)
Commercial.................................. $1,203,053 $307,664 $ 71,087 $1,581,804
Commercial real estate...................... 265,246 573,162 302,803 1,141,211
---------- -------- -------- ----------
$1,468,299 $880,826 $373,890 $2,723,015
========= ======== ======== =========
<FN>
- ---------------
(1) Of the total commercial and commercial real estate loans above with
remaining maturities in excess of one year, 37% have adjustable rates of
interest.
(2) Excludes $22.2 million of commercial and $25.8 million of commercial real
estate nonperforming loans.
NONPERFORMING ASSETS; RESTRUCTURED, ACCRUING LOANS;
AND ACCRUING LOANS 90 DAYS OR MORE PAST DUE
1995(1) 1994 1993 1992 1991 1990
------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Nonperforming loans.............. $63,830 $ 54,627 $110,001 $180,580 $222,725 $365,261
Other real estate owned
In-substance foreclosures...... 5,272 44,610 72,505 100,669 146,638 143,301
Foreclosed property............ 23,688 47,760 70,950 102,750 99,163 34,005
------- -------- -------- -------- -------- --------
28,960 92,370 143,455 203,419 245,801 177,306
Less OREO reserve.............. 10,164 24,971 29,776 7,833 -- --
------- -------- -------- -------- -------- --------
OREO, net of reserve........... 18,796 67,399 113,679 195,586 245,801 177,306
------- -------- -------- -------- -------- --------
Total nonperforming assets....... $82,626 $122,026 $223,680 $376,166 $468,526 $542,567
======= ======== ======== ======== ======== ========
Restructured, accruing loans..... $ 5,949 $ 13,537 $ 18,398 $ 12,084 $ 39,066 $ 467
======= ======== ======== ======== ======== ========
Accruing loans 90 days or more
past due....................... $40,472 $ 36,193 $ 51,749 $ 91,895 $116,814 $ 99,348
======= ======== ======== ======== ======== ========
<FN>
- ---------------
(1) As a result of the adoption of SFAS 114 on January 1, 1995, the Company
reclassified $33.2 million of in-substance foreclosures and $8.7 million of
related reserves to loans and the allowance for loan losses, respectively.
12
14
SUMMARY OF LOAN LOSS EXPERIENCE
1995(1) 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Loans outstanding at December 31..... $7,771,093 $6,648,520 $6,103,170 $5,937,999 $6,353,034
========== ========== ========== ========== ==========
Average loans........................ $7,121,849 $6,202,289 $5,910,489 $6,152,838 $6,735,040
========== ========== ========== ========== ==========
Allowance for Loan Losses
Beginning balance at January 1..... $ 146,835 $ 171,496 $ 192,700 $ 212,500 $ 214,203
Allowance acquired through
acquisitions.................... 10,305 -- -- -- --
Loans charged off:
Commercial...................... 6,704 10,113 24,231 62,437 73,833
Commercial real estate.......... 9,821 22,179 15,513 29,237 48,885
Residential mortgage............ 7,621 7,946 11,203 12,861 17,250
Instalment...................... 27,873 26,356 29,016 36,255 35,686
---------- ---------- ---------- ---------- ----------
Total loans charged off....... 52,019 66,594 79,963 140,790 175,654
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial...................... 7,224 7,815 11,778 6,660 2,254
Commercial real estate.......... 6,608 1,352 2,339 778 965
Residential mortgage............ 2,691 2,267 2,062 974 79
Instalment...................... 7,044 6,499 6,080 5,742 5,253
---------- ---------- ---------- ---------- ----------
Total recoveries.............. 23,567 17,933 22,259 14,154 8,551
---------- ---------- ---------- ---------- ----------
Net loans charged off.............. 28,452 48,661 57,704 126,636 167,103
Provision for loan losses.......... 25,000 24,000 36,500 106,836 165,400
---------- ---------- ---------- ---------- ----------
Balance at December 31............. $ 153,688 $ 146,835 $ 171,496 $ 192,700 $ 212,500
========== ========== ========== ========== ==========
Ratio of net loans charged off
during period to average loans
outstanding..................... .40% 0.78% 0.98% 2.06% 2.48%
<FN>
- ---------------
(1) As a result of the adoption of SFAS No. 114 on January 1, 1995, $33.2
million of in-substance foreclosures and related reserves of $8.7 million
were reclassified to loans and the allowance for loan losses, respectively.
Charge-offs of $8.7 million were subsequently recorded during the first
quarter of 1995. The reclassification of in-substance reserves and
subsequent charge-offs had no effect on the allowance for loan losses and
are not reflected in the table above.
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (1)
COMMERCIAL RESIDENTIAL
COMMERCIAL REAL ESTATE MORTGAGE INSTALMENT
LOANS LOANS LOANS LOANS TOTAL
---------- ----------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
December 31, 1995
Allowance amount.............. $42,133 $63,041 $15,837 $32,677 $153,688
Loan category to total
loans...................... 20.6% 15.1% 26.4% 37.9% 100.0%
December 31, 1994
Allowance amount.............. $45,064 $57,476 $14,348 $29,947 $146,835
Loan category to total
loans...................... 23.0% 14.4% 20.1% 42.5% 100.0%
December 31, 1993
Allowance amount.............. $47,298 $66,455 $21,621 $36,122 $171,496
Loan category to total
loans...................... 21.7% 15.3% 20.4% 42.6% 100.0%
December 31, 1992
Allowance amount.............. $67,800 $73,707 $22,060 $29,133 $192,700
Loan category to total
loans...................... 23.8% 17.2% 21.0% 38.0% 100.0%
December 31, 1991
Allowance amount.............. $90,444 $68,670 $22,641 $30,745 $212,500
Loan category to total
loans...................... 26.0% 19.1% 20.1% 34.8% 100.0%
<FN>
- ---------------
(1) The distribution of the allowance for loan losses is based on an assessment
of an aggregate potential for future losses in the respective year-end loan
portfolios. While the allowance has been distributed to individual loan
categories, it is available to absorb losses in the total portfolio. The
distribution of the allowance includes both allocations assigned to
specifically identified problem loans and unallocated amounts that are not
specifically identified as to any individual loan. The unallocated amounts
related to commercial and commercial real estate loans were $96 million as
of December 31, 1995, as described in the CREDIT QUALITY section under Item
7.
13
15
REMAINING MATURITIES OF TIME DEPOSITS -- $100,000 OR MORE
AT DECEMBER 31, 1995
TOTAL TIME
DEPOSITS--
$100,000 OR MORE
--------------------
(IN THOUSANDS)
90 days or less............................................................ $208,106
91-180 days................................................................ 65,281
181-365 days............................................................... 31,093
Over one year.............................................................. 22,950
--------
Total............................................................ $327,430(1)
========
<FN>
- ---------------
(1) Included in this amount are $215 million of corporate certificates of
deposits and $112 million of consumer certificates of deposit of $100,000 or
more.
SHORT-TERM BORROWINGS
MAXIMUM
AMOUNT AVERAGE WEIGHTED WEIGHTED
BALANCE OUTSTANDING OUTSTANDING AVERAGE AVERAGE
OUTSTANDING AT DURING INTEREST RATE INTEREST RATE
AT DECEMBER 31 ANY MONTH- END THE YEAR AT YEAR-END DURING THE YEAR
-------------- ------------- ----------- ------------- ---------------
(DOLLARS IN THOUSANDS)
1995............ $718,941 $1,243,490 $915,711 5.74% 5.91%
1994............ 849,517 1,137,318 839,070 5.81 4.50
1993............ 507,820 507,820 150,608 3.10 2.72
ITEM 2. PROPERTIES.
BayBanks, Inc., and its subsidiaries occupy both owned and leased premises.
The offices occupied by the Company in Boston, Massachusetts include its
principal executive offices and are leased from nonaffiliated companies.
Property occupied by the three banking subsidiaries represents the majority of
the Company's property, and is generally considered to be in good condition and
adequate for the purpose for which it is used. Bank properties include bank
buildings and branches and free-standing automated banking facilities. BayBank,
N.A., the Company's principal bank subsidiary, owns an 11-story 208,000 square
foot building, of which 6% is leased to nonaffiliates. Of the 237 branch offices
of the subsidiary banks at December 31, 1995, 96 were located in owned buildings
and 141 were located in leased buildings. In addition, the Company leases sites
for 420 automated banking facilities.
BayBank Systems, Inc. owns and occupies a 185,000 square foot technology
center and an adjoining 121,000 square foot facility that houses its principal
data processing equipment. At December 31, 1995, there was an aggregate $37
million mortgage on these facilities to its parent at market terms.
ITEM 3. LEGAL PROCEEDINGS.
There were no material pending legal proceedings other than ordinary
routine litigation incidental to the conduct of the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
14
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) The stock of BayBanks, Inc. is traded over the counter through the
Nasdaq National Market under the symbol BBNK. The quarterly share data
information is presented in Note 19 to the consolidated financial
statements under Item 8.
(b) As of February 29, 1996, there were approximately 5,600 holders of
record of the Company's common stock.
(c) The Company paid dividends of $2.20 per share during 1995, $1.60 per
share during 1994 and $.90 per share during 1993. The Company paid a
dividend quarterly from 1928 through 1990. During 1991 and 1992, the
Company did not pay any dividends. For additional information on
dividend payments, reference is made to the CAPITAL AND DIVIDENDS
section of Management's Discussion and Analysis under Item 7, and Note 1
to the consolidated financial statements under Item 8.
15
17
ITEM 6. SELECTED FINANCIAL DATA.
AVERAGE BALANCES
1995 1994 1993 1992 1991 1990
----------- ----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)(1)
ASSETS
Interest-bearing deposits and other short-term
investments(2).................................. $ 305,281 $ 217,122 $ 593,317 $ 623,200 $ 675,655 $ 436,888
Securities available for sale(3)
U.S. Government securities...................... 181,295 242,774 1,158,347 303,306 -- --
Mortgage-backed securities...................... 21,290 -- -- -- -- --
Asset-backed securities......................... 3,963 -- -- -- -- --
State and local government securities........... 32,080 -- -- -- -- --
Corporate and other............................. 248,461 212,445 83,424 15,344 -- --
----------- ----------- ---------- ---------- ---------- ----------
487,089 455,219 1,241,771 318,650 -- --
Investment securities(3)
U.S. Government securities...................... 1,823,853 2,047,405 622,387 782,293 536,255 327,103
Mortgage-backed securities...................... 45,293 37,551 -- 412,396 623,476 567,500
Asset-backed securities......................... 137,901 203,558 67,130 -- -- --
State and local government securities........... 185,675 151,901 74,190 50,192 87,792 142,117
Industrial revenue bonds........................ 45,690 54,722 68,921 84,757 98,644 114,042
Corporate and other............................. 3,718 1,886 1,976 4,917 1,886 13,528
----------- ----------- ---------- ---------- ---------- ----------
2,242,130 2,497,023 834,604 1,334,555 1,348,053 1,164,290
Loans(4)
Commercial...................................... 1,586,319 1,381,699 1,364,807 1,553,643 1,849,960 2,251,316
Commercial real estate.......................... 1,034,239 919,383 956,991 1,117,933 1,343,300 1,545,502
Residential mortgage............................ 1,650,781 1,240,278 1,171,044 1,256,553 1,357,703 1,549,862
Instalment...................................... 2,850,510 2,660,929 2,417,647 2,224,709 2,184,077 2,109,570
----------- ----------- ---------- ---------- ---------- ----------
7,121,849 6,202,289 5,910,489 6,152,838 6,735,040 7,456,250
Less allowance for loan losses.................. 152,612 160,077 188,191 213,949 228,192 139,603
----------- ----------- ---------- ---------- ---------- ----------
6,969,237 6,042,212 5,722,298 5,938,889 6,506,848 7,316,647
----------- ----------- ---------- ---------- ---------- ----------
Total earning assets............................ 10,156,349 9,371,653 8,580,181 8,429,243 8,758,748 9,057,428
Cash and due from banks........................... 675,027 636,840 629,428 604,115 553,945 570,755
Other assets...................................... 465,757 479,352 548,223 615,396 590,896 443,036
----------- ----------- ---------- ---------- ---------- ----------
Total assets.................................... $11,144,521 $10,327,768 $9,569,641 $9,434,805 $9,675,397 $9,931,616
=========== =========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand.......................................... $ 2,059,243 $ 1,982,663 $1,886,914 $1,717,345 $1,501,448 $1,481,019
NOW accounts.................................... 1,418,119 1,394,038 1,336,270 1,218,252 1,038,135 932,851
Savings......................................... 1,461,476 1,492,200 1,399,886 1,223,626 993,305 919,678
Money market deposit accounts................... 2,515,907 2,668,275 2,865,209 3,034,586 3,260,294 3,184,659
Consumer time................................... 1,556,778 989,844 1,102,025 1,363,997 1,692,020 1,821,337
Time -- $100,000 or more........................ 204,610 90,823 33,322 57,547 187,863 407,320
----------- ----------- ---------- ---------- ---------- ----------
9,216,133 8,617,843 8,623,626 8,615,353 8,673,065 8,746,864
Federal funds purchased and other short-term
borrowings(5)................................... 915,711 839,070 150,608 147,856 366,262 474,026
Long-term debt.................................... 58,095 53,323 54,437 55,226 55,052 53,691
----------- ----------- ---------- ---------- ---------- ----------
Total deposits and borrowings................... 10,189,939 9,510,236 8,828,671 8,818,435 9,094,379 9,274,581
Other liabilities(6).............................. 96,653 74,429 69,937 81,366 87,381 106,033
Stockholders' equity.............................. 857,929 743,103 671,033 535,004 493,637 551,002
----------- ----------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity...... $11,144,521 $10,327,768 $9,569,641 $9,434,805 $9,675,397 $9,931,616
=========== =========== ========== ========== ========== ==========
CAPITAL RATIOS
Risk-based
Core (minimum regulatory standard -- 4.00%)..... 11.41% 11.51% 10.68% 10.37% 7.28% 6.40%
Total (minimum regulatory standard -- 8.00%).... 12.80 13.06 12.40 12.30 9.29 8.33
Leverage ratio.................................... 7.66 7.35 7.26 6.79 5.38 4.83
Year-end book value per share..................... $ 48.43 $ 41.51 $ 37.52 $ 34.81 $ 31.30 $ 30.49
Year-end tangible book value per share............ 45.64 41.28 37.32 34.56 30.91 29.94
<FN>
- ---------------
(1) Substantially all balances are derived from daily averages. In certain
instances, a method approximating daily averages was used.
(2) Includes interest-bearing deposits in other banks, federal funds sold,
securities purchased under agreement to resell, bankers' acceptances
purchased, and trading account securities.
(3) During 1995, the Financial Accounting Standards Board allowed a one-time
reassessment of the classification of securities, and the Company
reclassified $2.0 billion from investment securities to securities available
for sale.
(4) Nonperforming loans are included in the average balances. Interest income is
recorded on an accrual basis. Thus, loans that are nonperforming do not
contribute to net interest income and affect the net interest margin.
(5) Includes federal funds purchased, securities sold under agreement to
repurchase, and demand notes issued to the U.S. Treasury.
(6) Other liabilities include guarantee of ESOP indebtedness.
16
18
SUMMARY OF OPERATIONS
1995(7) 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, ON A TAX EQUIVALENT BASIS,
EXCEPT PER SHARE AMOUNTS)
Income on interest-bearing deposits and other short-term
investments(8).............................................. $ 18,020 $ 8,966 $ 19,931 $ 22,925 $ 40,019 $ 35,879
Interest on securities portfolios
Taxable..................................................... 125,955 125,096 82,343 86,304 95,542 81,417
Tax-exempt(8)............................................... 32,143 22,217 12,897 10,807 14,961 27,686
-------- -------- -------- -------- -------- ---------
158,098 147,313 95,240 97,111 110,503 109,103
-------- -------- -------- -------- -------- ---------
Interest and fees on loans
Commercial(8)............................................... 138,913 104,159 89,383 109,048 161,156 231,046
Commercial real estate...................................... 95,852 77,111 74,353 92,548 122,519 146,705
Residential mortgage........................................ 126,248 91,660 92,451 111,390 132,725 155,384
Instalment.................................................. 274,323 236,573 224,471 227,652 250,890 256,015
-------- -------- -------- -------- -------- ---------
635,336 509,503 480,658 540,638 667,290 789,150
-------- -------- -------- -------- -------- ---------
Total income on earning assets................................ 811,454 665,782 595,829 660,674 817,812 934,132
Interest expense on deposits and borrowings
NOW and savings accounts.................................... 52,709 48,524 52,040 67,304 94,544 96,926
Money market deposit accounts............................... 85,013 63,014 66,001 97,256 173,393 223,861
Consumer time............................................... 84,791 37,080 41,514 66,627 114,868 147,752
Time -- $100,000 or more.................................... 11,675 3,949 886 2,048 11,356 32,804
Short-term borrowings....................................... 54,128 37,739 4,098 4,285 19,941 36,477
Long-term debt.............................................. 3,682 2,552 2,109 2,489 3,860 4,622
-------- -------- -------- -------- -------- ---------
Total interest expense........................................ 291,998 192,858 166,648 240,009 417,962 542,442
-------- -------- -------- -------- -------- ---------
Net interest income........................................... 519,456 472,924 429,181 420,665 399,850 391,690
Noninterest income(9)
Service charges and fees on deposit accounts................ 109,812 109,918 105,211 96,671 88,533 70,823
Other noninterest income.................................... 109,439 97,370 93,313 87,210 81,220 84,988
-------- -------- -------- -------- -------- ---------
Total noninterest income(9)................................. 219,251 207,288 198,524 183,881 169,753 155,811
-------- -------- -------- -------- -------- ---------
Total income from operations.................................. 738,707 680,212 627,705 604,546 569,603 547,501
Operating expenses(10)
Salaries and benefits....................................... 248,154 229,572 212,954 199,604 184,399 179,723
Occupancy and equipment..................................... 91,898 86,741 87,550 89,909 85,493 87,326
Other operating expenses.................................... 138,823 140,857 146,201 139,803 128,467 111,454
-------- -------- -------- -------- -------- ---------
Total operating expenses(10)................................ 478,875 457,170 446,705 429,316 398,359 378,503
-------- -------- -------- -------- -------- ---------
Operating income before net securities gains and provisions
for loan losses and OREO reserve............................ 259,832 223,042 181,000 175,230 171,244 168,998
-------- -------- -------- -------- -------- ---------
Net securities gains.......................................... 40 203 411 76,929 40,963 19,582
-------- -------- -------- -------- -------- ---------
Provision for loan losses..................................... 25,000 24,000 36,500 106,836 165,400 289,958
Provision for OREO reserve, net............................... 179 9,372 24,830 45,482 27,450 14,582
-------- -------- -------- -------- -------- ---------
Total credit provisions....................................... 25,179 33,372 61,330 152,318 192,850 304,540
-------- -------- -------- -------- -------- ---------
Pre-tax income (loss)......................................... 234,693 189,873 120,081 99,841 19,357 (115,960)
Less tax equivalent adjustment included above................. 12,024 7,982 5,358 4,153 2,954 9,058
-------- -------- -------- -------- -------- ---------
Income (loss) before taxes and cumulative effect of accounting
change...................................................... 222,669 181,891 114,723 95,688 16,403 (125,018)
Provision for income taxes (benefit)(11)...................... 85,295 73,522 47,072 36,451 6,748 (55,216)
-------- -------- -------- -------- -------- ---------
Income (loss) before cumulative effect of accounting change... 137,374 108,369 67,651 59,237 9,655 (69,802)
Less cumulative effect of accounting change (net of tax
benefit of $683 in 1994).................................... -- 932 -- -- -- --
-------- -------- -------- -------- -------- ---------
NET INCOME (Loss)............................................. $137,374 $107,437 $ 67,651 $ 59,237 $ 9,655 $ (69,802)
======== ======== ======== ======== ======== =========
EARNINGS (LOSS) PER SHARE(12)................................. $ 7.01 $ 5.60(13) $ 3.57 $ 3.57 $ 0.60 $ (4.37)
Dividends Declared Per Share.................................. 2.20 1.60 0.90 -- -- 1.05
PERFORMANCE RATIOS
Operating profit margin....................................... 35.2% 32.8% 28.8% 29.0% 30.1% 30.9%
Return on average stockholders' equity(14).................... 16.0 14.5 10.1 11.1 2.0 (12.7)
Return on average total assets(14)............................ 1.23 1.04 0.71 0.63 0.10 (0.70)
<FN>
- ---------------
(7) Includes the results of operations of NFS and Cornerstone subsequent to
their respective acquisition dates (see Note 2 to the consolidated
financial statements under Item 8).
(8) These line items are presented on a tax equivalent basis. Because of the
interplay of federal and Massachusetts income taxes, $1.00 of federal
tax-exempt income was the fully taxable equivalent of $1.50 in 1995.
(9) In 1995, the Company recognized a $1.2 million gain from the sale of its
corporate bond trusteeship business. In 1990, the Company recognized a $4.8
million pension settlement gain and a $1.2 million gain from the sale of
its payroll processing service.
(10) In 1995, the Company recorded a $4.5 million accrual for an expected
special assessment on thrift deposits.
(11) In 1995, the provision for income taxes is net of a settlement of a tax
claim against the Commonwealth of Massachusetts in the amount of $2.6
million, net of federal income tax.
(12) For 1990 -- 1995, the difference between earnings (loss) per share as
reported and fully diluted was less than 3%.
(13) Based on net income after accounting change. The effect of the cumulative
accounting change was $.05 per share.
(14) 1995 and 1994 include the impact of the average unrealized gain on the
securities available for sale portfolio.
17
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The Company has entered into an Agreement and Plan of Merger dated December
12, 1995, with Bank of Boston Corporation ("Bank of Boston"). Under the Merger
Agreement, at the effective time of the merger, each outstanding share of the
common stock of the Company will be converted into the right to receive 2.2
newly issued shares of Bank of Boston common stock. The merger is subject to the
approval of the stockholders of the Company and the stockholders of Bank of
Boston, to federal and state regulatory approvals, and to other conditions.
Current plans call for the merger to be completed by the middle of 1996. After
completion of the merger, the principal banking subsidiary of Bank of Boston
will operate as BayBank of Boston, N.A. See Note 20 to the consolidated
financial statements under Item 8 for further discussion of the pending merger.
The discussion in this Form 10-K does not give effect to the merger.
18
20
FINANCIAL REVIEW
EARNINGS ANALYSIS
OPERATING INCOME
Operating income (TABLE A) was $259.8 million in 1995, compared with $223.0
million in 1994 and $181.0 million in 1993. The 16% increase in 1995 from 1994
resulted primarily from a 10% increase in net interest income and a 6% increase
in noninterest income, offset by operating expenses that were only 5% above 1994
levels. Reflected in the Company's results of operations from their dates of
acquisition are BayBank FSB and BayBank NH, the two New Hampshire banking
organizations that became subsidiaries of the Company upon the acquisition of
NFS Financial Corp. ("NFS") on July 1, 1995, and of Cornerstone Financial
Corporation ("Cornerstone") on December 1, 1995, respectively.
TABLE A
SUMMARY OF OPERATIONS
TAX EQUIVALENT BASIS
INCREASE INCREASE
(DECREASE) (DECREASE)
1995 FROM 1994 1994 FROM 1993 1993
-------- -------------- -------- ------------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income on earning assets....... $811,454 $145,672 22% $665,782 $ 69,953 12% $595,829
Interest expense on deposits
and borrowings............... 291,998 99,140 51 192,858 26,210 16 166,648
-------- -------- -------- -------- --------
Net interest income............ 519,456 46,532 10 472,924 43,743 10 429,181
Noninterest income............. 219,251 11,963 6 207,288 8,764 4 198,524
-------- -------- -------- -------- --------
Total income from operations... 738,707 58,495 9 680,212 52,507 8 627,705
Operating expenses............. 478,875 21,705 5 457,170 10,465 2 446,705
-------- -------- -------- -------- --------
OPERATING INCOME BEFORE NET
SECURITIES GAINS AND
PROVISIONS FOR LOAN LOSSES
AND OREO RESERVE............. 259,832 36,790 16 223,042 42,042 23 181,000
-------- -------- -------- -------- --------
Net securities gains........... 40 (163) (80) 203 (208) (51) 411
-------- -------- -------- -------- --------
Provision for loan losses...... 25,000 1,000 4 24,000 (12,500) (34) 36,500
Provision for OREO reserve,
net.......................... 179 (9,193) (98) 9,372 (15,458) (62) 24,830
-------- -------- -------- -------- --------
Total credit provisions........ 25,179 (8,193) (25) 33,372 (27,958) (46) 61,330
-------- -------- -------- -------- --------
Pre-tax income................. 234,693 44,820 24 189,873 69,792 58 120,081
-------- -------- -------- -------- --------
Less tax equivalent adjustment
included above............... 12,024 4,042 51 7,982 2,624 49 5,358
-------- -------- -------- -------- --------
Income before taxes and
cumulative effect of
accounting change............ 222,669 40,778 22 181,891 67,168 59 114,723
Income taxes................... 85,295 11,773 16 73,522 26,450 56 47,072
-------- -------- -------- -------- --------
Income before cumulative effect
of accounting change......... 137,374 29,005 27 108,369 40,718 60 67,651
Less cumulative effect of
accounting change (net of tax
benefit of $683)............. -- (932) 932 932 --
-------- -------- -------- -------- --------
NET INCOME..................... $137,374 $ 29,937 28 $107,437 $ 39,786 59 $ 67,651
======== ======== ======== ======== ========
EARNINGS PER SHARE
Income before accounting
change.................... $ 7.01 $ 1.36 24 $ 5.65 $ 2.08 58 $ 3.57
Less cumulative effect of
accounting change......... -- (0.05) 0.05 0.05 --
-------- -------- -------- -------- --------
Net Income................... $ 7.01 $ 1.41 25 $ 5.60 $ 2.03 57 $ 3.57
======== ======== ======== ======== ========
19
21
NET INTEREST INCOME
Net interest income was $519.5 million in 1995, compared with $472.9
million in 1994.
As analyzed further in Table B, the growth in net interest income in 1995
compared with that of 1994 was primarily the result of an 8% increase in average
earning assets combined with the effect of somewhat higher interest rates.
Average loans increased 11%, excluding the loans at BayBank FSB and BayBank NH.
While there was growth in both corporate and consumer lending, residential real
estate lending was the most significant contributor (TABLE E, page 25). In
addition, the acquisitions of BayBank FSB and BayBank NH added $505 million in
loans and $226 million in securities.
The yield on earning assets was 7.99% in 1995, compared with 7.10% in 1994,
as a result of overall higher interest rates on the loan and securities
portfolios.
BayBanks' funding costs increased during 1995 due to higher market interest
rates as rates on core deposits (which include money market deposit accounts
["MMDAs"] and consumer certificates of deposit) increased in 1995 compared with
1994 as a result of market conditions. In addition, some customers moved
balances from transaction accounts and MMDAs to higher-yielding certificates of
deposit. The cost of total interest-bearing liabilities (as a percentage of
average earning assets) increased 82 basis points to 2.88% in 1995, compared
with 2.06% in 1994.
The 1995 net interest margin of 5.11%, which compares favorably with the
Keefe, Bruyette and Woods Bank Index of 4.25%, was seven basis points above the
net interest margin for 1994. The Company believes that its substantial core
deposit base with its emphasis on transaction accounts has allowed the growth in
loans and generally higher rates on earning assets to positively affect the
Company's net interest margin.
TABLE B
ANALYSIS OF NET INTEREST INCOME
NET
INTEREST INTEREST INTEREST
INCOME EXPENSE INCOME
-------- -------- --------
(IN THOUSANDS, ON A TAX EQUIVALENT
BASIS)
1993 AS REPORTED........................................... $595,829 $166,648 $429,181
1994 increase (decrease) due to:
Changes in balances...................................... 47,218 27,083 20,135
Changes in interest rates................................ 22,735 (873) 23,608
-------- -------- --------
69,953 26,210 43,743
-------- -------- --------
1994 AS REPORTED........................................... $665,782 $192,858 $472,924
1995 increase due to:
Changes in balances...................................... 70,875 36,934 33,941
Changes in interest rates................................ 74,797 62,206 12,591
-------- -------- --------
145,672 99,140 46,532
-------- -------- --------
1995 AS REPORTED........................................... $811,454 $291,998 $519,456
======== ======== ========
FEES, SERVICE CHARGES, AND OTHER NONINTEREST INCOME
Noninterest income consists primarily of service charges on deposit
accounts and fees from credit and non-credit services. The income is well
diversified among consumer, corporate, and small business banking activities.
Noninterest income, detailed in Table C (page 21), increased to $219.3 million
in 1995 from $207.3 million in 1994.
Service charges and fees on deposit accounts continued to provide
approximately one-half of noninterest income. Total service charges and fees on
deposit accounts were $109.8 million in 1995, compared with $109.9
20
22
million in 1994. Increases in consumer service charge income in 1995 were the
result of higher service charges from selected repricings and stronger volume,
but were offset by a decline in corporate service charges due to higher earnings
credit rates on compensating deposit balances.
Other components of noninterest income experienced growth during 1995.
Processing fees increased 12% to $18.2 million in 1995 from $16.2 million in
1994, primarily as the result of an increased volume of point-of-sale
transactions. Investment management and brokerage fees increased 23% to $10.2
million in 1995 from $8.3 million in 1994, due primarily to increased third
party mutual fund sales, and investment advisory and shareholder servicing fees
from BayFunds[REGISTERED TRADEMARK], the Company's proprietary mutual fund
family.
Total assets under management in BayFunds were $1.6 billion at December 31,
1995, compared with $1.3 billion at December 31, 1994.
Mortgage banking fees were $9.5 million in 1995, compared with $7.2 million
in 1994. The increase from 1994 was due to increased application volume and
additional income recognized as a result of the capitalization of originated
mortgage servicing rights (see Note 3 to the consolidated financial statements
under Item 8). These increases were partially offset by a decrease in secondary
marketing income as the volume of loans sold to the secondary market declined in
1995.
International fees increased 14% to $7.3 million in 1995 from $6.3 million
in 1994 as the result of an increase in activity, largely net gains from foreign
exchange transactions.
The Company periodically sells student loans when these primarily
government-guaranteed loans are no longer in a deferred payment status. During
1995, the Company sold $136 million in student loans, resulting in a gain of
$3.8 million. In 1994, student loan sales of $134 million resulted in gains of
$4.5 million.
Other noninterest income was $7.5 million in 1995 and $4.2 million in 1994.
The increase in 1995 was primarily due to a $1.2 million gain on the sale of the
Company's corporate bond trusteeship business and gains on sales of branch
buildings no longer utilized by the Company.
TABLE C
NONINTEREST INCOME
% INCREASE
(DECREASE)
-------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges and fees on
deposit accounts........................ $109,812 $109,918 $105,211 --% 4%
Credit card fees.......................... 20,685 19,549 18,892 6 3
Processing fees........................... 18,195 16,174 13,788 12 17
Trust fees................................ 14,433 14,127 14,559 2 (3)
Investment management and
brokerage fees.......................... 10,214 8,293 6,318 23 31
Mortgage banking fees..................... 9,547 7,152 11,972 33 (40)
International fees........................ 7,259 6,344 5,845 14 9
All other fees............................ 17,858 17,000 16,159 5 5
Student loan sales gains.................. 3,780 4,543 1,762 (17) 158
Other noninterest income.................. 7,468 4,188 4,018 78 4
-------- -------- --------
Total noninterest income................ $219,251 $207,288 $198,524 6 4
======== ======== ========
21
23
OPERATING EXPENSES
The operating expense analysis presented in Table D (page 23) separates
other real estate owned ("OREO") and loan workout expenses from other expenses.
Operating expenses, excluding OREO and loan workout, were $473.8 million in
1995, compared with $447.2 million in 1994.
Salaries and benefits expenses increased 8% to $248.2 million in 1995,
compared with $229.6 million in 1994, primarily as the result of normal salary
and benefit increases, the acquisitions of BayBank FSB and BayBank NH, and
increased costs for profit sharing and performance awards.
Occupancy and equipment expenses were $91.9 million in 1995, compared with
$86.7 million in 1994. The increase was primarily the result of the New
Hampshire acquisitions, an increase in rent expense due to the opening of new
branch locations, including supermarket branches, and costs associated with
branch closings. Marketing and public relations expenses increased due to
expanded marketing efforts that included advertising for new branches and
introduction of the BayBank product line in New Hampshire.
Service bureau and other data processing expenses increased 12% to $19.6
million in 1995, compared with $17.4 million in 1994, as a result of systems
enhancements and the acquisitions of NFS and Cornerstone.
Printing and supplies increased 19% to $15.2 million in 1995, compared with
$12.8 million in 1994, due primarily to increased volume as a result of recent
acquisitions and internal mergers of subsidiary banks as well as higher costs of
paper, printed forms, and other supplies.
Professional services increased 20% to $13.0 million in 1995, compared with
$10.8 million in 1994, primarily from the use of contract programming for
systems development, personnel hiring costs related to selected staff additions,
and increases in real estate appraisals due to higher mortgage applications
volume.
Deposit insurance expense decreased 50% to $10.7 million in 1995, compared
with $21.7 million in 1994. This decrease reflects the Federal Deposit Insurance
Corporation's ("FDIC") reduction in the premiums charged to banks for deposit
insurance, effective June 1, 1995. Improved risk classifications at the
Company's banking subsidiaries also affected the reduction in expense. The
benefit of lower insurance rates was partially offset by an increase in the
insured deposit base. In 1995, the Company accrued for an expected special
assessment of $4.5 million on thrift deposits; the Company acquired
approximately $530 million of thrift deposits as a result of the acquisition of
NFS, a federal savings bank. The Company believes that the likelihood of the
Congressional proposal to recapitalize the Savings Association Insurance Fund
("SAIF"), which insures federal savings banks, eventually becoming law makes it
appropriate to accrue for the special assessment that would be made under that
law.
Postage expense reflects an increase in postal rates in 1995. Legal and
consulting expense decreased as a result of a decrease in general legal costs in
1995 as compared with 1994 partially offset by increased consulting expenses
related to studies of various systems and business unit operational structures.
22
24
OREO and loan workout expenses were $5.1 million in 1995, compared with
$10.0 million in 1994, reflecting the continued disposition of OREO properties
and impaired loans (see Nonperforming Loans on page 30).
TABLE D
OPERATING EXPENSES
% INCREASE
(DECREASE)
-------------------
1995 VS. 1994 VS.
1995 1994 1993 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and benefits..................... $248,154 $229,572 $212,954 8% 8%
Occupancy and equipment................... 91,898 86,741 87,550 6 (1)
Marketing and public relations............ 24,243 22,726 21,341 7 6
Service bureau and other data
processing.............................. 19,588 17,443 16,538 12 5
Printing and supplies..................... 15,233 12,767 12,997 19 (2)
Professional services..................... 12,963 10,807 13,744 20 (21)
Deposit insurance......................... 10,747 21,708 21,949 (50) (1)
Postage................................... 9,689 8,711 8,290 11 5
Legal and consulting...................... 7,587 8,516 6,609 (11) 29
Courier................................... 4,911 4,666 4,133 5 13
SAIF special assessment................... 4,500 -- -- -- --
Other..................................... 24,291 23,544 23,132 3 2
-------- -------- --------
Total operating expenses excluding OREO
expenses................................ 473,804 447,201 429,237 6 4
OREO and loan workout expenses............ 5,071 9,969 17,468 (49) (43)
-------- -------- --------
Total operating expenses.................. $478,875 $457,170 $446,705 5 2
======== ======== ========
PROVISIONS FOR LOAN LOSSES AND THE OREO RESERVE
The provisions for loan losses and the OREO reserve (see TABLE A, page 19)
declined in 1995 to $25.2 million, compared with $33.4 million in 1994,
reflecting improvements in credit quality and real estate values. The provision
for loan losses was $25.0 million in 1995, compared with $24.0 million in 1994.
The net provision for the OREO reserve was $179 thousand in 1995, compared with
$9.4 million in 1994. Provisions made were offset by net gains on sales of
properties of $4.7 million in 1995 and $6.3 million in 1994.
INCOME TAXES
The Company's provision for income taxes was $85.3 million in 1995,
compared with $73.5 million in 1994. The 1995 tax provision includes an
adjustment for a settlement, favorable to the Company, of a tax claim against
the Commonwealth of Massachusetts. The settlement related to the taxability of
interest income on certain Massachusetts bonds on which the Company had paid
income taxes prior to 1993.
In July 1995, the Commonwealth of Massachusetts passed a tax reform bill
that reduced the state tax rate for banks. Under the new tax law, the rate that
banks pay will be reduced over the next four years from 12.54% to 10.50% in
1999. In accordance with the new tax law, the rate was reduced from 12.54% to
12.13% in the third quarter of 1995 retroactive to January 1, 1995.
The effective tax rate for 1995 was 38.3%, compared with 40.4% in 1994. The
effective tax rate, excluding the settlement adjustment, was 39.5% in 1995. The
decrease in the effective tax rate in 1995 compared with that of 1994 was
primarily due to a higher level of tax-exempt income in 1995 and the reduction
in the state tax rate.
23
25
BALANCE SHEET REVIEW
TRENDS IN EARNING ASSETS
Average earning assets increased to $10.2 billion in 1995, compared with
$9.4 billion in 1994, due to growth in the average loan balances. The
acquisitions of NFS and Cornerstone added $505 million of loans. Average loans,
excluding the impact of NFS and Cornerstone, increased in both the commercial
and consumer areas.
LOAN PORTFOLIO
Consumer loans represented 64% of the year-end loan portfolio, with $2.1
billion in residential loan balances and $2.9 billion in various types of
instalment loan balances. Consumer lending activities are primarily focused on
the Massachusetts and New Hampshire markets. Commercial and commercial real
estate loans were 36% of the portfolio. The majority of these loans are to New
England-based companies, primarily local middle market companies and small
businesses in Massachusetts and New Hampshire.
The Company originates fixed-rate and adjustable-rate residential mortgage
loans. The majority of fixed-rate residential mortgage loan originations are
securitized and sold to the secondary market with servicing retained. The
remainder of the fixed-rate and adjustable-rate residential real estate loan
originations are held in the loan portfolio or may be securitized and
transferred to the securities available for sale portfolio. Student loans are
originated and held in the loan portfolio while these primarily
government-guaranteed loans are in a deferred payment status. Student loans held
for sale at December 31, 1995, were $33 million. The Company sold $136 million
of student loans in 1995, compared with sales of $134 million in 1994.
An analysis of the changes in major loan categories for 1995 and 1994 is
presented in Table E (page 25). Loan business volume was $936 million in 1995,
after deducting loans added by the acquisitions of NFS and Cornerstone; loan
business volume was $1.0 billion in 1994. Residential mortgage activity was the
largest contributor to this volume, principally as the result of adjustable-rate
purchase money mortgages. The Company underwrote and sold $150 million of
fixed-rate residential mortgage loans during 1995, compared with $270 million in
1994. At December 31, 1995, loans held for sale were $20 million, compared with
$5 million at December 31, 1994. Instalment net loan business volume was $226
million, compared with $389 million in 1994. Automobile lending, particularly in
the first three quarters of the year, was affected adversely by higher rates,
slower auto sales, and active competition from nonbank lenders. Activity picked
up in the fourth quarter as the Company instituted selective rate reductions.
Commercial loan volume was $35 million in 1995, compared with $216 million in
1994. This reduction in net business volume was primarily related to auto dealer
financings as loan volumes declined in 1995 from 1994. In addition,
international outstandings decreased during 1995 compared with increases in
outstandings during 1994. Auto dealer outstandings were adversely affected by a
combination of lower auto sales during 1995 and some delays in deliveries as a
result of the auto trucker strike. The Company's international loan portfolio,
which is primarily focused on Mexico and South America, was $138 million at
December 31, 1995, compared with $160 million at December 31, 1994. These
international credits are predominantly trade related and primarily with
well-known and established foreign banks. Business volume in the commercial real
estate portfolio was $68 million in 1995, compared with $55 million in 1994.
24
26
TABLE E
CHANGES IN THE LOAN PORTFOLIO AT YEAR-END -- 1995 VS. 1994
ANALYSIS OF CHANGE IN
LOAN CATEGORIES -- 1995
INCREASE ------------------------------------------------------ 1994
(DECREASE) GROSS TRANSFERS LOANS NET NET
FROM YEAR- CHARGE- TO ACQUIRED, BUSINESS BUSINESS
1995 END 1994 OFFS OREO SALES NET(1) VOLUME VOLUME
---------- ---------- -------- --------- --------- -------- -------- ----------
(IN THOUSANDS)
Commercial................... $1,604,031 $ 75,766 $ (6,704) $ (73) $ -- $ 47,081 $ 35,462 $ 216,394
Commercial real estate....... 1,167,043 210,447 (9,821) -- -- 152,359 67,909 55,068
Residential mortgage......... 2,053,635(2) 718,169 (7,621) (2,711) (150,196) 272,893 605,804 386,409
Instalment loans
Automobile and other....... 1,384,356 65,611 (7,266) -- -- 19,057 53,820 151,792
Home equity................ 799,608 57,404 (1,507) (377) -- 36,848 22,440 44,285
Credit card................ 314,316 (5,210) (12,446) -- -- -- 7,236 5,726
Student loans.............. 301,160(3) (10,311) (374) -- (136,218) 52 126,229 169,025
Reserve credit............. 146,944 10,697 (6,280) -- -- 240 16,737 18,045
---------- ---------- -------- ------- --------- -------- -------- ----------
Total instalment loans..... 2,946,384 118,191 (27,873) (377) (136,218) 56,197 226,462 388,873
---------- ---------- -------- ------- --------- -------- -------- ----------
Total loans.................. $7,771,093 $1,122,573 $(52,019) $(3,161) $(286,414) $528,530 $935,637 $1,046,744
========== ========== ======== ======= ========= ======== ======== ==========
<FN>
- ---------------
(1) As a result of the adoption of SFAS No. 114 on January 1, 1995, the Company
reclassified $33.2 million of in-substance foreclosures and $8.7 million of
related reserves to loans and the allowance for loan losses, respectively.
Charge-offs of $8.7 million were subsequently recorded during the first
quarter of 1995. These items are included in the numbers above.
(2) Includes residential mortgage loans held for sale of $20 million in 1995.
(3) Includes student loans held for sale of $33 million in 1995.
SECURITIES PORTFOLIOS
The securities portfolios (TABLE F, page 26) totaled $3.0 billion at
December 31, 1995, $2.9 billion at December 31, 1994, and $3.0 billion at
December 31, 1993. The weighted average maturity of the securities portfolios
was 1.3 years at December 31, 1995, compared with 1.6 years at December 31,
1994, and .8 years at December 31, 1993.
Short-term investments were $361 million at December 31, 1995, compared
with $166 million at December 31, 1994, and $803 million at December 31, 1993.
In November of 1995, the Financial Accounting Standards Board ("FASB")
issued a special report that allowed for a one-time reassessment of the
appropriateness of the classifications of all securities held at the time. As a
result of its reassessment, the Company reclassified $2.0 billion from
investment securities to securities available for sale.
Securities available for sale, consisting principally of debt securities,
are stated at market value in 1995 and 1994 and at the lower of aggregate cost
or market in 1993. 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. Securities available for sale were
$2.5 billion at December 31, 1995, $221 million at December 31, 1994, and $629
million at December 31, 1993. At December 31, 1995, securities available for
sale had gross unrealized gains of $34 million and gross unrealized losses of $3
million.
The Company's securities available for sale portfolio contains primarily
U.S. Government securities, state and local government securities, asset-backed
securities, and U.S. Agency mortgage-backed securities. The total state and
local government portfolio, which is concentrated primarily in Massachusetts,
was $227 million at December 31, 1995, with the single largest issue being
approximately $6 million. All securities were either rated investment grade or,
in the case of unrated securities, determined by management to be equivalent to
investment grade.
25
27
The investment securities portfolio, consisting principally of industrial
revenue bonds and Federal Reserve Bank stock at December 31, 1995, is stated at
amortized cost. The Company's investment securities portfolio was $54 million at
December 31, 1995, $2.6 billion at December 31, 1994, and $1.6 billion at
December 31, 1993. At December 31, 1995, the market value of the investment
securities portfolio approximated the amortized cost of the portfolio.
The Company also has a trading account securities portfolio consisting
principally of short-term state and local government securities recorded at
market value, which was $51 million, $27 million, and $15 million at December
31, 1995, 1994, and 1993, respectively. Trading account gains were $2.8 million
in 1995, $2.1 million in 1994, and $2.3 million in 1993.
TABLE F
SECURITIES PORTFOLIOS
AT DECEMBER 31
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Short-term investments................................. $ 361,164 $ 166,286 $ 803,068
---------- ---------- ----------
Securities available for sale(1)
U.S. Government securities........................... 1,828,408 -- 322,707
State and local government securities................ 227,499 8,564 18,964
U.S. Agency mortgage-backed securities............... 97,799 -- 30,832
Asset-backed securities.............................. 43,754 -- --
Corporate and other.................................. 351,667 212,038 256,500
---------- ---------- ----------
2,549,127 220,602 629,003
---------- ---------- ----------
Investment securities(1)
U.S. Government securities........................... -- 2,083,519 1,203,315
Asset-backed securities.............................. -- 200,386 204,798
State and local government securities................ -- 171,436 128,997
Industrial revenue bonds............................. 41,544 49,548 59,958
U.S. Agency mortgage-backed securities............... -- 49,503 --
Other................................................ 12,854 1,857 1,992
---------- ---------- ----------
54,398 2,556,249 1,599,060
---------- ---------- ----------
Total.................................................. $2,964,689 $2,943,137 $3,031,131
========== ========== ==========
Weighted average maturity of securities available for
sale and investment securities in years(2)........... 1.5 1.7 1.1
Weighted average maturity of total securities in
years(2)............................................. 1.3 1.6 0.8
<FN>
- ---------------
(1) During 1995, the Financial Accounting Standards Board allowed a one-time
reassessment of the classification of securities, and the Company
reclassified $2.0 billion from investment securities to securities available
for sale.
(2) The weighted average maturity calculation excludes amortizing industrial
revenue bonds and reflects estimated prepayments for U.S. Agency
mortgage-backed securities and asset-backed securities.
DEPOSITS AND OTHER SOURCES OF FUNDS
The Company's extensive product lines, Customer Sales and Service Center,
and banking network of 237 full-service offices and 453 remote banking
facilities generate significant core deposits. Core deposits accounted for 98%
of total average deposits during 1995 and 99% in 1994.
Core deposits include transaction accounts (demand, NOW, and savings
accounts), money market deposit accounts, and consumer time certificates.
Average core deposits were $9.0 billion in 1995, compared with $8.5 billion in
1994. Average transaction accounts were $4.9 billion in 1995 and 1994. Average
money
26
28
market deposit accounts decreased from $2.7 billion in 1994 to $2.5 billion in
1995. Customers continued to move towards certificates of deposit, particularly
as interest rates rose during the first part of 1995; average consumer
certificates of deposit increased to $1.6 billion in 1995, compared with $1.0
billion in 1994. The acquisitions of NFS and Cornerstone added $315 million of
certificates of deposit.
Average corporate certificates of deposit in excess of $100 thousand
("CDs"), which represent a small portion of the Company's total funding, were
$205 million in 1995, compared with $91 million in 1994.
Average purchased funds were up slightly at $916 million in 1995, compared
with $839 million in 1994.
INTEREST RATE RISK MANAGEMENT AND LIQUIDITY
BayBanks' Capital Markets Committee monitors and manages the Company's
overall balance sheet interest sensitivity position, the securities portfolios,
funding, and liquidity. Interest sensitivity, as measured by the Company's gap
position, is affected by the level and direction of interest rates and current
liquidity preferences of its customers. A negative gap generally indicates that
liabilities will reprice more quickly than assets, and a positive gap generally
indicates that assets will reprice in aggregate before liabilities. These
factors, as well as projected balance sheet growth, current and potential
pricing actions, competitive influences, national monetary and fiscal policy,
and the national and regional economic environments, are considered in the asset
and liability management decision process.
The Company's interest sensitivity gap position, as shown in Table G (page
28), is based on contractual maturities and repricing opportunities for loans,
securities, deposits, and borrowings. However, in a period of rising or falling
interest rates, this basis of presentation does not reflect lags that may occur
in the repricing of certain loans and deposits. For example, the cost of certain
interest-bearing core deposit categories (primarily savings, NOW, and money
market deposit accounts) has lagged changes in market interest rates, although
the Company contractually can change the interest rates on these deposits at any
time. A management adjustment provides for these expected repricing lags and for
the notion that interest rate changes in many of these core deposit categories,
particularly certain transaction accounts, have not been as sensitive to changes
in market interest rates. The management adjustment is based upon the
relationship of the expected movement in core deposit rates relative to market
rates and is reviewed periodically and adjusted to reflect changes in trends.
During 1995, the management adjustment was modified to further reflect the lower
sensitivity of rates on core deposits to changes in market interest rates.
At December 31, 1995, the Company's adjusted gap for the total
within-180-day period had moved from a positive $76 million at December 31,
1994, to a positive gap position of $958 million. The total within-one-year gap
moved from a positive $648 million at December 31, 1994, to a positive $1.6
billion at December 31, 1995.
In addition to the gap analysis presented in the table, the Company also
uses a simulation model that incorporates varying interest rate scenarios,
including the effect of rapid changes (both increases and decreases up to 200
basis points) in interest rates on its net interest income and net interest
margin. The Company's policy is to minimize volatility in its net interest
income and net interest margin.
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29
TABLE G
INTEREST RATE SENSITIVITY POSITION
AT DECEMBER 31, 1995
0-30 31-90 91-180 TOTAL WITHIN 181-365 TOTAL WITHIN
DAYS DAYS DAYS 180 DAYS DAYS ONE YEAR
------- ------- ---- ------------ ------ ------------
(IN MILLIONS)
Total assets...................... $ 3,859 $ 817 $780 $ 5,456 $1,291 $ 6,747
Total liabilities................. 7,177 369 437 7,983 562 8,545
------- ------- ---- ------- ------ -------
Net contractual gap position...... (3,318) 448 343 (2,527) 729 (1,798)
Net interest rate swaps........... -- 4 (2) 2 -- 2
------- ------- ---- ------- ------ -------
Net gap position including
interest rate swaps at December
31, 1995........................ $(3,318) $ 452 $341 $(2,525) $ 729 $(1,796)
Management adjustment............. 4,578 (1,031) (64) 3,483 (48) 3,435
------- ------- ---- ------- ------ -------
Management-adjusted gap at
December 31, 1995............... $ 1,260 $ (579) $277 $ 958 $ 681 $ 1,639
======= ======= ==== ======= ====== =======
Management-adjusted gap at
December 31, 1994............... $ 1,084 $(1,275) $267 $ 76 $ 572 $ 648
======= ======= ==== ======= ====== =======
Liquidity, for commercial banking activities, is the ability to respond to
maturing obligations, deposit withdrawals, and loan demand. The liquidity
positions of the Company's banking subsidiaries are closely monitored by the
Company's Capital Markets Committee. BayBanks' distribution network provides a
stable base of in-market core deposits and limits the need to raise funds from
the national market.
The Company's net liquidity position (short-term investments, securities
available for sale, and investment securities, less pledged securities, large
CDs, and purchased funds) was $1.7 billion, or 16% of total deposits and
borrowings, at December 31, 1995, compared with $1.6 billion, also 16% of total
deposits and borrowings, at December 31, 1994. The Company's strong liquidity
position allowed for the expansion of the loan portfolio and the acquisitions of
NFS and Cornerstone in 1995. The Company derives additional liquidity
flexibility from the relatively short average maturity (1.3 years) of its
securities portfolios (page 26).
The statement of cash flows provides additional information on liquidity.
The statement presents the results of the Company's operating, investing, and
financing activities. Operating activities included $137 million in net income
for 1995, before adjustment of noncash items. Investing activities consist
primarily of both proceeds from sales and purchases of short-term investments
and securities and net loan originations. Financing activities consist primarily
of the net deposit activity in the Company's various accounts and short-term
borrowings, as well as dividends paid.
Cash and cash equivalents were $829 million at December 31, 1994. During
1995, net cash provided by operating activities was $285 million, net cash used
in investing activities totaled $567 million, and net cash provided by financing
activities was $375 million. Cash and cash equivalents were $922 million at
December 31, 1995.
The parent company's primary source of liquidity is dividends received from
its subsidiaries and income earned on its securities portfolios. The most
significant uses of the parent company's resources are capital contributions to
banking and other subsidiaries when appropriate, dividends paid to stockholders,
and the acquisition of subsidiaries. In 1995, two of the Company's banking
subsidiaries repaid $51 million in floating-rate notes to the parent company.
The parent company contributed $1 million of capital to a nonbank subsidiary
during 1995. Dividends received from banking subsidiaries were $101 million, and
dividends received from nonbank subsidiaries were $35 million during 1995. The
parent company paid $43 million in dividends to its stockholders in 1995. During
1995, the parent company paid $60 million in cash in the acquisition of NFS and
$18 million in cash in the acquisition of Cornerstone (see Note 2 to the
consolidated financial statements under Item 8 for further discussion). At
December 31, 1995, the parent company had $154 million in cash, short-term
investments, and other securities.
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30
The Merger Agreement with Bank of Boston requires the Company to obtain the
consent of Bank of Boston before incurring indebtedness, disposing of assets, or
making material investments, in each case other than in the ordinary course
consistent with past practice. The Company does not believe that these
restrictions will have a material effect on its liquidity or operations during
the period before the merger is consummated.
CREDIT QUALITY REVIEW
OVERVIEW
The Company continually monitors the credit quality of its loan portfolio.
Employing a standard system for grading loans, individual account officers
assign loan grades, or risk ratings, and, if necessary, a specific loan loss
reserve calculated under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan."
An independent Loan Review Department then reviews loan grades and specific loan
loss reserves. Any loan or portion of a loan determined to be uncollectible is
charged off. On a quarterly basis, senior management reviews the loan portfolio,
with particular emphasis on higher-risk loans, to assess the credit quality and
loss potential inherent in the portfolio. Also considered in this review are
delinquency trends and the adequacy of reserves. The size of the allowance for
loan losses, the OREO reserve, and the related provisions reflect this analysis.
Nonperforming assets (which exclude restructured, accruing loans and
accruing loans 90 days or more past due) include nonperforming loans (including
impaired loans, as defined below) and OREO and were $83 million at December 31,
1995, a 32% decrease from $122 million at December 31, 1994.
The decline in nonperforming assets is shown in Table H. This result was
achieved by successful workout activities that included property sales, payments
on nonperforming loans, and loans that qualified for, and were returned to,
accrual status. Favorable resolutions were $85 million in 1995, or 70% of
nonperforming assets at the beginning of the year. Additions to nonperforming
assets were $66 million in 1995, a decrease of 11% compared with $74 million in
1994.
TABLE H
CHANGES IN ASSET QUALITY
SIX MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
1995 12/31/95 6/30/95 1994 12/31/94 6/30/94
-------- -------- -------- --------- -------- --------
(IN THOUSANDS)
Nonperforming assets(1)..... $ 82,626 $ 82,626 $ 96,814 $ 122,026 $122,026 $172,921
======== ======== ======== ========= ======== ========
Nonperforming asset
activity:
Additions................. $ 66,041 $ 36,598 $ 29,443 $ 73,889 $ 29,787 $ 44,102
-------- -------- -------- --------- -------- --------
Payments.................. (44,867) (25,579) (19,288) (36,174) (17,225) (18,949)
Return to accrual......... (3,889) (2,558) (1,331) (33,429) (19,088) (14,341)
OREO sales................ (36,458) (15,950) (20,508) (70,304) (29,302) (41,002)
-------- -------- -------- --------- -------- --------
Total improvements........ (85,214) (44,087) (41,127) (139,907) (65,615) (74,292)
Net outflow............... (19,173) (7,489) (11,684) (66,018) (35,828) (30,190)
-------- -------- -------- --------- -------- --------
Charge-offs................. (26,365)(2) (12,392) (13,973)(2) (40,441) (16,289) (24,152)
Change in OREO reserve...... 6,138 (2) 5,693 445 (2) 4,805 1,222 3,583
-------- -------- -------- --------- -------- --------
Total decrease in
nonperforming assets...... $(39,400) $(14,188) $(25,212) $(101,654) $(50,895) $(50,759)
======== ======== ======== ========= ======== ========
<FN>
- ---------------
(1) Nonperforming assets include nonperforming loans and OREO and exclude
restructured, accruing loans and accruing loans 90 days or more past due.
(2) The transfer of $8.7 million of reserves related to in-substance
foreclosures reclassified to loans upon adoption of SFAS No. 114 and
subsequent charge-offs of $8.7 million recorded during the first quarter of
1995 had no effect on total nonperforming assets and are not reflected in
the table above.
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31
NONPERFORMING LOANS
Effective 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." Under SFAS No.
114, a loan is impaired when it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. Large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage and
instalment loans, are exempt from the provisions of SFAS No. 114. Upon adoption
of this statement on January 1, 1995, the Company reclassified $33 million of
in-substance foreclosures and $9 million of related reserves to loans and the
allowance for loan losses, respectively.
Total nonperforming loans (TABLE I) were $64 million at December 31, 1995,
compared with $55 million at December 31, 1994. On a pro forma basis, assuming
the adoption of SFAS No. 114 on December 31, 1994, nonperforming loans declined
19% since last year-end as the resolution of problem assets exceeded new
additions.
TABLE I
NONPERFORMING LOANS(1)
AT DECEMBER 31
1995 1994 1993
--------------- --------------- ----------------
(DOLLARS IN THOUSANDS)
Commercial.............................. $22,227 35% $17,480 32% $ 47,751 43%
Commercial real estate.................. 25,832 41 26,638 49 49,014 45
Residential mortgage.................... 13,068 20 8,971 16 11,473 10
Instalment.............................. 2,703 4 1,538 3 1,763 2
------- --- ------- --- -------- ---
Total nonperforming loans.......... $63,830 100% $54,627 100% $110,001 100%
======= === ======= === ======== ===
<FN>
- ---------------
(1) Excludes restructured, accruing loans and accruing loans 90 days or more
past due.
OTHER REAL ESTATE OWNED
OREO consists of foreclosed properties and in-substance foreclosures.
Foreclosed properties are being prepared for sale or are currently listed for
sale. Under SFAS No. 114, the definition of in-substance foreclosures has been
narrowed to assets for which the Company has received physical possession of the
collateral. OREO (net of a valuation reserve) declined to $19 million at
December 31, 1995, from $67 million at December 31, 1994, primarily reflecting
the reclassification of certain in-substance foreclosures to loans upon adoption
of SFAS No. 114, as discussed above. Excluding the impact of the SFAS No. 114
reclassification, OREO continued to decline primarily due to property sales.
RESTRUCTURED, ACCRUING LOANS
The Company restructures credits with troubled borrowers if such
arrangements are likely to minimize losses the Company may otherwise incur on a
particular credit. Loans that have been restructured remain on nonaccrual status
until the customer has demonstrated a period of performance under the new
contractual terms.
The adoption of SFAS No. 114 also affected the accounting for troubled debt
restructurings. Troubled debt restructurings entered into after December 31,
1994, are accounted for as impaired loans until the year subsequent to
restructure, provided that the loan bears a market rate of interest at the time
of restructure and is performing under the restructured terms. The amount of
troubled debt restructurings entered into in 1995 was not significant. In
accordance with the provisions of SFAS No. 114 and SFAS No. 118, these loans
have been accounted for as impaired loans and have been disclosed as
nonperforming loans.
30
32
Loans restructured prior to the adoption of SFAS No. 114 are exempt from
the provisions of that statement provided they are performing under the
restructured terms. At December 31, 1995, restructured, accruing loans that were
entered into prior to the adoption of SFAS No. 114 and were performing under the
restructured terms were $6 million; restructured, accruing loans were $14
million at December 31, 1994.
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
Accruing loans 90 days or more past due, presented in Table J, increased
slightly to $40 million at December 31, 1995, from $36 million at December 31,
1994. The increase was the result of the New Hampshire acquisitions and an
overall increase in consumer credit delinquencies. Of the $40 million in
accruing loans 90 days or more past due at December 31, 1995, residential real
estate loans and instalment loans together represented 94% of the total.
Residential real estate and instalment loans by their nature include a large
number of smaller loans. Of the $13 million in such residential real estate
loans, $12 million were in owner-occupied properties.
TABLE J
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT DECEMBER 31
1995 1994 1993
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Commercial..................................... $ 1,710 4% $ 348 1% $ 3,558 7%
Commercial real estate......................... 831 2 4,626 13 5,093 10
Residential mortgage........................... 13,238 33 10,104 28 20,698 40
Instalment..................................... 24,693 61 21,115 58 22,400 43
------- --- ------- --- ------- ---
Total........................................ $40,472 100% $36,193 100% $51,749 100%
======= === ======= === ======= ===
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $154 million at December 31, 1995,
reflecting the $10.3 million allowance acquired in the acquisitions of NFS and
Cornerstone, the provision for loan losses of $25.0 million, and net charge-offs
of $28.5 million during 1995. The coverage of nonperforming loans (allowance for
loan losses as a percentage of nonperforming loans) decreased to 241% at
December 31, 1995, from 269% at December 31, 1994. However, on a pro forma
basis, assuming the adoption of SFAS No. 114 on December 31, 1994, and the
subsequent charge-off of in-substance foreclosure reserves reclassified to the
allowance for loan losses, the 1994 coverage ratio would have been 186%.
The allowance for loan losses (TABLE K, page 32) consists of both allocated
and unallocated portions. The allocated portion represents amounts within the
total allowance assigned to specifically identified problem loans. The
unallocated portion is the amount set aside to cover the risk of loss that is
not specifically identified as to any individual loan, but that is inherent in
any loan portfolio. The unallocated allowance is calculated by migrating each
loan category by that category's recent loan loss experience. The process
involves analysis of loan grade loss histories and trends for each type of loan.
Economic factors and trends are also considered when determining the total
unallocated portion of the allowance. Statistical modeling is the primary
methodology for determining the amount of the allowance apportioned to the
consumer portfolios (residential and instalment loans). However, the apportioned
amount is considered unallocated in nature.
31
33
TABLE K
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AT DECEMBER 31, 1995
SPECIFIC
ALLOCATIONS UNALLOCATED TOTAL
----------- ----------- --------
(DOLLARS IN THOUSANDS)
LOAN CATEGORY
Commercial................................................ $5,169 $ 36,964 $ 42,133
Commercial real estate.................................... 3,583 59,458 63,041
------ -------- --------
Total corporate......................................... 8,752 96,422 105,174
Residential mortgage...................................... -- 15,837 15,837
Instalment................................................ -- 32,677 32,677
------ -------- --------
Total allowance......................................... $8,752 $144,936 $153,688
====== ======== ========
Percentage of total allowance........................... 6% 94% 100%
====== ======== ========
CAPITAL AND DIVIDENDS
BayBanks' consolidated risk-based capital ratios were 12.80% for total
capital and 11.41% for core capital at December 31, 1995, compared with 13.06%
and 11.51%, respectively, at December 31, 1994. The consolidated leverage ratio
was 7.66% at December 31, 1995, and 7.35% at December 31, 1994.
On January 25, 1996, BayBanks declared a quarterly dividend of $.60 per
share payable March 1, 1996. Total dividends declared and paid for 1995 were
$2.20, a 38% increase over the 1994 dividends declared and paid of $1.60. The
closing price of BayBanks' stock on December 31, 1995, was $98.25, compared with
$52.75 at December 31, 1994, an increase of 86%. Under the Company's Merger
Agreement with Bank of Boston, the Company's quarterly dividend may not be
increased above $.60 without the consent of Bank of Boston.
COMPARISON OF 1994 AND 1993
NET INTEREST INCOME
Net interest income (see TABLE B, page 20) was $472.9 million in 1994,
compared with $429.2 million in 1993.
The growth in net interest income in 1994 compared with 1993 was primarily
the result of a 9% increase in average earning assets and an increase in
interest rates. Instalment lending played a significant role in earning asset
increases for the year as a whole, while commercial lending activity was
particularly strong in the second half of 1994. In addition, growth was affected
by the general expansion of the securities portfolios over the course of the
year.
The yield on earning assets was 7.10% in 1994, compared with 6.94% in 1993,
as the result of higher rates on the commercial and commercial real estate loan
portfolios as market rates increased and to some increases in yields on
securities as maturities were reinvested at higher rates.
BayBanks' funding costs during 1994 increased due to an increased volume of
purchased funds and an atmosphere of rising interest rates. Rates on core
deposits steadily increased during 1994, albeit at a much slower rate than
general market rates. The cost of total interest-bearing liabilities (as a
percentage of average earning assets) increased 12 basis points to 2.06% in 1994
compared with 1993.
FEES, SERVICE CHARGES, AND OTHER NONINTEREST INCOME
Noninterest income (see TABLE C, page 21) increased to $207.3 million in
1994 from $198.5 million in 1993.
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34
Total service charges and fees on deposits increased 4% to $109.9 million
in 1994, compared with $105.2 million in 1993. An increase in the number of
consumer accounts and selected repricings resulted in higher service charges and
fees from consumer accounts. These increases were partially offset by a decline
in corporate service charges resulting from higher earnings credit rates on
compensating deposit balances.
Other components of noninterest income experienced growth during 1994.
Processing fees increased 17% to $16.2 million in 1994 from $13.8 million in
1993 primarily as the result of an increased volume of point-of-sale
transactions. Investment management and brokerage fees increased 31% to $8.3
million in 1994 from $6.3 million in 1993 due primarily to investment advisory
fees from higher BayFunds balances on average in 1994 as compared with 1993. The
total amount of assets under management in BayFunds was $1.3 billion at December
31, 1994, compared with $1.1 billion at December 31, 1993.
Mortgage banking fees were $7.2 million in 1994, compared with $12.0
million in 1993. A decrease in refinance volumes in 1994, as market interest
rates increased, resulted in lower fee income.
Student loan sales gains were $4.5 million in 1994, compared with $1.8
million in 1993, resulting from a higher volume of sales and more favorable
pricing.
OPERATING EXPENSES
Operating expenses, excluding OREO and legal expenses related to loan
workouts (see TABLE D, page 23) were $447.2 million in 1994, compared with
$429.2 million in 1993.
Salaries and benefits increased 8% to $229.6 million in 1994, compared with
$213.0 million in 1993, primarily as the result of normal salary increases,
additional staffing requirements, and higher accruals for performance awards.
Marketing and public relations increased due to higher promotional activity
related to corporate and consumer lending, as well as community banking
programs. Service bureau and other data processing expenses increased 5% to
$17.4 million in 1994, compared with $16.5 million in 1993, as a result of
updating processing systems. Professional services declined 21% in 1994 to $10.8
million from $13.7 million in 1993, primarily due to lower utilization of
outside staffing services in the Company's mortgage banking operations. Courier
expenses increased due primarily to an increase in armored carrier costs
associated with additional remote ATMs and extended branch hours. Legal and
consulting expenses reflected increased costs for consumer business projects as
well as an increase in general legal costs in 1994 compared with 1993. The cost
of administering, managing, and disposing of OREO properties and legal expenses
related to such workouts was $10.0 million in 1994, compared with $17.5 million
in 1993, reflecting the continued disposition of OREO and the resolution of
workout credits.
PROVISIONS FOR LOAN LOSSES AND THE OREO RESERVE
The provisions for loan losses and the OREO reserve (see TABLE A, page 19)
declined substantially in 1994 to $33.4 million, compared with $61.3 million in
1993, reflecting continued improvements in credit quality. The provision for
loan losses was $24.0 million in 1994, compared with $36.5 million in 1993. The
provision for the OREO reserve was $9.4 million in 1994, compared with $24.8
million in 1993. The OREO provision includes net gains on sales of properties of
$6.3 million in 1994 and $7.6 million in 1993.
INCOME TAXES
The Company reported a provision for income taxes of $73.5 million in 1994,
compared with $47.1 million in 1993. The effective tax rate in 1994 was 40.4%,
compared with 41.0% in 1993.
IMPENDING ACCOUNTING CHANGES
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was
adopted by the Company on January 1, 1996. This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
33
35
intangibles, and goodwill related to such assets being held and used and for
such assets and certain identifiable intangibles to be disposed of. The
implementation of this statement is not expected to have a material effect on
the Company's results of operations or financial condition.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which became effective on January 1, 1996. This statement
establishes a fair-value-based method of accounting for stock-based compensation
plans under which compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period. However, the
statement allows a company to continue to measure compensation cost for such
plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Under APB Opinion No. 25, no compensation cost is
recorded if, at the grant date, the exercise price of options granted is equal
to the fair market value of the Company's common stock. The Company has elected
to continue to follow the accounting method under APB No. 25. SFAS No. 123
requires companies that elect to continue to follow the accounting in APB
Opinion No. 25 to disclose in the notes to their financial statements pro forma
net income and earnings per share as if the fair-value-based method of
accounting had been applied. Based on 1995 activity, net income and earnings per
share would not have been materially affected had SFAS No. 123 been applied.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
-------------
Independent Auditors' Report........................................... 35
Consolidated Balance Sheet -- December 31, 1995 and 1994............... 36
Consolidated Statement of Income -- Years Ended December 31, 1995,
1994,
and 1993............................................................. 37
Consolidated Statement of Changes in Stockholders' Equity -- Years
Ended
December 31, 1995, 1994, and 1993.................................... 38
Consolidated Statement of Cash Flows -- Years Ended December 31, 1995,
1994, and 1993....................................................... 39
Notes to Financial Statements.......................................... 40-66
34
36
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
Certified Public Accountants
99 High Street
Boston, MA 02110
To the Board of Directors and Stockholders of BayBanks, Inc.:
We have audited the accompanying consolidated balance sheets of BayBanks,
Inc., and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BayBanks,
Inc., and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
JANUARY 18, 1996
35
37
BAYBANKS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31
---------------------------
1995 1994
----------- -----------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
ASSETS
Cash and due from banks (Note 4).................................. $ 922,031 $ 829,170
Trading account securities (Note 3)............................... 50,755 27,416
Securities portfolios (Note 3)
Interest-bearing deposits and other short-term investments...... 361,164 166,286
Securities available for sale -- amortized cost $2,518,199 in
1995 and $220,132 in 1994 (Note 5)........................... 2,549,127 220,602
Investment securities -- market value $54,398 in 1995 and
$2,481,584 in 1994 (Note 5).................................. 54,398 2,556,249
----------- -----------
2,964,689 2,943,137
Loans -- net of unearned income and fees (Notes 3 and 6)
Commercial...................................................... 1,604,031 1,528,265
Commercial real estate.......................................... 1,167,043 956,596
Residential mortgage............................................ 2,053,635 1,335,466
Instalment...................................................... 2,946,384 2,828,193
----------- -----------
7,771,093 6,648,520
Less allowance for loan losses (Notes 3 and 7).................. 153,688 146,835
----------- -----------
7,617,405 6,501,685
Premises and equipment, net (Note 8).............................. 215,714 195,430
Other real estate owned and in-substance foreclosures, net
(Notes 3 and 7)................................................. 18,796 67,399
Goodwill and other intangibles (Notes 2 and 3).................... 54,869 4,421
Other assets...................................................... 219,242 202,289
----------- -----------
Total assets................................................. $12,063,501 $10,770,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand.......................................................... $ 2,383,823 $ 2,214,761
NOW accounts.................................................... 1,657,825 1,491,694
Savings......................................................... 1,498,596 1,462,459
Money market deposit accounts................................... 2,599,295 2,560,425
Consumer time................................................... 1,862,611 1,095,357
Time -- $100,000 or more........................................ 215,257 175,663
----------- -----------
10,217,407 9,000,359
Federal funds purchased and other short-term borrowings (Note
9).............................................................. 718,941 849,517
Accrued expenses and other accounts payable....................... 104,831 71,854
Long-term debt (Note 10).......................................... 64,849 51,154
Guarantee of ESOP indebtedness (Note 12).......................... 6,289 9,451
Stockholders' equity (Notes 1, 11, and 20):
Common stock, par value $2.00 per share
Shares authorized -- 50,000,000
Shares issued -- 19,642,774 in 1995 and 18,999,354 in 1994... 39,286 37,999
Surplus......................................................... 360,969 314,924
Retained earnings............................................... 539,711 444,891
Net unrealized gain on securities available for sale, net of tax
(Note 3)..................................................... 17,678 276
Treasury stock at cost -- 1,841 shares in 1995 and 1,431 shares
in 1994...................................................... (171) (27)
Guarantee of ESOP indebtedness (Note 12)........................ (6,289) (9,451)
----------- -----------
Total stockholders' equity................................... 951,184 788,612
----------- -----------
Total liabilities and stockholders' equity................... $12,063,501 $10,770,947
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
36
38
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Income on interest-bearing deposits and other
short-term investments............................ $ 17,169 $ 8,467 $ 19,002
Interest on securities portfolios
Taxable........................................... 125,955 125,096 82,343
Tax-exempt........................................ 21,658 14,734 8,468
----------- ----------- -----------
147,613 139,830 90,811
Interest and fees on loans.......................... 634,648 509,503 480,658
----------- ----------- -----------
Total income on earning assets...................... 799,430 657,800 590,471
Interest expense on deposits and borrowings
Deposits.......................................... 234,188 152,567 160,441
Short-term borrowings (Note 9).................... 54,128 37,739 4,098
Long-term debt (Note 10).......................... 3,682 2,552 2,109
----------- ----------- -----------
Total interest expense.............................. 291,998 192,858 166,648
----------- ----------- -----------
Net interest income................................. 507,432 464,942 423,823
Provision for loan losses (Note 7).................. 25,000 24,000 36,500
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 482,432 440,942 387,323
Noninterest income
Service charges and fees on deposit accounts...... 109,812 109,918 105,211
Other noninterest income (Note 13)................ 109,439 97,370 93,313
----------- ----------- -----------
Total noninterest income............................ 219,251 207,288 198,524
Net securities gains (Notes 3 and 5)................ 40 203 411
Operating expenses
Salaries and benefits (Notes 11 and 12)........... 248,154 229,572 212,954
Occupancy and equipment (Note 8).................. 91,898 86,741 87,550
Other operating expenses (Note 14)................ 138,823 140,857 146,201
----------- ----------- -----------
Total operating expenses............................ 478,875 457,170 446,705
Provision for OREO reserve, net (Notes 3 and 7)..... 179 9,372 24,830
----------- ----------- -----------
Total operating expenses after OREO provision....... 479,054 466,542 471,535
----------- ----------- -----------
Income before taxes and cumulative effect of
accounting change................................. 222,669 181,891 114,723
Provision for income taxes (Notes 3 and 15)......... 85,295 73,522 47,072
----------- ----------- -----------
Income before cumulative effect of accounting
change............................................ 137,374 108,369 67,651
Less cumulative effect of accounting change (net of
tax benefit of $683 in 1994) (Note 12)............ -- 932 --
----------- ----------- -----------
Net Income.......................................... $ 137,374 $ 107,437 $ 67,651
=========== =========== ===========
Earnings Per Share (Note 3)
Income before accounting change................... $ 7.01 $ 5.65 $ 3.57
Less cumulative effect of accounting change....... -- 0.05 --
----------- ----------- -----------
Net income........................................ $ 7.01 $ 5.60 $ 3.57
=========== =========== ===========
Average shares outstanding.......................... 19,608,734 19,173,524 18,953,397
The accompanying notes are an integral part of these consolidated financial
statements.
37
39
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NET UNREALIZED
GAIN ON
SECURITIES
COMMON RETAINED AVAILABLE TREASURY ESOP LOAN
STOCK SURPLUS EARNINGS FOR SALE STOCK GUARANTEE TOTAL
------- -------- --------- -------------- -------- --------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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)
(Note 11)................................. 138 (914) (776)
Other, principally employee benefit plans
(Note 11)................................. 1,364 1,364
------- -------- -------- ------- ------- -------- --------
BALANCE AS OF DECEMBER 31, 1993............... 37,486 310,355 367,662 -- -- (12,241) 703,262
Net unrealized gain on securities available
for sale at January 1, 1994 (Note 3)...... 2,526 2,526
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 3)..... (2,250) (2,250)
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)
(Note 11)................................. 48 (1,727) (1,679)
Other, principally employee benefit plans
(Note 11)................................. 1,938 1,938
------- -------- -------- ------- ------- -------- --------
BALANCE AS OF DECEMBER 31, 1994............... 37,999 314,924 444,891 276 (27) (9,451) 788,612
Net income -- 1995.......................... 137,374 137,374
Cash dividends declared ($2.20 per share)... (42,554) (42,554)
Stock issued in acquisition of NFS Financial
Corp. (NFS) (487,267 shares) (Note 2)..... 975 37,641 38,616
Options issued in acquisition of NFS (29,778
options) (Note 2)......................... 1,504 1,504
Payment on ESOP note........................ 3,162 3,162
Net change in valuation reserve related to
securities available for sale portfolio,
net of deferred income taxes (Note 3)..... 17,402 17,402
Exercise of stock options (176,886
shares)................................... 253 2,231 3,130 5,614
Stock issued (1,960 shares) in payment of
fees...................................... 4 118 122
Stock issued (27,750 shares) in connection
with restricted stock plan................ 55 (55) --
Treasury shares acquired (50,853 shares)
(Note 11)................................. 107 (3,274) (3,167)
Other, principally employee benefit plans
(Note 11)................................. 4,499 4,499
------- -------- -------- ------- ------- -------- --------
BALANCE AS OF DECEMBER 31, 1995............... $39,286 $360,969 $539,711 $ 17,678 $ (171) $ (6,289) $951,184
======= ======== ======== ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
38
40
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................................. $ 137,374 $ 107,437 $ 67,651
Adjustments to reconcile net income to net cash provided by operating
activities:
Proceeds from sales and maturities of trading account securities(1)....... 3,010,411 2,493,752 1,832,047
Purchases of trading account securities................................... (3,042,417) (2,530,409) (1,803,249)
Amortization of security premium.......................................... 12,170 22,084 10,842
Net securities gains...................................................... (40) (203) (411)
Fixed-rate mortgages sold................................................. 150,196 269,995 815,722
Fixed-rate mortgages originated for sale, net of principal payments....... (162,569) (123,289) (775,749)
Student loans transferred from portfolio and sold......................... 136,218 134,107 67,363
Provision for loan losses................................................. 25,000 24,000 36,500
Amortization of goodwill and other intangibles............................ 2,420 558 684
Depreciation and amortization of premises and equipment................... 26,319 24,365 24,218
Gain on sales of premises and equipment................................... (1,756) (934) --
Provision for OREO reserve, net........................................... 179 9,372 24,830
Deferred income taxes..................................................... 1,616 9,216 2,675
Change in other assets.................................................... (11,548) (1,839) (27,223)
Change in interest receivable............................................. (18,800) (22,997) (107)
Change in accrued expenses and other accounts payable..................... 8,721 17,467 6,163
Change in interest payable................................................ 11,970 4,483 (3,320)
---------- ---------- ----------
Net cash provided by operating activities............................. 285,464 437,165 278,636
---------- ---------- ----------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale........................ 139,231 313,796 449,217
Proceeds from maturities of securities available for sale................... 625,849 360,199 605,245
Purchases of securities available for sale(1)(2)............................ (864,721) (246,555) (651,384)
Proceeds from maturities of investment securities(2)........................ 2,436,369 1,006,045 184,280
Purchases of investment securities.......................................... (1,941,985) (1,979,848) (1,115,180)
Net cash provided (used) by:
Short-term investments.................................................... (163,279) 636,782 288,917
Loans(3)(4)(5)............................................................ (742,421) (897,746) (348,318)
Proceeds from sales of premises and equipment............................... 2,585 1,703 125
Purchases of premises and equipment......................................... (33,700) (28,010) (18,467)
Proceeds from sales and payments related to OREO(4)(5)...................... 22,634 59,830 75,184
Purchases of financial institutions, net of cash acquired................... (47,803) -- --
---------- ---------- ----------
Net cash used by investing activities................................. (567,241) (773,804) (530,381)
---------- ---------- ----------
FINANCING ACTIVITIES
Net cash provided (used) by:
Demand deposits, NOW, and savings accounts................................ 136,176 150,715 276,644
Money market deposits..................................................... (65,827) (171,295) (235,571)
Consumer time deposits.................................................... 452,672 101,412 (240,802)
Time -- $100,000 or more.................................................. 39,202 140,706 (3,998)
Short-term borrowings..................................................... (143,027) 341,697 367,851
Long-term debt............................................................ (4,451) (3,293) 653
Dividends paid.............................................................. (42,554) (30,208) (16,801)
Other equity transactions................................................... 2,447 3,090 3,028
---------- ---------- ----------
Net cash provided by financing activities................................. 374,638 532,824 151,004
---------- ---------- ----------
Net change in cash and cash equivalents..................................... 92,861 196,185 (100,741)
Cash and cash equivalents at beginning of year(6)........................... 829,170 632,985 733,726
---------- ---------- ----------
Cash and cash equivalents at end of year(6)................................. $ 922,031 $ 829,170 $ 632,985
========== ========== ==========
Supplemental disclosure of cash flow information
Interest paid............................................................. $ 280,028 $ 188,375 $ 169,968
Taxes paid................................................................ 98,003 64,463 58,026
<FN>
- ---------------
(1) Excludes transfers of trading account securities to the securities available
for sale portfolio of $8.8 million, $23.8 million, and $30.8 million in
1995, 1994, and 1993, respectively.
(2) Excludes transfer of investment securities to the securities available for
sale portfolio of $2.0 billion in 1995 (see Note 5).
(3) Excludes transfers of loans to the other real estate owned category of $3.2
million, $30.7 million, and $40.5 million in 1995, 1994, and 1993,
respectively.
(4) Excludes loan originations in conjunction with OREO sales of $6.3 million,
$7.8 million, and $22.4 million in 1995, 1994, and 1993, respectively.
(5) 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.
(6) 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.
39
41
NOTES TO FINANCIAL STATEMENTS
NOTE 1. CONDENSED FINANCIAL INFORMATION OF THE PARENT
The condensed balance sheet is presented for 1995 and 1994, and a statement
of income and statement of cash flows are presented for the years 1993 through
1995, for BayBanks, Inc. (the "parent company").
BALANCE SHEET
DECEMBER 31
-----------------------
1995 1994
---------- --------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Cash and short-term investments...................................... $ 14,260 $ 15,472
Securities available for sale -- amortized cost $140,117 in 1995
and $2 in 1994..................................................... 140,142 6
Investment securities -- market value $66,842 in 1994................ -- 66,882
Investment in capital stock of subsidiaries
Banking subsidiaries............................................... 843,728 675,451
Nonbank subsidiaries............................................... 181 38,490
---------- --------
843,909 713,941
Notes and advances due from subsidiaries............................. 15,000 52,600
Other assets......................................................... 3,509 1,311
---------- --------
Total assets.................................................... $1,016,820 $850,212
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other accounts payable.......................... $ 9,347 $ 2,149
Long-term debt....................................................... 50,000 50,000
Guarantee of ESOP indebtedness....................................... 6,289 9,451
Stockholders' equity:
Common stock, par value $2.00 per share
Shares authorized -- 50,000,000
Shares issued -- 19,642,774 in 1995 and 18,999,354 in 1994...... 39,286 37,999
Surplus............................................................ 360,969 314,924
Retained earnings.................................................. 539,711 444,891
Net unrealized gain on securities available for sale, net of tax... 17,678 276
Treasury stock at cost -- 1,841 shares in 1995 and 1,431 shares in
1994............................................................ (171) (27)
Guarantee of ESOP indebtedness..................................... (6,289) (9,451)
---------- --------
Total stockholders' equity...................................... 951,184 788,612
---------- --------
Total liabilities and stockholders' equity.................... $1,016,820 $850,212
========== ========
40
42
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
---------------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
Income:
Dividends from subsidiaries
Banking subsidiaries................................... $101,318 $ 25,440 $10,000
Nonbank subsidiaries................................... 35,064 10,000 6,500
-------- -------- -------
136,382 35,440 16,500
Interest from subsidiaries................................ 605 2,297 1,775
Interest on short-term investments........................ 1,243 504 443
Interest and dividends on securities portfolios........... 4,804 2,162 1,271
Other income.............................................. 130 631 547
-------- -------- -------
Total income........................................... 143,164 41,034 20,536
-------- -------- -------
Expenses:
Interest on debentures and notes payable.................. 3,155 2,251 1,743
General and administrative................................ 455 2,344 700
-------- -------- -------
Total expenses......................................... 3,610 4,595 2,443
-------- -------- -------
Income before income taxes and equity in undistributed
income of subsidiaries.................................... 139,554 36,439 18,093
Income tax expense.......................................... 1,341 77 358
-------- -------- -------
Income before equity in undistributed income of
subsidiaries.............................................. 138,213 36,362 17,735
Equity in subsidiaries' undistributed income................ (839) 71,075 49,916
-------- -------- -------
Net income.................................................. $137,374 $107,437 $67,651
======== ======== =======
41
43
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Dividends from subsidiaries
Banking subsidiaries................................ $ 101,318 $ 25,440 $ 10,000
Nonbank subsidiaries................................ 35,064 10,000 6,500
---------- --------- ---------
136,382 35,440 16,500
Interest received...................................... 3,081 3,715 3,323
Other income........................................... 130 631 547
Interest paid.......................................... (3,186) (2,218) (1,779)
Operating expenditures................................. (333) (1,945) (814)
Income taxes (paid) received........................... (654) 1,965 (463)
---------- --------- ---------
Net cash provided by operating activities........... 135,420 37,588 17,314
---------- --------- ---------
INVESTING ACTIVITIES
Purchases of securities................................ (2,079,088) (181,086) (166,082)
Sales and maturities of securities..................... 2,020,077 168,692 163,355
Net repayments from (advances to) subsidiaries......... 34,092 -- (1,000)
Investments in subsidiaries............................ (1,000) -- (21,500)
Purchases of financial institutions (Note 2)........... (73,288) -- --
---------- --------- ---------
Net cash flow used by investing activities............. (99,207) (12,394) (25,227)
---------- --------- ---------
FINANCING ACTIVITIES
Dividends paid......................................... (42,554) (30,208) (16,801)
Payment of debt........................................ -- (10) --
Proceeds from exercise of stock options................ 2,504 3,197 3,296
Proceeds from affiliates for stock compensation plan... 2,709 1,552 1,099
Deferred payment plan.................................. (84) (118) (105)
---------- --------- ---------
Net cash flow used by financing activities............. (37,425) (25,587) (12,511)
---------- --------- ---------
Net change in cash and cash equivalents................ (1,212) (393) (20,424)
Cash and cash equivalents at beginning of year......... 15,472 15,865 36,289
---------- --------- ---------
Cash and cash equivalents at end of year............... $ 14,260 $ 15,472 $ 15,865
========== ========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income............................................... $ 137,374 $ 107,437 $ 67,651
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in subsidiaries' undistributed income............. 839 (71,075) (49,916)
Amortization of security discount, net................... (3,198) (1,288) (46)
Net change in accrued expenses........................... (285) 374 (340)
Net change in accrued income taxes....................... 661 2,042 (105)
All other................................................ 29 98 70
---------- --------- ---------
Total adjustments................................... (1,954) (69,849) (50,337)
---------- --------- ---------
Net cash provided by operating activities................ $ 135,420 $ 37,588 $ 17,314
========== ========= =========
42
44
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 the Company's principal bank subsidiary, a
national bank, is limited by statute to its 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 payment of dividends by the Company's other banking
subsidiaries is subject to other applicable statutory and regulatory
limitations. The Company's banking 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, 1995, the Company's banking subsidiaries could have declared
additional dividends of approximately $89 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
banking 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, 1995, the
Company had no borrowings outstanding from any of its 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.
On December 12, 1995, upon entering into an agreement and plan of merger
with Bank of Boston Corporation (see Note 20), the Company's Stockholders Rights
Plan was amended to exclude the merger agreement with Bank of Boston
Corporation, the related BayBanks Stock Option Agreement, and all transactions
contemplated thereby, from the scope of the Stockholders Rights Plan.
NOTE 2. ACQUISITIONS OF FINANCIAL INSTITUTIONS AND CONSOLIDATION OF BANK
SUBSIDIARIES
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 that 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
43
45
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$1.5 million. At June 30, 1995, NFS had total assets of $625 million. Including
acquisition costs, the total cash paid for NFS was $60.2 million, of which
$889,000 was held in escrow at December 31, 1995, and was payable to former NFS
shareholders. Following the acquisition, NFS Savings Bank, FSB, and Plaistow
Cooperative Bank, FSB, were merged and are operating as BayBank FSB. In
addition, 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.
After the close of business on November 30, 1995, the Company acquired
Cornerstone Financial Corporation ("Cornerstone"), parent company of Cornerstone
Bank of Derry, NH. The stockholders of Cornerstone received $8.80 in cash for
each outstanding share of common stock held, an aggregate of approximately $17.7
million. At November 30, 1995, Cornerstone had total assets of $143 million.
Including acquisition costs, the total cash paid for Cornerstone was $18.1
million, of which $4.7 million was held in escrow at December 31, 1995, and was
payable to former Cornerstone shareholders. Following the acquisition,
Cornerstone Bank began operating as BayBank NH. In addition, the name of the
parent was changed from Cornerstone to BayBanks, Inc. (a New Hampshire
corporation). In December of 1995, BayBanks, Inc. (a New Hampshire corporation)
was merged into BayBanks, Inc.
These acquisitions were accounted for as purchases. Accordingly, the
results of operations of NFS and Cornerstone have been included with those of
the Company since the date of each company's acquisition. Under this method of
accounting, the purchase prices are allocated to the respective assets and
liabilities acquired based on their estimated fair values, net of applicable
income tax effects. The following table shows the fair values of assets and
liabilities acquired and intangible assets recorded:
Fair value of tangible assets acquired................................. $762,889,000
Fair value of liabilities acquired..................................... 694,879,000
Goodwill............................................................... 41,796,000
Core deposit intangibles............................................... 7,207,000
Purchased mortgage servicing rights.................................... 1,612,000
Goodwill is being amortized to other operating expenses on a straight-line
basis over 15 years. Other intangibles are amortized over the estimated benefit
period.
The unaudited pro forma consolidated results of operations for the years
ended December 31, 1995 and 1994, assuming the acquisitions of NFS and
Cornerstone had occurred as of January 1, 1995 and 1994, respectively, are as
follows:
PRO FORMA RESULTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-------------------------
1995 1994
---------- ----------
Net interest income......................................... $ 522,720 $ 489,532
Noninterest income.......................................... 223,312 213,388
Income before cumulative effect of accounting change........ 138,296 110,170
Net income.................................................. 138,296 109,238
Income before accounting change per share................... 6.97 5.60
Net income per share........................................ 6.97 5.56
Average common shares outstanding........................... 19,852,368 19,660,791
During 1995, the Company merged BayBank Connecticut, N.A., into BayBank
Boston, N.A. Subsequently, the Company's largest bank, BayBank, became a
national bank (BayBank, N.A.) and BayBank Boston, N.A., was merged into BayBank,
N.A. BayBank, N.A., is headquartered in Boston, Massachusetts, and is regulated
by the Office of the Comptroller of the Currency ("OCC"). In addition, effective
December 29, 1995, the Company contributed its principal nonbank subsidiaries to
BayBank, N.A.
44
46
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. 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, which require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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
$190,000,000 and $8,000,000, respectively, in 1995 and $76,900,000 and
$12,316,000, respectively, in 1994. The remaining investments are money market
mutual funds and other short-term deposits.
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 -- Securities available for sale, consisting principally of debt
securities, are stated at market value. Decisions to purchase or sell these
securities as part of the Company's ongoing asset and liability management
process are based on management's assessment of changes in economic and
financial market conditions, interest rate environments, the Company's balance
sheet and its interest sensitivity position, liquidity, and capital. The cost of
securities sold is determined by the specific identification method. The net
unrealized gains on securities available for sale, net of tax, are reflected as
a component of stockholders' equity.
The investment securities portfolio, principally debt securities, was
stated at cost, adjusted for amortization of premium and accretion of discount
using a level yield method, which reflected management's intention and ability
to hold these securities until maturity. See Note 5 for a discussion of changes
in the classification of securities during 1995.
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, $24,434,000 at
year-end 1995 and $23,040,000 at year-end 1994, 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 $7,817,000 and $8,229,000 at year-end 1995 and 1994,
respectively. The premium on loans acquired through the purchases of NFS and
Cornerstone (see Note 2) of $4,299,000 at December 31, 1995, is amortized to
interest income on a basis that results in approximately level rates of return
over the term of the loan.
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. Effective January 1, 1995, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights." Under the provisions of SFAS No.
122, entities engaged in mortgage banking activities are required to recognize
rights to service mortgage loans for others as separate assets, whether those
rights were acquired through loan origination activities or through purchase
transactions. The costs allocated to mortgage servicing rights and excess
mortgage servicing fee receivables are capitalized and amortized using the level
yield method over the remaining lives of the loans. Prior to the adoption of
SFAS No. 122, the total cost of originating a mortgage was allocated to the
loan. Actual prepayment
45
47
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
experience is reviewed periodically, and the mortgage servicing rights and
excess mortgage servicing rights are adjusted accordingly to reflect current
circumstances. The adoption of SFAS No. 122 did not have a material effect on
the Company's results of operations or financial condition.
At December 31, 1995 and 1994, mortgage loans held for sale were
$20,446,000 and $4,571,000, respectively. Mortgage servicing rights were
$5,540,000 and $3,610,000 at December 31, 1995 and 1994, respectively. Loans
serviced for others were $2.0 billion, $1.9 billion, and $2.0 billion at
December 31, 1995, 1994, and 1993, respectively.
Effective 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 require changes in both the disclosure and impairment measurement of
nonperforming loans. Certain loans that had previously been reported as
nonperforming and certain in-substance foreclosures are now required to be
disclosed as impaired loans. At adoption, the Company reclassified $33,173,000
of in-substance foreclosures and related reserves of $8,669,000 to loans and the
allowance for loan losses, respectively. In accordance with the provisions of
SFAS No. 114 and SFAS No. 118, prior year balances were not reclassified since
taken as a whole they were immaterial to the financial statements.
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.
Restructured, accruing loans entered into prior to the adoption of SFAS No.
114 are not required to be reported as impaired loans unless such loans are not
performing in accordance with the restructured terms at, or subsequent to,
adoption of SFAS No. 114. Troubled debt restructurings entered into subsequent
to the adoption of these statements are reported as impaired loans. In the year
subsequent to restructure, these loans may be removed from the impaired loan
disclosure provided that the loan bears a market rate of interest at the time of
restructure and is performing under the restructured terms. The Company entered
into $229 thousand of troubled debt restructurings during 1995. At December 31,
1995, restructured, accruing loans that were entered into prior to the adoption
of SFAS No. 114 and were performing under the restructured terms were $6
million. During 1995 and 1994, 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. The
interest income that would have been recorded had these loans performed
according to their original terms is immaterial to the financial statements of
the Company. There are no commitments to lend additional funds to these
borrowers.
Commercial and commercial real estate loans are considered impaired, and
are placed on nonaccrual, when it is probable that the Company will not be able
to collect all amounts due according to the contractual terms of the loan
agreement. Residential mortgages and instalment loans are collectively evaluated
for impairment since they are comprised of smaller-balance homogeneous loans.
The amount of impairment of all impaired loans is determined by the difference
between the present value of the expected cash flows related to the loan, using
the original contractual interest rate, and its recorded value, or, as a
practical expedient in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loan. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. At December 31, 1995, total impaired loans were $48,059,000,
comprised of $21,726,000 that had related allowances of $8,578,000 and
$26,333,000 that did not require a related allowance since there was no
impairment as measured by the provisions of SFAS No. 114. During the year, the
average recorded
46
48
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
investment in impaired loans was $51,989,000; impaired loans did not contribute
to interest income in 1995 since all cash receipts were applied to principal.
Loans are placed on nonaccrual when payment of principal or interest is
considered to be in doubt or is past due 90 days or more, except for consumer
loans and those loans which, in management's judgment, are adequately secured
and for which collection is probable. Secured consumer loans are generally
placed on nonaccrual within 120 days, unless adequately collateralized.
Unsecured consumer loans are charged to the allowance for loan losses when
deemed by management to be uncollectible, in keeping with generally accepted
industry practice. 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
$63,830,000 at year-end 1995 and $54,627,000 at year-end 1994. Interest income
earned during the year on year-end nonperforming loans was approximately
$708,000; if these loans had been performing under contractual terms, interest
would have been approximately $5,372,000. In 1994, these amounts were $568,000
and $4,485,000, respectively.
ALLOWANCE FOR LOAN LOSSES -- Loans, including impaired 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
portfolio growth. Included in the allowance are amounts allocated to specific
loans (including impaired loans as discussed above), amounts allocated to other
loans that may become uncollectible but cannot be individually identified, and
unallocated amounts. Management believes that the allowance for loan losses is
adequate.
Various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses of the Company's
subsidiaries. Such agencies can require the Company to recognize additions to
the allowance based on regulatory judgments of information available at the time
of their examination.
OTHER REAL ESTATE OWNED -- Other real estate owned ("OREO") consists of
foreclosed properties and in-substance foreclosures. The adoption of SFAS No.
114 had an impact on the accounting for in-substance foreclosures effective
January 1, 1995. SFAS No. 114 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.
Prior to the adoption of SFAS No. 114, loans were classified as
in-substance foreclosures under the following circumstances: when the debtor had
little or no equity in the collateral, considering the current fair value of the
collateral; when proceeds for repayment of the loan were expected to come only
from the operation or sale of the collateral; and when the debtor had 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 was doubtful that the debtor would be
able to rebuild equity in the collateral or otherwise repay the loan in the
foreseeable future.
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. Subsequent changes in the value, net of
disposition costs, 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.
Expenses to administer these properties are charged to operating expense as
incurred.
47
49
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL AND OTHER INTANGIBLES -- Goodwill (the excess of purchase price
over the fair value of net assets acquired) is recorded as an asset and
amortized to expense over 15 years on a straight-line basis. Other intangibles
are recorded as assets and amortized to expense over their estimated benefit
periods. Goodwill and other intangible assets are reviewed for possible
impairment when events or changed circumstances may affect the underlying basis
of the asset.
INCOME TAXES -- The Company uses the asset and liability method of
accounting for income taxes. 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.
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 295,792 for 1995 and 303,286 for
1994. 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%.
IMPENDING ACCOUNTING STANDARDS -- In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was
adopted by the Company on January 1, 1996. This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to such assets being held and used and for
such assets and certain identifiable intangibles to be disposed of. The
implementation of this statement is not expected to have a material effect on
the Company's results of operations or financial condition.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which became effective on January 1, 1996. This statement
establishes a fair-value-based method of accounting for stock-based compensation
plans under which compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period. However, the
statement allows a company to continue to measure compensation cost for such
plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Under APB Opinion No. 25, no compensation cost is
recorded if, at the grant date, the exercise price of options granted is equal
to the fair market value of the Company's common stock. The Company has elected
to continue to follow the accounting method under APB No. 25. SFAS No. 123
requires companies that elect to continue to follow the accounting in APB
Opinion No. 25 to disclose in the notes to their financial statements pro forma
net income and earnings per share as if the fair-value-based method of
accounting had been applied. Based on 1995 activity, net income and earnings per
share would not have been materially affected had the accounting method under
SFAS No. 123 been applied.
NOTE 4. FEDERAL RESERVE ACCOUNT BALANCES
The Company's banking subsidiaries 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 $323,071,000 for 1995 and $309,821,000 for
1994.
48
50
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. SECURITIES PORTFOLIOS
The amortized cost, gross unrealized gains and losses, market values, and
weighted average yields, based on amortized cost, of the following securities
portfolios by maturity (excluding interest-bearing deposits and other short-term
investments) were:
DECEMBER 31, 1995
--------------------------------------------------------------
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
U.S. Government securities, maturing
Within 1 year.......................... $ 771,321 $ 98 $(1,743) $ 769,676 4.73%
After 1 year but within 5 years........ 1,025,147 32,124 (561) 1,056,710 6.55
After 5 years but within 10 years...... 1,997 25 -- 2,022 5.77
--------- ------- ------- ----------
1,798,465 32,247 (2,304) 1,828,408 5.77
--------- ------- ------- ----------
State and local government securities,
maturing
Within 1 year.......................... 122,010 72 (8) 122,074 6.48
After 1 year but within 5 years........ 54,926 659 (52) 55,533 6.78
After 5 years but within 10 years...... 48,868 979 (104) 49,743 7.28
After 10 years......................... 150 -- (1) 149 7.07
--------- ------- ------- ----------
225,954 1,710 (165) 227,499 6.73
--------- ------- ------- ----------
Corporate, maturing
Within 1 year.......................... 310,157 21 -- 310,178 6.37
After 1 year but within 5 years........ 7,580 29 -- 7,609 6.23
--------- ------- ------- ----------
317,737 50 -- 317,787 6.36
--------- ------- ------- ----------
U.S. Agency mortgage-backed securities... 98,120 194 (515) 97,799 5.73
Asset-backed securities.................. 44,051 -- (297) 43,754 4.20
Other.................................... 33,872 8 -- 33,880 6.70
--------- ------- ------- ----------
Total securities available for
sale.............................. $2,518,199 $34,209 $(3,281) $2,549,127 5.91%
========== ======= ======= ========== =====
INVESTMENT SECURITIES
Industrial revenue bonds................. $ 41,544 $ -- $ -- $ 41,544 10.97%
Other.................................... 12,854 -- -- 12,854 6.00
---------- ------- ------- ----------
Total investment securities......... $ 54,398 $ -- $ -- $ 54,398 9.80%
========== ======= ======= ========== =====
49
51
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE
State and local government securities........ $ 8,578 $ -- $ (14) $ 8,564
Corporate.................................... 183,900 -- -- 183,900
Other........................................ 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
Asset-backed securities...................... 200,386 -- (5,652) 194,734
State and local government securities........ 171,436 89 (1,250) 170,275
Industrial revenue bonds..................... 49,548 -- -- 49,548
U.S. Agency mortgage-backed securities....... 49,503 -- (2,761) 46,742
Corporate and other.......................... 1,857 -- -- 1,857
---------- ---- -------- ----------
Total investment securities................ $2,556,249 $ 99 $(74,764) $2,481,584
========== ==== ======== ==========
The year-end maturity distribution excludes industrial revenue bonds, which
are not regarded as principal debt securities, U.S. Agency mortgage-backed
securities, asset-backed securities, and other securities that do not have a
stated maturity. The maturity of mortgage-backed securities and asset-backed
securities, reflecting estimated prepayments, ranged from 3 months to 5 1/2
years.
The book value of securities pledged to secure public and trust deposits,
to collateralize repurchase agreements, and to meet other legal requirements was
$817,827,000 at December 31, 1995.
During 1995, proceeds from sales of securities available for sale were
$139,231,000, resulting in gross realized gains of $189,000. There was $10,000
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 $101,199,000,
resulting in gross realized losses of $139,000.
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 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.
In 1995, the FASB allowed a one-time reassessment of the appropriateness of
the classifications of all securities held, and the Company reclassified $2.0
billion from investment securities to securities available for sale. At the time
of the reclassification, there were $29.7 million in unrealized gains and $4.5
million in unrealized losses relating to the securities transferred.
BayBank, N.A., the Company's principal bank subsidiary, and BayBank FSB,
the Company's savings bank subsidiary, are members of the Federal Home Loan Bank
of Boston ("FHLB"). As members of the FHLB, BayBank, N.A., and BayBank FSB are
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, 1995 and 1994, $33,635,000 and $27,556,000, respectively, in the stock of
the FHLB are included in the securities available for sale portfolio in the
other category at cost, which approximates market value.
50
52
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. 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. Activity during the year on loans
outstanding at year-end was as follows:
1995
--------------
(IN THOUSANDS)
Balance, January 1..................................................... $18,465
Additions during the year.............................................. 39,283
Reductions during the year............................................. 51,249
-------
Balance, December 31................................................... $ 6,499
=======
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 7. ALLOWANCE FOR LOAN LOSSES AND OREO RESERVE
Activity in the allowance for loan loss account was:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Balance, January 1................................. $146,835 $171,496 $192,700
Allowance acquired through acquisitions............ 10,305 -- --
Provision.......................................... 25,000 24,000 36,500
Loan losses charged off............................ (52,019) (66,594) (79,963)
Less recoveries.................................. 23,567 17,933 22,259
-------- -------- --------
Net charge-offs.................................... (28,452) (48,661) (57,704)
-------- -------- --------
Adoption of SFAS No. 114:
Reclassification................................... 8,669 -- --
Charge-offs........................................ (8,669) -- --
-------- -------- --------
Net impact......................................... -- -- --
-------- -------- --------
Balance, December 31............................... $153,688 $146,835 $171,496
======== ======== ========
Activity in the OREO reserve account was:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Balance, January 1................................. $ 24,971 $ 29,776 $ 7,833
Additions to the OREO reserve...................... 4,892 15,639 32,471
Reclassification upon adoption of SFAS No. 114..... (8,669) -- --
Reductions related to sales........................ (11,030) (20,444) (10,528)
-------- -------- --------
Balance, December 31............................... $ 10,164 $ 24,971 $ 29,776
======== ======== ========
51
53
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. 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:
1995 1994
-------- --------
(IN THOUSANDS)
Buildings...................................................... $178,735 $161,598
Leasehold improvements......................................... 64,948 59,596
Land........................................................... 21,541 16,974
Equipment...................................................... 223,632 197,818
-------- --------
488,856 435,986
Less accumulated depreciation.................................. 273,142 240,556
-------- --------
Premises and equipment, net.................................... $215,714 $195,430
======== ========
Depreciation and amortization expense of premises, equipment, and leasehold
improvements was $26,319,000 in 1995, $24,365,000 in 1994, and $24,218,000 in
1993.
Total rental expense was $27,605,000 in 1995, $24,967,000 in 1994, and
$26,346,000 in 1993, net of $1,576,000, $1,473,000, and $1,705,000 in rental
income from subleases, respectively. Contingent rentals were negligible. As of
December 31, 1995, 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)
1996...................................................... $16,565 $1,546 $15,019
1997...................................................... 15,554 1,329 14,225
1998...................................................... 10,113 832 9,281
1999...................................................... 7,904 699 7,205
2000...................................................... 5,575 642 4,933
Thereafter................................................ 11,701 1,019 10,682
Most leases contain escalation of rent clauses based on increases in real
estate taxes or equipment usage. Many leases include renewal provisions.
52
54
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS
Balances outstanding as of December 31, 1995 and 1994, consisted of the
following:
FEDERAL FEDERAL HOME U.S.
FUNDS REPURCHASE LOAN BANK TREASURY
TOTAL PURCHASED AGREEMENTS BORROWINGS AND OTHER
---------- --------- ---------- ------------ ---------
(DOLLARS IN THOUSANDS)
1995
Year-end balance............... $ 718,941 $194,725 $ 462,101 $ 4,972 $ 57,143
Maximum month-end balance...... 1,243,490 245,165 1,084,035 50,000 200,000
Average daily balance.......... 915,711 159,120 648,887 15,331 92,373
Weighted average interest
rates:
As of year-end............... 5.74% 5.53% 5.85% 6.08% 5.48%
During the year.............. 5.91 5.91 5.87 6.36 6.05
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 --
NOTE 10. LONG-TERM DEBT
In September 1985, the Company issued $50,000,000 in floating-rate notes.
The notes 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 1995, the weighted average rate paid was
6.21%, and at December 31, 1995, the rate was 5.81%. The proceeds were used in
the funding of the affiliate banks on identical terms. During 1995, the
affiliate banks repaid the funds to the parent company. The notes may be
redeemed by the Company in whole or in part at any time at 100% of the principal
amount plus accrued interest. The Company plans to call the notes for redemption
during 1996.
The balance of long-term debt at December 31, 1995, includes $13,731,000 in
long-term Federal Home Loan Bank ("FHLB") borrowings assumed in the acquisition
of BayBank FSB and mortgage debt at two subsidiaries totaling $797,000. The
rates on the FHLB borrowings ranged from 5.22% to 5.43% at December 31, 1995,
with maturities in 1997 and 1998. FHLB stock and residential mortgage loans are
pledged as collateral to secure the borrowings. The monthly payment amounts of
the mortgage debt at two subsidiaries total $7,000 with final maturities from
1997 to 2013. Obligations on capitalized leases totaled $321,000 at December 31,
1995.
53
55
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. 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.
Shares issued under stock option plans may be authorized but unissued shares, or
treasury shares that were acquired in connection with stock option and
compensation plans. The following is a summary of the changes in options
outstanding for the last three years:
1995 1994 1993
-------- -------- --------
Options outstanding at the beginning of the year... 615,297 830,434 916,348
Options granted.................................... 50,000 -- 97,500
Options exercised.................................. (176,886) (171,303) (157,414)
Options forfeited.................................. -- (43,834) (26,000)
Options converted (Note 2)......................... 29,778 -- --
-------- -------- --------
Options outstanding at the end of the year......... 518,189 615,297 830,434
======== ======== ========
During 1995, prices of stock options exercised ranged from $13.75 to
$45.00. Prices of shares under option at December 31, 1995, ranged from $13.75
to $62.50, and options for 358,185 shares were exercisable. Unless exercised,
the options will expire at varying dates through 2005. There was no compensation
expense recorded in the years presented related to stock options.
In addition to the above, the Company has a restricted stock plan that was
adopted in 1994 and expires in 2004. As of December 31, 1995, 139,750 shares had
been awarded. Under the terms of the merger agreement with Bank of Boston
Corporation, no additional shares may be awarded without their consent. 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, 1995, such restrictions
remained on 208,242 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 1995,
restrictions on 54,152 shares lapsed, and 2,899 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 $5,290,000 at December 31,
1995, $6,150,000 at December 31, 1994, and $1,451,000 at December 31, 1993.
Compensation expense related to restricted stock grants, net of forfeitures, was
$2,709,000 in 1995, $1,552,000 in 1994, and $1,099,000 in 1993.
Upon approval of the pending merger with Bank of Boston Corporation (see
Note 20) by the Company's shareholders, stock options will become fully vested,
and any restriction periods or other restrictions on outstanding awards of
restricted stock will lapse.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which will be effective for fiscal years beginning after December
15, 1995 (see Note 3).
NOTE 12. 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.
Prior to its acquisition date, the employees of NFS were covered by a
separate noncontributory defined benefit plan that provided benefits based upon
length of service and qualifying compensation. Effective January 1, 1996, the
NFS pension plan was merged into the Company's plan. Cornerstone did not provide
a noncontributory defined benefit plan.
54
56
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The table below, which includes NFS for 1995, sets forth the plan's funded
status and amounts recognized at December 31:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligations....................... $ 97,019 $ 67,099 $ 69,418
======== ======== ========
Accumulated benefit obligations.................. $ 98,791 $ 68,259 $ 71,160
======== ======== ========
Projected benefit obligations.................... $121,034 $ 85,586 $ 91,816
Plan assets (primarily marketable securities)
at market value.................................. 166,882 120,358 120,041
-------- -------- --------
Net assets in excess of projected benefit
obligations...................................... 45,848 34,772 28,225
Unrecognized experience gain....................... (28,550) (12,294) (5,316)
Unrecognized prior service cost.................... 4,909 573 1,831
Unamortized net excess pension assets at transition
recognized over 15 years......................... (8,857) (10,333) (11,809)
-------- -------- --------
Prepaid pension cost recorded in other assets...... $ 13,350 $ 12,718 $ 12,931
======== ======== ========
Assumptions used in determining the actuarial present value of the
projected benefit obligation as of December 31 are as follows:
1995 1994 1993
---- ---- ----
Discount rate.................................................. 7.25% 8.50% 7.25%
Rate of increase in future compensation levels................. 4.45 5.25 4.70
Net periodic pension expense, which includes NFS since its acquisition
date, consisted of the following:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Service costs earned during period................. $ 4,364 $ 4,551 $ 4,083
Interest cost on projected benefit obligation...... 8,011 6,943 6,304
Actual return on plan assets....................... (47,799) (3,290) (11,113)
Net amortization and deferral...................... 35,292 (7,991) 987
--------- ------- ---------
Net pension expense (income)....................... $ (132) $ 213 $ 261
========= ======= =========
In addition to the above, the Company maintains a nonqualified excess
retirement plan to provide benefits above IRS limits and a nonqualified,
supplemental retirement plan for certain officers. The benefits provided under
these plans are unfunded, and any payments to plan participants are made by the
Company. As of December 31, 1995, 1994, and 1993, $6,214,000, $4,339,000, and
$1,962,000, respectively, were included in other liabilities for these plans.
The expense associated with the nonqualified plans as of December 31 was as
follows:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Service costs earned during period................. $ 322 $ 380 $ 79
Interest cost on projected benefit obligation...... 553 421 240
Actual return on plan assets....................... -- -- --
Net amortization and deferral...................... 334 345 162
------ ------ ----
Supplemental retirement expense.................... $1,209 $1,146 $481
====== ====== ====
55
57
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions used in determining the net pension expense and the
nonqualified plan expenses were as follows:
1995 1994 1993
---- ---- ----
Rate of return on plan assets.................................. 9.00% 9.00% 9.00%
Discount rate.................................................. 8.50 7.25 8.00
Rate of increase in future compensation levels................. 5.25 4.70 5.20
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 major portion of these benefits has been
paid 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, 1995, the balance of the ESOP loan was $6,289,000 at an
interest rate of 6.19%, and unallocated ESOP shares were 270,495.
During 1995, ESOP expense of $2,217,000, net of dividends, included an
accrual to cover the loan payment due on January 31, 1996, and interest expense
on the ESOP loan of $409,000. The dividends used to service the ESOP debt, which
were paid on shares held by the ESOP, were $1,557,000 in 1995, $1,188,000 in
1994, and $697,000 in 1993. The Company accrued additional contributions to the
savings and profit sharing plan of $3,897,000 in 1995 and $2,100,000 in 1994;
the Company accrued no such additional contributions in 1993.
Prior to their acquisition dates, NFS and Cornerstone maintained profit
sharing plans covering eligible employees. Effective January 1, 1996, the NFS
and Cornerstone profit sharing plans were merged into the Company's savings and
profit sharing plan.
The Company has agreements with certain executives and 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 these arrangements. The Company and Bank of Boston
Corporation have entered into employment agreements with certain members of the
Company's management that will provide employment and severance benefits from
and after consummation of the merger agreement with Bank of Boston Corporation.
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 Company allocated the present value of these
expected benefits to be paid to employees after their retirement to the periods
in which employees rendered service to earn the benefits.
The initial transition obligation associated with the adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
(adopted as of January 1, 1993) was $3,600,000. In accordance with the
statement, since eligibility for these Company-subsidized benefits ceased at
December 31, 1993, the Company will recognize this liability over the remaining
transition periods allowed, which ranges from approximately two years for the
medical insurance to twelve years for the life insurance and Medicare
supplements.
56
58
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation......... $ 3,258 $ 3,086 $ 3,597
Unrecognized net gain (loss).......................... 5 273 (186)
Unrecognized prior service cost....................... -- -- --
Unrecognized net transition obligation................ (2,448) (2,801) (3,152)
------- ------- -------
Net postretirement benefit liability.................. $ 815 $ 558 $ 259
======= ======= =======
Postretirement benefit expense was $560,000 in 1995, $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, 1995, or the aggregate of the service and interest components of
the net periodic postretirement benefit cost for the twelve months ended
December 31, 1995. The present value of the accumulated benefit obligation
assumed a 7.25% 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 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 1995 and 1994
was $2,159,000 and $1,851,000, respectively.
NOTE 13. OTHER NONINTEREST INCOME
The major components of other noninterest income were:
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
-------- ------- -------
(IN THOUSANDS)
Credit card fees..................................... $ 20,685 $19,549 $18,892
Processing fees...................................... 18,195 16,174 13,788
Trust fees........................................... 14,433 14,127 14,559
Investment management and brokerage fees............. 10,214 8,293 6,318
Mortgage banking fees................................ 9,547 7,152 11,972
International fees................................... 7,259 6,344 5,845
Other noninterest income............................. 29,106 25,731 21,939
-------- ------- -------
$109,439 $97,370 $93,313
======== ======= =======
57
59
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. OTHER OPERATING EXPENSES
The major components of other operating expenses were:
YEAR ENDED DECEMBER 31
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Marketing and public relations..................... $ 24,243 $ 22,726 $ 21,341
Service bureau and other data processing........... 19,588 17,443 16,538
Deposit insurance.................................. 15,247 21,708 21,949
Printing and supplies.............................. 15,233 12,767 12,997
Professional services.............................. 12,963 10,807 13,744
Postage............................................ 9,689 8,711 8,290
Legal and consulting............................... 7,587 8,516 6,609
Amortization of goodwill and other intangibles..... 2,420 558 684
Other operating expenses........................... 26,782 27,652 26,581
-------- -------- --------
133,752 130,888 128,733
OREO and loan workout expenses..................... 5,071 9,969 17,468
-------- -------- --------
$138,823 $140,857 $146,201
======== ======== ========
NOTE 15. INCOME TAXES
The provision for income taxes was comprised of the following:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Provision for:
Federal income tax............................... $61,565 $50,449 $32,254
State income tax................................. 23,730 23,073 14,818
------- ------- -------
$85,295 $73,522 $47,072
======= ======= =======
The current and deferred components of the provision were as follows:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Current taxes payable:
Federal.......................................... $61,625 $44,370 $31,084
State............................................ 22,054 19,936 13,313
------- ------- -------
$83,679 $64,306 $44,397
======= ======= =======
Deferred taxes (benefit):
Federal.......................................... $ (60) $ 6,079 $ 1,170
State............................................ 1,676 3,137 1,505
------- ------- -------
$ 1,616 $ 9,216 $ 2,675
======= ======= =======
Excluded from the above table are tax effects related to certain items that
were recorded directly in stockholders' equity, including market value
adjustments related to securities available for sale, stock options, and
restricted stock. Net tax effects recorded directly in stockholders' equity
amounted to an $11,330,000 charge in 1995 and a $472,000 charge in 1994.
58
60
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the effective income tax rate and the nominal
federal tax rate on income before taxes are reconciled as follows:
1995 1994 1995
---- ---- ----
Nominal federal tax rate................................... 35.0% 35.0% 35.0%
State income tax rate, net of federal tax benefit.......... 8.1 8.2 8.4
Tax-exempt income.......................................... (2.2) (1.7) (2.3)
Dividend received deduction................................ (1.0) (.8) (.4)
Utilization of tax credits................................. (.6) (.7) (.4)
Settlement of tax litigation............................... (1.2) -- --
Other...................................................... .2 .4 .7
---- ---- ----
38.3% 40.4% 41.0%
==== ==== ====
At December 31, the Company had gross deferred tax assets and gross
deferred tax liabilities as follows:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Deferred income tax assets:
Loan losses......................................... $63,980 $63,211 $73,900
OREO reserve........................................ 4,368 7,365 12,972
Loan fees, net...................................... 2,818 3,210 5,128
Deferred compensation............................... 8,663 5,447 3,636
Other, net.......................................... 3,770 2,754 223
------- ------- -------
83,599 81,987 95,859
------- ------- -------
Deferred income tax liabilities:
Lease financing..................................... 8,301 10,474 13,365
Depreciation........................................ 7,105 7,049 8,928
Pension credit...................................... 5,664 5,598 5,575
Unrealized gain on securities available for sale.... 13,250 194 --
Purchase accounting................................. 12,560 -- --
Other, net.......................................... 2,954 2,696 2,605
------- ------- -------
49,834 26,011 30,473
------- ------- -------
Net deferred income tax asset....................... $33,765 $55,976 $65,386
======= ======= =======
It is expected that the existing deferred tax assets will be realized from
the reversal of existing deferred tax liabilities and the recognition of future
taxable income.
During 1995, the Company added net deferred tax assets of $5,383,000 from
the acquisitions of NFS and Cornerstone. An additional $12,922,000 of net
deferred tax liabilities were recorded as the tax effect of fair market value
adjustments related to these acquisitions.
NOTE 16. 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.
59
61
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OFF-BALANCE SHEET RISK -- In the normal course of business, the Company
occasionally uses various off-balance sheet commitments and financial
instruments to accommodate certain financing requirements of customers and for
interest rate risk management purposes. 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.
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, 1995
and 1994, were as follows:
CONTRACT OR
NOTIONAL AMOUNT
-----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Loan commitments.............................................. $3,568,000 $3,065,000
Foreign exchange contracts.................................... 184,000 99,000
Standby letters of credit..................................... 155,000 146,000
Forward commitments........................................... 40,000 23,000
Loans sold with recourse...................................... 32,000 38,000
Securities purchase and sell commitments...................... 32,000 15,000
Interest rate swaps and options............................... 24,000 14,000
Letters of credit............................................. 18,000 14,000
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 $4,600,000 and $3,500,000 at
December 31, 1995 and 1994, 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 $197,000 and $177,000 at December 31, 1995 and 1994, 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 $1,463,000 and $780,000 at December 31,
1995 and 1994, respectively.
60
62
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
SECURITIES PURCHASE AND SELL COMMITMENTS -- In connection with its capital
markets activities, the Company regularly commits to purchase and sell
securities.
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.
NOTE 17. 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.
61
63
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995 and 1994.
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 adjustable-rate 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-rate and variable-rate commercial and
commercial real estate loans was determined by discounted cash flow techniques.
Year-end 1995 and 1994 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, 1995 and 1994.
OTHER ASSETS -- Financial instruments classified as other assets that are
subject to the disclosure requirements of SFAS No. 107 consist principally of
interest receivable, mortgage servicing rights, and required 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 16. 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.
62
64
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair values of the financial instruments presented, and as determined
under the guidelines established by SFAS No. 107 as previously described,
depends highly on assumptions as they existed as of December 31, 1995 and 1994,
and on the related methodologies applied and do not purport to represent actual
economic value in a bona fide transaction with a legitimate buyer under normal
market conditions. It should also be noted that different financial institutions
will use different assumptions and methodologies in determining fair values such
that comparisons between institutions may be difficult. The Company did not
attempt to determine the fair value of its substantial base of core deposits, as
their disclosure is not required and due to the lack of generally accepted,
industry-wide methodology for determining such values. With that understanding,
the financial statement amounts and estimated fair values of financial
instruments at December 31, 1995 and 1994, were as follows:
1995 1994
----------------------- -----------------------
FINANCIAL FAIR FINANCIAL FAIR
STATEMENT VALUE STATEMENT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS
Cash and due from banks................. $ 922,031 $ 922,031 $ 829,170 $ 829,170
Trading account securities.............. 50,755 50,755 27,416 27,416
Interest-bearing deposits and other
short-term investments................ 361,164 361,164 166,286 166,286
Securities portfolios................... 2,603,525 2,603,525 2,776,851 2,702,186
Loans (net of allowance):
Commercial and commercial real estate... 2,665,900 2,760,000 2,382,321 2,425,000
Consumer................................ 4,951,505 5,084,000 4,119,364 4,182,000
---------- ---------- ---------- ---------
7,617,405 7,844,000 6,501,685 6,607,000
FINANCIAL LIABILITIES
Deposits:
Demand, NOW, savings, and money market
deposit accounts...................... $8,139,539 $8,139,539 $7,729,339 $7,729,339
Consumer time........................... 1,862,611 1,844,000 1,095,357 1,087,000
Time -- $100,000 or more................ 215,257 215,257 175,663 175,663
Federal funds purchased and other
short-term borrowings................. 718,941 718,941 849,517 849,517
Long-term debt.......................... 64,849 64,500 51,154 51,000
NOTE 18. 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.
63
65
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for years 1993 through 1995 are as
follows:
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Income on earning assets
First Quarter.................................... $189,384 $146,485 $148,897
Second Quarter................................... 194,102 156,238 147,704
Third Quarter.................................... 206,935 172,816 147,138
Fourth Quarter................................... 209,009 182,261 146,732
-------- -------- --------
$799,430 $657,800 $590,471
======== ======== ========
Interest expense
First Quarter.................................... $ 66,430 $ 37,818 $ 47,369
Second Quarter................................... 70,885 43,423 42,787
Third Quarter.................................... 76,738 52,812 38,856
Fourth Quarter................................... 77,945 58,805 37,636
-------- -------- --------
$291,998 $192,858 $166,648
======== ======== ========
Net interest income
First Quarter.................................... $122,954 $108,667 $101,528
Second Quarter................................... 123,217 112,815 104,917
Third Quarter.................................... 130,197 120,004 108,282
Fourth Quarter................................... 131,064 123,456 109,096
-------- -------- --------
$507,432 $464,942 $423,823
======== ======== ========
Noninterest income
First Quarter.................................... $ 51,441 $ 49,715 $ 46,896
Second Quarter................................... 55,752 54,031 48,751
Third Quarter.................................... 57,344 52,557 51,904
Fourth Quarter................................... 54,714 50,985 50,973
-------- -------- --------
$219,251 $207,288 $198,524
======== ======== ========
Net securities gains
First Quarter.................................... $ 1 $ 39 $ --
Second Quarter................................... -- 436 358
Third Quarter.................................... 42 -- 49
Fourth Quarter................................... (3) (272) 4
-------- -------- --------
$ 40 $ 203 $ 411
======== ======== ========
Provisions for loan losses and OREO reserve
First Quarter.................................... $ 7,500 $ 8,937 $ 18,500
Second Quarter................................... 6,500 8,500 16,892
Third Quarter.................................... 5,771 8,415 16,800
Fourth Quarter................................... 5,408 7,520 9,138
-------- -------- --------
$ 25,179 $ 33,372 $ 61,330
======== ======== ========
64
66
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1994 1993
------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net income
First Quarter.................................... $ 30,475 $ 21,279 $ 12,761
Second Quarter................................... 34,358 26,422 14,207
Third Quarter.................................... 34,719 29,033 18,001
Fourth Quarter................................... 37,822 30,703 22,682
-------------- -------------- --------------
$ 137,374 $ 107,437 $ 67,651
============== ============== ==============
Average number of outstanding shares
First Quarter.................................... 19,261,941 19,093,447 18,871,018
Second Quarter................................... 19,322,107 19,154,620 18,937,724
Third Quarter.................................... 19,907,015 19,187,890 19,000,208
Fourth Quarter................................... 19,933,899 19,255,579 19,004,540
Earnings per share
First Quarter.................................... $ 1.58 $ 1.11(1) $ .68
Second Quarter................................... 1.78 1.38 .75
Third Quarter.................................... 1.74 1.51 .95
Fourth Quarter................................... 1.90 1.59 1.19
-------------- -------------- --------------
$ 7.01(2) $ 5.60(1)(2) $ 3.57
============== ============== ==============
Dividends declared and paid
First Quarter.................................... $ 0.50 $ 0.35 $ 0.20
Second Quarter................................... 0.50 0.35 0.20
Third Quarter.................................... 0.60 0.45 0.25
Fourth Quarter................................... 0.60 0.45 0.25
Range of BayBanks, Inc., common stock -- last sale
price
First Quarter.................................... $52 -64 1/2 $57 1/4-50 $52 1/8-38 3/4
Second Quarter................................... 60 1/2-79 1/2 64 1/8-54 1/2 51 1/4-38 1/4
Third Quarter.................................... 74 3/4-83 3/4 63 -54 1/4 50 1/2-43 1/4
Fourth Quarter................................... 75 7/8-98 1/4 59 1/2-51 50 3/4-43 1/4
<FN>
- ---------------
(1) Includes expense of $.05 per share resulting from the cumulative effect of
an accounting change.
(2) The sum of the quarters' earnings per share for 1995 and 1994 does not equal
the full-year amount due to the effect of the issuance of common stock.
NOTE 20. PENDING MERGER
On December 12, 1995, the Company and Bank of Boston Corporation ("Bank of
Boston") entered into an agreement and plan of merger, pursuant to which a
subsidiary of Bank of Boston will merge with and into the Company and the
Company will become a wholly-owned subsidiary of Bank of Boston (the "Merger").
In addition, related Stock Option Agreements were executed pursuant to which
Bank of Boston granted the Company a conditional option to purchase up to
22,400,761 shares of Bank of Boston common stock and the Company granted to Bank
of Boston a conditional option to purchase up to 3,907,120 shares of the
Company's common stock, in each case equaling 19.9% of the outstanding shares of
the respective granting company's stock. As a result of the Merger, each share
of the common stock of the Company outstanding immediately prior to the
effective time of the Merger will be converted into the right to receive 2.2
newly issued shares of Bank of Boston common stock. Outstanding options to
purchase common stock of the Company will be converted to options to purchase
common stock of Bank of Boston on the same basis.
65
67
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Merger is intended to constitute a tax-free transaction and to be
accounted for as a pooling of interests. The Merger is expected to be completed
by the middle of 1996 and is subject to approval by federal and state bank
regulators and the shareholders of both companies. Subsequent to completion of
the Merger, the principal banking subsidiary will operate as BayBank of Boston,
N.A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or matters of disagreement on accounting and
financial disclosure with the Company's independent auditors.
66
68
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning directors is presented in the section titled "The
BayBanks Meeting -- Additional Matters -- Election of Directors" of the
Company's proxy statement for the annual meeting to be held on April 25, 1996,
and is incorporated herein by reference. The following are the executive
officers of the registrant as of February 29, 1996:
AGE TITLE
---
William M. Crozier, Jr... 63 Chairman and President
Donald L. Isaacs......... 48 Vice Chairman
Richard F. Pollard....... 63 Vice Chairman
Ilene Beal............... 50 Executive Vice President and Secretary
Michael W. Vasily........ 51 Executive Vice President and Chief Financial
Officer
Joan E. Tonra............ 49 Senior Vice President and Controller
Mr. Crozier has been an officer of BayBanks, Inc. since 1967 and was elected
Chairman of the Board and Director in 1974. In 1977, Mr. Crozier was elected to
the additional post of President.
Mr. Isaacs was elected Vice Chairman of the Board and Director in 1992,
Executive Vice President in 1985, Senior Vice President in 1979, and Vice
President in 1978, and joined the Company in 1974. Mr. Isaacs is also the
Chairman of the Board of BayBank Systems, Inc., the Company's technology
subsidiary.
Mr. Pollard was elected Vice Chairman of the Board and Director in 1983 and
Executive Vice President in 1979 and had been a Senior Vice President since
1976. Mr. Pollard is also the senior lending officer of the Company.
Ms. Beal was elected Secretary in 1991, Executive Vice President in 1985, Senior
Vice President in 1979, and Vice President in 1977, and has been with the
Company since 1972.
Mr. Vasily was elected Chief Financial Officer in 1991, Executive Vice President
in 1987, Senior Vice President in 1980, and Vice President upon joining the
Company in 1978, and was the Controller of the Company from 1983 to 1989.
Ms. Tonra was elected Senior Vice President of BayBanks, Inc., in 1985 and
Controller in 1989, and joined the Company in 1985. She is the Principal
Accounting Officer of the Company.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning management remuneration and transactions is presented in
the section titled "The BayBanks Meeting -- Additional Matters -- Executive
Compensation" of the Company's proxy statement for the annual meeting to be held
on April 25, 1996, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning securities ownership of management and concerning
securities ownership of certain beneficial owners is presented in the sections
titled "The BayBanks Meeting -- Additional Matters -- Election of Directors" and
"-- Ownership of BayBanks Common Stock" of the Company's proxy statement for the
annual meeting to be held on April 25, 1996, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning relationships and transactions of the Company's executive
officers and directors is presented in the section titled "The BayBanks
Meeting -- Additional Matters -- Election of Directors" of the
67
69
Company's proxy statement for the annual meeting to be held on April 25, 1996,
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following financial statements of the Company and its subsidiaries
are presented in Item 8:
Independent Auditors' Report
Consolidated Balance Sheet-December 31, 1995 and 1994
Consolidated Statement of Income-Years Ended December 31, 1995, 1994,
and 1993
Consolidated Statement of Changes in Stockholders' Equity-Years Ended
December 31, 1995, 1994, and 1993
Consolidated Statement of Cash Flows-Years Ended December 31, 1995,
1994, and 1993
Notes to Financial Statements
2. Financial Statement Schedules
All schedules are omitted because either the required information is
shown in the financial statements or notes, or they are not applicable,
or the data is not significant.
3. Exhibits
See the Exhibit List and Index on pages 70 through 72.
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 22, 1995, reporting the
execution of a merger agreement on December 12, 1995, pursuant to which a
subsidiary of Bank of Boston Corporation ("Bank of Boston") will be merged
into the Company and the Company will become a wholly-owned subsidiary of
Bank of Boston, and related option agreements pursuant to which Bank of
Boston granted to the Company a conditional option to purchase up to
22,400,761 shares of Bank of Boston common stock and the Company granted to
Bank of Boston a conditional option to purchase up to 3,907,120 shares of
BayBanks, Inc. common stock, in each case equalling 19.9% of the
outstanding shares of the respective granting company's stock.
68
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BAYBANKS, INC.
(Registrant)
By: /s/ MICHAEL W. VASILY
MICHAEL W. VASILY
Executive Vice President
March 14, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 14, 1996, by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ JOHN A. CERVIERI JR. /s/ WILLIAM M. CROZIER, JR.
- ------------------------------------ -------------------------------------
JOHN A. CERVIERI JR. WILLIAM M. CROZIER, JR.
Director Chairman of the Board,
President, and Director
(Principal Executive Officer)
/s/ ROBERT L. GABLE /s/ DONALD L. ISAACS
- ------------------------------------ -------------------------------------
ROBERT L. GABLE DONALD L. ISAACS
Director Vice Chairman of the Board and Director
/s/ SAMUEL J. GERSON /s/ RICHARD F. POLLARD
- ------------------------------------ -------------------------------------
SAMUEL J. GERSON RICHARD F. POLLARD
Director Vice Chairman of the Board and Director
/s/ NORMAN E. MACNEIL /s/ MICHAEL W. VASILY
- ------------------------------------ -------------------------------------
NORMAN E. MACNEIL MICHAEL W. VASILY
Director Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ ARLENE A. McNAMEE /s/ JOAN E. TONRA
- ------------------------------------ -------------------------------------
ARLENE A. MCNAMEE JOAN E. TONRA
Director Senior Vice President and Controller
(Principal Accounting Officer)
/s/ THOMAS R. PIPER
- ------------------------------------
THOMAS R. PIPER
Director
/s/ GLENN P. STREHLE
- ------------------------------------
GLENN P. STREHLE
Director
/s/ JOSEPH H. TORRAS
- ------------------------------------
JOSEPH H. TORRAS
Director
69
71
BAYBANKS, INC.
EXHIBIT LIST AND INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
PLAN OF ACQUISITION
2.1* -- Acquisition Agreement dated December 22, 1994 by and between the Registrant
and NFS Financial Corp. (Exhibit 2(a) to the Registrant's Current Report on
Form 8-K filed with the Commission on January 4, 1995). The schedules referred
to in the Acquisition Agreement are omitted. The Registrant hereby agrees to
furnish a copy of any such schedule to the Commission upon request.
2.2* -- Agreement and Plan of Merger dated December 12, 1995 by and among the
Registrant, Bank of Boston Corporation, and Boston Merger Corp (Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed with the Commission on
December 22, 1995). The schedules referred to in the Agreement and Plan of
Merger are omitted. The Registrant hereby agrees to furnish a copy of any such
schedule to the Commission upon request.
2.3* -- Stock Option Agreement dated as of December 12, 1995 between the Registrant
and Bank of Boston Corporation (Exhibit B to the Registrant's Schedule 13D
with respect to Bank of Boston Corporation filed with the Commission on
December 22, 1995).
ARTICLES OF INCORPORATION AND BY-LAWS
3.1(a)* -- Articles of Organization as amended, through June 28, 1988 (Exhibit 4 to
Registration Statement No. 33-22834).
(b)* -- Certificate of Vote of Directors Establishing a Series of a Class of Stock
filed
March 10, 1989 (Exhibit 3.1(b) to 1993 Form 10-K).
(c) -- Certificate of Vote of Directors adopted July 26, 1990, electing to have
certain Massachusetts legislation concerning the classification of boards of
directors apply to the Registrant.
3.2* -- By-Laws as amended through October 27, 1994 (Exhibit 3.1 to September 30, 1994
Form 10-Q).
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1* -- Indenture dated as of September 15, 1985 (Exhibit 4.1 to Registration
Statement No. 33-00130).
4.2* -- Rights Agreement dated December 23, 1988 (Exhibit 1 to Registration Statement
on Form 8-A filed December 23, 1988).
4.3* -- Amendment dated December 12, 1995 to the Rights Agreement dated December 23,
1988 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with
the Commission on December 22, 1995).
4.4 -- The Registrant has certain long-term debt instruments under which the total
amount of securities authorized does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis. The Registrant hereby
agrees to furnish a copy of any such instruments to the Commission upon
request.
MATERIAL CONTRACTS-EXECUTIVE COMPENSATION PLANS
10.1* -- 1978 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as
amended (Exhibit 10.1 to 1991 Form 10-K).
10.2* -- Amendment dated October 27, 1994 to 1978 Stock Option Plan for Key Employees
of BayBanks, Inc. and Affiliates (Exhibit 10.1 to September 30, 1994 Form
10-Q).
10.3* -- 1988 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as
amended. (Exhibit 10.2 to September 30, 1994 Form 10-Q).
70
72
EXHIBIT
NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------
10.4* -- BayBanks, Inc., Incentive Compensation Plan, as amended (Exhibit 10.5 to
September 30, 1994 Form 10-Q).
10.5* -- BayBanks, Inc., Compensation Plan for Directors, as amended (Exhibit 10.6 to
September 30, 1994 Form 10-Q).
10.6* -- 1990 Stock Plan for Directors, as amended (Exhibit 10.7 to September 30, 1994
Form 10-Q).
10.7* -- 1982 Restricted Stock Plan for Key Employees of BayBanks, Inc., and
Affiliates, as amended (Exhibit 10.3 to September 30, 1994 Form 10-Q).
10.8* -- BayBanks Inc., 1994 Restricted Stock Plan, as amended (Exhibit 10.4 to
September 30, 1994 Form 10-Q).
10.9* -- BayBanks Supplemental Executive Retirement Plan (Exhibit 19.6 to June 30, 1991
Form 10-Q).
10.10* -- First Amendment dated February 26, 1992, to BayBanks Supplemental Executive
Retirement Plan (Exhibit 10.8 to 1991 Form 10-K).
10.11* -- Second Amendment dated July 19, 1994 to BayBanks Supplemental Executive
Retirement Plan (Exhibit 10.2 to June 30, 1994 Form 10-Q).
10.12* -- Third Amendment dated October 27, 1994 to BayBanks Supplemental Executive
Retirement Plan (Exhibit 10.8 to September 30, 1994 Form 10-Q).
10.13* -- BayBanks Profit Sharing Excess Benefit Plan (Exhibit 10.1 to March 31, 1993
Form 10-Q).
10.14* -- First Amendment to BayBanks Profit Sharing Excess Benefit Plan (Exhibit 10.1
to June 30, 1994 Form 10-Q).
10.15* -- BayBanks Retirement Excess Benefit Plan (Exhibit 10.3 to June 30, 1994 Form
10-Q).
10.16* -- BayBanks, Inc., Severance Benefits Plan, as amended (Exhibit 10.9 to September
30, 1994 Form 10-Q).
10.17* -- BayBanks Deferred Payment Plans Trust Agreement (Exhibit 19 to June 30, 1992
Form 10-Q).
10.18* -- First Amendment dated October 27, 1994 to BayBanks Deferred Payment Plans
Trust Agreement (Exhibit 10.10 to September 30, 1994 Form 10-Q).
10.19 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston
Corporation, BayBanks, Inc., and William M. Crozier, Jr.
10.20 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston
Corporation, BayBanks Inc., and Richard F. Pollard.
10.21 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston
Corporation, BayBanks Inc., and Donald L. Isaacs.
10.22 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston
Corporation, BayBanks Inc., and Michael W. Vasily.
10.23 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston
Corporation, BayBanks Inc., and Ilene Beal.
10.24 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston
Corporation, BayBanks Inc., and Joan E. Tonra.
71
73
EXHIBIT
NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------
MATERIAL CONTRACTS -- OTHER
10.25 -- ESOP Stock Purchase Agreement dated as of January 22, 1990, between the
Registrant and Marine Midland Bank, N.A., as Co-Trustee of the Savings, Profit
Sharing and Stock Ownership Plan for Employees of BayBanks, Inc., and
Affiliated Companies.
MISCELLANEOUS
11 -- Computation of Primary and Fully Diluted Earnings Per Share. See Page 73.
21 -- Subsidiaries of the Registrant. See Page 74.
23 -- Consent of Independent Auditors. See Page 75.
27 -- Financial Data Schedule.
- ---------------
* Incorporated by reference to the document indicated in parentheses.
72
74
EXHIBIT 11.1
BAYBANKS, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1995 1994
----------- -----------
PRIMARY:
Weighted average shares........................................... 19,312,942 18,870,238
Common stock equivalents:
Stock options................................................ 295,792 303,286
----------- -----------
Primary weighted average shares................................... 19,608,734 19,173,524
========== ==========
Income before cumulative effect of accounting change.............. $ 137,374 $ 108,369
Less cumulative effect of accounting change....................... -- 932
----------- -----------
Net income........................................................ $ 137,374 $ 107,437
========== ==========
Primary earnings per share:
Income before cumulative effect of accounting change......... $ 7.01 $ 5.65
Less cumulative effect of accounting change.................. -- 0.05
----------- -----------
Net income................................................... $ 7.01 5.60
========== ==========
FULLY DILUTED:
Weighted average shares........................................... 19,312,942 18,870,238
Common stock equivalents:
Stock options................................................ 327,112 307,047
----------- -----------
Fully diluted weighted average shares............................. 19,640,054 19,177,285
========== ==========
Income before cumulative effect of accounting change.............. $ 137,374 $ 108,369
Less cumulative effect of accounting change....................... -- 932
----------- -----------
Net income........................................................ $ 137,374 $ 107,437
========== ==========
Fully diluted earnings per share:
Income before cumulative effect of accounting change......... $ 6.99 $ 5.65
Less cumulative effect of accounting change.................. -- 0.05
----------- -----------
Net income................................................... $ 6.99 $ 5.60
========== ==========
73
75
EXHIBIT 21
BAYBANKS, INC.
SUBSIDIARIES OF THE REGISTRANT
BayBanks, Inc..................................................... Massachusetts
BayBank, N.A...................................................... United States of America
BayBanks Brokerage Services, Inc................................ Massachusetts
BayBanks Credit Corp. .......................................... Massachusetts
BayBanks Finance & Leasing Co., Inc. ........................... Massachusetts
BayBanks Investment Management, Inc. ........................... Massachusetts
BayBanks Mortgage Corp. ........................................ Massachusetts
BayBank Systems, Inc. .......................................... Massachusetts
BayBank FSB....................................................... United States of America
BayBank NH........................................................ New Hampshire
BayBanks Life Insurance Company................................... Arizona
All such subsidiaries are included in the consolidated financial statements
filed as part of this report. Certain other subsidiaries have been omitted
above, since considered in the aggregate as a single subsidiary, they would not
constitute a significant subsidiary.
74
76
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
BayBanks, Inc.:
We consent to incorporation by reference in Registration Statements Nos.
2-38598, 2-63815, 2-82945, 2-89461, 33-6964, 33-22834, 33-54509, and 33-60991 on
Forms S-8 of BayBanks, Inc. of our report dated January 18, 1996, relating to
the consolidated balance sheets of BayBanks, Inc. and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995, which report is included herein.
/S/ KPMG PEAT MARWICK LLP
BOSTON, MASSACHUSETTS
MARCH 14, 1996
75