Document/Exhibit Description Pages Size
1: 10-K Baybanks, Inc. Form 10-K 19 116K
2: EX-3.1B Certificate of Vote of Directors 11 28K
3: EX-10.7 1994 Restricted Stock Plan 5 21K
4: EX-11 Computation of Earnings 2± 8K
5: EX-13 Portions of Annual Report 66± 321K
6: EX-22 Subsidaries of the Registrant 1 6K
7: EX-23 Consent of Independent Auditors 1 7K
PORTIONS OF 1993 ANNUAL REPORT EXHIBIT 13
FINANCIAL REVIEW
PERFORMANCE OVERVIEW
BayBanks' net income was $67.7 million in 1993, or $3.57 per share, up
significantly from 1992 after excluding the effect of securities gains. Net
income for 1992, which included after-tax securities gains of $44.4 million, or
$2.67 per share, was $59.2 million, also $3.57 per share. Securities gains for
1993 were only $234 thousand (after-tax), or $.01 per share. Earnings per share
in 1993 also reflected a 14% increase in average shares outstanding, primarily
as a result of BayBanks' 2.3 million common share offering in the fourth
quarter of 1992. Net income in 1991 was $9.7 million, or $.60 per share,
including after-tax securities gains of $23.7 million, or $1.48 per share.
The key factors that affected net income were as follows:
o Operating income (as defined below) was $181.0 million in 1993, compared
with $175.2 million in 1992 and $171.2 million in 1991.
o There were virtually no securities gains in 1993, compared with $76.9
million in 1992 and $41.0 million in 1991.
o Credit provisions (the provision for loan losses and net additions to the
other real estate owned reserve) declined by $91.0 million, from $152.3
million in 1992 to $61.3 million in 1993. Credit provisions were $192.9
million in 1991.
o The lower credit provisions were due to the significant improvement in
credit quality over the past three years. Nonperforming assets declined 41%
to $224 million at year-end 1993 from $376 million at year-end 1992 and
$469 million at year-end 1991.
Most importantly, BayBanks' quarterly dividend was reinstated in the first
quarter of 1993 and has been increased twice since that time. For the first two
quarters of 1993, a dividend was paid at a rate of $.20 per share, increasing
to $.25 per share during the third and fourth quarters of the year. The
full-year dividend was $.90 per share. On January 27, 1994, the Board of
Directors raised the quarterly dividend to $.35 per share payable March 1,
1994.
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EARNINGS ANALYSIS
Operating Income
Operating income includes net interest income (on a tax equivalent basis)
and noninterest income and is after operating expenses, but excludes net
securities gains, the provision for loan losses, and net additions to the other
real estate owned (OREO) reserve and is before income taxes.
Operating income (TABLE A) was $181.0 million in 1993, up from $175.2
million in 1992 and $171.2 million in 1991. In 1993, higher noninterest income
and net interest
TABLE A
----------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Tax equivalent basis
(Dollars in thousands except
per share amounts) INCREASE (DECREASE) INCREASE (DECREASE)
1993 FROM 1992 1992 FROM 1991 1991
--------- ------------------ --------- -------------------- ---------
Income on earning assets . . . . . . $ 595,829 $ (64,845) (10)% $ 660,674 $(157,138) (19)% $ 817,812
Interest on deposits and borrowings . 166,648 (73,361) (31) 240,009 (177,953) (43) 417,962
--------- --------- --------- --------- ---------
Net interest income . . . . . . . . . 429,181 8,516 2 420,665 20,815 5 399,850
Noninterest income . . . . . . . . . 198,524 14,643 8 183,881 14,128 8 169,753
--------- --------- --------- --------- ---------
Total income from operations . . . . 627,705 23,159 4 604,546 34,943 6 569,603
Operating expenses . . . . . . . . . 446,705 17,389 4 429,316 30,957 8 398,359
--------- --------- --------- --------- ---------
OPERATING INCOME BEFORE NET
SECURITIES GAINS AND PROVISION FOR
LOAN LOSSES AND OREO RESERVE . . . 181,000 5,770 3 175,230 3,986 2 171,244
--------- --------- --------- --------- ---------
Net securities gains . . . . . . . . 411 (76,518) (99) 76,929 35,966 88 40,963
--------- --------- --------- --------- ---------
Provision for loan losses . . . . . . 36,500 (70,336) (66) 106,836 (58,564) (35) 165,400
Provision for OREO reserve, net . . . 24,830 (20,652) (45) 45,482 18,032 66 27,450
--------- --------- --------- --------- ---------
Total credit provisions . . . . . . . 61,330 (90,988) (60) 152,318 (40,532) (21) 192,850
--------- --------- --------- --------- ---------
Pre-tax income . . . . . . . . . . . 120,081 20,240 99,841 80,484 19,357
Less tax equivalent adjustment
included above . . . . . . . . . . 5,358 1,205 4,153 1,199 2,954
--------- --------- --------- --------- ---------
Income before taxes . . . . . . . . . 114,723 19,035 95,688 79,285 16,403
Income taxes . . . . . . . . . . . . 47,072 10,621 36,451 29,703 6,748
--------- --------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . $ 67,651 $ 8,414 $ 59,237 $ 49,582 $ 9,655
========= ========= ========= ========= =========
EARNINGS PER SHARE . . . . . . . . . $ 3.57 $ -- $ 3.57 $ 2.97 $ 0.60
========= ========= ========= ========= =========
4
income were partially offset by expenses associated with the introduction of
BayFunds in the first quarter of the year, increased personnel required to
process higher levels of consumer lending (primarily automobile finance and
residential mortgage volumes), and additional sales staff in the Customer Sales
and Service Center due to increasing sales activity.
Net Interest Income (tax equivalent basis)
Net interest income, the primary contributor to operating income, is affected by
many factors, including the volume, interest rates, and relative mix of both
earning assets and interest-bearing and noninterest-bearing sources of funds.
These factors also affect the net interest margin, as does the size of the
balance sheet. Net interest income increased in 1993 as consumer credit balances
grew, deposit rates declined, and the mix of deposits shifted to lower-cost
categories. Net interest income increased to $429.2 million in 1993 from $420.7
million in 1992 and $399.9 million in 1991 (TABLE B). The increase in net
interest income in 1993 from 1992 was primarily attributed to lower deposit
costs, increased instalment lending activities, principally automobile lending,
and increased average securities portfolios balances and was partially offset by
lower overall earning asset yields. During the first half of 1993, net interest
income was below prior year levels due to a 1992 fourth quarter securities
portfolio repositioning. That action, which resulted in a $41.1 million gain
from the sale of $1.1 billion in securities, nevertheless led to the
reinvestment of sale proceeds in securities with shorter maturities and lower
yields, thus lowering interest income on securities beginning in the fourth
quarter of 1992.
In the second half of 1993,
[FIGURE 1]
The lower income from securities was offset by higher interest income
from growth in consumer loans, declining deposit costs, and a shift to
lower-cost deposit categories.
BayBanks' funding costs have continued to decline as deposit rates have
fallen and customers' liquidity preferences have resulted in a shift to
lower-rate NOW and savings accounts. From 1992 to 1993, the cost of
interest-bearing liabilities (as a percentage of average earning assets)
declined 91 basis points, while earning assets yields declined 90 basis points
due to a lower overall rate structure and the impact of the repositioning of
BayBanks' securities portfolios in the fourth quarter of 1992. Thus, the 1993
net interest margin of 5.00%, which compares favorably to industry margins
(FIGURE 1), ended the year one basis point above the net
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TABLE B
---------------------------------------------------------------------------------------------------------------------------------
Analysis of Net Interest Income
(In thousands on a tax equivalent basis)
NET
INTEREST INTEREST INTEREST
INCOME EXPENSE INCOME
---------- ---------- ----------
1991 AS REPORTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 817,812 $ 417,962 $ 399,850
1992 increase (decrease) due to:
Changes in balances . . . . . . . . . . . . . . . . . . . . . . . . . . (46,650) (35,281) (11,369)
Lower interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . (110,488) (142,672) 32,184
---------- ---------- ----------
(157,138) (177,953) 20,815
---------- ---------- ----------
1992 AS REPORTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,674 240,009 420,665
1993 increase (decrease) due to:
Changes in balances . . . . . . . . . . . . . . . . . . . . . . . . . . (2,460) (8,781) 6,321
Lower interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . (62,385) (64,580) 2,195
---------- ---------- ----------
(64,845) (73,361) 8,516
---------- ---------- ----------
1993 AS REPORTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 595,829 $ 166,648 $ 429,181
========== ========== ==========
5
interest margin for 1992; the margin was 5.08% in the fourth quarter of 1993,
compared with 4.85% in the same quarter in 1992. The net interest margin was
4.57% in 1991.
Fees, Service Charges, and Other Noninterest Income
Noninterest income consists primarily of service charges on deposit
accounts and fees from credit and non-credit services and is well diversified
among consumer, corporate and small business, and investment services
activities. Noninterest income (TABLE C) increased 8% to $198.5 million in 1993
from $183.9 million in 1992; noninterest income was $169.8 million in 1991.
Service charges and fees on deposit accounts, contributing over one-half
of noninterest income, increased 9% to $105.2 million in 1993 from $96.7
million in 1992. This increase was attributable to higher sales levels due in
large part to the growing contribution by BayBanks' state-of-the-art Customer
Sales and Service Center and selective repricing of consumer and corporate
payment and cash management products.
Credit card fees were $18.9 million in 1993, compared with $19.4 million
in 1992. This slight decline in fees was due to slightly lower transaction
volumes and promotions that included selected annual fee waivers.
Trust fees were $14.6 million in 1993 and $14.8 million in 1992. The
decline in trust fees in 1993 was due to the decrease in income from the
management of corporate employee benefit plan assets, which are now invested in
BayFunds. Investment management and brokerage fees increased 56% to $6.6
million in 1993 from $4.2 million in 1992. Increases were attributed to
stronger sales through the Company's discount brokerage and increased sales of
BayFunds, for which affiliates of the Company act as advisors for a fee based
on balances in the funds.
Processing fees increased due to higher income from non-BayBank
cardholders using BayBank ATMs and BayBank cardholders using network ATMs.
Mortgage banking fees were $12.0 million in 1993, compared with $10.2 million
in 1992, due to continued strong refinancing volumes. International fees
reflected a slightly lower volume of letter of credit fees.
BayBanks periodically sells student loans when these loans reach a stage
when processing can be more efficiently handled by agencies set up for that
purpose. During 1993, student loan sales gains were $1.8 million, compared with
$1.0 million in 1992 and $1.2 million in 1991.
Operating Expenses
The operating expense analysis, presented in TABLE D (page 7), separates
expense categories of a more recurring nature from OREO and legal expenses
related to the workout of problem assets. Operating expenses, excluding OREO
and legal expenses, were $429.2 million in 1993, compared with $410.9 million
in 1992 and $381.1 million in 1991. The more significant changes in operating
expenses are discussed below.
Salaries and benefits increased in 1993 to accommodate expanded business
opportunities. Furthermore, prior to the first quarter launch of BayFunds, a
qualified professional sales staff was recruited and trained. Mortgage staff
was added to handle the strong mortgage refinancing volume in 1993, and
additional personnel were necessary to handle higher consumer lending
activities, primarily automobile lending. Additional professional staff was
also required to accommodate higher sales volumes through BayBanks' Customer
Sales and Service Center. In addition, salaries and benefits included normal
salary increases and higher employee benefit costs.
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TABLE C
----------------------------------------------------------------------------------------------------------------------------------
Noninterest Income
(Dollars in thousands)
% INCREASE (DECREASE)
-----------------------------
1993 1992 1991 1993 VS. 1992 1992 VS. 1991
---------- ----------- ----------- ------------- -------------
Service charges and fees on deposit accounts . . . $ 105,211 $ 96,671 $ 88,533 9% 9%
Credit card fees . . . . . . . . . . . . . . . . . 18,892 19,398 19,354 (3) --
Trust fees . . . . . . . . . . . . . . . . . . . . 14,559 14,810 14,891 (2) (1)
Processing fees . . . . . . . . . . . . . . . . . . 13,788 12,624 12,220 9 3
Mortgage banking fees . . . . . . . . . . . . . . . 11,972 10,207 6,035 17 69
Investment management and brokerage fees . . . . . 6,561 4,197 1,949 56 115
International fees . . . . . . . . . . . . . . . . 5,845 6,035 5,890 (3) 2
All other fees . . . . . . . . . . . . . . . . . . 14,676 13,517 12,756 9 6
Student loan sales gains . . . . . . . . . . . . . 1,762 997 1,208 77 (17)
Other noninterest income . . . . . . . . . . . . . 5,258 5,425 6,917 (3) (22)
---------- ---------- ----------
Total noninterest income . . . . . . . . . . . . $ 198,524 $ 183,881 $ 169,753 8 8
========== ========== ==========
6
Occupancy and equipment expenses declined due to reduced rent from
favorable lease renegotiations and expirations, lower telephone expenses due to
prior year realignments, and reduced equipment maintenance expenses.
The increase in FDIC insurance expense in 1993 and 1992 was due to an
increase in FDIC insurance rates and an increased level of deposits. Marketing
and public relations expense increased in 1993 from 1992 due to higher
promotional activities associated with the launch of BayFunds and increased
advertising of consumer credit products. Service bureau and other data
processing expense increased due to increased processing volumes, and
professional services reflected a decline in general legal costs in 1993, which
had increased in 1992 from 1991 levels.
The expense of administering, managing, and disposing of OREO properties
was $17.5 million in 1993, down from $18.5 million in 1992, as a result of a
reduction in legal expenses and the number of properties owned.
Provisions for Loan Losses and the OREO Reserve
The provisions for loan losses and the OREO reserve (credit provisions)
declined substantially in 1993 from 1992 due to the continued improvement in
BayBanks' credit quality.
Credit provisions were $61.3 million in 1993, down $91 million, or 60%,
from $152.3 million in 1992; credit provisions were $192.9 million in 1991. The
decline in the provision for loan losses from $106.8 million in 1992 to $36.5
million in 1993 accounted for the largest portion of the reduction. The OREO
provision was $24.8 million in 1993, down from $45.5 million in 1992. The OREO
provisions were net of gains from the sale of properties of $7.6 million in
1993 and $54 thousand in 1992.
Income Taxes
The effective income tax rates for 1993 and 1992 were 41.0% and 38.1%,
respectively. BayBanks' current combined federal and state statutory tax rate
is approximately 43%. The lower rate in 1992 was affected by a federal
alternative minimum tax credit. The 1993 provision included a higher marginal
state tax rate for the Company due to proportionately higher Massachusetts bank
income in 1993, which is taxed at 12.54%, compared with 9.5% for nonbank
income, and also reflected the increase in the federal income tax rate from 34%
to 35%.
During 1993, the Internal Revenue Service (IRS) completed a review of the
Company's tax returns for the years 1986 through 1990 and has proposed certain
adjustments, primarily related to the timing of income and expense recognition,
that could result in additional taxes and interest payments. Should the IRS
prevail, a majority of the proposed adjustments would result in shifting tax
deductions from prior years to 1991 and 1992. The Company believes it has
strong support for its positions and has filed an appeal of the proposed
adjustments. The Company does not believe that future interest or tax payments
related to the proposed adjustments, if any, would have a material impact on
its results of operations or financial condition.
Also during 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as described in Note 2 to the
financial statements. Adoption of Statement No. 109 did not have a material
effect on the Company's results of operations or financial condition.
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TABLE D
----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
(Dollars in thousands)
% INCREASE (DECREASE)
---------------------------
1993 1992 1991 1993 VS. 1992 1992 VS. 1991
----------- ---------- ---------- ------------- -------------
Salaries and benefits . . . . . . . . . . . . . . . $ 212,954 $ 199,604 $ 184,399 7% 8%
Occupancy and equipment . . . . . . . . . . . . . . 87,116 88,950 85,465 (2) 4
FDIC insurance . . . . . . . . . . . . . . . . . . 21,949 19,289 18,329 14 5
Marketing and public relations . . . . . . . . . . 21,341 17,033 13,466 25 26
Service bureau and other data processing . . . . . 16,538 15,602 13,444 6 16
Professional services . . . . . . . . . . . . . . . 13,744 12,482 8,577 10 46
Printing and supplies . . . . . . . . . . . . . . . 12,997 12,557 11,879 4 6
Postage . . . . . . . . . . . . . . . . . . . . . . 8,290 8,201 8,213 1 --
Travel and courier . . . . . . . . . . . . . . . . 7,748 7,649 7,273 1 5
Legal and consulting . . . . . . . . . . . . . . . 6,609 9,763 7,933 (32) 23
Insurance . . . . . . . . . . . . . . . . . . . . . 4,367 5,161 5,306 (15) (3)
Other . . . . . . . . . . . . . . . . . . . . . . . 15,584 14,575 16,829 7 (13)
----------- ---------- ----------
Total operating expenses excluding OREO expenses . 429,237 410,866 381,113 4 8
OREO and legal expenses related to workout . . . . 17,468 18,450 17,246 (5) 7
----------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . $ 446,705 $ 429,316 $ 398,359 4 8
=========== =========== ==========
7
[FIGURE 2] [FIGURE 3]
BALANCE SHEET REVIEW
Trends in Earning Assets
Average earning assets increased to $8.6 billion in 1993 from $8.4
billion in 1992. During 1993, the mix of average earning assets reflected the
smallest shift from loans to securities since 1989 (FIGURE 2). For 1993,
average loans were $5.9 billion, compared with $6.2 billion in 1992 (FIGURE 3).
However, average loan balances rose during the year, for a total average
increase of $106 million from the first to the fourth quarter of the year, and
at year-end 1993, total loans were $6.1 billion, up from $5.9 billion at
year-end 1992. Average securities portfolios increased from $2.3 billion in
1992 to $2.7 billion in 1993.
Loan Portfolio
The Company maintains a diversified loan portfolio, with the consumer
portfolios representing 63% of the 1993 year-end portfolio, up from 59% at 1992
year-end. The commercial portfolios, commercial and commercial real estate
loans, account for the remaining 37% of the portfolio, compared with 41% in
1992. At December 31, 1993, the consumer portfolios included $2.6 billion in
instalment loans and $1.2 billion in residential mortgage loans. The majority
of the Company's commercial loans are to New England-based companies, primarily
local middle-market companies and small businesses in Massachusetts.
Instalment loans were the source of BayBanks' loan portfolio growth
during 1993. Instalment lending benefited from increased promotional activities
and BayBanks' Customer Sales and Service Center, which operates 24 hours a day,
seven days a week, all year.
The majority of residential real estate loans are sold to the secondary
market. Fixed-rate residential mortgage loans, approximately 75% of total loan
originations in 1993, are generally securitized and sold with servicing rights
retained. Floating-rate residential real estate mortgage loans and some
selected 10- and 15-year fixed-rate loans are held in the residential real
estate loan portfolio or may be securitized and transferred to the securities
available for sale portfolio.
From 1992 to 1993, loan portfolio net business volume increased from $708
million to $1.2 billion (TABLE E, page 9). During 1993, the increase in
instalment loan net business volume was $441 million, up substantially from
$145 million in 1992, led by gains in indirect automobile lending, where
BayBanks has a very strong market position. Student loan activity also
increased, from $118 million in 1992 to $135 million in 1993. Home equity
lending had a net business volume change of $104 million as the decline in 1992
reversed to a small increase in 1993. The majority of the growth in residential
mortgage loan portfolio net business volume was in fixed-rate refinancings sold
to the secondary market. Commercial loan volumes fluctuated somewhat during
1993 due to selected overnight money market-priced loans, international trade
finance activities, principally with Mexican banks (approximately $85 million
at 1993 year-end compared
8
with $45 million a year ago), and payments on nonperforming loans. However,
the rate of decline in the commercial loan portfolio slowed from $165 million
in 1992 to $53 million in 1993 as Massachusetts businesses showed some signs of
recovery. Commercial real estate balances continued to reflect payments on
nonperforming loans and scheduled amortization that exceeded new loan volume.
Securities Portfolios
TABLE F presents the securities portfolios, which are comprised of
short-term investments, securities available for sale, and investment
securities. The total portfolio increased to $3.0 billion at December 31, 1993,
from $2.8 billion at year-end 1992 and $2.0 billion at year-end 1991. During
the past three years, BayBanks has shortened the
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TABLE E
---------------------------------------------------------------------------------------------------------------------------------
Changes in the Loan Portfolio
At Year-End -- 1993 vs. 1992
(In thousands)
ANALYSIS OF CHANGE IN LOAN CATEGORIES --1993
---------------------------------------------- 1992
DECEMBER 31 GROSS TRANSFERS NET NET
------------------------- INCREASE CHARGE- TO SALES AND BUSINESS BUSINESS
1993 1992 (DECREASE) OFFS OREO SECURITIZATION VOLUME VOLUME
---------- ------------ ---------- --------- --------- -------------- ---------- ----------
Commercial . . . . . . . . . $1,324,968 $ 1,411,120 $ (86,152) $ (24,231) $ (9,018) $ -- $ (52,903) $ (165,162)
Commercial real estate . . . 935,471 1,022,515 (87,044) (15,513) (11,751) -- (59,780) (108,818)
Residential mortgage . . . . 1,242,597* 1,247,633* (5,036) (11,203) (18,821) (815,722) 840,710 836,753
Instalment loans
Automobile and other. . . . 1,200,596 928,461 272,135 (9,403) -- -- 281,538 77,195
Home equity . . . . . . . 673,409 669,969 3,440 (2,987) (870) -- 7,297 (96,828)
Credit card . . . . . . . 325,794 332,351 (6,557) (11,316) -- -- 4,759 38,778
Student loans . . . . . . 276,923 209,539 67,384 (245) -- (67,363) 134,992 117,572
Reserve credit . . . . . . 123,412 116,411 7,001 (5,065) -- -- 12,066 8,552
---------- ------------ --------- --------- --------- ---------- ---------- ----------
Total instalment loans 2,600,134 2,256,731 343,403 (29,016) (870) (67,363) 440,652 145,269
---------- ------------ --------- --------- --------- ---------- ---------- ----------
Total loans . . . . . . . . . $6,103,170 $ 5,937,999 $ 165,171 $ (79,963) $ (40,460) $ (883,085) $1,168,679 $ 708,042
========== ============ ========= ========= ========= ========== ========== ==========
* Includes residential mortgage loans held for sale of $138 million in 1993 and
$186 million in 1992.
[Enlarge/Download Table]
TABLE F
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Securities Portfolios
At December 31
(Dollars in thousands)
1993 1992 1991
---------- ---------- ----------
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . $ 803,068 $1,091,985 $ 579,912
---------- ---------- ----------
Securities available for sale
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322,707 1,433,945 --
U.S. Agency mortgage-backed securities . . . . . . . . . . . . . . . . 30,832 88,932 --
State and local governments . . . . . . . . . . . . . . . . . . . . . 18,964 -- --
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . 256,500 -- --
---------- ---------- ----------
629,003 1,522,877 --
---------- ---------- ----------
Investment securities
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,203,315 -- 627,050
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . 204,798 -- 651,381
State and local governments . . . . . . . . . . . . . . . . . . . . . 128,997 37,869 25,547
Industrial revenue bonds . . . . . . . . . . . . . . . . . . . . . . . 59,958 75,938 91,345
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . 1,992 42,685 2,038
---------- ---------- ----------
1,599,060 156,492 1,397,361
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,031,131 $2,771,354 $1,977,273
========== ========== ==========
Weighted average maturity of securities available for sale
and investment securities in years* . . . . . . . . . . . . . . . . . 1.1 1.5 5.2
Weighted average maturity of total securities in years * . . . . . . . . 0.8 1.0 3.8
* The weighted average maturity calculation excludes amortizing IRBs and
reflects estimated prepayments for mortgage-backed securities.
9
weighted average maturity of its securities portfolios in conjunction with the
portfolio repositioning previously discussed in the Net Interest Income
section, thus increasing its liquidity and responsiveness to potential changes
in interest rates. The weighted average maturity of the securities available
for sale and investment securities declined to 1.1 years at year-end 1993 from
1.5 years at year-end 1992. When short-term investments are included, the
weighted average maturity declined to .8 years at year-end 1993. Since the
repositioning reduced the average maturity of the securities portfolios, the
yields on these portfolios were also reduced.
Short-term investments were $803 million at December 31, 1993,
compared with $1.1 billion at December 31, 1992. The decline in the balance of
short-term investments reflects the reinvestment of certain proceeds from
maturing short-term investments into the securities available for sale and
investment securities portfolios during 1993.
Securities available for sale, consisting primarily of debt
securities, are stated at the lower of aggregate cost or market value.
Decisions to purchase or sell these securities are part of the Company's asset
and liability management process and are based on the assessment of changes in
economic and financial market conditions, interest rate environments, the
Company's balance sheet structure, interest sensitivity position, liquidity,
and capital. Securities available for sale were $629 million at December 31,
1993, compared with $1.5 billion at year-end 1992 as maturities were reinvested
in the investment securities portfolio. At December 31, 1993, securities
available for sale had gross unrealized gains of $4 million and gross
unrealized losses of $5 thousand.
The investment securities portfolio, principally debt securities, is
stated at amortized cost. This basis for valuation reflects management's
intention and ability to hold these securities until maturity. The Company's
investment securities portfolio was $1.6 billion at December 31, 1993, compared
with $156 million at December 31, 1992. During 1993, investment securities
increased due to purchases and the transfer of $495 million in securities
available for sale to this category. These securities were transferred at
amortized cost since they had an unrealized gain. At December 31, 1993, gross
unrealized gains in the investment securities portfolio were $7 million, and
gross unrealized losses were $911 thousand.
BayBanks' investment securities portfolio includes U.S. Treasury and
Agency securities, as well as state and
[FIGURE 4]
local government securities (principally tax anticipation notes) and industrial
revenue bonds. State and local government securities totaled $129 million at
December 31, 1993, with the single largest issue being under $7 million. Of
this total portfolio, $113 million were securities rated investment grade and
$16 million were unrated. All municipal securities are subject to an internal
credit review process that assigns a rating to the securities. Industrial
revenue bonds, $60 million at December 31, 1993, are also subject to an
internal credit review process. While there is no ready market for the
Company's holdings of industrial revenue bonds, management has determined that,
based on periodic private placement quotes, their amortized cost is a
reasonable estimate of market value.
Trading account securities, consisting of debt securities, are
recorded at market value, which was $15 million at December 31, 1993. Trading
account gains were $2.3 million in 1993 and $2.2 million in 1992.
Deposits and Other Sources of Funds
The Company's extensive banking system includes 201 full-service
offices and 356 automated banking facilities, with a total of 1,009 ATMs that
generate significant core deposits, which accounted for over 99% of total
average deposits in 1993 and 1992. Contributing to this strong core deposit
position is BayBanks' state-of-the-art Customer Sales and Service Center.
Core deposits include transaction accounts (demand, NOW, and savings
accounts), money market deposit accounts (MMDA), and consumer time certificates
(FIGURE 4).
10
Average core deposits were $8.6 billion in 1993. Within the core
deposit categories, there has been a shift in mix to lower-cost transaction
accounts, with average balances increasing $464 million in 1993 to $4.6
billion, which had a positive effect on the Company's net interest margin.
Higher-cost MMDA accounts and consumer certificates of deposit
declined by $431 million in 1993. Average MMDAs declined $169 million to $2.9
billion in 1993 from 1992, and average consumer time deposits declined $262
million to $1.1 billion. In addition, average certificates of deposit in excess
of $100 thousand (CDs) remain at relatively low levels, $33 million in 1993,
compared with $58 million in 1992.
In addition, BayFunds, the Company's family of six mutual funds,
extends BayBanks' product lines and provides additional balance sheet
flexibility and fee income. At December 31, 1993, BayFunds had increased by
$390 million to $1.1 billion (from initial fund balances that were converted to
BayFunds). The conversion included three employee benefit plan funds, and a
corporate cash management product that includes a corporate sweep feature, that
with an existing money market fund aggregated $730 million at the date of
transfer. Cash management balances fluctuated during 1993 according to the
liquidity preferences of BayBanks' business customers, while consumer accounts
have grown steadily.
Purchased funds increased to $508 million at December 31, 1993, from
$140 million a year ago as the Company increased its short-term investments
late in the fourth quarter. The Company may continue to maintain this slightly
higher shorter-term investment position funded by purchased funds as a way of
taking advantage of its strong capital position. While net interest income
should increase, the net interest margin may decline somewhat, reflecting lower
spreads on these additional investments.
Interest Rate Risk Management and Liquidity
BayBanks' Capital Markets Committee closely monitors and manages the
overall on- and off-balance sheet interest sensitivity position, short-term
investments and the securities portfolios, funding, and liquidity. Interest
sensitivity, as measured by the Company's gap position, is affected by the
level and direction of interest rates and current liquidity preferences of its
customers. These factors, as well as projected balance sheet growth, current
and potential pricing actions, competitive influences, national monetary and
fiscal policy, the national and regional economic environment, and current and
expected behavior of financial and capital markets, are considered in the asset
and liability management decision process.
The Company's interest sensitivity gap position in TABLE G is first
presented based on contractual maturities and repricing opportunities. In a
period of rising or falling interest rates this basis of presentation does not
reflect lags that may occur in the repricing of certain loans and deposits. For
example, certain interest-bearing core deposit categories may lag changes in
market interest rates, although the Company contractually could change the
rates at any time. A management adjustment provides for these expected
repricing lags. The management adjustment also recognizes that interest rate
changes in these core deposit categories are not as sensitive to changes in
market interest rates.
In addition to the gap analysis presented in the table, the Company
also uses a simulation model under varying interest rate scenarios, including
the effect of rapid changes (both increases and decreases up to 200 basis
points) in interest rates on its net interest income and net interest margin.
The Company's policy is to minimize volatility in its net interest income and
net interest margin.
[Enlarge/Download Table]
TABLE G
------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Position
At December 31, 1993
(In millions)
0-30 31-90 91-180 TOTAL WITHIN 181-365 TOTAL WITHIN
DAYS DAYS DAYS 180 DAYS DAYS ONE YEAR
-------- -------- ------- -------- ------- --------
Total assets . . . . . . . . . . . . . . . . . $ 3,697 $ 604 $ 544 $ 4,845 $ 1,147 $ 5,992
Total liabilities . . . . . . . . . . . . . . . 6,490 210 263 6,963 201 7,164
-------- -------- ------- -------- ------- --------
Net contractual gap position . . . . . . . . . (2,793) 394 281 (2,118) 946 (1,172)
Net interest rate swaps . . . . . . . . . . . . -- 8 -- 8 -- 8
-------- -------- ------- -------- ------- --------
Net gap position including interest
rate swaps at December 31, 1993 . . . . . . $ (2,793) $ 402 $ 281 $ (2,110) $ 946 $ (1,164)
Management adjustment . . . . . . . . . . . . . 5,418 (2,727) (465) 2,226 (930) 1,296
-------- -------- ------- -------- ------- --------
Management-adjusted gap at
December 31, 1993 . . . . . . . . . . . . . $ 2,625 $ (2,325) $ (184) $ 116 $ 16 $ 132
======== ======== ======= ======== ======= ========
Management-adjusted gap at
December 31, 1992 . . . . . . . . . . . . . $ 2,517 $ (2,643) $ (178) $ (304) $ (54) $ (358)
======== ======== ======= ======== ======= ========
11
[FIGURE 5]
At December 31, 1993, the Company's adjusted gap for the total
within-180-day period decreased from a negative gap of $304 million at December
31, 1992, to a positive gap of $116 million at December 31, 1993, primarily as
the result of the continued shortening of the securities portfolio during 1992.
The total within-one-year gap reflected similar changes, moving from negative
$358 million to a positive $132 million. The Company believes its overall
management-adjusted gap is essentially neutral, and therefore the effect of a
change in market interest rates on net interest income should not be
significant.
Liquidity, for commercial banking activities, is the ability to
respond to maturing obligations, deposit withdrawals, and loan demand. The
liquidity positions of the Company's bank subsidiaries are closely monitored by
the Company's Capital Markets Committee. BayBanks' retail network provides a
stable base of in-market core deposits and limits the need to raise funds from
the national market.
The Company's net liquidity position (short-term investments,
securities available for sale, and investment securities, less pledged
securities, large CDs, and federal funds purchased) continues to be strong and
was $2.3 billion at December 31, 1993 and 1992 (FIGURE 5). The Company has
additional liquidity flexibility due to the relatively short average maturity
of less than one year of its combined short-term investments and securities
portfolios. This substantial liquidity position enabled BayBanks to increase
its investment securities portfolio during 1993 as described above.
An analysis of the changes in cash flows provides additional
information on liquidity. The statement of cash flows presented elsewhere in
this report includes operating, investing, and financing categories. Operating
activities included $67.7 million in net income for 1993, before adjustments
for noncash items. Investing activities are primarily comprised of both
proceeds from and purchases of securities, short-term investment activity, and
net loan originations. Financing activities present the net change in the
Company's various deposit accounts, short-term borrowings, and dividends paid.
Cash and cash equivalents were $734 million on January 1, 1993. During
1993, net cash provided by operating activities was $284 million, net cash used
by investing activities totaled $529 million, and net cash provided by
financing activities was $144 million. Cash and cash equivalents were $633
million at December 31, 1993.
The parent company's primary sources of liquidity are dividend and
interest income received from its subsidiaries. The most significant uses of
the parent company's resources are capital contributions to subsidiaries when
appropriate and dividends paid to stockholders. In managing liquidity,
regulatory limitations on the extent to which bank subsidiaries can pay
dividends or supply funds to the parent company are taken into account, as
discussed in Note 1 to the financial statements. During 1993, the parent
company provided $22 million in capital to its subsidiaries. During 1993, the
parent company received a total of $17 million in dividends from its
subsidiaries, of which $10 million was from a banking subsidiary and $7 million
was from a nonbank subsidiary, and paid $17 million in dividends to its
stockholders. At December 31, 1993, the parent company had approximately $69
million in cash, short-term investments, and other securities. The parent
company does not sell commercial paper and does not have any revolving credit
lines or short-term debt outstanding.
CREDIT QUALITY REVIEW
Overview
The Company continually monitors its loan portfolios. Employing a
standard system for grading loans, individual account officers are responsible
for assigning their loans a grade and, if necessary, a specific loan loss
reserve. An independent Loan Review Department reviews loan grades and specific
reserves. Any loan or portion of a loan determined to be uncollectible is
charged off. On a quarterly basis, senior management reviews the loan
portfolio, with particular emphasis on higher-risk loans,
12
to assess the quality and loss potential inherent in the portfolio, considering
the Company's market and economic conditions in general. Also considered in
this review are historic loan loss experience, delinquency trends, and other
factors. The size of the allowance for loan losses and the related provision
for loan losses reflect this analysis.
Nonperforming assets (which exclude restructured, accruing loans and
accruing loans 90 days or more past due) include nonperforming loans and OREO
and were $224 million at December 31, 1993, a 41% decrease from $376 million at
December 31, 1992. Nonperforming assets continued the downward trend that
began in 1991 (FIGURE 6). While the Company expects to experience continued
improvement in nonperforming assets, the pace of that improvement will depend
on many factors, including the national and regional economy and local real
estate market conditions.
During 1993, the decline in nonperforming assets (TABLE H) was
attributed to continued successful workout activities that included an increase
in property sales, payments on nonperforming loans, and loans that qualified
for return to accrual status. These favorable resolutions climbed to $181
million in 1993 from $138 million in 1992, while at the same time there has
been a reduction in net
[FIGURE 6]
new nonperforming assets, which were down from $181 million in 1992 to $106
million in 1993. The combination of these two favorable trends resulted in a
net outflow of nonperforming assets of $75 million in 1993, compared with a net
inflow of $43 million in 1992.
[Enlarge/Download Table]
TABLE H
-----------------------------------------------------------------------------------------------------------------------
Changes in Asset Quality
(In thousands)
SIX MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
1993 12/31/93 6/30/93 1992 12/31/92 6/30/92
---------- ---------- --------- ---------- ---------- ----------
Nonperforming assets* . . . . . . . . . . $ 223,680 $ 223,680 $ 308,374 $ 376,166 $ 376,166 $ 426,758
========== ========== ========= ========== ========== ==========
Nonperforming asset activity:
Additions . . . . . . . . . . . . . . $ 106,205 $ 41,786 $ 64,419 $ 181,253 $ 66,568 $ 114,685
---------- ---------- --------- ---------- ---------- ----------
Payments . . . . . . . . . . . . . . . (66,934) (25,347) (41,587) (39,879) (25,201) (14,678)
Return to accrual . . . . . . . . . . (24,004) (17,566) (6,438) (19,992) (7,246) (12,746)
OREO sales . . . . . . . . . . . . . . (90,066) (48,165) (41,901) (78,589) (39,836) (38,753)
---------- ---------- --------- ---------- ---------- ----------
Total improvements . . . . . . . . . . (181,004) (91,078) (89,926) (138,460) (72,283) (66,177)
---------- ---------- --------- ---------- ---------- ----------
Net (outflow) inflow . . . . . . . . . (74,799) (49,292) (25,507) 42,793 (5,715) 48,508
---------- ---------- --------- ---------- ---------- ----------
Charge-offs . . . . . . . . . . . . . . . (55,744) (28,101) (27,643) (127,320) (39,111) (88,209)
Change in OREO reserve . . . . . . . . . (21,943) (7,301) (14,642) (7,833) (5,766) (2,067)
---------- ---------- --------- ---------- ---------- ----------
Total decrease in nonperforming assets . $ (152,486) $ (84,694) $ (67,792) $ (92,360) $ (50,592) $ (41,768)
========== ========== ========= ========== ========== ==========
* Nonperforming assets include nonperforming loans and OREO and exclude
restructured, accruing loans and accruing loans 90 days or more past due.
[Enlarge/Download Table]
TABLE I
------------------------------------------------------------------------------------------------------------------------
Nonperforming Loans
At December 31
(Dollars in thousands)
1993 1992 1991
---------------------- ----------------------- -----------------------
Commercial . . . . . . . . . . . . . . . $ 47,751 43% $ 82,110 46% $ 109,710 49%
Commercial real estate . . . . . . . . . 49,014 45 79,144 44 98,214 44
Residential mortgage . . . . . . . . . . 11,473 10 14,889 8 10,254 5
Instalment . . . . . . . . . . . . . . . 1,763 2 4,437 2 4,547 2
---------- --- ---------- --- ---------- ---
Total nonperforming loans . . . . . . $ 110,001 100% $ 180,580 100% $ 222,725 100%
========== === ========== === ========== ===
13
Nonperforming Loans
Nonperforming loans (TABLE I, page 13) declined 39% to $110 million at
December 31, 1993, from $181 million at December 31, 1992; nonperforming
commercial loans decreased 42% to $48 million while nonperforming commercial
real estate loans declined 38% to $49 million during this period. Trends in
nonperforming consumer portfolios (residential mortgage and instalment loans)
were also positive, as they declined 32% to $13 million during the year.
Other Real Estate Owned (OREO)
OREO consists of foreclosed properties and in-substance foreclosures.
Foreclosed properties are being prepared for sale or are currently listed for
sale. The Company is also involved in managing in-substance foreclosures,
taking operating control to stabilize values while the properties are being
prepared for sale, or working closely with borrowers to obtain new equity.
OREO (net of a valuation reserve) declined by $82 million, or 42%,
from $196 million at December 31, 1992, to $114 million at December 31, 1993,
primarily due to property sales. OREO declined in all major property types. The
five largest properties ranged from $5 million down to $3 million, with the
majority of OREO comprised of smaller dollar properties.
Restructured, Accruing Loans
The Company restructures credits with troubled borrowers if such
arrangements are likely to minimize losses the Company may incur on a
particular credit. Loans that have been restructured remain on nonaccrual
status until the borrower has demonstrated a period of performance under the
new contractual terms. The restructured, accruing category is reported as a
separate component of the Company's credit quality information, and income on
restructured loans is recognized in interest income based upon the restructured
terms. Restructured, accruing loans were $18 million at year-end 1993, compared
with $12 million at year-end 1992.
Accruing Loans 90 Days or More Past Due
Accruing loans 90 days or more past due (TABLE J) were $52 million at
December 31, 1993, compared with $92 million at December 31, 1992. Of the $52
million in accruing loans past due 90 days or more at December 31, 1993, $21
million were residential mortgages and $22 million were instalment loans; these
consumer portfolios together represented 83% of the total. Of the $21 million
in residential mortgages, $17 million were in owner-occupied properties.
Residential mortgages and instalment loans by their nature include a large
number of smaller loans. Commercial and commercial real estate accruing loans
90 days or more past due at December 31, 1993, declined significantly from
December 31, 1992, from $36 million to $9 million.
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses and is reduced by net loans charged off. Net loans charged off were $58
million in 1993, compared with $127 million in 1992. Most of the reduction in
charge-offs was in commercial and commercial real estate loans. The provision
for loan losses was $36.5 million in 1993, compared with $106.8 million in
1992. Since older problem assets are being resolved and the rate of emerging
problem assets continued to decline, the allowance for loan losses was not
replenished to the full extent of net charge-offs. The allowance for loan
losses was $171 million at December 31, 1993, and $193 million at December 31,
1992. While the overall allowance declined, its coverage of nonperforming loans
increased to 156% at December 31, 1993, from 107% at December 31, 1992, and 95%
at December 31, 1991.
[Enlarge/Download Table]
TABLE J
-----------------------------------------------------------------------------------------------------------------------
Accruing Loans 90 Days or More Past Due
At December 31
(Dollars in thousands)
1993 1992 1991
-------------------- ------------------- --------------------
Commercial . . . . . . . . . . . . . . . $ 3,558 7% $ 11,480 12% $ 20,237 17%
Commercial real estate . . . . . . . . . 5,093 10 24,824 27 14,895 13
Residential mortgage . . . . . . . . . . 20,698 40 28,914 32 39,963 34
Instalment . . . . . . . . . . . . . . . 22,400 43 26,677 29 41,719 36
--------- --- --------- --- ---------- ---
Total . . . . . . . . . . . . . . . . $ 51,749 100% $ 91,895 100% $ 116,814 100%
========= === ========= === ========== ===
14
[Enlarge/Download Table]
TABLE K
-------------------------------------------------------------------------------------------------------------------------
Allocation of the Allowance for Loan Losses
At December 31, 1993
(Dollars in thousands)
SPECIFIC
LOAN CATEGORY ALLOCATIONS UNALLOCATED TOTAL
------------ ----------- -----------
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,012 $ 31,286 $ 47,298
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . 13,162 53,293 66,455
------------ ---------- -----------
Total corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,174 84,579 113,753
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . -- 21,621 21,621
Instalment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 36,122 36,122
------------ ---------- -----------
Total allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,174 $ 142,322 $ 171,496
============ ========== ===========
Percentage of total allowance . . . . . . . . . . . . . . . . . . . . 17% 83% 100%
============ ========== ===========
The allowance for loan losses 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, it is
considered unallocated in nature. TABLE K presents the allocation of the
allowance for loan losses at December 31, 1993.
CAPITAL AND DIVIDENDS
BayBanks' consolidated risk-based capital ratios were 12.40% for total
capital and 10.68% for core capital at December 31, 1993, compared with 12.30%
and 10.37% at December 31, 1992 (FIGURE 7). The leverage ratio was 7.26% at
December 31, 1993, compared with 6.79% at December 31, 1992. These ratios
exceeded regulatory capital guidelines.
During 1992, the Company completed a public offering of 2.3 million
shares of common stock that raised $79 million in capital. The Company
contributed $22 million in capital to its subsidiaries during 1993 and $8
million in 1992. The remaining funds were held by the parent company in cash
and securities portfolios at December 31, 1993. The parent company from time to
time may contribute additional capital to its subsidiaries.
The Company reinstated its quarterly cash dividend in the first
quarter of 1993 at an initial rate of $.20 per share; an equal amount was paid
in the second quarter. In the third quarter of 1993, the Company increased its
quarterly cash dividend to $.25 per share, which dividend was also paid in the
fourth quarter. Total dividends declared for 1993 were $.90. On January 27,
1994, the Board of Directors raised the quarterly dividend amount when it
declared a dividend of $.35 per
[FIGURE 7]
15
[FIGURE 8]
share payable on March 1, 1994. BayBanks' stock performance for the last three
years is presented in FIGURE 8. The closing price on December 31, 1993, was
$50.75.
IMPENDING ACCOUNTING CHANGES
In 1992, the Financial Accounting Standards Board (FASB) issued
Statement No. 112, "Employers' Accounting for Postemployment Benefits."
Statement No. 112 is effective for fiscal years beginning after December 15,
1993. In management's opinion, the adoption of Statement No. 112, as further
described in Note 11 to the financial statements, will not have a material
effect on the Company's results of operations or financial condition.
In May 1993, the FASB issued Statement No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement is effective for fiscal
years beginning after December 15, 1994. Adoption of Statement No. 114 will
require changes in the disclosure of nonperforming assets. Loans currently
being reported as nonperforming and in-substance foreclosures will be reported
as impaired loans in a note to the financial statements. Restructured loans,
reported as troubled debt restructuring prior to the adoption of Statement No.
114, will not be regarded as impaired loans when the statement is adopted if
they are performing under the restructured terms. Troubled debt restructurings
entered into after the adoption of Statement No. 114 will be accounted for as
impaired loans. The amount of impairment will be determined by the difference
between the present value of the expected cash flows related to the loan using
the contract rate and its recorded value, or in the case of collateralized
loans, the difference between the appraised value of the collateral and the
recorded amount of the loan. Any additional impairment will be recorded as an
adjustment to the existing allowance for loan losses account. The adoption of
Statement No. 114 is not expected to have a material effect on the Company's
results of operations or financial condition.
In May of 1993, the FASB issued Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This statement is effective
for fiscal years beginning after December 15, 1993. The adoption of Statement
No. 115 requires securities available for sale to be recorded at fair value.
Changes in the fair value of securities available for sale will be recorded in
a valuation account in the stockholders' equity section of the balance sheet,
net of tax. The adoption of Statement No. 115 is expected to have an effect on
the Company's financial condition, as changes in the fair value of securities
available for sale will occur and will be reflected in stockholders' equity. If
Statement No. 115 had been adopted as of December 31, 1993, the estimated
after-tax effect on the Company's stockholders' equity for the unrealized gain
on the securities available for sale portfolio would have been to increase the
stockholders' equity account by approximately $2.5 million.
16
[Download Table]
FINANCIAL STATEMENTS
---------------------------------------------------------
Auditors' Report . . . . . . . . . . . . . . . . . . 17
Consolidated Balance Sheet . . . . . . . . . . . . . 18
Consolidated Statement of Income . . . . . . . . . . 19
Consolidated Statement of Changes in
Stockholders' Equity . . . . . . . . . . . . . . . 20
Consolidated Statement of Cash Flows . . . . . . . . 21
Notes to Financial Statements . . . . . . . . . . . . 22
[LOGO]
KPMG PEAT MARWICK
Certified Public Accountants
One Boston Place
Boston, MA 02108
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, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1993 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK
January 24, 1994
17
[Enlarge/Download Table]
CONSOLIDATED BALANCE SHEET
(In thousands except share amounts) BAYBANKS, INC.
------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
----------------------------
1993 1992
------------ -----------
ASSETS
Cash and due from banks (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 632,985 $ 733,726
Interest-bearing deposits and other short-term investments (Note 2) . . . . . . . . . . . . . . . 803,068 1,091,985
Trading accounts (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,595 74,694
Securities available for sale--market value $633,446 in 1993 and $1,530,917 in 1992 (Notes 2 and 4) 629,003 1,522,877
Investment securities--market value $1,605,091 in 1993 and $157,024 in 1992 (Notes 2 and 4) . . 1,599,060 156,492
Loans--net of unearned income and fees (Notes 2 and 5)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,324,968 1,411,120
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,471 1,022,515
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,242,597 1,247,633
Instalment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,134 2,256,731
----------- -----------
6,103,170 5,937,999
Less allowance for loan losses (Notes 2 and 6) . . . . . . . . . . . . . . . . . . . . . . . . 171,496 192,700
----------- -----------
5,931,674 5,745,299
Premises and equipment, net (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,554 198,430
Customers' acceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,467 11,778
Other real estate owned and in-substance foreclosures, net (Notes 2 and 6) . . . . . . . . . . . 113,679 195,586
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,499 165,419
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,110,584 $ 9,896,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,077,206 $ 1,978,102
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,481,859 1,442,820
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,459,134 1,320,633
Money market deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,731,720 2,967,291
Consumer time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993,945 1,234,747
Time--$100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,957 38,955
----------- -----------
8,778,821 8,982,548
Federal funds purchased and other short-term borrowings (Note 8) . . . . . . . . . . . . . . . . 507,820 139,969
Acceptances outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,467 11,778
Accrued expenses and other accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,485 48,111
Long-term debt (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,488 55,188
Guarantee of ESOP indebtedness (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,241 14,473
Stockholders' equity (Notes 1 and 10):
Common stock: par value $2.00 per share
Shares authorized--50,000,000
Shares issued--18,742,934 in 1993 and 18,507,952 in 1992 . . . . . . . . . . . . . . . . . . 37,486 37,016
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,355 304,890
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,662 316,812
----------- -----------
715,503 658,718
Less treasury stock at cost--950 shares in 1992 . . . . . . . . . . . . . . . . . . . . . . . -- 26
Less guarantee of ESOP indebtedness (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . 12,241 14,473
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703,262 644,219
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $10,110,584 $ 9,896,286
=========== ===========
------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
[Enlarge/Download Table]
CONSOLIDATED STATEMENT OF INCOME
(In thousands except share amounts) BAYBANKS, INC.
-----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
--------------------------------------------
1993 1992 1991
------------ ------------ ------------
Income on interest-bearing deposits and other
short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,002 $ 22,416 $ 39,937
Interest on securities portfolios
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,510 86,304 95,542
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,301 7,163 12,089
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . 480,658 540,638 667,290
------------ ------------ ------------
Total income on earning assets . . . . . . . . . . . . . . . . . . . . . . . . 590,471 656,521 814,858
Interest expense on deposits and borrowings
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,441 233,235 394,161
Short-term borrowings (Note 8) . . . . . . . . . . . . . . . . . . . . . . . 4,098 4,285 19,941
Long-term debt (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,109 2,489 3,860
------------ ------------ ------------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,648 240,009 417,962
------------ ------------ ------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423,823 416,512 396,896
Provision for loan losses (Note 6) . . . . . . . . . . . . . . . . . . . . . . 36,500 106,836 165,400
------------ ------------ ------------
Net interest income after provision for loan losses . . . . . . . . . . . . . . 387,323 309,676 231,496
Noninterest income
Service charges and fees on deposit accounts . . . . . . . . . . . . . . . . 105,211 96,671 88,533
Other noninterest income (Note 12) . . . . . . . . . . . . . . . . . . . . . 93,313 87,210 81,220
------------ ------------ ------------
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,524 183,881 169,753
Net securities gains (Notes 2 and 4) . . . . . . . . . . . . . . . . . . . . . 411 76,929 40,963
Operating expenses
Salaries and benefits (Notes 10 and 11) . . . . . . . . . . . . . . . . . . . 212,954 199,604 184,399
Occupancy and equipment (Note 7) . . . . . . . . . . . . . . . . . . . . . . 87,116 88,950 85,465
Other operating expenses (Note 13) . . . . . . . . . . . . . . . . . . . . . 146,635 140,762 128,495
------------ ------------ ------------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 446,705 429,316 398,359
Provision for OREO reserve, net (Notes 2 and 6) . . . . . . . . . . . . . . . . 24,830 45,482 27,450
------------ ------------ ------------
Total operating expenses after OREO provision . . . . . . . . . . . . . . . . . 471,535 474,798 425,809
------------ ------------ ------------
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,723 95,688 16,403
Provision for income taxes (Notes 2 and 14) . . . . . . . . . . . . . . . . . . 47,072 36,451 6,748
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655
============ ============ ============
EARNINGS PER SHARE (NOTE 2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.57 $ 3.57 $ 0.60
Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 18,953,397 16,575,768 16,021,645
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
[Enlarge/Download Table]
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except share amounts) BAYBANKS, INC.
----------------------------------------------------------------------------------------------------------------------------
COMMON RETAINED TREASURY
STOCK SURPLUS EARNINGS STOCK
--------- --------- ---------- ----------
BALANCE AS OF DECEMBER 31, 1990 . . . . . . . . . . . . . . . . . . $ 32,046 $ 227,100 $ 246,564 $ (264)
Net income--1991 . . . . . . . . . . . . . . . . . . . . . . . 9,655
Payment on ESOP note . . . . . . . . . . . . . . . . . . . . .
Stock issued (1,091 shares) in conversion of
debentures . . . . . . . . . . . . . . . . . . . . . . . . . 2 13
Stock issued (8,577 shares) in payment of fees . . . . . . . . 4 (144) 264
Deferred compensation expense recorded for stock
issued (1,000 shares) in connection with restricted
stock plan . . . . . . . . . . . . . . . . . . . . . . . . . 2 (2)
Amortization of deferred compensation expense (Note 10) . . . . 1,170
Recognition of prior unrealized loss on equity
security held for investment . . . . . . . . . . . . . . . . 1,356
Treasury shares acquired (9,000 shares) . . . . . . . . . . . . (319)
--------- --------- --------- ----------
BALANCE AS OF DECEMBER 31, 1991 . . . . . . . . . . . . . . . . . . 32,054 228,137 257,575 (319)
Net income--1992 . . . . . . . . . . . . . . . . . . . . . . . 59,237
Proceeds from common stock offering, net of issuance
costs of $3,494 (2,300,000 shares) . . . . . . . . . . . . . 4,600 74,706
Payment on ESOP note . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options (20,336 shares) . . . . . . . . . . . 8 (170) 520
Stock issued (3,360 shares) in payment of fees . . . . . . . . 7 94
Deferred compensation expense recorded for stock
issued (173,700 shares) in connection with restricted
stock plan . . . . . . . . . . . . . . . . . . . . . . . . . 347 (347)
Amortization of deferred compensation expense (Note 10) . . . . 2,332
Treasury shares acquired (8,500 shares) . . . . . . . . . . . . 138 (227)
--------- --------- --------- ----------
BALANCE AS OF DECEMBER 31, 1992 . . . . . . . . . . . . . . . . . . 37,016 304,890 316,812 (26)
Net income--1993 . . . . . . . . . . . . . . . . . . . . . . . 67,651
Cash dividends declared ($0.90 per share) . . . . . . . . . . . (16,801)
Payment on ESOP note . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options (157,414 shares) . . . . . . . . . . 269 2,706 940
Stock issued (98,471 shares) in conversion of debentures . . . . 197 1,156
Stock issued (2,156 shares) in payment of fees . . . . . . . . 4 101
Amortization of deferred compensation expense (Note 10) . . . . 1,364
Treasury shares acquired (22,109 shares) . . . . . . . . . . . 138 (914)
--------- --------- --------- ----------
BALANCE AS OF DECEMBER 31, 1993 . . . . . . . . . . . . . . . . . . $ 37,486 $ 310,355 $ 367,662 $ --
========= ========= ========= ==========
[Enlarge/Download Table]
ESOP Loan
Guarantee Total
---------- ---------
BALANCE AS OF DECEMBER 31, 1990 . . . . . . . . . . . . . . . . . . $ (17,170) $ 488,276
Net income--1991 . . . . . . . . . . . . . . . . . . . . . . . 9,655
Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . 1,023 1,023
Stock issued (1,091 shares) in conversion of
debentures . . . . . . . . . . . . . . . . . . . . . . . . . 15
Stock issued (8,577 shares) in payment of fees . . . . . . . . 124
Deferred compensation expense recorded for stock
issued (1,000 shares) in connection with restricted
stock plan . . . . . . . . . . . . . . . . . . . . . . . . . --
Amortization of deferred compensation expense (Note 10) . . . . 1,170
Recognition of prior unrealized loss on equity
security held for investment . . . . . . . . . . . . . . . . 1,356
Treasury shares acquired (9,000 shares) . . . . . . . . . . . . (319)
---------- ---------
BALANCE AS OF DECEMBER 31, 1991 . . . . . . . . . . . . . . . . . . (16,147) 501,300
Net income--1992 . . . . . . . . . . . . . . . . . . . . . . . 59,237
Proceeds from common stock offering, net of issuance
costs of $3,494 (2,300,000 shares) . . . . . . . . . . . . . 79,306
Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . 1,674 1,674
Exercise of stock options (20,336 shares) . . . . . . . . . . . 358
Stock issued (3,360 shares) in payment of fees . . . . . . . . 101
Deferred compensation expense recorded for stock
issued (173,700 shares) in connection with restricted
stock plan . . . . . . . . . . . . . . . . . . . . . . . . . --
Amortization of deferred compensation expense (Note 10) . . . . 2,332
Treasury shares acquired (8,500 shares) . . . . . . . . . . . . (89)
---------- ---------
BALANCE AS OF DECEMBER 31, 1992 . . . . . . . . . . . . . . . . . . (14,473) 644,219
Net income--1993 . . . . . . . . . . . . . . . . . . . . . . . 67,651
Cash dividends declared ($0.90 per share) . . . . . . . . . . . (16,801)
Payment on ESOP note . . . . . . . . . . . . . . . . . . . . . 2,232 2,232
Exercise of stock options (157,414 shares) . . . . . . . . . . 3,915
Stock issued (98,471 shares) in conversion of debentures . . . . 1,353
Stock issued (2,156 shares) in payment of fees . . . . . . . . 105
Amortization of deferred compensation expense (Note 10) . . . . 1,364
Treasury shares acquired (22,109 shares) . . . . . . . . . . . (776)
---------- ---------
BALANCE AS OF DECEMBER 31, 1993 . . . . . . . . . . . . . . . . . . $ (12,241) $ 703,262
========== =========
----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
[Enlarge/Download Table]
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands) BAYBANKS, INC.
----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
--------------------------------------
OPERATING ACTIVITIES 1993 1992 1991
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655
Adjustments to reconcile net income to net cash
provided by operating activities:
Fixed-rate mortgages sold . . . . . . . . . . . . . . . . . 815,722 779,000 295,000
Fixed-rate mortgages originated for sale . . . . . . . . . . (783,000) (906,000) (346,000)
Student loans transferred from portfolio and sold . . . . . 67,363 53,827 106,091
Proceeds from sales and maturities of trading account assets 1,863,350 659,000 702,000
Purchases of trading account assets . . . . . . . . . . . . (1,803,249) (694,000) (704,000)
Provision for loan losses . . . . . . . . . . . . . . . . . 36,500 106,836 165,400
Amortization (accretion) of security premium (discount) . . (7,149) 18,073 --
Provision for OREO reserve, net . . . . . . . . . . . . . . 24,830 45,482 27,450
Deferred income taxes . . . . . . . . . . . . . . . . . . . 2,675 (1,839) (1,259)
Depreciation and amortization of premises and equipment . . 24,218 24,246 23,599
Net securities gains . . . . . . . . . . . . . . . . . . . . (411) (76,929) (40,963)
Change in other assets . . . . . . . . . . . . . . . . . . . (23,184) 14,379 22,655
Change in accrued expenses . . . . . . . . . . . . . . . . . 6,411 9,263 9,085
Change in interest receivable . . . . . . . . . . . . . . . (3,573) 6,871 15,599
Change in interest payable . . . . . . . . . . . . . . . . . (3,673) (10,072) (17,105)
---------- ---------- ----------
Net cash provided by operating activities . . . . . . . . 284,481 87,374 267,207
---------- ---------- ----------
INVESTING ACTIVITIES
Proceeds from sales of securities . . . . . . . . . . . . . . . 331,550 2,453,685 1,710,102
Proceeds from maturities of securities . . . . . . . . . . . . 792,843 74,989 165,000
Purchases of securities . . . . . . . . . . . . . . . . . . . . (1,665,527) (2,703,169) (1,461,472)
Net cash provided (used) by:
Short-term investments . . . . . . . . . . . . . . . . . . . 288,917 (512,073) (471,556)
Loans (2)(3)(4) . . . . . . . . . . . . . . . . . . . . . . (333,598) 249,442 232,857
Customer acceptances . . . . . . . . . . . . . . . . . . . . 7,311 (528) 110
Net purchases of premises and equipment . . . . . . . . . . . . (18,342) (26,017) (35,933)
Deposits assumed from a thrift institution (5) . . . . . . . . -- 254,372 52,817
Proceeds from sales of OREO (3) . . . . . . . . . . . . . . . . 67,715 54,808 43,863
---------- ---------- ----------
Net cash (used) provided by investing activities . . . . . (529,131) (154,491) 235,788
---------- ---------- ----------
FINANCING ACTIVITIES
Net cash provided (used) by:
Demand deposits, NOW, and savings accounts . . . . . . . . 276,644 648,095 417,899
Money market deposits . . . . . . . . . . . . . . . . . . . (235,571) (186,194) (135,232)
Consumer time deposits . . . . . . . . . . . . . . . . . . . (240,802) (415,086) (315,959)
Time deposits greater than $100,000 . . . . . . . . . . . . (3,998) (65,964) (222,265)
Short-term borrowings . . . . . . . . . . . . . . . . . . . 367,851 17,140 (366,434)
Customer acceptances . . . . . . . . . . . . . . . . . . . . (7,311) 528 (110)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . (700) (81) 266
Net proceeds from common stock offering . . . . . . . . . . . -- 79,306 --
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (16,801) -- --
Other equity transactions . . . . . . . . . . . . . . . . . . 4,597 285 (988)
---------- ---------- ----------
Net cash provided (used) by financing activities . . . . . 143,909 78,029 (622,823)
---------- ---------- ----------
Net change in cash and cash equivalents . . . . . . . . . . . (100,741) 10,912 (119,828)
Cash and cash equivalents at beginning of year (1) . . . . . . 733,726 722,814 842,642
---------- ---------- ----------
Cash and cash equivalents at end of year (1) . . . . . . . . . $ 632,985 $ 733,726 $ 722,814
========== ========== ==========
Supplemental disclosure of cash flow information
Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ 170,321 $ 250,081 $ 435,067
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . 58,026 20,551 12,818
----------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
(1) Cash and cash equivalents consist of cash on hand and due from banks.
(2) Excludes transfers of loans to the other real estate owned category of
$40.5 million, $89.7 million, and $153.7 million in 1993, 1992, and 1991,
respectively.
(3) Excludes loan originations in conjunction with OREO sales of $22.4
million, $23.8 million, and $14.0 million in 1993, 1992, and 1991,
respectively.
(4) Excludes transfers of securitized residential mortgage loans to the
investment securities portfolio of $50.0 million in 1992 and $182.4
million in 1991.
(5) Deposits assumed from failed thrift institutions are net of cash paid,
which was an immaterial amount in each case. The Company did not assume
any material assets or liabilities in conjunction with these transactions.
21
NOTES TO FINANCIAL STATEMENTS
NOTE 1. CONDENSED FINANCIAL INFORMATION OF THE PARENT
The condensed balance sheet is presented for 1993 and 1992, and a statement of
income and statement of cash flows are presented for the years 1991 through
1993, for BayBanks, Inc. (the parent company).
[Download Table]
BALANCE SHEET DECEMBER 31
---------------------------
(In thousands except share amounts) 1993 1992
---------- ----------
ASSETS
Cash and short-term investments . . . . . . . $ 15,865 $ 36,289
Securities available for sale
market value $30,000 in 1993
and $9,858 in 1992 . . . . . . . . . . . . 30,000 9,858
Investment securities
market value $22,790 in 1993
and $40,100 in 1992 . . . . . . . . . . . 22,758 40,100
Investment in capital stock
of subsidiaries
Banking subsidiaries . . . . . . . . . . 605,488 538,452
Nonbank subsidiaries . . . . . . . . . . 37,356 32,976
---------- ----------
642,844 571,428
---------- ----------
Notes and advances due from
subsidiaries . . . . . . . . . . . . . . . 52,600 51,600
Other assets . . . . . . . . . . . . . . . . 2,305 1,704
---------- ----------
Total assets . . . . . . . . . . . . . . . $ 766,372 $ 710,979
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accrued expenses and
other accounts payable . . . . . . . . . . $ 818 $ 882
Long-term debt . . . . . . . . . . . . . . . 50,051 51,405
Guarantee of ESOP indebtedness . . . . . . . 12,241 14,473
Stockholders' equity . . . . . . . . . . . . 715,503 658,718
Less treasury stock at cost
950 shares in 1992 . . . . . . . . . . . -- 26
Less guarantee of ESOP
indebtedness . . . . . . . . . . . . . . . 12,241 14,473
---------- ----------
Total stockholders' equity . . . . . . . . 703,262 644,219
---------- ----------
Total liabilities and
stockholders' equity . . . . . . . . . . $ 766,372 $ 710,979
========== ==========
NOTE 1. (CONTINUED)
[Enlarge/Download Table]
STATEMENT OF INCOME YEAR ENDED DECEMBER 31
-------------------------------------------
(In thousands) 1993 1992 1991
---------- ---------- ----------
Income:
Dividends from subsidiaries
Banking subsidiaries . . . . . . . . . . $ 10,000 $ -- $ 903
Nonbank subsidiaries . . . . . . . . . . 6,500 1,400 2,950
---------- ---------- ----------
16,500 1,400 3,853
---------- ---------- ----------
Fee income
from subsidiaries . . . . . . . . . . . 547 416 304
Interest from
subsidiaries . . . . . . . . . . . . . . 1,775 2,137 3,388
Interest on short-term
investments . . . . . . . . . . . . . . 443 551 454
Interest and dividends on
securities portfolios . . . . . . . . . 1,271 91 --
Writedown of marketable
equity security held
for investment . . . . . . . . . . . . . -- -- (1,392)
Other income . . . . . . . . . . . . . . . -- 2 44
---------- ---------- ----------
Total income . . . . . . . . . . . . . . 20,536 4,597 6,651
---------- ---------- ----------
Expenses:
Interest on debentures
and notes payable . . . . . . . . . . . 1,743 2,166 3,393
General and
administrative . . . . . . . . . . . . . 700 791 668
---------- ---------- ----------
Total expenses . . . . . . . . . . . . . 2,443 2,957 4,061
---------- ---------- ----------
Income before income taxes
and equity in undistributed
income of subsidiaries . . . . . . . . . . 18,093 1,640 2,590
Income tax expense . . . . . . . . . . . . . 358 145 65
---------- ---------- ----------
Income before equity
in undistributed income
of subsidiaries . . . . . . . . . . . . . 17,735 1,495 2,525
Equity in subsidiaries'
undistributed income . . . . . . . . . . . 49,916 57,742 7,130
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655
========== ========== ==========
[Enlarge/Download Table]
STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31
-------------------------------------------
(In thousands) 1993 1992 1991
---------- ---------- ----------
OPERATING ACTIVITIES
Dividends from subsidiaries
Banking subsidiaries . . . . . . . . . . $ 10,000 $ -- $ 903
Nonbank subsidiaries . . . . . . . . . . 6,500 1,400 2,950
---------- ---------- ----------
16,500 1,400 3,853
---------- ---------- ----------
Fees from subsidiaries . . . . . . . . . . 547 416 400
Interest received . . . . . . . . . . . . 3,323 2,700 3,842
Interest paid . . . . . . . . . . . . . . (1,779) (2,193) (3,437)
Operating expenditures . . . . . . . . . . (814) (474) (3,826)
Income tax expense . . . . . . . . . . . . (463) (135) (377)
---------- ---------- ----------
Net cash provided by
operating activities . . . . . . . . . . 17,314 1,714 455
---------- ---------- ----------
(Statement of Cash Flows continued next page)
22
NOTE 1. (CONTINUED)
STATEMENT OF CASH FLOWS (CONT.)
[Download Table]
YEAR ENDED DECEMBER 31
-------------------------------------
1993 1992 1991
--------- ------------ ----------
INVESTING ACTIVITIES
Purchases of securities . . . . . . (166,082) (49,958) --
Sales and maturities of
securities . . . . . . . . . . . 163,355 -- --
Sale of premises and
equipment to
subsidiaries . . . . . . . . . . -- -- 2,110
Net advances (to) from
subsidiaries . . . . . . . . . . (1,000) (600) 6,000
Investments in
subsidiaries . . . . . . . . . . (21,500) (8,000) (5,500)
--------- ----------- -----------
Net cash flow (used) provided
by investing activities (25,227) (58,558) 2,610
--------- ----------- -----------
FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . (16,801) -- --
Net proceeds from
common stock offering -- 79,306 --
Proceeds from exercise of
stock options . . . . . . . . . 3,296 358 --
Proceeds from affiliates
for stock compensation
plan . . . . . . . . . . . . . . 1,099 2,230 1,095
Deferred payment plan (105) (642) --
--------- ----------- -----------
Net cash flow (used) provided
by financing activities (12,511) 81,252 1,095
--------- ----------- -----------
Net change in cash and
cash equivalents . . . . . . . . (20,424) 24,408 4,160
Cash and cash equivalents
at beginning of year 36,289 11,881 7,721
--------- ----------- -----------
Cash and cash equivalents
at end of year . . . . . . . . . $ 15,865 $ 36,289 $ 11,881
========= =========== ===========
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in subsidiaries'
undistributed income (49,916) (57,742) (7,130)
Net change in accrued
expenses . . . . . . . . . . . . . (340) 176 (2,927)
Net change in accrued
income taxes . . . . . . . . . . . (105) 10 (312)
Writedown of marketable
equity security . . . . . . . . . . -- -- 1,392
All other . . . . . . . . . . . . . . 24 33 (223)
--------- ----------- -----------
Total adjustments . . . . . . . . . (50,337) (57,523) (9,200)
--------- ----------- -----------
Net cash provided
by operating activities $ 17,314 $ 1,714 $ 455
========= =========== ===========
NOTE 1. (CONTINUED)
BayBanks, Inc., 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. A significant source of
funds used by the parent company for operating activities and the payment of
dividends to shareholders is dividends received from its banking and other
subsidiaries.
The payment of dividends by national and state banks is generally limited by
statute to their retained earnings, after deducting losses and statutorily
defined bad debts in excess of established allowances for loan losses. The
payment of dividends by national banks is further limited by statute to the
current year's net income plus the undistributed net income of the two
preceding years. The Company's bank subsidiaries are also required to achieve
and maintain certain minimum capital ratios under applicable regulatory
guidelines. Banking regulators also 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, 1993, the Company's bank subsidiaries
could have declared dividends of approximately $53 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 must also consider
additional factors, including the amount of current period net income,
liquidity, asset quality, and economic conditions and trends.
Federal law also imposes limitations on the extent to which the Company's bank
subsidiaries may finance or otherwise supply funds to the Company and its
nonbank subsidiaries. Such transactions with the Company and each of its
nonbank subsidiaries are limited to 10% of each subsidiary bank's capital and
surplus. There is also a 20% limit on each bank's aggregate covered
transactions with the Company and all of its nonbank subsidiaries. At December
31, 1993, the Company had no borrowings outstanding from any of its
subsidiaries, and one of the Company's nonbank subsidiaries had a secured loan
of $38,021,000 outstanding from a bank subsidiary, representing 6.3% of the
aggregate capital and surplus of the bank subsidiaries.
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.
23
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements of the Company
and its subsidiaries follow generally accepted accounting principles and
reporting practices applicable to the banking industry. Material intercompany
transactions have been eliminated. Certain prior years' amounts have been
reclassified to conform with the current year presentation.
INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS - Consists of
federal funds sold and securities purchased under resale agreements of
$541,260,000 in 1993 and $368,750,000 in 1992, respectively, and debt
securities with maturities of less than 90 days. Debt securities are reported
at amortized cost, which approximates market value.
TRADING ACCOUNT SECURITIES - Consists primarily of municipal securities held
for resale to customers. These securities are recorded at market value.
SECURITIES - Securities available for sale, consisting principally
of debt securities, are stated at the lower of aggregate amortized cost or
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 investment securities portfolio, principally debt securities, is stated at
cost, adjusted for amortization of premium and accretion of discount using a
level yield method. This basis for valuation reflects management's intention
and ability to hold these securities until maturity.
INTEREST RATE SWAP AGREEMENTS - The Company uses interest rate swap agreements
to manage its interest rate exposure. Income or expense on these agreements is
recorded as an adjustment to the yield on the underlying asset or liability.
LOANS - Interest income on most loans is accrued on the principal amount of
loans outstanding. Unearned income on leases and loans made on a discount
basis, $24,248,000 at year-end 1993 and $25,819,000 at year-end 1992, 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 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 $11,353,000 and
$10,577,000 at year-end 1993 and 1992, respectively.
The Company engages in certain mortgage banking activities through a mortgage
subsidiary. Mortgage loans originated and held for sale are carried at the
lower of aggregate cost or market value, and gains and losses are determined
using the specific identification method. Loans sold with servicing retained
may give rise to a mortgage servicing asset that is amortized over the period
during which the servicing income is expected to be earned. Prepayment
assumptions that affect the determination of mortgage servicing rights are
reviewed periodically, and the amortization is adjusted to reflect current
circumstances. At December 31, 1993, mortgage loans held for sale were
$138,376,000, loans serviced for others were $2.0 billion, and excess mortgage
servicing rights were $4,213,000.
Loans are placed on nonaccrual and are considered nonperforming when payment of
principal or interest is considered to be in doubt. In addition, all loans past
due 90 days or more as to principal or interest are placed on nonaccrual status
except for certain consumer loans and those loans which, in management's
judgment, are adequately secured and for which collection is probable.
Previously accrued income that has not been collected is
NOTE 2. (CONTINUED)
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
$110,001,000 at year-end 1993 and $180,580,000 at year-end 1992. Interest
income earned during the year on year-end nonperforming loans was approximately
$960,000; if these loans had been performing under contractual terms, interest
would have been approximately $8,300,000. In 1992, these amounts were
$4,300,000 and $14,900,000, respectively.
Loans are classified as restructured, accruing loans 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 were $18,398,000 and $12,084,000 at December 31,
1993 and 1992, respectively. During 1993 and 1992, interest income recorded on
these loans approximated a market interest rate and in the aggregate was not
significantly different had these loans performed according to their original
terms. There are no commitments to lend additional funds to these borrowers.
ALLOWANCE FOR LOAN LOSSES - Loans considered to be uncollectible are charged to
the allowance for loan losses. Additions to the allowance are provided by
recoveries of previously charged-off loans and by the provision for loan losses
in amounts sufficient to maintain the adequacy of the allowance. The adequacy
is determined by management's evaluation of potential losses in the portfolio,
economic conditions, historical net charge-offs, and anticipated portfolio
growth. Included in the allowance are amounts allocated to specific loans,
amounts allocated to other loans that may become uncollectible but cannot be
individually identified, and unallocated amounts. Management believes that the
allowance for loan losses is adequate.
Various regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses of the Company's
subsidiaries. Such agencies can require the Company to recognize additions to
the allowance based on regulatory judgments of information available at the
time of their examination.
OTHER REAL ESTATE OWNED - Other real estate owned (OREO) consists of foreclosed
properties and in-substance foreclosures. Loans are classified as in-substance
foreclosures under the following circumstances: when the debtor has little or
no equity in the collateral, considering the current fair value of the
collateral; and when proceeds for repayment of the loan can be expected to come
only from the operation or sale of the collateral; and when the debtor has
either formally or effectively abandoned control of the collateral to the
creditor or retained control of the collateral, but, because of the current
financial condition of the debtor, or the economic prospects for the debtor
and/or the collateral in the foreseeable future, it is doubtful that the debtor
will be able to rebuild equity in the collateral or otherwise repay the loan in
the foreseeable future.
Other real estate owned is recorded at the lower of the book value of the loan
or the fair value of the asset acquired, less estimated disposition costs. The
excess, if any, of the loan amount over the fair value of the asset acquired is
charged off against the allowance for loan losses. Pursuant to the adoption of
accounting Statement
24
NOTE 2. (CONTINUED)
of Position (SOP) 92-3, "Accounting for Foreclosed Assets," which became
effective for periods ending after December 15, 1992, subsequent changes in the
value of OREO (including in-substance foreclosures) are recorded directly to an
OREO reserve. These changes in the OREO reserve are included in total operating
expenses. Proceeds in excess of the carrying value at the time of sale are
recorded as a reduction in the provision for the OREO reserve. Prior to the
adoption of SOP 92-3 at December 31, 1992, changes in the value of OREO were
recorded directly to the value of the property. Expenses to administer these
properties are charged to operating expense as incurred.
INCOME TAXES - In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," effective January 1, 1993. The Company adopted Statement No. 109
as of January 1, 1993.
Statement No. 109 changed the Company's method of accounting for income taxes
from the deferred method to the asset and liability method. The objective of
the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. A valuation allowance, if necessary, is established to
provide for
NOTE 2. (CONTINUED)
deferred tax assets that are not expected to be realized. Adoption
of Statement No. 109 did not have a material effect on the Company's results of
operations or financial condition.
Prior to adoption of Statement No. 109, the Company accounted for income taxes
under Accounting Principles Board (APB) Opinion No. 11. Under APB Opinion No.
11, deferred taxes were provided for all significant items of income and
expense that were recognized in different periods for financial reporting and
income tax purposes.
EARNINGS PER SHARE - Earnings per common share are computed by dividing net
income by the weighted average number of common shares outstanding and dilutive
common stock equivalents (stock options) for each period presented. Average
dilutive common stock equivalents were 282,175 for 1993 and 150,328 for 1992.
The dual presentation of primary and fully diluted earnings per common share is
not presented, since the difference from earnings per share is less than 3%.
NOTE 3. FEDERAL RESERVE ACCOUNT BALANCES
The Company's banks are required to maintain average reserve balances with the
Federal Reserve Bank. These balances can be either in the form of vault cash or
funds left on deposit with the Federal Reserve Bank. The average amount of
these balances was $305,379,000 for 1993 and $290,287,000 for 1992.
NOTE 4. SECURITIES PORTFOLIOS
The amortized cost, estimated market values, and yields of the following
securities portfolios by maturity (excluding interest-bearing deposits and
other short-term investments) were:
[Enlarge/Download Table]
YEAR-END SECURITIES PORTFOLIOS
--------------------------------------------------------------
GROSS GROSS WEIGHTED
DECEMBER 31, 1993 CARRYING UNREALIZED UNREALIZED MARKET AVERAGE
(Dollars in thousands on a tax equivalent basis) VALUE GAINS LOSSES VALUE YIELD
----- ----- ------ ----- -----
SECURITIES AVAILABLE FOR SALE
U.S. Government securities, maturing
Within 1 year . . . . . . . . . . . . . . . $ 322,707 $ 3,280 $ (3) $ 325,984 4.91%
----------- ---------- -------- -----------
322,707 3,280 (3) 325,984 4.91
----------- ---------- -------- -----------
State and local governments, maturing
Within 1 year . . . . . . . . . . . . . . . 18,944 6 (2) 18,948 3.92
After 1 year but within 5 years . . . . . . 20 -- -- 20 7.39
----------- ---------- -------- -----------
18,964 6 (2) 18,968 3.92
----------- ---------- -------- -----------
CORPORATE AND OTHER, MATURING
Within 1 year . . . . . . . . . . . . . . . 256,500 -- -- 256,500 4.02
----------- ---------- -------- -----------
256,500 -- -- 256,500 4.02
----------- ---------- -------- -----------
Mortgage-backed securities . . . . . . . . . . 30,832 1,162 -- 31,994 6.32
----------- ---------- -------- -----------
Total securities available for sale . . . . $ 629,003 $ 4,448 $ (5) $ 633,446 4.59%
=========== ========== ======== ===========
INVESTMENT SECURITIES
U.S. Government securities, maturing
Within 1 year . . . . . . . . . . . . . . . $ 464,118 $ 3,026 $ -- $ 467,144 4.32%
After 1 year but within 5 years . . . . . . 739,197 3,421 (59) 742,559 4.34
----------- ---------- -------- ----------
1,203,315 6,447 (59) 1,209,703 4.33
----------- ---------- -------- ----------
State and local governments, maturing
Within 1 year . . . . . . . . . . . . . . . 112,576 98 (9) 112,665 4.20
After 1 year but within 5 years . . . . . . 12,755 209 (12) 12,952 6.77
After 5 years but within 10 years . . . . . 3,666 73 (4) 3,735 7.17
----------- ---------- -------- ----------
128,997 380 (25) 129,352 4.54
----------- ---------- -------- ----------
Asset-backed securities . . . . . . . . . . . . 204,798 115 (827) 204,086 4.33
Industrial revenue bonds . . . . . . . . . . . 59,958 -- -- 59,958 5.34
Corporate and other . . . . . . . . . . . . . . 1,992 -- -- 1,992 --
----------- ---------- -------- ----------
Total investment securities . . . . . . . . $ 1,599,060 $ 6,942 $ (911) $1,605,091 4.38%
=========== ========== ======== ==========
(Note 4 continued next page)
25
NOTE 4. (CONTINUED)
[Enlarge/Download Table]
YEAR-END SECURITIES PORTFOLIOS
-------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 1992 CARRYING UNREALIZED UNREALIZED MARKET
(In Thousands) VALUE GAINS LOSSES VALUE
------------- ------------ ------------ ---------------
SECURITIES AVAILABLE FOR SALE
U.S. Government securities . . . . . . . . $ 1,433,945 $ 9,074 $ (2,198) $ 1,440,821
Mortgage-backed securities . . . . . . . . 88,932 1,164 -- 90,096
------------- ------------ ------------ ---------------
Total securities available for sale . . . $ 1,522,877 $ 10,238 $ (2,198) $ 1,530,917
============= ============ ============ ===============
INVESTMENT SECURITIES
State and local governments . . . . . . . . $ 37,869 $ 532 $ -- $ 38,401
Industrial revenue bonds . . . . . . . . . 75,938 -- -- 75,938
Corporate and other . . . . . . . . . . . . 42,685 -- -- 42,685
------------- ------------ ------------ ---------------
Total investment securities . . . . . . . $ 156,492 $ 532 $ -- $ 157,024
============= ============ ============ ===============
The year-end maturity distribution excludes industrial revenue bonds, which are
not regarded as principal debt securities, and mortgage-backed and asset-backed
securities.
The book value of securities pledged to secure public and trust deposits and
repurchase agreements, and to meet other legal requirements was $676,934,000 at
December 31, 1993.
During 1993, proceeds from sales of securities available for sale were
$331,550,000, resulting in realized gains of $439,000. There were $28,000 in
realized losses from the sales of these securities.
During 1992, proceeds from sales of securities available for sale were
$1,192,000,000, and proceeds from sales of investment securities were
$1,262,000,000, resulting in realized gains of $41,123,000 and $37,506,000,
respectively. There were $1,700,000 in realized losses from the sales of
investment securities.
In 1993, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Statement No. 115, which will be effective in 1994, changes
the accounting for short-term investments and the securities portfolios. The
Company's current balance sheet classifications conform with Statement No.
115. However, beginning in 1994, changes in the fair value of the securities
available for sale portfolio will be recorded directly to a separate category
of stockholders' equity. Currently, securities available for sale are valued at
the lower of aggregate cost or market, and changes therein are recorded
directly to earnings. At December 31, 1993, the fair value of the securities
available for sale exceeded their cost by $4,443,000, or $2,526,000 on an
after-tax basis, and thus, stockholders' equity would have increased by that
amount if Statement No. 115 had been in effect at year-end.
NOTE 5. LOANS TO RELATED PARTIES
Loans outstanding to executive officers and directors of the Company and its
principal subsidiaries consist primarily of loans made to executive officers
and related business interests of certain directors; these loans were
$32,193,000 and $20,954,000 at December 31, 1993, and December 31, 1992,
respectively. An analysis of the activity during the year for loans outstanding
at year-end is as follows:
NOTE 5. (CONTINUED)
[Download Table]
(In thousands) 1993
--------
Balance, January 1 . . . . . . . . . . . . . $ 20,954
Additions during the year . . . . . . . . . 21,188
Reductions during the year . . . . . . . . . (9,949)
--------
Balance, December 31 . . . . . . . . . . . . $ 32,193
========
These loans were made in the ordinary course of business under normal credit
terms, including interest rates and collateralization prevailing at the time
for comparable transactions with other persons, and do not represent more than
a normal risk of collection.
NOTE 6. ALLOWANCE FOR LOAN LOSSES AND OREO RESERVE
Activity in the allowance for loan loss account was:
[Download Table]
(In thousands) 1993 1992 1991
---------- ---------- ----------
Balance, January 1 . . . . . . . . . . . . $ 192,700 $ 212,500 $ 214,203
Provision . . . . . . . . . . . . . . . . . 36,500 106,836 165,400
Loan losses charged off . . . . . . . . . . (79,963) (140,790) (175,654)
Less recoveries . . . . . . . . . . . 22,259 14,154 8,551
---------- ---------- ----------
Net charge-offs . . . . . . . . . . . . . . (57,704) (126,636) (167,103)
---------- ---------- ----------
Balance, December 31 . . . . . . . . . . . $ 171,496 $ 192,700 $ 212,500
========== ========== ==========
Activity in the other real estate owned reserve was:
[Download Table]
1993
----------
Balance, January 1 . . . . . . . . . . . . $ 7,833
Additions to the OREO reserve . . . . . . . 32,471
Reductions related to sales . . . . . . . . (10,528)
----------
Balance, December 31 . . . . . . . . . . . $ 29,776
==========
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation on buildings is computed primarily on a
straight-line basis with estimated lives ranging from 25 to 50 years. Furniture
and equipment useful lives generally range from 3 to 10 years. Leasehold
improvements are amortized over their useful life or lease term, whichever is
shorter.
26
NOTE 7. (CONTINUED)
Premises and equipment were comprised of the following:
[Download Table]
(In thousands) 1993 1992
---------- ----------
Buildings . . . . . . . . . . . . . . . . . $ 160,770 $ 155,513
Land . . . . . . . . . . . . . . . . . . . 15,694 15,770
Equipment . . . . . . . . . . . . . . . . . 233,393 222,841
---------- ----------
409,857 394,124
Accumulated
depreciation . . . . . . . . . . . . . . 217,303 195,694
---------- ----------
Net premises
and equipment . . . . . . . . . . . . . . $ 192,554 $ 198,430
========== ==========
Depreciation and amortization expense of premises, equipment, and leasehold
improvements was $24,218,000 in 1993, $24,246,000 in 1992, and $23,599,000 in
1991.
Total rental expense was $26,346,000 in 1993, $27,367,000 in 1992, and
$28,180,000 in 1991, net of $1,705,000, $2,232,000, and $2,496,000 in rental
income from subleases, respectively. Contingent rentals were negligible. As of
December 31, 1993, the Company and its subsidiaries were obligated, under
non-cancelable operating leases (primarily for premises), for minimum rentals
in future periods as follows:
[Download Table]
(In thousands) TOTAL RENTAL NET
OBLIGATION INCOME OBLIGATION
---------- --------- -----------
1994 . . . . . . . . . . . $ 11,619 $ 1,118 $ 10,501
1995 . . . . . . . . . . . 11,583 1,012 10,571
1996 . . . . . . . . . . . 10,673 899 9,774
1997 . . . . . . . . . . . 9,785 776 9,009
1998 . . . . . . . . . . . 7,346 688 6,658
Thereafter . . . . . . . . 17,559 2,074 15,485
Most leases contain escalation of rent clauses based on increases in real
estate taxes or equipment usage. Many leases include renewal provisions.
NOTE 8. FEDERAL FUNDS PURCHASED AND OTHER
SHORT-TERM BORROWINGS
Balances outstanding as of December 31, 1993 and 1992,
consisted of the following:
[Download Table]
(Dollars in thousands) FEDERAL U.S.
FUNDS REPURCHASE TREASURY
TOTAL PURCHASED AGREEMENTS AND OTHER
---------- ---------- ----------- ----------
1993
Year-end
balance . . . . . . . . . $ 507,820 $ 54,235 $ 448,182 $ 5,403
Maximum
month-end
balance . . . . . . . . . 507,820 88,620 448,182 7,058
Average daily
balance . . . . . . . . 150,608 71,770 74,654 4,184
Weighted average
interest rates:
As of
year-end . . . . . . . 3.10% 2.78% 3.18% -
During
the year . . . . . . . 2.72 2.79 2.81 -
Note 8. (Continued)
[Download Table]
(Dollars in thousands) FEDERAL U.S.
FUNDS REPURCHASE TREASURY
TOTAL PURCHASED AGREEMENTS AND OTHER
---------- ---------- ----------- ----------
1992
Year-end
balance . . . . . . . . . $ 139,969 $ 91,655 $ 41,019 $ 7,295
Maximum
month-end
balance . . . . . . . . . 267,225 97,407 196,357 7,295
Average daily
balance . . . . . . . . . 147,856 84,639 61,221 1,996
Weighted average
interest rates:
As of
year-end . . . . . . . 2.43% 2.72% 2.13% --
During
the year . . . . . . . 2.90 3.29 2.44 --
NOTE 9. LONG-TERM DEBT
In September 1985, the Company issued $50,000,000 in floating-rate notes. The
notes will mature on September 30, 1997, and pay interest at a rate, adjusted
quarterly, of 1/8 of 1% above the London Interbank Offered Rate (LIBOR) for
three-month Eurodollar deposits. During 1993 the weighted average rate paid was
3.43%, and at December 31, 1993, the rate was 3.44%. The proceeds were used in
the funding of the affiliate banks on identical terms. The notes may be
redeemed by the Company in whole or in part at any time at 100% of the
principal amount plus accrued interest.
The Company's 5% debentures, due January 15, 1994, were convertible into common
stock of the Company at $13.75 per share, for which purpose 3,709 shares were
reserved at December 31, 1993, and were redeemable at the option of the Company
at 100% of the principal amount. At December 31, 1993, the debentures totaled
$51,000. The debentures were paid in full at maturity.
The balance of long-term debt at December 31, 1993, includes mortgage debt at
two subsidiaries totaling $4,097,000. The monthly payment amounts of the
mortgages totaled $40,000 in 1993 with final maturities from 1994 to 2013.
Obligations on capitalized leases totaled $340,000 at December 31, 1993.
NOTE 10. EMPLOYEE STOCK OPTION PLANS
The Company offers shares of common stock to key employees under stock option
plans. Options are awarded by a committee of the Board of Directors. The
following is a summary of the changes in options outstanding for the last three
years:
[Download Table]
1993 1992 1991
-------- ------- -------
Options outstanding at
the beginning of the year . . . . . . . . 916,348 817,684 729,184
Options granted . . . . . . . . . . . . . . 97,500 182,000 176,500
Options exercised . . . . . . . . . . . . . (157,414) (20,336) --
Options forfeited . . . . . . . . . . . . . (26,000) (63,000) (88,000)
-------- ------- -------
Options outstanding at
the end of the year . . . . . . . . . . . 830,434 916,348 817,684
======== ======= =======
27
NOTE 10. (CONTINUED)
Prices of shares under option at December 31, 1993, ranged from $13.75 to
$45.00, and options for 426,228 shares were exercisable. Unless exercised, the
options will expire at varying dates through 2003. There was no compensation
expense recorded in the years presented related to stock options.
In addition to the above, the Company had a restricted stock plan, which
expired in 1992. As of December 31, 1993, 400,000 shares had been awarded.
Certificates for shares awarded were 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, 1993, such restrictions remained on 181,395
shares outstanding. 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 1993, restrictions on 59,328 shares
lapsed, and 11,446 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 $1,451,000 at December 31, 1993, $2,952,000 at
December 31, 1992, and $1,337,000 at December 31, 1991. Compensation expense
related to restricted stock grants, net of forfeitures, was $1,099,000 in 1993,
$2,232,000 in 1992, and $860,000 in 1991.
NOTE 11. BENEFITS
The Company and its subsidiaries provide a noncontributory defined benefit
pension plan that covers substantially all employees. Benefits are based upon
length of service and qualifying compensation during the final years of
employment. Contributions are made to the plan as costs are accrued. Assets
held by the plan consist primarily of government securities and common stock.
The table below sets forth the plan's funded status and amounts recognized at
December 31, 1993, 1992, and 1991.
[Download Table]
(In thousands) December 31
------------------------------------
1993 1992 1991
---------- ---------- ----------
Actuarial present value of
benefit obligations:
Vested benefit
obligations . . . . . . . . . . . . . . . $ 69,418 $ 54,765 $ 44,093
========== ========== ==========
Accumulated benefit
obligations . . . . . . . . . . . . . . . $ 71,160 $ 56,479 $ 45,636
========== ========== ==========
Projected benefit
obligations . . . . . . . . . . . . . . . $ 91,816 $ 78,667 $ 64,267
Plan assets (primarily
marketable securities)
at market value . . . . . . . . . . . . . 120,041 111,021 97,202
---------- ---------- ----------
Net assets in excess of
projected benefit
obligations . . . . . . . . . . . . . . . 28,225 32,354 32,935
Unrecognized experience
gain . . . . . . . . . . . . . . . . . . (5,316) (7,988) (7,288)
Unrecognized prior service
cost . . . . . . . . . . . . . . . . . . 1,831 2,112 2,392
Unamortized net excess
pension assets at
transition recognized
over 15 years . . . . . . . . . . . . . . (11,809) (13,286) (14,761)
---------- ---------- ----------
Prepaid pension cost
recorded in
other assets . . . . . . . . . . . . . . $ 12,931 $ 13,192 $ 13,278
========== ========== ==========
NOTE 11. (CONTINUED)
Assumptions used in determining the actuarial present value of the projected
benefit obligation as of December 31 are as follows:
[Download Table]
1993 1992 1991
---------- ---------- ----------
Discount rate . . . . . . . . . . . . . . . 7.25% 8.00% 9.00%
Rate of increase in future
compensation levels . . . . . . . . . . . 4.70 5.20 6.20
Net periodic pension expense (credit) consisted of the following:
[Download Table]
(In thousands) 1993 1992 1991
--------- --------- ---------
Service costs
earned during
period . . . . . . . . . . . . . . . . . $ 4,083 $ 3,724 $ 3,615
Interest cost on
projected benefit
obligation . . . . . . . . . . . . . . 6,304 6,071 5,314
Actual return
on plan
assets . . . . . . . . . . . . . . . . . (11,113) (15,382) (18,631)
Net amortization
and deferral. . . . . . . . . . . . . . . 987 5,673 9,584
--------- --------- ---------
Net pension
expense
(credit) . . . . . . . . . . . . . . . . $ 261 $ 86 $ (118)
========= ========= =========
Assumptions used in determining the net pension expense (credit) were as
follows:
[Download Table]
1993 1992 1991
--------- --------- ---------
Rate of return on plan assets . . . . . . . 9.00% 9.50% 9.50%
Discount rate . . . . . . . . . . . . . . . 8.00 9.00 9.00
Rate of increase in future
compensation levels . . . . . . . . . . . 5.20 6.20 6.20
In addition to the above, the Company provides supplemental retirement
benefits, the cost of which was $480,969 in 1993, $419,250 in 1992, and
$376,000 in 1991.
The Company has a savings and profit sharing plan that is interrelated with an
employee stock ownership plan (ESOP). Under these plans, employees of the
Company and its subsidiaries are eligible to receive benefits upon completion
of certain service requirements, with a portion of such benefits payable under
the ESOP in shares of the Company's common stock. In 1989, 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, is payable
in eight increasing instalments that began on January 31, 1990.
At December 31, 1993, the balance of the ESOP loan was $12,241,000, and
unallocated ESOP shares were 526,495. During 1993, ESOP expense of $2,566,000
included an accrual to cover the loan payment due on January 31, 1994, and
interest expense on the ESOP loan of $455,000. The amount of dividends used to
service the debt, which were paid on shares held by the ESOP, was $697,000 in
1993; there were no dividends paid in 1992 and 1991.
Apart from the contributions to the ESOP, the Company made no contributions to
the savings and profit sharing plan in 1993, 1992, or 1991. As of December 31,
1993, accumulated ESOP benefits totaling $2,647,000 will reduce future
contributions to the savings and profit sharing plan.
28
NOTE 11. (CONTINUED)
The Company has a plan providing severance benefits for certain employees of
the Company and its subsidiaries with respect to certain terminations of
employment within two years after a change in control of the Company.
Approximately 3,500 employees are potentially eligible for benefits under the
plan. Existing compensation and benefit plans have been amended to protect
previously earned compensation and future benefits in the event of a change in
control of the Company.
The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" as of
January 1, 1993. Statement No. 106 requires a calculation of the present value
of expected benefits to be paid to employees after their retirement and an
allocation of those benefits to the periods in which employees render service
to earn the benefits. For employees retiring prior to December 31, 1993, the
Company provided $5,000 of life insurance and a Medicare premium supplement and
permitted those under 65 to participate in the Company's medical plan by paying
the full group rate; full-time employees pay approximately 25% of the group
rate. Those retiring after December 31, 1993, will not receive the Medicare
supplement and will pay premiums for life and medical insurance reflecting the
Company's full cost of coverage for retirees.
The initial transition obligation associated with the adoption of Statement No.
106 was $3,600,000. In accordance with the statement, the Company will
recognize this liability over the remaining service periods of plan
participants. Since eligibility for these Company-subsidized benefits ceased at
December 31, 1993, this period ranges from approximately five years for the
medical insurance to thirteen years for the life insurance and Medicare
supplements.
The table below sets forth the plan's funded status and amounts recognized at
December 31, 1993.
Accumulated Postretirement Benefit Obligation:
[Download Table]
(In thousands)
Life insurance . . . . . . . . . . . . . . $ (2,445)
Early retirement medical . . . . . . . . . (244)
Medicare supplement . . . . . . . . . . . . (908)
---------
Total . . . . . . . . . . . . . . . . . . $ (3,597)
=========
Plan assets . . . . . . . . . . . . . . . . $ --
=========
Accumulated postretirement
benefit obligation in excess of
assets . . . . . . . . . . . . . . . . . $ (3,597)
Unrecognized net loss . . . . . . . . . . . 186
Unrecognized prior service cost . . . . . . --
Unrecognized net transition
obligation . . . . . . . . . . . . . . . 3,152
---------
Net postretirement benefit liability. . . . $ (259)
=========
Postretirement benefit expense was $619,000 in 1993.
In 1992, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." Statement No. 112, which will be effective in 1994, covers all
postemployment benefits not already covered by the two prior accounting
pronouncements. Adoption of Statement No. 112 will result in an additional
accrual of postemployment benefits of $1,600,000, of which the after-tax amount
of approximately $1,000,000 will be recorded in the first quarter of 1994. The
recurring annual cost of postemployment benefits to former employees is
estimated at approximately $250,000. This amount is comparable to the annual
cost incurred in 1993.
NOTE 12. OTHER NONINTEREST INCOME
The major components of other noninterest income were:
[Enlarge/Download Table]
YEAR ENDED
---------------------------------------------------
(In thousands) 1993 1992 1991
-------- -------- ---------
Credit card fees . . . . . . . . . $ 18,892 $ 19,398 $ 19,354
Trust fees . . . . . . . . . . . . 14,559 14,810 14,891
Processing fees . . . . . . . . . . 13,788 12,624 12,220
Mortgage banking fees . . . . . . . 11,972 10,207 6,035
Investment management
and brokerage fees . . . . . . . 6,561 4,197 1,949
International fees . . . . . . . . 5,845 6,035 5,890
Other noninterest
income . . . . . . . . . . . . . 21,696 19,939 20,881
-------- -------- --------
$ 93,313 $ 87,210 $ 81,220
======== ======== ========
NOTE 13. OTHER OPERATING EXPENSES
The major components of other operating expenses were:
[Download Table]
YEAR ENDED DECEMBER 31
----------------------------------------------------
(In thousands) 1993 1992 1991
--------- --------- ----------
FDIC insurance . . . . . $ 21,949 $ 19,289 $ 18,329
Marketing and public
relations . . . . . . . 21,341 17,033 13,466
Service bureau and
other data processing . 16,538 15,602 13,444
Professional services . . 13,744 12,482 8,577
Printing and supplies . . 12,997 12,557 11,879
Postage . . . . . . . . . 8,290 8,201 8,213
Legal and consulting . . 6,609 9,763 7,933
Other operating expenses. 27,699 27,385 29,408
--------- --------- ---------
129,167 122,312 111,249
OREO and legal expenses
related to workout. . . 17,468 18,450 17,246
--------- --------- ---------
$ 146,635 $ 140,762 $ 128,495
========= ========= =========
NOTE 14. INCOME TAXES
The provision for income taxes was comprised of the following:
[Download Table]
(In thousands) 1993 1992 1991
--------- --------- ---------
Provision for:
Federal income tax . . . . . . . $ 32,254 $ 25,101 $ 2,720
State income tax . . . . . . . 14,818 11,350 4,028
--------- --------- ---------
$ 47,072 $ 36,451 $ 6,748
========= ========= =========
The current and deferred components of the provision were as follows:
[Download Table]
(In thousands)
Current taxes payable:
Federal . . . . . . . . . . . . . $ 31,084 $ 26,940 $ 3,743
State . . . . . . . . . . . . . . 13,313 11,350 4,264
--------- --------- ---------
$ 44,397 $ 38,290 $ 8,007
========= ========= =========
Deferred taxes (benefit):
Federal . . . . . . . . . . . . . $ 1,170 $ (1,839) $ (1,023)
State . . . . . . . . . . . . . . 1,505 -- (236)
--------- --------- ---------
$ 2,675 $ (1,839) $ (1,259)
========= ========= =========
29
NOTE 14. (CONTINUED)
The major components of deferred income tax expense (benefit) were as follows:
[Download Table]
(In thousands) 1993 1992 1991
--------- --------- ----------
Loan losses . . . . . . . $ 9,360 $ 6,628 $ 907
Depreciation . . . . . . (1,859) (1,408) (1,004)
Loan fees, net . . . . . (348) (211) 644
Pension credit . . . . . (360) (31) 33
Lease financing . . . . . (2,973) (439) 543
Provision for OREO
reserve, net . . . . . (3,300) (4,947) (3,046)
Other, net . . . . . . . 2,155 (1,431) 664
--------- --------- ---------
$ 2,675 $ (1,839) $ (1,259)
========= ========= =========
The differences between the effective income tax rate and the nominal federal
tax rate on income before taxes are reconciled as follows:
[Download Table]
1993 1992 1991
--------- --------- ----------
Nominal federal tax rate 35.0% 34.0% 34.0%
State tax rate, net of
federal tax benefit . . 8.4 7.8 16.2
Tax-exempt income . . . . (2.3) (2.6) (24.3)
Alternative minimum tax . - (1.4) 8.1
Non-deductible goodwill . .2 0.6 4.4
Other . . . . . . . . . . (.3) (0.3) 2.7
----------- ----------- -----------
41.0% 38.1% 41.1%
=========== =========== ===========
At December 31, 1993, and January 1, 1993, the Company had gross deferred tax
assets and gross deferred tax liabilities as follows:
[Download Table]
DECEMBER 31 JANUARY 1
(In thousands) 1993 1993
--------- ----------
Deferred tax assets:
Loan losses . . . . . . . . . . . . . . $ 73,900 $ 83,260
OREO reserve . . . . . . . . . . . . . 12,972 9,672
Loan fees, net . . . . . . . . . . . . 5,128 4,780
Other, net . . . . . . . . . . . . . . 3,859 4,448
--------- ---------
95,859 102,160
--------- ---------
Deferred tax liabilities:
Lease financing . . . . . . . . . . . . 13,365 16,338
Depreciation . . . . . . . . . . . . . 8,928 10,787
Pension credit . . . . . . . . . . . . 5,575 5,935
Other, net . . . . . . . . . . . . . . 2,606 1,040
--------- ---------
30,474 34,100
--------- ---------
Net deferred tax asset . . . . . . . $ 65,385 $ 68,060
========= =========
NOTE 15. FINANCIAL INSTRUMENTS WITH CREDIT RISK AND OFF-BALANCE SHEET RISK
CONCENTRATION OF CREDIT RISK - The Company is a commercial banking
organization, providing diversified financial services to individuals,
businesses, governmental units, and other banks. The Company provides a
comprehensive range of credit, non-credit, and international banking products
and services to the New England region, with particular emphasis in the
Commonwealth of Massachusetts, and accordingly is affected by general economic
conditions in the region.
OFF-BALANCE SHEET RISK - In the normal course of business, the Company uses
various off-balance sheet commitments and financial
NOTE 15. (CONTINUED)
instruments for interest rate risk management purposes and to accommodate
certain financing requirements of customers. These commitments and financial
instruments may include loan commitments, interest rate swaps, 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.
Off-balance sheet financial instruments at December 31, 1993 and 1992, were as
follows:
[Download Table]
CONTRACT OR
NOTIONAL AMOUNT
----------------------------------
(In thousands) 1993 1992
----------- -----------
Loan commitments . . . . . . . . . . . . $ 2,763,000 $ 2,810,000
Standby letters of credit . . . . . . . . 164,000 172,000
Forward commitments . . . . . . . . . . . 163,000 244,000
Loans sold with recourse . . . . . . . . 46,000 68,000
Foreign exchange
commitment contracts . . . . . . . . . 44,000 37,000
Letters of credit . . . . . . . . . . . . 15,000 25,000
Interest rate swaps . . . . . . . . . . . 8,000 21,000
Securities purchase and sell
commitments . . . . . . . . . . . . . . -- 1,000
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.
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.
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 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
30
NOTE 15. (CONTINUED)
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.
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
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.
FOREIGN EXCHANGE COMMITMENT CONTRACTS - The Company periodically enters into
offsetting agreements to purchase foreign currency and, in turn, to sell it to
customers. Credit risk exists because in the event the customer fails to take
delivery of the foreign currency, the Company is thus required to resell it to
the market.
INTEREST RATE SWAPS - The Company uses interest rate swap contracts in
conjunction with asset and liability management activities and to adjust
interest rate risk associated with specific customer transactions. These
contracts 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.
SECURITIES PURCHASE AND SELL COMMITMENTS - In connection with its capital
markets activities, the Company regularly commits to purchase and sell
securities issued by the U.S. Government and its agencies and by
municipalities.
NOTE 16. DISCLOSURES ABOUT THE FAIR VALUE OF
FINANCIAL INSTRUMENTS
Under the provisions of Statement of Financial Accounting Standards 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. Statement 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 Statement 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
Statement 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
NOTE 16. (CONTINUED)
that are usually traded in broad markets. Fair values are based upon market
prices and dealer quotes. If a quoted market price is not available for a
particular security, the fair value is determined by reference to quoted market
prices for securities with similar characteristics.
LOANS - For certain homogeneous categories of instalment loans, including
student loans and credit card receivables, fair value has been estimated using
quoted market prices for similar loans. The fair value of other instalment
loans, including automobile financing, was determined by discounted cash flow
techniques using interest rates for similar loans at December 31, 1993. Credit
risk factors were incorporated in the discount rates used for these loans and
reflected in the market prices obtained for homogeneous loans.
The fair value of residential mortgage loans, including ARMs and fixed-rate
loans, was determined using discounted cash flow techniques with year-end
interest rates, and by comparison with quoted market prices for mortgage-backed
securities with similar interest rates and terms. The analysis also reflected
estimated prepayment factors.
The fair value of both fixed- and variable-rate commercial and commercial real
estate loans was determined by discounted cash flow techniques. Year-end 1993
interest rates were used that incorporated the risk of credit loss associated
with each type of loan, based on an evaluation performed as of December 31,
1993.
DEPOSITS - The fair value of demand deposits, NOW and savings accounts, and
money market deposits is defined by Statement 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 is
estimated by the use of present value techniques. These techniques considered
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.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - 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 and
interest rate swaps was determined by reference to the market for similar
instruments.
31
NOTE 16. (CONTINUED)
At December 31, 1993, the estimated fair values of off-balance sheet financial
instruments, consisting primarily of loan commitments, were not considered to
be material.
The fair value of the financial instruments presented, and as determined under
the guidelines established by Statement No. 107 as previously described, depend
highly on assumptions as they existed as of December 31, 1993 and 1992, 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, 1993 and 1992, were as follows:
[Download Table]
1993 1992
-------------------------- -------------------------
FINANCIAL FAIR FINANCIAL FAIR
STATEMENT VALUE STATEMENT VALUE
----------- ----------- ------------- ----------
Financial assets
Cash and due
from banks . . . . . $ 632,985 $ 632,985 $ 733,726 $ 733,726
Interest-bearing
deposits and
other short-term
investments . . . . 803,068 803,068 1,091,985 1,091,985
Trading accounts . . 14,595 14,595 74,694 74,694
Securities
portfolios . . . . . 2,228,063 2,238,537 1,679,369 1,687,941
Loans (net of
allowance): . . . . .
Commercial
and commercial
real estate . . . . 2,146,686 2,210,000 2,292,128 2,345,000
Consumer . . . . . . 3,784,988 3,980,000 3,453,171 3,676,000
----------- ----------- ----------- ----------
5,931,674 6,190,000 5,745,299 6,021,000
Financial liabilities
Deposits:
Demand, NOW,
savings, and money
market deposit
accounts . . . . . . $ 7,749,919 $ 7,749,919 $ 7,708,846 $7,708,846
Consumer time . . . . 993,945 1,003,000 1,234,747 1,250,000
Time - $100,000
or more . . . . . . . 34,957 34,957 38,955 38,955
Federal funds
purchased
and other
short-term
borrowings . . . . . 507,820 507,820 139,969 139,969
Long-term debt . . . 54,488 54,000 55,188 52,000
NOTE 17. CONTINGENCIES
The Company and its subsidiaries are involved in a number of legal proceedings
arising in the normal course of business. After reviewing such matters, the
Company believes that their resolution will not materially affect its results
of operations or financial position.
NOTE 18. QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for years 1991 through 1993 are as follows:
[Download Table]
(In thousands except for
share amounts) YEAR ENDED DECEMBER 31
-------------------------------------------
1993 1992 1991
---------- ----------- ----------
Net interest income
First Quarter . . . . $ 101,528 $ 101,271 $ 97,303
Second Quarter . . . . 104,917 104,548 98,799
Third Quarter . . . . 108,282 107,428 98,477
Fourth Quarter . . . . 109,096 103,265 102,317
--------- --------- ----------
$ 423,823 $ 416,512 $ 396,896
========= ========= ==========
Noninterest income
First Quarter . . . . $ 46,896 $ 43,309 $ 40,339
Second Quarter . . . . 48,751 46,484 42,142
Third Quarter . . . . 51,904 46,801 43,832
Fourth Quarter . . . . 50,973 47,287 43,440
--------- --------- ----------
$ 198,524 $ 183,881 $ 169,753
========= ========= ==========
Net securities gains
First Quarter . . . . $ -- $ 35,413 $ 228
Second Quarter . . . . 358 393 2,357
Third Quarter . . . . 49 -- 8,988
Fourth Quarter . . . . 4 41,123 29,390
--------- --------- ----------
$ 411 $ 76,929 $ 40,963
========= ========= ==========
Provision for loan losses and
OREO reserve
First Quarter . . . . $ 18,500 $ 60,210 $ 34,914
Second Quarter . . . . 16,892 38,619 42,646
Third Quarter . . . . 16,800 27,754 49,786
Fourth Quarter . . . . 9,138 25,735 65,504
--------- --------- ----------
$ 61,330 $ 152,318 $ 192,850
========= ========= ==========
Net income
First Quarter . . . . $ 12,761 $ 8,229 $ 1,001
Second Quarter . . . . 14,207 6,515 1,124
Third Quarter . . . . 18,001 10,436 1,063
Fourth Quarter . . . . 22,682 34,057 6,467
--------- --------- ----------
$ 67,651 $ 59,237 $ 9,655
========= ========= ==========
Earnings per share
First Quarter . . . . $ .68 $ .51 $ .06
Second Quarter . . . . .75 .40 .07
Third Quarter . . . . .95 .64 .07
Fourth Quarter . . . . 1.19 1.97 .40
--------- --------- ----------
$ 3.57 $ 3.57* $ 0.60
========= ========= ==========
* The sum of the quarters' earnings per share for 1992 does not equal the
full-year amount due to the effect of the issuance of additional common stock
in the fourth quarter of 1992.
32
[Download Table]
HISTORICAL FINANCIAL AND STATISTICAL INFORMATION
------------------------------------------------
Average Balances . . . . . . . . . . . . . . . . . . . 34
Summary of Operations . . . . . . . . . . . . . . . . . 35
Average Yields, Rates Paid, and Net Interest Margin . . 36
Distribution of Loans . . . . . . . . . . . . . . . . . 37
Credit Quality . . . . . . . . . . . . . . . . . . . . 37
Other Data . . . . . . . . . . . . . . . . . . . . . . 38
Quarterly Share Data . . . . . . . . . . . . . . . . . 38
33
[Enlarge/Download Table]
Average Balances BAYBANKS, INC.
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share amounts) (1) 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ---------- ----------
Assets
Interest-bearing deposits and
other short-term investments (2) . . . . . $ 593,317 $ 623,200 $ 675,655 $ 436,888 $ 120,583 $ 22,065
Securities available for sale
U.S. Government . . . . . . . . . . . . . . 1,158,347 303,306 -- -- -- --
Corporate and other . . . . . . . . . . . . 83,424 15,344 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
1,241,771 318,650 -- -- -- --
Investment securities
U.S. Government . . . . . . . . . . . . . . 622,387 782,293 536,255 327,103 342,587 182,191
Mortgage-backed securities . . . . . . . . -- 412,396 623,476 567,500 149,320 135,846
Asset-backed securities . . . . . . . . . . 67,130 -- -- -- -- --
State and local governments . . . . . . . . 74,190 50,192 87,792 142,117 154,759 290,246
Industrial revenue bonds . . . . . . . . . 68,921 84,757 98,644 114,042 129,245 151,007
Corporate and other . . . . . . . . . . . . 1,976 4,917 1,886 13,528 113,606 125,090
---------- ---------- ---------- ---------- ---------- ----------
834,604 1,334,555 1,348,053 1,164,290 889,517 884,380
Loans (3)
Commercial . . . . . . . . . . . . . . . . 1,364,807 1,553,643 1,849,960 2,251,316 2,495,733 2,250,770
Commercial real estate . . . . . . . . . . 956,991 1,117,933 1,343,300 1,545,502 1,551,012 1,327,703
Residential mortgage . . . . . . . . . . . 1,171,044 1,256,553 1,357,703 1,549,862 1,790,472 1,540,256
Instalment . . . . . . . . . . . . . . . . 2,417,647 2,224,709 2,184,077 2,109,570 1,978,854 1,817,261
---------- ---------- ---------- ---------- ---------- ----------
5,910,489 6,152,838 6,735,040 7,456,250 7,816,071 6,935,990
Less allowance for loan losses . . . . . . 188,191 213,949 228,192 139,603 61,070 49,865
---------- ---------- ---------- ---------- ---------- ----------
5,722,298 5,938,889 6,506,848 7,316,647 7,755,001 6,886,125
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets . . . . . . . . . . . 8,580,181 8,429,243 8,758,748 9,057,428 8,826,171 7,842,435
Cash and due from banks . . . . . . . . . . . 629,428 604,115 553,945 570,755 565,418 567,519
Other assets . . . . . . . . . . . . . . . . 548,223 615,396 590,896 443,036 356,241 319,692
---------- ---------- ---------- ---------- ---------- ----------
Total assets . . . . . . . . . . . . . . . $9,569,641 $9,434,805 $9,675,397 $9,931,616 $9,686,760 $8,679,781
========== ========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand . . . . . . . . . . . . . . . . . . $1,886,914 $1,717,345 $1,501,448 $1,481,019 $1,491,246 $1,543,244
NOW accounts . . . . . . . . . . . . . . . 1,336,270 1,218,252 1,038,135 932,851 869,409 860,662
Savings . . . . . . . . . . . . . . . . . 1,399,886 1,223,626 993,305 919,678 972,190 1,116,344
Money market deposit accounts . . . . . . 2,865,209 3,034,586 3,260,294 3,184,659 2,577,672 2,041,353
Consumer time . . . . . . . . . . . . . . 1,102,025 1,363,997 1,692,020 1,821,337 1,857,656 1,241,756
Time - $100,000 or more . . . . . . . . . 33,322 57,547 187,863 407,320 471,424 528,552
---------- ---------- ---------- ---------- ---------- ----------
8,623,626 8,615,353 8,673,065 8,746,864 8,239,597 7,331,911
Federal funds purchased and other
short-term borrowings (4) . . . . . . . . 150,608 147,856 366,262 474,026 658,100 629,867
Long-term debt . . . . . . . . . . . . . . . 54,437 55,226 55,052 53,691 53,372 51,757
---------- ---------- ---------- ---------- ---------- ----------
Total deposits and borrowings . . . . . . 8,828,671 8,818,435 9,094,379 9,274,581 8,951,069 8,013,535
Other liabilities (5) . . . . . . . . . . . . 69,937 81,366 87,381 106,033 149,957 132,067
Stockholders' equity . . . . . . . . . . . . 671,033 535,004 493,637 551,002 585,734 534,179
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $9,569,641 $9,434,805 $9,675,397 $9,931,616 $9,686,760 $8,679,781
========== ========== ========== ========== ========== ==========
CAPITAL RATIOS
Risk-based (6)
Core (minimum regulatory standard - 4.00%) 10.68% 10.37% 7.28% 6.40% n/a n/a
Total (minimum regulatory standard - 8.00%) 12.40 12.30 9.29 8.33 n/a n/a
Leverage ratio (6) . . . . . . . . . . . . . 7.26 6.79 5.38 4.83 n/a n/a
Prior measures (6)
Primary . . . . . . . . . . . . . . . . . n/a n/a n/a 6.80 6.60 6.50
Total . . . . . . . . . . . . . . . . . . n/a n/a n/a 7.30 7.10 7.00
Year-end book value per share . . . . . . . . $ 37.52 $ 34.81 $ 31.30 $ 30.49 $ 37.67 $ 35.43
----------------------------------------------------------------------------------------------------------------------------
<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 assets.
(3) 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.
(4) Includes federal funds purchased, securities sold under agreement to
repurchase, and demand notes issued to the U.S. Treasury.
(5) Other liabilities include guarantee of ESOP indebtedness in 1993, 1992,
1991, and 1990.
(6) The risk-based capital ratios and the leverage capital ratio were phased
in December 31, 1990.
34
[Enlarge/Download Table]
SUMMARY OF OPERATIONS BAYBANKS, INC.
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands on a tax equivalent basis 1993 1992 1991 1990 1989 1988
except share amounts) (7) ---------- ---------- ---------- ---------- ---------- ----------
Income on interest-bearing deposits and other
short-term investments . . . . . . . . . $ 19,931 $ 22,925 $ 40,019 $ 35,879 $ 11,334 $ 1,679
Interest on securities portfolios
Taxable . . . . . . . . . . . . . . . . . 84,510 86,304 95,542 81,417 44,117 26,367
Tax-exempt . . . . . . . . . . . . . . . . 10,730 10,807 14,961 27,686 42,304 53,697
---------- ---------- ---------- ---------- ---------- ----------
95,240 97,111 110,503 109,103 86,421 80,064
---------- ---------- ---------- ---------- ---------- ----------
Interest and fees on loans
Commercial (8) . . . . . . . . . . . . . . 89,383 109,048 161,156 231,046 281,336 230,023
Commercial real estate . . . . . . . . . . 74,353 92,548 122,519 146,705 173,229 141,131
Residential mortgage . . . . . . . . . . . 92,451 111,390 132,725 155,384 178,470 148,096
Instalment . . . . . . . . . . . . . . . . 224,471 227,652 250,890 256,015 242,005 204,430
---------- ---------- ---------- ---------- ---------- ----------
480,658 540,638 667,290 789,150 875,040 723,680
---------- ---------- ---------- ---------- ---------- ----------
Total income on earning assets . . . . . . . 595,829 660,674 817,812 934,132 972,795 805,423
Interest expense on deposits and borrowings
NOW and savings accounts . . . . . . . . . 52,040 67,304 94,544 96,926 97,143 102,690
Money market deposit accounts . . . . . . 66,001 97,256 173,393 223,861 201,878 132,566
Consumer time . . . . . . . . . . . . . . 41,514 66,627 114,868 147,752 163,986 101,103
Time - $100,000 or more . . . . . . . . . 886 2,048 11,356 32,804 42,189 40,627
Short-term borrowings . . . . . . . . . . 4,098 4,285 19,941 36,477 59,180 46,026
Long-term debt . . . . . . . . . . . . . . 2,109 2,489 3,860 4,622 5,059 4,130
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense . . . . . . . . . . . 166,648 240,009 417,962 542,442 569,435 427,142
---------- ---------- ---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . . . 429,181 420,665 399,850 391,690 403,360 378,281
Noninterest income (8)
Service charges and fees on deposit accounts 105,211 96,671 88,533 70,823 64,200 53,842
Other noninterest income . . . . . . . . . 93,313 87,210 81,220 84,988 76,837 79,977
---------- ---------- ---------- ---------- ---------- ----------
Total noninterest income (8) . . . . . . . 198,524 183,881 169,753 155,811 141,037 133,819
---------- ---------- ---------- ---------- ---------- ----------
Total income from operations . . . . . . . . 627,705 604,546 569,603 547,501 544,397 512,100
Operating expenses
Salaries and benefits . . . . . . . . . . 212,954 199,604 184,399 179,723 178,630 165,440
Occupancy and equipment . . . . . . . . . 87,116 88,950 85,465 87,326 85,305 78,174
Other operating expenses . . . . . . . . . 146,635 140,762 128,495 111,454 107,320 99,500
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . 446,705 429,316 398,359 378,503 371,255 343,114
---------- ---------- ---------- ---------- ---------- ----------
Operating Income before Net Securities Gains
and Provisions for Loan Losses and OREO
Reserve . . . . . . . . . . . . . . . . . 181,000 175,230 171,244 168,998 173,142 168,986
---------- ---------- ---------- ---------- ---------- ----------
Net securities gains . . . . . . . . . . . . 411 76,929 40,963 19,582 10,878 254
---------- ---------- ---------- ---------- ---------- ----------
Provision for loan losses . . . . . . . . . . 36,500 106,836 165,400 289,958 75,000 16,600
Provision for OREO reserve, net . . . . . . . 24,830 45,482 27,450 14,582 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total credit provisions . . . . . . . . . . . 61,330 152,318 192,850 304,540 75,000 16,600
---------- ---------- ---------- ---------- ---------- ----------
Pre-tax income (loss) . . . . . . . . . . . . 120,081 99,841 19,357 (115,960) 109,020 152,640
Less tax equivalent adjustment
included above . . . . . . . . . . . . . 5,358 4,153 2,954 9,058 13,703 17,287
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before taxes . . . . . . . . . 114,723 95,688 16,403 (125,018) 95,317 135,353
Provision for income taxes (benefit) . . . . 47,072 36,451 6,748 (55,216) 32,173 46,819
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ 67,651 $ 59,237 $ 9,655 $ (69,802) $ 63,144 $ 88,534
========== ========== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE (9) . . . . . . . . $ 3.57 $ 3.57 $ 0.60 $ (4.37) $ 3.95 $ 5.57
Dividends Paid Per Share . . . . . . . . . . 0.90 - - 1.05 1.80 1.60
PERFORMANCE RATIOS
Operating profit margin . . . . . . . . . . . 28.8% 29.0% 30.1% 30.9% 31.8% 33.0%
Return on average stockholders' equity . . . 10.1 11.1 2.0 (12.7) 10.8 16.6
Return on average total assets . . . . . . . 0.71 0.63 0.10 (0.70) 0.65 1.02
----------------------------------------------------------------------------------------------------------------------------
<FN>
(7) Certain items in the summary that are tax-exempt have been restated to
include the federal tax benefit derived from income on obligations of state
and local governments, industrial revenue bonds, and certain other
securities, thus facilitating the comparison between returns on alternative
types of earning assets and between totals that contain varying mixtures of
fully taxable and federal tax-exempt income. Because of the interplay of
federal and Massachusetts income taxes, $1.00 of federal tax-exempt income
was the fully taxable equivalent of $1.55 in 1993.
(8) There were no significant items (excluding net securities gains) considered
by management to be of a nonrecurring nature included in the Summary of
Operations above for 1991-1993. 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. In 1989, the Company recognized a $2.5
million gain from liquidation of loans acquired at a discount in 1987. In
1988, the Company also recognized a gain of $7.4 million from liquidation
of these loans, $4.2 million in gains from property sales, and a gain of
$4.0 million from the sale of the Company's investment in the CIRRUS(R)
automated teller network.
(9) For 1988-1993, the difference between earnings (loss) per share as reported
and fully diluted was less than 3%.
35
[Enlarge/Download Table]
AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN (Tax equivalent basis) BAYBANKS, INC.
-----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ----
Interest-bearing deposits and other short-term investments 3.36% 3.68% 5.92% 8.21% 9.40% 7.61%
Securities available for sale . . . . . . . . . . . . . 4.48% 4.79% --% --% --% --%
U.S. Government . . . . . . . . . . . . . . . . . 4.54 4.70 -- -- -- --
Corporate and other. . . . . . . . . . . . . . . . 3.73 6.45 -- -- -- --
Investment securities . . . . . . . . . . . . . . . . . 4.74% 6.13% 8.20% 9.37% 9.72% 9.05%
U.S. Government . . . . . . . . . . . . . . . . . 4.29 5.65 7.47 8.52 9.24 8.54
Mortgage-backed securities . . . . . . . . . . . . -- 6.46 8.88 9.44 8.35 7.95
Asset-backed securities . . . . . . . . . . . . . 4.44 -- -- -- -- --
State and local governments . . . . . . . . . . . 5.53 7.16 7.51 9.29 9.42 8.90
Industrial revenue bonds . . . . . . . . . . . . . 8.26 8.49 8.48 11.44 12.45 10.93
Corporate and other . . . . . . . . . . . . . . . 6.22 4.33 5.67 10.64 10.25 9.09
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 8.13% 8.79% 9.91% 10.58% 11.20% 10.43%
Commercial . . . . . . . . . . . . . . . . . . . 6.55 7.02 8.71 10.26 11.27 10.22
Commercial real estate . . . . . . . . . . . . . . 7.77 8.28 9.12 9.49 11.17 10.63
Residential mortgage . . . . . . . . . . . . . . . 7.89 8.86 9.78 10.03 9.97 9.62
Instalment . . . . . . . . . . . . . . . . . . . . 9.28 10.23 11.49 12.14 12.23 11.25
Total earning assets . . . . . . . . . . . . . . . . . 6.94% 7.84% 9.34% 10.31% 11.02% 10.27%
Interest-bearing funds . . . . . . . . . . . . . . . . 2.40% 3.38% 5.50% 6.96% 7.63% 6.60%
NOW and savings accounts . . . . . . . . . . . . . 1.90 2.76 4.65 5.23 5.28 5.18
Money market deposit accounts . . . . . . . . . . 2.30 3.20 5.32 7.03 7.83 6.49
Consumer time . . . . . . . . . . . . . . . . . . 3.77 4.88 6.79 8.11 8.83 8.14
Time - $100,000 or more . . . . . . . . . . . . . 2.66 3.56 6.04 8.05 8.95 7.69
Short-term borrowings (4) . . . . . . . . . . . . 2.72 2.90 5.44 7.70 8.99 7.31
Long-term debt . . . . . . . . . . . . . . . . . . 3.87 4.51 7.01 8.60 9.48 7.98
Interest expense as a percentage of average
earning assets . . . . . . . . . . . . . . . . . . 1.94% 2.85% 4.77% 5.99% 6.45% 5.45%
Net interest margin . . . . . . . . . . . . . . . . . . 5.00% 4.99% 4.57% 4.32% 4.57% 4.82%
36
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DISTRIBUTION OF LOANS BAYBANKS, INC.
---------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- --------- -----------
Commercial . . . . . . . . . . . . . . . $ 1,324,968 $ 1,411,120 $ 1,654,118 $ 2,036,426 $ 2,489,158 $ 2,413,693
Commercial real estate
Commercial mortgages . . . . . . . . . 877,834 965,134 1,132,466 1,172,848 1,173,877 1,008,024
Construction loans . . . . . . . . . . 57,637 57,381 79,483 247,025 410,649 477,722
----------- ----------- ------------ ----------- ----------- ------------
Total commercial real estate . . . . . 935,471 1,022,515 1,211,949 1,419,873 1,584,526 1,485,746
Residential mortgage . . . . . . . . . . 1,242,597 1,247,633 1,274,591 1,447,043 1,878,335 1,719,049
Instalment . . . . . . . . . . . . . . . 2,600,134 2,256,731 2,212,376 2,226,999 2,060,875 1,950,200
----------- ----------- ------------ ----------- ----------- ------------
Total loans . . . . . . . . . . . . . . . $ 6,103,170 $ 5,937,999 $ 6,353,034 $ 7,130,341 $ 8,012,894 $ 7,568,688
=========== =========== ============ =========== =========== ============
[Enlarge/Download Table]
CREDIT QUALITY
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1992 1991 1990 1989 1988
---------- --------- --------- --------- --------- --------
Nonperforming Assets; Restructured,
Accruing Loans; and Accruing Loans
90 Days or More Past Due
Nonperforming loans . . . . . . . . . . . . . $ 110,001 $ 180,580 $ 222,725 $ 365,261 $ 146,669 $ 53,839
Other real estate owned
In-substance foreclosures . . . . . . . . 72,505 100,669 146,638 143,301 -- --
Foreclosed property . . . . . . . . . . . 70,950 102,750 99,163 34,005 8,588 2,348
---------- --------- --------- --------- --------- --------
143,455 203,419 245,801 177,306 8,588 2,348
Less OREO reserve . . . . . . . . . . . . 29,776 7,833 -- -- -- --
---------- --------- --------- --------- --------- --------
OREO, net of reserve . . . . . . . . . . . 113,679 195,586 245,801 177,306 8,588 2,348
---------- --------- --------- --------- --------- --------
Total nonperforming assets . . . . . . . . . $ 223,680 $ 376,166 $ 468,526 $ 542,567 $ 155,257 $ 56,187
========== ========= ========= ========= ========= ========
Restructured, accruing loans . . . . . . . . $ 18,398 $ 12,084 $ 39,066 $ 467 $ 543 $ 518
========== ========= ========= ========= ========= ========
Accruing loans 90 days or more past due . . . $ 51,749 $ 91,895 $ 116,814 $ 99,348 $ 114,434 $ 41,114
========== ========= ========= ========= ========= ========
Nonperforming assets as a percentage
of loans and OREO . . . . . . . . . . . . 3.6% 6.1% 7.1% 7.4% 1.9% 0.7%
Nonperforming assets as a percentage
of total assets . . . . . . . . . . . . . 2.2 3.8 4.9 5.4 1.6 0.6
Allowance for loan losses as a percentage
of year-end loans . . . . . . . . . 2.8 3.2 3.3 3.0 1.1 0.7
Allowance for loan losses as a percentage
of nonperforming loans . . . . . . . . . . 155.9 106.7 95.4 58.6 57.8 97.9
Allowance for loan losses and OREO
reserve as a percentage of nonperforming
loans and OREO . . . . . . . . . . . . . . 79.4 52.2 45.4 39.5 54.6 93.9
Allowance for loan losses as a percentage
of nonperforming loans; restructured,
accruing loans; and accruing loans past
due 90 days or more . . . . . . . . . . . 95.2 67.7 56.1 46.1 32.4 55.2
37
[Enlarge/Download Table]
OTHER DATA BAYBANKS, INC.
-----------------------------------------------------------------------------------------------
1993 1992 1991
------------ ------------ -----------
Average number of common
shares outstanding . . . . . . . . . . 18,953,397 16,575,768 16,021,645
Range of BayBanks, Inc.,
common stock - last sale price . . . . $52 1/8-38 1/4 $40 3/4-18 3/4 $19 1/2-9 5/8
Number of common stockholders
of record (approximate) . . . . . . . 4,600 4,900 5,300
Number of full-time equivalent
employees at year-end (approximate) . 5,571 5,527 5,531
Number of full-service offices
at year-end . . . . . . . . . . . . . 201 204 211
Number of automated banking
facilities at year-end . . . . . . . . 356 349 339
Number of automated teller
machines at year-end . . . . . . . . . 1,009 994 991
Book value of trust assets at year-end
(in thousands) . . . . . . . . . . . . $5,195,741 $4,483,643 $3,784,282
[Enlarge/Download Table]
Other Data BAYBANKS, INC.
--------------------------------------------------------------------------------------------
1990 1989 1988
---------- ------------ ----------
Average number of common
shares outstanding . . . . . . . . . . 15,965,653 15,929,658 15,892,306
Range of BayBanks, Inc.,
common stock - last sale price . . . . $32-11 3/8 $46 1/4-26 1/4 $48-36
Number of common stockholders
of record (approximate) . . . . . . . 5,800 6,000 5,700
Number of full-time equivalent
employees at year-end (approximate) . 5,733 5,748 5,665
Number of full-service offices
at year-end . . . . . . . . . . . . . 228 225 229
Number of automated banking
facilities at year-end . . . . . . . . 331 302 270
Number of automated teller
machines at year-end . . . . . . . . . 991 972 919
Book value of trust assets at year-end
(in thousands) . . . . . . . . . . . . $3,599,402 $3,290,090 $2,587,797
[Enlarge/Download Table]
QUARTERLY SHARE DATA
---------------------------------------------------------------------------------------------------------------------------------
Average number of outstanding shares 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
----------- ----------- ----------- -----------
1993 . . . . . . . . . . . . . . . . . . . . . . . . 19,004,540 19,000,208 18,937,724 18,871,018
1992 . . . . . . . . . . . . . . . . . . . . . . . . 17,329,351 16,204,906 16,203,022 16,137,694
1991 . . . . . . . . . . . . . . . . . . . . . . . . 16,022,503 16,025,342 16,022,188 16,016,439
Net income
1993 . . . . . . . . . . . . . . . . . . . . . . . . $1.19 $0.95 $0.75 $0.68
1992 . . . . . . . . . . . . . . . . . . . . . . . . 1.97 0.64 0.40 0.51
1991 . . . . . . . . . . . . . . . . . . . . . . . . 0.40 0.07 0.07 0.06
Dividends declared
1993 . . . . . . . . . . . . . . . . . . . . . . . . $0.25 $0.25 $0.20 $0.20
1992 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
1991 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
Dividends paid
1993 . . . . . . . . . . . . . . . . . . . . . . . . $0.25 $0.25 $0.20 $0.20
1992 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
1991 . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
Range of BayBanks, Inc., common stock - last sale price
1993 . . . . . . . . . . . . . . . . . . . . . . . . $50 3/4 - 43 1/4 $50 1/2 - 43 1/4 $51 1/4 - 38 1/4 $52 1/8 - 38 3/4
1992 . . . . . . . . . . . . . . . . . . . . . . . . 40 3/4 - 30 1/8 36 1/2 - 28 3/4 36 7/8 - 26 3/4 31 1/4 - 18 3/4
1991 . . . . . . . . . . . . . . . . . . . . . . . . 19 1/2 - 16 1/8 19 1/2 - 12 3/4 18 3/4 - 13 19 1/2 - 9 5/8
38
APPENDIX
Narrative descriptions of graphical image material omitted from text of
Form 10-K and from Exhibit 13, portions of the BayBanks, Inc. 1993 Annual Report
to Stockholders.
Annual Report Figure 1 - Net Interest Margin
Figure 1 compares the Company's net interest margin from 1988 through 1993 to
the net interest margin of the Keefe, Bruyette and Woods, Inc., Bank Index for
banks with assets ranging from $10-25 billion. The graph is a line graph with
the following data points:
[Download Table]
Keefe, Bruyette and
BayBanks, Inc. Woods, Inc. Bank Index
-------------- ----------------------
1988 4.82% 4.50%
1989 4.57 4.46
1990 4.32 4.13
1991 4.57 4.33
1992 4.99 4.57
1993 5.00 4.70
The y-axis of the graph ranges from 4.00% to 5.00% in .10% intervals. The
information on this graph is shown on a tax equivalent basis.
Annual Report Figure 2 - Average Earning Assets
Figure 2 is a bar graph comparing the Company's mix of average earning assets
from 1989 through 1993. The graph shows the amounts of securities available for
sale, short-term investments, investment securities, and loans. The data points
are as follows:
[Download Table]
(In millions) 1989 1990 1991 1992 1993
---- ---- ---- ---- ----
Securities
available for
sale $ ---- $ ---- $ ---- $ 319 $1,242
Short-term
investments 121 437 676 623 593
Investment
securities 890 1,164 1,348 1,335 835
Loans 7,816 7,456 6,735 6,153 5,910
------ ------ ------ ------ ------
Total $8,580 $8,429 $8,759 $9,057 $8,826
====== ====== ====== ====== ======
The y-axis ranges from $0 to $10,000 million in intervals of $1,000 million.
The data points for each year are stacked on top of each other to come to a bar
the height of the total as shown above.
Annual Report Figure 3 - Average Loans
Figure 3 shows a bar for each of the years 1989 through 1993. The bars are
split horizontally to depict the mix in average loans among commercial,
commercial real estate, residential mortgage, and instalment loans. The data
points are as follows:
[Download Table]
(In millions) 1989 1990 1991 1992 1993
---- ---- ---- ---- ----
Commercial $2,496 $2,251 $1,850 $1,554 $1,365
Commercial
real estate 1,551 1,546 1,343 1,118 960
Residential
mortgage 1,790 1,550 1,358 1,257 1,171
Instalment 1,979 2,110 2,184 2,225 2,418
------ ------ ------ ------ ------
Total loans $7,816 $7,456 $6,735 $6,153 $5,910
====== ====== ====== ====== ======
The data points for each year are stacked on top of each other to come to a bar
the height of the total as shown above. The y-axis ranges from $0 to $8,000
million in intervals of $1,000 million.
Annual Report Figure 4 - Average Core Deposits and Borrowings
Figure 4 is a bar graph with a bar for each year from 1989 through 1993. Each
bar is made up of the following components: Debt, Large CDs and other
borrowings, MMDA and consumer time, and demand, NOW and savings. The height of
each bar is the average core deposits and borrowings for that year. The data
points are as follows:
[Download Table]
(In millions) 1989 1990 1991 1992 1993
---- ---- ---- ---- ----
Debt $ 53 $ 54 $ 55 $ 55 $ 54
Large CDs and
other borrowings 1,130 881 554 205 184
MMDA and consumer
time 4,435 5,006 4,952 4,399 3,967
Demand, NOW, and
savings 3,333 3,334 3,533 4,159 4,623
------ ------ ------ ------ ------
Total $8,951 $9,275 $9,094 $8,818 $8,829
====== ====== ====== ====== ======
The data points for each year are stacked on top of each other to come to a bar
height equal to the totals shown above.The y-axis ranges from $0 to $10,000
million in intervals of $1,000 million.
Annual Report Figure 5 - Short-term Investments and Securities Portfolios
Compared with Non-Core Funding
Figure 5 is a combination bar and line graph with a bar for each of the years
from 1991 through 1993. The height of the bars is the total of the year-end
short-term investments and securities portfolios, net of pledged securities
amounts, for each year. The bars are split horizontally between year-end
short-term investments and year-end securities available for sale and investment
securities, net of pledged amounts. The line runs through the data points
representing year-end federal funds purchased and large CDs for each year.
The data points are as follows:
[Download Table]
(In millions) 1991 1992 1993
---- ---- ----
Short-term investments $ 580 $1,092 $ 803
Securities available for sale
and investment securities* 1,033 1,293 1,551
------ ------ -----
1,613 2,385 2,354
Federal funds purchased and
large CDs 154 131 89
* Net of pledged securities.
The y-axis ranges from $0 to $2,500 million in intervals of $500 million.
Annual Report Figure 6 - Nonperforming Assets
Figure 6 is a bar graph showing nonperforming assets for each of the years from
1991 through 1993. The height of the bars is the total nonperforming assets
for each year-end. The bars are split horizontally showing the mix of OREO and
nonperforming loans for each year. The data points are as follows:
[Download Table]
(In millions) 1991 1992 1993
---- ---- ----
OREO $ 246 $ 195 $ 114
Nonperforming loans 223 181 110
----- ------ -----
Total $ 469 $ 376 $ 224
===== ====== =====
The y-axis ranges from $0 to $500 million in intervals of $100 million.
Annual Report Figure 7 - Capital Ratios
Figure 7 is a bar graph showing capital ratios with three bars side by side for
each year from 1991 through 1993. The first bar in each year is the height of
the leverage ratio at year-end; the second bar is the height of the core
risk-based capital ratio at year-end, and the third bar is the height of the
total risk-based capital ratio at year-end. The data points are as follows:
[Download Table]
1991 1992 1993
---- ---- ----
Leverage 5.38% 6.79% 7.26%
Core risk-based 7.28 10.37 10.68
Total risk-based 9.29 12.30 12.40
The y-axis ranges from 0-15% in intervals of 5%.
Annual Report Figure 8 - Stock Performance
Figure 8 is a bar graph showing the range of the last sale price of the
Company's common stock for each of the years from 1991 through 1993. The bar
height is the difference between the high last sale price and the low last sale
price for each year. The bars begin at the low last sale price and end at the
high last sale price. There is a line going through each bar at the position of
the closing price as of December 31 for each year. The data points are as
follows:
[Download Table]
1991 1992 1993
---- ---- ----
High last sale price $19.50 $40.75 $52.13
Low last sale price 9.63 18.75 38.25
Closing price 19.13 40.75 50.75
The y-axis ranges from $0 to $60 in intervals of $10.
Dates Referenced Herein and Documents Incorporated by Reference
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