<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1994 Commission File No. 0-959
------------------------
BAYBANKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2008039
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
175 FEDERAL STREET,
BOSTON, MASSACHUSETTS 02110
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (617) 482-1040
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past 90 days. Yes/X/ No / /
As of July 29, 1994, 18,875,941 shares of the registrant's common stock,
$2.00 par value, were outstanding.
The list of exhibits to this report appears on page 28.
===============================================================================
<PAGE> 2
PART I -- FINANCIAL INFORMATION
<TABLE>
ITEM 1 -- FINANCIAL STATEMENTS
BAYBANKS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
----------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks........................................ $ 659,739 $ 632,985 $ 678,795
Interest-bearing deposits and other short-term investments..... 160,850 803,068 494,454
Trading accounts............................................... 15,986 14,595 46,399
Securities available for sale -- amortized cost $499,005 at
June 30, 1994, market value $633,446 at December 31, 1993,
and $1,124,829 at June 30, 1993 (Note 2)..................... 500,395 629,003 1,115,912
Investment securities -- market value $2,685,389 at June 30,
1994, $1,605,091 at December 31, 1993, and $1,066,942 at June
30, 1993 (Note 2)............................................ 2,723,696 1,599,060 1,058,921
Loans, net of unearned income and fees
Commercial................................................... 1,370,885 1,324,968 1,422,375
Commercial real estate....................................... 898,807 935,471 954,792
Residential mortgage......................................... 1,239,026 1,242,597 1,199,009
Instalment................................................... 2,592,853 2,600,134 2,431,603
----------- ----------- ----------
6,101,571 6,103,170 6,007,779
Less allowance for loan losses............................... 154,126 171,496 183,794
----------- ----------- ----------
5,947,445 5,931,674 5,823,985
Premises and equipment, net.................................... 192,436 192,554 195,589
Other real estate owned and in-substance foreclosures, net..... 89,178 113,679 152,742
Other assets................................................... 200,530 193,966 194,770
----------- ----------- ----------
Total assets.......................................... $10,490,255 $10,110,584 $9,761,567
============ ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand....................................................... $ 2,062,723 $ 2,077,206 $1,970,674
NOW accounts................................................. 1,418,609 1,481,859 1,353,725
Savings...................................................... 1,499,173 1,459,134 1,408,844
Money market deposit accounts................................ 2,664,896 2,731,720 2,859,017
Consumer time................................................ 947,424 993,945 1,097,393
Time -- $100,000 or more..................................... 80,607 34,957 32,317
----------- ----------- ----------
8,673,432 8,778,821 8,721,970
Federal funds purchased and other short-term borrowings (Note
2)........................................................... 954,977 507,820 255,162
Accrued expenses and other accounts payable.................... 54,870 53,952 47,500
Long-term debt................................................. 54,024 54,488 54,543
Guarantee of ESOP indebtedness................................. 9,451 12,241 12,241
Stockholders' equity:
Common stock, par value $2.00 per share
Shares authorized -- 50,000,000
Shares issued -- 18,835,989 at June 30, 1994, 18,742,934 at
December 31, 1993, and 18,692,013 at June 30, 1993....... 37,672 37,486 37,384
Surplus........................................................ 312,333 310,355 308,714
Retained earnings.............................................. 402,998 367,662 336,342
----------- ----------- ----------
753,003 715,503 682,440
Less treasury stock at cost -- 850 shares at June 30, 1994, and
1,101 shares at June 30, 1993................................ 51 -- 48
Less guarantee of ESOP indebtedness............................ 9,451 12,241 12,241
----------- ----------- ----------
Total stockholders' equity............................ 743,501 703,262 670,151
----------- ----------- ----------
Total liabilities and stockholders' equity............ $10,490,255 $10,110,584 $9,761,567
============ ============ ==========
</TABLE>
2
<PAGE> 3
<TABLE>
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------- ---------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income on interest-bearing deposits and other
short-term investments....................... $ 1,925 $ 5,103 $ 4,410 $ 12,586
Interest on securities available for sale and
investment securities........................ 33,555 21,961 60,545 41,880
Interest and fees on loans..................... 120,758 120,640 237,768 242,135
-------- -------- -------- --------
Total income on earning assets................. 156,238 147,704 302,723 296,601
Interest expense on deposits and borrowings
Deposits..................................... 35,509 41,293 69,387 87,452
Short-term borrowings........................ 7,308 989 10,724 1,651
Long-term debt............................... 606 505 1,130 1,053
-------- -------- -------- --------
Total interest expense......................... 43,423 42,787 81,241 90,156
-------- -------- -------- --------
Net interest income............................ 112,815 104,917 221,482 206,445
Provision for loan losses...................... 6,000 9,000 12,000 20,500
-------- -------- -------- --------
Net interest income after provision for loan
losses....................................... 106,815 95,917 209,482 185,945
Noninterest income
Service charges and fees on deposit
accounts.................................. 27,784 26,837 54,042 51,781
Other noninterest income..................... 26,247 21,914 49,704 43,866
-------- -------- -------- --------
Total noninterest income....................... 54,031 48,751 103,746 95,647
Net securities gains........................... 436 358 475 358
Operating expenses
Salaries and benefits........................ 57,434 52,529 113,817 104,136
Occupancy and equipment...................... 21,559 22,397 44,046 44,821
Other operating expenses..................... 35,719 38,113 69,044 73,242
-------- -------- -------- --------
Total operating expenses....................... 114,712 113,039 226,907 222,199
Provision for OREO reserve, net................ 2,500 7,892 5,437 14,892
-------- -------- -------- --------
Total operating expenses and OREO provision.... 117,212 120,931 232,344 237,091
-------- -------- -------- --------
Income before taxes and cumulative effect of
accounting change............................ 44,070 24,095 81,359 44,859
Provision for income taxes..................... 17,648 9,888 32,726 17,891
-------- -------- -------- --------
Income before cumulative effect of accounting
change....................................... 26,422 14,207 48,633 26,968
Less cumulative effect of accounting change
(net of tax benefit of $683)................. -- -- 932 --
-------- -------- -------- --------
NET INCOME..................................... $ 26,422 $ 14,207 $ 47,701 $ 26,968
======== ======== ======== ========
Earnings Per Share
Income before accounting change.............. $ 1.38 $ 0.75 $ 2.54 $ 1.43
Less cumulative effect of accounting
change.................................... -- -- 0.05 --
-------- -------- -------- --------
Net Income................................... $ 1.38 $ 0.75 $ 2.49 $ 1.43
======== ======== ======== ========
Average shares outstanding..................... 19,154,620 18,937,724 19,124,143 18,904,691
</TABLE>
3
<PAGE> 4
<TABLE>
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
COMMON RETAINED TREASURY ESOP LOAN
STOCK SURPLUS EARNINGS STOCK GUARANTEE TOTAL
------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1992... $37,016 $304,890 $316,812 $(26) $(14,473) $644,219
Net income -- Six Months Ended
June 30, 1993................ 26,968 26,968
Cash dividends declared ($0.40
per share)................... (7,438) (7,438)
Other equity transactions....... 368 3,824 (22) 2,232 6,402
------- -------- -------- -------- --------- --------
BALANCE AS OF JUNE 30, 1993....... $37,384 $308,714* $336,342 $(48) $(12,241) $670,151
======= ======== ======== ====== ========= ========
BALANCE AS OF DECEMBER 31, 1993... $37,486 $310,355 $367,662 $ -- $(12,241) $703,262
Net income -- Six Months Ended
June 30, 1994................ 47,701 47,701
Cash dividends declared ($0.70
per share)................... (13,164) (13,164)
Change in valuation reserve
related to securities
available for sale portfolio,
net of tax................... 799 799
Other equity transactions....... 186 1,978 (51) 2,790 4,903
------- -------- -------- -------- --------- --------
BALANCE AS OF JUNE 30, 1994....... $37,672 $312,333* $402,998 $(51) $ (9,451) $743,501
======= ======== ======== ====== ========= ========
<FN>
- - ---------------
* Net of unamortized deferred compensation expense of $1,104 and $2,192 at
June 30, 1994 and 1993, respectively.
</TABLE>
4
<PAGE> 5
<TABLE>
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------
1994 1993
----------- ---------
<S> <C> <C>
Operating Activities
Net income............................................................... $ 47,701 $ 26,968
Adjustments to reconcile net income to net cash provided by operating
activities:
Fixed-rate mortgages sold.............................................. 228,741 434,430
Fixed-rate mortgages originated for sale............................... (130,346) (404,000)
Student loans transferred from portfolio and sold...................... 127,004 14,576
Proceeds from sales and maturities of trading account assets........... 1,195,989 827,187
Purchases of trading account assets.................................... (1,212,177) (800,298)
Provision for loan losses.............................................. 12,000 20,500
Amortization of security premium....................................... 14,453 2,639
Provision for OREO reserve, net........................................ 5,437 14,892
Deferred income taxes.................................................. 12,502 (2,595)
Depreciation and amortization of premises and equipment................ 12,754 12,502
Net securities gains................................................... (475) (358)
Change in other assets................................................. (2,842) (21,185)
Change in accrued expenses............................................. 4,030 (1,103)
Change in interest receivable.......................................... (19,809) 2,645
Change in interest payable............................................. 470 (3,034)
----------- ---------
Net cash provided by operating activities......................... 295,432 123,766
----------- ---------
Investing Activities
Proceeds from sales of securities available for sale..................... 104,200 120,557
Proceeds from maturities of securities available for sale................ 131,837 101,479
Purchases of securities available for sale............................... (95,655) (333,789)
Proceeds from maturities of investment securities........................ 316,345 79,950
Purchases of investment securities....................................... (1,450,739) (465,942)
Net cash provided (used) by:
Short-term investments................................................. 642,218 597,531
Loans(1)(2)............................................................ (269,627) (153,594)
Customers' acceptances................................................. 3,187 7,547
Net purchases of premises and equipment.................................. (12,636) (9,661)
Proceeds from sales of OREO(2)........................................... 35,521 33,165
----------- ---------
Net cash used by investing activities............................. (595,349) (22,757)
----------- ---------
Financing Activities
Net cash provided (used) by:
Demand deposits, NOW, and savings accounts............................. (37,694) (6,702)
Money market deposits.................................................. (66,824) (108,274)
Consumer time deposits................................................. (46,521) (137,354)
Time deposits greater than $100,000.................................... 45,650 (6,638)
Short-term borrowings.................................................. 447,157 115,193
Customers' acceptances................................................. (3,187) (7,547)
Long-term debt......................................................... (464) (645)
Dividends paid........................................................... (13,164) (7,438)
Other equity transactions................................................ 1,718 3,465
----------- ---------
Net cash provided (used) by financing activities.................. 326,671 (155,940)
----------- ---------
Net change in cash and cash equivalents.................................... 26,754 (54,931)
Cash and cash equivalents at beginning of year(3).......................... 632,985 733,726
----------- ---------
Cash and cash equivalents at June 30(3).................................... $ 659,739 $ 678,795
============ ==========
Supplemental disclosure of cash flow information
Interest paid............................................................ $ 80,771 $ 93,528
Taxes paid............................................................... 25,145 37,551
<FN>
- - ---------------
(1) Excludes transfers of loans to the other real estate owned category of $20.8
million and $19.6 million in 1994, and 1993, respectively.
(2) Excludes loan originations in conjunction with OREO sales of $5.5 million
and $8.7 million in 1994 and 1993, respectively.
(3) Cash and cash equivalents consist of cash on hand and due from banks.
</TABLE>
5
<PAGE> 6
BAYBANKS, INC.
NOTE 1. ACCOUNTING ADJUSTMENTS
In the opinion of management, all of the adjustments (consisting of normal
recurring accruals unless otherwise indicated) necessary for a fair statement of
the results of operations have been included in the accompanying financial
statements. Certain 1993 amounts have been reclassified to conform with the 1994
presentation.
<TABLE>
NOTE 2. SECURITIES PORTFOLIOS
<CAPTION>
PERIOD-END SECURITIES PORTFOLIOS
------------------------------------------------------------
GROSS GROSS WEIGHTED
AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
COST GAINS LOSSES VALUE YIELD*
---------- ---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
JUNE 30, 1994
SECURITIES AVAILABLE FOR SALE
U.S. Government securities, maturing
Within 1 year........................... $ 217,916 $ 369 $ (11) $ 218,274 5.03%
---------- ------ --------- -----------
217,916 369 (11) 218,274 5.03
---------- ------ --------- -----------
State and local governments, maturing
Within 1 year........................... 9,833 -- (5) 9,828 4.75
---------- ------ --------- -----------
9,833 -- (5) 9,828 4.75
---------- ------ --------- -----------
Corporate, maturing
Within 1 year........................... 217,300 -- -- 217,300 4.88
---------- ------ --------- -----------
217,300 -- -- 217,300 4.88
---------- ------ --------- -----------
Mortgage-backed securities................ 26,302 612 -- 26,914 6.02
Other**................................... 27,654 425 -- 28,079 7.57
---------- ------ --------- -----------
Total Securities Available for
Sale.......................... $ 499,005 $1,406 $ (16) $ 500,395 5.15%
========== ====== ========= ===========
INVESTMENT SECURITIES
U.S. Government securities, maturing
Within 1 year........................... $ 683,036 $ 126 $ (8,372) $ 674,790 4.43%
After 1 year but within 5 years......... 1,546,865 4 (23,359) 1,523,510 5.23
After 5 years but within 10 years....... 78,948 -- (339) 78,609 6.76
---------- ------ --------- -----------
2,308,849 130 (32,070) 2,276,909 5.05
State and local governments, maturing
Within 1 year........................... 75,662 29 (78) 75,613 4.63
After 1 year but within 5 years......... 24,773 78 (400) 24,451 6.19
After 5 years but within 10 years....... 5,822 20 (208) 5,634 6.97
---------- ------ --------- -----------
106,257 127 (686) 105,698 5.12
Asset-backed securities................... 203,665 -- (4,368) 199,297 4.33
Mortgage-backed securities................ 49,473 -- (1,440) 48,033 5.14
Industrial revenue bonds.................. 53,595 -- -- 53,595 9.67
Other..................................... 1,857 -- -- 1,857 --
---------- ------ --------- -----------
Total Investment Securities..... $2,723,696 $ 257 $ (38,564) $ 2,685,389 5.09%
========== ====== ========= ===========
<FN>
- - ---------------
* Tax equivalent basis.
** During the second quarter of 1994, BayBank, the Company's principal bank
subsidiary, became a member of the Federal Home Loan Bank of Boston (FHLB).
As of June 30, 1994, $27,555,500 in the stock of the FHLB is included in the
Securities Available for Sale portfolio in the Other category. Outstanding
advances as of June 30, 1994 due to the FHLB were $50,000,000, at an average
interest rate of 4.52% and with an average maturity of .2 years, and are
included on the consolidated balance sheet in the other short-term borrowings
category.
</TABLE>
6
<PAGE> 7
<TABLE>
BAYBANKS, INC.
NOTE 2. SECURITIES PORTFOLIOS (CONTINUED)
<CAPTION>
PERIOD-END SECURITIES PORTFOLIOS
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
SECURITIES AVAILABLE FOR SALE
U.S. Government securities......................... $ 322,707 $3,280 $ (3) $ 325,984
State and local governments........................ 18,964 6 (2) 18,968
Mortgage-backed securities......................... 30,832 1,162 -- 31,994
Corporate.......................................... 256,500 -- -- 256,500
---------- ---------- ---------- -----------
Total Securities Available for Sale...... $ 629,003 $4,448 $ (5) $ 633,446
========= ======== ======== =========
INVESTMENT SECURITIES
U.S. Government securities......................... $1,203,315 $6,447 $ (59) $ 1,209,703
State and local governments........................ 128,997 380 (25) 129,352
Asset-backed securities............................ 204,798 115 (827) 204,086
Industrial revenue bonds........................... 59,958 -- -- 59,958
Other.............................................. 1,992 -- -- 1,992
---------- ---------- ---------- -----------
Total Investment Securities.............. $1,599,060 $6,942 $ (911) $ 1,605,091
========= ======== ======== =========
JUNE 30, 1993
SECURITIES AVAILABLE FOR SALE
U.S. Government securities......................... $1,007,927 $7,548 $ (40) $ 1,015,435
Mortgage-backed securities......................... 36,235 1,409 -- 37,644
Corporate.......................................... 71,750 -- -- 71,750
---------- ---------- ---------- -----------
Total Securities Available for Sale...... $1,115,912 $8,957 $ (40) $ 1,124,829
========= ======== ======== =========
INVESTMENT SECURITIES
U.S. Government securities......................... $ 945,701 $7,857 $ (225) $ 953,333
State and local governments........................ 41,684 389 -- 42,073
Industrial revenue bonds........................... 69,566 -- -- 69,566
Other.............................................. 1,970 -- -- 1,970
---------- ---------- ---------- -----------
Total Investment Securities.............. $1,058,921 $8,246 $ (225) $ 1,066,942
========= ======== ======== =========
</TABLE>
7
<PAGE> 8
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE OVERVIEW
BayBanks' net income was $26.4 million for the second quarter of 1994, or
$1.38 per share, compared with net income of $14.2 million, or $.75 per share,
for the second quarter of 1993. Net income for the first six months of 1994 was
$47.7 million, or $2.49 per share, compared with $27.0 million, or $1.43 per
share, for the first six months of 1993. The increase in net income was affected
by the following items:
- Operating income (defined below) increased by 30% in the second quarter
of 1994, compared with that of the second quarter of 1993, as a result of
an 8% increase in net interest income and an 11% increase in noninterest
income, which was partially offset by a 1% growth in expenses. Included
in noninterest income was a $4.4 million gain on the sale of student
loans (see Page 10).
- Asset quality continued to improve; nonperforming assets were reduced to
$173 million, a 23% decrease from December 31, 1993, and a 44% decrease
from June 30, 1993. As a consequence, the combined provision for loan
losses and the other real estate owned (OREO) reserve decreased 50% to
$8.5 million in the second quarter of 1994 from $16.9 million in the
second quarter of 1993. The comparable decrease for the first six months
of 1994 was 51%, or $17.4 million, compared with $35.4 million for the
same period in 1993.
- Net income for the first quarter of 1994 included an after-tax charge of
$932 thousand, or $.05 per share, reflecting the cumulative effect of the
Company's adoption of Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits."
EARNINGS ANALYSIS
Operating Income
Operating income, presented in TABLE A, is on a tax equivalent basis;
excludes net securities gains, and the provisions for loan losses and the OREO
reserve; and is before income taxes and the cumulative effect of the accounting
change. For the second quarter of 1994, total operating income was $54.2
million, compared with $48.2 million in the first quarter and $41.8 million in
the second quarter of 1993. The increase over the previous year was a result of
an 8% increase in net interest income and an 11% growth in noninterest income.
For the six-month periods, operating income was $102.4 million in 1994,
compared with $82.2 million in 1993. In 1994, increases in both net interest
income and noninterest income were partially offset by a modest increase in
operating expenses.
8
<PAGE> 9
<TABLE>
TABLE A
SUMMARY OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30
TAX EQUIVALENT BASIS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
SECOND FIRST SECOND SIX MONTHS
QUARTER QUARTER QUARTER -------------------
1994 1994 1993 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income on earning assets.................... $158,305 $148,458 $148,885 $306,763 $298,897
Interest on deposits and borrowings......... 43,423 37,818 42,787 81,241 90,156
-------- -------- -------- -------- --------
Net interest income......................... 114,882 110,640 106,098 225,522 208,741
Noninterest income.......................... 54,031 49,715 48,751 103,746 95,647
-------- -------- -------- -------- --------
Total income from operations................ 168,913 160,355 154,849 329,268 304,388
Operating expenses.......................... 114,712 112,195 113,039 226,907 222,199
-------- -------- -------- -------- --------
Operating Income before Net Securities Gains
and Provisions for Loan Losses and OREO
Reserve................................... 54,201 48,160 41,810 102,361 82,189
-------- -------- -------- -------- --------
Net securities gains........................ 436 39 358 475 358
-------- -------- -------- -------- --------
Provision for loan losses................... 6,000 6,000 9,000 12,000 20,500
Provision for OREO reserve, net............. 2,500 2,937 7,892 5,437 14,892
-------- -------- -------- -------- --------
Total credit provisions..................... 8,500 8,937 16,892 17,437 35,392
-------- -------- -------- -------- --------
Income before taxes and cumulative effect of
accounting change......................... 46,137 39,262 25,276 85,399 47,155
Income taxes and tax equivalent
adjustment................................ 19,715 17,051 11,069 36,766 20,187
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting change......................... 26,422 22,211 14,207 48,633 26,968
Less cumulative effect of accounting change
(net of tax benefit)...................... -- 932 -- 932 --
-------- -------- -------- -------- --------
Net Income.................................. $ 26,422 $ 21,279 $ 14,207 $ 47,701 $ 26,968
======== ======== ======== ======== ========
Earnings Per Share
Income before accounting change........... $ 1.38 $ 1.16 $ 0.75 $ 2.54 $ 1.43
Less cumulative effect of accounting
change................................. -- 0.05 -- 0.05 --
-------- -------- -------- -------- --------
Net Income............................. $ 1.38 $ 1.11 $ 0.75 $ 2.49 $ 1.43
======== ======== ======== ======== ========
</TABLE>
Net Interest Income (tax equivalent basis)
Net interest income was $114.9 million in the second quarter of 1994,
$110.6 million in the preceding quarter, and $106.1 million in the second
quarter of 1993. The net interest margin in the first and second quarters of
1994 was 5.00%, compared with 4.96% in the second quarter of 1993. Net interest
income and the net interest margin are affected by the mix of interest-bearing
assets and liabilities, movements in interest rates, and the level of
nonperforming assets. A 7% growth in average earning assets and a slight
improvement in the net interest margin were responsible for the increase in net
interest income in the second quarter of 1994, compared with the second quarter
of 1993. Net interest income and the net interest margin were affected by the
expansion of the securities portfolios, financed by purchased funds, to take
advantage of the Company's strong capital position.
The cost of total interest-bearing liabilities fell 10 basis points to
2.35% in the second quarter of 1994 from 2.45% in the second quarter of 1993.
The yield on average earning assets fell by 7 basis points to 6.89% in the
second quarter of 1994, compared with 6.96% in the second quarter of 1993, due
to a decrease in the loan portfolio yield from 8.20% to 7.98%.
For the six-month periods, net interest income increased from $208.7
million in 1993 to $225.5 million in 1994. This increase was related to a 6%
increase in average earning assets in 1994, compared with 1993 and an increase
in the net interest margin from 4.90% in 1993 to 5.01% in 1994. The cost of
total interest-bearing liabilities fell 34 basis points to 2.25% for the first
six months of 1994 from 2.59% in 1993. For the same period
9
<PAGE> 10
the yield on average earning assets fell by 21 basis points to 6.81% in 1994,
compared with 7.02% in 1993, due to a decrease in the loan portfolio yield from
8.29% to 7.90%.
Due to a recent rise in market interest rates, the yield on average earning
assets in the second quarter of 1994 was 6.89%, compared with 6.72% in the first
quarter of 1994. The cost of interest-bearing liabilities was 2.35% in the
second quarter of 1994, compared with 2.16% in the first quarter of 1994. The
Company's net interest margin was 5.00% in the first and second quarters of
1994.
Fees, Service Charges, and Other Noninterest Income
Noninterest income consists primarily of service charges and fees on
deposit accounts and fees from credit and non-credit services and is well
diversified among consumer, corporate, and small business banking activities.
Noninterest income (TABLE B) increased 11% to $54.0 million in the second
quarter of 1994, compared with $48.8 million in the second quarter of 1993. For
the first six months, noninterest income increased 8% to $103.7 million in 1994
from $95.6 million in 1993.
Service charges and fees on deposit accounts continued to provide over one
half of noninterest income. Total service charges and fees on deposits increased
4% to $27.8 million in the second quarter of 1994, compared with $26.8 million
in the second quarter of 1993. For the first six months, service charges and
fees on deposit accounts were up 4% to $54.0 million in 1994 from $51.8 million
in 1993. The increase was attributable to higher service charges and fees on
consumer accounts partially offset by a decline in corporate service charges due
to higher earnings credit rates on compensating deposit balances.
Credit card fees increased 2% to $4.6 million in the second quarter of
1994, compared with $4.5 million in the second quarter of 1993, due primarily to
the timing of promotional annual fee waivers in 1994. For the first six months
of 1994, credit card fees increased 7% to $9.7 million from $9.0 million in 1993
due to higher merchant volume and the timing of promotional fee waivers.
Processing fees increased 18% to $4.0 million in the second quarter of 1994
from $3.4 million in the second quarter of 1993. For the six-month periods,
processing fees were $7.3 million in 1994 and $6.6 million in 1993. The increase
in processing fees in 1994 was primarily due to an increasing volume of
point-of-sale transactions.
Mortgage banking fees decreased 44% to $1.5 million in the second quarter
of 1994 from $2.6 million in the second quarter of 1993. For the six-month
periods, mortgage banking fees were $3.8 million in 1994 and $5.4 million in
1993. The decrease in mortgage banking fees was due to a lower level of
secondary market activity resulting from a decrease in refinance volumes as
interest rates increased.
Investment management and brokerage fees increased 29% to $1.9 million in
the second quarter of 1994 from $1.5 million in the second quarter of 1993. For
the six-month periods, investment management and brokerage fees increased 40% to
$4.0 million in 1994 from $2.8 million in 1993. The increase in investment
management and brokerage fees was due to increases in brokerage fees for retail
transactions, mutual fund sales fees, and investment advisory fees from
BayFunds(R). Total assets under management in BayFunds were $1.2 billion at June
30, 1994, compared with $1.0 billion at June 30, 1993.
The Company periodically sells student loans when these loans are no longer
in a deferred payment status. During the second quarter of 1994, the Company
sold $127 million in student loans, resulting in a gain of $4.4 million; gains
related to the sale of student loans in the second quarter of 1993 were $223
thousand. It is not anticipated that significant student loan sales will occur
in the third or fourth quarters of 1994. Student loan sales gains were $1.5
million in the third quarter of 1993.
Securities gains were $436 thousand in the second quarter of 1994, compared
with $358 thousand in the second quarter of 1993.
10
<PAGE> 11
<TABLE>
TABLE B
NONINTEREST INCOME
FOR THE PERIODS ENDED JUNE 30
(IN THOUSANDS)
<CAPTION>
SECOND QUARTER SIX MONTHS
----------------------------- ------------------------------
1994 1993 CHANGE 1994 1993 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees on deposit
accounts......................... $27,784 $26,837 $ 947 $ 54,042 $51,781 $ 2,261
Credit card fees................... 4,630 4,542 88 9,705 9,042 663
Trust fees......................... 3,377 3,583 (206) 7,150 7,213 (63)
Processing fees.................... 3,951 3,361 590 7,331 6,596 735
Mortgage banking fees.............. 1,473 2,616 (1,143) 3,770 5,417 (1,647)
Investment management and brokerage
fees............................. 1,912 1,486 426 3,979 2,848 1,131
International fees................. 1,618 1,516 102 2,844 2,865 (21)
Student loan sales gains........... 4,395 223 4,172 4,395 223 4,172
Other noninterest income........... 4,891 4,587 304 10,530 9,662 868
------- ------- ------- -------- ------- -------
Total noninterest income...... $54,031 $48,751 $ 5,280 $103,746 $95,647 $ 8,099
======= ======= ======= ======== ======= =======
</TABLE>
Operating Expenses
The operating expense analysis presented in TABLE C (Page 12) separates
OREO and legal expenses related to the workout of problem assets from other
operating expenses. Operating expenses, excluding OREO and legal expenses
related to workouts (as well as writedowns and reserves related to OREO), were
$111.6 million in the second quarter of 1994, compared with $107.9 million in
the second quarter of 1993; for the first six months, these operating expenses
were $220.2 million in 1994, compared with $212.0 million in 1993.
Salaries and benefits were $57.4 million in the second quarter of 1994,
compared with $52.5 million in the second quarter of 1993. For the first
six-month periods, salaries and benefits were $113.8 million in 1994, compared
with $104.1 million in 1993. The increase resulted from normal salary increases,
including the timing of such increases, higher accruals for performance awards,
higher benefits costs, and the additional staffing required by certain product
lines.
Occupancy and equipment were $21.6 million in the second quarter of 1994,
compared with $22.4 million in the second quarter of 1993. For the first six
months of 1994, occupancy and equipment were $44.0 million, compared with $44.8
million for the first six months of 1993. The decrease in occupancy and
equipment is due principally to renegotiation of telecommunications and other
equipment rental contracts in 1994.
FDIC insurance was $5.5 million in the second quarter of 1994, compared
with $4.9 million in the second quarter of 1993. The second quarter of 1993
amount reflects the FDIC retroactively giving banks the benefit of higher
capital ratios, achieved in the second half of 1992. A refund of $1.3 million,
related to the first six months of 1993, was received in the second quarter of
1993.
Other operating expenses were $15.8 million in the second quarter of 1994,
compared with $16.3 million in the second quarter of 1993. Included in the 1993
second quarter is a charge of $1.4 million in interest expense related to issues
that the Company has settled or is contesting with the Internal Revenue Service.
The cost of administering, managing, and disposing of OREO properties and
legal expenses related to workout were $3.1 million in the second quarter of
1994, compared with $5.2 million in the second quarter of 1993, reflecting the
continued disposition of OREO. For the first six months of 1994, these costs
were $6.7 million, down from $10.2 million in 1993.
11
<PAGE> 12
<TABLE>
TABLE C
OPERATING EXPENSES
FOR THE PERIODS ENDED JUNE 30
(IN THOUSANDS)
<CAPTION>
SECOND QUARTER SIX MONTHS
------------------------------- -------------------------------
1994 1993 CHANGE 1994 1993 CHANGE
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits........... $ 57,434 $ 52,529 $ 4,905 $113,817 $104,136 $ 9,681
Occupancy and equipment......... 21,559 22,397 (838) 44,046 44,821 (775)
FDIC insurance.................. 5,451 4,890 561 10,902 11,052 (150)
Marketing and public
relations..................... 6,244 6,378 (134) 11,361 11,067 294
Postage and supplies............ 5,090 5,340 (250) 9,928 10,128 (200)
Other........................... 15,836 16,318 (482) 30,180 30,792 (612)
-------- -------- ------- -------- -------- -------
Operating expenses excluding
OREO expenses................. 111,614 107,852 3,762 220,234 211,996 8,238
OREO and legal expenses related
to workout.................... 3,098 5,187 (2,089) 6,673 10,203 (3,530)
-------- -------- ------- -------- -------- -------
Total operating expenses... $114,712 $113,039 $ 1,673 $226,907 $222,199 $ 4,708
======== ======== ======= ======== ======== =======
</TABLE>
Provision for Loan Losses and Other Real Estate Owned Reserve
Due to the continued improvement in BayBanks' credit quality, the provision
for loan losses and the OREO reserve (credit provisions) declined substantially
in the second quarter of 1994 to $8.5 million, compared with $16.9 million in
the second quarter of 1993.
The provision for loan losses was $6.0 million in the second quarter of
1994, compared with $9.0 million in the second quarter of 1993. For the first
six months of 1994, the provision for loan losses was $12.0 million, compared
with $20.5 million in 1993.
The provision for the OREO reserve was $2.5 million in the second quarter
of 1994, compared with $7.9 million in the second quarter of 1993. For the first
six months of 1994, the provision for the OREO reserve was $5.4 million,
compared with $14.9 million in 1993. The OREO provision was net of $2.6 million
of net gains on sales of properties in the second quarter of 1994 and $937
thousand in the second quarter of 1993. For the first six months of 1994, net
gains on the sales of OREO properties were $3.1 million as compared with $2.0
million in 1993.
Income Taxes
The Company reported a provision for income taxes of $17.6 million in the
second quarter of 1994, compared with $9.9 million in the second quarter of
1993. The effective tax rate in the second quarter of 1994 was 40.0%, compared
with 41.0% in the second quarter of 1993. For the 1994 and 1993 first six-month
periods, the effective tax rates were 40.2% and 39.9%, respectively.
BALANCE SHEET REVIEW
Trends in Earning Assets
Average earning assets increased to $9.2 billion during the second quarter
of 1994, compared with $8.6 billion in the second quarter of 1993. The increase
was due primarily to the expansion of the securities portfolios, financed by
purchased funds, to take advantage of the Company's strong capital position.
Average earning assets were $9.1 billion for the first six months of 1994,
compared with $8.6 billion in the first six months of 1993.
Loan Portfolio
The loan portfolio of the Company is diversified (TABLE D). Consumer loans
represent 63% of the quarter-end loan portfolio, with $1.2 billion in
residential loan balances and $2.6 billion in various types of
12
<PAGE> 13
instalment loan balances. The consumer lending activities of the Company are
focused primarily on the Massachusetts market. The remaining 37% of the loan
portfolio is commercial and commercial real estate loans. The majority of the
Company's commercial loans are to New England-based companies, primarily local
middle-market companies and small businesses in Massachusetts.
The Company originates fixed-and adjustable-rate residential mortgage
loans. The majority of fixed-rate residential real estate loan originations are
securitized and sold to the secondary market with servicing retained. The
remainder of the fixed-rate and floating-rate residential real estate loan
originations are held in the loan portfolio or may be securitized and
transferred to the securities available for sale portfolio.
An analysis of changes in major loan categories for the second quarters and
first six months of 1994 and 1993 is presented in TABLE D. Net business volume
was $267 million, compared with $404 million in the second quarter of 1993.
Residential real estate loan volume in the second quarter was principally due to
mortgages for purchases as refinance activity continued to decline. The Company
sold $57 million of fixed-rate residential real estate loans during the second
quarter of 1994, compared with $169 million in the second quarter of 1993. At
June 30, 1994 loans held for resale were $18 million, compared with $174 million
at June 30, 1993. Instalment loan net business volume was $100 million in the
second quarter of 1994, compared with $33 million in the first quarter of 1994
and $127 million in the second quarter of 1993. Automobile lending totals were
down when compared with 1993's second quarter due to an exceptionally strong
performance in 1993. The decline in the automobile lending category was
partially offset by increased net business volumes in student loans, reserve
credit, and credit card loans. Outflows in the commercial real estate portfolio
were $6 million during the second quarter of 1994, compared with $7 million in
the second quarter of 1993. Commercial loan volumes continued to fluctuate due
to selected overnight money market-priced loans, international trade finance
activities, primarily with Mexican and South American banks, and continuing
paydowns on loans to certain industries where the Company is no longer active.
TABLE D
CHANGES IN THE LOAN PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
SECOND QUARTER 1994
ANALYSIS OF CHANGE IN LOAN CATEGORIES NET BUSINESS
--------------------------------------------- VOLUME
GROSS TRANSFERS NET SECOND
JUNE 30 MARCH 31 INCREASE CHARGE- TO BUSINESS QUARTER
1994 1994 (DECREASE) OFFS OREO SALES VOLUME 1993
---------- ---------- ---------- -------- ----------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.................. $1,370,885 $1,324,429 $ 46,456 $ (5,609) $ (69) $ -- $ 52,134 $ 26,791
Commercial real estate...... 898,807 919,664 (20,857) (7,664) (6,849) -- (6,344) (6,736)
Residential mortgage........ 1,239,026* 1,182,028* 56,998 (2,145) (4,960) (57,378) 121,481 257,006
Instalment loans
Automobile and other...... 1,236,018 1,185,353 50,665 (1,808) -- -- 52,473 99,736
Home equity............... 712,438 693,500 18,938 (404) (3) -- 19,345 22,420
Credit card............... 300,054 297,355 2,699 (3,106) -- -- 5,805 (2,741)
Student loans............. 216,115 327,767 (111,652) (100) -- (126,671) 15,119 1,972
Reserve credit............ 128,228 122,039 6,189 (1,236) -- -- 7,425 5,224
---------- ---------- --------- -------- -------- --------- -------- --------
Total instalment loans.... 2,592,853 2,626,014 (33,161) (6,654) (3) (126,671) 100,167 126,611
---------- ---------- --------- -------- -------- --------- -------- --------
Total loans......... $6,101,571 $6,052,135 $ 49,436 $(22,072) $(11,881) $(184,049) $267,438 $403,672
========== ========== ========= ======== ======== ========= ======== ========
<FN>
- - ---------------
* Includes residential mortgage loans held for sale of $18 million at June 30,
1994 and $40 million at March 31, 1994.
</TABLE>
13
<PAGE> 14
<TABLE>
TABLE D
CHANGES IN THE LOAN PORTFOLIO
(IN THOUSANDS)
(CONTINUED)
<CAPTION>
NET
SIX MONTHS ENDED JUNE 30, 1994 BUSINESS
ANALYSIS OF CHANGE IN LOAN CATEGORIES VOLUME
--------------------------------------------- SIX MONTHS
GROSS TRANSFERS NET ENDED
JUNE 30 DECEMBER 31 INCREASE CHARGE- TO BUSINESS JUNE 30,
1994 1993 (DECREASE) OFFS OREO SALES VOLUME 1993
---------- ------------ ---------- -------- ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................. $1,370,885 $1,324,968 $ 45,917 $ (7,057) $ (1,163) $ -- $ 54,137 $ 23,850
Commercial real estate..... 898,807 935,471 (36,664) (13,715) (10,864) -- (12,085) (52,724)
Residential mortgage....... 1,239,026* 1,242,597* (3,571) (3,932) (8,752) (228,741) 237,854 401,737
Instalment loans
Automobile and other..... 1,236,018 1,173,950 62,068 (3,792) -- -- 65,860 165,011
Home equity.............. 712,438 700,055 12,383 (949) (3) -- 13,335 (2,117)
Credit card.............. 300,054 325,794 (25,740) (6,087) -- -- (19,653) (10,280)
Student loans............ 216,115 276,923 (60,808) (124) -- (127,004) 66,320 47,365
Reserve credit........... 128,228 123,412 4,816 (2,707) -- -- 7,523 5,437
---------- ---------- -------- -------- ---------- --------- -------- --------
Total instalment loans... 2,592,853 2,600,134 (7,281) (13,659) (3) (127,004) 133,385 205,416
---------- ---------- -------- -------- ---------- --------- -------- --------
Total loans........ $6,101,571 $6,103,170 $ (1,599) $(38,363) $ (20,782) $(355,745) $413,291 $578,279
========== ========== ======== ======== ========= ========= ======== ========
<FN>
- - ---------------
* Includes residential mortgage loans held for sale of $18 million at June 30,
1994 and $138 million at December 31, 1993.
</TABLE>
Securities Portfolios
The securities portfolios are presented in TABLE E and consist of
short-term investments, securities available for sale, and investment
securities. The securities portfolio was $3.4 billion at June 30, 1994, $3.0
billion at December 31, 1993, and $2.7 billion at June 30, 1993. The weighted
average maturity of the securities portfolio was 1.6 years at June 30, 1994,
compared with .8 years at December 31, 1993 and 1.0 years at June 30, 1993.
During the first half of 1994, the average maturity of the securities portfolio
has been lengthened, and thus the yields on the portfolios also increased.
Short-term investments were $160.9 million at June 30, 1994, compared with
$803.1 million at December 31, 1993, and $494.5 million at June 30, 1993. The
decline in the balance reflects the reinvestment of certain proceeds from
maturing short-term investments into the securities available for sale and
investment securities portfolios.
Securities available for sale, consisting principally of debt securities,
are stated at market value in 1994, and at the lower of aggregate cost or market
for previous periods. Decisions to purchase or sell these securities as part of
the Company's ongoing asset and liability management process are based on
management's assessment of changes in economic and financial market conditions,
interest rate environments, the Company's balance sheet and its interest
sensitivity position, liquidity, and capital. At June 30, 1994, securities
available for sale had gross unrealized gains of $1.4 million and gross
unrealized losses of $16 thousand.
The investment securities portfolio, principally debt securities, is stated
at amortized cost. This basis for valuation reflects management's intention and
ability to hold these securities until maturity. The Company's investment
securities portfolio was $2.7 billion at June 30, 1994, and $1.1 billion at June
30, 1993. The aggregate market value of the investment securities portfolio was
$2.7 billion and $1.1 billion at June 30, 1994 and 1993, respectively. The
maturity of the investment securities portfolio was extended to 2.0 years at
June 30, 1994, compared with 1.3 years at December 31, 1993, and 1.6 years at
June 30, 1993. At June 30, 1994, gross unrealized gains were $257 thousand, and
gross unrealized losses were $38.6 million.
The Company's investment securities portfolio contains U.S. Government
securities, state and local government securities, asset-backed securities,
mortgage-backed securities, and industrial revenue bonds. The total state and
local government portfolio was $106 million at June 30, 1994, with the single
largest issue being approximately $5 million. Of this total, $76 million were
securities rated investment grade and $30 million were unrated. All municipal
securities are subject to an internal review process that assigns a rating to
the
14
<PAGE> 15
securities. In the case of rated securities, the process verifies or adjusts the
independent rating. In the case of unrated securities only securities determined
to be equivalent to investment grade are purchased. Industrial revenue bonds are
also subject to a credit review process. While there is no ready market for the
Company's holdings of industrial revenue bonds, management has determined that,
based on periodic private placement quotes, their amortized cost is a reasonable
estimate of market value.
Trading account securities, consisting of debt securities, are recorded at
market value. Trading account gains were $504 thousand in the second quarter of
1994 and $448 thousand in the second quarter of 1993.
<TABLE>
TABLE E
SECURITIES PORTFOLIOS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
---------- ----------- ----------
<S> <C> <C> <C>
Short-term investments............................. $ 160,850 $ 803,068 $ 494,454
---------- ----------- ----------
Securities available for sale
U.S. Treasury.................................... 218,274 322,707 1,007,927
U.S. Agency mortgage-backed securities........... 26,914 30,832 36,235
State and local governments...................... 9,828 18,964 --
Corporate and other.............................. 245,379 256,500 71,750
---------- ----------- ----------
500,395 629,003 1,115,912
---------- ----------- ----------
Investment securities
U.S. Treasury.................................... 2,308,849 1,203,315 945,701
Asset-backed securities.......................... 203,665 204,798 --
State and local governments...................... 106,257 128,997 41,684
Industrial revenue bonds......................... 53,595 59,958 69,566
U.S. Agency mortgage-backed securities........... 49,473 -- --
Corporate and other.............................. 1,857 1,992 1,970
---------- ----------- ----------
2,723,696 1,599,060 1,058,921
---------- ----------- ----------
Total.................................... $3,384,941 $ 3,031,131 $2,669,287
========== =========== ==========
Weighted average maturity of securities available
for sale and investment securities in years*..... 1.7 1.1 1.2
Weighted average maturity of total securities in
years*........................................... 1.6 0.8 1.0
<FN>
- - ---------------
* The weighted average maturity calculation excludes amortizing IRBs and
reflects estimated prepayments for mortgage-backed securities.
</TABLE>
Deposits and Other Sources of Funds
The Company's extensive product lines and banking network of 202
full-service offices and 356 automated banking facilities generate significant
core deposits, which accounted for over 99% of total average deposits during the
second quarters of 1994 and 1993.
Core deposits include transaction accounts (demand, NOW, and savings
accounts), money market deposit accounts, and consumer time certificates.
Average core deposits were $8.5 billion in the second quarter of 1994, compared
with $8.6 billion in the second quarter of 1993. Average core deposits were $8.5
billion and $8.6 billion for the first six months of 1994 and 1993,
respectively. Average transaction accounts were $4.9 billion in the second
quarter of 1994, compared with $4.5 billion in the second quarter of 1993 and
$4.8 billion in the first quarter of 1994, reflecting certain customers'
preferences to maintain significant balances in lower-yielding transaction
accounts, thus having a positive impact on the Company's net interest margin.
15
<PAGE> 16
Average money market deposit and consumer certificate of deposit balances
were $3.6 billion during the second quarter of 1994, compared with $4.1 billion
in the second quarter of 1993, and were $3.7 billion and $4.1 billion in the
first six months of 1994 and 1993, respectively.
Average corporate certificates of deposit in excess of $100 thousand (CDs),
which represent a small portion of the Company's total funding, were $63 million
in the second quarter of 1994, compared with $35 million in the second quarter
of 1993, and were $50 million and $37 million in the first six months of 1994
and 1993, respectively.
Purchased funds increased to $955 million at June 30, 1994, from $508
million at December 31, 1993, and $255 million at June 30, 1993, as the
securities portfolio was increased, as discussed in the Trends in Earning Assets
section. The use of purchased funds to finance the securities portfolio may be
continued in order to take advantage of the Company's strong capital position.
While these funding and investment actions increased net interest income, the
net interest margin reflects the lower net interest spread on such transactions.
Interest Rate Risk Management and Liquidity
BayBanks' Capital Markets Committee monitors and manages the overall on-and
off-balance sheet interest sensitivity position, short-term investments, and the
securities portfolios, funding, and liquidity. Interest sensitivity, as measured
by the Company's gap position, is affected by the level and direction of
interest rates and current liquidity preferences of its customers. These
factors, as well as projected balance sheet growth, current and potential
pricing actions, competitive influences, national monetary and fiscal policy,
and the national and regional economic environment, are considered in the asset
and liability management decision process.
The Company's interest sensitivity gap position in TABLE F is first
presented based on contractual maturities and repricing opportunities. In a
period of rising or falling interest rates this basis of presentation does not
reflect lags that may occur in the repricing of certain loans and deposits. For
example, the cost of certain interest-bearing core deposit categories may lag
changes in market interest rates, although the Company contractually could
change the interest rates on these deposits at any time. A management adjustment
provides for the expected repricing lags. The management adjustment also
recognizes that interest rate changes in these core deposit categories are not
as sensitive to changes in market interest rates.
In addition to the gap analysis presented in the table, the Company also
uses a simulation model under varying interest rate scenarios, including the
effect of rapid changes (both increases and decreases up to 200 basis points) in
interest rates on its net interest income and net interest margin. The Company's
policy is to minimize volatility in its net interest income and net interest
margin.
At June 30, 1994, the Company's adjusted gap position for the total
within-180-day period moved from a positive gap position of $116 million at
December 31, 1993, to a negative gap position of $458 million at June 30, 1994.
The total within-one-year gap moved from a positive $132 million at December 31,
1993, to a negative $460 million at June 30, 1994. The Company believes its
overall management-adjusted gap is essentially neutral, and therefore the effect
on net interest income of a change in market interest rates should not be
significant.
16
<PAGE> 17
<TABLE>
TABLE F
INTEREST RATE SENSITIVITY POSITION
AT PERIOD-END
(IN MILLIONS)
<CAPTION>
0-30 31-90 91-180 TOTAL WITHIN 181-365 TOTAL WITHIN
DAYS DAYS DAYS 180 DAYS DAYS ONE YEAR
------- ------- ------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1994
Total assets...................... $ 3,231 $ 592 $ 824 $ 4,647 $1,147 $ 5,794
Total liabilities................. 7,041 195 153 7,389 230 7,619
------- ------- ------ ------------ ------- ------------
Net contractual gap position...... (3,810) 397 671 (2,742) 917 (1,825)
Net interest rate swaps........... -- 8 -- 8 -- 8
------- ------- ------ ------------ ------- ------------
Net gap position including
interest rate swaps at June 30,
1994............................ (3,810) 405 671 (2,734) 917 (1,817)
Management adjustment............. 5,407 (2,671) (460 ) 2,276 (919 ) 1,357
------- ------- ------ ------------ ------- ------------
Management adjusted gap at June 30,
1994.............................. $ 1,597 $(2,266) $ 211 $ (458) $ (2 ) $ (460)
======== ======== ====== ============ ======= ============
Management adjusted gap at December
31, 1993.......................... $ 2,625 $(2,325) $(184 ) $ 116 $ 16 $ 132
======== ======== ====== ============ ======= ============
Management adjusted gap at June 30,
1993.............................. $ 2,609 $(2,512) $ 97 $ 194 $ (219 ) $ (25)
======== ======== ====== ============ ======= ============
</TABLE>
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. BayBank's retail network provides a stable
base of in-market core deposits and limits the need to raise funds from the
national market.
The Company's net liquidity position (short-term investments, securities
available for sale, and investment securities, less pledged securities, large
CDs, and purchased funds) was $2.1 billion, or 22% of total deposits and
borrowings, at June 30, 1994, compared with $2.0 billion, or 23% of total
deposits and borrowings, at June 30, 1993. The Company also has additional
liquidity flexibility due to the relatively short average maturity (1.6 years)
of its securities portfolios.
The statement of cash flows provides additional information on liquidity.
The statement of cash flows includes operating, investing, and financing
categories. Operating activities included $47.7 million in net income for the
first six months of 1994, before adjustment of noncash items. Investing
activities are primarily comprised of both proceeds from sales and purchases of
short-term investments and securities and net loan originations. Financing
activities present the net change in the Company's various deposit accounts,
short-term borrowings, and dividends paid.
Cash and cash equivalents were $633 million at December 31, 1993. During
the first six months of 1994, net cash provided by operating activities was $295
million, net cash used in investing activities totaled $595 million and net cash
provided by financing activities was $327 million. Cash and cash equivalents
were $660 million at June 30, 1994.
The parent company's sources of liquidity are dividend and interest income
received from its subsidiaries. The most significant uses of the parent
company's resources are capital contributions to banking and other subsidiaries
when appropriate and dividends paid to stockholders. In managing liquidity,
regulatory limitations on the extent to which bank subsidiaries can pay
dividends or supply funds to the parent company are taken into account. During
the first six months of 1994 the parent company did not provide any capital to
its subsidiaries. Dividends received from bank subsidiaries were $12.2 million;
dividends from nonbank subsidiaries were $2.0 million during the first six
months of 1994. The parent company paid $13.2 million in dividends to its
stockholders during the first six months of 1994. At June 30, 1994, the parent
company had $73 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.
17
<PAGE> 18
CREDIT QUALITY REVIEW
Overview
The Company continually monitors the credit quality of its loan portfolio.
Employing a standard system for grading loans, individual account officers
assign their loans a grade, or risk rating, and, if necessary, a specific loan
loss reserve. An independent Loan Review Department then reviews loan grades and
specific loan loss reserves. Any loan or portion of a loan determined to be
uncollectible is charged off. On a quarterly basis, senior management reviews
the loan portfolio, with particular emphasis on higher-risk loans, to assess the
credit quality and loss potential inherent in the portfolio. Also considered in
this review are delinquency trends and the adequacy of reserves. The size of the
allowance for loan losses, the related provision, as well as the adequacy of
OREO reserves reflect this analysis.
Nonperforming assets, presented in TABLE G (which exclude restructured,
accruing loans, and accruing loans 90 days or more past due), include
nonperforming loans and OREO and were $173 million at June 30, 1994, a 23%
decrease from $224 million at December 31, 1993, and a 44% decrease from $308
million at June 30, 1993. In the second quarter of 1994, nonperforming assets
continued the downward trend that began in the first quarter of 1991. While the
Company expects to experience continued improvement in nonperforming assets, the
pace of that improvement will depend on many factors, including national and
regional economic conditions.
<TABLE>
TABLE G
NONPERFORMING ASSETS, RESTRUCTURED, ACCRUING LOANS, AND
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
------- ----------- -------
<S> <C> <C> <C>
Nonperforming loans....................................... $ 83,743 $ 110,001 $155,632
Other real estate owned
In-substance foreclosures............................... 58,345 72,505 76,897
Foreclosed property..................................... 57,026 70,950 98,320
-------- --------- --------
115,371 143,455 175,217
Less OREO reserve....................................... 26,193 29,776 22,475
-------- --------- --------
OREO, net of reserve.................................... 89,178 113,679 152,742
-------- --------- --------
Total nonperforming assets................................ $172,921 $ 223,680 $308,374
======== ========= ========
Restructured, accruing loans.............................. $ 12,112 $ 18,398 $ 15,413
======== ========= ========
Accruing loans 90 days or more past due................... $ 41,644 $ 51,749 $ 70,379
======== ========= ========
Nonperforming assets as a percentage of loans and OREO.... 2.8% 3.6% 5.0%
Nonperforming assets as a percentage of total assets...... 1.6 2.2 3.2
</TABLE>
The decline in nonperforming assets, presented in TABLE H (which exclude
restructured, accruing loans and accruing loans 90 days or more past due), is
affected by successful workout activities that include property sales, payments
on nonperforming loans, and loans that qualified for and were returned to
accrual status. These favorable resolutions were $40 million in the second
quarter of 1994, or 20% of nonperforming assets at the beginning of the period.
During the second quarter of 1994, additions to nonperforming assets were $23
million; additions to nonperforming assets in the second quarter of 1993 were
$33 million.
Favorable resolutions increased for the first six months of 1994 compared
with 1993, as there was a net outflow before charge-offs and writedowns of $30
million in 1994, compared with a net outflow of $26 million in 1993.
18
<PAGE> 19
<TABLE>
TABLE H
CHANGE IN ASSET QUALITY
(IN THOUSANDS)
<CAPTION>
SIX MONTHS
1994 1993 ENDED
-------------------- -------------------------------- JUNE 30
SECOND FIRST FOURTH THIRD SECOND --------------------
QUARTER QUARTER QUARTER QUARTER QUARTER 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets*......... $172,921 $203,744 $223,680 $272,396 $308,374 $172,921 $308,374
========= ========= ========= ========= ========= ========= =========
Nonperforming asset activity:
Additions................... $ 23,446 $ 20,656 $ 14,752 $ 27,034 $ 33,135 $ 44,102 $ 64,419
-------- -------- -------- -------- -------- -------- --------
Payments.................... (10,879) (8,070) (9,832) (15,515) (16,239) (18,949) (41,587)
Returns to accrual.......... (9,992) (4,349) (9,545) (8,021) (6,126) (14,341) (6,438)
OREO sales.................. (19,525) (21,477) (27,514) (20,651) (19,861) (41,002) (41,901)
-------- -------- -------- -------- -------- -------- --------
Total improvements... (40,396) (33,896) (46,891) (44,187) (42,226) (74,292) (89,926)
-------- -------- -------- -------- -------- -------- --------
Net outflow.......... (16,950) (13,240) (32,139) (17,153) (9,091) (30,190) (25,507)
-------- -------- -------- -------- -------- -------- --------
Charge-offs................... (14,648) (9,504) (16,135) (11,967) (14,051) (24,152) (27,643)
Change in OREO reserve........ 775 2,808 (442) (6,858) (6,962) 3,583 (14,642)
-------- -------- -------- -------- -------- -------- --------
Total decrease in nonperforming
assets...................... $(30,823) $(19,936) $(48,716) $(35,978) $(30,104) $(50,759) $(67,792)
========= ========= ========= ========= ========= ========= =========
<FN>
- - ---------------
* Excludes restructured, accruing loans and accruing loans 90 days or more past
due.
</TABLE>
Nonperforming Loans
Total nonperforming loans, TABLE I (which exclude restructured, accruing
loans and accruing loans 90 days or more past due), declined 46% to $84 million
at June 30, 1994, compared with $156 million at June 30, 1993. Nonperforming
commercial loans decreased 52% to $35 million at June 30, 1994, compared with
$74 million at June 30, 1993; commercial real estate nonperforming loans
declined 47% during the same period to $35 million at June 30, 1994, compared
with $66 million at June 30, 1993. The nonperforming loans in the consumer
portfolio, which includes residential mortgages and instalment loans, decreased
14% to $13 million at June 30, 1994, from $15 million at June 30, 1993.
<TABLE>
TABLE I
NONPERFORMING LOANS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993 JUNE 30, 1993
----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial..................... $35,408 42% $ 47,751 43% $ 74,179 48%
Commercial real estate......... 35,114 42 49,014 45 66,057 42
Residential mortgage........... 11,781 14 11,473 10 12,937 8
Instalment..................... 1,440 2 1,763 2 2,459 2
------- --- -------- --- -------- ---
Total nonperforming
loans................... $83,743 100% $110,001 100% $155,632 100%
======= === ======== === ======== ===
</TABLE>
Other Real Estate Owned
OREO consists of foreclosed properties and in-substance foreclosures.
Foreclosed properties are being prepared for sale or are currently listed for
sale. The Company is also involved in managing in-substance foreclosures, taking
operating control to stabilize values while the properties are being prepared
for sale, or working closely with borrowers to obtain new equity.
OREO (net of a valuation reserve) declined 42% to $89 million at June 30,
1994, from $153 million at June 30, 1993. The decline was primarily due to
property sales. The five largest OREO properties at June 30,
19
<PAGE> 20
1994 ranged in value from $6.6 million down to $2.7 million, with the majority
of OREO comprised of smaller-value properties.
Restructured, Accruing Loans
The Company restructures credits with borrowers experiencing a period of
financial difficulty, if such arrangements are likely to minimize losses the
Company may otherwise incur on a particular credit. Loans that have been
restructured generally remain on nonaccrual status until the customer has
demonstrated a period of performance under the new contractual terms.
Restructured, accruing loans were $12 million at June 30, 1994, compared with
$15 million at June 30, 1993.
Accruing Loans 90 Days or More Past Due
Accruing loans 90 days or more past due presented in Table J declined 41%
to $42 million at June 30, 1994, compared with $70 million at June 30, 1993. Of
the $42 million in accruing loans past due 90 days or more at June 30, 1994, $13
million were residential real estate loans and $20 million were instalment
loans, which together represented 78% of the total. Residential real estate and
instalment loans by their nature include a large number of smaller loans. Of the
$13 million in such residential real estate loans, $11 million were in
owner-occupied properties. Commercial and commercial real estate accruing loans
90 days or more past due at June 30, 1994 were $9 million, compared with $22
million at June 30, 1993.
<TABLE>
TABLE J
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993 JUNE 30, 1993
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial....................... $ 2,381 6% $ 3,558 7% $ 7,120 10%
Commercial real estate........... 6,799 16 5,093 10 14,895 21
Residential mortgage............. 12,823 31 20,698 40 26,591 38
Instalment....................... 19,641 47 22,400 43 21,773 31
------- --- ------- --- ------- ---
Total.................. $41,644 100% $51,749 100% $70,379 100%
======= === ======= === ======= ===
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan losses
and is reduced by net loans charged off (TABLE K). Net loans charged off were
$17.1 million in the second quarter of 1994, compared with $13.4 million in the
second quarter of 1993. The increase resulted from a higher level of commercial
real estate loans charged off and a lower level of commercial loan recoveries in
the second quarter of 1994 compared with the second quarter of 1993. Net
charge-offs for the first six months of 1994 were $29.4 million, level with the
first six months of 1993. The provision for loan losses was $6.0 million in the
second quarter of 1994, compared with $9.0 million in the second quarter of
1993. For the first six months of 1994, the provision for loan losses was $12.0
million, compared with $20.5 million for the first six months of 1993. Since
older problem assets are being resolved and the rate of emerging problem assets
continued to decline, the allowance for loan losses was not replenished to the
full extent of charge-offs. The allowance for loan losses was $154.1 million at
June 30, 1994, and $183.8 million at June 30, 1993. While the overall allowance
for loan losses declined, its coverage of nonperforming loans increased to 184%
at June 30, 1994, from 118% at June 30, 1993.
20
<PAGE> 21
<TABLE>
TABLE K
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<CAPTION>
SECOND QUARTER SIX MONTHS
------------------------- -------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loans outstanding at June 30........................ $6,101,571 $6,007,779 $6,101,571 $6,007,779
========== ========== ========== ==========
Average Loans....................................... $6,054,613 $5,889,550 $6,048,500 $5,873,057
========== ========== ========== ==========
Allowance for loan losses:
Balance at beginning of period...................... $ 165,221 $ 188,237 $ 171,496 $ 192,700
Loans charged off
Commercial...................................... 5,610 6,455 7,058 11,020
Commercial real estate.......................... 7,663 3,780 13,714 7,948
Residential mortgage............................ 2,145 2,371 3,932 5,609
Instalment...................................... 6,654 7,276 13,659 15,277
---------- ---------- ---------- ----------
Total loans charged off......................... 22,072 19,882 38,363 39,854
---------- ---------- ---------- ----------
Recoveries
Commercial...................................... 2,205 3,811 3,885 5,738
Commercial real estate.......................... 353 467 595 651
Residential mortgage............................ 537 427 1,209 862
Instalment...................................... 1,882 1,734 3,304 3,197
---------- ---------- ---------- ----------
Total recoveries................................ 4,977 6,439 8,993 10,448
---------- ---------- ---------- ----------
Net loans charged off........................... 17,095 13,443 29,370 29,406
Provision for loan losses........................... 6,000 9,000 12,000 20,500
---------- ---------- ---------- ----------
Balance at June 30.................................. $ 154,126 $ 183,794 $ 154,126 $ 183,794
========== ========== ========== ==========
Annualized net charge-offs as a percentage of
average period-to-date loans...................... 1.1% 0.9% 1.0% 1.0%
Allowance for possible loan losses as a percentage
of period-end loans............................... 2.5 3.1 2.5 3.1
Allowance for loan losses as a percentage of
nonperforming loans............................... 184.0 118.1 184.0 118.1
Allowance for loan losses as a percentage of
nonperforming loans, restructured, accruing loans,
and accruing loans past due 90 days or more....... 112.1 76.1 112.1 76.1
</TABLE>
CAPITAL AND DIVIDENDS
BayBanks' consolidated risk-based capital ratios were 13.45% for total
capital and 11.71% for core capital at June 30, 1994, compared with 12.98% and
11.05%, respectively, at June 30, 1993. At December 31, 1993, the consolidated
risk-based capital ratios were 12.40% for total capital and 10.68% for core
capital. The consolidated leverage ratio was 7.32%, 7.26%, and 7.07% at June 30,
1994, December 31, 1993, and June 30, 1993, respectively. (TABLE L).
<TABLE>
TABLE L
CAPITAL RATIOS
JUNE 30, 1994
<CAPTION>
RISK-BASED RATIOS
--------------------------------------------------------
TIER 1 CAPITAL TOTAL CAPITAL LEVERAGE RATIO*
--------------------------- --------------------------- ---------------------------
REQUIRED TO BE REQUIRED TO BE REQUIRED TO BE
WELL CAPITALIZED* REPORTED WELL CAPITALIZED* REPORTED WELL CAPITALIZED* REPORTED
----------------- -------- ----------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
BayBanks, Inc................. n/a 11.71% n/a 13.45% n/a 7.32%
BayBank....................... 6.00% 9.78 10.00% 11.52 5.00% 6.14
BayBank Boston, N.A........... 6.00 11.56 10.00 13.46 5.00 6.56
BayBank Connecticut, N.A...... 6.00 14.53 10.00 15.80 5.00 10.61
</TABLE>
- - ---------------
* Under Federal Prompt Corrective Action and Risk-based Deposit Insurance
Assessment Regulations.
n/a -- not applicable
21
<PAGE> 22
BayBanks paid a dividend in the second quarter of 1994 of $.35 per share.
BayBanks reinstated its quarterly cash dividend in the first quarter of 1993, at
the rate of $.20 per share. Dividends paid since reinstatement of the quarterly
cash dividend are as follows: (TABLE M)
<TABLE>
TABLE M
DIVIDENDS PAID
<CAPTION>
1994 1993
SIX MONTHS ------------------- ------------------------------------------
- - ---------------- SECOND FIRST FOURTH THIRD SECOND FIRST
1994 1993 QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- - ------ ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.70 $0.40 $0.35 $0.35 $0.25 $0.25 $0.20 $0.20
===== ===== ====== ====== ====== ====== ===== ======
</TABLE>
On July 27, 1994, BayBanks declared its third quarter dividend at $.45 per
share payable September 1, 1994.
IMPENDING ACCOUNTING CHANGE
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement No. 114, "Accounting by Creditors for Impairment of a Loan." This
statement is effective for fiscal years beginning after December 15, 1994.
Adoption of Statement No. 114 will require changes in the disclosure of
nonperforming assets. Loans currently reported as nonperforming and in-substance
foreclosures will be reported as impaired loans in a financial statement
footnote. Restructured loans, reported as restructured, accruing loans prior to
the adoption of Statement No. 114, will not be regarded as impaired loans when
the statement is adopted if they are performing under the restructured terms.
Restructured, accruing loans entered into after the adoption of Statement No.
114 will be accounted for as impaired loans. The amount of impairment will be
determined by the difference between the present value of the expected cash
flows related to the loan using the contractual interest rate and its recorded
value, or as a practical expedient in the case of collateralized loans, the
difference between the appraised value of the collateral and the recorded amount
of the loan. Any additional impairment will be recorded as an adjustment to the
existing allowance for loan losses account. The adoption of Statement No. 114 is
not expected to have a material effect on the Company's results of operations or
financial condition.
22
<PAGE> 23
BAYBANKS, INC.
AVERAGE BALANCES AND CAPITAL RATIOS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1994 1993
SIX MONTHS ---------------- ------------------------
--------------- SECOND FIRST FOURTH THIRD SECOND
1994 1993 QUARTER QUARTER QUARTER QUARTER QUARTER
------ ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits and other short-term
investments................................... $ 259 $ 774 $ 204 $ 315 $ 420 $ 412 $ 651
Securities available for sale, at cost.......... 608 1,587 597 618 831 974 1,504
Investment securities, at cost.................. 2,143 326 2,347 1,938 1,469 1,201 526
Loans*
Commercial.................................... 1,327 1,401 1,360 1,294 1,288 1,371 1,414
Commercial real estate........................ 917 977 908 926 930 945 960
Residential mortgage.......................... 1,201 1,156 1,193 1,209 1,194 1,178 1,128
Instalment.................................... 2,604 2,340 2,594 2,613 2,550 2,461 2,388
------ ------ ------- ------ ------ ------ ------
6,049 5,874 6,055 6,042 5,962 5,955 5,890
Less allowance for loan losses................ 168 192 164 172 184 185 190
------ ------ ------- ------ ------ ------ ------
5,881 5,682 5,891 5,870 5,778 5,770 5,700
------ ------ ------- ------ ------ ------ ------
Total earning assets................... 9,059 8,561 9,203 8,913 8,682 8,542 8,571
Cash and due from banks......................... 612 614 622 602 659 630 628
Other assets.................................... 487 568 480 495 519 539 566
------ ------ ------- ------ ------ ------ ------
Total assets........................... $9,990 $9,551 $10,141 $9,838 $9,676 $9,526 $9,575
====== ====== ======== ====== ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand........................................ $1,951 $1,811 $ 1,946 $1,955 $2,031 $1,914 $1,826
NOW accounts.................................. 1,395 1,317 1,399 1,391 1,372 1,338 1,331
Savings....................................... 1,495 1,367 1,509 1,481 1,443 1,422 1,390
Money market deposit accounts................. 2,721 2,941 2,700 2,742 2,758 2,823 2,926
Consumer time................................. 959 1,163 945 975 1,016 1,069 1,130
Time -- $100,000 or more...................... 50 37 63 37 30 29 35
------ ------ ------- ------ ------ ------ ------
8,571 8,636 8,562 8,581 8,650 8,595 8,638
Federal funds purchased and other short-term
borrowings.................................... 578 127 728 425 209 139 148
Long-term debt.................................. 54 54 54 54 55 55 54
------ ------ ------- ------ ------ ------ ------
Total deposits and borrowings................. 9,203 8,817 9,344 9,060 8,914 8,789 8,840
Other liabilities**............................. 66 77 66 66 70 60 72
Stockholders' equity............................ 721 657 731 712 692 677 663
------ ------ ------- ------ ------ ------ ------
Total liabilities and stockholders'
equity............................... $9,990 $9,551 $10,141 $9,838 $9,676 $9,526 $9,575
====== ====== ======== ====== ====== ====== ======
CAPITAL RATIOS
Risk-Based
Core (Min. regulatory standard -- 4.00%)...... 11.71% 11.05% 11.71% 11.32% 10.68% 11.14% 11.05%
Total (Min. regulatory standard -- 8.00%)..... 13.45 12.98 13.45 13.06 12.40 13.06 12.98
Leverage........................................ 7.32 7.07 7.32 7.33 7.26 7.26 7.07
</TABLE>
- - ---------------
* Nonperforming loans are included in the average balances.
** Includes guarantee of ESOP indebtedness.
23
<PAGE> 24
<TABLE>
BAYBANKS, INC.
SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
1994 1993
SIX MONTHS ------------------- ------------------------------
------------------- SECOND FIRST FOURTH THIRD SECOND
1994 1993 QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income on earning assets (tax
equivalent basis)................ $306,763 $298,897 $158,305 $148,458 $148,393 $148,539 $148,885
Interest expense on deposits and
borrowings....................... 81,241 90,156 43,423 37,818 37,636 38,856 42,787
-------- -------- -------- -------- -------- -------- --------
Net interest income................ 225,522 208,741 114,882 110,640 110,757 109,683 106,098
Noninterest income................. 103,746 95,647 54,031 49,715 50,973 51,904 48,751
-------- -------- -------- -------- -------- -------- --------
Total income from operations....... 329,268 304,388 168,913 160,355 161,730 161,587 154,849
Operating expenses................. 226,907 222,199 114,712 112,195 112,282 112,224 113,039
-------- -------- -------- -------- -------- -------- --------
Operating Income before Net
Securities Gains and Provisions
for Loan Losses and OREO
Reserve.......................... 102,361 82,189 54,201 48,160 49,448 49,363 41,810
Net securities gains............... 475 358 436 39 4 49 358
Provision for loan losses.......... 12,000 20,500 6,000 6,000 7,000 9,000 9,000
Provision for OREO reserve, net.... 5,437 14,892 2,500 2,937 2,138 7,800 7,892
-------- -------- -------- -------- -------- -------- --------
Total credit provisions............ 17,437 35,392 8,500 8,937 9,138 16,800 16,892
-------- -------- -------- -------- -------- -------- --------
Pre-tax income..................... 85,399 47,155 46,137 39,262 40,314 32,612 25,276
Less tax equivalent adjustment
included above................... 4,040 2,296 2,067 1,973 1,661 1,401 1,181
-------- -------- -------- -------- -------- -------- --------
Income before taxes and cumulative
effect of accounting change...... 81,359 44,859 44,070 37,289 38,653 31,211 24,095
Provision for income taxes......... 32,726 17,891 17,648 15,078 15,971 13,210 9,888
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
accounting change................ 48,633 26,968 26,422 22,211 22,682 18,001 14,207
Less cumulative effect of
accounting change (net of tax
benefit of $683)................. 932 -- -- 932 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income......................... $ 47,701 $ 26,968 $ 26,422 $ 21,279 $ 22,682 $ 18,001 $ 14,207
======== ======== ======== ======== ======== ======== ========
Earnings Per Share
Income before accounting
change........................ $ 2.54 $ 1.43 $ 1.38 $ 1.16 $ 1.19 $ 0.95 $ 0.75
Less cumulative effect of
accounting change............. 0.05 -- -- 0.05 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income....................... $ 2.49 $ 1.43 $ 1.38 $ 1.11 $ 1.19 $ 0.95 $ 0.75
======== ======== ======== ======== ======== ======== ========
Dividends Paid Per Share........... $ 0.70 $ 0.40 $ 0.35 $ 0.35 $ 0.25 $ 0.25 $ 0.20
======== ======== ======== ======== ======== ======== ========
Financial Ratios
Return on average equity........... 13.3% 8.3% 14.5% 12.1% 13.0% 10.5% 8.6%
Return on average assets........... 0.96 0.57 1.05 0.88 0.93 0.75 0.60
Common Stock Data
Period-end book value per share.... $ 39.47 $ 35.85 $ 39.47 $ 38.51 $ 37.52 $ 36.56 $ 35.85
Dividend payout ratio.............. 28.1% 28.0% 25.4% 31.5% 21.0% 26.3% 26.7%
Range of BayBanks, Inc., last sale
price
High............................. $ 64.13 $ 52.13 $ 64.13 $ 57.25 $ 50.75 $ 50.50 $ 51.25
Low.............................. 50.00 38.25 54.50 50.00 43.25 43.25 38.25
Close............................ 60.25 43.00 60.25 54.50 50.75 48.75 43.00
</TABLE>
24
<PAGE> 25
<TABLE>
BAYBANKS, INC.
AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN*
<CAPTION>
1994 1993
SIX MONTHS ---------------- --------------------------
------------- SECOND FIRST FOURTH THIRD SECOND
1994 1993 QUARTER QUARTER QUARTER QUARTER QUARTER
---- ---- ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits and other
short-term investments................... 3.56% 3.34% 3.94% 3.32% 3.24% 3.28% 3.23%
Securities available for sale**............ 4.80 4.45 4.98 4.64 4.70 4.40 4.39
Investment securities...................... 4.68 5.41 4.80 4.55 4.52 4.67 4.93
Loans...................................... 7.90 8.29 7.98 7.81 7.90 8.03 8.20
Commercial............................... 6.89 6.60 7.19 6.57 6.48 6.50 6.57
Commercial real estate................... 7.82 7.80 8.05 7.58 7.74 7.73 7.90
Residential mortgage..................... 7.29 8.18 7.24 7.35 7.51 7.74 8.08
Instalment............................... 8.72 9.56 8.72 8.71 8.86 9.14 9.36
Total earning assets....................... 6.81% 7.02% 6.89% 6.72% 6.80% 6.91% 6.96%
Interest-bearing funds..................... 2.25% 2.59% 2.35% 2.16% 2.16% 2.24% 2.45%
NOW accounts............................. 1.34 1.91 1.34 1.33 1.42 1.54 1.80
Savings.................................. 1.92 2.28 1.93 1.90 1.92 1.96 2.16
Money market deposit accounts............ 2.12 2.49 2.20 2.04 2.08 2.13 2.32
Consumer time............................ 3.46 3.93 3.46 3.45 3.52 3.65 3.80
Time-$100,000 or more.................... 3.40 2.70 3.69 2.91 2.63 2.57 2.66
Short-term borrowings.................... 3.69 2.59 3.97 3.21 2.86 2.60 2.65
Long-term debt........................... 4.16 3.85 4.44 3.88 3.75 3.83 3.69
Interest expense as a percentage of average
earning assets........................... 1.80% 2.12% 1.89% 1.72% 1.72% 1.80% 2.00%
Net interest margin........................ 5.01% 4.90% 5.00% 5.00% 5.08% 5.11% 4.96%
<FN>
- - ---------------
* Tax equivalent basis.
** Yields based on average cost.
</TABLE>
25
<PAGE> 26
PART II -- OTHER INFORMATION
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders on April 28, 1994, the Company's
stockholders voted as follows:
A. To reelect Messrs. Samuel J. Gerson, Thomas R. Piper, Richard F.
Pollard and Joseph H. Torras to the Board of Directors for a three-year
term.
<TABLE>
<CAPTION>
TOTAL VOTE
TOTAL VOTE FOR WITHHELD FROM
EACH NOMINEE EACH NOMINEE
-------------- -------------
<S> <C> <C>
Samuel J. Gerson......................... 16,067,364 182,421
Thomas R. Piper.......................... 16,066,610 180,176
Richard F. Pollard....................... 16,062,091 187,694
Joseph H. Torras......................... 16,069,559 180,266
</TABLE>
There were no abstentions and no broker non-votes.
B. To approve the BayBanks, Inc. 1994 Restricted Stock Plan, providing for
the issuance of up to 500,000 shares.
<TABLE>
<S> <C>
Total Vote for the Proposal................................ 14,067,450
Total Vote Against the Proposal............................ 1,931,951
Abstentions................................................ 250,383
</TABLE>
There were no broker non-votes.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) See Exhibit List and Index on page 28.
b) No report on Form 8-K was filed during the second quarter ended June 30,
1994.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BayBanks, Inc.
(Registrant)
By: /s/ MICHAEL W. VASILY
Michael W. Vasily
Executive Vice President
and Chief Financial Officer
(Duly Authorized and
Principal Financial Officer)
Date: August 12, 1994
27
<PAGE> 28
<TABLE>
BAYBANKS, INC.
EXHIBIT LIST AND INDEX
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<S> <C>
First Amendment dated July 19, 1994, to BayBanks Profit Sharing Excess
10.1 -- Benefit Plan
Amendment dated July 19, 1994, to BayBanks Supplemental Executive Retirement
10.2 -- Plan
10.3 -- BayBanks Retirement Excess Benefit Plan
11.1 -- Computation of Primary and Fully Diluted Earnings Per Share
</TABLE>
28
<PAGE> 1
Exhibit 10.1
------------
BAYBANKS PROFIT SHARING EXCESS BENEFIT PLAN
First Amendment to the Restated Plan
------------------------------------
The BayBanks Profit Sharing Excess Benefit Plan, as restated effective
January 1, 1989, is hereby amended effective as of January 1, 1994 as follows:
The first sentence of Section 3 is amended in its entirety to read as
follows:
"If the full amount of Employer contributions or the full number of ESOP
shares that otherwise would be credited to a participant's accounts for a
plan year under Section 6.1 or Section 7.3 of the Plan (other than ESOP
shares that otherwise would be credited to a participant's account solely
as a result of the release of ESOP shares from the suspense account
following a repayment of all or a portion of an exempt loan described in
Section 7.2) cannot be so credited either because of the limits on annual
additions to his accounts under Section 15.1 of the Plan or because of the
limit on the amount of base compensation that may be taken into account
under Section 2.1 of the Plan or under Code Section 401(a)(17) (or other
applicable limitation under the Code), the amount that cannot be so
credited will be paid to such participant hereunder."
Executed on July 19, 1994.
BAYBANKS, INC.
By: /s/ Ilene Beal
----------------------------
<PAGE> 1
Exhibit 10.2
------------
BAYBANKS SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
First Amendment
---------------
The BayBanks Supplemental Executive Retirement Plan, established
effective as of January 1, 1989, is hereby amended as follows effective as of
January 1, 1994.
Section 4.1 is amended by renumbering subsections (c) and (d) as
subsections (d) and (e) respectively (and all affected cross references are
changed accordingly), and by adding the following new subsection (c):
"(c) MINIMUM BENEFIT. If, as a result of the application of
the nondiscrimination requirements of Code Section 401(a)(4) or the
regulations thereunder to the Retirement Plan the full amount of a
participant's Retirement Plan benefits (including benefits payable as
a result of the occurrence of a change in control of BayBanks, Inc. or
other benefits) cannot be paid to him from the Retirement Plan, the
amount that cannot be paid to him from the Retirement Plan for such
reason will be paid to him as a minimum benefit under this plan. Any
such minimum benefit will be payable in the form provided under
Section 4.9 of this plan."
Executed on July 19, 1994.
THE CORPORATE COMPENSATION
COMMITTEE OF BAYBANKS, INC.
By: /s/ Ilene Beal
----------------------------------
(pursuant to delegated authority)
The undersigned hereby consents to the foregoing amendment.
BAYBANKS, INC.
By: /s/ Ilene Beal
----------------------------------
<PAGE> 1
Exhibit 10.3
------------
BAYBANKS RETIREMENT EXCESS BENEFIT PLAN
First Amendment and Restatement
-------------------------------
1. Establishment and Restatement of Plan.
--------------------------------------
(a) BayBanks, Inc. ("BayBanks") and the other Employers maintaining
the Retirement Plan for Employees of BayBanks, Inc. and Affiliated
Companies (as it was then named) (the "retirement plan") established this
retirement excess benefit plan (the "retirement excess plan") to pay
participants in the retirement plan benefits that would have been payable
to them under the retirement plan but for the restrictions on benefits
imposed by Section 10.1 and 10.2 of the retirement plan. To such extent,
the retirement excess plan was (and is) intended to be an "excess benefit
plan" as defined in Section 3(36) of ERISA.
(b) Subsequently, the retirement excess plan was amended and
restated to reflect changes in the retirement plan made to conform to
changes in the applicable tax laws, specifically the Code Section
401(a)(17) limit on the amount of compensation of any participant taken
into account under the retirement plan. The effective date of that
restatement of the retirement excess plan is January 1, 1989 (the
effective date of the first limitation on compensation imposed by Code
Section 401(a)(17) and the effective date of the retirement plan
amendments conforming thereto).
2. DEFINITIONS AND REFERENCES. Unless the context requires otherwise,
all terms defined in the retirement plan will have the same meaning when used
in this retirement excess plan. References to sections of the retirement plan
are to the plan as amended from time to time (and if any section is renumbered,
reference herein is to the same section as renumbered).
3. EXCLUSION OF SERP PARTICIPANTS. To avoid duplication of benefits, no
person who is a participant in the BayBanks Supplemental Executive Retirement
Plan (SERP) and who is eligible to receive a SERP benefit that would be
duplicative of the benefit provided under this retirement excess plan will
participate in this retirement excess plan or receive any benefit hereunder to
the extent of the duplication.
4. EXCESS BENEFIT PAYMENTS. If the full amount of the retirement
benefit that would otherwise be payable to a participant under the retirement
plan's benefit provisions (Article 5) cannot be paid to him because of the
limitations on benefits under Sections 10.1 and 10.2 of the retirement plan, or
because of the limit on the amount of earnings that may be taken into account
under Section 5.8 of the retirement plan or under Code Section 401(a)(17) (or
other applicable limitation under the Code), the amount that cannot be paid
<PAGE> 2
under the retirement plan will be paid under this retirement excess plan. Such
payments will be made in the same form and at the same time as benefit payments
under the retirement plan. If payments under the retirement plan commence on a
date other than the participant's normal retirement date or are paid in a form
other than the normal form of payment (Section 6.1), benefit payment amounts
hereunder will be actuarially adjusted in the same manner as benefit payments
under the retirement plan. Benefit payments hereunder will be reduced by all
taxes and other amounts (if any) required to be withheld.
5. NO FUND OR USE OF RETIREMENT PLAN ASSETS. There will be no trustee
under the retirement excess plan and no escrow or trust fund associated with
the retirement excess plan. Contributions will be made by the Employers only
as and when benefit payments are payable to a participant hereunder. Assets of
the retirement plan will not be used for purposes of this retirement excess
plan, and benefit payments under this retirement excess plan will not be
commingled with any part of the trust fund established under the retirement
plan. However, the trustee under the retirement plan may act as agent for the
Employers in disbursing benefit payments under this retirement excess plan to
participants.
Notwithstanding the preceding paragraph, BayBanks in its sole discretion
may establish a grantor trust of which it is treated as the owner under Code
Section 671 (or may utilize an existing such trust) to provide for the payment
of benefits hereunder subject to such terms and conditions as BayBanks may deem
necessary or advisable to insure that benefits are not includable, by reason of
the trust, in the income of participants before actual payment. Such a trust
will not be utilized if such use would result in this plan's being treated as
"funded" for purposes of ERISA.
6. ADMINISTRATION. This retirement excess plan will be administered by
the Retirement Committee constituted under Article 14 of the retirement plan,
which will have sole responsibility for the interpretation and operation of
this plan.
7. AMENDMENT OR TERMINATION. BayBanks may, without the consent of any
participant or other person, amend this retirement excess plan at any time from
time to time. BayBanks may terminate this retirement excess plan at any time.
8. INTERPRETATION. This retirement excess plan will be construed,
enforced and administered according to the laws of the Commonwealth of
Massachusetts.
Executed on July 19, 1994.
BAYBANKS, INC.
By: /s/ Ilene Beal
-------------------------------
<PAGE> 1
EXHIBIT 11.1
<TABLE>
BAYBANKS, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
FOR THE SIX MONTHS AND QUARTERS ENDED JUNE 30
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
SIX MONTHS ENDED JUNE 30 QUARTER ENDED JUNE 30
---------------------------- ----------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares............. 18,798,391 18,619,252 18,818,163 18,676,783
Common Stock Equivalents (CSE):
Stock options..................... 325,752 285,439 336,457 260,941
----------- ----------- ----------- -----------
Primary weighted average shares..... 19,124,143 18,904,691 19,154,620 18,937,724
=========== =========== =========== ===========
Income before cumulative effect of
accounting change................. $ 48,633 $ 26,968 $ 26,422 $ 14,207
Less cumulative effect of accounting
change............................ 932 --. -- --
----------- ----------- ----------- -----------
Net Income.......................... $ 47,701 $ 26,968 $ 26,422 $ 14,207
=========== =========== =========== ===========
Primary earnings per share:
Income before cumulative effect of
accounting change.............. $ 2.54 $ 1.43 $ 1.38 $ 0.75
Less cumulative effect of
accounting change.............. 0.05 -- -- --
----------- ----------- ----------- -----------
Net Income........................ $ 2.49 $ 1.43 $ 1.38 $ 0.75
=========== =========== =========== ===========
FULLY DILUTED:
Weighted average shares............. 18,798,391.. 18,619,252 18,818,163 18,676,783
Common Stock Equivalents (CSE):
Stock options..................... 325,752 285,439 336,457 260,941
Stock options not CSE............... 7,523 33,110 5,087 100
5% convertible debentures........... -- 4,073(1) -- 4,073(1)
----------- ----------- ----------- -----------
Fully diluted weighted average
shares............................ 19,131,666 18,941,874 19,159,707 18,941,897
=========== =========== =========== ===========
Income before cumulative effect of
accounting change................. $ 48,633 $ 26,968 $ 26,422 $ 14,207
Less cumulative effect of accounting
change............................ 932 -- -- --
----------- ----------- ----------- -----------
Net Income.......................... $ 47,701 $ 26,968 $ 26,422 $ 14,207
5% debentures interest
expense -- net of tax............. -- 1 -- 1
----------- ----------- ----------- -----------
Net Income -- fully diluted basis... $ 47,701 $ 26,969 $ 26,422 $ 14,208
=========== =========== =========== ===========
Fully diluted earnings per share:
Income before cumulative effect of
accounting change.............. $ 2.54 $ 1.42 $ 1.38 $ 0.75
Less cumulative effect of
accounting change.............. 0.05 -- -- --
----------- ----------- ----------- -----------
Net Income........................ $ 2.49 $ 1.42 $ 1.38 $ 0.75
=========== =========== =========== ===========
<FN>
- - ---------------
(1) $56 convertible at $13.75 per share.
</TABLE>
