<PAGE> 1
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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
<TABLE>
<S> <C>
For the quarter ended June 30, 1995 Commission File No. 0-959
</TABLE>
------------------------
BAYBANKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2008039
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
175 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(Address of principal executive offices) (Zip code)
</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 31, 1995, 19,570,025 shares of the registrant's common stock,
$2.00 par value, were outstanding.
The list of exhibits to this report appears on page 28.
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAYBANKS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
1995 1994 1994
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks..................................................... $ 839,063 $ 829,170 $ 659,739
Trading accounts............................................................ 47,835 27,416 15,986
Securities portfolios
Interest-bearing deposits and other short-term investments.................. 198,600 166,286 160,850
Securities available for sale -- amortized cost $214,836 at June 30, 1995,
$220,132 at December 31, 1994, and $499,005 at June 30, 1994.............. 215,563 220,602 500,395
Investment securities -- market value $2,457,033 at June 30, 1995,
$2,481,584 at December 31, 1994, and $2,685,389 at June 30, 1994.......... 2,449,708 2,556,249 2,723,696
----------- ----------- -----------
2,863,871 2,943,137 3,384,941
Loans, net of unearned income and fees
Commercial................................................................ 1,633,060 1,528,265 1,352,961
Commercial real estate.................................................... 982,819 956,596 916,731
Residential mortgage...................................................... 1,499,309 1,335,466 1,239,026
Instalment................................................................ 2,824,969 2,828,193 2,592,853
----------- ----------- -----------
6,940,157 6,648,520 6,101,571
Less allowance for loan losses............................................ 146,345 146,835 154,126
----------- ----------- -----------
6,793,812 6,501,685 5,947,445
Premises and equipment, net................................................. 195,244 195,430 192,436
Other real estate owned and in-substance foreclosures, net.................. 23,846 67,399 89,178
Other assets................................................................ 242,029 206,710 200,530
----------- ----------- -----------
Total assets.......................................................... $11,005,700 $10,770,947 $10,490,255
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand.................................................................... $ 2,181,104 $ 2,214,761 $ 2,062,723
NOW accounts.............................................................. 1,430,111 1,491,694 1,418,609
Savings................................................................... 1,419,254 1,462,459 1,499,173
Money market deposit accounts............................................. 2,467,478 2,560,425 2,664,896
Consumer time............................................................. 1,473,761 1,095,357 947,424
Time -- $100,000 or more.................................................. 209,354 175,663 80,607
----------- ----------- -----------
9,181,062 9,000,359 8,673,432
Federal funds purchased and other short-term borrowings..................... 849,490 849,517 954,977
Accrued expenses and other accounts payable................................. 77,753 71,854 54,870
Long-term debt.............................................................. 51,136 51,154 54,024
Guarantee of ESOP indebtedness.............................................. 6,289 9,451 9,451
Stockholders' equity:
Common stock, par value $2.00 per share
Shares authorized -- 50,000,000
Shares issued -- 19,049,817 at June 30, 1995, 18,999,354 at December 31,
1994, and 18,835,989 at June 30, 1994.................................. 38,100 37,999 37,672
Surplus................................................................... 317,023 314,924 312,333
Retained earnings......................................................... 491,136 445,167 402,998
----------- ----------- -----------
846,259 798,090 753,003
Less treasury stock at cost -- 1,431 shares at December 31, 1994, and 850
shares at June 30, 1994................................................. -- 27 51
Less guarantee of ESOP indebtedness....................................... 6,289 9,451 9,451
----------- ----------- -----------
Total stockholders' equity............................................ 839,970 788,612 743,501
----------- ----------- -----------
Total liabilities and stockholders' equity............................ $11,005,700 $10,770,947 $10,490,255
=========== =========== ===========
</TABLE>
2
<PAGE> 3
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income on interest-bearing deposits and other
short-term investments........................ $ 3,141 $ 1,925 $ 6,004 $ 4,410
Interest on securities available for sale and
investment securities......................... 37,775 33,555 75,707 60,545
Interest and fees on loans...................... 153,186 120,758 301,775 237,768
----------- ----------- ----------- -----------
Total income on earning assets.................. 194,102 156,238 383,486 302,723
Interest expense on deposits and borrowings
Deposits...................................... 55,712 35,509 105,039 69,387
Short-term borrowings......................... 14,352 7,308 30,624 10,724
Long-term debt................................ 821 606 1,652 1,130
----------- ----------- ----------- -----------
Total interest expense.......................... 70,885 43,423 137,315 81,241
----------- ----------- ----------- -----------
Net interest income............................. 123,217 112,815 246,171 221,482
Provision for loan losses....................... 6,500 6,000 13,000 12,000
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses........................................ 116,717 106,815 233,171 209,482
Noninterest income
Service charges and fees on deposit
accounts................................... 27,640 27,784 54,283 54,042
Other noninterest income...................... 28,112 26,247 52,910 49,704
----------- ----------- ----------- -----------
Total noninterest income........................ 55,752 54,031 107,193 103,746
Net securities gains............................ -- 436 1 475
Operating expenses
Salaries and benefits......................... 61,417 57,434 121,735 113,817
Occupancy and equipment....................... 22,416 21,616 45,014 44,194
Other operating expenses...................... 36,093 35,662 69,729 68,896
----------- ----------- ----------- -----------
Total operating expenses........................ 119,926 114,712 236,478 226,907
Provision for OREO reserve, net................. -- 2,500 1,000 5,437
----------- ----------- ----------- -----------
Total operating expenses after OREO provision... 119,926 117,212 237,478 232,344
----------- ----------- ----------- -----------
Income before taxes and cumulative effect of
accounting change............................. 52,543 44,070 102,887 81,359
Provision for income taxes...................... 18,185 17,648 38,054 32,726
----------- ----------- ----------- -----------
Income before cumulative effect of accounting
change........................................ 34,358 26,422 64,833 48,633
Less cumulative effect of accounting change (net
of tax benefit of $683 in 1994)............... -- -- -- 932
----------- ----------- ----------- -----------
NET INCOME...................................... $ 34,358 $ 26,422 $ 64,833 $ 47,701
Earnings Per Share
Income before accounting change............... $ 1.78 $ 1.38 $ 3.36 $ 2.54
Less cumulative effect of accounting change... -- -- -- 0.05
----------- ----------- ----------- -----------
Net Income.................................... $ 1.78 $ 1.38 $ 3.36 $ 2.49
=========== =========== =========== ===========
Average shares outstanding...................... 19,322,107 19,154,620 19,292,097 19,124,143
</TABLE>
3
<PAGE> 4
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON RETAINED TREASURY ESOP LOAN
STOCK SURPLUS EARNINGS STOCK GUARANTEE TOTAL
------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
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)
Net change in valuation reserve related to
securities available for sale portfolio,
net of deferred income taxes............ 799 799
Other, principally employee benefit
plans................................... 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
======= ======== ======== ==== ======== ========
BALANCE AS OF DECEMBER 31, 1994............. $37,999 $314,924* $445,167 $(27) $ (9,451) $788,612
Net income -- Six months ended June 30,
1995.................................... 64,833 64,833
Cash dividends declared ($1.00 per
share).................................. (19,015) (19,015)
Net change in valuation reserve related to
securities available for sale portfolio,
net of deferred income taxes............ 151 151
Other, principally employee benefit
plans................................... 101 2,099 27 3,162 5,389
------- ------- -------- ---- -------- --------
BALANCE AS OF JUNE 30, 1995................. $38,100 $317,023* $491,136 $ -- $ (6,289) $839,970
======= ======== ======== ==== ======== ========
<FN>
- ---------------
* Net of unamortized restricted stock compensation expense of $5,892, $6,150,
and $1,104 at June 30, 1995, December 31, 1994, and June 30, 1994,
respectively.
</TABLE>
4
<PAGE> 5
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................ $ 64,833 $ 47,701
Adjustments to reconcile net income to net cash provided by operating
activities:
Proceeds from sales and maturities of trading account assets(1)......... 1,130,794 1,195,989
Purchases of trading account assets..................................... (1,159,925) (1,212,177)
Amortization of security premium........................................ 7,291 14,453
Net securities gains.................................................... (1) (475)
Fixed-rate mortgages sold............................................... 24,942 228,741
Fixed-rate mortgages originated for sale, net of principal payments..... (27,374) (130,346)
Student loans transferred from portfolio and sold....................... 50,633 127,004
Provision for loan losses............................................... 13,000 12,000
Depreciation and amortization of premises and equipment................. 13,209 12,754
Gain on sales of premises and equipment................................. (1,737) (225)
Provision for OREO reserve, net......................................... 1,000 5,437
Deferred income taxes................................................... 2,639 12,502
Change in other assets.................................................. (31,380) 345
Change in interest receivable........................................... (5,746) (19,809)
Change in accrued expenses and other accounts payable................... 2,126 897
Change in interest payable.............................................. 5,106 470
---------- ----------
Net cash provided by operating activities............................. 89,410 295,261
---------- ----------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale...................... 75,360 104,200
Proceeds from maturities of securities available for sale................. 3,833 131,837
Purchases of securities available for sale(1)............................. (65,065) (95,655)
Proceeds from maturities of investment securities......................... 1,435,827 316,345
Purchases of investment securities........................................ (1,336,696) (1,450,739)
Net cash provided (used) by:
Short-term investments.................................................. (32,314) 642,218
Loans(2)(3)(4).......................................................... (325,702) (269,627)
Proceeds from sales of premises and equipment............................. 2,305 473
Purchases of premises and equipment....................................... (13,591) (12,884)
Proceeds from sales and payments related to OREO(3)(4).................... 14,927 35,521
---------- ----------
Net cash used by investing activities................................. (241,116) (598,311)
---------- ----------
FINANCING ACTIVITIES
Net cash provided (used) by:
Demand deposits, NOW, and savings accounts.............................. (138,445) (37,694)
Money market deposits................................................... (92,947) (66,824)
Consumer time deposits.................................................. 378,404 (46,521)
Time -- $100,000 or more................................................ 33,691 45,650
Short-term borrowings................................................... (27) 447,157
Long-term debt.......................................................... (18) (423)
Dividends paid............................................................ (19,015) (13,164)
Other equity transactions................................................. (44) 1,623
---------- ----------
Net cash provided by financing activities............................. 161,599 329,804
---------- ----------
Net change in cash and cash equivalents................................... 9,893 26,754
Cash and cash equivalents at beginning of year(5)......................... 829,170 632,985
---------- ----------
Cash and cash equivalents at June 30(5)................................... $ 839,063 $ 659,739
========== ==========
Supplemental disclosure of cash flow information
Interest paid........................................................... $ 132,209 $ 80,771
Taxes paid.............................................................. 48,318 25,145
<FN>
- ---------------
(1) Excludes transfers of trading account assets to the securities available for
sale portfolio of $8.8 million and $14.8 million in 1995 and 1994,
respectively.
(2) Excludes transfers of loans to the other real estate owned category of $1.2
million and $20.8 million in 1995 and 1994, respectively.
(3) Excludes loan originations in conjunction with OREO sales of $4.3 million
and $5.5 million in 1995 and 1994, respectively.
(4) Excludes $33.2 million of in-substance foreclosures and related reserves of
$8.7 million reclassified to loans and the allowance for loan losses,
respectively, as a result of the adoption of SFAS No. 114 on January 1,
1995.
(5) Cash and cash equivalents consist of cash on hand and due from banks.
</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, prepared in accordance with generally accepted accounting
principles. Certain 1994 amounts have been reclassified to conform with the 1995
presentation. These financial statements are unaudited.
<TABLE>
NOTE 2. SECURITIES PORTFOLIOS
<CAPTION>
GROSS GROSS WEIGHTED
AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE
COST GAINS LOSSES VALUE YIELD(1)
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
JUNE 30, 1995 (2)
SECURITIES AVAILABLE FOR SALE
State and local government securities,
maturing
Within 1 year........................... $ 11,018 $ 12 $ -- $ 11,030 6.74%
Corporate, maturing
Within 1 year........................... 174,600 -- -- 174,600 6.43
Other(3).................................. 29,218 715 -- 29,933 7.08
---------- -------- --------- ----------
Total securities available for
sale............................... $ 214,836 $ 727 $ -- $ 215,563 6.53%
========== ======== ========= ========== =====
INVESTMENT SECURITIES
U.S. Government securities, maturing
Within 1 year........................... $ 705,611 $ 24 $ (5,132) $ 700,503 4.62%
After 1 year but within 5 years......... 1,277,865 19,903 (5,565) 1,292,203 6.19
---------- -------- --------- ----------
1,983,476 19,927 (10,697) 1,992,706 5.63
---------- -------- --------- ----------
State and local government securities,
maturing
Within 1 year........................... 113,393 46 (31) 113,408 6.73
After 1 year but within 5 years......... 40,502 288 (234) 40,556 6.86
After 5 years but within 10 years....... 31,938 393 (198) 32,133 7.51
---------- -------- --------- ----------
185,833 727 (463) 186,097 6.89
---------- -------- --------- ----------
Asset-backed securities................... 182,366 -- (1,468) 180,898 4.33
Mortgage-backed securities................ 49,534 -- (701) 48,833 4.90
Industrial revenue bonds.................. 46,657 -- -- 46,657 11.32
Corporate and other....................... 1,842 -- -- 1,842 --
---------- -------- --------- ----------
Total investment securities..... $2,449,708 $ 20,654 $ (13,329) $2,457,033 5.72%
========== ======== ========= ========== =====
<FN>
- ---------------
(1) Tax equivalent basis.
(2) The period-end maturity distribution excludes industrial revenue bonds,
which are not regarded as principal debt securities, mortgage-backed
securities, asset-backed securities, and other securities that do not have
a stated maturity.
(3) BayBank, the Company's principal bank subsidiary, is a member of the
Federal Home Loan Bank (FHLB). As of June 30, 1995, $29,120,400 in stock of
the FHLB is included in the Securities Available for Sale portfolio in the
Other category at cost, which approximates market value. As of June 30,
1995, BayBank had a $25,000,000 outstanding advance from the FHLB, at an
interest rate of 6.17% and with a maturity date of July 3, 1995. This
outstanding advance is included on the consolidated balance sheet in the
other short-term borrowings category.
</TABLE>
6
<PAGE> 7
<TABLE>
NOTE 2. SECURITIES PORTFOLIOS (CONTINUED)
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
SECURITIES AVAILABLE FOR SALE
State and local government securities........ $ 8,578 $ -- $ (14) $ 8,564
Corporate.................................... 183,900 -- -- 183,900
Other(1)..................................... 27,654 484 -- 28,138
---------- ------ --------- ----------
Total securities available for
sale............................. $ 220,132 $ 484 $ (14) $ 220,602
========== ====== ========= ==========
INVESTMENT SECURITIES
U.S. Government securities................... $2,083,519 $ 10 $ (65,101) $2,018,428
Asset-backed securities...................... 200,386 -- (5,652) 194,734
State and local government securities........ 171,436 89 (1,250) 170,275
Mortgage-backed securities................... 49,503 -- (2,761) 46,742
Industrial revenue bonds..................... 49,548 -- -- 49,548
Other........................................ 1,857 -- -- 1,857
---------- ------ --------- ----------
Total investment securities........ $2,556,249 $ 99 $ (74,764) $2,481,584
========== ====== ========= ==========
JUNE 30, 1994
SECURITIES AVAILABLE FOR SALE
U.S. Government securities................... $ 217,916 $ 369 $ (11) $ 218,274
Mortgage-backed securities................... 26,302 612 -- 26,914
State and local government securities........ 9,833 -- (5) 9,828
Corporate.................................... 217,300 -- -- 217,300
Other(1)..................................... 27,654 425 -- 28,079
---------- ------ --------- ----------
Total securities available for
sale............................. $ 499,005 $1,406 $ (16) $ 500,395
========== ====== ========= ==========
INVESTMENT SECURITIES
U.S. Government securities................... $2,308,849 $ 130 $ (32,070) $2,276,909
Asset-backed securities...................... 203,665 -- (4,368) 199,297
State and local government securities........ 106,257 127 (686) 105,698
Mortgage-backed securities................... 49,473 -- (1,440) 48,033
Industrial revenue bonds..................... 53,595 -- -- 53,595
Other........................................ 1,857 -- -- 1,857
---------- ------ --------- ----------
Total investment securities........ $2,723,696 $ 257 $ (38,564) $2,685,389
========== ====== ========= ==========
<FN>
- ---------------
(1) As of December 31, 1994, and June 30, 1994, $27,555,500 in stock of the FHLB
is included in the Securities Available for Sale portfolio in the Other
category at cost, which approximates market value.
</TABLE>
NOTE 3. ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
During the second quarter of 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights," effective January 1, 1995. SFAS No. 122 is applied
prospectively. Under the provisions of SFAS No. 122, the total cost of
originating a mortgage is allocated between the rights to service the loan and
the loan based on their relative fair values at the date of origination when the
Company has a definitive plan to sell or securitize the loan and retain the
mortgage servicing rights. This allocation is based on the assumption that a
normal servicing fee will be received and that the rights to the remaining cash
flow from the underlying mortgage loans will be sold or securitized. The
adoption of SFAS No. 122 did not have a material effect on the Company's results
of operations or financial condition.
NOTE 4. ACQUISITIONS OF FINANCIAL INSTITUTIONS
The Company's acquisition of the southern New Hampshire-based holding
company, NFS Financial Corp. (NFS), parent company of NFS Savings Bank, FSB, and
Plaistow Cooperative Bank, FSB, became
7
<PAGE> 8
effective after the close of business on June 30, 1995. The stockholders of NFS
received $20.15 in cash and .1696 shares of BayBanks, Inc. common stock for each
share of NFS common stock held, an aggregate of $58.1 million in cash and
487,267 shares of BayBanks, Inc. common stock. In addition, outstanding options
to purchase NFS common stock were converted into options to purchase an
aggregate of 29,778 shares of BayBanks, Inc. common stock. At June 30, 1995, NFS
had total assets of $625 million. The acquisition will be accounted for as a
purchase. The acquisition will first be reflected in the Company's September 30,
1995 financial statements.
On March 24, 1995, the Company announced that it had agreed to acquire
Cornerstone Financial Corporation (Cornerstone), parent company of Cornerstone
Bank of Derry, NH. The stockholders of Cornerstone will receive $8.80 in cash
for each outstanding share of common stock held, an aggregate of approximately
$18.5 million. The acquisition, approved by the boards of directors of both
companies, is subject to approval by the stockholders of Cornerstone and various
federal and state regulatory agencies. Cornerstone had total assets of $145
million at June 30, 1995. The acquisition will be accounted for as a purchase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE OVERVIEW
BayBanks' net income was $34.4 million for the second quarter of 1995, or
$1.78 per share, compared with net income of $26.4 million, or $1.38 per share,
for the second quarter of 1994, an increase of 29% on a per share basis. Net
income for the first six months of 1995 was $64.8 million, or $3.36 per share,
compared with $47.7 million, or $2.49 per share, for the first six months of
1994, an increase of 35% on a per share basis. The increase in net income was
affected by the following items:
- Operating income (defined below) increased by 14% in the second quarter
of 1995 compared with the second quarter of 1994, primarily as the result
of a 10% increase in net interest income.
- Included in the second quarter results was the settlement of a tax claim
against the Commonwealth of Massachusetts in the amount of $2.6 million,
net of federal income tax.
- Asset quality continued to improve; nonperforming assets were reduced to
$96.8 million, a 14% decrease from March 31, 1995, and a 44% decrease
from June 30, 1994. As a consequence, the combined provisions for loan
losses and the other real estate owned (OREO) reserve (credit provisions)
decreased to $6.5 million for the second quarter of 1995, compared with
$8.5 million in 1994 and $7.5 million in the first quarter of 1995. For
the six-month periods, credit provisions declined 20% to $14.0 million
compared with 1994.
- In 1994, net income for the first six months 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
(SFAS)No. 112, "Employers' Accounting for Postemployment Benefits."
EARNINGS ANALYSIS
Operating Income (tax equivalent basis)
Operating income, presented in TABLE A, excludes net securities gains and
the provisions for loan losses and the OREO reserve and is before income taxes.
For the second quarter of 1995, operating income was $62.0 million, compared
with $60.6 million in the first quarter of 1995 and $54.2 million in the second
quarter of 1994. The increase over the previous year was a result of a 10%
increase in net interest income and a 3% growth in noninterest income, offset by
a 5% increase in operating expenses.
For the six-month periods, operating income was $122.6 million in 1995,
compared with $102.4 million in 1994. In 1995, a 12% increase in net interest
income and a 3% increase in noninterest income were partially offset by a 4%
increase in operating expenses.
8
<PAGE> 9
TABLE A
SUMMARY OF OPERATIONS
FOR THE FOLLOWING PERIODS
TAX EQUIVALENT BASIS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SECOND FIRST SECOND SIX MONTHS
QUARTER QUARTER QUARTER -------------------
1995 1995 1994 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income on earning assets.................... $197,045 $192,179 $158,305 $389,224 $306,763
Interest on deposits and borrowings......... 70,885 66,430 43,423 137,315 81,241
-------- -------- -------- -------- --------
Net interest income......................... 126,160 125,749 114,882 251,909 225,522
Noninterest income.......................... 55,752 51,441 54,031 107,193 103,746
-------- -------- -------- -------- --------
Total income from operations................ 181,912 177,190 168,913 359,102 329,268
Operating expenses.......................... 119,926 116,552 114,712 236,478 226,907
-------- -------- -------- -------- --------
Operating Income Before Net Securities Gains
and
Provisions for Loan Losses and OREO
Reserve................................ 61,986 60,638 54,201 122,624 102,361
-------- -------- -------- -------- --------
Net securities gains........................ -- 1 436 1 475
-------- -------- -------- -------- --------
Provision for loan losses................... 6,500 6,500 6,000 13,000 12,000
Provision for OREO reserve, net............. -- 1,000 2,500 1,000 5,437
-------- -------- -------- -------- --------
Credit provisions........................... 6,500 7,500 8,500 14,000 17,437
-------- -------- -------- -------- --------
Income before taxes and cumulative effect of
accounting change......................... 55,486 53,139 46,137 108,625 85,399
Income taxes and tax equivalent
adjustment................................ 21,128 22,664 19,715 43,792 36,766
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting change......................... 34,358 30,475 26,422 64,833 48,633
Less cumulative effect of accounting change
(net of tax benefit of $683).............. -- -- -- -- 932
-------- -------- -------- -------- --------
Net Income.................................. $ 34,358 $ 30,475 $ 26,422 $ 64,833 $ 47,701
======== ======== ======== ======== ========
Earnings Per Share
Income before accounting change........... $ 1.78 $ 1.58 $ 1.38 $ 3.36 $ 2.54
Less cumulative effect of accounting
change................................. -- -- -- -- 0.05
-------- -------- -------- -------- --------
Net Income................................ $ 1.78 $ 1.58 $ 1.38 $ 3.36 $ 2.49
======== ======== ======== ======== ========
</TABLE>
Net Interest Income
Net interest income was $126.2 million in the second quarter of 1995,
$125.7 million in the preceding quarter, and $114.9 million in the second
quarter of 1994. The net interest margin in the second quarter of 1995 was
5.13%, compared with 5.16% in the first quarter of 1995, and 5.00% in the second
quarter of 1994. Net interest income and the net interest margin are affected by
both the quantity and the mix of interest-bearing assets and liabilities and
movements in interest rates.
The growth in net interest income in the second quarter of 1995 compared
with that of the second quarter of 1994 resulted from a 7% growth in average
earning assets and higher interest rates. Average loans increased by 13%; the
growth was balanced between corporate and consumer lending.
The yield on earning assets was 8.01% in the second quarter of 1995,
compared with 6.89% in the second quarter of 1994, as a result of overall higher
interest rates on the loan and securities portfolios.
BayBanks' funding costs increased during the second quarter of 1995,
compared with those of the second quarter of 1994, due to increased market
interest rates, higher levels of consumer certificates of deposit, and an
increased level of purchased funds. Rates on core deposits (which include money
market deposit accounts [MMDAs] and consumer certificates of deposit) increased
in the second quarter of 1995, compared with those of the second quarter of
1994, due to overall higher interest rates and market conditions. In addition,
certain customers moved balances from transaction accounts and money market
deposit accounts to higher-yielding certificates of deposit. The cost of total
interest-bearing liabilities (as a percentage of average earning assets)
increased 99 basis points to 2.88% in the second quarter of 1995, compared with
1.89% in the second quarter of 1994.
9
<PAGE> 10
For the six-month periods, net interest income increased from $225.5
million in 1994 to $251.9 million in 1995. This increase was related to a 9%
increase in average earning assets during the first six months of 1995, compared
with 1994, and an increase in the net interest margin from 5.01% in 1994 to
5.14% in 1995. The yield on average earning assets rose by 114 basis points to
7.95% for the first six months of 1995, compared with 6.81% in 1994, due to
overall higher interest rates. For the same period, the cost of total
interest-bearing liabilities (as a percentage of average earnings assets) rose
101 basis points to 2.81% in 1995 from 1.80% in 1994.
Noninterest Income
Noninterest income consists primarily of service charges on deposit
accounts and fees from credit and non-credit services. This income is well
diversified among consumer, corporate, and small business banking activities.
Noninterest income (TABLE B) increased 3% to $55.8 million in the second
quarter of 1995, from $54.0 million in the second quarter of 1994. For the first
six months, noninterest income increased 3% to $107.2 million in 1995 from
$103.7 million in 1994.
Service charges and fees on deposit accounts continued to provide
approximately one-half of noninterest income. Total service charges and fees on
deposit accounts were $27.6 million in the second quarter of 1995, compared with
$27.8 million in the second quarter of 1994. For the first six months, service
charges and fees on deposit accounts were $54.3 million and $54.0 million in
1995 and 1994, respectively. Increased income due to higher service charges and
fees on consumer accounts resulting from selected repricings was offset by a
decline in corporate service charges due to higher earnings credit rates on
compensating deposit balances.
Processing fees increased 21% to $4.8 million in the second quarter of 1995
from $4.0 million in the second quarter of 1994. For the six-month periods,
processing fees were $8.8 million in 1995 and $7.3 million in 1994, a 20%
increase. The increase in processing fees in 1995 resulted primarily from an
increased volume of point-of-sale transactions and termination fees from
correspondent banks, the result of industry consolidation.
Investment management and brokerage fees increased 35% to $2.6 million in
the second quarter of 1995 from $1.9 million in the second quarter of 1994. For
the six-month periods, investment management and brokerage fees increased 23% to
$4.9 million in 1995 from $4.0 million in 1994. The increase in investment
management and brokerage fees was due to commissions on increased third party
mutual fund sales and investment advisory fees from BayFunds,(R) the Company's
proprietary mutual fund family. Total assets under management in BayFunds were
$1.5 billion at June 30, 1995, compared with $1.2 billion at June 30, 1994.
Mortgage banking fees increased 53% to $2.3 million in the second quarter
of 1995 from $1.5 million in the second quarter of 1994 due to an increase in
volume. In addition, the second quarter of 1995 includes $220 thousand of
additional income recognized upon the adoption of SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which requires the capitalization of originated
mortgage servicing rights (see Footnote 3 on page 7). For the six-month periods,
mortgage banking fees were $4.0 million in 1995 and $3.8 million in 1994.
International fees increased 17% to $1.9 million in the second quarter of
1995, from $1.6 million in the second quarter of 1994. For the six-month
periods, international fees increased 25%, from $2.8 million in 1994 to $3.6
million in 1995. This increase resulted primarily from an increase in
international activity including net gains from foreign exchange transactions.
The Company periodically sells student loans when these loans are no longer
in a deferred payment status. During the second quarter of 1995, the Company
sold $51 million in student loans, resulting in a gain of $1.1 million; in the
second quarter of 1994, the sale of $127 million in student loans produced a
gain of $4.4 million.
Other noninterest income was $3.0 million in the second quarter of 1995 and
$838 thousand in the second quarter of 1994. For the six-month periods, other
noninterest income was $4.9 million in 1995 and $1.9 million in 1994. The
increase in 1995 was primarily due to a $1.2 million second quarter gain on the
sale of the Company's corporate bond trusteeship business as well as gains on
sales of branch buildings no longer utilized by the Company.
10
<PAGE> 11
<TABLE>
TABLE B
NONINTEREST INCOME
FOR THE PERIODS ENDED JUNE 30
(IN THOUSANDS)
<CAPTION>
SECOND QUARTER SIX MONTHS
--------------------------- ------------------------------
1995 1994 CHANGE 1995 1994 CHANGE
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees on
deposit accounts.................... $27,640 $27,784 $ (144) $ 54,283 $ 54,042 $ 241
Processing fees....................... 4,785 3,951 834 8,770 7,332 1,438
Credit card fees...................... 4,701 4,630 71 9,804 9,705 99
Trust fees............................ 3,584 3,377 207 7,201 7,150 51
Investment management and
brokerage fees...................... 2,590 1,912 678 4,896 3,979 917
Mortgage banking fees................. 2,261 1,473 788 3,966 3,769 197
International fees.................... 1,888 1,618 270 3,559 2,844 715
All other fees........................ 4,157 4,053 104 8,714 8,593 121
Student loan sales gains.............. 1,149 4,395 (3,246) 1,149 4,395 (3,246)
Other noninterest income.............. 2,997 838 2,159 4,851 1,937 2,914
------- ------- ------- -------- -------- -------
Total noninterest income.... $55,752 $54,031 $ 1,721 $107,193 $103,746 $ 3,447
======= ======= ======= ======== ======== =======
</TABLE>
Operating Expenses
The operating expense analysis presented in TABLE C (page 12) separates
OREO and loan workout expenses from other operating expenses. Operating
expenses, excluding OREO and loan workout, were $118.3 million in the second
quarter of 1995, compared with $111.6 million in the second quarter of 1994; for
the first six months, these operating expenses were $233.1 million in 1995 and
$220.2 million in 1994.
Salaries and benefits were $61.4 million in the second quarter of 1995,
compared with $57.4 million in the second quarter of 1994. For the first
six-month periods, salaries and benefits were $121.7 million in 1995, compared
with $113.8 million in 1994. The increase was primarily the result of normal
salary and benefit increases, selected additions to staff, and accruals for
profit sharing and performance awards.
Occupancy and equipment expenses were $22.4 million in the second quarter
of 1995, compared with $21.6 million in the second quarter of 1994. For the
first six months of 1995, occupancy and equipment expenses were $45.0 million,
compared with $44.2 million for the first six months of 1994. The increase was
primarily the result of an increase in rent expense due to the opening of new
branch locations, including supermarket branches, and costs associated with
branch closings.
Postage and supplies expenses were $5.5 million in the second quarter of
1995, compared with $5.1 million in the second quarter of 1994. For the first
six months, postage and supplies expenses were $11.3 million in 1995, compared
with $9.9 million in 1994. This increase was the result of increased postal
rates in 1995, combined with an increased volume and higher costs of printed
forms and supplies.
FDIC insurance expense declined 11% to $4.9 million in the second quarter
of 1995, from $5.5 million in the second quarter of 1994. For the first six
months, FDIC insurance expense was $9.8 million in 1995, compared with $10.9
million in 1994. The decrease was attributable to improved FDIC risk
classifications at the Company's bank subsidiaries which resulted in lower
insurance rates in 1995. The benefit of lower insurance rates was partially
offset by an increase in the insured deposit base.
Other operating expenses were $17.9 million in the second quarter of 1995,
compared with $15.7 million in the second quarter of 1994. For the first six
months, other operating expenses were $33.9 million in 1995, compared with $30.0
million in 1994. The increase in other expenses was primarily the result of
increases in purchased software and consulting expenses associated with systems
enhancements, and personnel hiring costs related to selected additions to staff.
11
<PAGE> 12
OREO and loan workout expenses decreased 47% to $1.7 million in the second
quarter of 1995, from $3.1 million in the second quarter of 1994, reflecting the
continued disposition of OREO properties and impaired loans (see Nonperforming
Loans on page 20). For the first six months, OREO and loan workout expenses were
$3.4 million in 1995, compared with $6.7 million in 1994.
<TABLE>
TABLE C
OPERATING EXPENSES
FOR THE PERIODS ENDED JUNE 30
(IN THOUSANDS)
<CAPTION>
SECOND QUARTER SIX MONTHS
-------------------------------- --------------------------------
1995 1994 CHANGE 1995 1994 CHANGE
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits........ $ 61,417 $ 57,434 $3,983 $121,735 $113,817 $ 7,918
Occupancy and equipment...... 22,416 21,616 800 45,014 44,194 820
Marketing and public
relations.................. 6,132 6,244 (112) 11,471 11,361 110
Postage and supplies......... 5,540 5,090 450 11,262 9,928 1,334
FDIC insurance............... 4,875 5,451 (576) 9,750 10,902 (1,152)
Other........................ 17,894 15,736 2,158 33,851 29,989 3,862
-------- -------- ------ -------- -------- -------
Operating expenses excluding
OREO expenses.............. 118,274 111,571 6,703 233,083 220,191 12,892
OREO and loan workout
expenses................... 1,652 3,141 (1,489) 3,395 6,716 (3,321)
-------- -------- ------ -------- -------- -------
Total operating
expenses......... $119,926 $114,712 $5,214 $236,478 $226,907 $ 9,571
======== ======== ====== ======== ======== =======
</TABLE>
Provisions for Loan Losses and the OREO Reserve
The provisions for loan losses and the OREO reserve declined in the second
quarter of 1995 to $6.5 million from $8.5 million in the second quarter of 1994.
The provision for loan losses was $6.5 million in the second quarter of
1995, compared with $6.0 million in the second quarter of 1994. For the first
six months of 1995, the provision for loan losses was $13.0 million, compared
with $12.0 million in 1994.
There was no net provision for the OREO reserve in the second quarter of
1995, compared with $2.5 million in the second quarter of 1994. For the first
six months of 1995, the net provision for the OREO reserve was $1.0 million,
compared with $5.4 million in 1994. The OREO provision was offset by net gains
on sales of properties of $2.8 million in the second quarter of 1995 and $2.6
million in the second quarter of 1994. For the first six months of 1995, net
gains on the sales of OREO properties were $4.3 million, compared with $3.1
million in 1994.
Income Taxes
The Company's provision for income taxes was $18.2 million in the second
quarter of 1995, compared with $17.6 million in the second quarter of 1994. The
1995 second quarter tax provision includes an adjustment for a settlement of a
tax claim against the Commonwealth of Massachusetts. The settlement resolves a
claim related to the taxability of interest income on certain Massachusetts
bonds on which the Company paid income taxes prior to 1985.
The effective tax rate for the second quarter of 1995, excluding the
settlement adjustment, was 39.6%, compared with 40.0% in the second quarter of
1994. The effective tax rate for the first six-month periods, excluding the
settlement adjustment, was 39.5% in 1995, compared with 40.2% in 1994, due to a
higher level of tax-exempt interest in 1995.
In July 1995, the Commonwealth of Massachusetts passed a tax reform bill
that will reduce the state tax rate for banks. Under the new tax law, the rate
banks pay will be reduced over the next four years from the current rate of
12.54% to 10.50% in 1999. The law also provides for the taxation of out-of-state
banks that do business in the Commonwealth.
12
<PAGE> 13
BALANCE SHEET REVIEW
Trends in Earning Assets
Average earning assets increased 7% to $9.8 billion during the second
quarter of 1995, compared with $9.2 billion in the second quarter of 1994,
primarily due to growth in the average loan balances. The growth was balanced
between the commercial and consumer loan portfolios. Average earning assets were
$9.8 billion for the first six months of 1995, compared with $9.1 billion for
the first six months of 1994.
Loan Portfolio
Consumer loans represented 62% of the Company's quarter-end loan portfolio,
with $1.5 billion in residential loan balances and $2.8 billion in various types
of instalment loan balances. Consumer lending activities are focused primarily
on the Massachusetts market. Commercial and commercial real estate loans were
38% of the loan portfolio. The majority of these loans are to New England-based
companies, primarily local middle-market companies and small businesses in
Massachusetts.
The Company originates fixed-rate and adjustable-rate residential mortgage
loans. The majority of fixed-rate residential mortgage loan originations are
securitized and sold to the secondary market with servicing retained. The
remainder of the fixed-rate and adjustable-rate residential real estate loan
originations are held in the loan portfolio or may be securitized and
transferred to the securities available for sale portfolio. Student loans are
originated and held in the loan portfolio while they are in a deferred payment
status. Student loans held for sale at June 30, 1995, were $124 million. The
Company sold $51 million of student loans in the second quarter of 1995,
compared with sales of $127 million in the second quarter of 1994. In July 1995,
the Company sold $60 million of student loans.
An analysis of changes in major loan categories for the second quarters and
first six months of 1995 and 1994 is presented in TABLE D (page 14). Loan
business volume was $250 million in the second quarter of 1995, compared with
$267 million in the second quarter of 1994. Commercial loan volume was $55
million in the second quarter of 1995, compared with $34 million in the second
quarter of 1994. Commercial loan growth was widely distributed and included
increases in short-term money market-priced loans and asset-based lending,
partially offset by a decline in auto dealer outstandings. The Company's
international loan portfolio, which is focused primarily on Mexico and South
America, stood at $175 million at June 30, 1995, compared with $172 million at
March 31, 1995, and $146 million at June 30, 1994. These international
facilities are predominantly trade related and primarily with well-known and
established foreign banks. Business volume in the commercial real estate
portfolio was $10 million during the second quarter of 1995, compared with $12
million during the second quarter of 1994. Residential mortgage volume was
principally the result of purchase money mortgages, mostly adjustable-rate. The
Company underwrote and sold $17 million of fixed-rate residential mortgage loans
during the second quarter of 1995, compared with $57 million in the second
quarter of 1994. The decline in secondary market activity is due to a decline in
fixed-rate mortgage refinancing. At June 30, 1995, loans held for sale were $16
million, compared with $18 million at June 30, 1994. Instalment net loan
business volume was $42 million, compared with $100 million in the second
quarter of 1994. Automobile lending, in particular, was affected by higher rates
and active competition from nonbank lenders.
13
<PAGE> 14
<TABLE>
TABLE D
CHANGES IN THE LOAN PORTFOLIO
(IN THOUSANDS)
<CAPTION>
SECOND QUARTER 1995
INCREASE ANALYSIS OF CHANGE IN LOAN CATEGORIES NET BUSINESS
(DECREASE) ---------------------------------------------- VOLUME
FOR THE NET SECOND
JUNE 30 SECOND GROSS TRANSFERS BUSINESS QUARTER
1995 QUARTER CHARGE-OFFS TO OREO SALES VOLUME 1994
---------- ---------- ------------ --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial........................... $1,633,060 $ 52,657 $ (2,193) $ (51) $ -- $ 54,901 $ 34,210
Commercial real estate............... 982,819 4,833 (5,294) -- -- 10,127 11,580
Residential mortgage................. 1,499,309(1) 122,937 (2,442) (411) (17,182) 142,972 121,481
Instalment loans
Automobile and other............... 1,295,405 5,946 (1,621) -- -- 7,567 52,473
Home equity........................ 768,973 13,024 (209) (146) -- 13,379 19,345
Credit card........................ 292,192 (1,303) (2,806) -- -- 1,503 5,805
Student loans...................... 328,440(2) (38,662) (184) -- (50,633) 12,155 15,119
Reserve credit..................... 139,959 6,231 (1,492) -- -- 7,723 7,425
---------- -------- -------- ----- -------- -------- --------
Total instalment loans............. 2,824,969 (14,764) (6,312) (146) (50,633) 42,327 100,167
---------- -------- -------- ----- -------- -------- --------
Total loans.......................... $6,940,157 $165,663 $(16,241) $(608) $(67,815) $250,327 $267,438
========== ======== ======== ===== ======== ======== ========
<FN>
- ---------------
(1) Includes residential mortgage loans held for sale of $16 million at June 30,
1995.
(2) Includes student loans held for sale of $124 million at June 30, 1995.
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995 NET BUSINESS
INCREASE ANALYSIS OF CHANGE IN LOAN CATEGORIES VOLUME
(DECREASE) ----------------------------------------------------- SIX MONTHS
FOR THE GROSS OTHER NET ENDED
JUNE 30 FIRST CHARGE- TRANSFERS TRANSFERS, BUSINESS JUNE 30
1995 SIX MONTHS OFFS TO OREO SALES NET(1) VOLUME 1994
---------- ---------- -------- ------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................. $1,633,060 $104,795 $ (3,154) $ (73) $ -- $ 1,525 $106,497 $ 36,213
Commercial real estate..... 982,819 26,223 (7,007) -- -- 16,802 16,428 5,839
Residential mortgage....... 1,499,309(2) 163,843 (3,829) (911) (24,942) 6,177 187,348 237,854
Instalment loans
Automobile and other..... 1,295,405 (23,340) (3,352) -- -- -- (19,988) 65,860
Home equity.............. 768,973 26,769 (720) (223) -- -- 27,712 13,335
Credit card.............. 292,192 (27,334) (5,947) -- -- -- (21,387) (19,653)
Student loans............ 328,440(3) 16,969 (337) -- (50,633) -- 67,939 66,320
Reserve credit........... 139,959 3,712 (3,143) -- -- -- 6,855 7,523
---------- -------- -------- ------- -------- ------- -------- --------
Total instalment loans... 2,824,969 (3,224) (13,499) (223) (50,633) -- 61,131 133,385
---------- -------- -------- ------- -------- ------- -------- --------
Total loans................ $6,940,157 $291,637 $(27,489) $(1,207) $(75,575) $24,504 $371,404 $413,291
========== ======== ======== ======= ======== ======= ======== ========
<FN>
- ---------------
(1) As a result of the adoption of SFAS No. 114 on January 1, 1995, the Company
reclassified $33.2 million of in-substance foreclosures and $8.7 million of
related reserves to loans and the allowance for loan losses, respectively.
Charge-offs of $8.7 million were subsequently recorded during the first
quarter of 1995.
(2) Includes residential mortgage loans held for sale of $16 million at June 30,
1995.
(3) Includes student loans held for sale of $124 million at June 30, 1995.
</TABLE>
14
<PAGE> 15
Securities Portfolios
The securities portfolios (TABLE E, page 16) totaled $2.9 billion at June
30, 1995, and December 31, 1994, and $3.4 billion at June 30, 1994. The weighted
average maturity of the securities portfolios was 1.5 years at June 30, 1995,
compared with 1.6 years at December 31, 1994, and June 30, 1994.
Short-term investments were $199 million at June 30, 1995, compared with
$166 million at December 31, 1994, and $161 million at June 30, 1994.
Securities available for sale, consisting principally of debt securities,
are stated at market value. Decisions to purchase or sell these securities as
part of the Company's ongoing asset and liability management process are based
on management's assessment of changes in economic and financial market
conditions, interest rate environments, the Company's balance sheet and its
interest sensitivity position, liquidity, and capital.
The investment securities portfolio, consisting principally of debt
securities, is stated at amortized cost, reflecting management's intention and
ability to hold these securities until maturity. The Company's investment
securities portfolio was $2.4 billion at June 30, 1995, and $2.7 billion at June
30, 1994. At June 30, 1995, gross unrealized gains were $21 million, and gross
unrealized losses were $13 million.
The Company's investment securities portfolio contains primarily 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, which is concentrated primarily in
Massachusetts, was $186 million at June 30, 1995, with the single largest issue
being approximately $7 million. All securities were either rated investment
grade or, in the case of unrated securities, were determined by management to be
equivalent to investment grade.
The Company also has a trading account securities portfolio consisting of
debt securities recorded at market value, which was $48 million at June 30,
1995, and $16 million at June 30, 1994. Trading account gains were $675 thousand
in the second quarter of 1995, compared with $504 thousand in the second quarter
of 1994.
15
<PAGE> 16
<TABLE>
TABLE E
SECURITIES PORTFOLIOS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
1995 1994 1994
---------- ----------- ----------
<S> <C> <C> <C>
Short-term investments................................. $ 198,600 $ 166,286 $ 160,850
---------- ---------- ----------
Securities available for sale
U.S. Government securities........................... -- -- 218,274
U.S. Agency mortgage-backed securities............... -- -- 26,914
State and local government securities................ 11,030 8,564 9,828
Corporate and other.................................. 204,533 212,038 245,379
---------- ---------- ----------
215,563 220,602 500,395
---------- ---------- ----------
Investment securities
U.S. Government securities........................... 1,983,476 2,083,519 2,308,849
Asset-backed securities.............................. 182,366 200,386 203,665
State and local government securities................ 185,833 171,436 106,257
Industrial revenue bonds............................. 46,657 49,548 53,595
U.S. Agency mortgage-backed securities............... 49,534 49,503 49,473
Corporate and other.................................. 1,842 1,857 1,857
---------- ---------- ----------
2,449,708 2,556,249 2,723,696
---------- ---------- ----------
Total.................................................. $2,863,871 $2,943,137 $3,384,941
========== ========== ==========
Weighted average maturity of securities available for
sale and investment securities in years*............. 1.6 1.7 1.7
Weighted average maturity of total securities in
years*............................................... 1.5 1.6 1.6
<FN>
- ---------------
* The weighted average maturity calculation excludes amortizing IRBs and
reflects estimated prepayments for mortgage-backed securities.
</TABLE>
16
<PAGE> 17
Deposits and Other Sources of Funds
The Company's extensive product lines, Customer Sales and Service Center,
and banking network of 217 full-service offices and 392 remote banking
facilities generate significant core deposits. Core deposits accounted for 98%
of total average deposits during the second quarter of 1995.
Core deposits include transaction accounts (demand, NOW, and savings
accounts), money market deposit accounts, and consumer time certificates.
Average core deposits were $8.7 billion in the second quarter of 1995 and $8.5
billion in the second quarter of 1994. Average core deposits were $8.6 billion
and $8.5 billion for the first six months of 1995 and 1994, respectively.
Average transaction accounts were $4.8 billion in the second quarter of 1995,
down slightly from $4.9 billion in the second quarter of 1994, as certain
customers moved balances to higher-yielding certificates of deposit. Average
consumer certificates of deposit were $1.4 billion during the second quarter of
1995, compared with $945 million in the second quarter of 1994, and were $1.3
billion and $959 million in the first six months of 1995 and 1994, respectively.
Average corporate certificates of deposit in excess of $100 thousand (CDs)
were $210 million in the second quarter of 1995, compared with $63 million in
the second quarter of 1994, and were $193 million and $50 million in the first
six months of 1995 and 1994, respectively.
Average purchased funds were $947 million and $728 million for the quarters
ended June 30, 1995, and June 30, 1994, respectively, as the average loan
portfolio was increased.
Interest Rate Risk Management and Liquidity
BayBanks' Capital Markets Committee monitors and manages the Company's
overall balance sheet interest sensitivity position, the securities portfolios,
funding, and liquidity. Interest sensitivity, as measured by the Company's gap
position, is affected by the level and direction of interest rates and current
liquidity preferences of its customers. A negative gap indicates that
liabilities will reprice more quickly than assets, and a positive gap indicates
that assets will reprice in aggregate before liabilities. These factors, as well
as projected balance sheet growth, current and potential pricing actions,
competitive influences, national monetary and fiscal policy, and the national
and regional economic environments, are considered in the asset and liability
management decision process.
The Company's interest sensitivity gap position, as shown in TABLE F (page
18), is based on contractual maturities and repricing opportunities; however, in
a period of rising or falling interest rates, this basis of presentation does
not reflect lags that may occur in the repricing of certain loans and deposits.
For example, the cost of certain interest-bearing core deposit categories may
lag changes in market interest rates, although the Company contractually can
change the interest rates on these deposits at any time. A management adjustment
provides for these expected repricing lags and for the notion that interest rate
changes in many of these core deposit categories, particularly certain
transaction accounts, have not been as sensitive to changes in market interest
rates.
At June 30, 1995, the Company's adjusted gap for the total within-180-day
period had moved from a positive gap position of $76 million at December 31,
1994, to a positive gap position of $686 million. The total within-one-year gap
moved from a positive $648 million at December 31, 1994, to a positive $1.2
billion at June 30, 1995.
17
<PAGE> 18
<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, 1995
Total assets......................... $3,828 $ 683 $630 $ 5,141 $1,201 $6,342
Total liabilities.................... 6,619 198 328 7,145 429 7,574
------ ------- ---- ------- ------ ------
Net contractual gap position......... (2,791) 485 302 (2,004) 772 (1,232)
Net interest rate swaps.............. -- 5 -- 5 (2) 3
------ ------- ---- ------- ------ ------
Net gap position including interest
rate swaps at June 30, 1995....... (2,791) 490 302 (1,999) 770 (1,229)
Management adjustment................ 4,439 (1,644) (110) 2,685 (221) 2,464
------ ------- ---- ------- ------ ------
Management adjusted gap at June 30,
1995................................. $1,648 $(1,154) $192 $ 686 $ 549 $1,235
====== ======= ==== ======= ====== ======
Management adjusted gap at December 31,
1994................................. $1,084 $(1,275) $267 $ 76 $ 572 $ 648
====== ======= ==== ======= ====== ======
Management adjusted gap at June 30,
1994................................. $1,597 $(2,266) $211 $ (458) $ (2) $ (460)
====== ======= ==== ======= ====== ======
</TABLE>
In addition to the gap analysis presented in the table, the Company also
uses a simulation model that incorporates varying interest rate scenarios,
including the effect of rapid changes (both increases and decreases up to 200
basis points) in interest rates on its net interest income and net interest
margin. The Company's policy is to minimize volatility in its net interest
income and net interest margin.
Liquidity, for commercial banking activities, is the ability to respond to
maturing obligations, deposit withdrawals, and loan demand. The liquidity
positions of the Company's bank subsidiaries are closely monitored by the
Company's Capital Markets Committee. BayBanks' distribution network provides a
stable base of in-market core deposits and limits the need to raise funds from
the national market.
The Company's net liquidity position (short-term investments, securities
available for sale, and investment securities, less pledged securities, large
CDs, and purchased funds) was $1.6 billion, or 16% of total deposits and
borrowings at June 30, 1995. The Company's strong liquidity position allowed for
the expansion of the loan portfolio during the second quarter of 1995. The
Company derives additional liquidity flexibility from the relatively short
average maturity (1.5 years) of its securities portfolios.
The statement of cash flows provides additional information on liquidity.
The statement presents the results of the Company's operating, investing, and
financing activities. Operating activities included $64.8 million in net income
for the first six months of 1995, before adjustment of noncash items. Investing
activities consist primarily of both proceeds from sales and purchases of
short-term investments and securities and net loan originations. Financing
activities consist primarily of the net deposit activity in the Company's
various accounts and short-term borrowings, as well as dividends paid.
Cash and cash equivalents were $829 million at December 31, 1994. During
the first six months of 1995, net cash provided by operating activities was $89
million, net cash used in investing activities totaled $241 million, and net
cash provided by financing activities was $162 million. Cash and cash
equivalents were $839 million at June 30, 1995.
The parent company's sources of liquidity are dividend and interest income
received from its subsidiaries and income earned on its securities portfolios.
The most significant uses of the parent company's resources are capital
contributions to banking and other subsidiaries when appropriate, the
acquisition of subsidiaries, and dividends paid to stockholders. During the
first six months of 1995 BayBank, the Company's largest bank subsidiary, repaid
a $46.5 million floating-rate note to the parent company. The parent company
contributed $1 million of capital to a nonbank subsidiary during the first six
months of 1995. Dividends received from bank subsidiaries were $16 million, and
dividends received from nonbank subsidiaries were $5 million during the first
six months of 1995. The parent company paid $19 million in dividends to its
stockholders. At June 30,
18
<PAGE> 19
1995, the parent company had $132 million in cash, short-term investments, and
other securities. The parent company subsequently paid $58 million in cash to
complete the acquisition of NFS.
CREDIT QUALITY REVIEW
Overview
The Company continually monitors the credit quality of its loan portfolio.
Employing a standard system for grading loans, individual account officers
assign loan grades, or risk ratings, and, if necessary, a specific loan loss
reserve calculated under the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." An independent Loan Review Department then
reviews loan grades and specific loan loss reserves. Any loan or portion of a
loan determined to be uncollectible is charged off. On a quarterly basis, senior
management reviews the loan portfolio, with particular emphasis on higher-risk
loans, to assess the credit quality and loss potential inherent in the
portfolio. Also considered in this review are delinquency trends and the
adequacy of reserves. The size of the allowance for loan losses, the OREO
reserve, and the related provisions reflect this analysis.
Nonperforming assets, presented in TABLE G (which exclude restructured,
accruing loans and accruing loans 90 days or more past due) include
nonperforming loans (including impaired loans, as defined below) and OREO and
were $97 million at June 30, 1995, a 21% decrease from $122 million at December
31, 1994, and a 44% decrease from $173 million at June 30, 1994.
<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
1995 1994 1994
------- ----------- --------
<S> <C> <C> <C>
Nonperforming loans.................................... $72,968 $ 54,627 $ 83,743
Other real estate owned
In-substance foreclosures (ISF)...................... 6,561 44,610 58,345
Foreclosed property.................................. 33,142 47,760 57,026
------- -------- --------
39,703 92,370 115,371
Less OREO reserve.................................... 15,857 24,971 26,193
------- -------- --------
OREO, net of reserve................................. 23,846 67,399 89,178
------- -------- --------
Total nonperforming assets............................. $96,814 $122,026 $172,921
======= ======== ========
Restructured, accruing loans........................... $ 3,619 $ 13,537 $ 12,112
======= ======== ========
Accruing loans 90 days or more past due................ $33,651 $ 36,193 $ 41,644
======= ======== ========
Nonperforming assets as a percentage of loans and
OREO................................................. 1.4% 1.8% 2.8%
Nonperforming assets as a percentage of total assets... 0.9 1.1 1.6
</TABLE>
The decline in nonperforming assets is shown in TABLE H (page 20). This
result was achieved by successful workout activities that included property
sales, payments on nonperforming loans, and loans that qualified for, and were
returned to, accrual status. Favorable resolutions were $29 million in the
second quarter of 1995, or 26% of nonperforming assets at the beginning of the
period. Additions to nonperforming assets were $22 million in the second quarter
of 1995. As of June 30, 1995, the Company had OREO property sales pending of
$3.0 million.
19
<PAGE> 20
<TABLE>
TABLE H
CHANGE IN ASSET QUALITY
(IN THOUSANDS)
<CAPTION>
SIX MONTHS
1995 1994 ENDED
--------------------- ---------------------------------- JUNE 30
SECOND FIRST FOURTH THIRD SECOND ---------------------
QUARTER QUARTER QUARTER QUARTER QUARTER 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets (1)............ $ 96,814 $112,005 $122,026 $137,104 $172,921 $ 96,814 $172,921
======== ======== ======== ======== ======== ======== ========
Nonperforming asset activity:
Additions......................... $ 21,870 $ 7,573 $ 19,554 $ 10,233 $ 23,446 $ 29,443 $ 44,102
-------- -------- -------- -------- -------- -------- --------
Payments.......................... (13,567) (5,721) (6,797) (10,428) (10,879) (19,288) (18,949)
Returns to accrual................ (1,227) (104) (7,098) (11,990) (9,992) (1,331) (14,341)
OREO sales........................ (13,863) (6,645) (14,244) (15,058) (19,525) (20,508) (41,002)
-------- -------- -------- -------- -------- -------- --------
Total improvements............... (28,657) (12,470) (28,139) (37,476) (40,396) (41,127) (74,292)
-------- -------- -------- -------- -------- -------- --------
Net outflow...................... (6,787) (4,897) (8,585) (27,243) (16,950) (11,684) (30,190)
-------- -------- -------- -------- -------- -------- --------
Charge-offs......................... (9,089) (4,884)(2) (8,378) (7,911) (14,648) (13,973)(2) (24,152)
Net change in OREO reserve.......... 685 (240)(2) 1,885 (663) 775 445(2) 3,583
-------- -------- -------- -------- -------- -------- --------
Total decrease in nonperforming
assets............................ $(15,191) $(10,021) $(15,078) $(35,817) $(30,823) $(25,212) $(50,759)
======== ======== ======== ======== ======== ======== ========
<FN>
- ---------------
(1) At period-end, excluding restructured, accruing loans and accruing loans 90
days or more past due.
(2) The transfer of $8.7 million of reserves related to in-substance
foreclosures reclassified to loans upon adoption of SFAS No. 114 and
subsequent charge-offs of $8.7 million recorded during the first quarter of
1995 had no effect on total nonperforming assets and are not reflected in
the table above.
</TABLE>
Nonperforming Loans
Effective January 1, 1995, the Company adopted SFAS No. 114 and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." Under SFAS No. 114, a loan is impaired when it is probable that
the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment, such as
residential mortgage and instalment loans, are exempt from the provisions of
SFAS No. 114. Upon adoption of this statement on January 1, 1995, the Company
reclassified $33 million of in-substance foreclosures and $9 million of related
reserves to loans and the allowance for loan losses, respectively.
Total nonperforming loans (TABLE I) were $73 million at June 30, 1995,
compared with $55 million at December 31, 1994, and $84 million at June 30,
1994. During the second quarter of 1995, nonperforming loans decreased 3% from
$76 million at March 31, 1995. On a pro forma basis, assuming the adoption of
SFAS No. 114 on December 31, 1994, nonperforming loans declined 8% since
year-end as the resolution of problem assets continued to exceed new additions.
<TABLE>
TABLE I
NONPERFORMING LOANS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
DECEMBER 31,
JUNE 30, 1995 1994 JUNE 30, 1994
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial............................ $25,944 35% $17,480 32% $35,408 42%
Commercial real estate................ 30,504 42 26,638 49 35,114 42
Residential mortgage.................. 14,406 20 8,971 16 11,781 14
Instalment............................ 2,114 3 1,538 3 1,440 2
------- --- ------ --- ------- ---
Total nonperforming loans... $72,968 100% $54,627 100% $83,743 100%
======= === ====== === ======= ===
</TABLE>
20
<PAGE> 21
Other Real Estate Owned
OREO consists of foreclosed properties and in-substance foreclosures.
Foreclosed properties are being prepared for sale or are currently listed for
sale. Under SFAS No. 114, the definition of in-substance foreclosure has been
narrowed to assets for which the Company has received physical possession of the
collateral. OREO (net of a valuation reserve), which reflects the
reclassification of certain in-substance foreclosures to loans upon adoption of
SFAS No. 114, as discussed above, declined to $24 million during the first six
months of 1995 from $67 million at December 31, 1994, and $89 million at June
30, 1994. Excluding the impact of the SFAS No. 114 reclassification, OREO
continued to decline due primarily to property sales.
Restructured, Accruing Loans
The Company restructures credits with troubled borrowers if such
arrangements are likely to minimize losses the Company may otherwise incur on a
particular credit. Loans that have been restructured generally remain on
nonaccrual status until the customer has demonstrated a period of performance
under the new contractual terms.
The adoption of SFAS No. 114 also impacts the accounting for troubled debt
restructurings. Restructured, accruing loans entered into after January 1, 1995,
are accounted for as impaired loans until the year subsequent to restructure,
provided that the loan bears a market rate of interest at the time of
restructure and is performing under the restructured terms. The Company entered
into $754 thousand of restructured, accruing loan agreements during the second
quarter of 1995. In accordance with the provisions of SFAS No. 114 and SFAS No.
118, these loans have been accounted for as impaired loans and have been
disclosed as nonperforming loans. Loans restructured prior to the adoption of
SFAS No. 114 are exempt from the provisions of that statement provided that they
are performing under the restructured terms.
At June 30, 1995, restructured, accruing loans that were entered into prior
to the adoption of SFAS No. 114 and were performing under the restructured terms
were $4 million; restructured, accruing loans were $14 million at December 31,
1994.
Accruing Loans 90 Days or More Past Due
Accruing loans 90 days or more past due declined 7% to $34 million at June
30, 1995, from $36 million at December 31, 1994, and 19% from $42 million at
June 30, 1994 (TABLE J).
Of the $34 million in accruing loans past due 90 days or more at June 30,
1995, residential real estate loans and instalment loans together represented
86% of the total. Residential real estate and instalment loans by their nature
include a large number of smaller loans. Of the $10 million in residential real
estate loans, $8 million were in owner-occupied properties.
<TABLE>
TABLE J
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
DECEMBER 31
JUNE 30, 1995 1994 JUNE 30, 1994
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial................................... $ 1,826 5% $ 348 1% $ 2,381 6%
Commercial real estate....................... 2,987 9 4,626 13 6,799 16
Residential mortgage......................... 9,907 30 10,104 28 12,823 31
Instalment................................... 18,931 56 21,115 58 19,641 47
------- --- ------- --- ------- ---
Total.............................. $33,651 100% $36,193 100% $41,644 100%
======= === ======= === ======= ===
</TABLE>
Allowance for Loan Losses
The allowance for loan losses (TABLE K, page 22) was $146 million at June
30, 1995, remaining at the March 31, 1995 level as the provision for loan losses
and net charge-offs were $6.5 million during the second quarter of 1995. The
coverage of nonperforming loans (allowance for loan losses as a percentage of
21
<PAGE> 22
nonperforming loans) increased to 201% at June 30, 1995, from 184% at June 30,
1994. The coverage of nonperforming loans was 269% at December 31, 1994.
However, on a pro forma basis, assuming the adoption of SFAS No. 114 on December
31, 1994, and the subsequent charge-off of ISF reserves reclassified to the
allowance for loan losses, the year-end coverage ratio would have been 186%.
TABLE K
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
------------------------- -------------------------
1995 1994 1995(1) 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loans outstanding at June 30.............. $6,940,157 $6,101,571 $6,940,157 $6,101,571
========== ========== ========== ==========
Average loans............................. $6,830,659 $6,054,613 $6,770,758 $6,048,500
========== ========== ========== ==========
Allowance for loan losses:
Balance at beginning of period............ $ 146,348 $ 165,221 $ 146,835 $ 171,496
Loans charged off
Commercial........................... 2,193 5,609 3,154 7,057
Commercial real estate............... 5,294 7,664 7,007 13,715
Residential mortgage................. 2,442 2,145 3,829 3,932
Instalment........................... 6,312 6,654 13,499 13,659
---------- ---------- ---------- ----------
Total loans charged off.............. 16,241 22,072 27,489 38,363
---------- ---------- ---------- ----------
Recoveries
Commercial........................... 3,566 2,205 4,579 3,885
Commercial real estate............... 3,081 353 4,377 595
Residential mortgage................. 951 537 1,391 1,209
Instalment........................... 2,140 1,882 3,652 3,304
---------- ---------- ---------- ----------
Total recoveries..................... 9,738 4,977 13,999 8,993
---------- ---------- ---------- ----------
Net loans charged off................ 6,503 17,095 13,490 29,370
Provision for loan losses............... 6,500 6,000 13,000 12,000
---------- ---------- ---------- ----------
Balance at June 30........................ $ 146,345 $ 154,126 $ 146,345 $ 154,126
========== ========== ========== ==========
Annualized net charge-offs as a percentage
of average period-to-date loans......... 0.4% 1.1% 0.4% 1.0%
Allowance for loan losses as a percentage
of period-end loans..................... 2.1 2.5 2.1 2.5
Allowance for loan losses as a percentage
of
nonperforming loans..................... 200.6 184.0 200.6 184.0
Allowance for loan losses as a percentage
of nonperforming loans, restructured,
accruing loans, and accruing loans past
due 90 days
or more................................. 132.8 112.1 132.8 112.1
</TABLE>
- ---------------
(1) As a result of the adoption of SFAS No. 114 on January 1, 1995, $33.2
million of in-substance foreclosures and related reserves of $8.7 million
were reclassified to loans and the allowance for loan losses, respectively.
Charge-offs of $8.7 million were subsequently recorded during the first
quarter of 1995. The reclassification of in-substance foreclosures reserves
and subsequent charge-offs had no effect on the allowance for loan losses
and are not reflected in the table above.
22
<PAGE> 23
CAPITAL AND DIVIDENDS
BayBanks' consolidated risk-based capital ratios were 13.53% for total
capital and 11.99% for core capital at June 30, 1995, compared with 13.45% and
11.71%, respectively, at June 30, 1994. At December 31, 1994, the consolidated
risk-based capital ratios were 13.06% for total capital and 11.51% for core
capital. The consolidated leverage ratio was 7.75%, 7.35%, and 7.32% at June 30,
1995, December 31, 1994, and June 30, 1994, respectively (TABLE L).
TABLE L
CAPITAL RATIOS
JUNE 30, 1995
<TABLE>
<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% 11.99% n/a% 13.53% n/a% 7.75%
BayBank....................... 6.00 10.05 10.00 11.31 5.00 6.56
BayBank Boston, N.A........... 6.00 11.25 10.00 12.89 5.00 6.92
BayBank Connecticut, N.A...... 6.00 14.26 10.00 15.52 5.00 12.98
</TABLE>
- ---------------
* Under Federal Prompt Corrective Action and Risk-based Deposit Insurance
Assessment Regulations.
n/a - not applicable
BayBanks paid a dividend in the second quarter of 1995 of $.50 per share,
bringing the dividend paid through the first six months of 1995 to $1.00 per
share. On July 27, 1995, BayBanks declared a quarterly dividend of $.60 per
share payable September 1, 1995, representing a 20% increase over the previous
quarterly dividend.
23
<PAGE> 24
BAYBANKS, INC.
AVERAGE BALANCES AND CAPITAL RATIOS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994
SIX MONTHS ----------------- ---------------------------
---------------- SECOND FIRST FOURTH THIRD SECOND
1995 1994 QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits and other short-term
investments........................................... $ 210 $ 259 $ 215 $ 205 $ 176 $ 175 $ 204
Securities available for sale, at cost.................. 228 608 225 231 190 420 597
Investment securities, at cost.......................... 2,630 2,143 2,574 2,687 2,849 2,840 2,347
Loans(1)
Commercial............................................ 1,574 1,327 1,615 1,533 1,499 1,372 1,360
Commercial real estate................................ 981 917 981 980 928 915 908
Residential mortgage.................................. 1,386 1,201 1,415 1,357 1,302 1,256 1,193
Instalment............................................ 2,830 2,604 2,820 2,840 2,776 2,659 2,594
------- ------ ------- ------- ------- ------- -------
6,771 6,049 6,831 6,710 6,505 6,202 6,055
Less allowance for loan losses........................ 149 168 146 151 150 155 164
------- ------ ------- ------- ------- ------- -------
6,622 5,881 6,685 6,559 6,355 6,047 5,891
------- ------ ------- ------- ------- ------- -------
Total earning assets............................ 9,839 9,059 9,845 9,833 9,720 9,637 9,203
Cash and due from banks................................. 649 612 667 632 672 651 622
Other assets............................................ 442 487 442 440 463 480 480
------- ------ ------- ------- ------- ------- -------
Total assets.................................... $10,781 $9,990 $10,808 $10,754 $10,705 $10,613 $10,141
======= ====== ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand................................................ $ 2,006 $1,951 $2,013 $1,998 $2,037 $1,992 $1,946
NOW accounts.......................................... 1,380 1,395 1,377 1,383 1,397 1,388 1,399
Savings............................................... 1,441 1,495 1,431 1,451 1,477 1,502 1,509
Money market deposit accounts......................... 2,489 2,721 2,468 2,512 2,577 2,655 2,700
Consumer time......................................... 1,295 959 1,401 1,189 1,059 981 945
Time -- $100,000 or more.............................. 193 50 210 175 136 125 63
------- ------ ------- ------- ------- ------- -------
8,804 8,571 8,900 8,708 8,683 8,643 8,562
Federal funds purchased and other short-term
borrowings............................................ 1,030 578 947 1,114 1,107 1,086 728
Long-term debt.......................................... 51 54 51 51 51 54 54
------- ------ ------- ------- ------- ------- -------
Total deposits and borrowings................... 9,885 9,203 9,898 9,873 9,841 9,783 9,344
Other liabilities(2).................................... 84 66 86 81 89 77 66
Stockholders' equity.................................... 812 721 824 800 775 753 731
------- ------ ------- ------- ------- ------- -------
Total liabilities and stockholders' equity...... $10,781 $9,990 $10,808 $10,754 $10,705 $10,613 $10,141
======= ====== ======= ======= ======= ======= =======
CAPITAL RATIOS
Risk-Based
Core (Min. regulatory standard -- 4.00%).............. 11.99% 11.71% 11.99 % 11.81 % 11.51 % 11.74 % 11.71 %
Total (Min. regulatory standard -- 8.00%)............. 13.53 13.45 13.53 13.36 13.06 13.46 13.45
Leverage................................................ 7.75 7.32 7.75 7.55 7.35 7.21 7.32
</TABLE>
- ---------------
(1) Nonperforming loans are included in the average balances.
(2) Includes guarantee of ESOP indebtedness.
24
<PAGE> 25
BAYBANKS, INC.
SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS ON A TAX EQUIVALENT BASIS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994
SIX MONTHS ------------------- ------------------------------
------------------- SECOND FIRST FOURTH THIRD SECOND
1995 1994 QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income on earning assets........... $389,224 $306,763 $197,045 $192,179 $184,387 $174,632 $158,305
Interest expense on deposits and
borrowings....................... 137,315 81,241 70,885 66,430 58,805 52,812 43,423
-------- -------- -------- -------- -------- -------- --------
Net interest income................ 251,909 225,522 126,160 125,749 125,582 121,820 114,882
Noninterest income................. 107,193 103,746 55,752 51,441 50,985 52,557 54,031
-------- -------- -------- -------- -------- -------- --------
Total income from operations....... 359,102 329,268 181,912 177,190 176,567 174,377 168,913
Operating expenses................. 236,478 226,907 119,926 116,552 115,557 114,706 114,712
-------- -------- -------- -------- -------- -------- --------
OPERATING INCOME BEFORE NET
SECURITIES GAINS (LOSSES) AND
PROVISIONS FOR LOAN LOSSES AND
OREO RESERVE..................... 122,624 102,361 61,986 60,638 61,010 59,671 54,201
-------- -------- -------- -------- -------- -------- --------
Net securities gains (losses)...... 1 475 -- 1 (272) -- 436
-------- -------- -------- -------- -------- -------- --------
Provision for loan losses.......... 13,000 12,000 6,500 6,500 6,000 6,000 6,000
Provision for OREO reserve, net.... 1,000 5,437 -- 1,000 1,520 2,415 2,500
-------- -------- -------- -------- -------- -------- --------
Credit provisions.................. 14,000 17,437 6,500 7,500 7,520 8,415 8,500
-------- -------- -------- -------- -------- -------- --------
Pre-tax income..................... 108,625 85,399 55,486 53,139 53,218 51,256 46,137
Less tax equivalent adjustment
included above................... 5,738 4,040 2,943 2,795 2,126 1,816 2,067
-------- -------- -------- -------- -------- -------- --------
Income before taxes and cumulative
effect of accounting change...... 102,887 81,359 52,543 50,344 51,092 49,440 44,070
Provision for income taxes......... 38,054 32,726 18,185 19,869 20,389 20,407 17,648
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
accounting change................ 64,833 48,633 34,358 30,475 30,703 29,033 26,422
Less cumulative effect of
accounting change (net of tax
benefit of $683)................. -- 932 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
NET INCOME......................... $ 64,833 $ 47,701 $ 34,358 $ 30,475 $ 30,703 $ 29,033 $ 26,422
======== ======== ======== ======== ======== ======== ========
EARNINGS PER SHARE
Income before accounting
change......................... $ 3.36 $ 2.54 $ 1.78 $ 1.58 $ 1.59 $ 1.51 $ 1.38
Less cumulative effect of
accounting change.............. -- 0.05 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income....................... $ 3.36 $ 2.49 $ 1.78 $ 1.58 $ 1.59 $ 1.51 $ 1.38
======== ======== ======== ======== ======== ======== ========
DIVIDENDS PAID PER SHARE........... $ 1.00 $ 0.70 $ 0.50 $ 0.50 $ 0.45 $ 0.45 $ 0.35
FINANCIAL RATIOS
Return on average equity........... 16.1% 13.3% 16.7% 15.5% 15.7% 15.3% 14.5%
Return on average assets........... 1.21 0.96 1.28 1.15 1.14 1.09 1.05
COMMON STOCK DATA
Period-end book value per share.... $ 44.09 $ 39.47 $ 44.09 $ 42.81 $ 41.51 $ 40.30 $ 39.47
Dividend payout ratio.............. 29.8% 28.1% 28.1% 31.6% 28.3% 29.7% 25.4%
Range of BayBanks, Inc., last sale
price
High............................. $ 79.50 $ 64.13 $ 79.50 $ 64.50 $ 59.50 $ 63.00 $ 64.13
Low.............................. 52.00 50.00 60.50 52.00 51.00 54.25 54.50
Close............................ 79.25 60.25 79.25 64.50 52.75 55.00 60.25
</TABLE>
25
<PAGE> 26
BAYBANKS, INC.
AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN(1)
<TABLE>
<CAPTION>
1995 1994
SIX MONTHS ------------------- -------------------------------
------------- SECOND FIRST FOURTH THIRD SECOND
1995 1994 QUARTER QUARTER QUARTER QUARTER QUARTER
---- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits and other
short-term investments............... 5.94% 3.56% 6.04% 5.84% 5.24% 4.38% 3.94%
Securities available for sale(2)....... 6.72 4.80 6.64 6.80 6.27 5.42 4.98
Investment securities.................. 5.61 4.68 5.72 5.51 5.23 5.13 4.80
Loans.................................. 8.96 7.90 8.99 8.94 8.55 8.35 7.98
Commercial........................... 8.88 6.89 8.85 8.92 8.29 7.68 7.19
Commercial real estate............... 9.14 7.82 9.31 8.98 8.89 8.54 8.05
Residential mortgage................. 7.66 7.29 7.69 7.62 7.49 7.48 7.24
Instalment........................... 9.59 8.72 9.61 9.57 9.07 9.03 8.72
Total earning assets................... 7.95% 6.81% 8.01% 7.89% 7.47% 7.20% 6.89%
Interest-bearing funds................. 3.50% 2.25% 3.60% 3.41% 2.98% 2.68% 2.35%
NOW accounts......................... 1.36 1.34 1.36 1.37 1.37 1.37 1.34
Savings.............................. 2.27 1.92 2.29 2.25 2.17 1.96 1.93
Money market deposit accounts........ 3.30 2.12 3.37 3.22 2.72 2.50 2.20
Consumer time........................ 5.17 3.46 5.46 4.83 4.21 3.80 3.46
Time -- $100,000 or more............. 5.81 3.40 5.84 5.78 5.08 4.29 3.69
Short-term borrowings................ 5.91 3.69 5.99 5.84 5.14 4.50 3.97
Long-term debt....................... 6.42 4.16 6.35 6.50 5.54 5.05 4.44
Interest expense as a percentage of
average earning assets............... 2.81% 1.80% 2.88% 2.73% 2.39% 2.17% 1.89%
Net interest margin.................... 5.14% 5.01% 5.13% 5.16% 5.08% 5.03% 5.00%
</TABLE>
- ---------------
(1) Tax equivalent basis.
(2) Yields based on average cost.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on April 27, 1995, the Company's
stockholders voted as follows to reelect Messrs. William M. Crozier, Jr., Robert
L. Gable, Norman E. MacNeil, and Glenn P. Strehle 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>
William M. Crozier, Jr................................ 16,299,432 344,800
Robert L. Gable....................................... 16,301,676 342,556
Norman E. MacNeil..................................... 16,317,390 326,842
Glenn P. Strehle...................................... 16,326,045 318,187
</TABLE>
There were no abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit List and Index on page 28.
(b) A report on Form 8-K was filed on April 3, 1995, reporting the
execution of an Acquisition Agreement on March 23, 1995, under which
the Company would acquire Cornerstone Financial Corporation
("Cornerstone"), and a related Option Agreement under which Cornerstone
granted to the Company an option to purchase up to 14% of the
outstanding shares of Cornerstone common stock.
A report on Form 8-K was filed on July 7, 1995, reporting the
consummation after the close of business on June 30, 1995 of the
Company's acquisition of NFS Financial Corp. and its subsidiary banks
and the merger of those two banks into a single federal savings bank
under the name BayBank FSB.
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 8, 1995
27
<PAGE> 28
<TABLE>
BAYBANKS, INC.
EXHIBIT LIST AND INDEX
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
MISCELLANEOUS
11.1 -- Computation of Primary and Fully Diluted Earnings Per Share. See Page 29.
27 -- Financial Data Schedule.
</TABLE>
28
<PAGE> 1
EXHIBIT 11.1
<TABLE>
BAYBANKS, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
FOR THE PERIODS ENDED JUNE 30
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
SIX MONTHS ENDED JUNE 30
QUARTER ENDED JUNE 30
--------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares............. 19,011,952 18,798,391 19,025,148 18,818,163
Common stock equivalents (CSE):
Stock options..................... 280,145 325,752 296,959 336,457
----------- ----------- ----------- -----------
Primary weighted average shares..... 19,292,097 19,124,143 19,322,107 19,154,620
=========== =========== =========== ===========
Income before cumulative effect of
accounting change................. $ 64,833 $ 48,633 $ 34,358 $ 26,422
Less cumulative effect of accounting
change............................ -- 932 -- --
----------- ----------- ----------- -----------
Net income.......................... $ 64,833 $ 47,701 $ 34,358 $ 26,422
=========== =========== =========== ===========
Primary earnings per share:
Income before cumulative effect
of accounting change......... $ 3.36 $ 2.54 $ 1.78 $ 1.38
Less cumulative effect of
accounting change............ -- 0.05 -- --
----------- ----------- ----------- -----------
Net income..................... $ 3.36 $ 2.49 $ 1.78 $ 1.38
=========== =========== =========== ===========
FULLY DILUTED:
Weighted average shares............. 19,011,952 18,798,391 19,025,148 18,818,163
Common stock equivalents (CSE):
Stock options..................... 320,439 333,275 337,253 341,544
----------- ----------- ----------- -----------
Fully diluted weighted average
shares............................ 19,332,391 19,131,666 19,362,401 19,159,707
=========== =========== =========== ===========
Income before cumulative effect of
accounting change................. $ 64,833 $ 48,633 $ 34,358 $ 26,422
Less cumulative effect of accounting
change............................ -- 932 -- --
----------- ----------- ----------- -----------
Net income.......................... $ 64,833 $ 47,701 $ 34,358 $ 26,422
=========== =========== =========== ===========
Fully diluted earnings per share:
Income before cumulative effect
of accounting change......... $ 3.35 $ 2.54 $ 1.77 $ 1.38
Less cumulative effect of
accounting change............ -- 0.05 -- --
----------- ----------- ----------- -----------
Net income..................... $ 3.35 $ 2.49 $ 1.77 $ 1.38
=========== =========== =========== ===========
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BAYBANKS, INC. FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 839,063
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 198,600
<TRADING-ASSETS> 47,835
<INVESTMENTS-HELD-FOR-SALE> 215,563
<INVESTMENTS-CARRYING> 2,449,708
<INVESTMENTS-MARKET> 2,457,033
<LOANS> 6,940,157
<ALLOWANCE> 146,345
<TOTAL-ASSETS> 11,005,700
<DEPOSITS> 9,181,062
<SHORT-TERM> 849,490
<LIABILITIES-OTHER> 84,042
<LONG-TERM> 51,136
<COMMON> 38,100
0
0
<OTHER-SE> 801,870
<TOTAL-LIABILITIES-AND-EQUITY> 11,005,700
<INTEREST-LOAN> 301,775
<INTEREST-INVEST> 75,707
<INTEREST-OTHER> 6,004
<INTEREST-TOTAL> 383,486
<INTEREST-DEPOSIT> 105,039
<INTEREST-EXPENSE> 137,315
<INTEREST-INCOME-NET> 246,171
<LOAN-LOSSES> 13,000
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 237,478
<INCOME-PRETAX> 102,887
<INCOME-PRE-EXTRAORDINARY> 64,833
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,833
<EPS-PRIMARY> 3.36
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.14
<LOANS-NON> 72,968
<LOANS-PAST> 33,651
<LOANS-TROUBLED> 3,619
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 146,835
<CHARGE-OFFS> 27,489
<RECOVERIES> 13,999
<ALLOWANCE-CLOSE> 146,345
<ALLOWANCE-DOMESTIC> 8,136
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 138,209
</TABLE>
