<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 September 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 October 31, 1995, 19,628,571 shares of the registrant's common stock,
$2.00 par value, were outstanding.
The list of exhibits to this report appears on page 30.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAYBANKS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1995 1994 1994
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks..................................................... $ 749,763 $ 829,170 $ 658,070
Trading accounts............................................................ 77,076 27,416 21,521
Securities portfolios
Interest-bearing deposits and other short-term investments................ 349,310 166,286 155,503
Securities available for sale -- amortized cost $316,939 at September 30,
1995, $220,132 at December 31, 1994, and $140,599 at September 30,
1994.................................................................... 317,664 220,602 141,406
Investment securities -- market value $2,199,459 at September 30, 1995,
$2,481,584 at December 31, 1994, and $2,842,806 at September 30, 1994... 2,190,033 2,556,249 2,892,584
----------- ----------- -----------
2,857,007 2,943,137 3,189,493
Loans, net of unearned income and fees
Commercial................................................................ 1,594,045 1,528,265 1,421,961
Commercial real estate.................................................... 1,081,386 956,596 910,185
Residential mortgage...................................................... 1,944,293 1,335,466 1,283,960
Instalment................................................................ 2,856,772 2,828,193 2,736,869
----------- ----------- -----------
7,476,496 6,648,520 6,352,975
Less allowance for loan losses............................................ 153,808 146,835 150,614
----------- ----------- -----------
7,322,688 6,501,685 6,202,361
Premises and equipment, net................................................. 204,614 195,430 191,629
Other real estate owned and in-substance foreclosures, net.................. 18,703 67,399 77,566
Goodwill and other intangibles.............................................. 47,857 4,421 3,330
Other assets................................................................ 247,062 202,289 192,967
----------- ----------- -----------
Total assets....................................................... $11,524,770 $10,770,947 $10,536,937
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand.................................................................... $ 2,190,591 $ 2,214,761 $ 2,063,635
NOW accounts.............................................................. 1,481,047 1,491,694 1,415,506
Savings................................................................... 1,466,976 1,462,459 1,486,199
Money market deposit accounts............................................. 2,545,710 2,560,425 2,602,956
Consumer time............................................................. 1,819,229 1,095,357 1,014,838
Time -- $100,000 or more.................................................. 219,808 175,663 112,932
----------- ----------- -----------
9,723,361 9,000,359 8,696,066
Federal funds purchased and other short-term borrowings..................... 731,979 849,517 951,037
Accrued expenses and other accounts payable................................. 92,157 71,854 60,653
Long-term debt.............................................................. 64,829 51,154 54,009
Guarantee of ESOP indebtedness.............................................. 6,289 9,451 9,451
Stockholders' equity:
Common stock, par value $2.00 per share
Shares authorized -- 50,000,000
Shares issued -- 19,622,393 at September 30, 1995, 18,999,354 at
December 31, 1994, and 18,999,093 at September 30, 1994................ 39,245 37,999 37,998
Surplus................................................................... 359,102 314,924 313,968
Retained earnings......................................................... 514,097 445,167 423,206
----------- ----------- -----------
912,444 798,090 775,172
Less treasury stock at cost -- 1,431 shares at December 31, 1994............ -- 27 --
Less guarantee of ESOP indebtedness......................................... 6,289 9,451 9,451
----------- ----------- -----------
Total stockholders' equity......................................... 906,155 788,612 765,721
----------- ----------- -----------
Total liabilities and stockholders' equity......................... $11,524,770 $10,770,947 $10,536,937
=========== =========== ===========
</TABLE>
2
<PAGE> 3
<TABLE>
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
THIRD QUARTER NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------ ------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income on interest-bearing deposits and other
short-term investments............................... $ 5,140 $ 1,822 $ 11,144 $ 6,232
Interest on securities available for sale and
investment
securities........................................... 36,513 40,754 112,220 101,299
Interest and fees on loans............................. 165,282 130,240 467,057 368,008
---------- ---------- ---------- ----------
Total income on earning assets......................... 206,935 172,816 590,421 475,539
Interest expense on deposits and borrowings
Deposits............................................. 63,910 39,640 168,949 109,027
Short-term borrowings................................ 11,794 12,475 42,418 23,199
Long-term debt....................................... 1,034 697 2,686 1,827
---------- ---------- ---------- ----------
Total interest expense................................. 76,738 52,812 214,053 134,053
---------- ---------- ---------- ----------
Net interest income.................................... 130,197 120,004 376,368 341,486
Provision for loan losses.............................. 6,000 6,000 19,000 18,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses.... 124,197 114,004 357,368 323,486
Noninterest income
Service charges and fees on deposit accounts......... 28,030 28,176 82,313 82,218
Other noninterest income............................. 29,314 24,381 82,224 74,085
---------- ---------- ---------- ----------
Total noninterest income............................... 57,344 52,557 164,537 156,303
Net securities gains................................... 42 -- 43 475
Operating expenses
Salaries and benefits................................ 65,128 58,264 186,863 172,081
Occupancy and equipment.............................. 23,272 21,897 68,286 66,091
Other operating expenses............................. 36,709 34,545 106,438 103,441
---------- ---------- ---------- ----------
Total operating expenses............................... 125,109 114,706 361,587 341,613
Provision for OREO reserve, net........................ (229) 2,415 771 7,852
---------- ---------- ---------- ----------
Total operating expenses after OREO provision.......... 124,880 117,121 362,358 349,465
---------- ---------- ---------- ----------
Income before taxes and cumulative effect of accounting
change............................................... 56,703 49,440 159,590 130,799
Provision for income taxes............................. 21,984 20,407 60,038 53,133
---------- ---------- ---------- ----------
Income before cumulative effect of accounting change... 34,719 29,033 99,552 77,666
Less cumulative effect of accounting change (net of tax
benefit of $683 in 1994)............................. -- -- -- 932
---------- ---------- ---------- ----------
NET INCOME............................................. $ 34,719 $ 29,033 $ 99,552 $ 76,734
========= ========= ========= =========
Earnings Per Share
Income before accounting change...................... $ 1.74 $ 1.51 $ 5.11 $ 4.06
Less cumulative effect of accounting change.......... -- -- -- 0.05
---------- ---------- ---------- ----------
Net Income........................................... $ 1.74 $ 1.51 $ 5.11 $ 4.01
========= ========= ========= =========
Average shares outstanding............................. 19,907,015 19,187,890 19,499,181 19,145,704
</TABLE>
3
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<TABLE>
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
COMMON RETAINED TREASURY ESOP LOAN
STOCK SURPLUS EARNINGS STOCK GUARANTEE TOTAL
------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1993............ $37,486 $310,355 $367,662 $ -- $(12,241 ) $703,262
Net income -- Nine months ended September
30, 1994............................... 76,734 76,734
Cash dividends declared ($1.15 per
share)................................. (21,659) (21,659)
Net change in valuation reserve related
to securities available for sale
portfolio, net of deferred income
taxes.................................. 469 469
Other, principally employee benefit
plans.................................. 512 3,613 -- 2,790 6,915
------- -------- -------- -------- --------- --------
BALANCE AS OF SEPTEMBER 30, 1994........... $37,998 $313,968* $423,206 $ -- $ (9,451 ) $765,721
======== ========= ========= ========= =========== =========
BALANCE AS OF DECEMBER 31, 1994............ $37,999 $314,924* $445,167 $ (27) $ (9,451 ) $788,612
Net income -- Nine months ended September
30, 1995............................... 99,552 99,552
Stock issued in acquisition of NFS
Financial Corp. (NFS) (487,267
shares)................................ 975 37,641 38,616
Options issued in acquisition of NFS
(29,778 options)....................... 1,504 1,504
Cash dividends declared ($1.60 per
share)................................. (30,773) (30,773)
Net change in valuation reserve related
to securities available for sale
portfolio, net of deferred income
taxes.................................. 151 151
Other, principally employee benefit
plans.................................. 271 5,033 27 3,162 8,493
------- -------- -------- -------- --------- --------
BALANCE AS OF SEPTEMBER 30, 1995........... $39,245 $359,102* $514,097 $ -- $ (6,289 ) $906,155
======== ========= ========= ========= =========== =========
<FN>
- ---------------
* Net of unamortized restricted stock compensation expense of $5,856, $6,150,
and $6,844 at September 30, 1995, December 31, 1994, and September 30, 1994,
respectively.
</TABLE>
4
<PAGE> 5
<TABLE>
BAYBANKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................................... $ 99,552 $ 76,734
Adjustments to reconcile net income to net cash provided by operating activities:
Proceeds from sales and maturities of trading account assets(1)................... 1,716,437 1,927,406
Purchases of trading account assets............................................... (1,774,781) (1,949,810)
Amortization of security premium.................................................. 10,338 19,100
Net securities gains.............................................................. (43) (475)
Fixed-rate mortgages sold......................................................... 79,535 255,043
Fixed-rate mortgages originated for sale, net of principal payments............... (98,629) (149,286)
Student loans transferred from portfolio and sold................................. 130,732 127,013
Provision for loan losses......................................................... 19,000 18,000
Amortization of goodwill and other intangibles.................................... 1,243 419
Depreciation and amortization of premises and equipment........................... 20,032 19,131
Gain on sales of premises and equipment........................................... (1,756) (903)
Provision for OREO reserve, net................................................... 771 7,852
Deferred income taxes............................................................. 4,009 13,243
Change in other assets............................................................ (41,148) (2,148)
Change in interest receivable..................................................... (10,401) (13,987)
Change in accrued expenses and other accounts payable............................. 7,922 6,540
Change in interest payable........................................................ 9,921 1,255
----------- -----------
Net cash provided by operating activities..................................... 172,734 355,127
----------- -----------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale................................ 110,348 264,758
Proceeds from maturities of securities available for sale........................... 39,996 329,197
Purchases of securities available for sale(1)....................................... (102,430) (95,655)
Proceeds from maturities of investment securities................................... 2,053,958 496,191
Purchases of investment securities.................................................. (1,698,366) (1,802,954)
Net cash provided (used) by:
Short-term investments............................................................ (163,441) 647,565
Loans(2)(3)(4).................................................................... (483,477) (541,480)
Proceeds from sales of premises and equipment....................................... 2,585 1,469
Purchases of premises and equipment................................................. (21,762) (18,772)
Proceeds from sales and payments related to OREO(3)(4).............................. 20,241 48,284
Purchase of NFS, net of cash acquired............................................... (40,056) --
----------- -----------
Net cash used by investing activities......................................... (282,404) (671,397)
----------- -----------
FINANCING ACTIVITIES
Net cash provided (used) by:
Demand deposits, NOW, and savings accounts........................................ (186,855) (52,859)
Money market deposits............................................................. (108,377) (128,764)
Consumer time deposits............................................................ 444,916 20,893
Time -- $100,000 or more.......................................................... 43,753 77,975
Short-term borrowings............................................................. (129,989) 443,217
Long-term debt.................................................................... (4,471) (438)
Dividends paid...................................................................... (30,773) (21,659)
Other equity transactions........................................................... 2,059 2,990
----------- -----------
Net cash provided by financing activities..................................... 30,263 341,355
----------- -----------
Net change in cash and cash equivalents............................................... (79,407) 25,085
Cash and cash equivalents at beginning of year(5)..................................... 829,170 632,985
----------- -----------
Cash and cash equivalents at September 30(5).......................................... $ 749,763 $ 658,070
=========== ===========
Supplemental disclosure of cash flow information
Interest paid....................................................................... $ 204,132 $ 132,798
Taxes paid, net of refunds.......................................................... 68,128 37,584
<FN>
- ---------------
(1) Excludes transfers of trading account assets to the securities available for
sale portfolio of $8.8 million and $15.5 million in 1995 and 1994,
respectively.
(2) Excludes transfers of loans to the other real estate owned category of $2.8
million and $27.2 million in 1995 and 1994, respectively.
(3) Excludes loan originations in conjunction with OREO sales of $6.3 million
and $7.2 million in 1995 and 1994, respectively.
(4) Excludes $33.2 million of in-substance foreclosures and related reserves of
$8.7 million reclassified to loans and the allowance for loan losses,
respectively, as a result of the adoption of SFAS No. 114 on January 1,
1995.
(5) Cash and cash equivalents consist of cash on hand and due from banks.
</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>
SEPTEMBER 30, 1995(2)
SECURITIES AVAILABLE FOR SALE
U.S. Government securities, maturing
Within 1 year........................... $ 23,028 $ 19 $ (1) $ 23,046 5.93%
After 1 year but within 5 years......... 3,014 1 -- 3,015 5.94
---------- ------- -------- ----------
26,042 20 (1) 26,061 5.93
---------- ------- -------- ----------
State and local government securities,
maturing
Within 1 year........................... 10,604 2 (9) 10,597 6.45
Corporate, maturing
Within 1 year........................... 195,197 25 -- 195,222 6.13
Mortgage-backed securities................ 52,473 48 (88) 52,433 6.36
Other(3).................................. 32,623 728 -- 33,351 6.78
---------- ------- -------- ----------
Total securities available for
sale.......................... $ 316,939 $ 823 $ (98) $ 317,664 6.23%
========== ======= ======== ========== =====
INVESTMENT SECURITIES
U.S. Government securities, maturing
Within 1 year........................... $ 613,946 $ 3 $ (3,667) $ 610,282 4.62%
After 1 year but within 5 years......... 1,149,278 16,938 (3,376) 1,162,840 6.35
---------- ------- -------- ----------
1,763,224 16,941 (7,043) 1,773,122 5.75
---------- ------- -------- ----------
State and local government securities,
maturing
Within 1 year........................... 137,121 54 (13) 137,162 6.56
After 1 year but within 5 years......... 43,964 430 (148) 44,246 6.89
After 5 years but within 10 years....... 36,945 623 (86) 37,482 7.49
After 10 years.......................... 150 1 -- 151 7.73
---------- ------- -------- ----------
218,180 1,108 (247) 219,041 6.78
---------- ------- -------- ----------
Asset-backed securities................... 113,098 -- (738) 112,360 4.32
Mortgage-backed securities................ 49,806 -- (595) 49,211 4.90
Industrial revenue bonds.................. 43,540 -- -- 43,540 10.95
Corporate and other....................... 2,185 -- -- 2,185 --
---------- ------- -------- ----------
Total investment securities..... $2,190,033 $ 18,049 $ (8,623) $2,199,459 5.86%
========== ======= ======== ========== =====
<FN>
- ---------------
(1) Tax equivalent basis.
(2) The period-end maturity distribution excludes industrial revenue bonds,
which are not regarded as principal debt securities, asset-backed
securities, mortgage-backed securities, and other securities that do not
have a stated maturity.
(3) BayBank, the Company's principal bank subsidiary, and BayBank FSB, the
Company's New Hampshire bank subsidiary, are members of the Federal Home
Loan Bank (FHLB). As of September 30, 1995, $32.2 million in stock of the
FHLB is included in the Securities Available for Sale portfolio in the
Other category at cost, which approximates market value. As of September
30, 1995, total advances of $18.7 million were outstanding from the FHLB at
an average interest rate of 5.14% and with an average maturity of 1.88
years. These outstanding advances are included on the consolidated balance
sheet in the other short-term borrowings and long-term debt categories.
</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
State and local government securities.............. 171,436 89 (1,250) 170,275
Asset-backed securities............................ 200,386 -- (5,652) 194,734
Mortgage-backed securities......................... 49,503 -- (2,761) 46,742
Industrial revenue bonds........................... 49,548 -- -- 49,548
Other.............................................. 1,857 -- -- 1,857
---------- ---- -------- ----------
Total investment securities.............. $2,556,249 $ 99 $(74,764) $2,481,584
========== ==== ======== ==========
SEPTEMBER 30, 1994
SECURITIES AVAILABLE FOR SALE
U.S. Government securities......................... $ 24,741 $ -- $ (3) $ 24,738
State and local government securities.............. 5,029 -- (3) 5,026
Mortgage-backed securities......................... 25,075 328 -- 25,403
Corporate.......................................... 58,100 -- -- 58,100
Other(1)........................................... 27,654 485 -- 28,139
---------- ---- -------- ----------
Total securities available for sale...... $ 140,599 $813 $ (6) $ 141,406
========== ==== ======== ==========
INVESTMENT SECURITIES
U.S. Government securities......................... $2,426,683 $ 9 $(43,386) $2,383,306
State and local government securities.............. 159,815 109 (667) 159,257
Asset-backed securities............................ 203,089 -- (4,097) 198,992
Mortgage-backed securities......................... 49,488 -- (1,746) 47,742
Industrial revenue bonds........................... 51,652 -- -- 51,652
Other.............................................. 1,857 -- -- 1,857
---------- ---- -------- ----------
Total investment securities.............. $2,892,584 $118 $(49,896) $2,842,806
========== ==== ======== ==========
<FN>
- ---------------
(1) As of December 31, 1994, and September 30, 1994, $27.6 million in stock of
the FHLB is included in the Securities Available for Sale portfolio in the
Other category at cost, which approximates market value.
</TABLE>
NOTE 3. ACQUISITION OF FINANCIAL INSTITUTIONS
The Company's acquisition of the southern New Hampshire-based holding
company, NFS Financial Corp. (NFS), parent company of NFS Savings Bank, FSB, and
Plaistow Cooperative Bank, FSB, became effective after the close of business on
June 30, 1995. The stockholders of NFS received $20.15 in cash and .1696 shares
of BayBanks, Inc. common stock for each share of NFS common stock held, an
aggregate of $58.1 million in cash and 487,267 shares of BayBanks, Inc. common
stock which were issued at a value of $38.6 million. In addition, outstanding
options to purchase NFS common stock were converted into options to purchase an
aggregate of 29,778 shares of BayBanks, Inc. common stock. The options issued
were valued at $1.5 million. At June 30, 1995, NFS had total assets of $625
million. Following the acquisition, NFS Savings Bank, FSB and Plaistow
Cooperative Bank, FSB were merged and are operating as BayBank FSB. In addition,
7
<PAGE> 8
the name of the holding company was changed from NFS to BayBank New Hampshire,
Inc. (BBNH). In September of 1995, BBNH was merged into BayBanks, Inc.
This acquisition was accounted for as a purchase. Accordingly, the results
of operations of BayBank FSB have been included with those of the Company since
the date of acquisition. Under this method of accounting, the purchase price is
allocated to the respective assets acquired and liabilities assumed based on
their estimated fair values, net of applicable income tax effects. Goodwill (the
excess of the purchase price over the fair value of the net assets acquired) of
$37 million was created in the acquisition. Goodwill is being amortized in other
operating expenses on a straight-line basis over 15 years.
<TABLE>
The unaudited pro forma consolidated results of operations for the nine
months ended September 30, 1995 and 1994, assuming the acquisition of NFS had
occurred as of January 1, 1995 and 1994, respectively, are as follows:
<CAPTION>
PRO FORMA RESULTS
-----------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1994
---------- ----------
(IN THOUSANDS
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Net interest income................................................... $ 387,975 $ 355,965
Noninterest income.................................................... 166,423 158,661
Income before cumulative effect of accounting change.................. 100,911 78,671
Net income............................................................ 100,911 77,739
Income before accounting change per share............................. 5.09 4.01
Net income per share.................................................. 5.09 3.96
Average common shares outstanding..................................... 19,824,026 19,632,971
</TABLE>
On March 24, 1995, the Company announced that it had agreed to acquire
Cornerstone Financial Corporation (Cornerstone), parent company of Cornerstone
Bank of Derry, NH. The stockholders of Cornerstone will receive $8.80 in cash
for each outstanding share of common stock held, an aggregate of approximately
$18.6 million. The acquisition is expected to close later this year. Cornerstone
had total assets of $141 million at September 30, 1995. The acquisition will be
accounted for as a purchase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE OVERVIEW
BayBanks' net income was $34.7 million for the third quarter of 1995, or
$1.74 per share, compared with net income of $29.0 million, or $1.51 per share,
for the third quarter of 1994, an increase of 15% on a per share basis. Net
income for the first nine months of 1995 was $99.6 million, or $5.11 per share,
compared with $76.7 million, or $4.01 per share, for the first nine months of
1994, an increase of 27% on a per share basis. The increase in net income was
affected by the following items:
- Reflected in the Company's third quarter 1995 earnings were the results
of operations of BayBank FSB, the surviving bank from the acquisition of
NFS.
- Operating income (defined below) increased by 9% in the third quarter of
1995, compared with that of the third quarter of 1994, as the result of
9% increases in both net interest income and noninterest income,
partially offset by a 9% growth in expenses. Excluding the effects of the
addition of BayBank FSB, the increase in operating income was 14% due to
a 4% increase in net interest income and an 8% increase in noninterest
income, partially offset by a 1% increase in expenses.
- Reflected in operating income for the third quarter of 1995 was the
FDIC's reduction of premiums on bank deposits. This reduction was offset
by an accrual for an expected special assessment on thrift deposits. See
page 13 for further discussion of these items.
8
<PAGE> 9
- Nonperforming assets were reduced to $77 million, a 37% decrease from
December 31, 1994, and a 44% decrease from September 30, 1994. Asset
quality continued to improve, and as a consequence, the combined
provisions for loan losses and the other real estate owned (OREO) reserve
(credit provisions) decreased to $5.8 million for the third quarter of
1995 from $8.4 million in the third quarter of 1994. For the nine-month
periods, credit provisions declined 24% to $19.8 million in 1995 compared
with those of 1994.
- Included in the 1995 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, recorded in the second quarter.
- In 1994, net income for the first nine 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."
EARNING ANALYSIS
Operating Income (tax equivalent basis)
Operating income, presented in TABLE A (page 10), excludes net securities
gains and the provisions for loan losses and the OREO reserve and is before
income taxes. For the third quarter of 1995, operating income was $65.3 million,
compared with $62.0 million in the second quarter of 1995 and $59.7 million in
the third quarter of 1994. The increase over that of the previous year was a
result of 9% increases in both net interest income and noninterest income,
partially offset by a 9% increase in operating expenses.
For the nine-month periods, operating income was $187.9 million in 1995,
compared with $162.0 million in 1994. In 1995, the 11% increase in net interest
income and the 5% increase in noninterest income were partially offset by a 6%
increase in operating expenses. Excluding the effects of the addition of BayBank
FSB, the increase in operating income was 18% due to a 9% increase in net
interest income and a 5% increase in noninterest income, partially offset by a
3% increase in expenses.
9
<PAGE> 10
<TABLE>
TABLE A
SUMMARY OF OPERATIONS
FOR THE FOLLOWING PERIODS
TAX EQUIVALENT BASIS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THIRD SECOND THIRD NINE MONTHS
QUARTER QUARTER QUARTER -------------------
1995 1995 1994 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income on earning assets.................... $209,826 $197,045 $174,632 $599,050 $481,395
Interest expense on deposits and
borrowings................................ 76,738 70,885 52,812 214,053 134,053
-------- -------- -------- -------- --------
Net interest income......................... 133,088 126,160 121,820 384,997 347,342
Noninterest income.......................... 57,344 55,752 52,557 164,537 156,303
-------- -------- -------- -------- --------
Total income from operations................ 190,432 181,912 174,377 549,534 503,645
Operating expenses.......................... 125,109 119,926 114,706 361,587 341,613
-------- -------- -------- -------- --------
Operating Income Before Net Securities Gains
and Provisions for Loan Losses and OREO
Reserve................................... 65,323 61,986 59,671 187,947 162,032
-------- -------- -------- -------- --------
Net securities gains........................ 42 -- -- 43 475
-------- -------- -------- -------- --------
Provision for loan losses................... 6,000 6,500 6,000 19,000 18,000
Provision for OREO reserve, net............. (229) -- 2,415 771 7,852
-------- -------- -------- -------- --------
Credit provisions........................... 5,771 6,500 8,415 19,771 25,852
-------- -------- -------- -------- --------
Income before taxes and cumulative effect of
accounting change......................... 59,594 55,486 51,256 168,219 136,655
Income taxes and tax equivalent
adjustment................................ 24,875 21,128 22,223 68,667 58,989
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting change......................... 34,719 34,358 29,033 99,552 77,666
Less cumulative effect of accounting change
(net of tax benefit of $683).............. -- -- -- -- 932
-------- -------- -------- -------- --------
Net Income.................................. $ 34,719 $ 34,358 $ 29,033 $ 99,552 $ 76,734
======== ======== ======== ======== ========
Earnings Per Share
Income before accounting change........... $ 1.74 $ 1.78 $ 1.51 $ 5.11 $ 4.06
Less cumulative effect of accounting
change................................. -- -- -- -- 0.05
-------- -------- -------- -------- --------
Net Income................................ $ 1.74 $ 1.78 $ 1.51 $ 5.11 $ 4.01
======== ======== ======== ======== ========
</TABLE>
Net Interest Income
Net interest income was $133.1 million in the third quarter of 1995, $126.2
million in the preceding quarter, and $121.8 million in the third quarter of
1994. The net interest margin in the third quarter of 1995 declined slightly to
5.10%, compared with 5.13% in the previous quarter, reflecting the somewhat
lower spreads at BayBank FSB. The net interest margin was 5.03% in the third
quarter of 1994. In general, 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 third quarter of 1995, compared
with that of the third quarter of 1994, resulted from an 8% growth in average
earning assets and higher interest rates. Average loans increased by 12%,
excluding the effect of the acquisition of NFS (now BayBank FSB). The growth was
balanced between corporate and consumer lending. The acquisition added $448
million in loans and $155 million in securities.
The yield on earning assets was 8.03% in the third quarter of 1995,
compared with 7.20% in the third quarter of 1994, as a result of overall higher
interest rates on the loan and securities portfolios.
BayBanks' funding costs increased during the third quarter of 1995,
compared with those of the third quarter of 1994, due to increased market
interest rates and higher levels of consumer certificates of deposits. Rates on
core deposits (which include money market deposit accounts [MMDAs] and consumer
certificates
10
<PAGE> 11
of deposit) increased in the third quarter of 1995, compared with those of the
third quarter of 1994, due to overall higher interest rates and market
conditions. In addition, 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 76 basis points to 2.93% in the third quarter of 1995,
compared with 2.17% in the third quarter of 1994.
For the nine-month periods, net interest income increased from $347.3
million in 1994 to $385.0 million in 1995. This increase was related to an 8%
increase in average earning assets during the first nine months of 1995,
compared with those of 1994, and an increase in the net interest margin from
5.01% in 1994 to 5.13% in 1995. The yield on average earning assets rose by 104
basis points to 7.98% for the first nine months of 1995, compared with 6.94% 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 92 basis points to 2.85% in 1995 from 1.93% 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, page 12) increased 9% to $57.3 million in the
third quarter of 1995, from $52.6 million in the third quarter of 1994. For the
first nine months, noninterest income increased 5% to $164.5 million in 1995
from $156.3 million in 1994.
Service charges and fees on deposit accounts continued to provide
approximately one-half of noninterest income. Total service charges and fees on
deposit accounts of $28.0 million in the third quarter of 1995 were stable
compared with those of the same period last year. For the first nine months,
service charges and fees on deposit accounts were $82.3 million and $82.2
million in 1995 and 1994, respectively. Increases in consumer service charge
income, for the nine-month period, were the result of higher service charges
from selected repricings and stronger volume but were offset by a decline in
corporate service charges due to higher earnings credit rates on compensating
deposit balances.
Credit card fees increased 8% to $5.6 million in the third quarter of 1995
from $5.2 million in the third quarter of 1994. For the nine-month periods,
credit card fees were $15.4 million in 1995 and $14.9 million in 1994. The
increase resulted primarily from an increase in transaction volume.
Processing fees increased 7% to $4.4 million in the third quarter of 1995
from $4.0 million in the third quarter of 1994. For the nine-month periods,
processing fees were $13.1 million in 1995 and $11.4 million in 1994, a 15%
increase. The increase in processing fees in 1995 resulted primarily from an
increased volume of point-of-sale transactions and from termination fees from
correspondent banks as a result of industry consolidations.
Investment management and brokerage fees increased 39% to $2.7 million in
the third quarter of 1995 from $1.9 million in the third quarter of 1994. For
the nine-month periods, investment management and brokerage fees increased 28%
to $7.6 million in 1995 from $5.9 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 September 30, 1995 compared with $1.3 billion at September 30,
1994.
Mortgage banking fees increased 41% to $2.6 million in the third quarter of
1995 from $1.9 million in the third quarter of 1994. The increase in mortgage
banking fees was due to increases in fees from application volume and additional
income recognized as a result of the application of SFAS No. 122 "Accounting for
Mortgage Servicing Rights," which requires the capitalization of originated
mortgage servicing rights, which was adopted in the second quarter of 1995. For
the nine-month period, mortgage banking fees increased 17% to $6.6 million from
$5.6 million in 1994. On a year-to-date basis, the increases in application
income and
11
<PAGE> 12
mortgage servicing rights were partially offset by a decrease in secondary
marketing income as the volume of loans sold to the secondary market declined.
International fees increased 4% to $2.0 million in the third quarter of
1995 from $1.9 million in the third quarter of 1994. For the nine-month periods,
international fees increased 17%, from $4.8 million in 1994 to $5.6 million in
1995. This increase resulted primarily from an increase in international
activity, primarily 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 third quarter of 1995, the Company sold
$80 million in student loans, resulting in a gain of $2.3 million. For the
nine-month period, the Company sold $131 million in student loans, resulting in
a gain of $3.5 million; the sale of $127 million in student loans in the second
quarter of 1994 produced a gain of $4.4 million.
Other noninterest income was $1.3 million in the third quarter of 1995 and
$1.5 million in the third quarter of 1994. The third quarter of 1994 included
gains on sales of branch buildings of $678 thousand; there were no such sales in
the third quarter of 1995. This decrease was partially offset by increases in
trading gains and other miscellaneous fees. For the nine-month periods, other
noninterest income was $6.1 million in 1995 and $3.4 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 and gains on sales of
branch buildings no longer utilized by the Company.
TABLE B
NONINTEREST INCOME
FOR THE PERIODS ENDED SEPTEMBER 30
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
--------------------------- ------------------------------
1995 1994 CHANGE 1995 1994 CHANGE
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees on
deposit accounts.................... $28,030 $28,176 $ (146) $ 82,313 $ 82,218 $ 95
Credit card fees...................... 5,614 5,212 402 15,418 14,917 501
Processing fees....................... 4,352 4,049 303 13,122 11,381 1,741
Trust fees............................ 3,778 3,599 179 10,979 10,749 230
Investment management and
brokerage fees...................... 2,655 1,913 742 7,551 5,892 1,659
Mortgage banking fees................. 2,617 1,858 759 6,583 5,627 956
International fees.................... 2,031 1,949 82 5,590 4,793 797
All other fees........................ 4,662 4,330 332 13,376 12,923 453
Student loan sales gains.............. 2,322 -- 2,322 3,471 4,395 (924)
Other noninterest income.............. 1,283 1,471 (188) 6,134 3,408 2,726
------- ------- ------- -------- -------- --------
Total noninterest income.... $57,344 $52,557 $ 4,787 $164,537 $156,303 $ 8,234
======= ======= ======= ======== ======== ========
</TABLE>
Operating Expenses
The operating expense analysis presented in TABLE C (page 14) separates
OREO and loan workout expenses from other operating expenses. Operating
expenses, excluding OREO and loan workout, were $124.2 million in the third
quarter of 1995, compared with $113.5 million in the third quarter of 1994; for
the first nine months, these operating expenses were $357.3 million in 1995 and
$333.7 million in 1994.
Salaries and benefits expenses were $65.1 million in the third quarter of
1995, compared with $58.3 million in the third quarter of 1994. For the first
nine-month periods, salaries and benefits expenses were $186.9 million in 1995,
compared with $172.1 million in 1994. The increase was primarily the result of
normal salary and benefit increases, the acquisition of NFS (now BayBank FSB),
selected additions to staff, and increased accruals for profit sharing and
performance awards.
12
<PAGE> 13
Occupancy and equipment expenses were $23.3 million in the third quarter of
1995, compared with $21.9 million in the third quarter of 1994. For the first
nine-months of 1995, occupancy and equipment expenses were $68.3 million,
compared with $66.1 million for the first nine-months of 1994. These increases
were primarily the result of an increase in rent expense due to the acquisition
of NFS and the opening of new branch locations, including supermarket branches,
and costs associated with branch closings.
Postage and supplies expenses were $6.0 million in the third quarter of
1995, compared with $5.3 million in the third quarter of 1994. For the first
nine months, postage and supplies expenses were $17.3 million in 1995, compared
with $15.2 million in 1994. These increases were the result of increased postal
rates in 1995, combined with an increased volume and higher paper costs of
printed forms and supplies.
Deposit insurance expense was a credit of $186 thousand in the third
quarter of 1995, compared with an expense of $5.4 million in the third quarter
of 1994; and was $9.6 million for the nine-month period in 1995, compared with
$16.3 million in 1994. This decrease reflects the FDIC's reduction in the
premiums charged to banks for deposit insurance, retroactive to June 1, 1995. A
$1.4 million refund relating to June 1995 was received and reflected in the
third quarter expense. Improved risk classifications at the Company's bank
subsidiaries also affected the reduction in expense. The benefit of lower
insurance rates was partially offset by an increase in the insured deposit base.
The new insurance schedule and improved risk classification lowers the Company's
quarterly insurance assessment from $4.9 million to $1.2 million (including the
impact of the acquisition of NFS), a decrease of 76%.
In the third quarter of 1995, the Company accrued for an expected special
assessment of $4.5 million on thrift deposits; the Company acquired
approximately $530 million of thrift deposits as a result of the acquisition of
NFS. The Company believes that the likelihood of the current Congressional
proposal to recapitalize the Savings Association Insurance Fund (SAIF), which
insures federal savings banks, becoming law made it appropriate to accrue for
this special assessment at September 30, 1995.
Other operating expenses were $18.9 million in the third quarter of 1995,
compared with $16.4 million in the third quarter of 1994. For the first nine
months, other operating expenses were $52.8 million in 1995, compared with $46.4
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 staff additions. In
addition, other operating expenses in the third quarter of 1995 included $861
thousand of goodwill and other intangible amortization related to the
acquisition of NFS.
OREO and loan workout expenses decreased 21% to $936 thousand in the third
quarter of 1995 from $1.2 million in the third quarter of 1994, reflecting the
continued disposition of OREO properties and impaired loans (see Nonperforming
Loans on page 22). For the first nine months, OREO and loan workout expenses
were $4.3 million in 1995, compared with $7.9 million in 1994.
13
<PAGE> 14
TABLE C
OPERATING EXPENSES
FOR THE PERIODS ENDED SEPTEMBER 30
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
--------------------------------- ---------------------------------
1995 1994 CHANGE 1995 1994 CHANGE
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits...... $ 65,128 $ 58,264 $ 6,864 $186,863 $172,081 $14,782
Occupancy and equipment.... 23,272 21,897 1,375 68,286 66,091 2,195
Marketing and public
relations................ 6,526 6,270 256 17,997 17,631 366
Postage and supplies....... 6,020 5,278 742 17,282 15,206 2,076
Deposit insurance.......... (186) 5,403 (5,589) 9,564 16,305 (6,741)
SAIF special assessment.... 4,500 -- 4,500 4,500 -- 4,500
Other...................... 18,913 16,412 2,501 52,764 46,401 6,363
-------- -------- ------- -------- -------- -------
Operating expenses
excluding OREO
expenses................. 124,173 113,524 10,649 357,256 333,715 23,541
OREO and loan workout
expenses................. 936 1,182 (246) 4,331 7,898 (3,567)
-------- -------- ------- -------- -------- -------
Total operating
expenses....... $125,109 $114,706 $10,403 $361,587 $341,613 $19,974
======== ======== ======= ======== ======== =======
</TABLE>
PROVISIONS FOR LOAN LOSSES AND THE OREO RESERVE
The provisions for loan losses and the OREO reserve declined in the third
quarter of 1995 to $5.8 million from $8.4 million in the third quarter of 1994.
The provision for loan losses was $6.0 million in the third quarter of 1995
and 1994. For the first nine months of 1995, the provision for loan losses was
$19.0 million, compared with $18.0 million in 1994.
The provision for the OREO reserve was a net credit of $229 thousand in the
third quarter of 1995, compared with a net expense of $2.4 million in the third
quarter of 1994. For the first nine months of 1995, the net provision for the
OREO reserve was $771 thousand, compared with $7.9 million in 1994. The OREO
provision was offset by net gains on sales of properties of $278 thousand in the
third quarter of 1995 and $1.7 million in the third quarter of 1994. For the
first nine months of 1995, net gains on the sales of OREO properties were $4.5
million, compared with $4.8 million in 1994.
Income Taxes
The Company's provision for income taxes was $22.0 million in the third
quarter of 1995, compared with $20.4 million in the third quarter of 1994. The
provision for income taxes was $60.0 million for the first nine months of 1995,
compared with $53.1 million for the first nine months of 1994. The 1995 tax
provision includes an adjustment during the second quarter 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.
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
that banks pay will be reduced over the next four years from 12.54% to 10.50% in
1999. In accordance with the new tax law, the rate was reduced from 12.54% to
12.13% in the third quarter of 1995 retroactive to January 1, 1995.
The effective tax rate for the third quarter of 1995 was 38.8% compared
with 41.3% in the third quarter of 1994. The effective tax rate for the first
nine-month periods was 37.6% in 1995, compared with 40.6% in 1994. The effective
tax rate for the first nine-months, excluding the settlement adjustment, was
39.3% in 1995. The decrease in the effective tax rate in 1995 compared with that
of 1994 was primarily due to a higher level of tax-exempt interest in 1995 and
the reduction in the state tax rate.
14
<PAGE> 15
BALANCE SHEET REVIEW
Trends in Earning Assets
Average earning assets increased 8% to $10.4 billion during the third
quarter of 1995, compared with $9.6 billion in the third quarter of 1994,
primarily due to growth in the average loan balances. The increase was due to
the addition of $448 million of loans through the acquisition of NFS and to
growth in both the commercial and consumer loan portfolios. Average earning
assets were $10.0 billion for the first nine months of 1995, compared with $9.3
billion for the first nine months of 1994.
Loan Portfolio
Consumer loans represented 64% of the Company's quarter-end loan portfolio,
with $1.9 billion in residential loan balances and $2.9 billion in various types
of instalment loan balances. Consumer lending activities are primarily focused
on the Massachusetts and New Hampshire markets. Commercial and commercial real
estate loans were 36% of the 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 September 30, 1995 were $39 million. The
Company sold $131 million of student loans in the first nine months of 1995,
compared with sales of $127 million in the first nine months of 1994.
An analysis of changes in major loan categories for the third quarter and
first nine months of 1995 and 1994 is presented in TABLE D (page 16). Loan
business volume was $237 million in the third quarter of 1995, after deducting
the effect of the acquisition of NFS; loan volume was $298 million in the third
quarter of 1994. Residential mortgage activity was the largest contributor to
this volume, principally the result of adjustable-rate purchase money mortgages.
The Company underwrote and sold $55 million of fixed-rate residential mortgage
loans during the third quarter of 1995, compared with $26 million in the third
quarter of 1994. At September 30, 1995, loans held for sale were $34 million,
compared with $8 million at September 30, 1994. Instalment net loan business
volume was $67 million, compared with $151 million in the third quarter of 1994.
Automobile lending, in particular, was affected adversely by higher rates,
slower auto sales, and active competition from nonbank lenders. The decline in
commercial loan volume by $68 million in the third quarter of 1995, compared
with an increase of $73 million in the third quarter of 1994, was due to reduced
auto dealer outstandings and a decline in the international loan portfolio. Auto
dealer outstandings were adversely affected by a combination of seasonal
factors, lower auto sales during 1995, and some delays in deliveries as a result
of the auto trucker strike. The increase in the third quarter of 1994 was due
largely to the addition of new auto dealers. The Company's international loan
portfolio, which is primarily focused on Mexico and South America, stood at $145
million at September 30, 1995, compared with $175 million at June 30, 1995, and
$129 million at September 30, 1994. These international credits are
predominantly trade related and primarily with well-known and established
foreign banks. Business volume in the commercial real estate portfolio declined
by $8 million during the third quarter of 1995, compared with a decline of $2
million during the third quarter of 1994.
15
<PAGE> 16
<TABLE>
TABLE D
CHANGES IN THE LOAN PORTFOLIO
(IN THOUSANDS)
<CAPTION>
THIRD QUARTER 1995
INCREASE ANALYSIS OF CHANGE IN LOAN CATEGORIES NET BUSINESS
(DECREASE) ------------------------------------------------------ VOLUME
FOR THE GROSS NFS NET THIRD
SEPTEMBER 30 THIRD CHARGE- TRANSFERS LOANS BUSINESS QUARTER
1995 QUARTER OFFS TO OREO SALES ACQUIRED VOLUME 1994
------------ ---------- -------- ------- --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................. $1,594,045 $(39,015) $ (2,102) $ -- $ -- $ 30,611 $(67,524) $ 73,185
Commercial real estate..... 1,081,386 98,567 (1,213) -- -- 108,075 (8,295) (2,111)
Residential mortgage....... 1,944,293(1) 444,984 (2,173) (1,441 ) (54,593) 257,068 246,123 76,245
Instalment loans
Automobile and other..... 1,329,504 34,099 (1,892) -- -- 17,357 18,634 72,025
Home equity.............. 809,960 40,987 (479) (154 ) -- 34,552 7,068 24,096
Credit card.............. 294,818 2,626 (3,095) -- -- -- 5,721 7,273
Student loans............ 278,124(2) (50,316) (32) -- (80,099) 52 29,763 41,856
Reserve credit........... 144,366 4,407 (1,478) -- -- 240 5,645 5,592
---------- -------- -------- ------- --------- -------- -------- --------
Total instalment loans... 2,856,772 31,803 (6,976) (154) (80,099) 52,201 66,831 150,842
---------- -------- -------- ------- --------- -------- -------- --------
Total loans................ $7,476,496 $536,339 $(12,464) $(1,595) $(134,692) $447,955 $237,135 $298,161
========== ======== ======== ======= ========= ======== ======== ========
<FN>
- ---------------
(1) Includes residential mortgage loans held for sale of $34 million at
September 30, 1995.
(2) Includes student loans held for sale of $39 million at September 30, 1995.
</TABLE>
<TABLE>
<CAPTION>
NET BUSINESS
INCREASE NINE MONTHS ENDED SEPTEMBER 30, 1995 VOLUME
(DECREASE) ANALYSIS OF CHANGE IN LOAN CATEGORIES NINE
FOR THE ------------------------------------------------------ MONTHS
FIRST GROSS OTHER NET ENDED
SEPTEMBER 30 NINE CHARGE- TRANSFERS TRANSFERS, BUSINESS SEPTEMBER 30
1995 MONTHS OFFS TO OREO SALES NET(1)(2) VOLUME 1994
------------ ---------- -------- ------- --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................ $1,594,045 $ 65,780 $ (5,256) $ (73 ) $ -- $ 32,136 $ 38,973 $109,398
Commercial real estate.... 1,081,386 124,790 (8,220) -- -- 124,877 8,133 3,728
Residential mortgage...... 1,944,293(3) 608,827 (6,002) (2,352 ) (79,535) 263,245 433,471 314,099
Instalment loans
Automobile and other.... 1,329,504 10,759 (5,245) -- -- 17,357 (1,353) 137,885
Home equity............. 809,960 67,756 (1,199) (377 ) -- 34,552 34,780 37,431
Credit card............. 294,818 (24,708) (9,042) -- -- -- (15,666) (12,380)
Student loans........... 278,124(4) (33,347) (368) -- (130,732) 52 97,701 108,176
Reserve credit.......... 144,366 8,119 (4,621) -- -- 240 12,500 13,115
---------- -------- -------- ------- --------- -------- -------- --------
Total instalment
loans................. 2,856,772 28,579 (20,475) (377) (130,732) 52,201 127,962 284,227
---------- -------- -------- ------- --------- -------- -------- --------
Total loans............... $7,476,496 $827,976 $(39,953) $(2,802) $(210,267) $472,459 $608,539 $711,452
========== ======== ======== ======= ========= ======== ======== ========
<FN>
- ---------------
(1) Includes $447,955 of loans from the acquisition of NFS (now BayBank FSB).
(2) 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.
(3) Includes residential mortgage loans held for sale of $34 million at
September 30, 1995.
(4) Includes student loans held for sale of $39 million at September 30, 1995.
</TABLE>
Securities Portfolios
The securities portfolios (TABLE E, page 18) totaled $2.9 billion at
September 30, 1995 and December 31, 1994, and $3.2 billion at September 30,
1994. The weighted average maturity of the securities portfolios was 1.4 years
at September 30, 1995, compared with 1.6 years at December 31, 1994, and 1.7
years at September 30, 1994.
Short-term investments were $349 million at September 30, 1995, compared
with $166 million at December 31, 1994, and $156 million at September 30, 1994.
16
<PAGE> 17
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. Securities available for
sale were $318 million at September 30, 1995, $221 million at December 31, 1994,
and $141 million at September 30, 1994.
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 $2.2 billion at September 30, 1995, $2.6 billion at
December 31, 1994, and $2.9 billion at September 30, 1994. At September 30,
1995, gross unrealized gains were $18.0 million and gross unrealized losses were
$8.6 million.
The Company's investment securities portfolio contains U.S. Government
securities, state and local government securities, asset-backed securities,
mortgage-backed securities, and industrial revenue bonds. The total state and
local government portfolio, which is concentrated primarily in Massachusetts,
was $218 million at September 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
principally of short-term state and local government securities recorded at
market value, which was $77 million at September 30, 1995, and $22 million at
September 30, 1994. For the first nine months, trading account gains were $2.0
million in 1995, compared with $1.5 million in 1994.
17
<PAGE> 18
<TABLE>
TABLE E
SECURITIES PORTFOLIOS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1995 1994 1994
------------ ----------- ------------
<S> <C> <C> <C>
Short-term investments.................................... $ 349,310 $ 166,286 $ 155,503
---------- ----------- ----------
Securities available for sale
U.S. Government securities.............................. 26,061 -- 24,738
U.S. Agency mortgage-backed securities.................. 52,433 -- 25,403
State and local government securities................... 10,597 8,564 5,026
Corporate and other..................................... 228,573 212,038 86,239
---------- ----------- ----------
317,664 220,602 141,406
---------- ----------- ----------
Investment securities
U.S. Government securities.............................. 1,763,224 2,083,519 2,426,683
Asset-backed securities................................. 113,098 200,386 203,089
U.S. Agency mortgage-backed securities.................. 49,806 49,503 49,488
State and local government securities................... 218,180 171,436 159,815
Industrial revenue bonds................................ 43,540 49,548 51,652
Corporate and other..................................... 2,185 1,857 1,857
---------- ---------- ----------
2,190,033 2,556,249 2,892,584
---------- ---------- ----------
Total..................................................... $2,857,007 $2,943,137 $3,189,493
========== ========== ==========
Weighted average maturity of securities available for sale
and investment securities in years*..................... 1.6 1.7 1.8
Weighted average maturity of total securities in years*... 1.4 1.6 1.7
<FN>
- ---------------
* The weighted average maturity calculation excludes amortizing IRBs and
reflects estimated prepayments for mortgage-backed securities.
</TABLE>
Deposits and Other Sources of Funds
The Company's extensive product lines, Customer Sales and Service Center,
and banking network of 223 full-service offices and 420 remote banking
facilities generate significant core deposits. Core deposits accounted for 98%
of total average deposits during the third 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 $9.3 billion in the third quarter of 1995 and $8.5
billion in the third quarter of 1994. Average core deposits were $8.9 billion
and $8.5 billion for the first nine months of 1995 and 1994, respectively.
Average transaction accounts were $5.0 billion in the third quarter of 1995, up
slightly from $4.9 billion in the third quarter of 1994. Average consumer
certificates of deposit were $1.8 billion during the third quarter of 1995,
compared with $981 million in the third quarter of 1994, and were $1.5 billion
and $967 million in the first nine months of 1995 and 1994, respectively.
Average corporate certificates of deposit in excess of $100 thousand (CDs)
were $216 million in the third quarter of 1995, compared with $125 million in
the third quarter of 1994, and were $200 million and $75 million in the first
nine months of 1995 and 1994, respectively.
Average purchased funds were $799 million in the third quarter of 1995,
down from $1.1 billion in the third quarter of 1994 as a higher portion of
funding was provided by certificates of deposit.
18
<PAGE> 19
Interest Rate Risk Management and Liquidity
BayBanks' Capital Markets Committee monitors and manages the Company's
overall balance sheet interest sensitivity position, the securities portfolios,
funding, and liquidity. Interest sensitivity, as measured by the Company's gap
position, is affected by the level and direction of interest rates and current
liquidity preferences of its customers. A negative gap generally indicates that
liabilities will reprice more quickly than assets, and a positive gap generally
indicates that assets will reprice in aggregate before liabilities. These
factors, as well as projected balance sheet growth, current and potential
pricing actions, competitive influences, national monetary and fiscal policy,
and the national and regional economic environments, are considered in the asset
and liability management decision process.
The Company's interest sensitivity gap position, as shown in TABLE F 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 has lagged
changes in market interest rates, although the Company contractually can change
the interest rates on these deposits at any time. A management adjustment
provides for these expected repricing lags and for the notion that interest rate
changes in many of these core deposit categories, particularly certain
transaction accounts, have not been as sensitive to changes in market interest
rates. The management adjustment is reviewed periodically and adjusted to
reflect changes in trends. During 1995, the management adjustment was modified
to further reflect the lower sensitivity of core deposits to changes in interest
rates.
At September 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 $1.2 billion. The total
within-one-year gap moved from a positive $648 million at December 31, 1994, to
a positive $1.8 billion at September 30, 1995.
<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>
September 30, 1995
Total assets........................ $ 3,932 $ 633 $733 $ 5,298 $ 1,230 $ 6,528
Total liabilities................... 6,832 399 308 7,539 592 8,131
------- ------- ---- -------- ------- --------
Net contractual gap position........ (2,900) 234 425 (2,241) 638 (1,603)
Net interest rate swaps............. -- 5 -- 5 (2) 3
------- ------- ---- -------- ------- --------
Net gap position including interest
rate swaps at September 30,
1995............................. (2,900) 239 425 (2,236) 636 (1,600)
Management adjustment............... 4,456 (975) (64) 3,417 (48) 3,369
------- ------- ---- -------- ------- --------
Management adjusted gap at
September 30, 1995.................. $ 1,556 $ (736) $361 $ 1,181 $ 588 $ 1,769
======= ======= ==== ======== ======= ========
Management adjusted gap at
December 31, 1994................... $ 1,084 $(1,275) $267 $ 76 $ 572 $ 648
======= ======= ==== ======== ======= ========
Management adjusted gap at
September 30, 1994.................. $ 1,730 $(2,275) $246 $ (299) $ 86 $ (213)
======= ======= ==== ======== ======= ========
</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.
19
<PAGE> 20
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 $1.4 billion, or 13% of total deposits and
borrowings, at September 30, 1995. The Company's strong liquidity position
allowed for the expansion of the loan portfolio during the third quarter of
1995. The Company derives additional liquidity flexibility from the relatively
short average maturity (1.4 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 $99.6 million in net income
for the first nine months of 1995, before adjustment of noncash items. Investing
activities consist primarily of both the 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 nine months of 1995, net cash provided by operating activities was
$173 million, net cash used in investing activities totaled $282 million, and
net cash provided by financing activities was $30 million. Cash and cash
equivalents were $750 million at September 30, 1995.
The parent company's primary source of liquidity is dividends received from
its subsidiaries and income earned on its securities portfolios. The most
significant uses of the parent company's resources are capital contributions to
banking and other subsidiaries when appropriate, dividends paid to stockholders,
and the acquisition of subsidiaries. In the first quarter of 1995, BayBank, the
Company's largest bank subsidiary, repaid a $46.5 million floating rate note to
the parent company. In addition, in the third quarter of 1995 BayBank Boston,
N.A. repaid a $4.5 million floating rate note to the parent company. The parent
company contributed $1 million of capital to a nonbank subsidiary during the
first nine months of 1995. Dividends received from bank subsidiaries were $25
million, and dividends received from nonbank subsidiaries were $8 million during
the first nine months of 1995. The parent company received a special dividend
from its bank subsidiaries in the amount of $39 million in October of 1995. The
parent company paid $31 million in dividends to its stockholders in 1995. During
the third quarter of 1995, the parent company paid $58 million in cash to
complete the acquisition of NFS. At September 30, 1995, the parent company had
$92 million in cash, short-term investments, and other securities.
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 (page 21), (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 $77 million at September 30, 1995, a 37% decrease from $122
million at December 31, 1994 and a 44% decrease from $137 million at September
30, 1994.
20
<PAGE> 21
<TABLE>
TABLE G
NONPERFORMING ASSETS, RESTRUCTURED, ACCRUING LOANS, AND
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1995(1) 1994 1994
------------ ----------- ------------
<S> <C> <C> <C>
Nonperforming loans....................................... $58,174 $ 54,627 $ 59,538
Other real estate owned
In-substance foreclosures............................... 5,272 44,610 52,737
Foreclosed property..................................... 24,883 47,760 51,685
------- -------- --------
30,155 92,370 104,422
Less OREO reserve....................................... 11,452 24,971 26,856
------- -------- --------
OREO, net of reserve.................................... 18,703 67,399 77,566
------- -------- --------
Total nonperforming assets................................ $76,877 $122,026 $137,104
======= ======== ========
Restructured, accruing loans.............................. $ 3,609 $ 13,537 $ 8,772
======= ======== ========
Accruing loans 90 days or more past due................... $34,849 $ 36,193 $ 43,483
======= ======== ========
Nonperforming assets as a percentage of loans and OREO.... 1.0% 1.8% 2.1%
Nonperforming assets as a percentage of total assets...... 0.7 1.1 1.3
<FN>
- ---------------
(1) As a result of the adoption of SFAS 114 on January 1, 1995, the Company
reclassified $33.2 million of in-substance foreclosures and $8.7 million of
related reserves to loans and the allowances for loan losses, respectively.
</TABLE>
The decline in nonperforming assets is shown in TABLE H. This result was
achieved by successful workout activities that included property sales, payments
on nonperforming loans, and loans that qualified for, and were returned to,
accrual status. Favorable resolutions were $30 million in the third quarter of
1995, or 31% of nonperforming assets at the beginning of the period. Additions
to nonperforming assets were $13 million in the third quarter of 1995.
TABLE H
CHANGE IN ASSET QUALITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
1995 1994 ENDED
------------------------------ ------------------- SEPTEMBER 30
THIRD SECOND FIRST FOURTH THIRD -----------------------
QUARTER QUARTER QUARTER QUARTER QUARTER 1995 1994
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets (1)................. $ 76,877 $ 96,814 $112,005 $122,026 $137,104 $ 76,877 $ 137,104
======== ======== ======== ======== ======== ======== =========
Nonperforming asset activity:
Additions.............................. $ 12,715 $ 21,870 $ 7,573 $ 19,554 $ 10,233 $ 42,158 $ 54,335
-------- -------- -------- -------- -------- -------- ---------
Payments............................... (16,087) (13,567) (5,721) (6,797) (10,428) (35,375) (29,377)
Returns to accrual..................... (2,251) (1,227) (104) (7,098) (11,990) (3,582) (26,331)
OREO sales............................. (12,022) (13,863) (6,645) (14,244) (15,058) (32,530) (56,060)
-------- -------- -------- -------- -------- -------- ---------
Total improvements.................... (30,360) (28,657) (12,470) (28,139) (37,476) (71,487) (111,768)
-------- -------- -------- -------- -------- -------- ---------
Net outflow........................... (17,645) (6,787) (4,897) (8,585) (27,243) (29,329) (57,433)
-------- -------- -------- -------- -------- -------- ---------
Charge-offs.............................. (6,697) (9,089) (4,884)(2) (8,378) (7,911) (20,670)(2) (32,063)
Net change in OREO reserve............... 4,405 685 (240)(2) 1,885 (663) 4,850(2) 2,920
-------- -------- -------- -------- -------- -------- ---------
Total decrease in nonperforming assets... $(19,937) $(15,191) $(10,021) $(15,078) $(35,817) $(45,149) $ (86,576)
======== ======== ======== ======== ======== ======== =========
<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>
21
<PAGE> 22
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 $58 million at September 30, 1995,
compared with $55 million at December 31, 1994, and $60 million at September 30,
1994. During the third quarter of 1995, nonperforming loans decreased 20% from
$73 million at June 30, 1995. On a pro forma basis, assuming the adoption of
SFAS No. 114 on December 31, 1994, nonperforming loans declined 26% since
year-end as the resolution of problem assets continued to exceed new additions.
TABLE I
NONPERFORMING LOANS
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial.............................. $15,172 26% $17,480 32% $19,763 33%
Commercial real estate.................. 27,655 48 26,638 49 28,000 47
Residential mortgage.................... 12,918 22 8,971 16 10,318 17
Instalment.............................. 2,429 4 1,538 3 1,457 3
------- --- ------- --- ------- ---
Total nonperforming loans..... $58,174 100% $54,627 100% $59,538 100%
======= === ======= === ======= ===
</TABLE>
Other Real Estate Owned
OREO consists of foreclosed properties and in-substance foreclosures.
Foreclosed properties are being prepared for sale or are currently listed for
sale. 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 $19 million during the first nine
months of 1995 from $67 million at December 31, 1994 and $78 million at
September 30, 1994. Excluding the impact of the SFAS No. 114 reclassification,
OREO continued to decline primarily due to property sales.
Restructured, Accruing Loans
The Company restructures credits with troubled borrowers if such
arrangements are likely to minimize losses the Company may otherwise incur on a
particular credit. Loans that have been restructured remain on nonaccrual status
until the customer has demonstrated a period of performance under the new
contractual terms.
The adoption of SFAS No. 114 also impacted 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 did not
enter into any restructured, accruing loan agreements during the third quarter
of 1995. 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.
22
<PAGE> 23
At September 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 4% to $35 million at
September 30, 1995, from $36 million at December 31, 1994, and declined 20% from
$43 million at September 30, 1994 (TABLE J).
Of the $35 million in accruing loans past due 90 days or more at September
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 $11 million in
residential real estate loans, $10 million were for owner-occupied properties.
TABLE J
ACCRUING LOANS 90 DAYS OR MORE PAST DUE
AT PERIOD-END
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial.............................. $ 1,480 4% $ 348 1% $ 3,503 8%
Commercial real estate.................. 3,553 10 4,626 13 9,643 22
Residential mortgage.................... 11,177 32 10,104 28 11,587 27
Instalment.............................. 18,639 54 21,115 58 18,750 43
------- --- ------- --- ------- ---
Total......................... $34,849 100% $36,193 100% $43,483 100%
======= === ======= === ======= ===
</TABLE>
Allowance for Loan Losses
Since older problem assets are being resolved and the amount of emerging
problem assets is declining, the allowance for loan losses (TABLE K, page 24)
was not replenished to the full extent of net charge-offs. The allowance for
loan losses was $154 million at September 30, 1995; this reflected the $8.2
million allowance acquired in the acquisition of NFS (now BayBank FSB), the
provision for loan losses of $6.0 million, and net charge-offs of $6.8 million
during the third quarter of 1995. The coverage of nonperforming loans (allowance
for loan losses as a percentage of nonperforming loans) increased to 264% at
September 30, 1995, from 253% at September 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%.
23
<PAGE> 24
<TABLE>
TABLE K
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<CAPTION>
THIRD QUARTER NINE MONTHS
----------------------- -----------------------
1995 1994 1995(1) 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loans outstanding at September 30............... $7,476,496 $6,352,975 $7,476,496 $6,352,975
========== ========== ========== ==========
Average loans................................... $7,376,088 $6,201,580 $6,974,748 $6,100,086
========== ========== ========== ==========
Allowance for loan losses:
Balance at beginning of period.................. $ 146,345 $ 154,126 $ 146,835 $ 171,496
Allowance acquired through acquisition........ 8,240 -- 8,240 --
Loans charged off
Commercial................................... 2,102 2,364 5,256 9,421
Commercial real estate....................... 1,213 3,535 8,220 17,250
Residential mortgage......................... 2,173 1,648 6,002 5,580
Instalment................................... 6,976 6,469 20,475 20,128
---------- ---------- ---------- ----------
Total loans charged off...................... 12,464 14,016 39,953 52,379
---------- ---------- ---------- ----------
Recoveries
Commercial................................. 1,608 2,017 6,187 5,902
Commercial real estate..................... 1,551 371 5,928 966
Residential mortgage....................... 678 483 2,069 1,692
Instalment................................. 1,850 1,633 5,502 4,937
---------- ---------- ---------- ----------
Total recoveries........................... 5,687 4,504 19,686 13,497
---------- ---------- ---------- ----------
Net loans charged off...................... 6,777 9,512 20,267 38,882
Provision for loan losses..................... 6,000 6,000 19,000 18,000
---------- ---------- ---------- ----------
Balance at September 30......................... $ 153,808 $ 150,614 $ 153,808 $ 150,614
========== ========== ========== ==========
Annualized net charge-offs as a percentage of
average period-to-date loans.................. 0.4% 0.6% 0.4% 0.9%
Allowance for loan losses as a percentage of
period-end loans.............................. 2.1 2.4 2.1 2.4
Allowance for loan losses as a percentage of
nonperforming loans........................... 264.4 253.0 264.4 253.0
Allowance for loan losses as a percentage of
nonperforming loans, restructured, accruing
loans, and accruing loans past due 90 days or
more.......................................... 159.2 134.7 159.2 134.7
<FN>
- ---------------
(1) As a result of the adoption of SFAS No. 114 on January 1, 1995, $33.2
million of in-substance foreclosures and related reserves of $8.7 million
were reclassified to loans and the allowance for loan losses, respectively.
Charge-offs of $8.7 million were subsequently recorded during the first
quarter of 1995. The reclassification of in-substance foreclosures reserves
and subsequent charge-offs had no effect on the allowance for loan losses
and are not reflected in the table above.
</TABLE>
CAPITAL AND DIVIDENDS
BayBanks' consolidated risk-based capital ratios were 13.10% for total
capital and 11.57% for core capital at September 30, 1995, compared with 13.46%
and 11.74%, respectively, at September 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 7.59%, 7.35%, and 7.21% at
September 30, 1995, December 31, 1994, and September 30, 1994, respectively
(TABLE L, page 25).
24
<PAGE> 25
TABLE L
CAPITAL RATIOS
SEPTEMBER 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% 11.57% n/a% 13.10% n/a% 7.59%
BayBank (Note)................ 6.00 10.22 10.00 11.48 5.00 6.79
BayBank Boston, N.A. (Note)... 6.00 11.93 10.00 13.21 5.00 7.65
BayBank FSB................... 6.00 12.01 10.00 13.27 5.00 7.53
- ---------------
BayBank, N.A. (Pro Forma)..... 6.00 10.46 10.00 11.72 5.00 6.92
</TABLE>
* Under Federal Prompt Corrective Action and Risk-based Deposit Insurance
Assessment Regulations.
n/a - not applicable
Note: During the third quarter of 1995, BayBank Connecticut, N.A. was merged
into BayBank Boston, N.A. On November 1, BayBank became a national bank
(BayBank, N.A.) and BayBank Boston, N.A. was merged into BayBank, N.A.
BayBanks paid a dividend in the third quarter of 1995 of $.60 per share,
bringing the dividend paid in the first nine months of 1995 to $1.60 per share.
On October 26, 1995, BayBanks declared a quarterly dividend of $.60 per share
payable December 1, 1995.
25
<PAGE> 26
<TABLE>
BAYBANKS, INC.
AVERAGE BALANCES AND CAPITAL RATIOS
(DOLLARS IN MILLIONS)
<CAPTION>
1995 1994
NINE MONTHS --------------------------- -----------------
----------------- THIRD SECOND FIRST FOURTH THIRD
1995 1994 QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits and other short-term
investments.......................................... $ 263 $ 231 $ 366 $ 215 $ 205 $ 176 $ 175
Securities available for sale, at cost................. 265 545 337 225 231 190 420
Investment securities, at cost......................... 2,520 2,378 2,303 2,574 2,687 2,849 2,840
Loans(1)
Commercial........................................... 1,586 1,342 1,609 1,615 1,533 1,499 1,372
Commercial real estate............................... 1,017 916 1,090 981 980 928 915
Residential mortgage................................. 1,536 1,219 1,831 1,415 1,357 1,302 1,256
Instalment........................................... 2,836 2,622 2,846 2,820 2,840 2,776 2,659
------- ------ ------ ------ ------ ------ ------
6,975 6,099 7,376 6,831 6,710 6,505 6,202
Less allowance for loan losses....................... 152 163 157 146 151 150 155
------- ------ ------ ------ ------ ------ ------
6,823 5,936 7,219 6,685 6,559 6,355 6,047
------- ------ ------ ------ ------ ------ ------
Total earning assets........................... 10,023 9,253 10,382 9,845 9,833 9,720 9,637
Cash and due from banks................................ 663 625 690 667 632 672 651
Other assets........................................... 459 485 495 442 440 463 480
------- ------ ------ ------ ------ ------ ------
Total assets................................... $10,993 $10,200 $11,410 $10,808 $10,754 $10,705 $10,613
======= ======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand............................................... $ 2,034 $ 1,964 $2,090 $2,013 $1,998 $2,037 $1,992
NOW accounts......................................... 1,400 1,393 1,439 1,377 1,383 1,397 1,388
Savings.............................................. 1,454 1,497 1,479 1,431 1,451 1,477 1,502
Money market deposit accounts........................ 2,506 2,699 2,539 2,468 2,512 2,577 2,655
Consumer time........................................ 1,462 967 1,789 1,401 1,189 1,059 981
Time -- $100,000 or more............................. 200 75 216 210 175 136 125
------- ------ ------ ------ ------ ------ ------
9,056 8,595 9,552 8,900 8,708 8,683 8,643
Federal funds purchased and other short-term
borrowings........................................... 952 749 799 947 1,114 1,107 1,086
Long-term debt......................................... 56 54 65 51 51 51 54
------- ------ ------ ------ ------ ------ ------
Total deposits and borrowings.................. 10,064 9,398 10,416 9,898 9,873 9,841 9,783
Other liabilities(2)................................... 91 70 103 86 81 89 77
Stockholders' equity................................... 838 732 891 824 800 775 753
------- ------ ------ ------ ------ ------ ------
Total liabilities and stockholders' equity..... $10,993 $10,200 $11,410 $10,808 $10,754 $10,705 $10,613
======= ======= ======= ======= ======= ======= =======
CAPITAL RATIOS
Risk-Based
Core (Min. regulatory standard -- 4.00%)............. 11.57% 11.74% 11.57 % 11.99 % 11.81 % 11.51 % 11.74 %
Total (Min. regulatory standard -- 8.00%)............ 13.10 13.46 13.10 13.53 13.36 13.06 13.46
Leverage............................................... 7.59 7.21 7.59 7.75 7.55 7.35 7.21
<FN>
- ---------------
(1) Nonperforming loans are included in the average balances.
(2) Includes guarantee of ESOP indebtedness.
</TABLE>
26
<PAGE> 27
<TABLE>
BAYBANKS, INC.
SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS ON A TAX EQUIVALENT BASIS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
1995 1994
NINE MONTHS -------------------------------- --------------------
-------------------- THIRD SECOND FIRST FOURTH THIRD
1995 1994 QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income on earning assets................... $599,050 $481,395 $209,826 $197,045 $192,179 $184,387 $174,632
Interest expense on deposits and
borrowings............................... 214,053 134,053 76,738 70,885 66,430 58,805 52,812
-------- -------- -------- -------- -------- -------- --------
Net interest income........................ 384,997 347,342 133,088 126,160 125,749 125,582 121,820
Noninterest income......................... 164,537 156,303 57,344 55,752 51,441 50,985 52,557
-------- -------- -------- -------- -------- -------- --------
Total income from operations............... 549,534 503,645 190,432 181,912 177,190 176,567 174,377
Operating expenses......................... 361,587 341,613 125,109 119,926 116,552 115,557 114,706
-------- -------- -------- -------- -------- -------- --------
OPERATING INCOME BEFORE NET SECURITIES
GAINS (LOSSES) AND PROVISIONS FOR LOAN
LOSSES AND OREO RESERVE.................. 187,947 162,032 65,323 61,986 60,638 61,010 59,671
-------- -------- -------- -------- -------- -------- --------
Net securities gains (losses).............. 43 475 42 -- 1 (272) --
-------- -------- -------- -------- -------- -------- --------
Provision for loan losses.................. 19,000 18,000 6,000 6,500 6,500 6,000 6,000
Provision for OREO reserve, net............ 771 7,852 (229) -- 1,000 1,520 2,415
-------- -------- -------- -------- -------- -------- --------
Credit provisions.......................... 19,771 25,852 5,771 6,500 7,500 7,520 8,415
-------- -------- -------- -------- -------- -------- --------
Pre-tax income............................. 168,219 136,655 59,594 55,486 53,139 53,218 51,256
Less tax equivalent adjustment included
above.................................... 8,629 5,856 2,891 2,943 2,795 2,126 1,816
-------- -------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change..................... 159,590 130,799 56,703 52,543 50,344 51,092 49,440
Provision for income taxes................. 60,038 53,133 21,984 18,185 19,869 20,389 20,407
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
accounting change........................ 99,552 77,666 34,719 34,358 30,475 30,703 29,033
Less cumulative effect of accounting change
(net of tax benefit of $683)............. -- 932 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
NET INCOME................................. $ 99,552 $ 76,734 $ 34,719 $ 34,358 $ 30,475 $ 30,703 $ 29,033
======== ======== ======== ======== ======== ======== ========
EARNINGS PER SHARE
Income before accounting change.......... $ 5.11 $ 4.06 $ 1.74 $ 1.78 $ 1.58 $ 1.59 $ 1.51
Less cumulative effect of
accounting change...................... -- 0.05 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income............................... $ 5.11 $ 4.01 $ 1.74 $ 1.78 $ 1.58 $ 1.59 $ 1.51
======== ======== ======== ======== ======== ======== ========
DIVIDENDS PAID PER SHARE................... $ 1.60 $ 1.15 $ 0.60 $ 0.50 $ 0.50 $ 0.45 $ 0.45
FINANCIAL RATIOS
Return on average equity................... 15.9% 14.0% 15.5% 16.7% 15.5% 15.7% 15.3%
Return on average assets................... 1.21 1.01 1.21 1.28 1.15 1.14 1.09
COMMON STOCK DATA
Period-end book value per share............ $ 46.18 $ 40.30 $ 46.18 $ 44.09 $ 42.81 $ 41.51 $ 40.30
Dividend payout ratio...................... 31.3% 28.7% 34.5% 28.1% 31.6% 28.3% 29.7%
Range of BayBanks, Inc., last sale price
High..................................... $ 83.75 $ 64.13 $ 83.75 $ 79.50 $ 64.50 $ 59.50 $ 63.00
Low...................................... 52.00 50.00 74.75 60.50 52.00 51.00 54.25
Close.................................... 75.88 55.00 75.88 79.25 64.50 52.75 55.00
</TABLE>
27
<PAGE> 28
<TABLE>
BAYBANKS, INC.
AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN(1)
<CAPTION>
1995 1994
NINE MONTHS ------------------------------- -------------------
------------- THIRD SECOND FIRST FOURTH THIRD
1995 1994 QUARTER QUARTER QUARTER QUARTER QUARTER
---- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits and other
short-term investments............... 5.86% 3.77% 5.78% 6.04% 5.84% 5.24% 4.38%
Securities available for sale(2)....... 6.52 4.96 6.24 6.64 6.80 6.27 5.42
Investment securities.................. 5.67 4.86 5.81 5.72 5.51 5.23 5.13
Loans.................................. 8.94 8.05 8.92 8.99 8.94 8.55 8.35
Commercial........................... 8.81 7.16 8.68 8.85 8.92 8.29 7.68
Commercial real estate............... 9.19 8.06 9.26 9.31 8.98 8.89 8.54
Residential mortgage................. 7.67 7.36 7.70 7.69 7.62 7.49 7.48
Instalment........................... 9.62 8.83 9.70 9.61 9.57 9.07 9.03
Total earning assets................... 7.98% 6.94% 8.03% 8.01% 7.89% 7.47% 7.20%
Interest-bearing funds................. 3.55% 2.40% 3.65% 3.60% 3.41% 2.98% 2.68%
NOW accounts......................... 1.37 1.35 1.37 1.36 1.37 1.37 1.37
Savings.............................. 2.28 1.93 2.30 2.29 2.25 2.17 1.96
Money market deposit accounts........ 3.35 2.25 3.44 3.37 3.22 2.72 2.50
Consumer time........................ 5.35 3.57 5.61 5.46 4.83 4.21 3.80
Time -- $100,000 or more............. 5.75 3.90 5.65 5.84 5.78 5.08 4.29
Short-term borrowings................ 5.87 4.09 5.77 5.99 5.84 5.14 4.50
Long-term debt....................... 6.34 4.46 6.22 6.35 6.50 5.54 5.05
Interest expense as a percentage of
average earning assets............... 2.85% 1.93% 2.93% 2.88% 2.73% 2.39% 2.17%
Net interest margin.................... 5.13% 5.01% 5.10% 5.13% 5.16% 5.08% 5.03%
<FN>
- ---------------
(1) Tax equivalent basis.
(2) Yields based on average cost.
</TABLE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit List and Index on page 30.
(b) 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.
28
<PAGE> 29
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: November 13, 1995
29
<PAGE> 30
<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 31.
27 -- Financial Data Schedule.
</TABLE>
30
<PAGE> 1
<TABLE> EXHIBIT 11.1
BAYBANKS, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
FOR THE PERIODS ENDED SEPTEMBER 30
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER QUARTER ENDED SEPTEMBER 30
30
--------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares............. 19,206,107 18,827,078 19,588,083 18,883,516
Common stock equivalents (CSE):
Stock options.................. 293,074 318,626 318,932 304,374
----------- ----------- ----------- -----------
Primary weighted average shares..... 19,499,181 19,145,704 19,907,015 19,187,890
=========== =========== =========== ===========
Income before cumulative effect of
accounting change................. $ 99,552 $ 77,666 $ 34,719 $ 29,033
Less cumulative effect of accounting
change............................ -- 932 -- --
----------- ----------- ----------- -----------
Net income.......................... $ 99,552 $ 76,734 $ 34,719 $ 29,033
=========== =========== =========== ===========
Primary earnings per share:
Income before cumulative effect
of accounting change......... $ 5.11 $ 4.06 $ 1.74 $ 1.51
Less cumulative effect of
accounting change............ -- 0.05 -- --
----------- ----------- ----------- -----------
Net income..................... $ 5.11 $ 4.01 $ 1.74 $ 1.51
=========== =========== =========== ===========
FULLY DILUTED:
Weighted average shares............. 19,206,107 18,827,078 19,588,083 18,883,516
Common stock equivalents (CSE):
Stock options.................. 316,432 323,641 318,932 304,374
----------- ----------- ----------- -----------
Fully diluted weighted average
shares............................ 19,522,539 19,150,719 19,907,015 19,187,890
=========== =========== =========== ===========
Income before cumulative effect of
accounting change................. $ 99,552 $ 77,666 $ 34,719 $ 29,033
Less cumulative effect of accounting
change............................ -- 932 -- --
----------- ----------- ----------- -----------
Net income.......................... $ 99,552 $ 76,734 $ 34,719 $ 29,033
=========== =========== =========== ===========
Fully diluted earnings per share:
Income before cumulative effect
of accounting change......... $ 5.10 $ 4.06 $ 1.74 $ 1.51
Less cumulative effect of
accounting change............ -- 0.05 -- --
----------- ----------- ----------- -----------
Net income..................... $ 5.10 $ 4.01 $ 1.74 $ 1.51
=========== =========== =========== ===========
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BAYBANKS, INC. FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 749,763
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 349,310
<TRADING-ASSETS> 77,076
<INVESTMENTS-HELD-FOR-SALE> 317,664
<INVESTMENTS-CARRYING> 2,190,033
<INVESTMENTS-MARKET> 2,199,459
<LOANS> 7,476,496
<ALLOWANCE> 153,808
<TOTAL-ASSETS> 11,524,770
<DEPOSITS> 9,723,361
<SHORT-TERM> 731,979
<LIABILITIES-OTHER> 98,446
<LONG-TERM> 64,829
<COMMON> 39,245
0
0
<OTHER-SE> 866,910
<TOTAL-LIABILITIES-AND-EQUITY> 11,524,770
<INTEREST-LOAN> 467,057
<INTEREST-INVEST> 112,220
<INTEREST-OTHER> 11,144
<INTEREST-TOTAL> 590,421
<INTEREST-DEPOSIT> 168,949
<INTEREST-EXPENSE> 214,053
<INTEREST-INCOME-NET> 376,368
<LOAN-LOSSES> 19,000
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 362,358
<INCOME-PRETAX> 159,590
<INCOME-PRE-EXTRAORDINARY> 99,552
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,552
<EPS-PRIMARY> 5.11
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.13
<LOANS-NON> 58,174
<LOANS-PAST> 34,849
<LOANS-TROUBLED> 3,609
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 146,835
<CHARGE-OFFS> 39,953
<RECOVERIES> 19,686
<ALLOWANCE-CLOSE> 153,808
<ALLOWANCE-DOMESTIC> 6,752
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 147,056
</TABLE>
