-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lj3FjeT9wdvQY4gwnEmc+4iCcBbmtOsh1Caud4L0iFdBUbSbIe5SDPOoix62aYAy YJikoAzaQR8K/kyskUgRWQ== 0000950135-96-001390.txt : 19960319 0000950135-96-001390.hdr.sgml : 19960319 ACCESSION NUMBER: 0000950135-96-001390 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960318 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAYBANKS INC CENTRAL INDEX KEY: 0000010497 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042008039 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-00959 FILM NUMBER: 96535631 BUSINESS ADDRESS: STREET 1: 175 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174821040 MAIL ADDRESS: STREET 1: 175 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: BAYSTATE CORP DATE OF NAME CHANGE: 19760602 10-K405 1 BAYBANKS, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 0-959 BAYBANKS, INC. (REGISTRANT) MASSACHUSETTS 04-2008039 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
175 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 482-1040 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $2.00 PAR VALUE (TITLE OF CLASS) RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, NO PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- State the aggregate market value of the voting stock held by non-affiliates of the registrant as of February 29, 1996: COMMON STOCK, $2.00 PAR -- $2,027,790,210 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of February 29, 1996: COMMON STOCK, $2.00 PAR -- 19,707,874 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the annual meeting of stockholders to be held on April 25, 1996 are incorporated by reference in Part III. The list of exhibits to this report appears on pages 70 through 72. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL COMPANY INFORMATION As used herein, the "Company" means BayBanks, Inc. alone or BayBanks, Inc. together with its consolidated subsidiaries, depending on the context, and the "BayBanks" means the Company's three banking subsidiaries. BayBanks, Inc., established in 1928, is a registered bank holding company and savings and loan holding company and is headquartered in Boston, Massachusetts. At December 31, 1995, the Company had total assets of $12.1 billion, total deposits of $10.2 billion, total stockholders' equity of $951 million, and 5,829 full-time equivalent employees. The Company's largest subsidiary is BayBank, N.A., a national bank based in Boston, with branches in Massachusetts and Connecticut. BayBank, N.A. had total assets of $11.1 billion at December 31, 1995. BayBank FSB, a federally chartered savings association, is based in Nashua, New Hampshire, and BayBank NH, a New Hampshire commercial bank, is based in Derry, New Hampshire. The Company also maintains a loan production office in Portland, Maine. The Company has entered into an Agreement and Plan of Merger dated December 12, 1995 with Bank of Boston Corporation ("Bank of Boston"). Under the Merger Agreement, at the effective time of the merger, each outstanding share of the common stock of the Company will be converted into the right to receive 2.2 newly issued shares of Bank of Boston common stock. The merger is subject to the approval of the stockholders of the Company and of the stockholders of Bank of Boston, to federal and state regulatory approvals, and to other conditions. Current plans call for the merger to be completed by the middle of 1996. After completion of the merger the principal banking subsidiary of Bank of Boston will operate as BayBank of Boston, N.A. See Note 20 to the consolidated financial statements under Item 8 for further discussion of the pending merger. The discussion in this Form 10-K does not give effect to the merger. In connection with the Merger Agreement, the Company granted to Bank of Boston a conditional option to purchase shares of common stock of the Company equal to 19.9% of the Company's outstanding shares at a price of $83.75 per share. This option is exercisable only in certain events related to a possible acquisition of the Company by another party and may have the effect of discouraging such an acquisition. In certain circumstances, the Company also may be required to repurchase the option and any shares issued thereunder. The Company has an extensive banking network with 237 full-service offices and 453 automated banking facilities serving 174 cities and towns in Massachusetts, fourteen in New Hampshire, and two in Connecticut. The Company is best known for its use of advanced banking technology, featuring state-of-the-art computer and telecommunications technology to process customer transactions, provide customer information, and increase the efficiency of its data processing activities. BayBank Systems, Inc., a nonbank subsidiary of BayBank, N.A., engages in data processing, product and systems development, and other technologically oriented operations, principally for the Company but also for franchisees and correspondents. In particular, BayBank Systems, Inc., operates the proprietary X-Press 24(R) and X-Press 24 Cash(R) automated teller machine ("ATM") networks. BayBanks Credit Corp. and BayBanks Mortgage Corp. (subsidiaries of BayBank, N.A.) provide instalment loan, credit card, and mortgage loan operations and services. BayBanks Mortgage Corp. also services approximately $2.0 billion of residential mortgage loans originated by the BayBanks that have been placed in the secondary market. Other subsidiaries provide brokerage and investment management services to the BayBanks and others. 1 3 The following presents selected financial information for the Company's three banking subsidiaries:
AT DECEMBER 31 -------------------------------------------------------- MASSACHUSETTS AND CONNECTICUT NEW HAMPSHIRE ------------------ ---------------------------------- BAYBANK BAYBANK BAYBANK, N.A. FSB NH ----------------- --------------- -------------- 1995 1994(1) 1995 1994(2) 1995 1994(2) ------- ------- ----- ------- ---- ------- (IN MILLIONS) Securities portfolios................ $ 2,731 $ 2,889 $ 85 n/a $ 72 n/a Total loans.......................... 7,194 6,649 521 n/a 56 n/a Total earning assets................. 9,925 9,538 606 n/a 128 n/a Total assets......................... 11,127 10,689 659 n/a 147 n/a Total deposits....................... 9,575 9,001 518 n/a 125 n/a Subordinated debt.................... -- 52 -- n/a -- n/a Stockholders' equity................. 734 714 89 n/a 21 n/a - --------------- (1) During 1995 the Company's Massachusetts and Connecticut banking subsidiaries, BayBank Boston, N.A., BayBank, and BayBank Connecticut, N.A., were merged into one entity, BayBank, N.A. The 1994 pro forma information assumes the merger was effective as of December 31, 1994. (2) As discussed more fully on page 3, BayBank FSB and BayBank NH are the subsidiaries resulting from the 1995 acquisitions of two New Hampshire banking organizations.
GENERAL BANKING BUSINESS The Company provides a complete range of banking, investment, and related financial services, with particular emphasis on consumer and middle market business customers. In addition to its normal deposit and lending activities, the Company aggressively pursues fee income opportunities, both in traditional and automated banking services and in the investment field, including acting as investment adviser and shareholder servicing agent for BayFunds[REGISTERED TRADEMARK], a proprietary mutual fund family. Consumer Banking The Company is a recognized leader in consumer banking, with the largest consumer market share in Massachusetts. More households in Massachusetts do business with the BayBanks than with any other banking organization. The Company offers a wide variety of consumer banking products, including FDIC-insured checking, money market, savings, and time deposit accounts; credit cards; home mortgages and home equity financing; instalment loans; and trust and private banking services. The Company's proprietary X-Press 24 Network operates over 1,300 ATMs in Massachusetts, New Hampshire, and Connecticut, including 200 cash machines located in retail stores, and processes approximately 11 million transactions per month; the Company has over 1 million ATM cards in use. Approximately 90 nonaffiliated financial institutions represent 238 of the ATMs in the X-Press 24 network. X-Press 24 cardholders can perform automated banking transactions at over 215,000 CIRRUS[REGISTERED TRADEMARK] and NYCE[REGISTERED TRADEMARK] terminals worldwide. BayBank cardholders can also use their cards to make point-of-sale purchases at retail establishments worldwide, including grocery stores, automobile service stations and, through BayBank X-Press Check[REGISTERED TRADEMARK], anywhere a MasterCard[REGISTERED TRADEMARK] is accepted. The Company provides a broad range of support and maintenance services to the X-Press 24 network member institutions. In addition to its branch and ATM networks, the Company operates a state-of-the-art customer sales and service center twenty-four hours a day, seven days a week, that provides customer service and product information, opens consumer bank accounts, and arranges consumer loans. In 1996 the Company plans to introduce HomeLink[REGISTERED TRADEMARK], a new home banking service for the consumer market. Corporate Banking The Company provides a comprehensive range of cash management, credit, deposit, international banking, and related services to businesses, hospitals, educational institutions, and local governments, with 2 4 particular emphasis on the middle market. Specialized products available to BayBanks' business and governmental customers include personal computer-based cash management services with which a customer may perform a range of deposit account transactions; X-Press Trade[registered trademark], offering automated international letter of credit services; BayBank X-Press Tax[registered trademark] for automated payroll tax depositing; a Collateralized Municipal Money Market Account; and the Escrow Client Account Service. BayBank, N.A. also acts as trustee or custodian for employee benefit and pension plans. Specific lending groups focus on healthcare and educational institutions, municipalities, automobile dealers, construction and contracting companies, retailers, emerging technology companies, and international trade finance. The Company also provides secured financing, in the form of asset-based lending, leasing, and real estate lending, for commercial customers. The Company's general corporate lending activities are directed toward small and middle market companies in the New England region, with a primary emphasis on Massachusetts and southern New Hampshire enterprises. Investment Services The Company's subsidiaries offer a wide range of fiduciary and investment services to individual, trust, and business customers. The municipal securities dealership at BayBank, N.A. is a significant participant in the underwriting of Massachusetts municipal obligations and engages in private placement activities. BayBanks Brokerage Services, Inc., provides retail brokerage services. BayBanks Investment Management, Inc., a registered investment adviser, provides portfolio advice and asset management for individuals and businesses and manages the BayBank, N.A. trust department's common trust funds. As of December 31, 1995, the BayBank, N.A. trust department had total assets with a book value of $4.6 billion under management or in custody. BayBanks Investment Management, Inc., and BayBank, N.A. act as investment advisers to BayFunds, which consists of money market, equity, and bond portfolios with aggregate assets of approximately than $1.6 billion at year-end 1995. ACQUISITIONS AND CONSOLIDATION OF BANK SUBSIDIARIES The Company's acquisition of NFS Financial Corp. ("NFS"), parent company of NFS Savings Bank, FSB, Nashua, New Hampshire, and Plaistow Cooperative Bank, FSB, Plaistow, New Hampshire, became effective after the close of business on June 30, 1995. As of the date of acquisition, NFS had total assets of $625 million. Following the acquisition, NFS Savings Bank, FSB and Plaistow Cooperative Bank, FSB were merged and are operating as BayBank FSB. In addition, the name of the parent company was changed from NFS to BayBank New Hampshire ("BBNH"). In September of 1995, BBNH was merged into BayBanks, Inc. The Company acquired Cornerstone Financial Corporation ("Cornerstone"), parent company of Cornerstone Bank of Derry, New Hampshire, after the close of business on November 30, 1995. At the date of acquisition, Cornerstone had total assets of $143 million. Following the acquisition, Cornerstone Bank began operating as BayBank NH. In addition, the name of the parent company was changed from Cornerstone to BayBanks, Inc. (a New Hampshire corporation). In December of 1995, BayBanks, Inc. (a New Hampshire corporation) was merged into BayBanks, Inc. During 1995, the Company merged BayBank Connecticut, N.A. into BayBank Boston, N.A. Subsequently, the Company's lead bank, BayBank, was converted to a national bank (BayBank, N.A.) and BayBank Boston, N.A. was merged into BayBank, N.A., now headquartered in Boston. The Company has filed applications to convert BayBank FSB and BayBank NH to nationally chartered banks, to merge BayBank NH into BayBank FSB (after conversion of charters) and to merge the surviving New Hampshire national bank into BayBank, N.A. COMPETITION The BayBanks operate in a highly competitive banking market. The banking subsidiaries compete with other banks in their respective service areas, with several large commercial banks located in the City of Boston, and with a number of large regional and national commercial banks located throughout the country. 3 5 Legislation enacted in recent years and changing regulatory interpretations have substantially increased the geographic and product competition among commercial banks, thrift institutions, mortgage companies, leasing companies, credit unions, finance companies, and nonbanking institutions, including mutual funds, insurance companies, brokerage firms, investment banks, and a variety of financial services and advisory companies. In the international business, the BayBanks compete with other domestic banks having foreign operations and with major foreign banks and other financial institutions. GOVERNMENT MONETARY POLICY The earnings and growth of the banking industry in general are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). An important function of the Federal Reserve Board is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are open market operations in U.S. Government securities, changes in the discount rates on member bank borrowings, and changes in amount or methods of calculating reserve requirements against member banks' deposits. These means, used in varying combinations, influence the overall growth of bank loans, investments, and deposits as well as the rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future. The effect of such policies upon the future business and earnings of the Company cannot be predicted. GENERAL BANKING REGULATION The Company is a bank holding company and a savings and loan holding company subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956 and the Office of Thift Supervision ("OTS") under the Home Owner's Loan Act, respectively. As a bank holding company, the activities of the Company and its banking and nonbank subsidiaries are limited to the business of banking and activities closely related or incidental to banking. The Company may not acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. The Company is also subject to the Massachusetts bank holding company law that requires the Company to obtain the prior approval of the Massachusetts Board of Bank Incorporation for holding company mergers and bank acquisitions. The Company's largest subsidiary bank, BayBank N.A., is a national banking association subject to supervision and examination by the Office of the Comptroller of the Currency ("OCC"). BayBank FSB is a federal savings bank subject to supervision and examination by the OTS. BayBank NH is subject to supervision and examination by the Federal Deposit Insurance Corporation ("FDIC") and the New Hampshire Bank Commissioner ("Bank Commissioner"). All of the Company's banking subsidiaries are insured by and subject to certain regulations of the FDIC. They are also subject to various requirements and restrictions under federal and state law, which include requirements to obtain regulatory approval of certain business transactions, including establishing and closing bank branches; requirements to maintain reserves against deposits; restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon; and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Company's banking subsidiaries. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. Because the Company is a holding company, its right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of banking subsidiaries), except to the extent that the Company may itself be a creditor with recognized claims against the subsidiary. 4 6 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provided for increased funding for FDIC deposit insurance and for expanded regulation of the banking industry. Among other things, FDICIA required the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital ratio categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. The critical capital level must be a level of tangible equity equal to at least 2% of total assets, but may be fixed at a higher level by regulation. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating and may be reclassified to a lower category by action based on other supervisory criteria. For an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized it must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage ratio of at least 4% (3% in some cases). FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to increased regulatory monitoring and growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount needed to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. The FDIC has adopted regulations governing the receipt of brokered deposits that require certain banks, depending on their capital ratios and other factors, to obtain a waiver from the FDIC before they may accept brokered deposits, and that limit the interest rates certain banks can offer on deposits. Although the Company does not solicit brokered deposits, all of its banking subsidiaries are free to do so without restraint under the regulation. Under FDIC's risk-based deposit insurance premium system for the Bank Insurance Fund ("BIF"), banks currently pay within a range of a $2,000 statutory minimum assessment to 27 cents per $100 of domestic deposits, depending on their risk classification. Under the FDIC's risk-based deposit insurance premium system for the Savings Association Insurance Fund ("SAIF"), thrifts currently pay within a range of 23 cents per $100 of domestic deposits to 31 cents per $100 of domestic deposits, depending on their risk classification. To arrive at a risk-based assessment for each bank or thrift, the FDIC places the bank or thrift in one of nine risk categories, using a two-step process based first on capital ratios and then on other relevant supervisory information. Each institution is assigned to one of three groups (well capitalized, adequately capitalized, or undercapitalized) based on its capital ratios. For these purposes, a well capitalized institution is one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, and a 5% Tier 1 leverage capital ratio. An adequately capitalized institution must have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio, and a 4% Tier 1 leverage capital ratio. An undercapitalized institution is one that does not meet either of the foregoing definitions. Each institution is also assigned to one of three supervisory subgroups based on an evaluation of the risk posed by the institution to the BIF or SAIF. Well capitalized 5 7 banks and thrifts presenting the lowest risk to the BIF or SAIF pay the lowest assessment rate, while undercapitalized banks and thrifts presenting the highest risk pay the highest rate. The BayBanks' capital ratios at December 31, 1995, placed all of them in the well capitalized category for assessment purposes (see "Regulatory Capital Requirements"). The assessment will depend on the level of deposit balances and the BayBanks' respective applicable risk categories. Other significant provisions of FDICIA required federal banking regulators to establish standards in a number of areas to assure bank safety and soundness, including internal controls; credit underwriting; asset growth; management compensation; ratios of classified assets to capital; and earnings. The legislation also contained provisions that require the adoption of capital guidelines applicable to interest rate risks; tighten independent auditing requirements; restrict the activities and investments of state-chartered insured banks; strengthen various consumer banking laws; limit the ability of undercapitalized banks to borrow from the Federal Reserve's discount window; and require regulators to perform annual on-site bank examinations and set standards for real estate lending. REGULATORY CAPITAL REQUIREMENTS Under the risk-based capital measures for banks, thrifts, and bank holding companies, a banking organization's reported balance sheet is converted to risk-based amounts by assigning each asset to a risk category, which is then multiplied by the risk weight for that category. Off-balance sheet exposures are converted to risk-based amounts through a two-step process. First, off-balance sheet assets and credit equivalent amounts (e.g., interest rate swaps) are multiplied by a credit conversion factor depending on the defined categorization of the particular item. Then the converted items are assigned to a risk category that weights the items according to their relative risk. The total of the risk-weighted on-and off-balance sheet amounts represents a banking organization's risk-adjusted assets for purposes of determining capital ratios under the risk-based guidelines. Risk-adjusted assets can either exceed or be less than reported assets, depending on the risk profile of the banking organization. Risk-adjusted assets for institutions such as the Company will generally be less than reported assets because retail banking activities include proportionally more residential real estate loans with a lower risk rating and a relatively small off-balance sheet position. A banking organization's total qualifying capital includes two components, core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common stockholders' equity, qualifying perpetual preferred stock, and minority interests, less goodwill and other intangible assets. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, certain other capital instruments, and term subordinated debt, which is discounted at 20% a year during its final five years of maturity. The Company's major capital components include stockholders' equity in core capital, and the allowance for loan losses and grandfathered floating rate notes (subject to an 80% discount) in supplementary capital. At December 31, 1995, the minimum risk-based capital requirements were 4.00% for core capital and 8.00% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter for banks and by period-end total assets for thrifts. The minimum leverage ratio is 3.00%, although banking organizations are expected to exceed that amount by 100 or 200 basis points or more, depending upon their circumstances. At December 31, 1995, the Company's consolidated risk-based capital ratios were 11.41% for core capital and 12.80% for total capital, and at December 31, 1994, were 11.51% and 13.06%, respectively. The Company's consolidated leverage ratio was 7.66% at December 31, 1995, and 7.35% at December 31, 1994. These ratios exceeded the minimum regulatory guidelines. 6 8 The following table presents the risk-based and leverage capital ratios required for depository institutions to be considered well capitalized under applicable federal regulations and the reported capital ratios of the Company and its bank and thrift subsidiaries at December 31, 1995:
RISK-BASED RATIOS ------------------------------------------------------------- TIER 1 CAPITAL TOTAL CAPITAL LEVERAGE RATIO ----------------------------- ----------------------------- ----------------------------- REQUIRED TO BE REQUIRED TO BE REQUIRED TO BE WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED WELL CAPITALIZED(1) REPORTED ------------------- -------- ------------------- -------- ------------------- -------- BayBanks, Inc........... n/a 11.41% n/a 12.80% n/a 7.66% BayBank, N.A. (Note).... 6.00% 9.75 10.00% 11.01 5.00% 6.56 BayBank FSB (Note)...... 6.00 12.68 10.00 13.94 5.00 7.66 BayBank NH (Note)....... 6.00 21.34 10.00 22.61 5.00 9.94 - --------------- BayBank, N.A. (Pro Forma) (Note).... 6.00 10.00 10.00 11.26 5.00 6.78 (1) Under Federal Prompt Corrective Action and Risk-based Deposit Insurance Assessment Regulations. n/a -- not applicable Note: BayBanks has filed applications to convert BayBank FSB and BayBank NH to nationally chartered banks, to merge BayBank NH into BayBank FSB (after conversion of charters) and to merge the surviving New Hampshire national bank into BayBank, N.A. The Pro Forma BayBank, N.A. capital ratios assume these mergers were effective as of December 31, 1995.
The Company increased its quarterly dividend in 1995 following a trend that began with the reinstatement of the quarterly dividend in the first quarter of 1993. For the first and second quarters of 1995, a dividend of $.50 per share was paid. The quarterly dividend was increased to $.60 per share for the third and fourth quarters of 1995. On January 25, 1996, the Board of Directors declared a first quarter dividend of $.60 per share, payable on March 1, 1996. Under its agreement and plan of merger with Bank of Boston, the Company's quarterly dividend may be increased further only with the approval of Bank of Boston. STATISTICAL DISCLOSURES Securities Act Guide 3, Statistical Disclosure by Bank Holding Companies, requires certain statistical disclosures. The statistical information required is either presented in statistical tables within this section, presented elsewhere in this report, or is not applicable. This information should be read in conjunction with the Financial Review under Item 7 and the consolidated financial statements and related notes under Item 8 in this report.
PAGE IN THIS REPORT ----------- Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential Average balances............................................................ 16 Summary of operations....................................................... 17 Average yields and rates paid............................................... 9 Analysis of net interest income............................................. 10 Securities Portfolios Book value by security type................................................. 11 Year-end maturities and yields of principal debt securities................. 49 Securities of an issue in excess of 10% of stockholders' equity............. n/a
7 9
PAGE IN THIS REPORT ----------- Loan Portfolio Distribution of loans....................................................... 12 Maturity distribution of commercial and commercial real estate loans........ 12 Nonperforming assets; restructured, accruing loans; and accruing loans 90 days or more past due...................................................... 12 Policy for placing loans on nonaccrual status............................... 46-47 Interest income which would have been recorded on nonperforming loans had they performed in accordance with their original terms vs. interest income actually recorded on nonperforming loans................................... 47 Foreign outstandings........................................................ n/a Loan concentrations......................................................... n/a Other interest-bearing assets............................................... n/a Summary of Loan Loss Experience Summary of loan loss experience............................................. 13 Discussion of additions to the allowance.................................... 47 Distribution of allowance for loan losses................................... 13 Deposits Average balances of deposit categories...................................... 16 Average rates paid.......................................................... 9 Foreign deposits in domestic offices........................................ n/a Remaining maturities of time deposits -- $100,000 or more................... 14 Amount outstanding of time deposits -- $100,000 or more; issued by a foreign office............................................................. n/a Return on Equity and Assets Return on average stockholders' equity...................................... 17 Return on average total assets.............................................. 17 Dividend payout ratio....................................................... * Average equity to average assets ratio...................................... ** Short-Term Borrowings............................................................ 14 - --------------- n/a -- not applicable * The dividend payout ratio was 31.4% in 1995, 28.6% in 1994, and 25.2% in 1993; there were no dividends paid in 1992 or 1991. ** The average equity to average assets ratio was 7.70% in 1995, 7.20% in 1994, 7.01% in 1993, 5.67% in 1992, and 5.10% in 1991.
8 10 AVERAGE YIELDS, RATES PAID, AND NET INTEREST MARGIN (TAX EQUIVALENT BASIS)
1995 1994 1993 1992 1991 1990 ----- ---- ---- ----- ----- ----- Interest-bearing deposits and other short-term investments..................... 5.90% 4.13% 3.36% 3.68% 5.92% 8.21% Securities available for sale(1)............. 6.15% 5.10% 4.48% 4.79% --% --% U.S. Government securities................. 5.49 5.27 4.54 4.70 -- -- Mortgage-backed securities................. 9.89 -- -- -- -- -- Asset-backed securities.................... 5.64 -- -- -- -- -- State and local government securities...... 5.80 -- -- -- -- -- Corporate and other........................ 6.42 4.91 3.73 6.45 -- -- Investment securities........................ 5.72% 4.97% 4.74% 6.13% 8.20% 9.37% U.S. Government securities................. 5.60 4.88 4.29 5.65 7.47 8.52 Mortgage-backed securities................. 5.54 4.88 -- 6.46 8.88 9.44 Asset-backed securities.................... 4.16 4.48 4.44 -- -- -- State and local government securities...... 6.66 5.23 5.53 7.16 7.51 9.29 Industrial revenue bonds................... 11.18 9.60 8.26 8.49 8.48 11.44 Corporate and other........................ 5.92 5.99 6.22 4.33 5.67 10.64 Loans(2)..................................... 8.92% 8.21% 8.13% 8.79% 9.91% 10.58% Commercial................................. 8.76 7.54 6.55 7.02 8.71 10.26 Commercial real estate..................... 9.27 8.39 7.77 8.28 9.12 9.49 Residential mortgage....................... 7.65 7.39 7.89 8.86 9.78 10.03 Instalment................................. 9.62 8.89 9.28 10.23 11.49 12.14 Total earnings assets........................ 7.99% 7.10% 6.94% 7.84% 9.34% 10.31% Interest-bearing funds....................... 3.59% 2.56% 2.40% 3.38% 5.50% 6.96% NOW and savings accounts................... 1.83 1.68 1.90 2.76 4.65 5.23 Money market deposit accounts.............. 3.38 2.36 2.30 3.20 5.32 7.03 Consumer time.............................. 5.45 3.75 3.77 4.88 6.79 8.11 Time -- $100,000 or more................... 5.71 4.35 2.66 3.56 6.04 8.05 Short-term borrowings...................... 5.91 4.50 2.72 2.90 5.44 7.70 Long-term debt............................. 6.34 4.79 3.87 4.51 7.01 8.60 Interest expense as a percentage of average earning assets............................. 2.88% 2.06% 1.94% 2.85% 4.77% 5.99% Net interest margin.......................... 5.11% 5.04% 5.00% 4.99% 4.57% 4.32% - --------------- (1) Yields based on average amortized cost. (2) Nonperforming loans (nonaccrual loans) are included in average loan balances. Interest income is recorded on an accrual basis. Thus, nonperforming loans do not contribute to net interest income and affect the net interest margin.
9 11 ANALYSIS OF NET INTEREST INCOME (IN THOUSANDS, ON A TAX EQUIVALENT BASIS)
CHANGE DUE TO: --------------------- CHANGE CHANGE IN INCREASE IN INTEREST (DECREASE) BALANCES RATES ---------- -------- -------- 1995 COMPARED WITH 1994(1)(2) Short-term investments..................................... $ 9,054 $ 5,204 $ 3,850 Securities portfolios...................................... 10,785 (11,524) 22,309 Loans(3)................................................... 125,833 77,195 48,638 -------- -------- ------- Total.................................................... 145,672 70,875 74,797 -------- -------- ------- NOW & savings accounts..................................... 4,185 (121) 4,306 Money market deposit accounts.............................. 21,999 (5,148) 27,147 Consumer time.............................................. 47,711 30,878 16,833 Time--$100,000 or more..................................... 7,726 6,493 1,233 Short-term borrowings & long-term debt..................... 17,519 4,832 12,687 -------- -------- ------- Total.................................................... 99,140 36,934 62,206 -------- -------- ------- Net interest income........................................ $ 46,532 $ 33,941 $12,591 ======== ======== ======= 1994 COMPARED WITH 1993(1)(2) Short-term investments..................................... $(10,965) $(15,535) $ 4,570 Securities portfolios...................................... 52,073 39,997 12,076 Loans(3)................................................... 28,845 22,756 6,089 -------- -------- ------- Total.................................................... 69,953 47,218 22,735 -------- -------- ------- NOW & savings accounts..................................... (3,516) 2,523 (6,039) Money market deposit accounts.............................. (2,987) (4,652) 1,665 Consumer time.............................................. (4,434) (4,200) (234) Time--$100,000 or more..................................... 3,063 2,500 563 Short-term borrowings & long-term debt..................... 34,084 30,912 3,172 -------- -------- ------- Total.................................................... 26,210 27,083 (873) -------- -------- ------- Net interest income........................................ $ 43,743 $ 20,135 $23,608 ======== ======== ======= - --------------- (1) The rate/volume variance is allocated to the Change in Balances category. (2) Presented on a tax equivalent basis at the combined effective federal and state tax rate of 42.9% in 1995, and 43.2% for 1994. (3) Loan income includes loan fees, primarily related to commercial and residential real estate loans, of $6.6 million in 1995, $6.3 million in 1994, and $6.2 million in 1993.
10 12 SECURITIES AVAILABLE FOR SALE AT DECEMBER 31
1995 (NOTE) 1994 1993 ------------------------ -------------------- -------------------- ESTIMATED ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE* COST VALUE* COST* VALUE ----------- ----------- --------- --------- --------- --------- (IN THOUSANDS) U.S. Government securities.... $1,798,465 $1,828,408 $ -- $ -- $322,707 $325,984 State and local government securities.................. 225,954 227,499 8,578 8,564 18,964 18,968 U.S Agency mortgage-backed securities.................. 98,120 97,799 -- -- 30,832 31,994 Asset-backed securities....... 44,051 43,754 -- -- -- -- Corporate and other........... 351,609 351,667 211,554 212,038 256,500 256,500 ---------- ---------- -------- -------- -------- -------- $2,518,199 $2,549,127 $220,132 $220,602 $629,003 $633,446 ========== ========== ======== ======== ======== ======== - --------------- * Balance sheet carrying value.
INVESTMENT SECURITIES AT DECEMBER 31
1995 (NOTE) 1994 1993 ------------------------ ------------------------ ------------------------ ESTIMATED ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST* VALUE COST* VALUE COST* VALUE ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) U.S. Government securities............ $ -- $ -- $2,083,519 $2,018,428 $1,203,315 $1,209,703 Asset-backed securities............ -- -- 200,386 194,734 204,798 204,086 State and local government securities............ -- -- 171,436 170,275 128,997 129,352 Industrial revenue bonds................. 41,544 41,544 49,548 49,548 59,958 59,958 U.S. Agency mortgage- backed securities..... -- -- 49,503 46,742 -- -- Corporate and other..... 12,854 12,854 1,857 1,857 1,992 1,992 ------- ------- ---------- ---------- ---------- ---------- $54,398 $54,398 $2,556,249 $2,481,584 $1,599,060 $1,605,091 ======= ======= ========== ========== ========== ========== - --------------- * Balance sheet carrying value. Note: During 1995 the Financial Accounting Standards Board allowed a one-time reassessment of the classification of securities, and the Company reclassified $2.0 billion from investment securities to securities available for sale.
11 13 DISTRIBUTION OF LOANS AT DECEMBER 31
1995 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Commercial............... $ 1,604,031 $ 1,528,265 $ 1,324,968 $ 1,411,120 $ 1,654,118 $ 2,036,426 Commercial real estate Commercial mortgages... 1,117,110 919,271 877,834 965,134 1,132,466 1,172,848 Construction loans..... 49,933 37,325 57,637 57,381 79,483 247,025 ----------- ----------- ----------- ----------- ----------- ----------- Total commercial real estate....... 1,167,043 956,596 935,471 1,022,515 1,211,949 1,419,873 Residential real estate................. 2,053,635 1,335,466 1,242,597 1,247,633 1,274,591 1,447,043 Instalment............... 2,946,384 2,828,193 2,600,134 2,256,731 2,212,376 2,226,999 ----------- ----------- ----------- ----------- ----------- ----------- Total loans.............. $ 7,771,093 $ 6,648,520 $ 6,103,170 $ 5,937,999 $ 6,353,034 $ 7,130,341 ========= ========= ========= ========= ========= =========
MATURITY DISTRIBUTION OF COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS AT DECEMBER 31, 1995
AFTER ONE BUT WITHIN OVER ONE YEAR FIVE FIVE OR LESS YEARS(1) YEARS(1) TOTAL(2) ---------- -------- -------- ---------- (IN THOUSANDS) Commercial.................................. $1,203,053 $307,664 $ 71,087 $1,581,804 Commercial real estate...................... 265,246 573,162 302,803 1,141,211 ---------- -------- -------- ---------- $1,468,299 $880,826 $373,890 $2,723,015 ========= ======== ======== ========= - --------------- (1) Of the total commercial and commercial real estate loans above with remaining maturities in excess of one year, 37% have adjustable rates of interest. (2) Excludes $22.2 million of commercial and $25.8 million of commercial real estate nonperforming loans.
NONPERFORMING ASSETS; RESTRUCTURED, ACCRUING LOANS; AND ACCRUING LOANS 90 DAYS OR MORE PAST DUE
1995(1) 1994 1993 1992 1991 1990 ------- -------- -------- -------- -------- -------- (IN THOUSANDS) Nonperforming loans.............. $63,830 $ 54,627 $110,001 $180,580 $222,725 $365,261 Other real estate owned In-substance foreclosures...... 5,272 44,610 72,505 100,669 146,638 143,301 Foreclosed property............ 23,688 47,760 70,950 102,750 99,163 34,005 ------- -------- -------- -------- -------- -------- 28,960 92,370 143,455 203,419 245,801 177,306 Less OREO reserve.............. 10,164 24,971 29,776 7,833 -- -- ------- -------- -------- -------- -------- -------- OREO, net of reserve........... 18,796 67,399 113,679 195,586 245,801 177,306 ------- -------- -------- -------- -------- -------- Total nonperforming assets....... $82,626 $122,026 $223,680 $376,166 $468,526 $542,567 ======= ======== ======== ======== ======== ======== Restructured, accruing loans..... $ 5,949 $ 13,537 $ 18,398 $ 12,084 $ 39,066 $ 467 ======= ======== ======== ======== ======== ======== Accruing loans 90 days or more past due....................... $40,472 $ 36,193 $ 51,749 $ 91,895 $116,814 $ 99,348 ======= ======== ======== ======== ======== ======== - --------------- (1) As a result of the adoption of SFAS 114 on January 1, 1995, the Company reclassified $33.2 million of in-substance foreclosures and $8.7 million of related reserves to loans and the allowance for loan losses, respectively.
12 14 SUMMARY OF LOAN LOSS EXPERIENCE
1995(1) 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Loans outstanding at December 31..... $7,771,093 $6,648,520 $6,103,170 $5,937,999 $6,353,034 ========== ========== ========== ========== ========== Average loans........................ $7,121,849 $6,202,289 $5,910,489 $6,152,838 $6,735,040 ========== ========== ========== ========== ========== Allowance for Loan Losses Beginning balance at January 1..... $ 146,835 $ 171,496 $ 192,700 $ 212,500 $ 214,203 Allowance acquired through acquisitions.................... 10,305 -- -- -- -- Loans charged off: Commercial...................... 6,704 10,113 24,231 62,437 73,833 Commercial real estate.......... 9,821 22,179 15,513 29,237 48,885 Residential mortgage............ 7,621 7,946 11,203 12,861 17,250 Instalment...................... 27,873 26,356 29,016 36,255 35,686 ---------- ---------- ---------- ---------- ---------- Total loans charged off....... 52,019 66,594 79,963 140,790 175,654 ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial...................... 7,224 7,815 11,778 6,660 2,254 Commercial real estate.......... 6,608 1,352 2,339 778 965 Residential mortgage............ 2,691 2,267 2,062 974 79 Instalment...................... 7,044 6,499 6,080 5,742 5,253 ---------- ---------- ---------- ---------- ---------- Total recoveries.............. 23,567 17,933 22,259 14,154 8,551 ---------- ---------- ---------- ---------- ---------- Net loans charged off.............. 28,452 48,661 57,704 126,636 167,103 Provision for loan losses.......... 25,000 24,000 36,500 106,836 165,400 ---------- ---------- ---------- ---------- ---------- Balance at December 31............. $ 153,688 $ 146,835 $ 171,496 $ 192,700 $ 212,500 ========== ========== ========== ========== ========== Ratio of net loans charged off during period to average loans outstanding..................... .40% 0.78% 0.98% 2.06% 2.48% - --------------- (1) As a result of the adoption of SFAS No. 114 on January 1, 1995, $33.2 million of in-substance foreclosures and related reserves of $8.7 million were reclassified to loans and the allowance for loan losses, respectively. Charge-offs of $8.7 million were subsequently recorded during the first quarter of 1995. The reclassification of in-substance reserves and subsequent charge-offs had no effect on the allowance for loan losses and are not reflected in the table above.
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (1)
COMMERCIAL RESIDENTIAL COMMERCIAL REAL ESTATE MORTGAGE INSTALMENT LOANS LOANS LOANS LOANS TOTAL ---------- ----------- ----------- ---------- -------- (DOLLARS IN THOUSANDS) December 31, 1995 Allowance amount.............. $42,133 $63,041 $15,837 $32,677 $153,688 Loan category to total loans...................... 20.6% 15.1% 26.4% 37.9% 100.0% December 31, 1994 Allowance amount.............. $45,064 $57,476 $14,348 $29,947 $146,835 Loan category to total loans...................... 23.0% 14.4% 20.1% 42.5% 100.0% December 31, 1993 Allowance amount.............. $47,298 $66,455 $21,621 $36,122 $171,496 Loan category to total loans...................... 21.7% 15.3% 20.4% 42.6% 100.0% December 31, 1992 Allowance amount.............. $67,800 $73,707 $22,060 $29,133 $192,700 Loan category to total loans...................... 23.8% 17.2% 21.0% 38.0% 100.0% December 31, 1991 Allowance amount.............. $90,444 $68,670 $22,641 $30,745 $212,500 Loan category to total loans...................... 26.0% 19.1% 20.1% 34.8% 100.0% - --------------- (1) The distribution of the allowance for loan losses is based on an assessment of an aggregate potential for future losses in the respective year-end loan portfolios. While the allowance has been distributed to individual loan categories, it is available to absorb losses in the total portfolio. The distribution of the allowance includes both allocations assigned to specifically identified problem loans and unallocated amounts that are not specifically identified as to any individual loan. The unallocated amounts related to commercial and commercial real estate loans were $96 million as of December 31, 1995, as described in the CREDIT QUALITY section under Item 7.
13 15 REMAINING MATURITIES OF TIME DEPOSITS -- $100,000 OR MORE AT DECEMBER 31, 1995
TOTAL TIME DEPOSITS-- $100,000 OR MORE -------------------- (IN THOUSANDS) 90 days or less............................................................ $208,106 91-180 days................................................................ 65,281 181-365 days............................................................... 31,093 Over one year.............................................................. 22,950 -------- Total............................................................ $327,430(1) ======== - --------------- (1) Included in this amount are $215 million of corporate certificates of deposits and $112 million of consumer certificates of deposit of $100,000 or more.
SHORT-TERM BORROWINGS
MAXIMUM AMOUNT AVERAGE WEIGHTED WEIGHTED BALANCE OUTSTANDING OUTSTANDING AVERAGE AVERAGE OUTSTANDING AT DURING INTEREST RATE INTEREST RATE AT DECEMBER 31 ANY MONTH- END THE YEAR AT YEAR-END DURING THE YEAR -------------- ------------- ----------- ------------- --------------- (DOLLARS IN THOUSANDS) 1995............ $718,941 $1,243,490 $915,711 5.74% 5.91% 1994............ 849,517 1,137,318 839,070 5.81 4.50 1993............ 507,820 507,820 150,608 3.10 2.72
ITEM 2. PROPERTIES. BayBanks, Inc., and its subsidiaries occupy both owned and leased premises. The offices occupied by the Company in Boston, Massachusetts include its principal executive offices and are leased from nonaffiliated companies. Property occupied by the three banking subsidiaries represents the majority of the Company's property, and is generally considered to be in good condition and adequate for the purpose for which it is used. Bank properties include bank buildings and branches and free-standing automated banking facilities. BayBank, N.A., the Company's principal bank subsidiary, owns an 11-story 208,000 square foot building, of which 6% is leased to nonaffiliates. Of the 237 branch offices of the subsidiary banks at December 31, 1995, 96 were located in owned buildings and 141 were located in leased buildings. In addition, the Company leases sites for 420 automated banking facilities. BayBank Systems, Inc. owns and occupies a 185,000 square foot technology center and an adjoining 121,000 square foot facility that houses its principal data processing equipment. At December 31, 1995, there was an aggregate $37 million mortgage on these facilities to its parent at market terms. ITEM 3. LEGAL PROCEEDINGS. There were no material pending legal proceedings other than ordinary routine litigation incidental to the conduct of the Company's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1995. 14 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The stock of BayBanks, Inc. is traded over the counter through the Nasdaq National Market under the symbol BBNK. The quarterly share data information is presented in Note 19 to the consolidated financial statements under Item 8. (b) As of February 29, 1996, there were approximately 5,600 holders of record of the Company's common stock. (c) The Company paid dividends of $2.20 per share during 1995, $1.60 per share during 1994 and $.90 per share during 1993. The Company paid a dividend quarterly from 1928 through 1990. During 1991 and 1992, the Company did not pay any dividends. For additional information on dividend payments, reference is made to the CAPITAL AND DIVIDENDS section of Management's Discussion and Analysis under Item 7, and Note 1 to the consolidated financial statements under Item 8. 15 17 ITEM 6. SELECTED FINANCIAL DATA. AVERAGE BALANCES
1995 1994 1993 1992 1991 1990 ----------- ----------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)(1) ASSETS Interest-bearing deposits and other short-term investments(2).................................. $ 305,281 $ 217,122 $ 593,317 $ 623,200 $ 675,655 $ 436,888 Securities available for sale(3) U.S. Government securities...................... 181,295 242,774 1,158,347 303,306 -- -- Mortgage-backed securities...................... 21,290 -- -- -- -- -- Asset-backed securities......................... 3,963 -- -- -- -- -- State and local government securities........... 32,080 -- -- -- -- -- Corporate and other............................. 248,461 212,445 83,424 15,344 -- -- ----------- ----------- ---------- ---------- ---------- ---------- 487,089 455,219 1,241,771 318,650 -- -- Investment securities(3) U.S. Government securities...................... 1,823,853 2,047,405 622,387 782,293 536,255 327,103 Mortgage-backed securities...................... 45,293 37,551 -- 412,396 623,476 567,500 Asset-backed securities......................... 137,901 203,558 67,130 -- -- -- State and local government securities........... 185,675 151,901 74,190 50,192 87,792 142,117 Industrial revenue bonds........................ 45,690 54,722 68,921 84,757 98,644 114,042 Corporate and other............................. 3,718 1,886 1,976 4,917 1,886 13,528 ----------- ----------- ---------- ---------- ---------- ---------- 2,242,130 2,497,023 834,604 1,334,555 1,348,053 1,164,290 Loans(4) Commercial...................................... 1,586,319 1,381,699 1,364,807 1,553,643 1,849,960 2,251,316 Commercial real estate.......................... 1,034,239 919,383 956,991 1,117,933 1,343,300 1,545,502 Residential mortgage............................ 1,650,781 1,240,278 1,171,044 1,256,553 1,357,703 1,549,862 Instalment...................................... 2,850,510 2,660,929 2,417,647 2,224,709 2,184,077 2,109,570 ----------- ----------- ---------- ---------- ---------- ---------- 7,121,849 6,202,289 5,910,489 6,152,838 6,735,040 7,456,250 Less allowance for loan losses.................. 152,612 160,077 188,191 213,949 228,192 139,603 ----------- ----------- ---------- ---------- ---------- ---------- 6,969,237 6,042,212 5,722,298 5,938,889 6,506,848 7,316,647 ----------- ----------- ---------- ---------- ---------- ---------- Total earning assets............................ 10,156,349 9,371,653 8,580,181 8,429,243 8,758,748 9,057,428 Cash and due from banks........................... 675,027 636,840 629,428 604,115 553,945 570,755 Other assets...................................... 465,757 479,352 548,223 615,396 590,896 443,036 ----------- ----------- ---------- ---------- ---------- ---------- Total assets.................................... $11,144,521 $10,327,768 $9,569,641 $9,434,805 $9,675,397 $9,931,616 =========== =========== ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand.......................................... $ 2,059,243 $ 1,982,663 $1,886,914 $1,717,345 $1,501,448 $1,481,019 NOW accounts.................................... 1,418,119 1,394,038 1,336,270 1,218,252 1,038,135 932,851 Savings......................................... 1,461,476 1,492,200 1,399,886 1,223,626 993,305 919,678 Money market deposit accounts................... 2,515,907 2,668,275 2,865,209 3,034,586 3,260,294 3,184,659 Consumer time................................... 1,556,778 989,844 1,102,025 1,363,997 1,692,020 1,821,337 Time -- $100,000 or more........................ 204,610 90,823 33,322 57,547 187,863 407,320 ----------- ----------- ---------- ---------- ---------- ---------- 9,216,133 8,617,843 8,623,626 8,615,353 8,673,065 8,746,864 Federal funds purchased and other short-term borrowings(5)................................... 915,711 839,070 150,608 147,856 366,262 474,026 Long-term debt.................................... 58,095 53,323 54,437 55,226 55,052 53,691 ----------- ----------- ---------- ---------- ---------- ---------- Total deposits and borrowings................... 10,189,939 9,510,236 8,828,671 8,818,435 9,094,379 9,274,581 Other liabilities(6).............................. 96,653 74,429 69,937 81,366 87,381 106,033 Stockholders' equity.............................. 857,929 743,103 671,033 535,004 493,637 551,002 ----------- ----------- ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity...... $11,144,521 $10,327,768 $9,569,641 $9,434,805 $9,675,397 $9,931,616 =========== =========== ========== ========== ========== ========== CAPITAL RATIOS Risk-based Core (minimum regulatory standard -- 4.00%)..... 11.41% 11.51% 10.68% 10.37% 7.28% 6.40% Total (minimum regulatory standard -- 8.00%).... 12.80 13.06 12.40 12.30 9.29 8.33 Leverage ratio.................................... 7.66 7.35 7.26 6.79 5.38 4.83 Year-end book value per share..................... $ 48.43 $ 41.51 $ 37.52 $ 34.81 $ 31.30 $ 30.49 Year-end tangible book value per share............ 45.64 41.28 37.32 34.56 30.91 29.94 - --------------- (1) Substantially all balances are derived from daily averages. In certain instances, a method approximating daily averages was used. (2) Includes interest-bearing deposits in other banks, federal funds sold, securities purchased under agreement to resell, bankers' acceptances purchased, and trading account securities. (3) During 1995, the Financial Accounting Standards Board allowed a one-time reassessment of the classification of securities, and the Company reclassified $2.0 billion from investment securities to securities available for sale. (4) Nonperforming loans are included in the average balances. Interest income is recorded on an accrual basis. Thus, loans that are nonperforming do not contribute to net interest income and affect the net interest margin. (5) Includes federal funds purchased, securities sold under agreement to repurchase, and demand notes issued to the U.S. Treasury. (6) Other liabilities include guarantee of ESOP indebtedness.
16 18 SUMMARY OF OPERATIONS
1995(7) 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, ON A TAX EQUIVALENT BASIS, EXCEPT PER SHARE AMOUNTS) Income on interest-bearing deposits and other short-term investments(8).............................................. $ 18,020 $ 8,966 $ 19,931 $ 22,925 $ 40,019 $ 35,879 Interest on securities portfolios Taxable..................................................... 125,955 125,096 82,343 86,304 95,542 81,417 Tax-exempt(8)............................................... 32,143 22,217 12,897 10,807 14,961 27,686 -------- -------- -------- -------- -------- --------- 158,098 147,313 95,240 97,111 110,503 109,103 -------- -------- -------- -------- -------- --------- Interest and fees on loans Commercial(8)............................................... 138,913 104,159 89,383 109,048 161,156 231,046 Commercial real estate...................................... 95,852 77,111 74,353 92,548 122,519 146,705 Residential mortgage........................................ 126,248 91,660 92,451 111,390 132,725 155,384 Instalment.................................................. 274,323 236,573 224,471 227,652 250,890 256,015 -------- -------- -------- -------- -------- --------- 635,336 509,503 480,658 540,638 667,290 789,150 -------- -------- -------- -------- -------- --------- Total income on earning assets................................ 811,454 665,782 595,829 660,674 817,812 934,132 Interest expense on deposits and borrowings NOW and savings accounts.................................... 52,709 48,524 52,040 67,304 94,544 96,926 Money market deposit accounts............................... 85,013 63,014 66,001 97,256 173,393 223,861 Consumer time............................................... 84,791 37,080 41,514 66,627 114,868 147,752 Time -- $100,000 or more.................................... 11,675 3,949 886 2,048 11,356 32,804 Short-term borrowings....................................... 54,128 37,739 4,098 4,285 19,941 36,477 Long-term debt.............................................. 3,682 2,552 2,109 2,489 3,860 4,622 -------- -------- -------- -------- -------- --------- Total interest expense........................................ 291,998 192,858 166,648 240,009 417,962 542,442 -------- -------- -------- -------- -------- --------- Net interest income........................................... 519,456 472,924 429,181 420,665 399,850 391,690 Noninterest income(9) Service charges and fees on deposit accounts................ 109,812 109,918 105,211 96,671 88,533 70,823 Other noninterest income.................................... 109,439 97,370 93,313 87,210 81,220 84,988 -------- -------- -------- -------- -------- --------- Total noninterest income(9)................................. 219,251 207,288 198,524 183,881 169,753 155,811 -------- -------- -------- -------- -------- --------- Total income from operations.................................. 738,707 680,212 627,705 604,546 569,603 547,501 Operating expenses(10) Salaries and benefits....................................... 248,154 229,572 212,954 199,604 184,399 179,723 Occupancy and equipment..................................... 91,898 86,741 87,550 89,909 85,493 87,326 Other operating expenses.................................... 138,823 140,857 146,201 139,803 128,467 111,454 -------- -------- -------- -------- -------- --------- Total operating expenses(10)................................ 478,875 457,170 446,705 429,316 398,359 378,503 -------- -------- -------- -------- -------- --------- Operating income before net securities gains and provisions for loan losses and OREO reserve............................ 259,832 223,042 181,000 175,230 171,244 168,998 -------- -------- -------- -------- -------- --------- Net securities gains.......................................... 40 203 411 76,929 40,963 19,582 -------- -------- -------- -------- -------- --------- Provision for loan losses..................................... 25,000 24,000 36,500 106,836 165,400 289,958 Provision for OREO reserve, net............................... 179 9,372 24,830 45,482 27,450 14,582 -------- -------- -------- -------- -------- --------- Total credit provisions....................................... 25,179 33,372 61,330 152,318 192,850 304,540 -------- -------- -------- -------- -------- --------- Pre-tax income (loss)......................................... 234,693 189,873 120,081 99,841 19,357 (115,960) Less tax equivalent adjustment included above................. 12,024 7,982 5,358 4,153 2,954 9,058 -------- -------- -------- -------- -------- --------- Income (loss) before taxes and cumulative effect of accounting change...................................................... 222,669 181,891 114,723 95,688 16,403 (125,018) Provision for income taxes (benefit)(11)...................... 85,295 73,522 47,072 36,451 6,748 (55,216) -------- -------- -------- -------- -------- --------- Income (loss) before cumulative effect of accounting change... 137,374 108,369 67,651 59,237 9,655 (69,802) Less cumulative effect of accounting change (net of tax benefit of $683 in 1994).................................... -- 932 -- -- -- -- -------- -------- -------- -------- -------- --------- NET INCOME (Loss)............................................. $137,374 $107,437 $ 67,651 $ 59,237 $ 9,655 $ (69,802) ======== ======== ======== ======== ======== ========= EARNINGS (LOSS) PER SHARE(12)................................. $ 7.01 $ 5.60(13) $ 3.57 $ 3.57 $ 0.60 $ (4.37) Dividends Declared Per Share.................................. 2.20 1.60 0.90 -- -- 1.05 PERFORMANCE RATIOS Operating profit margin....................................... 35.2% 32.8% 28.8% 29.0% 30.1% 30.9% Return on average stockholders' equity(14).................... 16.0 14.5 10.1 11.1 2.0 (12.7) Return on average total assets(14)............................ 1.23 1.04 0.71 0.63 0.10 (0.70) - --------------- (7) Includes the results of operations of NFS and Cornerstone subsequent to their respective acquisition dates (see Note 2 to the consolidated financial statements under Item 8). (8) These line items are presented on a tax equivalent basis. Because of the interplay of federal and Massachusetts income taxes, $1.00 of federal tax-exempt income was the fully taxable equivalent of $1.50 in 1995. (9) In 1995, the Company recognized a $1.2 million gain from the sale of its corporate bond trusteeship business. In 1990, the Company recognized a $4.8 million pension settlement gain and a $1.2 million gain from the sale of its payroll processing service. (10) In 1995, the Company recorded a $4.5 million accrual for an expected special assessment on thrift deposits. (11) In 1995, the provision for income taxes is net of a settlement of a tax claim against the Commonwealth of Massachusetts in the amount of $2.6 million, net of federal income tax. (12) For 1990 -- 1995, the difference between earnings (loss) per share as reported and fully diluted was less than 3%. (13) Based on net income after accounting change. The effect of the cumulative accounting change was $.05 per share. (14) 1995 and 1994 include the impact of the average unrealized gain on the securities available for sale portfolio.
17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. The Company has entered into an Agreement and Plan of Merger dated December 12, 1995, with Bank of Boston Corporation ("Bank of Boston"). Under the Merger Agreement, at the effective time of the merger, each outstanding share of the common stock of the Company will be converted into the right to receive 2.2 newly issued shares of Bank of Boston common stock. The merger is subject to the approval of the stockholders of the Company and the stockholders of Bank of Boston, to federal and state regulatory approvals, and to other conditions. Current plans call for the merger to be completed by the middle of 1996. After completion of the merger, the principal banking subsidiary of Bank of Boston will operate as BayBank of Boston, N.A. See Note 20 to the consolidated financial statements under Item 8 for further discussion of the pending merger. The discussion in this Form 10-K does not give effect to the merger. 18 20 FINANCIAL REVIEW EARNINGS ANALYSIS OPERATING INCOME Operating income (TABLE A) was $259.8 million in 1995, compared with $223.0 million in 1994 and $181.0 million in 1993. The 16% increase in 1995 from 1994 resulted primarily from a 10% increase in net interest income and a 6% increase in noninterest income, offset by operating expenses that were only 5% above 1994 levels. Reflected in the Company's results of operations from their dates of acquisition are BayBank FSB and BayBank NH, the two New Hampshire banking organizations that became subsidiaries of the Company upon the acquisition of NFS Financial Corp. ("NFS") on July 1, 1995, and of Cornerstone Financial Corporation ("Cornerstone") on December 1, 1995, respectively. TABLE A SUMMARY OF OPERATIONS TAX EQUIVALENT BASIS
INCREASE INCREASE (DECREASE) (DECREASE) 1995 FROM 1994 1994 FROM 1993 1993 -------- -------------- -------- ------------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income on earning assets....... $811,454 $145,672 22% $665,782 $ 69,953 12% $595,829 Interest expense on deposits and borrowings............... 291,998 99,140 51 192,858 26,210 16 166,648 -------- -------- -------- -------- -------- Net interest income............ 519,456 46,532 10 472,924 43,743 10 429,181 Noninterest income............. 219,251 11,963 6 207,288 8,764 4 198,524 -------- -------- -------- -------- -------- Total income from operations... 738,707 58,495 9 680,212 52,507 8 627,705 Operating expenses............. 478,875 21,705 5 457,170 10,465 2 446,705 -------- -------- -------- -------- -------- OPERATING INCOME BEFORE NET SECURITIES GAINS AND PROVISIONS FOR LOAN LOSSES AND OREO RESERVE............. 259,832 36,790 16 223,042 42,042 23 181,000 -------- -------- -------- -------- -------- Net securities gains........... 40 (163) (80) 203 (208) (51) 411 -------- -------- -------- -------- -------- Provision for loan losses...... 25,000 1,000 4 24,000 (12,500) (34) 36,500 Provision for OREO reserve, net.......................... 179 (9,193) (98) 9,372 (15,458) (62) 24,830 -------- -------- -------- -------- -------- Total credit provisions........ 25,179 (8,193) (25) 33,372 (27,958) (46) 61,330 -------- -------- -------- -------- -------- Pre-tax income................. 234,693 44,820 24 189,873 69,792 58 120,081 -------- -------- -------- -------- -------- Less tax equivalent adjustment included above............... 12,024 4,042 51 7,982 2,624 49 5,358 -------- -------- -------- -------- -------- Income before taxes and cumulative effect of accounting change............ 222,669 40,778 22 181,891 67,168 59 114,723 Income taxes................... 85,295 11,773 16 73,522 26,450 56 47,072 -------- -------- -------- -------- -------- Income before cumulative effect of accounting change......... 137,374 29,005 27 108,369 40,718 60 67,651 Less cumulative effect of accounting change (net of tax benefit of $683)............. -- (932) 932 932 -- -------- -------- -------- -------- -------- NET INCOME..................... $137,374 $ 29,937 28 $107,437 $ 39,786 59 $ 67,651 ======== ======== ======== ======== ======== EARNINGS PER SHARE Income before accounting change.................... $ 7.01 $ 1.36 24 $ 5.65 $ 2.08 58 $ 3.57 Less cumulative effect of accounting change......... -- (0.05) 0.05 0.05 -- -------- -------- -------- -------- -------- Net Income................... $ 7.01 $ 1.41 25 $ 5.60 $ 2.03 57 $ 3.57 ======== ======== ======== ======== ========
19 21 NET INTEREST INCOME Net interest income was $519.5 million in 1995, compared with $472.9 million in 1994. As analyzed further in Table B, the growth in net interest income in 1995 compared with that of 1994 was primarily the result of an 8% increase in average earning assets combined with the effect of somewhat higher interest rates. Average loans increased 11%, excluding the loans at BayBank FSB and BayBank NH. While there was growth in both corporate and consumer lending, residential real estate lending was the most significant contributor (TABLE E, page 25). In addition, the acquisitions of BayBank FSB and BayBank NH added $505 million in loans and $226 million in securities. The yield on earning assets was 7.99% in 1995, compared with 7.10% in 1994, as a result of overall higher interest rates on the loan and securities portfolios. BayBanks' funding costs increased during 1995 due to higher market interest rates as rates on core deposits (which include money market deposit accounts ["MMDAs"] and consumer certificates of deposit) increased in 1995 compared with 1994 as a result of market conditions. In addition, some customers moved balances from transaction accounts and MMDAs to higher-yielding certificates of deposit. The cost of total interest-bearing liabilities (as a percentage of average earning assets) increased 82 basis points to 2.88% in 1995, compared with 2.06% in 1994. The 1995 net interest margin of 5.11%, which compares favorably with the Keefe, Bruyette and Woods Bank Index of 4.25%, was seven basis points above the net interest margin for 1994. The Company believes that its substantial core deposit base with its emphasis on transaction accounts has allowed the growth in loans and generally higher rates on earning assets to positively affect the Company's net interest margin. TABLE B ANALYSIS OF NET INTEREST INCOME
NET INTEREST INTEREST INTEREST INCOME EXPENSE INCOME -------- -------- -------- (IN THOUSANDS, ON A TAX EQUIVALENT BASIS) 1993 AS REPORTED........................................... $595,829 $166,648 $429,181 1994 increase (decrease) due to: Changes in balances...................................... 47,218 27,083 20,135 Changes in interest rates................................ 22,735 (873) 23,608 -------- -------- -------- 69,953 26,210 43,743 -------- -------- -------- 1994 AS REPORTED........................................... $665,782 $192,858 $472,924 1995 increase due to: Changes in balances...................................... 70,875 36,934 33,941 Changes in interest rates................................ 74,797 62,206 12,591 -------- -------- -------- 145,672 99,140 46,532 -------- -------- -------- 1995 AS REPORTED........................................... $811,454 $291,998 $519,456 ======== ======== ========
FEES, SERVICE CHARGES, AND OTHER NONINTEREST INCOME Noninterest income consists primarily of service charges on deposit accounts and fees from credit and non-credit services. The income is well diversified among consumer, corporate, and small business banking activities. Noninterest income, detailed in Table C (page 21), increased to $219.3 million in 1995 from $207.3 million in 1994. Service charges and fees on deposit accounts continued to provide approximately one-half of noninterest income. Total service charges and fees on deposit accounts were $109.8 million in 1995, compared with $109.9 20 22 million in 1994. Increases in consumer service charge income in 1995 were the result of higher service charges from selected repricings and stronger volume, but were offset by a decline in corporate service charges due to higher earnings credit rates on compensating deposit balances. Other components of noninterest income experienced growth during 1995. Processing fees increased 12% to $18.2 million in 1995 from $16.2 million in 1994, primarily as the result of an increased volume of point-of-sale transactions. Investment management and brokerage fees increased 23% to $10.2 million in 1995 from $8.3 million in 1994, due primarily to increased third party mutual fund sales, and investment advisory and shareholder servicing fees from BayFunds[REGISTERED TRADEMARK], the Company's proprietary mutual fund family. Total assets under management in BayFunds were $1.6 billion at December 31, 1995, compared with $1.3 billion at December 31, 1994. Mortgage banking fees were $9.5 million in 1995, compared with $7.2 million in 1994. The increase from 1994 was due to increased application volume and additional income recognized as a result of the capitalization of originated mortgage servicing rights (see Note 3 to the consolidated financial statements under Item 8). These increases were partially offset by a decrease in secondary marketing income as the volume of loans sold to the secondary market declined in 1995. International fees increased 14% to $7.3 million in 1995 from $6.3 million in 1994 as the result of an increase in activity, largely net gains from foreign exchange transactions. The Company periodically sells student loans when these primarily government-guaranteed loans are no longer in a deferred payment status. During 1995, the Company sold $136 million in student loans, resulting in a gain of $3.8 million. In 1994, student loan sales of $134 million resulted in gains of $4.5 million. Other noninterest income was $7.5 million in 1995 and $4.2 million in 1994. The increase in 1995 was primarily due to a $1.2 million gain on the sale of the Company's corporate bond trusteeship business and gains on sales of branch buildings no longer utilized by the Company. TABLE C NONINTEREST INCOME
% INCREASE (DECREASE) ------------------- 1995 VS. 1994 VS. 1995 1994 1993 1994 1993 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Service charges and fees on deposit accounts........................ $109,812 $109,918 $105,211 --% 4% Credit card fees.......................... 20,685 19,549 18,892 6 3 Processing fees........................... 18,195 16,174 13,788 12 17 Trust fees................................ 14,433 14,127 14,559 2 (3) Investment management and brokerage fees.......................... 10,214 8,293 6,318 23 31 Mortgage banking fees..................... 9,547 7,152 11,972 33 (40) International fees........................ 7,259 6,344 5,845 14 9 All other fees............................ 17,858 17,000 16,159 5 5 Student loan sales gains.................. 3,780 4,543 1,762 (17) 158 Other noninterest income.................. 7,468 4,188 4,018 78 4 -------- -------- -------- Total noninterest income................ $219,251 $207,288 $198,524 6 4 ======== ======== ========
21 23 OPERATING EXPENSES The operating expense analysis presented in Table D (page 23) separates other real estate owned ("OREO") and loan workout expenses from other expenses. Operating expenses, excluding OREO and loan workout, were $473.8 million in 1995, compared with $447.2 million in 1994. Salaries and benefits expenses increased 8% to $248.2 million in 1995, compared with $229.6 million in 1994, primarily as the result of normal salary and benefit increases, the acquisitions of BayBank FSB and BayBank NH, and increased costs for profit sharing and performance awards. Occupancy and equipment expenses were $91.9 million in 1995, compared with $86.7 million in 1994. The increase was primarily the result of the New Hampshire acquisitions, an increase in rent expense due to the opening of new branch locations, including supermarket branches, and costs associated with branch closings. Marketing and public relations expenses increased due to expanded marketing efforts that included advertising for new branches and introduction of the BayBank product line in New Hampshire. Service bureau and other data processing expenses increased 12% to $19.6 million in 1995, compared with $17.4 million in 1994, as a result of systems enhancements and the acquisitions of NFS and Cornerstone. Printing and supplies increased 19% to $15.2 million in 1995, compared with $12.8 million in 1994, due primarily to increased volume as a result of recent acquisitions and internal mergers of subsidiary banks as well as higher costs of paper, printed forms, and other supplies. Professional services increased 20% to $13.0 million in 1995, compared with $10.8 million in 1994, primarily from the use of contract programming for systems development, personnel hiring costs related to selected staff additions, and increases in real estate appraisals due to higher mortgage applications volume. Deposit insurance expense decreased 50% to $10.7 million in 1995, compared with $21.7 million in 1994. This decrease reflects the Federal Deposit Insurance Corporation's ("FDIC") reduction in the premiums charged to banks for deposit insurance, effective June 1, 1995. Improved risk classifications at the Company's banking subsidiaries also affected the reduction in expense. The benefit of lower insurance rates was partially offset by an increase in the insured deposit base. In 1995, the Company accrued for an expected special assessment of $4.5 million on thrift deposits; the Company acquired approximately $530 million of thrift deposits as a result of the acquisition of NFS, a federal savings bank. The Company believes that the likelihood of the Congressional proposal to recapitalize the Savings Association Insurance Fund ("SAIF"), which insures federal savings banks, eventually becoming law makes it appropriate to accrue for the special assessment that would be made under that law. Postage expense reflects an increase in postal rates in 1995. Legal and consulting expense decreased as a result of a decrease in general legal costs in 1995 as compared with 1994 partially offset by increased consulting expenses related to studies of various systems and business unit operational structures. 22 24 OREO and loan workout expenses were $5.1 million in 1995, compared with $10.0 million in 1994, reflecting the continued disposition of OREO properties and impaired loans (see Nonperforming Loans on page 30). TABLE D OPERATING EXPENSES
% INCREASE (DECREASE) ------------------- 1995 VS. 1994 VS. 1995 1994 1993 1994 1993 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Salaries and benefits..................... $248,154 $229,572 $212,954 8% 8% Occupancy and equipment................... 91,898 86,741 87,550 6 (1) Marketing and public relations............ 24,243 22,726 21,341 7 6 Service bureau and other data processing.............................. 19,588 17,443 16,538 12 5 Printing and supplies..................... 15,233 12,767 12,997 19 (2) Professional services..................... 12,963 10,807 13,744 20 (21) Deposit insurance......................... 10,747 21,708 21,949 (50) (1) Postage................................... 9,689 8,711 8,290 11 5 Legal and consulting...................... 7,587 8,516 6,609 (11) 29 Courier................................... 4,911 4,666 4,133 5 13 SAIF special assessment................... 4,500 -- -- -- -- Other..................................... 24,291 23,544 23,132 3 2 -------- -------- -------- Total operating expenses excluding OREO expenses................................ 473,804 447,201 429,237 6 4 OREO and loan workout expenses............ 5,071 9,969 17,468 (49) (43) -------- -------- -------- Total operating expenses.................. $478,875 $457,170 $446,705 5 2 ======== ======== ========
PROVISIONS FOR LOAN LOSSES AND THE OREO RESERVE The provisions for loan losses and the OREO reserve (see TABLE A, page 19) declined in 1995 to $25.2 million, compared with $33.4 million in 1994, reflecting improvements in credit quality and real estate values. The provision for loan losses was $25.0 million in 1995, compared with $24.0 million in 1994. The net provision for the OREO reserve was $179 thousand in 1995, compared with $9.4 million in 1994. Provisions made were offset by net gains on sales of properties of $4.7 million in 1995 and $6.3 million in 1994. INCOME TAXES The Company's provision for income taxes was $85.3 million in 1995, compared with $73.5 million in 1994. The 1995 tax provision includes an adjustment for a settlement, favorable to the Company, of a tax claim against the Commonwealth of Massachusetts. The settlement related to the taxability of interest income on certain Massachusetts bonds on which the Company had paid income taxes prior to 1993. In July 1995, the Commonwealth of Massachusetts passed a tax reform bill that reduced the state tax rate for banks. Under the new tax law, the rate that banks pay will be reduced over the next four years from 12.54% to 10.50% in 1999. In accordance with the new tax law, the rate was reduced from 12.54% to 12.13% in the third quarter of 1995 retroactive to January 1, 1995. The effective tax rate for 1995 was 38.3%, compared with 40.4% in 1994. The effective tax rate, excluding the settlement adjustment, was 39.5% in 1995. The decrease in the effective tax rate in 1995 compared with that of 1994 was primarily due to a higher level of tax-exempt income in 1995 and the reduction in the state tax rate. 23 25 BALANCE SHEET REVIEW TRENDS IN EARNING ASSETS Average earning assets increased to $10.2 billion in 1995, compared with $9.4 billion in 1994, due to growth in the average loan balances. The acquisitions of NFS and Cornerstone added $505 million of loans. Average loans, excluding the impact of NFS and Cornerstone, increased in both the commercial and consumer areas. LOAN PORTFOLIO Consumer loans represented 64% of the year-end loan portfolio, with $2.1 billion in residential loan balances and $2.9 billion in various types of instalment loan balances. Consumer lending activities are primarily focused on the Massachusetts and New Hampshire markets. Commercial and commercial real estate loans were 36% of the portfolio. The majority of these loans are to New England-based companies, primarily local middle market companies and small businesses in Massachusetts and New Hampshire. The Company originates fixed-rate and adjustable-rate residential mortgage loans. The majority of fixed-rate residential mortgage loan originations are securitized and sold to the secondary market with servicing retained. The remainder of the fixed-rate and adjustable-rate residential real estate loan originations are held in the loan portfolio or may be securitized and transferred to the securities available for sale portfolio. Student loans are originated and held in the loan portfolio while these primarily government-guaranteed loans are in a deferred payment status. Student loans held for sale at December 31, 1995, were $33 million. The Company sold $136 million of student loans in 1995, compared with sales of $134 million in 1994. An analysis of the changes in major loan categories for 1995 and 1994 is presented in Table E (page 25). Loan business volume was $936 million in 1995, after deducting loans added by the acquisitions of NFS and Cornerstone; loan business volume was $1.0 billion in 1994. Residential mortgage activity was the largest contributor to this volume, principally as the result of adjustable-rate purchase money mortgages. The Company underwrote and sold $150 million of fixed-rate residential mortgage loans during 1995, compared with $270 million in 1994. At December 31, 1995, loans held for sale were $20 million, compared with $5 million at December 31, 1994. Instalment net loan business volume was $226 million, compared with $389 million in 1994. Automobile lending, particularly in the first three quarters of the year, was affected adversely by higher rates, slower auto sales, and active competition from nonbank lenders. Activity picked up in the fourth quarter as the Company instituted selective rate reductions. Commercial loan volume was $35 million in 1995, compared with $216 million in 1994. This reduction in net business volume was primarily related to auto dealer financings as loan volumes declined in 1995 from 1994. In addition, international outstandings decreased during 1995 compared with increases in outstandings during 1994. Auto dealer outstandings were adversely affected by a combination of lower auto sales during 1995 and some delays in deliveries as a result of the auto trucker strike. The Company's international loan portfolio, which is primarily focused on Mexico and South America, was $138 million at December 31, 1995, compared with $160 million at December 31, 1994. These international credits are predominantly trade related and primarily with well-known and established foreign banks. Business volume in the commercial real estate portfolio was $68 million in 1995, compared with $55 million in 1994. 24 26 TABLE E CHANGES IN THE LOAN PORTFOLIO AT YEAR-END -- 1995 VS. 1994
ANALYSIS OF CHANGE IN LOAN CATEGORIES -- 1995 INCREASE ------------------------------------------------------ 1994 (DECREASE) GROSS TRANSFERS LOANS NET NET FROM YEAR- CHARGE- TO ACQUIRED, BUSINESS BUSINESS 1995 END 1994 OFFS OREO SALES NET(1) VOLUME VOLUME ---------- ---------- -------- --------- --------- -------- -------- ---------- (IN THOUSANDS) Commercial................... $1,604,031 $ 75,766 $ (6,704) $ (73) $ -- $ 47,081 $ 35,462 $ 216,394 Commercial real estate....... 1,167,043 210,447 (9,821) -- -- 152,359 67,909 55,068 Residential mortgage......... 2,053,635(2) 718,169 (7,621) (2,711) (150,196) 272,893 605,804 386,409 Instalment loans Automobile and other....... 1,384,356 65,611 (7,266) -- -- 19,057 53,820 151,792 Home equity................ 799,608 57,404 (1,507) (377) -- 36,848 22,440 44,285 Credit card................ 314,316 (5,210) (12,446) -- -- -- 7,236 5,726 Student loans.............. 301,160(3) (10,311) (374) -- (136,218) 52 126,229 169,025 Reserve credit............. 146,944 10,697 (6,280) -- -- 240 16,737 18,045 ---------- ---------- -------- ------- --------- -------- -------- ---------- Total instalment loans..... 2,946,384 118,191 (27,873) (377) (136,218) 56,197 226,462 388,873 ---------- ---------- -------- ------- --------- -------- -------- ---------- Total loans.................. $7,771,093 $1,122,573 $(52,019) $(3,161) $(286,414) $528,530 $935,637 $1,046,744 ========== ========== ======== ======= ========= ======== ======== ========== - --------------- (1) As a result of the adoption of SFAS No. 114 on January 1, 1995, the Company reclassified $33.2 million of in-substance foreclosures and $8.7 million of related reserves to loans and the allowance for loan losses, respectively. Charge-offs of $8.7 million were subsequently recorded during the first quarter of 1995. These items are included in the numbers above. (2) Includes residential mortgage loans held for sale of $20 million in 1995. (3) Includes student loans held for sale of $33 million in 1995.
SECURITIES PORTFOLIOS The securities portfolios (TABLE F, page 26) totaled $3.0 billion at December 31, 1995, $2.9 billion at December 31, 1994, and $3.0 billion at December 31, 1993. The weighted average maturity of the securities portfolios was 1.3 years at December 31, 1995, compared with 1.6 years at December 31, 1994, and .8 years at December 31, 1993. Short-term investments were $361 million at December 31, 1995, compared with $166 million at December 31, 1994, and $803 million at December 31, 1993. In November of 1995, the Financial Accounting Standards Board ("FASB") issued a special report that allowed for a one-time reassessment of the appropriateness of the classifications of all securities held at the time. As a result of its reassessment, the Company reclassified $2.0 billion from investment securities to securities available for sale. Securities available for sale, consisting principally of debt securities, are stated at market value in 1995 and 1994 and at the lower of aggregate cost or market in 1993. Decisions to purchase or sell these securities as part of the Company's ongoing asset and liability management process are based on management's assessment of changes in economic and financial market conditions, interest rate environments, the Company's balance sheet and its interest sensitivity position, liquidity, and capital. Securities available for sale were $2.5 billion at December 31, 1995, $221 million at December 31, 1994, and $629 million at December 31, 1993. At December 31, 1995, securities available for sale had gross unrealized gains of $34 million and gross unrealized losses of $3 million. The Company's securities available for sale portfolio contains primarily U.S. Government securities, state and local government securities, asset-backed securities, and U.S. Agency mortgage-backed securities. The total state and local government portfolio, which is concentrated primarily in Massachusetts, was $227 million at December 31, 1995, with the single largest issue being approximately $6 million. All securities were either rated investment grade or, in the case of unrated securities, determined by management to be equivalent to investment grade. 25 27 The investment securities portfolio, consisting principally of industrial revenue bonds and Federal Reserve Bank stock at December 31, 1995, is stated at amortized cost. The Company's investment securities portfolio was $54 million at December 31, 1995, $2.6 billion at December 31, 1994, and $1.6 billion at December 31, 1993. At December 31, 1995, the market value of the investment securities portfolio approximated the amortized cost of the portfolio. The Company also has a trading account securities portfolio consisting principally of short-term state and local government securities recorded at market value, which was $51 million, $27 million, and $15 million at December 31, 1995, 1994, and 1993, respectively. Trading account gains were $2.8 million in 1995, $2.1 million in 1994, and $2.3 million in 1993. TABLE F SECURITIES PORTFOLIOS AT DECEMBER 31
1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Short-term investments................................. $ 361,164 $ 166,286 $ 803,068 ---------- ---------- ---------- Securities available for sale(1) U.S. Government securities........................... 1,828,408 -- 322,707 State and local government securities................ 227,499 8,564 18,964 U.S. Agency mortgage-backed securities............... 97,799 -- 30,832 Asset-backed securities.............................. 43,754 -- -- Corporate and other.................................. 351,667 212,038 256,500 ---------- ---------- ---------- 2,549,127 220,602 629,003 ---------- ---------- ---------- Investment securities(1) U.S. Government securities........................... -- 2,083,519 1,203,315 Asset-backed securities.............................. -- 200,386 204,798 State and local government securities................ -- 171,436 128,997 Industrial revenue bonds............................. 41,544 49,548 59,958 U.S. Agency mortgage-backed securities............... -- 49,503 -- Other................................................ 12,854 1,857 1,992 ---------- ---------- ---------- 54,398 2,556,249 1,599,060 ---------- ---------- ---------- Total.................................................. $2,964,689 $2,943,137 $3,031,131 ========== ========== ========== Weighted average maturity of securities available for sale and investment securities in years(2)........... 1.5 1.7 1.1 Weighted average maturity of total securities in years(2)............................................. 1.3 1.6 0.8 - --------------- (1) During 1995, the Financial Accounting Standards Board allowed a one-time reassessment of the classification of securities, and the Company reclassified $2.0 billion from investment securities to securities available for sale. (2) The weighted average maturity calculation excludes amortizing industrial revenue bonds and reflects estimated prepayments for U.S. Agency mortgage-backed securities and asset-backed securities.
DEPOSITS AND OTHER SOURCES OF FUNDS The Company's extensive product lines, Customer Sales and Service Center, and banking network of 237 full-service offices and 453 remote banking facilities generate significant core deposits. Core deposits accounted for 98% of total average deposits during 1995 and 99% in 1994. Core deposits include transaction accounts (demand, NOW, and savings accounts), money market deposit accounts, and consumer time certificates. Average core deposits were $9.0 billion in 1995, compared with $8.5 billion in 1994. Average transaction accounts were $4.9 billion in 1995 and 1994. Average money 26 28 market deposit accounts decreased from $2.7 billion in 1994 to $2.5 billion in 1995. Customers continued to move towards certificates of deposit, particularly as interest rates rose during the first part of 1995; average consumer certificates of deposit increased to $1.6 billion in 1995, compared with $1.0 billion in 1994. The acquisitions of NFS and Cornerstone added $315 million of certificates of deposit. Average corporate certificates of deposit in excess of $100 thousand ("CDs"), which represent a small portion of the Company's total funding, were $205 million in 1995, compared with $91 million in 1994. Average purchased funds were up slightly at $916 million in 1995, compared with $839 million in 1994. INTEREST RATE RISK MANAGEMENT AND LIQUIDITY BayBanks' Capital Markets Committee monitors and manages the Company's overall balance sheet interest sensitivity position, the securities portfolios, funding, and liquidity. Interest sensitivity, as measured by the Company's gap position, is affected by the level and direction of interest rates and current liquidity preferences of its customers. A negative gap generally indicates that liabilities will reprice more quickly than assets, and a positive gap generally indicates that assets will reprice in aggregate before liabilities. These factors, as well as projected balance sheet growth, current and potential pricing actions, competitive influences, national monetary and fiscal policy, and the national and regional economic environments, are considered in the asset and liability management decision process. The Company's interest sensitivity gap position, as shown in Table G (page 28), is based on contractual maturities and repricing opportunities for loans, securities, deposits, and borrowings. However, in a period of rising or falling interest rates, this basis of presentation does not reflect lags that may occur in the repricing of certain loans and deposits. For example, the cost of certain interest-bearing core deposit categories (primarily savings, NOW, and money market deposit accounts) has lagged changes in market interest rates, although the Company contractually can change the interest rates on these deposits at any time. A management adjustment provides for these expected repricing lags and for the notion that interest rate changes in many of these core deposit categories, particularly certain transaction accounts, have not been as sensitive to changes in market interest rates. The management adjustment is based upon the relationship of the expected movement in core deposit rates relative to market rates and is reviewed periodically and adjusted to reflect changes in trends. During 1995, the management adjustment was modified to further reflect the lower sensitivity of rates on core deposits to changes in market interest rates. At December 31, 1995, the Company's adjusted gap for the total within-180-day period had moved from a positive $76 million at December 31, 1994, to a positive gap position of $958 million. The total within-one-year gap moved from a positive $648 million at December 31, 1994, to a positive $1.6 billion at December 31, 1995. In addition to the gap analysis presented in the table, the Company also uses a simulation model that incorporates varying interest rate scenarios, including the effect of rapid changes (both increases and decreases up to 200 basis points) in interest rates on its net interest income and net interest margin. The Company's policy is to minimize volatility in its net interest income and net interest margin. 27 29 TABLE G INTEREST RATE SENSITIVITY POSITION AT DECEMBER 31, 1995
0-30 31-90 91-180 TOTAL WITHIN 181-365 TOTAL WITHIN DAYS DAYS DAYS 180 DAYS DAYS ONE YEAR ------- ------- ---- ------------ ------ ------------ (IN MILLIONS) Total assets...................... $ 3,859 $ 817 $780 $ 5,456 $1,291 $ 6,747 Total liabilities................. 7,177 369 437 7,983 562 8,545 ------- ------- ---- ------- ------ ------- Net contractual gap position...... (3,318) 448 343 (2,527) 729 (1,798) Net interest rate swaps........... -- 4 (2) 2 -- 2 ------- ------- ---- ------- ------ ------- Net gap position including interest rate swaps at December 31, 1995........................ $(3,318) $ 452 $341 $(2,525) $ 729 $(1,796) Management adjustment............. 4,578 (1,031) (64) 3,483 (48) 3,435 ------- ------- ---- ------- ------ ------- Management-adjusted gap at December 31, 1995............... $ 1,260 $ (579) $277 $ 958 $ 681 $ 1,639 ======= ======= ==== ======= ====== ======= Management-adjusted gap at December 31, 1994............... $ 1,084 $(1,275) $267 $ 76 $ 572 $ 648 ======= ======= ==== ======= ====== =======
Liquidity, for commercial banking activities, is the ability to respond to maturing obligations, deposit withdrawals, and loan demand. The liquidity positions of the Company's banking subsidiaries are closely monitored by the Company's Capital Markets Committee. BayBanks' distribution network provides a stable base of in-market core deposits and limits the need to raise funds from the national market. The Company's net liquidity position (short-term investments, securities available for sale, and investment securities, less pledged securities, large CDs, and purchased funds) was $1.7 billion, or 16% of total deposits and borrowings, at December 31, 1995, compared with $1.6 billion, also 16% of total deposits and borrowings, at December 31, 1994. The Company's strong liquidity position allowed for the expansion of the loan portfolio and the acquisitions of NFS and Cornerstone in 1995. The Company derives additional liquidity flexibility from the relatively short average maturity (1.3 years) of its securities portfolios (page 26). The statement of cash flows provides additional information on liquidity. The statement presents the results of the Company's operating, investing, and financing activities. Operating activities included $137 million in net income for 1995, before adjustment of noncash items. Investing activities consist primarily of both proceeds from sales and purchases of short-term investments and securities and net loan originations. Financing activities consist primarily of the net deposit activity in the Company's various accounts and short-term borrowings, as well as dividends paid. Cash and cash equivalents were $829 million at December 31, 1994. During 1995, net cash provided by operating activities was $285 million, net cash used in investing activities totaled $567 million, and net cash provided by financing activities was $375 million. Cash and cash equivalents were $922 million at December 31, 1995. The parent company's primary source of liquidity is dividends received from its subsidiaries and income earned on its securities portfolios. The most significant uses of the parent company's resources are capital contributions to banking and other subsidiaries when appropriate, dividends paid to stockholders, and the acquisition of subsidiaries. In 1995, two of the Company's banking subsidiaries repaid $51 million in floating-rate notes to the parent company. The parent company contributed $1 million of capital to a nonbank subsidiary during 1995. Dividends received from banking subsidiaries were $101 million, and dividends received from nonbank subsidiaries were $35 million during 1995. The parent company paid $43 million in dividends to its stockholders in 1995. During 1995, the parent company paid $60 million in cash in the acquisition of NFS and $18 million in cash in the acquisition of Cornerstone (see Note 2 to the consolidated financial statements under Item 8 for further discussion). At December 31, 1995, the parent company had $154 million in cash, short-term investments, and other securities. 28 30 The Merger Agreement with Bank of Boston requires the Company to obtain the consent of Bank of Boston before incurring indebtedness, disposing of assets, or making material investments, in each case other than in the ordinary course consistent with past practice. The Company does not believe that these restrictions will have a material effect on its liquidity or operations during the period before the merger is consummated. CREDIT QUALITY REVIEW OVERVIEW The Company continually monitors the credit quality of its loan portfolio. Employing a standard system for grading loans, individual account officers assign loan grades, or risk ratings, and, if necessary, a specific loan loss reserve calculated under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." An independent Loan Review Department then reviews loan grades and specific loan loss reserves. Any loan or portion of a loan determined to be uncollectible is charged off. On a quarterly basis, senior management reviews the loan portfolio, with particular emphasis on higher-risk loans, to assess the credit quality and loss potential inherent in the portfolio. Also considered in this review are delinquency trends and the adequacy of reserves. The size of the allowance for loan losses, the OREO reserve, and the related provisions reflect this analysis. Nonperforming assets (which exclude restructured, accruing loans and accruing loans 90 days or more past due) include nonperforming loans (including impaired loans, as defined below) and OREO and were $83 million at December 31, 1995, a 32% decrease from $122 million at December 31, 1994. The decline in nonperforming assets is shown in Table H. This result was achieved by successful workout activities that included property sales, payments on nonperforming loans, and loans that qualified for, and were returned to, accrual status. Favorable resolutions were $85 million in 1995, or 70% of nonperforming assets at the beginning of the year. Additions to nonperforming assets were $66 million in 1995, a decrease of 11% compared with $74 million in 1994. TABLE H CHANGES IN ASSET QUALITY
SIX MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- 1995 12/31/95 6/30/95 1994 12/31/94 6/30/94 -------- -------- -------- --------- -------- -------- (IN THOUSANDS) Nonperforming assets(1)..... $ 82,626 $ 82,626 $ 96,814 $ 122,026 $122,026 $172,921 ======== ======== ======== ========= ======== ======== Nonperforming asset activity: Additions................. $ 66,041 $ 36,598 $ 29,443 $ 73,889 $ 29,787 $ 44,102 -------- -------- -------- --------- -------- -------- Payments.................. (44,867) (25,579) (19,288) (36,174) (17,225) (18,949) Return to accrual......... (3,889) (2,558) (1,331) (33,429) (19,088) (14,341) OREO sales................ (36,458) (15,950) (20,508) (70,304) (29,302) (41,002) -------- -------- -------- --------- -------- -------- Total improvements........ (85,214) (44,087) (41,127) (139,907) (65,615) (74,292) Net outflow............... (19,173) (7,489) (11,684) (66,018) (35,828) (30,190) -------- -------- -------- --------- -------- -------- Charge-offs................. (26,365)(2) (12,392) (13,973)(2) (40,441) (16,289) (24,152) Change in OREO reserve...... 6,138 (2) 5,693 445 (2) 4,805 1,222 3,583 -------- -------- -------- --------- -------- -------- Total decrease in nonperforming assets...... $(39,400) $(14,188) $(25,212) $(101,654) $(50,895) $(50,759) ======== ======== ======== ========= ======== ======== - --------------- (1) Nonperforming assets include nonperforming loans and OREO and exclude restructured, accruing loans and accruing loans 90 days or more past due. (2) The transfer of $8.7 million of reserves related to in-substance foreclosures reclassified to loans upon adoption of SFAS No. 114 and subsequent charge-offs of $8.7 million recorded during the first quarter of 1995 had no effect on total nonperforming assets and are not reflected in the table above.
29 31 NONPERFORMING LOANS Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Under SFAS No. 114, a loan is impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage and instalment loans, are exempt from the provisions of SFAS No. 114. Upon adoption of this statement on January 1, 1995, the Company reclassified $33 million of in-substance foreclosures and $9 million of related reserves to loans and the allowance for loan losses, respectively. Total nonperforming loans (TABLE I) were $64 million at December 31, 1995, compared with $55 million at December 31, 1994. On a pro forma basis, assuming the adoption of SFAS No. 114 on December 31, 1994, nonperforming loans declined 19% since last year-end as the resolution of problem assets exceeded new additions. TABLE I NONPERFORMING LOANS(1) AT DECEMBER 31
1995 1994 1993 --------------- --------------- ---------------- (DOLLARS IN THOUSANDS) Commercial.............................. $22,227 35% $17,480 32% $ 47,751 43% Commercial real estate.................. 25,832 41 26,638 49 49,014 45 Residential mortgage.................... 13,068 20 8,971 16 11,473 10 Instalment.............................. 2,703 4 1,538 3 1,763 2 ------- --- ------- --- -------- --- Total nonperforming loans.......... $63,830 100% $54,627 100% $110,001 100% ======= === ======= === ======== === - --------------- (1) Excludes restructured, accruing loans and accruing loans 90 days or more past due.
OTHER REAL ESTATE OWNED OREO consists of foreclosed properties and in-substance foreclosures. Foreclosed properties are being prepared for sale or are currently listed for sale. Under SFAS No. 114, the definition of in-substance foreclosures has been narrowed to assets for which the Company has received physical possession of the collateral. OREO (net of a valuation reserve) declined to $19 million at December 31, 1995, from $67 million at December 31, 1994, primarily reflecting the reclassification of certain in-substance foreclosures to loans upon adoption of SFAS No. 114, as discussed above. Excluding the impact of the SFAS No. 114 reclassification, OREO continued to decline primarily due to property sales. RESTRUCTURED, ACCRUING LOANS The Company restructures credits with troubled borrowers if such arrangements are likely to minimize losses the Company may otherwise incur on a particular credit. Loans that have been restructured remain on nonaccrual status until the customer has demonstrated a period of performance under the new contractual terms. The adoption of SFAS No. 114 also affected the accounting for troubled debt restructurings. Troubled debt restructurings entered into after December 31, 1994, are accounted for as impaired loans until the year subsequent to restructure, provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. The amount of troubled debt restructurings entered into in 1995 was not significant. In accordance with the provisions of SFAS No. 114 and SFAS No. 118, these loans have been accounted for as impaired loans and have been disclosed as nonperforming loans. 30 32 Loans restructured prior to the adoption of SFAS No. 114 are exempt from the provisions of that statement provided they are performing under the restructured terms. At December 31, 1995, restructured, accruing loans that were entered into prior to the adoption of SFAS No. 114 and were performing under the restructured terms were $6 million; restructured, accruing loans were $14 million at December 31, 1994. ACCRUING LOANS 90 DAYS OR MORE PAST DUE Accruing loans 90 days or more past due, presented in Table J, increased slightly to $40 million at December 31, 1995, from $36 million at December 31, 1994. The increase was the result of the New Hampshire acquisitions and an overall increase in consumer credit delinquencies. Of the $40 million in accruing loans 90 days or more past due at December 31, 1995, residential real estate loans and instalment loans together represented 94% of the total. Residential real estate and instalment loans by their nature include a large number of smaller loans. Of the $13 million in such residential real estate loans, $12 million were in owner-occupied properties. TABLE J ACCRUING LOANS 90 DAYS OR MORE PAST DUE AT DECEMBER 31
1995 1994 1993 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Commercial..................................... $ 1,710 4% $ 348 1% $ 3,558 7% Commercial real estate......................... 831 2 4,626 13 5,093 10 Residential mortgage........................... 13,238 33 10,104 28 20,698 40 Instalment..................................... 24,693 61 21,115 58 22,400 43 ------- --- ------- --- ------- --- Total........................................ $40,472 100% $36,193 100% $51,749 100% ======= === ======= === ======= ===
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses was $154 million at December 31, 1995, reflecting the $10.3 million allowance acquired in the acquisitions of NFS and Cornerstone, the provision for loan losses of $25.0 million, and net charge-offs of $28.5 million during 1995. The coverage of nonperforming loans (allowance for loan losses as a percentage of nonperforming loans) decreased to 241% at December 31, 1995, from 269% at December 31, 1994. However, on a pro forma basis, assuming the adoption of SFAS No. 114 on December 31, 1994, and the subsequent charge-off of in-substance foreclosure reserves reclassified to the allowance for loan losses, the 1994 coverage ratio would have been 186%. The allowance for loan losses (TABLE K, page 32) consists of both allocated and unallocated portions. The allocated portion represents amounts within the total allowance assigned to specifically identified problem loans. The unallocated portion is the amount set aside to cover the risk of loss that is not specifically identified as to any individual loan, but that is inherent in any loan portfolio. The unallocated allowance is calculated by migrating each loan category by that category's recent loan loss experience. The process involves analysis of loan grade loss histories and trends for each type of loan. Economic factors and trends are also considered when determining the total unallocated portion of the allowance. Statistical modeling is the primary methodology for determining the amount of the allowance apportioned to the consumer portfolios (residential and instalment loans). However, the apportioned amount is considered unallocated in nature. 31 33 TABLE K ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, 1995
SPECIFIC ALLOCATIONS UNALLOCATED TOTAL ----------- ----------- -------- (DOLLARS IN THOUSANDS) LOAN CATEGORY Commercial................................................ $5,169 $ 36,964 $ 42,133 Commercial real estate.................................... 3,583 59,458 63,041 ------ -------- -------- Total corporate......................................... 8,752 96,422 105,174 Residential mortgage...................................... -- 15,837 15,837 Instalment................................................ -- 32,677 32,677 ------ -------- -------- Total allowance......................................... $8,752 $144,936 $153,688 ====== ======== ======== Percentage of total allowance........................... 6% 94% 100% ====== ======== ========
CAPITAL AND DIVIDENDS BayBanks' consolidated risk-based capital ratios were 12.80% for total capital and 11.41% for core capital at December 31, 1995, compared with 13.06% and 11.51%, respectively, at December 31, 1994. The consolidated leverage ratio was 7.66% at December 31, 1995, and 7.35% at December 31, 1994. On January 25, 1996, BayBanks declared a quarterly dividend of $.60 per share payable March 1, 1996. Total dividends declared and paid for 1995 were $2.20, a 38% increase over the 1994 dividends declared and paid of $1.60. The closing price of BayBanks' stock on December 31, 1995, was $98.25, compared with $52.75 at December 31, 1994, an increase of 86%. Under the Company's Merger Agreement with Bank of Boston, the Company's quarterly dividend may not be increased above $.60 without the consent of Bank of Boston. COMPARISON OF 1994 AND 1993 NET INTEREST INCOME Net interest income (see TABLE B, page 20) was $472.9 million in 1994, compared with $429.2 million in 1993. The growth in net interest income in 1994 compared with 1993 was primarily the result of a 9% increase in average earning assets and an increase in interest rates. Instalment lending played a significant role in earning asset increases for the year as a whole, while commercial lending activity was particularly strong in the second half of 1994. In addition, growth was affected by the general expansion of the securities portfolios over the course of the year. The yield on earning assets was 7.10% in 1994, compared with 6.94% in 1993, as the result of higher rates on the commercial and commercial real estate loan portfolios as market rates increased and to some increases in yields on securities as maturities were reinvested at higher rates. BayBanks' funding costs during 1994 increased due to an increased volume of purchased funds and an atmosphere of rising interest rates. Rates on core deposits steadily increased during 1994, albeit at a much slower rate than general market rates. The cost of total interest-bearing liabilities (as a percentage of average earning assets) increased 12 basis points to 2.06% in 1994 compared with 1993. FEES, SERVICE CHARGES, AND OTHER NONINTEREST INCOME Noninterest income (see TABLE C, page 21) increased to $207.3 million in 1994 from $198.5 million in 1993. 32 34 Total service charges and fees on deposits increased 4% to $109.9 million in 1994, compared with $105.2 million in 1993. An increase in the number of consumer accounts and selected repricings resulted in higher service charges and fees from consumer accounts. These increases were partially offset by a decline in corporate service charges resulting from higher earnings credit rates on compensating deposit balances. Other components of noninterest income experienced growth during 1994. Processing fees increased 17% to $16.2 million in 1994 from $13.8 million in 1993 primarily as the result of an increased volume of point-of-sale transactions. Investment management and brokerage fees increased 31% to $8.3 million in 1994 from $6.3 million in 1993 due primarily to investment advisory fees from higher BayFunds balances on average in 1994 as compared with 1993. The total amount of assets under management in BayFunds was $1.3 billion at December 31, 1994, compared with $1.1 billion at December 31, 1993. Mortgage banking fees were $7.2 million in 1994, compared with $12.0 million in 1993. A decrease in refinance volumes in 1994, as market interest rates increased, resulted in lower fee income. Student loan sales gains were $4.5 million in 1994, compared with $1.8 million in 1993, resulting from a higher volume of sales and more favorable pricing. OPERATING EXPENSES Operating expenses, excluding OREO and legal expenses related to loan workouts (see TABLE D, page 23) were $447.2 million in 1994, compared with $429.2 million in 1993. Salaries and benefits increased 8% to $229.6 million in 1994, compared with $213.0 million in 1993, primarily as the result of normal salary increases, additional staffing requirements, and higher accruals for performance awards. Marketing and public relations increased due to higher promotional activity related to corporate and consumer lending, as well as community banking programs. Service bureau and other data processing expenses increased 5% to $17.4 million in 1994, compared with $16.5 million in 1993, as a result of updating processing systems. Professional services declined 21% in 1994 to $10.8 million from $13.7 million in 1993, primarily due to lower utilization of outside staffing services in the Company's mortgage banking operations. Courier expenses increased due primarily to an increase in armored carrier costs associated with additional remote ATMs and extended branch hours. Legal and consulting expenses reflected increased costs for consumer business projects as well as an increase in general legal costs in 1994 compared with 1993. The cost of administering, managing, and disposing of OREO properties and legal expenses related to such workouts was $10.0 million in 1994, compared with $17.5 million in 1993, reflecting the continued disposition of OREO and the resolution of workout credits. PROVISIONS FOR LOAN LOSSES AND THE OREO RESERVE The provisions for loan losses and the OREO reserve (see TABLE A, page 19) declined substantially in 1994 to $33.4 million, compared with $61.3 million in 1993, reflecting continued improvements in credit quality. The provision for loan losses was $24.0 million in 1994, compared with $36.5 million in 1993. The provision for the OREO reserve was $9.4 million in 1994, compared with $24.8 million in 1993. The OREO provision includes net gains on sales of properties of $6.3 million in 1994 and $7.6 million in 1993. INCOME TAXES The Company reported a provision for income taxes of $73.5 million in 1994, compared with $47.1 million in 1993. The effective tax rate in 1994 was 40.4%, compared with 41.0% in 1993. IMPENDING ACCOUNTING CHANGES In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was adopted by the Company on January 1, 1996. This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable 33 35 intangibles, and goodwill related to such assets being held and used and for such assets and certain identifiable intangibles to be disposed of. The implementation of this statement is not expected to have a material effect on the Company's results of operations or financial condition. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective on January 1, 1996. This statement establishes a fair-value-based method of accounting for stock-based compensation plans under which compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. However, the statement allows a company to continue to measure compensation cost for such plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no compensation cost is recorded if, at the grant date, the exercise price of options granted is equal to the fair market value of the Company's common stock. The Company has elected to continue to follow the accounting method under APB No. 25. SFAS No. 123 requires companies that elect to continue to follow the accounting in APB Opinion No. 25 to disclose in the notes to their financial statements pro forma net income and earnings per share as if the fair-value-based method of accounting had been applied. Based on 1995 activity, net income and earnings per share would not have been materially affected had SFAS No. 123 been applied. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE ------------- Independent Auditors' Report........................................... 35 Consolidated Balance Sheet -- December 31, 1995 and 1994............... 36 Consolidated Statement of Income -- Years Ended December 31, 1995, 1994, and 1993............................................................. 37 Consolidated Statement of Changes in Stockholders' Equity -- Years Ended December 31, 1995, 1994, and 1993.................................... 38 Consolidated Statement of Cash Flows -- Years Ended December 31, 1995, 1994, and 1993....................................................... 39 Notes to Financial Statements.......................................... 40-66
34 36 INDEPENDENT AUDITORS' REPORT KPMG Peat Marwick LLP Certified Public Accountants 99 High Street Boston, MA 02110 To the Board of Directors and Stockholders of BayBanks, Inc.: We have audited the accompanying consolidated balance sheets of BayBanks, Inc., and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BayBanks, Inc., and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP JANUARY 18, 1996 35 37 BAYBANKS, INC. CONSOLIDATED BALANCE SHEET
DECEMBER 31 --------------------------- 1995 1994 ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Cash and due from banks (Note 4).................................. $ 922,031 $ 829,170 Trading account securities (Note 3)............................... 50,755 27,416 Securities portfolios (Note 3) Interest-bearing deposits and other short-term investments...... 361,164 166,286 Securities available for sale -- amortized cost $2,518,199 in 1995 and $220,132 in 1994 (Note 5)........................... 2,549,127 220,602 Investment securities -- market value $54,398 in 1995 and $2,481,584 in 1994 (Note 5).................................. 54,398 2,556,249 ----------- ----------- 2,964,689 2,943,137 Loans -- net of unearned income and fees (Notes 3 and 6) Commercial...................................................... 1,604,031 1,528,265 Commercial real estate.......................................... 1,167,043 956,596 Residential mortgage............................................ 2,053,635 1,335,466 Instalment...................................................... 2,946,384 2,828,193 ----------- ----------- 7,771,093 6,648,520 Less allowance for loan losses (Notes 3 and 7).................. 153,688 146,835 ----------- ----------- 7,617,405 6,501,685 Premises and equipment, net (Note 8).............................. 215,714 195,430 Other real estate owned and in-substance foreclosures, net (Notes 3 and 7)................................................. 18,796 67,399 Goodwill and other intangibles (Notes 2 and 3).................... 54,869 4,421 Other assets...................................................... 219,242 202,289 ----------- ----------- Total assets................................................. $12,063,501 $10,770,947 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand.......................................................... $ 2,383,823 $ 2,214,761 NOW accounts.................................................... 1,657,825 1,491,694 Savings......................................................... 1,498,596 1,462,459 Money market deposit accounts................................... 2,599,295 2,560,425 Consumer time................................................... 1,862,611 1,095,357 Time -- $100,000 or more........................................ 215,257 175,663 ----------- ----------- 10,217,407 9,000,359 Federal funds purchased and other short-term borrowings (Note 9).............................................................. 718,941 849,517 Accrued expenses and other accounts payable....................... 104,831 71,854 Long-term debt (Note 10).......................................... 64,849 51,154 Guarantee of ESOP indebtedness (Note 12).......................... 6,289 9,451 Stockholders' equity (Notes 1, 11, and 20): Common stock, par value $2.00 per share Shares authorized -- 50,000,000 Shares issued -- 19,642,774 in 1995 and 18,999,354 in 1994... 39,286 37,999 Surplus......................................................... 360,969 314,924 Retained earnings............................................... 539,711 444,891 Net unrealized gain on securities available for sale, net of tax (Note 3)..................................................... 17,678 276 Treasury stock at cost -- 1,841 shares in 1995 and 1,431 shares in 1994...................................................... (171) (27) Guarantee of ESOP indebtedness (Note 12)........................ (6,289) (9,451) ----------- ----------- Total stockholders' equity................................... 951,184 788,612 ----------- ----------- Total liabilities and stockholders' equity................... $12,063,501 $10,770,947 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 36 38 BAYBANKS, INC. CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Income on interest-bearing deposits and other short-term investments............................ $ 17,169 $ 8,467 $ 19,002 Interest on securities portfolios Taxable........................................... 125,955 125,096 82,343 Tax-exempt........................................ 21,658 14,734 8,468 ----------- ----------- ----------- 147,613 139,830 90,811 Interest and fees on loans.......................... 634,648 509,503 480,658 ----------- ----------- ----------- Total income on earning assets...................... 799,430 657,800 590,471 Interest expense on deposits and borrowings Deposits.......................................... 234,188 152,567 160,441 Short-term borrowings (Note 9).................... 54,128 37,739 4,098 Long-term debt (Note 10).......................... 3,682 2,552 2,109 ----------- ----------- ----------- Total interest expense.............................. 291,998 192,858 166,648 ----------- ----------- ----------- Net interest income................................. 507,432 464,942 423,823 Provision for loan losses (Note 7).................. 25,000 24,000 36,500 ----------- ----------- ----------- Net interest income after provision for loan losses............................................ 482,432 440,942 387,323 Noninterest income Service charges and fees on deposit accounts...... 109,812 109,918 105,211 Other noninterest income (Note 13)................ 109,439 97,370 93,313 ----------- ----------- ----------- Total noninterest income............................ 219,251 207,288 198,524 Net securities gains (Notes 3 and 5)................ 40 203 411 Operating expenses Salaries and benefits (Notes 11 and 12)........... 248,154 229,572 212,954 Occupancy and equipment (Note 8).................. 91,898 86,741 87,550 Other operating expenses (Note 14)................ 138,823 140,857 146,201 ----------- ----------- ----------- Total operating expenses............................ 478,875 457,170 446,705 Provision for OREO reserve, net (Notes 3 and 7)..... 179 9,372 24,830 ----------- ----------- ----------- Total operating expenses after OREO provision....... 479,054 466,542 471,535 ----------- ----------- ----------- Income before taxes and cumulative effect of accounting change................................. 222,669 181,891 114,723 Provision for income taxes (Notes 3 and 15)......... 85,295 73,522 47,072 ----------- ----------- ----------- Income before cumulative effect of accounting change............................................ 137,374 108,369 67,651 Less cumulative effect of accounting change (net of tax benefit of $683 in 1994) (Note 12)............ -- 932 -- ----------- ----------- ----------- Net Income.......................................... $ 137,374 $ 107,437 $ 67,651 =========== =========== =========== Earnings Per Share (Note 3) Income before accounting change................... $ 7.01 $ 5.65 $ 3.57 Less cumulative effect of accounting change....... -- 0.05 -- ----------- ----------- ----------- Net income........................................ $ 7.01 $ 5.60 $ 3.57 =========== =========== =========== Average shares outstanding.......................... 19,608,734 19,173,524 18,953,397
The accompanying notes are an integral part of these consolidated financial statements. 37 39 BAYBANKS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NET UNREALIZED GAIN ON SECURITIES COMMON RETAINED AVAILABLE TREASURY ESOP LOAN STOCK SURPLUS EARNINGS FOR SALE STOCK GUARANTEE TOTAL ------- -------- --------- -------------- -------- --------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) BALANCE AS OF DECEMBER 31, 1992............... $37,016 $304,890 $316,812 $ -- $ (26) $(14,473) $644,219 Net income -- 1993.......................... 67,651 67,651 Cash dividends declared ($0.90 per share)... (16,801) (16,801) Payment on ESOP note........................ 2,232 2,232 Exercise of stock options (157,414 shares)................................... 269 2,706 940 3,915 Stock issued (98,471 shares) in conversion of debentures............................. 197 1,156 1,353 Stock issued (2,156 shares) in payment of fees...................................... 4 101 105 Treasury shares acquired (22,109 shares) (Note 11)................................. 138 (914) (776) Other, principally employee benefit plans (Note 11)................................. 1,364 1,364 ------- -------- -------- ------- ------- -------- -------- BALANCE AS OF DECEMBER 31, 1993............... 37,486 310,355 367,662 -- -- (12,241) 703,262 Net unrealized gain on securities available for sale at January 1, 1994 (Note 3)...... 2,526 2,526 Net income -- 1994.......................... 107,437 107,437 Cash dividends declared ($1.60 per share)... (30,208) (30,208) Payment on ESOP note........................ 2,790 2,790 Net change in valuation reserve related to securities available for sale portfolio, net of deferred income taxes (Note 3)..... (2,250) (2,250) Exercise of stock options (171,303 shares)................................... 279 2,663 1,700 4,642 Stock issued (2,980 shares) in conversion of debentures............................. 6 35 41 Stock issued (2,088 shares) in payment of fees...................................... 4 109 113 Stock issued (112,000 shares) in connection with restricted stock plan................ 224 (224) -- Treasury shares acquired (33,382 shares) (Note 11)................................. 48 (1,727) (1,679) Other, principally employee benefit plans (Note 11)................................. 1,938 1,938 ------- -------- -------- ------- ------- -------- -------- BALANCE AS OF DECEMBER 31, 1994............... 37,999 314,924 444,891 276 (27) (9,451) 788,612 Net income -- 1995.......................... 137,374 137,374 Cash dividends declared ($2.20 per share)... (42,554) (42,554) Stock issued in acquisition of NFS Financial Corp. (NFS) (487,267 shares) (Note 2)..... 975 37,641 38,616 Options issued in acquisition of NFS (29,778 options) (Note 2)......................... 1,504 1,504 Payment on ESOP note........................ 3,162 3,162 Net change in valuation reserve related to securities available for sale portfolio, net of deferred income taxes (Note 3)..... 17,402 17,402 Exercise of stock options (176,886 shares)................................... 253 2,231 3,130 5,614 Stock issued (1,960 shares) in payment of fees...................................... 4 118 122 Stock issued (27,750 shares) in connection with restricted stock plan................ 55 (55) -- Treasury shares acquired (50,853 shares) (Note 11)................................. 107 (3,274) (3,167) Other, principally employee benefit plans (Note 11)................................. 4,499 4,499 ------- -------- -------- ------- ------- -------- -------- BALANCE AS OF DECEMBER 31, 1995............... $39,286 $360,969 $539,711 $ 17,678 $ (171) $ (6,289) $951,184 ======= ======== ======== ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 38 40 BAYBANKS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................................. $ 137,374 $ 107,437 $ 67,651 Adjustments to reconcile net income to net cash provided by operating activities: Proceeds from sales and maturities of trading account securities(1)....... 3,010,411 2,493,752 1,832,047 Purchases of trading account securities................................... (3,042,417) (2,530,409) (1,803,249) Amortization of security premium.......................................... 12,170 22,084 10,842 Net securities gains...................................................... (40) (203) (411) Fixed-rate mortgages sold................................................. 150,196 269,995 815,722 Fixed-rate mortgages originated for sale, net of principal payments....... (162,569) (123,289) (775,749) Student loans transferred from portfolio and sold......................... 136,218 134,107 67,363 Provision for loan losses................................................. 25,000 24,000 36,500 Amortization of goodwill and other intangibles............................ 2,420 558 684 Depreciation and amortization of premises and equipment................... 26,319 24,365 24,218 Gain on sales of premises and equipment................................... (1,756) (934) -- Provision for OREO reserve, net........................................... 179 9,372 24,830 Deferred income taxes..................................................... 1,616 9,216 2,675 Change in other assets.................................................... (11,548) (1,839) (27,223) Change in interest receivable............................................. (18,800) (22,997) (107) Change in accrued expenses and other accounts payable..................... 8,721 17,467 6,163 Change in interest payable................................................ 11,970 4,483 (3,320) ---------- ---------- ---------- Net cash provided by operating activities............................. 285,464 437,165 278,636 ---------- ---------- ---------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale........................ 139,231 313,796 449,217 Proceeds from maturities of securities available for sale................... 625,849 360,199 605,245 Purchases of securities available for sale(1)(2)............................ (864,721) (246,555) (651,384) Proceeds from maturities of investment securities(2)........................ 2,436,369 1,006,045 184,280 Purchases of investment securities.......................................... (1,941,985) (1,979,848) (1,115,180) Net cash provided (used) by: Short-term investments.................................................... (163,279) 636,782 288,917 Loans(3)(4)(5)............................................................ (742,421) (897,746) (348,318) Proceeds from sales of premises and equipment............................... 2,585 1,703 125 Purchases of premises and equipment......................................... (33,700) (28,010) (18,467) Proceeds from sales and payments related to OREO(4)(5)...................... 22,634 59,830 75,184 Purchases of financial institutions, net of cash acquired................... (47,803) -- -- ---------- ---------- ---------- Net cash used by investing activities................................. (567,241) (773,804) (530,381) ---------- ---------- ---------- FINANCING ACTIVITIES Net cash provided (used) by: Demand deposits, NOW, and savings accounts................................ 136,176 150,715 276,644 Money market deposits..................................................... (65,827) (171,295) (235,571) Consumer time deposits.................................................... 452,672 101,412 (240,802) Time -- $100,000 or more.................................................. 39,202 140,706 (3,998) Short-term borrowings..................................................... (143,027) 341,697 367,851 Long-term debt............................................................ (4,451) (3,293) 653 Dividends paid.............................................................. (42,554) (30,208) (16,801) Other equity transactions................................................... 2,447 3,090 3,028 ---------- ---------- ---------- Net cash provided by financing activities................................. 374,638 532,824 151,004 ---------- ---------- ---------- Net change in cash and cash equivalents..................................... 92,861 196,185 (100,741) Cash and cash equivalents at beginning of year(6)........................... 829,170 632,985 733,726 ---------- ---------- ---------- Cash and cash equivalents at end of year(6)................................. $ 922,031 $ 829,170 $ 632,985 ========== ========== ========== Supplemental disclosure of cash flow information Interest paid............................................................. $ 280,028 $ 188,375 $ 169,968 Taxes paid................................................................ 98,003 64,463 58,026 - --------------- (1) Excludes transfers of trading account securities to the securities available for sale portfolio of $8.8 million, $23.8 million, and $30.8 million in 1995, 1994, and 1993, respectively. (2) Excludes transfer of investment securities to the securities available for sale portfolio of $2.0 billion in 1995 (see Note 5). (3) Excludes transfers of loans to the other real estate owned category of $3.2 million, $30.7 million, and $40.5 million in 1995, 1994, and 1993, respectively. (4) Excludes loan originations in conjunction with OREO sales of $6.3 million, $7.8 million, and $22.4 million in 1995, 1994, and 1993, respectively. (5) Excludes $33.2 million of in-substance foreclosures and related reserves of $8.7 million reclassified to loans and the allowance for loan losses, respectively, as a result of the adoption of SFAS No. 114 on January 1, 1995. (6) Cash and cash equivalents consist of cash on hand and due from banks.
The accompanying notes are an integral part of these consolidated financial statements. 39 41 NOTES TO FINANCIAL STATEMENTS NOTE 1. CONDENSED FINANCIAL INFORMATION OF THE PARENT The condensed balance sheet is presented for 1995 and 1994, and a statement of income and statement of cash flows are presented for the years 1993 through 1995, for BayBanks, Inc. (the "parent company"). BALANCE SHEET
DECEMBER 31 ----------------------- 1995 1994 ---------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Cash and short-term investments...................................... $ 14,260 $ 15,472 Securities available for sale -- amortized cost $140,117 in 1995 and $2 in 1994..................................................... 140,142 6 Investment securities -- market value $66,842 in 1994................ -- 66,882 Investment in capital stock of subsidiaries Banking subsidiaries............................................... 843,728 675,451 Nonbank subsidiaries............................................... 181 38,490 ---------- -------- 843,909 713,941 Notes and advances due from subsidiaries............................. 15,000 52,600 Other assets......................................................... 3,509 1,311 ---------- -------- Total assets.................................................... $1,016,820 $850,212 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other accounts payable.......................... $ 9,347 $ 2,149 Long-term debt....................................................... 50,000 50,000 Guarantee of ESOP indebtedness....................................... 6,289 9,451 Stockholders' equity: Common stock, par value $2.00 per share Shares authorized -- 50,000,000 Shares issued -- 19,642,774 in 1995 and 18,999,354 in 1994...... 39,286 37,999 Surplus............................................................ 360,969 314,924 Retained earnings.................................................. 539,711 444,891 Net unrealized gain on securities available for sale, net of tax... 17,678 276 Treasury stock at cost -- 1,841 shares in 1995 and 1,431 shares in 1994............................................................ (171) (27) Guarantee of ESOP indebtedness..................................... (6,289) (9,451) ---------- -------- Total stockholders' equity...................................... 951,184 788,612 ---------- -------- Total liabilities and stockholders' equity.................... $1,016,820 $850,212 ========== ========
40 42 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 --------------------------------- 1995 1994 1993 -------- -------- ------- (IN THOUSANDS) Income: Dividends from subsidiaries Banking subsidiaries................................... $101,318 $ 25,440 $10,000 Nonbank subsidiaries................................... 35,064 10,000 6,500 -------- -------- ------- 136,382 35,440 16,500 Interest from subsidiaries................................ 605 2,297 1,775 Interest on short-term investments........................ 1,243 504 443 Interest and dividends on securities portfolios........... 4,804 2,162 1,271 Other income.............................................. 130 631 547 -------- -------- ------- Total income........................................... 143,164 41,034 20,536 -------- -------- ------- Expenses: Interest on debentures and notes payable.................. 3,155 2,251 1,743 General and administrative................................ 455 2,344 700 -------- -------- ------- Total expenses......................................... 3,610 4,595 2,443 -------- -------- ------- Income before income taxes and equity in undistributed income of subsidiaries.................................... 139,554 36,439 18,093 Income tax expense.......................................... 1,341 77 358 -------- -------- ------- Income before equity in undistributed income of subsidiaries.............................................. 138,213 36,362 17,735 Equity in subsidiaries' undistributed income................ (839) 71,075 49,916 -------- -------- ------- Net income.................................................. $137,374 $107,437 $67,651 ======== ======== =======
41 43 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 ----------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Dividends from subsidiaries Banking subsidiaries................................ $ 101,318 $ 25,440 $ 10,000 Nonbank subsidiaries................................ 35,064 10,000 6,500 ---------- --------- --------- 136,382 35,440 16,500 Interest received...................................... 3,081 3,715 3,323 Other income........................................... 130 631 547 Interest paid.......................................... (3,186) (2,218) (1,779) Operating expenditures................................. (333) (1,945) (814) Income taxes (paid) received........................... (654) 1,965 (463) ---------- --------- --------- Net cash provided by operating activities........... 135,420 37,588 17,314 ---------- --------- --------- INVESTING ACTIVITIES Purchases of securities................................ (2,079,088) (181,086) (166,082) Sales and maturities of securities..................... 2,020,077 168,692 163,355 Net repayments from (advances to) subsidiaries......... 34,092 -- (1,000) Investments in subsidiaries............................ (1,000) -- (21,500) Purchases of financial institutions (Note 2)........... (73,288) -- -- ---------- --------- --------- Net cash flow used by investing activities............. (99,207) (12,394) (25,227) ---------- --------- --------- FINANCING ACTIVITIES Dividends paid......................................... (42,554) (30,208) (16,801) Payment of debt........................................ -- (10) -- Proceeds from exercise of stock options................ 2,504 3,197 3,296 Proceeds from affiliates for stock compensation plan... 2,709 1,552 1,099 Deferred payment plan.................................. (84) (118) (105) ---------- --------- --------- Net cash flow used by financing activities............. (37,425) (25,587) (12,511) ---------- --------- --------- Net change in cash and cash equivalents................ (1,212) (393) (20,424) Cash and cash equivalents at beginning of year......... 15,472 15,865 36,289 ---------- --------- --------- Cash and cash equivalents at end of year............... $ 14,260 $ 15,472 $ 15,865 ========== ========= ========= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income............................................... $ 137,374 $ 107,437 $ 67,651 Adjustments to reconcile net income to net cash provided by operating activities: Equity in subsidiaries' undistributed income............. 839 (71,075) (49,916) Amortization of security discount, net................... (3,198) (1,288) (46) Net change in accrued expenses........................... (285) 374 (340) Net change in accrued income taxes....................... 661 2,042 (105) All other................................................ 29 98 70 ---------- --------- --------- Total adjustments................................... (1,954) (69,849) (50,337) ---------- --------- --------- Net cash provided by operating activities................ $ 135,420 $ 37,588 $ 17,314 ========== ========= =========
42 44 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A significant source of funds used by BayBanks, Inc., the parent company, for the payment of dividends to shareholders is dividends received from its banking and other subsidiaries. The payment of dividends by the Company's principal bank subsidiary, a national bank, is limited by statute to its retained earnings, after deducting losses and statutorily defined bad debts in excess of established allowances for loan losses. The payment of dividends by national banks is further limited by statute to the current year's net income plus the undistributed net income of the two preceding years. The payment of dividends by the Company's other banking subsidiaries is subject to other applicable statutory and regulatory limitations. The Company's banking subsidiaries are also required to achieve and maintain certain minimum capital ratios under applicable regulatory guidelines. Banking regulators have authority to prohibit banks and bank holding companies from paying dividends if they deem payment to be an unsafe or unsound practice. As of December 31, 1995, the Company's banking subsidiaries could have declared additional dividends of approximately $89 million while remaining in compliance with the foregoing statutory limitations and remaining "well capitalized" under regulatory capital guidelines. Any decision to declare a dividend by the Company or any of its subsidiaries also considers additional factors, including the amount of current period net income, liquidity, asset quality, and economic conditions and trends. Federal law imposes limitations on the extent to which the Company's banking subsidiaries may finance or otherwise supply funds to the Company and its nonbank subsidiaries. Such transactions with the Company and each of its nonbank subsidiaries are limited to 10% of each subsidiary bank's capital and surplus. There is also a 20% limit on each bank's aggregate covered transactions with the Company and all of its nonbank subsidiaries. At December 31, 1995, the Company had no borrowings outstanding from any of its subsidiaries. The parent company has not sold commercial paper and does not have any revolving credit lines or other short-term debt outstanding that relies on credit ratings from public rating agencies. The Company has a Stockholders Rights Plan under which stock purchase rights have been distributed to the Company's stockholders. The rights may become exercisable in the event of certain unsolicited attempts to acquire the Company. The rights, which expire in December 1998, become exercisable 10 business days after a person, including a group, acquires 20% or more of the Company's outstanding common stock or commences a tender offer that would result in such person owning 25% or more of such stock or the Board of Directors determines that a person owning 10% or more of such stock is an "adverse person." If any person becomes the owner of 25% or more of the outstanding common stock or the Board determines that a person is an adverse person, the rights of holders other than such owner or adverse person become rights to buy shares of common stock of the Company (or of the acquiring company if the Company is acquired in certain mergers or other business combinations) having a market value of twice the exercise price of each right, with the result that such owner's or adverse person's interest in the Company would be substantially diluted. The Company may redeem the right, at a price of $.01 per right, until 10 business days after a person acquires 20% or more of the outstanding common stock or the Board has determined that a person is an adverse person. On December 12, 1995, upon entering into an agreement and plan of merger with Bank of Boston Corporation (see Note 20), the Company's Stockholders Rights Plan was amended to exclude the merger agreement with Bank of Boston Corporation, the related BayBanks Stock Option Agreement, and all transactions contemplated thereby, from the scope of the Stockholders Rights Plan. NOTE 2. ACQUISITIONS OF FINANCIAL INSTITUTIONS AND CONSOLIDATION OF BANK SUBSIDIARIES The Company's acquisition of the southern New Hampshire-based holding company, NFS Financial Corp. ("NFS"), parent company of NFS Savings Bank, FSB, and Plaistow Cooperative Bank, FSB, became effective after the close of business on June 30, 1995. The stockholders of NFS received $20.15 in cash and .1696 shares of BayBanks, Inc., common stock for each share of NFS common stock held, an aggregate of $58.1 million in cash and 487,267 shares of BayBanks, Inc., common stock that were issued at a value of $38.6 million. In addition, outstanding options to purchase NFS common stock were converted into options to purchase an aggregate of 29,778 shares of BayBanks, Inc., common stock. The options issued were valued at 43 45 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) $1.5 million. At June 30, 1995, NFS had total assets of $625 million. Including acquisition costs, the total cash paid for NFS was $60.2 million, of which $889,000 was held in escrow at December 31, 1995, and was payable to former NFS shareholders. Following the acquisition, NFS Savings Bank, FSB, and Plaistow Cooperative Bank, FSB, were merged and are operating as BayBank FSB. In addition, the name of the holding company was changed from NFS to BayBank New Hampshire, Inc. ("BBNH"). In September of 1995, BBNH was merged into BayBanks, Inc. After the close of business on November 30, 1995, the Company acquired Cornerstone Financial Corporation ("Cornerstone"), parent company of Cornerstone Bank of Derry, NH. The stockholders of Cornerstone received $8.80 in cash for each outstanding share of common stock held, an aggregate of approximately $17.7 million. At November 30, 1995, Cornerstone had total assets of $143 million. Including acquisition costs, the total cash paid for Cornerstone was $18.1 million, of which $4.7 million was held in escrow at December 31, 1995, and was payable to former Cornerstone shareholders. Following the acquisition, Cornerstone Bank began operating as BayBank NH. In addition, the name of the parent was changed from Cornerstone to BayBanks, Inc. (a New Hampshire corporation). In December of 1995, BayBanks, Inc. (a New Hampshire corporation) was merged into BayBanks, Inc. These acquisitions were accounted for as purchases. Accordingly, the results of operations of NFS and Cornerstone have been included with those of the Company since the date of each company's acquisition. Under this method of accounting, the purchase prices are allocated to the respective assets and liabilities acquired based on their estimated fair values, net of applicable income tax effects. The following table shows the fair values of assets and liabilities acquired and intangible assets recorded: Fair value of tangible assets acquired................................. $762,889,000 Fair value of liabilities acquired..................................... 694,879,000 Goodwill............................................................... 41,796,000 Core deposit intangibles............................................... 7,207,000 Purchased mortgage servicing rights.................................... 1,612,000
Goodwill is being amortized to other operating expenses on a straight-line basis over 15 years. Other intangibles are amortized over the estimated benefit period. The unaudited pro forma consolidated results of operations for the years ended December 31, 1995 and 1994, assuming the acquisitions of NFS and Cornerstone had occurred as of January 1, 1995 and 1994, respectively, are as follows: PRO FORMA RESULTS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ------------------------- 1995 1994 ---------- ---------- Net interest income......................................... $ 522,720 $ 489,532 Noninterest income.......................................... 223,312 213,388 Income before cumulative effect of accounting change........ 138,296 110,170 Net income.................................................. 138,296 109,238 Income before accounting change per share................... 6.97 5.60 Net income per share........................................ 6.97 5.56 Average common shares outstanding........................... 19,852,368 19,660,791
During 1995, the Company merged BayBank Connecticut, N.A., into BayBank Boston, N.A. Subsequently, the Company's largest bank, BayBank, became a national bank (BayBank, N.A.) and BayBank Boston, N.A., was merged into BayBank, N.A. BayBank, N.A., is headquartered in Boston, Massachusetts, and is regulated by the Office of the Comptroller of the Currency ("OCC"). In addition, effective December 29, 1995, the Company contributed its principal nonbank subsidiaries to BayBank, N.A. 44 46 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION -- The consolidated financial statements of the Company and its subsidiaries follow generally accepted accounting principles and reporting practices applicable to the banking industry, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material intercompany transactions have been eliminated. Certain prior years' amounts have been reclassified to conform with the current year presentation. INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS -- Consists of federal funds sold and securities purchased under resale agreements of $190,000,000 and $8,000,000, respectively, in 1995 and $76,900,000 and $12,316,000, respectively, in 1994. The remaining investments are money market mutual funds and other short-term deposits. TRADING ACCOUNT SECURITIES -- Consists primarily of municipal securities held for resale to customers. These securities are recorded at market value; realized and unrealized gains and losses on trading securities are recorded in the current period in noninterest income. SECURITIES -- Securities available for sale, consisting principally of debt securities, are stated at market value. Decisions to purchase or sell these securities as part of the Company's ongoing asset and liability management process are based on management's assessment of changes in economic and financial market conditions, interest rate environments, the Company's balance sheet and its interest sensitivity position, liquidity, and capital. The cost of securities sold is determined by the specific identification method. The net unrealized gains on securities available for sale, net of tax, are reflected as a component of stockholders' equity. The investment securities portfolio, principally debt securities, was stated at cost, adjusted for amortization of premium and accretion of discount using a level yield method, which reflected management's intention and ability to hold these securities until maturity. See Note 5 for a discussion of changes in the classification of securities during 1995. INTEREST RATE SWAP AGREEMENTS -- The Company occasionally uses interest rate swap agreements to manage its interest rate exposure. The net differential paid or received on the swaps is accounted for as an adjustment to the yield on the item hedged. LOANS -- Interest income on most loans is accrued on the principal amount of loans outstanding. Unearned income on leases and loans, $24,434,000 at year-end 1995 and $23,040,000 at year-end 1994, is credited to interest income on a basis that results in approximately level rates of return over the term of the lease or loan. Certain loan fees and credit card fees, net of certain qualifying origination costs, are deferred and amortized over the life of the related loan or commitment period. Deferred loan and credit card fees, included in unearned income, were $7,817,000 and $8,229,000 at year-end 1995 and 1994, respectively. The premium on loans acquired through the purchases of NFS and Cornerstone (see Note 2) of $4,299,000 at December 31, 1995, is amortized to interest income on a basis that results in approximately level rates of return over the term of the loan. The Company engages in certain mortgage banking activities through a mortgage subsidiary. Mortgage loans originated and held for sale are carried at the lower of aggregate cost or market value. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." Under the provisions of SFAS No. 122, entities engaged in mortgage banking activities are required to recognize rights to service mortgage loans for others as separate assets, whether those rights were acquired through loan origination activities or through purchase transactions. The costs allocated to mortgage servicing rights and excess mortgage servicing fee receivables are capitalized and amortized using the level yield method over the remaining lives of the loans. Prior to the adoption of SFAS No. 122, the total cost of originating a mortgage was allocated to the loan. Actual prepayment 45 47 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) experience is reviewed periodically, and the mortgage servicing rights and excess mortgage servicing rights are adjusted accordingly to reflect current circumstances. The adoption of SFAS No. 122 did not have a material effect on the Company's results of operations or financial condition. At December 31, 1995 and 1994, mortgage loans held for sale were $20,446,000 and $4,571,000, respectively. Mortgage servicing rights were $5,540,000 and $3,610,000 at December 31, 1995 and 1994, respectively. Loans serviced for others were $2.0 billion, $1.9 billion, and $2.0 billion at December 31, 1995, 1994, and 1993, respectively. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." These statements require changes in both the disclosure and impairment measurement of nonperforming loans. Certain loans that had previously been reported as nonperforming and certain in-substance foreclosures are now required to be disclosed as impaired loans. At adoption, the Company reclassified $33,173,000 of in-substance foreclosures and related reserves of $8,669,000 to loans and the allowance for loan losses, respectively. In accordance with the provisions of SFAS No. 114 and SFAS No. 118, prior year balances were not reclassified since taken as a whole they were immaterial to the financial statements. Loans are classified as restructured, accruing loans, after a period of performance, when the Company has granted, for economic or legal reasons related to the borrower's financial difficulties, a concession to the customer that the Company would not otherwise consider. Such concessions can be any one or a combination of the following modifications to the terms of the debt: the reduction of the stated interest rate for the remaining original life of the debt; extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk; reduction of the face amount or maturity amount of the debt as stated in the debt instrument; and reduction of accrued interest. Restructured, accruing loans entered into prior to the adoption of SFAS No. 114 are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms at, or subsequent to, adoption of SFAS No. 114. Troubled debt restructurings entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure, these loans may be removed from the impaired loan disclosure provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. The Company entered into $229 thousand of troubled debt restructurings during 1995. At December 31, 1995, restructured, accruing loans that were entered into prior to the adoption of SFAS No. 114 and were performing under the restructured terms were $6 million. During 1995 and 1994, interest income recorded on these loans approximated a market interest rate and in the aggregate was not significantly different had these loans performed according to their original terms. The interest income that would have been recorded had these loans performed according to their original terms is immaterial to the financial statements of the Company. There are no commitments to lend additional funds to these borrowers. Commercial and commercial real estate loans are considered impaired, and are placed on nonaccrual, when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Residential mortgages and instalment loans are collectively evaluated for impairment since they are comprised of smaller-balance homogeneous loans. The amount of impairment of all impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. At December 31, 1995, total impaired loans were $48,059,000, comprised of $21,726,000 that had related allowances of $8,578,000 and $26,333,000 that did not require a related allowance since there was no impairment as measured by the provisions of SFAS No. 114. During the year, the average recorded 46 48 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) investment in impaired loans was $51,989,000; impaired loans did not contribute to interest income in 1995 since all cash receipts were applied to principal. Loans are placed on nonaccrual when payment of principal or interest is considered to be in doubt or is past due 90 days or more, except for consumer loans and those loans which, in management's judgment, are adequately secured and for which collection is probable. Secured consumer loans are generally placed on nonaccrual within 120 days, unless adequately collateralized. Unsecured consumer loans are charged to the allowance for loan losses when deemed by management to be uncollectible, in keeping with generally accepted industry practice. Previously accrued income that has not been collected is reversed from current income, and subsequent cash receipts are applied to reduce the unpaid principal balance. Loans are returned to accrual status when collection of all contractual principal and interest is reasonably assured and there has been sustained repayment performance. Nonperforming loans were $63,830,000 at year-end 1995 and $54,627,000 at year-end 1994. Interest income earned during the year on year-end nonperforming loans was approximately $708,000; if these loans had been performing under contractual terms, interest would have been approximately $5,372,000. In 1994, these amounts were $568,000 and $4,485,000, respectively. ALLOWANCE FOR LOAN LOSSES -- Loans, including impaired loans, considered to be uncollectible are charged to the allowance for loan losses. Additions to the allowance are provided by recoveries of previously charged-off loans and by the provision for loan losses in amounts sufficient to maintain the adequacy of the allowance. The adequacy is determined by management's evaluation of potential losses in the portfolio, economic conditions, historical net charge-offs, and portfolio growth. Included in the allowance are amounts allocated to specific loans (including impaired loans as discussed above), amounts allocated to other loans that may become uncollectible but cannot be individually identified, and unallocated amounts. Management believes that the allowance for loan losses is adequate. Various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses of the Company's subsidiaries. Such agencies can require the Company to recognize additions to the allowance based on regulatory judgments of information available at the time of their examination. OTHER REAL ESTATE OWNED -- Other real estate owned ("OREO") consists of foreclosed properties and in-substance foreclosures. The adoption of SFAS No. 114 had an impact on the accounting for in-substance foreclosures effective January 1, 1995. SFAS No. 114 narrowed the definition of in-substance foreclosures to assets for which the Company has received physical possession of the collateral. Upon adoption of this statement on January 1, 1995, the Company reclassified $33,173,000 of in-substance foreclosures and $8,669,000 of related reserves to loans and the allowance for loan losses, respectively. Prior to the adoption of SFAS No. 114, loans were classified as in-substance foreclosures under the following circumstances: when the debtor had little or no equity in the collateral, considering the current fair value of the collateral; when proceeds for repayment of the loan were expected to come only from the operation or sale of the collateral; and when the debtor had either formally or effectively abandoned control of the collateral to the creditor or retained control of the collateral, but, because of the current financial condition of the debtor or the economic prospects for the debtor and/or the collateral in the foreseeable future, it was doubtful that the debtor would be able to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. OREO is recorded at the lower of the book value of the loan or the fair value of the asset acquired, less estimated disposition costs. The excess, if any, of the loan amount over the fair value of the asset acquired is charged off against the allowance for loan losses. Subsequent changes in the value, net of disposition costs, of OREO (including in-substance foreclosures) are recorded directly to an OREO reserve. These changes in the OREO reserve are included in total operating expenses. Proceeds in excess of the carrying value at the time of sale are recorded as a reduction in the provision for the OREO reserve. Expenses to administer these properties are charged to operating expense as incurred. 47 49 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) GOODWILL AND OTHER INTANGIBLES -- Goodwill (the excess of purchase price over the fair value of net assets acquired) is recorded as an asset and amortized to expense over 15 years on a straight-line basis. Other intangibles are recorded as assets and amortized to expense over their estimated benefit periods. Goodwill and other intangible assets are reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. INCOME TAXES -- The Company uses the asset and liability method of accounting for income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance, if necessary, is established to provide for deferred tax assets that are not expected to be realized. EARNINGS PER SHARE -- Earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding and dilutive common stock equivalents (stock options) for each period presented. Average dilutive common stock equivalents were 295,792 for 1995 and 303,286 for 1994. The dual presentation of primary and fully diluted earnings per common share is not presented, since the difference in earnings per share is less than 3%. IMPENDING ACCOUNTING STANDARDS -- In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was adopted by the Company on January 1, 1996. This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to such assets being held and used and for such assets and certain identifiable intangibles to be disposed of. The implementation of this statement is not expected to have a material effect on the Company's results of operations or financial condition. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective on January 1, 1996. This statement establishes a fair-value-based method of accounting for stock-based compensation plans under which compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. However, the statement allows a company to continue to measure compensation cost for such plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no compensation cost is recorded if, at the grant date, the exercise price of options granted is equal to the fair market value of the Company's common stock. The Company has elected to continue to follow the accounting method under APB No. 25. SFAS No. 123 requires companies that elect to continue to follow the accounting in APB Opinion No. 25 to disclose in the notes to their financial statements pro forma net income and earnings per share as if the fair-value-based method of accounting had been applied. Based on 1995 activity, net income and earnings per share would not have been materially affected had the accounting method under SFAS No. 123 been applied. NOTE 4. FEDERAL RESERVE ACCOUNT BALANCES The Company's banking subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. These balances can be in the form of either vault cash or funds left on deposit with the Federal Reserve Bank. The average amount of these balances was $323,071,000 for 1995 and $309,821,000 for 1994. 48 50 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. SECURITIES PORTFOLIOS The amortized cost, gross unrealized gains and losses, market values, and weighted average yields, based on amortized cost, of the following securities portfolios by maturity (excluding interest-bearing deposits and other short-term investments) were:
DECEMBER 31, 1995 -------------------------------------------------------------- GROSS GROSS WEIGHTED AMORTIZED UNREALIZED UNREALIZED MARKET AVERAGE COST GAINS LOSSES VALUE YIELD ----------- ---------- ---------- ----------- -------- (DOLLARS IN THOUSANDS, ON A TAX EQUIVALENT BASIS) SECURITIES AVAILABLE FOR SALE U.S. Government securities, maturing Within 1 year.......................... $ 771,321 $ 98 $(1,743) $ 769,676 4.73% After 1 year but within 5 years........ 1,025,147 32,124 (561) 1,056,710 6.55 After 5 years but within 10 years...... 1,997 25 -- 2,022 5.77 --------- ------- ------- ---------- 1,798,465 32,247 (2,304) 1,828,408 5.77 --------- ------- ------- ---------- State and local government securities, maturing Within 1 year.......................... 122,010 72 (8) 122,074 6.48 After 1 year but within 5 years........ 54,926 659 (52) 55,533 6.78 After 5 years but within 10 years...... 48,868 979 (104) 49,743 7.28 After 10 years......................... 150 -- (1) 149 7.07 --------- ------- ------- ---------- 225,954 1,710 (165) 227,499 6.73 --------- ------- ------- ---------- Corporate, maturing Within 1 year.......................... 310,157 21 -- 310,178 6.37 After 1 year but within 5 years........ 7,580 29 -- 7,609 6.23 --------- ------- ------- ---------- 317,737 50 -- 317,787 6.36 --------- ------- ------- ---------- U.S. Agency mortgage-backed securities... 98,120 194 (515) 97,799 5.73 Asset-backed securities.................. 44,051 -- (297) 43,754 4.20 Other.................................... 33,872 8 -- 33,880 6.70 --------- ------- ------- ---------- Total securities available for sale.............................. $2,518,199 $34,209 $(3,281) $2,549,127 5.91% ========== ======= ======= ========== ===== INVESTMENT SECURITIES Industrial revenue bonds................. $ 41,544 $ -- $ -- $ 41,544 10.97% Other.................................... 12,854 -- -- 12,854 6.00 ---------- ------- ------- ---------- Total investment securities......... $ 54,398 $ -- $ -- $ 54,398 9.80% ========== ======= ======= ========== =====
49 51 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 ------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) SECURITIES AVAILABLE FOR SALE State and local government securities........ $ 8,578 $ -- $ (14) $ 8,564 Corporate.................................... 183,900 -- -- 183,900 Other........................................ 27,654 484 -- 28,138 ---------- ---- -------- ---------- Total securities available for sale........ $ 220,132 $484 $ (14) $ 220,602 ========== ==== ======== ========== INVESTMENT SECURITIES U.S. Government securities................... $2,083,519 $ 10 $(65,101) $2,018,428 Asset-backed securities...................... 200,386 -- (5,652) 194,734 State and local government securities........ 171,436 89 (1,250) 170,275 Industrial revenue bonds..................... 49,548 -- -- 49,548 U.S. Agency mortgage-backed securities....... 49,503 -- (2,761) 46,742 Corporate and other.......................... 1,857 -- -- 1,857 ---------- ---- -------- ---------- Total investment securities................ $2,556,249 $ 99 $(74,764) $2,481,584 ========== ==== ======== ==========
The year-end maturity distribution excludes industrial revenue bonds, which are not regarded as principal debt securities, U.S. Agency mortgage-backed securities, asset-backed securities, and other securities that do not have a stated maturity. The maturity of mortgage-backed securities and asset-backed securities, reflecting estimated prepayments, ranged from 3 months to 5 1/2 years. The book value of securities pledged to secure public and trust deposits, to collateralize repurchase agreements, and to meet other legal requirements was $817,827,000 at December 31, 1995. During 1995, proceeds from sales of securities available for sale were $139,231,000, resulting in gross realized gains of $189,000. There was $10,000 in gross realized losses from the sales of these securities. Proceeds from sales of investment securities within 90 days of maturity, regarded as maturities in accordance with generally accepted accounting principles, were $101,199,000, resulting in gross realized losses of $139,000. During 1994, proceeds from sales of securities available for sale were $313,796,000, resulting in gross realized gains of $518,000. There was $3,000 in gross realized losses from the sales of these securities. Proceeds from sales of investment securities within 90 days of maturity were $313,459,000, resulting in gross realized losses of $312,000. During 1993, proceeds from sales of securities available for sale were $449,217,000, resulting in gross realized gains of $439,000. There was $28,000 in gross realized losses from the sales of these securities. In 1995, the FASB allowed a one-time reassessment of the appropriateness of the classifications of all securities held, and the Company reclassified $2.0 billion from investment securities to securities available for sale. At the time of the reclassification, there were $29.7 million in unrealized gains and $4.5 million in unrealized losses relating to the securities transferred. BayBank, N.A., the Company's principal bank subsidiary, and BayBank FSB, the Company's savings bank subsidiary, are members of the Federal Home Loan Bank of Boston ("FHLB"). As members of the FHLB, BayBank, N.A., and BayBank FSB are required to invest in the stock of the FHLB in an amount equal to the greater of 1% of residential mortgage loans or 3/10 of 1% of total assets. As of December 31, 1995 and 1994, $33,635,000 and $27,556,000, respectively, in the stock of the FHLB are included in the securities available for sale portfolio in the other category at cost, which approximates market value. 50 52 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6. LOANS TO RELATED PARTIES Loans outstanding to related parties of the Company and its principal subsidiaries consist primarily of loans made to executive officers and business interests related to certain directors. Activity during the year on loans outstanding at year-end was as follows:
1995 -------------- (IN THOUSANDS) Balance, January 1..................................................... $18,465 Additions during the year.............................................. 39,283 Reductions during the year............................................. 51,249 ------- Balance, December 31................................................... $ 6,499 =======
These loans were made in the ordinary course of business under normal credit terms, including collateralization and interest rates prevailing at the time for comparable transactions with other persons, and do not represent more than a normal risk of collection. NOTE 7. ALLOWANCE FOR LOAN LOSSES AND OREO RESERVE Activity in the allowance for loan loss account was:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Balance, January 1................................. $146,835 $171,496 $192,700 Allowance acquired through acquisitions............ 10,305 -- -- Provision.......................................... 25,000 24,000 36,500 Loan losses charged off............................ (52,019) (66,594) (79,963) Less recoveries.................................. 23,567 17,933 22,259 -------- -------- -------- Net charge-offs.................................... (28,452) (48,661) (57,704) -------- -------- -------- Adoption of SFAS No. 114: Reclassification................................... 8,669 -- -- Charge-offs........................................ (8,669) -- -- -------- -------- -------- Net impact......................................... -- -- -- -------- -------- -------- Balance, December 31............................... $153,688 $146,835 $171,496 ======== ======== ========
Activity in the OREO reserve account was:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Balance, January 1................................. $ 24,971 $ 29,776 $ 7,833 Additions to the OREO reserve...................... 4,892 15,639 32,471 Reclassification upon adoption of SFAS No. 114..... (8,669) -- -- Reductions related to sales........................ (11,030) (20,444) (10,528) -------- -------- -------- Balance, December 31............................... $ 10,164 $ 24,971 $ 29,776 ======== ======== ========
51 53 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation on buildings is computed primarily on a straight-line basis with estimated lives ranging from 25 to 50 years. Furniture and equipment useful lives generally range from 3 to 10 years. Leasehold improvements are amortized over their useful lives or lease terms, whichever is shorter. Premises and equipment were comprised of the following:
1995 1994 -------- -------- (IN THOUSANDS) Buildings...................................................... $178,735 $161,598 Leasehold improvements......................................... 64,948 59,596 Land........................................................... 21,541 16,974 Equipment...................................................... 223,632 197,818 -------- -------- 488,856 435,986 Less accumulated depreciation.................................. 273,142 240,556 -------- -------- Premises and equipment, net.................................... $215,714 $195,430 ======== ========
Depreciation and amortization expense of premises, equipment, and leasehold improvements was $26,319,000 in 1995, $24,365,000 in 1994, and $24,218,000 in 1993. Total rental expense was $27,605,000 in 1995, $24,967,000 in 1994, and $26,346,000 in 1993, net of $1,576,000, $1,473,000, and $1,705,000 in rental income from subleases, respectively. Contingent rentals were negligible. As of December 31, 1995, the Company and its subsidiaries were obligated, under noncancelable operating leases (primarily for premises), for minimum rentals in future periods as follows:
TOTAL RENTAL NET OBLIGATION INCOME OBLIGATION ---------- ------ ---------- (IN THOUSANDS) 1996...................................................... $16,565 $1,546 $15,019 1997...................................................... 15,554 1,329 14,225 1998...................................................... 10,113 832 9,281 1999...................................................... 7,904 699 7,205 2000...................................................... 5,575 642 4,933 Thereafter................................................ 11,701 1,019 10,682
Most leases contain escalation of rent clauses based on increases in real estate taxes or equipment usage. Many leases include renewal provisions. 52 54 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9. FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS Balances outstanding as of December 31, 1995 and 1994, consisted of the following:
FEDERAL FEDERAL HOME U.S. FUNDS REPURCHASE LOAN BANK TREASURY TOTAL PURCHASED AGREEMENTS BORROWINGS AND OTHER ---------- --------- ---------- ------------ --------- (DOLLARS IN THOUSANDS) 1995 Year-end balance............... $ 718,941 $194,725 $ 462,101 $ 4,972 $ 57,143 Maximum month-end balance...... 1,243,490 245,165 1,084,035 50,000 200,000 Average daily balance.......... 915,711 159,120 648,887 15,331 92,373 Weighted average interest rates: As of year-end............... 5.74% 5.53% 5.85% 6.08% 5.48% During the year.............. 5.91 5.91 5.87 6.36 6.05 1994 Year-end balance............... $ 849,517 $ 46,800 $ 797,333 $ -- $ 5,384 Maximum month-end balance...... 1,137,318 109,390 1,066,905 100,000 9,720 Average daily balance.......... 839,070 75,405 729,406 29,521 4,738 Weighted average interest rates: As of year-end............... 5.81% 6.11% 5.80% --% --% During the year.............. 4.50 4.18 4.55 4.71 --
NOTE 10. LONG-TERM DEBT In September 1985, the Company issued $50,000,000 in floating-rate notes. The notes mature on September 30, 1997, and pay interest at a rate, adjusted quarterly, of 1/8 of 1% above the London Interbank Offered Rate ("LIBOR") for three-month Eurodollar deposits. During 1995, the weighted average rate paid was 6.21%, and at December 31, 1995, the rate was 5.81%. The proceeds were used in the funding of the affiliate banks on identical terms. During 1995, the affiliate banks repaid the funds to the parent company. The notes may be redeemed by the Company in whole or in part at any time at 100% of the principal amount plus accrued interest. The Company plans to call the notes for redemption during 1996. The balance of long-term debt at December 31, 1995, includes $13,731,000 in long-term Federal Home Loan Bank ("FHLB") borrowings assumed in the acquisition of BayBank FSB and mortgage debt at two subsidiaries totaling $797,000. The rates on the FHLB borrowings ranged from 5.22% to 5.43% at December 31, 1995, with maturities in 1997 and 1998. FHLB stock and residential mortgage loans are pledged as collateral to secure the borrowings. The monthly payment amounts of the mortgage debt at two subsidiaries total $7,000 with final maturities from 1997 to 2013. Obligations on capitalized leases totaled $321,000 at December 31, 1995. 53 55 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. EMPLOYEE STOCK OPTION PLANS The Company offers shares of common stock to key employees under stock option plans. Options are awarded by a committee of the Board of Directors. Shares issued under stock option plans may be authorized but unissued shares, or treasury shares that were acquired in connection with stock option and compensation plans. The following is a summary of the changes in options outstanding for the last three years:
1995 1994 1993 -------- -------- -------- Options outstanding at the beginning of the year... 615,297 830,434 916,348 Options granted.................................... 50,000 -- 97,500 Options exercised.................................. (176,886) (171,303) (157,414) Options forfeited.................................. -- (43,834) (26,000) Options converted (Note 2)......................... 29,778 -- -- -------- -------- -------- Options outstanding at the end of the year......... 518,189 615,297 830,434 ======== ======== ========
During 1995, prices of stock options exercised ranged from $13.75 to $45.00. Prices of shares under option at December 31, 1995, ranged from $13.75 to $62.50, and options for 358,185 shares were exercisable. Unless exercised, the options will expire at varying dates through 2005. There was no compensation expense recorded in the years presented related to stock options. In addition to the above, the Company has a restricted stock plan that was adopted in 1994 and expires in 2004. As of December 31, 1995, 139,750 shares had been awarded. Under the terms of the merger agreement with Bank of Boston Corporation, no additional shares may be awarded without their consent. The Company also had a restricted stock plan that expired in 1992. Under this plan, 400,000 shares were awarded. Certificates for shares awarded are issued in the name of the employee, who has all the rights of a shareholder, with the shares subject to certain restrictions. At December 31, 1995, such restrictions remained on 208,242 shares outstanding from these plans. The certificates are held by the Company until the restrictions lapse or the shares are forfeited. Restriction periods vary from 1 to 10 years from the date of grant. During 1995, restrictions on 54,152 shares lapsed, and 2,899 shares were forfeited. The fair market value of awarded shares was previously recorded as deferred compensation as a segregation of surplus that is amortized to benefits expense over the restriction period. The unamortized amounts were $5,290,000 at December 31, 1995, $6,150,000 at December 31, 1994, and $1,451,000 at December 31, 1993. Compensation expense related to restricted stock grants, net of forfeitures, was $2,709,000 in 1995, $1,552,000 in 1994, and $1,099,000 in 1993. Upon approval of the pending merger with Bank of Boston Corporation (see Note 20) by the Company's shareholders, stock options will become fully vested, and any restriction periods or other restrictions on outstanding awards of restricted stock will lapse. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which will be effective for fiscal years beginning after December 15, 1995 (see Note 3). NOTE 12. BENEFITS The Company and its subsidiaries provide a noncontributory defined benefit pension plan that covers substantially all employees. Benefits are based upon length of service and qualifying compensation during the final years of employment. Contributions are made to the plan as costs are accrued. Assets held by the plan consist primarily of government securities and common stock. Prior to its acquisition date, the employees of NFS were covered by a separate noncontributory defined benefit plan that provided benefits based upon length of service and qualifying compensation. Effective January 1, 1996, the NFS pension plan was merged into the Company's plan. Cornerstone did not provide a noncontributory defined benefit plan. 54 56 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The table below, which includes NFS for 1995, sets forth the plan's funded status and amounts recognized at December 31:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligations....................... $ 97,019 $ 67,099 $ 69,418 ======== ======== ======== Accumulated benefit obligations.................. $ 98,791 $ 68,259 $ 71,160 ======== ======== ======== Projected benefit obligations.................... $121,034 $ 85,586 $ 91,816 Plan assets (primarily marketable securities) at market value.................................. 166,882 120,358 120,041 -------- -------- -------- Net assets in excess of projected benefit obligations...................................... 45,848 34,772 28,225 Unrecognized experience gain....................... (28,550) (12,294) (5,316) Unrecognized prior service cost.................... 4,909 573 1,831 Unamortized net excess pension assets at transition recognized over 15 years......................... (8,857) (10,333) (11,809) -------- -------- -------- Prepaid pension cost recorded in other assets...... $ 13,350 $ 12,718 $ 12,931 ======== ======== ========
Assumptions used in determining the actuarial present value of the projected benefit obligation as of December 31 are as follows:
1995 1994 1993 ---- ---- ---- Discount rate.................................................. 7.25% 8.50% 7.25% Rate of increase in future compensation levels................. 4.45 5.25 4.70
Net periodic pension expense, which includes NFS since its acquisition date, consisted of the following:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Service costs earned during period................. $ 4,364 $ 4,551 $ 4,083 Interest cost on projected benefit obligation...... 8,011 6,943 6,304 Actual return on plan assets....................... (47,799) (3,290) (11,113) Net amortization and deferral...................... 35,292 (7,991) 987 --------- ------- --------- Net pension expense (income)....................... $ (132) $ 213 $ 261 ========= ======= =========
In addition to the above, the Company maintains a nonqualified excess retirement plan to provide benefits above IRS limits and a nonqualified, supplemental retirement plan for certain officers. The benefits provided under these plans are unfunded, and any payments to plan participants are made by the Company. As of December 31, 1995, 1994, and 1993, $6,214,000, $4,339,000, and $1,962,000, respectively, were included in other liabilities for these plans. The expense associated with the nonqualified plans as of December 31 was as follows:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Service costs earned during period................. $ 322 $ 380 $ 79 Interest cost on projected benefit obligation...... 553 421 240 Actual return on plan assets....................... -- -- -- Net amortization and deferral...................... 334 345 162 ------ ------ ---- Supplemental retirement expense.................... $1,209 $1,146 $481 ====== ====== ====
55 57 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Assumptions used in determining the net pension expense and the nonqualified plan expenses were as follows:
1995 1994 1993 ---- ---- ---- Rate of return on plan assets.................................. 9.00% 9.00% 9.00% Discount rate.................................................. 8.50 7.25 8.00 Rate of increase in future compensation levels................. 5.25 4.70 5.20
The Company has a savings and profit sharing plan that is interrelated with an employee stock ownership plan ("ESOP"). Employees are eligible to participate in these plans if they meet certain service requirements. Benefits are based on the Company's financial performance. A major portion of these benefits has been paid under the ESOP in shares of the Company's common stock. In 1990, the ESOP borrowed $18,600,000 from a third party to purchase 800,000 shares of the Company's common stock. This loan, unconditionally guaranteed by the Company, bears interest at a rate equal to Reserve Adjusted LIBOR plus .35% and is payable in eight annual instalments ending January 31, 1997. At December 31, 1995, the balance of the ESOP loan was $6,289,000 at an interest rate of 6.19%, and unallocated ESOP shares were 270,495. During 1995, ESOP expense of $2,217,000, net of dividends, included an accrual to cover the loan payment due on January 31, 1996, and interest expense on the ESOP loan of $409,000. The dividends used to service the ESOP debt, which were paid on shares held by the ESOP, were $1,557,000 in 1995, $1,188,000 in 1994, and $697,000 in 1993. The Company accrued additional contributions to the savings and profit sharing plan of $3,897,000 in 1995 and $2,100,000 in 1994; the Company accrued no such additional contributions in 1993. Prior to their acquisition dates, NFS and Cornerstone maintained profit sharing plans covering eligible employees. Effective January 1, 1996, the NFS and Cornerstone profit sharing plans were merged into the Company's savings and profit sharing plan. The Company has agreements with certain executives and a plan providing severance benefits for certain employees of the Company and its subsidiaries with respect to certain terminations of employment within two years after a change in control of the Company. Approximately 3,800 employees are potentially eligible for benefits under these arrangements. The Company and Bank of Boston Corporation have entered into employment agreements with certain members of the Company's management that will provide employment and severance benefits from and after consummation of the merger agreement with Bank of Boston Corporation. For employees retiring prior to December 31, 1993, the Company provided $5,000 of life insurance and a Medicare premium supplement and permitted those under 65 to participate in the Company's medical plan by paying the full group rate; full-time employees pay approximately 25% of the group rate. Those retiring after December 31, 1993, will not receive the Medicare supplement and will pay premiums for life and medical insurance reflecting the Company's full cost of coverage for retirees. The Company allocated the present value of these expected benefits to be paid to employees after their retirement to the periods in which employees rendered service to earn the benefits. The initial transition obligation associated with the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," (adopted as of January 1, 1993) was $3,600,000. In accordance with the statement, since eligibility for these Company-subsidized benefits ceased at December 31, 1993, the Company will recognize this liability over the remaining transition periods allowed, which ranges from approximately two years for the medical insurance to twelve years for the life insurance and Medicare supplements. 56 58 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The table below sets forth the status of the Company's accumulated postretirement benefit obligation, which was unfunded as of December 31: Accumulated Postretirement Benefit Obligation:
1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Accumulated postretirement benefit obligation......... $ 3,258 $ 3,086 $ 3,597 Unrecognized net gain (loss).......................... 5 273 (186) Unrecognized prior service cost....................... -- -- -- Unrecognized net transition obligation................ (2,448) (2,801) (3,152) ------- ------- ------- Net postretirement benefit liability.................. $ 815 $ 558 $ 259 ======= ======= =======
Postretirement benefit expense was $560,000 in 1995, $613,000 in 1994, and $619,000 in 1993. Increasing the health care cost trend by 1% in each year would not materially affect the accumulated postretirement benefit obligation as of December 31, 1995, or the aggregate of the service and interest components of the net periodic postretirement benefit cost for the twelve months ended December 31, 1995. The present value of the accumulated benefit obligation assumed a 7.25% discount rate compounded annually. Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 covers all postemployment benefits not already covered by two prior accounting pronouncements. Adoption of SFAS No. 112 resulted in additional postemployment benefits of $1,615,000, which were recorded in the first quarter of 1994 at $932,000 on an after-tax basis. The annual cost of postemployment benefits to former employees for 1995 and 1994 was $2,159,000 and $1,851,000, respectively. NOTE 13. OTHER NONINTEREST INCOME The major components of other noninterest income were:
YEAR ENDED DECEMBER 31 -------------------------------- 1995 1994 1993 -------- ------- ------- (IN THOUSANDS) Credit card fees..................................... $ 20,685 $19,549 $18,892 Processing fees...................................... 18,195 16,174 13,788 Trust fees........................................... 14,433 14,127 14,559 Investment management and brokerage fees............. 10,214 8,293 6,318 Mortgage banking fees................................ 9,547 7,152 11,972 International fees................................... 7,259 6,344 5,845 Other noninterest income............................. 29,106 25,731 21,939 -------- ------- ------- $109,439 $97,370 $93,313 ======== ======= =======
57 59 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14. OTHER OPERATING EXPENSES The major components of other operating expenses were:
YEAR ENDED DECEMBER 31 ---------------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Marketing and public relations..................... $ 24,243 $ 22,726 $ 21,341 Service bureau and other data processing........... 19,588 17,443 16,538 Deposit insurance.................................. 15,247 21,708 21,949 Printing and supplies.............................. 15,233 12,767 12,997 Professional services.............................. 12,963 10,807 13,744 Postage............................................ 9,689 8,711 8,290 Legal and consulting............................... 7,587 8,516 6,609 Amortization of goodwill and other intangibles..... 2,420 558 684 Other operating expenses........................... 26,782 27,652 26,581 -------- -------- -------- 133,752 130,888 128,733 OREO and loan workout expenses..................... 5,071 9,969 17,468 -------- -------- -------- $138,823 $140,857 $146,201 ======== ======== ========
NOTE 15. INCOME TAXES The provision for income taxes was comprised of the following:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Provision for: Federal income tax............................... $61,565 $50,449 $32,254 State income tax................................. 23,730 23,073 14,818 ------- ------- ------- $85,295 $73,522 $47,072 ======= ======= =======
The current and deferred components of the provision were as follows:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Current taxes payable: Federal.......................................... $61,625 $44,370 $31,084 State............................................ 22,054 19,936 13,313 ------- ------- ------- $83,679 $64,306 $44,397 ======= ======= ======= Deferred taxes (benefit): Federal.......................................... $ (60) $ 6,079 $ 1,170 State............................................ 1,676 3,137 1,505 ------- ------- ------- $ 1,616 $ 9,216 $ 2,675 ======= ======= =======
Excluded from the above table are tax effects related to certain items that were recorded directly in stockholders' equity, including market value adjustments related to securities available for sale, stock options, and restricted stock. Net tax effects recorded directly in stockholders' equity amounted to an $11,330,000 charge in 1995 and a $472,000 charge in 1994. 58 60 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The differences between the effective income tax rate and the nominal federal tax rate on income before taxes are reconciled as follows:
1995 1994 1995 ---- ---- ---- Nominal federal tax rate................................... 35.0% 35.0% 35.0% State income tax rate, net of federal tax benefit.......... 8.1 8.2 8.4 Tax-exempt income.......................................... (2.2) (1.7) (2.3) Dividend received deduction................................ (1.0) (.8) (.4) Utilization of tax credits................................. (.6) (.7) (.4) Settlement of tax litigation............................... (1.2) -- -- Other...................................................... .2 .4 .7 ---- ---- ---- 38.3% 40.4% 41.0% ==== ==== ====
At December 31, the Company had gross deferred tax assets and gross deferred tax liabilities as follows:
1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Deferred income tax assets: Loan losses......................................... $63,980 $63,211 $73,900 OREO reserve........................................ 4,368 7,365 12,972 Loan fees, net...................................... 2,818 3,210 5,128 Deferred compensation............................... 8,663 5,447 3,636 Other, net.......................................... 3,770 2,754 223 ------- ------- ------- 83,599 81,987 95,859 ------- ------- ------- Deferred income tax liabilities: Lease financing..................................... 8,301 10,474 13,365 Depreciation........................................ 7,105 7,049 8,928 Pension credit...................................... 5,664 5,598 5,575 Unrealized gain on securities available for sale.... 13,250 194 -- Purchase accounting................................. 12,560 -- -- Other, net.......................................... 2,954 2,696 2,605 ------- ------- ------- 49,834 26,011 30,473 ------- ------- ------- Net deferred income tax asset....................... $33,765 $55,976 $65,386 ======= ======= =======
It is expected that the existing deferred tax assets will be realized from the reversal of existing deferred tax liabilities and the recognition of future taxable income. During 1995, the Company added net deferred tax assets of $5,383,000 from the acquisitions of NFS and Cornerstone. An additional $12,922,000 of net deferred tax liabilities were recorded as the tax effect of fair market value adjustments related to these acquisitions. NOTE 16. FINANCIAL INSTRUMENTS WITH CREDIT RISK AND OFF-BALANCE SHEET RISK AND DERIVATIVE FINANCIAL INSTRUMENTS CONCENTRATION OF CREDIT RISK -- The Company is a commercial banking organization, providing diversified financial services to individuals, businesses, governmental units, and other banks. The Company provides a comprehensive range of credit, non-credit, and international banking products and services to the New England region, with particular emphasis in the Commonwealth of Massachusetts, and accordingly is affected by general economic conditions in the region. 59 61 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) OFF-BALANCE SHEET RISK -- In the normal course of business, the Company occasionally uses various off-balance sheet commitments and financial instruments to accommodate certain financing requirements of customers and for interest rate risk management purposes. These commitments and financial instruments may include loan commitments, interest rate swaps and options, standby letters of credit, loans sold with recourse, letters of credit, forward contracts, interest rate caps, and interest rate floors. These instruments involve varying degrees of credit and market risk in excess of the amounts included in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company's involvement in each particular class of financial instrument. The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees under recourse arrangements is represented by the contractual amount of those instruments. The Company uses the same credit policies in extending commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate swaps, caps, and floors, the contract or notional amounts do not represent an exposure to credit loss. The Company controls the credit risk of its interest rate swap agreements through credit approvals, limits, and monitoring procedures in conjunction with its interest rate risk management activities. Unless otherwise noted, the Company does not require collateral or other security to support financial instruments with credit risk. DERIVATIVE FINANCIAL INSTRUMENTS -- The Company has only limited involvement with derivative financial instruments for interest rate risk management and trading purposes. Off-balance sheet and derivative financial instruments at December 31, 1995 and 1994, were as follows:
CONTRACT OR NOTIONAL AMOUNT ----------------------- 1995 1994 ---------- ---------- (IN THOUSANDS) Loan commitments.............................................. $3,568,000 $3,065,000 Foreign exchange contracts.................................... 184,000 99,000 Standby letters of credit..................................... 155,000 146,000 Forward commitments........................................... 40,000 23,000 Loans sold with recourse...................................... 32,000 38,000 Securities purchase and sell commitments...................... 32,000 15,000 Interest rate swaps and options............................... 24,000 14,000 Letters of credit............................................. 18,000 14,000
LOAN COMMITMENTS, LETTERS OF CREDIT, AND STANDBY LETTERS OF CREDIT -- Loan commitments and letters of credit are granted under the same credit policies used for on-balance sheet outstandings. Commitments are subject to various terms and conditions that have to be met before being drawn upon and have a fixed expiration date. The nature of many commitments is such that they are expected to expire without being drawn upon, thus not requiring future funding by the Company. The fair value of loan commitments was $4,600,000 and $3,500,000 at December 31, 1995 and 1994, respectively. Letters of credit are documents, principally related to export and import trade transactions, issued by the Company on behalf of its customers in favor of third parties, who can present demands on the Company within specified terms and conditions. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The fair value of letters of credit was $197,000 and $177,000 at December 31, 1995 and 1994, respectively. FOREIGN EXCHANGE CONTRACTS -- The Company enters into offsetting agreements to purchase foreign currency and, in turn, to sell it to customers. Credit risk exists because in the event that a customer fails to take delivery of the foreign currency, the Company is required to resell it to the market. The fair value of foreign exchange contracts was $1,463,000 and $780,000 at December 31, 1995 and 1994, respectively. 60 62 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FORWARD COMMITMENTS -- The Company enters into forward contract commitments to reduce the market risk associated with originating residential mortgage loans for sale. Contractual terms of forward commitments specify the aggregate amount of the contract, the interest rate or prices at which loans are to be delivered, and the period covered. The market risk to the Company is the potential inability to originate loans at prices specified in the contract within the commitment period, thus resulting in a potential difference between loan origination requirements under contract terms and those loans acquired at market prices to fulfill the commitment. The Company also enters into a limited number of forward rate options with commercial customers, which in turn are hedged in their entirety. LOANS SOLD WITH RECOURSE -- The Company sells residential mortgage loans to the secondary market in connection with its mortgage banking business. While the majority of these loans are sold on a nonrecourse basis, there is a nominal dollar amount of recourse loans. All residential mortgage loans are subject to the same credit policies, and off-balance sheet loans with recourse have the same credit risk as on-balance sheet loans. If a borrower defaults on a loan sold with recourse, it is sold back to the Company to initiate normal collection efforts. SECURITIES PURCHASE AND SELL COMMITMENTS -- In connection with its capital markets activities, the Company regularly commits to purchase and sell securities. INTEREST RATE SWAPS AND OPTIONS -- The Company uses interest rate swap contracts and options in conjunction with asset and liability management activities and to adjust interest rate risk associated with specific customer transactions. These agreements allow the Company to exchange fixed or variable interest rate payment amounts on existing assets or liabilities without changing the terms or amount of the underlying principal. Interest rate swaps are stated in notional terms, which represent the aggregate amount of the specific asset or liability being hedged by the interest rate swap transaction. However, the actual exposure to credit risk is the stream of interest payments under the contractual terms of the swap, not the notional amount. The Company manages the credit risk by entering into interest rate swap agreements only with highly regarded counterparties after a credit review process. NOTE 17. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Under the provisions of SFAS No. 107, "Disclosures about the Fair Value of Financial Instruments," the Company is required to estimate and disclose the fair value of certain of its on- and off-balance sheet financial instruments. SFAS No. 107 defines what constitutes a financial instrument and recommends general methodologies to determine fair value. The fair value of a financial instrument as defined in SFAS No. 107 is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices are used to establish fair value when they are available for a particular financial instrument, and present value and other valuation techniques are utilized to estimate the fair value of financial instruments that do not have quoted market prices. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which disclosure is required by SFAS No. 107. CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS AND OTHER SHORT-TERM INVESTMENTS -- The current fair value of these financial instruments is defined as the amount recorded in the balance sheet categories. SECURITIES PORTFOLIOS -- Securities available for sale, investment securities, and trading account securities are financial instruments that are usually traded in broad markets. Fair values are based upon market prices and dealer quotes. If a quoted market price is not available for a particular security, the fair value is determined by reference to quoted market prices for securities with similar characteristics. 61 63 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) LOANS -- For certain homogeneous categories of instalment loans, including student loans and credit card receivables, fair value has been estimated using quoted market prices for similar loans. The fair value of other instalment loans, including automobile financing, was determined by discounted cash flow techniques using interest rates for similar loans at December 31, 1995 and 1994. Credit risk factors were incorporated in the discount rates used for these loans and are reflected in the market prices obtained for homogeneous loans. The fair value of residential mortgage loans, including adjustable-rate and fixed-rate loans, was determined using discounted cash flow techniques with year-end interest rates, and by comparison with quoted market prices for mortgage-backed securities with similar interest rates and terms. The analysis also reflected estimated prepayment factors. The fair value of both fixed-rate and variable-rate commercial and commercial real estate loans was determined by discounted cash flow techniques. Year-end 1995 and 1994 interest rates were used that incorporated the risk of credit loss associated with each type of loan, based on an evaluation performed as of December 31, 1995 and 1994. OTHER ASSETS -- Financial instruments classified as other assets that are subject to the disclosure requirements of SFAS No. 107 consist principally of interest receivable, mortgage servicing rights, and required investments in low-income housing limited partnerships. The carrying amounts of these financial instruments approximate their fair value. DEPOSITS -- The fair value of demand deposits, NOW and savings accounts, and money market deposits is defined by SFAS No. 107 as the amount payable on demand at the reporting date. Therefore, for these financial instruments, the amounts recorded in the balance sheet are also reported as their fair value under the provisions of the statement, and no core deposit value was derived for fair value disclosure purposes. The fair value of certificates of deposit with fixed interest rates was estimated by the use of present value techniques. These techniques consider the cash flow related to these certificates, year-end interest rates at which similar certificates were issued with similar remaining maturities, and the probability of early withdrawal if interest rates were to rise. SHORT-TERM BORROWINGS -- The carrying amounts of federal funds purchased and other short-term borrowings are defined to approximate their fair values. LONG-TERM DEBT -- The fair value of long-term debt was established by market prices of the debt and present value techniques that consider the debt's remaining maturity and yield and the current credit ratings of the Company. ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE -- Financial instruments included in accrued expenses and other accounts payable that are subject to the disclosure requirements of SFAS No. 107 consist principally of interest payable. The carrying value of interest payable approximates its fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- The estimated fair values of loan commitments, standby letters of credit, and foreign exchange contracts are disclosed in Note 16. The fair values of all other off-balance sheet financial instruments were not considered to be material. These financial instruments generally are not sold or traded, and there is no standard methodology for determining their fair values. The Company's loan commitments are not beyond normal market terms and do not include fees or conditions other than those associated with customary market practices. The fair value of loan commitments was calculated by determining the discounted present value of the remaining contractual fees over the unexpired commitment period, generally not more than one year. The fair value of securities purchase and sell commitments was determined by reference to the price of the underlying securities. The fair value of standby letters of credit was determined by reference to the current fees charged to issue similar letters of credit. The fair value of forward commitments, foreign exchange contracts, and interest rate swaps was determined by reference to the market for similar instruments. 62 64 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The fair values of the financial instruments presented, and as determined under the guidelines established by SFAS No. 107 as previously described, depends highly on assumptions as they existed as of December 31, 1995 and 1994, and on the related methodologies applied and do not purport to represent actual economic value in a bona fide transaction with a legitimate buyer under normal market conditions. It should also be noted that different financial institutions will use different assumptions and methodologies in determining fair values such that comparisons between institutions may be difficult. The Company did not attempt to determine the fair value of its substantial base of core deposits, as their disclosure is not required and due to the lack of generally accepted, industry-wide methodology for determining such values. With that understanding, the financial statement amounts and estimated fair values of financial instruments at December 31, 1995 and 1994, were as follows:
1995 1994 ----------------------- ----------------------- FINANCIAL FAIR FINANCIAL FAIR STATEMENT VALUE STATEMENT VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) FINANCIAL ASSETS Cash and due from banks................. $ 922,031 $ 922,031 $ 829,170 $ 829,170 Trading account securities.............. 50,755 50,755 27,416 27,416 Interest-bearing deposits and other short-term investments................ 361,164 361,164 166,286 166,286 Securities portfolios................... 2,603,525 2,603,525 2,776,851 2,702,186 Loans (net of allowance): Commercial and commercial real estate... 2,665,900 2,760,000 2,382,321 2,425,000 Consumer................................ 4,951,505 5,084,000 4,119,364 4,182,000 ---------- ---------- ---------- --------- 7,617,405 7,844,000 6,501,685 6,607,000 FINANCIAL LIABILITIES Deposits: Demand, NOW, savings, and money market deposit accounts...................... $8,139,539 $8,139,539 $7,729,339 $7,729,339 Consumer time........................... 1,862,611 1,844,000 1,095,357 1,087,000 Time -- $100,000 or more................ 215,257 215,257 175,663 175,663 Federal funds purchased and other short-term borrowings................. 718,941 718,941 849,517 849,517 Long-term debt.......................... 64,849 64,500 51,154 51,000
NOTE 18. CONTINGENCIES The Company and its subsidiaries are involved in a number of legal proceedings arising in the normal course of business. After reviewing such matters, the Company believes that their resolution will not materially affect its results of operations or financial position. 63 65 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19. QUARTERLY DATA (UNAUDITED) Summarized quarterly financial data for years 1993 through 1995 are as follows:
YEAR ENDED DECEMBER 31 -------------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Income on earning assets First Quarter.................................... $189,384 $146,485 $148,897 Second Quarter................................... 194,102 156,238 147,704 Third Quarter.................................... 206,935 172,816 147,138 Fourth Quarter................................... 209,009 182,261 146,732 -------- -------- -------- $799,430 $657,800 $590,471 ======== ======== ======== Interest expense First Quarter.................................... $ 66,430 $ 37,818 $ 47,369 Second Quarter................................... 70,885 43,423 42,787 Third Quarter.................................... 76,738 52,812 38,856 Fourth Quarter................................... 77,945 58,805 37,636 -------- -------- -------- $291,998 $192,858 $166,648 ======== ======== ======== Net interest income First Quarter.................................... $122,954 $108,667 $101,528 Second Quarter................................... 123,217 112,815 104,917 Third Quarter.................................... 130,197 120,004 108,282 Fourth Quarter................................... 131,064 123,456 109,096 -------- -------- -------- $507,432 $464,942 $423,823 ======== ======== ======== Noninterest income First Quarter.................................... $ 51,441 $ 49,715 $ 46,896 Second Quarter................................... 55,752 54,031 48,751 Third Quarter.................................... 57,344 52,557 51,904 Fourth Quarter................................... 54,714 50,985 50,973 -------- -------- -------- $219,251 $207,288 $198,524 ======== ======== ======== Net securities gains First Quarter.................................... $ 1 $ 39 $ -- Second Quarter................................... -- 436 358 Third Quarter.................................... 42 -- 49 Fourth Quarter................................... (3) (272) 4 -------- -------- -------- $ 40 $ 203 $ 411 ======== ======== ======== Provisions for loan losses and OREO reserve First Quarter.................................... $ 7,500 $ 8,937 $ 18,500 Second Quarter................................... 6,500 8,500 16,892 Third Quarter.................................... 5,771 8,415 16,800 Fourth Quarter................................... 5,408 7,520 9,138 -------- -------- -------- $ 25,179 $ 33,372 $ 61,330 ======== ======== ========
64 66 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31 ---------------------------------------------------- 1995 1994 1993 ------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net income First Quarter.................................... $ 30,475 $ 21,279 $ 12,761 Second Quarter................................... 34,358 26,422 14,207 Third Quarter.................................... 34,719 29,033 18,001 Fourth Quarter................................... 37,822 30,703 22,682 -------------- -------------- -------------- $ 137,374 $ 107,437 $ 67,651 ============== ============== ============== Average number of outstanding shares First Quarter.................................... 19,261,941 19,093,447 18,871,018 Second Quarter................................... 19,322,107 19,154,620 18,937,724 Third Quarter.................................... 19,907,015 19,187,890 19,000,208 Fourth Quarter................................... 19,933,899 19,255,579 19,004,540 Earnings per share First Quarter.................................... $ 1.58 $ 1.11(1) $ .68 Second Quarter................................... 1.78 1.38 .75 Third Quarter.................................... 1.74 1.51 .95 Fourth Quarter................................... 1.90 1.59 1.19 -------------- -------------- -------------- $ 7.01(2) $ 5.60(1)(2) $ 3.57 ============== ============== ============== Dividends declared and paid First Quarter.................................... $ 0.50 $ 0.35 $ 0.20 Second Quarter................................... 0.50 0.35 0.20 Third Quarter.................................... 0.60 0.45 0.25 Fourth Quarter................................... 0.60 0.45 0.25 Range of BayBanks, Inc., common stock -- last sale price First Quarter.................................... $52 -64 1/2 $57 1/4-50 $52 1/8-38 3/4 Second Quarter................................... 60 1/2-79 1/2 64 1/8-54 1/2 51 1/4-38 1/4 Third Quarter.................................... 74 3/4-83 3/4 63 -54 1/4 50 1/2-43 1/4 Fourth Quarter................................... 75 7/8-98 1/4 59 1/2-51 50 3/4-43 1/4 - --------------- (1) Includes expense of $.05 per share resulting from the cumulative effect of an accounting change. (2) The sum of the quarters' earnings per share for 1995 and 1994 does not equal the full-year amount due to the effect of the issuance of common stock.
NOTE 20. PENDING MERGER On December 12, 1995, the Company and Bank of Boston Corporation ("Bank of Boston") entered into an agreement and plan of merger, pursuant to which a subsidiary of Bank of Boston will merge with and into the Company and the Company will become a wholly-owned subsidiary of Bank of Boston (the "Merger"). In addition, related Stock Option Agreements were executed pursuant to which Bank of Boston granted the Company a conditional option to purchase up to 22,400,761 shares of Bank of Boston common stock and the Company granted to Bank of Boston a conditional option to purchase up to 3,907,120 shares of the Company's common stock, in each case equaling 19.9% of the outstanding shares of the respective granting company's stock. As a result of the Merger, each share of the common stock of the Company outstanding immediately prior to the effective time of the Merger will be converted into the right to receive 2.2 newly issued shares of Bank of Boston common stock. Outstanding options to purchase common stock of the Company will be converted to options to purchase common stock of Bank of Boston on the same basis. 65 67 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Merger is intended to constitute a tax-free transaction and to be accounted for as a pooling of interests. The Merger is expected to be completed by the middle of 1996 and is subject to approval by federal and state bank regulators and the shareholders of both companies. Subsequent to completion of the Merger, the principal banking subsidiary will operate as BayBank of Boston, N.A. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in or matters of disagreement on accounting and financial disclosure with the Company's independent auditors. 66 68 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning directors is presented in the section titled "The BayBanks Meeting -- Additional Matters -- Election of Directors" of the Company's proxy statement for the annual meeting to be held on April 25, 1996, and is incorporated herein by reference. The following are the executive officers of the registrant as of February 29, 1996:
AGE TITLE --- William M. Crozier, Jr... 63 Chairman and President Donald L. Isaacs......... 48 Vice Chairman Richard F. Pollard....... 63 Vice Chairman Ilene Beal............... 50 Executive Vice President and Secretary Michael W. Vasily........ 51 Executive Vice President and Chief Financial Officer Joan E. Tonra............ 49 Senior Vice President and Controller
Mr. Crozier has been an officer of BayBanks, Inc. since 1967 and was elected Chairman of the Board and Director in 1974. In 1977, Mr. Crozier was elected to the additional post of President. Mr. Isaacs was elected Vice Chairman of the Board and Director in 1992, Executive Vice President in 1985, Senior Vice President in 1979, and Vice President in 1978, and joined the Company in 1974. Mr. Isaacs is also the Chairman of the Board of BayBank Systems, Inc., the Company's technology subsidiary. Mr. Pollard was elected Vice Chairman of the Board and Director in 1983 and Executive Vice President in 1979 and had been a Senior Vice President since 1976. Mr. Pollard is also the senior lending officer of the Company. Ms. Beal was elected Secretary in 1991, Executive Vice President in 1985, Senior Vice President in 1979, and Vice President in 1977, and has been with the Company since 1972. Mr. Vasily was elected Chief Financial Officer in 1991, Executive Vice President in 1987, Senior Vice President in 1980, and Vice President upon joining the Company in 1978, and was the Controller of the Company from 1983 to 1989. Ms. Tonra was elected Senior Vice President of BayBanks, Inc., in 1985 and Controller in 1989, and joined the Company in 1985. She is the Principal Accounting Officer of the Company. ITEM 11. EXECUTIVE COMPENSATION. Information concerning management remuneration and transactions is presented in the section titled "The BayBanks Meeting -- Additional Matters -- Executive Compensation" of the Company's proxy statement for the annual meeting to be held on April 25, 1996, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information concerning securities ownership of management and concerning securities ownership of certain beneficial owners is presented in the sections titled "The BayBanks Meeting -- Additional Matters -- Election of Directors" and "-- Ownership of BayBanks Common Stock" of the Company's proxy statement for the annual meeting to be held on April 25, 1996, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information concerning relationships and transactions of the Company's executive officers and directors is presented in the section titled "The BayBanks Meeting -- Additional Matters -- Election of Directors" of the 67 69 Company's proxy statement for the annual meeting to be held on April 25, 1996, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements The following financial statements of the Company and its subsidiaries are presented in Item 8: Independent Auditors' Report Consolidated Balance Sheet-December 31, 1995 and 1994 Consolidated Statement of Income-Years Ended December 31, 1995, 1994, and 1993 Consolidated Statement of Changes in Stockholders' Equity-Years Ended December 31, 1995, 1994, and 1993 Consolidated Statement of Cash Flows-Years Ended December 31, 1995, 1994, and 1993 Notes to Financial Statements 2. Financial Statement Schedules All schedules are omitted because either the required information is shown in the financial statements or notes, or they are not applicable, or the data is not significant. 3. Exhibits See the Exhibit List and Index on pages 70 through 72. (b) Reports on Form 8-K A report on Form 8-K was filed on December 22, 1995, reporting the execution of a merger agreement on December 12, 1995, pursuant to which a subsidiary of Bank of Boston Corporation ("Bank of Boston") will be merged into the Company and the Company will become a wholly-owned subsidiary of Bank of Boston, and related option agreements pursuant to which Bank of Boston granted to the Company a conditional option to purchase up to 22,400,761 shares of Bank of Boston common stock and the Company granted to Bank of Boston a conditional option to purchase up to 3,907,120 shares of BayBanks, Inc. common stock, in each case equalling 19.9% of the outstanding shares of the respective granting company's stock. 68 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BAYBANKS, INC. (Registrant) By: /s/ MICHAEL W. VASILY MICHAEL W. VASILY Executive Vice President March 14, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 14, 1996, by the following persons on behalf of the registrant and in the capacities indicated. /s/ JOHN A. CERVIERI JR. /s/ WILLIAM M. CROZIER, JR. - ------------------------------------ ------------------------------------- JOHN A. CERVIERI JR. WILLIAM M. CROZIER, JR. Director Chairman of the Board, President, and Director (Principal Executive Officer) /s/ ROBERT L. GABLE /s/ DONALD L. ISAACS - ------------------------------------ ------------------------------------- ROBERT L. GABLE DONALD L. ISAACS Director Vice Chairman of the Board and Director /s/ SAMUEL J. GERSON /s/ RICHARD F. POLLARD - ------------------------------------ ------------------------------------- SAMUEL J. GERSON RICHARD F. POLLARD Director Vice Chairman of the Board and Director /s/ NORMAN E. MACNEIL /s/ MICHAEL W. VASILY - ------------------------------------ ------------------------------------- NORMAN E. MACNEIL MICHAEL W. VASILY Director Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ ARLENE A. McNAMEE /s/ JOAN E. TONRA - ------------------------------------ ------------------------------------- ARLENE A. MCNAMEE JOAN E. TONRA Director Senior Vice President and Controller (Principal Accounting Officer) /s/ THOMAS R. PIPER - ------------------------------------ THOMAS R. PIPER Director /s/ GLENN P. STREHLE - ------------------------------------ GLENN P. STREHLE Director /s/ JOSEPH H. TORRAS - ------------------------------------ JOSEPH H. TORRAS Director
69 71 BAYBANKS, INC. EXHIBIT LIST AND INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- PLAN OF ACQUISITION 2.1* -- Acquisition Agreement dated December 22, 1994 by and between the Registrant and NFS Financial Corp. (Exhibit 2(a) to the Registrant's Current Report on Form 8-K filed with the Commission on January 4, 1995). The schedules referred to in the Acquisition Agreement are omitted. The Registrant hereby agrees to furnish a copy of any such schedule to the Commission upon request. 2.2* -- Agreement and Plan of Merger dated December 12, 1995 by and among the Registrant, Bank of Boston Corporation, and Boston Merger Corp (Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the Commission on December 22, 1995). The schedules referred to in the Agreement and Plan of Merger are omitted. The Registrant hereby agrees to furnish a copy of any such schedule to the Commission upon request. 2.3* -- Stock Option Agreement dated as of December 12, 1995 between the Registrant and Bank of Boston Corporation (Exhibit B to the Registrant's Schedule 13D with respect to Bank of Boston Corporation filed with the Commission on December 22, 1995). ARTICLES OF INCORPORATION AND BY-LAWS 3.1(a)* -- Articles of Organization as amended, through June 28, 1988 (Exhibit 4 to Registration Statement No. 33-22834). (b)* -- Certificate of Vote of Directors Establishing a Series of a Class of Stock filed March 10, 1989 (Exhibit 3.1(b) to 1993 Form 10-K). (c) -- Certificate of Vote of Directors adopted July 26, 1990, electing to have certain Massachusetts legislation concerning the classification of boards of directors apply to the Registrant. 3.2* -- By-Laws as amended through October 27, 1994 (Exhibit 3.1 to September 30, 1994 Form 10-Q). INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1* -- Indenture dated as of September 15, 1985 (Exhibit 4.1 to Registration Statement No. 33-00130). 4.2* -- Rights Agreement dated December 23, 1988 (Exhibit 1 to Registration Statement on Form 8-A filed December 23, 1988). 4.3* -- Amendment dated December 12, 1995 to the Rights Agreement dated December 23, 1988 (Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on December 22, 1995). 4.4 -- The Registrant has certain long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instruments to the Commission upon request. MATERIAL CONTRACTS-EXECUTIVE COMPENSATION PLANS 10.1* -- 1978 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended (Exhibit 10.1 to 1991 Form 10-K). 10.2* -- Amendment dated October 27, 1994 to 1978 Stock Option Plan for Key Employees of BayBanks, Inc. and Affiliates (Exhibit 10.1 to September 30, 1994 Form 10-Q). 10.3* -- 1988 Stock Option Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended. (Exhibit 10.2 to September 30, 1994 Form 10-Q).
70 72
EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------ 10.4* -- BayBanks, Inc., Incentive Compensation Plan, as amended (Exhibit 10.5 to September 30, 1994 Form 10-Q). 10.5* -- BayBanks, Inc., Compensation Plan for Directors, as amended (Exhibit 10.6 to September 30, 1994 Form 10-Q). 10.6* -- 1990 Stock Plan for Directors, as amended (Exhibit 10.7 to September 30, 1994 Form 10-Q). 10.7* -- 1982 Restricted Stock Plan for Key Employees of BayBanks, Inc., and Affiliates, as amended (Exhibit 10.3 to September 30, 1994 Form 10-Q). 10.8* -- BayBanks Inc., 1994 Restricted Stock Plan, as amended (Exhibit 10.4 to September 30, 1994 Form 10-Q). 10.9* -- BayBanks Supplemental Executive Retirement Plan (Exhibit 19.6 to June 30, 1991 Form 10-Q). 10.10* -- First Amendment dated February 26, 1992, to BayBanks Supplemental Executive Retirement Plan (Exhibit 10.8 to 1991 Form 10-K). 10.11* -- Second Amendment dated July 19, 1994 to BayBanks Supplemental Executive Retirement Plan (Exhibit 10.2 to June 30, 1994 Form 10-Q). 10.12* -- Third Amendment dated October 27, 1994 to BayBanks Supplemental Executive Retirement Plan (Exhibit 10.8 to September 30, 1994 Form 10-Q). 10.13* -- BayBanks Profit Sharing Excess Benefit Plan (Exhibit 10.1 to March 31, 1993 Form 10-Q). 10.14* -- First Amendment to BayBanks Profit Sharing Excess Benefit Plan (Exhibit 10.1 to June 30, 1994 Form 10-Q). 10.15* -- BayBanks Retirement Excess Benefit Plan (Exhibit 10.3 to June 30, 1994 Form 10-Q). 10.16* -- BayBanks, Inc., Severance Benefits Plan, as amended (Exhibit 10.9 to September 30, 1994 Form 10-Q). 10.17* -- BayBanks Deferred Payment Plans Trust Agreement (Exhibit 19 to June 30, 1992 Form 10-Q). 10.18* -- First Amendment dated October 27, 1994 to BayBanks Deferred Payment Plans Trust Agreement (Exhibit 10.10 to September 30, 1994 Form 10-Q). 10.19 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston Corporation, BayBanks, Inc., and William M. Crozier, Jr. 10.20 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston Corporation, BayBanks Inc., and Richard F. Pollard. 10.21 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston Corporation, BayBanks Inc., and Donald L. Isaacs. 10.22 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston Corporation, BayBanks Inc., and Michael W. Vasily. 10.23 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston Corporation, BayBanks Inc., and Ilene Beal. 10.24 -- Employment Agreement dated as of December 12, 1995 by and among Bank of Boston Corporation, BayBanks Inc., and Joan E. Tonra.
71 73
EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------ MATERIAL CONTRACTS -- OTHER 10.25 -- ESOP Stock Purchase Agreement dated as of January 22, 1990, between the Registrant and Marine Midland Bank, N.A., as Co-Trustee of the Savings, Profit Sharing and Stock Ownership Plan for Employees of BayBanks, Inc., and Affiliated Companies. MISCELLANEOUS 11 -- Computation of Primary and Fully Diluted Earnings Per Share. See Page 73. 21 -- Subsidiaries of the Registrant. See Page 74. 23 -- Consent of Independent Auditors. See Page 75. 27 -- Financial Data Schedule.
- --------------- * Incorporated by reference to the document indicated in parentheses. 72 74 EXHIBIT 11.1 BAYBANKS, INC. COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1995 1994 ----------- ----------- PRIMARY: Weighted average shares........................................... 19,312,942 18,870,238 Common stock equivalents: Stock options................................................ 295,792 303,286 ----------- ----------- Primary weighted average shares................................... 19,608,734 19,173,524 ========== ========== Income before cumulative effect of accounting change.............. $ 137,374 $ 108,369 Less cumulative effect of accounting change....................... -- 932 ----------- ----------- Net income........................................................ $ 137,374 $ 107,437 ========== ========== Primary earnings per share: Income before cumulative effect of accounting change......... $ 7.01 $ 5.65 Less cumulative effect of accounting change.................. -- 0.05 ----------- ----------- Net income................................................... $ 7.01 5.60 ========== ========== FULLY DILUTED: Weighted average shares........................................... 19,312,942 18,870,238 Common stock equivalents: Stock options................................................ 327,112 307,047 ----------- ----------- Fully diluted weighted average shares............................. 19,640,054 19,177,285 ========== ========== Income before cumulative effect of accounting change.............. $ 137,374 $ 108,369 Less cumulative effect of accounting change....................... -- 932 ----------- ----------- Net income........................................................ $ 137,374 $ 107,437 ========== ========== Fully diluted earnings per share: Income before cumulative effect of accounting change......... $ 6.99 $ 5.65 Less cumulative effect of accounting change.................. -- 0.05 ----------- ----------- Net income................................................... $ 6.99 $ 5.60 ========== ==========
73 75 EXHIBIT 21 BAYBANKS, INC. SUBSIDIARIES OF THE REGISTRANT BayBanks, Inc..................................................... Massachusetts BayBank, N.A...................................................... United States of America BayBanks Brokerage Services, Inc................................ Massachusetts BayBanks Credit Corp. .......................................... Massachusetts BayBanks Finance & Leasing Co., Inc. ........................... Massachusetts BayBanks Investment Management, Inc. ........................... Massachusetts BayBanks Mortgage Corp. ........................................ Massachusetts BayBank Systems, Inc. .......................................... Massachusetts BayBank FSB....................................................... United States of America BayBank NH........................................................ New Hampshire BayBanks Life Insurance Company................................... Arizona
All such subsidiaries are included in the consolidated financial statements filed as part of this report. Certain other subsidiaries have been omitted above, since considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. 74 76 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors BayBanks, Inc.: We consent to incorporation by reference in Registration Statements Nos. 2-38598, 2-63815, 2-82945, 2-89461, 33-6964, 33-22834, 33-54509, and 33-60991 on Forms S-8 of BayBanks, Inc. of our report dated January 18, 1996, relating to the consolidated balance sheets of BayBanks, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, which report is included herein. /S/ KPMG PEAT MARWICK LLP BOSTON, MASSACHUSETTS MARCH 14, 1996 75 EX-3.1(C) 2 CERTIFICATE OF VOTE OF DIRECTORS 1 Exhibit 3.1(c) -------------- CERTIFICATE ----------- I, Ilene Beal, Assistant Clerk of BayBanks, Inc., hereby certify that at a meeting of the Board of Directors of said Corporation held at the offices of BayBanks, Inc., 175 Federal Street, Boston, Massachusetts on Thursday, July 26, 1990, at which meeting a quorum was present and acting throughout, the following votes were unanimously adopted by said Board of Directors: VOTED: That this Corporation hereby elects to be subject to the - ----- provisions of paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws. VOTED: That the number of Directors constituting the entire - ----- Board of Directors of the Corporation shall be and hereby is fixed at nine until further vote of this Board. VOTED: That the Board of Directors of the Corporation shall be - ----- and hereby is classified in accordance with paragraph (a) of Section 50A of Chapter 156B of the Massachusetts General Laws into three classes of Directors, namely Class I Directors, Class II Directors, and Class III Directors, with the term of office of the Class I Directors to continue until the first annual meeting following the date of this meeting and until their successors are duly elected and qualified, the term of office of the Class II Directors to continue until the second annual meeting following the date of this meeting and until their successors are duly elected and qualified and the term of office of the Class III Directors to continue until the third annual meeting following the date of this meeting and until their successors are duly elected and qualified; and that the Directors of the Corporation are hereby designated to serve in the classes of Directors as follows: Class I Directors: Class II Directors: ----------------- ------------------ Thomas R.Piper William M. Crozier, Jr. Richard F. Pollard Norman E. MacNeil Harvey H. Thayer Glenn P. Strehle Class III Directors: ------------------- John J. Arena John A. Cervieri Jr. William T. Sandalls, Jr. I further certify that said votes have not been altered, amended or rescinded since the date thereof. Witness my hand and the seal of said Corporation this ninth day of August 1990. /s/ Ilene Beal ------------------------------------- Ilene Beal, Assistant Clerk of BayBanks, Inc. EX-10.19 3 EMPLOYMENT AGREEMENT WITH WILLIAM M. CROZIER, JR. 1 Exhibit 10.19 ------------- EMPLOYMENT AGREEMENT AGREEMENT by and among Bank of Boston Corporation, a Massachusetts corporation ("Bank of Boston" or the "Company"), BayBanks, Inc., a Massachusetts corporation (the "BayBanks") and William M. Crozier, Jr. (the "Executive"), dated as of the 12th day of December, 1995. The Board of Directors of BayBanks and Bank of Boston (the "Board"), has determined that it is in the best interests of Bank of Boston, the Company and their shareholders to assure that BayBanks will have the continued dedication of the Executive pending the merger of the Company and BayBanks (the "Merger") pursuant to the Agreement and Plan of Merger dated as of December 12, 1995 and to provide the surviving corporation after the Merger with continuity of management. Therefore, in order to accomplish these objectives, the Boards of Directors of BayBanks and Bank of Boston have caused BayBanks and Bank of Boston to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. EFFECTIVE DATE. The "Effective Date" shall mean the effective date of the Merger. 2. EMPLOYMENT PERIOD. The Company agrees to employ Executive, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on December 31, 1998 (the "Employment Period"). 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) (A) During the Employment Period, the Executive shall serve as Chairman of the Board of Directors of the Company and of BayBank Bank of Boston N.A. or such other entity as shall be the Company's most significant New England bank. Executive will be involved in the formulation of the overall strategy and policies of Bank of Boston and its subsidiaries with special responsibilities for integration of the New England banking operations of BayBanks and Bank of Boston and such other authority, duties and responsibilities as are commensurate with such position and as may be consistent with such position and (B) unless otherwise agreed between the Company and the Executive, the Executive's services shall be performed at Bank of Boston's headquarters in Boston, Massachusetts. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) 2 manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to the rate pay able to the Chief Executive Officer of the Company. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies; PROVIDED, HOWEVER, the Executive shall be paid an annual incentive award (pro rated in the case of the period commencing on the Effective Date and ending on December 31, 1996) at least equal to the greater of (x) 65% of his Annual Base Salary, and (y) 75% of the annual incentive award provided to the Chief Executive Officer of the Company and Executive shall continue to participate in BayBanks's Supplemental Executive Retirement Plan as in effect immediately prior to the Effective Date (the "SERP") during the Employment Period. (iii) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies. For purposes of determining the Executive's right to participate and level of participation in any retiree health or similar plan of the Company, Executive's service with BayBanks shall be deemed to be service with the Company for all purposes. (iv) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. 3 (v) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, to the extent applicable generally to other peer executives of the Company and its affiliated companies. (vi) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect generally at any time with respect to other peer executives of the Company and its affiliated companies. 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto, or 4 (iv) a material breach of the covenants contained in Section 9. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. 5 For purposes of this Section 4(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON: OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) to the extent not previously paid, the product of (x) the maximum annual incentive or similar award for which the Executive is eligible immediately prior to the Effective Date, or if greater, any annual bonus paid during the Employment Period (the "Eligible Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365 and (3) any unused sick pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and 6 (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) the number of years (including fractions thereof) from the Date of Termination until December 31, 1998 (the "Continuation Period") and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Eligible Annual Bonus; and (ii) the Executive's benefit under the Company's SERP shall be increased to the benefit that would be payable thereunder if, utilizing actuarial assumptions no less favorable to the Executive than those in effect immediately prior to the Effective Date, the Executive's employment continued for the Continuation Period, assuming for this purpose that (x) all accrued benefits are fully vested, and (y) the Executive's compensation during the Continuation Period is that required by Section 3(b)(i) and his annual bonus in each of the year (or portion thereof) during the Continuation Period is equal to the Eligible Annual Bonus; and (iii) for the Continuation Period after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(iii) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Continuation and to have retired on the last day of such period; (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (v) the Executive shall be given service credit for unused sick pay under all of the benefit plans in which the Executive participates for purposes of determining eligibility and the amount of benefits thereunder; in the event such credit can not be given under such plans, the Executive shall be provided with cash equivalent thereof. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued 7 Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(b) shall include death benefits as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) CAUSE: OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 5(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about 8 the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 8. Certain Additional Payments By The Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand LLC or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm reasonably acceptable to the Company to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the 9 calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or 10 income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. CONFIDENTIAL INFORMATION. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would be inadequate and insufficient. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. 11 (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: William M. Crozier, Jr. ------------------- 41 Ridge Hill Farm Road Wellesley, MA 02181 If to Bank of Boston: -------------------- 100 Federal Street Boston, Massachusetts 02110 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive 12 or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will", and prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof, including, without limitation, Executive's participation in the Company's Plan Supplementing Statutory Insurance Pay. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ William M. Crozier, Jr. --------------------------------- WILLIAM M. CROZIER, JR. BANK OF BOSTON CORPORATION By: /s/ Peter J. Manning ------------------------------ BAYBANKS By: /s/ Ilene Beal ------------------------------ Executive Vice President EX-10.20 4 EMPLOYMENT AGREEMENT WITH RICHARD F. POLLARD 1 Exhibit 10.20 ------------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and among Bank of Boston Corporation, a Massachusetts corporation ("Bank of Boston" or the "Company"), BayBanks, Inc., a Massachusetts corporation ("BayBanks") and Richard F. Pollard (the "Executive"), dated as of the 12th day of December, 1995. The Boards of Directors of BayBanks and Bank of Boston have determined that it is in the best interests of BayBanks, the Company and their shareholders to assure that BayBanks will have the continued dedication of the Executive pending the merger of the Company and BayBanks (the "Merger") pursuant to the Agreement and Plan of Merger dated as of December 12, 1995 and to provide the surviving corporation after the Merger with continuity of management. Therefore, in order to accomplish these objectives, the Boards of Directors of BayBanks and Bank of Boston have caused BayBanks and Bank of Boston to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. EFFECTIVE DATE. The "Effective Date" shall mean the effective date of the Merger. 2. EMPLOYMENT PERIOD. The Company agrees to employ the Executive or cause the Executive to be employed, and the Executive hereby agrees to remain in the employ of the Company or its affiliates subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the first day of month on or after the Executive's 65th birthday (the "Employment Period"). 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) (A) During the Employment Period, the Executive shall serve as Vice Chairman of BayBank of Boston N.A. or such other entity as is the most significant New England bank of Bank of Boston reporting to the Office of the Executive Officer of Bank of Boston with responsibility for assisting in the integration of the corporate banking operations of BayBanks and Bank of Boston and with such other authority, duties and responsibilities as are commensurate with such position and (B) the Executive's services shall be performed in Boston, Massachusetts. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) 2 deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) INCENTIVE SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, including, without limitation, eligibility for a pro rata bonus for the year in which the Effective Date occurs; provided, however, Executive shall continue to participate in BayBanks's Supplemental Retirement Plan as in effect immediately prior to the Effective Date (the "SERP") during the Employment Period. (iii) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies. For purposes of determining the Executive's right to participate and level of participation in any retiree health or similar plan of the Company, Executive's service with - 2 - 3 BayBanks shall be deemed to be service with the Company for all purposes. (iv) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. (v) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, to the extent applicable generally to other peer executives of the Company and its affiliated companies. (vi) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect generally at any time with respect to other peer executives of the Company and its affiliated companies. 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section ll(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its - 3 - 4 affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto, or (iv) a material breach of the covenants contained in Section 9. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; - 4 - 5 (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executives employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. For purposes of this Section 4(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section ll(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the - 5 - 6 Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) the product of (x) the maximum annual incentive or similar award for which the Executive is eligible immediately prior to the Effective Date, or if greater, any annual bonus paid during the Employment Period (the "Eligible Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365 and (3) any unused sick pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) the number of years (including fractions thereof) from the Date of Termination until the last day of the Employment Period (the "Continuation Period") and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Eligible Annual Bonus; and (ii) the Executive's benefit under the Company's SERP shall be increased to the benefit that would be payable thereunder if, utilizing actuarial assumptions no less favorable to the Executive than those in effect immediately prior to the Effective Date, the Executive's employment continued for the Continuation Period, assuming for this purpose that (x) all accrued benefits are fully vested, and (y) the Executive's compensation during the Continuation Period is that required by Section 3(b)(i) and his annual bonus in each year (or portion thereof) of the Continuation Period is equal to the Eligible Annual Bonus; and (iii) for the Continuation Period, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(iii) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer - 6 - 7 executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Continuation Period and to have retired on the last day of such period; (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; (v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (vi) the Executive shall be given service credit for unused sick pay under all of the benefit plans in which the Executive participates for purposes of determining eligibility and the amount of benefits thereunder; in the event such credit can not be given under such plans, the Executive shall be provided with cash equivalent thereof. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(b) shall include death benefits as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in - 7 - 8 this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section ll(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 5(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). - 8 - 9 8. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand LLC or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm reasonably acceptable to the Company to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code - 9 - 10 at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such - 10 - 11 contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. CONFIDENTIAL INFORMATION. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. - 11 - 12 (b) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would be inadequate and insufficient. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inureto the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Richard F. Pollard ------------------- One Devonshire Place Apt. 2202 Boston, MA 02109 If to Bank of Boston: -------------------- 100 Federal Street Boston, Massachusetts 02110 Attention: General Counsel - 12 - 13 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will", and prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof, including, without limitation, Executive's participation in the Company's Plan Supplementing Statutory Insurance Pay. - 13 - 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Richard F. Pollard ------------------------------------- RICHARD F. POLLARD BANK OF BOSTON CORPORATION By /s/ Peter J. Manning ---------------------------------- BAYBANKS, INC. By /s/ William M. Crozier, Jr. ---------------------------------- - 14 - EX-10.21 5 EMPLOYMENT AGREEMENT WITH DONALD L. ISAACS 1 Exhibit 10.21 ------------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and among Bank of Boston Corporation, a Massachusetts corporation ("Bank of Boston" or the "Company"), BayBanks, Inc., a Massachusetts corporation ("BayBanks") and Donald L. Isaacs (the "Executive"), dated as of the 12th day of December, 1995. The Boards of Directors of BayBanks and Bank of Boston have determined that it is in the best interests of BayBanks, the Company and their shareholders to assure that BayBanks will have the continued dedication of the Executive pending the merger of the Company and BayBanks (the "Merger") pursuant to the Agreement and Plan of Merger dated as of December 12, 1995 and to provide the surviving corporation after the Merger with continuity of management. Therefore, in order to accomplish these objectives, the Boards of Directors of BayBanks and Bank of Boston have caused BayBanks and Bank of Boston to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. EFFECTIVE DATE. The "Effective Date" shall mean the effective date of the Merger. 2. EMPLOYMENT PERIOD. The Company agrees to employ the Executive or cause the Executive to be employed, and the Executive hereby agrees to remain in the employ of the Company or its affiliates subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on April 1, 1997 (the "Employment Period"). 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) (A) During the Employment Period, the Executive shall serve as Vice Chairman of BayBank of Boston N.A. or such other entity as is the most significant New England bank of Bank of Boston with responsibility for regional banking integration and overhead allocation reporting to the office of the Executive Officer of the Company and with such other authority, duties and responsibilities as are commensurate with such position and (B) the Executive's services shall be performed in Boston, Massachusetts. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. However, the Company acknowledges that the Executive shall be entitled to a sabbatical during 1996 of approximately four months. During the Employment Period it shall not be a violation of this Agreement for the 2 Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "Affiliated Companies" shall include any company controlled by, controlling or under common control with the Company. (ii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, including, without limitation, eligibility for a pro rata bonus for the year in which the Effective Date occurs; provided, however, at the end of the Employment Period, Executive shall be deemed to have sufficient age and service to equal 75 years under BayBank's Supplemental Executive Retirement Plan, as in effect immediately prior to the Effective Date (the "SERP"). (iii) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and - 2 - 3 its affiliated companies. For purposes of determining the Executive's right to participate and level of participation in any retiree health or similar plan of the Company, Executive's service with BayBanks shall be deemed to be service with the Company for all purposes. (iv) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. (v) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, to the extent applicable generally to other peer executives of the Company and its affiliated companies. (vi) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect generally at any time with respect to other peer executives of the Company and its affiliated companies. 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: - 3 - 4 (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto, or (iv) a material breach of the covenants contained in Section 9. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of-the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding - 4 - 5 for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. For purposes of this Section 4(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. - 5 - 6 (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) to the extent not previously paid, the product of (x) the maximum annual incentive or similar award for which the Executive is eligible immediately prior to the Effective Date, or if greater, any annual bonus paid during the Employment Period (the "Eligible Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365 and (3) any unused sick pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) the number of years (including fractions thereof) from the Date of Termination until the last day of the Employment Period (the "Continuation Period") and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Eligible Annual Bonus; and (ii) the Executive's benefit under the Company's SERP shall be increased to the benefit that would be payable thereunder if, utilizing actuarial assumptions no less favorable to the Executive than those in effect immediately prior to the Effective Date, the sum of the Executive's age and years of service under the SERP equaled 75, assuming for this purpose that (x) all accrued benefits are fully vested, (y) the Executive's compensation during the additional period required to generate sufficient years of age and service is that required by Section 3(b)(i) and his annual bonus during such period is equal to the - 6 - 7 Eligible Annual Bonus, and (z) the Executive is 55 years old on the Date of Termination; and (iii) for the Continuation Period, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(iii) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Continuation Period and to have retired on the last day of such period; (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; (v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (vi) the Executive shall be given service credit for unused sick pay under all of the benefit plans in which the Executive participates for purposes of determining eligibility and the amount of benefits thereunder; in the event such credit can not be given under such plans, the Executive shall be provided with cash equivalent thereof. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With - 7 - 8 respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(b) shall include death benefits as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 5(a)(ii), such - 8 - 9 amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 8. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination shall be made by Coopers & Lybrand LLC or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time - 9 - 10 as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm reasonably acceptable to the Company to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; - 10 - 11 provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. CONFIDENTIAL INFORMATION. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all - 11 - 12 secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would be inadequate and insufficient. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict oflaws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a - 12 - 13 written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Donald L. Isaacs ------------------- 34 Yarmouth Road Wellesley, MA 02181 If to Bank of Boston: -------------------- 100 Federal Street Boston, Massachusetts 02110 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will", and prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof, including, without limitation, Executive's participation in the Company's Plan Supplementing Statutory Insurance Pay. - 13 - 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Donald L. Isaacs ---------------------------------- DONALD L. ISAACS BANK OF BOSTON CORPORATION By /s/ Peter J. Manning ------------------------------- BAYBANKS, INC. By /s/ William M. Crozier, Jr. ------------------------------- - 14 - EX-10.22 6 EMPLOYMENT AGREEMENT WITH MICHAEL W. VASILY 1 Exhibit 10.22 ------------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and among Bank of Boston Corporation, a Massachusetts corporation ("Bank of Boston" or the "Company"), BayBanks, Inc., a Massachusetts corporation ("BayBanks") and Michael W. Vasily (the "Executive"), dated as of the 12th day of December, 1995. The Boards of Directors of BayBanks and Bank of Boston have determined that it is in the best interests of BayBanks, the Company and their shareholders to assure that BayBanks will have the continued dedication of the Executive pending the merger of the Company and BayBanks (the "Merger") pursuant to the Agreement and Plan of Merger dated as of December 12, 1995 and to provide the surviving corporation after the Merger with continuity of management. Therefore, in order to accomplish these objectives, the Boards of Directors of BayBanks and Bank of Boston have caused BayBanks and Bank of Boston to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. EFFECTIVE DATE. The "Effective Date" shall mean the effective date of the Merger. 2. EMPLOYMENT PERIOD. The Company agrees to employ the Executive or cause the Executive to be employed, and the Executive hereby agrees to remain in the employ of the Company or its affiliates subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary thereof (the "Employment Period"). 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) (A) During the Employment Period, the Executive shall serve in a position with the Company or its affiliated companies commensurate with his position as Executive Vice President and Chief Financial Officer of BayBanks immediately prior to the Effective Date, assigned to the Chairman of the Company and reporting to the chief financial officer, with such authority, duties and responsibilities as are commensurate with such position, including financial control and related duties in areas reporting to the Chairman and serving as a member of the Company's New England Banking integration team, and (B) the Executive's services shall be performed in Boston, Massachusetts. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the 2 performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, control ling or under common control with the Company. (ii) INCENTIVE SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, including without limitation, eligibility for a pro rata bonus for the year in which the Effective Date occurs. For purposes of determining the Executive's right to participate and level of participation in any retiree health or similar plan of the Company, Executive's service with BayBanks shall be deemed to be service with the Company for all purposes. (iii) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies. (iv) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. (v) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, to the extent applicable generally to other peer executives of the Company and its affiliated companies. - 2 - 3 (vi) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect generally at any time with respect to other peer executives of the Company and its affiliated companies. 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto, or (iv) a material breach of the covenants contained in Section 9. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act, based upon authority given pursuant to a resolution duly - 3 - 4 adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. For purposes of this Section 4(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. - 4 - 5 (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) to the extent not previously paid, the product of (x) the maximum annual incentive or similar award for which the Executive is eligible immediately prior to the Effective Date, or if greater, any annual bonus paid during the Employment Period (the "Eligible Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365 and (3) any unused sick pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Eligible Annual Bonus; and - 5 - 6 (ii) the Executive's benefit under the BayBanks Supplemental Executive Retirement Plan as in effect immediately prior to the Effective Date shall be increased to the benefit that would be payable thereunder if, utilizing actuarial assumptions no less favorable to the Executive than those in effect immediately prior to the Effective Date, the Executive's employment continued for three years after the Date of Termination, assuming for this purpose that (x) all accrued benefits are fully vested and (y) the Executive's compensation during the three years is that required by Section 3(b)(i) and his annual bonus in each of the three years is equal to the Eligible Annual Bonus; and (iii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(iii) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement Services the scope and provider of which shall be selected by the Executive in his sole discretion; (v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (vi) the Executive shall be given service credit for unused sick pay under all of the benefit plans in which the Executive participates for purposes of determining eligibility and the amount of benefits thereunder; in the event such credit can not be given under such plans, the Executive shall be provided with cash equivalent thereof. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(b) shall include death benefits as in effect on the date - 6 - 7 of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 5(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). - 7 - 8 8. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand LLC or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm reasonably acceptable to the Company to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. - 8 - 9 (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder - 9 - 10 and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. CONFIDENTIAL INFORMATION. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would be inadequate and insufficient. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to - 10 - 11 the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Michael W. Vasily ------------------- 59 Boston Rock Road Melrose, MA 02176 If to Bank of Boston: 100 Federal Street -------------------- Boston, Massachusetts 02110 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will", and prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after - 11 - 12 the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof, including, without limitation, Executive's participation in the Company's Plan Supplementing Statutory Insurance Pay. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Michael W. Vasily ------------------------------------- BANK OF BOSTON CORPORATION By /s/ Peter J. Manning ---------------------------------- BAYBANKS, INC. By /s/ William m. Crozier, Jr. ---------------------------------- EMPLOYMENT AGREEMENT ADDENDUM ----------------------------- I hereby acknowledge and confirm that for purposes of interpretation of Section 3(a) of the Employment Agreement attached, the word "commensurate" does not mean "equal" and should be understood in the context of the substantial difference in size between Bank of Boston and BayBanks. Signed /s/ Michael W. Vasily ------------------------------ - 12 - EX-10.23 7 EMPLOYMENT AGREEMENT WITH ILENE BEAL 1 Exhibit 10.23 ------------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and among Bank of Boston Corporation, a Massachusetts corporation ("Bank of Boston" or the "Company"), BayBanks, Inc., a Massachusetts corporation ("BayBanks") and Ilene Beal (the "Executive"), dated as of the 12th day of December, 1995. The Boards of Directors of BayBanks and Bank of Boston have determined that it is in the best interests of BayBanks, the Company and their shareholders to assure that BayBanks will have the continued dedication of the Executive pending the merger of the Company and BayBanks (the "Merger") pursuant to the Agreement and Plan of Merger dated as of December 12, 1995 and to provide the surviving corporation after the Merger with continuity of management. Therefore, in order to accomplish these objectives, the Boards of Directors of BayBanks and Bank of Boston have caused BayBanks and Bank of Boston to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. EFFECTIVE DATE. The "Effective Date" shall mean the effective date of the Merger. 2. EMPLOYMENT PERIOD. The Company agrees to employ the Executive or cause the Executive to be employed, and the Executive hereby agrees to remain in the employ of the Company or its affiliates subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary thereof (the "Employment Period"). 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) (A) During the Employment Period, the Executive shall serve in a position with the Company or its affiliated companies commensurate to her position as a Executive Vice President and Chief Administrative Officer of BayBanks immediately prior to the Effective Date assigned to the Chairman of the Company and reporting to the chief legal officer of Bank of Boston with such authority, duties and responsibilities as are commensurate with such position and (B) the Executive's services shall be performed in Boston, Massachusetts. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of her attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so 2 long as such activities do not significantly interfere with the performance of the Executives responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, including, without limitation, eligibility for a pro rata bonus for the year in which the Effective Date occurs. (iii) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies. For purposes of determining the Executive's right to participate and level of participation in any retiree health or similar plan of the Company, Executive's service with BayBanks shall be deemed to be service with the Company for all purposes. (iv) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all -2- 3 reasonable expenses incurred by the Executive in accordance with the Company's policies. (v) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, to the extent applicable generally to other peer executives of the Company and its affiliated companies. (vi) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect generally at any time with respect to other peer executives of the Company and its affiliated companies. 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer -3- 4 believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto, or (iv) a material breach of the covenants contained in Section 9. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in -4- 5 bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. For purposes of this Section 4(c), any good faith determination of "Good Reasons" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or -5- 6 Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) to the extent not previously paid, the product of (x) the maximum annual incentive or similar award for which the Executive is eligible immediately prior to the Effective Date, or if greater, any annual bonus paid during the Employment Period (the "Eligible Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365 and (3) any unused sick pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Eligible Annual Bonus; and (ii) the Executive's benefit under the Company's Supplemental Executive Retirement Plan as in effect immediately prior to the Effective Date (the "SERP") shall be increased to the benefit that would be payable thereunder if, utilizing actuarial assumptions no less favorable to the Executive than those in effect immediately prior to the Effective Date, the Executive's employment continued for three years after the Date of Termination, assuming for this purpose that (x) all accrued benefits are fully vested, (y) the Executive's compensation during the three years is that required by Section 3(b)(i) and her annual bonus in each of the three years is equal to the Eligible Annual Bonus, and (z) the Executive were 55 years old on the Date of Termination; and (iii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(iii) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families provided, however, that if the -6- 7 Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in her sole discretion; (v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (vi) the Executive shall be given service credit for unused sick pay under all of the benefit plans in which the Executive participates for purposes of determining eligibility and the amount of benefits thereunder; in the event such credit can not be given under such plans, the Executive shall be provided with cash equivalent thereof. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(b) shall include death benefits as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(c) shall include, and the Executive shall be -7- 8 entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause or the Executive terminates her employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) her Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 5(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). -8- 9 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand LLC or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm reasonably acceptable to the Company to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code -9- 10 at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such -10- 11 contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. CONFIDENTIAL INFORMATION. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. -11- 12 (b) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would be inadequate and insufficient. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Ilene Beal ------------------- 30 Bradford Road Wellesley, MA 02181 If to Bank of Boston: -------------------- 100 Federal Street Boston, Massachusetts 02110 Attention: General Counsel -12- 13 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will", and prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof, including, without limitation, Executive's participation in the Company's Plan Supplementing Statutory Insurance Pay. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Ilene Beal -------------------------------- ILENE BEAL BANK OF BOSTON CORPORATION By /s/ Peter J. Manning ----------------------------- BAYBANKS, INC. By /s/ William M. Crozier, Jr. ------------------------------- -13- 14 EMPLOYMENT AGREEMENT ADDENDUM ----------------------------- I hereby acknowledge and confirm that for purposes of interpretation of Section 3(a) of the Employment Agreement attached, the word "commensurate" does not mean "equal" and should be understood in the context of the substantial difference in size between Bank of Boston and BayBanks. Signed: /s/ Ilene Beal -------------------------- -14- EX-10.24 8 EMPLOYMENT AGREEMENT WITH JOAN E. TONRA 1 Exhibit 10.24 ------------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and among Bank of Boston Corporation, a Massachusetts corporation ("Bank of Boston" or the "Company"), BayBanks, Inc., a Massachusetts corporation ("BayBanks") and Joan E. Tonra (the "Executive"), dated as of the 12th day of December, 1995. The Boards of Directors of BayBanks and Bank of Boston have determined that it is in the best interests of BayBanks, the Company and their shareholders to assure that BayBanks will have the continued dedication of the Executive pending the merger of the Company and BayBanks (the "Merger") pursuant to the Agreement and Plan of Merger dated as of December 12, 1995 and to provide the surviving corporation after the Merger with continuity of management. Therefore, in order to accomplish these objectives, the Boards of Directors of BayBanks and Bank of Boston have caused BayBanks and Bank of Boston to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. EFFECTIVE DATE. The "Effective Date" shall mean the effective date of the Merger. 2. EMPLOYMENT PERIOD. The Company agrees to employ the Executive or cause the Executive to be employed, and the Executive hereby agrees to remain in the employ of the Company or its affiliates subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary thereof (the "Employment Period"). 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) (A) During the Employment Period, the Executive shall serve in a position with the Company or its affiliated companies commensurate with her position as Senior Vice President and Controller of BayBanks immediately prior to the Effective Date reporting to Mr. Vasily or his successor, with such authority, duties and responsibilities as are commensurate with such position and (B) the Executive's services shall be performed in Boston, Massachusetts. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of her attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executives responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued 2 conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) INCENTIVE. SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, including, without limitation, eligibility for a pro rata bonus for the year in which the Effective Date occurs. (iii) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies. For purposes of determining the Executive's right to participate and level of participation in any retiree health or similar plan of the Company, Executive's service with BayBanks shall be deemed to be service with the Company for all purposes. (iv) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the Company's policies. (v) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, to the extent applicable generally to other peer executives of the Company and its affiliated companies. (vi) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. -2- 3 (vii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies as in effect generally at any time with respect to other peer executives of the Company and its affiliated companies. 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 11(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, Disability shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued failure of the Executive to perform substantially the Executives duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) conviction of a felony or guilty or nolo contendere plea by the Executive with respect thereto, or (iv) a material breach of the covenants contained in Section 9. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a -3- 4 resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive or Good Reason. For purposes of this Agreement, "Good Reasons" shall mean in the absence of a written consent of the Executive: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executives position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any material failure by the Company to comply with any of the provisions of Section 3(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 35 miles from that provided in Section 3(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executives employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement. For purposes of this Section 4(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the -4- 5 Executives employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON: OTHER THAN FOR CAUSE DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) to the extent not previously paid, the product of (x) the maximum annual incentive or similar award for which the Executive is eligible immediately prior to the Effective Date, or if greater, any annual bonus paid during the Employment Period (the "Eligible Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365 and (3) any unused sick pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Eligible Annual Bonus; and (ii) the Executive's benefit under the BayBanks Supplemental Executive Retirement Plan as in effect immediately prior to the Effective Date shall be increased to the benefit that would be payable thereunder if, utilizing actuarial assumptions no less favorable to the Executive than those in effect immediately prior to the Effective Date, the Executive's employment continued for two years after the Date of Termination, assuming for this purpose that (x) all accrued benefits are fully vested and (y) the Executive's compensation during the two -5- 6 years is that required by Section 3(b)(i) and her annual bonus in each of the three years is equal to the Eligible Annual Bonus; and (iii) for two years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(iii) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two years after the Date of Termination and to have retired on the last day of such period; (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in her sole discretion; (v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (vi) the Executive shall be given service credit for unused sick pay under all of the benefit plans in which the Executive participates for purposes of determining eligibility and the amount of benefits thereunder; in the event such credit can not be given under such plans, the Executive shall be provided with cash equivalent thereof. (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(b) shall include death benefits as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the -6- 7 timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) CAUSE: OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause or the Executive terminates her employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) her Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 5(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without -7- 8 regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand LLC or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm reasonably acceptable to the Company to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. -8- 9 The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the -9- 10 requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. CONFIDENTIAL INFORMATION. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) In the event of a breach or threatened breach of this Section 9, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledges that damages would he inadequate and insufficient. (c) Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9. 10. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed -10- 11 in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Joan E. Tonra ------------------- The Ledges, #81 7 Wainwright Road Winchester, MA 01890 If to Bank of Boston: -------------------- 100 Federal Street Boston, Massachusetts 02110 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will", and prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other employment, severance or change of control agreement between the parties with respect to the subject matter hereof, including, without limitation, Executive's participation in the Company's Plan Supplementing Statutory Insurance Pay. -11- 12 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Joan E. Tonra --------------------------------- Joan E. Tonra BANK OF BOSTON By /s/ Peter J. Manning ------------------------------- BAYBANKS, INC. By /s/ William M. Crozier, Jr. ------------------------------- EMPLOYMENT AGREEMENT ADDENDUM ----------------------------- I hereby acknowledge and confirm that for purposes of interpretation of Section 3(a) of the Employment Agreement attached, the word "commensurate" does not mean "equal" and should be understood in the context of the substantial difference in size between Bank of Boston and BayBanks. Signed: /s/ Joan E. Tonra -------------------------- -12- EX-10.25 9 ESOP STOCK PURCHASE AGREEMENT 1 Exhibit 10.25 ------------- ESOP Stock Purchase Agreement ----------------------------- This Agreement dated as of January 22, 1990 is between BayBanks, Inc. (the "Company"), a Massachusetts corporation, and Marine Midland Bank, N.A. (the "Trustee"), as Co-Trustee under the Trust Agreement under the Savings, Profit Sharing and Stock Ownership Plan for Employees of BayBanks, Inc. and Affiliated Companies (the "Plan"). The Company desires to sell, and the Trustee desires to purchase 800,000 shares of Common Stock, par value $2.00 per share, of the Company (the "Shares"), for the purposes of the Plan's employee stock ownership plan feature (the "ESOP"), at the price of $23.25 per share, which is the lower of (i) the last reported sale price of the Common Stock on the National Association of Securities Dealers Automated Quotation System on the Closing Date and (ii) the average of such last reported sale price on each of the three consecutive business days ending with and including the Closing Date, or an aggregate amount equal to $18,600,000 (the "Purchase Price"). Accordingly, the parties hereby agree as follows: 1. Acquisition of Stock. -------------------- 1.1. Upon the terms and subject to the conditions hereof, the Company shall issue, sell, transfer, and deliver the Shares to the Trustee, and the Trustee shall purchase the Shares for the Purchase Price in the manner set forth below. 1.2. The consummation of the purchase and sale contemplated hereby shall take place on January 22, 1990, or such other date as the parties may mutually agree (the "Closing Date"). 1.3. On the Closing Date, the Trustee shall deliver or cause to be delivered to the Company a bank check or wire transfer in an amount equal to the Purchase Price, and the Company shall deliver to the Trustee a duly executed Certificate or certificates representing 799,400 of the Shares. The Company shall deliver to the Trustee a duly executed certificate or certificates representing 600 of the Shares as soon as practicable, but not later than thirty days, after the Closing Date. 1.4. No Commission will be charged to or payable by the Trustee in connection with the purchase of the Shares hereunder. 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company represents, warrants and covenants as follows (capitalized terms used in this Section 2 and not defined in this Agreement are used with the same respective meanings as in the Term Loan and Guaranty Agreement of even date herewith among the Company, the Trustee, and Westpac Banking Corporation (the "Loan Agreement")): -1- 2 2.1. When the Shares are issued and delivered against payment therefor, all of such Shares shall have been duly and validly authorized and will constitute fully-paid and non-assessable shares of Common Stock of the Company. 2.2. The Company has full right and authority to issue, sell, transfer, and deliver the Shares and will effectively transfer to the Trustee, on the Closing Date, the full right, title, and interest therein and thereto, free and clear of all options, claims, charges, encumbrances, agreements, trusts, equities, and rights, whether contingent or absolute, of any nature whatsoever, except for beneficial interests accruing to ESOP participants under the Plan and applicable law and the matters referred to in Section 4. 2.3. The ESOP has been duly authorized and is an employee stock ownership plan within the meaning of Section 4975 of the Internal Revenue Code of 1986, as amended. 2.4. The Company (i) is a corporation duly organized and validly existing and in good standing under the laws of the Commonwealth of Massachusetts, (ii) is duly licensed or qualified to do business and in good standing in each jurisdiction where the failure to be so licensed or qualified could have a material adverse effect on its ability to perform any of its obligations under this Agreement, and (iii) has all requisite power and authority to own its properties and conduct its business as presently conducted and to execute and deliver, and to perform its obligations under, this Agreement. 2.5. The consolidated financial statements of the Company and its Subsidiaries for the year ended December 31, 1988, previously delivered to the Trustee fairly present in accordance with GAAP the consolidated financial position of the Company and its Subsidiaries as of the date thereof and the consolidated results of their operations for the year then ended. The financial information contained in the Company's press release dated January 12, 1990, furnished to the Trustee was prepared by the Company in good faith. Except as disclosed to the Trustee in such press release or otherwise in writing prior to the date hereof, since December 31, 1988, there has been no material adverse change in the financial condition or business of the Company and its Subsidiaries, taken as a whole, and no change which could materially impair the ability of the Company to perform its obligations hereunder. 2.6. There is no action, suit, proceeding or investigation at law or in equity by or before any court, governmental body, agency, commission or other tribunal now pending or, to the best knowledge of the Company after due inquiry, threatened against or affecting the Company or any of its Subsidiaries or any of their respective property or rights (i) which, if adversely determined, may have a material adverse impact on the financial condition or business of the Company and its Subsidiaries, taken as a whole, or could materially impair the ability of the Company to perform its obligations hereunder (except as disclosed to the Trustee in writing on or before the date of this Agreement) or (ii) which questions or would question the validity of this Agreement. -2- 3 2.7. The execution, delivery and performance of this Agreement will not (i) conflict with, result in a breach of, or constitute a default under, any terms or provisions of any indenture, mortgage or other agreement or instrument to which the Company or any Subsidiary is a party or by which it or any of its assets is bound, or any existing applicable law, rule, regulation, license, judgment, order or decree of any government, governmental body or court having jurisdiction over the Company or any Subsidiary or any of its activities or properties, or the Articles of Organization or By-Laws of the Company or (ii) result in, or require the creation or imposition of, any lien upon or with respect to any properties now or hereafter owned by the Company or any Subsidiary, except as may be contemplated hereby or thereby. 2.8. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of the Company. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable according to its terms. 2.9. All authorizations, consents, approvals, registrations, filings, exemptions and licenses with or from governmental or regulatory authorities that are necessary for the execution, delivery and performance of this Agreement have been effected and obtained and are in full force and effect. 2.10. Each member of the Controlled Group has fulfilled its Obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is not in violation of any presently applicable provisions of ERISA and the Code with respect to any Plan, which violation would have a material adverse effect on the Company's ability to perform its obligations under this Agreement, and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA other than liability for PBGC premiums in accordance with ERISA . As of each Plan's most recent valuation date, the present value of its liabilities (utilizing PBGC assumptions) did not exceed its assets. 2.11. The Company has filed all tax returns required to be filed by it and has paid all taxes and other governmental charges due pursuant to such returns or pursuant to any assessment received by the Company except any taxes or governmental charges that are being contested in good faith and by appropriate proceedings. The charges, accruals and reserves on the books of the Company in respect of any taxes or other governmental charges are adequate to the extent required by GAAP to provide for the liabilities in respect thereof. 2.12. Neither the Company nor any Subsidiary of the Company is in violation of any law, rule, regulation, order, writ, judgment, decree, determination or award applicable to it or any indenture, lease, loan or other agreement to which it is a party or by which it or its properties may be bound or affected, the violation of which would have a material adverse effect upon the business or financial condition of the Company or such Subsidiary or upon the ability of the Company to perform any of its obligations under this Agreement. -3- 4 2.13. At least 95% of the issued and outstanding capital stock of each Subsidiary of the Company is owned beneficially and of record by the Company, free from any Lien. Each such Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation or laws of the United States, as the case may be, and has the corporate power and authority to own its assets and to carry on its business as it is now being conducted. 2.14. The Company shall as soon as practicable apply for, and use its best efforts to obtain and deliver to the Trustee as promptly as practicable, a determination letter from the Internal Revenue Service to the effect that the ESOP meets the requirements for qualification under Sections 401(a) and 4975(e)(7) of the Code and tax exemption under Section 501(a) of the Code. 2.15. The Company acknowledges that, in purchasing the Shares hereunder, the Trustee is relying upon the accuracy and completeness of the information made available to the public by the Company as reflected in filings, distributions or disclosures required by federal, state or local statutes, rules, orders or regulations, or as otherwise have been made available to the public and upon such other information as the Company or its agents have provided to the Trustee or its agents prior to the date hereof. 3. REPRESENTATIONS AND WARRANTIES OF TRUSTEE. The Trustee represents and warrants as follows: 3.1. The Trustee is properly authorized to execute and deliver this Agreement. 3.2. The Shares to be acquired pursuant to this Agreement will be acquired for investment, and not with a view to the distribution or resale thereof, except in compliance with the requirements of the Securities Act of 1933 and the terms of the ESOP. 4. STOCK CERTIFICATE LEGEND. Each Certificate representing Shares held by the Trustee shall bear the following legend: The shares represented by this certificate have not been registered under the Securities Act of 1933 (the "Act") and may not be offered, sold or otherwise transferred unless registered under the Act and any applicable state securities laws or, in the opinion of counsel satisfactory to the issuer, in form and substance satisfactory to the issuer, such offer, sale or other transfer is exempt from registration or otherwise in compliance with the Act and such laws. 5. REGISTRATION RIGHTS. The Company agrees that, upon the reasonable written request of Trustee B under the Trust Agreement or its successor ("Trustee B"), it will, at its expense, prepare and file as promptly as practicable after such request, and use its best efforts to cause to become effective, a registration statement on an appropriate form, including a final Prospectus (the "Registration Statement") under and complying with the Securities Act of 1933, as -4- 5 amended, and the rules and regulations thereunder, relating to the number of the Shares the public sale of which shall be necessary for Trustee B to carry out its responsibilities under the Plan and the Trust Agreement. Whenever Shares are so registered, the Company shall also use its best efforts to register or qualify the Shares covered by the Registration Statement under the "blue sky" or securities laws of such jurisdictions within the United States as Trustee B may reasonably request; provided, however, that the Company shall not be required to consent to the general service of process for all purposes in any jurisdiction where it is not then qualified to do business. 6. CERTAIN LIMITATIONS. The execution and delivery of this Agreement and the performance by the Trustee of this Agreement and under the terms of the Plan and Trust have been, or will be, effected by the Trustee in its capacity as Trustee. Nothing in this Agreement shall be interpreted to increase, decrease or modify in any manner any liability of the Trustee to the Company or to any trustee, representative or other claimant by right of the Company resulting from the Trustee's performance of its duties under the constituent instruments of the Plan or the Trust, and no personal liability shall be asserted or enforceable against said entity by reason of the covenants, statements or representations contained in this Agreement. 7. Miscellaneous Provisions. ------------------------ 7.1. This Agreement constitutes the entire agreement between the parties hereto relating to the purchase of the Shares by the Trustee and supersedes any prior agreement or understanding relating to the transactions contemplated hereby. This Agreement may be modified or amended only by a written instrument executed by or on behalf of the parties hereto. The headings and captions contained herein are solely for convenience of reference and do not constitute a part of this Agreement or affect its meaning or construction. 7.2. The representations and warranties of the Company contained in Section 2 hereof shall survive the Closing hereunder. 7.3. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 7.4. This Agreement shall be binding upon, and inure to the benefit of, the successors and assigns of the Company and the Trustee. 7.5. This Agreement shall be construed and enforced in accordance with the laws of the Commonwealth of Massachusetts. 7.6. In case any term of this Agreement shall be held invalid, illegal, or unenforceable in whole or in part, neither the validity of the remaining part of such term nor the validity of any other term of this Agreement shall be affected thereby. -5- 6 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers on the date stated above. BAYBANKS, INC. By: /s/ William T. Sandalls, Jr. ----------------------------- Vice Chairman of the Board MARINE MIDLAND BANK, N. A., solely as Trustee of the Savings, Profit Sharing and Stock Ownership Trust for Employees of BayBanks, Inc. and Affiliated Companies and not in its individual or corporate capacity By: /s/ James McDonald ----------------------------- Vice President -6- EX-27 10 FINANCIAL DATA SCHEDULE
9 THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF BAYBANKS, INC. FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 922,031 163,164 198,000 50,755 2,549,127 54,398 54,398 7,771,093 153,688 12,063,501 10,217,407 718,941 111,120 64,849 39,286 0 0 911,898 12,063,501 634,648 147,613 17,169 799,430 234,188 291,998 507,432 25,000 40 479,054 222,669 137,374 0 0 137,374 7.01 0 5.11 63,830 40,472 5,949 0 146,835 52,019 23,567 153,688 8,752 0 144,936
-----END PRIVACY-ENHANCED MESSAGE-----