As filed with the Securities and Exchange Commission on November 16, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Date of Report (Date of Earliest Event Reported): September 30, 1998
BANKAMERICA CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-6523 56-0906609
- ------------------------ ------------ -------------------
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
100 North Tryon Street, Charlotte, North Carolina 28255
-------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(704) 386-5000
--------------
(Registrant's Telephone Number, including Area Code)
<PAGE>
Item 5. OTHER EVENTS
Merger Between NationsBank Corporation and BankAmerica Corporation. On
-------------------------------------------------------------------
September 25, 1998, NationsBank Corporation, a North Carolina corporation
("NationsBank"), merged with and into NationsBank (DE) Corporation, a Delaware
corporation and a direct, wholly owned subsidiary of NationsBank ("NationsBank
(DE)"), with NationsBank (DE) as the surviving corporation. NationsBank (DE)
simultaneously changed its name to "NationsBank Corporation." The purpose of
this merger was to change NationsBank's jurisdiction of incorporation from North
Carolina to Delaware. On September 30, 1998, BankAmerica Corporation
("BankAmerica") merged with and into NationsBank (the "Merger"). The combined
company was renamed "BankAmerica Corporation" (the "Corporation"). Prior to the
Merger, BankAmerica operated as a multi-bank holding company, providing retail
banking products and services principally in the Western United States and in
Texas, and corporate banking products and services throughout the United States
and internationally. As a result of the Merger, each outstanding share of
BankAmerica common stock was converted into 1.1316 shares of the Corporation's
common stock, resulting in the net issuance of approximately 779 million shares
of the Corporation's common stock to BankAmerica shareholders. Existing shares
of NationsBank continue to represent the same number of shares of the
Corporation as they represented prior to the Merger. This transaction was
accounted for as a pooling of interests. Under this method of accounting, the
recorded assets, liabilities, shareholders' equity, income and expenses of
NationsBank and BankAmerica have been combined and reflected at their historical
amounts.
The following supplemental consolidated financial information of the
Corporation restates the Corporation's historical Consolidated Financial
Statements as of December 31, 1997 and 1996 and for the three years ended
December 31, 1997 to reflect the Merger and is incorporated herein by reference
to Exhibit 99.1 filed herewith:
1. Supplemental Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995.
2. Supplemental Consolidated Balance Sheet as of December 31, 1997 and
1996.
3. Supplemental Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
4. Supplemental Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995.
5. Notes to Supplemental Consolidated Financial Statements.
The report of PricewaterhouseCoopers LLP, independent accountants, on
the supplemental consolidated financial statements of the Corporation as of
December 31, 1997 and 1996 and for the three years ended December 31, 1997 is
filed herewith as part of Exhibit 99.1 and the related consent is filed herewith
as Exhibit 23. Both the opinion and the consent are included herein by
reference.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
Not applicable.
(b) Pro Forma Financial Information.
Not applicable.
(c) Exhibits.
12(a) Ratio of Earnings to Fixed Charges.
12(b) Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
23 Consent of PricewaterhouseCoopers LLP.
99.1 Supplemental Consolidated Financial Statements of
BankAmerica Corporation as of December 31, 1997 and 1996 and
for the three years ended December 31, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
BANKAMERICA CORPORATION
By: /s/ MARC D. OKEN
-----------------------------
Marc D. Oken
Executive Vice President and
Principal Financial Executive
November 16, 1998
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
12(a) Ratio of Earnings to Fixed Charges.
12(b) Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
23 Consent of PricewaterhouseCoopers LLP.
99.1 Supplemental Consolidated Financial Statements of BankAmerica
Corporation as of December 31, 1997 and 1996 and for the three
years ended December 31, 1997.
<TABLE>
<CAPTION>
BANKAMERICA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
================================================================================
Year Ended December 31
-----------------------------------
(Dollars in millions, except per share
information) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $29,085 $26,439 $24,860
Interest and dividends on securities 3,283 2,797 3,139
Federal funds sold and securities purchased
under agreements to resell 1,516 1,371 1,592
Trading account securities 2,582 2,229 1,841
Other interest income 867 800 726
- --------------------------------------------------------------------------------
Total interest income 37,333 33,636 32,158
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 10,684 9,600 10,015
Borrowed funds 4,105 3,699 3,194
Trading account liabilities 975 880 1,077
Long-term debt 3,137 2,503 2,083
- --------------------------------------------------------------------------------
Total interest expense 18,901 16,682 16,369
- --------------------------------------------------------------------------------
NET INTEREST INCOME 18,432 16,954 15,789
PROVISION FOR CREDIT LOSSES 1,904 1,645 945
- --------------------------------------------------------------------------------
NET CREDIT INCOME 16,528 15,309 14,844
GAINS ON SALES OF SECURITIES 271 147 68
NONINTEREST INCOME
Service charges on deposit accounts 3,373 2,822 2,453
Mortgage servicing and other mortgage-
related income 401 340 279
Investment banking income 1,476 1,028 797
Trading account profits and fees 976 885 824
Brokerage income 355 259 248
Other nondeposit-related service fees 743 584 482
Asset management and fiduciary service fees 990 744 828
Credit card income 1,231 899 731
Other income 2,211 2,043 1,490
- --------------------------------------------------------------------------------
Total noninterest income 11,756 9,604 8,132
- --------------------------------------------------------------------------------
FORECLOSED PROPERTIES EXPENSE 20 45 63
MERGER AND RESTRUCTURING ITEMS EXPENSE 374 398 -
OTHER NONINTEREST EXPENSE
Personnel 8,703 7,501 7,183
Occupancy, net 1,576 1,476 1,352
Equipment 1,408 1,229 1,137
Marketing 655 589 544
Professional fees 763 634 501
Amortization of intangibles 855 544 560
Data processing 626 551 536
Telecommunications 491 413 382
Other general operating 2,039 1,953 2,014
General administrative and miscellaneous 489 416 395
- --------------------------------------------------------------------------------
Total other noninterest expense 17,605 15,306 14,604
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 10,556 9,311 8,377
INCOME TAX EXPENSE 4,014 3,498 3,230
- --------------------------------------------------------------------------------
NET INCOME $ 6,542 $ 5,813 $ 5,147
- -------------------------------------------=====================================
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 6,431 $ 5,611 $ 4,896
- -------------------------------------------=====================================
PER SHARE INFORMATION/1/
Earnings per common share $ 3.71 $ 3.42 $ 3.03
- -------------------------------------------=====================================
Diluted earnings per common share $ 3.61 $ 3.36 $ 2.98
- -------------------------------------------=====================================
Dividends per common share $ 1.37 $ 1.20 $ 1.04
- -------------------------------------------=====================================
AVERAGE COMMON SHARES ISSUED
AND OUTSTANDING (IN THOUSANDS)/1/ 1,733,194 1,638,382 1,613,404
- -------------------------------------------=====================================
</TABLE>
/1/ Shares and per share information reflect a two-for-one stock split on
February 27, 1997.
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BANKAMERICA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
================================================================================
December 31
-----------------------
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 28,466 $ 28,571
Time deposits placed and other short-term investments 8,363 7,695
Securities
Held for investment, at cost (market value $4,905
and $6,030) 4,822 6,249
Available for sale 62,209 29,517
- --------------------------------------------------------------------------------
Total securities 67,031 35,766
- --------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 20,200 14,406
Trading account assets 35,937 27,761
Loans and leases 341,059 316,660
Factored accounts receivable 1,081 1,049
Allowance for credit losses (6,778) (6,316)
- --------------------------------------------------------------------------------
Loans, leases and factored accounts receivable,
net of allowance for credit losses 335,362 311,393
- --------------------------------------------------------------------------------
Premises and equipment, net 8,123 7,672
Customers' acceptance liability 4,891 3,935
Interest receivable 3,584 2,759
Unrealized gains on off-balance sheet instruments 14,824 11,190
Mortgage servicing rights 2,040 1,669
Goodwill 13,551 6,141
Core deposit and other intangibles 2,203 2,037
Other assets 26,408 16,707
- --------------------------------------------------------------------------------
TOTAL ASSETS $570,983 $477,702
- --------------------------------------------------------========================
LIABILITIES
Deposits in domestic offices:
Interest-bearing $202,082 $183,568
Noninterest-bearing 85,815 73,174
Deposits in foreign offices:
Interest-bearing 56,719 50,788
Noninterest-bearing 1,681 1,570
- --------------------------------------------------------------------------------
Total deposits 346,297 309,100
- --------------------------------------------------------------------------------
Federal funds purchased and securities sold under
agreements to repurchase 61,414 30,466
Trading account liabilities 17,300 12,014
Commercial paper 5,925 5,849
Other short-term borrowings 12,120 12,239
Liability to factoring clients 591 597
Acceptances outstanding 4,893 3,935
Unrealized losses on off-balance sheet instruments 13,639 11,413
Accrued expenses and other liabilities 16,755 11,290
Trust preferred securities 4,578 2,965
Long-term debt 42,887 40,041
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 526,399 439,909
- --------------------------------------------------------------------------------
Contingent liabilities and other financial
commitments (NOTES EIGHT AND TEN)
SHAREHOLDERS' EQUITY
Preferred stock: authorized - 100,000,000 shares;
issued and outstanding - 10,933,884 and
41,767,188 shares 708 2,413
Common stock: authorized - 5,000,000,000 shares;
issued and outstanding - 1,722,537,672 and
1,602,764,190 shares 15,140 11,419
Retained earnings 28,438 24,071
Other, including loan to ESOP trust 298 (110)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 44,584 37,793
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $570,983 $477,702
- --------------------------------------------------------========================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BANKAMERICA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
Year Ended December 31
-------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,542 $ 5,813 $ 5,147
Reconciliation of net income to net cash
provided by (used in) operating
activities
Provision for credit losses 1,904 1,645 945
Gains on sales of securities (271) (147) (68)
Depreciation and premises improvements
amortization 1,108 983 908
Amortization of intangibles 855 544 560
Deferred income tax expense 1,182 965 433
Net change in trading instruments (3,271) (3,506) (8,064)
Net (increase) decrease in interest
receivable (542) 604 (92)
Net increase (decrease) in interest
payable 179 (515) 272
Other operating activities (6,261) (2,506) (3,409)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 1,425 3,880 (3,368)
INVESTING ACTIVITIES
Proceeds from maturities of securities
held for investment 1,898 3,440 8,061
Purchases of securities held for investment (570) (646) (1,521)
Proceeds from sales and maturities of
securities available for sale 44,268 40,767 38,437
Purchases of securities available for sale (56,825) (24,150) (37,174)
Net (increase) decrease in federal funds
sold and securities purchased under
agreements to resell (3,531) (2,078) 5,072
Net (increase) decrease in time deposits
placed and other short-term investments (857) (512) 1,473
Purchases and net originations of loans
and leases (39,348) (30,801) (34,626)
Proceeds from sales and securitizations
of loans and leases 30,936 17,947 6,598
Purchases and originations of mortgage
servicing rights (419) (654) (688)
Purchases of factored accounts receivable (7,919) (7,738) (7,856)
Collections of factored accounts receivable 7,873 7,656 7,834
Net purchases of premises and equipment (888) (1,183) (1,103)
Proceeds from sales of foreclosed properties 610 694 849
Sales and acquisitions of business
activities, net of cash 1,289 795 (1,020)
- --------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (23,483) 3,537 (15,664)
FINANCING ACTIVITIES
Net increase in deposits 4,774 267 4,734
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase 26,680 (11,959) 5,314
Net (decrease) increase in other short-
term borrowings and commercial paper (1,440) 3,442 2,009
Proceeds from issuance of trust
preferred securities 1,613 2,965 -
Proceeds from issuance of long-term debt 7,823 11,199 14,481
Retirement of long-term debt (6,740) (6,272) (4,901)
Proceeds from issuance of common stock 1,892 573 722
Cash dividends paid (2,175) (1,888) (1,677)
Common stock repurchased (8,540) (3,193) (1,813)
Other financing activities (2,036) (63) (317)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 21,851 (4,929) 18,552
Effect of exchange rate changes on
cash and cash equivalents 102 22 8
- --------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (105) 2,510 (472)
Cash and cash equivalents on January 1 28,571 26,061 26,533
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS ON
DECEMBER 31 $ 28,466 $ 28,571 $ 26,061
- -------------------------------------------=====================================
Supplemental cash flow disclosure:
Cash paid for interest $ 18,585 $ 17,113 $ 16,126
Cash paid for income taxes 1,760 2,456 2,303
</TABLE>
Loans transferred to foreclosed properties amounted to $431, $569 and $701 in
1997, 1996 and 1995, respectively.
Loans securitized and retained in the securities available for sale portfolio
amounted to $7,842 and $4,558 in 1997 and 1996, respectively.
The fair values of noncash assets acquired and liabilities assumed in
acquisitions during 1997 were approximately $52,226 and $43,024, respectively,
net of cash acquired.
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BANKAMERICA CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
================================================================================
(Dollars in Total
millions, Common Stock Share-
shares in Preferred ---------------- Retained holders'
thousands) Stock Shares Amount Earnings Other Equity
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE ON DECEMBER
31, 1994 $3,394 1,622,704 $13,978 $16,478 $ (814) $33,036
Net income 5,147 5,147
Cash dividends:
Common (1,426) (1,426)
Preferred (251) (251)
Common stock issued
under dividend
reinvestment and
employee plans 30,862 682 40 722
Common stock issued
in acquisitions 6,785 221 5 226
Common stock
repurchased (74,012) (1,813) (1,813)
Redemption of
preferred stock (197) (197)
Conversion of
preferred stock (365) 19,441 365 -
Net change in unrea-
lized gains (losses)
on securities
available for sale
and marketable
equity securities,
net of taxes 852 852
Other (6) (330) (15) 20 (1)
- --------------------------------------------------------------------------------
BALANCE ON DECEMBER
31, 1995 2,826 1,605,450 13,418 19,953 98 36,295
- --------------------------------------------------------------------------------
Net income 5,813 5,813
Cash dividends:
Common (1,686) (1,686)
Preferred (202) (202)
Common stock issued
under dividend
reinvestment and
employee plans 18,463 536 37 573
Stock issued in
acquisitions 73 55,436 586 192 2 853
Common stock repur-
chased (85,036) (3,193) (3,193)
Redemption of
preferred stock (381) (381)
Conversion of
preferred stock (98) 8,703 98 -
Net change in
unrealized gains
(losses) on
securities avail-
able for sale and
marketable equity
securities, net of
taxes (239) (239)
Other (7) (252) (26) 1 (8) (40)
- --------------------------------------------------------------------------------
BALANCE ON DECEMBER
31, 1996 2,413 1,602,764 11,419 24,071 (110) 37,793
- --------------------------------------------------------------------------------
Net income 6,542 6,542
Cash dividends:
Common (2,064) (2,064)
Preferred (111) (111)
Common stock issued
under dividend
reinvestment and
employee plans 47,431 1,888 4 1,892
Stock issued in
acquisitions 82 219,024 10,320 10,402
Common stock repur-
chased (150,016) (8,540) (8,540)
Redemption of
preferred stock (1,701) (1,701)
Conversion of
preferred stock (86) 3,859 86 -
Net change in
unrealized gains
(losses) on
securities avail-
able for sale and
marketable equity
securities, net
of taxes 419 419
Other (524) (33) (15) (48)
- --------------------------------------------------------------------------------
BALANCE ON DECEMBER
31, 1997 $ 708 1,722,538 $15,140 $28,438 $ 298 $44,584
- ---------------------===========================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
BANKAMERICA CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On September 30, 1998, BankAmerica Corporation (BankAmerica) merged
with and into NationsBank Corporation (the Merger). The combined company was
renamed BankAmerica Corporation (the Corporation). The transaction was accounted
for as a pooling of interests. The supplemental financial statements have been
restated to present the combined results of the Corporation as if the Merger had
been in effect for all periods presented.
On January 9, 1998, the Corporation completed its merger with Barnett
Banks, Inc. (Barnett). The transaction was accounted for as a pooling of
interests. The supplemental financial statements have been restated to present
the combined results of the Corporation and Barnett as if the merger had been in
effect for all periods presented.
The Corporation is a Delaware corporation and a multi-bank holding
company registered under the Bank Holding Company Act of 1956, as amended, with
its principal assets being the stock of its subsidiaries. Through its banking
subsidiaries and its nonbanking subsidiaries, the Corporation provides a diverse
range of banking and nonbanking financial services and products throughout the
U.S. and in selected international markets.
- --------------------------------------------------------------------------------
NOTE ONE - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The supplemental consolidated financial statements include the accounts
of the Corporation and its majority-owned subsidiaries. All significant inter-
company accounts and transactions have been eliminated. Results of operations of
companies purchased are included from the dates of acquisition. Certain prior
period amounts have been reclassified to conform to current year
classifications.
Assets held in an agency or fiduciary capacity are not included in the
supplemental consolidated financial statements.
The preparation of the supplemental consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates. Significant estimates made
by management are discussed in these footnotes as applicable.
On February 27, 1997, the Corporation completed a two-for-one split of
its common stock. Accordingly, the supplemental consolidated financial
statements for all years presented reflect the impact of the stock split.
CASH AND CASH EQUIVALENTS
Cash on hand, cash items in the process of collection and amounts due
from correspondent banks and the Federal Reserve Bank are included in cash and
cash equivalents.
SECURITIES
Securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability to hold to
maturity are classified as held for investment and reported at amortized cost.
All other securities, except those used in trading activities, are classified as
available for sale and carried at fair value with net unrealized gains and
losses included in shareholders' equity on an after-tax basis. Marketable equity
securities, which are included in other assets, are carried at fair value with
net unrealized gains and losses included in shareholders' equity, net of tax.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income. Realized
gains and losses from the sales of securities are determined using the specific
identification method.
LOANS HELD FOR SALE
Loans held for sale include residential mortgage, commercial real
estate and other loans and are carried at the lower of aggregate cost or market
value. Generally, such loans are originated with the intent of sale and are
included in other assets.
<PAGE>
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold
under agreements to repurchase are treated as collateralized financing
transactions and are recorded at the amounts at which the securities were
acquired or sold plus accrued interest. The Corporation's policy is to obtain
the use of securities purchased under agreements to resell. The market value of
the underlying securities which collateralize the related receivable on
agreements to resell is monitored, including accrued interest, and additional
collateral is requested when deemed appropriate.
TRADING INSTRUMENTS
Instruments utilized in trading activities include both securities and
derivatives and are stated at fair value. Fair value is generally based on
quoted market prices. If quoted market prices are not available, fair values are
estimated based on dealer quotes, pricing models or quoted prices for
instruments with similar characteristics. Gross unrealized gains and losses on
trading derivative positions with the same counterparty are generally presented
on a net basis for balance sheet reporting purposes where legally enforceable
master netting agreements have been executed. Realized and unrealized gains and
losses are recognized as trading account profits and fees.
LOANS AND LEASES
Loans are reported at their outstanding principal balances net of any
charge-offs, unamortized deferred fees and costs on originated loans and
premiums or discounts on purchased loans. Loan origination fees and certain
direct origination costs are deferred and recognized as adjustments to income
over the lives of the related loans. Discounts and premiums are amortized to
income using methods that approximate the interest method.
The Corporation provides equipment financing to its customers through a
variety of lease arrangements. Direct financing leases are carried at the
aggregate of lease payments receivable plus estimated residual value of the
leased property, less unearned income. Leveraged leases, which are a form
of financing lease, are carried net of nonrecourse debt. Unearned income
on leveraged and direct financing leases are amortized over the lease terms
by methods that approximate the interest method.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is primarily available to absorb losses
inherent in the loans, leases and factored accounts receivable portfolios.
Credit exposures deemed to be uncollectible are charged against the allowance
for credit losses. Recoveries of previously charged off amounts are credited to
the allowance for credit losses.
Individually identified impaired loans are measured based on the
present value of payments expected to be received, observable market prices, or
for loans that are solely dependent on the collateral for repayment, the
estimated fair value of the collateral. If the recorded investment in the
impaired loan exceeds the measure of estimated fair value, a valuation allowance
is established as a component of the allowance for credit losses.
The Corporation's process for determining an appropriate allowance for
credit losses includes management's judgment and use of estimates. The adequacy
of the allowance for credit losses is reviewed regularly by management. On a
quarterly basis, a comprehensive review of the adequacy of the allowance for
credit losses is performed. This assessment is made in the context of historical
losses as well as existing economic conditions and performance trends within
specific portfolio segments and individual concentrations of credit. Additions
to the allowance for credit losses are made by charges to the provision for
credit losses.
NONPERFORMING LOANS
Commercial loans and leases that are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to timely collection,
including loans that are individually identified as being impaired, are
generally classified as nonperforming loans unless well secured and in the
process of collection. Loans are considered impaired when it is probable that
all amounts, including principal and interest, will not be collected in
accordance with contractual terms of the loan agreement. Loans whose contractual
terms have been restructured in a manner which grants a concession to a
borrower experiencing financial difficulties are classified as nonperforming
until such time as the loan is not impaired based on the terms of the
restructured agreement and the interest rate is a market rate as measured at
the restructuring date. Impaired loans are included in nonperforming loans.
Generally, all other loans which are past due 90 days or more as to principal
or interest are classified as nonperforming regardless of collateral or
collection status. Generally, interest accrued but not collected is reversed
when a loan or lease is classified as nonperforming.
<PAGE>
Interest collections on nonperforming loans and leases for which the
ultimate collectibility of principal is uncertain are applied as principal
reductions. Otherwise, such collections are credited to income when received.
Credit card loans that are 180 days past due are charged off and not
classified as nonperforming. All other consumer loans and residential
mortgages are generally charged off at 120 days past due or placed on
nonperforming status upon repossession or the inception of foreclosure
proceedings. Ordinarily, interest accrued but not collected is charged off along
with the principal.
FORECLOSED PROPERTIES
Assets are classified as foreclosed properties upon actual foreclosure
or when physical possession of the collateral is taken regardless of whether
foreclosure proceedings have taken place.
Foreclosed properties are carried at the lower of the recorded amount
of the loan or lease for which the property previously served as collateral, or
the fair value of the property less estimated costs to sell. Prior to
foreclosure, the recorded amount of the loan or lease is reduced, if necessary,
to the fair value, less estimated costs to sell, of the real estate to be
acquired by charging the allowance for credit losses.
Subsequent to foreclosure, gains or losses on the sale of and losses on
the periodic revaluation of foreclosed properties are credited or charged to
expense. Net costs of maintaining and operating foreclosed properties are
expensed as incurred.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are recognized principally using
the straight-line method over the estimated useful lives of the assets.
MORTGAGE SERVICING RIGHTS
The total cost of mortgage loans originated for sale or purchased is
allocated between the cost of the loans and the mortgage servicing rights (MSRs)
based on the relative fair values of the loans and the MSRs. MSRs acquired
separately are capitalized at cost. During 1997, the Corporation capitalized
$749 million of MSRs. The cost of the MSRs is amortized in proportion to and
over the estimated period of net servicing revenues. During 1997, amortization
was $303 million.
The fair value on December 31, 1997 of capitalized MSRs approximated $2
billion. Total loans serviced approximated $216 billion on December 31, 1997,
including loans serviced on behalf of the Corporation's banking subsidiaries.
The predominant characteristics used as the basis for stratifying MSRs are loan
type and interest rate. The MSRs strata are evaluated for impairment by
estimating the fair value based on anticipated future net cash flows, taking
into consideration prepayment predictions. If the carrying value of the MSRs
exceeds the estimated fair value, a valuation allowance is established. Changes
to the valuation allowance are charged against or credited to mortgage servicing
income and fees. The valuation allowance on December 31, 1997, 1996 and 1995 and
changes in the valuation allowance during 1997, 1996 and 1995 were
insignificant.
To manage risk associated with changes in prepayment rates, the
Corporation uses various financial instruments including purchased options and
swaps. The notional amount on December 31, 1997 was $8.7 billion and the
unrealized gain on such contracts was $57 million.
SECURITIZATIONS
The Corporation, through certain of its subsidiaries, securitizes,
sells and services interests in certain home equity, installment, commercial and
bank card loans. Included in other income are gains on the securitization and
sale of these loans, as well as the related net servicing income. The gains from
securitization of such loans include the estimated present value of future cash
flows over the expected life of the securitization, discounted at a market rate
at the time of sale using estimates of prepayment rates and credit loss amounts.
A corresponding receivable is recorded at the time of sale and is included in
other assets. The fair value of this receivable is reviewed and adjusted based
on changes in market conditions and estimates. See MORTGAGE SERVICING RIGHTS for
a discussion of the Corporation's mortgage servicing activity.
For certain servicing related assets that can be settled in such a way
that the Corporation could not recover substantially all of its recorded
investment, the carrying value is adjusted to fair value based on changes in
market conditions and estimates. The adjustment is reflected as an unrealized
gain or loss in shareholders' equity, unless a decline in value is determined to
be unrecoverable, at which point it is expensed.
<PAGE>
GOODWILL AND OTHER INTANGIBLES
Net assets of companies acquired in purchase transactions are recorded
at fair value at the date of acquisition. Identified intangibles are amortized
on an accelerated or straight-line basis over the period benefited. Goodwill is
amortized on a straight-line basis over a period not to exceed 25 years. The
recoverability of goodwill and other intangibles is evaluated if events or
circumstances indicate a possible inability to realize the carrying amount. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
INCOME TAXES
There are two components of income tax provision: current and deferred.
Current income tax expense approximates taxes to be paid or refunded for the
applicable period. Balance sheet amounts of deferred taxes are recognized on the
temporary differences between the bases of assets and liabilities as measured by
tax laws and their bases as reported in the financial statements. Deferred tax
expense or benefit is then recognized for the change in deferred tax liabilities
or assets between periods.
Recognition of deferred tax assets is based on management's belief that
it is more likely than not that the tax benefit associated with certain
temporary differences, tax operating loss carryforwards and tax credits will be
realized. A valuation allowance is recorded for those deferred tax items for
which it is more likely than not that realization will not occur.
RETIREMENT BENEFITS
The Corporation has established qualified retirement plans covering
full-time, salaried employees and certain part-time employees. Pension expense
under these plans is charged to current operations and consists of several
components of net pension cost based on various actuarial assumptions regarding
future experience under the plans.
In addition, the Corporation and its subsidiaries have established
unfunded supplemental benefit plans providing any benefits that could not be
paid from a qualified retirement plan because of Internal Revenue Code
restrictions and supplemental executive retirement plans for selected officers
of the Corporation and its subsidiaries. These plans are nonqualified and,
therefore, in general, a participant's or beneficiary's claim to benefits is as
a general creditor.
The Corporation and its subsidiaries have established several
postretirement medical benefit plans which are not funded.
RISK MANAGEMENT INSTRUMENTS
Risk management instruments are utilized to modify the interest rate
characteristics of related assets or liabilities or hedge against fluctuations
in interest rates, currency exchange rates or other such exposures as part of
the Corporation's asset and liability management process. Instruments must be
designated as hedges and must be effective throughout the hedge period. To
qualify as hedges, risk management instruments must be linked to specific assets
or liabilities or pools of similar assets or liabilities.
Swaps, principally interest rate, used in the asset and liability
management process are accounted for on the accrual basis with revenues or
expenses recognized as adjustments to income or expense on the underlying linked
assets or liabilities. Risk management swaps generally are not terminated. When
terminations do occur, gains or losses are recorded as adjustments to the
carrying value of the underlying assets or liabilities and recognized as income
or expense over the shorter of either the remaining expected lives of such
underlying assets or liabilities or the remaining life of the swap. In
circumstances where the underlying assets or liabilities are sold, any remaining
carrying value adjustments and the cumulative change in value of any open
positions are recognized immediately as a component of the gain or loss on
disposition of such underlying assets or liabilities.
Gains and losses associated with interest rate futures and forward
contracts used as effective hedges of existing risk positions or anticipated
transactions are deferred as an adjustment to the carrying value of the related
asset or liability and recognized in income over the remaining term of the
related asset or liability.
Risk management instruments used to hedge or modify the interest rate
characteristics of debt securities classified as available for sale are carried
at fair value with unrealized gains or losses deferred as a component of
shareholders' equity.
<PAGE>
To manage interest rate risk, the Corporation also uses interest rate
option products, primarily caps and floors. Interest rate caps and floors are
agreements where, for a fee, the purchaser obtains the right to receive interest
payments when a variable interest rate moves above or below a specified cap or
floor rate, respectively. Such instruments are primarily linked to long-term
debt, short-term borrowings and pools of similar residential mortgages and
consist mainly of purchased options. The Corporation also purchases options to
protect the value of certain assets, principally MSRs, against changes in
prepayment rates. Option premiums are amortized over the option life on a
straight-line basis. Such contracts are designated as hedges, and gains or
losses are recorded as adjustments to the carrying value of the MSRs, which are
subjected to impairment valuations as described in the MSRs accounting policy.
The Corporation also utilizes forward delivery contracts and options to
reduce the interest rate risk inherent in mortgage loans held for sale and the
commitments made to borrowers for mortgage loans which have not been funded.
These financial instruments are considered in the Corporation's lower of cost or
market valuation of its mortgage loans held for sale.
The Corporation has made investments in a number of operations in
foreign countries. Certain assets and liabilities of these operations are often
denominated in foreign currencies which exposes the Corporation to foreign
currency risks.
To qualify for hedge accounting, a foreign exchange contract must
reduce risk at the level of the specific transaction. Realized and unrealized
gains and losses on instruments that hedge firm commitments are deferred and
included in the measurement of the subsequent transaction; however, losses are
deferred only to the extent of expected gains on the future commitment. Realized
and unrealized gains and losses on instruments that hedge net foreign capital
exposure are recorded in shareholders' equity as foreign currency translation
adjustments.
EARNINGS PER COMMON SHARE
Earnings per common share for all periods presented is computed by
dividing net income, reduced by dividends on preferred stock, by the weighted
average number of common shares issued and outstanding. Diluted earnings per
common share is computed by dividing net income available to common
shareholders, adjusted for the effect of assumed conversions, by the weighted
average number of common shares issued and outstanding and dilutive potential
common shares, which include convertible preferred stock and stock options.
Dilutive potential common shares are calculated using the treasury stock method.
FOREIGN CURRENCY TRANSLATION
Assets, liabilities, and operations of foreign branches and subsidi-
aries are recorded based on the functional currency of each entity. For the
majority of the foreign operations, the functional currency is the local
currency, in which case the assets, liabilities, and operations are translated,
for consolidation purposes, at current exchange rates from the local currency to
the reporting currency, the U.S. dollar. The resulting gains or losses are
reported as a component of "Other" within shareholders' equity on a net-of-tax
basis. When the foreign entity is not a free-standing operation or is in a
hyperinflationary economy, the functional currency used to measure the financial
statements of a foreign entity is the U.S. dollar. In these instances, the
resulting gains and losses are included in income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130) and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 130 establishes standards for the reporting and
displaying of comprehensive income and its components in financial statements.
SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," and specifies new disclosure requirements for operating segment
financial information. In February 1998, Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132) was issued. SFAS 132 revises and
standardizes employers' disclosures about pension and other postretirement
benefit plans. These standards are effective for fiscal years beginning after
December 15, 1997. The Corporation adopted the provisions of these standards
during the first quarter of 1998.
During the second quarter of 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133). This standard
requires the Corporation to recognize all derivatives as either assets or
liabilities in its financial statements and measure such instruments at their
<PAGE>
fair values. Hedging activities must be redesignated and documented pursuant to
the provisions of the statement. This statement becomes effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. At this time, the
Corporation is still assessing the impact of SFAS 133 on its financial condition
and results of operations.
In October 1998, Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS 134), was
issued. SFAS 134 provides guidance for mortgage banking firms on how to account
for interests retained after securitizing mortgage loans previously held for
sale. SFAS 134 is effective for fiscal quarters beginning after December 15,
1998. The Corporation does not expect the adoption of this standard to have a
material impact on its results of operations or financial condition.
- --------------------------------------------------------------------------------
NOTE TWO - MERGER-RELATED ACTIVITY
On September 30, 1998, the Corporation completed its Merger with
BankAmerica, a multi-bank holding company headquartered in San Francisco,
California. Prior to the Merger, BankAmerica provided banking and various other
financial services throughout the U.S. and in selected international markets to
consumers and business customers, including corporations, governments and other
institutions. As a result of the Merger, each outstanding share of BankAmerica
common stock was converted into 1.1316 shares of the Corporation's common stock,
resulting in the net issuance of approximately 779 million shares of the
Corporation's common stock to the former BankAmerica shareholders. Each share of
NationsBank common stock continued as one share in the new company's common
stock. In addition, approximately 88 million options to purchase the Corpora-
tion's common stock were issued to convert similar stock options granted to
certain BankAmerica employees. This transaction was accounted for as a pooling
of interests. Under this method of accounting, the recorded assets, liabilities,
shareholders' equity, income and expenses of NationsBank and BankAmerica
have been combined and reflected at their historical amounts. NationsBank's
total assets, total deposits and total shareholders' equity on the date of the
Merger were approximately $331.9 billion, $166.8 billion and $27.7 billion,
respectively. BankAmerica's total assets, total deposits and total shareholders'
equity on the date of the Merger amounted to approximately $263.4 billion,
$179.0 billion and $19.6 billion, respectively.
In compliance with certain requirements of the Federal Reserve Board,
the Department of Justice and certain New Mexico authorities in connection with
the Merger, the Corporation has entered into an agreement to divest certain
branches of Bank of America National Trust and Savings Association (Bank of
America NT&SA) with loans and deposits aggregating approximately $167 million
and $500 million, respectively, in various markets in New Mexico. These
transactions are expected to be completed in the fourth quarter of 1998.
In connection with the Merger, the Corporation recorded pre-tax merger
and restructuring items during the third quarter of 1998 of approximately $725
million ($519 million after-tax), which consisted of approximately $390 million
primarily in severance and change in control and other employee related items,
$95 million of conversion and related costs and occupancy and equipment expenses
(primarily signage write-off and customer communication), $110 million of exit
and related costs and $130 million of other merger costs (including legal and
investment banking fees). The Corporation anticipates recording additional
merger and restructuring items during the fourth quarter of 1998 and in 1999.
On January 9, 1998, the Corporation completed its merger with Barnett,
a multi-bank holding company headquartered in Jacksonville, Florida (the Barnett
merger). Barnett's total assets, total deposits and total shareholders' equity
on the date of the merger were approximately $46.0 billion, $35.4 billion and
$3.4 billion, respectively. As a result of the Barnett merger, each outstanding
share of Barnett common stock was converted into 1.1875 shares of the
Corporation's common stock, resulting in the net issuance of approximately
233 million common shares to the former Barnett shareholders. In addition,
approximately 11 million options to purchase the Corporation's common stock were
issued to convert similar stock options granted to certain Barnett employees.
This transaction was also accounted for as a pooling of interests.
In connection with the Barnett merger, the Corporation incurred pre-tax
merger and restructuring items during the first quarter of 1998 of approximately
$900 million ($642 million after-tax), which consisted of approximately $375
million primarily in severance and change in control payments, $300 million of
conversion and related costs and occupancy and equipment expenses (primarily
lease exit costs and the elimination of duplicate facilities and other
capitalized assets), $125 million of exit costs related to contract terminations
and $100 million of other Barnett merger costs (including legal and investment
banking fees).
<PAGE>
The merger-related charge of $118 million recorded in 1996 was due to
the Corporation's acquisition of Bank South. The charge consisted of severance
costs, facilities consolidations and branch closures, cancellations of
contractual obligations and other merger-related expenses.
BankAmerica recorded a pre-tax restructuring charge of $280 million in
1996 as a result of decisions to implement a number of restructurings of its
business activities. The charge covered approximately $196 million for severance
payments, $72 million for occupancy expense, primarily reflecting the planned
closure of 120 branches, and $12 million for other costs.
On October 1, 1997, the Corporation completed the acquisition of
Montgomery Securities (Montgomery), an investment banking and institutional
brokerage firm headquartered in San Francisco, California. The purchase price
consisted of $840 million in cash and approximately 5.3 million unregistered
shares of the Corporation's common stock for an aggregate amount of
approximately $1.1 billion. Montgomery had 1996 revenues of approximately $600
million and assets of approximately $3.0 billion on the date of acquisition. The
Corporation accounted for this acquisition as a purchase.
On October 1, 1997, the Corporation also acquired Robertson, Stephens &
Company Group, L.L.C. (Robertson Stephens), a San Francisco-based investment
banking and investment management firm. The acquisition involved a cash
transaction consisting of an initial payment of $245 million to the
equity-owning partners of Robertson Stephens, up to $225 million of compensation
over a three-year period to certain Robertson Stephens equity owning partners,
subject to continued employment, and up to $70 million to be distributed from a
cash retention pool as compensation in the form of awards vesting over a
four-year period. The acquisition was accounted for by the purchase method of
accounting. In May 1998, BankAmerica announced that it had reached an agreement
to sell the investment banking operations of Robertson Stephens. On August 24,
1998, the agreement received federal regulatory approval and on August 31, 1998,
the sale of the investment banking operations of Robertson Stephens was
completed. The Corporation has also announced its intention to sell the
Robertson Stephens' investment management operations.
On January 7, 1997, the Corporation completed the acquisition of
Boatmen's Bancshares, Inc. (Boatmen's), headquartered in St. Louis, Missouri,
resulting in the issuance of approximately 195 million shares of the
Corporation's common stock valued at $9.4 billion on the date of the acquisition
and aggregate cash payments of $371 million to Boatmen's shareholders. On the
date of the acquisition, Boatmen's total assets and total deposits were
approximately $41.2 billion and $32.0 billion, respectively. The Corporation
accounted for this acquisition as a purchase.
The following table presents condensed pro forma consolidated results
of operations for the year ended December 31, 1996 as if the acquisition of
Boatmen's had occurred on January 1, 1996. This information combines the
historical results of operations of the Corporation and Boatmen's after the
effect of purchase accounting adjustments. The cash portion of the purchase
price is 35 percent, which reflects the actual cash election of 4 percent paid
at closing plus share repurchases completed prior to the initiation of the
Barnett merger. The pro forma information does not purport to be indicative of
the results that would have been obtained if the operations had actually been
combined during the periods presented and is not necessarily indicative of
operating results to be expected in future periods.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
(Dollars in millions, except per share
information) 1996
--------------------------------------------------------
<S> <C>
Net interest income $18,213
Net income 5,837
Net income available to common shareholders 5,628
Earnings per common share 3.44
Diluted earnings per common share 3.37
</TABLE>
On June 1, 1997, the branching provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 took effect, allowing banking
companies to consolidate their subsidiary bank operations across state lines. On
December 31, 1997, the Corporation operated its banking activities primarily
under nine charters: NationsBank, N.A., Bank of America, NT&SA, NationsBank of
Texas, N.A., Bank of America Texas, N.A., Barnett Bank, N.A., Bank of America
Community Development Bank, Bank of America, FSB, and Bank of America National
Association and NationsBank of Delaware, N.A. (which, together with Bank of
America National Association, operates the Corporation's credit card business).
On May 6, 1998, the Corporation completed the merger of NationsBank of Texas,
N.A. with and into NationsBank, N.A., and on October 8, 1998, the Corporation
completed the merger of Barnett Bank, N.A. with and into NationsBank, N.A. The
Corporation expects to continue the consolidation of other banking subsidiaries
throughout 1998 and 1999.
In 1996, the Corporation completed the initial public offering (IPO) of
16.1 million shares of Class A Common Stock of BA Merchant Services Inc. (ticker
symbol "BPI" on the New York Stock Exchange), a subsidiary of the Corporation.
On October 22, 1998, the Corporation announced the potential acquisition of
outstanding shares of Class A Common Stock of BA Merchant Services Inc. The
currently proposed cash price is $15.50 per share. The target date for complet-
ing the transaction is the first half of 1999.
- --------------------------------------------------------------------------------
NOTE THREE - SECURITIES
The amortized costs and fair values of securities held for investment
and securities available for sale on December 31 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD FOR
INVESTMENT
1997
U.S. Treasury securities
and agency debentures $ 516 $ 1 $ 1 $ 516
Foreign sovereign
securities 1,448 61 39 1,470
Mortgage-backed
securities 2,408 43 3 2,448
Other taxable securities 56 9 4 61
- --------------------------------------------------------------------------------
Total taxable 4,428 114 47 4,495
Tax-exempt securities 394 17 1 410
- --------------------------------------------------------------------------------
TOTAL $ 4,822 $131 $ 48 $ 4,905
- -----------------------------===================================================
1996
U.S. Treasury securities
and agency debentures $ 880 $ - $ 3 $ 877
Foreign sovereign
securities 1,525 15 285 1,255
Mortgage-backed
securities 3,264 34 19 3,279
Other taxable securities 64 25 - 89
- --------------------------------------------------------------------------------
Total taxable 5,733 74 307 5,500
Tax-exempt securities 516 18 4 530
- --------------------------------------------------------------------------------
TOTAL $ 6,249 $ 92 $311 $ 6,030
- -----------------------------===================================================
1995
U.S. Treasury securities
and agency debentures $ 2,375 $ 7 $ 10 $ 2,372
Foreign sovereign
securities 1,204 - 377 827
Mortgage-backed
securities 4,364 53 10 4,407
Other taxable securities 478 15 20 473
- --------------------------------------------------------------------------------
Total taxable 8,421 75 417 8,079
Tax-exempt securities 868 38 5 901
- --------------------------------------------------------------------------------
TOTAL $ 9,289 $113 $422 $ 8,980
- -----------------------------===================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE
FOR SALE
1997
U.S. Treasury securities
and agency debentures $10,614 $268 $ 6 $10,876
Foreign sovereign
securities 10,797 43 96 10,744
Mortgage-backed
securities 36,256 363 30 36,589
Other taxable securities 2,271 13 3 2,281
- --------------------------------------------------------------------------------
Total taxable 59,938 687 135 60,490
Tax-exempt securities 1,661 58 - 1,719
- --------------------------------------------------------------------------------
TOTAL $61,599 $745 $135 $62,209
- -----------------------------===================================================
1996
U.S. Treasury securities
and agency debentures $ 5,298 $ 61 $ 46 $ 5,313
Foreign sovereign
securities 4,129 52 153 4,028
Mortgage-backed securities 17,256 95 88 17,263
Other taxable securities 2,150 8 10 2,148
- --------------------------------------------------------------------------------
Total taxable 28,833 216 297 28,752
Tax-exempt securities 746 21 2 765
- --------------------------------------------------------------------------------
TOTAL $29,579 $237 $299 $29,517
- -----------------------------===================================================
1995
U.S. Treasury securities
and agency debentures $21,302 $482 $ 22 $21,762
Foreign sovereign
securities 3,884 39 265 3,658
Mortgage-backed securities 8,297 109 27 8,379
Other taxable securities 2,575 162 1 2,736
- --------------------------------------------------------------------------------
Total taxable 36,058 792 315 36,535
Tax-exempt securities 54 2 - 56
- --------------------------------------------------------------------------------
TOTAL $36,112 $794 $315 $36,591
- -----------------------------===================================================
</TABLE>
The expected maturity distribution and yields (computed on a taxable-
equivalent basis) of the Corporation's securities portfolio on December 31, 1997
are summarized on the next page. Actual maturities may differ from contractual
maturities or maturities shown on the next page since borrowers may have the
right to prepay obligations with or without prepayment penalties.
<PAGE>
<TABLE>
<CAPTION>
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after
(Dollars in millions) or less years years 10 years Total
- -------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMORTIZED COST OF SECURITIES
HELD FOR INVESTMENT
U.S. Treasury securities
and agency debentures $ 116 4.95% $ 399 5.86% $ - -% $ 1 4.47% $ 516 5.66%
Foreign sovereign securities 251 7.14 115 7.92 56 8.87 1,026 4.01 1,448 5.05
Mortgage-backed securities 313 5.97 279 6.99 699 7.62 1,117 7.48 2,408 7.27
Other taxable securities 8 8.24 46 7.76 - - 2 6.56 56 7.76
- -------------------------------------------------------------------------------------------------------------------
Total taxable 688 6.25 839 6.62 755 7.71 2,146 5.82 4,428 6.36
Tax-exempt securities 57 7.22 127 6.50 97 5.99 113 5.90 394 6.31
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 745 6.33% $ 966 6.61% $ 852 7.52% $ 2,259 5.82% $ 4,822 6.36%
- ----------------------------------=================================================================================
FAIR VALUE OF SECURITIES
HELD FOR INVESTMENT $ 744 $ 976 $ 878 $ 2,307 $ 4,905
- ----------------------------------=================================================================================
FAIR VALUE OF SECURITIES
AVAILABLE FOR SALE
U.S. Treasury securities
and agency debentures $ 854 5.73% $ 5,008 6.02% $ 4,606 6.06% $ 408 7.25% $10,876 6.05%
Foreign sovereign securities 3,302 7.91 4,721 4.97 829 5.79 1,892 6.28 10,744 6.17
Mortgage-backed securities 432 5.63 12,663 7.26 16,464 6.83 7,030 7.09 36,589 7.02
Other taxable securities 777 6.74 514 12.44 337 6.83 653 5.76 2,281 7.76
- -------------------------------------------------------------------------------------------------------------------
Total taxable 5,365 7.21 22,906 6.63 22,236 6.63 9,983 6.86 60,490 6.71
Tax-exempt securities 120 7.51 311 7.21 439 7.77 849 8.24 1,719 7.87
- -------------------------------------------------------------------------------------------------------------------
TOTAL $5,485 7.22% $23,217 6.64% $22,675 6.66% $10,832 6.96% $62,209 6.75%
- ----------------------------------=================================================================================
AMORTIZED COST OF SECURITIES
AVAILABLE FOR SALE $5,429 $23,005 $22,404 $10,761 $61,599
- ----------------------------------=================================================================================
</TABLE>
The components of gains and losses on sales of securities available
for sale for the years ended December 31 were:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Gross gains on sales of securities $289 $310 $348
Gross losses on sales of securities 18 163 280
----------------------------------------------------------------------
NET GAINS ON SALES OF SECURITIES $271 $147 $ 68
------------------------------------------============================
</TABLE>
There were no sales of securities held for investment in 1997, 1996 or
1995.
Excluding securities issued by the U.S. government and its agencies and
corporations, there were no investments in securities from one issuer that
exceeded 10 percent of supplemental consolidated shareholders' equity on
December 31, 1997 or 1996.
The income tax expense attributable to realized net gains on securities
sales was $101 million, $54 million and $25 million in 1997, 1996 and 1995,
respectively.
Securities are pledged or assigned to secure borrowed funds, government
and trust deposits and for other purposes. The carrying value of pledged
securities was $57.3 billion and $27.2 billion on December 31, 1997 and 1996,
respectively.
On December 31, 1997, the valuation allowance for securities available
for sale, marketable equity securities and certain servicing assets increased
shareholders' equity by $545 million, primarily reflecting $610 million of
pre-tax appreciation on securities available for sale and $220 million of
pre-tax appreciation on marketable equity securities.
<PAGE>
NOTE FOUR - TRADING ACCOUNT ASSETS AND LIABILITIES
The fair values of the components of trading account assets and
liabilities on December 31 and the average fair values for the
years ended December 31 were:
<TABLE>
<CAPTION>
Average Balances
--------------------
(In millions) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES OWNED
U.S. Treasury securities $10,537 $ 8,317 $12,625 $15,431
Securities of other U.S.
Government agencies and
corporations 2,392 2,777 2,473 2,544
Certificates of deposit,
bankers' acceptances and
commercial paper 1,867 1,638 2,240 1,697
Corporate debt 3,439 2,858 2,703 2,063
Foreign sovereign debt 12,650 10,240 14,102 8,069
Mortgage-backed securities 3,277 847 2,324 568
Other securities 1,775 1,084 1,440 1,381
- --------------------------------------------------------------------------------
TOTAL TRADING ACCOUNT ASSETS $35,937 $27,761 $37,907 $31,753
- ----------------------------------==============================================
SHORT SALES
U.S. Treasury securities $13,087 $10,195 $12,034 $11,603
Corporate debt 217 470 276 564
Foreign sovereign debt 2,983 1,050 2,148 1,181
Other securities 1,013 299 580 295
- --------------------------------------------------------------------------------
TOTAL TRADING ACCOUNT
LIABILITIES $17,300 $12,014 $15,038 $13,643
- ----------------------------------==============================================
</TABLE>
The net change in the unrealized gain or loss on trading securities
held on December 31, 1997 and 1996 was included in trading account profits and
fees and amounted to a loss of $143 million for 1997 and a gain of $80 million
for 1996.
Foreign exchange contract and securities trading activities generated
most of the Corporation's trading account profits and fees.
Derivatives-dealer assets and liabilities are reported as unrealized
gains on off-balance sheet instruments and unrealized losses on off-balance
sheet instruments, respectively. See NOTE NINE for additional information on
derivatives-dealer positions, including credit risk.
The average fair values of derivative-dealer assets on December 31,
1997 and 1996 was $12,563 million and $11,749 million, respectively. The average
fair values of derivative-dealer liabilities on December 31, 1997 and 1996 was
$11,503 million and $10,596 million, respectively.
<PAGE>
NOTE FIVE - LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE
Loans, leases and factored accounts receivable on December 31 were:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
----------------- -----------------
(In millions) Amount Percent Amount Percent
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial-domestic $121,382 35.5% $104,687 33.0%
Commercial-foreign 30,080 8.8 26,781 8.4
Commercial real estate-domestic 28,567 8.3 25,881 8.1
Commercial real estate-foreign 324 0.1 356 0.1
- --------------------------------------------------------------------------------
Total commercial 180,353 52.7 157,705 49.6
Residential mortgage 71,540 20.9 80,400 25.3
Home equity lines 16,536 4.8 12,541 4.0
Bankcard 14,908 4.4 16,561 5.2
Direct/indirect consumer 40,058 11.7 33,353 10.5
Consumer finance 14,566 4.3 13,081 4.1
Foreign consumer 3,098 0.9 3,019 1.0
- --------------------------------------------------------------------------------
Total consumer 160,706 47.0 158,955 50.0
- --------------------------------------------------------------------------------
Factored accounts receivable 1,081 0.3 1,049 0.3
- --------------------------------------------------------------------------------
TOTAL LOANS, LEASES AND FACTORED
ACCOUNTS RECEIVABLE $342,140 100.0% $317,709 100.0%
- -------------------------------------===========================================
</TABLE>
Transactions in the allowance for credit losses were:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance on January 1 $ 6,316 $ 6,222 $ 6,377
- --------------------------------------------------------------------------------
Loans, leases and factored accounts
receivable charged off (2,603) (2,369) (1,819)
Recoveries of loans, leases and factored
accounts receivable previously charged
off 751 702 688
- --------------------------------------------------------------------------------
Net charge-offs (1,852) (1,667) (1,131)
Provision for credit losses 1,904 1,645 945
Allowance applicable to loans of purchased
companies and other 410 116 31
- --------------------------------------------------------------------------------
BALANCE ON DECEMBER 31 $ 6,778 $ 6,316 $ 6,222
- ----------------------------------------------==================================
</TABLE>
The following table presents the recorded investment in loans that were
considered to be impaired, all of which were classified as nonperforming, on
December 31:
<TABLE>
<CAPTION>
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial-domestic $ 538 $ 664
Commercial-foreign 158 110
Commercial real estate-domestic 327 491
Commercial real estate-foreign 1 2
- --------------------------------------------------------------------------------
TOTAL COMMERCIAL $1,024 $1,267
- ------------------------------------------------------------====================
</TABLE>
The average recorded investment in certain impaired loans for the years
ended December 31, 1997, 1996 and 1995 was approximately $1.4 billion, $1.8
billion and $2.1 billion, respectively. As of December 31, 1997 and 1996, the
recorded investment on impaired loans requiring an allowance for credit losses
was $885 million and $798 million, and the related allowance for credit losses
was $145 million and $157 million, respectively. For the years ended December
31, 1997, 1996 and 1995, interest income recognized on impaired loans totaled
$80 million, $83 million and $114 million, respectively, all of which was
recognized on a cash basis.
<PAGE>
On December 31, 1997, 1996 and 1995, nonperforming loans, including
certain loans which are considered impaired, totaled $2.1 billion, $2.2 billion
and $2.8 billion, respectively.
The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 1997, 1996 and 1995
was $130 million, $130 million and $135 million, respectively. If these loans
had been accruing interest at their originally contracted rates, related income
would have been $349 million, $388 million and $457 million in 1997, 1996 and
1995, respectively.
Foreclosed properties amounted to $309 million, $511 million and $675
million on December 31, 1997, 1996 and 1995, respectively. The cost of
carrying foreclosed properties amounted to $26 million, $35 million and $51
million in 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
NOTE SIX - DEPOSITS
On December 31, 1997, the Corporation had domestic certificates of
deposit of $100 thousand or greater totaling $23.6 billion, with $11.8 billion
maturing within three months, $4.5 billion maturing within three to six months,
$3.7 billion maturing within six to twelve months and $3.6 billion maturing
after twelve months. Additionally, on December 31, 1997, the Corporation had
other domestic time deposits of $100 thousand or greater totaling $607 million,
with $139 million maturing within three months, $41 million maturing within
three to six months, $78 million maturing within six to twelve months and $349
million maturing after twelve months. Foreign office certificates of deposit and
other time deposits of $100 thousand or greater totaled $48.7 billion and $35.8
billion on December 31, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
NOTE SEVEN - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
NationsBank, N.A. maintains a program to offer up to $25.0 billion of
bank notes from time to time with fixed or floating rates and maturities from
7 days or more from date of issue. Prior to the merger of NationsBank of Texas,
N.A. with and into NationsBank, N.A. on May 6, 1998, NationsBank, N.A. and
NationsBank of Texas, N.A. maintained a similar program to offer up to $9.0
billion of bank notes with maturities from 30 days to 15 years from date of
issue. On December 31, 1997 and 1996, there were short-term bank notes outstand-
ing of $304 million and $872 million, respectively. In addition, there were bank
notes outstanding on December 31, 1997 and 1996 totaling $5.1 billion
and $3.5 billion, respectively, which were classified as long-term debt.
Bank of America NT&SA and Bank of America National Association maintain
a program to offer up to $12.0 billion of bank notes from time to time with
fixed or floating rates and maturities from 30 days to 15 years from date of
issue. On December 31, 1997 and 1996, there were short-term bank notes
outstanding of $4.3 billion and $6.5 billion, respectively. In addition, there
were medium-term bank notes outstanding on December 31, 1996 totaling $215
million which was classified as long-term debt.
At December 31, 1997, the Corporation had two fully committed
commercial paper back-up facilities aggregating $1.4 billion. Of this amount,
$957 million expires in October 1998 and $479 million expires in October 2002.
In addition, the Corporation had a $1.6 billion long-term line of credit that
expires in May 2001. Effective January 9, 1998, one of the Corporation's
commercial paper back-up lines of credit totaling $760 million, which was
assumed with the Barnett merger, was canceled. As of September 30, 1998 there
were no amounts outstanding under such credit facilities.
<PAGE>
The contractual maturities of long-term debt on December 31 were:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- -----------
Various Various
Fixed-Rate Floating-Rate
Debt Debt Amount Amount
(In millions) Obligations Obligations Outstanding Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PARENT COMPANY
Senior debt
Due in 1997 $ - $ - $ - $ 2,593
Due in 1998 1,244 1,548 2,792 2,217
Due in 1999 341 2,040 2,381 3,285
Due in 2000 488 2,698 3,186 3,162
Due in 2001 1,217 2,035 3,252 3,252
Due in 2002 129 2,161 2,290 1,584
Thereafter 827 2,133 2,960 2,014
- --------------------------------------------------------------------------------
4,246 12,615 16,861 18,107
- --------------------------------------------------------------------------------
Subordinated debt
Due in 1997 - - - 75
Due in 1998 52 - 52 53
Due in 1999 584 99 683 685
Due in 2000 417 - 417 419
Due in 2001 1,325 30 1,355 1,211
Due in 2002 2,187 26 2,213 2,209
Thereafter 8,152 1,598 9,750 8,289
- --------------------------------------------------------------------------------
12,717 1,753 14,470 12,941
- --------------------------------------------------------------------------------
Total parent company
long-term debt 16,963 14,368 31,331 31,048
- --------------------------------------------------------------------------------
BANKING AND NONBANKING
SUBSIDIARIES
Senior debt
Due in 1997 - - - 1,317
Due in 1998 883 3,019 3,902 3,099
Due in 1999 102 1,410 1,512 224
Due in 2000 354 3,011 3,365 2,012
Due in 2001 178 277 455 767
Due in 2002 159 284 443 35
Thereafter 153 219 372 413
- --------------------------------------------------------------------------------
1,829 8,220 10,049 7,867
- --------------------------------------------------------------------------------
Subordinated debt
Due in 1997 - - - 24
Due in 1998 10 - 10 10
Due in 1999 11 - 11 11
Due in 2000 12 - 12 12
Due in 2001 308 - 308 311
Thereafter 400 8 408 409
- --------------------------------------------------------------------------------
741 8 749 777
- --------------------------------------------------------------------------------
Total banking and
nonbanking subsi-
diaries long-term
debt 2,570 8,228 10,798 8,644
- --------------------------------------------------------------------------------
$19,533 $22,596 42,129 39,692
- --------------------------------------------------------------------------------
Notes payable to
finance the pur-
chase of leased
vehicles 625 -
Obligations under
capital leases 133 349
- --------------------------------------------------------------------------------
TOTAL LONG-
TERM DEBT $42,887 $40,041
- -----------------------------------------------------------=====================
</TABLE>
The Corporation's floating-rate long-term debt of $22.6 billion at
December 31, 1997 matures at various dates through 2003. The majority of the
floating rates are based on three- and six-month London InterBank Offer Rates
(LIBOR). At December 31, 1997, the interest rates on floating-rate long-term
debt ranged from 5.70% to 7.91%. These obligations were denominated primarily in
U.S. dollars.
As part of its interest rate risk management activities, the
Corporation enters into interest rate contracts for certain long-term debt
issuances. Through the use of interest rate swaps, $6.2 billion of fixed-rate
debt with rates ranging from 5.55 percent to 11.50 percent have been effectively
converted to floating rates primarily at spreads over LIBOR.
<PAGE>
Through the use of interest rate options, the Corporation has the right
to purchase interest rate caps to hedge its risk on floating-rate debt against a
rise in interest rates. At December 31, 1997, the interest rate options had a
notional amount of approximately $2.7 billion. In addition, the Corporation has
entered into other interest rate contracts, primarily futures, with notional
amounts of approximately $1.0 billion at December 31, 1997 to reduce the
interest rate risk by shortening the repricing profile on floating-rate debt
that reprices within one year.
On December 31, 1997, including the effects of interest rate contracts
for certain long-term debt issuances, the weighted average effective interest
rates for total long-term debt, total fixed-rate debt and total floating-rate
debt (based on the rates in effect on December 31, 1997) were 6.69 percent, 7.50
percent and 6.00 percent, respectively. These obligations were denominated
primarily in U.S. dollars.
As described below, certain debt obligations outstanding on December
31, 1997 may be redeemed prior to maturity at the option of the Corporation:
<TABLE>
<CAPTION>
Amount
Outstanding
Year Redeemable Year of Maturities (In millions)
------------------------------------------------------------
<S> <C> <C>
Currently redeemable 2002 $ 28
1998 2000 1,487
1999 - 2000 2001 - 2011 2,266
2001 - 2005 2003 - 2024 655
</TABLE>
Main Place Real Estate Investment Trust (MPREIT), a limited purpose
subsidiary of NationsBank, N.A., had $4.0 billion of mortgage-backed bonds
outstanding on December 31, 1997. Of this amount, $1.0 billion was issued during
March 1997. MPREIT had outstanding mortgage loans of $16.6 billion on December
31, 1997, of which $6.0 billion served as collateral for the outstanding
mortgage-backed bonds.
Under its Euro medium-term note programs, the Corporation may offer up
to $14.5 billion of senior or subordinated notes exclusively to non-United
States residents. The notes bear interest at fixed or floating rates and may be
denominated in U.S. dollars or foreign currencies. The Corporation uses foreign
currency contracts to convert certain foreign-denominated debt into U.S.
dollars. On December 31, 1997, $5.7 billion of notes were outstanding under
these programs.
Since October 1996, the Corporation formed twelve wholly owned grantor
trusts (NationsBank Capital Trusts I, II, III and IV, BankAmerica
Institutional Capital A and B, BankAmerica Capital I, II and III, and Barnett
Capital I, II and III) to issue preferred securities and to invest the proceeds
of such preferred securities into notes of the Corporation. Certain of the
preferred securities were issued at a discount. Such preferred securities may be
redeemed prior to maturity at the option of the Corporation. The sole assets of
each of the grantor trusts are the Junior Subordinated Deferrable Interest Notes
of the Corporation (the Notes) held by such grantor trusts. Such securities
qualify as Tier 1 Capital for regulatory purposes.
Payment of periodic cash distributions and payment upon liquidation or
redemption with respect to preferred securities are guaranteed by the Corpora-
tion to the extent of funds held by the grantor trusts (the Preferred
Securities Guarantee). The Preferred Securities Guarantee, when taken
together with the Corporation's other obligations including its obligations
under the Notes, will constitute a full and unconditional guarantee, on a
subordinated basis, by the Corporation of payments due on the preferred
securities.
<PAGE>
The terms of the preferred securities are summarized as follows:
<TABLE>
<CAPTION>
Aggregate
Face Principal
Amount Amount of Interest
(Dollars in millions) Issued The Notes Rate Redeemable Maturity
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NATIONSBANK
Capital Trust I
(Issued Dec. 1996) $ 600 $ 619 7.84% Dec. 2001 Dec. 2026
Capital Trust II
(Issued Dec. 1996) 365 376 7.83 Dec. 2006 Dec. 2026
Capital Trust III 500 516 3-mo. Jan. 2007 Jan. 2027
(Issued Feb. 1997) LIBOR
+55 bps
Capital Trust IV
(Issued Apr. 1997) 500 516 8.25 Apr. 2007 Apr. 2027
BANKAMERICA
Institutional Capital
A (Issued Nov. 1996) 450 464 8.07 Dec. 2006 Dec. 2026
Institutional Capital
B (Issued Nov. 1996) 300 309 7.70 Dec. 2006 Dec. 2026
Capital I
(Issued Dec. 1996) 300 309 7.75 Dec. 2001 Dec. 2026
Capital II
(Issued Dec. 1996) 450 464 8.00 Dec. 2006 Dec. 2026
Capital III 400 412 3-mo. Jan. 2002 Jan. 2027
(Issued Jan. 1997) LIBOR
+57 bps
BARNETT
Capital I
(Issued Nov. 1996) 300 309 8.06 Dec. 2006 Dec. 2026
Capital II
(Issued Dec. 1996) 200 206 7.95 Dec. 2006 Dec. 2026
Capital III 250 258 3-mo. Feb. 2007 Feb. 2027
(Issued Jan. 1997) LIBOR
+62.5 bps
- --------------------------------------------------------------------------------
TOTAL $4,615/a/ $4,758
- ------------------------===================-------------------------------------
</TABLE>
/a/ Excludes $37 million of deferred issuance costs.
During 1997, the Corporation obtained notes payable to finance the
purchase of leased vehicles and additional obligations under capital leases as a
result of the acquisition of Oxford Resources Corp. Notes payable to finance
the purchase of leased vehicles are due in installments equal to the lease
rentals receivable by the Corporation from the lease. The final payments on
these borrowings are equal to the estimated residual value of the vehicle at
lease termination.
As of October 23, 1998, the Corporation had the authority to issue
approximately $9.6 billion of corporate debt and other securities under its
existing shelf registration statements and $3.2 billion of corporate debt
securities under the Euro medium-term note program.
- --------------------------------------------------------------------------------
NOTE EIGHT - SHAREHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE
On December 31, 1997 and 1996, the Corporation's Preferred Stock
included BankAmerica's outstanding preferred stock of $614 million and $2,242
million, respectively. These preferred shares were nonvoting except in certain
limited circumstances. The shares were redeemable at the option of BankAmerica
during the redemption period and at the redemption price per share plus accrued
and unpaid dividends to the redemption date. During 1997 and 1996, BankAmerica
redeemed a portion of its preferred shares for an aggregate of $1,628 million
and $381 million, respectively. On June 29, 1998, BankAmerica redeemed all of
its remaining outstanding preferred shares.
In April 1988, BankAmerica declared a dividend of one preferred share
purchase right (a Right) for each outstanding share of BankAmerica's common
stock pursuant to the Rights Agreement dated April 11, 1988 between BankAmerica
and Manufacturers Hanover Trust Company of California, as rights agent (the
Rights Agreement). Each Right entitled the holder, upon the occurrence of
certain events, to buy from BankAmerica, until the earlier of April 22, 1998 or
the redemption of the Rights, one two-hundredth of a share of Cumulative
Participating Preferred Stock, Series E, at an exercise price of $25.00 per
Right (subject to adjustment). On April 22, 1998, the Rights Agreement expired
in accordance with its terms.
<PAGE>
As of December 31, 1997, the Corporation had issued 2.2 million shares
of ESOP Convertible Preferred Stock, Series C (ESOP Preferred Stock). The ESOP
Preferred Stock has a stated and liquidation value of $42.50 per share, provides
for an annual cumulative dividend of $3.30 per share and each share is
convertible into 1.68 shares of the Corporation's common stock. ESOP Preferred
Stock in the amount of $86 million, $7 million and $6 million in 1997, 1996, and
1995, respectively, was converted into the Corporation's common stock.
In November 1989, Barnett incorporated ESOP provisions into its
existing 401(k) employee benefit plan (Barnett ESOP). The Barnett ESOP acquired
$141 million of common stock using the proceeds of a loan from the Corporation.
The terms of the loan include equal monthly payments of principal and interest
through September 2015. Interest is at 9.75% and prepayments of principal are
allowed. The loan is generally being repaid from contributions to the plan by
the Corporation and dividends on unallocated shares held by the Barnett ESOP.
Shares held by the Barnett ESOP are allocated to plan participants as the loan
is repaid. As of December 31, 1997, 6.4 million shares of common stock had been
released and allocated. During 1997, 1996 and 1995 Barnett ESOP common stock
released and allocated amounted to $8 million, $13 million and $13 million,
respectively.
As consideration in the merger of NationsBank, N.A. (South) and
NationsBank, N.A. during the second quarter of 1997, NationsBank, N.A. exchanged
approximately $73 million for preferred stock issued by NationsBank, N.A.
(South) in the 1996 acquisition of Citizens Federal Bank F.S.B. Such preferred
stock consisted of approximately 0.5 million shares of NationsBank, N.A. (South)
8.50% Series H Noncumulative Preferred Stock and approximately 2.4 million
shares of NationsBank, N.A. (South) 8.75% Series 1993A Noncumulative Preferred
Stock.
During 1997 and 1996, the Corporation repurchased approximately 150
million shares of common stock and approximately 85 million shares of common
stock, respectively, under various stock repurchase programs authorized by the
Board of Directors. On September 24, 1998, the Board of Directors of the
Corporation approved the purchase of up to 20 million shares of the Corpora-
tion's common stock in the open market or through private transactions.
Other shareholders' equity on December 31 was comprised of the
following:
<TABLE>
<CAPTION>
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Restricted stock award plan deferred compensation $(23) $ (19)
Net unrealized gains (losses) on securities available
for sale, marketable equity securities
and certain servicing assets, net of tax 545 126
Loan to ESOP trust (85) (110)
Foreign exchange translation adjustments and other (139) (107)
- --------------------------------------------------------------------------------
TOTAL $298 $(110)
- -------------------------------------------------------------===================
</TABLE>
<PAGE>
In accordance with SFAS No. 128, "Earnings per Share," the calculation
of earnings per common share and diluted earnings per common share is presented
below:
<TABLE>
<CAPTION>
(Dollars in millions, except per
share data, shares in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE COMPUTATION
Net income $6,542 $ 5,813 $5,147
Total preferred stock dividends (111) (202) (251)
- --------------------------------------------------------------------------------
Income available to common shareholders $6,431 $ 5,611 $4,896
- --------------------------------------------------------------------------------
Average common shares issued
and outstanding 1,733,194 1,638,382 1,613,404
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE $ 3.71 $ 3.42 $ 3.03
- ------------------------------------------======================================
DILUTED EARNINGS PER COMMON SHARE
COMPUTATION
Income available to common shareholders $6,431 $ 5,611 $4,896
Total preferred stock dividends 111 202 251
Preferred stock dividends on
nonconvertible stock (104) (193) (224)
- --------------------------------------------------------------------------------
Effect of assumed conversions 7 9 27
- --------------------------------------------------------------------------------
Income available to common shareholders
and assumed conversions $6,438 $ 5,620 $4,923
- --------------------------------------------------------------------------------
Average common shares issued
and outstanding 1,733,194 1,638,382 1,613,404
Incremental shares from assumed
conversions:
Convertible preferred stock 3,736 6,158 18,818
Stock options 45,242 26,086 17,839
- --------------------------------------------------------------------------------
Dilutive potential common shares 48,978 32,244 36,657
- --------------------------------------------------------------------------------
Total dilutive average common
shares issued and outstanding 1,782,172 1,670,626 1,650,061
- --------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 3.61 $ 3.36 $ 2.98
- -----------------------------------------=======================================
</TABLE>
<PAGE>
NOTE NINE - COMMITMENTS AND CONTINGENCIES AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
In the normal course of business, the Corporation enters into a number
of off-balance sheet commitments. These commitments expose the Corporation to
varying degrees of credit and market risk and are subject to the same credit and
risk limitation reviews as those recorded on the balance sheet.
CREDIT EXTENSION COMMITMENTS
The Corporation enters into commitments to extend credit, standby
letters of credit and commercial letters of credit to meet the financing needs
of its customers. The commitments shown below have been reduced by amounts
collateralized by cash and amounts participated to other financial institutions.
The following summarizes commitments outstanding on December 31:
<TABLE>
<CAPTION>
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Credit card commitments $ 69,297 $ 66,880
Other loan commitments 226,773 190,359
Standby letters of credit and financial guarantees 31,315 27,884
Commercial letters of credit 3,748 4,943
</TABLE>
Commitments to extend credit are legally binding, generally have
specified rates and maturities and are for specified purposes. The Corporation
manages the credit risk on these commitments by subjecting these commitments to
normal credit approval and monitoring processes and protecting against
deterioration in the borrowers' ability to pay through adverse-change clauses
which require borrowers to maintain various credit and liquidity measures. As of
December 31, 1997 and 1996, there were no unfunded commitments to any
industry or country (including Asian countries) greater than 10 percent of
total unfunded commitments to lend. Credit card lines are unsecured commitments
which are reviewed at least annually by management. Upon evaluation of the
customers' creditworthiness, the Corporation has the right to terminate or
change the terms of the credit card lines. Of the December 31, 1997 other loan
commitments, $98.8 billion is scheduled to expire in less than one year,
$104.5 billion in one to five years and $23.5 billion after five years.
Standby letters of credit (SBLC) and financial guarantees are issued to
support the debt obligations of customers. If a SBLC or financial guarantee is
drawn upon, the Corporation looks to its customer for payment. SBLCs and
financial guarantees are subject to the same approval and collateral policies as
other extensions of credit. Of the December 31, 1997 SBLCs and financial
guarantees, $20.1 billion is scheduled to expire in less than one year, $10.3
billion in one to five years and $0.9 billion after five years.
Commercial letters of credit, issued primarily to facilitate customer
trade finance activities, are collateralized by the underlying goods being
shipped by the customer and are generally short term.
For each of these types of instruments, the Corporation's maximum
exposure to credit loss is represented by the contractual amount of these
instruments. Many of the commitments are collateralized or are expected to
expire without being drawn upon; therefore, the total commitment amounts do not
necessarily represent risk of loss or future cash requirements.
DERIVATIVES
Derivatives utilized by the Corporation include interest rate swaps,
financial futures and forward settlement contracts and option contracts. A swap
agreement is a contract between two parties to exchange cash flows based on
specified underlying notional amounts and indices. Financial futures and forward
settlement contracts are agreements to buy or sell a quantity of a financial
instrument, currency or commodity at a predetermined future date and rate or
price. An option contract is an agreement that conveys to the purchaser the
right, but not the obligation, to buy or sell a quantity of a financial
instrument, index, currency or commodity at a predetermined rate or price at a
time or during a period in the future. These option agreements can be transacted
on organized exchanges or directly between parties.
<PAGE>
ASSET AND LIABILITY MANAGEMENT ACTIVITIES
The Corporation uses derivative financial instruments to manage
interest rate risk related to designated assets and liabilities, primarily
variable rate commercial loans, fixed rate and adjustable rate residential
mortgages, long-term debt, and deposits.
One strategy that the Corporation employs in managing interest rate
risk is the use of interest rate swaps to modify the interest rate
characteristics of designated categories of assets and liabilities. For example,
the Corporation may enter into an interest rate swap to alter cash flows on its
long-term debt from fixed to floating rate in an effort to manage interest rate
sensitivity.
Another hedging strategy used by the Corporation is the purchase of
options to protect against significant loss due to extreme interest rate
movements. For example, the Corporation may purchase interest rate floors on its
adjustable rate mortgage portfolio to reduce the risk of loss from a rapid or
prolonged decline in interest rates. In addition, the Corporation may use
interest rate swaps to hedge against market value fluctuations of securities
available for sale.
The following table outlines the Corporation's Asset and Liability
Management (ALM) contracts on December 31, 1997:
<TABLE>
<CAPTION>
Notional Fair
(In millions) Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Receive fixed rate swaps $56,091 $ 165
Pay fixed rate swaps 25,002 (182)
Basis swaps 2,658 (1)
Futures and forward rate contracts 89,650 (16)
Option products 24,113 35
- --------------------------------------------------------------------------------
TOTAL $ 1
- --------------------------------------------------------------------------======
</TABLE>
In addition to the contracts in the table above, the Corporation uses
foreign currency contracts to manage the foreign exchange risk associated with
certain foreign-denominated liabilities. Foreign exchange contracts, which
include spot, forward and futures contracts, represent agreements to exchange
the currency of one country for the currency of another country at an
agreed-upon price, on an agreed-upon settlement date. Foreign exchange option
contracts are similar to interest rate option contracts except that they are
based on currencies rather than interest rates. Exposure to loss on these
contracts will increase or decrease over their respective lives as currency
exchange and interest rates fluctuate. The Corporation's credit risk exposure
for exchange-traded instruments is minimal as these instruments conform to
standard terms and are subject to policies set by the exchange involved,
including counterparty approval, margin requirements and security deposit
requirements. On December 31, 1997, spot, forward and futures contracts and
currency swaps had notional values of $3.8 billion and $3.5 billion,
respectively.
CREDIT RISK ASSOCIATED WITH DERIVATIVES ACTIVITIES
Credit risk associated with ALM and trading derivatives is measured at
net replacement cost should the counterparties with contracts in a gain position
completely fail to perform under the terms of those contracts and any collateral
underlying the contracts proves to be of no value. In managing derivatives
credit risk, both the current exposure, which is the replacement cost of
contracts on the measurement date, as well as an estimate of the potential
change in value of contracts over their remaining lives are considered. In
managing credit risk associated with its derivatives activities, the Corporation
deals primarily with U.S. and foreign commercial banks, broker/dealers and
corporate counterparties. On December 31, 1997, credit risk associated with ALM
activities was not significant.
<PAGE>
During 1997 there were no material credit losses associated with ALM or
trading derivatives transactions. In addition, on December 31, 1997, there were
no material nonperforming derivatives positions. To minimize credit risk, the
Corporation enters into legally enforceable master netting agreements, which
reduce risk by permitting the closeout and netting of transactions upon the
occurrence of certain events.
A portion of the derivatives-dealer activity involves exchange-traded
instruments. Because exchange-traded instruments conform to standard terms and
are subject to policies set by the exchange involved, including counterparty
approval, margin requirements and security deposit requirements, the credit risk
is minimal.
The table below presents the notional or contract amounts on December
31, 1997 and 1996 and the credit risk (the net replacement cost of contracts
in a gain position on December 31, 1997 and 1996) of the Corporation's
derivatives-dealer positions which are primarily executed in the
over-the-counter market for trading purposes. The notional or contract amounts
indicate the total volume of transactions and significantly exceed the amount of
the Corporation's credit or market risk associated with these instruments. The
credit risk amounts presented in the following table do not consider the value
of any collateral, but generally take into consideration the effects of legally
enforceable master netting agreements.
DERIVATIVES - DEALER POSITIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
-------------------- ---------------------
Contract/ Credit Contract/ Credit
(In millions) Notional Risk/1/ Notional Risk/1/
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Contracts
Swaps $868,708 $ 3,759 $694,347 $ 4,193
Futures and forwards 470,640 120 506,779 319
Written options 476,152 - 331,273 -
Purchased options 449,383 1,078 335,396 934
Foreign Exchange Contracts
Swaps 31,028 1,577 28,892 975
Spot, futures and forwards 628,265 7,214 706,795 3,807
Written options 80,438 - 87,921 -
Purchased options 75,998 970 84,988 671
Commodity and Other Contracts
Swaps 2,713 80 1,330 100
Futures and forwards 3,147 - 3,029 -
Written options 14,159 - 14,471 -
Purchased options 13,954 403 14,163 425
- --------------------------------------------------------------------------------
Total before cross
product netting 15,201 11,424
- --------------------------------------------------------------------------------
Cross product netting 749 584
- --------------------------------------------------------------------------------
Net replacement cost $14,452 $10,840
- ------------------------------------------------================================
</TABLE>
/1/Represents the net replacement cost the Corporation could incur should
counterparties with contracts in a gain position to the Corporation
completely fail to perform under the terms of those contracts. Amounts
include accrued interest.
As of December 31, 1997, the Corporation had a notional value of $965
million in credit derivatives, primarily credit default swaps.
The table above includes both long and short derivatives-dealer
positions. The fair value of dealer positions on December 31, 1997 and 1996, as
well as their average fair values for 1997 and 1996 are disclosed in NOTE FOUR.
SECURITIES LENDING
During 1997, the Corporation sold substantially all of its securities
lending business. This transaction did not have a material impact on the
Corporation's results of operations or financial position.
<PAGE>
WHEN ISSUED SECURITIES
When issued securities are commitments to purchase or sell securities
in the time period between the announcement of a securities offering and the
issuance of those securities. On December 31, 1997, the Corporation had
commitments to purchase and sell when issued securities of $8.8 billion and $8.2
billion, respectively. On December 31, 1996, the Corporation had commitments
to purchase and sell when issued securities of $8.8 billion and $9.1 billion,
respectively.
LITIGATION
In the ordinary course of business, the Corporation and its
subsidiaries are routinely defendants in or parties to a number of pending and
threatened legal actions and proceedings, including several actions brought on
behalf of various classes of claimants. In certain of these actions and
proceedings, substantial money damages are asserted against the Corporation and
its subsidiaries and certain of these actions and proceedings are based on
alleged violations of consumer protection, securities, environmental, banking
and other laws.
The Corporation's subsidiary, Bank of America NT&SA has been named in
one such suit by the City of San Francisco and several related public entities,
and by the State of California, in an action entitled State of California, etc
ex rel Stull v. Bank of America NT&SA, et al. (No. 968-484). The case was
instituted on April 1, 1995 in the Superior Court for the City and County of San
Francisco. The City of San Francisco and related public entities intervened in
the case on May 1, 1997, and the State of California took over prosecution of
the case on May 5, 1997. The chief allegation of this suit is that Bank of
America NT&SA retained unclaimed funds related to bonds and coupons that were
not presented by bondholders rather than returning them to certain bond issuers
or escheating such funds to the State. The suit also alleges False Claims Act
exposure for alleged fee overcharges and claims that Bank of America improperly
invested bond program funds. On November 12, 1998, the plaintiffs and Bank
of America settled this suit whereby Bank of America agreed to pay $187.5
million to the plaintiffs. The settlement is subject to court approval.
The Corporation and certain present and former officers have been named
as defendants in approximately 24 uncertified class actions filed in federal
court alleging, among other things, that the defendants failed to disclose
material facts about BankAmerica's losses relating to D. E. Shaw & Co., L.P.
until mid-October 1998, in violation of various provisions of the federal
securities laws. The uncertified class members consist generally of persons who
were entitled to vote on the merger of NationsBank and BankAmerica, or who
purchased or acquired securities of the Corporation or its predecessors between
August 4, 1998 and October 13, 1998. Similar actions are pending in California
state court, alleging violations of the California Corporations Code and
involving factual allegations essentially the same as the federal actions. In
addition, certain cases filed in California State court have alleged that the
proxy statement prospectus of August 4, 1998 falsely stated that the Merger
would be one of equals and alleged conspiracy on the part of certain executives
to gain control over the newly merged entity. At least one complaint seeks
recovery under various state common law theories. The Corporation believes the
actions lack merit and will defend them vigorously. The amount of any ultimate
exposure cannot be determined with certaintly at this time.
Management believes, based upon the advice of counsel, that the actions
and proceedings and the losses, if any, resulting from the final outcome
thereof, will not be material in the aggregate to the Corporation's financial
position or results of operations.
- --------------------------------------------------------------------------------
NOTE TEN - REGULATORY REQUIREMENTS AND RESTRICTIONS
The Corporation's banking subsidiaries are required to maintain average
reserve balances with the Federal Reserve Bank (FRB) based on a percentage of
certain deposits. Average reserve balances held with the FRB to meet these
requirements amounted to $3.2 billion and $4.3 billion for 1997 and 1996,
respectively.
The primary source of funds for cash distributions by the Corporation
to its shareholders is dividends received from its banking subsidiaries. The
subsidiary banks can initiate aggregate dividend payments in 1998, without prior
regulatory approval, of $5.7 billion plus an additional amount equal to their
net profits for 1998, as defined by statute, up to the date of any such dividend
<PAGE>
declaration. The amount of dividends that each subsidiary bank may declare in a
calendar year without approval by the Office of the Comptroller of the Currency
(OCC) is the bank's net profits for that year combined with its net retained
profits, as defined, for the preceding two years.
The Corporation's subsidiary, Bank of America, FSB, is subject to
regulatory restrictions by the Office of Thrift Supervision (OTS) on its payment
of dividends. Under these restrictions, Bank of America, FSB, can initiate
dividend payments in 1998 without prior regulatory approval of $267 million.
Regulations also restrict banking subsidiaries in lending funds to
affiliates. On December 31, 1997, the total amount which could be loaned to the
Corporation by its banking subsidiaries was approximately $4.1 billion. On
December 31, 1997, no loans to the Corporation from its banking subsidiaries
were outstanding.
The FRB, the OCC, the Federal Deposit Insurance Corporation and the OTS
(collectively, the Agencies) have issued regulatory capital guidelines for U.S.
banking organizations. As of December 31, 1997, the Corporation and each of its
banking subsidiaries were well capitalized under this regulatory framework.
There are no conditions or events since December 31, 1997 that management
believes have changed either the Corporation's or its banking subsidiaries'
capital classifications. Failure to meet the capital requirements can initiate
certain mandatory and discretionary actions by regulators that could have a
material effect on the Corporation's financial statements.
The regulatory capital guidelines measure capital in relation to the
credit risk of both on- and off-balance sheet items using various risk weights.
Under the regulatory capital guidelines, Total Capital consists of two tiers of
capital. Tier 1 Capital includes common shareholders' equity and qualifying
preferred stock, less goodwill and other adjustments. Tier 2 Capital consists of
preferred stock not qualifying as Tier 1 Capital, mandatory convertible debt,
limited amounts of subordinated debt, other qualifying term debt and the
allowance for credit losses up to 1.25 percent of risk-weighted assets. In
accordance with the FRB's amendment to its capital adequacy guidelines effective
for periods beginning December 31, 1997, the Corporation is now required to
include its broker/dealer subsidiaries, Montgomery and Robertson Stephens, when
calculating regulatory capital ratios. Previously, the Corporation had been
required to exclude the equity, assets and off-balance sheet exposures of its
broker/dealer subsidiary.
A well-capitalized institution must maintain a Tier 1 Capital ratio of
six percent and a Total Capital ratio of ten percent. In order to meet minimum
adequately capitalized regulatory requirements, an institution must maintain a
Tier 1 Capital ratio of four percent and a Total Capital ratio of eight percent.
The leverage ratio guidelines establish a minimum of 100 to 200 basis
points above three percent. Banking organizations must maintain a leverage
capital ratio of at least five percent to be classified as well capitalized.
On September 12, 1996, the Agencies amended their regulatory capital
guidelines to incorporate a measure for market risk. In accordance with the
amended guidelines, the Corporation and any of its banking subsidiaries with
significant trading activity, as defined in the amendment, must incorporate a
measure for market risk in their regulatory capital calculations effective for
reporting periods after January 1, 1998. The revised guidelines have not had a
material impact on the Corporation or its subsidiaries' regulatory capital
ratios or their well-capitalized status.
The following table, which does not reflect the combined ratios for the
Corporation, presents the actual capital ratios and amounts and minimum required
capital amounts for NationsBank, NationsBank N.A, BankAmerica and Bank of
America NT & SA on December 31:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Amount Amount
Required Required
for Minimum for Minimum
(Dollars in Actual Capital Actual Capital
millions) Ratio Amount Adequacy Ratio Amount Adequacy
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TIER 1 CAPITAL
NationsBank 6.50% $13,593 $ 8,371 7.76% $ 12,384 $ 6,384
NationsBank, N.A. 7.58 10,537 5,557 7.54 5,137 2,725
BankAmerica 7.53 17,291 9,188 7.77 17,044 8,779
Bank of America
NT&SA 7.49 15,660 8,361 7.10 10,701 6,032
TOTAL CAPITAL
NationsBank 10.89 22,787 16,742 12.66 20,208 12,770
NationsBank, N.A. 10.98 15,256 11,113 10.41 7,093 5,451
BankAmerica 11.56 26,554 18,376 11.79 25,880 17,559
Bank of America
NT&SA 11.28 23,576 16,722 10.96 16,521 12,064
LEVERAGE CAPITAL
NationsBank 5.57 13,593 7,321 7.09 12,384 6,987
NationsBank, N.A. 5.68 10,537 5,568 6.21 5,137 3,309
BankAmerica 6.81 17,291 10,159 7.44 17,229 9,257
Bank of America
NT&SA 6.93 15,660 9,036 6.18 10,701 6,922
</TABLE>
<PAGE>
As of December 31, 1997 and 1996, all of the Corporation's depository
institution subsidiaries met the well-capitalized requirements under the
regulatory framework for prompt corrective action.
NationsBank's ratios and amounts for 1997 and 1996 have not been
restated to reflect the impact of the Barnett merger. Barnett and its signifi-
cant banking subsidiary were considered "well capitalized" on December 31, 1997
and 1996 under the regulatory framework.
During 1997, several subsidiaries including NationsBank, N.A. (South)
and various subsidiaries acquired in the purchase of Boatmen's were merged with
and into NationsBank, N.A. The capital ratios and amounts for NationsBank, N.A.
as of December 31, 1996 have not been restated to reflect the impact of such
mergers. In addition, the capital ratios and amounts for NationsBank have not
been restated at December 31, 1996 for amendments to the regulatory capital
guidelines during 1997.
NOTE ELEVEN -- EMPLOYEE BENEFIT PLANS
The Corporation sponsors noncontributory trusteed pension plans
that cover substantially all officers and employees. The plans provide
defined benefits based on an employee's compensation, age at retirement and
years of service. It is the policy of the Corporation to fund not less than the
minimum funding amount required by the Employee Retirement Income Security Act.
The following table sets forth the plans' estimated status on December 31:
<TABLE>
<CAPTION>
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation
Accumulated benefit obligation, including
vested benefits of $4,401 and $3,786 $(4,735) $(4,033)
- ----------------------------------------------------============================
Projected benefit obligation for services
rendered to date $(4,915) $(4,318)
Plan assets at fair value, primarily listed
stocks, fixed income securities and real
estate 5,792 5,016
- --------------------------------------------------------------------------------
Plan assets in excess of projected benefit
obligation 877 698
Unrecognized net loss 363 348
Unrecognized net transition asset being
amortized (9) (16)
Unrecognized prior service (benefit) cost
being amortized (103) 10
Deferred investment gain (39) (39)
Additional minimum liability (2) (3)
- --------------------------------------------------------------------------------
Prepaid pension cost $ 1,087 $ 998
- ----------------------------------------------------============================
</TABLE>
Net periodic pension expense for the years ended December 31 included
the following components:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 151 $ 144 $ 145
Interest cost on projected
benefit obligation 331 292 299
Actual return on plan assets (777) (610) (902)
Net amortization and deferral 343 253 533
- --------------------------------------------------------------------------------
Net periodic pension expense $ 48 $ 79 $ 75
- ----------------------------------==============================================
</TABLE>
For December 31, 1997, the weighted average discount rate and rate of
increase in future compensation used in determining the actuarial present value
of the projected benefit obligation ranged from 7.25 percent to 7.5 percent and
4.0 percent to 6.5 percent, respectively. The related expected long-term rate of
return on plan assets ranged from 8.5 percent to 10.0 percent. For December 31,
1996, the weighted average discount rate, rate of increase in future
compensation and expected long-term rate of return on plan assets ranged from
6.5 percent to 8.0 percent, 4.0 percent to 7.25 percent and 8.0 percent to 10.0
percent, respectively.
<PAGE>
HEALTH AND LIFE BENEFIT PLANS
The Corporation provides health care and life insurance benefits for
active and retired employees. Substantially all of the Corporation's employees,
including certain employees in foreign countries, may become eligible for
postretirement benefits if they reach early retirement age while employed by the
Corporation and they have the required number of years of service. Under the
Corporation's current plan, eligible retirees are entitled to a fixed dollar
amount for each year of service. Additionally, certain current retirees are
eligible for different benefits attributable to prior plans. The Corporation's
accrued postretirement benefit liability was partially funded at December 31,
1997.
A reconciliation of the estimated status of the postretirement benefit
obligation on December 31 is as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $(728) $(637)
Fully eligible active participants (29) (22)
Other active plan participants (173) (142)
- --------------------------------------------------------------------------------
(930) (801)
Plan assets at fair value 164 137
Unamortized transition obligation 507 540
Unamortized service benefit (2) (22)
Unrecognized net gain (30) (63)
- --------------------------------------------------------------------------------
Accrued postemployment benefit liability $(291) $(209)
- --------------------------------------------------------========================
</TABLE>
Net periodic postretirement expense for the years ended December 31
included the following:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $9 $10 $9
Interest cost on accumulated
postretirement benefit obligation 62 57 67
Actual return on plan assets (24) (14) (19)
Amortization of transition obligation
over 20 years 40 35 44
Amortization of gains (1) - (4)
- --------------------------------------------------------------------------------
Net periodic postretirement expense $86 $ 88 $ 97
- ----------------------------------------========================================
</TABLE>
The health care cost trend rates used in determining the accumulated
postretirement benefit obligation ranged from 6.5 percent to 8.5 percent for
pre-65 benefits and 4.75 percent to 8.5 percent for post-65 benefits. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation ranged from 6.5 percent to 7.5 percent and
7.25 percent to 8.0 percent at December 31, 1997 and 1996, respectively.
DEFINED CONTRIBUTION PLANS
The Corporation maintains several defined contribution savings and
profit sharing plans, two of which feature leveraged employee stock ownership
(ESOP) provisions. See NOTE EIGHT for additional information on the two ESOP
provisions.
ESOP PLANS
The Corporation contributed approximately $45 million, $39 million and
$43 million for 1997, 1996 and 1995, respectively, in cash which was utilized
primarily to purchase the Corporation's common stock under the terms of these
plans. The Corporation also contributed approximately $23 million, $25 million
and $20 million in common stock for 1997, 1996, and 1995, respectively under
the terms of the Barnett ESOP. On December 31, 1997, an aggregate of
35,670,786 shares of the Corporation's common stock and 2,192,387 shares of
ESOP preferred stock were held by the Corporation's various savings and profit
sharing plans.
Under the terms of the ESOP Preferred Stock provision, payments to the
plan for dividends on the ESOP Preferred Stock were $7 million for both 1997 and
1996 and $8 million for 1995. Interest incurred to service the debt of the ESOP
Preferred Stock amounted to $2 million, $3 million and $4 million for 1997, 1996
and 1995, respectively.
<PAGE>
BANKAMERICA PLANS
BankAmerica maintains certain nonqualified defined contribution
retirement plans. The related retirement benefits are paid from BankAmerica's
assets. In addition, certain non-U.S. employees within BankAmerica are covered
under defined contribution pension plans that are separately administered in
accordance with local laws.
Aggregate contributions for all BankAmerica defined contribution plans
were $169 million, $175 million, and $93 million in 1997, 1996, and 1995,
respectively. Certain employer and employee contributions to the plans are
used to purchase the Corporation's common stock at prices that approximate
market values. Contributions, including dividends, to the plans were used to
purchase 598,958 shares for $34 million in 1997, 861,254 shares for $30 million
in 1996, and 669,783 shares for $16 million in 1995. Sales by the plans of the
Corporation's common stock were 528,829 shares for $32 million in 1997,
657,625 shares for $26 million in 1996, and 1,909,208 shares for $45 million
in 1995. The plans held 34,252,005 shares, 35,460,291 shares and 36,197,967
shares of the Corporation's common stock at December 31, 1997, 1996 and 1995,
respectively.
STOCK OPTION AND AWARD PLANS
At December 31, 1997, the Corporation had certain stock-based
compensation plans (the Plans) which are described below. The Corporation
applies the provisions of Accounting Principles Board Opinion No. 25 in
accounting for its stock option and award plans and has elected to provide SFAS
123 disclosures as if the Corporation had adopted the fair-value based method of
measuring outstanding employee stock options in 1997 and 1996 as indicated
below:
<TABLE>
<CAPTION>
As Reported Pro Forma
---------------- ----------------
(Dollars in millions, except per share data) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $6,542 $5,813 $6,254 $5,688
Net income available to common shareholders 6,431 5,611 6,143 5,487
Earnings per share 3.71 3.43 3.54 3.35
Diluted earnings per share 3.61 3.36 3.46 3.29
</TABLE>
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the fair
value of traded options, which have different characteristics than employee
stock options, and changes to the subjective assumptions used in the model can
result in materially different fair value estimates. The weighted average
grant-date fair values of the options granted during 1997 and 1996 were based on
the following assumptions:
<TABLE>
<CAPTION>
Risk-Free Dividend Expected
Interest Rates Yield Lives Volatility
-------------- ------------ -------------- ------------
1997 1996 1997 1996 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 Associates
Stock Option
Award Plan 5.60% N/A 3.50% N/A 1 year N/A 24.7% N/A
1996 Associates
Stock Option
Award Plan 6.31 6.44% 3.50 3.55% 3 years 4 years 21.4 20.8%
Long-Term
Incentive Plan 6.33 5.37 3.50 3.29 6 years 5 years 34.3 36.3
Key Employee
Stock Plan 6.29 5.52 3.50 3.55 7 years 7 years 27.8 24.6
BankAmerica
Management
Stock Plan 6.23 5.95 2.96 3.23 4 years 5 years 24.5 20.8
BankAmerica PEP
Plan 6.23 N/A 2.96 N/A 7 years N/A 24.5 N/A
BankAmerica
Take Ownership!
TM Plan 6.23 5.95 2.96 3.23 3 years 3 years 24.5 20.8
</TABLE>
<PAGE>
Compensation expense under the fair-value based method is recognized
over the vesting period of the related stock options. Accordingly, the pro forma
results of applying SFAS 123 in 1997 and 1996 may not be indicative of future
amounts.
ASSOCIATES STOCK OPTION AWARD PLAN:
Under the Associates Stock Option Award Plan (ASOP), as amended,
the Corporation has granted to certain full- and part-time employees options to
purchase an aggregate of approximately 47 million shares of the Corporation's
common stock. Under the ASOP, options generally become vested once the
Corporation's common stock attains certain predetermined closing market prices
for at least ten consecutive trading days. Approximately 42 million of the
options granted under the ASOP have vested, 32 million of which have an exercise
price of $42 1/8 per share and 10 million of which have an exercise price of $49
7/16. Approximately 5 million of the remaining options granted under the ASOP
have an exercise price of $56 1/8 per share and, in general, become 50% vested
after the Corporation's common stock closes at or above $68 per share for ten
consecutive trading days and become fully (100%) vested after the Corporation's
common stock closes at or above $80 per share for ten consecutive trading days,
provided that such options may not vest prior to April 1, 1998. Notwithstanding
the price, any outstanding unvested options generally vest and become
exercisable on July 1, 2000. All options granted under the ASOP expire on June
29, 2001.
KEY EMPLOYEE STOCK PLAN:
The Key Employee Stock Plan (KEYSOP), as amended and restated, provides
for different types of awards including stock options, restricted stock and
performance shares. Under the KEYSOP, ten-year options to purchase approximately
19 million shares of common stock have been granted to certain employees at the
closing market price on the respective grant dates. Options granted under the
KEYSOP generally vest in three or four equal annual installments. Additionally,
645 thousand shares of restricted stock were granted during 1997. These shares
generally vest in three substantially equal installments beginning January 1998.
On January 2, 1998, ten-year options to purchase approximately 3.8
million shares of common stock at $60 3/4 were granted to certain employees. On
February 2, 1998, ten-year options to purchase approximately 900 thousand shares
of common stock at $61 7/16 were granted to certain employees. For both grants,
options vest and become exercisable in three equal annual installments beginning
one year from the date of grant. Additionally, on January 9, 1998, approximately
1.3 million shares of restricted stock and ten-year options to purchase 495
thousand shares of common stock were granted to certain former Barnett
executives in connection with their employment with the Corporation. Shares of
restricted stock generally vest in two or three equal annual installments.
Options were granted at $59 and become fully vested and exercisable two years
from date of grant.
BANKAMERICA STOCK PLANS:
In connection with the Merger, outstanding BankAmerica stock options
were converted into options to purchase the Corporation's common stock based on
the exchange ratio.
BankAmerica offered shares of the Corporation's common stock under
three compensation plans: 1992 Management Stock Plan (the management stock
plan), Performance Equity Program (PEP) and Take Ownership!TM The BankAmerica
Global Stock Option Program (Take Ownership!).
BankAmerica offered shares of common stock to certain key employees
through options or restricted stock under the management stock plan. The shares
under option generally vest ratably over three years. In addition, the shares
under option generally become exercisable not earlier than six months and not
later than ten years after the date the options are granted.
Options awarded before August 5, 1991 to principal officers of
BankAmerica are subject to certain restrictions and also constitute stock
appreciation rights (SARs) equal to the number of shares covered by the options.
These SARs are exercisable for the difference between the option price and the
current market price of the stock at the time of exercise. The difference can be
received in cash or in shares. SARs, which are included in options for purposes
of this disclosure, are exercisable under the same terms as the related stock
options.
<PAGE>
Under the management stock plan, BankAmerica also awarded restricted
stock to certain key employees. Generally, the stock is not released until the
employee has completed a continuous service requirement specified in the award
agreement. During 1997, BankAmerica awarded 1,197,749 restricted shares with a
weighted-average fair value at the date of grant of $64.81 per share. Bank-
America awarded 1,286,914 restricted shares during 1996 which had a weighted-
average fair value at the date of grant of $36.64 per share. In addition, in
1994 and 1995, shares of restricted stock were awarded under a three-year
performance share program. There were no restricted shares awarded in 1996
and 1997 under the performance share program. Generally, these shares
vested in three installments as the price of the Corporation's common
stock attained the specified targets. In 1996, the final installment of
341,743 of these shares vested. Shares of restricted stock outstanding under
the management stock plan were 4,083,311 and 4,713,684 at December 31, 1997 and
1996, respectively.
Effective May 22, 1997, BankAmerica adopted PEP under which BankAmerica
offers shares of the Corporation's common stock to certain key employees. Two
types of awards can be made under PEP: market price options and premium price
options. The market price options become exercisable ratably over three years
and generally have a maximum term of ten years after the date the options are
granted. The premium price options generally are exercisable not earlier than
three years and not later than ten years after the date the options are granted.
Furthermore, the premium price options only become exercisable when the Corpora-
tion's common stock price increases significantly to specified threshold levels
within given time frames. Limited SARs may be awarded in conjunction with
premium price options and become exercisable upon a change in control.
Effective October 1, 1996, BankAmerica adopted Take Ownership! which
covers substantially all of its employees. The shares granted under Take
Ownership! vest ratably over three years and have a maximum term of five years
after the date of grant. As of December 31, 1997, 31,700,423 options were
outstanding under this program.
On September 30, 1998, as a result of the Merger, substantially all of
BankAmerica's stock options and restricted stock granted prior to March 27, 1998
vested. Options and restricted stock granted subsequent to March 27, 1998 retain
their original vesting terms.
OTHER PLANS:
In connection with the Barnett merger on January 9, 1998, outstanding
Barnett stock options were converted into options to purchase the Corporation's
common stock based on the exchange ratio. Barnett has long-term incentive plans
that provide stock-based awards, including stock options and time-based and
performance-based restricted stock, to certain officers. All options are granted
at current market value for a term of ten years and, subject to limited
exceptions, are not exercisable before the third anniversary of the date of
grant. Time-based awards provide that restrictions lapse beginning on the third
anniversary of the date of the grant. Performance-based awards require that
specific performance criteria be met in order for restrictions to lapse. On
December 19, 1997, as a result of the shareholder approval of the Barnett
merger, all outstanding stock options and restricted stock vested in accordance
with change-in-control provisions.
Additional options and restricted stock under former plans and stock
options assumed in connection with various acquisitions remain outstanding and
are included in the tables below. No further awards may be granted under these
plans.
<PAGE>
The following tables present the status of all plans as of December 31,
1997, 1996 and 1995, and changes during the years then ended:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Employee Stock Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 106,432,319 $30.79 64,125,702 $21.84 62,002,284 $19.43
Options due to
acquisitions 6,688,329 21.99 1,098,580 17.26 264,446 19.55
Granted 76,963,367 58.42 62,227,398 39.92 21,611,030 26.20
Exercised (44,990,054) 33.34 (15,643,484) 17.12 (18,437,694) 17.90
Forfeited (8,684,743) 45.23 (5,375,877) 36.83 ( 1,314,364) 24.45
- --------------------------------------------------------------------------------
Outstanding at
end of year 136,409,218 44.18 106,432,319 32.30 64,125,702 22.05
- --------------------------------------------------------------------------------
Options exercis-
able at year end 63,927,295 30.90 31,983,859 19.14 32,656,784 16.56
- --------------------------------------------------------------------------------
Weighted-average
fair value of
options granted
during the year $ 9.35 $ 7.41 $ 6.52
- ------------------==============================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
Restricted Weighted- Weighted- Weighted-
Stock Average Average Average
Awards Exercise Exercise Exercise
(includes KEYSOP) Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding unvested
grants at beginning
of year 6,459,158 $24.68 8,087,399 $21.45 8,567,676 $20.91
Granted 2,120,681 57.76 1,302,525 36.55 1,598,171 23.91
Vested (3,112,871) 22.76 (2,570,226) 20.84 (1,809,779) 21.07
Canceled (286,956) 32.43 (360,540) 22.51 (268,669) 21.43
- --------------------------------------------------------------------------------
Outstanding unvested
grants at end
of year 5,180,012 $38.94 6,459,158 $24.68 8,087,399 $21.45
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding on
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at December 31 Life Price at December 31 Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.00-$ 30.00 38,929,797 6.0 years $20.86 33,170,070 $20.55
$30.01-$ 46.50 31,171,700 6.3 years 39.05 23,088,518 40.11
$46.51-$ 65.50 35,648,015 5.5 years 50.61 7,668,707 47.99
$65.51-$108.00 30,659,706 7.7 years 71.06 - -
- --------------------------------------------------------------------------------
Total 136,409,218 6.3 years $44.18 63,927,295 $30.90
- ------------------==============================================================
</TABLE>
<PAGE>
NOTE TWELVE -- INCOME TAXES
The components of income tax expense for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current portion - expense
Federal $2,083 $2,015 $2,156
State 212 239 389
Foreign 537 279 252
- --------------------------------------------------------------------------------
2,832 2,533 2,797
- --------------------------------------------------------------------------------
Deferred portion - expense (benefit)
Federal 982 773 421
State 204 188 41
Foreign (4) 4 (29)
- --------------------------------------------------------------------------------
1,182 965 433
- --------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $4,014 $3,498 $3,230
- --------------------------------------------====================================
</TABLE>
The preceding table does not include the tax effects of
unrealized gains and losses on securities available for sale, marketable equity
securities, foreign currency translation and certain servicing assets that are
included in shareholders' equity and certain tax benefits associated with the
Corporation's employee stock plans. As a result of these tax effects,
shareholders' equity increased (decreased) by $144 million, $273 million and
($465) million in 1997, 1996 and 1995, respectively. The Corporation's current
income tax expense approximates the amounts payable for those years. Deferred
income tax expense represents the change in the deferred tax asset or liability
and is discussed further below.
A reconciliation of the expected federal income tax expense to
the actual consolidated income tax expense for the years ended December 31 was
as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal tax expense $3,695 $3,259 $2,932
Increase (decrease) in taxes resulting from
Tax-exempt income (84) (68) (67)
State tax expense, net of federal benefit 275 282 290
Goodwill amortization 219 97 98
Other (91) (72) (23)
- --------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $4,014 $3,498 $3,230
- --------------------------------------------====================================
</TABLE>
<PAGE>
Significant components of the Corporation's deferred tax (liabilities)
assets on December 31 were as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities
Securities valuation $ (634) $ (533)
Equipment lease financing (3,643) (2,700)
Depreciation (409) (421)
Intangibles (592) (640)
Employee retirement benefits (279) (325)
Loan fees and expenses (73) (79)
Deferred gain and loss (165) (93)
Other net (793) (427)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (6,588) (5,218)
- --------------------------------------------------------------------------------
Deferred tax assets
Employee benefits 306 151
Net operating loss carryforwards 130 109
Allowance for credit losses 2,623 2,497
Foreclosed properties 87 95
General business credit carryforwards 9 32
Accrued expenses 287 284
Other net 643 577
- --------------------------------------------------------------------------------
Gross deferred tax assets 4,085 3,745
Valuation allowance (111) (125)
- --------------------------------------------------------------------------------
Gross defered tax assets, net of
valuation allowance 3,974 3,620
- --------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $(2,614) $(1,598)
- ---------------------------------------------------------=======================
</TABLE>
The Corporation's deferred tax assets on December 31, 1997 include a
valuation allowance of $111 million representing primarily net operating loss
carryforwards for which it is more likely than not that realization will not
occur. The net change in the valuation allowance for deferred tax assets was a
decrease of $14 million due to the realization of certain state deferred tax
assets. In the future, the recognition of deferred tax assets subject to the
valuation allowance may result in a reduction to goodwill of up to $25 million.
At December 31, 1997, federal income taxes had not been provided on
$350 million of undistributed earnings of foreign subsidiaries earned prior to
1987 that have been reinvested for an indefinite period of time. If the
undistributed earnings were distributed, credits for foreign taxes paid on such
earnings and for the related foreign withholding taxes payable upon remittance,
would be available to offset $70 million of the $150 million resulting tax
expense.
- --------------------------------------------------------------------------------
NOTE THIRTEEN -- FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
(SFAS 107), requires the disclosure of the estimated fair values of financial
instruments. The fair value of a financial instrument 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, if available,
are utilized as estimates of the fair values of financial instruments. Because
no quoted market prices exist for a significant part of the Corporation's
financial instruments, the fair values of such instruments have been derived
based on management's assumptions, the amount and timing of future cash flows
and estimated discount rates. The estimation methods for individual
classifications of financial instruments are described more fully below.
Different assumptions could significantly affect these estimates. Accordingly,
the net realizable values could be materially different from the estimates
presented below.
<PAGE>
In addition, the estimates are only indicative of the value of
individual financial instruments and should not be considered an indication of
the fair value of the combined Corporation.
The provisions of SFAS 107 do not require the disclosure of
nonfinancial instruments, including intangible assets. The value of the
Corporation's intangibles such as goodwill, franchise, credit card and trust
relationships and MSRs, is significant. The disclosure of fair value amounts
does not include lease financing and factored accounts receivable.
SHORT-TERM FINANCIAL INSTRUMENTS
The carrying values of short-term financial instruments, including cash
and cash equivalents, federal funds sold and purchased, resale and repurchase
agreements, and commercial paper and short-term borrowings, approximate the fair
values of these instruments. These financial instruments generally expose the
Corporation to limited credit risk and have no stated maturities, or have an
average maturity of less than 30 days and carry interest rates which approximate
market.
FINANCIAL INSTRUMENTS TRADED IN THE SECONDARY MARKET
Securities held for investment, securities available for sale, loans
held for sale, trading account instruments, long-term debt and trust preferred
securities traded actively in the secondary market have been valued using quoted
market prices.
LOANS
Fair values were estimated for groups of similar loans based upon type
of loan, credit quality and maturity. The fair value of loans was determined by
discounting estimated cash flows using interest rates approximating the
Corporation's December 31 origination rates for similar loans. Where quoted
market prices were available, primarily for certain residential mortgage loans,
such market prices were utilized as estimates for fair values. Contractual cash
flows for residential mortgage loans were adjusted for estimated prepayments
using published industry data. Where credit deterioration has occurred,
estimated cash flows for fixed- and variable-rate loans have been reduced to
incorporate estimated losses.
The fair values of domestic commercial loans that do not reprice or
mature within relatively short time frames for BankAmerica were estimated using
discounted cash flow models. The discount rates were based on current market
interest rates for similar types of loans, remaining maturities and credit
ratings. For domestic commercial loans that reprice within relatively short time
frames, the carrying values were used to approximate their fair values.
Substantially all of the foreigh loans reprice within relatively short time
frames. Accordingly, for the majority of foreign loans, the carrying values were
assumed to approximate their fair values. For purposes of these fair value
estimates, the fair values of nonaccrual loans were computed by deducting an
estimated market discount from their carrying values to reflect the uncertainty
of future cash flows. The fair values of commitments to extend credit were not
significant at either December 31, 1997 or 1996. The aggregate fair value of
loans excludes the effect of off-balance-sheet financial instruments that
qualify as accounting hedges. The fair value of these hedges was negative $23
million and negative $8 million at December 31, 1997 and 1996, respectively. The
contract amounts of these instruments was $18.1 billion and $12.5 billion at
December 31, 1997 and 1996, respectively.
DEPOSITS
The fair value for deposits with stated maturities was calculated by
discounting contractual cash flows using current market rates for instruments
with similar maturities. For deposits with no stated maturities, the carrying
amount was considered to approximate fair value and does not take into account
the Corporation's long-term relationships with depositors.
<PAGE>
The book and fair values of financial instruments for which book and
fair value differed on December 31 were:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------
Book Fair Book Fair
(In millions) Value Value Value Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Loans $328,314 $331,366 $305,543 $306,558
FINANCIAL LIABILITIES
Deposits 346,297 346,001 309,100 308,390
Trust preferred securities 4,578 4,783 2,965 3,365
Long-term debt (excluding
obligations under
capital leases) 42,754 43,419 39,692 40,114
</TABLE>
For all other financial instruments, book value approximates fair
value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the Corporation's ALM and other derivatives contracts
is presented in the Derivatives section of NOTE NINE and the MSRs section of
NOTE ONE.
The fair value of liabilities on binding commitments to lend for
NationsBank is based on the present value of cash flow streams using fee rates
currently charged for similar agreements versus original contractual fee rates,
taking into account the creditworthiness of the borrowers. The fair values were
liabilities of approximately $127 million and $211 million on December 31, 1997
and 1996, respectively.
For BankAmerica, the fair value of exchange-traded derivative financial
instruments was based on quoted market prices or dealer quotes. Fair value of
non-exchange traded, or over-the-counter (OTC) derivative financial instruments
consisted of net unrealized gains and losses, accrued interest receivable or
payable, and premiums paid or received. These amounts were generally calculated
using discounted cash flow models based on current market yields for similar
types of instruments and the maturity of each instrument. The discount rates
were based on market interest rates and indices for similar derivative financial
instruments prevalent in the market. The fair value of these financial
instruments was $427 million and negative $432 million for trading and ALM at
December 31, 1997 and $49 million and negative $462 million for trading and ALM
at December 31, 1996, respectively.
<PAGE>
NOTE FOURTEEN -- BANKAMERICA CORPORATION (PARENT COMPANY)
The following tables present consolidated Parent Company financial
information:
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31
--------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from consolidated
Subsidiary banks $5,730 $4,274 $3,109
Other subsidiaries 728 670 160
Interest from consolidated subsidiaries 1,690 1,540 1,421
Other income 647 753 673
- --------------------------------------------------------------------------------
8,795 7,237 5,363
- --------------------------------------------------------------------------------
EXPENSES
Interest on borrowed funds 2,529 2,146 1,964
Noninterest expense 632 625 587
- --------------------------------------------------------------------------------
3,161 2,771 2,551
EARNINGS
Income before equity in undistributed
earnings of consolidated subsidiaries
and income taxes 5,634 4,466 2,812
- --------------------------------------------------------------------------------
Equity in undistributed earnings of
consolidated
Subsidiary banks 471 1,087 1,883
Other subsidiaries 106 92 273
- --------------------------------------------------------------------------------
577 1,179 2,156
- --------------------------------------------------------------------------------
Income before income taxes 6,211 5,645 4,968
Income tax benefit (331) (168) (179)
- --------------------------------------------------------------------------------
Net income $6,542 $5,813 $5,147
- -----------------------------------------=======================================
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $6,431 $5,611 $4,896
- -----------------------------------------=======================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEET
December 31
------------------------
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash held at subsidiary banks $ 2,518 $ 4,969
Temporary investments 1,208 5,232
Receivables from consolidated
Subsidiary banks 11,309 8,867
Other subsidiaries 13,933 12,961
Investment in consolidated
Subsidiary banks 49,445 39,029
Other subsidiaries 4,243 3,268
Other assets 3,117 2,565
- --------------------------------------------------------------------------------
TOTAL ASSETS $85,773 $76,891
- --------------------------------------------------------========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper and other notes payable $ 3,563 $ 3,896
Accrued expenses and other liabilities 2,200 1,483
Payables to consolidated subsidiaries 4,095 2,671
Long-term debt 31,331 31,048
Shareholders' equity 44,584 37,793
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $85,773 $76,891
- --------------------------------------------------------========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
--------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,542 $ 5,813 $ 5,147
Reconciliation of net income to net
cash provided by operating
activities
Equity in undistributed earnings
of consolidated subsidiaries (610) (1,232) (2,184)
Other operating activities 247 563 1
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 6,179 5,144 2,964
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in temporary
investments 4,037 (3,754) 705
Net increase in receivables from
consolidated subsidiaries (2,814) (613) (3,417)
Additional capital investment in
subsidiaries 60 (98) (458)
Acquisitions of subsidiaries, net
of cash (194) (726) -
Other investing activities 191 353 452
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 1,280 (4,838) (2,718)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in commercial
paper and other notes payable (400) 616 (199)
Proceeds from issuance of long-term
debt 4,887 8,804 7,371
Retirement of long-term debt (4,055) (4,423) (3,624)
Proceeds from issuance of common
stock 1,892 573 722
Common stock repurchased (8,540) (3,193) (1,813)
Cash dividends paid (2,175) (1,888) (1,677)
Other financing activities (1,519) 955 (382)
- --------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (9,910) 1,444 398
- --------------------------------------------------------------------------------
Net (decrease) increase in cash
held at subsidiary banks (2,451) 1,750 644
Cash held at subsidiary banks on
January 1 4,969 3,219 2,575
- --------------------------------------------------------------------------------
CASH HELD AT SUBSIDIARY BANKS
ON DECEMBER 31 $2,518 $ 4,969 $ 3,219
- ------------------------------------------======================================
</TABLE>
<PAGE>
NOTE FIFTEEN - PERFORMANCE BY GEOGRAPHIC AREA
Since the Corporation's operations are highly integrated, certain
asset, liability, income, and expense amounts must be allocated to arrive at
total assets, net interest and noninterest income, and net income by geographic
area. The Corporation identifies its geographic performance based upon the
business unit in which the assets are recorded and where the income is earned
and the expenses are incurred. In certain circumstances, units may transact
business with customers who are out of their immediate geographic area. For
example, a U.S. domiciled unit may have made a loan to a borrower who resides in
Latin America. In this instance, the loan and related income would be included
in domestic activities. Translation losses, for those units in hyperinflationary
economies, net of hedging, totaled $27 million, $23 million, and $14 million in
1997, 1996, and 1995, respectively. These amounts, which are reported in other
noninterest income, are included in the table below:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------
Net Interest and
(In millions) Year Total Assets Noninterest Income Net Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic 1997 $510,697 $28,442 $6,576
1996 $423,012 $24,741 $5,540
1995 $413,730 $22,893 $5,388
- --------------------------------------------------------------------------------
Asia 1997 25,411 885 (181)
1996 22,472 985 246
1995 18,365 683 112
- --------------------------------------------------------------------------------
Europe, Middle 1997 26,037 454 (37)
East, and Africa 1996 26,282 501 (53)
1995 23,700 225 (287)
- --------------------------------------------------------------------------------
Latin America 1997 6,372 355 163
and the Caribbean 1996 4,411 268 53
1995 4,003 92 (82)
- --------------------------------------------------------------------------------
Canada 1997 2,466 52 21
1996 1,525 63 27
1995 1,062 28 16
- --------------------------------------------------------------------------------
Total Foreign 1997 60,286 1,746 (34)
1996 54,690 1,817 273
1995 47,130 1,028 (241)
- --------------------------------------------------------------------------------
TOTAL 1997 $570,983 $30,188 $6,542
1996 $477,702 $26,558 $5,813
1995 $460,860 $23,921 $5,147
- --------------------------------================================================
</TABLE>
As of December 31, 1997 and 1996, no industry type nor individual state
in the domestic geographic area exceeded 10 percent of total loans.
<PAGE>
REPORT OF MANAGEMENT
The management of BankAmerica Corporation is responsible for the
preparation, integrity and objectivity of the supplemental consolidated
financial statements of the Corporation. The supplemental consolidated financial
statements and notes have been prepared by the Corporation in accordance with
generally accepted accounting principles and, in the judgment of management,
present fairly the Corporation's financial position and results of operations.
The supplemental financial information contained elsewhere in this report is
consistent with that in the supplemental financial statements. The supplemental
financial statements and other financial information in this report include
amounts that are based on management's best estimates and judgments and give due
consideration to materiality.
The Corporation maintains a system of internal accounting controls to
provide reasonable assurance that assets are safe-guarded and that transactions
are executed in accordance with management's authorization and recorded properly
to permit the preparation of financial statements in accordance with generally
accepted accounting principles. Management recognizes that even a highly
effective internal control system has inherent risks, including the possibility
of human error and the circumvention or overriding of controls, and that the
effectiveness of an internal control system can change with circumstances.
However, management believes that the internal control system provides
reasonable assurance that errors or irregularities that could be material to the
financial statements are prevented or would be detected on a timely basis and
corrected through the normal course of business. As of December 31, 1997,
management believes that the internal controls are in place and operating
effectively.
The Internal Audit Division of the Corporation reviews, evaluates,
monitors and makes recommendations on both administrative and accounting
control, which acts as an integral, but independent, part of the system of
internal controls.
The independent accountants were engaged to perform an independent
audit of the supplemental consolidated financial statements. In determining
the nature and extent of their auditing procedures, they have evaluated the
Corporation's accounting policies and procedures and the effectiveness of the
related internal control system. An independent audit provides an objective
review of management's responsibility to report operating results and financial
condition. Their report appears on page 44.
The Board of Directors discharges its responsibility for the
Corporation's financial statements through its Audit Committee. The Audit
Committee meets periodically with the independent accountants, internal auditors
and management. Both the independent accountants and internal auditors have
direct access to the Audit Committee to discuss the scope and results of their
work, the adequacy of internal account controls and the quality of financial
reporting.
/s/ HUGH L. MCCOLL JR. /s/ JAMES H. HANCE JR.
- --------------------------- ---------------------------
Hugh L. McColl Jr. James H. Hance Jr.
Chairman and Chief Financial Officer
Chief Executive Officer
November 13, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of BankAmerica Corporation
In our opinion, the accompanying supplemental consolidated balance sheet and the
related supplemental consolidated statements of income, of changes in
shareholderes' equity and of cash flows present fairly, in all material
respects, the financial position of BankAmerica Corporation (the "Corporation")
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Corporation's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note Two, on September 30, 1998, NationsBank Corporation merged
with BankAmerica Corporation to form the Corporation in a transaction accounted
for as a pooling of interests. The accompanying supplemental consolidated
financial statements give retroactive effect to the merger.
/s/ PRICEWATHERHOUSECOOPERS LLP
- -------------------------------
PriceWaterhouseCoopers LLP
Charlotte, North Carolina
November 13, 1998
<TABLE>
<CAPTION>
BANKAMERICA CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12(a)
================================================================================
Year Ended December 31
----------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EXCLUDING INTEREST ON
DEPOSITS
Income before taxes $10,556 $ 9,311 $ 8,377 $ 7,010 $ 6,047
Equity in undistributed
(earnings) losses of
unconsolidated
subsidiaries (49) (7) (19) (55) (42)
Fixed charges:
Interest expense
(including capitalized
interest) 8,219 7,082 6,354 4,572 2,735
1/3 of net rent expense 302 282 275 250 241
- --------------------------------------------------------------------------------
Total fixed charges 8,521 7,364 6,629 4,822 2,976
- --------------------------------------------------------------------------------
Earnings (excluding
capitalized interest) $19,026 $16,668 $14,987 $11,774 $ 8,979
- --------------------------------------------------------------------------------
Fixed charges $ 8,521 $ 7,364 $ 6,629 $ 4,822 $ 2,976
- --------------------------------------------------------------------------------
RATIO OF EARNINGS TO
FIXED CHARGES 2.23 2.26 2.26 2.44 3.02
- ----------------------------====================================================
INCLUDING INTEREST ON
DEPOSITS
Income before taxes $10,556 $ 9,311 $ 8,377 $ 7,010 $ 6,047
Equity in undistributed
(earnings) losses of
unconsolidated
subsidiaries (49) (7) (19) (55) (42)
Fixed charges:
Interest expense
(including capitalized
interest) 18,903 16,682 16,369 11,083 8,757
1/3 of net rent expense 302 282 275 250 241
- --------------------------------------------------------------------------------
Total fixed charges 19,205 16,964 16,644 11,333 8,998
- --------------------------------------------------------------------------------
Earnings (excluding
capitalized interest) $29,710 $26,268 $25,002 $18,285 $15,001
- --------------------------------------------------------------------------------
Fixed charges $19,205 $16,964 $16,644 $11,333 $ 8,998
- --------------------------------------------------------------------------------
RATIO OF EARNINGS TO
FIXED CHARGES 1.55 1.55 1.50 1.61 1.67
- ----------------------------====================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BANKAMERICA CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS EXHIBIT 12(b)
================================================================================
Year Ended December 31
----------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EXCLUDING INTEREST ON
DEPOSITS
Income before taxes $10,556 $ 9,311 $ 8,377 $ 7,010 $ 6,047
Equity in undistributed
(earnings) losses of
unconsolidated
subsidiaries (49) (7) (19) (55) (42)
Fixed charges:
Interest expense
(including capitalized
interest) 8,219 7,082 6,354 4,572 2,735
1/3 of net rent expense 302 282 275 250 241
- --------------------------------------------------------------------------------
Total fixed charges 8,521 7,364 6,629 4,822 2,976
- --------------------------------------------------------------------------------
Preferred dividend
requirements 183 332 426 467 466
- --------------------------------------------------------------------------------
Earnings (excluding
capitalized interest) $19,026 $16,668 $14,987 $11,774 $ 8,979
- --------------------------------------------------------------------------------
Fixed charges and
preferred dividends $ 8,704 $ 7,696 $ 7,055 $ 5,289 $ 3,442
- --------------------------------------------------------------------------------
RATIO OF EARNINGS TO
FIXED CHARGES AND
PREFERRED DIVIDENDS 2.19 2.17 2.12 2.23 2.61
- ---------------------------=====================================================
INCLUDING INTEREST ON
DEPOSITS
Income before taxes $ 10,556 $ 9,311 $ 8,377 $ 7,010 $ 6,047
Equity in undistributed
(earnings) losses of
unconsolidated
subsidiaries (49) (7) (19) (55) (42)
Fixed charges:
Interest expense
(including capitalized
interest) 18,903 16,682 16,369 11,083 8,757
1/3 of net rent expense 302 282 275 250 241
- --------------------------------------------------------------------------------
Total fixed charges 19,205 16,964 16,644 11,333 8,998
- --------------------------------------------------------------------------------
Preferred dividend
requirements 183 332 426 467 466
- --------------------------------------------------------------------------------
Earnings (excluding
capitalized interest) $29,710 $26,268 $25,002 $18,285 $15,001
- --------------------------------------------------------------------------------
Fixed charges and
preferred dividends $ 19,388 $ 17,296 $ 17,070 $ 11,800 $ 9,464
- --------------------------------------------------------------------------------
RATIO OF EARNINGS TO
FIXED CHARGES AND
PREFERRED DIVIDENDS 1.53 1.52 1.46 1.55 1.59
- ---------------------------=====================================================
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 333-07229;
333-15375; 333-18273; 333-43137; 333-13811; 333-51367; 33-54784; 33-49881;
33-57533; 33-63097 and 333-45498); the Registration Statements on Form S-8 (Nos.
33-45279; 33-60695; 333-02875; 333-07105; 333-20913; 333-24331; 333-58657;
333-65209 and 2-80406); and the Post-Effective Amendment Nos. 3 and 4 on Form
S-8 to Registration Statement on Form S-4 (No. 333-60553)) of BankAmerica
Corporation of our report dated November 13, 1998 appearing on page 44 of this
Form 8-K.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PriceWaterhouseCoopers LLP
Charlotte, North Carolina
November 13, 1998
