As filed with the Securities and Exchange Commission on April 15, 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): January 9, 1998
NATIONSBANK CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
North Carolina 1-6523 56-0906609
-------------- ------ ----------
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
NationsBank Corporate Center, Charlotte, North Carolina 28255
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(704) 386-5000
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(Registrant's Telephone Number, including Area Code)
<PAGE>
ITEM 5. OTHER EVENTS
Merger with Barnett Banks, Inc. On January 9, 1998, NationsBank
-------------------------------
Corporation (the Corporation) completed its merger with Barnett Banks, Inc.
(Barnett), a multi-bank holding company headquartered in Jacksonville, Florida.
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. 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 the Corporation and Barnett have been combined and reflected at
their historical amounts.
The following consolidated financial information of the Corporation restate
the Corporation's historical consolidated Management's Discussion and Analysis
of Results of Operations and Financial Condition and financial statements as of
and for the three years ended December 31, 1997 to reflect the Barnett merger
and are incorporated herein by reference to Exhibit 99.1 filed herewith:
1. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
2. Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995.
3. Consolidated Balance Sheet as of December 31, 1997 and 1996.
4. Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
5. Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.
6. Notes to Consolidated Financial Statements.
The report of Price Waterhouse LLP, independent accountants, on the
consolidated financial statements of the Corporation as of 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 incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
Not applicable.
<PAGE>
(c) Exhibits.
23 Consent of Price Waterhouse LLP.
99.1 Restated Consolidated Management's Discussion and Analysis of
Results of Operations and Financial Condition and Financial
Statements of NationsBank Corporation as of and for the three
years ended December 31, 1997.
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.
NATIONSBANK CORPORATION
By: /s/ Marc D. Oken
_________________________
Marc D. Oken
Chief Accounting Officer
Dated: April 15, 1998
<PAGE>
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
ON JANUARY 9, 1998, THE CORPORATION COMPLETED ITS MERGER WITH BARNETT,
CREATING THE THIRD LARGEST BANKING COMPANY IN THE UNITED STATES WITH
APPROXIMATELY $310 BILLION IN ASSETS (THE MERGER). THE MERGER WAS ACCOUNTED FOR
AS A POOLING OF INTERESTS AND ACCORDINGLY ALL RELATED FINANCIAL INFORMATION HAS
BEEN RESTATED FOR ALL PERIODS PRESENTED. ON FEBRUARY 27, 1997, THE CORPORATION
COMPLETED A 2-FOR-1 SPLIT OF ITS COMMON STOCK. ALL FINANCIAL DATA INCLUDED IN
THIS CURRENT REPORT ON FORM 8-K REFLECTS THE IMPACT OF THE MERGER AND STOCK
SPLIT.
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH ARE
SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS, WHICH ARE
REPRESENTATIVE ONLY ON THE DATE HEREOF. READERS OF THIS REPORT SHOULD NOT RELY
SOLELY ON THE FORWARD-LOOKING STATEMENTS AND SHOULD CONSIDER ALL UNCERTAINTIES
AND RISKS DISCUSSED THROUGHOUT THIS REPORT. THE CORPORATION UNDERTAKES NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
THE CORPORATION'S LOAN GROWTH IS DEPENDENT ON ECONOMIC CONDITIONS AS
WELL AS VARIOUS DISCRETIONARY FACTORS, SUCH AS DECISIONS TO SECURITIZE, SELL OR
PURCHASE CERTAIN LOANS OR LOAN PORTFOLIOS, SYNDICATIONS OR PARTICIPATIONS OF
LOANS, THE RETENTION OF RESIDENTIAL MORTGAGE LOANS GENERATED BY THE MORTGAGE
SUBSIDIARY, THE MANAGEMENT OF BORROWER, INDUSTRY, PRODUCT AND GEOGRAPHIC
CONCENTRATIONS AND THE MIX OF THE LOAN PORTFOLIO. THE RATE OF CHARGE-OFFS AND,
ACCORDINGLY, PROVISION EXPENSE CAN BE AFFECTED BY LOCAL, REGIONAL AND
INTERNATIONAL ECONOMIC CONDITIONS, CONCENTRATIONS OF BORROWERS, INDUSTRIES,
PRODUCTS AND GEOGRAPHIC LOCATIONS, THE MIX OF THE LOAN PORTFOLIO AND
MANAGEMENT'S JUDGMENTS REGARDING THE COLLECTIBILITY OF LOANS. LIQUIDITY
REQUIREMENTS MAY CHANGE AS A RESULT OF FLUCTUATIONS IN ASSETS AND LIABILITIES
AND OFF-BALANCE SHEET EXPOSURES, WHICH WILL IMPACT THE CAPITAL AND DEBT
FINANCING NEEDS OF THE CORPORATION AND THE MIX OF FUNDING SOURCES. DECISIONS TO
PURCHASE OR SELL SECURITIES ARE ALSO DEPENDENT ON LIQUIDITY REQUIREMENTS AS WELL
AS ON- AND OFF-BALANCE SHEET POSITIONS. FACTORS THAT MAY IMPACT INTEREST RATE
RISK INCLUDE LOCAL, REGIONAL AND INTERNATIONAL ECONOMIC CONDITIONS, LEVELS, MIX,
MATURITIES, YIELDS OR RATES OF ASSETS AND LIABILITIES, UTILIZATION AND
EFFECTIVENESS OF INTEREST RATE CONTRACTS AND THE WHOLESALE AND RETAIL FUNDING
SOURCES OF THE CORPORATION. FACTORS THAT MAY CAUSE ACTUAL NONINTEREST EXPENSE TO
DIFFER FROM ESTIMATES INCLUDE UNCERTAINTIES RELATING TO THE CORPORATION'S
EFFORTS TO PREPARE ITS SYSTEMS AND TECHNOLOGY FOR THE YEAR 2000, AS WELL AS
UNCERTAINTIES RELATING TO THE ABILITY OF THIRD PARTIES WITH WHOM THE CORPORATION
HAS BUSINESS RELATIONSHIPS TO ADDRESS THE YEAR 2000 ISSUE IN A TIMELY AND
ADEQUATE MANNER.
IN ADDITION, THE BANKING INDUSTRY IN GENERAL IS SUBJECT TO VARIOUS
MONETARY AND FISCAL POLICIES AND REGULATIONS, WHICH INCLUDE THOSE DETERMINED BY
THE FEDERAL RESERVE BOARD, THE OFFICE OF THE COMPTROLLER OF THE CURRENCY,
FEDERAL DEPOSIT INSURANCE CORPORATION, STATE REGULATORS AND THE OFFICE OF THRIFT
SUPERVISION, WHICH POLICIES AND REGULATIONS COULD AFFECT THE CORPORATION'S
RESULTS. OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER FROM THE
FORWARD-LOOKING STATEMENTS INCLUDE COMPETITION WITH OTHER LOCAL, REGIONAL AND
INTERNATIONAL BANKS, SAVINGS AND LOAN ASSOCIATIONS, CREDIT UNIONS AND OTHER
NON-BANK FINANCIAL INSTITUTIONS, SUCH AS INVESTMENT BANKING FIRMS, INVESTMENT
ADVISORY FIRMS, BROKERAGE FIRMS, MUTUAL FUNDS AND INSURANCE COMPANIES, AS WELL
AS OTHER ENTITIES WHICH OFFER FINANCIAL SERVICES, LOCATED BOTH WITHIN AND
WITHOUT THE UNITED STATES; INTEREST RATE, MARKET AND MONETARY FLUCTUATIONS;
INFLATION; GENERAL ECONOMIC CONDITIONS AND ECONOMIC CONDITIONS IN THE GEOGRAPHIC
REGIONS AND INDUSTRIES IN WHICH THE CORPORATION OPERATES; INTRODUCTION AND
ACCEPTANCE OF NEW BANKING-RELATED PRODUCTS, SERVICES AND ENHANCEMENTS; FEE
PRICING STRATEGIES, MERGERS AND ACQUISITIONS AND THEIR INTEGRATION INTO THE
CORPORATION; AND MANAGEMENT'S ABILITY TO MANAGE THESE AND OTHER RISKS.
1997 COMPARED TO 1996
OVERVIEW
The Corporation is a multi-bank holding company headquartered in
Charlotte, North Carolina, which provides a diversified range of banking and
certain non-banking financial services both domestically and internationally
through three major Business Units: the GENERAL BANK, GLOBAL FINANCE and
FINANCIAL SERVICES.
2
<PAGE>
On January 7, 1997, the Corporation completed its acquisition of
Boatmen's Bancshares, Inc. (Boatmen's), headquartered in St. Louis, Missouri. In
addition, on October 1, 1997, the Corporation acquired Montgomery Securities
(Montgomery), an investment banking and institutional brokerage firm
headquartered in San Francisco, California. The Corporation accounted for these
acquisitions as purchase business combinations; therefore, the results of
operations of Boatmen's and Montgomery are included in the financial statements
of the Corporation from their dates of acquisition, respectively.
The increases over the prior year in income, expense and balance sheet
categories were due largely to the Boatmen's acquisition; however, income and
most balance sheet categories were also impacted by internal growth. Other
significant changes in the Corporation's results of operations and financial
position are described in the following sections.
Refer to TABLE ONE and TABLE NINETEEN for annual and quarterly selected
financial data, respectively.
KEY PERFORMANCE HIGHLIGHTS FOR 1997 WERE:
o Operating net income (net income excluding merger and restructuring items)
reflected growth of approximately 19 percent over 1996, amounting to $3.60
billion for the year ended December 31, 1997 compared to $3.02 billion in
1996. Operating earnings per common share for 1997 increased 4 percent to
$3.81 from $3.65 in 1996 and operating diluted earnings per common share
increased 3 percent to $3.71 from $3.59 in 1996. Including merger and
restructuring items of $374 million ($264 million, net of tax) and $118
million ($77 million, net of tax) for 1997 and 1996, respectively, net
income was $3.33 billion and $2.94 billion, respectively. Earnings per
common share and diluted earnings per common share including merger and
restructuring items were $3.53 and $3.44, respectively, for 1997 and $3.56
and $3.50, respectively, for 1996.
o Taxable-equivalent net interest income increased 18 percent to $9.8
billion in 1997. Excluding the impact of the Boatmen's acquisition, loan
sales and securitizations, net interest income increased approximately 6
percent. The net interest yield increased to 3.98 percent compared to 3.91
percent in 1996.
o The provision for credit losses covered net charge-offs and totaled $954
million in 1997 compared to $760 million in 1996. Net charge-offs as a
percentage of average loans, leases and factored accounts receivable
increased to .53 percent in 1997 compared to .49 percent in 1996, while net
charge-offs totaled $951 million in 1997 compared to $750 million in 1996.
Higher net charge-offs were largely the result of an increase in the
average loans, leases, and factored accounts receivable portfolio,
attributable to both the Boatmen's acquisition and core loan growth as well
as deterioration in consumer credit quality experienced on an industry-wide
basis. Higher total consumer net charge-offs were partially offset by lower
net charge-offs in the total commercial loan portfolio. Nonperforming
assets were $1.4 billion on December 31, 1997 compared to $1.3 billion on
December 31, 1996, the result of the Boatmen's acquisition.
o Noninterest income increased 35 percent to $5.9 billion in 1997. This
growth was attributable to higher levels of income from virtually all
areas, including service charges on deposit accounts, investment banking
income, asset management and fiduciary service fees and brokerage income.
Excluding the acquisitions of Boatmen's and Montgomery, noninterest income
increased approximately 12 percent.
o Noninterest expense increased to $9.2 billion, but increased less than 3
percent if the Boatmen's and Montgomery acquisitions and related transition
expenses were excluded.
o Operating cash basis ratios, which measure operating performance excluding
merger and restructuring items, intangible assets and the related
amortization expense, improved with operating cash basis diluted earnings
per common share rising 11 percent to $4.23 in 1997 compared to $3.80 in
1996. Return on average tangible common shareholders' equity, excluding
merger and restructuring items, increased 655 basis points to 29.41 percent
in 1997 compared to 22.86 percent in 1996. The cash basis efficiency ratio
was 55.3 percent in 1997.
The remainder of management's discussion and analysis of the
consolidated results of operations and financial condition of the Corporation
should be read together with the consolidated financial statements and related
notes presented on pages 38 through 73.
3
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Table One
Five-Year Summary of Selected Financial Data
(Dollars in Millions Except Per-Share Information)
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income statement
Interest income $ 19,687 $ 16,832 $ 16,186 $ 13,084 $ 10,858
Interest expense 9,970 8,608 8,992 6,239 4,570
Net interest income (taxable-equivalent) 9,848 8,335 7,338 6,983 6,423
Net interest income 9,717 8,224 7,194 6,845 6,288
Provision for credit losses 954 760 505 384 550
Gains (losses) on sales of securities 155 86 34 (26) 82
Noninterest income 5,929 4,408 3,787 3,153 2,702
Foreclosed properties expense 9 21 30 5 170
Merger and restructuring items 374 118 - - 30
Other noninterest expense 9,234 7,283 6,670 6,290 5,703
Income before taxes and effect of change
in method of accounting for income taxes 5,230 4,536 3,810 3,293 2,619
Income tax expense 1,898 1,597 1,327 1,115 897
Income before effect of change in method of
accounting for income taxes 3,332 2,939 2,483 2,178 1,722
Effect of change in method of accounting for
income taxes - - - - 200
Net income 3,332 2,939 2,483 2,178 1,922
Net income available to common shareholders 3,321 2,922 2,459 2,150 1,894
Net income (excluding merger and restructuring items) 3,596 3,016 2,483 2,178 1,942
Average common shares issued (in thousands) 941,992 820,945 773,799 782,255 749,122
Per common share
Earnings before effect of change
in method of accounting for income taxes $ 3.53 $ 3.56 $ 3.18 $ 2.75 $ 2.26
Earnings 3.53 3.56 3.18 2.75 2.53
Earnings (excluding merger and restructuring items) 3.81 3.65 3.18 2.75 2.55
Diluted earnings 3.44 3.50 3.10 2.70 2.48
Diluted earnings (excluding merger and restructuring items) 3.71 3.59 3.10 2.70 2.51
Cash dividends paid 1.37 1.20 1.04 .94 .82
Shareholders' equity (year-end) 26.15 21.23 20.59 17.75 16.19
Balance sheet (year-end)
Total loans, leases and factored accounts receivable,
net of unearned income 176,778 153,041 147,519 131,892 117,937
Total assets 310,554 226,949 228,852 210,882 196,017
Total deposits 173,643 140,329 134,925 135,579 123,747
Long-term debt 28,890 24,212 18,966 9,265 9,034
Common shareholders' equity 24,684 16,956 15,933 13,895 12,518
Total shareholders' equity 24,747 17,079 16,073 14,145 12,853
Performance ratios
Return on average assets 1.16 % 1.22 % 1.08 % 1.07 % 1.00 %
Return on average assets (excluding merger and
restructuring items) 1.25 1.25 1.08 1.07 1.01
Return on average common shareholders' equity (1) 14.12 17.74 16.91 16.23 15.23
Return on average common shareholders' equity
(excluding merger and restructuring items) (1) 15.25 18.21 16.91 16.23 15.41
Efficiency ratio 58.5 57.1 60.0 62.1 62.5
Total equity to total assets 7.97 7.53 7.02 6.71 6.56
Risk-based capital ratios (year-end)
Tier 1 6.50 7.76 7.24 7.43 7.41
Total 10.89 12.66 11.58 11.47 11.73
Leverage capital ratio 5.57 7.09 6.27 6.18 6.00
Cash basis financial data (2)
Earnings per common share $ 4.06 $ 3.78 $ 3.40 $ 2.95 $ 2.71
Earnings per common share (excluding merger
and restructuring items) 4.34 3.87 3.40 2.95 2.73
Diluted earnings per common share 3.96 3.71 3.32 2.90 2.66
Diluted earnings per common share (excluding
merger and restructuring items) 4.23 3.80 3.32 2.90 2.68
Return on average tangible assets 1.38 % 1.30 % 1.17 % 1.15 % 1.09 %
Return on average tangible assets (excluding
merger and restructuring items) 1.47 1.34 1.17 1.15 1.10
Return on average tangible common shareholders' equity (1) 27.51 22.31 21.32 19.89 18.56
Return on average tangible common shareholders' equity
(excluding merger and restructuring items) (1) 29.41 22.86 21.32 19.89 18.76
Efficiency ratio 55.3 55.7 58.4 60.5 61.0
Ending tangible equity to tangible assets 4.73 6.44 6.09 5.81 5.83
Market price per share of common stock
Close at the end of the year $ 60 13/16 $ 48 7/8 $ 34 13/16 $ 22 9/16 $ 24 1/2
High for the year 71 11/16 52 5/8 37 3/8 28 11/16 29
Low for the year 48 32 3/16 22 5/16 21 11/16 22 1/4
</TABLE>
(1) Average common shareholders' equity does not include the effect of market
value adjustments to securities available for sale and marketable equity
securities.
(2) Cash basis calculations exclude intangible assets and the related
amortization expense.
In 1993, return on average assets and return on equity after the tax benefit
from the impact of adopting a new income tax accounting standard were 1.12% and
17.03%, respectively.
- --------------------------------------------------------------------------------
4
<PAGE>
BUSINESS UNIT OPERATIONS
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries. The
Corporation manages its business activities through three major business units:
GENERAL BANK, GLOBAL FINANCE and FINANCIAL SERVICES. The business units are
managed with a focus on numerous performance objectives as presented in TABLE
TWO, including business unit earnings, return on average equity and the
efficiency ratio. The table also includes certain cash basis information, which
excludes the impact of intangible assets and the related amortization expense.
The net interest income of the business units reflects the results of a
funds transfer pricing process which derives net interest income by matching
assets and liabilities with similar interest rate sensitivity and maturity
characteristics. Equity capital is allocated to each business unit based on an
assessment of its inherent risk.
The GENERAL BANK and GLOBAL FINANCE business unit results reflect the
impact of the purchase of Boatmen's, which resulted in an increase in goodwill
of approximately $5.9 billion and approximately $234 million of related
amortization expense on a consolidated basis in 1997. This additional expense
had unfavorable impacts on the return on average equity and efficiency ratios
for both the GENERAL BANK and GLOBAL FINANCE in 1997. GLOBAL FINANCE'S results
also reflect the impact of the purchase of Montgomery.
The GENERAL BANK provides comprehensive retail banking services for
individuals and businesses. Within the GENERAL BANK, the BANKING GROUP is the
service provider to the consumer sector as well as small and medium-size
companies. The BANKING GROUP'S delivery channels included approximately 3,000
banking centers and approximately 7,000 automated teller machines which provide
fully-automated, 24-hour cash dispensing and deposit services. These delivery
channels are located throughout the Corporation's franchise and serve 16 million
households in 16 states and the District of Columbia. Specialized services, such
as the origination and servicing of residential mortgage loans, the issuance and
servicing of credit cards, indirect lending, dealer finance and certain
insurance services, are provided throughout the Corporation's franchise. In
addition, certain other products are provided by the FINANCIAL PRODUCTS GROUP on
a nationwide basis. The GENERAL BANK also contains the ASSET MANAGEMENT GROUP,
which includes businesses that provide full-service and discount brokerage,
investment advisory and investment management services. The ASSET MANAGEMENT
GROUP also advises the Nations Funds family of mutual funds. The PRIVATE CLIENT
GROUP is part of the ASSET MANAGEMENT GROUP and provides asset management,
banking and trust services for wealthy individuals, business owners, corporate
executives and the private foundations established by them.
The GENERAL BANK'S earnings increased 14 percent to $2.4 billion in
1997. The acquisition of Boatmen's accounted for a large portion of the GENERAL
BANK'S increased earnings over 1996 with internal growth also contributing to
the increase. Taxable-equivalent net interest income in the GENERAL BANK
increased $1.3 billion, primarily reflecting the impact of the Boatmen's
acquisition, deposit pricing management efforts and core loan growth. The net
interest yield remained essentially unchanged in 1997. Average loans increased
from $108.7 billion in 1996 to $125.3 billion in 1997 with the increase due to
the Boatmen's acquisition. Excluding the impact of the Boatmen's acquisition and
the $8.1-billion of securitizations that occurred mainly during the third
quarter of 1997, average loans and leases were essentially unchanged compared to
1996 average levels.
Noninterest income in the GENERAL BANK rose 28 percent to $4.0 billion
due to higher service charges on deposit accounts, mortgage servicing and other
mortgage-related income and credit card income. The increase was attributable
primarily to the acquisition of Boatmen's but also reflected the impact of
internal growth of approximately 12 percent for service charges on deposit
accounts and approximately 3 percent for credit card income. Higher deposit
account service charges were the result of changes in deposit pricing throughout
the Corporation's franchise. Also contributing to the increase was a gain on the
sale of a $306-million out-of-market credit card portfolio during the third
quarter of 1997. Noninterest expense increased 26 percent to $7.2 billion due to
the acquisition of Boatmen's, which resulted in an increase in full-time
equivalent employees and additional amortization expense, with the remaining
increase spread across most major expense categories. Excluding the acquisition
of Boatmen's, noninterest expense increased less than 3 percent when compared to
1996. The cash basis efficiency ratio was essentially unchanged at 57.7 percent
for
5
<PAGE>
1997. The return on average tangible equity increased approximately 200 basis
points to 28 percent, the result of revenue growth which offset an increase in
operating expenses and higher equity levels resulting from the Boatmen's
acquisition.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Two
Business Unit Summary
For the Year Ended December 31
(Dollars in Millions)
General Bank Global Finance Financial Services
---------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income
(taxable-equivalent) $ 7,752 $ 6,493 $ 1,416 $ 1,202 $ 543 $ 593
Noninterest income 4,003 3,123 1,430 1,019 496 261
---------- ----------- ------------ ----------- ---------- -----------
Total revenue 11,755 9,616 2,846 2,221 1,039 854
Provision for credit losses 731 592 74 43 149 125
Gains on sales of securities 37 44 2 - - -
Foreclosed properties
expense (income) 8 17 (8) (5) 9 9
Noninterest expense 7,199 5,695 1,490 1,188 546 401
---------- ----------- ------------ ----------- ---------- -----------
Income before income taxes 3,854 3,356 1,292 995 335 319
Income tax expense 1,451 1,240 466 360 130 113
---------- ----------- ------------ ----------- ---------- -----------
Net income (1) $ 2,403 $ 2,116 $ 826 $ 635 $ 205 $ 206
========== =========== ============ =========== ========== ===========
Cash basis earnings (2) $ 2,814 $ 2,256 $ 879 $ 652 $ 243 $ 228
Net interest yield 4.84 % 4.85 % 3.01 %(4) 3.09 %(4) 5.67% 6.88%
Average equity to average assets 8.04 6.98 5.5 4.9 17.67 16.50
Return on average equity 17 21 17 16 9 13
Return on average tangible equity (2) 28 26 20 17 17 19
Efficiency ratio 61.2 59.2 52.4 53.5 52.6 47.0
Cash basis efficiency ratio (2) 57.7 57.8 50.5 52.7 48.9 44.4
Average (3)
Total loans and leases,
net of unearned income $ 125,320 $ 108,671 $ 42,290 $ 36,117 $ 9,502 $ 8,578
Total deposits 147,832 121,109 9,992 8,212 - -
Total assets 174,797 144,181 89,194 78,368 12,289 9,601
Period-end (3)
Total loans and leases,
net of unearned income 123,767 106,639 41,802 36,763 10,576 8,864
Total deposits 148,411 123,911 11,458 8,321 - -
</TABLE>
(1) Business Unit results are presented on a fully allocated basis but do not
include net expenses of $102 million for 1997 and $18 million for 1996,
which represent the net impact of earnings associated with unassigned
capital, gains on sales of certain securities, merger and restructuring
items and other corporate activities.
(2) Cash basis calculations exclude intangible assets and the related
amortization expense.
(3) The sums of balance sheet amounts differ from consolidated amounts due to
activities between the Business Units.
(4) Global Finance's net interest yield excludes the impact of trading-related
activities. Including trading-related activities, the net interest yield
was 1.82 percent for 1997 and 1.78 percent for 1996.
- --------------------------------------------------------------------------------
GLOBAL FINANCE provides a broad array of banking, bank-related and
investment banking products and services to domestic and international
corporations, institutions and other customers through its CORPORATE
FINANCE/CAPITAL MARKETS, SPECIALIZED LENDING, REAL ESTATE, and TRANSACTION
PRODUCTS units. The GLOBAL FINANCE group serves as a principal lender and
investor, as well as an advisor, and manages treasury and trade transactions for
clients and customers. Loan origination and syndication, asset-backed lending,
leasing, factoring, project finance and mergers and acquisitions consulting are
representative of the services provided. These services are provided through
various domestic and international offices. Through its Section 20 subsidiary,
NATIONSBANC MONTGOMERY SECURITIES LLC, GLOBAL FINANCE is a primary dealer of
U.S. Government Securities and underwrites, distributes and makes markets in
high-grade and high-yield debt securities and equity securities. Additionally,
GLOBAL FINANCE is a market maker in derivative products which include swap
agreements, option contracts, forward settlement contracts, financial futures
and other derivative products in certain interest rate, foreign exchange,
commodity and equity markets. In support of these activities, GLOBAL FINANCE
takes positions to support client demands and its own account. Major centers for
the above activities are Charlotte, Chicago, London, New York, San Francisco,
Singapore and Tokyo.
GLOBAL FINANCE earned $826 million in 1997 compared to $635 million in
1996, the result of higher levels of net interest income and noninterest income,
which more than offset higher
6
<PAGE>
noninterest and provision expenses. Taxable-equivalent net interest income for
1997 was $1.4 billion compared to $1.2 billion in 1996 reflecting loan growth
partially offset by increased funding costs and competitive pressure on
commercial loan pricing. The average loans and leases portfolio increased to
$42.3 billion in 1997 compared to $36.1 billion in 1996 as the result of core
loan growth and the acquisition of Boatmen's. This increase was net of a
securitization of $4.2 billion of commercial loans completed during the third
quarter of 1997.
Noninterest income rose 40 percent over 1996, reflecting higher
securities underwriting and other investment banking income and brokerage
income, due to the impact of the Montgomery acquisition and continued growth.
Noninterest expense increased to $1.5 billion in 1997, due mainly to higher
personnel and amortization expenses associated with the Montgomery and Boatmen's
acquisitions. The cash basis efficiency ratio improved 220 basis points to 50.5
percent as revenue growth outpaced expense increases. The return on average
tangible equity increased 300 basis points to 20 percent, reflecting the impact
of higher earnings.
FINANCIAL SERVICES is comprised of NATIONSCREDIT CORPORATION,
EQUICREDIT CORPORATION (EQUICREDIT) and OXFORD RESOURCES CORP. (OXFORD).
NATIONSCREDIT CORPORATION includes NATIONSCREDIT CONSUMER CORPORATION and
NATIONSCREDIT COMMERCIAL CORPORATION. NATIONSCREDIT CONSUMER CORPORATION, which
has 268 branches in 41 states, provides personal, mortgage and automobile loans
to consumers, and retail finance programs to dealers. NATIONSCREDIT COMMERCIAL
CORPORATION consists of divisions that specialize in the following commercial
financing areas: equipment loans and leases; loans for debt restructuring,
mergers and acquisitions and working capital; real estate, golf/recreational and
health care financing; and inventory financing to manufacturers, distributors
and dealers. EQUICREDIT provides sub-prime mortgage and home equity loans
directly and through correspondents and OXFORD (acquired on April 1, 1997)
provides lease financing for purchasers of new and used cars.
FINANCIAL SERVICES' earnings of $205 million were essentially flat in
comparison to 1996. Taxable-equivalent net interest income decreased 8 percent
resulting from the interest expense associated with funding OXFORD'S automobiles
under operating leases. The related revenues for OXFORD are recognized as a
component of noninterest income. The $924 million increase in average loans and
leases was net of securitizations of approximately $3.4 billion. The net
interest yield of 5.67 percent was down 121 basis points from 1996 due
principally to the addition of OXFORD'S interest expense as well as increased
competitive pressure on loan pricing. Noninterest income rose 90 percent to $496
million in 1997, reflecting the addition of OXFORD and gains associated with the
sale of 29 branches during the first quarter of 1997. Noninterest expense
increased 36 percent to $546 million due primarily to the acquisition of OXFORD
while the cash basis efficiency ratio was 48.9 percent in 1997. The return on
average equity decreased from 13 percent to 9 percent in 1997 as a result of
flat earnings on a higher equity base.
RESULTS OF OPERATIONS
NET INTEREST INCOME
An analysis of the Corporation's taxable-equivalent net interest income
and average balance sheet levels for the last three years and most recent five
quarters is presented in TABLES THREE and TWENTY, respectively. The changes in
net interest income from year to year are analyzed in TABLE FOUR.
Taxable-equivalent net interest income increased approximately 18
percent to $9.8 billion in 1997 compared to $8.3 billion in 1996 due primarily
to the acquisition of Boatmen's. Excluding the impact of the Boatmen's
acquisition, loan sales and securitizations, core net interest income increased
approximately 6 percent over 1996. This increase was the result of the improved
contribution of the securities portfolios, deposit pricing management efforts
and core loan growth, partially offset by the impact of the sale of certain
consumer loans in the third quarter of 1996 and an increased reliance on
long-term debt. While securitizations lowered net interest income by
approximately $507 million in 1997, they did not significantly affect the
Corporation's earnings. When the Corporation securitizes loans, its role becomes
that of a servicer and the income related to securitized loans is reflected in
noninterest income.
The net interest yield increased to 3.98 percent in 1997 compared to
3.91 percent in 1996, primarily reflecting the improved contribution of the
securities portfolios and deposit pricing
7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Table Three
12-Month Taxable-Equivalent Data
(Dollars in Millions)
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Average Average
Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned income (1)
Commercial $ 64,681 $ 5,441 8.41 % $ 54,369 $ 4,458 8.20 %
Real estate commercial 9,942 879 8.84 8,265 734 8.88
Real estate construction 4,621 419 9.07 3,974 360 9.07
----------------------------------------------------------------------------
Total commercial 79,244 6,739 8.50 66,608 5,552 8.33
----------------------------------------------------------------------------
Residential mortgage 41,096 3,215 7.82 38,038 2,963 7.79
Credit card 8,135 993 12.21 7,818 967 12.36
Other consumer 38,601 3,665 9.49 33,043 3,174 9.61
----------------------------------------------------------------------------
Total consumer 87,832 7,873 8.96 78,899 7,104 9.00
----------------------------------------------------------------------------
Foreign 3,626 258 7.10 2,792 192 6.86
Lease financing 6,037 476 7.89 4,487 344 7.69
----------------------------------------------------------------------------
Total loans and leases, net 176,739 15,346 8.68 152,786 13,192 8.63
----------------------------------------------------------------------------
Securities
Held for investment 1,553 95 6.11 3,442 193 5.59
Available for sale (2) 30,836 2,100 6.81 22,318 1,465 6.57
----------------------------------------------------------------------------
Total securities 32,389 2,195 6.78 25,760 1,658 6.44
----------------------------------------------------------------------------
Federal funds sold and securities purchased
under agreements to resell 12,502 699 5.59 13,265 689 5.19
Time deposits placed and other
short-term investments 2,181 126 5.79 1,492 82 5.52
Trading account securities (3) 22,500 1,352 6.01 19,057 1,228 6.44
Other earning assets 1,226 100 8.16 1,078 94 8.74
----------------------------------------------------------------------------
Total earning assets (4) 247,537 19,818 8.01 213,438 16,943 7.94
Cash and cash equivalents 10,826 9,891
Factored accounts receivable 1,179 1,136
Other assets, less allowance for credit losses 28,255 17,663
----------------------------------------------------------------------------
Total assets $ 287,797 $ 242,128
============================================================================
Interest-bearing liabilities
Savings $ 12,777 248 1.94 $ 12,165 255 2.10
NOW and money market deposit accounts 53,316 1,330 2.49 42,385 1,004 2.37
Consumer CDs and IRAs 50,329 2,615 5.20 42,327 2,212 5.23
Negotiated CDs, public funds and other time deposits 3,142 172 5.49 3,160 173 5.50
Foreign time deposits 9,776 526 5.38 11,180 602 5.38
Federal funds purchased, securities sold under
agreements to repurchase and other short-term
borrowings 44,786 2,435 5.44 41,747 2,274 5.45
Trading account liabilities (3) 10,285 678 6.59 10,161 653 6.42
Long-term debt (5) 29,758 1,966 6.61 21,906 1,435 6.55
----------------------------------------------------------------------------
Total interest-bearing liabilities (6) 214,169 9,970 4.66 185,031 8,608 4.65
----------------------------------------------------------------------------
Noninterest-bearing sources
Noninterest-bearing deposits 37,574 29,562
Other liabilities 12,441 10,948
Shareholders' equity 23,613 16,587
----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 287,797 $ 242,128
============================================================================
Net interest spread 3.35 3.29
Impact of noninterest-bearing sources .63 .62
----------------------------------------------------------------------------
Net interest income/yield on earning assets $ 9,848 3.98 % $ 8,335 3.91 %
============================================================================
<CAPTION>
---------------------------------------------
1995
---------------------------------------------
Average
Balance Income
Sheet or Yields/
Amounts Expense Rates
---------------------------------------------
<S> <C> <C> <C>
Earning assets
Loans and leases, net of unearned income (1)
Commercial $ 50,912 $ 4,176 8.20 %
Real estate commercial 9,514 871 9.15
Real estate construction 4,037 400 9.91
---------------------------------------------
Total commercial 64,463 5,447 8.45
---------------------------------------------
Residential mortgage 31,680 2,446 7.72
Credit card 6,528 879 13.47
Other consumer 31,275 3,043 9.73
---------------------------------------------
Total consumer 69,483 6,368 9.16
---------------------------------------------
Foreign 2,036 157 7.71
Lease financing 3,277 249 7.60
---------------------------------------------
Total loans and leases, net 139,259 12,221 8.78
---------------------------------------------
Securities
Held for investment 15,521 864 5.57
Available for sale (2) 16,725 1,037 6.20
---------------------------------------------
Total securities 32,246 1,901 5.90
---------------------------------------------
Federal funds sold and securities purchased
under agreements to resell 15,242 942 6.18
Time deposits placed and other
short-term investments 2,066 142 6.87
Trading account securities (3) 14,177 1,100 7.76
Other earning assets 322 24 7.45
---------------------------------------------
Total earning assets (4) 203,312 16,330 8.03
Cash and cash equivalents 9,833
Factored accounts receivable 1,163
Other assets, less allowance for credit losses 15,344
---------------------------------------------
Total assets $ 229,652
=============================================
Interest-bearing liabilities
Savings $ 12,010 275 2.29
NOW and money market deposit accounts 40,397 1,033 2.56
Consumer CDs and IRAs 36,853 1,917 5.20
Negotiated CDs, public funds and other time deposits 3,038 168 5.53
Foreign time deposits 14,103 881 6.25
Federal funds purchased, securities sold under
agreements to repurchase and other short-term
borrowings 46,793 2,858 6.11
Trading account liabilities (3) 12,025 896 7.45
Long-term debt (5) 13,607 964 7.08
---------------------------------------------
Total interest-bearing liabilities (6) 178,826 8,992 5.03
---------------------------------------------
Noninterest-bearing sources
Noninterest-bearing deposits 26,568
Other liabilities 9,491
Shareholders' equity 14,767
---------------------------------------------
Total liabilities and shareholders' equity $ 229,652
=============================================
Net interest spread 3.00
Impact of noninterest-bearing sources .61
---------------------------------------------
Net interest income/yield on earning assets $ 7,338 3.61 %
==============================================
</TABLE>
(1) Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
(2) The average balance sheet amounts and yields on securities available for
sale are based on the average of historical amortized cost balances.
(3) The fair values of derivatives-dealer positions are reported in other
assets and liabilities, respectively.
(4) Interest income includes taxable-equivalent adjustments of $131, $111 and
$144 in 1997, 1996 and 1995, respectively. Interest income also includes
the impact of risk management interest rate contracts, which increased
(decreased) interest income on the underlying linked assets $163, $29 and
($244) in 1997, 1996 and 1995, respectively.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (decreased) increased interest expense on the underlying
linked liabilities $(40), $54 and $30 in 1997, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
8
<PAGE>
TABLE FOUR
CHANGES IN TAXABLE-EQUIVALENT NET INTEREST INCOME
(DOLLARS IN MILLIONS)
THIS TABLE PRESENTS AN ANALYSIS OF THE YEAR-TO-YEAR CHANGES IN NET INTEREST
INCOME ON A FULLY TAXABLE-EQUIVALENT BASIS FOR THE YEARS SHOWN. THE CHANGES
FOR EACH CATEGORY OF INCOME AND EXPENSE ARE DIVIDED BETWEEN THE PORTION OF
CHANGE ATTRIBUTABLE TO THE VARIANCE IN AVERAGE LEVELS OR YIELDS/RATES FOR
THAT CATEGORY. THE AMOUNT OF CHANGE THAT CANNOT BE SEPARATED IS ALLOCATED TO
EACH VARIANCE PROPORTIONATELY.
<TABLE>
<CAPTION>
FROM 1996 TO 1997 FROM 1995 TO 1996
-----------------------------------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
IN INCOME / EXPENSE IN INCOME / EXPENSE
DUE TO CHANGE IN DUE TO CHANGE IN
-----------------------------------------------------------------------------------
PERCENTAGE PERCENTAGE
AVERAGE YIELDS/ INCREASE AVERAGE YIELDS/ INCREASE
LEVELS RATES TOTAL (DECREASE) LEVELS RATES TOTAL (DECREASE)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income
Loans and leases, net of unearned income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 865 $ 118 $ 983 22.1% $ 283 $ (1) $ 282 6.8%
Real estate commercial 148 (3) 145 19.8 (112) (25) (137) (15.7)
Real estate construction 59 - 59 16.4 (6) (34) (40) (10.0)
----------- --------
Total commercial 1,073 114 1,187 21.4 180 (75) 105 1.9
----------- --------
Residential mortgage 239 13 252 8.5 495 22 517 21.1
Credit card 39 (13) 26 2.7 164 (76) 88 10.0
Other consumer 528 (37) 491 15.5 170 (39) 131 4.3
----------- --------
Total consumer 801 (32) 769 10.8 850 (114) 736 11.6
----------- --------
Foreign 59 7 66 34.4 53 (18) 35 22.3
Lease financing 122 10 132 38.4 93 2 95 38.2
----------- --------
Total loans and leases, net 2,079 75 2,154 16.3 1,171 (200) 971 7.9
----------- --------
Securities
Held for investment (114) 16 (98) (50.8) (677) 6 (671) (77.7)
Available for sale 578 57 635 43.3 364 64 428 41.3
----------- --------
Total securities 445 92 537 32.4 (406) 163 (243) (12.8)
----------- --------
Federal funds sold and securities purchased
under agreements to resell (41) 51 10 1.5 (113) (140) (253) (26.9)
Time deposits placed and other
short-term investments 40 4 44 53.7 (35) (25) (60) (42.3)
Trading account securities 211 (87) 124 10.1 336 (208) 128 11.6
-----------
--------
Other earning assets 12 (6) 6 6.4 65 5 70 291.7
--------
-----------
Total interest income 2,729 146 2,875 17.0 806 (193) 613 3.8
----------- --------
Interest expense
Savings 12 (19) (7) (2.7) 4 (24) (20) (7.3)
NOW and money market deposit accounts 270 56 326 32.5 49 (78) (29) (2.8)
Consumer CDs and IRAs 416 (13) 403 18.2 286 9 295 15.4
Negotiated CDs, public funds
and other time deposits (1) 0 (1) (.6) 7 (2) 5 3.0
Foreign time deposits (76) 0 (76) (12.6) (167) (112) (279) (31.7)
Federal funds purchased, securities sold under
agreements to repurchase and other short-term
borrowings 165 (4) 161 7.1 (292) (292) (584) (20.4)
Trading account liabilities 8 17 25 3.8 (129) (114) (243) (27.1)
Long-term debt 519 12 531 37.0 549 (78) 471 48.9
----------- --------
Total interest expense 1,356 6 1,362 15.8 305 (689) (384) (4.3)
----------- --------
Net interest income 1,354 159 1,513 18.2 377 620 997 13.6
=========== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
management efforts. The positive impact of the acquisition of Boatmen's on the
net interest yield was offset by additional funding costs related to the
acquisition.
Loan growth is dependent on economic conditions as well as various
discretionary factors, such as decisions to securitize certain loan portfolios,
the retention of residential mortgage loans generated by the Corporation's
mortgage subsidiary and the management of borrower, industry, product and
geographic concentrations.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $954 million in 1997 compared to
$760 million in 1996. The provision for credit losses for 1997 and 1996 covered
net charge-offs of $951 million and $750 million, respectively. Higher provision
expense in 1997 was due to higher net charge-offs resulting from an increase in
the average loans, leases, and factored accounts receivable portfolio,
attributable to both the Boatmen's acquisition and core loan growth, as well as
deterioration in consumer credit quality experienced on an industry-wide basis.
Higher total consumer net charge-offs were partially offset by lower net
charge-offs in the total commercial loan portfolio. For additional information
on the allowance for credit losses, certain credit quality ratios and credit
quality information on specific loan categories, see the Credit Risk Management
and Credit Portfolio Review section beginning on page 24.
GAINS ON SALES OF SECURITIES
Gains on the sales of securities were $155 million in 1997 compared to
$86 million in 1996. The increase in 1997 reflects the Corporation's sale of a
significant portion of the Boatmen's portfolio subsequent to the acquisition
date as well as the sale of lower-yielding securities and the reinvestment of
the proceeds from such sales into higher-spread products.
NONINTEREST INCOME
As presented in TABLE FIVE, noninterest income increased 35 percent to
$5.9 billion in 1997, reflecting the acquisitions of Boatmen's and Montgomery.
Excluding these acquisitions, noninterest income increased approximately 12
percent in 1997.
<TABLE>
<CAPTION>
TABLE FIVE
NONINTEREST INCOME
(DOLLARS IN MILLIONS)
Change
------------------------
1997 1996 Amount Percent
--------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,835 $ 1,393 $ 442 31.7%
Mortgage servicing and other mortgage-related income 293 224 69 30.8
Investment banking income 715 384 331 86.2
Trading account profits and fees 272 278 (6) (2.2)
Brokerage income 278 147 131 89.1
Other nondeposit-related service fees 373 311 62 19.9
Asset management and fiduciary service fees 732 513 219 42.7
Credit card income 420 369 51 13.8
Other income 1,011 789 222 28.1
--------------------------------------------------
$ 5,929 $ 4,408 $ 1,521 34.5
==================================================
</TABLE>
o Service charges on deposit accounts amounted to $1.8 billion in 1997, an
increase of 32 percent over 1996, attributable to growth in number of
households served due principally to the acquisition of Boatmen's and the
impact of changes in deposit pricing throughout the Corporation's
franchise. Excluding the impact of the Boatmen's acquisition, service
charges increased approximately 11 percent for 1997.
10
<PAGE>
o Mortgage servicing and other mortgage-related income grew 31 percent to
$293 million in 1997 due to the acquisition of the Boatmen's mortgage
portfolio. The average portfolio of loans serviced increased 17 percent
from $104.0 billion in 1996 to $121.2 billion in 1997. This increase was
net of the impact of the sale of Barnett's mortgage servicing portfolio in
the second quarter of 1996. On December 31, 1997, the servicing portfolio,
which includes mortgage loans originated by the Corporation's mortgage
subsidiary as well as loans serviced on behalf of the Corporation's banking
subsidiaries, totaled $126.5 billion compared to $96.4 billion on December
31, 1996. Mortgage loan originations through the Corporation's mortgage
subsidiary increased to $19.7 billion in 1997 compared to $16.8 billion in
1996. The increase in loan originations experienced in 1997 was due to the
acquisition of Boatmen's and the Corporation's efforts to maintain the
mortgage servicing portfolio at target levels. Origination volume in 1997
consisted of approximately $8.7 billion of retail loan volume and $11.0
billion of correspondent and wholesale loan volume.
In conducting its mortgage production activities, the Corporation is
exposed to interest rate risk for the period between loan commitment date
and subsequent delivery date. To manage this risk, the Corporation enters
into various financial instruments including forward delivery and option
contracts. The notional amount of such contracts was approximately $2.7
billion on December 31, 1997. Net unrealized losses associated with these
contracts were $15 million on December 31, 1997. These contracts have an
average expected maturity of less than 90 days.
o Investment banking income increased 86 percent to $715 million in 1997
reflecting increased levels of securities underwriting activity,
syndication fees and advisory fees. Higher syndication fees were the result
of 725 deals totaling $431.0 billion in 1997 compared to 566 deals totaling
$346.0 billion in 1996. Securities underwriting and advisory services fees
increased in 1997 reflecting the impact of the Montgomery acquisition and
continued internal growth.
An analysis of investment banking income by major business activity
follows (in millions):
1997 1996
---------------
INVESTMENT BANKING INCOME
Syndications $ 201 $ 119
Securities underwriting 265 91
Principle investment activities 71 90
Advisory services 70 9
Other 108 75
---------------
Total investment banking income $ 715 $ 384
===============
o Trading account profits and fees totaled $272 million in 1997, a decrease
of 2 percent from $278 million in 1996. The fair values of the components
of the Corporation's trading account assets and liabilities on December 31,
1997 and 1996 as well as their average fair values for 1997 and 1996 are
disclosed in Note Four to the consolidated financial statements on page 51.
An analysis of trading account profits and fees by major business
activity follows (in millions):
1997 1996
- ------------------------------------------------------------------------------
Trading Account Profits and Fees
Interest rate contracts $ 141 $ 136
Foreign exchange contracts 61 8
Securities trading 25 96
Other 45 38
-----------------
$ 272 $ 278
=================
11
<PAGE>
o Brokerage income increased 89 percent to $278 million in 1997, due mainly
to the acquisition of Montgomery as well as internal growth of
approximately 31 percent.
o Asset management and fiduciary service fees increased 43 percent to $732
million in 1997. An analysis of asset management and fiduciary service
fees by major business activity for 1997 and 1996 as well as the market
values of assets under management and administration on December 31
follows (in millions):
1997 1996
----------------------
ASSET MANAGEMENT AND FIDUCIARY SERVICE FEES
Private Client Group $ 494 $ 328
Consumer investing 50 39
Funds and business/institutional investment management 62 54
Retirement services, corporate trust and other 126 92
--------------------
Total asset management and fiduciary service fees $ 732 $ 513
====================
MARKET VALUE OF ASSETS
Assets under management $ 112,129 $ 80,030
Assets under administration 187,146 192,754
The PRIVATE CLIENT GROUP provides asset management and banking and
trust services, primarily to individuals. Fees for these services increased
$166 million in 1997 over 1996, due principally to the Boatmen's
acquisition, increased sales, and market appreciation associated with
assets under management. Consumer investing revenues reflect fees received
as the investment advisor to the Nations Funds family of mutual funds.
Funds and business/institutional investment management fees include
revenues from SOVRAN CAPITAL MANAGEMENT and TRADESTREET INVESTMENT
ASSOCIATES, INC., which provide institutional investors with investment
management services. Retirement services and corporate trust fees include
investment advisory, administrative, fiduciary, and record-keeping services
for business and institutional customers. Assets under management and
administration in 1997 were impacted by the Boatmen's acquisition and the
third quarter 1997 sales of certain corporate and institutional trust
businesses, which included businesses that provided administrative and
record-keeping services for employee benefit plans.
o Credit card income increased 14 percent to $420 million in 1997 due
primarily to the acquisition of Boatmen's and internal growth of
approximately 2 percent. Credit card income includes $28 million and $47
million from credit card securitizations in 1997 and 1996, respectively.
This decrease in credit card securitization income was mainly due to higher
than expected charge-off levels.
o Other income totaled $1.0 billion in 1997, an increase of $222 million over
1996. Other income includes: certain prepayment fees and other fees (such
as net gains on sales of miscellaneous investments, business activities,
premises and other similar items), net rental income on operating
automobile leases, servicing and related fees from the Corporation's
consumer finance business, insurance commissions and earnings and bankers'
acceptances and letters of credit fees.
MERGER AND RESTRUCTURING ITEMS
During 1997 and 1996, the Corporation incurred pretax merger and
restructuring items of $374 million and $118 million, respectively. The merger
and restructuring items of $374 million consisted primarily of payments made
under certain executive supplemental compensation plans which became payable
upon approval of the Merger by the Barnett shareholders and certain transaction
and contract termination payments. Substantially all amounts were paid as of
December 31, 1997. The
12
<PAGE>
Corporation anticipates recording additional merger and restructuring items
totaling $900 million during the first quarter of 1998. See Note Two to the
consolidated financial statements for further details.
The $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 and restructuring items.
NONINTEREST EXPENSE
Excluding the impact of the Boatmen's and Montgomery acquisitions,
noninterest expense increased less than 3 percent between 1997 and 1996,
demonstrating successful acquisition integration and expense management efforts.
<TABLE>
<CAPTION>
TABLE SIX
NONINTEREST EXPENSE
(DOLLARS IN MILLIONS)
1997 1996
-------------------------------------------------------
PERCENT PERCENT
OF TAXABLE- OF TAXABLE-
EQUIVALENT EQUIVALENT
NET INTEREST NET INTEREST
AND AND
NONINTEREST NONINTEREST CHANGE
---------------------------
AMOUNT INCOME AMOUNT INCOME AMOUNT PERCENT
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personnel $ 4,528 28.7% $ 3,543 27.8% $ 985 27.8%
Occupancy, net 783 5.0 658 5.2 125 19.0
Equipment 780 4.9 608 4.8 172 28.3
Marketing 341 2.2 291 2.4 50 17.2
Professional fees 383 2.4 312 2.4 71 22.8
Amortization of intangibles 503 3.2 179 1.4 324 181.0
Data processing 346 2.2 295 2.3 51 17.3
Telecommunications 283 1.8 218 1.7 65 29.8
Other general operating 1,011 6.4 959 7.5 52 5.4
General administrative and miscellaneous 276 1.7 220 1.7 56 25.5
--------------------------------------------------------------------------------------
$ 9,234 58.5% $ 7,283 57.2% $ 1,951 26.8%
======================================================================================
</TABLE>
Based on information in TABLE SIX, a discussion of the significant
components and changes in noninterest expense in 1997 compared to 1996 levels
follows:
o Personnel expense increased $985 million over 1996, due primarily to the
impact of the Boatmen's and Montgomery acquisitions. Including the impact
of these acquisitions, the Corporation had approximately 102,000 full-time
equivalent employees on December 31, 1997 compared to approximately 82,000
full-time equivalent employees on December 31, 1996. Excluding the impact
of the Boatmen's and Montgomery acquisitions, full-time equivalent
employees at December 31, 1997 increased approximately 4 percent compared
to December 31, 1996 levels.
o Occupancy expense increased 19 percent to $783 million in 1997 compared to
$658 million in 1996 due to the acquisition of Boatmen's.
o Equipment expense amounted to $780 million in 1997, an increase of
approximately 28 percent over 1996, reflecting the Boatmen's acquisition as
well as enhancements to data delivery channels and product delivery systems
throughout the Corporation such as the Model Banking initiative, direct
banking (including PC Banking) and data base management.
o Professional fees increased $71 million over 1996 to $383 million,
reflecting the impact of the Boatmen's acquisition as well as higher
consulting and technical support fees for projects to enhance revenue
growth, the development and installation of infrastructure enhancements and
customer-related data delivery areas.
13
<PAGE>
o Intangibles amortization expense increased to $503 million in 1997,
reflecting the impact of the Boatmen's acquisition.
o Other general operating expenses increased $52 million to $1.0 billion in
1997 due to higher expenses associated with the acquisition of Boatmen's.
Noninterest expense includes the cost of projects to ensure accurate
date recognition and data processing with respect to the Year 2000 issue as it
relates to the Corporation's businesses, operations, customers and vendors. A
process of software inventory, analysis, modification, testing and verification
and implementation is underway. The Corporation expects to substantially
complete the Year 2000 software conversion projects by the end of 1998. The
related costs, which are expensed as incurred, are included in professional,
data processing, and equipment expenses. Year 2000 expenses incurred through the
end of 1997 amounted to approximately $25 million and the total cost of the Year
2000 project is estimated to be approximately $120 million.
Management believes that its plans for dealing with the Year 2000 issue
will result in timely and adequate modifications of systems and technology.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the corrective measures the Corporation undertakes, but also on the way in which
the Year 2000 issue is addressed by governmental agencies, businesses, and other
entities who provide data to, or receive data from, the Corporation, or whose
financial condition or operational capability is important to the Corporation as
borrowers, vendors, customers or investment opportunities. Therefore,
communications with these parties have commenced to heighten their awareness of
the Year 2000 issue. Over the next two years, the plans of such third parties to
address the Year 2000 issue will be monitored and any identified impact on the
Corporation will be evaluated.
In addition, on January 1, 1999, several countries that are members of
the European Monetary Union plan to replace their respective currencies with one
common currency-the euro. Costs to prepare systems impacted by this currency
change are expected to be immaterial.
INCOME TAXES
The Corporation's income tax expense for 1997 and 1996 was $1.9 billion
and $1.6 billion, respectively, for an effective tax rate of 36.3 percent for
1997 and 35.2 percent for 1996.
Note Eleven to the consolidated financial statements on page 68
includes a reconciliation of federal income tax expense computed using the
federal statutory rate of 35 percent to actual income tax expense.
BALANCE SHEET REVIEW AND LIQUIDITY RISK MANAGEMENT
The Corporation utilizes an integrated approach in managing its balance
sheet which includes management of interest rate sensitivity, credit risk,
liquidity risk and its capital position. The average balances discussed below
can be derived from TABLE THREE. The following discussion addresses changes in
average balances in 1997 compared to 1996.
Average customer-based funds increased $27.5 billion to $157.1 billion
in 1997 due to deposits obtained in the Boatmen's acquisition. As a percentage
of total sources, average customer-based funds remained essentially unchanged at
55 percent in 1997.
Average market-based funds increased $1.8 billion in 1997 to $64.8
billion and comprised a smaller portion of total sources of funds at 23 percent
in 1997 compared to 26 percent in 1996. The increase in average market-based
funds was due primarily to the Boatmen's acquisition. The $7.9 billion increase
in average long-term debt was mainly the result of borrowings to fund
repurchases of shares issued in the Boatmen's acquisition.
Average loans and leases, the Corporation's primary use of funds,
increased $24.0 billion to $176.7 billion during 1997. As a percentage of total
uses of funds, average loans and leases decreased to 62 percent in 1997 from 63
percent in 1996. The increase in average loans and leases was due primarily to
the impact of the Boatmen's acquisition and core loan growth, partially offset
by the impact of $15.7 billion of securitizations, most of which occurred in the
third quarter of 1997. The ratio of average loans and leases to customer-based
funds was 112 percent in 1997 and 118 percent in 1996.
Average other assets and cash and cash equivalents increased $11.5
billion to $39.1 billion in 1997 due largely to an increase in intangible assets
related to the acquisition of Boatmen's.
14
<PAGE>
Cash and cash equivalents were $13.8 billion on December 31, 1997, an
increase of $1.9 billion from December 31, 1996. During 1997, net cash used in
operating activities was $439 million, net cash used in investing activities was
$19.4 billion and net cash provided by financing activities was $21.7 billion.
For further information on cash flows, see the Consolidated Statement of Cash
Flows on page 40 in the consolidated financial statements.
Liquidity is a measure of the Corporation's ability to fulfill its cash
requirements and is managed by the Corporation through its asset and liability
management process. The Corporation monitors its assets and liabilities and
modifies these positions as liquidity requirements change. This process, coupled
with the Corporation's ability to raise capital and debt financing, is designed
to cover the liquidity needs of the Corporation. Management believes that the
Corporation's sources of liquidity are more than adequate to meet its cash
requirements.
The following discussion provides an overview of significant on- and
off-balance sheet components.
SECURITIES
The securities portfolio serves a primary role in the overall context
of balance sheet management by the Corporation. The decision to purchase or sell
securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity requirements and
on- and off-balance sheet positions.
The securities portfolio on December 31, 1997 consisted of securities
held for investment totaling $1.2 billion and securities available for sale
totaling $49.4 billion compared to $2.1 billion and $17.3 billion, respectively,
on December 31, 1996. The increase in available for sale securities reflects
initiatives to invest excess capital in the securities portfolio and the impact
of approximately $7.8 billion of securities obtained principally through
residential mortgage loans that were securitized and retained primarily during
the third quarter of 1997. Also contributing to the increase in available for
sale securities since December 31, 1996 was the purchase of higher yielding
mortgage-backed securities in the first quarter of 1997.
On December 31, 1997, the market value of the Corporation's securities
held for investment reflected net unrealized appreciation of $5 million. On
December 31, 1996, the market value of the Corporation's portfolio of securities
held for investment approximated the book value of the portfolio.
The valuation allowance for securities available for sale, marketable
equity securities and certain servicing assets increased shareholders' equity by
$408 million on December 31, 1997, reflecting primarily pretax appreciation of
$115 million on marketable equity securities and $502 million on debt
securities. The valuation allowance increased shareholders' equity by $94
million on December 31, 1996. The increase in the valuation allowance was
primarily attributable to a decrease in interest rates when comparing December
31, 1997 to December 31, 1996, but also reflected the impact of higher
securities balances.
The estimated average maturities of securities held for investment and
securities available for sale portfolios were 1.48 years and 5.45 years,
respectively, on December 31, 1997 compared to 1.47 years and 5.54 years,
respectively, on December 31, 1996. The decrease in the average expected
maturity of the available for sale portfolio is attributable to purchases of
securities during 1997 with shorter average maturities than the weighted average
maturities of securities owned on December 31, 1996.
LOANS AND LEASES
Total loans and leases increased approximately 16 percent to $175.7
billion on December 31, 1997 compared to $152.0 billion on December 31, 1996. As
presented in TABLE THREE, average total loans and leases increased 16 percent to
$176.7 billion in 1997 compared to $152.8 billion in 1996 due primarily to the
impact of the Boatmen's acquisition and core loan growth, partially offset by
the impact of $15.7 billion of securitizations, most of which occurred during
the third quarter of 1997.
Average commercial loans increased to $64.7 billion in 1997 compared to
$54.4 billion in 1996, due largely to the Boatmen's acquisition and core loan
growth, partially offset by the impact of a $4.2-billion commercial loan
securitization that occurred during the third quarter of 1997. Average real
estate commercial and construction loans increased to $14.6 billion in 1997 as a
result
15
<PAGE>
of the addition of Boatmen's. Excluding the Boatmen's acquisition, real estate
commercial and construction loans decreased, reflecting the Corporation's
efforts to lower its exposure to this line of business.
Average residential mortgage loans increased 8 percent to $41.1 billion
in 1997 compared to $38.0 billion in 1996, mainly the result of the Boatmen's
acquisition as well as core loan growth. The increase in mortgage loans was
partially offset by the impact of $8.1 billion of mortgage loan securitizations
which occurred primarily during the third quarter of 1997.
Average credit card and other consumer loans, including direct and
indirect consumer loans and home equity loans, increased $5.9 billion, primarily
the result of the Boatmen's acquisition. This increase was partially offset by
$3.4 billion of other consumer loan securitizations.
A significant source of liquidity for the Corporation is the repayment
and maturities of loans. TABLE SEVEN shows selected loan maturity data on
December 31, 1997 and indicates that approximately 37 percent of the selected
loans had maturities of one year or less. The securitization and sale of certain
loans and the use of loans as collateral in asset-backed financing arrangements
are also sources of liquidity.
<TABLE>
<CAPTION>
TABLE SEVEN
SELECTED LOAN MATURITY DATA
DECEMBER 31, 1997
(DOLLARS IN MILLIONS)
THIS TABLE PRESENTS THE MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF
SELECTED LOAN CATEGORIES (EXCLUDING RESIDENTIAL MORTGAGE, CREDIT CARD, OTHER
CONSUMER LOANS, LEASE FINANCING AND FACTORED ACCOUNTS RECEIVABLE).
MATURITIES ARE PRESENTED ON A CONTRACTUAL BASIS.
DUE AFTER
DUE IN 1 1 YEAR
YEAR THROUGH DUE AFTER
OR LESS 5 YEARS 5 YEARS TOTAL
----------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 22,619 $ 31,606 $ 11,384 $ 65,609
Real estate commercial 2,270 4,995 1,729 8,994
Real estate construction 2,356 2,126 183 4,665
Foreign 3,158 587 372 4,117
---------------------------------------------------
Total selected loans, net of unearned income $ 30,403 $ 39,314 $ 13,668 $ 83,385
===================================================
Percent of total 36.5% 47.1% 16.4% 100.0%
Cumulative percent of total 36.5 83.6 100.0
Sensitivity of loans to changes in interest rates-loans due after one year
Predetermined interest rate $ 9,995 $ 5,739 $ 15,734
Floating or adjustable interest rate 29,319 7,929 37,248
---------------------------------
$ 39,314 $ 13,668 $ 52,982
===================================
</TABLE>
DEPOSITS
TABLE THREE provides information on the average amounts of deposits and
the rates paid by deposit category. Through the Corporation's diverse retail
banking network, deposits remain a primary source of funds for the Corporation.
Average deposits increased 19 percent in 1997 over 1996 due to deposits acquired
in the Boatmen's transaction.
On December 31, 1997, the Corporation had domestic certificates of
deposit of $100 thousand or greater totaling $11.4 billion, with $5.1 billion
maturing within three months, $2.3 billion maturing within three to six months,
$2.0 billion maturing within six to twelve months and $2.0 billion maturing
after twelve months.
Additionally, on December 31, 1997, the Corporation had other domestic time
deposits of $100 thousand or greater totaling $506 million, with $78 million
maturing within three months, $41 million maturing within three to six months,
$78 million maturing within six to twelve months and $309 million maturing after
twelve months.
16
<PAGE>
Foreign office certificates of deposit and other time deposits of $100 thousand
or greater totaled $14.4 billion and $8.1 billion on December 31, 1997 and 1996,
respectively.
SHORT-TERM BORROWINGS AND TRADING ACCOUNT LIABILITIES
The Corporation uses short-term borrowings as a funding source and in
its management of interest rate risk. TABLE EIGHT presents the categories of
short-term borrowings.
During 1997, total average short-term borrowings increased 7 percent to
$44.8 billion and trading account liabilities (excluding derivatives-dealer
positions) remained essentially unchanged from 1996 levels, amounting to $10.3
billion in 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Eight
Short-Term Borrowings
(Dollars in Millions)
1997 1996 1995
-------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased
On December 31 $ 6,360 5.93 % $ 4,011 6.52% $ 6,089 5.27%
Average during year 5,375 5.56 5,172 5.36 6,215 5.92
Maximum month-end balance during year 8,153 - 8,936 - 8,245 -
Securities sold under agreements to repurchase
On December 31 40,144 5.24 16,635 5.40 23,785 5.65
Average during year 33,806 5.10 29,541 5.36 31,161 6.12
Maximum month-end balance during year 40,144 - 30,369 - 39,686 -
Commercial paper
On December 31 3,752 5.82 2,829 5.41 3,443 5.69
Average during year 3,379 5.69 3,580 5.58 3,223 6.10
Maximum month-end balance during year 3,752 - 4,264 - 3,687 -
Other short-term borrowings
On December 31 4,127 5.62 1,837 5.20 4,653 5.93
Average during year 2,226 6.22 3,454 6.23 6,194 6.20
Maximum month-end balance during year 4,127 - 5,270 - 7,631 -
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LONG-TERM DEBT
Long-term debt increased 19 percent from $24.2 billion at December 31,
1996 to $28.9 billion on December 31, 1997 mainly as a result of borrowings to
fund repurchases of shares issued in the Boatmen's acquisition. During 1997, the
Corporation issued $1.3 billion of trust preferred securities and $1.0 billion
of mortgage backed bonds. Also during 1997, the Corporation issued $5.1 billion
in long-term senior and subordinated debt, including $2.1 billion which was
issued under its medium-term note program and $2.5 billion under a bank note
program. See Note Six to the consolidated financial statements on page 53 for
further details on long-term debt.
OTHER
The Corporation has commercial paper back-up lines totaling $1.5
billion of which $1.0 billion expires in October 1998 and $500 million expires
in October 2002. No borrowings have been made under these lines.
The Corporation's financial position is reflected in the following debt
ratings, which include upgrades as applicable from December 31, 1996 ratings:
17
<PAGE>
Commercial Senior
Paper Debt
------------------------
Moody's Investors Service P-1 Aa3
Standard & Poor's Corporation A-1 A+
Duff and Phelps, Inc. D-1+ A+
Fitch IBCA, Inc. F-1 A+
Thomson BankWatch TBW-1 A+
In managing liquidity, the Corporation takes into consideration the
ability of the subsidiary banks to pay dividends to the parent company. See Note
Nine to the consolidated financial statements on page 61 for further details on
dividend capabilities of the subsidiary banks.
CAPITAL RESOURCES AND CAPITAL MANAGEMENT
Shareholders' equity on December 31, 1997 was $24.7 billion compared to
$17.1 billion on December 31, 1996. The acquisition of Boatmen's resulted in the
issuance of approximately 195 million shares of common stock and an increase of
$9.5 billion in total shareholders' equity. The increase was partially offset by
the repurchase of approximately 114 million shares of common stock for $6.5
billion.
The Corporation's and its significant banking subsidiaries' regulatory
capital ratios, along with a description of the components of risk-based
capital, capital adequacy requirements and prompt corrective action provisions,
are included in Note Nine to the consolidated financial statements on page 61.
MARKET RISK MANAGEMENT
In the normal course of conducting its business activities, the
Corporation is exposed to market risk which includes both price and liquidity
risk. Price risk arises from fluctuations in interest rates, foreign exchange
rates and commodity and equity prices that may result in changes in the market
values of financial instruments. Liquidity risk arises from the possibility that
the Corporation may not be able to satisfy current and future financial
commitments or that the Corporation may not be able to liquidate financial
instruments at market prices. Risk management procedures and policies have been
established and are utilized to manage the Corporation's exposure to market
risk. The strategy of the Corporation with respect to market risk is to maximize
net income while maintaining an acceptable level of risk to changes in market
rates. While achievement of this goal requires a balance between profitability,
liquidity and market price risk, there are opportunities to enhance revenues
through controlled risks. In implementing strategies to manage interest rate
risk, the primary tools used by the Corporation are its securities portfolio and
interest rate contracts, and management of the mix, yields or rates and
maturities of assets and of the wholesale and retail funding sources of the
Corporation.
Market risk is managed by the Corporation's Finance Committee which
formulates policy based on desirable levels of market risk. In setting desirable
levels of market risk, the Finance Committee considers the impact on both
earnings and capital of the current outlook in market rates, potential changes
in market rates, world and regional economies, liquidity, business strategies
and other factors.
In January 1997, the Securities and Exchange Commission (SEC) adopted
new rules that require more comprehensive disclosures of accounting policies for
derivatives as well as enhanced quantitative and qualitative disclosures of
market risk for derivative and other financial instruments. The market risk
disclosures must be presented for most financial instruments, which must be
classified into two portfolios: financial instruments entered into for trading
purposes and all other covered financial instruments (non-trading portfolio).
18
<PAGE>
For a discussion of non-trading, on-balance sheet financial instruments
see TABLE NINE in the following Market Risk Management section on page 21. For
information on market risk associated with Asset and Liability Management (ALM)
activities, see the following discussion on page 22 of the Market Risk
Management section and the mortgage banking section of Noninterest Income on
page 12 as well as the Mortgage Servicing Rights section in Note One to the
consolidated financial statements on page 44. Market risk associated with the
trading portfolio is discussed in the following Market Risk Management section
on page 22. The composition of the trading portfolio and related fair values are
included in Note Four to the consolidated financial statements on page 51.
Derivatives-dealer positions and related credit risk are presented in Note Eight
to the consolidated financial statements on page 60. Accounting policies for ALM
and trading derivatives are disclosed in Note One to the consolidated financial
statements in the Trading Instruments and Risk Management Instruments sections
on pages 43 and 45, respectively.
NON-TRADING PORTFOLIO
The Corporation's ALM process is used to manage interest rate risk
through the structuring of balance sheet and off-balance sheet portfolios and
identifying and linking such off-balance sheet positions to specific assets and
liabilities. Interest rate risk represents the only material market risk
exposure to the Corporation's non-trading on-balance sheet financial
instruments. To effectively measure and manage interest rate risk, the
Corporation uses computer simulations which determine the impact on net interest
income of numerous interest rate scenarios, balance sheet trends and strategies.
These simulations cover the following financial instruments: short-term
financial instruments, securities, loans, deposits, borrowings and off-balance
sheet financial instruments. These simulations incorporate assumptions about
balance sheet dynamics, such as loan and deposit growth and pricing, changes in
funding mix and asset and liability repricing and maturity characteristics.
Simulations are run under various interest rate scenarios to determine the
impact on net income and capital. From these scenarios, interest rate risk is
quantified and appropriate strategies are developed and implemented. The overall
interest rate risk position and strategies are reviewed on an ongoing basis by
senior management.
Additionally, duration and market value sensitivity measures are
selectively utilized where they provide added value to the overall interest rate
risk management process.
On December 31, 1997, the interest rate risk position of the
Corporation was relatively neutral as the impact of a gradual parallel 100
basis-point rise or fall in interest rates over the next 12 months when compared
to stable rates was estimated to be less than 2 percent of net income.
TABLE NINE summarizes the expected maturities, unrealized gains and
losses and weighted average effective yields and rates associated with the
Corporation's significant non-trading, on-balance sheet financial instruments.
Cash and cash equivalents, time deposits placed and other short-term
investments, fed funds sold and purchased, resale and repurchase agreements,
commercial paper, other short-term borrowings and foreign deposits, which are
similar in nature to other short-term borrowings, are excluded from TABLE NINE
as their respective carrying values approximate fair values. These financial
instruments generally expose the Corporation to insignificant market risk as
they have either no stated maturities or an average maturity of less than 30
days and interest rates that approximate market. However, these financial
instruments can expose the Corporation to interest rate risk by requiring more
or less reliance on alternative funding sources, such as long-term debt. Loans
held for sale are also excluded as their carrying values approximate their fair
values, generally exposing the Corporation to insignificant market risk. For
further information on the fair value of financial instruments, see Note Twelve
to the consolidated financial statements on page 70.
19
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Nine
Non-Trading On- Balance Sheet Financial Instruments
December 31, 1997
(Dollars in Millions)
Expected Maturity
-----------------------------------------------------------
Unrealized After
Total Gain/(Loss) 1998 1999 2000 2001 2002 2002
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans, net of unearned income (1)
Fixed Rate
Book value $ 72,773 $ 1,017 $ 24,385 $ 13,227 $ 9,633 $5,946 $ 4,223 $ 15,359
Weighted average effective yield 8.87 %
Variable Rate
Book value $ 96,585 1,317 38,603 12,466 10,351 7,311 8,833 19,021
Weighted average effective yield 8.39 %
Securities held for investment (2)
Fixed Rate
Book value $ 986 4 445 458 16 13 9 45
Weighted average effective yield 5.94 %
Variable Rate
Book value $ 170 1 5 144 - 21 - -
Weighted average effective yield 6.65 %
Securities available for sale (2)
Fixed Rate
Book value $ 47,423 498 1,709 5,047 1,925 2,804 11,291 24,647
Weighted average effective yield 6.41 %
Variable Rate
Book value $ 2,025 4 6 3 94 1,127 213 582
Weighted average effective yield 7.03 %
Liabilities
Total Domestic Deposits (3)
Fixed Rate
Book value $ 117,211 $ (364) $ 31,761 $ 8,167 $ 2,501 $ 838 $ 774 $ 73,170
Weighted average effective rate 2.53 %
Variable Rate
Book value $ 42,039 (3) 6,763 5,233 4,295 3,699 3,170 18,879
Weighted average effective rate 4.73 %
Long-term debt (excluding obligations
under capital leases) (4)
Fixed Rate
Book value $ 12,599 (596) 1,291 600 867 1,719 527 7,595
Weighted average effective rate 7.26 %
Variable Rate
Book value $ 15,839 (21) 3,761 3,031 4,193 923 1,670 2,261
Weighted average effective rate 6.03 %
Trust preferred securities (4)
Fixed Rate
Book value $ 1,962 (91) - - - - 600 1,362
Weighted average effective rate 8.12 %
Variable Rate
Book value $ 743 (10) - - - - - 743
Weighted average effective rate 6.59 %
</TABLE>
(1) Expected maturities reflect the impact of prepayment assumptions.
(2) Expected maturities are based on contractual maturities.
(3) When measuring and managing market risk associated with domestic deposits,
the Corporation considers its long-term relationships with depositors. The
unrealized loss on domestic deposits in this table does not consider these
long-term relationships.
(4) Expected maturities of long-term debt and trust preferred securities
reflect the Corporation's ability to redeem such debt prior to contractual
maturities.
- --------------------------------------------------------------------------------
20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Ten
Asset and Liability Management Interest Rate Contracts
December 31, 1997
(Dollars in Millions, Average Expected Maturity in Years)
Expected Maturity Average
--------------------------------------------------------------------------------
Unrealized After Expected
Gain/(Loss) Total 1998 1999 2000 2001 2002 2002 Maturity
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Conversion Swaps
Receive fixed generic $ 230 3.04
Notional amount $ 23,474 $1,800 $1,625 $6,575 $ 9,289 $4,185 $ -
Weighted average receive rate 6.35% 5.56% 6.38 % 6.40 % 6.38 % 6.53% - %
Weighted average pay rate 5.90 5.89 5.88 5.87 5.90 5.93 -
Pay fixed generic (19) 2.55
---------
Notional amount $ 1,386 $ 1 $ 251 $1,001 $ 71 $ 1 $ 61
Weighted average pay rate 6.74% 5.90% 6.46 % 6.70 % 7.39 % 5.90% 7.93 %
Weighted average receive rate 6.02 6.00 5.91 5.81 7.96 6.00 7.56
Total asset conversion swaps $ 211
=========
Notional amount $ 24,860 $1,801 $1,876 $7,576 $ 9,360 $4,186 $ 61
Liability Conversion Swaps
Receive fixed generic $ 100 5.03
Notional amount $ 7,713 $1,687 $ 826 $ 308 $ 1,102 $ 495 $3,295
Weighted average receive rate 6.77% 6.69% 7.26 % 6.79 % 6.08 % 6.92% 6.89 %
Weighted average pay rate 6.24 6.57 7.51 6.13 5.97 5.85 5.92
Pay fixed generic (3) 1.27
---------
Notional amount $ 116 $ 100 $ - $ 8 $ - $ 8 $ -
Weighted average pay rate 8.86% 9.31% - % 6.01 % - % 6.65% - %
Weighted average receive rate 5.56 5.32 - 5.84 - 5.91 -
Total liability conversion swaps$ 97
=========
Notional amount $ 7,829 $1,787 $ 826 $ 316 $ 1,102 $ 503 $3,295
- ------------------------------------------------------------------------------------------------------------------------------------
Total receive fixed swaps $ 330 3.53
Notional amount $ 31,187 $3,487 $2,451 $6,883 $10,391 $4,680 $3,295
Weighted average receive rate 6.46% 6.11% 6.68 % 6.42 % 6.35 % 6.58% 6.89 %
Weighted average pay rate 5.98 6.22 6.42 5.88 5.91 5.92 5.92
Total pay fixed swaps (22) 2.45
Notional amount $ 1,502 $ 101 $ 251 $1,009 $ 71 $ 9 $ 61
Weighted average pay rate 6.91% 9.28% 6.46 % 6.69 % 7.39 % 6.54% 7.93 %
Weighted average receive rate 5.97 5.33 5.91 5.81 7.96 5.92 7.56
Basis Swaps $ (1) 1.44
---------
Notional amount $ 2,358 $ 750 $1,125 $ 218 96 $ 169 $ -
Weighted average receive rate 5.86% 5.74% 5.80 % 5.91 % 7.23 % 5.96% - %
Weighted average pay rate 5.90 5.78 5.84 6.00 7.27 5.92 -
Total Swaps $ 307
---------
Notional amount $ 35,047 $4,338 $3,827 $8,110 $10,558 $4,858 $3,356
- ------------------------------------------------------------------------------------------------------------------------------------
Option Products
Notional amount (7) $ 6,154 $ 2,702 $ 2,825 $ 143 $ 85 $ 163 $ 236
Weighted average strike rate 6.77% 6.39% 6.64 % 8.13 % 9.43% 7.70% 10.29 %
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $ 300
---------
Notional amount $ 41,201 $ 7,040 $ 6,652 $ 8,253 $ 10,643 $ 5,021 $ 3,592
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Risk management interest rate contracts are utilized in the ALM
process. Such contracts, which are generally non-leveraged generic interest rate
and basis swaps and options, allow the Corporation to effectively manage its
interest rate risk position. As reflected in TABLE TEN, the total gross notional
amount of the Corporation's ALM interest rate swaps on December 31, 1997 was
$35.0 billion, with the Corporation receiving fixed on $31.2 billion, primarily
converting variable-rate commercial loans to fixed rate, and receiving variable
on $1.5 billion. The net receive fixed position on December 31, 1997 was $29.7
billion compared to $30.6 billion on December 31, 1996. In addition, the
Corporation has $2.4 billion of basis swaps linked primarily to long-term debt.
TABLE TEN also summarizes the expected maturities, weighted average pay
and receive rates and the unrealized gains and losses on December 31, 1997 of
the Corporation's ALM interest rate contracts. Floating rates represent the last
repricing and will change in the future primarily based on movements in one-,
three- and six-month LIBOR rates.
The net unrealized appreciation of the ALM swap portfolio on December
31, 1997 was $307 million compared to net unrealized appreciation of $64 million
on December 31, 1996, reflecting a decrease in interest rates when comparing
December 31, 1997 to December 31, 1996. The amount of net realized deferred
gains associated with terminated ALM swaps was $51 million on December 31, 1997
compared to $41 million of net realized deferred losses on December 31, 1996.
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. On December 31, 1997, the Corporation had a gross
notional amount of $6.2 billion in outstanding interest rate option contracts
used for ALM purposes compared to $6.7 billion on December 31, 1996. Such
instruments are primarily linked to long-term debt, short-term borrowings and
pools of similar residential mortgages and consist mainly of purchased options.
On December 31, 1997, the net unrealized depreciation of ALM option products was
$7 million compared to net unrealized appreciation of $3 million on December 31,
1996. The amount of net realized deferred gains associated with terminated ALM
options was $13 million on December 31, 1997 compared to $4 million of net
realized deferred gains on December 31, 1996.
In addition, the Corporation uses foreign currency contracts to manage
the foreign exchange risk associated with foreign-denominated liabilities.
Foreign currency contracts involve the conversion of certain scheduled interest
and principal payments denominated in foreign currencies. On December 31, 1997,
these contracts had a notional value of $2.7 billion and a net market value of
negative $67 million.
The net unrealized appreciation in the estimated value of the ALM
interest rate and net negative market value in the ALM foreign exchange
portfolio should be viewed in the context of the overall balance sheet. The
value of any single component of the balance sheet or off-balance sheet
positions should not be viewed in isolation.
For a discussion of the Corporation's management of risk associated
with mortgage production activities, see the Noninterest Income section on page
12 and the Mortgage Servicing Rights section in Note One to the consolidated
financial statements on page 44.
TRADING PORTFOLIO
The Corporation manages its exposure to market risk resulting from
trading activities through a risk management function which is independent of
the business units. Each major trading site is monitored by this risk management
unit. Risk limits have been approved by the Corporation's Finance Committee, and
daily earnings at risk limits are generally allocated to the business units. In
addition to limits placed on these individual business units, limits are also
imposed on the risks individual traders can take and on the amount of risk that
can be concentrated in a particular product or market. Risk positions are
monitored by business unit, risk management personnel and senior management on a
daily basis. Business unit and risk management personnel are responsible for
continual monitoring of the changing aggregate position of the portfolios under
their responsibility, including projection of the profit or loss levels that
could result from both normal and extreme market moves. If any market risk
limits are inadvertently
22
<PAGE>
exceeded, the risk management unit ensures that actions are taken as necessary
to bring portfolios within approved trading limits.
To estimate potential losses that could result from adverse market
movements, the factor based scenario model is used to calculate daily earnings
at risk. This model breaks down yield curve movements into three underlying
factors to produce sixteen yield curve scenarios used to estimate hypothetical
profit or loss. Earnings at risk represents a one-day measurement of pretax
earnings at risk from movements in market prices using the assumption that
positions cannot be rehedged during the period of any prescribed price and
volatility change. A 99-percent confidence level is utilized, which indicates
that actual trading profits and losses may deviate from expected levels and
exceed estimates approximately one day out of every 100 days of trading
activity.
Earnings at risk estimates are measured on a daily basis at the
individual trading unit level, by type of trading activity and for all trading
activities in the aggregate. Daily reports of estimates compared to respective
limits are reviewed by senior management, and trading strategies are adjusted
accordingly. In addition to the earnings at risk analysis, portfolios which have
significant option positions are stress tested continually to simulate the
potential loss that might occur due to unexpected market movements.
Earnings at risk is measured on both a gross and uncorrelated basis.
The gross measure assumes that adverse market movements occur simultaneously
across all segments of the trading portfolio, an unlikely assumption. On
December 31, 1997, the gross estimates for aggregate interest rate, foreign
exchange and equity and commodity trading activities were $52 million, $6
million and $3 million, respectively. Alternatively, using a statistical measure
which is more likely to capture the effects of market movements, the
uncorrelated estimate on December 31, 1997 for aggregate trading activities was
$22 million. Both measures indicate that the Corporation's primary risk exposure
is related to its interest rate activities.
Average daily trading revenues in 1997 approximated $1 million. During
1997, the Corporation's trading activities resulted in positive daily revenues
for approximately 64 percent of total trading days. During 1997, the standard
deviation of trading revenues was $4 million. Using this data, one can conclude
that the aggregate trading activities should not result in exposure of more than
$8 million for any one day, assuming 99-percent confidence. When comparing daily
earnings at risk to trading revenues, daily earnings at risk will average
considerably more due to the assumption of no corrective actions as well as the
assumption that adverse market movements occur simultaneously across all
segments of the trading portfolio. Instruments included in the Corporation's
trading portfolio (including derivatives-dealer positions) and their fair values
are disclosed in Notes Four and Eight of the notes to the consolidated financial
statements on pages 51 and 60, respectively.
CREDIT RISK MANAGEMENT AND CREDIT PORTFOLIO REVIEW
In conducting business activities, the Corporation is exposed to the
possibility that borrowers or counterparties may default on their obligations to
the Corporation. Credit risk arises through the extension of loans, leases,
factored accounts receivable, certain securities, letters of credit, financial
guarantees and through counterparty risk on trading and capital markets
transactions. To manage this risk, the Credit Policy group establishes policies
and procedures to manage both on- and off-balance sheet credit risk and
communicates and monitors the application of these policies and procedures
throughout the Corporation.
The Corporation's overall objective in managing credit risk is to
minimize the adverse impact of any single event or set of occurrences. To
achieve this objective, the Corporation strives to maintain a credit risk
profile that is diverse in terms of product type, industry concentration,
geographic distribution and borrower or counterparty concentration.
The Credit Policy group works with lending officers, trading personnel
and various other line personnel in areas that conduct activities involving
credit risk and is involved in the implementation, refinement and monitoring of
credit policies and procedures.
The Corporation manages credit exposure to individual borrowers and
counterparties on an aggregate basis including loans, leases, factored accounts
receivable, securities, letters of credit, bankers' acceptances, derivatives and
unfunded commitments. The creditworthiness of a borrower or counterparty is
determined by experienced personnel, and limits are established for the total
credit exposure to any one borrower or counterparty. Credit limits are subject
to varying levels
23
<PAGE>
of approval by senior line and credit policy management. Total exposure to a
borrower or counterparty is aggregated and measured against established limits.
The originating credit officer assigns borrowers or counterparties an
initial risk rating which is based on the amount of inherent credit risk and
reviewed for appropriateness by senior line and credit policy personnel. Credits
are monitored by line and credit policy personnel for deterioration in a
borrower's or counterparty's financial condition which would impact the ability
of the borrower or counterparty to perform under the contract. Risk ratings are
adjusted as necessary.
For consumer lending, credit scoring systems are utilized to provide
standards for extension of credit. Consumer portfolio credit risk is monitored
primarily using statistical models and actual payment experience to predict
portfolio behavior.
When required, the Corporation obtains collateral to support credit
extensions and commitments. Generally, such collateral is in the form of real
and personal property, cash on deposit or other highly liquid instruments. In
certain circumstances, the Corporation obtains real property as security for
some loans that are made on the general creditworthiness of the borrower and
whose proceeds were not used for real estate-related purposes.
The Corporation also manages exposure to a single borrower, industry,
product-type or other concentration through syndications of credits,
participations, loan sales and securitizations. Through GLOBAL FINANCE, the
Corporation is a major participant in the syndications market. In a syndicated
facility, each participating lender funds only its portion of the syndicated
facility, therefore limiting its exposure to the borrower. The Corporation also
identifies and reduces its exposure to funded borrower, product or industry
concentrations through loan sales. Generally, these sales are without recourse
to the Corporation.
In conducting derivatives activities in certain jurisdictions, the
Corporation reduces credit risk to any one counterparty through the use of
legally enforceable master netting agreements which allow the Corporation to
settle positive and negative positions with the same counterparty on a net
basis. For more information on the Corporation's off-balance sheet credit risk,
see Note Eight to the consolidated financial statements on page 57.
An independent credit review group conducts ongoing reviews of credit
activities and portfolios, reexamining on a regular basis risk assessments for
credit exposures and overall compliance with policy.
LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE PORTFOLIO- The
Corporation's credit exposure is focused in its loans, leases and factored
accounts receivable portfolio which totaled $176.8 billion on December 31, 1997.
TABLE FIFTEEN presents a distribution of loans by category.
ALLOWANCE FOR CREDIT LOSSES - The Corporation's allowance for credit
losses was $3.3 billion, or 1.85 percent of net loans, leases and factored
accounts receivable on December 31, 1997, compared to $2.8 billion, or 1.82
percent, on December 31, 1996, with the increase in the allowance attributable
to the acquisition of Boatmen's. TABLE ELEVEN provides an analysis of the
changes in the allowance for credit losses. Total net charge-offs increased $201
million in 1997 to $951 million, or .53 percent of average loans, leases and
factored accounts receivable, compared to $750 million, or .49 percent, in 1996.
Higher net charge-offs were largely the result of an increase in the average
loans, leases, and factored accounts receivable portfolio, attributable to both
the Boatmen's acquisition and core loan growth as well as deterioration in
consumer credit quality experienced on an industry-wide basis. This resulted in
increases in total consumer net charge-offs, which were partially offset by
lower total commercial net charge-offs during 1997.
24
<PAGE>
<TABLE>
<CAPTION>
Table Eleven
Allowance For Credit Losses
(Dollars in Millions)
1997 1996 1995 1994 1993
-----------------------------------------------------------------
Balance on January 1 $ 2,792 $ 2,668 $ 2,687 $ 2,691 2,002
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, leases and factored accounts receivable charged off
Commercial (170) (161) (109) (128) (133)
Real estate commercial (26) (41) (38) (53) (117)
Real estate construction (3) (5) (17) (30) (35)
---------- ------------------------------------------------------
Total commercial (199) (207) (164) (211) (285)
-------------------------------------------------------------------
Residential mortgage (29) (19) (11) (9) (13)
Credit card (533) (375) (262) (172) (227)
Other consumer (502) (413) (335) (254) (252)
-----------------------------------------------------------------
Total consumer (1,064) (807) (608) (435) (492)
-------------------------------------------------------------------
Lease financing (16) (4) (2) (4) (5)
Factored accounts receivable (19) (27) (34) (32) (30)
-------------------------------------------------------------------
Total loans, leases and factored accounts
receivable charged off (1,298) (1,045) (808) (682) (812)
-------------------------------------------------------------------
Recoveries of loans, leases and factored accounts
receivable previously charged off
Commercial 87 78 93 87 91
Real estate commercial 28 22 27 30 29
Real estate construction 6 3 9 27 14
-----------------------------------------------------------------
Total commercial 121 103 129 144 134
-------------------------------------------------------------------
Residential mortgage 4 3 2 2 3
Credit card 86 71 35 30 26
Other consumer 127 107 87 83 85
-----------------------------------------------------------------
Total consumer 217 181 124 115 114
-------------------------------------------------------------------
Foreign - - - - 1
Lease financing 2 1 1 3 2
Factored accounts receivable 7 10 12 11 7
-------------------------------------------------------------------
Total recoveries of loans, leases and
factored accounts receivable previously charged off 347 295 266 273 258
-----------------------------------------------------------------
Net charge-offs (951) (750) (542) (409) (554)
------------ ------------------------------------------------------
Provision for credit losses 954 760 505 384 550
Allowance applicable to loans of purchased companies and other 482 114 18 21 693
-----------------------------------------------------------------
Balance on December 31 $ 3,277 $ 2,792 $ 2,668 $ 2,687 $ 2,691
-------------------------------------------------------------------
Loans, leases and factored accounts receivable,
net of unearned income, outstanding on December 31 $ 176,778 $ 153,041 $ 147,519 $ 131,892 117,937
Allowance for credit losses as a percentage of
loans, leases and factored accounts receivable,
net of unearned income, outstanding on December 31 1.85% 1.82 % 1.81 % 2.04 % 2.28 %
Average loans, leases and factored accounts receivable,
net of unearned income, outstanding during the year $ 177,918 $ 153,922 $ 140,422 $ 123,068 105,898
Net charge-offs as a percentage of average loans,
leases and factored accounts receivable,
net of unearned income, outstanding during the year .53% .49 % .39 % .33 % .52 %
Ratio of the allowance for credit losses
on December 31 to net charge-offs 3.45 3.72 4.92 6.57 4.86
Allowance for credit losses as a percentage of
nonperforming loans 270.05% 258.52% 304.57 % 268.16 % 188.45%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Excluding increases that resulted from the acquisition of Boatmen's,
management expects charge-offs in general to increase modestly in 1998, with
increases in the consumer loan categories anticipated as the Corporation
continues its efforts to shift the mix of the loan portfolio to a higher
consumer loan concentration. Furthermore, future economic conditions also will
impact credit quality and may result in increased net charge-offs and higher
provision for credit losses.
Portions of the allowance for credit losses are allocated to cover the
estimated losses inherent in particular risk categories of loans. The allocation
of the allowance for credit losses, as presented in TABLE TWELVE, is based upon
the Corporation's loss experience over a period of years and is adjusted for
existing economic conditions as well as performance trends within specific
portfolio segments and individual concentrations of credit.
The nature of the process by which the Corporation determines the
appropriate allowance for credit losses requires the exercise of considerable
judgment. Management believes that the allowance for credit losses is
appropriate given its analysis of inherent credit losses on December 31, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Twelve
Allocation of the Allowance for Credit Losses
December 31
(Dollars in Millions)
1997 1996 1995 1994 1993
------------------- ----------------- --------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 907 27.7 % $ 734 26.3% $ 699 26.3% $ 654 24.3 % $ 596 22.2%
Real estate commercial 409 12.5 328 11.7 398 14.9 500 18.6 520 19.3
Real estate construction 202 6.1 155 5.6 161 6.0 163 6.1 197 7.3
------------------ --------------- ------------------------------------------------------------
Total commercial 1,518 46.3 1,217 43.6 1,258 47.2 1,317 49.0 1,313 48.8
------------------ --------------- ------------------------------------------------------------
Residential mortgage 95 2.9 104 3.7 87 3.3 68 2.5 59 2.2
Credit card 379 11.5 286 10.3 315 11.8 224 8.3 178 6.6
Other consumer 543 16.6 430 15.4 400 15.0 311 11.6 317 11.8
------------------ --------------- ------------------------------------------------------------
Total consumer 1,017 31.0 820 29.4 802 30.1 603 22.4 554 20.6
------------------ --------------- ------------------------------------------------------------
Foreign 31 .9 23 .8 21 .8 19 .7 8 .3
Lease financing 72 2.2 61 2.2 36 1.3 26 1.0 16 .6
Factored accounts receivable 22 .7 20 .7 20 .7 13 .5 13 .5
Unallocated 617 18.9 651 23.3 531 19.9 709 26.4 787 29.2
------------------ --------------- ------------------------------------------------------------
$ 3,277 100.0 % $2,792 100.0% $ 2,668 100.0% $ 2,687 100.0 % $ 2,691 100.0%
================== =============== ===========================================================
</TABLE>
NONPERFORMING ASSETS - On December 31, 1997, nonperforming assets were
$1.4 billion, or .77 percent of net loans, leases, factored accounts receivable
and foreclosed properties, compared to $1.3 billion, or .83 percent, on December
31, 1996. As presented in TABLE THIRTEEN, nonperforming loans were $1.2 billion
at the end of 1997 compared to $1.1 billion at the end of 1996. The allowance
coverage of nonperforming loans was 270 percent on December 31, 1997 compared to
259 percent at the end of 1996.
Foreclosed properties decreased to $147 million on December 31, 1997
compared to $188 million on December 31, 1996.
26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Thirteen
Nonperforming Assets
December 31
(Dollars in Millions)
1997 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Commercial $ 316 $ 376 $ 302 $ 411 $ 559
Real estate commercial 185 176 241 291 448
Real estate construction 23 37 31 76 172
---------------------------------------------------------------------
Total commercial 524 589 574 778 1,179
---------------------------------------------------------------------
Residential mortgage 382 322 153 118 138
Other consumer 274 144 143 94 93
---------------------------------------------------------------------
Total consumer 656 466 296 212 231
---------------------------------------------------------------------
Foreign 1 - - 3 8
Lease financing 33 25 6 9 10
---------------------------------------------------------------------
Total nonperforming loans 1,214 1,080 876 1,002 1,428
---------------------------------------------------------------------
Foreclosed properties 147 188 215 427 813
---------------------------------------------------------------------
Total nonperforming assets $ 1,361 $ 1,268 $ 1,091 $ 1,429 $ 2,241
=====================================================================
Nonperforming assets as a percentage of
Total assets .44 % .56 % .48 % .68 % 1.14%
Loans, leases and factored accounts receivable,
net of unearned income, and foreclosed properties .77 .83 .74 1.08 1.89
The loss of income associated with nonperforming loans on December 31 and the
cost of carrying foreclosed properties were:
1997 1996 1995 1994 1993
--------------------------------------------------------------------
Income that would have been recorded in accordance
with original terms $ 150 $ 122 $ 119 $ 114 $ 112
Less income actually recorded (60) (42) (33) (38) (44)
--------------------------------------------------------------------
Loss of income $ 90 $ 80 $ 86 $ 76 $ 68
====================================================================
Cost of carrying foreclosed properties $ 11 $ 11 $ 18 $ 29 $ 25
====================================================================
</TABLE>
On December 31, 1997, there were no material commitments to lend additional
funds with respect to nonperforming loans.
- --------------------------------------------------------------------------------
Internal loan workout units are devoted to the management and/or
collection of certain nonperforming assets as well as certain performing loans.
Management believes concerted collection strategies and a proactive approach to
managing overall credit risk have expedited the disposition, collection and
renegotiation of nonperforming and other lower-quality assets. As part of this
process, management routinely evaluates all reasonable alternatives, including
the sale of assets individually or in groups, and selects the optimal strategy.
LOANS PAST DUE 90 DAYS OR MORE - TABLE FOURTEEN presents total loans
past due 90 days or more and still accruing interest. On December 31, 1997,
loans past due 90 days or more and still accruing interest were $411 million, or
.23 percent of net loans, leases and factored accounts receivable, compared to
$286 million, or .19 percent, on December 31, 1996. The increase of $125 million
was the result of deterioration in consumer credit quality experienced on an
industry-wide basis and the Boatmen's acquisition.
27
<PAGE>
<TABLE>
<CAPTION>
TABLE FOURTEEN
LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST
DECEMBER 31
(DOLLARS IN MILLIONS)
1997 1996
----------------------------------------------------------------------
AMOUNT PERCENT (1) AMOUNT PERCENT (1)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 36 .05% $ 39 .07 %
Real estate commercial 10 .11 14 .19
Real estate construction 4 .09 5 .14
---------------------------------------------------------------------
Total commercial 50 .06 58 .09
---------------------------------------------------------------------
Residential mortgage 87 .23 63 .17
Credit card 171 2.08 112 1.43
Other consumer 95 .24 44 .14
---------------------------------------------------------------------
Total consumer 353 .41 219 .28
---------------------------------------------------------------------
Factored accounts receivable 8 .74 9 .86
--------------------------------------------------------------------
Total $ 411 .23 $ 286 .19
=====================================================================
</TABLE>
(1) REPRESENTS AMOUNTS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST AS
A PERCENTAGE OF NET LOANS FOR EACH LOAN CATEGORY AND AS A PERCENTAGE OF
NET LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE FOR TOTAL LOANS.
CONCENTRATIONS OF CREDIT RISK - In an effort to minimize the adverse
impact of any single event or set of occurrences, the Corporation strives to
maintain a diverse credit portfolio as outlined in TABLES SEVENTEEN and
EIGHTEEN. TABLE FIFTEEN presents the distribution of loans, leases and factored
accounts receivable by category.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE FIFTEEN
DISTRIBUTION OF LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE
DECEMBER 31
(DOLLARS IN MILLIONS)
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Commercial $ 65,609 37.1% $ 55,356 36.1% $ 52,576 35.6% $ 49,005 37.1% $ 44,862 38.0%
Real estate commercial 8,994 5.1 7,462 4.9 8,364 5.7 9,728 7.4 10,863 9.2
Real estate construction 4,665 2.6 3,680 2.4 3,889 2.6 3,910 3.0 4,110 3.5
-----------------------------------------------------------------------------------------------
Total commercial 79,268 44.8 66,498 43.4 64,829 43.9 62,643 47.5 59,835 50.7
-----------------------------------------------------------------------------------------------
Residential mortgage 37,344 21.1 37,749 24.7 34,918 23.7 27,800 21.1 22,138 18.8
Credit card 8,203 4.6 7,854 5.1 8,315 5.6 6,128 4.6 4,856 4.1
Other consumer 40,427 22.9 31,671 20.7 32,259 21.9 29,347 22.3 27,114 23.0
-----------------------------------------------------------------------------------------------
Total consumer 85,974 48.6 77,274 50.5 75,492 51.2 63,275 48.0 54,108 45.9
-----------------------------------------------------------------------------------------------
Lease financing 5,485 3.1 4,541 3.0 3,311 2.2 2,440 1.8 1,729 1.5
Factored accounts receivable 1,081 .7 1,049 .7 991 .7 1,004 .8 1,001 .8
-----------------------------------------------------------------------------------------------
171,808 97.2 149,362 97.6 144,623 98.0 129,362 98.1 116,673 98.9
-----------------------------------------------------------------------------------------------
Foreign
Commercial and industrial
companies 3,094 1.8 2,250 1.5 1,661 1.1 1,208 .9 537 .5
Banks and other financial
institutions 1,023 .6 755 .5 694 .5 876 .7 452 .4
Governments and
official institutions - - - - 7 - 6 - 22 -
Lease financing 853 .5 674 .4 534 .4 440 .3 253 .2
-----------------------------------------------------------------------------------------------
4,970 2.8 3,679 2.4 2,896 2.0 2,530 1.9 1,264 1.1
-----------------------------------------------------------------------------------------------
Total loans, leases and factored
accounts receivable, net
of unearned income $ 176,778 100.0% $ 153,041 100.0% $ 147,519 100.0% $ 131,892 100.0% $ 117,937 100.0%
==============================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following section discusses credit risk in the loan portfolio,
including net charge-offs by loan categories as presented in TABLE SIXTEEN.
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Sixteen
Net Charge-offs in Dollars and as a Percentage of Average Loans Outstanding
(Dollars in Millions)
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 83 .13 % $ 83 .15% $ 16 .03% $ 41 .09 % $ 42 .11%
Real estate commercial and construction (5) n/m 21 .17 19 .14 26 .18 109 .80
-----------------------------------------------------------------------------------------
Total commercial 78 .10 104 .16 35 .05 67 .11 151 .29
-----------------------------------------------------------------------------------------
Residential mortgage 25 .06 16 .04 9 .03 7 .03 10 .05
Credit card 447 5.74 304 4.05 227 3.48 142 2.77 201 3.72
Other consumer 375 .97 306 .93 248 .79 171 .61 167 .69
-----------------------------------------------------------------------------------------
Total consumer 847 .96 626 .79 484 .70 320 .55 378 .76
-----------------------------------------------------------------------------------------
Foreign - - - - - - - - (1) n/m
Lease financing 14 .23 3 .07 1 .03 1 .07 3 .18
Factored accounts receivable 12 1.02 17 1.50 22 1.89 21 1.68 23 2.14
-----------------------------------------------------------------------------------------
Total net charge-offs $ 951 .53 $ 750 .49 $ 542 .39 $ 409 .33 $ 554 .52
=========================================================================================
Selected managed net charge-offs
and ratios (1):
Managed credit cards $ 642 6.21 % 462 % 4.75 $ 306 4.01 % $ 221 3.53 % $ 210 3.90%
Managed other consumer loans 429 .95 333 .88 253 .77 171 .61 167 .69
n/m= not meaningful
(1) Includes both on-balance sheet and securitized loans.
Net charge-offs for each loan type are calculated as a percentage of
average outstanding or managed loans for each loan category. Total net
charge-offs are calculated based on total average outstanding loans,
leases and factored accounts receivable.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
REAL ESTATE - Total nonresidential real estate commercial and
construction loans, the portion of such loans which are nonperforming,
foreclosed properties and other credit exposures are presented in TABLE
SEVENTEEN. The exposures presented represent credit extensions for real
estate-related purposes to borrowers or counterparties who are primarily in the
real estate development or investment business and for which the ultimate
repayment of the credit is dependent on the sale, lease, rental or refinancing
of the real estate.
Total nonresidential real estate commercial and construction loans
totaled $13.7 billion, or 8 percent of net loans, leases and factored accounts
receivable, on December 31, 1997 compared to $11.1 billion, or 7 percent, at the
end of 1996 with the increase due to the acquisition of Boatmen's. Excluding the
Boatmen's acquisition, real estate commercial and construction loans decreased
as a result of the Corporation's efforts to lower its exposure to this line of
business. Real estate loans past due 90 days or more and still accruing interest
were $14 million, or .10 percent of total real estate loans, on December 31,
1997 compared to $19 million, or .17 percent, on December 31, 1996.
The exposures included in TABLE SEVENTEEN do not include credit
extensions which were made on the general creditworthiness of the borrower for
which real estate was obtained as security and for which the ultimate repayment
of the credit is not dependent on the sale, lease, rental or refinancing of the
real estate. Accordingly, the exposures presented do not include commercial
loans secured by owner-occupied real estate, except where the borrower is a real
estate developer. In addition to the amounts presented in the tables, on
December 31, 1997, the Corporation had approximately $11.5 billion of commercial
loans which were not real estate dependent but for which the Corporation had
obtained real estate as a secondary repayment source.
29
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
TABLE SEVENTEEN
REAL ESTATE COMMERCIAL AND CONSTRUCTION LOANS, FORECLOSED PROPERTIES
AND OTHER REAL ESTATE CREDIT EXPOSURES
December 31, 1997
(Dollars in Millions) OTHER
LOANS (1) FORECLOSED CREDIT
---------------------------------------------
OUTSTANDING NONPERFORMING PROPERTIES EXPOSURES (2)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY GEOGRAPHIC REGION (3):
Florida and Georgia $ 4,309 $ 66 $ 33 $ 464
Missouri, Kansas, Illinois, Iowa and Arkansas 2,364 38 6 156
Texas, Oklahoma and New Mexico 1,500 21 5 353
Maryland, District of Columbia and Virginia 1,254 27 14 366
North Carolina and South Carolina 1,213 26 6 164
Other states 3,019 30 7 624
-------------------------------------------------------------------------
$ 13,659 $ 208 $ 71 $ 2,127
=========================================================================
BY PROPERTY TYPE:
Apartments $ 2,347 $ 14 $ - $ 835
Office buildings 2,116 17 7 121
Shopping centers/retail 1,784 53 3 461
Residential 1,678 25 7 75
Industrial/warehouse 1,111 17 1 22
Hotels 1,067 15 1 117
Land and land development 1,003 22 34 95
Commercial-other 432 13 12 141
Resorts/golf courses 430 1 - 3
Unsecured 233 2 - 41
Multiple use 111 4 1 2
Other 1,347 25 5 214
-------------------------------------------------------------------------
$ 13,659 $ 208 $ 71 $ 2,127
=========================================================================
</TABLE>
(1) ON DECEMBER 31, 1997, THE CORPORATION HAD UNFUNDED BINDING REAL ESTATE
COMMERCIAL AND CONSTRUCTION LOAN COMMITMENTS.
(2) OTHER CREDIT EXPOSURES INCLUDE LETTERS OF CREDIT AND LOANS HELD FOR
SALE.
(3) DISTRIBUTION BASED ON GEOGRAPHIC LOCATION OF COLLATERAL.
- -------------------------------------------------------------------------------
OTHER INDUSTRIES - TABLE EIGHTEEN presents selected industry credit
exposures, commercial loans, factored accounts receivable and lease financings.
Commercial loan outstandings totaled $65.6 billion and $55.4 billion on December
31, 1997 and 1996, respectively, or 37 percent and 36 percent of net loans,
leases and factored accounts receivable, respectively. This increase, due
largely to the addition of Boatmen's and core loan growth, was partially offset
by the impact of the $4.2-billion commercial loan securitization in the third
quarter of 1997. The Corporation had commercial loan net charge-offs in 1997 of
$83 million, or .13 percent of average commercial loans, compared to $83
million, or .15 percent of average commercial loans, in 1996. Excluding a
$40-million charge-off of one large retail credit, commercial loan net
charge-offs were $43 million, or .07 percent of average commercial loans, in
1997. Commercial loans past due 90 days or more and still accruing interest were
$36 million, or .05 percent of commercial loans, on December 31, 1997 compared
to $39 million, or .07 percent, on December 31, 1996. Nonperforming commercial
loans were $316 million, or .48 percent of commercial loans, on December 31,
1997, compared to $376 million, or .68 percent, on December 31, 1996.
30
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
TABLE EIGHTEEN
SELECTED INDUSTRY LOANS, LEASES AND FACTORED ACCOUNTS
RECEIVABLE, NET OF UNEARNED INCOME
DECEMBER 31, 1997
(DOLLARS IN MILLIONS)
Outstanding
------------------
<S> <C>
Health care $ 4,844
Food, including agribusiness 3,955
Automotive, excluding trucking 3,431
Machinery and equipment, excluding defense 3,422
Leisure and sports 3,263
Oil and gas 3,112
Media 3,040
Textiles and apparel, excluding retail 2,972
Retail 2,807
Telecommunications 2,193
</TABLE>
- -------------------------------------------------------------------------------
CONSUMER - On December 31, 1997 and 1996, total consumer loan
outstandings totaled $86.0 billion and $77.3 billion, respectively, representing
49 percent and 51 percent of net loans, leases and factored accounts receivable
on December 31, 1997 and 1996, respectively. This increase, due mainly to the
addition of Boatmen's and core loan growth, was net of mortgage and other
consumer loan securitizations of $8.1 billion and $3.4 billion, respectively,
during 1997. Credit card net charge-offs during 1997 caused most of the increase
in total consumer net charge-offs and were due mainly to deterioration in
consumer credit quality experienced on an industry-wide basis. This increase was
partially offset as a result of the sale of $776 million of credit card loans
during the fourth quarter of 1996. In addition, an increase in other consumer
net charge-offs contributed to the higher levels of net charge-offs during 1997.
Average credit card receivables managed by the CARD SERVICES group
(excluding private label credit cards) increased to $10.3 billion in 1997
compared to $9.7 billion in 1996. Average securitized credit card loans totaled
$2.6 billion during 1997 compared to $2.2 billion during 1996.
Average managed other consumer loans, which includes direct and
indirect consumer loans and home equity lines, as well as indirect auto and
consumer finance loans, were $45.2 billion in 1997, compared to $37.7 billion in
1996. The increase in loans was due primarily to the acquisition of Boatmen's
and increased loan production at EquiCredit. Higher net charge-offs were due to
the acquisition of Boatmen's as well as deterioration in consumer credit quality
experienced on an industry-wide basis.
Total consumer loans past due 90 days or more and still accruing
interest were $353 million, or .41 percent of total consumer loans, on December
31, 1997 compared to $219 million, or .28 percent, at the end of 1996. Total
consumer nonperforming loans were $656 million, or .76 percent of total consumer
loans, on December 31, 1997 compared to $466 million, or .60 percent, on
December 31, 1996.
FOREIGN - Foreign outstandings include loans and leases,
interest-bearing deposits with foreign banks, bankers' acceptances and other
investments. The Corporation's foreign commercial
31
<PAGE>
outstandings totaled $17.4 billion, $8.5 billion and $3.8 billion on December
31, 1997, 1996 and 1995, respectively. The Corporation had foreign outstandings
of $2.3 billion with Germany, $2.5 billion with countries in Asia (primarily
Japan), $3.3 billion with France and $3.8 billion with Canada on December 31,
1997. There were no foreign outstandings to any country greater than 1 percent
of total assets on December 31, 1996 and 1995.
32
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Nineteen
Selected Quarterly Operating Results
(Dollars in Millions Except Per-Share Information)
1997 Quarters
----------------------------------------------------------------------
Fourth Third Second First Fourth
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 5,080 $ 4,940 $ 4,886 $ 4,781 $ 4,106
Interest expense 2,640 2,515 2,447 2,368 2,054
Net interest income (taxable-equivalent) 2,475 2,457 2,472 2,444 2,077
Net interest income 2,440 2,425 2,439 2,413 2,052
Provision for credit losses 278 229 225 222 179
Gains (losses) on sales of securities 62 21 29 43 33
Noninterest income 1,687 1,497 1,424 1,321 1,155
Foreclosed properties expense (income) 6 5 - (2) 5
Merger and restructuring items 302 72 - - -
Other noninterest expense 2,554 2,222 2,233 2,225 1,867
Income before income taxes 1,049 1,415 1,434 1,332 1,189
Income tax expense 402 504 515 477 408
Net income 647 911 919 855 781
Net income (excluding merger and restructuring items) 867 955 919 855 781
Earnings per common share .69 .97 .97 .90 .97
Earnings per common share (excluding merger and
restructuring items) .92 1.02 .97 .90 .97
Diluted earnings per common share .67 .95 .94 .88 .95
Diluted earnings per common share
(excluding merger and restructuring items) .90 1.00 .94 .88 .95
Dividends per common share .38 .33 .33 .33 .33
Yield on average earning assets 7.98 % 8.05% 8.07% 7.94% 7.95%
Rate on average interest-bearing liabilities 4.76 4.70 4.62 4.54 4.58
Net interest spread 3.22 3.35 3.45 3.40 3.37
Net interest yield 3.86 3.98 4.05 4.03 4.00
Average total assets $ 297,842 $ 285,406 $284,194 $283,614 $234,849
Average total deposits 166,343 165,461 167,762 168,128 138,500
Average total shareholders' equity 24,034 23,219 23,531 23,666 16,597
Return on average assets .86 % 1.27% 1.30% 1.22% 1.32%
Return on average assets (excluding merger and
restructuring items) 1.15 1.33 1.30 1.22 1.32
Return on average common shareholders' equity (1) 10.68 15.58 15.68 14.69 18.76
Return on average common shareholders'
equity (excluding merger and restructuring items) (1) 14.31 16.34 15.68 14.69 18.76
Cash basis financial data (2)
Earnings per common share $ .83 $ 1.11 $ 1.10 $ 1.02 $ 1.02
Earnings per common share (excluding
merger and restructuring items) 1.06 1.16 1.10 1.02 1.02
Diluted earnings per common share .81 1.08 1.07 .99 1.01
Diluted earnings per common share
(excluding merger and restructuring items) 1.04 1.13 1.07 .99 1.01
Return on average tangible assets 1.08 % 1.49% 1.53% 1.43% 1.42%
Return on average tangible assets
(excluding merger and restructuring items) 1.38 1.56 1.53 1.43 1.42
Return on average tangible common shareholders' equity (1) 23.03 30.31 30.36 26.37 23.69
Return on average tangible common shareholders' equity
(excluding merger and restructuring items) (1) 29.50 31.61 30.36 26.37 23.69
Market price per share of common stock
High for the period $ 66 3/8 $ 71 11/16 $ 70 $ 65 $ 52 5/8
Low for the period 55 56 5/8 54 48 43 1/8
Closing price 60 13/16 61 7/8 64 9/16 55 1/2 48 7/8
Tier 1 Capital Ratio 6.50 % 7.00% 6.83% 7.06% 7.76 %
Total Capital Ratio 10.89 11.56 11.32 11.58 12.66
<CAPTION>
1996 Quarters
-------------------------------------------
Third Second First
- -------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C>
Interest income $ 4,181 $ 4,207 $ 4,338
Interest expense 2,116 2,136 2,302
Net interest income (taxable-equivalent) 2,091 2,100 2,067
Net interest income 2,065 2,071 2,036
Provision for credit losses 190 194 197
Gains (losses) on sales of securities 26 (6) 33
Noninterest income 1,076 1,104 1,073
Foreclosed properties expense (income) 7 8 1
Merger-related items - - 118
Other noninterest expense 1,809 1,807 1,800
Income before income taxes 1,161 1,160 1,026
Income tax expense 409 415 365
Net income 752 745 661
Net income (excluding merger-related items) 752 745 738
Earnings per common share .92 .89 .79
Earnings per common share (excluding merger-related items) .92 .89 .89
Diluted earnings per common share .91 .88 .78
Diluted earnings per common share
(excluding merger-related items) .91 .88 .87
Dividends per common share .29 .29 .29
Yield on average earning assets 7.96% 7.92% 7.92 %
Rate on average interest-bearing liabilities 4.64 4.62 4.76
Net interest spread 3.32 3.30 3.16
Net interest yield 3.96 3.93 3.75
Average total assets $238,539 $243,887 $248,700
Average total deposits 140,425 143,504 140,755
Average total shareholders' equity 16,444 16,851 16,457
Return on average assets 1.25 % 1.23 % 1.06 %
Return on average assets (excluding merger-related items) 1.25 1.23 1.19
Return on average common shareholders' equity (1) 18.23 17.78 16.26
Return on average common shareholders'
equity (excluding merger-related items) (1) 18.23 17.78 18.16
Cash basis financial data (2)
Earnings per common share $ .97 $ .94 $ .84
Earnings per common share (excluding
merger-related items) .97 .94 .93
Diluted earnings per common share .96 .93 .83
Diluted earnings per common share
(excluding merger-related items) .96 .93 .92
Return on average tangible assets 1.34 % 1.31 % 1.14 %
Return on average tangible assets
(excluding merger-related items) 1.34 1.31 1.27
Return on average tangible common shareholders' equity (1) 22.94 22.26 20.44
Return on average tangible common shareholders' equity
(excluding merger-related items) (1) 22.94 22.26 22.70
Market price per share of common stock
High for the period $ 47 1/16 $ 42 5/16 $ 40 11/16
Low for the period 38 3/16 37 3/8 32 3/16
Closing price 43 7/16 41 5/16 40 1/16
Tier 1 Capital Ratio 7.05% 7.58% 7.35 %
Total Capital Ratio 12.05 11.93 11.71
</TABLE>
(1) Average common shareholders' equity does not include the effect of market
value adjustments to securities available for sale and marketable equity
securities.
(2) Cash basis calculations exclude intangible assets and the related
amortization expense.
- --------------------------------------------------------------------------------
33
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
TABLE TWENTY
QUARTERLY TAXABLE-EQUIVALENT DATA
(DOLLARS IN MILLIONS)
Fourth Quarter 1997 Third Quarter 1997
------------------------------------- -----------------------------
Average Average
Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates
------------ ----------- ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned income (1)
Commercial $ 63,656 $ 1,340 8.35% $ 65,061 $ 1,379 8.41%
Real estate commercial 9,181 206 8.88 9,583 212 8.81
Real estate construction 4,736 105 8.81 4,584 104 8.96
---------------------------------------------------------------------
Total commercial 77,573 1,651 8.44 79,228 1,695 8.49
---------------------------------------------------------------------
Residential mortgage 37,188 725 7.77 41,919 828 7.87
Credit card 7,863 244 12.30 8,120 252 12.34
Other consumer 39,492 956 9.61 38,530 921 9.48
---------------------------------------------------------------------
Total consumer 84,543 1,925 9.05 88,569 2,001 8.98
---------------------------------------------------------------------
Foreign 3,795 71 7.44 3,962 69 6.88
Lease financing 6,298 125 7.93 6,235 123 7.86
---------------------------------------------------------------------
Total loans and leases, net 172,209 3,772 8.70 177,994 3,888 8.68
---------------------------------------------------------------------
Securities
Held for investment 1,231 19 6.26 1,425 22 6.23
Available for sale (2) 43,024 731 6.78 28,946 496 6.84
---------------------------------------------------------------------
Total securities 44,255 750 6.77 30,371 518 6.81
---------------------------------------------------------------------
Federal funds sold and securities purchased
under agreements to resell 12,734 170 5.30 11,567 159 5.45
Time deposits placed and other short-term investments 2,229 38 6.84 1,809 27 5.91
Trading account securities (3) 21,726 350 6.41 22,628 353 6.20
Other earning assets 1,762 35 7.87 1,253 27 8.48
---------------------------------------------------------------------
Total earning assets (4) 254,915 5,115 7.98 245,622 4,972 8.05
Cash and cash equivalents 10,809 10,488
Factored accounts receivable 1,234 1,206
Other assets, less allowance for credit losses 30,884 28,090
---------------------------------------------------------------------
Total assets $ 297,842 $ 285,406
=====================================================================
Interest-bearing liabilities
Savings 12,368 59 1.90 $ 12,594 60 1.89
NOW and money market deposit accounts 52,492 333 2.51 52,656 327 2.46
Consumer CDs and IRAs 49,285 648 5.22 49,697 649 5.19
Negotiated CDs, public funds and other time deposits 2,640 38 5.65 3,052 43 5.56
Foreign time deposits 10,622 150 5.60 9,668 133 5.43
Federal funds purchased, securities sold under
agreements to repurchase and other short-term
borrowings 50,801 708 5.53 43,943 623 5.62
Trading account liabilities (3) 11,527 190 6.54 10,241 163 6.30
Long-term debt (5) 30,806 514 6.68 30,967 517 6.68
---------------------------------------------------------------------
Total interest-bearing liabilities (6) 220,541 2,640 4.76 212,818 2,515 4.70
---------------------------------------------------------------------
Noninterest-bearing sources
Noninterest-bearing deposits 38,936 37,794
Other liabilities 14,331 11,575
Shareholders' equity 24,034 23,219
---------------------------------------------------------------------
Total liabilities and shareholders' equity $ 297,842 $ 285,406
=====================================================================
Net interest spread 3.22 3.35
Impact of noninterest-bearing sources .64 .63
---------------------------------------------------------------------
Net interest income/yield on earning assets $ 2,475 3.86% $ 2,457 3.98%
=====================================================================
</TABLE>
(1) NONPERFORMING LOANS ARE INCLUDED IN THE RESPECTIVE AVERAGE LOAN
BALANCES. INCOME ON SUCH NONPERFORMING LOANS IS RECOGNIZED ON A CASH
BASIS.
(2) THE AVERAGE BALANCE SHEET AMOUNTS AND YIELDS ON SECURITIES AVAILABLE
FOR SALE ARE BASED ON THE AVERAGE OF HISTORICAL AMORTIZED COST
BALANCES.
(3) THE FAIR VALUES OF DERIVATIVES-DEALER POSITIONS ARE REPORTED IN OTHER
ASSETS AND LIABILITIES, RESPECTIVELY.
(4) INTEREST INCOME INCLUDES TAXABLE-EQUIVALENT ADJUSTMENTS OF $35, $32,
$33 AND $31 IN THE FOURTH, THIRD, SECOND AND FIRST QUARTERS OF 1997,
RESPECTIVELY, AND $25 IN THE FOURTH QUARTER OF 1996. INTEREST INCOME
ALSO INCLUDES THE IMPACT OF RISK MANAGEMENT INTEREST RATE CONTRACTS,
WHICH INCREASED INTEREST INCOME ON THE UNDERLYING LINKED ASSETS $35,
$34, $40 AND $54 IN THE FOURTH, THIRD, SECOND AND FIRST QUARTERS OF
1997, RESPECTIVELY, AND $34 IN THE FOURTH QUARTER OF 1996.
(5) LONG-TERM DEBT INCLUDES TRUST PREFERRED SECURITIES.
(6) INTEREST EXPENSE INCLUDES THE IMPACT OF RISK MANAGEMENT INTEREST RATE
CONTRACTS, WHICH DECREASED INTEREST EXPENSE ON THE UNDERLYING LINKED
LIABILITIES $11, $8, $11 AND $10 IN THE FOURTH, THIRD, SECOND AND FIRST
QUARTERS OF 1997, RESPECTIVELY, AND $1 IN THE FOURTH QUARTER OF 1996.
- -------------------------------------------------------------------------------
34
<PAGE>
<TABLE>
<CAPTION>
Second Quarter 1997 First Quarter 1997 Fourth Quarter 1996
- ------------------------------------ ----------------------------------- --------------------------------------
Average Average Average
Balance Income Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates Amounts Expense Rates
- ------------ --------- --------- -------- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 65,329 $ 1,382 8.48% $ 64,687 $ 1,341 8.41% $ 54,968 $ 1,153 8.34%
10,389 231 8.91 10,636 230 8.75 7,493 166 8.79
4,569 107 9.46 4,593 103 9.07 3,899 86 8.90
- -------------------------------------------------------------------------------------------------------------------
80,287 1,720 8.59 79,916 1,674 8.49 66,360 1,405 8.42
- -------------------------------------------------------------------------------------------------------------------
43,522 851 7.83 41,799 811 7.80 38,040 738 7.74
8,298 253 12.24 8,263 244 11.96 7,417 222 11.91
38,147 901 9.47 38,222 887 9.42 31,670 758 9.52
- -------------------------------------------------------------------------------------------------------------------
89,967 2,005 8.93 88,284 1,942 8.89 77,127 1,718 8.87
- -------------------------------------------------------------------------------------------------------------------
3,291 59 7.25 3,445 59 6.84 2,856 49 6.88
5,885 116 7.87 5,724 112 7.90 4,914 96 7.77
- -------------------------------------------------------------------------------------------------------------------
179,430 3,900 8.71 177,369 3,787 8.64 151,257 3,268 8.60
- -------------------------------------------------------------------------------------------------------------------
1,647 24 5.94 1,919 29 6.05 2,585 36 5.55
25,563 438 6.85 25,638 435 6.81 16,404 283 6.90
- -------------------------------------------------------------------------------------------------------------------
27,210 462 6.80 27,557 464 6.76 18,989 319 6.72
- -------------------------------------------------------------------------------------------------------------------
11,788 174 5.92 13,943 196 5.70 12,600 167 5.27
2,381 32 5.35 2,312 29 5.10 2,059 26 4.86
22,800 332 5.84 22,855 317 5.60 21,160 334 6.32
819 19 9.32 1,062 19 7.39 802 17 8.60
- -------------------------------------------------------------------------------------------------------------------
244,428 4,919 8.07 245,098 4,812 7.94 206,867 4,131 7.95
10,520 11,499 9,977
1,193 1,081 1,258
28,053 25,936 16,747
- -------------------------------------------------------------------------------------------------------------------
$ 284,194 $ 283,614 $ 234,849
===================================================================================================================
$ 12,990 62 1.94 $ 13,167 65 2.02 $ 11,576 59 2.02
53,906 336 2.49 54,239 335 2.51 42,500 251 2.35
50,685 657 5.19 51,679 661 5.18 43,145 561 5.17
3,401 46 5.48 3,485 46 5.32 2,589 36 5.54
9,523 125 5.30 9,278 118 5.14 9,139 117 5.10
42,177 568 5.40 42,136 536 5.16 36,076 485 5.35
9,390 160 6.84 9,967 165 6.72 9,336 152 6.47
30,044 493 6.57 27,162 442 6.51 24,109 393 6.53
- -------------------------------------------------------------------------------------------------------------------
212,116 2,447 4.62 211,113 2,368 4.54 178,470 2,054 4.58
- -------------------------------------------------------------------------------------------------------------------
37,257 36,280 29,551
11,290 12,555 10,231
23,531 23,666 16,597
- -------------------------------------------------------------------------------------------------------------------
$ 284,194 $ 283,614 $ 234,849
===================================================================================================================
3.45 3.40 3.37
.60 .63 .63
- -------------------------------------------------------------------------------------------------------------------
$ 2,472 4.05% $ 2,444 4.03% $ 2,077 4.00%
===================================================================================================================
</TABLE>
35
<PAGE>
1996 COMPARED TO 1995
The following discussion and analysis provides a comparison of the
Corporation's results of operations for the years ended December 31, 1996 and
1995. This discussion should be read in conjunction with the consolidated
financial statements and related notes on pages 38 through 73.
OVERVIEW
The Corporation's continued earnings momentum was demonstrated through
a 21-percent increase in operating net income to $3.02 billion in 1996 compared
to $2.48 billion in 1995. Operating earnings per common share for 1996 increased
15 percent to $3.65 from $3.18 in 1995. Including a merger and restructuring
item of $118 million ($77 million, net of tax), net income increased 18 percent
to $2.94 billion while earnings per common share rose 12 percent to $3.56 and
diluted earnings per common share increased 13 percent to $3.50, respectively.
NET INTEREST INCOME
Taxable-equivalent net interest income increased 14 percent to $8.3
billion in 1996 compared to $7.3 billion in 1995 due to acquisitions of several
banking operations, higher spreads in the securities portfolio, core loan growth
and increased noninterest-bearing deposits, partially offset by the impact of
securitizations and a shift in funding to long-term debt.
The net interest yield increased 30 basis points to 3.91 percent in
1996 compared to 3.61 percent in 1995 due to the sale of low-yielding securities
and the reinvestment of proceeds into higher-spread products.
PROVISION FOR CREDIT LOSSES
The provision for credit losses covered net charge-offs and was $760
million in 1996 compared to $505 million in the prior year, reflecting the
continuation of a return to more normalized levels of credit losses following
periods of unusually low credit losses. Net charge-offs increased $208 million
to $750 million in 1996 over 1995 due primarily to increases in credit card,
commercial and other consumer net charge-offs.
The allowance for credit losses was $2.8 billion, or 1.82 percent of
net loans, leases and factored accounts receivable, on December 31, 1996
compared to $2.7 billion, or 1.81 percent, at the end of 1995. The allowance for
credit losses was 259 percent of nonperforming loans on December 31, 1996
compared to 305 percent on December 31, 1995.
NONINTEREST INCOME
Noninterest income increased 16 percent to $4.4 billion in 1996, driven
primarily by higher deposit account service charges, investment banking income
and mortgage servicing and other mortgage-related income.
NONINTEREST EXPENSE
Noninterest expense increased 9 percent to $7.3 billion. Excluding the
impact of acquisitions, noninterest expense increased 5 percent, the result of
increased expenditures in selected areas to support revenue growth through
enhancing customer sales and optimizing product and data delivery channels.
Higher marketing expenses associated with the 1996 Summer Olympics also
contributed to the increase in 1996 expenses.
INCOME TAXES
The Corporation's income tax expense for 1996 was $1.6 billion, for an
effective tax rate of 35.2 percent of pretax income. Income tax expense for 1995
was $1.3 billion, for an effective tax rate of 34.8 percent.
36
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER-SHARE INFORMATION)
YEAR ENDED DECEMBER 31
-------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 15,270 $ 13,121 $ 12,134
Interest and dividends on securities 2,140 1,618 1,844
Federal funds sold and securities purchased under agreements to resell 699 689 942
Trading account securities 1,352 1,228 1,100
Other interest income 226 176 166
-------------------------------------------
Total interest income 19,687 16,832 16,186
-------------------------------------------
INTEREST EXPENSE
Deposits 4,891 4,246 4,274
Borrowed funds 2,435 2,274 2,858
Trading account liabilities 678 653 896
Long-term debt 1,966 1,435 964
-------------------------------------------
Total interest expense 9,970 8,608 8,992
-------------------------------------------
NET INTEREST INCOME 9,717 8,224 7,194
PROVISION FOR CREDIT LOSSES 954 760 505
-------------------------------------------
NET CREDIT INCOME 8,763 7,464 6,689
GAINS ON SALES OF SECURITIES 155 86 34
NONINTEREST INCOME
Service charges on deposit accounts 1,835 1,393 1,132
Mortgage servicing and other mortgage-related income 293 224 146
Investment banking income 715 384 192
Trading account profits and fees 272 278 313
Brokerage income 278 147 146
Other nondeposit-related service fees 373 311 290
Asset management and fiduciary service fees 732 513 522
Credit card income 420 369 338
Other income 1,011 789 708
-------------------------------------------
Total noninterest income 5,929 4,408 3,787
-------------------------------------------
FORECLOSED PROPERTIES EXPENSE 9 21 30
MERGER AND RESTRUCTURING ITEMS 374 118 -
OTHER NONINTEREST EXPENSE
Personnel 4,528 3,543 3,250
Occupancy, net 783 658 621
Equipment 780 608 541
Marketing 341 291 261
Professional fees 383 312 207
Amortization of intangibles 503 179 173
Data processing 346 295 272
Telecommunications 283 218 191
Other general operating 1,011 959 955
General administrative and miscellaneous 276 220 199
-------------------------------------------
Total other noninterest expense 9,234 7,283 6,670
-------------------------------------------
INCOME BEFORE INCOME TAXES 5,230 4,536 3,810
INCOME TAX EXPENSE 1,898 1,597 1,327
-------------------------------------------
NET INCOME $ 3,332 $ 2,939 $ 2,483
===========================================
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,321 $ 2,922 $ 2,459
============================================
PER-SHARE INFORMATION (1)
Earnings per common share $ 3.53 $ 3.56 $ 3.18
============================================
Diluted earnings per common share $ 3.44 $ 3.50 $ 3.10
============================================
Dividends per common share $ 1.37 $ 1.20 $ 1.04
============================================
AVERAGE COMMON SHARES ISSUED (IN THOUSANDS) (1) 941,992 820,945 773,799
============================================
</TABLE>
(1) SHARES AND PER-SHARE DATA REFLECT A 2-FOR-1 STOCK SPLIT ON FEBRUARY 27,
1997.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
DECEMBER 31
------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,781 $ 11,881
Time deposits placed and other short-term investments 2,501 1,986
Securities
Held for investment, at cost (market value $1,161 and $2,110) 1,156 2,110
Available for sale 49,448 17,285
------------------------------
Total securities 50,604 19,395
------------------------------
Federal funds sold and securities purchased under agreements to resell 10,024 6,962
Trading account assets 23,682 18,693
Loans and leases, net of unearned income 175,697 151,992
Factored accounts receivable 1,081 1,049
Allowance for credit losses (3,277) (2,792)
------------------------------
Loans, leases and factored accounts receivable, net of unearned income
and allowance for credit losses 173,501 150,249
------------------------------
Premises and equipment, net 4,424 3,847
Customers' acceptance liability 1,330 1,074
Interest receivable 2,024 1,476
Mortgage servicing rights 1,311 963
Goodwill 9,729 2,204
Core deposit and other intangibles 823 418
Other assets 16,820 7,801
------------------------------
$ 310,554 $ 226,949
==============================
LIABILITIES
Deposits
Noninterest-bearing $ 41,700 $ 32,209
Savings 12,293 11,436
NOW and money market deposit accounts 53,969 43,359
Time 51,288 45,272
Foreign time 14,393 8,053
------------------------------
Total deposits 173,643 140,329
------------------------------
Federal funds purchased and securities sold under agreements to repurchase 46,504 20,646
Trading account liabilities 15,207 11,771
Commercial paper 3,752 2,829
Other short-term borrowings 4,127 1,837
Liability to factoring clients 591 597
Acceptances outstanding 1,330 1,074
Accrued expenses and other liabilities 9,058 5,110
Trust preferred securities 2,705 1,465
Long-term debt 28,890 24,212
------------------------------
Total liabilities 285,807 209,870
------------------------------
Contingent liabilities and other financial commitments (Notes Eight and Ten)
SHAREHOLDERS' EQUITY
Preferred stock: authorized - 45,000,000 shares; issued - 2,209,784 and 5,228,948 shares 94 171
Common stock: authorized - 1,250,000,000 shares; issued - 943,932,530 and 798,724,153 shares 9,779 4,479
Retained earnings 14,592 12,482
Other, including loan to ESOP trust 282 (53)
-----------------------------
Total shareholders' equity 24,747 17,079
-----------------------------
$ 310,554 $ 226,949
=============================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,332 $ 2,939 $ 2,483
Reconciliation of net income to net cash (used in) provided by operating activities
Provision for credit losses 954 760 505
Gains on sales of securities (155) (86) (34)
Depreciation and premises improvements amortization 553 416 378
Amortization of intangibles 503 179 173
Deferred income tax expense 488 360 165
Net change in trading instruments (1,272) (3,280) (5,175)
Net (increase) decrease in interest receivable (266) 522 (193)
Net increase (decrease) in interest payable 74 (547) 254
Other operating activities (4,650) 1,385 (3,563)
-----------------------------------------
Net cash (used in) provided by operating activities (439) 2,648 (5,007)
-----------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of securities held for investment 987 2,329 5,547
Purchases of securities held for investment (128) (14) (545)
Proceeds from sales and maturities of securities available for sale 37,308 32,977 30,206
Purchases of securities available for sale (49,570) (16,489) (29,758)
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell (800) (316) 4,856
Net (increase) decrease in time deposits placed and other short-term investments (719) (565) 863
Purchase and net originations of loans and leases (28,521) (13,637) (19,385)
Proceeds from sales and securitizations of loans and leases 21,102 12,171 4,616
Purchases and originations of mortgage servicing rights (397) (366) (598)
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 (287) (518) (454)
Proceeds from sales of foreclosed properties 280 262 324
Sales and acquisitions of business activities, net of cash 1,389 795 (1,020)
-----------------------------------------
Net cash (used in) provided by investing activities (19,402) 16,547 (5,370)
-----------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 883 (7,104) (1,109)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 21,590 (10,235) 2,558
Net increase (decrease) in other short-term borrowings and commercial paper 1,911 (4,307) (713)
Proceeds from issuance of trust preferred securities 1,240 1,465 -
Proceeds from issuance of long-term debt 6,133 7,480 11,893
Retirement of long-term debt (3,601) (3,307) (2,249)
Proceeds from issuance of common stock 1,418 240 326
Cash dividends paid (1,222) (923) (766)
Common stock repurchased (6,515) (1,842) (887)
Other financing activities (96) 112 (24)
-----------------------------------------
Net cash provided by (used in) financing activities 21,741 (18,421) 9,029
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 1,900 774 (1,348)
Cash and cash equivalents on January 1 11,881 11,107 12,455
-----------------------------------------
Cash and cash equivalents on December 31 $ 13,781 $ 11,881 $ 11,107
=========================================
Supplemental cash flow disclosure:
Cash paid for interest $ 9,896 $ 9,074 $ 8,765
Cash paid for income taxes 646 1,132 961
</TABLE>
LOANS TRANSFERRED TO FORECLOSED PROPERTIES AMOUNTED TO $212, $209 AND $181 IN
1997, 1996 AND 1995, RESPECTIVELY.
LOANS SECURITIZED AND RETAINED IN THE AVAILABLE FOR SALE SECURITIES 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 $51,555 AND $42,692 RESPECTIVELY,
NET OF CASH ACQUIRED.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in Millions, Shares in Thousands)
Total
Common Stock Retained Share-
Preferred -------------------- holders'
Stock Shares Amount Earnings Other Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance on December 31, 1994 $ 326 782,645 $ 5,683 $ 8,550 $ (414) $ 14,145
Net income 2,483 2,483
Cash dividends by pooled companies:
NationsBank
Common (567) (567)
Preferred (8) (8)
Barnett
Common (175) (175)
Preferred (16) (16)
Common stock issued under dividend
reinvestment and employee plans 12,166 286 40 326
Common stock issued in acquisitions 6,785 221 5 226
Common stock repurchased (35,096) (887) (887)
Conversion of preferred stock (117) 7,117 117
Net change in unrealized gains (losses)
on securities available for sale and
marketable equity securities 525 525
Other (6) 226 6 21 21
----------------------------------------------------------------------
Balance on December 31, 1995 203 773,843 5,426 10,272 172 16,073
Net income 2,939 2,939
Cash dividends by pooled companies:
NationsBank
Common (707) (707)
Preferred (15) (15)
Barnett
Common (199) (199)
Preferred (2) (2)
Common stock issued under employee plans 6,997 203 37 240
Stock issued in acquisitions 73 55,436 586 192 2 853
Common stock repurchased (46,513) (1,842) (1,842)
Conversion of preferred stock (98) 8,703 98
Net change in unrealized gains (losses)
on securities available for sale and
marketable equity securities (270) (270)
Other (7) 258 8 2 6 9
-----------------------------------------------------------------------
Balance on December 31, 1996 171 798,724 4,479 12,482 (53) 17,079
Net income 3,332 3,332
Cash dividends by pooled companies:
NationsBank
Common (985) (985)
Preferred (11) (11)
Barnett
Common (226) (226)
Common stock issued under employee plans 36,517 1,414 4 1,418
Stock issued in acquisitions 82 219,024 10,320 10,402
Common stock repurchased (114,201) (6,515) (6,515)
Redemption of preferred stock (73) (73)
Conversion of preferred stock (86) 3,859 86
Net change in unrealized gains (losses)
on securities available for sale and
marketable equity securities 314 314
Other 10 (5) 17 12
-----------------------------------------------------------------------
Balance on December 31, 1997 $ 94 943,933 $ 9,779 $14,592 $ 282 $ 24,747
=======================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
On January 9, 1998, NationsBank Corporation (the Corporation) completed
its merger with Barnett Banks, Inc. (Barnett). The transaction was accounted for
as a pooling of interests. The 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 North Carolina 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 various nonbanking subsidiaries, the Corporation
provides banking and banking-related services primarily throughout the
Mid-Atlantic, the Midwest, the Southeast and the Southwest.
NOTE ONE - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation and its majority-owned subsidiaries. All significant intercompany
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
consolidated financial statements.
The preparation of the 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 2-for-1 split of its
common stock. Accordingly, the 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 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.
43
<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
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.
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 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
44
<PAGE>
measured at the restructuring date. Impaired loans are included in nonperforming
loans. Generally, loans which are past due 180 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.
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 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 $397 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 $188 million.
The fair value on December 31, 1997 of capitalized MSRs approximated
the carrying value of $1.3 billion. Total loans serviced approximated $126.5
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 options and interest
rate swaps. The notional amount on December 31, 1997 was $8.7 billion and the
unrealized gain on such contracts was $57 million.
45
<PAGE>
CONSUMER FINANCE LENDING
The Corporation provides consumer finance lending primarily through
NationsCredit Corporation, EquiCredit Corporation and Oxford Resources Corp.
Included in other income are gains on the securitization and sale of home equity
and automobile secured installment loans and servicing income on securitized
loans. The gains on sales of such loans include the estimated present value of
servicing revenues in excess of a contractual servicing fee over the expected
average life of the loans, discounted at a market rate at the time of sale and
adjusted for projected prepayments and expected foreclosure expenses. A
corresponding asset, capitalized servicing income, is recorded at the time of
sale and is included in other assets.
The Corporation adjusts the carrying value of the assets to fair value
based on changes in market conditions and changes in estimates. The adjustment
is reflected as an unrealized gain or loss in shareholders' equity, unless the
asset is determined to be permanently impaired. Permanent impairments are
expensed.
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.
46
<PAGE>
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. In addition, gains or losses on foreign currency
contracts are a component of the revaluation of the underlying
foreign-denominated 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.
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 in
the interest rate market 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.
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 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 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.
47
<PAGE>
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 SFAS 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, SFAS 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 will adopt the provisions of
these standards during the first quarter of 1998.
NOTE TWO - MERGER-RELATED ACTIVITY
On April 13, 1998, the Corporation announced a definitive agreement to
merge with BankAmerica Corporation (BankAmerica). The merger will create a new
holding company called BankAmerica Corporation to be headquartered in Charlotte,
North Carolina. Each outstanding share of BankAmerica common stock will be
converted into 1.1316 shares of the new holding company and each share of the
Corporation's common stock will become a share in the new company. The merger
is expected to close in the fourth quarter of 1998 and is subject to regulatory
and shareholder approval.
On January 9, 1998, the Corporation completed its merger with Barnett,
a multi-bank holding company headquartered in Jacksonville, Florida (the
Merger). Barnett's total assets, total deposits and total shareholders' equity
on the date of the Merger amounted to approximately $46.0 billion, $35.4 billion
and $3.4 billion, respectively. 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 stock were issued to convert similar stock options granted to
certain Barnett 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 the Corporation and Barnett have
been combined and reflected at their historical amounts.
In connection with the Merger, the Corporation expects to incur pretax
merger and restructuring items during the first quarter of 1998 of approximately
$900 million ($642 million after-tax), which will include 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 Merger costs (including legal and investment banking
fees).
In compliance with certain requirements of the Federal Reserve Board,
the Department of Justice and certain Florida authorities in connection with the
Merger, the Corporation and Barnett have entered into agreements to divest
certain branches of Barnett with loans and deposits aggregating approximately
$2.5 billion and $4.0 billion, respectively, in various markets in Florida.
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.
The Corporation consummated the acquisition of First Federal Savings
Bank of Brunswick, Georgia (Brunswick) on April 15, 1997. As of the acquisition
date, Brunswick had assets of approximately $249 million and deposits of
approximately $219 million. The Corporation issued approximately 2.4 million
shares of its common stock in this acquisition. The Corporation accounted for
this acquisition as a purchase.
On April 1, 1997, the Corporation acquired all of the outstanding
common stock of Oxford Resources Corp. (Oxford), a national automobile leasing
company for 16.2 million
48
<PAGE>
shares of common stock. On the date of acquisition, Oxford's total assets and
total liabilities were $1.9 billion and $1.8 billion, respectively. The
acquisition was accounted for as a purchase.
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.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
(Dollars in millions, except per share information)
1996
- ---------------------------------------------------------------------
Net interest income $ 9,483
Net income 2,964
Net income available to common shareholders 2,940
Earnings per common share 3.08
Diluted earnings per common share 3.04
In January 1995, the Corporation acquired EquiCredit Corporation
(EquiCredit), a national consumer finance company, for $332 million. EquiCredit
specializes in originating, securitizing, and servicing consumer loans secured
by first or second mortgages. The Corporation accounted for this acquisition
as a purchase.
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 four charters: NationsBank, N.A., NationsBank of Texas, N.A., Barnett
Bank, N.A. and NationsBank of Delaware, N.A., which operates the Corporation's
credit card business. The Corporation expects to continue the consolidation of
other banking subsidiaries throughout 1998.
49
<PAGE>
NOTE THREE --- SECURITIES
The amortized costs and market values of securities held for investment
and securities available for sale on December 31 were (dollars in millions):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES HELD FOR INVESTMENT COST GAINS LOSSES VALUE
- -------------------------------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
1997
U.S. Treasury securities and agency debentures $ 500 $ 1 $ (1) $ 500
Foreign sovereign securities 32 - - 32
Mortgage-backed securities 532 2 (1) 533
Other taxable securities 5 - - 5
-------------- ----------- -------------- --------------
Total taxable 1,069 3 (2) 1,070
-------------- ----------- -------------- --------------
Tax-exempt securities 87 4 - 91
-------------- ----------- -------------- --------------
Total $ 1,156 $ 7 $ (2) $ 1,161
============== =========== ============== ==============
1996
U.S. Treasury securities and agency debentures $ 862 $ - $ (3) $ 859
Foreign sovereign securities 25 - - 25
Mortgage-backed securities 1,101 3 (4) 1,100
Other taxable securities 5 - - 5
-------------- ----------- -------------- --------------
Total taxable 1,993 3 (7) 1,989
-------------- ----------- -------------- --------------
Tax-exempt securities 117 4 - 121
-------------- ----------- -------------- --------------
Total $ 2,110 $ 7 $ (7) $ 2,110
============== =========== ============== ==============
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ----------------------------- -------------- ----------- -------------- --------------
1997
U.S. Treasury securities and agency debentures $ 9,171 $ 95 $ (4) $ 9,262
Foreign sovereign securities 6,400 16 (20) 6,396
Mortgage-backed securities 30,163 375 (27) 30,511
Other taxable securities 1,550 9 - 1,559
-------------- ----------- -------------- --------------
Total taxable 47,284 495 (51) 47,728
-------------- ----------- -------------- --------------
Tax-exempt securities 1,662 58 - 1,720
-------------- ----------- -------------- --------------
Total $ 48,946 $ 553 $ (51) $ 49,448
============== =========== ============== ==============
1996
U.S. Treasury securities and agency debentures $ 3,643 $ 19 $ (29) $ 3,633
Foreign sovereign securities 952 2 (8) 946
Mortgage-backed securities 10,646 61 (49) 10,658
Other taxable securities 1,278 8 (2) 1,284
-------------- ----------- -------------- --------------
Total taxable 16,519 90 (88) 16,521
-------------- ----------- -------------- --------------
Tax-exempt securities 745 21 (2) 764
-------------- ----------- -------------- --------------
Total $ 17,264 $ 111 $ (90) $ 17,285
============== =========== ============== ==============
</TABLE>
50
<PAGE>
The components, expected maturity distribution and yields (computed on
a taxable-equivalent basis) of the Corporation's securities portfolio on
December 31, 1997 are summarized below (dollars in millions). Actual maturities
may differ from contractual maturities or maturities shown below since borrowers
may have the right to prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
DUE AFTER 1 DUE AFTER 5
DUE IN 1 YEAR THROUGH 5 THROUGH 10 DUE AFTER
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>
Amortized cost of securities held
for investment
U.S. Treasury securities
and agency debentures $ 101 4.94% $ 399 5.86% $ - - % $ - - % $ 500 5.68%
Foreign sovereign securities 8 5.86 13 7.60 10 6.59 1 6.62 32 6.84
Mortgage-backed securities 313 5.97 216 6.73 3 5.63 - - 532 6.28
Other taxable securities 3 8.01 - - - - 2 6.56 5 7.18
-------- -------- --------- -------- ------- ------- ------- -------- ------- -------
Total taxable 425 5.74 628 6.19 13 6.40 3 6.74 1,069 6.02
Tax-exempt securities 25 9.62 33 9.36 10 9.34 19 9.29 87 9.42
-------- -------- --------- -------- ------- ------- ------- -------- ------- -------
Total $ 450 5.96 $ 661 6.35 $ 23 7.70 $ 22 8.89 $ 1,156 6.27
======== ======== ========= ======== ======== ======= ======= ======== ======= =======
Market value of securities
held for investment $ 448 $ 665 $ 24 $ 24 $ 1,161
======== ========= ======== ======= =======
Market value of securities
available for sale
U.S. Treasury securities
and agency debentures $ 771 5.96% $ 4,716 6.00% $ 3,514 6.04% $ 261 6.36% $ 9,262 6.01%
Foreign sovereign securities 67 20.13 4,446 4.87 809 5.76 1,074 5.63 6,396 5.27
Mortgage-backed securities 428 5.61 12,657 7.26 15,478 6.82 1,948 6.99 30,511 7.00
Other taxable securities 329 5.64 374 14.53 234 6.74 622 5.80 1,559 8.01
-------- -------- --------- -------- ------- ------- ------- -------- ------- -------
Total taxable 1,595 6.39 22,193 6.63 20,035 6.64 3,905 6.39 47,728 6.60
Tax-exempt securities 120 7.51 311 7.21 441 7.77 848 8.24 1,720 7.87
-------- -------- --------- -------- ------- ------- ------- -------- ------- -------
Total $ 1,715 6.47 $ 22,504 6.64 $ 20,476 6.67 $ 4,753 6.70 $ 49,448 6.65
======== ======== ========= ======== ======= ======= ======= ======== ======= =======
Amortized cost of securitites
available for sale $ 1,713 $ 22,287 $ 20,249 $ 4,697 $ 48,946
======== ========= ========== ======= ========
</TABLE>
The components of gains and losses on sales of available for sale
securities for the years ended December 31 were (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Gross gains on sales of securities $ 162 $ 219 $ 80
Gross losses on sales of securities (7) (133) (46)
----------- ------------ -----------
Net gains on sales of securities $ 155 $ 86 $ 34
=========== ============ ===========
</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 consolidated shareholders' equity on December 31, 1997 or
1996.
The income tax expense attributable to realized net gains on securities
sales was $55 million, $30 million and $12 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 $42.2 billion and $15.7 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 $408 million, primarily reflecting $502 million of
pretax appreciation on securities available for sale and $115 million of pretax
appreciation on marketable equity securities.
51
<PAGE>
NOTE FOUR -- TRADING ACCOUNT ASSETS AND LIABILITIES
The fair values on December 31 and the average fair values for the
years ended December 31 of the components of trading account assets and
liabilities were (dollars in millions):
<TABLE>
<CAPTION>
Average Balances
1997 1996 1997 1996
------------------------ ---------------------------
<S> <C> <C> <C> <C>
Securities owned
U.S. Treasury securities $ 8,701 $ 6,918 $ 10,260 $ 13,177
Securities of other U.S. Government agencies and corporations 1,375 2,096 1,585 1,843
Certificates of deposit, bankers' acceptances and commercial paper 517 501 645 553
Corporate debt 1,808 1,552 1,686 1,410
Foreign sovereign debt 4,939 3,396 6,270 1,044
Mortgage-backed securities 2,299 502 1,698 358
Other securities 403 430 356 672
---------- ----------- ----------- --------------
Total securities owned 20,042 15,395 22,500 19,057
Derivatives-dealer positions 3,640 3,298 4,261 3,791
---------- ----------- ----------- --------------
Total trading account assets $ 23,682 $ 18,693 $ 26,761 $ 22,848
========== =========== =========== ==============
Short sales
U.S. Treasury securities $ 8,970 $ 7,162 $ 8,319 $ 9,311
Corporate debt 140 452 232 535
Foreign sovereign debt 1,825 - 968 -
Other securities 904 309 766 315
---------- ----------- ----------- --------------
Total short sales 11,839 7,923 10,285 10,161
Derivatives-dealer positions 3,368 3,848 3,848 3,170
---------- ----------- ----------- --------------
Total trading account liabilities $ 15,207 $ 11,771 $ 14,133 $ 13,331
========== =========== =========== ==============
</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 $31 million for 1997 and a gain of $68 million
for 1996.
Interest rate and foreign exchange contract trading activities
generated most of the Corporation's trading account profits and fees.
Derivatives-dealer positions presented in the table above represent the
fair values of interest rate, foreign exchange, equity and commodity-related
products including financial futures, forward settlement and option contracts
and swap agreements associated with the Corporation's derivatives trading
activities. See Note Eight for additional information on derivatives-dealer
positions, including credit risk.
52
<PAGE>
NOTE FIVE -- LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE
Loans, leases and factored accounts receivable on December 31 were
(dollars in millions):
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LOANS
Commercial $ 65,841 $ 55,574
Real estate commercial 8,994 7,462
Real estate construction 4,665 3,680
----------------------------------
Total commercial 79,500 66,716
----------------------------------
Residential mortgage 37,414 37,734
Credit card 8,203 7,854
Other consumer 40,751 32,078
----------------------------------
Total consumer 86,368 77,666
----------------------------------
Foreign 4,117 3,006
Factored accounts receivable 1,081 1,049
----------------------------------
Total loans and factored accounts receivable 171,066 148,437
Less unearned income (626) (611)
----------------------------------
Loans and factored accounts receivable, net of unearned income 170,440 147,826
----------------------------------
LEASES
Lease receivables 6,648 5,523
Estimated residual value 1,793 1,538
Less unearned income (2,103) (1,846)
----------------------------------
Leases, net of unearned income 6,338 5,215
----------------------------------
Loans, leases and factored accounts receivable, net of unearned income $ 176,778 $ 153,041
==================================
</TABLE>
Transactions in the allowance for credit losses were (dollars in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Balance on January 1 $ 2,792 $ 2,668 $ 2,687
--------------------------------------
Loans, leases and factored accounts receivable charged off (1,298) (1,045) (808)
Recoveries of loans, leases and factored accounts receivable previously charged off 347 295 266
--------------------------------------
Net charge offs (951) (750) (542)
Provision for credit losses 954 760 505
Allowance applicable to loans of purchased companies and other 482 114 18
--------------------------------------
Balance on December 31 $ 3,277 $ 2,792 $ 2,668
======================================
</TABLE>
53
<PAGE>
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 (dollars in millions):
1997 1996
--------------------------
Commercial $ 316 $ 376
Real estate commercial 185 176
Real estate construction 23 37
--------------------------
Total impaired loans $ 524 $ 589
==========================
The average recorded investment in certain impaired loans for the years
ended December 31, 1997, 1996 and 1995 was approximately $639 million, $634
million and $733 million, respectively. For the years ended December 31, 1997,
1996 and 1995, interest income recognized on impaired loans totaled $30 million,
$33 million and $34 million, respectively, all of which was recognized on a cash
basis.
On December 31, 1997, 1996 and 1995, nonperforming loans, including
certain loans which are considered impaired, totaled $1.2 billion, $1.1 billion
and $876 million, 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 $60 million, $42 million and $33 million, respectively. If these loans had
been accruing interest at their originally contracted rates, related income
would have been $150 million, $122 million and $119 million in 1997, 1996 and
1995, respectively.
Foreclosed properties amounted to $147 million, $188 million and $215
million on December 31, 1997, 1996 and 1995, respectively. The cost of carrying
foreclosed properties amounted to $11 million, $11 million and $18 million in
1997, 1996 and 1995, respectively.
NOTE SIX - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
NationsBank, N.A. and NationsBank of Texas, N.A. maintain a program to
offer up to $9.0 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 $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.
On December 31, 1997, the Corporation, excluding Barnett, had unused
commercial paper back-up lines of credit totaling $1.5 billion of which $1.0
billion expires in October 1998 and $500 million expires in October 2002. These
lines were supported by fees paid to unaffiliated banks. Effective January 9,
1998, one of the Corporation's commercial paper back-up lines of credit totaling
$760 million, which was assumed in connection with the Merger, was canceled.
54
<PAGE>
The contractual maturities of long-term debt on December 31 were
(dollars in millions):
<TABLE>
<CAPTION>
1997
---------------------------------------------
Various Various
Fixed-Rate Floating-Rate 1996
Debt Debt Amount Amount
Obligations Obligations Outstanding Outstanding
------------------------------------------------------------
<S> <C> <C> <C> <C>
Parent company
Senior debt
Due in 1997 $ - $ - $ - $ 901
Due in 1998 1,025 1,415 2,440 1,865
Due in 1999 126 1,648 1,774 1,325
Due in 2000 472 1,118 1,590 1,566
Due in 2001 499 1,103 1,602 1,602
Due in 2002 20 1,455 1,475 1,268
Thereafter 622 1,842 2,464 1,512
------------------------------------------------------------
2,764 8,581 11,345 10,039
------------------------------------------------------------
Subordinated debt
Due in 1997 - - - 75
Due in 1999 330 - 330 330
Due in 2001 549 - 549 399
Due in 2002 350 - 350 349
Thereafter 4,565 1,275 5,840 5,274
------------------------------------------------------------
5,794 1,275 7,069 6,427
------------------------------------------------------------
Total parent company long-term debt 8,558 9,856 18,414 16,466
------------------------------------------------------------
Banking and nonbanking subsidiaries
Senior debt
Due in 1997 - - - 1,302
Due in 1998 660 2,977 3,637 2,886
Due in 1999 99 1,410 1,509 224
Due in 2000 354 2,932 3,286 1,928
Due in 2001 178 277 455 347
Due in 2002 17 284 301 35
Thereafter 125 172 297 404
------------------------------------------------------------
1,433 8,052 9,485 7,126
------------------------------------------------------------
Subordinated debt
Due in 1997 - - - 5
Due in 2004 and thereafter 300 8 308 308
------------------------------------------------------------
300 8 308 313
------------------------------------------------------------
Total banking and nonbanking subsidiaries long-term debt 1,733 8,060 9,793 7,439
------------------------------------------------------------
$ 10,291 $ 17,916 28,207 23,905
============================================================
Notes payable to finance the purchase of leased vehicles 231 -
Obligations under capital leases 452 307
-----------------------------
Total long-term debt $ 28,890 $ 24,212
=============================
</TABLE>
As part of its interest rate risk management activities, the
Corporation enters into risk management interest rate contracts for certain
long-term debt issuances. Through the use of interest rate swaps, $2.2 billion
of fixed-rate debt with rates ranging from 5.60 percent to 8.57 percent have
been effectively converted to floating rates primarily at spreads over LIBOR.
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 6.48 percent, 7.36
percent and 5.98 percent, respectively.
55
<PAGE>
As described below, certain debt obligations outstanding on December
31, 1997 may be redeemed prior to maturity at the option of the Corporation
(dollars in millions):
Year Redeemable Year of Maturities Amount Outstanding
- -----------------------------------------------------------------------------
Currently redeemable 2002 $ 28
1998 2000 500
1999 - 2000 2005 - 2011 716
2001 - 2005 2006 - 2024 455
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 program, the Corporation may offer up
to $4.5 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 foreign-denominated debt into U.S. dollars. On
December 31, 1997, $2.3 billion of notes was outstanding under this program.
Since October 1996, the Corporation formed seven wholly owned grantor
trusts (NationsBank Capital Trusts I, II, III and IV 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 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 is guaranteed by the Corporation
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.
The terms of the preferred securities are summarized as follows
(dollars in millions):
<TABLE>
<CAPTION>
NationsBank
--------------------------------------------------------------------------
Capital Trust I Capital Trust II Capital Trust III Capital Trust IV
(Issued (Issued (Issued (Issued
December 1996) December 1996) February 1997) April 1997)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Face amount issued $600 $365 $500 $500
Aggregate principal amount of the Notes 619 376 516 516
Interest rate 7.84% 7.83% 3-mo. LIBOR 8.25%
+55 bps
Redeemable December 2001 December 2006 January 2007 April 2007
Maturity December 2026 December 2026 January 2027 April 2027
<CAPTION>
Barnett
----------------------------------------------------------------
Capital I Capital II Capital III
(Issued (Issued (Issued
November 1996) December 1996) January 1997)
-----------------------------------------------------------------
<C> <C> <C>
Face amount issued $300 $200 $250
Aggregate principal amount of the Notes 309 206 258
Interest rate 8.06% 7.95% 3-mo LIBOR
+62.5 bps
Redeemable December 2006 December 2006 February 2007
Maturity December 2026 December 2026 February 2027
</TABLE>
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 Oxford acquisition. 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 residual value of the vehicle at lease termination.
As of March 17, 1998, the Corporation had the authority to issue
approximately $1.8 billion of corporate debt securities and preferred and common
stock under its existing shelf registration statements and $2.1 billion of
corporate debt securities under the Euro medium-term note program.
56
<PAGE>
NOTE SEVEN - SHAREHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE
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 .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 114
million shares of common stock and approximately 47 million shares of common
stock, respectively, under various stock repurchase programs authorized by the
Board of Directors.
Other shareholders' equity on December 31 was comprised of the
following (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Restricted stock award plan
deferred compensation $ (23) $ (19)
Net unrealized gains (losses) on avaliable for
sale securities, marketable equity securities
and certain servicing assets, net of tax 408 94
Loan to ESOP trust (85) (110)
Foreign exchange translation adjustments
and other (18) (18)
----------------------------------
$ 282 $ (53)
==================================
</TABLE>
57
<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 (dollars in millions, except per share information, shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings per common share computation
Net income $ 3,332 $ 2,939 $ 2,483
Total preferred stock dividends (11) (17) (24)
-----------------------------------------------------
Income available to common shareholders $ 3,321 $ 2,922 $ 2,459
-----------------------------------------------------
Average common shares issued 941,992 820,945 773,799
-----------------------------------------------------
Earnings per common share $ 3.53 $ 3.56 $ 3.18
=====================================================
Diluted earnings per common share computation
Income available to common shareholders $ 3,321 $ 2,922 $ 2,459
Total preferred stock dividends 11 17 24
Preferred stock dividends on nonconvertible stock (4) (8) -
-----------------------------------------------------
Effect of assumed conversions 7 9 24
-----------------------------------------------------
Income available to common shareholders
and assumed conversions $ 3,328 $ 2,931 $ 2,483
-----------------------------------------------------
Average common shares issued 941,992 820,945 773,799
Incremental shares from assumed conversions:
Convertible preferred stock 3,736 6,158 18,818
Stock options 21,944 10,603 7,487
-----------------------------------------------------
Dilutive potential common shares 25,680 16,761 26,305
-----------------------------------------------------
Total dilutive average common shares issued 967,672 837,706 800,104
-----------------------------------------------------
Diluted earnings per common share $ 3.44 $ 3.50 $ 3.10
=====================================================
</TABLE>
NOTE EIGHT - 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.
58
<PAGE>
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 (dollars in
millions):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit
Credit card commitments $ 33,377 $ 29,983
Other loan commitments 112,002 90,125
Standby letters of credit and
financial guarantees 12,427 10,792
Commercial letters of credit 1,403 879
</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. 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, $45.0 billion is scheduled to expire
in less than one year, $48.5 billion in one to five years and $18.5 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, $8.5 billion is scheduled to expire in less than one year, $3.7
billion in one to five years and $269 million 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.
59
<PAGE>
ASSET AND LIABILITY MANAGEMENT ACTIVITIES
Risk management uses interest rate contracts in the asset and liability
management (ALM) process. Such contracts, which are generally non-leveraged
generic interest rate and basis swaps and options, allow the Corporation to
effectively manage its interest rate risk position.
Generic interest rate swaps involve the exchange of fixed-rate and
variable-rate interest payments based on the contractual underlying notional
amounts. Basis swaps involve the exchange of interest payments based on the
contractual underlying notional amounts, where both the pay rate and the receive
rate are floating rates based on different indices. Option products primarily
consist of caps and floors.
The following table outlines the Corporation's ALM contracts on
December 31, 1997 (dollars in millions):
<TABLE>
<CAPTION>
Weighted
Weighted Average
Notional Average Receive Unrealized
Amount Pay Rate Rate Gain/(Loss)
------------------------------------------------------
<S> <C> <C> <C> <C>
Generic receive fixed $ 31,187 5.98 % 6.46% $ 330
Generic pay fixed 1,502 6.91 5.97 (22)
Basis swaps 2,358 5.90 5.86 (1)
Option products 6,154 (7)
------------- --------
Total $ 41,201 $ 300
============= ========
</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 currency swaps involve the
conversion of certain scheduled interest and principal payments denominated in
foreign currencies. On December 31, 1997, these contracts had a notional value
of $2.7 billion and a net market value of negative $67 million.
The net unrealized appreciation in the estimated value of the ALM
interest rate and net negative market value in the ALM foreign exchange contract
portfolio should be viewed in the context of the overall balance sheet. The
value of any single component of the balance sheet or off-balance sheet
positions should not be viewed in isolation.
CREDIT RISK ASSOCIATED WITH DERIVATIVES ACTIVITIES
Credit risk associated with ALM and trading derivatives is measured as
the 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 with creditworthy counterparties, primarily U.S. and
foreign commercial banks, broker-dealers and corporates. On December 31, 1997,
credit risk associated with ALM activities was not significant.
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 close out 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.
60
<PAGE>
The table below presents the notional or contract amounts on December
31, 1997 and 1996 and the current credit risk amounts (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
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------
Contract/ Credit Risk Contract/ Credit Risk
Notional Amount (1) Notional Amount (1)
-------------------------------------------------------------------------------------------------------------
Interest Rate Contracts
<S> <C> <C> <C> <C>
Swaps $ 408,254 $ 1,580 $ 252,187 $ 927
Futures and forwards 213,520 1 186,333 5
Written options 449,810 - 298,594 -
Purchased options 413,196 683 294,591 561
Foreign Exchange Contracts
Swaps 1,980 127 1,303 24
Spot, futures and forwards 53,438 685 94,028 1,137
Written options 49,146 - 63,081 -
Purchased options 46,063 450 61,716 352
Commodity and Other Contracts
Swaps 852 49 812 81
Futures and forwards 2,739 - 2,728 -
Written options 13,023 - 14,064 -
Purchased options 13,011 346 13,828 357
-------------- -------------
Total before cross product netting 3,921 3,444
-------------- -------------
Cross product netting 368 286
-------------- -------------
Net replacement cost $ 3,553 $ 3,158
============== =============
</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.
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.
61
<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 $6.5 billion and $5.7
billion, respectively. On December 31, 1996, commitments to purchase and sell
when issued securities were $7.4 billion each.
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. Management believes, based upon the advice of counsel, that the
actions and proceedings and 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 NINE - 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 $230 million and $554 million 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 $1.7 billion plus an additional amount equal to their
net profits for 1998, as defined by statute, up to the date of any such dividend
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.
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 $1.8 billion. On
December 31, 1997, no loans to the Corporation from its banking subsidiaries
were outstanding.
The Federal Reserve Board, the OCC and the Federal Deposit Insurance
Corporation (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 subsidiary, NATIONSBANC MONTGOMERY SECURITIES LLC,
when calculating regulatory capital ratios. Previously, the
62
<PAGE>
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
regulatory capital 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 ratio of Tier 1
Capital to quarterly average assets, excluding goodwill and certain other items,
of three to four 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 are not expected
to have a material impact on the Corporation or its subsidiaries' regulatory
capital ratios or their well capitalized status.
The following table presents the actual capital ratios and amounts and
minimum required capital amounts for the Corporation and its significant banking
subsidiaries on December 31 (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------------------------
AMOUNT REQUIRED AMOUNT REQUIRED
ACTUAL FOR MINIMUM ACTUAL FOR MINIMUM
--------------------------- CAPITAL ------------------------ CAPITAL
RATIO AMOUNT ADEQUACY RATIO AMOUNT ADEQUACY
- ------------------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL
<S> <C> <C> <C> <C> <C> <C>
NATIONSBANK CORPORATION 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
NationsBank of Texas, N.A. 7.36 3,221 1,751 6.78 2,468 1,456
TOTAL CAPITAL
NATIONSBANK CORPORATION 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
NationsBank of Texas, N.A. 10.13 4,434 3,502 10.19 3,706 2,910
LEVERAGE CAPITAL
NATIONSBANK CORPORATION 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
NationsBank of Texas, N.A. 5.63 3,221 1,715 6.23 2,468 1,585
</TABLE>
Ratios and amounts for 1997 and 1996 have not been restated to reflect
the impact of the Barnett merger. Barnett and its significant 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 Corporation
have not been restated at December 31, 1996 for amendments to the regulatory
capital guidelines during 1997.
63
<PAGE>
NOTE TEN -- 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 (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
---------------------
<S> <C> <C>
Actuarial present value of benefit obligation
Accumulated benefit obligation, including vested benefits of $1,558 and $1,089......... $ (1,611) $ (1,131)
=====================
Projected benefit obligation for service rendered to date.............................. $ (1,709) $ (1,347)
Plan assets at fair value, primarily listed stocks, fixed income securities and
real estate............................................................................ 2,123 1,631
---------------------
Plan assets in excess of projected benefit obligation .................................... 414 284
Unrecognized net loss .................................................................... 276 197
Unrecognized net transition asset being amortized ........................................ (24) (31)
Unrecognized prior service benefit being amortized ....................................... (136) (31)
Deferred investment gain ................................................................. (39) (39)
---------------------
Prepaid pension cost .................................................................. $ 491 $ 380
=====================
</TABLE>
Net periodic pension expense (benefit) for the years ended December 31
included the following components (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period ........................................... $ 60 $ 59 $ 47
Interest cost on projected benefit obligation ............................................ 124 104 99
Actual return on plan assets ............................................................. (257) (202) (271)
Net amortization and deferral ............................................................ 60 58 134
------------------------------
Net periodic pension expense (benefit) ................................................ $ (13) $ 19 $ 9
==============================
</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 were 7.5 percent and 4.0 percent,
respectively. The related expected long-term rate of return on plan assets
ranged from 9.5 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 were from 7.75 to 8.0 percent, 4.0 percent and 9.5
to 10.0 percent, respectively.
HEALTH AND LIFE BENEFIT PLANS
In addition to providing retirement benefits, 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. The "projected unit credit" actuarial
method was used to determine the normal cost and actuarial liability.
64
<PAGE>
A reconciliation of the estimated status of the postretirement benefit
obligation on December 31 is as follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
---------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees............................................................... $ (218) $ (170)
Fully eligible active participants..................................... (11) (3)
Other active plan participants......................................... (69) (53)
----------- ----------
(298) (226)
Plan assets at fair value................................................ 28 21
Unamortized transition obligation........................................ 109 116
Unamortized service cost................................................. 1 1
Unrecognized net loss (gain)............................................. 6 (2)
------------ ---------
Accrued postemployment benefit liability............................. $ (154) $ (90)
============= ========
</TABLE>
Net periodic postretirement expense for the years ended December 31
included the following (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----------- -----------
<S> <C> <C> <C>
Service cost............................................................ $ 4 $ 4 $ 3
Interest cost on accumulated postretirement benefit obligation.......... 22 17 18
Actual return on plan assets............................................ (4) (2) (2)
Amortization of transition obligation over 20 years..................... 7 7 7
Amortization of gains................................................... (1) - (4)
-------- --------- ------
Net periodic postretirement expense.................................. $ 28 $ 26 $ 22
=========== ========== =======
</TABLE>
The health care cost trend rates used in determining the accumulated
postretirement benefit obligation were 6.50 percent for pre-65 benefits and 4.75
percent for post-65 benefits. A one-percent change in the average health care
cost trend rates would increase the accumulated postretirement benefit
obligation by 6 percent and the aggregate of the service cost and interest cost
components of net periodic postretirement benefit cost by 5 percent. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent and 8.0 percent at December
31, 1997 and 1996, respectively. The plan assets at December 31, 1997 consisted
primarily of investments in pooled-equity and fixed-income funds.
SAVINGS AND PROFIT SHARING PLANS
In addition to the retirement plans, the Corporation maintains several
defined contribution savings and profit sharing plans, two of which feature
leveraged employee stock ownership (ESOP) provisions. See Note Seven for
additional information on the two ESOP provisions.
For 1997, 1996 and 1995, the Corporation contributed approximately $45
million, $39 million and $43 million, 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.
65
<PAGE>
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
(dollars in millions except per share data):
<TABLE>
<CAPTION>
As Reported Pro Forma
----------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------
<S> <C> <C>
Net income......................................................... $ 3,332 $ 2,939 $ 3,148 $ 2,845
Net income available to common shareholders........................ 3,321 2,922 3,137 2,828
Earnings per share................................................. 3.53 3.56 3.33 3.44
Diluted earnings per share......................................... 3.44 3.50 3.25 3.39
</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
----------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 Associates Stock Option Award Plan............... 5.60% N/A 3.50% N/A 1 year N/A
1996 Associates Stock Option Award Plan............... 6.31 6.44% 3.50 3.55% 3 years 4 years
Long-Term Incentive Plan.............................. 6.33 5.37 3.50 3.29 6 years 5 years
Key Employee Stock Plan............................... 6.29 5.52 3.50 3.55 7 years 7 years
<CAPTION>
Volatility
-----------------------
1997 1996
-----------------------
<S> <C> <C>
1997 Associates Stock Option Award Plan........... 24.7% N/A
1996 Associates Stock Option Award Plan........... 21.4 20.8%
Long-Term Incentive Plan.......................... 34.3 36.3
Key Employee Stock Plan........................... 27.8 24.6
</TABLE>
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.
1996 ASSOCIATES STOCK OPTION AWARD PLAN:
Under the 1996 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
66
<PAGE>
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.
OTHER PLANS:
In connection with the Merger, 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. As a result of the change in control
substantially all outstanding Barnett options became exercisable as of December
19, 1997.
On December 19, 1997, as a result of the shareholder approval of the
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.
The following tables present the status of the Plans as of December 31,
1997, 1996 and 1995, and changes during the years then ended:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Employee Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 55,306,195 $33.56 23,103,677 $26.98 22,721,898 $24.85
Shares due to acquisitions............. 6,688,329 21.99 1,098,580 17.26 264,446 19.55
Granted................................ 30,685,409 49.16 41,020,365 40.05 9,967,217 28.94
Exercised.............................. (35,372,027) 36.62 (5,759,639) 18.37 (9,201,387) 22.11
Forfeited.............................. (3,780,661) 43.50 (4,156,788) 38.89 (648,497) 27.94
--------------------------------------------------------------------------------------
Outstanding at end of year............. 53,527,245 38.07 55,306,195 33.56 23,103,677 26.98
=========================================================================================
Options exercisable at year end....... 40,367,661 34.88 11,376,273 20.94 11,007,597 17.91
Weighted-average fair value of
options granted during the year... $9.79 $7.81 $6.85
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Restricted Stock Awards (includes KEYSOP) Shares Grant Price Shares Grant Price Shares Grant Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding unvested grants at
beginning of year................. 1,739,363 $22.25 2,930,580 $22.45 4,067,142 $22.36
Granted .............................. 906,488 48.41 9,500 26.85 125,000 24.50
Vested................................ (1,523,661) 24.37 (1,106,062) 22.76 (1,139,107) 22.38
Canceled.............................. (25,489) 32.87 (94,655) 22.76 (122,455) 21.79
------------------------------------------------------------------------------------------
Outstanding unvested grants
at end of year................... 1,096,701 40.68 1,739,363 22.25 2,930,580 22.45
==========================================================================================
</TABLE>
67
<PAGE>
The following table summarizes information about stock options
outstanding on December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at December 31 Contractual Life Exercise Price at December 31 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.00 - $30.00 17,043,137 6.4 years $ 21.72 15,024,027 $ 21.77
$30.01 - $46.50 22,664,985 5.5 years 39.99 20,218,885 40.62
$46.51 - $65.50 13,819,123 6.7 years 55.09 5,124,749 50.68
----------------- -----------------
$4.00 - $65.50 53,527,245 6.1 years 38.07 40,367,661 34.88
================= =================
</TABLE>
68
<PAGE>
NOTE ELEVEN -- INCOME TAXES
The components of income tax expense for the years ended December 31
were (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current portion - expense
Federal........................................... $1,320 $1,145 $1,065
State............................................. 73 78 84
Foreign........................................... 17 14 13
------------------------------------------
1,410 1,237 1,162
------------------------------------------
Deferred portion - expense (benefit)
Federal......................................... 466 354 153
State........................................... 20 13 12
Foreign......................................... 2 (7) -
------------------------------------------
488 360 165
------------------------------------------
Total income tax expense..................... $1,898 $1,597 $1,327
==========================================
</TABLE>
The preceding table does not reflect the tax effects of unrealized
gains and losses on securities available for sale, marketable equity securities
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 $61
million, $213 million and ($288) 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 (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expected federal tax expense ............................. $1,831 $1,588 $1,334
Increase (decrease) in taxes resulting from
Tax-exempt income....................................... (64) (50) (50)
State tax expense, net of federal benefit............... 65 64 73
Goodwill amortization................................... 130 29 25
Other................................................... (64) (34) (55)
------------------------------------------
Total income tax expense............................. $1,898 $1,597 $1,327
==========================================
</TABLE>
69
<PAGE>
Significant components of the Corporation's deferred tax (liabilities)
assets on December 31 were as follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
Deferred tax liabilities
<S> <C> <C>
Securities available for sale................................ $ (206) $ (50)
Equipment lease financing.................................... (1,477) (1,002)
Depreciation................................................. (222) (194)
Intangibles.................................................. (128) (95)
Employee retirement benefits................................. (79) (88)
Other, net................................................... (402) (294)
--------------------------
Gross deferred tax liabilities......................... (2,514) (1,723)
--------------------------
Deferred tax assets
Employee benefits........................................... 224 119
Net operating loss carryforwards............................ 66 47
Allowance for credit losses................................. 1,148 963
Foreclosed properties....................................... 50 41
Loan fees and expenses...................................... 38 34
General business credit carryforwards....................... 6 10
Other, net.................................................. 323 179
--------------------------
Gross deferred tax assets.............................. 1,855 1,393
Valuation allowance.................................... (44) (50)
--------------------------
Gross deferred tax assets, net of valuation allowance.. 1,811 1,343
--------------------------
Net deferred tax liabilities..................................... $ (703) $ (380)
==========================
</TABLE>
The Corporation's deferred tax assets on December 31, 1997 include a
valuation allowance of $44 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 $6 million due to the realization of certain state deferred tax
assets.
70
<PAGE>
NOTE TWELVE -- 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.
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.
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.
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.
71
<PAGE>
The book and fair values of financial instruments for which book and
fair value differed on December 31 were (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------
Book Fair Book Fair
Value Value Value Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Loans, net of unearned income................................ $ 169,359 $ 171,693 $ 146,777 $ 147,411
Allowance for credit losses.................................. (3,277) - (2,792) -
Financial liabilities
Deposits.................................................... 173,643 174,072 140,329 140,419
Trust preferred securities................................... 2,705 2,806 1,465 1,464
Long-term debt (excluding obligations under capital leases).. 28,438 29,055 23,905 23,992
</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 Eight and the MSRs section of
Note One to the consolidated financial statements.
The fair value of liabilities on binding commitments to lend 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.
72
<PAGE>
NOTE THIRTEEN -- NATIONSBANK CORPORATION (PARENT COMPANY)
The following tables present consolidated parent company financial
information (dollars in millions):
<TABLE>
<CAPTION>
Condensed Consolidated Statement of Income
Year Ended December 31
--------------------------------------
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Income
Dividends from consolidated
Subsidiary banks and bank holding companies....................... $ 3,332 $ 2,309 $ 999
Other subsidiaries................................................ 34 210 7
Interest from consolidated subsidiaries............................. 907 799 635
Other income........................................................ 563 593 547
--------------------------------------
4,836 3,911 2,188
--------------------------------------
Expenses
Interest on borrowed funds.......................................... 1,363 1,051 835
Noninterest expense................................................. 483 519 462
--------------------------------------
1,846 1,570 1,297
--------------------------------------
Earnings
Income before equity in undistributed earnings of
consolidated subsidiaries and taxes............................... 2,990 2,341 891
--------------------------------------
Equity in undistributed earnings of consolidated
Subsidiary banks and bank holding companies....................... (110) 501 1,363
Other subsidiaries................................................ 262 34 208
--------------------------------------
152 535 1,571
--------------------------------------
Income before income taxes................................................ 3,142 2,876 2,462
Income tax benefit........................................................ (190) (63) (21)
--------------------------------------
Net income................................................................. $ 3,332 $ 2,939 $ 2,483
======================================
Net income available to common shareholders................................. $ 3,321 $ 2,922 $ 2,459
======================================
</TABLE>
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
Assets
Cash held at subsidiary banks........................................ $ 8 $ 8
Temporary investments................................................ 572 4,250
Receivables from consolidated
Subsidiary banks and bank holding companies....................... 5,994 4,152
Other subsidiaries................................................ 11,169 8,851
Investment in consolidated
Subsidiary banks and bank holding companies........................ 27,536 17,355
Other subsidiaries................................................. 2,431 1,705
Other assets......................................................... 1,769 1,176
================================
$ 49,479 $ 37,497
================================
Liabilities and Shareholders' Equity
Commercial paper and other notes payable............................. $ 2,869 $ 2,344
Accrued expenses and other liabilities............................... 1,434 613
Payables to consolidated subsidiaries................................ 2,015 995
Long-term debt....................................................... 18,414 16,466
Shareholders' equity................................................. 24,747 17,079
=================================
$ 49,479 $ 37,497
=================================
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Condensed Consolidated Statement of Cash Flows
Year Ended December 31
------------------------------------------------
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Operating Activities .............................................................
Net income ................................................................. $ 3,332 $ 2,939 $ 2,483
Reconciliation of net income to net cash provided by operating activities
Equity in undistributed earnings of consolidated subsidiaries ............ (152) (535) (1,571)
Other operating activities ............................................... 4 802 (380)
------------------------------------------------
Net cash provided by operating activities ............................. 3,184 3,206 532
------------------------------------------------
Investing Activities
Net decrease (increase) in temporary investments .......................... 3,678 (3,854) 187
Net increase in receivables from consolidated subsidiaries................. (4,160) (88) (3,627)
Additional capital investment in subsidiaries ............................. (267) (424) (384)
(Acquisitions) sales of subsidiaries, net of cash ......................... 61 (726) -
Other investing activities ................................................ 804 449 482
------------------------------------------------
Net cash provided by (used in) investing activities .................. 116 (4,643) (3,342)
------------------------------------------------
Financing Activities
Net increase (decrease) in commercial paper and other notes payable ....... 525 (150) 68
Proceeds from issuance of long-term debt .................................. 3,492 5,810 5,106
Retirement of long-term debt .............................................. (995) (1,709) (1,033)
Proceeds from issuance of common stock .................................... 1,418 240 326
Common stock repurchased .................................................. (6,515) (1,842) (887)
Cash dividends paid ....................................................... (1,222) (916) (766)
Other financing activities ................................................ (3) 4 -
------------------------------------------------
Net cash (used in) provided by financing activities .................. (3,300) 1,437 2,814
------------------------------------------------
Net increase in cash held at subsidiary banks.................................... - - 4
Cash held at subsidiary banks on January 1 ...................................... 8 8 4
------------------------------------------------
Cash held at subsidiary banks on December 31 .................................... $ 8 $ 8 $ 8
================================================
</TABLE>
74
<PAGE>
REPORT OF MANAGEMENT
The management of NationsBank Corporation is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
of the Corporation. The 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 financial information
contained elsewhere in this report is consistent with that in the financial
statements. The 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 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 75.
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 accounting controls and the quality of financial
reporting.
Hugh L. McColl Jr. James H. Hance Jr.
Chief Executive Officer Vice Chairman and
Chief Financial Officer
April 13, 1998
75
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NATIONSBANK CORPORATION
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of NationsBank 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 January 9, 1998, the Corporation merged
with Barnett Banks, Inc. in a transaction accounted for as a pooling of
interests. The accompanying consolidated financial statements give retroactive
effect to the merger of the Corporation with Barnett Banks, Inc.
Price Waterhouse LLP
Charlotte, North Carolina
April 13, 1998
76
<PAGE>
Exhibit 23
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. 33-44826;
33-57533; 33-63097; 333-7229; 333-13811; 333-15375; 333-18273 and 333-43137);
the Registration Statements on Form S-8 (Nos. 2-80406; 33-45279; 33-60695;
333-02875; 333-07105; 333-20913 and 333-24331) and the Post-Effective Amendment
No. 1 on Form S-8 to Registration Statements on Form S-4 (Nos. 33-43125;
33-55145; 33-63351; 33-62069; 33-62208; 333-16189 and 333-40515) of NationsBank
Corporation of our report dated April 13, 1998 appearing on page 75 of this
Form 8-K.
Price Waterhouse LLP
Charlotte, North Carolina
April 13, 1998
