<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
For the quarterly period ended March 31, 1998
-------------------------
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
For the transition period from _____________________ to _____________
Commission file number 1-6523
-------
NationsBank Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0906609
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
NationsBank Corporate Center, Charlotte, North Carolina 28255
- --------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
(704) 386-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
On April 30, 1998, there were 957,880,720 shares of NationsBank Corporation
Common Stock outstanding.
<PAGE>
NationsBank Corporation
March 31, 1998 Form 10-Q
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Income for the Three Months
Ended March 31, 1998 and 1997....................................................................... 3
Consolidated Balance Sheet on March 31, 1998 and December 31, 1997 ................................. 4
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 ............................................................................ 5
Consolidated Statement of Changes in Shareholders' Equity for
the Three Months Ended March 31, 1998 and 1997 ..................................................... 6
Notes to Consolidated Financial Statements ......................................................... 7
Item 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition ............................................................................................. 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................37
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K .................................................................. 38
Signature .......................................................................................................39
Index to Exhibits ...............................................................................................40
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries
Consolidated Statement of Income
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in Millions Except Per-Share Information)
Three Months
Ended March 31
----------------------------
1998 1997
----------------------------
Interest income
<S> <C> <C>
Interest and fees on loans and leases $ 3,775 $ 3,769
Interest and dividends on securities 842 452
Federal funds sold and securities purchased under agreements to resell 176 195
Trading account securities 356 317
Other interest income 120 48
----------------------------
Total interest income 5,269 4,781
----------------------------
Interest expense
Deposits 1,203 1,225
Borrowed funds 821 536
Trading account liabilities 194 165
Long-term debt 521 442
----------------------------
Total interest expense 2,739 2,368
----------------------------
Net interest income 2,530 2,413
Provision for credit losses 265 222
----------------------------
Net credit income 2,265 2,191
Gains on sales of securities 152 43
Noninterest income
Service charges on deposit accounts 454 432
Mortgage servicing and other mortgage-related income 75 71
Investment banking income 310 91
Trading account profits and fees 106 100
Brokerage income 112 43
Other nondeposit-related service fees 99 89
Asset management and fiduciary service fees 170 187
Credit card income 96 95
Other income 354 213
----------------------------
Total noninterest income 1,776 1,321
----------------------------
Foreclosed properties expense (income) 5 (2)
Merger and restructuring items 900 -
Other noninterest expense
Personnel 1,238 1,094
Occupancy, net 204 184
Equipment 195 196
Marketing 88 86
Professional fees 89 85
Amortization of intangibles 139 113
Data processing 107 85
Telecommunications 76 67
Other general operating 230 256
General administrative and miscellaneous 86 59
----------------------------
Total other noninterest expense 2,452 2,225
----------------------------
Income before income taxes 836 1,332
Income tax expense 339 477
----------------------------
Net income $ 497 $ 855
============================
Net income available to common shareholders $ 495 $ 851
============================
Per-share information
Earnings per common share $ .52 $ .90
============================
Diluted earnings per common share $ .51 $ .88
============================
Dividends per common share $ .38 $ .33
============================
Average common shares issued (in thousands) 949,641 945,184
============================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries
Consolidated Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions)
March 31 December 31
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 13,421 $ 13,781
Time deposits placed and other short-term investments 1,841 2,501
Securities
Held for investment, at cost (market value - $1,040 and $1,161) 1,028 1,156
Available for sale 50,271 49,448
-------------------------------
Total securities 51,299 50,604
-------------------------------
Federal funds sold and securities purchased under agreements to resell 10,914 10,024
Trading account assets 23,751 23,682
Loans and leases, net of unearned income 178,252 175,697
Factored accounts receivable 1,234 1,081
Allowance for credit losses (3,245) (3,277)
-------------------------------
Loans, leases and factored accounts receivable, net of unearned income
and allowance for credit losses 176,241 173,501
-------------------------------
Premises and equipment, net 4,272 4,424
Customers' acceptance liability 1,089 1,330
Interest receivable 1,991 2,024
Mortgage servicing rights 1,353 1,311
Goodwill 9,612 9,729
Core deposit and other intangibles 792 823
Other assets 17,927 16,820
-------------------------------
$ 314,503 $ 310,554
===============================
Liabilities
Deposits
Noninterest-bearing $ 42,660 $ 41,700
Savings 12,517 12,293
NOW and money market deposit accounts 53,669 53,969
Time 50,628 51,288
Foreign time 10,572 14,393
-------------------------------
Total deposits 170,046 173,643
-------------------------------
Federal funds purchased and securities sold under agreements to repurchase 47,534 46,504
Trading account liabilities 17,991 15,207
Commercial paper 3,088 3,752
Other short-term borrowings 7,334 4,127
Liability to factoring clients 725 591
Acceptances outstanding 1,089 1,330
Accrued expenses and other liabilities 9,224 9,058
Trust preferred securities 2,705 2,705
Long-term debt 29,547 28,890
-------------------------------
Total liabilities 289,283 285,807
-------------------------------
Contingent liabilities and other financial commitments (Note Six)
Shareholders' Equity
Preferred stock: authorized - 45,000,000 shares; issued - 2,133,560 and 2,209,784 shares 91 94
Common stock: authorized - 1,250,000,000 shares; issued - 955,198,552 and 943,932,530 shares 10,202 9,779
Retained earnings 14,724 14,592
Other 203 282
-------------------------------
Total shareholders' equity 25,220 24,747
-------------------------------
$ 314,503 $ 310,554
===============================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries
Consolidated Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Three Months
Ended March 31
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Operating Activities
Net income $ 497 $ 855
Reconciliation of net income to net cash provided by (used in) operating activities
Provision for credit losses 265 222
Gains on sales of securities (152) (43)
Merger and restructuring items 900 -
Depreciation and premises improvements amortization 142 140
Amortization of intangibles 139 113
Deferred income tax expense 167 97
Net change in trading instruments 2,714 (4,577)
Net decrease in interest receivable 33 47
Net increase (decrease) in interest payable 22 (46)
Other operating activities (1,820) (970)
---------------------------
Net cash provided by (used in) operating activities 2,907 (4,162)
---------------------------
Investing Activities
Proceeds from maturities of securities held for investment 132 385
Purchases of securities held for investment (4) (107)
Proceeds from sales and maturities of securities available for sale 16,230 12,404
Purchases of securities available for sale (16,708) (8,732)
Net increase in federal funds sold and securities purchased under agreements to resell (890) (1,824)
Net decrease (increase) in time deposits placed and other short-term investments 660 (357)
Purchases and net originations of loans and leases (8,934) (5,731)
Proceeds from sales and securitizations of loans and leases 4,509 3,280
Purchases and originations of mortgage servicing rights (107) (147)
Purchases of factored accounts receivable (1,924) (1,859)
Collections of factored accounts receivable 1,768 1,694
Net purchases of premises and equipment (23) (174)
Proceeds from sales of foreclosed properties 60 48
Sales and acquisitions of business activities, net of cash (81) 2,461
---------------------------
Net cash (used in) provided by investing activities (5,312) 1,341
---------------------------
Financing Activities
Net decrease in deposits (2,170) (1,524)
Net increase in federal funds purchased and securities
sold under agreements to repurchase 1,030 7,609
Net increase (decrease) in other short-term borrowings and commercial paper 2,542 (498)
Proceeds from issuance of trust preferred securities - 742
Proceeds from issuance of long-term debt 2,420 2,059
Retirement of long-term debt (1,796) (325)
Proceeds from issuance of common stock 355 444
Cash dividends paid (364) (297)
Common stock repurchased - (3,903)
Other financing activities 28 36
---------------------------
Net cash provided by financing activities 2,045 4,343
---------------------------
Net (decrease) increase in cash and cash equivalents (360) 1,522
Cash and cash equivalents on January 1 13,781 11,881
---------------------------
Cash and cash equivalents on March 31 $ 13,421 $ 13,403
===========================
</TABLE>
Loans transferred to foreclosed properties amounted to $61 and $51 for the three
months ended March 31, 1998 and 1997, respectively.
Loans securitized and retained in the securities portfolio amounted to $551 for
the three months ended March 31, 1998.
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions, Shares in Thousands)
Common Stock
Preferred ------------------------------ Comprehensive
Stock Shares Amount Income
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance on December 31, 1996 $ 171 798,724 $ 4,479
Net income $ 855
Other comprehensive income, net of tax (179)
---------------
Comprehensive income $ 676
===============
Cash dividends
Common
Preferred
Common stock issued under employee plans 13,027 467
Stock issued in acquisitions 82 195,204 9,440
Common stock repurchased (72,465) (3,903)
Conversion of preferred stock (81) 3,644 81
Other 1 2
----------------------------------------------
Balance on March 31, 1997 $ 173 938,136 $ 10,564
==============================================
Balance on December 31, 1997 $ 94 943,933 $ 9,779
Net income $ 497
Other comprehensive income, net of tax (31)
---------------
Comprehensive income $ 466
===============
Cash dividends
Common
Preferred
Common stock issued under employee plans 10,752 405
Stock issued in acquisitions 385 15
Conversion of preferred stock (3) 129 3
Other
----------------------------------------------
Balance on March 31, 1998 $ 91 955,199 $ 10,202
==============================================
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Other Share-
Comprehensive Retained holders'
Income (1) Earnings Other Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance on December 31, 1996 $ 77 $ 12,482 $ (130) $ 17,079
Net income 855 855
Other comprehensive income, net of tax (179) (179)
Comprehensive income
Cash dividends
Common (293) (293)
Preferred (4) (4)
Common stock issued under employee plans (23) 444
Stock issued in acquisitions 9,522
Common stock repurchased (3,903)
Conversion of preferred stock
Other 2 1 4
------------------------------------------------------------------
Balance on March 31, 1997 $ (102) $ 13,042 $ (152) $ 23,525
==================================================================
Balance on December 31, 1997 $ 390 $ 14,592 $ (108) $ 24,747
Net income 497 497
Other comprehensive income, net of tax (31) (31)
Comprehensive income
Cash dividends
Common (362) (362)
Preferred (2) (2)
Common stock issued under employee plans (50) 355
Stock issued in acquisitions 15
Conversion of preferred stock
Other (1) 2 1
------------------------------------------------------------------
Balance on March 31, 1998 $ 359 $ 14,724 $ (156) $ 25,220
==================================================================
</TABLE>
(1) Accumulated Other Comprehensive Income includes net unrealized gains
(losses) on securities available for sale and marketable equity securities
and foreign currency translation adjustments.
See accompanying notes to consolidated financial statements.
6
<PAGE>
NationsBank Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Accounting Policies
The consolidated financial statements include the accounts of
NationsBank Corporation and its majority-owned subsidiaries (the Corporation).
All significant intercompany accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is
unaudited. In the opinion of management, all normal recurring adjustments
necessary for a fair presentation of the interim period results have been made.
Certain prior period amounts have been reclassified to conform to current period
classifications.
Accounting policies followed in the presentation of interim financial
results are presented on pages 42, 43, 44, 45, 46 and 47 of the Corporation's
Current Report on Form 8-K filed April 16, 1998, which restated the
Corporation's historical consolidated financial statements to reflect the merger
with Barnett Banks, Inc. (Barnett) which was completed on January 9, 1998.
During the first quarter of 1998, the Corporation adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." These standards require additional or
enhanced disclosures and, accordingly, did not have an impact on the
Corporation's results of operations or financial condition.
Note 2 - Merger-Related Activity
On April 10, 1998, the Corporation entered into an agreement and plan
of reorganization (the Merger Agreement) with BankAmerica Corporation
(BankAmerica). Under the Merger Agreement, the Corporation will create a new
subsidiary (NationsBank (DE)), and will merge into NationsBank (DE) (the
Reincorporation Merger), with NationsBank (DE) as the surviving corporation.
BankAmerica will then merge into NationsBank (DE), which will be the surviving
corporation (the BankAmerica Merger and together with the Reincorporation
Merger, the Recapitalization). Each share of the Corporation's common stock will
be automatically converted into one share of common stock of NationsBank (DE)
and each share of the Corporation's preferred stock will be converted into the
right to receive one share of NationsBank (DE) preferred stock on substantially
identical terms. Each share of BankAmerica's common stock will be converted into
the right to receive 1.1316 shares (the exchange ratio) of NationsBank (DE)
common stock and each share of BankAmerica's preferred stock will be converted
into the right to receive one share of NationsBank (DE) preferred stock on
substantially identical terms unless earlier redeemed. In addition, all rights
with respect to common stock options of both the Corporation and BankAmerica
will be converted into and become options of NationsBank (DE) with substantially
similar terms, adjusted to reflect the exchange ratio. The Recapitalization,
which will be accounted for as a pooling of interests, is expected to close in
the fourth quarter of 1998 and is subject to regulatory and shareholder
approval. On March 31, 1998, BankAmerica's total assets, deposits and
shareholders' equity were $265.4 billion, $173.9 billion and $19.9 billion,
respectively.
On January 9, 1998, the Corporation completed its merger with Barnett,
a multi-bank holding company headquartered in Jacksonville, Florida (the Barnett
merger). Barnett's total assets, total deposits and total shareholders' equity
on the date of the Barnett merger were 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 common stock were issued to convert stock options
previously granted to certain Barnett employees. This transaction was accounted
for as a pooling of interests and 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 Barnett merger, the Corporation incurred pretax
merger and restructuring items during the first quarter of 1998 of approximately
$900 million ($642 million after-tax), which
7
<PAGE>
included approximately $375 million primarily in severance and change in control
payments, $300 million of conversion and related costs and occupancy and
equipment expenses (primarily lease exit costs and the elimination of duplicate
facilities and other capitalized assets), $125 million of exit costs related to
contract terminations and $100 million of other Barnett merger costs (including
legal and investment banking fees).
The following table summarizes the activity in the merger and
restructuring reserve for the three months ended March 31, 1998 (dollars in
millions):
Three Months
Ended
March 31, 1998
---------------------
Blance at beginning of period $ -
Establishment of reserve 900
Cash payments (298)
Non-cash items (109)
---------------------
Balance on March 31, 1998 $ 493
---------------------
In compliance with certain requirements of the Federal Reserve Board, the
Department of Justice and certain Florida authorities in connection with the
Barnett merger, the Corporation has 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. These
transactions are expected to be completed prior to the end of the third quarter
of 1998.
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
March 31, 1998, 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. On May 6, 1998, the Corporation merged NationsBank of Texas, N.A. into
NationsBank, N.A. The Corporation plans to continue the consolidation of other
banking subsidiaries (other than NationsBank of Delaware, N.A.) throughout 1998.
8
<PAGE>
Note 3 - Trading Account Assets and Liabilities
The fair values of the components of trading account assets and
liabilities on March 31, 1998 and December 31, 1997 and the average fair values
for the three months ended March 31, 1998 were (dollars in millions):
<TABLE>
<CAPTION>
Average for
the Three
March 31, December 31, Months Ended
1998 1997 March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Securities owned
<S> <C> <C> <C>
U.S. Treasury securities $ 9,443 $ 8,701 $ 10,080
Securities of other U.S. Government agencies and corporations 1,239 1,375 1,454
Certificates of deposit, bankers' acceptances and commercial paper 877 517 627
Corporate debt 1,708 1,808 1,686
Foreign sovereign debt 3,846 4,939 6,857
Mortage-backed securities 1,868 2,299 2,778
Other securities 934 403 636
------------------------------ --------------------
Total securities owned 19,915 20,042 24,118
Derivatives-dealer positions 3,836 3,640 4,425
------------------------------ --------------------
Total trading account assets $ 23,751 $ 23,682 $ 28,543
------------------------------ --------------------
Short sales
U.S. Treasury securities $ 10,538 $ 8,970 $ 11,729
Corporate debt 13 140 54
Foreign sovereign debt 3,230 1,825 2,541
Other securities 651 904 1,081
------------------------------ --------------------
Total short sales 14,432 11,839 15,405
Derivatives-dealer positions 3,559 3,368 4,045
------------------------------ --------------------
Total trading account liabilities $ 17,991 $ 15,207 $ 19,450
----------------------------- --------------------
</TABLE>
Interest rate and securities 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 derivative trading
activities.
9
<PAGE>
Note 4 - Loans, Leases, and Factored Accounts Receivable
The distribution of net loans, leases, and factored accounts receivable
on March 31, 1998 and December 31, 1997 was as follows (dollars in millions):
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------------------- --------------------------------
Amount Percent Amount Percent
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic
Commercial $ 67,340 37.5 % $ 65,609 37.1 %
Real estate commercial 8,657 4.8 8,994 5.1
Real estate construction 4,724 2.7 4,665 2.6
-----------------------------------------------------------------
Total commercial 80,721 45.0 79,268 44.8
-----------------------------------------------------------------
Residential mortgage 38,024 21.2 37,344 21.1
Credit card 7,496 4.2 8,203 4.6
Other consumer 41,411 23.0 40,427 22.9
-----------------------------------------------------------------
Total consumer 86,931 48.4 85,974 48.6
----------------------------------------------------------------
Lease financing 5,909 3.3 5,485 3.1
Factored accounts receivable 1,234 .7 1,081 .7
----------------------------------------------------------------
174,795 97.4 171,808 97.2
Foreign 4,691 2.6 4,970 2.8
----------------------------------------------------------------
Total loans, leases and factored
accounts receivable, net
of unearned income $ 179,486 100.0 % $ 176,778 100.0 %
----------------------------------------------------------------
</TABLE>
On March 31, 1998, the recorded investment in certain loans that were
considered to be impaired was $708 million, all of which were classified as
nonperforming. Impaired loans on March 31, 1998 were comprised of commercial
loans of $472 million, real estate commercial loans of $179 million and real
estate construction loans of $57 million.
On March 31, 1998 and December 31, 1997, nonperforming loans, including
certain loans which are considered to be impaired, totaled $1.4 billion and $1.2
billion, respectively. Foreclosed properties amounted to $148 million and $147
million on March 31, 1998 and December 31, 1997, respectively.
Note 5 - Debt
In the first quarter of 1998, the Corporation issued $1.7 billion in
long-term debt, comprised of approximately $900 million of senior notes and $800
million of subordinated notes, with maturities ranging from 1999 to 2038. Of the
$1.7 billion issued, $90 million was converted to floating rates through
interest rate swaps at spreads ranging from 5 to 18 basis points over
three-month LIBOR. Fixed-rate debt of $1.4 billion issued but not swapped bears
interest at rates ranging from 5.75 percent to 6.80 percent. The remaining debt
issued bears interest at spreads equal to 5 basis points below one-month LIBOR
and 5 basis points below three-month LIBOR.
NationsBank, N.A. maintains 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. During the first quarter of 1998, $710
million of bank notes classified as long-term debt was issued under this
program. On March 31, 1998, there were short-term bank notes outstanding of $2.6
billion. In addition, there were bank notes outstanding on March 31, 1998
totaling $5.3 billion which were classified as long-term debt.
10
<PAGE>
Since October 1996, the Corporation (or its predecessors) 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 Deferrable
Interest Notes of the Corporation (the Notes) held by such grantor trusts. The
terms of the preferred securities as of March 31, 1998 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)
--------------------------------------------------------------
<S> <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>
On March 31, 1998, the Corporation 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 directly by the Corporation 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 Barnett merger,
was canceled.
On April 29, 1998, the Corporation filed a shelf registration with the
Securities and Exchange Commission for the issuance of up to $10.0 billion of
corporate debt and other securities. As of May 12, 1998, the registration
statement has not yet been declared effective. As of May 12, 1998, the
Corporation had the authority to issue approximately $1.0 billion of corporate
debt securities and preferred and common stock under existing shelf registration
statements.
The Corporation and NationsBank, N.A. may offer up to an aggregate of
$8.5 billion of senior or, in the case of the Corporation, subordinated notes
exclusively to non-United States residents under a joint Euro medium-term note
program. This program replaces the Corporation's $4.5 billion program announced
in July 1996. As of May 12, 1998, the Corporation and NationsBank, N.A. had the
authority to issue approximately $4.1 billion and $2.0 billion, respectively, of
corporate debt securities under this program.
Note 6 - Commitments and Contingencies
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 participated to other financial institutions. The
following summarizes commitments outstanding (dollars in millions):
March 31, December 31,
1998 1997
- ---------------------------------------------------------------------------
Commitments to extend credit
Credit card commitments $ 32,770 $ 33,377
Other loan commitments 113,259 112,002
Standby letters of credit and
financial guarantees 12,295 12,427
Commercial letters of credit 936 1,403
11
<PAGE>
On March 31, 1998, the Corporation had commitments to purchase and sell
when-issued securities of $3.6 billion and $3.9 billion, respectively. This
compares to commitments to purchase and sell when-issued securities of $6.5
billion and $5.7 billion on December 31, 1997, respectively.
Derivatives
The following table outlines the Corporation's asset and liability
management (ALM) contracts on March 31, 1998 (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 $ 29,699 5.85% 6.48 % $ 330
Generic pay fixed 1,585 6.85 5.80 (22)
Basis swaps 2,224 5.73 5.79 1
Option products 6,552 (19)
----------- ----------------
Total $ 40,060 $ 290
----------- ----------------
</TABLE>
The following table presents the notional or contract amounts on March
31, 1998 and December 31, 1997 and the current credit risk amounts (the net
replacement cost of contracts in a gain position on March 31, 1998 and December
31, 1997) 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.
12
<PAGE>
Derivatives - Dealer Positions
(Dollars in Millions)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
---------------------------------------------------------------------------------------------------------------------------
Contract/ Credit Risk Contract/ Credit Risk
Notional Amount (1) Notional Amount (1)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Contracts
Swaps $ 475,009 $ 1,807 $ 408,254 $ 1,580
Futures and forwards 287,903 18 213,520 1
Written options 460,584 - 449,810 -
Purchased options 607,833 630 413,196 683
Foreign Exchange Contracts
Swaps 3,173 168 1,980 127
Spot, futures and forwards 56,696 681 53,438 685
Written options 47,808 - 49,146 -
Purchased options 45,144 413 46,063 450
Commodity and Other Contracts
Swaps 881 86 852 49
Futures and forwards 2,499 - 2,739 -
Written options 15,156 - 13,023 -
Purchased options 15,074 358 13,011 346
-------------------- -------------------
Total before cross product netting 4,161 3,921
-------------------- -------------------
Cross product netting 470 368
-------------------- -------------------
Net replacement cost $ 3,691 $ 3,553
-------------------- -------------------
</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.
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 March 31, 1998,
credit risk associated with ALM activities was not significant.
During the first quarter of 1998, there were no credit losses
associated with ALM or trading derivatives transactions that were material to
the Corporation. In addition, on March 31, 1998, there were no nonperforming
derivatives positions that were material to the Corporation. 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.
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
these actions and proceedings and
13
<PAGE>
the losses, if any, resulting from the final outcome thereof, will not be
material in the aggregate to the Corporation's financial position or results of
operations.
Note 7 - Segment Reporting
On January 1, 1998, the Corporation adopted SFAS 131. Management reports
the results of operations of the Corporation through four business segments:
Consumer Banking, which includes the retail network and consumer finance; Middle
Market, which provides commercial banking services to companies with revenues
between $10 million and $250 million annually; Asset Management, which provides
full service and discount brokerage and investment advisory services and
includes the Private Client Group; and Corporate Finance, which provides banking
and investment banking products and services primarily to large domestic and
international corporations and institutions. The following table includes
revenues and net income for the three months ended March 31, 1998 and assets as
of March 31, 1998 for each business segment (dollars in millions):
Net
Revenues Income Assets
----------- -------- ------------
Consumer Banking $ 2,509 $ 460 $ 159,589
Middle Market 449 165 45,299
Asset Management 306 75 8,703
Corporate Finance 914 242 82,879
----------- -------- ------------
Total $ 4,178 $ 942 $ 296,470
----------- -------- ------------
There were no material intersegment revenues between the four business
segments.
A reconciliation of the combined segments' net income to consolidated
net income follows (dollars in millions):
Three months
ended
March 31, 1998
--------------
Segment's net income $ 942
Adjustments:
Gains on sales of securities, net of taxes 95
Gain on sale of partial ownership interest
of a mortgage company, net of taxes 72
Merger and restructuring items,net of taxes (642)
Other 30
--------------
Consolidated net income $ 497
--------------
14
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
On January 9, 1998, the Corporation completed its merger with Barnett
Banks, Inc. (Barnett) creating the third largest banking company in the United
States with approximately $310 billion in assets (the Barnett merger). The
Barnett merger was accounted for as a pooling of interests and accordingly all
financial information has been restated for all periods presented.
This report on Form 10-Q 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 the Corporation's Form 10-Q
should not rely solely on the forward-looking statements and should consider all
uncertainties and risks discussed throughout this report as well as those
discussed in the Corporation's most recent Annual Report on Form 10-K, as well
as its Current Report on Form 8-K filed April 16, 1998 which includes the
Corporation's financial statements restated for the Barnett merger. The
Corporation undertakes no obligation to update any forward-looking statements
made.
Earnings Review
Table One presents a comparison of selected operating results for the
three months ended March 31, 1998 and 1997. Significant changes in the
Corporation's results of operations and financial position are discussed in the
sections that follow.
Key performance highlights for the first quarter of 1998 were:
o Operating net income (net income excluding merger and restructuring items)
for the first quarter of 1998 reflected growth of approximately 33 percent
over the same period in 1997, amounting to $1.14 billion and $855 million,
respectively. Operating earnings per common share in the first three months
of 1998 increased by 33 percent to $1.20 from $.90 in the same period of
1997 and diluted operating earnings per common share increased to $1.17 in
the first quarter of 1998 from $.88 in the first quarter of 1997. Including
merger and restructuring items of $900 million ($642 million, net of tax),
earnings for the first quarter of 1998 were $497 million, or $.52 per
common share.
o Taxable-equivalent net interest income increased 5 percent to $2.6 billion
in the first quarter of 1998. The net interest yield decreased to 3.82
percent compared to 4.03 percent in the first quarter of 1997 due to higher
levels of investment securities and a decrease in the spreads between loans
and deposits.
o The provision for credit losses totaled $265 million for the first three
months of 1998 compared to $222 million for the same period in 1997. Net
charge-offs as a percentage of average loans, leases and factored accounts
receivable increased to .63 percent for the first quarter of 1998 compared
to .49 percent for the same period in 1997, while net charge-offs totaled
$277 million for the three months ended March 31, 1998 compared to $215
million for the same period in 1997. Higher total consumer net charge-offs
were covered by the provision for credit losses and were partially offset
by lower net charge-offs in the total commercial loan portfolio.
Nonperforming assets increased to $1.5 billion on March 31, 1998 compared
to $1.4 billion on December 31, 1997, the result of higher commercial
nonperforming loans.
o Noninterest income increased 34 percent to $1.8 billion in the first
quarter of 1998. This growth was attributable to higher levels of income
from almost all categories, including investment banking income, brokerage
income, and a gain on the sale of a partial ownership interest of a
mortgage company. Noninterest income increased approximately 16 percent
excluding the acquisitions of Montgomery Securities (Montgomery) in the
fourth quarter of 1997 and Oxford Resources Corp. (Oxford), a consumer
finance subsidiary that was acquired as part of the Barnett merger.
o Other noninterest expense increased 10 percent to $2.5 billion, but
remained essentially unchanged if acquisitions and related transition
expenses were excluded.
15
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Table One
Selected Operating Results
(Dollars in Millions Except Per-Share Information) Three Months
Ended March 31
-----------------------------------
1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income statement
Interest income $ 5,269 $ 4,781
Interest expense 2,739 2,368
Net interest income (taxable-equivalent) 2,564 2,444
Net interest income 2,530 2,413
Provision for credit losses 265 222
Gains on sales of securities 152 43
Noninterest income 1,776 1,321
Foreclosed properties expense (income) 5 (2)
Merger and restructuring items 900 -
Other noninterest expense 2,452 2,225
Income before taxes 836 1,332
Income tax expense 339 477
Net income 497 855
Net income available to common shareholders 495 851
Net income (excluding merger and restructuring items) 1,139 855
Average common shares issued (in thousands) 949,641 945,184
Per common share
Earnings $ .52 $ .90
Earnings (excluding merger and restructuring items) 1.20 .90
Diluted earnings .51 .88
Diluted earnings (excluding merger and restructuring items) 1.17 .88
Cash dividends paid .38 .33
Shareholders' equity (quarter-end) 26.34 24.94
Balance sheet (quarter-end)
Total loans, leases and factored accounts receivable, net of unearned income 179,486 179,575
Total assets 314,503 280,755
Total deposits 170,046 170,664
Long-term debt 29,547 26,306
Common shareholders' equity 25,160 23,400
Total shareholders' equity 25,220 23,525
Performance ratios
Return on average assets .64 % 1.22 %
Return on average assets (excluding merger and restructuring items) 1.47 1.22
Return on average common shareholders' equity (1) 8.28 14.69
Return on average common shareholders' equity
(excluding merger and restructuring items) (1) 19.01 14.69
Efficiency ratio 56.50 59.09
Total equity to total assets 8.02 8.38
Risk-based capital ratios (quarter-end) (2)
Tier 1 6.80 7.06
Total 11.19 11.58
Leverage capital ratio 5.64 6.19
Cash basis financial data (3)
Earnings per common share $ .67 $ 1.02
Earnings per common share (excluding merger and restructuring items) 1.34 1.02
Diluted earnings per common share .65 .99
Diluted earnings per common share (excluding merger and restructuring items) 1.31 .99
Return on average tangible assets .85 % 1.43 %
Return on average tangible assets (excluding merger and restructuring items) 1.70 1.43
Return on average tangible common shareholders' equity (1) 18.68 26.37
Return on average tangible common shareholders' equity
(excluding merger and restructuring items) (1) 37.60 26.37
Efficiency ratio 53.30 56.09
Ending tangible equity to tangible assets 4.87 5.29
Market price per share of common stock
Close at the end of the quarter $ 72 15/16 $ 55 1/2
High for the quarter 75 1/8 65
Low for the quarter 56 1/4 48
</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) Ratios for 1997 have not been restated to reflect the impact of the
Barnett Banks, Inc. merger.
(3) Cash basis calculations exclude intangible assets and the related
amortization expense.
- --------------------------------------------------------------------------------
16
<PAGE>
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 32 percent to $1.31 for the three months
ended March 31, 1998 compared to $.99 for the same period a year ago. For
the three months ended March 31, 1998, return on average tangible common
shareholders' equity, excluding merger and restructuring items, increased
to 37.60 percent compared to 26.37 percent for the same period in 1997.
The cash basis efficiency ratio was 53.30 percent in the first quarter of
1998, an improvement of 279 basis points from the first quarter of 1997
due to successful acquisition integration and expense management efforts.
Business Segment Operations
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries.
Management reports the results of the Corporation's operations through four
business segments: Consumer Banking, Middle Market, Asset Management, and
Corporate Finance.
The business segments summarized in Table Two are primarily managed
with a focus on various performance objectives including net income, return on
average equity and operating efficiency. These performance objectives are also
presented on a cash basis, which excludes the impact of goodwill and other
intangibles and related amortization expense. The net interest income of the
business segments 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 segment based on an assessment of its inherent risk.
Consumer Banking
The Consumer Banking segment provides comprehensive retail banking services
through multiple delivery channels including approximately 3,000 banking centers
and 7,000 automated teller machines providing 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. In addition, this segment provides specialized services
such as the origination and servicing of residential mortgage loans, issuance
and service of credit cards, direct banking via telephone and personal computer,
student lending and certain insurance services. The consumer finance component
provides personal, mortgage, home equity and automobile loans to consumers,
retail finance programs to dealers and lease financing to purchasers of new and
used cars. Consumer Banking also provides commercial banking services to
companies and other commercial entities with annual revenues of less than $10
million.
Consumer Banking's earnings increased 3 percent to $460 million in the
first three months of 1998. Taxable-equivalent net interest income increased $16
million, primarily reflecting higher interest income on securities, continued
deposit expense management efforts and reduced funding costs partially offset by
lower interest income on loans attributable to $11.5 billion of securitizations
completed mainly during the third quarter of 1997. As the Corporation continues
to securitize 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 27 basis points in the first three months of 1998, reflecting higher
yields from the loan and lease portfolio and deposit expense management efforts.
Excluding the impact of 1997 securitizations, average total loans and leases
grew approximately 7 percent over average levels in the first three months of
1997. Average total deposits for the first three months of 1998 decreased to
$132.4 billion from $137.9 billion in 1997, the result of deposit declines in
the former Boatmen's franchise including the impact of sales of selected banking
centers.
Noninterest income in Consumer Banking rose 6 percent to $777 million due
to mortgage servicing and other mortgage-related income, service charges on
deposit accounts and miscellaneous income. Mortgage servicing and other
mortgage-related income increased as a result of changes in the interest rate
environment as well as the Corporation's efforts to maintain the servicing
portfolio at target levels. Higher deposit account service charges resulted from
changes in deposit pricing throughout the
17
<PAGE>
NationsBank franchise during the third quarter of 1997. Noninterest expense
increased 2 percent to $1.6 billion primarily in personnel, occupancy, and data
processing expense, with decreases in most other major expense categories. This
modest increase reflects the efficiencies obtained from the successful
integration of the former Boatmen's franchise and expense management efforts.
The cash basis efficiency ratio was 58.4 percent, an improvement of
approximately 70 basis points compared to the ratio for the first three months
of 1997. The return on average tangible equity decreased slightly to 28 percent
for the first three months of 1998 compared to 27 percent for the same period in
1997, the result of higher operating expenses and a higher equity base.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Table Two
Business Segment Summary
For the Three Months Ended March 31
(Dollars in Millions)
Consumer Banking Middle Market
------------------------------ -------------------------
1998 1997 1998 1997
---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net interest income (taxable-equivalent) $ 1,732 $ 1,716 $ 343 $ 341
Noninterest income 777 733 106 99
------------ ------------- ----------- ------------
Total revenue 2,509 2,449 449 440
Provision for credit losses 230 187 21 9
Gains on sale of securities 4 - - -
Foreclosed properties expense (income) 4 4 1 1
Noninterest expense 1,562 1,534 174 177
------------ ------------- ----------- ------------
Income before income taxes 717 724 253 253
Income tax expense 257 277 88 93
------------ ------------- ----------- ------------
Net income (1) $ 460 $ 447 $ 165 $ 160
============ ============= =========== ============
Cash basis earnings (2) $ 557 $ 533 $ 181 $ 175
Net interest yield 4.99 % 4.72 % 3.33 % 3.56 %
Average equity to average assets 7.45 6.97 7.73 8.48
Return on average equity 16 16 19 19
Return on average tangible equity (2) 28 27 25 25
Efficiency ratio 62.3 62.6 38.8 40.2
Cash basis efficiency ratio (2) 58.4 59.1 35.2 36.8
Average (3)
Total loans and leases, net of unearned income $ 99,493 $103,262 $ 33,865 $ 32,084
Total deposits 132,352 137,895 9,031 8,408
Total assets 153,693 158,968 45,603 41,283
Period end (3)
Total loans and leases, net of unearned income 100,444 103,439 34,279 32,231
Total deposits 133,717 138,164 9,126 8,928
Total assets 159,589 157,594 45,299 41,349
<CAPTION>
----------------------------------------------------------------
Asset Management Corporate Finance
---------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net interest income (taxable-equivalent) $ 76 $ 59 $ 363 $ 274
Noninterest income 230 239 551 240
------------ ------------ ------------ -------------
Total revenue 306 298 914 514
Provision for credit losses - 5 14 21
Gains on sale of securities - - - -
Foreclosed properties expense (income) - - - (7)
Noninterest expense 188 214 528 300
------------ ------------ ------------ -------------
Income before income taxes 118 79 372 200
Income tax expense 43 29 130 74
------------ ------------ ------------ -------------
Net income (1) $ 75 $ 50 $ 242 $ 126
============ ============ ============ =============
Cash basis earnings (2) $ 78 $ 52 $ 264 $ 136
Net interest yield 3.84 % 3.80 % 3.44% (4) 2.82 % (4)
Average equity to average assets 9.25 10.82 5.89 5.14
Return on average equity 39 27 19 12
Return on average tangible equity (2) 44 31 25 15
Efficiency ratio 61.4 71.8 57.8 58.4
Cash basis efficiency ratio (2) 60.5 71.1 55.4 56.4
Average (3)
Total loans and leases, net of unearned income $ 7,781 $ 6,006 $ 35,859 $ 35,731
Total deposits 4,434 3,315 10,136 8,510
Total assets 8,419 6,822 87,805 80,166
Period end (3)
Total loans and leases, net of unearned income 8,056 6,460 35,558 36,525
Total deposits 4,681 3,829 11,029 10,653
Total assets 8,703 7,182 82,879 77,334
</TABLE>
(1) Business Segment results are presented on a fully allocated basis but do
not include $445 million net expense for first quarter 1998 and $72
million net income for first quarter 1997 which represent earnings
associated with unassigned capital, gains on sales of certain securities,
gains on business divestitures, merger and restructuring items as well as
other corporate activities.
(2) Excludes intangible assets and the related amortization expense.
(3) The sums of balance sheet amounts differ from consolidated amounts due to
activities between the Business Segments.
(4) Corporate Finance's net interest yield excludes the impact of
trading-related activities. Including trading-related activities, the net
interest yield was 1.93% and 1.59% for the first three months of 1998 and
1997, respectively.
- -------------------------------------------------------------------------------
Middle Market
The Middle Market segment provides a broad array of commercial banking
services for companies and other commercial entities with revenues between $10
million and $250 million annually including: commercial lending, treasury and
cash management services, asset-backed lending, leasing and factoring. Also
included is NationsCredit Commercial Corporation, which provides commercial
financing activities including: equipment loans and leases, loans for debt
restructuring, mergers and working capital, real estate and health care
financing and inventory financing to manufacturers, distributors and dealers.
Middle Market earned $165 million in the first three months of 1998
compared to $160 million in the first three months of 1997. The Middle Market
average loan and lease portfolio during the first quarter of 1998 increased to
$33.9 billion compared to $32.1 billion in the same period of 1997.
18
<PAGE>
Noninterest income rose 7 percent to $106 million over noninterest income
for the first three months of 1997. Noninterest expense for the period decreased
2 percent to $174 million. The cash basis efficiency ratio improved
approximately 160 basis points to 35.2 percent. The return on average tangible
equity remained unchanged at 25 percent.
Asset Management
The Asset Management segment includes businesses that provide full service
and discount brokerage, investment advisory, investment management and advisory
services for the Nations Funds family of mutual funds. Within the Asset
Management segment, the Private Client Group provides asset management, banking
and trust services for wealthy individuals, business owners and corporate
executives and the private foundations established by them.
Asset Management earned $75 million in the first three months of 1998
compared to $50 million in the first quarter of 1997, the result of strong
revenue growth in the core businesses following the sales of certain corporate
and institutional trust businesses during the third quarter of 1997.
Taxable-equivalent net interest income for the first three months of 1998 was
$76 million compared to $59 million in the same period a year ago, reflecting
income from increased loan levels. The average loan and lease portfolio in the
first quarter of 1998 increased to $7.8 billion compared to $6.0 billion in the
first three months of 1997 as a result of core loan growth. Assets under
management were $109 billion on March 31, 1998, a decrease of $7 billion from
the balance on December 31, 1997. The decrease was due to the sales of certain
corporate and institutional trust businesses and was partially offset by growth
in the remaining core businesses.
Noninterest income declined 4 percent in the first quarter of 1998. Core
revenue growth was more than offset by the sales of certain corporate and
institutional trust businesses which occurred in the third quarter of 1997.
Noninterest expense decreased 12 percent due primarily to the sales mentioned
previously. The cash basis efficiency ratio improved to 60.5 percent in the
first quarter of 1998 compared to 71.1 percent for the first three months of
1997. The return on average tangible equity increased to 44 percent.
Corporate Finance
Corporate Finance provides a broad array of banking and investment
banking products and services to domestic and international corporations,
institutions and other customers through its Capital Markets, Real Estate and
Transaction Products units. The Corporate Finance segment 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, 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, Corporate 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,
Corporate 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, Corporate 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.
Corporate Finance earned $242 million in the first three months of
1998 compared to $126 million in the same period of 1997, the result of higher
levels of net interest income and noninterest income, which more than offset
higher noninterest expenses. Taxable-equivalent net interest income for the
first three months of 1998 was $363 million compared to $274 million in the
first three months of 1997, reflecting increased trading account activity and
loan volumes partially offset by increased funding costs. The higher net
interest yield in the first three months of 1998 was due mainly to lower rates
on funding sources. Excluding the impact of a $4.2-billion securitization
completed in the third quarter of 1997, the Corporate Finance average loan and
lease portfolio increased approximately 12 percent over the levels in the first
three months of 1997.
Noninterest income rose to $551 million, an increase of 130 percent over
the first three months of 1997, reflecting higher investment banking fees,
brokerage income, and trading account profits and fees due to the acquisition of
Montgomery in the fourth quarter of 1997 as well as continued strong internal
growth. Noninterest expense rose to $528 million due primarily to higher
personnel expenses
19
<PAGE>
associated with the Montgomery acquisition. Amortization expense also increased
in the first quarter of 1998 due to the Montgomery acquisition. The cash basis
efficiency ratio improved approximately 100 basis points to 55.4 percent due to
increases in total revenues. The return on average tangible equity increased to
25 percent for the first quarter of 1998 from 15 percent for the same period in
1997.
See Note Seven of the Notes to the Consolidated Financial Statements
for additional business segment information.
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 five quarters is presented in
Table Three.
Taxable-equivalent net interest income increased approximately 5
percent to $2.6 billion in the first quarter of 1998 compared to $2.4 billion
for the same period in 1997. This increase was mainly the result of the improved
contribution of the securities portfolios as well as core loan growth. While
securitizations lowered net interest income by approximately $127 million in the
first quarter of 1998, they did not significantly affect the Corporation's
earnings. As the Corporation continues to securitize loans, its role becomes
that of a servicer and the income related to securitized loans is reflected in
noninterest income.
Of the $491-million increase in interest income for the first quarter
of 1998, $510 million was due to higher average earning assets, partially offset
by a $19-million decrease resulting from lower yields received on average
earning assets. Interest expense increased $371 million for the first quarter of
1998, of which $293 million was due to higher levels of average interest-bearing
liabilities and $78 million was due to the impact of higher rates paid on
average interest-bearing liabilities.
The net interest yield decreased 21 basis points to 3.82 percent in the
first quarter of 1998 compared to 4.03 percent for the same period in 1997 due
to higher levels of investment securities and a decrease in the spreads between
loans and deposits.
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 totaled $265 million for the first
three months of 1998 compared to $222 million for the same period in 1997 due to
increased net charge-offs which totaled $277 million for the three months ended
March 31, 1998 compared to $215 million for the same year-ago period. Higher
total consumer net charge-offs were covered by the provision for credit losses
and 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 "Allowance for Credit Losses" and "Concentrations of Credit
Risk" sections.
Gains on Sales of Securities
Gains on sales of securities were $152 million in the first quarter of
1998 compared to $43 million in the first quarter of 1997. Securities gains were
higher as a result of increased sales activity due to favorable market
opportunities.
20
<PAGE>
This Page Intentionally Left Blank
21
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table Three
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
First Quarter 1998 Fourth 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 $ 66,155 $ 1,373 8.42 % $ 63,656 $ 1,340 8.35%
Real estate commercial 9,344 202 8.75 9,181 206 8.88
Real estate construction 4,710 101 8.67 4,736 105 8.81
-----------------------------------------------------------------------
Total commercial 80,209 1,676 8.47 77,573 1,651 8.44
-----------------------------------------------------------------------
Residential mortgage 37,072 707 7.68 37,188 725 7.77
Credit card 7,831 241 12.46 7,863 244 12.30
Other consumer 40,914 967 9.59 39,492 956 9.61
-----------------------------------------------------------------------
Total consumer 85,817 1,915 9.02 84,543 1,925 9.05
-----------------------------------------------------------------------
Foreign 4,080 75 7.42 3,795 71 7.44
Lease financing 6,594 128 7.75 6,298 125 7.93
-----------------------------------------------------------------------
Total loans and leases, net 176,700 3,794 8.69 172,209 3,772 8.70
-----------------------------------------------------------------------
Securities
Held for investment 1,091 17 6.31 1,231 19 6.26
Available for sale (2) 48,342 840 6.98 43,024 731 6.78
-----------------------------------------------------------------------
Total securities 49,433 857 6.97 44,255 750 6.77
-----------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 13,664 176 5.22 12,734 170 5.30
Time deposits placed and other short-term investments 2,035 28 5.65 2,229 38 6.84
Trading account securities (3) 24,118 356 5.95 21,726 350 6.41
Other earning assets 5,242 92 7.15 1,762 35 7.87
-----------------------------------------------------------------------
Total earning assets (4) 271,192 5,303 7.90 254,915 5,115 7.98
Cash and cash equivalents 11,273 10,809
Factored accounts receivable 1,112 1,234
Other assets, less allowance for credit losses 31,352 30,884
-----------------------------------------------------------------------
Total assets $ 314,929 $ 297,842
-----------------------------------------------------------------------
Interest-bearing liabilities
Savings $ 12,329 57 1.89 $ 12,368 59 1.90
NOW and money market deposit accounts 52,993 338 2.59 52,492 333 2.51
Consumer CDs and IRAs 47,673 611 5.20 49,285 648 5.22
Negotiated CDs, public funds and other time deposits 3,081 41 5.41 2,640 38 5.65
Foreign time deposits 12,001 156 5.26 10,622 150 5.60
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 61,430 821 5.42 50,801 708 5.53
Trading account liabilities (3) 15,405 194 5.11 11,527 190 6.54
Long-term debt (5) 31,649 521 6.58 30,806 514 6.68
-----------------------------------------------------------------------
Total interest-bearing liabilities (6) 236,561 2,739 4.68 220,541 2,640 4.76
-----------------------------------------------------------------------
Noninterest-bearing sources
Noninterest-bearing deposits 39,451 38,936
Other liabilities 14,607 14,331
Shareholders' equity 24,310 24,034
-----------------------------------------------------------------------
Total liabilities and shareholders' equity $ 314,929 $ 297,842
-----------------------------------------------------------------------
Net interest spread 3.22 3.22
Impact of noninterest-bearing sources .60 .64
-----------------------------------------------------------------------
Net interest income/yield on earning assets $ 2,564 3.82 % $ 2,475 3.86%
=======================================================================
(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 $34 in the
first quarter of 1998 and $35, $32, $33 and $31 in the fourth, third,
second and and first quarters of 1997, respectively. Interest income also
includes the impact of risk management interest rate contracts, which
increased interest income on the underlying linked assets $43 in the
first quarter of 1998 and $35, $34, $40 and $54 in the fourth, third,
second and first quarters of 1997, respectively.
(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 $15 in the first quarter of 1998 and $11, $8, $11 and $10 in
the fourth, third, second and first quarters of 1997, respectively.
- --------------------------------------------------------------------------------
22
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------
Third Quarter 1997 Second Quarter 1997 First Quarter 1997
- ---------------------------------------------------------------------------------------------------------------------
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
- ------------ ------------ --------- ------------ ----------- ----------- ------------ ---------- -----------
$ 65,061 $ 1,379 8.41 % $ 65,329 $ 1,382 8.48 % $ 64,687 $ 1,341 8.41 %
9,583 212 8.81 10,389 231 8.91 10,636 230 8.75
4,584 104 8.96 4,569 107 9.46 4,593 103 9.07
- ----------------------------------------------------------------------------------------------------------------------
79,228 1,695 8.49 80,287 1,720 8.59 79,916 1,674 8.49
- ----------------------------------------------------------------------------------------------------------------------
41,919 828 7.87 43,522 851 7.83 41,799 811 7.80
8,120 252 12.34 8,298 253 12.24 8,263 244 11.96
38,530 921 9.48 38,147 901 9.47 38,222 887 9.42
- ----------------------------------------------------------------------------------------------------------------------
88,569 2,001 8.98 89,967 2,005 8.93 88,284 1,942 8.89
- ----------------------------------------------------------------------------------------------------------------------
3,962 69 6.88 3,291 59 7.25 3,445 59 6.84
6,235 123 7.86 5,885 116 7.87 5,724 112 7.90
- ----------------------------------------------------------------------------------------------------------------------
177,994 3,888 8.68 179,430 3,900 8.71 177,369 3,787 8.64
- ----------------------------------------------------------------------------------------------------------------------
1,425 22 6.23 1,647 24 5.94 1,919 29 6.05
28,946 496 6.84 25,563 438 6.85 25,638 435 6.81
- ----------------------------------------------------------------------------------------------------------------------
30,371 518 6.81 27,210 462 6.80 27,557 464 6.76
- ----------------------------------------------------------------------------------------------------------------------
11,567 159 5.45 11,788 174 5.92 13,943 196 5.70
1,809 27 5.91 2,381 32 5.35 2,312 29 5.10
22,628 353 6.20 22,800 332 5.84 22,855 317 5.60
1,253 27 8.48 819 19 9.32 1,062 19 7.39
- ----------------------------------------------------------------------------------------------------------------------
245,622 4,972 8.05 244,428 4,919 8.07 245,098 4,812 7.94
10,488 10,520 11,499
1,206 1,193 1,081
28,090 28,053 25,936
- ----------------------------------------------------------------------------------------------------------------------
$ 285,406 $ 284,194 $ 283,614
- ----------------------------------------------------------------------------------------------------------------------
$ 12,594 60 1.89 $ 12,990 62 1.94 $ 13,167 65 2.02
52,656 327 2.46 53,906 336 2.49 54,239 335 2.51
49,697 649 5.19 50,685 657 5.19 51,679 661 5.18
3,052 43 5.56 3,401 46 5.48 3,485 46 5.32
9,668 133 5.43 9,523 125 5.30 9,278 118 5.14
43,943 623 5.62 42,177 568 5.40 42,136 536 5.16
10,241 163 6.30 9,390 160 6.84 9,967 165 6.72
30,967 517 6.68 30,044 493 6.57 27,162 442 6.51
- ---------------------------------------------------------------------------------------------------------------------
212,818 2,515 4.70 212,116 2,447 4.62 211,113 2,368 4.54
- ---------------------------------------------------------------------------------------------------------------------
37,794 37,257 36,280
11,575 11,290 12,555
23,219 23,531 23,666
- ---------------------------------------------------------------------------------------------------------------------
$ 285,406 $ 284,194 $ 283,614
- ---------------------------------------------------------------------------------------------------------------------
3.35 3.45 3.40
.63 .60 .63
- ---------------------------------------------------------------------------------------------------------------------
$ 2,457 3.98 % $ 2,472 4.05 % $ 2,444 4.03 %
=====================================================================================================================
</TABLE>
23
<PAGE>
Noninterest Income
As presented in Table Four, noninterest income increased 34 percent to $1.8
billion in the first quarter of 1998, reflecting higher levels of income from
almost all categories, including investment banking income, brokerage income,
and a gain on the sale of a partial ownership interest in a mortgage company.
Excluding acquisitions, noninterest income increased approximately 16 percent.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Table Four
Noninterest Income
(Dollars in Millions)
Three Months
Ended March 31 Change
-----------------------------------------------------------
1998 1997 Amount Percent
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 454 $ 432 $ 22 5.1 %
Mortgage servicing and other mortgage-related income 75 71 4 5.6
Investment banking income 310 91 219 240.7
Trading account profits and fees 106 100 6 6.0
Brokerage income 112 43 69 160.5
Other nondeposit-related service fees 99 89 10 11.2
Asset management and fiduciary service fees 170 187 (17) (9.1)
Credit card income 96 95 1 1.1
Other income 354 213 141 66.2
-----------------------------------------------------------
$ 1,776 $ 1,321 $ 455 34.4
-----------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Mortgage servicing and other mortgage-related income increased 6 percent
to $75 million in the first quarter of 1998. The average portfolio of
loans serviced increased 8 percent from $117.0 billion in the first
quarter of 1997 to $126.2 billion in the first quarter of 1998. Mortgage
loan originations through the Corporation's mortgage subsidiary increased
from $4.0 billion in the first quarter of 1997 to $7.3 billion in the
first quarter of 1998, primarily reflecting changes in the interest rate
environment as well as the Corporation's efforts to maintain the mortgage
servicing portfolio at target levels. Origination volume in the first
quarter of 1998 was approximately $4.0 billion of correspondent and
wholesale loan volume and $3.3 billion of retail 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 $4.6
billion on March 31, 1998 with associated net unrealized gains of $5
million. These contracts generally have an average expected maturity of
less than 90 days. To manage risk associated with changes in prepayment
rates and the impact on mortgage servicing rights, the Corporation uses
various financial instruments including options and certain interest rate
swaps. The notional amount of such contracts on March 31, 1998 was $9.7
billion with an associated net unrealized gain of $1 million.
o Investment banking income increased 241 percent to $310 million in the
first quarter of 1998 reflecting increased levels of fees across all
categories. Excluding the acquisition of Montgomery, investment banking
income would have increased approximately 120 percent. Securities
underwriting fees increased $133 million to $159 million for the first
quarter of 1998 as a result of the Montgomery acquisition and continued
strong internal growth. Higher syndication fees were the result of 107
agent-only deals totaling $45.3 billion in the first quarter of 1998
compared to 86 agent-only deals totaling $29.9 billion in the same
year-ago period. Gains on principal investing activities (investing in
equity or equity-related transactions) increased $30 million in the first
quarter of 1998 over the same period in 1997.
24
<PAGE>
Advisory services fees increased in the first quarter of 1998 by $18
million reflecting the impact of the Montgomery acquisition.
Investment banking income by major business activity follows (in
millions):
Three Months Ended
March 31,
1998 1997
- ----------------------------------------------------------------------------
Investment Banking Income
Syndications $ 51 $ 20
Securities underwriting 159 26
Principal investment activities 55 25
Advisory services 23 5
Other 22 15
-----------------------
Total investment banking income $ 310 $ 91
-----------------------
o Trading account profits and fees by major business activity follows (in
millions):
Three Months Ended
March 31,
1998 1997
- --------------------------------------------------------------------------
Trading Account Profits and Fees
Securities trading $ 37 $ 19
Interest rate contracts 46 41
Foreign exchange contracts 10 17
Other 13 23
-----------------------
$ 106 $ 100
-----------------------
o Brokerage income increased $69 million from the first quarter of 1997 due
mainly to the addition of Montgomery as well as internal growth of 21
percent.
o Asset management and fiduciary service fees decreased $17 million to $170
million in the first quarter of 1998, reflecting the impact of 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 Other income totaled $354 million in the first quarter of 1998, an
increase of $141 million over the same period of 1997. The increase over
the first quarter of 1997 was due primarily to a gain on the sale of a
partial ownership interest of a mortgage company of approximately $110
million during the current quarter as well as the Oxford acquisition.
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.
25
<PAGE>
Merger and Restructuring Items
In connection with the Barnett merger during the first quarter of 1998,
the Corporation incurred pretax merger and restructuring items of $900 million
($642 million after-tax), which included approximately $375 million primarily in
severance and change in control payments, $300 million of conversion and related
costs and occupancy and equipment expenses (primarily lease exit costs and the
elimination of duplicate facilities and other capitalized assets), $125 million
of exit costs related to contract terminations and $100 million of other Barnett
merger costs (including legal and investment banking fees). See Note Two to the
consolidated financial statements for additional information.
Noninterest Expense
As presented in Table Five, the Corporation's noninterest expense
increased 10 percent to $2.5 billion in the first quarter of 1998 from $2.2
billion in the same period of 1997. Excluding acquisitions and related
transition expenses, noninterest expense was essentially unchanged.
A discussion of the significant components of noninterest expense in
the first quarter of 1998 compared to the first quarter of 1997 follows:
o Personnel expense increased $144 million over 1997 expenses due mainly to
the addition of Montgomery. Excluding the Montgomery acquisition,
personnel expense was essentially unchanged. On March 31, 1998, the
Corporation had approximately 100,000 full-time equivalent employees
compared to approximately 102,000 full-time equivalent employees on
December 31, 1997, including Barnett employees.
o Intangibles amortization expense increased $26 million in the first
quarter of 1998 compared to intangibles amortization expense in the first
quarter of 1997, reflecting the impact of the Montgomery and Oxford
transactions.
o Data processing expense increased $22 million in the first quarter of
1998 mainly as a result of the Montgomery acquisition.
o General administrative and miscellaneous expense increased $27 million in
the first quarter of 1998 to $86 million due mainly to the addition of
Montgomery.
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 for its systems by the end
of 1998. The related costs, which are expensed as incurred, are included in
professional, data processing, and equipment expenses. Cumulative Year 2000
expenses incurred through the first quarter of 1998 amounted to approximately
$41 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.
26
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Table Five
Noninterest Expense
(Dollars in Millions)
Three Months
Ended March 31 Change
-------------------------------------------------------
1998 1997 Amount Percent
-------------------------------------------------------
<S> <C> <C> <C> <C>
Personnel $ 1,238 $ 1,094 $ 144 13.2 %
Occupancy, net 204 184 20 10.9
Equipment 195 196 (1) (.5)
Marketing 88 86 2 2.3
Professional fees 89 85 4 4.7
Amortization of intangibles 139 113 26 23.0
Data processing 107 85 22 25.9
Telecommunications 76 67 9 13.4
Other general operating 230 256 (26) (10.2)
General administrative and miscellaneous 86 59 27 45.8
-------------------------------------------------------
$ 2,452 $ 2,225 $ 227 10.2
-------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Income Taxes
The Corporation's income tax expense for the first quarter of 1998 was
$339 million, an effective tax rate of 40.6 percent, or 34.4 percent excluding
merger and restructuring items. Income tax expense for the first quarter of 1997
was $477 million, an effective tax rate of 35.8 percent.
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 capital position. The average balances discussed below can be
derived from Table Three. The following discussion addresses changes in average
balances for the first three months of 1998 compared to the same period in 1997.
First quarter 1998 average levels of customer-based funds decreased
$3.3 billion to $155.5 billion compared to average levels for the first quarter
of 1997 due to deposit declines in the former Boatmen's franchise, including the
impact of sales of selected banking centers. As a percentage of total sources,
average levels of customer-based funds in the first quarter of 1998 decreased to
49 percent compared to 56 percent for the same period in 1997.
During the first quarter of 1998, higher average levels of market-based
funds replaced the lower average levels of customer-based funds. First quarter
1998 levels of average market-based funds increased $27.5 billion over 1997
levels to $88.8 billion compared to $61.3 billion for the same period in 1997.
Market-based funds also comprised a larger portion of total sources of funds at
approximately 28 percent in 1998 compared to approximately 22 percent during the
same period in 1997. In addition, first quarter 1998 average levels of long-term
debt increased by $4.5 billion over average levels during the same period in
1997, mainly the result of borrowings to fund repurchases of shares issued in
the Boatmen's acquisition.
Average first quarter 1998 loans and leases, the Corporation's primary
use of funds, decreased $669 million to $176.7 billion. As a percentage of total
uses of funds, average first quarter 1998 loans and leases decreased to 56
percent from 63 percent during the same period in 1997. The decrease in average
loans and leases was due primarily to approximately $15.7 billion of
securitizations in 1997, which mainly took place in the third quarter. The ratio
of average loans and leases to average customer-based funds was 114 percent in
1998 and 112 percent in 1997.
The average securities portfolio in the first quarter of 1998 increased
$21.9 billion over first quarter 1997 levels, amounting to 16 percent of total
uses of funds in 1998 compared to 10 percent in the first quarter of 1997. See
the following "Securities" section for additional information on the securities
portfolio.
27
<PAGE>
Average other assets and cash and cash equivalents increased $5.2
billion to $42.6 billion in the first three months in 1998 due largely to the
April 1, 1997 acquisition of Oxford and goodwill associated mainly with the
Montgomery acquisition.
Cash and cash equivalents were $13.4 billion on March 31, 1998
compared to $13.8 billion on December 31, 1997. During the first three months of
1998, net cash provided by operating activities was $2.9 billion, net cash used
in investing activities was $5.3 billion and net cash provided by financing
activities was $2.0 billion. For further information on cash flows, see the
Consolidated Statement of Cash Flows 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 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 on March 31, 1998 consisted of securities held
for investment totaling $1.0 billion and securities available for sale totaling
$50.3 billion compared to $1.2 billion and $49.4 billion, respectively, on
December 31, 1997. The increase in available for sale securities reflects
initiatives to invest excess capital in the securities portfolio.
On March 31, 1998 and December 31, 1997, the market value of the
Corporation's securities held for investment reflected net unrealized
appreciation of $12 million and $5 million, respectively.
The valuation reserve for securities available for sale, marketable
equity securities and certain servicing assets increased shareholders' equity by
$377 million on March 31, 1998, primarily reflecting pretax appreciation of $452
million on debt securities and $128 million on marketable equity securities. The
valuation reserve increased shareholders' equity by $408 million on December 31,
1997. The decrease in the valuation reserve was primarily attributable to the
reinvestment of proceeds from the sales and maturities of securities with higher
interest rates into securities with interest rates more representative of
current market rates.
The estimated average maturities of securities held for investment and
securities available for sale portfolios were 1.68 years and 6.72 years,
respectively, on March 31, 1998 compared with 1.48 years and 5.45 years,
respectively, on December 31, 1997. The increase in the average expected
maturity of the available for sale portfolio is attributable to purchases of
securities during the first quarter of 1998 with longer average maturities than
the weighted average maturities of securities owned on December 31, 1997.
Off-Balance Sheet
Derivatives - Asset and Liability Management Activities
Risk management interest rate contracts are used 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.
As reflected in Table Six, the total gross notional amount of the
Corporation's ALM interest rate swaps on March 31, 1998 was $33.5 billion, with
the Corporation receiving fixed on $29.7 billion, primarily converting
variable-rate commercial loans to fixed rate, and receiving variable on $1.6
billion. The net receive fixed position was $28.1 billion on March 31, 1998, a
decrease of $1.6 billion from December 31, 1997. In addition, the Corporation
had $2.2 billion of basis swaps linked primarily to long-term debt.
28
<PAGE>
Table Six
March 31, 1998
(Dollars in Millions, Average Expected Maturity in Years)
<TABLE>
<CAPTION>
Expected Maturity Average
---------------------------------------------------------------------------
Unrealized After Expected
Gain/(Loss) Total 1998 1999 2000 2001 2002 2002 Maturity
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Conversion Swaps
Receive fixed generic $ 223 2.95
Notional amount $ 20,532 $ 1,150 $ 350 $ 5,925 $ 9,671 $3,436 $ -
Weighted average receive rate 6.37% 5.75% 6.42% 6.41% 6.36% 6.53% - %
Weighted average pay rate 5.70 5.68 5.68 5.66 5.73 5.67
Pay fixed generic (20) 2.36
------------
Notional amount $ 1,386 $ - $ 250 $ 1,000 $ 68 $ - $ 68
Weighted average pay rate 6.74% - % 6.46% 6.70% 7.41% -% 7.80%
Weighted average receive rate 5.85 - 5.68 5.66 7.87 - 7.39
Total asset conversion swaps $ 203
------------
Notional amount $ 21,918 $ 1,150 $ 600 $ 6,925 $ 9,739 $3,436 $ 68
Liability Conversion Swaps
Receive fixed generic $ 107 4.64
Notional amount $ 9,167 $ 1,626 $ 836 $ 308 $ 2,541 $ 495 $ 3,361
Weighted average receive rate 6.73% 6.73% 7.26% 6.79% 6.31% 6.92% 6.89%
Weighted average pay rate 6.19 6.46 7.42 5.87 6.34 5.71 5.75
Pay fixed generic (2) 3.46
------------
Notional amount $ 199 $ 100 $ - $ 8 $ 10 $ 8 $ 73
Weighted average pay rate 7.61% 9.31% -% 6.01% 5.52% 6.65% 5.86%
Weighted average receive rate 5.41 5.24 - 5.54 5.54 5.69 5.59
Total liability conversion swaps $ 105
------------
Notional amount $ 9,366 $ 1,726 $ 836 $ 316 $ 2,551 $ 503 $ 3,434
- ------------------------------------------------------------------------------------------------------------------------------------
Total receive fixed swaps $ 330 3.47
Notional amount $ 29,699 $ 2,776 $ 1,186 $ 6,233 $ 12,212 $3,931 $ 3,361
Weighted average receive rate 6.48% 6.33% 7.01% 6.43% 6.35% 6.58% 6.89%
Weighted average pay rate 5.85 6.14 6.91 5.67 5.85 5.68 5.75
Total pay fixed swaps (22) 2.50
Notional amount $ 1,585 $ 100 $ 250 $ 1,008 $ 78 $ 8 $ 141
Weighted average pay rate 6.85% 9.31% 6.46% 6.69% 7.17% 6.65% 6.80%
Weighted average receive rate 5.80 5.24 5.68 5.65 7.57 5.69 6.46
Basis swaps $ 1 1.55
------------
Notional amount $ 2,224 $ 200 $ 1,325 $ 423 $ 107 $ 169 $ -
Weighted average receive rate 5.79% 5.69% 5.74% 5.71% 6.89% 5.75% - %
Weighted average pay rate 5.73 5.61 5.64 5.73 6.93 5.72 -
Total swaps $ 309
------------
Notional amount $ 33,508 $ 3,076 $ 2,761 $ 7,664 $ 12,397 $4,108 $ 3,502
- ------------------------------------------------------------------------------------------------------------------------------------
Option Products
Notional amount (19) $ 6,552 $ 2,100 $ 2,825 $ 143 $ 86 $ 163 $ 1,235
Weighted average strike rate 6.65% 6.50% 6.64% 8.13% 9.43% 7.70% 6.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $ 290
------------
Notional amount $ 40,060 $ 5,176 $ 5,586 $ 7,807 $ 12,483 $4,271 $ 4,737
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Table Six also summarizes the expected maturities, weighted average pay
and receive rates and the unrealized gains and losses on March 31, 1998 of the
Corporation's ALM interest rate contracts. Floating rates represent the last
repricing and will change in the future based primarily on movements in one-,
three- and six-month LIBOR rates.
The net unrealized appreciation of the ALM swap portfolio on March 31,
1998 was $309 million compared to unrealized appreciation of $307 million on
December 31, 1997. The amount of net realized deferred gains associated with
terminated ALM swaps was $70 million and $51 million on March 31, 1998 and
December 31, 1997, respectively.
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 March 31, 1998, the Corporation had a gross
notional amount of $6.6 billion in outstanding interest rate option contracts
used for ALM purposes compared to $6.2 billion at December 31, 1997. 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 March 31, 1998, the net unrealized depreciation of ALM option products was
$19 million compared to net unrealized depreciation of $7 million on December
31, 1997. The amount of net realized deferred gains associated with terminated
ALM options was $13 million on both March 31, 1998 and December 31, 1997.
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 March 31, 1998,
these contracts had a notional value of $2.4 billion and a net market value of
negative $61 million.
The net unrealized appreciation in the estimated value of the ALM
interest rate and net negative market value in the ALM foreign exchange
portfolios 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.
Allowance for Credit Losses
The Corporation's allowance for credit losses was $3.2 billion, or 1.81
percent of net loans, leases, and factored accounts receivable on March 31, 1998
compared to $3.3 billion, or 1.85 percent, on December 31, 1997.
Table Seven provides an analysis of the changes in the allowance for
credit losses. During the first quarter of 1998, higher other consumer and
credit card net charge-offs caused the $62-million increase in total net
charge-offs, which amounted to $277 million, or .63 percent of average loans,
leases and factored accounts receivable compared to $215 million, or .49
percent, for the same period in 1997. Higher other consumer net charge-offs were
due to net charge-offs associated with a sub-prime auto lending portfolio, which
the Corporation is allowing to run off, and core loan growth, while higher
credit card net charge-offs were due mainly to deterioration in consumer credit
quality experienced on an industry-wide basis. The increases in total consumer
net charge-offs were partially offset by lower total commercial net charge-offs
during the first quarter of 1998.
Excluding increases that resulted from recent acquisitions, management
expects charge-offs in general to increase modestly throughout 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.
Nonperforming Assets
As presented in Table Eight, on March 31, 1998, nonperforming assets
were $1.5 billion, or .86 percent of net loans, leases, factored accounts
receivable and foreclosed properties, compared to $1.4 billion, or .77 percent,
on December 31, 1997. Nonperforming loans increased to $1.4 billion on March 31,
1998 from $1.2 billion on December 31, 1997 due to higher commercial
nonperforming loans. The
30
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Table Seven
Allowance For Credit Losses
(Dollars in Millions) Three Months
Ended March 31
-------------------------------------------
1998 1997
-------------------------------------------
<S> <C> <C>
Balance on January 1 $ 3,277 $ 2,792
-------------------------------------------
Loans, leases and factored accounts receivable charged off
Commercial (29) (31)
Real estate commercial (2) (5)
Real estate construction (1) -
-------------------------------------------
Total commercial (32) (36)
-------------------------------------------
Residential mortgage (6) (6)
Credit card (137) (116)
Other consumer (169) (124)
-------------------------------------------
Total consumer (312) (246)
-------------------------------------------
Foreign - -
Lease financing (3) (5)
Factored accounts receivable (4) (4)
-------------------------------------------
Total loans, leases and factored accounts
receivable charged off (351) (291)
-------------------------------------------
Recoveries of loans, leases and factored accounts
receivable previously charged off
Commercial 16 18
Real estate commercial 3 3
Real estate construction 4 1
-------------------------------------------
Total commercial 23 22
-------------------------------------------
Residential mortgage 1 1
Credit card 16 21
Other consumer 33 29
-------------------------------------------
Total consumer 50 51
-------------------------------------------
Foreign - -
Lease financing - 1
Factored accounts receivable 1 2
-------------------------------------------
Total recoveries of loans, leases and
factored accounts receivable previously charged off 74 76
-------------------------------------------
Net charge-offs (277) (215)
-------------------------------------------
Provision for credit losses 265 222
Allowance applicable to loans of purchased companies and other (20) 463
-------------------------------------------
Balance on March 31 $ 3,245 $ 3,262
===========================================
Loans, leases and factored accounts receivable,
net of unearned income, outstanding end of period $ 179,486 $ 179,575
Allowance for credit losses as a percentage of
loans, leases and factored accounts receivable,
net of unearned income, outstanding end of period 1.81% 1.82%
Average loans, leases and factored accounts receivable,
net of unearned income, outstanding during the period $ 177,812 $ 178,450
Net charge-offs as a percentage of average loans, leases and
factored accounts receivable, net of unearned income,
outstanding during the period .63% .49%
Allowance for credit losses as a percentage of nonperforming loans 233.89 263.99
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
allowance coverage of nonperforming loans was 234 percent on March 31, 1998
compared to 270 percent on December 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Table Eight
Nonperforming Assets
(Dollars in Millions)
March 31 December 31 September 30 June 30 March 31
1998 1997 1997 1997 1997
--------------------------------------------------------------------------------
Nonperforming loans
<S> <C> <C> <C> <C> <C>
Commercial $ 472 $ 316 $ 399 $ 459 $ 430
Real estate commercial 179 185 233 231 187
Real estate construction 57 23 24 20 38
--------------------------------------------------------------------------------
Total commercial 708 524 656 710 655
--------------------------------------------------------------------------------
Residential mortgage 382 382 368 354 365
Other consumer 266 274 226 182 171
--------------------------------------------------------------------------------
Total consumer 648 656 594 536 536
--------------------------------------------------------------------------------
Foreign - 1 - - -
Lease financing 32 33 39 47 45
--------------------------------------------------------------------------------
Total nonperforming loans 1,388 1,214 1,289 1,293 1,236
--------------------------------------------------------------------------------
Foreclosed properties 148 147 206 201 217
--------------------------------------------------------------------------------
Total nonperforming assets $ 1,536 $ 1,361 $ 1,495 $ 1,494 $ 1,453
================================================================================
Nonperforming assets as a percentage of
Total assets .49% .44 % .52 % .53 % .52 %
Loans, leases and factored accounts
receivable, net of unearned income,
and foreclosed properties .86 .77 .88 .82 .81
Loans past due 90 days or more and not
classified as nonperforming $ 362 $411 $ 369 $370 $ 375
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
The following section discusses credit risk in the loan portfolio, including net
charge-offs by loan categories as presented in Table Nine.
32
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Table Nine
Net Charge-offs in Dollars and as a Percentage of Average Loans Outstanding
(Dollars in Millions)
Three Months
Ended March 31
-----------------------------------------------------
1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 13 .08 % $ 13 .08 %
Real estate commercial and construction (4) n/m 1 .03
-----------------------------------------------------
Total commercial 9 .05 14 .07
-----------------------------------------------------
Residential mortgage 5 .05 5 .05
Credit card 121 6.53 95 4.90
Other consumer 136 1.35 95 1.01
-----------------------------------------------------
Total consumer 262 1.24 195 .90
-----------------------------------------------------
Lease financing 3 .21 4 .26
Factored accounts receivable 3 .83 2 1.04
-----------------------------------------------------
Total net charge-offs $ 277 .63 $ 215 .49
-----------------------------------------------------
Selected managed net charge-offs and ratios:
Managed credit cards $ 166 6.69 % $ 147 5.72 %
Managed other consumer loans 156 1.32 109 .99
n/m = not meaningful
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 Ten. 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 $13.4 billion and $13.7 billion on March 31, 1998 and December 31, 1997,
respectively, or 8 percent of net loans, leases and factored accounts receivable
for both periods. Real estate loans past due 90 days or more and still accruing
interest were $14 million, or .10 percent of real estate loans, on both March
31, 1998 and December 31, 1997.
The exposures included in Table Ten 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 March
31, 1998, the Corporation had approximately $12.0 billion of commercial loans
which were not real estate dependent but for which the Corporation had obtained
real estate as secondary repayment security.
33
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Table Ten
Real Estate Commercial and Construction Loans, Foreclosed Properties
and Other Real Estate Credit Exposures
March 31, 1998
(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 $ 4,329 $ 82 $ 46 $ 494
Missouri, Kansas, Illinois, Iowa and Arkansas 2,213 42 11 18
Texas, Oklahoma and New Mexico 1,599 19 5 189
Maryland, District of Columbia and Virginia 1,161 41 17 349
North Carolina and South Carolina 1,113 27 4 292
Other states 2,966 25 15 431
------------------------------------------------------------------------
$ 13,381 $ 236 $ 98 $ 1,773
------------------------------------------------------------------------
By Property Type:
Apartments $ 2,265 $ 12 $ 1 $ 675
Residential 1,798 33 35 76
Shopping centers/retail 1,729 71 4 346
Office buildings 1,623 15 5 140
Hotels 1,247 12 - 62
Industrial/warehouse 1,174 18 3 71
Land and land development 899 27 34 94
Resorts/golf courses 449 - - -
Commercial-other 444 14 10 11
Unsecured 286 1 - 63
Multiple use 97 4 1 1
Other 1,370 29 5 234
------------------------------------------------------------------------
$ 13,381 $ 236 $ 98 $ 1,773
------------------------------------------------------------------------
(1) On March 31, 1998, 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.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Industries - Table Eleven presents selected industry credit
exposures, commercial loans, factored accounts receivable and lease financings.
On March 31, 1998, commercial loan outstandings totaled $67.3 billion, or 38
percent of net loans, leases and factored accounts receivable, and $65.6
billion, or 37 percent, on December 31, 1997. Average managed commercial loans
were $70.5 billion and $64.7 billion for the first three months of 1998 and
1997, respectively, and include a $4.2-billion commercial loan securitization
completed in the third quarter of 1997. The Corporation had commercial loan net
charge-offs during the first three months of 1998 and 1997 totaling $13 million,
or .08 percent of average commercial loans. Commercial loans past due 90 days or
more and still accruing interest were $32 million, or .05 percent of commercial
loans, on March 31, 1998 compared to $36 million, or .05 percent, on December
31, 1997. Nonperforming commercial loans were $472 million, or .70 percent of
commercial loans, on March 31, 1998, compared to $316 million, or .48 percent,
on December 31, 1997.
34
<PAGE>
- --------------------------------------------------------------------------------
Table Eleven
Selected Industry Loans, Leases and Factored Accounts
Receivable, Net of Unearned Income
March 31, 1998
(Dollars in Millions)
Outstanding
------------------
Health care $ 4,798
Food, including agribusiness 4,196
Automotive, excluding trucking 3,683
Machinery and equipment, excluding defense 3,667
Retail 3,134
Textiles and apparel, excluding retail 3,110
Leisure and sports 3,076
Oil and gas 2,946
Media 2,914
Transportation, excluding air and trucking 2,205
- --------------------------------------------------------------------------------
Consumer - On March 31, 1998 and December 31, 1997, total consumer loan
outstandings totaled $86.9 billion, or 48 percent of net loans, leases and
factored accounts receivable, and $86.0 billion, or 49 percent of net loans,
leases and factored accounts receivable, respectively. The increase in total
consumer net charge-offs during the first three months of 1998 was due mainly to
higher other consumer net charge-offs, the result of net charge-offs associated
with a sub-prime auto lending portfolio, which the Corporation is allowing to
run off, and core loan growth as well as higher credit card net charge-offs
resulting mainly from deterioration in consumer credit quality experienced on an
industry-wide basis.
Average residential mortgage loans were $37.1 billion for the first
quarter of 1998 compared to $41.8 billion for the same period in 1997,
reflecting the impact of approximately $8.1 billion of mortgage loan
securitizations that occurred primarily during the third quarter of 1997.
Average managed credit card receivables (excluding private label credit cards)
were $10.1 billion during the first three months of 1998 compared to $10.5
billion during the first quarter of 1997. Higher net charge-offs during the
first three months of 1998 reflect deterioration in consumer credit quality
experienced on an industry-wide basis. Average other consumer loans for the
first quarter of 1998 were $40.9 billion compared to $38.2 billion for the same
period in 1997. The increase was net of the impact of approximately $3.4 billion
of securitizations that occurred throughout 1997. Average managed other consumer
loans, which include direct and indirect consumer loans and home equity lines,
as well as indirect auto loan and consumer finance securitizations, increased to
$47.7 billion in the first quarter of 1998 compared to $44.5 billion in the same
period of 1997.
Total consumer loans past due 90 days or more and still accruing
interest were $304 million, or .35 percent of total consumer loans, on March 31,
1998 compared to $353 million, or .41 percent, on December 31, 1997. Total
consumer nonperforming loans were $648 million, or .75 percent of total consumer
loans and $656 million, or .76 percent on March 31, 1998 and December 31, 1997,
respectively.
35
<PAGE>
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.
For a discussion of market risk associated with ALM activities, see the
"Off-Balance Sheet" section. Market risk associated with trading activities is
discussed in this section and information on trading assets and liabilities and
derivatives-dealer positions can be found in Notes Three and Six to the
consolidated financial statements, respectively. There have been no significant
changes in market risk associated with non-trading, on-balance sheet financial
instruments since December 31, 1997.
On March 31, 1998, 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 was estimated to be less than
1 percent of net income when compared to stable rates.
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 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 March
31, 1998, the gross estimates for aggregate interest rate, foreign exchange and
equity and commodity trading activities were $59 million, $4 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
March 31, 1998 for aggregate trading activities was $24 million. Both measures
indicate that the Corporation's primary risk exposure is related to its interest
rate activities.
Average daily trading revenues during the first three months of 1998
approximated $2 million. During the first quarter of 1998, the Corporation's
trading activities resulted in positive daily revenues for approximately 66
percent of total trading days. During the first quarter of 1998, the standard
deviation of trading revenues was $3 million. Using this data, one can conclude
that the aggregate trading activities should not result in exposure of more than
$5 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.
36
<PAGE>
Capital Resources and Capital Management
Presented below are the Corporation's regulatory capital ratios on
March 31, 1998 and December 31, 1997:
March 31 December 31
1998 1997
-----------------------------------------------------------
Risk-Based Capital Ratios
Tier I Capital 6.80 % 6.50 %
Total Capital 11.19 10.89
Leverage Capital Ratio 5.64 5.57
The Corporation's and its significant banking subsidiaries' regulatory
capital ratios on March 31, 1998 exceeded the regulatory minimums of 4 percent
for Tier 1 risk-based capital, 8 percent for total risk-based capital and the
leverage guidelines of 100 to 200 basis points above the minimum ratio of 3
percent. The Corporation and its significant banking subsidiaries were
considered "well-capitalized" on March 31, 1998. Ratios for December 31, 1997
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.
Regulatory capital guidelines were amended on September 12, 1996 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 did not have a material
impact on the Corporation or its subsidiaries' regulatory capital ratios or
their well capitalized status on March 31, 1998.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Management" on page 36 for Quantitative and
Qualitative Disclosures about Market Risk.
37
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11 - Earnings Per Common Share Computation
Exhibit 12(a) - Ratio of Earnings to Fixed Charges
Exhibit 12(b) - Ratio of Earnings to Fixed Charges and
Preferred Dividends
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The following reports on Form 8-K were filed by the
Corporation during the quarter ended March 31, 1998:
Current Report on Form 8-K dated January 8, 1998, and filed
January 14, 1998, Items 5&7.
Current Report on Form 8-K dated December 9, 1997, and filed
January 22, 1998, Items 2, 5&7.
Current Report on Form 8-K dated January 29, 1998, and filed
February 3, 1998, Items 5&7.
Current Report on Form 8-K dated March 13, 1998, and filed
March 13, 1998, Item 5.
Current Report on Form 8-K dated March 17, 1998, and filed
March 23, 1998, Items 5&7.
38
<PAGE>
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NationsBank Corporation
------------------------------
Registrant
Date: May 15, 1998 /s/ Marc D. Oken
------------ --------------------------
Marc D. Oken
Executive Vice President
and Chief Accounting Officer
(Duly Authorized Officer and
Principal Accounting Officer)
39
<PAGE>
NationsBank Corporation
Form 10-Q
Index to Exhibits
Exhibit Description
11 Earnings Per Common Share Computation
12(a) Ratio of Earnings to Fixed Charges
12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends
27 Financial Data Schedule
40
<PAGE>
Diluted Earnings Per Common Share and Diluted Average Common Shares
Outstanding
For diluted earnings per common share, net income available to common
shareholders can be affected by the conversion of the registrant's convertible
preferred stock. Where the effect of this conversion would have been dilutive,
net income available to common shareholders is adjusted by the associated
preferred dividends. This adjusted net income is divided by the weighted average
number of common shares outstanding for each period plus amounts representing
the dilutive effect of stock options outstanding and the dilution resulting from
the conversion of the registrant's convertible preferred stock, if applicable.
The effect of convertible preferred stock is excluded from the computation of
diluted earnings per common share in periods in which the effect would be
antidilutive.
Diluted earnings per common share was determined as follows (shares in
thousands, dollars in millions except per-share information):
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Average common shares outstanding 949,641 945,184
Dilutive effect of
Convertible preferred stock 3,606 3,948
Stock options 20,314 23,537
-------------- --------------
Total dilutive shares 973,561 972,669
============== ==============
Income available to common shareholders $ 495 $ 851
Preferred dividends paid on dilutive convertible
preferred stock 2 2
-----------------------------
Total net income available to common shareholders
adjusted for full dilution $ 497 $ 853
============== ==============
Diluted earnings per common share $ .51 $ .88
-------------- --------------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries Exhibit 12(a)
Ratio of Earnings to Fixed Charges
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions)
Year ended December 31
Three Months -----------------------------------------------------------------------
Ended
March 31, 1998 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------
Excluding Interest on Deposits
- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 836 $ 5,230 $ 4,536 $ 3,810 $ 3,293 $ 2,619
Equity in undistributed (earnings) losses
of unconsolidated subsidiaries (1) - 2 (7) (3) (5)
Fixed charges:
Interest expense (including
capitalized interest) 1,531 5,060 4,342 4,706 3,056 1,512
Amortization of debt discount and
appropriate issuance costs 5 19 20 12 8 6
1/3 of net rent expense 46 180 157 155 141 129
---------- -------------------------------------------------------------------------
Total fixed charges 1,582 5,259 4,519 4,873 3,205 1,647
Earnings (excluding capitalized interest) $ 2,417 $ 10,489 $ 9,057 $ 8,676 $ 6,495 $ 4,261
========== =========================================================================
Fixed charges $ 1,582 $ 5,259 $ 4,519 $ 4,873 $ 3,205 $ 1,647
========== =========================================================================
Ratio of Earnings to Fixed Charges 1.53 1.99 2.00 1.78 2.03 2.59
Including Interest on Deposits
- ------------------------------------------------
Income before taxes $ 836 $ 5,230 $ 4,536 $ 3,810 $ 3,293 $ 2,619
Equity in undistributed (earnings) losses
of unconsolidated subsidiaries (1) - 2 (7) (3) (5)
Fixed charges:
Interest expense (including
capitalized interest) 2,734 9,951 8,588 8,980 6,231 4,450
Amortization of debt discount and
appropriate issuance costs 5 19 20 12 8 6
1/3 of net rent expense 46 180 157 155 141 129
---------- -------------------------------------------------------------------------
Total fixed charges 2,785 10,150 8,765 9,147 6,380 4,585
Earnings (excluding capitalized interest) $ 3,620 $ 15,380 $ 13,303 $ 12,950 $ 9,670 $ 7,199
========== =========================================================================
Fixed charges $ 2,785 $ 10,150 $ 8,765 $ 9,147 $ 6,380 $ 4,585
========== =========================================================================
Ratio of Earnings to Fixed Charges 1.30 1.52 1.52 1.42 1.52 1.57
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
NationsBank Corporation and Subsidiaries Exhibit 12(b)
Ratio of Earnings to Fixed Charges and Preferred Dividends
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions)
Three Months Year Ended December 31
------------------------------------------------------------------------
Ended
March 31, 1998 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------
Excluding Interest on Deposits
- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 836 $ 5,230 $ 4,536 $ 3,810 $ 3,293 $ 2,619
Equity in undistributed (earnings) losses
of unconsolidated subsidiaries (1) - 2 (7) (3) (5)
Fixed charges:
Interest expense (including
capitalized interest) 1,531 5,060 4,342 4,706 3,056 1,512
Amortization of debt discount and
appropriate issuance costs 5 19 20 12 8 6
1/3 of net rent expense 46 180 157 155 141 129
--------- --------------------------------------------------------------------------
Total fixed charges 1,582 5,259 4,519 4,873 3,205 1,647
Preferred dividend requirements 3 17 25 37 43 43
Earnings (excluding capitalized interest) $ 2,417 $ 10,489 $ 9,057 $ 8,676 $ 6,495 $ 4,261
========= =========================================================================
Fixed charges $ 1,585 $ 5,276 $ 4,544 $ 4,910 $ 3,248 $ 1,690
========= =========================================================================
Ratio of Earnings to Fixed Charges 1.52 1.99 1.99 1.77 2.00 2.52
Including Interest on Deposits
- ------------------------------
Income before taxes $ 836 $ 5,230 $ 4,536 $ 3,810 $ 3,293 $ 2,619
Equity in undistributed (earnings) losses
- -----------------------------------------------
of unconsolidated subsidiaries (1) - 2 (7) (3) (5)
Fixed charges:
Interest expense (including
capitalized interest) 2,734 9,951 8,588 8,980 6,231 4,450
Amortization of debt discount and
appropriate issuance costs 5 19 20 12 8 6
1/3 of net rent expense 46 180 157 155 141 129
--------- -------------------------------------------------------------------------
Total fixed charges 2,785 10,150 8,765 9,147 6,380 4,585
Preferred dividend requirements 3 17 25 37 43 43
Earnings (excluding capitalized interest) $ 3,620 $ 15,380 $ 13,303 $ 12,950 $ 9,670 $ 7,199
========= =========================================================================
Fixed charges $ 2,788 $ 10,167 $ 8,790 $ 9,184 $ 6,423 $ 4,628
========= =========================================================================
Ratio of Earnings to Fixed Charges 1.30 1.51 1.51 1.41 1.51 1.56
</TABLE>
43
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary information extracted from the March 31, 1998
Form 10-Q for NationsBank Corporation and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,421
<INT-BEARING-DEPOSITS> 1,841
<FED-FUNDS-SOLD> 10,914
<TRADING-ASSETS> 23,751
<INVESTMENTS-HELD-FOR-SALE> 50,271
<INVESTMENTS-CARRYING> 1,028
<INVESTMENTS-MARKET> 1,040
<LOANS> 179,486
<ALLOWANCE> (3,245)
<TOTAL-ASSETS> 314,503
<DEPOSITS> 170,046
<SHORT-TERM> 75,947
<LIABILITIES-OTHER> 13,743
<LONG-TERM> 29,547
0
91
<COMMON> 10,202
<OTHER-SE> 14,927
<TOTAL-LIABILITIES-AND-EQUITY> 314,503
<INTEREST-LOAN> 3,775
<INTEREST-INVEST> 842
<INTEREST-OTHER> 652
<INTEREST-TOTAL> 5,269
<INTEREST-DEPOSIT> 1,203
<INTEREST-EXPENSE> 2,739
<INTEREST-INCOME-NET> 2,530
<LOAN-LOSSES> 265
<SECURITIES-GAINS> 152
<EXPENSE-OTHER> 2,457
<INCOME-PRETAX> 900
<INCOME-PRE-EXTRAORDINARY> 836
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 497
<EPS-PRIMARY> .52
<EPS-DILUTED> .51
<YIELD-ACTUAL> 3.82
<LOANS-NON> 1,388
<LOANS-PAST> 362
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,277
<CHARGE-OFFS> 351
<RECOVERIES> 74
<ALLOWANCE-CLOSE> 3,245
<ALLOWANCE-DOMESTIC> 0<F1>
<ALLOWANCE-FOREIGN> 0<F1>
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1> Allowance-Domestic, Allowance-Foreign and Allowance-Unallocated are only
disclosed on an annual basis in the Corporation's 10-K and are therefore
not included in this Financial Data Schedule.
</FN>
</TABLE>
