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
For the Quarterly Period Ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State or other jurisdiction of incorporation or organization:
Delaware
I.R.S. Employer Identification Number:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
Charlotte, North Carolina 28255
Registrant's telephone number, including area code:
(704) 386-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
On July 31, 1999, there were 1,727,403,256 shares of Bank of America Corporation
Common Stock outstanding.
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Bank of America Corporation
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June 30, 1999 Form 10-Q
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INDEX
<S> <C> <C>
Page
Part I Item 1. Financial Statements:
Financial Consolidated Statement of Income for the Three
Information Months and Six Months Ended 2
June 30, 1999 and 1998
Consolidated Balance Sheet on June 30, 1999
and December 31, 1998 3
Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 4
Consolidated Statement of Changes in Share-
holders' Equity for the Six Months Ended
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 49
- -------------------------------------------------------------------------------------------------------------------
Part II
Other Information Item 1. Legal Proceedings 49
Item 6. Exhibits and Reports on Form 8-K 50
Signature 51
Index to Exhibits 52
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Part I. Financial Information
Item 1. Financial Statements
- ----------------------------------------------------------------------------------------------------------------------------
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
----------------------------- -----------------------------
(Dollars in Millions, Except Per-Share Information) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $ 6,853 $ 7,105 $ 13,623 $ 14,217
Interest and dividends on securities 1,143 1,077 2,318 2,206
Federal funds sold and securities purchased under
agreements to resell 387 433 768 850
Trading account assets 525 692 1,070 1,430
Other interest income 298 330 628 639
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 9,206 9,637 18,407 19,342
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 2,168 2,690 4,480 5,383
Short-term borrowings 1,396 1,229 2,751 2,539
Trading account liabilities 150 262 279 536
Long-term debt 880 830 1,685 1,639
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 4,594 5,011 9,195 10,097
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 4,612 4,626 9,212 9,245
Provision for credit losses 510 495 1,020 1,005
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 4,102 4,131 8,192 8,240
Gains on sales of securities 52 120 182 333
Noninterest income
Service charges on deposit accounts 900 844 1,755 1,660
Mortgage servicing income 125 207 257 379
Investment banking income 555 664 943 1,277
Trading account profits and fees 395 232 895 604
Brokerage income 192 188 376 368
Nondeposit-related service fees 123 164 259 339
Asset management and fiduciary service fees 274 261 517 506
Credit card income 448 352 808 671
Other income 510 724 935 1,325
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,522 3,636 6,745 7,129
- ----------------------------------------------------------------------------------------------------------------------------
Merger-related charges, net 200 (430) 200 470
Other noninterest expense
Personnel 2,261 2,425 4,594 4,865
Occupancy 395 421 791 803
Equipment 339 334 697 674
Marketing 147 145 294 303
Professional fees 166 209 292 404
Amortization of intangibles 225 227 447 455
Data processing 214 186 404 365
Telecommunications 140 138 276 269
Other general operating 446 528 866 1,041
General administrative and other 124 154 249 292
- ----------------------------------------------------------------------------------------------------------------------------
Total other noninterest expense 4,457 4,767 8,910 9,471
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,019 3,550 6,009 5,761
Income tax expense 1,104 1,252 2,180 2,132
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,915 $ 2,298 $ 3,829 $3,629
============================================================================================================================
Net income available to common shareholders $ 1,914 $ 2,287 $ 3,826 $3,607
============================================================================================================================
Per-share information
Earnings per common share $ 1.10 $ 1.32 $ 2.20 $ 2.09
============================================================================================================================
Diluted earnings per common share $ 1.07 $ 1.28 $ 2.15 $ 2.03
============================================================================================================================
Dividends per common share $ .45 $ .38 $ .90 $ .76
============================================================================================================================
Average common shares issued and outstanding (in thousands) 1,743,503 1,732,168 1,740,549 1,728,353
============================================================================================================================
See accompanying notes to consolidated financial statements.
2
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Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------------------
June 30 December 31
(Dollars in Millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S>
Assets <C> <C>
Cash and cash equivalents $ 24,197 $ 28,277
Time deposits placed and other short-term investments 5,350 6,750
Securities:
Held for investment, at cost (market value - $1,311 and $1,853) 1,499 1,997
Available for sale 75,012 78,590
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities 76,511 80,587
- ----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 35,907 27,146
Trading account assets 35,427 39,602
Derivative-dealer assets 13,808 16,400
Loans and leases 363,581 357,328
Allowance for credit losses (7,096) (7,122)
- ----------------------------------------------------------------------------------------------------------------------------------
Loans and leases, net of allowance for credit losses 356,485 350,206
- ----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 7,012 7,289
Customers' acceptance liability 1,908 2,671
Interest receivable 3,478 3,734
Mortgage servicing rights 3,538 2,376
Goodwill 12,741 12,695
Core deposits and other intangibles 1,875 2,013
Other assets 35,865 37,933
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $614,102 $617,679
==================================================================================================================================
Liabilities
Deposits in domestic offices:
Interest-bearing $201,018 $203,644
Noninterest-bearing 88,611 92,623
Deposits in foreign offices:
Interest-bearing 47,641 59,280
Noninterest-bearing 1,775 1,713
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 339,045 357,260
- ----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase 78,317 67,543
Trading account liabilities 16,394 14,170
Derivative-dealer liabilities 13,506 16,835
Commercial paper 7,604 6,749
Other short-term borrowings 34,045 24,742
Acceptances outstanding 1,908 2,671
Accrued expenses and other liabilities 17,638 30,929
Trust preferred securities 4,955 4,954
Long-term debt 55,059 45,888
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 568,471 571,741
- ----------------------------------------------------------------------------------------------------------------------------------
Contingent liabilities and other financial commitments (Note Six)
Shareholders' Equity
Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and
outstanding - 1,871,753 and 1,952,039 shares 80 83
Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and
outstanding - 1,722,930,646 and 1,724,484,305 shares 14,433 14,837
Retained earnings 33,256 30,998
Accumulated other comprehensive income (1,595) 152
Other (543) (132)
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 45,631 45,938
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $614,102 $617,679
==================================================================================================================================
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
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Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------
Six Months
Ended June 30
---------------------------
(Dollars in Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $3,829 $3,629
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses 1,020 1,005
Gains on sales of securities (182) (333)
Merger-related charges, net 200 470
Depreciation and premises improvements amortization 533 544
Amortization of intangibles 447 455
Deferred income tax (benefit) expense (542) 168
Net decrease (increase) in trading instruments 6,399 (3,038)
Net decrease in interest receivable 256 11
Net (decrease) increase in interest payable (155) 50
Other operating activities (10,084) (2,864)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,721 97
Investing Activities
Proceeds from maturities of securities held for investment 498 681
Purchases of securities held for investment - (223)
Proceeds from sales and maturities of securities available for sale 29,484 44,327
Purchases of securities available for sale (28,070) (36,181)
Net increase in federal funds sold and securities purchased
under agreements to resell (8,761) (4,939)
Net decrease in time deposits placed and other short-term investments 1,400 1,116
Purchases and net originations of loans and leases (26,696) (29,699)
Proceeds from sales and securitizations of loans and leases 19,892 19,318
Purchases and originations of mortgage servicing rights (1,428) (641)
Net (purchases) sales of premises and equipment (256) 204
Proceeds from sales of foreclosed properties 169 277
Sales and acquisitions of business activities, net of cash (1,483) (58)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,251) (5,818)
Financing Activities
Net (decrease) increase in deposits (18,215) 6,463
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 10,774 (4,950)
Net increase in commercial paper and other short-term borrowings 10,158 1,695
Proceeds from issuance of trust preferred securities - 340
Proceeds from issuance of long-term debt 12,420 5,979
Retirement of long-term debt (3,110) (3,718)
Proceeds from issuance of common stock 677 940
Redemption of preferred stock - (614)
Cash dividends paid (1,571) (1,220)
Common stock repurchased (1,722) (600)
Other financing activities 50 25
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,461 4,340
Effect of exchange rate changes on cash and cash equivalents (11) 27
- ------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,080) (1,354)
Cash and cash equivalents on January 1 28,277 28,466
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents on June 30 $ 24,197 $ 27,112
========================================================================================================================
Loans transferred to foreclosed properties amounted to $198 and $197 for the six months ended June 30, 1999 and 1998, respectively.
Loans securitized and retained in the trading and available for sale securities portfolios amounted to $367 and $2,607 for the
six months ended June 30, 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
4
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<TABLE>
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Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common Stock Other Share-
Preferred ----------------- Retained Comprehensive holders' Comprehensive
(Dollars in Million, Shares in Thousands) Stock Shares Amount Earning Income(1) Other Equity Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance on December 31, 1997 $708 1,722,538 $15,140 $28,438 $ 407 $(109) $44,584
Net income 3,629 3,629 $ 3,629
Other comprehensive income, net of tax (36) (36) (36)
--------------
Comprehensive income $ 3,593
==============
Cash dividends:
Common (1,198) (1,198)
Preferred (22) (22)
Common stock issued under dividend
reinvestment and employee plans 21,286 972 (32) 940
Stock issued in acquisitions 385 15 15
Common stock repurchased (9,349) (600) (600)
Conversion of preferred stock (9) 373 9
Redemption of preferred stock (614) (614)
Other (1) 12 11
- ---------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1998 $85 1,735,233 $15,535 $30,847 $ 371 $(129) $46,709
=====================================================================================================================
Balance on December 31, 1998 $83 1,724,484 $14,837 $30,998 $ 152 $(132) $45,938
Net income 3,829 3,829 $ 3,829
Other comprehensive income, net of tax (1,747) (1,747) (1,747)
--------------
Comprehensive income $ 2,082
==============
Cash dividends:
Common (1,568) (1,568)
Preferred (3) (3)
Common stock issued under dividend
reinvestment and employee plans 23,307 1,097 (420) 677
Common stock repurchased (25,000) (1,722) (1,722)
Conversion of preferred stock (3) 136 3
Other 4 218 9 227
- ---------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1999 $80 1,722,931 $14,433 $33,256 $(1,595) $(543) $45,631
=====================================================================================================================
(1)Changes in Accumulated Other Comprehensive Income include after-tax net unrealized losses on securities available for sale
and marketable equity securities of $1,710 and $37, and after-tax net unrealized losses (gains) on foreign
currency translation adjustments of $37 and $(1)for the six months ended June 30, 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
5
</TABLE>
<PAGE>
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On September 30, 1998, BankAmerica Corporation (BankAmerica) merged with
and into NationsBank Corporation (the Merger). The combined company was renamed
BankAmerica Corporation and on April 28, 1999, BankAmerica Corporation changed
its name to Bank of America Corporation (the Corporation). The transaction was
accounted for as a pooling of interests. The consolidated financial statements
have been restated to present the combined results of the Corporation as if the
Merger had been in effect for all periods presented.
On January 9, 1998, the Corporation completed its merger with Barnett
Banks, Inc. (Barnett). The transaction was accounted for as a pooling of
interests. The consolidated financial statements have been restated to present
the combined results of the Corporation and Barnett as if the merger had been in
effect for all periods presented.
The Corporation is a Delaware corporation and a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended, with its
principal assets being the stock of its subsidiaries. Through its banking and
nonbanking subsidiaries, the Corporation provides a diverse range of financial
services and products throughout the U.S. and in selected international markets.
Note One - Accounting Policies
The consolidated financial statements include the accounts of the
Corporation and its majority-owned subsidiaries. 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 statement 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 56 to 61 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1998.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, "Accounting for Derivative and Hedging
Activities" (SFAS 133). This standard requires all derivative instruments to be
recognized as assets or liabilities and measured at their fair values. In
addition, SFAS 133 provides for special hedge accounting, for fair value, cash
flow and foreign currency hedges, provided certain criteria are met. The
Corporation is required to adopt SFAS 133 on or before January 1, 2001. Upon
adoption, all hedging relationships must be redesignated and documented pursuant
to the provisions of the statement. The Corporation is in the process of
evaluating the impact of this statement on its risk management strategies and
processes, information systems and financial statements.
Note Two - Merger-Related Activity
On September 30, 1998, the Corporation completed its merger with
BankAmerica, a multi-bank holding company headquartered in San Francisco,
California. BankAmerica provided banking and other financial services throughout
the U.S. and in selected international markets to consumers and business
customers including corporations, governments and other institutions. As a
result of the Merger, each outstanding share of BankAmerica common stock was
converted into 1.1316 shares of the Corporation's common stock, resulting in the
net issuance of approximately 779 million shares of the Corporation's common
stock to the former BankAmerica shareholders. Each share of NationsBank
Corporation (NationsBank) common stock continued as one share in the new
company's common stock. In addition, approximately 88 million options to
6
<PAGE>
purchase the Corporation's common stock were issued to convert similar stock
options granted to certain BankAmerica employees. This transaction was accounted
for as a pooling of interests. Under this method of accounting, the recorded
assets, liabilities, shareholders' equity, income and expenses of NationsBank
and BankAmerica have been combined and reflected at their historical amounts.
NationsBank's total assets, total deposits and total shareholders' equity on the
date of the Merger were approximately $331.9 billion, $166.8 billion and $27.7
billion, respectively. BankAmerica's total assets, total deposits and total
shareholders' equity on the date of the Merger amounted to approximately $263.4
billion, $179.0 billion and $19.6 billion, respectively.
In connection with the Merger, the Corporation recorded a $1,325 million
pre-tax merger-related charge in 1998 of which $725 million ($519 million
after-tax) and $600 million ($441 million after-tax) were recorded in the third
and fourth quarters of 1998, respectively. The total pre-tax charge for 1998
consisted of approximately $740 million primarily of severance and change in
control and other employee-related items, $150 million of conversion and related
costs including occupancy, equipment and customer communication expenses, $300
million of exit and related costs and $135 million of other merger costs
(including legal, investment banking and filing fees). In the second quarter of
1999, the Corporation also recorded a pre-tax merger-related charge of $200
million ($145 million after-tax) in connection with the Merger. The pre-tax
charge consisted of approximately $94 million primarily of severance and change
in control and other employee-related items, $7 million of conversion and
related costs including occupancy, equipment and customer communication
expenses, $97 million of exit and related costs and $2 million of other
merger costs. The Corporation anticipates recording an additional pre-tax
merger-related charge of approximately $325 million ($272 million after-tax) in
1999.
The following table summarizes the activity in the BankAmerica
merger-related reserve during the six months ended June 30, 1999:
<TABLE>
<CAPTION>
Non-Cash
Balance on Amount Cash Payments Reductions Balance on
January 1 Included Applied to Applied to June 30
(Dollars in Millions) 1999 Expense Reserve Reserve 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Severance, change in control
and other employee-related costs $487 $ 94 $(374) $- $207
Conversion and related costs 143 7 (9) (46) 95
Exit and related costs 194 97 (109) (92) 90
Other merger costs 18 2 (5) (5) 10
- -----------------------------------------------------------------------------------------------------------------
Total $842 $200 $(497) $(143) $402
=================================================================================================================
</TABLE>
On January 9, 1998, the Corporation completed its merger with Barnett
Banks, Inc., a multi-bank holding company headquartered in Jacksonville, Florida
(the Barnett merger). Barnett's total assets, total deposits and total
shareholders' equity on the date of the merger were approximately $46.0 billion,
$35.4 billion and $3.4 billion, respectively. As a result of the Barnett merger,
each outstanding share of Barnett common stock was converted into 1.1875 shares
of the Corporation's common stock, resulting in the net issuance of
approximately 233 million common shares to the former Barnett shareholders. In
addition, approximately 11 million options to purchase the Corporation's common
stock were issued to convert stock options granted to certain Barnett employees.
This transaction was also accounted for as a pooling of interests.
In connection with the Barnett merger, the Corporation incurred a pre-tax
merger-related charge during the first quarter of 1998, of approximately $900
million ($642 million after-tax), which consisted of approximately $375 million
primarily in severance and change in control payments, $300 million of
conversion and related costs including 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
7
<PAGE>
terminations and $100 million of other merger costs (including legal, investment
banking and filing fees). In the second quarter of 1998, the Corporation
recognized a $430 million gain resulting from the regulatory required
divestitures of certain Barnett branches. As of June 30, 1999, substantially all
of the Barnett merger-related reserves have been utilized.
In 1996, the Corporation completed the initial public offering of 16.1
million shares of Class A Common Stock of BA Merchant Services, Inc. (BAMS), a
subsidiary of the Corporation. On December 22, 1998, the Corporation and BAMS
signed a definitive merger agreement on which the Corporation agreed to buy BAMS
outstanding shares of Class A Common Stock other than the shares owned by the
Corporation. On April 28, 1999, BAMS became a wholly-owned subsidiary of Bank of
America National Trust and Savings Association (Bank of America NT&SA) and each
outstanding share of BAMS common stock other than the shares owned by the
Corporation was converted into the right to receive a cash payment equal to
$20.50 per share without interest, or $339.2 million.
As of June 30, 1999, the Corporation operated its banking activities
primarily under three charters: Bank of America NT&SA, NationsBank, N.A. and
Bank of America, N.A. (USA). On March 31, 1999, NationsBank of Delaware, N.A.
merged with and into Bank of America, N.A. (USA), an Arizona corporation
(formerly known as Bank of America National Association), which operates the
Corporation's credit card business. On April 1, 1999, the mortgage business of
BankAmerica transferred to NationsBanc Mortgage Corporation, which changed its
name to Bank of America Mortgage. On April 8, 1999, the Corporation merged Bank
of America Texas, N.A. into NationsBank, N.A. On July 5, 1999, NationsBank, N.A.
changed its name to Bank of America, N.A. On July 23, 1999, Bank of America,
N.A. merged into Bank of America NT&SA, and the surviving entity of that merger
changed its name to Bank of America, N.A. The Corporation expects to continue
the consolidation of other banking subsidiaries (other than Bank of America,
N.A. (USA)) throughout the remainder of 1999.
Note Three - Trading Account Assets and Liabilities
The fair value of the components of trading account assets and liabilities
on June 30, 1999 and December 31, 1998 and the average fair value for the six
months ended June 30, 1999 were:
<TABLE>
<CAPTION>
Average for
the Six
June 30 December 31 Months Ended
(Dollars in Millions) 1999 1998 June 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities owned:
U.S. Treasury securities $7,182 $7,854 $7,789
Securities of other U.S. Government agencies and corporations 1,598 524 1,036
Certificates of deposit, bankers' acceptances and commercial paper 2,490 2,723 2,464
Corporate debt 2,949 1,666 3,012
Foreign sovereign debt 9,751 11,774 11,523
Mortgage-backed securities 4,028 7,489 7,260
Other securities 7,429 7,572 7,396
- -------------------------------------------------------------------------------------------------------------------------
Total trading account assets $35,427 $ 39,602 $40,480
=========================================================================================================================
Short sales:
U.S. Treasury securities $12,982 $10,880 $10,510
Corporate debt 399 82 193
Foreign sovereign debt 1,828 3,166 819
Other securities 1,185 42 1,911
- -------------------------------------------------------------------------------------------------------------------------
Total trading account liabilities $16,394 $14,170 $13,433
=========================================================================================================================
</TABLE>
See Note Six of the consolidated financial statements on page 12 for
additional information on derivative-dealer positions, including credit risk.
8
<PAGE>
Note Four - Loans and Leases
Loans and leases on June 30, 1999 and December 31, 1998 were:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------------------------------------
(Dollars in Millions) Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial - domestic $136,650 37.5 % $137,422 38.5 %
Commercial - foreign 30,459 8.4 31,495 8.8
Commercial real estate - domestic 25,068 6.9 26,912 7.5
Commercial real estate - foreign 297 .1 301 .1
- ---------------------------------------------------------------------------------------------------
Total commercial 192,474 52.9 196,130 54.9
- ---------------------------------------------------------------------------------------------------
Residential mortgage 79,752 21.9 73,608 20.6
Home equity lines 16,018 4.4 15,653 4.4
Direct/Indirect consumer 42,324 11.7 40,510 11.3
Consumer finance 19,171 5.3 15,400 4.3
Bankcard 10,098 2.8 12,425 3.5
Foreign consumer 3,744 1.0 3,602 1.0
- ---------------------------------------------------------------------------------------------------
Total consumer 171,107 47.1 161,198 45.1
- ---------------------------------------------------------------------------------------------------
Total loans and leases $363,581 100.0 % $357,328 100.0 %
===================================================================================================
</TABLE>
The table below summarizes the changes in the allowance for credit losses
on loans and leases for the three months and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------------------------------
(Dollars in Millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 7,123 $ 6,763 $ 7,122 $ 6,778
- ---------------------------------------------------------------------------------------------------------------------------
Loans and leases charged off (672) (649) (1,338) (1,328)
Recoveries of loans and leases previously charged off 152 144 299 307
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs (520) (505) (1,039) (1,021)
Provision for credit losses 510 495 1,020 1,005
Other, net (17) (22) (7) (31)
- ---------------------------------------------------------------------------------------------------------------------------
Balance on June 30 $ 7,096 $ 6,731 $ 7,096 $ 6,731
===========================================================================================================================
</TABLE>
The following table presents the recorded investment in specific loans that
were considered impaired on June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
(Dollars in Millions) June 30, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Commercial - domestic $1,100 $ 796
Commercial - foreign 487 314
Commercial real estate - domestic 494 554
- ----------------------------------------------------------------------------------------
Total commercial $2,081 $1,664
========================================================================================
</TABLE>
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect all
amounts due, including principal and interest, according to the contractual
terms of the agreement. Once a loan has been identified as impaired, management
measures impairment in accordance with Statement of Financial Accounting
9
<PAGE>
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114). Impaired loans are measured based on the present value of payments
expected to be received, observable market prices, or for loans that are solely
dependent on the collateral for repayment, the estimated fair value of the
collateral. If the recorded investment in impaired loans exceeds the measure
of estimated fair value, a valuation allowance is established as a component of
the allowance for credit losses.
On June 30, 1999 and December 31, 1998, nonperforming loans, including
certain loans which are considered to be impaired, totaled $2.8 billion and $2.5
billion, respectively. Foreclosed properties amounted to $258 million and $282
million on June 30, 1999 and December 31, 1998, respectively.
Note Five - Debt
In the second quarter of 1999, the Corporation issued $2.2 billion in
senior and subordinated long-term debt, with maturities ranging from 2002 to
2039. Of the $2.2 billion issued, $1.7 billion was converted from fixed rates
ranging from 5.75 percent to 7.25 percent to floating rates through interest
rate swaps at spreads ranging from zero to 29 basis points over the three-month
London InterBank Offered Rate (LIBOR). The remaining $440 million of debt issued
bears interest at spreads ranging from five basis points below three-month LIBOR
to 20 basis points over three-month LIBOR, and at spreads equal to five basis
points below one-month LIBOR .
Bank of America, N.A. maintains a program to offer up to $35 billion of
bank notes from time to time with fixed or floating rates and maturities of 7
days or more from date of issue. On June 30, 1999 there were short-term and
long-term bank notes outstanding under current and former programs of $11.3
billion and $10.4 billion, respectively.
Since October 1996, the Corporation has formed thirteen wholly-owned
grantor trusts to issue trust preferred securities to the public. The grantor
trusts invested the proceeds of such trust preferred securities into junior
subordinated notes of the Corporation. Certain of the trust preferred securities
were issued at a discount. Such trust 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
outstanding trust preferred securities at June 30, 1999 are summarized as
follows:
10
<PAGE>
<TABLE>
<CAPTION>
Aggregate Per
Principal Aggregate Annum
Amount of Principal Interest Stated
Trust Preferred Amount of Rate of Maturity of
(Dollars in Millions) Issued Securities the Notes the Notes the Notes
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NationsBank
Capital Trust I December 1996 $600 $619 7.84 % December 2026
Capital Trust II December 1996 365 376 7.83 December 2026
Capital Trust III February 1997 500 516 3-mo. LIBOR January 2027
+55 bps
Capital Trust IV April 1997 500 516 8.25 April 2027
BankAmerica
Institutional Capital A November 1996 450 464 8.07 December 2026
Institutional Capital B November 1996 300 309 7.70 December 2026
Capital I December 1996 300 309 7.75 December 2026
Capital II December 1996 450 464 8.00 December 2026
Capital III January 1997 400 412 3-mo. LIBOR January 2027
+57 bps
Capital IV February 1998 350 361 7.00 March 2028
Barnett
Capital I November 1996 300 309 8.06 December 2026
Capital II December 1996 200 206 7.95 December 2026
Capital III January 1997 250 258 3-mo. LIBOR February 2027
+62.5 bps
- ------------------------------------------------------------------------------
Total $4,965 $5,119
==============================================================================
</TABLE>
For additional information on trust preferred securities, see Note Nine of
the Corporation's 1998 Annual Report on Form 10-K on pages 71-72.
At June 30, 1999, the Corporation had commercial paper back-up lines of
credit totaling $1.1 billion, of which $669 million expires in October 1999 and
$479 million expires in October 2002. In addition, the Corporation had a $1.6
billion line of credit which expires in May 2001. At June 30, 1999, there were
no amounts outstanding under these credit facilities. These lines are supported
by fees paid to unaffiliated banks.
As of June 30, 1999, the Corporation had the authority to issue
approximately $4.7 billion of corporate debt and other securities under its
existing shelf registration statement. On July 22, 1999, the Corporation filed a
shelf registration statement for the issuance of $15.0 billion of corporate debt
and other securities. The SEC declared the shelf registration statement
effective as of August 5, 1999.
Under a joint Euro medium-term note program, the Corporation and Bank of
America, N.A. may offer an aggregate of $15.0 billion of senior long-term debt
or, in the case of the Corporation, subordinated notes exclusively to non-United
States residents. The notes bear interest at fixed or floating rates and may be
denominated in U.S. dollars or foreign currencies. The Corporation uses foreign
currency contracts to convert certain foreign-denominated debt into the economic
equivalent of U.S. dollars. On June 30, 1999, $3.9 billion of notes were
outstanding under this program. On June 30, 1999, $3.5 billion of notes were
outstanding under the former BankAmerica Euro medium-term note program, which
was terminated in connection with the Merger. As of July 30, 1999, the
Corporation and Bank of America, N.A. had the authority to issue approximately
$10.6 billion in the aggregate of debt securities under the current program.
In the second quarter of 1999, Bank of America, N.A. issued $2.5 billion in
senior long-term bank notes, with maturities in 2000 and 2001. Of the $2.5
billion issued, $1.52 billion bears interest at floating rates with spreads
ranging from 284 to 285 basis points below the prime rate. Of the remaining $1.0
11
<PAGE>
billion, $783 million bears interest at spreads ranging from two to 15 basis
points above three-month LIBOR, and $188 million was issued with fixed rates
ranging from 5.19 percent to 5.64 percent which were converted to floating rates
through interest rate swaps at spreads ranging from 11 to 13 basis points below
three-month LIBOR. During the second quarter of 1999, Bank of America, F.S.B.
received advances from the Federal Home Loan Bank totaling $208 million, with
maturities ranging from 2004 to 2029. Of the $208 million in advances, $200
million bears interest at a floating rate of one basis point below three-month
LIBOR. The remaining $8 million bears interest at fixed rates ranging from 6.06
percent to 6.56 percent.
From July 1, 1999, through August 13, 1999, Bank of America, N.A. issued
$650 million of long-term bank notes.
From July 1, 1999, through August 13, 1999, the Corporation issued $476
million of long-term debt.
On May 25, 1999, Main Place Funding, LLC issued $1.5 billion in
Mortgage-Backed Bonds due May 28, 2002. The bonds were issued at a floating rate
of 12 basis points above three-month LIBOR.
Note Six - 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 amounts participated to other financial institutions.
The following summarizes outstanding commitments to extend credit:
<TABLE>
<CAPTION>
June 30 December 31
(Dollars in Millions) 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Credit card commitments $ 65,621 $ 67,018
Other loan commitments 241,938 234,453
Standby letters of credit and financial guarantees 31,685 33,311
Commercial letters of credit 4,159 3,035
</TABLE>
Derivatives
Credit Risk Associated with Derivative-Dealer Activities
The table on page 13 presents the notional or contract amounts on June 30,
1999 and December 31, 1998 and the credit risk amounts (the net replacement cost
of contracts in a gain position) of the Corporation's derivative-dealer
positions which are primarily executed in the over-the-counter market. This
table should be read in conjunction with the Off-Balance Sheet section on pages
29 through 33 and Note Eleven of the Corporation's 1998 Annual Report on Form
10-K. 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. Credit risk associated with derivatives is
measured as the net replacement cost should the counterparties with contracts in
a gain position to the Corporation completely fail to perform under the terms of
those contracts and any collateral underlying the contracts proves to be of no
value. The credit risk presented in the following table does not consider the
value of any collateral, but generally takes into consideration the effects of
legally enforceable master netting agreements.
12
<PAGE>
<TABLE>
<CAPTION>
Derivative-Dealer Positions
(Dollars in Millions) June 30, 1999 December 31, 1998
------------------------------------------------------------------------------------------------------
Contract/ Credit Contract/ Credit
Notional Risk Notional Risk
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps $1,860,051 $5,053 $1,539,862 $ 5,470
Futures and forwards 819,963 210 808,284 290
Written options 482,246 - 494,608 -
Purchased options 545,940 1,168 615,492 2,125
Foreign exchange contracts:
Swaps 37,941 1,466 37,357 1,403
Spot, futures and forwards 564,455 3,064 623,977 5,136
Written options 43,285 - 56,287 -
Purchased options 39,208 1,115 53,426 703
Commodity and other contracts:
Swaps 10,220 513 5,685 370
Futures and forwards 26,324 - 5,292 -
Written options 27,010 - 22,382 -
Purchased options 29,222 1,552 22,134 989
------------------------------------------------------------------------------------------------------
Total before cross product netting 14,141 16,486
Cross product netting 314 1,274
------------------------------------------------------------------------------------------------------
Net replacement cost $13,827 $15,212
======================================================================================================
</TABLE>
The table above includes both long and short derivative-dealer positions.
The average fair value of derivative-dealer assets for the six months ended June
30, 1999 and for year ended December 31, 1998 was $14.7 billion and $14.3
billion, respectively. The average fair value of derivative-dealer liabilities
for the six months ended June 30, 1999 and for the year ended December 31, 1998
was $15.1 billion and $13.3 billion, respectively. The fair value of
derivative-dealer assets at June 30, 1999 and December 31, 1998 was $13.8
billion and $16.4 billion, respectively. The fair value of derivative-dealer
liabilities at June 30, 1999 and December 31, 1998 was $13.5 billion and $16.8
billion, respectively.
The Corporation uses credit derivatives to diversify credit risk and lower
its risk portfolio by transferring the exposure of an underlying credit to
another counterparty. The Corporation also uses credit derivatives to generate
revenue by taking on exposure to underlying credits. On the client side, the
Corporation provides credit derivatives to sophisticated customers who wish to
hedge existing credit exposures or take on additional credit exposure to
generate revenue. The majority of the Corporation's credit derivative positions
consist of credit default swaps and total return swaps. As of June 30, 1999 and
December 31, 1998, the Corporation had a notional amount of $14.6 billion and
$16.9 billion, respectively, in credit derivatives.
Asset and Liability Management (ALM) Activities
The table on page 14 outlines the notional amount and fair value of the
Corporation's ALM contracts on June 30, 1999 and December 31, 1998. This table
should be read in conjunction with the Off-Balance Sheet section on pages 29
through 33 and Note Eleven of the Corporation's 1998 Annual Report on Form 10-K.
13
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------------------------------------
Notional Fair Notional Fair
(Dollars in Millions) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Receive fixed swaps $68,064 $(543) $60,450 $ 1,958
Pay fixed swaps 24,450 (263) 25,770 (1,006)
- ----------------------------------------------------------------------------------------------------------
Net receive fixed 43,614 (806) 34,680 952
Basis swaps 8,444 (5) 7,736 (10)
- ----------------------------------------------------------------------------------------------------------
Total net swap position 52,058 (811) 42,416 942
Futures and forward contracts - - 6,348 2
Option products 32,291 (20) 26,836 (46)
- ----------------------------------------------------------------------------------------------------------
Total interest rate contracts(1) $(831) $898
==========================================================================================================
(1) Not meaningful to sum notional amounts of different off-balance sheet products.
</TABLE>
When-Issued Securities
On June 30, 1999, the Corporation had commitments to purchase and sell
when-issued securities of $15.4 billion and $17.9 billion, respectively. On
December 31, 1998, the Corporation had commitments to purchase and sell
when-issued securities of $1.3 billion and $2.4 billion, respectively.
Litigation
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to a number of pending and threatened
legal actions and proceedings, including actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, environmental, banking and other laws.
The Corporation and certain present and former officers and directors have
been named as defendants in a number of actions filed in several federal courts
that have been consolidated for pretrial purposes before a Missouri federal
court. The amended complaint in the consolidated actions alleges, among other
things, that the defendants failed to disclose material facts about
BankAmerica's losses relating to D.E. Shaw & Co., L.P. until mid-October
1998, in violation of various provisions of federal and state laws. The amended
complaint also alleges that the proxy statement-prospectus of August 4, 1998,
falsely stated that the Merger would be one of equals and alleges a scheme to
have NationsBank gain control over the newly merged entity. The Missouri
federal court has certified classes consisting generally of persons who were
shareholders of NationsBank or BankAmerica on September 30, 1998, or were
entitled to vote on the Merger, or who purchased or acquired securities of the
Corporation or its predecessors between August 4, 1998 and October 13, 1998.
Similar uncertified class actions (including one limited to California
residents) are pending in California state court, alleging violations of the
California Corporations Code and other state laws. The Corporation believes the
actions lack merit and will defend them vigorously. The amount of any ultimate
exposure cannot be determined with certainty at this time.
Management believes that the actions and proceedings and the losses, if
any, resulting from the final outcome thereof, will not be material in the
aggregate to the Corporation's financial position or results of operations.
Note Seven - Stock Repurchase Program
On June 23, 1999, the Corporation's Board of Directors authorized the
repurchase of up to 130 million shares of the Corporation's common stock at an
aggregate cost of up to $10.0 billion. At June 30, 1999, the Corporation
had repurchased 25 million shares of its common stock under an accelerated share
repurchase program, which reduced shareholders' equity by $1.7 billion. Upon
final settlement, the average per-share price of this accelerated share
14
<PAGE>
repurchase was $72.63. The remaining buyback authority for common stock under
the current program totaled $8.3 billion at June 30, 1999.
Note Eight - Business Segment Information
Management reports the results of operations of the Corporation through
four business segments: Consumer Banking, which provides comprehensive retail
banking services to individuals and small businesses through multiple delivery
channels; Commercial Banking, which provides a wide range of commercial banking
services for businesses with annual revenues of up to $500 million; Global
Corporate and Investment Banking, which provides a broad array of financial and
investment banking products such as capital-raising products, trade finance,
treasury management, capital markets and financial advisory services to domestic
and international corporations, financial institutions and government entities;
and Principal Investing and Asset Management, which includes direct equity
investments in businesses and investments in general partnership funds, provides
asset management, banking and trust services for high net worth clients both in
the U.S. and internationally through its Private Bank, provides full service and
discount brokerage, investment advisory and investment management, as well as
advisory services for the Corporation's affiliated family of mutual funds.
The following table includes revenue and net income for the six months
ended June 30, 1999 and 1998, and total assets as of June 30, 1999 and 1998 for
each business segment:
<TABLE>
<CAPTION>
Revenue Net Income Total Assets
(Dollars in Millions) 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer Banking $8,864 $9,242 $1,851 $1,856 $272,966 $259,533
Commercial Banking 1,483 1,499 417 516 61,092 63,893
Global Corporate and Investment Banking 4,174 4,217 1,072 918 218,076 217,665
Principal Investing and Asset Management 1,318 1,334 392 367 23,589 21,361
- ------------------------------------------------------------------------------------------------------
Total $15,839 $16,292 $3,732 $3,657 $575,723 $562,452
======================================================================================================
</TABLE>
There were no material intersegment revenues between the four business
segments.
A reconciliation of the total of the segments' net income to
consolidated net income follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
(Dollars in Millions) 1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Segments' net income $3,732 $3,657
Adjustments, net of taxes:
Gains on sales of securities 109 205
Gains on sales of subsidiary companies - 44
Merger-related items (145) (365)
Earnings associated with unassigned capital 135 62
Other (2) 26
- ---------------------------------------------------------------------------
Consolidated net income $3,829 $3,629
===========================================================================
</TABLE>
15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
On September 25, 1998, BankAmerica Corporation reincorporated in Delaware
and on September 30, 1998, NationsBank Corporation (NationsBank) completed its
merger with the former BankAmerica Corporation (BankAmerica) and changed its
name to "BankAmerica Corporation". On April 28, 1999, BankAmerica Corporation
changed its name to Bank of America Corporation (the Corporation). In addition,
on January 9, 1998, the Corporation completed its merger with Barnett Banks,
Inc. (Barnett). The BankAmerica and Barnett mergers were each 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 that
are subject to risks and uncertainties and include information about possible or
assumed future results of operations. Many possible events or factors could
affect the future financial results and performance of the Corporation. This
could cause results or performance to differ materially from those expressed in
our forward-looking statements. Words such as "expects", "anticipates",
"believes", "estimates", variations of such words and other similar expressions
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in, or
implied by, such forward-looking statements. 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 1998 Annual Report on Form 10-K filed
March 22, 1999. These statements are representative only on the date hereof, and
the Corporation undertakes no obligation to update any forward-looking
statements made.
The possible events or factors include the following: the Corporation's
loan growth is dependent on economic conditions, as well as various
discretionary factors, such as decisions to securitize, sell, or purchase
certain loans or loan portfolios; syndications or participations of loans;
retention of residential mortgage loans; and the management of borrower,
industry, product and geographic concentrations and the mix of the loan
portfolio. The rate of charge-offs and provision expense can be affected by
local, regional and international economic and market conditions, concentrations
of borrowers, industries, products and geographic locations, the mix of the loan
portfolio and management's judgments regarding the collectibility of loans.
Liquidity requirements may change as a result of fluctuations in assets and
liabilities and off-balance sheet exposures, which will impact the capital and
debt financing needs of the Corporation and the mix of funding sources.
Decisions to purchase, hold or sell securities are also dependent on liquidity
requirements and market volatility, as well as on- and off-balance sheet
positions. Factors that may impact interest rate risk include local, regional
and international economic conditions, levels, mix, maturities, yields or rates
of assets and liabilities, utilization and effectiveness of interest rate
contracts and the wholesale and retail funding sources of the Corporation.
Factors that may cause actual noninterest expense to differ from estimates
include the ability of third parties with whom the Corporation has business
relationships to fully accommodate uncertainties relating to the Corporation's
efforts to prepare its technology systems and non-information technology systems
for the Year 2000, as well as uncertainties relating to the ability of third
parties with whom the Corporation has business relationships to address the Year
2000 issue in a timely and adequate manner. The Corporation is also exposed to
the potential of losses arising from adverse changes in market rates and prices
which can adversely impact the value of financial products, including
securities, loans, deposits, debt and derivative financial instruments, such as
futures, forwards, swaps, options and other financial instruments with similar
characteristics.
In addition, the banking industry in general is subject to various monetary
and fiscal policies and regulations, which include those determined by the
Federal Reserve Board, the Office of the Comptroller of the Currency (OCC),
Federal Deposit Insurance Corporation, state regulators and the Office of Thrift
Supervision, which policies and regulations could affect the Corporation's
results. Other factors that may cause actual results to differ from the
forward-looking statements include the following: competition with other local,
16
<PAGE>
regional and international banks, savings and loan associations, credit unions
and other nonbank financial institutions, such as investment banking firms,
investment advisory firms, brokerage firms, mutual funds and insurance
companies, as well as other entities which offer financial services, located
both within and outside the United States; interest rate, market and monetary
fluctuations; inflation; market volatility; general economic conditions and
economic conditions in the geographic regions and industries in which the
Corporation operates; introduction and acceptance of new banking-related
products, services and enhancements; fee pricing strategies, mergers and
acquisitions and their integration into the Corporation and management's ability
to manage these and other risks.
Earnings Review
Table One presents a comparison of selected operating results for the three
months and six months ended June 30, 1999 and 1998. Significant changes in the
Corporation's results of operations and financial position are discussed in the
sections that follow.
Net income for the three months ended June 30, 1999 decreased 16.7 percent
to $1.9 billion from $2.3 billion in the same period of 1998. Earnings per
common share and diluted earnings per common share were $1.10 and $1.07,
respectively, for the three months ended June 30, 1999, compared to $1.32 and
$1.28, respectively, in the comparable period of 1998. Operating net income (net
income excluding merger-related charges) for the three months ended June
30,1999, was $2.1 billion as compared to $2.0 billion from the same period in
1998. Operating earnings per common share and diluted operating earnings per
common share were $1.18 and $1.15, respectively, for the three months ended June
30, 1999, compared to $1.16 and $1.13 in the comparable period for 1998.
See Note Two of the consolidated financial statements on page 6 for additional
information on merger-related activity.
Operating net income for the six months ended June 30, 1999 remained
constant at $4.0 billion as compared to the six months ended June 30, 1998.
Operating earnings per common share and diluted operating earnings per common
share were $2.28 and $2.23, respectively, for the six months ended June 30, 1999
compared to $2.30 and $2.23 in the comparable prior year period. Including
merger-related charges for the six months ended June 30, 1999 of $200 million,
net income increased 5.5 percent to $3.8 billion from $3.6 billion for the six
months ended June 30, 1998, which included net merger-related charges of $470
million. The earnings per common share and diluted earnings per common share for
the six months ended June 30, 1999 were $2.20 and $2.15, respectively, compared
to $2.09 and $2.03 in the comparable prior year period.
Key performance highlights for the six months ended June 30, 1999 were:
o Taxable-equivalent net interest income for the six months ended June 30,
1999 remained constant at $9.3 billion as compared to the six months ended
June 30, 1998. The net interest yield decreased to 3.55 percent for the six
months ended June 30, 1999 compared to 3.81 percent for the six months
ended June 30, 1998 due primarily to higher levels of lower-yielding
investment securities.
o The provision for credit losses for the six months ended June 30, 1999
remained constant at $1.0 billion as compared to the same period in 1998.
Net charge-offs for the six months ended June 30, 1999 remained flat at
$1.0 billion in comparison to the same period in 1998. Net charge-offs as a
percentage of average loans and leases decreased to 0.58 percent for the
six months ended June 30, 1999 compared to 0.60 percent for the six months
ended June 30, 1998. Higher total commercial net charge-offs were offset by
lower net charge-offs in the consumer loan portfolio. Nonperforming assets
on June 30, 1999 were $3.1 billion compared to $2.8 billion at December 31,
1998, the result of higher commercial nonperforming loans.
o Noninterest income decreased 5.4 percent to $6.7 billion for the six months
ended June 30, 1999 compared to $7.1 billion in the same period of 1998.
This decrease was primarily attributable to lower levels of investment
banking income, mortgage servicing income and other income. The decrease
17
<PAGE>
was partially offset by higher levels of income from trading account
profits and fees, credit card income and deposit account service charges.
o Other noninterest expense decreased 5.9 percent to $8.9 billion for the six
months ended June 30, 1999 compared to $9.5 billion for the six months
ended June 30, 1998. This decrease was attributable to merger-related
savings resulting in lower levels of personnel expense, professional fees,
other general operating expense and general administrative expense.
o Cash basis ratios, which measure operating performance excluding goodwill
and other intangible assets and the related amortization expense, improved
with cash basis diluted earnings per common share increasing by 4.8 percent
to $2.40 for the six months ended June 30, 1999 compared to $2.29 for the
same period a year ago. Excluding merger-related charges, cash basis
diluted earnings per common share were $2.48 and $2.49 for the six months
ended June 30, 1999 and 1998, respectively. For the six months ended June
30, 1999, return on average tangible common shareholders' equity excluding
merger-related charges decreased to 27.97 percent compared to 31.88 percent
for the same period in 1998. Including merger-related charges, the return
on average tangible common shareholders' equity was 27.05 percent and 29.25
percent for the six months ended June 30, 1999 and 1998, respectively.
o The cash basis efficiency ratio excluding merger-related charges was 52.71
percent for the six months ended June 30, 1999, an improvement of 208 basis
points from the same period in 1998, primarily due to the $561 million
decrease in other noninterest expense for the six months ended June 30,
1999.
18
<PAGE>
<TABLE>
<CAPTION>
Table One
Selected Operating Results
Three Months Six Months
Ended June Ended June 30
-------------------------------------------------------
(Dollars in Millions, Except Per-Share Information) 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Statement
Interest income $ 9,206 $ 9,637 $ 18,407 $ 19,342
Interest expense 4,594 5,011 9,195 10,097
Net interest income 4,612 4,626 9,212 9,245
Net interest income (taxable-equivalent) 4,663 4,668 9,308 9,327
Provision for credit losses 510 495 1,020 1,005
Gains on sales of securities 52 120 182 333
Noninterest income 3,522 3,636 6,745 7,129
Merger-related charges, net 200 (430) 200 470
Other noninterest expense 4,457 4,767 8,910 9,471
Income before income taxes 3,019 3,550 6,009 5,761
Income tax expense 1,104 1,252 2,180 2,132
Net income 1,915 2,298 3,829 3,629
Net income available to common shareholders 1,914 2,287 3,826 3,607
Net income (excluding merger-related charges) 2,060 2,021 3,974 3,994
Average common shares issued and outstanding (in thousands) 1,743,503 1,732,168 1,740,549 1,728,353
Per common share data
Earnings $ 1.10 $ 1.32 $ 2.20 $ 2.09
Earnings (excluding merger-related charges) 1.18 1.16 2.28 2.30
Diluted earnings 1.07 1.28 2.15 2.03
Diluted earnings (excluding merger-related charges) 1.15 1.13 2.23 2.23
Cash dividends paid .45 .38 .90 .76
Shareholders' equity (period-end) 26.73 26.88 26.73 26.88
Balance Sheet (period-end)
Total loans and leases 363,581 344,358 363,581 344,358
Total assets 614,102 571,890 614,102 571,890
Total deposits 339,045 347,877 339,045 347,877
Long-term debt 55,059 45,102 55,059 45,102
Common shareholders' equity 45,551 46,646 45,551 46,646
Total shareholders' equity 45,631 46,709 45,631 46,709
Performance ratios
Return on average assets 1.25 % 1.61 % 1.26 % 1.27 %
Return on average assets (excluding merger-related charges) 1.34 1.41 1.31 1.40
Return on average common shareholders' equity 16.40 20.76 16.59 16.69
Return on average common shareholders' equity
(excluding merger-related charges) 17.64 18.24 17.22 18.38
Efficiency ratio (excluding merger-related charges) 54.44 57.38 55.49 57.55
Total equity to total assets (period-end) 7.43 8.17 7.43 8.17
Total average equity to total average assets 7.62 7.82 7.61 7.68
Dividend payout ratio 41.07 26.24 40.98 33.21
Risk-based capital ratios (period-end) (1)
Tier 1 capital 7.38 7.32 7.38 7.32
Total capital 11.09 11.77 11.09 11.77
Leverage ratio 6.34 6.21 6.34 6.21
Cash basis financial data (2)
Earnings per common share $ 1.23 $ 1.45 $ 2.45 $ 2.35
Earnings per common share (excluding merger-related charges) 1.31 1.29 2.54 2.56
Diluted earnings per common share 1.20 1.41 2.40 2.29
Diluted earnings per common share
(excluding merger-related charges) 1.28 1.25 2.48 2.49
Return on average tangible assets 1.43 % 1.81 % 1.44 % 1.47 %
Return on average tangible assets
(excluding merger-related charges) 1.53 1.61 1.49 1.60
Return on average tangible common shareholders' equity 26.68 35.10 27.05 29.25
Return on average tangible common shareholders' equity
(excluding merger-related charges) 28.49 31.23 27.97 31.88
Efficiency ratio (excluding merger-related charges) 51.70 54.65 52.71 54.79
Ending tangible equity to tangible assets 5.17 5.64 5.17 5.64
Market price per share of common stock
Closing $ 73 5/16 $ 76 11/16 $ 73 5/16 $ 76 11/16
High 76 1/8 85 76 1/8 85
Low 61 1/2 72 1/16 59 1/2 56 1/4
(1) Ratios for 1998 have not been restated to reflect the impact of the BankAmerica merger.
(2) Cash basis calculations exclude goodwill and other intangible assets and the related amortization expense.
</TABLE>
19
<PAGE>
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, Commercial Banking, Global Corporate and
Investment Banking, and Principal Investing and Asset Management.
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 intangible
assets 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.
See Note Eight of the consolidated financial statements on page 15 for
additional business segment information, including adjustments and a
reconciliation to consolidated net income.
Consumer Banking
The Consumer Banking segment provides comprehensive retail banking products
and services to individuals and small businesses through multiple delivery
channels including approximately 4,500 banking centers and 14,000 automated
teller machines (ATMs). These banking centers and ATMs are located principally
throughout the Corporation's franchise and serve approximately 30 million
households in 21 states and the District of Columbia. This segment also provides
specialized services such as the origination and servicing of residential
mortgage loans, issuance and servicing of credit cards, direct banking via
telephone and personal computer, student lending and certain insurance services.
The consumer finance component provides 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's earnings remained essentially unchanged at $1.9 billion
for the six months ended June 30, 1999 compared to the six months ended June 30,
1998. Taxable-equivalent net interest income decreased one percent to $5.9
billion, primarily reflecting the impact of securitizations, loan sales and
divestitures partially offset by average managed loan growth and reduced funding
costs from deposit expense management. As the Corporation continues to
securitize loans, its role becomes that of a servicer and the servicing income,
as well as the gains on securitizations, are reflected in noninterest income.
Excluding the impact of securitizations, acquisitions and divestitures, average
total loans and leases for the six months ended June 30, 1999 increased 14
percent over average levels for the six months ended June 30, 1998. Average
total deposits for the six months ended June 30, 1999 of $231.4 billion were
essentially unchanged compared to the six months ended June 30, 1998. The net
interest yield increased one basis point for the six months ended June 30, 1999
to 5.02 percent.
The provision for credit losses of $664 million for the six months ended
June 30, 1999 remained essentially unchanged from the same period during 1998.
Noninterest income in Consumer Banking declined nine percent to $3.0
billion for the six months ended June 30, 1999 due to lower mortgage servicing
and production fees and lower other income. Mortgage servicing and production
fees decreased primarily due to higher amortization expense and lower valuation
of servicing rights partially offset by increased mortgage servicing fees.
Noninterest expense decreased seven percent to $5.2 billion due to
reductions primarily in personnel expense, professional fees, other general
operating expense and data processing expense. These decreases mainly reflect
successful merger-related savings efforts. The cash basis efficiency ratio
was 55.4 percent, an improvement of 200 basis points over the six months ended
June 30, 1998. The return on tangible equity remained essentially unchanged
at 29 percent.
Commercial Banking
The Commercial Banking segment provides a wide range of commercial banking
20
<PAGE>
services for businesses with annual revenues of up to $500 million. Services
provided include commercial lending, treasury and cash management services,
asset-backed lending and factoring. Also included in this segment are the
Corporation's commercial finance operations which provide: 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.
Commercial Banking's earnings decreased 19 percent to $417 million for the
six months ended June 30, 1999 compared to $516 million for the six months ended
June 30, 1998. Taxable-equivalent net interest income decreased $41 million from
the comparable period in 1998, primarily reflecting lower yields on earning
assets. Commercial Banking's average managed loan and lease portfolio during the
six months ended June 30, 1999 increased slightly to $56.7 billion compared to
$55.8 billion during the same period of 1998.
The provision for credit losses for the six months ended June 30, 1999 of
$88 million increased from $30 million for the six months ended June 30, 1998.
Noninterest income increased seven percent to $409 million over the six
months ended June 30, 1998 primarily due to increased revenue from investment
banking activities.
Noninterest expense for the period increased 10 percent to $743 million
primarily due to an increase in other general operating expense. The cash basis
efficiency ratio increased 500 basis points to 46.9 percent. The return on
tangible equity decreased to 24 percent from 27 percent.
Global Corporate and Investment Banking
The Global Corporate and Investment Banking segment provides a broad array
of financial and investment banking products such as capital-raising products,
trade finance, treasury management, investment banking, capital markets, leasing
and financial advisory services to domestic and international corporations,
financial institutions and government entities. Clients are supported through
offices in 37 countries in four distinct geographic regions: U.S. and Canada;
Asia; Europe, Middle East and Africa; and Latin America. Products and services
provided include loan origination, cash management, foreign exchange, leasing,
leveraged finance, project finance, real estate, senior bank debt, structured
finance and trade services. The Global Corporate and Investment Banking segment
also provides commercial banking services for businesses with annual revenues of
$500 million or more. Through a separate subsidiary, Banc of America Securities
LLC, Global Corporate and Investment Banking is a primary dealer of U.S.
Government Securities, underwrites and makes markets in equity securities, and
underwrites and deals in high-grade and high-yield corporate debt securities,
commercial paper, mortgage-backed and asset-backed securities, federal agencies
securities and municipal securities. Banc of America Securities LLC also
provides correspondent clearing services for other securities broker/dealers,
offers traditional brokerage service to high net worth individuals and provides
prime-brokerage services. Debt and equity securities research, loan
syndications, mergers and acquisitions advisory services and private placements
are also provided through Banc of America Securities LLC. Additionally, Global
Corporate and Investment Banking is a market maker in derivative products which
include swap agreements, option contracts, forward settlement contracts,
financial futures, and other derivative products in certain interest rate,
foreign exchange, commodity and equity markets. In support of these activities,
Global Corporate and Investment Banking takes positions in securities and
derivatives to support client demands and for its own account.
Global Corporate and Investment Banking's net income increased 17 percent
to $1.1 billion for the six months ended June 30, 1999 compared to $918 million
for the six months ended June 30, 1998. Taxable-equivalent net interest income
for the six months ended June 30, 1999 decreased one percent to $1.9 billion
primarily due to the impact of lower rates and spread compression on loans and
deposits. The average managed loan and lease portfolio increased eight percent
to $113.6 billion for the six months ended June 30, 1999 compared to $105.6
billion for the six months ended June 30, 1998.
The provision for credit losses decreased from $304 million for the six
months ended June 30, 1998 to $224 million during the same period of 1999. The
decrease is primarily attributable to financial problems in the Asian economies.
Noninterest income for the six months ended June 30, 1999 declined one
percent to $2.3 billion over the six months ended June 30, 1998, reflecting
lower principal investment income, brokerage income and other income partially
21
<PAGE>
offset by an increase in trading account profits and fees. The decrease in
investment banking fees and brokerage income is partially attributable to the
sale of the investment banking operations of Robertson Stephens in the third
quarter of 1998.
Noninterest expense decreased six percent, due primarily to decreased
personnel expense and other general operating expense. The cash basis efficiency
ratio decreased to 53.2 percent for the six months ended June 30, 1999 compared
to 56.5 percent for the six months ended June 30, 1998. The return on tangible
equity increased three percent to 21 percent.
Principal Investing and Asset Management
The Principal Investing and Asset Management segment includes Asset
Management which provides asset management, banking and trust services for high
net worth clients both in the U.S. and internationally through its Private Bank.
In addition, this segment provides full service and discount brokerage,
investment advisory and investment management, as well as advisory services for
the Corporation's affiliated family of mutual funds. The Principal Investing
area includes direct equity investments in businesses and investments in general
partnership funds.
Principal Investing and Asset Management earned $392 million for the six
months ended June 30, 1999 compared to $367 million for the six months ended
June 30, 1998, an increase of seven percent. Taxable-equivalent net interest
income for the six months ended June 30, 1999 increased nine percent to $247
million compared to $227 million for the six months ended June 30, 1998,
reflecting increased loan volumes partially offset by increased funding costs.
The average managed loan and lease portfolio for the six months ended
June 30, 1999 increased 34 percent to $18.5 billion compared to $13.8
billion in the same period during 1998.
The provision for credit losses for the six months ended June 30, 1999
increased $34 million from the same period during 1998 primarily due to
portfolio growth.
Noninterest income for the six months ended June 30, 1999 fell three
percent to $1.1 billion compared to the six months ended June 30, 1998.
Investment banking fees decreased due to more favorable market conditions in
the first half of 1998. Asset management fees and brokerage income had strong
core growth in the first half of 1999 which was somewhat mitigated by the sale
of the investment management operations of Robertson Stephens.
Noninterest expense decreased 13 percent to $656 million, due primarily to
lower personnel expense, professional fees, other general operating expense and
data processing expense. The cash basis efficiency ratio decreased 740 basis
points to 48.4 percent. The return on tangible equity decreased to 30 percent
for the six months ended June 30, 1999 from 35 percent for the six months ended
June 30, 1998.
22
<PAGE>
<TABLE>
<CAPTION>
Table Two
Business Segment Summary
For the Six Months Ended June 30
Consumer Commercial
Banking Banking
-------------------------- ------------------------
(Dollars in Millions) 1999 1998 1999 1998
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Net interest income (taxable-equivalent) $5,889 $5,977 $ 1,074 $1,115
Noninterest income 2,975 3,265 409 384
Total revenue 8,864 9,242 1,483 1,499
Provision for credit losses 664 662 88 30
Gains on sale of securities 2 7 - 4
Noninterest expense 5,214 5,593 743 674
Income before income taxes 2,988 2,994 652 799
Income tax expense 1,137 1,138 235 283
Net income $1,851 $1,856 $ 417 $ 516
Cash basis earnings (1) $2,155 $2,144 $ 465 $ 563
Net interest yield 5.02 % 5.01 % 3.89 % 4.05
Average equity to average assets 7.32 7.69 7.74 8.21
Return on average equity 19 18 18 21
Return on tangible equity (1) 29 29 24 27
Efficiency ratio 58.8 60.5 50.1 45.0
Cash basis efficiency ratio (1) 55.4 57.4 46.9 41.9
Average:
Total loans and leases $180,281 $169,990 $55,423 $55,323
Total deposits 231,384 230,609 22,029 20,353
Total assets 262,201 265,205 60,782 61,230
Period-end:
Total loans and leases 184,541 167,024 54,605 54,314
Total deposits 229,721 228,374 22,707 22,341
Total assets 272,966 259,533 61,092 63,893
</TABLE>
<TABLE>
<CAPTION>
Global Corporate and Principal Investing and
Investment Banking Asset Management
-------------------------- ------------------------
1999 1998 1999 1998
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Net interest income (taxable-equivalent) $1,887 $1,911 $ 247 $ 227
Noninterest income 2,287 2,306 1,071 1,107
Total revenue 4,174 4,217 1,318 1,334
Provision for credit losses 224 304 44 10
Gains on sale of securities 9 2 - -
Noninterest expense 2,297 2,451 656 754
Income before income taxes 1,662 1,464 618 570
Income tax expense 590 546 226 203
Net income $1,072 $ 918 $ 392 $ 367
Cash basis earnings (1) $1,150 $ 988 $ 410 $ 378
Net interest yield 2.10 % 2.21 % 2.63 % 3.20
Average equity to average assets 5.74 5.89 13.16 13.44
Return on average equity 17 15 27 31
Return on tangible equity (1) 21 18 30 35
Efficiency ratio 55.0 58.1 49.8 56.5
Cash basis efficiency ratio (1) 53.2 56.5 48.4 55.8
Average:
Total loans and leases $109,247 $103,058 $18,479 $13,847
Total deposits 77,181 62,250 12,379 11,641
Total assets 219,462 210,836 22,609 17,584
Period-end:
Total loans and leases 105,799 108,885 19,063 15,389
Total deposits 76,669 66,060 10,989 11,487
Total assets 218,076 217,665 23,589 21,361
(1) Cash basis calculations exclude goodwill and other intangible assets and the related amortization expense.
</TABLE>
<PAGE>
Results of Operations
Net Interest Income
An analysis of the Corporation's taxable-equivalent net interest income and
average balance sheet levels for the most recent five quarters and for the six
months ended June 30, 1999 and 1998 is presented in Tables Three and Four,
respectively.
Taxable-equivalent net interest income remained flat at approximately $4.7
billion for the three months ended June 30, 1999 and 1998 and amounted to $9.3
billion for the six months ended June 30, 1999 and 1998. Managed loan growth and
increases in core funding levels were offset by the impact of securitizations,
divestitures, asset sales and lower yields on investment securities. The impact
of lower market interest rates and continuing spread compression on loans and
deposits were materially offset by the favorable impact of these lower rates on
the interest rate spread of the investment securities and swap portfolios.
Average earning assets increased nearly $38.1 billion and $34.0 billion
from the three months ended and six months ended June 30, 1998, respectively, to
$530.0 billion and $526.9 billion in the same periods of 1999. These increases
are primarily attributable to higher levels of investment securities and 11
percent managed loan growth, offset by securitizations, loans sales and
divestitures. Managed consumer loans increased 16 percent, led by franchise-wide
growth in residential mortgages of 24 percent and strong growth in real-estate
secured consumer finance loans of 32 percent. As the Corporation continues to
securitize loans, its role becomes that of a servicer and the servicing income,
as well as the gains on securitizations, is reflected in noninterest income.
Loan growth is dependent on economic conditions as well as various discretionary
23
<PAGE>
factors, such as decisions to securitize certain loan portfolios and the
management of borrower, industry, product and geographic concentrations.
The net interest yield decreased 27 basis points to 3.53 percent for the
three months ended June 30, 1999 and decreased 26 basis points to 3.55 percent
for the six months ended June 30, 1999, compared to 3.80 percent and 3.81
percent in the comparable periods of 1998, primarily due to higher levels of
lower-yielding investment securities.
Provision for Credit Losses
The provision for credit losses totaled $510 million and $1.0 billion for
the three months and six months ended June 30, 1999, respectively, compared to
$495 million and $1.0 billion for the same periods in 1998. Total net
charge-offs were essentially covered by the provision for credit losses. Higher
total commercial net charge-offs were offset by lower net charge-offs in the
total consumer 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 $52 million and $182 million for the
three months and six months ended June 30, 1999, respectively, compared to $120
million and $333 million in the respective periods for 1998. Securities gains
were lower in 1999 as a result of decreased activity connected with the
Corporation's overall risk management operations and less favorable market
conditions for certain debt instruments.
24
<PAGE>
<TABLE>
<CAPTION>
Table Three
Quarterly Taxable-Equivalent Data
Second Quarter 1999 First Quarter 1999
---------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in Millions) Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans and leases (1):
Commercial - domestic $138,257 $2,473 7.17 % $138,272 $2,444 7.16 %
Commercial - foreign 30,209 456 6.05 31,568 494 6.35
Commercial real estate - domestic 25,938 533 8.25 26,827 559 8.45
Commercial real estate - foreign 289 6 8.48 286 6 8.79
----------------------------------------------------------------------------------------------------------------------------
Total commercial 194,693 3,468 7.14 196,953 3,503 7.21
----------------------------------------------------------------------------------------------------------------------------
Residential mortgage 80,151 1,430 7.14 75,789 1,356 7.18
Home equity lines 15,857 304 7.68 15,537 298 7.79
Direct/Indirect consumer 42,240 859 8.15 41,652 847 8.24
Consumer finance 17,794 424 9.56 15,880 373 9.53
Bankcard 10,365 306 11.83 11,287 327 11.76
Foreign consumer 3,653 87 9.55 3,648 89 9.90
----------------------------------------------------------------------------------------------------------------------------
Total consumer 170,060 3,410 8.03 163,793 3,290 8.11
----------------------------------------------------------------------------------------------------------------------------
Total loans and leases 364,753 6,878 7.56 360,746 6,793 7.62
----------------------------------------------------------------------------------------------------------------------------
Securities:
Held for investment 1,482 28 7.61 1,905 33 6.84
Available for sale (2) 76,373 1,139 5.97 73,925 1,161 6.31
----------------------------------------------------------------------------------------------------------------------------
Total securities 77,855 1,167 6.00 75,830 1,194 6.33
----------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 29,521 387 5.25 26,561 381 5.80
Time deposits placed and other short-term
investments 5,159 65 5.03 6,408 88 5.58
Trading account assets 39,837 528 5.31 41,129 547 5.36
Other earning assets 12,924 232 7.23 13,008 243 7.53
----------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 530,049 9,257 7.00 523,682 9,246 7.13
----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 25,868 25,826
Other assets, less allowance for credit losses 59,447 60,116
----------------------------------------------------------------------------------------------------------------------------
Total assets $615,364 $609,624
============================================================================================================================
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $ 21,799 67 1.24 $ 21,637 71 1.33
NOW and money market deposit accounts 100,897 581 2.31 99,864 575 2.33
Consumer CDs and IRAs 73,601 847 4.61 74,362 857 4.68
Negotiated CDs, public funds and other
time deposits 6,238 80 5.14 6,914 89 5.20
----------------------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 202,535 1,575 3.12 202,777 1,592 3.18
----------------------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits (4):
Banks located in foreign countries 16,947 196 4.62 20,379 268 5.34
Governments and official institutions 8,089 98 4.81 9,172 113 5.02
Time, savings and other 26,354 299 4.56 26,980 339 5.10
----------------------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 51,390 593 4.62 56,531 720 5.17
----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 253,925 2,168 3.42 259,308 2,312 3.62
----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold
under agreements to repurchase and other
short-term borrowings 116,339 1,396 4.82 112,384 1,355 4.88
Trading account liabilities 14,178 150 4.25 12,679 129 4.13
Long-term debt (5) 58,302 880 6.03 52,642 805 6.12
----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (6) 442,744 4,594 4.16 437,013 4,601 4.26
----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 88,324 86,623
Other liabilities 37,405 39,709
Shareholders' equity 46,891 46,279
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $615,364 $609,624
----------------------------------------------------------------------------------------------------------------------------
Net interest spread 2.84 2.87
Impact of noninterest-bearing sources .69 .71
----------------------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $4,663 3.53 % $4,645 3.58 %
============================================================================================================================
(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 and yield on securities available for sale are based on the average of historical amortized
cost balances.
(3) Interest income includes taxable-equivalent adjustments of $51 and $45 in the second and first quarters of 1999
and $41, $40 and $42 in the fourth, third, and second quarters of 1998, respectively. Interest income also includes
the impact of risk management interest rate contracts, which increased interest income on the underlying linked assets
$83 and $63 in the second and first quarters of 1999 and $70, $46 and $29 in the fourth, third, and second quarters
of 1998, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or more.
(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 $52 and $60 in the second and first quarters of 1999 and $27, $9 and $4 in the
fourth, third, and second quarters of 1998, respectively.
25
<PAGE>
<CAPTION>
Fourth Quarter 1998 Third Quarter 1998 Second Quarter 1998
- ------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$136,629 $2,542 7.39 % $132,537 $2,538 7.59 % $127,788 $2,496 7.84 %
32,893 569 6.86 31,245 578 7.35 30,046 556 7.41
28,427 601 8.38 28,027 610 8.64 28,228 644 9.15
319 8 9.39 338 8 10.51 334 9 9.82
- ------------------------------------------------------------------------------------------
198,268 3,720 7.45 192,147 3,734 7.71 186,396 3,705 7.97
- ------------------------------------------------------------------------------------------
73,033 1,336 7.30 70,619 1,155 6.53 69,337 1,171 6.76
15,781 326 8.17 16,024 485 12.03 16,271 473 11.64
40,557 876 8.57 39,582 854 8.56 40,404 895 8.90
14,368 338 9.33 14,197 385 10.76 14,249 387 10.88
12,078 366 12.01 12,751 399 12.43 12,780 409 12.83
3,551 94 10.47 3,465 93 10.57 3,350 87 10.53
- ------------------------------------------------------------------------------------------
159,368 3,336 8.32 156,638 3,371 8.56 156,391 3,422 8.77
- ------------------------------------------------------------------------------------------
357,636 7,056 7.84 348,785 7,105 8.09 342,787 7,127 8.34
- ------------------------------------------------------------------------------------------
2,948 44 6.09 4,286 76 6.99 4,525 79 7.03
69,354 1,162 6.68 61,250 1,046 6.82 58,527 1,017 6.95
- ------------------------------------------------------------------------------------------
72,302 1,206 6.66 65,536 1,122 6.83 63,052 1,096 6.96
- ------------------------------------------------------------------------------------------
29,564 486 6.53 27,646 492 7.06 25,275 433 6.86
6,702 111 6.56 7,483 138 7.31 7,916 129 6.54
39,391 613 6.19 35,487 587 6.59 42,421 693 6.56
11,471 207 7.19 10,974 204 7.42 10,494 201 7.68
- ------------------------------------------------------------------------------------------
517,066 9,679 7.44 495,911 9,648 7.73 491,945 9,679 7.89
- ------------------------------------------------------------------------------------------
25,834 24,160 25,071
63,641 58,282 56,959
- ------------------------------------------------------------------------------------------
$606,541 $578,353 $573,975
==========================================================================================
$ 21,702 91 1.67 $ 22,775 107 1.87 $ 23,208 112 1.93
97,589 622 2.53 95,276 634 2.64 96,605 638 2.65
74,923 956 5.06 74,313 984 5.25 74,002 983 5.29
7,388 96 5.16 8,696 120 5.45 8,388 117 5.63
- ------------------------------------------------------------------------------------------
201,602 1,765 3.47 201,060 1,845 3.64 202,203 1,850 3.66
- ------------------------------------------------------------------------------------------
24,938 325 5.17 27,892 418 5.95 22,393 326 5.84
10,278 143 5.54 11,084 156 5.59 10,629 150 5.64
26,868 365 5.39 24,086 411 6.77 22,592 364 6.49
- ------------------------------------------------------------------------------------------
62,084 833 5.32 63,062 985 6.20 55,614 840 6.07
- ------------------------------------------------------------------------------------------
263,686 2,598 3.91 264,122 2,830 4.25 257,817 2,690 4.18
- ------------------------------------------------------------------------------------------
104,416 1,422 5.40 84,283 1,278 6.02 82,385 1,229 5.98
14,194 165 4.62 15,454 194 4.97 19,817 262 5.30
51,779 844 6.52 51,365 862 6.71 49,254 830 6.74
- ------------------------------------------------------------------------------------------
434,075 5,029 4.60 415,224 5,164 4.94 409,273 5,011 4.90
- ------------------------------------------------------------------------------------------
88,080 83,661 84,552
39,335 33,712 35,293
45,051 45,756 44,857
- ------------------------------------------------------------------------------------------
$606,541 $578,353 $573,975
- ------------------------------------------------------------------------------------------
2.84 2.79 2.99
.74 .81 .81
- ------------------------------------------------------------------------------------------
$4,650 3.58 % $4,484 3.60 % $4,668 3.80 %
==========================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Table Four
Six Month Taxable-Equivalent Data
Six Months Ended June 30
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in Millions) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans and leases (1):
Commercial - domestic $138,264 $4,917 7.17 % $125,698 $4,909 7.87 %
Commercial - foreign 30,885 950 6.20 29,943 1,098 7.39
Commercial real estate - domestic 26,380 1,092 8.35 28,612 1,292 9.11
Commercial real estate - foreign 288 12 8.63 331 17 10.15
- -----------------------------------------------------------------------------------------------------------------------------
Total commercial 195,817 6,971 7.18 184,584 7,316 7.99
- -----------------------------------------------------------------------------------------------------------------------------
Residential mortgage 77,982 2,786 7.16 69,841 2,389 6.85
Home equity lines 15,698 602 7.74 16,359 930 11.46
Direct/Indirect consumer 41,946 1,706 8.19 40,344 1,775 8.88
Consumer finance 16,842 797 9.55 14,454 806 11.24
Bankcard 10,824 633 11.80 13,515 873 13.02
Foreign consumer 3,651 176 9.72 3,284 171 10.49
- -----------------------------------------------------------------------------------------------------------------------------
Total consumer 166,943 6,700 8.07 157,797 6,944 8.85
- -----------------------------------------------------------------------------------------------------------------------------
Total loans and leases 362,760 13,671 7.59 342,381 14,260 8.39
- -----------------------------------------------------------------------------------------------------------------------------
Securities:
Held for investment 1,692 61 7.18 4,618 162 7.06
Available for sale (2) 75,156 2,300 6.14 59,794 2,078 6.97
- -----------------------------------------------------------------------------------------------------------------------------
Total securities 76,848 2,361 6.16 64,412 2,240 6.97
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased
under agreements to resell 28,049 768 5.51 25,950 850 6.60
Time deposits placed and other short-term
investments 5,780 153 5.33 8,215 265 6.51
Trading account assets 40,480 1,075 5.34 42,147 1,434 6.84
Other earning assets 12,967 475 7.38 9,773 375 7.72
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 526,884 18,503 7.07 492,878 19,424 7.93
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 25,847 24,816
Other assets, less allowance for credit losses 59,779 58,700
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $612,510 $576,394
=============================================================================================================================
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $ 21,718 138 1.28 $ 23,152 223 1.94
NOW and money market deposit accounts 100,385 1,156 2.32 96,651 1,280 2.67
Consumer CDs and IRAs 73,979 1,704 4.64 74,693 1,975 5.33
Negotiated CDs, public funds and other
time deposits 6,574 169 5.17 7,159 198 5.59
- -----------------------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 202,656 3,167 3.15 201,655 3,676 3.68
- -----------------------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits (4):
Banks located in foreign countries 18,653 464 5.01 22,728 662 5.87
Governments and official institutions 8,628 211 4.92 10,350 291 5.67
Time, savings, and other 26,665 638 4.83 23,027 754 6.60
- -----------------------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 53,946 1,313 4.91 56,105 1,707 6.13
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 256,602 4,480 3.52 257,760 5,383 4.21
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold
under agreements to repurchase and other
short-term borrowings 114,373 2,751 4.85 86,847 2,539 5.89
Trading account liabilities 13,433 279 4.19 20,165 536 5.36
Long-term debt (5) 55,487 1,685 6.07 48,340 1,639 6.78
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (6) 439,895 9,195 4.21 413,112 10,097 4.92
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 87,478 83,365
Other liabilities 38,550 35,671
Shareholders' equity 46,587 44,246
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $612,510 $576,394
- -----------------------------------------------------------------------------------------------------------------------------
Net interest spread 2.86 3.01
Impact of noninterest-bearing sources .69 .80
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $9,308 3.55 % $9,327 3.81 %
=============================================================================================================================
(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 and yield on securities available for sale are based on the average of historical amortized cost balances.
(3) Interest income includes taxable-equivalent adjustments of $96 and $82 in the six months ended June 30, 1999 and 1998,
respectively. Interest income also includes the impact of risk management interest rate contracts, which increased interest
income on the underlying linked assets $146 and $58 in the six months ended June 30, 1999 and 1998, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or more.
(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 $112 and $9 in the six months ended June 30, 1999 and 1998, respectively.
</TABLE>
27
<PAGE>
Noninterest Income
As presented in Table Five, noninterest income decreased three percent to
$3.5 billion and five percent to $6.7 billion for the three months and six
months ended June 30, 1999, respectively, reflecting lower levels of investment
banking income, other income, mortgage servicing income and nondeposit-related
service fees. These decreases were partially offset by higher levels of income
from trading account profits and fees, credit card income and deposit account
service fees.
<TABLE>
<CAPTION>
Table Five
Noninterest Income
Three Months Six Months
Ended June 30 Change Ended June 30 Change
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) 1999 1998 Amount Percent 1999 1998 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 900 $844 $ 56 6.6 % $1,755 $1,660 $ 95 5.7 %
Mortgage servicing income 125 207 (82) (39.6) 257 379 (122) (32.2)
Investment banking income 555 664 (109) (16.4) 943 1,277 (334) (26.2)
Trading account profits and fees 395 232 163 70.3 895 604 291 48.2
Brokerage income 192 188 4 2.1 376 368 8 2.2
Nondeposit-related service fees 123 164 (41) (25.0) 259 339 (80) (23.6)
Asset management and fiduciary service fees 274 261 13 5.0 517 506 11 2.2
Credit card income 448 352 96 27.3 808 671 137 20.4
Other income 510 724 (214) (29.6) 935 1,325 (390) (29.4)
- ----------------------------------------------------------------------------------------------------------------------------
Total $3,522 $3,636 $(114) (3.1) % $6,745 $7,129 $(384) (5.4) %
============================================================================================================================
</TABLE>
o Mortgage servicing income decreased $82 million to $125 million and $122
million to $257 million for the three months and six months ended June 30,
1999, respectively, as higher service fees and gains from the
capitalization of mortgaging service rights were more than offset by higher
amortization of servicing rights. The average portfolio of loans serviced
increased 13 percent from $216 billion in the six months ended June 30,
1998 to $245 billion in the six months ended June 30, 1999. Mortgage loan
originations through the Corporation's mortgage units were $30.6 billion
for the six months ended June 30, 1999 compared to $30.7 billion in the
same period in 1998. Origination volume for the six months ended June 30,
1999 was composed of approximately $14.3 billion of retail loans and $16.3
billion of correspondent and wholesale loans.
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 $6
billion on June 30, 1999 with an associated net unrealized appreciation of
$30 million. These contracts 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 swap contracts. The notional
amount of such contracts on June 30, 1999 was $37 billion with associated
net unrealized depreciation of $240 million.
o Investment banking income decreased 16 percent to $555 million and 26
percent to $943 million for the three months and six months ended June 30,
1999, respectively. The decrease was primarily attributable to lower levels
of securities underwriting fees and advisory services fees due to the sale
of the investment banking operations of Robertson Stephens in the third
quarter of 1998. Principal investing income decreased $39 million and $128
million for the three months and six months ended June 30, 1999,
respectively, compared to the same prior year periods, primarily due to
fewer sales of publicly-traded marketable equity securities. Other income
increased $56 million and $82 million for the three months and six months
28
<PAGE>
ended June 30, 1999, respectively, primarily due to a $39 million gain on
the sale of securities in the second quarter of 1999. Investment banking
income by major business activity follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------------
(Dollars in Millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Banking Income
Principal investing $135 $174 $290 $418
Securities underwriting 119 244 191 437
Syndications 120 130 190 217
Advisory services 111 102 153 168
Other 70 14 119 37
- --------------------------------------------------------------------------------------------------
Total $555 $664 $943 $1,277
==================================================================================================
</TABLE>
o Trading account profits and fees increased 70 percent to $395 million and
48 percent to $895 million for the three months and six months ended June
30, 1999, respectively, over the comparable 1998 periods. The increase is
primarily attributable to increased customer activity in interest-rate and
equity derivatives products during the three months ended June 30, 1999.
The fair value of the components of the Corporation's trading account
assets and liabilities on June 30, 1999 and December 31, 1998, as well as
their average fair value for the six months ended June 30, 1999 are
disclosed in Note Three of the consolidated financial statements on page 8.
Trading account profits and fees by major business activity follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------------
(Dollars in Millions) 1999 1998 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trading Account Profits and Fees
Derivatives and securities trading $225 $51 $549 $239
Foreign exchange contracts 151 173 305 344
Other 19 8 41 21
------------------------------------------------------------------------------------------------
Total $395 $232 $895 $604
================================================================================================
</TABLE>
o Credit card income increased 27 percent to $448 million and 20 percent to
$808 million for the three months and six months ended June 30, 1999,
respectively. This increase was primarily due to higher transaction and
merchant volumes, as well as higher excess servicing income, a result of
higher levels of securitizations compared to the three months and six
months ended June 30, 1998.
o Other income totaled $510 million and $935 million for the three months and
six months ended June 30, 1999, respectively, a decrease of $214 million
and $390 million over the same periods for 1998. The decline was primarily
due to a $110 million gain on the sale of a partial ownership interest in a
mortgage company in the first quarter of 1998 and a $84 million gain on the
sale of real estate in the second quarter of 1998. Other income includes
securitization gains of $32 million and $59 million for the three months
and six months ended June 30, 1999, respectively, compared to $89 million
and $116 million for the three months and six months ended June 30, 1998,
respectively.
29
<PAGE>
Other Noninterest Expense
As presented in Table Six, the Corporation's other noninterest expense
decreased seven percent and six percent to $4.5 billion and $8.9 billion for the
three months and six months ended June 30, 1999, respectively, over the same
periods of 1998. This decrease was attributable to merger-related savings
resulting in lower levels of personnel expense, occupancy, professional fees,
other general operating expense and general administrative and other expenses.
<TABLE>
<CAPTION>
Table Six
Other Noninterest Expense
Three Months Six Months
Ended June 30 Change Ended June 30 Change
-------------------------------------------------------------------------------
(Dollars in Millions) 1999 1998 Amount Percent 1999 1998 Amount Percent
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personnel $2,261 $2,425 $ (164) (6.8) % $4,594 $4,865 $ (271) (5.6) %
Occupancy 395 421 (26) (6.2) 791 803 (12) (1.5)
Equipment 339 334 5 1.5 697 674 23 3.4
Marketing 147 145 2 1.4 294 303 (9) (3.0)
Professional fees 166 209 (43) (20.6) 292 404 (112) (27.7)
Amortization of intangibles 225 227 (2) (.9) 447 455 (8) (1.8)
Data processing 214 186 28 15.1 404 365 39 10.7
Telecommunications 140 138 2 1.4 276 269 7 2.6
Other general operating 446 528 (82) (15.5) 866 1,041 (175) (16.8)
General administrative and other 124 154 (30) (19.5) 249 292 (43) (14.7)
- ---------------------------------------------------------------------------------------------------------------
Total $4,457 $4,767 $ (310) (6.5) % $8,910 $9,471 $ (561) (5.9) %
===============================================================================================================
</TABLE>
A discussion of the significant components of other noninterest expense for
the three months and six months ended June 30, 1999 compared to the same periods
in 1998 follows:
o Personnel expense decreased $164 million and $271 million for the three
months and six months ended June 30, 1999, respectively, compared to the
same periods in 1998 due mainly to merger-related savings in salaries and
wages, incentive compensation and other employee compensation. On June 30,
1999, the Corporation had approximately 162,000 full-time equivalent
employees compared to approximately 171,000 full-time equivalent employees
on December 31, 1998.
o Professional fees decreased 21 percent to $166 million for the three months
ended June 30, 1999 and 28 percent to $292 million for the six months ended
June 30, 1999 compared to the same periods in 1998, primarily due to
decreases in outside legal and professional services.
o Other general operating expense decreased $82 million and $175 million for
the three months and six months ended June 30, 1999, respectively, mainly
as a result of decreases in supplies and other operating expenses.
o General administrative and other expense declined $30 million and $43
million for the three months and six months ended June 30, 1999,
respectively, due mainly to decreased travel expenses and franchise and
personal property taxes.
30
<PAGE>
Year 2000 Project
The following is a Year 2000 Readiness Disclosure.
General
Because computers frequently use only two digits to recognize years, on
January 1, 2000, many computer systems, as well as equipment that uses embedded
computer chips, may be unable to distinguish between 1900 and 2000. If not
remediated, this problem could create system errors and failures resulting in
the disruption of normal business operations. Since 2000 is a leap year, there
could also be business disruptions as a result of the inability of many computer
systems to recognize February 29, 2000.
In October 1995, the Corporation began establishing project teams to
address Year 2000 issues. Personnel from these project teams and the
Corporation's business segments have identified and analyzed, and are correcting
and testing, computer systems throughout the Corporation ("Systems"). Personnel
have also taken inventory of equipment that uses embedded computer chips (i.e.,
"non-information technology systems" or "Infrastructure") and scheduled
remediation or replacement of this Infrastructure, as necessary. Examples of
Infrastructure include ATMs, building security systems, fire alarm systems,
identification and access cards, date stamps and elevators. The Corporation
tracks certain Systems and Infrastructure collectively ("Projects"). For
purposes of this section, the information provided for Systems and Projects is
generally provided on a combined basis.
State of Readiness
The Corporation's Year 2000 efforts are generally divided into phases for
analysis, remediation, testing and compliance. In the analysis phase, the
Corporation identifies Systems/Projects and Infrastructure that have Year 2000
issues and determines the steps necessary to remediate these issues. In the
remediation phase, the Corporation replaces, modifies or retires
Systems/Projects or Infrastructure, as necessary. During the testing phase, the
Corporation performs testing to determine whether the remediated
Systems/Projects and Infrastructure accurately process and identify dates. In
the compliance phase, the Corporation internally certifies the Systems/Projects
and Infrastructure that are Year 2000 ready and implements processes to enable
these Systems/Projects and Infrastructure to continue to identify and process
dates accurately through the Year 2000 and thereafter.
As of June 30, 1999, the Corporation has identified approximately 4,500
Systems/Projects. In addition, the Corporation has identified over 16,000
Infrastructure items that may have Year 2000 implications. For Systems/Projects
and Infrastructure, as of June 30, 1999, the analysis, remediation, testing and
compliance phases were all substantially complete. As of June 30, 1999, the
Corporation substantially completed all phases, in accordance with guidelines
established by the Federal Financial Institutions Examination Council (FFIEC),
as such guidelines are interpreted by the OCC.
The Corporation tracks Systems/Projects and Infrastructure for Year
2000-required changes based on a risk evaluation. Of the identified
Systems/Projects and Infrastructure, approximately 1,900 Systems/Projects and
approximately 850 Infrastructure items have been designated "mission critical"
(i.e., if not made Year 2000 ready, these Systems/Projects or Infrastructure
items would substantially impact the normal conduct of business). For mission
critical Systems/Projects and Infrastructure, as of June 30, 1999, the analysis,
remediation, testing and compliance phases were all substantially complete. The
Corporation is also performing additional "time machine testing" (i.e.,
emulating Year 2000 conditions in dedicated environments) on selected mission
critical Systems.
Ultimately, the potential impact of Year 2000 issues will depend not only
on corrective measures the Corporation undertakes, but also on the way in which
Year 2000 issues are addressed by governmental agencies, businesses and other
entities which 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, investment opportunities (either for the
Corporation's accounts or for the accounts of others) or lenders. In addition,
the Corporation's business may be affected by the corrective measures taken by
31
<PAGE>
the landlords and managers of buildings leased by the Corporation. Accordingly,
the Corporation is communicating with certain of these parties to evaluate any
potential impact on the Corporation.
In particular, the Corporation has contacted its service providers and
software vendors (collectively, "Vendors") and has requested information on
their Year 2000 project plans with respect to the services and products provided
by these Vendors. As of June 30, 1999, any Vendor which had not provided
appropriate documentation was placed in an "in process" category, which includes
those Vendors previously called "at risk." In addition, as of June 30, 1999, the
Corporation has designated approximately 36 percent of its Vendors as "mission
critical." As of June 30, 1999, the Corporation has confirmed or received
assurances that approximately 98 percent of the services and products provided
by its Vendors, and approximately 97 percent of the mission critical services
and products provided by its Vendors, are Year 2000 ready, the remainder of
which were "in process." In accordance with its contingency plans, the
Corporation will continue to focus on "in process" mission critical Vendors in
order to mitigate any potential risk.
The Corporation is also tracking the Year 2000 compliance efforts of
certain domestic and international agencies involved with payment systems for
cash and securities clearings. The Corporation has identified 202 agencies, all
of which have responded to the Corporation's inquiries that they are Year 2000
ready as of June 30, 1999.
In addition, the Corporation has completed Year 2000 risk assessments for
substantially all of its commercial credit exposure. By June 30, 1999, the
Corporation reassessed all customers deemed to be "high risk" and "medium risk."
For any customers deemed "high risk", on a quarterly basis, the Corporation's
Credit Review Committee reviews the results of customer assessments prepared by
the customers' relationship managers. Weakness in a borrower's Year 2000
strategy is part of the overall risk assessment process. Risk ratings and
exposure strategy are adjusted as required after consideration of all risk
issues. Any impact on the allowance for credit losses is determined through the
normal risk rating process.
The Corporation is also assessing potential Year 2000 risks associated with
its investment advisory and fiduciary activities. Each investment subsidiary has
a defined investment process and is integrating the consideration of Year 2000
issues into that process. When making investment decisions or recommendations,
the Corporation's investment research areas consider the Year 2000 issue as a
factor in their analysis and may take certain steps to investigate Year 2000
readiness, such as reviewing ratings, research reports and other publicly
available information. In the fiduciary area, the Corporation is continuing to
assess Year 2000 risks for business, real estate, oil and gas, and mineral
interests that are held in trust.
Following the merger with BankAmerica, the Corporation identified its
significant depositors and assessed the Year 2000 readiness of these customers.
The Corporation will continue to monitor these depositors for purposes of
determining any potential liquidity risks to the Corporation.
Costs
The Corporation currently estimates the total cost of the Year 2000 project
to be approximately $550 million. Of this amount, the Corporation has incurred
cumulative Year 2000 costs of approximately $477 million through June 30, 1999.
A significant portion of the costs through June 30, 1999 was not incremental to
the Corporation but instead constituted a reallocation of existing internal
systems technology resources and, accordingly, was funded from normal
operations. Remaining costs are expected to be similarly funded.
Contingency Plans
The Corporation has existing business continuity plans that address its
response to disruptions to business due to natural disasters, civil unrest,
utility outages or other occurrences. Using these existing plans, the
Corporation has developed supplements to address potential Year 2000 issues that
could impact its business processes.
The Corporation has completed approximately 1,100 supplemental plans, of
which approximately 784 are deemed "high risk" or "medium risk" plans that have
been tested to date. The remaining "high risk" supplemental plans, of which
there are currently four, will be tested prior to September 1, 1999. In addition
to these plans, the Corporation has designed and implemented an event management
32
<PAGE>
communications center as a single corporate-wide point of coordination and
information about all Year 2000 events, whether internal or external, that may
impact normal business processes. In addition to this center, the Corporation
has developed regional and functional event management teams. The Corporation is
conducting regional and global exercises simulating multiple, simultaneous and
diverse events to practice communication and coordination skills and processes.
During October and November 1999, the Corporation has scheduled all "high
risk" business continuity plans to be reviewed and revalidated to ensure
readiness for possible implementation in 2000.
Risks
Although the Corporation's remediation efforts are directed at reducing its
Year 2000 exposure, there can be no assurance that these efforts will fully
mitigate the effect of Year 2000 issues and it is likely that one or more events
may disrupt the Corporation's normal business operations. In the event the
Corporation fails to identify or correct a material Year 2000 problem, there
could be disruptions in normal business operations, which could have a material
adverse effect on the Corporation's results of operations, liquidity or
financial condition. In addition, there can be no assurance that significant
foreign and domestic third parties will adequately address their Year 2000
issues. Further, there may be some parties, such as governmental agencies,
utilities, telecommunication companies, financial services vendors and other
providers, for which alternative arrangements or resources are not available.
Also, risks associated with some foreign third parties may be greater than those
of domestic parties since there is general concern that some third parties
operating outside the United States are not addressing Year 2000 issues on a
timely basis.
In addition to the foregoing, the Corporation is subject to credit risk to
the extent borrowers fail to adequately address Year 2000 issues, to fiduciary
risk to the extent fiduciary assets fail to adequately address Year 2000 issues,
and to liquidity risk to the extent of deposit withdrawals and to the extent its
lenders are unable to provide the Corporation with funds due to Year 2000
issues. Although it is not possible to quantify the potential impact of these
risks at this time, there may be increases in future years in problem loans,
credit losses, losses in the fiduciary business and liquidity problems, as well
as the risk of litigation and potential losses from litigation related to the
foregoing.
Forward-looking statements contained in the foregoing "Year 2000 Project"
section should be read in conjunction with the cautionary statements included in
the introductory paragraphs under "Management's Discussion and Analysis of
Results of Operations and Financial Condition" on pages 16 and 17.
Income Taxes
The Corporation's income tax expense for the three months and six months
ended June 30, 1999 was $1.1 billion and $2.2 billion, respectively, for
effective tax rates of 37 percent and 36 percent, respectively, or 36 percent
for both periods excluding merger-related charges. Income tax expense for the
three months and six months ended June 30, 1998 was $1.25 billion and $2.13
billion, respectively, for effective tax rates of 35 percent and 37 percent, or
35 percent and 36 percent excluding merger-related charges, respectively.
33
<PAGE>
Balance Sheet Review and Liquidity Risk Management
The Corporation utilizes an integrated approach in managing its balance
sheet, which includes management of interest rate sensitivity, credit risk,
liquidity risk and its capital position. The average balances discussed below
can be derived from Table Four. The following discussion addresses changes in
average balances for the six months ended June 30, 1999 compared to the same
period in 1998.
Average levels of customer-based funds increased $5.1 billion to $290.1
billion for the six months ended June 30, 1999 compared to average levels for
the six months ended June 30, 1998. As a percentage of total sources, average
levels of customer-based funds decreased to 47.4 percent for the six months
ended June 30, 1999 from 49.4 percent for the six months ended June 30, 1998.
Average levels of market-based funds increased $18.6 billion for the six
months ended June 30, 1999 to $181.8 billion compared to $163.1 billion for the
six months ended June 30, 1998. In addition, 1999 average levels of long-term
debt increased by $7.1 billion over average levels during the same six month
period in 1998, mainly the result of borrowings to fund earning asset growth,
business development opportunities and share repurchases, and to replace
maturing debt.
Average loans and leases, the Corporation's primary use of funds, increased
$20.4 billion to $362.8 billion during the six months ended June 30, 1999.
Average managed loans and leases during the same period increased $37.9 billion,
or 10.8 percent, to $387.2 billion. This increase in average managed loans and
leases reflects strong loan growth in commercial and consumer products
throughout the franchise, partly attributable to continued strength in consumer
product introductions in certain regions.
The average securities portfolio for the six months ended June 30, 1999
increased $12.4 billion over 1998 levels, representing 12.6 percent of total
uses of funds in the first half of 1999 compared to 11.2 percent in the first
half of 1998. See the following "Securities" section for additional information
on the securities portfolio.
Average other assets and cash and cash equivalents increased $2.1 billion
to $85.6 billion for the six months ended June 30, 1999 due largely to increases
in the average balances of cash and cash equivalents, derivative-dealer assets
and secured accounts receivable, partially offset by a decrease in customers'
acceptance liability.
On June 30, 1999, cash and cash equivalents were $24.2 billion, a decrease
of $4.1 billion from December 31, 1998. During the six months ended June 30,
1999, net cash provided by operating activities was $1.7 billion, net cash used
in investing activities was $15.3 billion and net cash provided by financing
activities was $9.5 billion. For further information on cash flows, see the
Consolidated Statement of Cash Flows on page 4 in the consolidated financial
statements.
Liquidity is a measure of the Corporation's ability to fulfill its cash
requirements and is managed by the Corporation through its asset and liability
management process. The Corporation monitors its assets and liabilities and
modifies these positions as liquidity requirements change. This process, coupled
with the Corporation's ability to raise capital and debt financing, is designed
to cover the liquidity needs of the Corporation. Management believes that the
Corporation's sources of liquidity are more than adequate to meet its cash
requirements. The following discussion provides an overview of significant on-
and off-balance sheet components.
34
<PAGE>
Securities
The securities portfolio on June 30, 1999 consisted of securities held for
investment totaling $1.5 billion and securities available for sale totaling
$75.0 billion compared to $2.0 billion and $78.6 billion, respectively, on
December 31, 1998.
On June 30, 1999 and December 31, 1998, the market value of the
Corporation's securities held for investment reflected net unrealized
depreciation of $188 million and $144 million, respectively.
The valuation allowance for securities available for sale, marketable
equity securities and certain servicing assets decreased shareholders' equity by
$1.4 billion on June 30, 1999, primarily reflecting pre-tax depreciation of $2.4
billion on debt securities and pre-tax appreciation of $128 million on
marketable equity securities. The valuation allowance increased shareholders'
equity by $303 million on December 31, 1998. The change in the valuation
allowance was primarily attributable to an upward shift in certain segments of
the U.S. Treasury yield curve during the first half of 1999.
The estimated average duration of securities held for investment and
securities available for sale portfolios were 6.86 years and 4.04 years,
respectively, on June 30, 1999 compared to 5.59 years and 4.14 years,
respectively, on December 31, 1998.
Allowance for Credit Losses
The Corporation performs periodic and systematic detailed reviews of its
loan and lease portfolios to identify risks inherent in and to assess the
overall collectibility of those portfolios. As discussed below, certain
homogeneous loan portfolios are evaluated collectively, while remaining
portfolios are reviewed on an individual loan basis. These detailed reviews,
combined with historical loss experience and other factors, result in the
identification and quantification of specific reserves and loss factors which
are used in determining the amount of the allowance and related provision for
credit losses. The actual amount of credit losses realized may vary from
estimated losses due to changing economic conditions or changes in industry or
geographic concentrations. The Corporation has procedures in place to limit
differences between estimated and actual credit losses, which include detailed
periodic assessments by senior management of the various credit portfolios and
the models used to estimate credit losses in those portfolios.
Due to their homogeneous nature, consumer loans and certain smaller
business loans and leases, which includes residential mortgages, home equity
lines, direct/indirect, consumer finance, bankcard, and foreign consumer loans,
are generally evaluated as a group, based on individual loan type. This
evaluation is based primarily on historical, current and projected delinquency
and loss trends and provides a basis for establishing an adequate level of
allowance for credit losses.
Commercial and commercial real estate loans and leases are generally
evaluated individually due to a general lack of uniformity among individual
loans within each loan type and business segment. If necessary, an allowance for
credit losses is established for individual impaired loans. A loan is considered
impaired when, based on current information and events, it is probable that the
Corporation will be unable to collect all amounts due, including principal and
interest, according to the contractual terms of the agreement. Once a loan has
been identified as impaired, management measures impairment in accordance with
SFAS 114. Impaired loans are measured based on the present value of payments
expected to be received, observable market prices, or for loans that are solely
dependent on the collateral for repayment, the estimated fair value of the
collateral. If the recorded investment in impaired loans exceeds the measure
of estimated fair value, a valuation allowance is established as a component of
the allowance for credit losses.
35
<PAGE>
Portions of the allowance for credit losses are assigned to cover the
estimated probable losses in each loan and lease category based on the results
of the Corporation's detail review process as described above. Further
assignments are made based on general and specific economic conditions, as well
as performance trends within specific portfolio segments and individual
concentrations of credit, including geographic and industry concentrations. The
assigned portion of the allowance for credit losses continues to be weighted
toward the commercial loan portfolio, reflecting a higher level of nonperforming
loans and the potential for higher individual losses. The remaining unassigned
portion of the allowance for credit losses, determined separately from the
procedures outlined above, addresses certain industry and geographic
concentrations, including global economic uncertainty, covers exposures for
approved but unfunded legally binding commitments and minimizes the risk related
to the margin of imprecision inherent in the estimation of assigned reserves.
Due to the subjectivity involved in the determination of the unassigned portion
of the allowance for credit losses, the relationship of the unassigned component
to the total allowance for credit losses may fluctuate from period to period.
Management evaluates the adequacy of the allowance for credit losses based on
the combined total of the assigned and unassigned components.
The nature of the process by which the Corporation determines the
appropriate allowance for credit losses requires the exercise of considerable
judgment. After review of all relevant matters affecting loan collectibility,
management believes that the allowance for credit losses is appropriate given
its analysis of inherent credit losses on June 30, 1999.
36
<PAGE>
<TABLE>
<CAPTION>
Table Seven
Allowance For Credit Losses Three Months Six Months
Ended June 30 Ended June 30
-----------------------------------------------------
(Dollars in Millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 7,123 $ 6,763 $ 7,122 $ 6,778
- ----------------------------------------------------------------------------------------------------------------------
Loans and leases charged off
Commercial - domestic (178) (74) (384) (127)
Commercial - foreign (88) (53) (118) (89)
Commercial real estate - domestic (5) (10) (7) (13)
Commercial real estate - foreign (1) - (1) -
- ----------------------------------------------------------------------------------------------------------------------
Total commercial (272) (137) (510) (229)
Residential mortgage (8) (6) (15) (16)
Home equity lines (7) (7) (13) (15)
Direct/Indirect consumer (127) (138) (267) (284)
Consumer finance (84) (139) (182) (298)
Bankcard (167) (219) (339) (480)
Foreign consumer (7) (3) (12) (6)
- ----------------------------------------------------------------------------------------------------------------------
Total consumer (400) (512) (828) (1,099)
Total loans and leases charged off (672) (649) (1,338) (1,328)
- ----------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off
Commercial - domestic 31 24 56 50
Commercial - foreign 4 2 5 18
Commercial real estate - domestic 11 4 15 12
Commercial real estate - foreign - - - -
- ----------------------------------------------------------------------------------------------------------------------
Total commercial 46 30 76 80
Residential mortgage 1 2 3 3
Home equity lines 4 2 6 4
Direct/Indirect consumer 44 40 89 79
Consumer finance 42 47 92 89
Bankcard 14 22 31 50
Foreign consumer 1 1 2 2
- ----------------------------------------------------------------------------------------------------------------------
Total consumer 106 114 223 227
Total recoveries of loans and leases previously charged off 152 144 299 307
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs (520) (505) (1,039) (1,021)
- ----------------------------------------------------------------------------------------------------------------------
Provision for credit losses 510 495 1,020 1,005
Other, net (17) (22) (7) (31)
- ----------------------------------------------------------------------------------------------------------------------
Balance on June 30 $ 7,096 $ 6,731 $ 7,096 $ 6,731
======================================================================================================================
Loans and leases outstanding at end of period $363,581 $344,358 $363,581 $344,358
Allowance for credit losses as a percentage of
loans and leases outstanding at end of period 1.95% 1.95% 1.95% 1.95%
Average loans and leases outstanding during the period $364,753 $342,787 $362,760 $342,381
Net charge-offs as a percentage of average loans
and leases outstanding during the period .57% .59% .58% .60%
Allowance for credit losses as a percentage of
nonperforming loans at end of period 252.38 299.98 252.38 299.98
</TABLE>
37
<PAGE>
Nonperforming Assets
As presented in Table Eight, on June 30, 1999, nonperforming assets were
0.84 percent of net loans, leases and foreclosed properties, compared to 0.86
percent on March 31, 1999, and 0.77 percent, on December 31, 1998. Nonperforming
loans increased to $2.8 billion on June 30, 1999 from $2.5 billion on December
31, 1998 due to higher commercial nonperforming loans. The increase in
nonperforming loans was attributable to a few large credits and several
smaller credits in various industries throughout the United States and overseas.
The increase was not concentrated in any single geographic region or industry.
The allowance coverage of nonperforming loans was 252 percent on June 30, 1999
compared to 287 percent on December 31, 1998.
<TABLE>
<CAPTION>
Table Eight
Nonperforming Assets
June 30 March 31 December 31 September 30 June 30
(Dollars in Millions) 1999 1999 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Commercial - domestic $1,085 $1,085 $ 812 $ 717 $ 646
Commercial - foreign 492 434 314 288 347
Commercial real estate - domestic 203 272 299 303 306
Commercial real estate - foreign 3 3 4 3 3
- ------------------------------------------------------------------------------------------------------------------------
Total commercial 1,783 1,794 1,429 1,311 1,302
- ------------------------------------------------------------------------------------------------------------------------
Residential mortgage 565 634 722 690 669
Home equity lines 44 41 50 46 45
Direct/Indirect consumer 17 20 21 38 33
Consumer finance 382 332 246 209 187
Foreign consumer 21 17 14 - 8
- ------------------------------------------------------------------------------------------------------------------------
Total consumer 1,029 1,044 1,053 983 942
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,812 2,838 2,482 2,294 2,244
- ------------------------------------------------------------------------------------------------------------------------
Foreclosed properties 258 282 282 288 282
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,070 $3,120 $2,764 $2,582 $2,526
========================================================================================================================
Nonperforming assets as a percentage of
Total assets .50 % .51 % .45 % .43 % .44 %
Loans, leases and foreclosed
properties .84 .86 .77 .73 .73
Loans past due 90 days or more and not
classified as nonperforming $631 $571 $611 $540 $ 539
</TABLE>
The Corporation's investment in specific loans that were considered to be
impaired on June 30, and March 31, 1999 were $2.1 billion compared to $1.7
billion as of December 31, 1998. Note Four of the consolidated financial
statements on page 9 provides the reported investment in specific loans
considered to be impaired on June 30, 1999 and December 31, 1998.
Commercial-domestic impaired loans were $1.1 billion at June 30, and
March 31, 1999 from $0.8 billion at December 31, 1998. Commercial - foreign
impaired loans increased to $0.5 billion at June 30, and March 31, 1999 from
$0.3 billion at December 31, 1998. Commercial real estate - domestic impaired
loans decreased to $0.5 billion at June 30, and March 31, 1999 from $0.6 billion
at December 31, 1998.
38
<PAGE>
Concentrations of Credit Risk
In an effort to minimize the adverse impact of any single event or set of
occurrences, the Corporation strives to maintain a diverse credit portfolio as
outlined in Tables Ten and Eleven. The following section discusses credit risk
in the loan portfolio, including net charge-offs by loan categories as presented
in Table Nine.
<TABLE>
<CAPTION>
Table Nine
Net Charge-offs in Dollars and as a Percentage of Average Loans and Leases Outstanding
Three Months Six Months
Ended June 30 Ended June 30
-----------------------------------------------------------------------------------
(Dollars in Millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial - domestic $147 .43 % $ 50 .15 % $328 .48 % $ 77 .12 %
Commercial - foreign 84 1.12 51 .68 113 .74 71 .48
Commercial real estate - domestic (6) n/m 6 .09 (8) n/m 1 .01
Commercial real estate - foreign 1 .10 - - 1 .35 - -
- -------------------------------------------------------------------------------------------------------------------------
Total commercial 226 .47 107 .23 434 .45 149 .16
- -------------------------------------------------------------------------------------------------------------------------
Residential mortgage 7 .04 4 .03 12 .03 13 .04
Home equity lines 3 .09 5 .11 7 .09 11 .14
Direct/Indirect consumer 83 .78 98 .96 178 .85 205 1.02
Consumer finance 42 .94 92 2.59 90 1.08 209 2.92
Bankcard 153 5.94 197 6.36 308 5.78 430 6.57
Foreign consumer 6 .65 2 .28 10 .54 4 .25
- -------------------------------------------------------------------------------------------------------------------------
Total consumer 294 .69 398 1.02 605 .73 872 1.12
- -------------------------------------------------------------------------------------------------------------------------
Total net charge-offs $520 .57 % $505 .59 % $1,039 .58 % $1,021 .60 %
=========================================================================================================================
Selected managed net charge-offs
and ratios
Managed bankcard $294 6.13 % $331 6.52 % $587 6.07 % $671 6.65 %
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 and leases.
</TABLE>
Commercial Real Estate - Total commercial real estate - domestic loans
totaled $25.1 billion and $26.9 billion on June 30, 1999 and December 31, 1998,
respectively, or 7 percent and 8 percent of loans and leases, respectively.
Total commercial real estate - domestic loans, the
portion of such loans which are nonperforming, 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.
Commercial real estate - domestic loans past due 90 days or more and
still accruing interest were $19 million, or 0.08 percent of commercial real
estate - domestic loans, on June 30, 1999 and $12 million, or 0.04 percent, on
December 31, 1998.
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 June 30, 1999, the Corporation had approximately $15 billion of commercial
loans which were not real estate dependent but for which the Corporation had
obtained real estate as secondary repayment security.
39
<PAGE>
<TABLE>
<CAPTION>
Table Ten
Real Estate Commercial Loans, Foreclosed Properties
and Other Real Estate Credit Exposures
June 30, 1999
Loans Other
------------------------------------ Foreclosed Credit
(Dollars in Millions) Outstanding Nonperforming Properties (1) Exposures (2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
By Geographic Region (3)
California $ 5,996 $20 $ 45 $ 833
Southwest 3,364 25 2 379
Northwest 2,957 9 - 135
Florida 2,717 47 6 338
Geographically diversified 2,339 - - 389
Midwest 1,908 40 26 116
Midatlantic 1,675 17 6 281
Carolinas 1,156 12 9 89
Midsouth 1,154 9 3 128
Northeast 1,034 19 - 93
Other states 768 9 21 954
Non-US 297 - - -
- ----------------------------------------------------------------------------------------------------------
Total $25,365 $207 $118 $3,735
==========================================================================================================
By Property Type
Office buildings $4,951 $28 $ 8 $ 242
Apartments 4,760 14 1 979
Shopping centers/retail 3,229 36 29 479
Residential 2,620 26 3 189
Industrial/warehouse 2,223 21 1 110
Hotels/motels 1,419 15 - 81
Land and land development 1,166 11 48 220
Miscellaneous commercial 883 7 7 36
Multiple use 845 4 - 6
Unsecured 403 1 - 93
Non-US 297 - - -
Other 2,569 44 21 1,300
- ----------------------------------------------------------------------------------------------------------
Total $25,365 $207 $118 $3,735
==========================================================================================================
(1) Foreclosed properties include commercial real estate loans only.
(2) Other credit exposures include primarily letters of credit and loans held for sale.
(3) Distribution based on geographic location of collateral.
</TABLE>
Commercial - Total commercial - domestic loans outstanding totaled $136.7
billion and $137.4 billion on June 30, 1999 and December 31, 1998, respectively,
or 38 percent and 39 percent of loans and leases, respectively. The Corporation
had commercial domestic loan net charge-offs for the six months ended June 30,
1999 of $328 million, or 0.48 percent of average commercial - domestic loans,
compared to $77 million, or 0.12 percent of average commercial - domestic loans
for the six months ended June 30, 1998. The increase was spread across several
borrowers without concentration in any single industry or geographic region.
Nonperforming commercial - domestic
40
<PAGE>
loans were $1.1 billion, or 0.79 percent of commercial - domestic loans, on June
30, 1999, compared to $812 million, or 0.59 percent, on December 31, 1998.
Commercial - domestic loans past due 90 days or more and still accruing interest
were $192 million, or 0.14 percent of commercial domestic loans, on June 30,
1999 compared to $135 million, or 0.10 percent, on December 31, 1998.
Commercial - foreign loans outstanding totaled $30.5 billion and $31.5
billion on June 30, 1999 and December 31, 1998, respectively, or eight percent
and nine percent of loans and leases, respectively. The Corporation had
commercial - foreign loan net charge-offs for the six months ended June 30,
1999 of $113 million, or 0.74 percent of average commercial - foreign loans,
compared to $71 million, or 0.48 percent of average commercial - foreign
loans for the six months ended June 30, 1998. Nonperforming commercial -
foreign loans were $492 million, or 1.6 percent of commercial - foreign loans,
on June 30, 1999, compared to $314 million, or 1.0 percent, on December 31,
1998. Commercial - foreign loans past due 90 days or more and still accruing
interest were $64 million, or 0.21 percent of commercial - foreign loans, on
June 30, 1999 compared to $23 million, or 0.07 percent, on December 31, 1998.
For additional information see International Developments on page 42.
<TABLE>
<CAPTION>
Table Eleven
Significant Industry Loans and Leases (1)
June 30, 1999
(Dollars in Millions) Outstanding
----------------------------------------------------------------------
<S> <C>
Transportation $10,556
Media 8,603
Health care 8,537
Equipment and general manufacturing 8,477
Oil and gas 7,999
Agribusiness 7,398
Retail 7,378
Business services 7,221
Autos 6,656
Telecom 5,017
(1) Includes only non-real estate commercial loans and leases.
</TABLE>
Consumer - On June 30, 1999 and December 31, 1998, total domestic consumer
loans outstanding totaled $167.4 billion and $157.6 billion, respectively, or 46
percent and 44 percent of loans and leases, respectively.
Average residential mortgage loans were $80.2 billion and $78.0 billion,
respectively, for the three months and six months ended June 30, 1999 compared
to $69.3 billion and $69.8 billion for the same prior year periods, reflecting
an increase in retail origination activity due to a decline in the general level
of interest rates.
Average managed bankcard receivables were $19.2 billion and $19.5 billion,
respectively, for the three months and six months ended June 30, 1999 compared
to $20.4 billion for both the periods in 1998.
Average other consumer loans for the three months and six months ended
June 30, 1999 were $75.9 billion and $74.5 billion, respectively, compared to
$70.9 billion and $71.2 billion for the same prior year periods. The increase
was net of the impact of approximately $4.5 billion of securitizations that
occurred throughout 1998 and $1.9 billion of securitizations for the six months
ended June 30, 1999. Average managed other consumer loans, which include direct
and indirect consumer loans and home equity lines of credit, as well as indirect
auto loan and consumer finance securitizations, totaled $86.5 billion and $84.9
41
<PAGE>
billion in the three months and six months ended June 30, 1999, respectively,
and $75.1 billion and $74.4 billion in the same periods of 1998.
Total domestic consumer net charge-offs during the six months ended
June 30, 1999 decreased $273 million compared to the same period in 1998 due
mainly to lower bankcard and consumer finance net charge-offs.
Total consumer loans past due 90 days or more and still accruing interest
were $356 million, or 0.21 percent of total consumer loans, on June 30, 1999
compared to $441 million, or 0.27 percent, on December 31, 1998. Total consumer
nonperforming loans were $1.0 billion, or 0.60 percent of total consumer loans
and $1.1 billion, or 0.65 percent on June 30, 1999 and December 31, 1998,
respectively.
International Developments - During 1998, and continuing into 1999, a
number of countries in Asia, Latin America and Eastern Europe experienced
economic difficulties due to a combination of structural problems and negative
market reaction that resulted from increased awareness of these problems. While
each country's situation is unique, many share common factors such as: (1)
government actions which restrain normal functioning of free markets in physical
goods, capital and/or currencies; (2) perceived weaknesses of the banking
systems; and (3) perceived overvaluation of local currencies. In addition, since
these factors have resulted in capital movement out of the countries or in
reduced capital inflows, many of these countries are experiencing liquidity
problems in addition to the structural problems.
Where appropriate, the Corporation has adjusted its activities (including
its borrower selection) in light of the risks and opportunities discussed above.
The Corporation also has continued to reduce its exposures in Asia, Latin
America and Central and Eastern Europe throughout 1999. The Corporation will
continue to monitor and adjust its foreign activities on a country by country
basis depending on management's judgment of the likely developments in each
country and will take action as deemed appropriate. For a more comprehensive
discussion of the Corporation's risk management processes, refer to pages 29
through 35 of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998.
Regional Foreign Exposure - Through its credit and market risk management
activities, the Corporation has been devoting special attention to those
countries that have been negatively impacted by increasing global economic
pressure. This includes special attention to those Asian countries that are
currently experiencing currency and other economic problems, as well as
countries within Latin America and Eastern Europe which are also experiencing
similar problems.
In connection with its efforts to maintain a diversified portfolio, the
Corporation limits its exposure to any one geographic region or country and
monitors this exposure on a continuous basis. Table Twelve sets forth selected
regional exposures as of June 30, 1999. On June 30, 1999, the Corporation's
total exposure was $31.7 billion, a decrease of $5.0 billion from
December 31, 1998.
42
<PAGE>
The following table is based on the Federal Financial Institutions
Examination Council's instructions for periodic reporting of foreign exposures.
The table has been expanded to include "Gross Local Country Claims" as defined
in the table below and may not be consistent with disclosures by other financial
institutions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Table Twelve
Regional Foreign Exposure
Increase Increase
Total Gross Other Total (Decrease) (Decrease)
Cross- Local Cross- Exposure from from
Border Country Border June 30 March 31 December 31
(Dollars in Millions) Loans Claims (1) Claims (2) 1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Region/Country
Asia
China $ 82 $ 124 $143 $ 349 $ (94) $(100)
Hong Kong 44 4,549 333 4,926 (7) (262)
India 629 1,770 161 2,560 116 42
Indonesia 399 99 80 578 (99) (145)
Japan 173 1,231 2,160 3,564 (454) (1,497)
Korea (South) 499 541 793 1,833 (19) (46)
Malaysia 26 574 69 669 (100) (59)
Pakistan 13 369 14 396 100 44
Philippines 252 89 158 499 55 (84)
Singapore 115 1,440 191 1,746 (10) (260)
Taiwan 300 1,515 200 2,015 (179) (275)
Thailand 86 554 135 775 (79) (175)
Other 4 126 30 160 2 7
- -------------------------------------------------------------------------------------------------------------------------------
2,622 12,981 4,467 20,070 (768) (2,810)
- -------------------------------------------------------------------------------------------------------------------------------
Central and Eastern Europe
Russian Federation 26 - 7 33 (11) (27)
Other 231 75 259 565 (44) (139)
- -------------------------------------------------------------------------------------------------------------------------------
257 75 266 598 (55) (166)
- -------------------------------------------------------------------------------------------------------------------------------
Latin America
Argentina 596 353 264 1,213 (29) (54)
Brazil 1,300 691 912 2,903 (351) (515)
Chile 697 422 165 1,284 (134) (367)
Colombia 430 21 89 540 (39) (258)
Mexico 1,939 248 1,988 4,175 (402) (763)
Venezuela 101 56 352 509 (8) (48)
Other 231 - 179 410 16 (20)
- -------------------------------------------------------------------------------------------------------------------------------
5,294 1,791 3,949 11,034 (947) (2,025)
- -------------------------------------------------------------------------------------------------------------------------------
Total $8,173 $14,847 $8,682 $31,702 $(1,770) $(5,001)
===============================================================================================================================
(1) Includes the following claims by the Corporation's foreign offices on local country residents regardless of the currency: loans,
trading account securities, derivative products, unused commitments, standby letters of credit, commercial letters of credit,
formal guarantees, and securities available for sale (at market value) and held for investment (at cost).
(2) Includes: accrued interest receivable, acceptances, interest-bearing deposits in banks, trading account securities, other
interest-earning investments, other short-term monetary assets, unrealized gains on off-balance sheet instruments, unused
commitments, standby letters of credit, commercial letters of credit, formal guarantees, and available for sale and held to
maturity securities, including securities that are collateralized by U.S. Treasury securities as follows: Mexico - $1,098,
Venezuela - $199, Philippines - $22 and Latin America Other - $83. Held for investment securities amounted to $767
with a fair value of $566.
</TABLE>
43
<PAGE>
Off-Balance Sheet Financial Instruments
Derivatives - Asset and Liability Management (ALM) Activities
Interest rate contracts are used in the Corporation's ALM process. These
contracts, which are generally non-leveraged generic interest rate and basis
swaps, options and futures, 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 amount. 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. 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. Futures contracts used for ALM
activities are primarily index futures providing for cash payments based upon
the movements of a deposit rate index.
The amount of net realized deferred gains associated with terminated ALM
swaps were $246 million and $294 million at June 30, 1999 and December 31, 1998,
respectively. The amount of net realized deferred losses associated with
terminated ALM futures and forward rate contracts was $16 million and $1 million
at June 30, 1999 and December 31, 1998, respectively. The amount of net realized
deferred gains associated with terminated ALM options were $41 million and $26
million at June 30, 1999 and December 31, 1998, respectively. See Note Six of
the consolidated financial statements on page 12 for information on the notional
amount and fair value of the Corporation's ALM interest rate contracts.
In addition, the Corporation uses foreign currency contracts to manage the
foreign exchange risk associated with foreign-denominated assets and
liabilities, as well as the Corporation's equity investments in foreign
subsidiaries. Foreign exchange contracts, which include spot, forward and
futures contracts, represent agreements to exchange the currency of one country
for the currency of another country at an agreed-upon price, on an agreed-upon
settlement date. At June 30, 1999, these contracts had a notional amount of $8.8
billion and an unrealized loss of $10.0 million.
The fair values of the ALM interest rate and 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 and servicing activities, see the "Noninterest Income"
section on page 28.
Market Risk Management
In the normal course of conducting its business activities, the Corporation
is exposed to market risks including price and liquidity risk. Market risk is
the potential for loss arising from adverse changes in market rates and prices,
such as interest rates (interest rate risk), foreign currency exchange rates
(foreign exchange risk), commodity prices (commodity risk) and prices of equity
securities (equity risk). Financial products that expose the Corporation to
market risk include securities, loans, deposits, debt and derivative financial
instruments such as futures, forwards, swaps, options and other financial
instruments with similar characteristics. Liquidity risk arises from the
possibility that the Corporation may not be able to satisfy current or future
financial commitments or that the Corporation may be more reliant on alternative
funding sources such as long-term debt.
Market risk is managed by the Corporation's Finance Committee, which
formulates policy based on desirable levels of market risk. In setting desirable
levels of market risk, the Finance Committee considers the impact on both
earnings and capital of the current outlook in market rates, potential changes
in market rates, world and regional economies, liquidity, business strategies
and other factors.
With the exception of securities available for sale, which had an
unrealized loss of $2.4 billion at June 30, 1999, compared to an unrealized gain
of $0.4 billion at December 31, 1998, the expected maturities, unrealized gains
and losses and weighted average effective yields and rates associated with the
44
<PAGE>
Corporation's significant non-trading, on-balance sheet financial instruments
at June 30, 1999 were not significantly different from those at
December 31, 1998. For a discussion of non-trading, on-balance sheet financial
instruments see page 30 and Table Nine on page 31 of the Market Risk Management
section of the Corporation's 1998 Annual Report on Form 10-K.
Risk management interest rate contracts are utilized in the ALM process.
Such contracts, which are generally non-leveraged generic interest rate and
basis swaps, futures, forwards, and options, allow the Corporation to
effectively manage its interest rate risk position. As reflected in Table
Thirteen, the notional amount of the Corporation's receive fixed and pay fixed
interest rate swaps on June 30, 1999 was $68.1 billion and $24.5 billion,
respectively. The receive fixed interest rate swaps are primarily converting
variable-rate commercial loans to fixed-rate. The net receive fixed position on
June 30, 1999 was $43.6 billion notional compared to $34.7 billion notional on
December 31, 1998. In addition, the Corporation had $8.4 billion notional of
basis swaps at June 30, 1999 linked primarily to loans and long-term debt.
Table Thirteen also summarizes the estimated duration, weighted average pay
and receive rates and the unrealized gains and losses on June 30, 1999 of the
Corporation's ALM interest rate swaps, as well as the estimated duration and
unrealized gains and losses on June 30, 1999 of the Corporation's ALM basis
swaps and options contracts. Unrealized gains and losses are based on the last
repricing and will change in the future primarily based on movements in one-,
three- and six-month LIBOR rates. The ALM swap portfolio had an unrealized loss
of $811 million at June 30, 1999 and an unrealized gain of $942 million at
December 31, 1998. The change is primarily attributable to an increase in
interest rates. The net unrealized loss in the estimated value of the ALM
interest rate contracts 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 and servicing activities, see the "Noninterest Income"
section on page 28.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Table Thirteen
Asset and Liability Management Interest Rate Contracts
June 30, 1999
Expected Maturity
------------------------------------------------------------------------------ Average
(Dollars in Millions, Fair After Estimated
Average Estimated Duration in Years) Value Total 1999 2000 2001 2002 2003 2003 Duration
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total receive fixed swaps $(543) 4.15
Notional amount $68,064 $3,583 $12,848 $11,536 $3,216 $14,145 $22,736
Weighted average receive rate 6.14 % 5.99 % 5.96 % 6.46 % 6.85 % 5.69 % 6.28 %
Total pay fixed swaps $(263) 3.12
Notional amount $24,450 $3,419 $ 6,901 $ 4,492 $1,727 $ 2,477 $ 5,434
Weighted average pay rate 6.70 % 6.44 % 6.84 % 6.41 % 6.85 % 7.12 % 6.68 %
Basis swaps $ (5) 4.65
-------
Notional amount $8,444 $ 525 $ 743 $ 611 $1,669 $ 4,896 $ -
Total swaps $(811)
- ------------------------------------------------------------------------------------------------------------------------------------
Option products $(20)
Notional amount $32,291 $ 445 $ 505 $2,088 $ 868 $ 1,950 $26,435
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest rate contracts $(831)
========
</TABLE>
The table on the following page sets forth the calculated value-at-risk
(VAR) amounts for the six months ended June 30, 1999 for the Corporation's
trading activity. The amounts are calculated on a pre-tax basis. The first
45
<PAGE>
calculation assumes that each portfolio segment experiences adverse price
movements at the same time (i.e., the price movements are perfectly correlated).
The second calculation assumes that these adverse price movements within the
major portfolio segments do not occur at the same time (i.e., they are
uncorrelated). While the Corporation's trading positions resulted in improved
trading results in the six months ended June 30, 1999, compared to the same
period in 1998, the Corporation continued to lower its market risk. For
additional discussion of market risk associated with the trading portfolio, the
VAR model and how the Corporation manages its exposure to market risk, see pages
32 and 33 of the Corporation's 1998 Annual Report on Form 10-K. The composition
of the trading portfolio and the related fair values are included in Note Three
of the consolidated financial statements on page 8.
<TABLE>
<CAPTION>
Trading Activities Market Risk
--------------------------------------------------------
Six Months Ended June 30, 1999
--------------------------------------------------------
(US Dollar Equivalents in Millions) Average VAR High VAR (1) Low VAR (1)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Based on perfect positive correlation:
Interest rate $96.6 $126.8 $74.9
Foreign currency 12.5 18.2 7.9
Commodities 1.7 3.5 .9
Equity 9.0 13.9 3.0
Based on zero correlation:
Interest rate 28.4 41.2 21.2
Foreign currency 10.0 15.4 6.1
Commodities 1.3 3.0 .6
Equity 8.2 12.4 2.6
- -----------------------------------------------------------------------------------------------------
(1) The high and low for the entire trading account may not equal the sum of the individual components as the
highs or lows of the components occurred on different trading days.
</TABLE>
Capital Resources and Capital Management
Presented below are the Corporation's regulatory capital ratios on June
30, 1999 and December 31, 1998. The Corporation and its significant banking
subsidiaries were considered "well-capitalized" on June 30, 1999.
<TABLE>
<CAPTION>
June 30 December 31
(Dollars in Millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Risk-Based Capital Ratios:
Tier 1 Capital $ 38,145 $ 36,849
Tier 1 Capital ratio 7.38 % 7.06 %
Total Capital $ 57,365 $ 57,055
Total Capital ratio 11.09 % 10.94 %
Leverage ratio 6.34 6.22
Risk-weighted assets $ 517,130 $ 521,637
- --------------------------------------------------------------------------------
</TABLE>
The regulatory capital guidelines measure capital in relation to the credit
and market risk of both on- and off-balance sheet items using various risk
weights. Under the regulatory capital guidelines, Total Capital consists of
three tiers of capital. Tier 1 Capital includes common shareholders' equity and
qualifying preferred stock, less goodwill and other adjustments. Tier 2 Capital
consists of preferred stock not qualifying as Tier 1 Capital, mandatory
convertible debt, limited amounts of subordinated debt, other qualifying term
debt and the allowance for credit losses up to 1.25 percent of risk-weighted
assets. Tier 3 Capital includes subordinated debt that is unsecured, fully paid,
has an original maturity of at least two years, is not redeemable before
maturity without prior approval by the Federal Reserve and includes a lock-in
clause precluding payment of either interest or principal if the payment would
cause the issuing bank's risk-based capital ratio to fall or remain below the
46
<PAGE>
required minimum. At June 30, 1999, the Corporation had no subordinated debt
that qualified as Tier 3 Capital.
The Corporation's and its significant banking subsidiaries' regulatory
capital ratios on June 30, 1999 exceeded the regulatory minimums of four
percent for Tier 1 risk-based capital, eight percent for total risk-based
capital and the leverage guidelines of 100 to 200 basis points above the
minimum ratio of three percent.
47
<PAGE>
<TABLE>
<CAPTION>
Table Fourteen
Selected Quarterly Operating Results
1999 Quarters
---------------------------
(Dollars in Millions, Except Per-Share Information) Second First
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ 9,206 $ 9,201
Interest expense 4,594 4,601
Net interest income 4,612 4,600
Net interest income (taxable-equivalent) 4,663 4,645
Provision for credit losses 510 510
Gains on sales of securities 52 130
Noninterest income 3,522 3,223
Merger-related charges, net 200 -
Other noninterest expense 4,457 4,453
Income before income taxes 3,019 2,990
Income tax expense 1,104 1,076
Net income 1,915 1,914
Net income (excluding merger-related charges) 2,060 1,914
Earnings per common share 1.10 1.10
Earnings per common share (excluding merger-related charges) 1.18 1.10
Diluted earnings per common share 1.07 1.08
Diluted earnings per common share (excluding merger-related charges) 1.15 1.08
Dividends per common share .45 .45
Yield on average earning assets 7.00 % 7.13 %
Rate on average interest-bearing liabilities 4.16 4.26
Net interest spread 2.84 2.87
Net interest yield 3.53 3.58
Average total assets $ 615,364 $ 609,624
Average total deposits 342,249 345,931
Average total shareholders' equity 46,891 46,279
Return on average assets 1.25 % 1.27 %
Return on average assets (excluding merger-related charges) 1.34 1.27
Return on average common shareholders' equity 16.40 16.78
Return on average common shareholders' equity (excluding merger-related charges) 17.64 16.78
Cash basis financial data (1)
Earnings per common share $ 1.23 $ 1.23
Earnings per common share (excluding merger-related charges) 1.31 1.23
Diluted earnings per common share 1.20 1.20
Diluted earnings per common share (excluding merger-related charges) 1.28 1.20
Return on average tangible assets 1.43 % 1.46 %
Return on average tangible assets (excluding merger-related charges) 1.53 1.46
Return on average tangible common shareholders' equity 26.68 27.44
Return on average tangible common shareholders'
equity (excluding merger-related charges) 28.49 27.44
Market price per share of common stock
Closing price $ 73 5/16 $ 70 5/8
High for the period 76 1/8 74 1/2
Low for the period 61 1/2 59 1/2
Risk-based capital ratios (period-end)
Tier 1 capital 7.38 % 7.40 %
Total capital 11.09 11.17
(1) Cash basis calculations exclude goodwill and other intangible assets and the related amortization expense.
</TABLE>
48
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -
Market Risk Management" on page 44 and the
sections referenced therein for Quantitative and
Qualitative Disclosures about Market Risk.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Part II. Other Information
Item 1. Legal Litigation
Proceedings
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 actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, environmental, banking and other laws.
The Corporation and certain present and former officers and directors have
been named as defendants in a number of actions filed in several federal courts
that have been consolidated for pretrial purposes before a Missouri federal
court. The amended complaint in the consolidated actions alleges, among other
things, that the defendants failed to disclose material facts about
BankAmerica's losses relating to D.E. Shaw & Co., L.P. until mid-October 1998,
in violation of various provisions of federal and state laws. The amended
complaint also alleges that the proxy statement-prospectus of August 4, 1998,
falsely stated that the Merger would be one of equals and alleges a scheme to
have NationsBank gain control over the newly merged entity. The Missouri federal
court has certified classes consisting generally of persons who were
shareholders of NationsBank or BankAmerica on September 30, 1998, or were
entitled to vote on the Merger, or who purchased or acquired securities of the
Corporation or its predecessors between August 4, 1998 and October 13, 1998.
Similar uncertified class actions (including one limited to California
residents) are pending in California state court, alleging violations of the
California Corporations Code and other state laws. The Corporation believes the
actions lack merit and will defend them vigorously. The amount of any ultimate
exposure cannot be determined with certainty at this time.
Management believes that the actions and proceedings and the losses, if
any, resulting from the final outcome thereof, will not be material in the
aggregate to the Corporation's financial position or results of operations.
49
<PAGE>
Item 6. Exhibits a) Exhibits
and Reports on
Form 8-K
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 June 30, 1999:
Current Report on Form 8-K dated April 19, 1999
and filed April 23, 1999, Items 5 and 7.
Current Report on Form 8-K dated April 28, 1999 and
filed May 7, 1999, Items 5 and 7.
Current Report on Form 8-K dated June 9, 1999 and
filed June 15, 1999, Items 5 and 7.
Current Report on Form 8-K dated June 23, 1999 and
filed June 30, 1999, Items 5 and 7.
50
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bank of America Corporation
---------------------------
Registrant
Date: August 16 , 1999
---------------- /s/ MARC D. OKEN
-----------------
MARC D. OKEN
Executive Vice President and
Principal Financial Executive
(Duly Authorized Officer and
Chief Accounting Officer)
51
<PAGE>
Bank of America 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
52
Exhibit 11
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Shares in Thousands, Dollars in Millions ------------------------------------------------------------------
Except Per-Share Information) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average common shares outstanding 1,743,503 1,732,168 1,740,549 1,728,353
Dilutive effect of:
Convertible preferred stock 3,098 3,123 3,098 3,123
Stock options 40,244 49,421 39,670 47,471
- ---------------------------------------------------------------------------------------------------------------------------
Total dilutive average shares 1,786,845 1,784,712 1,783,317 1,778,947
===========================================================================================================================
Net income available to common shareholders $ 1,914 $ 2,287 $ 3,826 $ 3,607
Preferred dividends paid on dilutive convertible
preferred stock 1 1 3 3
- ---------------------------------------------------------------------------------------------------------------------------
Total net income available to common shareholders
adjusted for full dilution $ 1,915 $ 2,288 $ 3,829 $ 3,610
===========================================================================================================================
Diluted earnings per common share $ 1.07 $ 1.28 $ 2.15 $ 2.03
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<TABLE>
<CAPTION>
Bank of America Corporation and Subsidiaries Exhibit 12(a)
Ratio of Earnings to Fixed Charges
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
Six Months ---------------------------------------------------------
Ended
(Dollars in Millions) June 30, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Excluding Interest on Deposits
Income before income taxes $6,009 $8,048 $10,556 $9,311 $8,377 $7,010
Less: Equity in undistributed (earnings) losses
of unconsolidated subsidiaries (73) 162 (49) (7) (19) (55)
Fixed charges:
Interest expense (including capitalized interest) 4,715 9,479 8,219 7,082 6,354 4,572
1/3 of net rent expense 166 335 302 282 275 250
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed charges 4,881 9,814 8,521 7,364 6,629 4,822
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (excluding capitalized interest) $10,817 $18,024 $19,026 $16,668 $14,987 $11,774
- ----------------------------------------------------------------------------------------------------------------------------
Fixed charges $4,881 $9,814 $8,521 $7,364 $6,629 $4,822
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 2.22 1.84 2.23 2.26 2.26 2.44
============================================================================================================================
<CAPTION>
Year Ended December 31
Six Months ---------------------------------------------------------
Ended
(Dollars in Millions) June 30, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Including Interest on Deposits
Income before income taxes $6,009 $8,048 $10,556 $9,311 $8,377 $7,010
Less: Equity in undistributed (earnings) losses
of unconsolidated subsidiaries (73) 162 (49) (7) (19) (55)
Fixed charges:
Interest expense (including capitalized interest) 9,195 20,290 18,903 16,682 16,369 11,083
1/3 of net rent expense 166 335 302 282 275 250
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed charges 9,361 20,625 19,205 16,964 16,644 11,333
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (excluding capitalized interest) $15,297 $28,835 $29,710 $26,268 $25,002 $18,285
- ----------------------------------------------------------------------------------------------------------------------------
Fixed charges $9,361 $20,625 $19,205 $16,964 $16,644 $11,333
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.63 1.40 1.55 1.55 1.50 1.61
============================================================================================================================
</TABLE>
54
<TABLE>
<CAPTION>
Bank of America Corporation and Subsidiaries Exhibit 12(b)
Ratio of Earnings to Fixed Charges and Preferred Dividends
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
Six Months ---------------------------------------------------------
Ended
(Dollars in Millions) June 30, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Excluding Interest on Deposits
Income before income taxes $6,009 $8,048 $10,556 $9,311 $8,377 $7,010
Less: Equity in undistributed (earnings) losses
of unconsolidated subsidiaries (73) 162 (49) (7) (19) (55)
Fixed charges:
Interest expense (including capitalized interest) 4,715 9,479 8,219 7,082 6,354 4,572
1/3 of net rent expense 166 335 302 282 275 250
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed charges 4,881 9,814 8,521 7,364 6,629 4,822
Preferred dividend requirements 5 40 183 332 426 467
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (excluding capitalized interest) $10,817 $18,024 $19,026 $16,668 $14,987 $11,774
- ----------------------------------------------------------------------------------------------------------------------------
Fixed charges and preferred dividends $4,886 $9,854 $8,704 $7,696 $7,055 $5,289
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and preferred dividends 2.21 1.83 2.19 2.17 2.12 2.23
============================================================================================================================
<CAPTION>
Year Ended December 31
Six Months ---------------------------------------------------------
Ended
(Dollars in Millions) June 30, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Including Interest on Deposits
Income before income taxes $6,009 $8,048 $10,556 $9,311 $8,377 $7,010
Less: Equity in undistributed (earnings) losses
of unconsolidated subsidiaries (73) 162 (49) (7) (19) (55)
Fixed charges:
Interest expense (including capitalized interest) 9,195 20,290 18,903 16,682 16,369 11,083
1/3 of net rent expense 166 335 302 282 275 250
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed charges 9,361 20,625 19,205 16,964 16,644 11,333
Preferred dividend requirements 5 40 183 332 426 467
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (excluding capitalized interest) $15,297 $28,835 $29,710 $26,268 $25,002 $18,285
- ----------------------------------------------------------------------------------------------------------------------------
Fixed charges and preferred dividends $9,366 $20,665 $19,388 $17,296 $17,070 $11,800
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and preferred dividends 1.63 1.40 1.53 1.52 1.46 1.55
============================================================================================================================
</TABLE>
55
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary information extracted from the June 30, 1999 Form
10-Q for Bank of America corporation and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 24,197
<INT-BEARING-DEPOSITS> 5,350
<FED-FUNDS-SOLD> 35,907
<TRADING-ASSETS> 35,427
<INVESTMENTS-HELD-FOR-SALE> 75,012
<INVESTMENTS-CARRYING> 1,499
<INVESTMENTS-MARKET> 1,311
<LOANS> 363,581
<ALLOWANCE> (7,096)
<TOTAL-ASSETS> 614,102
<DEPOSITS> 339,045
<SHORT-TERM> 136,360
<LIABILITIES-OTHER> 38,007
<LONG-TERM> 55,059
0
80
<COMMON> 14,433
<OTHER-SE> 31,118
<TOTAL-LIABILITIES-AND-EQUITY> 614,102
<INTEREST-LOAN> 13,623
<INTEREST-INVEST> 2,318
<INTEREST-OTHER> 2,466
<INTEREST-TOTAL> 18,407
<INTEREST-DEPOSIT> 4,480
<INTEREST-EXPENSE> 9,195
<INTEREST-INCOME-NET> 9,212
<LOAN-LOSSES> 1,020
<SECURITIES-GAINS> 182
<EXPENSE-OTHER> 8,910
<INCOME-PRETAX> 6,009
<INCOME-PRE-EXTRAORDINARY> 6,009
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,829
<EPS-BASIC> 2.20
<EPS-DILUTED> 2.15
<YIELD-ACTUAL> 3.55
<LOANS-NON> 2,812
<LOANS-PAST> 631
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,122
<CHARGE-OFFS> 1,338
<RECOVERIES> 299
<ALLOWANCE-CLOSE> 7,096
<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>
