NationsBank Corporation and Subsidiaries Financial Summary - -------------------------------------------------------------------------------- (Dollars in Millions Except Per-Share Information)
1994 1993 Change ------------------------------------- For the Year Net income before effect of change in method of accounting for income taxes.......................... $ 1,690 $ 1,301 29.9 % Net income................................................ 1,690 1,501 12.6 Earnings per common share before effect of change in method of accounting for income taxes................ 6.12 5.00 22.4 Earnings per common share................................. 6.12 5.78 5.9 Cash dividends paid on common shares...................... 517 423 22.2 Dividends per common share................................ 1.88 1.64 14.6 Return on average common shareholders' equity............. 16.10 % 15.00 % At Year-End Assets.................................................... $ 169,604 $ 157,686 Deposits.................................................. 100,470 91,113 Loans, leases and factored accounts receivable, net of unearned income.................................. 103,371 92,007 Securities................................................ 25,825 29,054 Earning assets............................................ 151,722 140,890 Total shareholders' equity................................ 11,011 9,979 Per common share........................................ 39.70 36.39 Common shares issued (thousands).......................... 276,452 270,905 Market price per share of common stock.................... $ 45 1/8 $ 49 Daily Average Assets.................................................... $ 166,319 $ 134,400 for the Year Deposits.................................................. 93,757 83,471 Loans and leases, net of unearned income.................. 95,006 78,984 Securities................................................ 27,434 25,840 Earning assets............................................ 148,381 119,182 Total shareholders' equity................................ 10,484 8,651 Common shares issued (thousands).......................... 274,656 257,969 Risk-Based Tier 1.................................................... 7.43 % 7.41 % Capital Ratios Total..................................................... 11.47 11.73
Management's Discussion And Analysis 1994 Compared To 1993 Overview NationsBank Corporation (NationsBank or the Corporation) is a bank holding company headquartered in Charlotte, North Carolina, which provides financial products and services, both domestically and internationally. With $170 billion of total assets on December 31, 1994, NationsBank is the fourth largest banking company in the United States. Results for 1994 demonstrated the power and breadth of the Corporation's franchise and the diversity of its business activities. Despite the pressures of steadily rising interest rates and difficult financial markets in 1994, the Corporation's net income of $1.7 billion represented an increase of $389 million, or 30 percent, over 1993. Earnings in 1993 were $1.3 billion, excluding the impact of adopting a new income tax accounting standard. Earnings per common share were $6.12 and $5.00 for 1994 and 1993, respectively. Including the $200-million, or $.78-per-share impact of the new accounting standard, net income for 1993 was $1.5 billion, or $5.78 per common share. - -------------------------------------------------------------------------------- 1 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Dollars in Millions Except Per-Share Information)
1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- Income statement Income from earning assets...................................... $10,529 $8,327 $7,780 $9,398 $10,278 Interest expense................................................ 5,318 3,690 3,682 5,599 6,670 Net interest income (taxable-equivalent)........................ 5,305 4,723 4,190 3,940 3,771 Net interest income............................................. 5,211 4,637 4,098 3,799 3,608 Provision for credit losses..................................... 310 430 715 1,582 1,025 Gains (losses) on sales of securities........................... (13) 84 249 454 67 Noninterest income.............................................. 2,597 2,101 1,913 1,742 1,605 Other real estate owned expense (income)........................ (12) 78 183 127 65 Restructuring expense........................................... - 30 - 330 91 Other noninterest expense....................................... 4,942 4,293 3,966 3,847 3,473 Income tax expense (benefit).................................... 865 690 251 (93) 31 Effect of change in method of accounting for income taxes....... - 200 - - - Net income...................................................... 1,690 1,501 1,145 202 595 Per common share Earnings before effect of change in method of accounting for income taxes.................................... 6.12 5.00 4.60 .76 2.61 Earnings........................................................ 6.12 5.78 4.60 .76 2.61 Cash dividends paid............................................. 1.88 1.64 1.51 1.48 1.42 Shareholders' equity (year-end)................................. 39.70 36.39 30.80 27.03 27.30 Market price of common stock (close at year end)................ 45 1/8 49 51 3/8 40 5/8 22 7/8 Balance sheet (year-end) Total loans, leases and factored accounts receivable, net of unearned income......................................... 103,371 92,007 72,714 69,108 70,891 Total assets.................................................... 169,604 157,686 118,059 110,319 112,791 Total deposits.................................................. 100,470 91,113 82,727 88,075 89,065 Long-term debt and obligations under capital leases............. 8,488 8,352 3,066 2,876 2,766 Total shareholders' equity...................................... 11,011 9,979 7,814 6,518 6,283 Performance ratios Return on average assets........................................ 1.02% .97% 1.00% .17% .52% Return on average common shareholders' equity (1)............... 16.10 15.00 15.83 2.70 9.56 Market price per share of common stock High for the period............................................. $ 57 3/8 $ 58 $ 53 3/8 $ 42 3/4 $ 47 1/4 Low for the period.............................................. 43 3/8 44 1/2 39 5/8 21 1/2 16 7/8
(1) Average common shareholders' equity does not include the effect of market value adjustments to securities available for sale and marketable equity securities. In 1993, return on average assets and return on average common shareholders' equity after the tax benefit from the impact of adopting the new income tax accounting standard was 1.12% and 17.33%, respectively. Management's Discussion and Analysis 25 KEY PERFORMANCE HIGHLIGHTS FOR 1994 WERE: . Return on average common shareholders' equity increased to 16.10 percent from 15.00 percent in 1993. . Taxable-equivalent net interest income increased $582 million, or 12 percent, compared to 1993, resulting from a 24-percent increase in average earning assets. Average loans and leases rose 20 percent in 1994. Adjusting for acquisitions, internal loan growth was 12 percent. . Provision for credit losses decreased 28 percent to $310 million, compared to 1993, and OREO expense declined from $78 million in 1993 to a net recovery of $12 million in 1994. Nonperforming asset levels declined 36 percent and net charge-offs declined 23 percent. . Noninterest income increased to $2.6 billion, or 24 percent, over 1993 levels. After adjusting for acquisitions, noninterest income increased 11 percent reflecting higher trading account profits, investment banking income, service charges on deposit accounts and trust fees. . Noninterest expense increased 15 percent to $4.9 billion in 1994. Adjusting for acquisitions, expense growth was held to approximately two and one-half percent in 1994, reflecting the results of corporate-wide efforts to contain expense levels. The Corporation's efficiency ratio improved to 62.54 percent in 1994 from 62.91 percent in 1993. HIGHLIGHTS FROM A CUSTOMER GROUP PERSPECTIVE WERE: . The General Bank's 1994 earnings of $932 million increased $192 million, or 26 percent, from 1993. Return on average - -------------------------------------------------------------------------------- 2 CUSTOMER GROUP SUMMARY (Dollars in Millions)
General Bank Institutional Group Financial Services Other ----------------------------------------------------------------------------------- 1994 1993 1994 1993 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income (taxable-equivalent).... $ 3,689 $ 3,479 $ 1,180 $ 1,040 $ 413 $ 204 $ 24 $ - Noninterest income.......................... 1,712 1,430 834 626 51 45 - - ----------------------------------------------------------------------------------- Total revenue............................. 5,401 4,909 2,014 1,666 464 249 24 - Provision for credit losses................. 283 364 (46) 31 73 35 - - Gains (losses) on sales of securities....... - - - - - - (13) 84 Other real estate owned expense (income).... 8 30 (27) 43 7 5 - - Restructuring expense....................... - - - - - - - 30 Noninterest expense......................... 3,644 3,342 1,087 798 212 153 - - ----------------------------------------------------------------------------------- Income before income taxes and effect of changes in method of accounting for income taxes.............................. 1,466 1,173 1,000 794 172 56 11 54 Income tax expense.......................... 534 433 369 302 69 21 (13) 20 ----------------------------------------------------------------------------------- Income before effect of change in method of accounting for income taxes............ 932 740 631 492 103 35 24 34 Effect of change in method of accounting for income taxes.......................... - - - - - - - 200 ----------------------------------------------------------------------------------- Net income.................................. $ 932 $ 740 $ 631 $ 492 $ 103 $ 35 $ 24 $ 234 =================================================================================== Net interest yield.......................... 4.52% 4.76% 2.81% (1) 3.17% (1) 7.45% 7.80% Return on equity............................ 17% 16% 16% 16% 13% 13% Efficiency ratio............................ 67.46 68.08 53.95 47.90 45.64 61.62 Average (2) Total loans and leases, net of unearned income.................. $58,582 $50,055 $31,109 $26,855 $5,537 $2,622 Total deposits............................ 77,665 71,967 11,273 8,721 - - Total assets.............................. 86,860 77,976 66,496 44,599 6,064 3,102 Year end (2) Total loans and leases, net of unearned income.................. 63,578 59,591 33,193 28,244 6,380 5,164 Total deposits............................ 79,905 79,573 13,614 8,926 - -
(1) Institutional Group's net interest yield excludes the impact of the primary government securities dealer. Including the primary government securities dealer, the net interest yield was 1.98 percent in 1994 and 2.66 percent in 1993. (2) The sums of balance sheet amounts will differ from consolidated amounts due to intercompany balances. 26 NationsBank Corporation Annual Report 1994 [PIE CHART APPEARS HERE 1994 EARNINGS CONTRIBUTION BY CUSTOMER GROUP
General Institutional Financial Bank Group Services -------- ------- ---------- Percent of net income (excludes other) 56% 38% 6%]
. common shareholders' equity increased to 17 percent in 1994 from 16 percent in 1993. . Earnings for the Institutional Group grew 28 percent to $631 million, compared to 1993 earnings of $492 million. Return on average common shareholders' equity was 16 percent in both 1994 and 1993. . Financial Services earnings were $103 million in 1994 compared to $35 million in the prior year, primarily reflecting the full-year impact of the 1993 acquisition of U S WEST Financial Services Inc. Return on average common shareholders' equity was 13 percent in both 1994 and 1993 . The analysis of the results of operations and financial condition of the Corporation is impacted by acquisitions. As more fully discussed in Note 2 to the consolidated financial statements, the more significant acquisitions, all of which were accounted for as purchases, included: . MNC Financial Inc. (MNC), a bank holding company headquartered in Baltimore, Maryland, with total assets of approximately $16.5 billion. Acquired October 1, 1993. . Approximately $2.0 billion in net receivables and the ongoing business of U S WEST Financial Services Inc., now known as Greyrock Capital Group Inc. Acquired December 1, 1993. . Primarily $12 billion of trading account assets and certain of the liabilities of Chicago Research & Trading Group Ltd. (CRT), an options market-making and trading firm and a primary government securities dealer. Acquired July 2, 1993. . Approximately $3.7 billion of finance receivables and certain of the liabilities of Chrysler First Inc., the non-automotive finance subsidiary of Chrysler Financial Corporation, which now operates as NationsCredit. Acquired February 1, 1993. . Several smaller banking organizations, including aggregate loans of $654 million and deposits of $5.1 billion. Several mortgage banking operations, including mortgage servicing rights of $8.6 billion. The remainder of management's discussion and analysis of the consolidated results of operations and financial condition of NationsBank Corporation should be read together with the consolidated financial statements and related notes presented on pages 58 through 77. Customer Group Review The Corporation is segregated into three major internal management units, or Customer Groups. These units, shown in TABLE 2, are managed with a focus on numerous performance objectives including return on equity, operating efficiency and net income. The net income of the customer groups reflects a funds transfer pricing system which derives net interest income by matching assets and liabilities with similar interest rate sensitivity and maturity characteristics. Equity capital is allocated to each customer group based on an assessment of its inherent risk. The General Bank includes the Banking Group, which contains the retail banking network and is the service provider for small and medium-size companies; Financial Products, which provides specialized services such as credit cards, residential mortgages, indirect lending and brokerage on a national basis; and Trust and Private Banking. The General Bank earned $932 million in 1994, an increase of 26 percent over 1993. Return on equity improved to 17 percent. Groups with the largest contribution toward the higher returns included the Banking Group and Card Services, driven primarily by improvement in operating efficiency and credit quality. Net interest income in the General Bank grew six percent over 1993 reflecting the benefits of deposit cost containment efforts as well as 17-percent loan growth. Approximately two-thirds of this loan growth was internally generated while the remainder resulted from acquisitions. Internally generated loan growth was concentrated in residential mortgages and commercial loans. The increase in net interest income resulting from loan growth and deposit pricing was partially offset by a narrowing of the spread between securities and market-based funds. The General Bank's efficiency ratio continued to improve in 1994, declining 62 basis points to 67.46 percent, reflecting the benefits of operational consolidation and increases in fee income. The efficiency improvement was realized despite Model Banking development expense totaling $80 million in 1994. Model Banking is a system designed and in the process of being implemented across the Corporation's franchise to enhance retail customer sales and product delivery. The Banking Group contributed 58 percent of the General Bank's earnings in 1994 with a return on equity of 15 percent. In 1993, the Banking Group's return on equity was 14 percent. During 1994, average loans increased 25 percent, or $8.4 billion, with Management's Discussion and Analysis 27 - -------------------------------------------------------------------------------- 3 12-MONTH TAXABLE-EQUIVALENT DATA (Dollars in Millions)
1994 1993 1992 ------------------------------------------------------------------------------- AVERAGE Average Average BALANCE INCOME Balance Income Balance Income SHEET OR YIELDS/ Sheet or Yields/ Sheet or Yields/ AMOUNTS EXPENSE RATES Amounts Expense Rates Amounts Expense Rates - ------------------------------------------------------------------------------------------------------------------------------------ Earning assets Loans and leases, net of unearned income (1) Commercial (2).............................. $ 41,606 $ 3,147 7.56% $ 35,050 $ 2,438 6.96% $ 29,206 $ 2,067 7.08% Real estate commercial...................... 7,780 636 8.18 6,667 506 7.59 6,769 527 7.78 Real estate construction.................... 3,155 268 8.49 2,894 217 7.50 3,718 266 7.17 ------------------------------------------------------------------------------ Total commercial.......................... 52,541 4,051 7.71 44,611 3,161 7.09 39,693 2,860 7.20 ------------------------------------------------------------------------------ Residential mortgage........................ 14,980 1,141 7.62 10,904 902 8.27 8,245 769 9.33 Home equity................................. 2,531 202 7.99 2,173 155 7.14 2,109 148 7.05 Credit card................................. 3,956 508 12.84 4,376 596 13.62 3,969 574 14.45 Other consumer.............................. 17,237 1,629 9.45 14,289 1,366 9.56 12,047 1,277 10.60 ------------------------------------------------------------------------------ Total consumer............................ 38,704 3,480 8.99 31,742 3,019 9.51 26,370 2,768 10.50 ------------------------------------------------------------------------------ Foreign..................................... 1,417 86 6.10 961 52 5.49 823 55 6.63 Lease financing............................. 2,344 176 7.50 1,670 133 7.96 1,301 107 8.25 ------------------------------------------------------------------------------ Total loans and leases, net............... 95,006 7,793 8.20 78,984 6,365 8.06 68,187 5,790 8.49 ------------------------------------------------------------------------------ Securities Held for investment......................... 15,048 761 5.06 24,823 1,375 5.54 22,541 1,542 6.84 Available for sale (3)...................... 12,386 644 5.20 1,017 49 4.80 1,785 103 5.77 ------------------------------------------------------------------------------ Total securities.......................... 27,434 1,405 5.12 25,840 1,424 5.51 24,326 1,645 6.76 ------------------------------------------------------------------------------ Loans held for sale......................... 339 23 6.63 790 53 6.73 967 70 7.22 Federal funds sold and securities purchased under agreements to resell...... 13,389 547 4.09 6,049 194 3.21 5,346 201 3.77 Time deposits placed and other short-term investments.................... 1,762 90 5.12 2,037 79 3.91 1,802 92 5.09 Trading account securities (4).............. 10,451 765 7.32 5,482 298 5.43 1,592 74 4.64 ------------------------------------------------------------------------------ Total earning assets (5).................. 148,381 10,623 7.16 119,182 8,413 7.06 102,220 7,872 7.70 Cash and cash equivalents....................... 8,271 7,275 6,512 Factored accounts receivable.................... 1,252 1,074 949 Other assets, less allowance for credit losses and excluding Special Asset Division.......... 8,415 6,869 5,366 ------------------------------------------------------------------------------ Total assets, excluding Special Asset Division............................ $166,319 $134,400 $115,047 ============================================================================== Interest-bearing liabilities Savings....................................... $9,116 212 2.33 $ 6,774 161 2.38 $ 5,646 161 2.86 NOW and money market deposit accounts......... 29,724 696 2.34 28,641 641 2.24 28,283 798 2.82 Consumer CDs and IRAs......................... 23,937 999 4.17 23,387 1,057 4.52 25,835 1,443 5.58 Negotiated CDs, public funds and other time deposits..................... 3,319 133 4.02 4,211 167 3.97 5,663 279 4.93 Foreign time deposits......................... 7,544 375 4.98 3,033 123 4.05 1,648 91 5.52 Borrowed funds and trading account liabilities (4)(6).................. 48,323 2,353 4.87 33,293 1,149 3.45 19,204 639 3.33 Long-term debt and obligations under capital leases.............................. 8,033 550 6.85 5,268 392 7.44 3,036 271 8.92 Special Asset Division net funding allocation.......................... - - - - - - - - - ------------------------------------------------------------------------------ Total interest-bearing liabilities........ 129,996 5,318 4.09 104,607 3,690 3.53 89,315 3,682 4.12 Noninterest-bearing sources Noninterest-bearing deposits.................. 20,097 17,425 15,597 Other liabilities............................. 5,742 3,717 2,849 FDIC interest in NationsBank of Texas......... - - - Shareholders' equity.......................... 10,484 8,651 7,286 ------------------------------------------------------------------------------ Total liabilities and shareholders' equity................................... $166,319 $134,400 $115,047 ============================================================================== Net interest spread............................. 3.07 3.53 3.58 Impact of noninterest-bearing sources........... .51 .43 .52 ------------------------------------------------------------------------------ Net interest income/yield on earning assets..... $ 5,305 3.58% $4,723 3.96% $4,190 4.10% ==============================================================================
(1) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis. (2) Commercial loan interest income includes net interest rate swap revenues related to asset conversion swaps converting variable-rate commercial loans to fixed rate. Such amounts were $62 and $120 in 1994 and 1993, respectively. (3) The average balance sheet amounts and yields on securities available for sale are based on the average of historical amortized cost balances. (4) Gross unrealized gains and losses on off-balance sheet trading positions are reported in other assets and liabilities, respectively. (5) Interest income includes taxable-equivalent adjustments of $94, $86, $92, $141, $163 and $217 for 1994, 1993, 1992, 1991, 1990 and 1989, respectively. (6) Borrowed funds and trading account liabilities interest expense includes net interest rate swap expense related to liability conversion swaps fixing the cost of certain variable-rate liabilities, primarily market-based borrowed funds. Such amounts were $31 and $3 in 1994 and 1993, respectively. 28 NationsBank Corporation Annual Report 1994 - -------------------------------------------------------------------------------- 3 12-MONTH TAXABLE-EQUIVALENT DATA (Dollars in Millions)
1991 1990 ----------------------------------------------------------- Average Average Balance Income Balance Income Sheet or Yields/ Sheet or Yields/ Amounts Expense Rates Amounts Expense Rates - ------------------------------------------------------------------------------------------------------------------- Earning assets Loans and leases, net of unearned income (1) Commercial (2).............................. $ 29,731 $2,586 8.70% $ 29,890 $ 3,122 10.44% Real estate commercial...................... 6,473 591 9.13 5,931 622 10.49 Real estate construction.................... 5,085 449 8.82 5,289 573 10.84 ----------------------------------------------------------- Total commercial.......................... 41,289 3,626 8.78 41,110 4,317 10.50 ----------------------------------------------------------- Residential mortgage........................ 7,713 807 10.47 9,079 867 9.55 Home equity................................. 1,883 179 9.53 1,625 182 11.18 Credit card................................. 3,411 519 15.22 3,018 476 15.78 Other consumer.............................. 13,045 1,483 11.37 11,215 1,419 12.66 ----------------------------------------------------------- Total consumer............................ 26,052 2,988 11.47 24,937 2,944 11.81 ----------------------------------------------------------- Foreign..................................... 734 62 8.47 838 112 13.28 Lease financing............................. 1,292 141 10.89 1,240 118 9.53 ----------------------------------------------------------- Total loans and leases, net............... 69,367 6,817 9.83 68,125 7,491 11.00 ----------------------------------------------------------- Securities Held for investment......................... 25,412 2,189 8.61 25,984 2,377 9.15 Available for sale (3)...................... - - - - - - ----------------------------------------------------------- Total securities.......................... 25,412 2,189 8.61 25,984 2,377 9.15 ----------------------------------------------------------- Loans held for sale......................... 425 37 8.74 379 44 11.49 Federal funds sold and securities purchased under agreements to resell...... 4,904 289 5.89 2,148 175 8.16 Time deposits placed and other short-term investments.................... 1,661 115 6.89 2,810 251 8.95 Trading account securities (4).............. 1,321 92 6.99 1,211 103 8.43 ----------------------------------------------------------- Total earning assets (5).................. 103,090 9,539 9.25 100,657 10,441 10.37 Cash and cash equivalents....................... 6,387 6,622 Factored accounts receivable.................... 829 845 Other assets, less allowance for credit losses and excluding Special Asset Division.......... 5,486 5,568 ----------------------------------------------------------- Total assets, excluding Special Asset Division............................ $115,792 $113,692 =========================================================== Interest-bearing liabilities Savings....................................... $ 4,732 216 4.55 $ 5,003 258 5.15 NOW and money market deposit accounts......... 26,854 1,331 4.96 24,536 1,477 6.02 Consumer CDs and IRAs......................... 27,261 1,912 7.01 24,713 1,962 7.94 Negotiated CDs, public funds and other time deposits..................... 11,684 827 7.08 13,738 1,116 8.13 Foreign time deposits......................... 2,548 171 6.70 2,603 231 8.89 Borrowed funds and trading account liabilities (4)(6).................. 18,948 1,068 5.64 21,256 1,685 7.93 Long-term debt and obligations under capital leases.............................. 2,816 250 8.88 2,669 245 9.18 Special Asset Division net funding allocation.......................... (2,845) (176) (6.20) (4,057) (304) (7.49) ----------------------------------------------------------- Total interest-bearing liabilities........ 91,998 5,599 6.09 90,461 6,670 7.37 Noninterest-bearing sources Noninterest-bearing deposits.................. 14,491 14,067 Other liabilities............................. 2,698 2,942 FDIC interest in NationsBank of Texas......... - - Shareholders' equity.......................... 6,605 6,222 ----------------------------------------------------------- Total liabilities and shareholders' equity................................... $115,792 $113,692 =========================================================== Net interest spread............................. 3.16 3.00 Impact of noninterest-bearing sources........... .66 .75 ----------------------------------------------------------- Net interest income/yield on earning assets..... $3,940 3.82% $3,771 3.75% =========================================================== - ------------------------------------------------------------------------------- Five-Year 1989 Compounded ------------------------- Growth Rate Average 1989/94 Balance Income ------------------- Sheet or Yields/ Average Income or Amounts Expense Rates Balances Expense - ----------------------------------------------------------------------------------------------------------- Earning assets Loans and leases, net of unearned income (1) Commercial (2).............................. $ 28,060 $3,299 11.76% 8% (1)% Real estate commercial...................... 5,173 573 11.08 9 2 Real estate construction.................... 4,848 580 11.96 (8) (14) -------------------------- Total commercial.......................... 38,081 4,452 11.69 7 (2) -------------------------- Residential mortgage........................ 7,003 774 11.06 16 8 Home equity................................. 1,506 178 11.80 11 3 Credit card................................. 2,513 413 16.45 9 4 Other consumer.............................. 11,636 1,354 11.64 8 4 -------------------------- Total consumer............................ 22,658 2,719 12.00 11 5 -------------------------- Foreign..................................... 954 109 11.38 8 (5) Lease financing............................. 1,178 107 9.08 15 10 -------------------------- Total loans and leases, net............... 62,871 7,387 11.75 9 1 -------------------------- Securities Held for investment......................... 20,475 1,903 9.29 (6) (17) Available for sale (3)...................... - - - -------------------------- Total securities.......................... 20,475 1,903 9.29 6 (6) -------------------------- 251 31 12.36 6 (6) Loans held for sale......................... Federal funds sold and securities 2,314 213 9.20 42 21 purchased under agreements to resell...... Time deposits placed and other 3,022 294 9.72 (10) (21) short-term investments.................... 605 55 9.08 77 69 Trading account securities (4).............. -------------------------- Total earning assets (5).................. 89,538 9,883 11.04 11 1 Cash and cash equivalents....................... 6,474 5 Factored accounts receivable.................... 683 13 Other assets, less allowance for credit losses and excluding Special Asset Division.......... 4,644 13 -------------------------- Total assets, excluding Special Asset Division............................ $101,339 10 ========================== Interest-bearing liabilities Savings....................................... $6,203 364 5.86 8 (10) NOW and money market deposit accounts......... 18,695 1,159 6.20 10 (10) Consumer CDs and IRAs......................... 20,446 1,735 8.48 3 (10) Negotiated CDs, public funds and other time deposits..................... 15,685 1,379 8.79 (27) (37) Foreign time deposits......................... 2,670 257 9.63 23 8 Borrowed funds and trading account liabilities (4)(6).................. 17,854 1,606 8.99 22 8 Long-term debt and obligations under capital leases.............................. 2,061 203 9.84 31 22 Special Asset Division net funding allocation.......................... (5,164) (424) (8.20) -------------------------- Total interest-bearing liabilities........ 78,450 6,279 8.00 11 (3) Noninterest-bearing sources Noninterest-bearing deposits.................. 13,976 8 Other liabilities............................. 3,235 12 FDIC interest in NationsBank of Texas......... 412 Shareholders' equity.......................... 5,266 15 -------------------------- Total liabilities and shareholders' equity................................... $101,339 10 ========================== Net interest spread............................. 3.04 Impact of noninterest-bearing sources........... .99 -------------------------- Net interest income/yield on earning assets..... $3,604 4.03% 8 ==========================
Management's Disussion and Analysis 29 MNC accounting for approximately 40 percent of the increase. The $4.9 billion increase in average deposits reflected the full-year impact of MNC and four in- market acquisitions in Texas, Florida and South Carolina. The Financial Products group contributed 31 percent of the General Bank's earnings with a return on equity of 28 percent. Card Services accounted for over 50 percent of Financial Products' earnings and generated a return on equity of 46 percent. In 1993, the Card Services' return on equity was 27 percent. Dealer Finance is the next largest component of Financial Products and produced a return on equity of 17 percent in 1994. The 1993 return was 15 percent. The Institutional Group includes Corporate and Investment Banking activities, the Real Estate Banking Group, Specialized Lending and the Capital Markets Group, which includes customer-related derivatives, foreign exchange, securities trading and securities underwriting activities. Housed in this unit are NationsBanc-CRT and NationsBanc Capital Markets, Inc., which with its Section 20/Tier II powers, underwrites and deals in various types of corporate debt and has the power to underwrite and deal in equity securities. The Institutional Group earned $631 million in 1994, representing a return on equity of 16 percent. Continued asset quality improvements in the Real Estate Banking Group drove the increased return on equity for the Institutional Group overall. The increase in net interest income resulting from loan growth of 16 percent over 1993 was constrained by a narrowing of the spread between securities and market-based funds. Noninterest income for the Institutional Group rose $208 million, or 33 percent, reflecting higher trading gains (due to the full-year impact of CRT) and growth in investment banking and deposit fees. Investments committed to expand capital markets activities and the full-year impact of CRT largely drove the $289 million increase in operating expense and the change in the efficiency ratio. Real Estate Banking Group asset quality improvement contributed to the negative provision for credit losses and OREO recoveries for 1994. Combined, these two categories accounted for $147 million of the Institutional Group's $206 million growth in pretax earnings over 1993. Financial Services consists of NationsCredit and Greyrock Capital Group. In 1994, Financial Services contributed $103 million, or six percent, of consolidated earnings reflecting their first full year of NationsBank operations as well as strong growth throughout the year. On a year-end basis, loan growth of 24 percent included strength in consumer lending and inventory financing. The 13-percent return on equity was impacted by a higher equity-to-asset ratio of 13 percent in 1994, necessary to posture this unit for raising funds in the financial markets. The Other category in TABLE 2 includes gains and losses on sales of securities and earnings on unallocated equity. Results Of Operations NET INTEREST INCOME TABLE 3 presents an analysis of the Corporation's taxable-equivalent net interest income and average balance sheet levels for the last six years. TABLE 4 analyzes changes in net interest income from year to year. Taxable-equivalent net interest income increased $582 million to $5.3 billion in 1994, compared to $4.7 billion in 1993. The increase was due to higher earning asset levels, primarily loans and leases which increased $16.0 billion, or 20 percent. Loan growth in the General Bank approximated $9.0 billion, centered in commercial, residential mortgage and other consumer loans. The Institutional Group experienced loan growth of approximately $4.0 billion, reflecting primarily an increase in commercial loans. The $3.0-billion increase in average loans in Financial Services primarily reflects the full-year impact of Greyrock Capital Group. On a consolidated basis, after adjusting for acquisitions and the securitization of credit card receivables, loan levels increased by $9.1 billion, or 12 percent. The aggregate of average federal funds sold, securities purchased under agreements to resell and trading account assets increased $12.3 billion, primarily due to the 1993 acquisition and higher trading asset levels of the Corporation's primary government securities dealer. The increase in net interest income resulting from higher loan levels and deposit cost containment efforts was partially offset by a narrowing of the spread between fixed-rate investment securities and market-based funds. As more fully discussed in the Interest Rate Risk Management section, actions taken in the second half of 1994 to reposition the balance sheet in light of rising interest rates had a slight negative impact on net interest income. [PIE CHART APPEARS HERE 1994 CUSTOMER GROUP DISTRIBUTION OF LOANS AND REVENUES
General Institutional Financial Bank Group Services ------- ------- ----------- Percent of net loans and leases........................... 62% 32% 6% Percent of revenues................... 68% 26% 6%]
30 NationsBank Corporation Annual Report 1994 The net interest yield declined 38 basis points to 3.58 percent in 1994, compared to 3.96 percent in 1993. Excluding the impact of the Corporation's primary government securities dealer, for which revenues are recorded in noninterest income, the net interest yield declined 14 basis points to 4.04 percent, compared to 4.18 percent in 1993. The decline in the yield reflected the decreased spread between fixed-rate investment securities and market-based funds, partially offset by increased net interest yields resulting from loan growth and deposit cost containment efforts. The yield on average earning assets increased 10 basis points to 7.16 percent in 1994 from 7.06 percent in 1993. Excluding the impact of the trading assets of the Corporation's primary government securities dealer, the yield on average earning assets increased 16 basis points to 7.33 percent in 1994, compared to 7.17 percent in 1993. The yield on total loans and leases increased 14 basis points to 8.20 percent in 1994, reflecting loan growth in a rising interest rate environment. The Corporation's prime interest rate rose from an average of 6.00 percent in 1993 to 7.14 percent in 1994. - -------------------------------------------------------------------------------- 4 CHANGES IN TAXABLE-EQUIVALENT NET INTEREST INCOME (Dollars in Millions) This table presents an analysis of the year-to-year changes in net interest income on a fully taxable-equivalent basis for the years shown. The changes for each category of income and expense are divided between the portion of change attributable to the variance in average levels or yields/rates for that category. The amount of change that cannot be separated is allocated to each variance proportionately.
From 1993 to 1994 From 1992 to 1993 --------------------------------------------------------------------------------- Increase (Decrease) Increase (Decrease) in Income/Expense in Income/Expense Due to Change in Due to Change in --------------------------------------------------------------------------------- Percentage Percentage Average Yields/ Increase Average Yields/ Increase Levels Rates Total (Decrease) Levels Rates Total (Decrease) - ------------------------------------------------------------------------------------------------------------------------------------ Income from earning assets Loans and leases, net of unearned income Commercial................................. $ 483 $ 226 $ 709 29.1% $ 407 $ (36) $ 371 17.9% Real estate commercial..................... 89 41 130 25.7 (8) (13) (21) (4.0) Real estate construction................... 21 30 51 23.5 (61) 12 (49) (18.4) ------ ----- Total commercial......................... 595 295 890 28.2 349 (48) 301 10.5 ------ ----- Residential mortgage....................... 315 (76) 239 26.5 227 (94) 133 17.3 Home equity................................ 27 20 47 30.3 5 2 7 4.7 Credit card................................ (55) (33) (88) (14.8) 57 (35) 22 3.8 Other consumer............................. 279 (16) 263 19.3 222 (133) 89 7.0 ------ ----- Total consumer........................... 633 (172) 461 15.3 528 (277) 251 9.1 ------ ----- Foreign.................................... 27 7 34 65.4 8 (11) (3) (5.5) Lease financing............................ 51 (8) 43 32.3 29 (3) 26 24.3 ------ ----- Total loans and leases, net.............. 1,312 116 1,428 22.4 881 (306) 575 9.9 ------ ----- Securities Held for investment........................ (503) (111) (614) (44.7) 146 (313) (167) (10.8) Available for sale......................... 591 4 595 n/m (39) (15) (54) (52.4) ------ ----- Total securities......................... 85 (104) (19) (1.3) 98 (319) (221) (13.4) ------ ----- Loans held for sale........................ (31) 1 (30) (56.6) (12) (5) (17) (24.3) Federal funds sold and securities purchased under agreements to resell............... 287 66 353 182.0 25 (32) (7) (3.5) Time deposits placed and other short-term investments.............................. (12) 23 11 13.9 11 (24) (13) (14.1) Trading account securities................. 339 128 467 156.7 209 15 224 302.7 ------ ----- Total interest income.................... 2,089 121 2,210 26.3 1,234 (693) 541 6.9 ------ ----- Interest expense Savings.................................... 55 (4) 51 31.7 29 (29) - - NOW and money market deposit accounts...... 26 29 55 8.6 10 (167) (157) (19.7) Consumer CDs and IRAs...................... 24 (82) (58) (5.5) (128) (258) (386) (26.7) Negotiated CDs, public funds and other time deposits............................ (36) 2 (34) (20.4) (64) (48) (112) (40.1) Foreign time deposits...................... 219 33 252 204.9 61 (29) 32 35.2 Borrowed funds and trading account liabilities...................... 629 575 1,204 104.8 485 25 510 79.8 Long-term debt and obligations under capital leases........................... 191 (33) 158 40.3 172 (51) 121 44.6 ------ ----- Total interest expense................. 982 646 1,628 44.1 581 (573) 8 .2 ------ ----- Net interest income.......................... 1,076 (494) $ 582 12.3 676 (143) $ 533 12.7 ====== =====
n/m - not meaningful. Management's Discussion and Analysis 31 The Corporation did not fully reinvest proceeds from the 1994 maturities and sales of certain higher yielding securities during 1994. As a result, the yield on the securities portfolio declined 39 basis points to 5.12 percent in 1994. The average yield of the remaining securities portfolio on December 31, 1994 was 5.37 percent. Average interest-bearing liabilities increased $25.4 billion in 1994 compared to 1993. Borrowed funds and trading liabilities increased $15.0 billion, to $48.3 billion, resulting primarily from the acquisition and funding of the Corporation's primary government securities dealer and increased trading activities. Long-term debt increased $2.8 billion due to debt acquired in the MNC acquisition and debt securities issued in connection with financing Financial Services. Interest-bearing deposits increased $7.6 billion, principally due to acquisitions. Excluding deposits acquired from MNC in 1993 and California Federal Savings Bank in 1994, average interest-bearing deposit levels remained relatively flat. Consumer CDs and money market savings accounts declined, offset by increases in foreign time deposits. The increase in foreign time deposits resulted from wholesale funding initiatives. The rate on average interest-bearing liabilities increased 56 basis points to 4.09 percent in 1994, from 3.53 percent in 1993. Excluding the impact of the trading liabilities of the Corporation's primary government securities dealer, the rate on average interest-bearing liabilities increased 39 basis points to 3.83 percent in 1994, compared to 3.44 percent in 1993. This rate increase resulted from the Corporation's efforts to extend liability maturities through its use of longer-term bank notes and foreign time deposits in lieu of utilizing overnight funding. Net interest income in 1994 was impacted by the fourth quarter 1993 securitization of credit card receivables. The Corporation periodically securitizes credit card receivables which changes the Corporation's role from that of a lender to that of a loan servicer. During 1994, the Corporation managed an average credit card portfolio of $5.4 billion, including $1.4 billion which had been securitized. For the securitized portion of the credit card portfolio, residual net interest income after paying certificate holders and after credit losses is reported as servicing fees in noninterest income. PROVISION FOR CREDIT LOSSES The provision for credit losses was $310 million in 1994, compared to $430 million in the prior year. A strengthening economy, coupled with the Corporation's continued loan workout activities, resulted in an overall improvement in credit quality trends which led to lower credit costs. Excluding the fourth quarter 1993 impact of MNC, nonperforming asset levels declined every quarter of 1994 and 1993. Net charge-offs declined $96 million to $316 million in 1994. On December 31, 1994, the allowance for credit losses was $2.2 billion, or 2.11 percent of loans, leases and factored accounts receivable, compared to an allowance of $2.2 billion, or 2.36 percent, at the end of 1993. The allowance for credit losses was 273 percent of nonperforming loans on December 31, 1994, compared to 193 percent on December 31, 1993. TABLE 12 provides an analysis of the activity in the Corporation's allowance for credit losses for each of the last five years. Allowance levels, net charge-offs and nonperforming assets are discussed in the Asset Quality Review and Credit Risk Management section. SECURITIES GAINS AND LOSSES Losses from the sales of securities were $13 million in 1994, as securities were sold in the last quarter of 1994 as a part of interest rate repositioning efforts. Gains in 1993 were $84 million. NONINTEREST INCOME TABLE 5 compares the major categories of noninterest income for 1994 and 1993. Noninterest income totaled $2.6 billion in 1994, an increase of $496 million, or 24 percent, from $2.1 billion in 1993. Adjusted for acquisitions, growth in noninterest income was 11 percent in 1994. Trading account profits and fees, including foreign exchange income, increased $121 million, or 80 percent, in 1994 compared to 1993. This increase, resulting primarily from the acquisition of CRT, is concentrated in interest rate derivatives trading and is consistent with the expansion efforts in capital markets activities. An analysis of trading account profits [GRAPH APPEARS HERE Net Interest Income (Dollars in Billions)
1990 1991 1992 1993 1994 ------ ------ ------ ------ ------ Net interest income....... $3.771 $3.940 $4.190 $4.723 $5.305]
32 NationsBank Corporation Annual Report 1994 and fees by major business activity is as follows (dollars in millions):
1994 1993 - -------------------------------------------------------------- Securities trading............................. $ 82 $ 73 Interest rate contracts........................ 119 21 Foreign exchange contracts 27 27 Other.......................................... 45 31 Total trading account ---- ---- profits and fees........................... $273 $152 ==== ====
Growth, excluding acquisitions, occurred in most major categories of noninterest income as described below: . General Bank trust fees increased $22 million, or six percent, in 1994 compared to 1993. Increased fees were realized primarily due to growth in mutual fund investment advisory services, other trust related services and increased volume of securities lending activities. Partially offsetting these increases were fee decreases resulting from the rising interest rate environment which caused declines in the discretionary assets under management portfolio, principally in the market values of debt instruments. Discretionary assets under management and total assets under administration by the Trust Group were $57.4 billion and $163.6 billion, respectively, on December 31, 1994. . Service charges on deposit accounts increased $33 million, or five percent, from 1993. Concentrated emphasis on fee collections was the primary contributor to this growth. . Mortgage servicing and related fees increased $2 million, or three percent, in 1994 compared to 1993. Including acquisitions, the average portfolio of loans serviced increased 35 percent from $26.3 billion in 1993 to $35.5 billion in 1994. On December 31, 1994, the servicing portfolio totaled $39.0 billion. Mortgage loan originations through the Corporation's mortgage company decreased 38 percent during 1994 to $6.9 billion. The majority of this decrease was in retail loan volume coupled with a slight decline in correspondent wholesale volume. These declines reflected industry-wide trends of lower origination levels resulting from increases in interest rates. . Higher syndication fees and venture capital income in the Institutional Group contributed the majority of the $44-million, or 47-percent increase in investment banking income in 1994 compared to 1993. The Capital Markets syndication group led 362 deals totaling $195.5 billion during 1994, compared to 234 deals totaling $115.9 billion in 1993. . Credit card income increased $81 million in 1994, or 41 percent, compared to 1993. - -------------------------------------------------------------------------------- 5 NONINTEREST INCOME (Dollars in Millions)
1994 1993 ----------------------------------------------- Percent Percent of Taxable- Of Taxable- Equivalent Equivalent Change Net Interest Net Interest ------------------ Amount Income Amount Income Amount Percent - --------------------------------------------------------------------------------------------------------------- Trust fees........................... $ 435 8.2% $ 371 7.9% $ 64 17.3% ------------------------------------------------------------------- Service charges on deposit accounts.. 797 15.0 681 14.4 116 17.0 ------------------------------------------------------------------- Nondeposit-related service fees Safe deposit rent................ 27 .5 25 .5 2 8.0 Mortgage servicing and related fees............................ 86 1.6 77 1.6 9 11.7 Fees on factored accounts receivable...................... 74 1.4 74 1.6 - - Investment banking income........ 138 2.6 94 2.0 44 46.8 Other service fees............... 111 2.1 93 2.0 18 19.4 ------------------------------------------------------------------- Total nondeposit-related service fees............................ 436 8.2 363 7.7 73 20.1 ------------------------------------------------------------------- Credit card income Merchant discount fees........... 27 .5 30 .6 (3) (10.0) Annual credit card fees.......... 21 .4 24 .5 (3) (12.5) Other credit card fees........... 232 4.4 144 3.1 88 61.1 ------------------------------------------------------------------- Total credit card income......... 280 5.3 198 4.2 82 41.4 ------------------------------------------------------------------- Other income Brokerage income................. 44 .8 41 .9 3 7.3 Trading account profits and fees. 273 5.1 152 3.2 121 79.6 Bankers' acceptances and letters of credit....................... 67 1.3 65 1.4 2 3.1 Insurance commissions and earnings........................ 49 .9 39 .8 10 25.6 Miscellaneous.................... 216 4.2 191 4.0 25 13.1 ------------------------------------------------------------------- Total other income............... 649 12.3 488 10.3 161 33.0 ------------------------------------------------------------------- $2,597 49.0% $2,101 44.5% $ 496 23.6 ===================================================================
Management's Discussion and Analysis 33 A large portion of the increase in other credit card fees is related to the securitization of certain credit card loans during the fourth quarter of 1993. While this transaction served to increase this component of noninterest income, it also served to decrease net interest income and net charge-offs for 1994 compared to 1993. The overall effect on net income from the securitization of this portfolio was approximately neutral. The remainder of the increase relates to other new credit card initiatives including an increase in co-branding card income. OTHER REAL ESTATE OWNED EXPENSE OREO expense declined $90 million to a net recovery of $12 million in 1994 compared to expense of $78 million in 1993, consistent with the improvement in asset quality. Improved real estate markets resulted in lower OREO write-downs and increased gains on sales of these properties. NONINTEREST EXPENSE The Corporation's noninterest expense, as shown in TABLE 6, increased $649 million, or 15 percent, in 1994 compared to 1993. Most categories of noninterest expense were significantly influenced by acquisitions. Adjusting for the impact of acquisitions, noninterest expense in the current year increased approximately two and one-half percent, primarily in the categories described below: . Personnel expense increased $143 million, or eight percent, primarily due to increased incentives as well as salaries and wages. Additionally, within the Capital Markets Group, investments in personnel to expand the Corporation's capital markets and trading activities and growth in the business activities of the Institutional Bank and Financial Services resulted in increases in the number of associates in these customer groups. Also, contributing to the increase were higher pension costs and other employee benefits. . Equipment expense increased $20 million, or seven percent, in 1994 compared to 1993. This increase is primarily due to enhancements to computer resources, including higher rental expense for upgraded mainframe equipment and increased costs relating to product delivery systems. . Marketing expense increased $14 million, or 10 percent, in 1994 compared to 1993, due to the continuation of a "brand image" campaign that began in 1993 focusing on the NationsBank name and the Corporation's range of financial products and services. Increased credit card solicitations were also a primary factor. . Professional fees decreased $14 million, or nine percent, compared to 1993. The decline was largely the result of focused expense management efforts in this area. . The Corporation's FDIC insurance expense for 1994 decreased $13 million, or six percent, as a result of higher capital levels of certain of the Corporation's subsidiary banks as well as upgrades in supervisory risk - -------------------------------------------------------------------------------- 6 NONINTEREST EXPENSE (Dollars in Millions)
1994 1993 --------------------------------------------- Percent Percent of Taxable- of Taxable- Equivalent Equivalent Change Net Interest Net Interest --------------------- Amount Income Amount Income Amount Percent - ---------------------------------------------------------------------------------------------------------------------------- Personnel..................................... $2,311 43.6% $1,903 40.3% $408 21.4% Occupancy, net................................ 487 9.2 434 9.2 53 12.2 Equipment..................................... 364 6.9 317 6.7 47 14.8 Marketing..................................... 161 3.0 138 2.9 23 16.7 Professional fees............................. 171 3.2 168 3.6 3 1.8 Amortization of intangibles................... 141 2.7 110 2.3 31 28.2 Credit card................................... 44 .8 49 1.0 (5) (10.2) Private label credit card..................... 27 .5 37 .8 (10) (27.0) FDIC insurance................................ 211 4.0 205 4.3 6 2.9 Processing.................................... 235 4.4 190 4.0 45 23.7 Telecommunications............................ 137 2.6 122 2.6 15 12.3 Postage and courier........................... 126 2.4 120 2.6 6 5.0 Other general operating....................... 388 7.3 370 7.8 18 4.9 General administrative and miscellaneous...... 139 2.6 130 2.8 9 6.9 ------------------------------------------------------------------------- $4,942 93.2% $4,293 90.9% $649 15.1 =========================================================================
34 NationsBank Corporation Annual Report 1994 classifications due to improved asset quality. These factors decreased assessment rates under the risk-based assessment system mandated by the Federal Deposit Insurance Corporation. . The Corporation's combined general operating and general administrative and miscellaneous expenses decreased $9 million due to focused expense management efforts resulting in reduced expenses for postage, relocation and supplies, partially offset by increased expenses for telecommunications. INCOME TAXES The Corporation's income tax expense for 1994 was $865 million, for an effective tax rate of 33.9 percent of pretax income. Tax expense for 1993 was $690 million, for an effective tax rate of 34.7 percent. Note 13 to the consolidated financial statements includes a reconciliation of federal income tax expense computed using the federal statutory rate of 35 percent, to the actual income tax expense reported for 1994 and 1993. See Notes 1 and 13 to the consolidated financial statements for additional information on income taxes. Risk Management In conducting its business activities, the Corporation is exposed to interest rate, liquidity and credit risk. The successful management of risk is integral to the continued growth and profitability of the Corporation. The following sections address the Corporation's approach to managing risk. The first section presents a review of the Corporation's balance sheet and liquidity risk management practices. The Corporation's asset quality results for 1994 combined with a discussion of credit risk management policies and procedures are presented in the second section. The third section discusses the tools used to manage interest rate risk and outlines certain balance sheet repositioning efforts undertaken by the Corporation during 1994. The Corporation's capital resources and the management practices surrounding capital are discussed in the final section. Balance Sheet Review And Liquidity Risk Management Liquidity, a measure of the Corporation's ability to fulfill its cash requirements, is managed by the Corporation through its asset and liability management process. This entails measuring and managing the relative balance between asset, liability and off-balance sheet positions. This process, coupled with the Corporation's ability to raise capital and debt financing, ensures the maintenance of sufficient funds to meet the liquidity needs of the Corporation. TABLE 7 presents an analysis of the major - -------------------------------------------------------------------------------- 7 SOURCES AND USES OF FUNDS (Average Dollars in Millions)
1994 1993 ------------------------------------------------------- Amount Percent Amount Percent - ----------------------------------------------------------------------------------------------------------------------------------- Composition of sources Savings, NOW, money market deposit accounts, and consumer CDs and IRAs........................................ $ 62,777 37.7% $ 58,802 43.8% Noninterest-bearing funds........................................ 20,097 12.1 17,425 13.0 Customer-based portion of negotiated CDs......................... 1,328 .8 1,690 1.2 ------------------------------------------------------ Customer-based funds............................................. 84,202 50.6 77,917 58.0 Market-based funds............................................... 57,858 34.8 38,847 28.9 Long-term debt and obligations under capital leases.............. 8,033 4.8 5,268 3.9 Other liabilities................................................ 5,742 3.5 3,717 2.8 Shareholders' equity............................................. 10,484 6.3 8,651 6.4 ------------------------------------------------------ Total sources.................................................... $166,319 100.0% $134,400 100.0% ====================================================== Composition of uses Loans and leases, net of unearned income......................... $ 95,006 57.1% $ 78,984 58.8% Securities held for investment................................... 15,048 9.1 24,823 18.5 Securities available for sale.................................... 12,386 7.4 1,017 .7 Loans held for sale.............................................. 339 .2 790 .6 Time deposits placed and other short-term investments............ 1,762 1.1 2,037 1.5 Other earning assets............................................. 23,840 14.3 11,531 8.6 ------------------------------------------------------ Total earning assets............................................. 148,381 89.2 119,182 88.7 Factored accounts receivable..................................... 1,252 .8 1,074 .8 Other assets..................................................... 16,686 10.0 14,144 10.5 ------------------------------------------------------ Total uses....................................................... $166,319 100.0% $134,400 100.0% ======================================================
Management's Discussion and Analysis 35 sources and uses of funds for 1994 and 1993 based on average levels. The composition of sources of funds reflected a 49-percent increase in market-based funds to $57.9 billion in 1994 from $38.8 billion in the prior year. These funds represented 35 percent of total sources of funds in 1994 compared to 29 percent in 1993. Excluding the impact of trading account liabilities associated with the Corporation's primary government securities dealer, market-based funds increased 25 percent in 1994 from the prior year, primarily attributable to the extension of liability maturities through the use of bank notes and foreign time deposits. Customer-based funds increased to $84.2 billion from $77.9 billion in 1993 and represented 51 percent of total sources of funds in 1994, compared to 58 percent in 1993. The Corporation's primary use of funds, loans and leases, increased $16.0 billion, or 20 percent, to $95.0 billion in 1994, compared to $79.0 billion in 1993. This increase reflects both internal loan growth as well as acquisitions. Loans represent 57 percent of the Corporation's uses of funds. The Corporation's ratio of average loans and leases to customer-based funds was 113 percent in 1994, compared to 101 percent in the prior year. The change in this ratio is primarily due to loan growth of 20 percent, coupled with industry-wide disintermediation. Average other earning assets rose $12.3 billion, or 107 percent, to $23.8 billion in 1994 from $11.5 billion in 1993. Approximately $10.9 billion of this increase resulted from higher levels of trading account assets associated with the Corporation's primary government securities dealer. Cash and cash equivalents increased $1.9 billion from December 31, 1993 to December 31, 1994, due to net cash provided by operating activities of $9.1 billion, and $1.8 billion in cash provided by financing activities, offset by $9.0 billion in cash used in investing activities. The net increase in cash provided by operating activities of $7.0 billion from December 31, 1993 to December 31, 1994, was primarily attributable to the net change in trading instruments of $3.8 billion during 1994 as compared to $707 million during 1993. Cash used in investing activities decreased $1.6 billion in 1994 compared to 1993, as proceeds from the sales and maturities of securities available for sale exceeded the purchases of those securities. This increase in cash was offset by a decrease in the proceeds from the sales and securitizations of loans of $4.6 billion from year to year. - -------------------------------------------------------------------------------- 8 DISTRIBUTION OF LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE December 31 (Dollars in Millions)
1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------ AMOUNT PERCENT Amount Percent Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------------------ Domestic Commercial............... $ 44,665 43.1% $40,808 44.3% $32,260 44.4% $28,701 41.5% $30,951 43.7% Real estate commercial... 7,349 7.1 8,239 9.0 6,324 8.7 6,756 9.8 5,847 8.2 Real estate construction. 2,981 2.9 3,256 3.5 3,065 4.2 4,212 6.1 5,453 7.7 ------------------------------------------------------------------------------------------------------ Total commercial....... 54,995 53.1 52,303 56.8 41,649 57.3 39,669 57.4 42,251 59.6 ------------------------------------------------------------------------------------------------------ Residential mortgage..... 17,244 16.7 12,689 13.8 9,262 12.7 7,571 11.0 8,133 11.5 Home equity.............. 2,644 2.6 2,565 2.8 2,061 2.8 2,121 3.1 1,687 2.4 Credit card.............. 4,753 4.6 3,728 4.1 4,297 5.9 4,178 6.0 3,501 4.9 Other consumer........... 17,867 17.3 16,761 18.2 12,091 16.6 12,524 18.1 12,392 17.5 ------------------------------------------------------------------------------------------------------ Total consumer......... 42,508 41.2 35,743 38.9 27,711 38.0 26,394 38.2 25,713 36.3 ------------------------------------------------------------------------------------------------------ Lease financing.......... 2,440 2.4 1,729 1.9 1,301 1.8 1,229 1.8 1,236 1.7 Factored accounts receivable.............. 1,004 1.0 1,001 1.1 917 1.3 817 1.2 760 1.1 ------------------------------------------------------------------------------------------------------ 100,947 97.7 90,776 98.7 71,578 98.4 68,109 98.6 69,960 98.7 ------------------------------------------------------------------------------------------------------ Foreign Governments and official institutions... 6 - 22 - 2 - 42 .1 88 .1 Banks and other financial institutions............ 795 .8 446 .5 304 .4 177 .2 197 .3 Commercial and industrial companies............... 1,183 1.1 510 .5 634 .9 634 .9 584 .8 Lease financing.......... 440 .4 253 .3 196 .3 146 .2 62 .1 ------------------------------------------------------------------------------------------------------ 2,424 2.3 1,231 1.3 1,136 1.6 999 1.4 931 1.3 ------------------------------------------------------------------------------------------------------ Total loans, leases and factored accounts receivable, net of unearned income.......... $103,371 100.0% $92,007 100.0% $72,714 100.0% $69,108 100.0% $70,891 100.0% ======================================================================================================
36 NationsBank Corporation Annual Report 1994 The net cash provided by financing activities decreased $6.5 billion from December 31, 1993 to December 31, 1994. During 1994, proceeds from the issuances of long-term debt and subordinated capital notes exceeded principal payments and retirements by $181 million, as compared to net proceeds in 1993 of $3.7 billion. Also, in 1994, cash provided by the net increase in deposits, federal funds purchased and securities sold under agreements to repurchase was $1.7 billion as compared to a net increase of $2.9 billion in 1993. SECURITIES The securities portfolio on December 31, 1994, consisted of securities held for investment totaling $17.8 billion and securities available for sale totaling $8.0 billion compared to $13.6 billion and $15.5 billion, respectively, on December 31, 1993. On December 31, 1994, the Corporation's portfolio of securities held for investment reflected unrealized net depreciation of $699 million compared to unrealized net appreciation of $20 million on December 31, 1993. The valuation reserve for securities available for sale and marketable equity securities reduced shareholders' equity by $136 million on December 31, 1994, reflecting $264 million of pretax depreciation on securities available for sale, offset by $48 million of pretax appreciation on marketable equity securities. The valuation amount increased shareholders' equity by $104 million on December 31, 1993. The changes in depreciation for both the securities held for investment and the securities available for sale portfolios were primarily due to the rise in interest rates. Further increases in interest rates would cause further depreciation due to the fixed-rate nature of the portfolios. The estimated average maturity was 2.48 years and 2.73 years for securities held for investment and securities available for sale on December 31, 1994, respectively, compared to 1.83 years and 1.44 years on December 31, 1993. The estimated average maturity of the combined securities portfolio was 2.56 years on December 31, 1994, compared to 1.63 years on December 31, 1993. The increase in the estimated average maturity was primarily attributable to 1994 maturities and sales which served to decrease the aggregate period-end securities portfolio balance 11 percent and shift the composition of the remaining portfolio to a longer maturity. The securities portfolio serves a primary role in the overall context of balance sheet management by the Corporation. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment and other on- or off-balance sheet positions. The portfolio's scheduled maturities and the liquid nature of securities, in general, represent a significant source of liquidity. Approximately $8.0 billion, or 31 percent, of the securities portfolio matures in 1995. No liquidations other than scheduled maturities are currently anticipated. As such, no significant securities losses are expected to result from the unrealized depreciation in the - -------------------------------------------------------------------------------- 9 SELECTED LOAN MATURITY DATA December 31, 1994 (Dollars in Millions) This table presents the maturity distribution and interest sensitivity of selected loan categories (excluding residential mortgage, home equity, credit card, other consumer loans, lease financing and factored accounts receivable). Maturities are presented on a contractual basis.
Due after Due in 1 1 year year through Due after or less 5 years 5 years Total - ---------------------------------------------------------------------------------------------------------------------------- Commercial................................................................... $18,713 $18,443 $7,509 $44,665 Real estate commercial....................................................... 1,852 4,438 1,059 7,349 Real estate construction..................................................... 1,624 1,248 109 2,981 Foreign...................................................................... 1,653 247 84 1,984 -------------------------------------------- Total selected loans, net of unearned income............................... $23,842 $24,376 $8,761 $56,979 ============================================ Percent of total............................................................. 41.8% 42.8% 15.4% 100.0% Cumulative percent of total.................................................. 41.8 84.6 100.0 Sensitivity of loans to changes in interest rates--loans due after one year Predetermined interest rate................................................ $ 6,823 $3,320 $10,143 Floating or adjustable interest rate....................................... 17,553 5,441 22,994 -------------------------------- $24,376 $8,761 $33,137 ================================
Management's Discussion and Analysis 37 securities portfolio on December 31, 1994. For additional information on securities see Note 3 to the consolidated financial statements. LOANS AND LEASES Total loans and leases increased $11.4 billion to $102.4 billion on December 31, 1994, compared to $91.0 billion on December 31, 1993. Average loans and leases increased $16.0 billion to $95.0 billion in 1994 compared to $79.0 billion one year earlier. Approximately $9.1 billion, or 57 percent, of the increase in average loans and leases reflects internal loan growth, while the remainder of the increase is the result of acquisitions. Average loan growth in the commercial loan category increased $6.5 billion, or 19 percent, to $41.6 billion in 1994 from $35.1 billion in 1993. Internal loan growth, primarily in the General Bank and Institutional Bank, contributed $3.1 billion of the increase. Real estate commercial and construction loans averaged $10.9 billion, a $1.4 billion increase in average levels from the prior year. Excluding acquisitions, average levels decreased $595 million. Residential mortgage loans increased $4.1 billion, or 37 percent, to an average of $15.0 billion in 1994. The majority of this growth was due to increased origination of residential mortgages through the General Bank's vast banking center network coupled with a higher retention level of adjustable-rate mortgages generated through the Corporation's mortgage company. The scheduled repayments and maturities of loans also represent a substantial source of liquidity for the Corporation. TABLE 9 shows selected loan maturity data on December 31, 1994. Approximately 42 percent of the selected loans presented had maturities of one year or less. Other sources of liquidity, such as the securitization and sale of certain loans or portfolios, are also available to the Corporation. OTHER EARNING ASSETS As presented in TABLE 3, average other earning assets, including federal funds sold, securities purchased under agreements to resell and trading account securities, increased $12.3 billion to $23.8 billion in 1994, compared to 1993. Other earning assets represented 14 percent of total uses of funds in 1994, compared to 9 percent in 1993. Increases in trading account securities primarily reflected the acquisition and higher trading asset levels of the Corporation's primary government securities dealer. DEPOSITS TABLE 3 provides information on the average amounts of deposits and the rates paid by deposit category. Deposits are the Corporation's primary source of funds. Through its diverse retail banking network, the Corporation has access to customers who provide a highly stable source of funds. Average deposits increased $10.3 billion in 1994, compared to 1993, primarily due to acquisitions. TABLE 10 provides information on the maturity distribution of domestic certificates of deposit and other time deposits in amounts of $100 thousand or more for 1994. Domestic certificates of deposit and other time deposits in denominations of $100 thousand or more amounted to $6.2 billion on December 31, 1994, compared to $6.5 billion on December 31, 1993. Certificates of deposit and other time deposits of $100 thousand or more of foreign offices amounted to $12.6 billion and $3.8 billion on December 31, 1994 and 1993, respectively. SHORT-TERM BORROWINGS The Corporation uses short-term borrowings as a funding source and in its management of interest rate risk. TABLE 11 presents
=============================================================================== 10 MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN AMOUNTS OF $100 THOUSAND OR MORE December 31, 1994 (Dollars in Millions) Certificates Other Time of Deposit Deposits Total - ------------------------------------------------------------------------------- Maturing in 3 months or less................. $2,679 $ 32 $2,711 Maturing in over 3 through 6 months.......... 1,121 20 1,141 Maturing in over 6 through 12 months......... 939 35 974 Maturing in over 12 months................... 1,093 236 1,329 -------------------------------- $5,832 $323 $6,155 ================================
[BAR GRAPH APPEARS HERE Average Loans and Leases (Dollars in Billions)
1990 1991 1992 1993 1994 ------- ------- ------- ------ ------ Average loans and leases........ $68.125 $69.367 $68.187 $78.984 $95.006]
38 NationsBank Corporation Annual Report 1994 the categories of short-term borrowings. The increase in commercial paper outstanding in 1994 and 1993 primarily reflects the use of this funding source to finance Financial Services, a nonbank subsidiary of the parent company. The Corporation diversified its funding sources in 1993 by implementing a short-term bank note program. In 1994, the banking subsidiaries increased the maximum available issuance under this program by $3.0 billion to $6.0 billion. Outstandings on December 31, 1994, which are included in other short-term borrowings, were $4.5 billion under this program. TRADING ACCOUNT LIABILITIES Trading activities are primarily financed with funds from short sales. During 1994, average short sales approximated $10.5 billion. LONG-TERM DEBT On December 31, 1994 and 1993, long-term debt was $8.5 billion and $8.3 billion, respectively. During 1994, the Corporation issued approximately $1.2 billion in long-term senior and subordinated debt. This new debt was used for general corporate purposes including replacing debt repurchased due to its higher cost and funding for the internal loan growth of Financial Services. As a source of term liquidity, the Corporation has a medium-term note program which provides for issuance from time to time of medium-term notes with maturities of nine months or longer. See Note 7 to the consolidated financial statements for further details on long-term debt. OTHER On September 30, 1994, the Corporation renegotiated its commercial paper back-up lines establishing a single committed, $1.5 billion, three-year credit facility. No borrowings have been made under this credit facility. The Corporation's principal debt ratings on December 31, 1994 were as follows:
Commercial Senior Paper Debt - --------------------------------------------------------------------------- Moody's Investors Service.......................... P-1 A2 Standard & Poor's Corporation...................... A-1 A Duff and Phelps, Inc. ............................. Duff 1+ A+ Fitch Investors Service, Inc. ..................... F-1 A+ Thomson BankWatch.................................. TBW-1 A+
In managing liquidity, the Corporation takes into account the ability of the subsidiary banks to pay dividends to the parent corporation. See Note 10 to the consolidated financial statements for further details on dividends.
=============================================================================================================================== 11 SHORT-TERM BORROWINGS (Dollars in Millions) Federal funds purchased generally represent overnight borrowings and repurchase agreements represent borrowings which generally range from one day to three months in maturity. Commercial paper is issued in maturities not to exceed nine months. Other short-term borrowings principally consist of bank notes and U.S. Treasury note balances. 1994 1993 1992 ------------------------------------------------------------ AMOUNT RATE AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased On December 31.............................................. $ 3,993 5.19% $ 7,135 2.92% $ 6,420 2.94% Average during year......................................... 5,397 4.07 6,479 3.03 5,634 3.37 Maximum month-end balance during year....................... 7,264 - 7,899 - 8,644 - Securities sold under agreements to repurchase On December 31.............................................. 21,977 5.36 21,236 3.11 9,632 3.23 Average during year......................................... 24,903 4.32 17,283 3.13 10,382 3.25 Maximum month-end balance during year....................... 27,532 - 22,733 - 13,210 - Commercial paper On December 31.............................................. 2,519 5.22 2,056 3.26 784 3.29 Average during year......................................... 2,482 4.46 1,379 3.26 534 3.78 Maximum month-end balance during year....................... 2,871 - 2,056 - 784 - Other short-term borrowings On December 31.............................................. 5,640 7.21 5,522 3.08 4,560 3.18 Average during year......................................... 5,015 4.25 4,006 3.45 1,962 3.49 Maximum month-end balance during year....................... 6,634 - 8,187 - 4,781 -
Management's Discussion and Analysis 39 Asset Quality Review And Credit Risk Management In conducting business activities, the Corporation is exposed to the possibility that borrowers or counterparties may default on their obligations to the Corporation. Credit risk arises through the extension of loans, leases, factored accounts receivable and certain securities, financial guarantees, and through counterparty risk on trading and capital markets transactions. To manage this risk, the Credit Policy group establishes policies and procedures to manage both on- and off-balance sheet risk and communicates and monitors the application of these policies and procedures throughout the Corporation. ================================================================================ 12 ALLOWANCE FOR CREDIT LOSSES (Dollars in Millions)
1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------------------------------- Balance on January 1....................................................... $ 2,169 $ 1,454 $ 1,605 $ 1,322 $ 878 -------------------------------------------------- Loans, leases and factored accounts receivable charged off Commercial.............................................................. (113) (107) (245) (436) (206) Real estate commercial.................................................. (32) (84) (279) (316) (101) Real estate construction................................................ (27) (17) (114) (276) (58) -------------------------------------------------- Total commercial...................................................... (172) (208) (638) (1,028) (365) -------------------------------------------------- Residential mortgage.................................................... (7) (10) (18) (33) (15) Home equity............................................................. (2) (3) (4) (4) (2) Credit card............................................................. (126) (184) (172) (138) (91) Other consumer.......................................................... (190) (169) (162) (181) (160) -------------------------------------------------- Total consumer........................................................ (325) (366) (356) (356) (268) -------------------------------------------------- Foreign................................................................. - - (7) (3) (28) Lease financing......................................................... (4) (5) (8) (7) (9) Factored accounts receivable............................................ (32) (30) (17) (23) (29) -------------------------------------------------- Total loans, leases and factored accounts receivable charged off.............................................. (533) (609) (1,026) (1,417) (699) -------------------------------------------------- NationsBank of Texas charge-offs reimbursed by the FDIC.................... - - - - 13 -------------------------------------------------- Recoveries of loans, leases and factored accounts receivable previously charged off Commercial.............................................................. 69 67 62 36 27 Real estate commercial.................................................. 17 21 13 5 3 Real estate construction................................................ 26 12 8 3 - -------------------------------------------------- Total commercial...................................................... 112 100 83 44 30 -------------------------------------------------- Residential mortgage.................................................... 2 3 4 3 2 Home equity............................................................. 1 1 1 1 - Credit card............................................................. 22 19 13 19 12 Other consumer.......................................................... 66 64 47 36 30 -------------------------------------------------- Total consumer........................................................ 91 87 65 59 44 -------------------------------------------------- Foreign................................................................. - 1 1 1 2 Lease financing......................................................... 3 2 2 2 1 Factored accounts receivable............................................ 11 7 9 3 2 -------------------------------------------------- Total recoveries of loans, leases and factored accounts receivable previously charged off................. 217 197 160 109 79 -------------------------------------------------- Net charge-offs....................................................... (316) (412) (866) (1,308) (607) -------------------------------------------------- Provision for credit losses................................................ 310 430 715 1,582 1,025 Allowance applicable to loans of purchased companies....................... 23 697 - 9 26 -------------------------------------------------- Balance on December 31..................................................... $ 2,186 $ 2,169 $ 1,454 $ 1,605 $ 1,322 ================================================== Loans, leases and factored accounts receivable, net of unearned income, outstanding on December 31...................... $103,371 $92,007 $72,714 $69,108 $70,891 Allowance for credit losses as a percentage of loans, leases and factored accounts receivable, net of unearned income, outstanding on December 31...................... 2.11% 2.36% 2.00% 2.32% 1.86% Average loans, leases and factored accounts receivable, net of unearned income, outstanding during the year..................... $96,258 $80,058 $69,136 $70,196 $68,970 Net charge-offs as a percentage of average loans, leases and factored accounts receivable, net of unearned income, outstanding during the year..................... .33% .51% 1.25% 1.86% .88% Ratio of the allowance for credit losses on December 31 to net charge-offs....................................... 6.93 5.27 1.68 1.23 2.18 Allowance for credit losses as a percentage of nonperforming loans......... 273.07% 193.38% 103.11% 81.82% 100.46%
40 NationsBank Corporation Annual Report 1994 [BAR GRAPH APPEARS HERE Net Charge-offs As A Percentage of Average Net Loans
1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- Net charge-offs as a percentage of average net loans....... 0.88% 1.86% 1.25% 0.51% 0.33%]
Loan and Lease Portfolio -- The Corporation's credit risk is centered in its loan and lease portfolio which on December 31, 1994 totaled $102.4 billion, or 67 percent, of total earning assets. The Corporation's overall objective in managing loan portfolio risk is to minimize the adverse impact of any single event or set of occurrences. To achieve this objective, the Corporation strives to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration. The Credit Policy group works with lending officers and is involved with the implementation, refinement and monitoring of credit policies and procedures. For commercial loans, loan officers prepare proposals supporting the extension of credit. These proposals contain an analysis of the borrower and an evaluation of the ability of the borrower to repay the potential credit. The proposals are subject to varying levels of approval by senior line and credit policy management prior to extension of credit. Commercial loans receive an initial risk rating by the originating loan officer. This rating is based on the amount of credit risk inherent in the loan and is reviewed for appropriateness by senior line and credit policy management. Credits are monitored by line and credit policy personnel for deterioration in a borrower's financial condition which would impact the borrower's ability to repay the credit. Risk ratings are adjusted as necessary. For consumer loans, approval and funding is conducted in centralized locations. Generally, credit scoring systems are utilized to provide standards for extension of credit. Consumer portfolio credit risk is monitored primarily using statistical models to predict portfolio behavior. Additionally, product and geographic concentrations are monitored. An independent credit review group conducts ongoing reviews of the loan and lease portfolio, reexamining on a regular basis risk assessments for loans and leases and overall compliance with policy. To limit credit exposure, the Corporation obtains collateral to support credit extensions and commitments when deemed necessary. The most significant categories of collateral are real and personal property, cash on deposit and marketable securities. The Corporation obtains real property as security for some loans that are made on the basis of the general creditworthiness of the borrower and whose proceeds were not used for real estate-related purposes. The Corporation also manages exposure to a single borrower, industry, loan-type or other concentration through syndications of credits, participations, loan sales and securitizations. Through the Corporation's Capital Markets Group, the Corporation is a major participant in the syndications market. In a syndicated facility, each participating lender funds only their portion of the syndicated facility, therefore limiting their exposure to the borrower. The Corporation also identifies and reduces its exposure to funded borrower or industry concentrations through loan sales. Generally, these sales are without recourse to the Corporation. ================================================================================ 13 ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES December 31 (Dollars in Millions)
1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent - -------------------------------------------------------------------------------------------------------------------------------- Commercial...................... $444 20.3% $403 18.6% $303 20.9% $524 32.6% $498 37.7% Real estate commercial.......... 214 9.8 230 10.6 220 15.1 282 17.6 123 9.3 Real estate construction........ 83 3.8 123 5.7 141 9.7 252 15.7 239 18.1 ------------------------------------------------------------------------------------------ Total commercial.............. 741 33.9 756 34.9 664 45.7 1,058 65.9 860 65.1 ------------------------------------------------------------------------------------------ Residential mortgage............ 34 1.6 24 1.1 21 1.4 50 3.1 64 4.9 Home equity..................... 3 .1 23 1.1 18 1.2 26 1.6 23 1.7 Credit card..................... 117 5.4 92 4.2 125 8.6 104 6.5 78 5.9 Other consumer.................. 225 10.3 201 9.3 117 8.1 135 8.4 168 12.7 ------------------------------------------------------------------------------------------ Total consumer................ 379 17.4 340 15.7 281 19.3 315 19.6 333 25.2 ------------------------------------------------------------------------------------------ Foreign......................... 11 .5 13 .6 17 1.2 6 .4 5 .4 Lease financing................. 17 .8 13 .6 12 .8 12 .7 20 1.5 Factored accounts receivable.... 23 1.0 19 .9 18 1.2 17 1.1 11 .8 Unallocated..................... 1,015 46.4 1,028 47.3 462 31.8 197 12.3 93 7.0 ------------------------------------------------------------------------------------------ $2,186 100.0% $2,169 100.0% $1,454 100.0% $1,605 100.0% $1,322 100.0% ==========================================================================================
Management's Discussion and Analysis 41 Allowance for Credit Losses -- The Corporation's allowance for credit losses was $2.2 billion on December 31, 1994 and 1993. Continued improvements in credit quality during 1994, as evidenced by a 36-percent decline in nonperforming asset levels and a 23-percent decline in net charge-offs, resulted in a lower provision for credit losses in 1994. The allowance coverage of nonperforming loans increased to 273 percent on December 31, 1994, up from 193 percent at the end of 1993. Although credit quality has improved steadily, management continues to carefully monitor asset quality trends and reserve levels. Based on the risk rating process described above, an amount is allocated within the allowance for credit losses to cover the amount of loss estimated to be inherent in particular risk categories of loans. The allocation of the allowance for credit losses is presented in TABLE 13 and reflects a refinement in methodology of allocating the allowance for credit losses. The amount allocated is based upon the Corporation's loss experience within risk categories of loans over a period of years and is adjusted for existing economic conditions as well as performance trends within specific industries. In addition to the allocation by risk category, the Corporation reviews significant individual credits and concentrations of credits and makes additional allocations to the allowance when deemed necessary. The nature of the process by which the Corporation determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Management believes that the allowance for credit losses is appropriate given inherent credit losses on December 31, 1994. As presented in TABLE 12, net charge-offs for 1994 were $316 million, or .33 percent of average loans, leases and factored accounts receivable, versus $412 million, or .51 per- ================================================================================ 14 NONPERFORMING ASSETS December 31 (Dollars in Millions)
1994 1993 1992 1991 1990 - -------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans Commercial.............................................................. $ 362 $ 474 $ 650 $ 831 $ 537 Real estate commercial.................................................. 201 318 404 535 374 Real estate construction................................................ 66 142 210 480 349 --------------------------------------------------- Total commercial...................................................... 629 934 1,264 1,846 1,260 --------------------------------------------------- Residential mortgage.................................................... 66 77 88 114 56 Home equity (1)......................................................... 10 7 5 - - Other consumer (1)...................................................... 84 86 29 - - --------------------------------------------------- Total consumer........................................................ 160 170 122 114 56 --------------------------------------------------- Foreign................................................................. 3 8 9 1 - Lease financing (1)..................................................... 9 10 15 - - --------------------------------------------------- Total nonperforming loans............................................. 801 1,122 1,410 1,961 1,316 --------------------------------------------------- Other real estate owned..................................................... 337 661 587 843 335 --------------------------------------------------- Total nonperforming assets............................................ $1,138 $1,783 $1,997 $2,804 $1,651 =================================================== Nonperforming assets as a percentage of Total assets, excluding Special Asset Division.......................... .67% 1.13% 1.69% 2.54% 1.46% Loans, leases and factored accounts receivable, net of unearned income, and other real estate owned................... 1.10 1.92 2.72 4.01 2.32 Total loans past due 90 days or more and not classified as nonperforming......................................... $ 146 $ 167 $ 215 $ 223 $ 406
The loss of income associated with nonperforming loans on December 31 and the cost of carrying other real estate owned were:
1994 1993 1992 1991 1990 - -------------------------------------------------------------------------------------------------------------------------------- Income that would have been recorded in accordance with original terms........................................................ $ 96 $ 80 $ 105 $ 205 $ 140 Income actually recorded.................................................. (31) (34) (31) (82) (44) --------------------------------------------------- Loss of income............................................................ $ 65 $ 46 $ 74 $ 123 $ 96 =================================================== Cost of carrying other real estate owned.................................. $ 24 $ 18 $ 25 $ 36 $ 19
On December 31, 1994, there were no material outstanding commitments to lend additional funds with respect to nonperforming loans. (1) Included in commercial nonperforming loans in 1991 and 1990. 42 NationsBank Corporation Annual Report 1994 [BAR GRAPH APPEARS HERE Nonperforming Assets (Dollars in Billions)
1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- Nonperforming assets.............. $1.651 $2.804 $1.997 $1.783 $1.138 Nonperforming loans............ 1.316 1.961 1.410 1.122 0.801 OREO........................... 0.335 0.843 0.587 0.661 0.337]
cent, in 1993. After adjusting for the impact of acquisitions, net charge-offs declined $173 million, or 47 percent, from the prior year. Including acquisitions, the most significant declines were centered in credit card and real estate commercial loan net charge-offs which fell $61 million and $48 million, respectively. The decrease in credit card net charge-offs is attributable to lower levels of outstanding receivables due to the fourth quarter 1993 securitization of credit card receivables. Net charge-offs as a percentage of managed average credit card loans were 3.46 percent in 1994, compared to 3.78 percent in 1993. The decline in real estate commercial loan charge-offs is due to improvements in real estate markets, primarily the Mid- Atlantic, and the strengthened financial condition of borrowers. These declines were partially offset by net charge-offs of other consumer loans which increased $19 million, or 18 percent, in 1994. This increase is consistent with the 21 percent growth in average levels of the other consumer portfolio during 1994. Net charge-offs as a percentage of average other consumer loans were .72 percent in 1994 compared to .73 percent in 1993. Nonperforming Assets -- On December 31, 1994, nonperforming assets were $1.1 billion, or 1.10 percent of net loans, leases, factored accounts receivable and other real estate owned, compared to $1.8 billion, or 1.92 percent, at the end of 1993. As presented in TABLE 14, nonperforming loans were $801 million at the end of 1994, compared to $1.1 billion at the end of 1993. The decrease in nonperforming loan levels was centered in real estate commercial and construction nonperforming loans, which declined $193 million, or 42 percent, and in commercial nonperforming loans which declined $112 million, or 24 percent, from 1993. These declines primarily reflected payments resulting from the improved financial condition of borrowers and the results of the Corporation's continuing loan workout activities. Lease financing, other consumer and home equity nonperforming loan levels have increased slightly throughout the second half of 1994. These increases are primarily reflective of the 40-percent, 21-percent and 16-percent growth, respectively, in the average levels of these portfolios during 1994. Other real estate owned, which =============================================================================== 15 REAL ESTATE COMMERCIAL AND CONSTRUCTION LOANS AND OTHER REAL ESTATE OWNED BY GEOGRAPHIC REGION December 31, 1994 (Dollars in Millions)
Loans OREO --------------------------------------------- --------------- Outstanding Percent Nonperforming Percent Amount Percent - ---------------------------------------------------------------------------------------------------------------------------------- Maryland, District of Columbia and Virginia................. $ 3,005 29.1% $134 50.2% $122 46.4% North Carolina and South Carolina........................... 1,951 18.9 27 10.1 33 12.5 Florida..................................................... 1,899 18.4 55 20.6 87 33.1 Other states................................................ 3,475 33.6 51 19.1 21 8.0 ------------------------------------------ ------------ $10,330 100.0% $267 100.0% $263 100.0% ========================================== ============
Distribution based on geographic location of collateral. ================================================================================ 16 REAL ESTATE COMMERCIAL AND CONSTRUCTION LOANS AND OTHER REAL ESTATE OWNED BY PROPERTY TYPE December 31, 1994 (Dollars in Millions)
Loans OREO --------------------------------------------- --------------- Outstanding Percent Nonperforming Percent Amount Percent - ---------------------------------------------------------------------------------------------------------------------------------- Shopping centers/retail..................................... $ 1,990 19.3% $ 31 11.6% $ 37 14.1% Office buildings............................................ 1,786 17.3 40 15.0 39 14.8 Apartments.................................................. 1,478 14.3 19 7.1 5 1.9 Hotels...................................................... 965 9.3 17 6.4 3 1.1 Land and land development................................... 890 8.6 58 21.7 109 41.4 Residential................................................. 845 8.2 23 8.6 15 5.7 Industrial/warehouse........................................ 737 7.1 19 7.1 17 6.5 Commercial-other............................................ 372 3.6 10 3.7 10 3.8 Multiple use................................................ 349 3.4 4 1.5 1 .4 Resorts/golf courses........................................ 172 1.7 16 6.0 3 1.1 Other....................................................... 746 7.2 30 11.3 24 9.2 --------------------------------------------------------------- $10,330 100.0% $267 100.0% $263 100.0% ===============================================================
Management's Discussion and Analysis 43 represents real estate acquired through foreclosure and in-substance foreclosures, decreased $324 million, or 49 percent, to $337 million at the end of 1994 from $661 million at the end of 1993. Internal loan workout units are devoted to the management and/or collection of certain nonperforming assets as well as certain performing loans. Aggressive collection strategies and a proactive approach to managing overall credit risk has expedited the Corporation's disposition, collection and renegotiation of nonperforming and other lower-quality assets and allowed loan officers to concentrate on generating new business. The Corporation continues its efforts to expedite disposition, collection and renegotiation of nonperforming and other lower-quality assets. As a part of this process, the Corporation routinely evaluates all reasonable alternatives, including the sale of assets individually or in groups. The final decision to proceed with any alternative is evaluated in the context of the overall credit-risk profile of the Corporation. Concentrations of Credit Risk -- As previously discussed, the Corporation strives to maintain a diverse credit portfolio in an effort to minimize the adverse impact of any single event or set of occurrences. Summarized below are areas of credit risk with exposures in excess of 25 per- cent of shareholders' equity and a discussion of foreign outstandings. Real Estate -- Total nonresidential real estate commercial and construction loans declined to $10.3 billion, or 10 percent of total loans, leases and factored accounts receivable on December 31, 1994, from $11.5 billion, or 12 percent, at year-end 1993. TABLES 15 and 16 summarize the geographic and property-type distribution of these loans. During 1994, the Corporation recorded real estate net charge-offs of $16 million, or .15 percent of average real estate loans compared to net charge-offs of $68 million, or .71 percent in 1993. Nonperforming real estate loans totaled $267 million and $460 million on December 31, 1994 and 1993, respectively. Commercial -- Commercial loan outstandings totaled $44.7 billion, or 43 percent, of total loans, leases and factored accounts receivable on December 31, 1994, compared to $40.8 billion, or 44 percent, at year-end 1993. TABLE 17 presents selected commercial loans by industry. Net charge-offs of commercial loans totaled $44 million, or .11 percent of average commercial loans in 1994 versus $40 million, or .11 percent, in 1993. Nonperforming commercial loans were $362 million and $474 million on December 31, 1994 and 1993, respectively. Consumer -- On December 31, 1994, consumer loan outstandings totaled $42.5 billion, representing 41 percent of total loans, leases and factored accounts receivable. This compares to outstandings of $35.7 billion, or 39 percent, on December 31, 1993. TABLE 8 shows the components of the Corporation's consumer loan portfolio. Net charge-offs in the consumer portfolio were $234 million in 1994 compared to $279 million in 1993. Net charge-offs as a percentage of average loans in 1994 were 2.63 percent for credit card, .03 percent for residential mortgage, .04 percent for home equity and .72 percent for other consumer loans. This compares to net charge-off ratios of 3.77 percent, .06 percent, .09 percent and .73 percent, respectively, in 1993. Foreign -- Foreign outstandings, which exclude contingencies and the local currency transactions of each country, include loans and ================================================================================ 17 SELECTED COMMERCIAL LOANS December 31, 1994 (Dollars in Millions)
Unfunded Outstanding Commitments Nonperforming - ---------------------------------------------------------------------------------------------------------------------------- Health care........................................................... $3,690 $1,947 $35 Oil and gas........................................................... 3,571 3,463 2 Leisure and sports.................................................... 3,300 1,947 42 Communications........................................................ 3,255 3,165 4 Food.................................................................. 3,081 2,933 28 Retail................................................................ 2,666 2,940 25 Textiles and apparel.................................................. 2,594 1,475 26 Automotive............................................................ 2,402 1,539 12 Machinery and equipment............................................... 1,978 2,197 9 Construction.......................................................... 1,856 1,125 36 Electronics........................................................... 1,779 1,713 5 Forest products and paper............................................. 1,678 1,398 3 Utilities............................................................. 1,202 1,622 1 Finance companies..................................................... 1,070 4,713 -
44 NationsBank Corporation Annual Report 1994 leases, interest-bearing deposits with foreign banks, bankers' acceptances and other investments. The Corporation has no significant medium- or long-term outstandings to restructuring countries. The Corporation's foreign outstandings totaled $4.6 billion on December 31, 1994, compared to $2.1 billion on December 31, 1993. Interest Rate Risk Management The Corporation's asset and liability management process is utilized to manage the Corporation's interest rate risk through structuring the balance sheet and off-balance sheet portfolios to maximize net interest income while maintaining acceptable levels of risk to changes in market interest rates. While achievement of this goal requires a balance between profitability, liquidity and interest rate risk, there are opportunities to enhance revenues through controlled risk. Interest rate risk is managed by the Corporation's Finance Committee which formulates strategies based on a desirable level of interest rate risk. In setting desirable levels of interest rate risk, the Finance Committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in the outlook on interest rates, world and regional economies, liquidity, business strategies and other factors. To effectively measure and manage interest rate risk, the Corporation uses computer simulations which determine the impact on net interest income of various interest rate scenarios, balance sheet trends and strategies. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth, loan and deposit pricing, changes in funding mix and asset and liability repricing and maturity characteristics. Simulations based on numerous assumptions are run under various interest rate scenarios to determine the impact on net interest income and capital. From these scenarios, interest rate risk is quantified and appropriate strategies are developed and implemented. The overall interest rate risk position and strategies are reviewed on an ongoing basis by executive management. Additionally, duration and market value sensitivity measures are selectively utilized where they provide added value to the overall interest rate risk management process. In implementing strategies to manage interest rate risk, the primary tools used by the Corporation are the discretionary portfolio, which is comprised of the securities portfolio and interest rate swaps, and management of the mix, rates and maturities of the wholesale and retail funding sources of the Corporation. The investment securities portfolio serves a primary role in positioning the Corporation based on the long-term interest rate outlook. Securities available for sale serve as a key tool for near-term interest rate risk management and can be utilized to take advantage of market opportunities that are medium-term in nature. Interest rate swaps allow the Corporation to adjust its interest rate risk position without exposure to risk of loss of principal and funding requirements, as swaps do not involve the exchange of notional amounts, only net interest payments. The interest payments can be based on a fixed rate or a variable index. The Corporation uses non-leveraged generic swaps, index amortizing swaps and collateralized mortgage obligation (CMO) swaps. Generic swaps involve the exchange of fixed and variable interest rates based on the contractual underlying notional amounts. Index amortizing and CMO swaps also involve the exchange of fixed and variable interest rates, however, their notional amounts decline and their maturities vary based on certain interest rate indices in the case of index amortizing swaps, or mortgage prepayment rates in the case of CMO swaps. Such instruments are subjected to the same credit risk ================================================================================ 18 ASSET AND LIABILITY MANAGEMENT INTEREST RATE SWAPS NOTIONAL CONTRACTS (Dollars in Millions)
Index Generic Amortizing CMO Total ----------------- ---------- --------------- ----------------- Receive Pay Receive Receive Pay Receive Pay Fixed Fixed Fixed Fixed Fixed Fixed Fixed Total - -------------------------------------------------------------------------------------------------------------------------------- Balance on December 31, 1993............... $6,500 $ - $6,150 $1,076 $182 $13,726 $ 182 $13,908 Additions............................... 320 8,469 2,300 2,000 - 4,620 8,469 13,089 Maturities.............................. (292) (23) - (572) (85) (864) (108) (972) -------------------------------------------------------------------------------- BALANCE ON DECEMBER 31, 1994............... $6,528 $8,446 $8,450 $2,504 $ 97 $17,482 $ 8,543 $26,025 ================================================================================
Management's Discussion and Analysis 45 management policies and procedures as trading instruments as described on page 49. In light of the economic momentum in the U.S. economy, and the associated tightening of credit by the Federal Reserve Bank through increases in interest rates, the Corporation shifted, in the latter half of 1994, its interest rate risk position from one postured to benefit modestly from stable to declining rates to a more neutral position. The actions taken by the Corporation to shift its position included reduction of the net swap position, reduction of fixed-rate assets, and extension of maturities of fixed-rate deposits and borrowings. In the third quarter of 1994, in order to reduce the net swap position, the Corporation entered into two-year maturity, pay fixed, interest rate swaps with a notional amount of $8.0 billion. As a result, the Corporation's net receive fixed position on December 31, 1994 was $8.9 billion, compared to $13.5 billion on December 31, 1993. TABLE 18 summarizes the notional contracts and the activity for the ================================================================================ 19 ASSET AND LIABILITY MANAGEMENT INTEREST RATE SWAPS December 31, 1994 (Dollars in Millions, Average Maturity in Years)
Maturities -------------------------------------------------------------- Market After Average Value Total 1995 1996 1997 1998 1999 1999 Maturity - --------------------------------------------------------------------------------------------------------------------------------- ASSET CONVERSION SWAPS Receive fixed generic.................... $(188) 1.14 Notional value......................... $ 6,528 $3,137 $ 2,705 $ 575 $ 3 - $ 108 Weighted average receive rate.......... 4.52% 4.30% 4.63% 4.45% 6.58% - 8.25% Weighted average pay rate.............. 5.84 Receive fixed amortizing................. (619) 2.61 Notional value......................... $ 8,450 $ 110 $ 186 $6,140 $2,014 - - Weighted average receive rate.......... 4.92% 5.73% 5.69% 4.85% 5.01% - - Weighted average pay rate.............. 6.02 Receive fixed CMO........................ (149) 2.25 ----- Notional value......................... $ 2,504 $ 708 $ 488 $ 349 $ 474 $ 485 - Weighted average receive rate.......... 5.12% 5.12% 5.10% 5.11% 5.07% 5.21% - Weighted average pay rate.............. 6.10 Total asset conversion swaps............. $(956) 2.01 ===== Notional value......................... $17,482 $3,955 $ 3,379 $7,064 $2,491 $ 485 $ 108 Weighted average receive rate.......... 4.80% 4.49% 4.76% 4.83% 5.02% 5.21% 8.25% Weighted average pay rate.............. 5.96 LIABILITY CONVERSION SWAPS Pay fixed generic........................ $ 223 1.69 Notional value......................... $ 8,446 $ 110 $ 8,037 $ 125 $ 100 - $ 74 Weighted average pay rate.............. 6.39% 6.64% 6.44% 4.52% 5.12% - 5.37% Weighted average receive rate.......... 5.35 Pay fixed CMO............................ 7 2.08 ----- Notional value......................... $ 97 $ 24 $ 19 $ 14 $ 40 - - Weighted average pay rate.............. 4.44% 4.44% 4.44% 4.44% 4.44% - - Weighted average receive rate.......... 6.19 Total liability conversion swaps......... $ 230 1.69 ===== Notional value......................... $ 8,543 $ 134 $ 8,056 $ 139 $ 140 - $ 74 Weighted average pay rate.............. 6.37% 6.25% 6.44% 4.51% 4.93% - 5.37% Weighted average receive rate.......... 5.35 Total.................................... $(726) ===== Notional value......................... $26,025 $4,089 $11,435 $7,203 $2,631 $ 485 $ 182 Weighted average receive rate.......... 4.98% Weighted average pay rate.............. 6.10
Floating rates represent the last repricing and will change in the future based on movements in one, three or six month LIBOR rates. Maturities are based on interest rates implied by the forward curve on December 31, 1994, and may differ from actual maturities, depending on future interest rate movements and resultant prepayment patterns. In addition to the above asset and liability management interest rate swaps, on December 31, 1994, the Corporation had approximately $1.2 billion notional of net receive fixed generic interest rate swaps associated primarily with the credit card securitization. On December 31, 1994, these positions had an unrealized market value of negative $115 million. The weighted average receive rate is 5.19 percent and the pay rate on December 31, 1994 was 6.94 percent. 46 NationsBank Corporation Annual Report 1994 year ended December 31, 1994 of asset and liability management interest rate swaps (ALM swaps). The interest rate swap transactions entered into during 1994 increased the gross notional amount of the Corporation's ALM swaps program on December 31, 1994, to $26.0 billion with the Corporation receiving fixed on $17.5 billion, converting variable-rate commercial loans to fixed rate and receiving variable on $8.5 billion, fixing the cost of certain variable-rate liabilities, primarily market-based borrowed funds. Secondly, the Corporation adjusted its interest rate risk position by reducing the level of fixed-rate securities. As securities matured in 1994, the Corporation did not fully reinvest these proceeds. Additionally, during the fourth quarter, approximately $1.5 billion of securities were sold, without reinvestment of those proceeds. These actions give the Corporation the flexibility to reinvest as deemed appropriate. The third action taken to adjust the interest rate risk position was extension of the maturities of market-based funds, primarily bank notes and foreign time deposits. In addition to these efforts, the acquisition of approximately $3.9 billion of customer-based deposits from California Federal Savings Bank in 1994 helped adjust the interest rate risk sensitivity of the Corporation's liabilities, as approximately one-half of these deposits are not rate sensitive and are longer-term. The above actions shifted the Corporation's interest rate position from one postured to benefit modestly from stable to declining interest rates to a more neutral position. On December 31, 1994, the impact of a gradual 100-basis point rise in interest rates over the next 12 months was estimated to have an insignificant impact on net income when compared to stable rates. TABLE 19 summarizes the maturities, average pay and receive rates and the market value on December 31, 1994, of the Corporation's ALM swaps. The weighted average interest receive rate was 4.98 percent and pay rate was 6.10 percent as of ================================================================================ 20 INTEREST RATE GAP ANALYSIS December 31, 1994 (Dollars in Millions)
Over 12 Interest-Sensitive Months and --------------------------------------------- Noninterest- 30-Day 3-Month 6-Month 12-Month Total Sensitive Total - -------------------------------------------------------------------------------------------------------------------------------- Earning assets Loans and leases, net of unearned income.................................... $ 45,946 $ 9,243 $ 4,713 $ 6,343 $66,245 $36,122 $102,367 Securities held for investment....................... 49 88 222 4,485 4,844 12,956 17,800 Securities available for sale........................ 523 1,844 407 152 2,926 5,099 8,025 Loans held for sale.................................. 318 - - - 318 - 318 Time deposits placed and other short-term investments............................. 1,530 572 52 3 2,157 2 2,159 Other earning assets................................. 21,053 - - - 21,053 - 21,053 -------------------------------------------------------------------- Total............................................ 69,419 11,747 5,394 10,983 97,543 54,179 $151,722 -------------------------------------------------------------------- Interest-bearing liabilities Savings.............................................. 9,037 - - - 9,037 - $ 9,037 NOW and money market deposit accounts........................................... 21,881 - - - 21,881 7,871 29,752 Consumer CDs and IRAs................................ 3,212 3,785 4,992 4,881 16,870 8,070 24,940 Negotiated CDs, public funds and other time deposits................................ 776 725 614 345 2,460 298 2,758 Foreign time deposits................................ 5,754 1,542 3,513 1,794 12,603 - 12,603 Borrowed funds and trading account liabilities....... 39,614 1,449 2,188 2,304 45,555 - 45,555 Long-term debt and obligations under capital leases..................................... 552 1,605 2 565 2,724 5,764 8,488 -------------------------------------------------------------------- Total............................................ 80,826 9,106 11,309 9,889 111,130 22,003 133,133 Noninterest-bearing, net................................. - - - - - 18,589 18,589 -------------------------------------------------------------------- Total............................................ 80,826 9,106 11,309 9,889 111,130 40,592 $151,722 -------------------------------------------------------------------- Interest rate gap........................................ (11,407) 2,641 (5,915) 1,094 (13,587) 13,587 Effect of asset and liability management interest rate swaps, futures and other off-balance sheet items........................ (6,289) (198) (2,306) 2,662 (6,131) 6,131 --------------------------------------------------------- Adjusted interest rate gap............................... $(17,696) $ 2,443 $ (8,221) $ 3,756 $(19,718) $19,718 ========================================================= Cumulative adjusted interest rate gap.................... $(17,696) $(15,253) $(23,474) $(19,718) ======================================
Management's Discussion and Analysis 47 December 31, 1994. Net interest receipts and payments have been included in interest income and expense on the underlying instruments. Deferred gains and losses relating to any terminated contracts are insignificant. The unrealized depreciation in the estimated value of the ALM swap portfolio should be viewed in the context of the overall balance sheet. The value of any single component of the balance sheet or off-balance sheet position should not be viewed in isolation. For example, the value of core deposits and other fixed-rate longer-term liabilities increased as interest rates rose, offsetting the decline in value of swaps and other fixed-rate assets. The overall impact of a 100-basis point parallel increase in interest rates from December 31, 1994 levels is estimated to have an insignificant impact on the market value of equity. Table 20 represents the Corporation's interest rate gap position on December 31, 1994. Based on contractual maturities or repricing dates, or anticipated dates where no contractual maturity or repricing date exists, interest sensitive assets and liabilities are placed in maturity categories. The Corporation's negative cumulative interest rate gap position in the near term reflects the strong customer-deposit gathering franchise which provides a relatively stable core deposit base. These available funds have been deployed in longer-term interest-earning assets including certain loans and securities. A gap analysis is limited in its usefulness as it represents a one-day position which is continually changing and not necessarily indicative of the Corporation's position at any other time. Additionally, the gap analysis does not consider the many factors accompanying interest rate movements. Capital Resources And Capital Management Shareholders' equity on December 31, 1994, was $11.0 billion, compared to $10.0 billion on December 31, 1993. The Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC have issued risk-based capital guidelines for U.S. banking organizations. These guidelines provide a capital framework that is sensitive to differences in risk profiles among banking companies. The guidelines define a two-tier capital framework. Tier 1 Capital consists of common and qualifying preferred shareholders' equity less goodwill and other adjustments. Tier 2 Capital consists of mandatory convertible, subordinated and other qualifying term debt, preferred stock not qualifying as Tier 1 Capital and the allowance for credit losses up to 1.25 percent of risk-weighted assets. The risk-based capital guidelines are designed to measure Tier 1 and Total Capital in relation to the credit risk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet assets. Off-balance sheet items, such as loan commitments and derivatives, are also applied a risk weight after conversion to balance sheet equivalent amounts. On December 31, 1994, the Corporation's Tier 1 ratio was 7.43 percent, compared to 7.41 percent on December 31, 1993. The total risk-based capital ratio was 11.47 percent, compared to 11.73 percent on December 31, 1993. Both of these measures compare favorably with the regulatory minimums of four percent for Tier 1 and eight percent for total risk-based capital. The leverage ratio consists of Tier 1 Capital divided by total average quarterly assets, excluding goodwill and certain other items. The minimum leverage ratio guideline is three percent, although most banking organizations are expected to maintain ratios of at least 100 to 200 basis points above the three-percent minimum. The Corporation's leverage ratio was 6.18 percent on December 31, 1994, compared to 6.00 percent on December 31, 1993. The components of Tier 1 and Total Capital and on- and off-balance sheet risk- weighted assets on December 31 were (dollars in millions):
1994 1993 - ----------------------------------------------------------------------- Common shareholders' equity.................................. $ 10,976 $ 9,859 Qualifying preferred stock................................... 35 120 Less: Deductions from Tier 1 Capital..................... (1,500) (1,444) ---------------------- Tier 1 Capital.............................. 9,511 8,535 ---------------------- Allowance for credit losses.................................. 2,186 2,169 Qualifying debt............................. 3,781 3,667 Less: Deductions from Tier 2 Capital.......................... (797) (865) ---------------------- Tier 2 Capital.............................. 5,170 4,971 ---------------------- Total Capital........................... $ 14,681 $ 13,506 ====================== Balance sheet risk- weighted assets......................... $104,432 $ 95,084 Off-balance sheet risk- weighted assets......................... 27,252 23,237 Less: Deductions from risk-weighted assets.................... (3,691) (3,208) ---------------------- Net risk-weighted assets.................... $127,993 $115,113 ======================
[BAR GRAPH APPEARS HERE Risk-Based Capital (Dollars in Billions)
1993 1994 ---- ---- Risk-Based Capital Tier 1............................. 8.535 13.506 Total.............................. 9.511 14.681]
48 NationsBank Corporation Annual Report 1994 Trading Activities The Corporation maintains trading positions in a variety of cash and derivative financial instruments. The Corporation offers a number of products to customers, as well as enters into transactions for its own account. In setting trading strategies, the Corporation manages these activities to maximize trading revenues while at the same time taking controlled risk. Capital markets activities are managed in the Capital Markets Group and are conducted in two principal divisions, NationsBanc Capital Markets, Inc. (NCMI) and NationsBanc-CRT. Major trading sites include Charlotte, Chicago, New York and London. NCMI underwrites, trades and distributes debt and equity securities. Its business activities include both customer and proprietary trading activities. Additionally, NCMI is a primary dealer in U.S. Government securities. NationsBanc-CRT manages the Corporation's derivatives and foreign exchange business activities. Interest rate derivatives are the primary component of NationsBanc-CRT's customer-based and proprietary derivative products. Other derivative products consist primarily of commodity-based transactions. Note 4 to the consolidated financial statements details the individual components of the Corporation's trading assets and liabilities. Additionally, TABLE 21 provides information on the Corporation's derivative dealer positions. Credit Risk -- Within the Corporation's Credit Policy organization, a group is dedicated to managing credit risks associated with trading activities. The Corporation maintains trading positions in a number of markets and with a variety of counterparties or obligors (counterparties). To limit credit exposure arising from such transactions, the Corporation evaluates the credit standing of counterparties, establishes limits for the total exposure to any one counterparty, monitors exposure against the established limits and monitors trading portfolio composition to manage concentrations. The Corporation's exposure to credit risk from derivative financial instruments is represented by the fair value of instruments. Credit risk amounts represent the replacement cost the Corporation could incur should counterparties with contracts in a gain position completely fail to perform under the terms of those contracts and any collateral underlying the contracts proves to be of no value to the Corporation. Counterparties are subject to the credit approval and credit ================================================================================ 21 DERIVATIVES-DEALER POSITIONS December 31 (Dollars in Millions)
1994 1993 -------------------------------------------------------------- Credit Credit Contract/ Risk Contract/ Risk Notional Amount (1) Notional Amount (1) - --------------------------------------------------------------------------------------------------------------------------------- Interest Rate Contracts Swaps................................................... $ 45,179 $ 531 $15,758 $185 Futures and forwards.................................... 124,620 30 32,503 - Written options......................................... 114,928 - 58,499 - Purchased options....................................... 118,839 481 55,616 129 Foreign Exchange Contracts Swaps................................................... 470 - 258 7 Spot, futures and forwards.............................. 26,987 221 12,516 106 Written options......................................... 13,398 - 8,058 - Purchased options....................................... 13,507 167 8,051 134 Commodity Contracts Swaps................................................... 570 74 1,470 51 Futures and forwards.................................... 1,984 1 1,661 31 Written options......................................... 12,608 - 6,696 - Purchased options....................................... 11,591 309 7,339 313 ------ ---- $1,814 $956 ====== ====
(1) Represents the replacement cost the Corporation could incur should counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts. Amounts include interest. Management's Discussion and Analysis 49 monitoring policies and procedures of the Corporation. Certain instruments require the Corporation or the counterparty to maintain collateral for all or part of the exposure. Generally, such collateral is in the form of cash or other highly liquid instruments. Limits for exposure to any particular counterparty are established and monitored. In certain jurisdictions, counterparty risk is also reduced through the use of legally enforceable master netting arrangements which allow the Corporation to settle positions with the same counterparty on a net basis. The contract or notional amounts associated with the Corporation's dealer derivative positions are reflected in TABLE 21. The notional or contract amounts indicate the total volume of transactions and significantly exceed the amount of the Corporation's credit or market risk associated with these instruments. The credit risk amount for the instruments reflected in TABLE 21 is measured by the Corporation as the positive replacement cost on December 31, 1994 and 1993. Of the credit risk amount reported in TABLE 21, $354 million and $343 million relates to exchange-traded ================================================================================ 22 SELECTED QUARTERLY OPERATING RESULTS (Dollars in Millions Except Per-Share Information)
1994 Quarters 1993 Quarters ------------------------------------------------------------------------------ Fourth Third Second First Fourth Third Second First - -------------------------------------------------------------------------------------------------------------------------------- Income from earning assets.................... $ 2,918 $ 2,701 $ 2,512 $ 2,398 $ 2,395 $ 2,104 $ 1,932 $ 1,896 Interest expense.............................. 1,618 1,395 1,195 1,110 1,092 956 821 821 Net interest income (taxable-equivalent)...................... 1,326 1,330 1,339 1,310 1,326 1,168 1,131 1,098 Net interest income........................... 1,300 1,306 1,317 1,288 1,303 1,148 1,111 1,075 Provision for credit losses................... 70 70 70 100 100 100 110 120 Gains (losses) on sales of securities......... (28) (4) 5 14 - 50 22 12 Noninterest income............................ 639 649 629 680 615 524 481 481 Other real estate owned expense (income)...... (8) (6) (3) 5 22 11 21 24 Restructuring expense......................... - - - - - 30 - - Noninterest expense........................... 1,261 1,234 1,228 1,219 1,222 1,054 1,019 998 Income before income taxes and effect of change in method of accounting for income taxes.......................... 588 653 656 658 574 527 464 426 Income tax expense............................ 183 222 219 241 201 186 158 145 Income before effect of change in method of accounting for income taxes.............................. 405 431 437 417 373 341 306 281 Effect of change in method of accounting for income taxes............... - - - - - - - 200 Net income.................................... 405 431 437 417 373 341 306 481 Earnings per common share..................... 1.46 1.55 1.58 1.52 1.37 1.33 1.20 1.89 Dividends per common share.................... .50 .46 .46 .46 .42 .42 .40 .40 Yield on average earning assets............... 7.54% 7.24% 7.00% 6.81% 6.88% 6.96% 7.19% 7.28% Rate on average interest- bearing liabilities....................... 4.71 4.22 3.80 3.57 3.53 3.54 3.47 3.57 Net interest spread........................... 2.83 3.02 3.20 3.24 3.35 3.42 3.72 3.71 Net interest yield............................ 3.40 3.54 3.70 3.69 3.77 3.83 4.17 4.16 Average total assets.......................... $174,554 $167,283 $161,989 $161,294 $157,790 $136,195 $122,810 $120,374 Average total deposits........................ 98,574 94,656 91,358 90,260 90,338 80,404 81,264 81,819 Average total shareholders' equity............ 10,906 10,665 10,272 10,080 9,669 8,642 8,344 7,929 Return on average assets...................... .92% 1.02% 1.08% 1.05% .94% .99% 1.00% .95% Return on average common shareholders' equity...................... 14.68 16.00 17.04 16.82 15.34 15.60 14.65 14.29 Market price per share of common stock High for the period....................... $ 50 3/4 $ 56 $ 57 3/8 $ 50 7/8 $ 53 1/4 $ 53 5/8 $ 57 7/8 $ 58 Low for the period........................ 43 3/8 47 1/8 44 1/2 44 3/8 44 1/2 48 1/4 45 49 1/2 Closing price............................. 45 1/8 49 51 3/8 45 3/4 49 51 1/2 49 5/8 54 5/8 Risk-based capital ratios Tier 1.................................... 7.43% 7.48% 7.63% 7.50% 7.41% 7.60% 7.63% 7.61% Total..................................... 11.47 11.57 11.57 11.66 11.73 12.15 11.75 11.80
50 NationsBank Corporation Annual Report 1994 instruments for 1994 and 1993, respectively. Because exchange-traded instruments conform to standard terms and are subject to policies set by the exchange involved, including counterparty approval, margin requirements and security deposit requirements, the credit risk to the Corporation is minimal. Market Risk -- Market risk arises due to fluctuations in interest rates and market prices that may result in changes in the values of trading instruments. The Corporation manages its exposure to market risk resulting from trading activities through a risk management function. Each major trading site is monitored by these risk management units. Daily earnings at risk limits, which have been approved by the Corporation's Finance Committee, are generally allocated to the business units. In addition to limits placed on these individual business units, limits are imposed on the risks certain individual traders may take. Risk positions are monitored by line, risk management function personnel and senior management on a daily basis. Daily earnings at risk measures the rate of loss for a one-day, three-standard deviation movement in market prices if traders are unable to rehedge. In addition to these daily earnings at risk simulations, portfolios which have significant option positions are stress tested continually to simulate the potential loss that might occur due to unexpected market movements in each market. Limits are also established by product for losses which could result in these stress scenarios. Fourth Quarter Review The Corporation recorded net income of $405 million in the fourth quarter of 1994, compared to $373 million in the same period of the previous year. Results for the fourth quarter of 1993 reflected a full-quarter impact of the MNC acquisition. TABLE 22 presents selected quarterly operating results for each quarter of 1994 and 1993. TABLE 23 presents an analysis of the Corporation's taxable-equivalent net interest income for each of the last five quarters ending December 31, 1994. Taxable-equivalent net interest income was $1.3 billion in the fourth quarter of 1994 and 1993. The net interest yield was 3.40 percent in the fourth quarter of 1994, compared to 3.77 percent in the same quarter of 1993. Excluding the impact of the primary government securities dealer, the net interest yield totaled 3.88 percent in the fourth quarter of 1994 and 4.18 percent in the fourth quarter of 1993. The decline in the net interest yield is due to the narrowing of the spread between investment securities and market-based funds and actions taken to reposition the balance sheet in light of rising interest rates. Provision for credit losses was $70 million in the fourth quarter of 1994, compared to $100 million in the fourth quarter of 1993. This decline primarily reflected improved credit quality, as evidenced by decreases in net charge-offs and lower nonperforming asset levels. Net charge-offs for the fourth quarter of 1994 were $98 million, compared to $136 million in the prior year quarter. Securities losses in the fourth quarter of 1994 were $28 million resulting from the previously described interest rate risk repositioning initiatives. There were no securities gains or losses in the fourth quarter of 1993. Noninterest income, adjusted for the effects of acquisitions, increased $14 million in the fourth quarter of 1994 compared to the fourth quarter of 1993. Significant changes in the components of noninterest income included increases of $27 million in investment banking income, $8 million in deposit account service charges and $23 million in credit card income, primarily due to the impact of the December 1993 credit card securitization. These increases were partially offset by decreases of $30 million in trading account profits and fees, due to difficult conditions in the financial markets in the fourth quarter of 1994, and $17 million in miscellaneous income. Other real estate owned expense was a recovery of $8 million in the fourth quarter of 1994, compared to an expense of $22 million in the same period of 1993. Fourth quarter noninterest expense in 1994, adjusted for the effects of acquisitions, increased $2 million. Increases of $49 million in personnel expense and $7 million in equipment expense were offset by decreases in all other noninterest expense categories totaling approximately $54 million. In the fourth quarter of 1994, the Corporation recorded tax expense of $183 million for an effective tax rate of 31.1 percent of pretax income, compared to $201 million, or 35.0 percent of pretax income, recorded in the same period of 1993. This decrease is a result of adjustment of the Corporation's effective tax rate for the year, bringing it to 33.9 percent of pretax income on an annual basis. See Note 13 to the consolidated financial statements for a discussion of the Corporation's tax position. Management's Discussion and Analysis 51 ================================================================================ 23 QUARTERLY TAXABLE-EQUIVALENT DATA (Dollars in Millions)
Fourth Quarter 1994 Third Quarter 1994 ------------------------------------------------------------ Average Average Balance Income Balance Income Sheet or Yields/ Sheet or Yields/ Amounts Expense Rates Amounts Expense Rates - --------------------------------------------------------------------------------------------------------------------------------- Earning assets Loans and leases, net of unearned income (1) Commercial (2)............................................... $ 43,587 $ 855 7.78% $ 42,037 $ 805 7.60% Real estate commercial....................................... 7,289 162 8.86 7,473 159 8.43 Real estate construction..................................... 3,038 72 9.33 3,106 66 8.50 --------------------------------------------------------- Total commercial........................................... 53,914 1,089 8.01 52,616 1,030 7.77 --------------------------------------------------------- Residential mortgage......................................... 16,680 321 7.70 15,528 296 7.63 Home equity.................................................. 2,580 56 8.71 2,516 55 8.72 Credit card.................................................. 4,357 141 12.80 4,003 131 12.96 Other consumer............................................... 17,714 430 9.63 17,357 412 9.42 --------------------------------------------------------- Total consumer............................................. 41,331 948 9.13 39,404 894 9.03 --------------------------------------------------------- Foreign...................................................... 1,764 30 6.79 1,453 23 6.34 Lease financing.............................................. 2,755 53 7.71 2,474 49 7.90 --------------------------------------------------------- Total loans and leases, net................................ 99,764 2,120 8.44 95,947 1,996 8.27 --------------------------------------------------------- Securities Held for investment.......................................... 17,966 245 5.40 15,443 197 5.08 Available for sale (3)....................................... 8,560 117 5.44 11,683 152 5.17 --------------------------------------------------------- Total securities........................................... 26,526 362 5.42 27,126 349 5.12 --------------------------------------------------------- Loans held for sale............................................ 109 3 7.65 183 3 6.69 Federal funds sold and securities purchased under agreements to resell................................... 16,159 203 5.00 13,495 149 4.38 Time deposits placed and other short-term investments.......... 2,231 32 5.75 2,216 29 5.16 Trading account securities (4)................................. 10,318 224 8.64 10,488 199 7.52 --------------------------------------------------------- Total earning assets (5)................................... 155,107 2,944 7.54 149,455 2,725 7.24 Cash and cash equivalents........................................ 8,674 8,372 Factored accounts receivable..................................... 1,235 1,156 Other assets, less allowance for credit losses................... 9,538 8,300 --------------------------------------------------------- Total assets............................................... $174,554 $167,283 ========================================================= Interest-bearing liabilities Savings........................................................ $ 9,143 54 2.37 $ 9,255 54 2.31 NOW and money market deposit accounts.......................... 29,442 190 2.53 29,507 179 2.41 Consumer CDs and IRAs.......................................... 25,136 277 4.40 24,439 257 4.17 Negotiated CDs, public funds and other time deposits........... 2,825 35 4.80 3,223 34 4.23 Foreign time deposits.......................................... 11,576 162 5.57 8,436 108 5.06 Borrowed funds and trading account liabilities (4)(6).......... 50,110 756 5.99 48,688 629 5.13 Long-term debt and obligations under capital leases............ 8,147 144 7.08 7,731 134 6.95 --------------------------------------------------------- Total interest-bearing liabilities......................... 136,379 1,618 4.71 131,279 1,395 4.22 Noninterest-bearing sources Noninterest-bearing deposits................................... 20,452 19,796 Other liabilities.............................................. 6,817 5,543 Shareholders' equity........................................... 10,906 10,665 --------------------------------------------------------- Total liabilities and shareholders' equity................. $174,554 $167,283 ========================================================= Net interest spread.............................................. 2.83 3.02 Impact of noninterest-bearing sources............................ .57 .52 --------------------------------------------------------- Net interest income/yield on earning assets...................... $1,326 3.40% $1,330 3.54% =========================================================
(1) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis. (2) Commercial loan interest income includes net interest rate swap revenues related to asset conversion swaps converting variable-rate commercial loans to fixed rate. Such revenue (expense) amounts were $(32), $0, $38 and $56 in the fourth, third, second and first quarters of 1994, respectively, and $42 in the fourth quarter of 1993. (3) The average balance sheet amounts and yields on securities available for sale are based on the average of historical amortized cost balances. (4) Gross unrealized gains and losses on off-balance sheet trading positions are reported in other assets and liabilities, respectively. (5) Interest income includes taxable-equivalent adjustments of $26, $24, $22 and $22 in the fourth, third, second and first quarters of 1994, respectively, and $23 in the fourth quarter of 1993. (6) Borrowed funds and trading account liabilities interest expense includes net interest rate swap expense related to liability conversion swaps fixing the cost of certain variable-rate liabilities, primarily market-based borrowed funds. Such expense (revenue) was $20, $9, $(1) and $3 in the fourth, third, second and first quarters of 1994, respectively, and $2 in the fourth quarter of 1993. 52 NationsBank Corporation Annual Report 1994 ================================================================================ 23 QUARTERLY TAXABLE-EQUIVALENT DATA (Dollars in Millions)
Second Quarter 1994 First Quarter 1994 ------------------------------------------------------------ Average Average Balance Income Balance Income Sheet or Yields/ Sheet or Yields/ Amounts Expense Rates Amounts Expense Rates - --------------------------------------------------------------------------------------------------------------------------------- Earning assets Loans and leases, net of unearned income (1) Commercial (2)............................................... $ 40,339 $ 765 7.61% $ 40,421 $ 722 7.24% Real estate commercial....................................... 7,955 157 7.92 8,419 158 7.61 Real estate construction..................................... 3,226 68 8.42 3,253 62 7.73 ---------------------------------------------------------- Total commercial........................................... 51,520 990 7.71 52,093 942 7.33 ---------------------------------------------------------- Residential mortgage......................................... 14,329 270 7.53 13,340 254 7.63 Home equity.................................................. 2,480 46 7.41 2,547 45 7.11 Credit card.................................................. 3,783 115 12.27 3,673 121 13.32 Other consumer............................................... 17,060 397 9.33 16,806 390 9.41 ---------------------------------------------------------- Total consumer............................................. 37,652 828 8.82 36,366 810 8.99 ---------------------------------------------------------- Foreign...................................................... 1,287 18 5.73 1,157 15 5.15 Lease financing.............................................. 2,146 38 7.08 1,992 36 7.19 ---------------------------------------------------------- Total loans and leases, net................................ 92,605 1,874 8.12 91,608 1,803 7.96 ---------------------------------------------------------- Securities Held for investment.......................................... 14,009 167 4.79 12,714 152 4.82 Available for sale (3)....................................... 14,829 191 5.16 14,545 184 5.12 ---------------------------------------------------------- Total securities........................................... 28,838 358 4.98 27,259 336 4.98 ---------------------------------------------------------- Loans held for sale............................................ 392 6 6.49 681 11 6.46 Federal funds sold and securities purchased under agreements to resell................................... 11,780 108 3.64 12,073 87 2.95 Time deposits placed and other short-term investments.......... 1,211 15 4.96 1,375 14 4.12 Trading account securities (4)................................. 10,265 173 6.75 10,738 169 6.39 ---------------------------------------------------------- Total earning assets (5)................................... 145,091 2,534 7.00 143,734 2,420 6.81 Cash and cash equivalents........................................ 8,051 7,976 Factored accounts receivable..................................... 1,599 1,016 Other assets, less allowance for credit losses................... 7,248 8,568 ---------------------------------------------------------- Total assets............................................... $161,989 $161,294 ========================================================== Interest-bearing liabilities Savings........................................................ $ 9,181 53 2.30 $ 8,879 51 2.33 NOW and money market deposit accounts.......................... 29,816 166 2.24 30,140 161 2.17 Consumer CDs and IRAs.......................................... 22,855 231 4.02 23,295 234 4.09 Negotiated CDs, public funds and other time deposits........... 3,574 33 3.80 3,664 31 3.44 Foreign time deposits.......................................... 5,691 63 4.49 4,385 42 3.86 Borrowed funds and trading account liabilities (4)(6).......... 47,122 514 4.38 47,336 454 3.89 Long-term debt and obligations under capital leases............ 7,952 135 6.75 8,308 137 6.61 ---------------------------------------------------------- Total interest-bearing liabilities......................... 126,191 1,195 3.80 126,007 1,110 3.57 Noninterest-bearing sources Noninterest-bearing deposits................................... 20,241 19,897 Other liabilities.............................................. 5,285 5,310 Shareholders' equity........................................... 10,272 10,080 ---------------------------------------------------------- Total liabilities and shareholders' equity................. $161,989 $161,294 ========================================================== Net interest spread.............................................. 3.20 3.24 Impact of noninterest-bearing sources............................ .50 .45 ---------------------------------------------------------- Net interest income/yield on earning assets...................... $1,339 3.70% $1,310 3.69% ===============================================================================================================================
23 QUARTERLY TAXABLE-EQUIVALENT DATA (Dollars in Millions)
Fourth Quarter 1993 ----------------------------------- Average Balance Income Sheet or Yields/ Amounts Expense Rates - --------------------------------------------------------------------------------------------------------- Earning assets Loans and leases, net of unearned income (1) Commercial (2)............................................... $ 39,233 $ 702 7.10% Real estate commercial....................................... 7,915 150 7.51 Real estate construction..................................... 3,260 64 7.77 --------------------------------- Total commercial........................................... 50,408 916 7.21 --------------------------------- Residential mortgage......................................... 12,663 249 7.85 Home equity.................................................. 2,586 47 7.24 Credit card.................................................. 4,593 150 12.97 Other consumer............................................... 16,072 378 9.33 --------------------------------- Total consumer............................................. 35,914 824 9.12 --------------------------------- Foreign...................................................... 931 13 5.82 Lease financing.............................................. 1,894 35 7.47 --------------------------------- Total loans and leases, net................................ 89,147 1,788 7.97 --------------------------------- Securities Held for investment.......................................... 27,273 354 5.16 Available for sale (3)....................................... 2,211 26 4.69 --------------------------------- Total securities........................................... 29,484 380 5.13 --------------------------------- Loans held for sale............................................ 961 16 6.54 Federal funds sold and securities purchased under agreements to resell................................... 8,237 64 3.08 Time deposits placed and other short-term investments.......... 2,238 20 3.71 Trading account securities (4)................................. 9,590 150 6.19 --------------------------------- Total earning assets (5)................................... 139,657 2,418 6.88 Cash and cash equivalents........................................ 8,318 Factored accounts receivable..................................... 1,207 Other assets, less allowance for credit losses................... 8,608 --------------------------------- Total assets............................................... $157,790 ================================= Interest-bearing liabilities Savings........................................................ $8,542 52 2.45 NOW and money market deposit accounts.......................... 30,383 168 2.20 Consumer CDs and IRAs.......................................... 23,813 246 4.10 Negotiated CDs, public funds and other time deposits........... 3,717 32 3.36 Foreign time deposits.......................................... 4,031 39 3.80 Borrowed funds and trading account liabilities (4)(6).......... 44,188 421 3.74 Long-term debt and obligations under capital leases............ 8,233 134 6.52 --------------------------------- Total interest-bearing liabilities......................... 122,907 1,092 3.53 Noninterest-bearing sources Noninterest-bearing deposits................................... 19,852 Other liabilities.............................................. 5,362 Shareholders' equity........................................... 9,669 --------------------------------- Total liabilities and shareholders' equity................. $157,790 ================================= Net interest spread.............................................. 3.35 Impact of noninterest-bearing sources............................ .42 --------------------------------- Net interest income/yield on earning assets...................... $1,326 3.77% =================================
Management's Discussion and Analysis 53 1993 COMPARED TO 1992 The following discussion and analysis provides a comparison of the Corporation's results of operations for the years ended December 31, 1993 and 1992, and its financial condition as of December 31, 1993 and 1992. This discussion should be read in conjunction with the consolidated financial statements and related notes on pages 58 through 77. OVERVIEW In 1993, earnings totaled $1.5 billion, or $5.78 per common share, compared to 1992 earnings of $1.1 billion, or $4.60 per common share. Return on average common equity was 15.00 percent, excluding the impact of adopting a new income tax accounting standard in 1993, compared to 15.83 percent the previous year. The Corporation's results for 1993 reflected strong earnings in most operating units and improved credit quality. See Note 2 regarding information about acquisitions occurring in 1993 that affect comparability to 1992. CUSTOMER GROUP REVIEW The General Bank earned $740 million in 1993 compared to $660 million in 1992. The return on equity for the General Bank increased from 15 percent in 1992 to 16 percent in 1993. The efficiency ratio decreased from 68.64 percent in 1992 to 68.08 percent in 1993. The Institutional Group earned $492 million, an increase of $347 million from the previous year. Return on equity for the Institutional Group rose from 5 percent in 1992 to 16 percent in 1993. The group's efficiency ratio declined to 47.90 percent in 1993, from 52.96 percent in the prior year. Financial Services, which consists of NationsCredit and Greyrock Capital Group, was formed in 1993. For the year, net income totaled $35 million and return on equity was 13 percent. The group had an efficiency ratio of 61.62 percent in 1993. NET INTEREST INCOME Taxable-equivalent net interest income in 1993 was $4.7 billion, representing an increase of $533 million, or 13 percent, from the $4.2 billion reported in 1992. This increase was attributable to higher earning asset levels, particularly loan levels. The net interest yield declined 14 basis points to 3.96 percent in 1993 from 4.10 percent in 1992. The yield on average earning assets declined 64 basis points between the years, to 7.06 percent in 1993 from 7.70 percent in 1992. Excluding the impact of the Corporation's primary government securities dealer, the yield on average earning assets declined 53 basis points. The replacement at lower yields of a substantial portion of the Corporation's maturing investment securities was the largest contributor to the 53-basis point decline. The cost of interest-bearing liabilities fell 59 basis points, to 3.53 percent in 1993 from 4.12 percent in 1992, contributing significantly to the improvement in net interest income. A lower interest rate environment in 1993, coupled with a change in the mix among deposits, contributed to a decrease in rates paid on customer deposits. PROVISION FOR CREDIT LOSSES The provision for credit losses was $430 million in 1993, compared to $715 million in the prior year. Net charge-offs declined $454 million to $412 million in 1993. On December 31, 1993, the allowance for credit losses was $2.2 billion, or 2.36 percent of loans, leases and factored accounts receivable, compared to $1.5 billion, or 2.00 percent, at the end of 1992, and covered 193 percent of nonperforming loans, compared to 103 percent the previous year. SECURITIES GAINS Gains from the sales of securities were $84 million in 1993, compared to $249 million in 1992. The 1992 gains followed balance sheet management strategies to reposition the components and the estimated average maturity of the securities portfolios at a time when the portfolios contained substantial net appreciation. NONINTEREST INCOME Noninterest income totaled $2.1 billion in 1993, an increase of $188 million, or 10 percent, from $1.9 billion in 1992. After adjusting for acquisitions, divestitures and the 1992 gain on the sale of a mortgage servicing unit, noninterest income increased $185 million, or 11 percent, in 1993. Growth in most major categories of noninterest income during 1993 was partially offset by declines in mortgage servicing and related fees, brokerage income and asset management fees, all reflecting divestitures. 54 NationsBank Corporation Annual Report 1994 OTHER REAL ESTATE OWNED EXPENSE OREO expense declined $105 million to $78 million in 1993 from $183 million in 1992, consistent with the improvement in asset quality. The decline in 1993 was largely due to lower write-downs associated with real estate values subsequent to foreclosure in the Institutional Group's Real Estate Banking Group and lower net costs associated with management of a reduced level of foreclosed properties compared to the previous year. RESTRUCTURING EXPENSE Restructuring expense of $30 million in 1993, associated with the acquisition of MNC Financial Inc., represented the costs of employee severance and real estate dispositions. NONINTEREST EXPENSE Noninterest expense of $4.3 billion in 1993 increased eight percent from $4.0 billion in 1992. Excluding acquisitions, noninterest expense increased $132 million or four percent, to $3.9 billion in 1993. INCOME TAXES The Corporation's income tax expense for 1993 was $690 million, for an effective tax rate of 34.7 percent of pretax income. Tax expense for 1992 was $251 million, or 18.0 percent of pretax income. The lower effective rate in 1992 was primarily attributable to $265 million in tax benefits resulting from utilization of financial operating loss carryforwards. As a result of adopting a change in method of accounting for income taxes, the Corporation recorded its remaining unrecognized benefits of $200 million in 1993. As such, the 1993 effective rate more closely approximated the statutory rate of 35 percent. Management's Discussion and Analysis 55 NationsBank Corporation and Subsidiaries SIX-YEAR CONSOLIDATED STATISTICAL SUMMARY
1994 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------ TAXABLE-EQUIVALENT YIELDS EARNED Loans and leases, net of unearned income Commercial..................................................... 7.56% 6.96% 7.08% 8.70% 10.44% 11.76% Real estate commercial......................................... 8.18 7.59 7.78 9.13 10.49 11.08 Real estate construction....................................... 8.49 7.50 7.17 8.82 10.84 11.96 Total commercial............................................. 7.71 7.09 7.20 8.78 10.50 11.69 Residential mortgage........................................... 7.62 8.27 9.33 10.47 9.55 11.06 Home equity.................................................... 7.99 7.14 7.05 9.53 11.18 11.80 Credit card.................................................... 12.84 13.62 14.45 15.22 15.78 16.45 Other consumer................................................. 9.45 9.56 10.60 11.37 12.66 11.64 Total consumer............................................... 8.99 9.51 10.50 11.47 11.81 12.00 Foreign........................................................ 6.10 5.49 6.63 8.47 13.28 11.38 Lease financing................................................ 7.50 7.96 8.25 10.89 9.53 9.08 Total loans and leases, net.................................. 8.20 8.06 8.49 9.83 11.00 11.75 Securities Held for investment............................................ 5.06 5.54 6.84 8.61 9.15 9.29 Available for sale............................................. 5.20 4.80 5.77 - - - Total securities............................................. 5.12 5.51 6.76 8.61 9.15 9.29 Loans held for sale.............................................. 6.63 6.73 7.22 8.74 11.49 12.36 Federal funds sold and securities purchased under agreements to resell........................... 4.09 3.21 3.77 5.89 8.16 9.20 Time deposits placed and other short-term investments............ 5.12 3.91 5.09 6.89 8.95 9.72 Trading account securities....................................... 7.32 5.43 4.64 6.99 8.43 9.08 Total earning assets......................................... 7.16 7.06 7.70 9.25 10.37 11.04 RATES PAID Savings.......................................................... 2.33 2.38 2.86 4.55 5.15 5.86 NOW and money market deposit accounts............................ 2.34 2.24 2.82 4.96 6.02 6.20 Consumer CDs and IRAs............................................ 4.17 4.52 5.58 7.01 7.94 8.48 Negotiated CDs, public funds and other time deposits............. 4.02 3.97 4.93 7.08 8.13 8.79 Foreign time deposits............................................ 4.98 4.05 5.52 6.70 8.89 9.63 Borrowed funds and trading account liabilities................... 4.87 3.45 3.33 5.64 7.93 8.99 Long-term debt and obligations under capital leases.............. 6.85 7.44 8.92 8.88 9.18 9.84 Special Asset Division net funding allocation.................... - - - (6.20) (7.49) (8.20) Total interest-bearing liabilities........................... 4.09 3.53 4.12 6.09 7.37 8.00 PROFIT MARGINS Net interest spread.............................................. 3.07 3.53 3.58 3.16 3.00 3.04 Net interest yield............................................... 3.58 3.96 4.10 3.82 3.75 4.03 YEAR-END DATA (Dollars in millions) Loans, leases and factored accounts receivable, net of unearned income............................. $103,371 $92,007 $72,714 $69,108 $70,891 $66,360 Securities held for investment................................... 17,800 13,584 23,355 16,275 25,530 25,278 Securities available for sale.................................... 8,025 15,470 1,374 8,904 - - Loans held for sale.............................................. 318 1,697 1,236 585 315 357 Time deposits placed and other short-term investments............ 2,159 1,479 1,994 1,622 1,289 3,499 Total earning assets............................................. 151,722 140,890 103,872 96,491 98,754 96,052 Total assets (1)................................................. 169,604 157,686 118,059 100,319 112,791 110,246 Noninterest-bearing deposits..................................... 21,380 20,723 17,702 16,356 16,850 16,112 Domestic savings and time deposits............................... 66,487 66,356 62,988 70,359 70,091 66,790 Foreign time deposits............................................ 12,603 4,034 2,037 1,360 2,124 2,478 Total savings and time deposits.................................. 79,090 70,390 65,025 71,719 72,215 69,268 Total deposits................................................... 100,470 91,113 82,727 88,075 89,065 85,380 Borrowed funds and trading account liabilities................... 45,555 44,248 21,957 9,846 15,474 17,870 Long-term debt and obligations under capital leases.............. 8,488 8,352 3,066 2,876 2,766 2,517 Total shareholders' equity....................................... 11,011 9,979 7,814 6,518 6,283 6,003
(1) Excludes assets of NationsBank of Texas Special Asset Division in 1991, 1990 and 1989. (2) Includes FDIC's interest in earnings of NationsBank of Texas in 1989. 78 NationsBank Corporation Annual Report 1994
1994 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS RATIOS Return on average Total assets (1)(2).......................................... 1.02% .97% 1.00% .17% .52% 1.06% Earning assets (1)(2)........................................ 1.14 1.09 1.12 .20 .59 1.07 Common shareholders' equity.................................. 16.10 15.00 15.83 2.70 9.56 18.85 EARNINGS ANALYSIS (Taxable-Equivalent) Noninterest income as a percentage of net interest income.............................................. 48.96 44.48 45.65 44.22 42.56 39.23 Noninterest expense, excluding restructuring, as a percentage of net interest income....................... 93.16 90.90 94.64 97.62 92.10 89.44 Efficiency ratio: noninterest expense, excluding restructuring, divided by the sum of net interest income and noninterest income................................ 62.54 62.91 64.98 67.69 64.60 64.24 Overhead ratio: noninterest expense, excluding restructuring, less noninterest income divided by net interest income............................... 44.20 46.42 48.99 53.40 49.54 50.21 Net income as a percentage of net interest income.............................................. 31.86 31.79 27.33 5.12 15.77 26.48 ASSET QUALITY For the year Net charge-offs as a percentage of average loans, leases and factored accounts receivable............... .33 .51 1.25 1.86 .88 .48 Net charge-offs as a percentage of the provision for credit losses.................................. 101.79 95.76 121.15 82.70 59.24 74.38 At year end Allowance for credit losses as a percentage of net loans, leases and factored accounts receivable............... 2.11 2.36 2.00 2.32 1.86 1.32 Allowance for credit losses as a percentage of nonperforming loans.......................................... 273.07 193.38 103.11 81.82 100.46 151.67 Nonperforming assets as a percentage of net loans, leases, factored accounts receivable, and other real estate owned.................................. 1.10 1.92 2.72 4.01 2.32 1.08 Nonperforming assets as a percentage of total assets (1)............................................. .67 1.13 1.69 2.54 1.46 .65 Nonperforming assets (in millions)............................. $1,138 $1,783 $1,997 $2,804 $1,651 $716 RISK-BASED CAPITAL RATIOS Tier 1......................................................... 7.43% 7.41% 7.54% 6.38% 5.79% -- Total.......................................................... 11.47 11.73 11.52 10.30 9.58 -- Common shareholders' equity as a percentage of total assets at year end (1)................... 6.47% 6.25% 6.60% 5.67% 5.23% 5.10% Dividend payout ratio (per common share)....................... 30.78 28.38 33.07 215.36 61.54 30.66 Shareholders' equity per common share Average...................................................... $37.99 $33.36 $29.05 $27.97 $27.31 $24.97 At year end.................................................. 39.70 36.39 30.80 27.03 27.30 26.41 OTHER STATISTICS Number of full-time equivalent employees....................... 61,484 57,742 50,828 57,177 58,449 57,069 Rate of increase (decrease) in average Total loans and leases, net of unearned income............... 20.29% 15.83% (1.70)% 1.82% 8.36% 38.71% Earning assets............................................... 24.50 16.59 (.84) 2.42 12.42 44.26 Total assets (1)............................................. 23.75 16.82 (.64) 1.85 12.19 43.10 Total deposits............................................... 12.30 .97 (5.59) 3.44 8.99 51.37 Total shareholders' equity................................... 21.19 18.73 10.31 6.16 18.15 23.01 COMMON STOCK INFORMATION Market price per share High for the year............................................ $57 3/8 $58 $53 3/8 $42 3/4 $47 1/4 $55 Low for the year............................................. 43 3/8 44 1/2 39 5/8 21 1/2 16 7/8 27 Close at the end of the year................................. 45 1/8 49 51 3/8 40 5/8 22 7/8 46 1/4 Daily average trading volume................................... 753,515 666,591 727,578 397,054 405,087 303,599 Number of shareholders of record............................... 105,774 108,435 89,371 102,209 30,824 29,064
Six-Year Consolidated Statistical Summary 79