SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
For the quarterly period ended September 30, 1995
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OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
For the transition period from to
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Commission file number 1-6523
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NationsBank Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-0906609
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
NationsBank Corporate Center, Charlotte, North Carolina 28255
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(Address of principal executive offices and zip code)
(704) 386-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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On October 31, 1995, there were 270,922,029 shares of NationsBank Corporation
Common Stock outstanding.
1
NationsBank Corporation
September 30, 1995 Form 10-Q
Index
Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Income for the Three Months and
Nine Months Ended September 30, 1995 and 1994................. 3
Consolidated Balance Sheet on September 30, 1995 and
December 31, 1994............................................. 4
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1995 and 1994............................. 5
Consolidated Statement of Changes in Shareholders' Equity
for the Nine Months Ended September 30, 1995 and 1994......... 6
Notes to Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ......................................... 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 40
Signature................................................................. 41
Index to Exhibits......................................................... 42
2
Part I. Financial Information
Item 1. Financial Statements
NationsBank Corporation and Subsidiaries
Consolidated Statement of Income
(Dollars in Millions Except Per-Share Information)
Three Months Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
1995 1994 1995 1994
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Income from Earning Assets
Interest and fees on loans.............................. $ 2,392 $ 1,938 $ 6,879 $ 5,521
Lease financing income.................................. 58 42 159 104
Interest and dividends on securities
Held for investment................................... 202 196 668 514
Available for sale.................................... 181 146 449 510
Interest and fees on loans held for sale................ 8 3 12 20
Time deposits placed and other short-term investments... 32 29 114 58
Federal funds sold...................................... 11 13 39 27
Securities purchased under agreements to resell......... 240 136 727 317
Trading account securities.............................. 274 198 812 540
-----------------------------------------------
Total income from earning assets...................... 3,398 2,701 9,859 7,611
-----------------------------------------------
Interest Expense
Deposits................................................ 830 632 2,455 1,697
Borrowed funds.......................................... 691 437 2,068 1,090
Trading account liabilities............................. 240 192 711 507
Long-term debt.......................................... 246 134 591 406
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Total interest expense................................ 2,007 1,395 5,825 3,700
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Net interest income....................................... 1,391 1,306 4,034 3,911
Provision for credit losses............................... 100 70 240 240
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Net credit income......................................... 1,291 1,236 3,794 3,671
Gains (losses) on sales of securities..................... 3 (4) 8 15
Noninterest income........................................ 776 649 2,232 1,958
Other real estate owned expense (income).................. 7 (6) 10 (4)
Noninterest expense....................................... 1,245 1,234 3,821 3,681
-----------------------------------------------
Income before income taxes................................ 818 653 2,203 1,967
Income tax expense........................................ 288 222 763 682
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Net income................................................ $ 530 $ 431 $ 1,440 $ 1,285
===============================================
Net income available to common shareholders............... $ 528 $ 428 $ 1,434 $ 1,277
===============================================
Per-share information
Earnings per common share............................... $ 1.95 $ 1.55 $ 5.26 $ 4.66
===============================================
Fully diluted earnings per common share................. $ 1.93 $ 1.54 $ 5.19 $ 4.62
===============================================
Dividends per common share.............................. $ .50 $ .46 $ 1.50 $ 1.38
===============================================
Average common shares issued (in thousands)............... 270,306 275,868 272,790 274,292
===============================================
See accompanying notes to consolidated financial statements.
3
NationsBank Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in Millions)
September 30 December 31
1995 1994
-----------------------------
Assets
Cash and cash equivalents.................................................................... $ 7,387 $ 9,582
Time deposits placed and other short-term investments........................................ 1,965 2,159
Securities
Held for investment, at cost (market value - $13,722 and $17,101).......................... 13,674 17,800
Available for sale......................................................................... 9,782 8,025
-----------------------------
Total securities......................................................................... 23,456 25,825
-----------------------------
Loans held for sale.......................................................................... 454 318
Trading account assets....................................................................... 18,187 9,941
Federal funds sold........................................................................... 49 960
Securities purchased under agreements to resell.............................................. 6,771 10,152
Loans and leases, net of unearned income..................................................... 113,343 102,367
Factored accounts receivable................................................................. 1,258 1,004
-----------------------------
Loans, leases and factored accounts receivable, net of unearned income................... 114,601 103,371
-----------------------------
Allowance for credit losses.................................................................. (2,166) (2,186)
Premises, equipment and lease rights, net.................................................... 2,458 2,439
Customers' acceptance liability.............................................................. 764 684
Interest receivable.......................................................................... 1,732 1,408
Mortgage servicing rights.................................................................... 718 195
Goodwill..................................................................................... 1,035 1,047
Core deposit and other intangibles........................................................... 416 470
Other assets................................................................................. 4,311 3,239
-----------------------------
$ 182,138 $ 169,604
Liabilities =============================
Deposits
Noninterest-bearing........................................................................ $ 21,472 $ 21,380
Savings.................................................................................... 8,327 9,037
NOW and money market deposit accounts...................................................... 26,825 29,752
Time....................................................................................... 27,473 27,698
Foreign time............................................................................... 13,773 12,603
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Total deposits........................................................................... 97,870 100,470
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Federal funds purchased...................................................................... 5,623 3,993
Securities sold under agreements to repurchase............................................... 23,960 21,977
Commercial paper............................................................................. 2,754 2,519
Other short-term borrowings.................................................................. 5,041 5,640
Trading account liabilities.................................................................. 13,421 11,426
Liability to factoring clients............................................................... 719 586
Acceptances outstanding...................................................................... 764 684
Accrued expenses and other liabilities....................................................... 4,304 2,810
Long-term debt................................................................................. 15,741 8,488
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Total liabilities........................................................................ 170,197 158,593
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Shareholders' Equity
Preferred stock: authorized - 45,000,000 shares
ESOP Convertible, Series C: issued - 2,518,153 and 2,606,657 shares........................ 107 111
Common stock: authorized - 800,000,000 shares; issued - 270,544,137 and 276,451,552 shares... 4,388 4,740
Retained earnings............................................................................ 7,476 6,451
Other, including loan to ESOP trust.......................................................... (30) (291)
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Total shareholders' equity............................................................... 11,941 11,011
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$ 182,138 $ 169,604
=============================
See accompanying notes to consolidated financial statements.
4
NationsBank Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in Millions)
Nine Months
Ended September 30
----------------------------
1995 1994
----------------------------
Operating Activities
Net income......................................................................... $ 1,440 $ 1,285
Reconciliation of net income to net cash (used) provided by operating activities
Provision for credit losses...................................................... 240 240
Gains on sales of securities..................................................... (8) (15)
Depreciation and premises improvements amortization.............................. 209 196
Amortization of intangibles...................................................... 90 103
Deferred income tax expense...................................................... 119 95
Net change in trading instruments................................................ (6,251) 5,204
Net (increase) decrease in interest receivable................................... (324) 120
Net increase in interest payable................................................. 362 16
Net (increase) decrease in loans held for sale................................... (136) 953
Net increase in liability to factoring clients................................... 133 129
Other operating activities....................................................... 67 1,436
----------------------------
Net cash (used) provided by operating activities................................ (4,059) 9,762
----------------------------
Investing Activities
Proceeds from maturities of securities held for investment......................... 4,662 4,936
Purchases of securities held for investment........................................ (540) (9,204)
Proceeds from sales and maturities of securities available for sale................ 22,464 21,598
Purchases of securities available for sale......................................... (23,873) (16,006)
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell............................................. 4,292 (7,896)
Net (increase) decrease in time deposits placed and other short-term investments... 194 (1,285)
Net originations of loans and leases............................................... (9,331) (8,147)
Purchases of loans and leases...................................................... (4,151) (2,115)
Proceeds from sales and securitizations of loans................................... 2,066 3,555
Purchases of mortgage servicing rights............................................. (580) (117)
Purchases of factored accounts receivable.......................................... (5,996) (6,007)
Collections of factored accounts receivable........................................ 5,722 5,753
Net purchases of premises and equipment............................................ (232) (225)
Proceeds from sales of other real estate owned..................................... 143 383
Sales/(acquisitions) of business activities, net of cash........................... (667) 3,846
----------------------------
Net cash used in investing activities........................................... (5,827) (10,931)
----------------------------
Financing Activities
Net increase (decrease) in deposits................................................ (2,043) 1,206
Net increase in federal funds purchased and securities
sold under agreements to repurchase.............................................. 3,613 1,453
Net increase (decrease) in other short-term borrowings and commercial paper........ (364) 722
Proceeds from issuances of long-term debt.......................................... 8,268 299
Retirement of long-term debt....................................................... (1,000) (852)
Preferred stock repurchased and redeemed........................................... 0 (94)
Proceeds from issuances of common stock............................................ 184 195
Cash dividends paid................................................................ (415) (387)
Common stock repurchased........................................................... (522) (123)
Other financing activities......................................................... (30) (7)
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Net cash provided by financing activities....................................... 7,691 2,412
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Net increase (decrease) in cash and cash equivalents................................. (2,195) 1,243
Cash and cash equivalents on January 1............................................... 9,582 7,649
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Cash and cash equivalents on September 30............................................ $ 7,387 $ 8,892
============================
Loans transferred to other real estate owned amounted to $73 and $210 for the nine months ended September 30, 1995
and 1994, respectively.
See accompanying notes to consolidated financial statements.
5
NationsBank Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in Millions, Shares in Thousands)
Total
Common Stock Share-
Preferred -------------------- Retained Loan to holders'
Stock Shares Amount Earnings ESOP Trust Other Equity
--------------------------------------------------------------------------------
Balance on December 31, 1993................. $ 208 270,905 $ 4,594 $ 5,247 $ (88) $ 18 $ 9,979
Net income................................. 1,285 1,285
Cash dividends
Common................................... (379) (379)
Preferred................................ (8) (8)
Preferred stock repurchased and redeemed... (93) (1) (94)
Common stock issued under dividend
reinvestment and employee plans.......... 4,274 188 7 195
Common stock issued in acquisitions........ 2,629 21 41 62
Common stock repurchased................... (2,300) (123) (123)
Net change in unrealized gains (losses)
on securities available for sale and
marketable equity securities............. (215) (215)
Other...................................... (3) 60 3 6 1 7
--------------------------------------------------------------------------------
Balance on September 30, 1994................ $ 112 275,568 $ 4,682 $ 6,186 $ (82) $ (189) $ 10,709
================================================================================
Balance on December 31, 1994................. $ 111 276,452 $ 4,740 $ 6,451 $ (76) $ (215) $ 11,011
Net income................................. 1,440 1,440
Cash dividends
Common................................... (409) (409)
Preferred................................ (6) (6)
Common stock issued under dividend
reinvestment and employee plans.......... 3,750 166 18 184
Common stock repurchased................... (9,733) (522) (522)
Net change in unrealized gains (losses)
on securities available for sale and
marketable equity securities............. 241 241
Other...................................... (4) 75 4 6 (4) 2
--------------------------------------------------------------------------------
Balance on September 30, 1995................ $ 107 270,544 $ 4,388 $ 7,476 $ (70) $ 40 $ 11,941
================================================================================
See accompanying notes to consolidated financial statements.
6
NationsBank Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Accounting Policies
The consolidated financial statements include the accounts of
NationsBank Corporation and its subsidiaries (the Corporation). Significant
intercompany accounts and transactions have been eliminated in consolidation.
The information contained in the consolidated financial statements is
unaudited. In the opinion of management, all normal recurring adjustments
necessary for a fair presentation of the results of interim periods have been
made. Certain prior period amounts have been reclassified to conform to current
period classifications.
Accounting policies followed in the presentation of interim financial
results are presented on pages 62 and 63 of the 1994 Annual Report to
Shareholders, incorporated by reference into the Annual Report on Form 10-K,
for the year ended December 31, 1994, as updated by the following and Note 1 in
the Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30,
1995.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" which is effective for awards granted in fiscal years
beginning after December 15, 1995. This standard defines a fair value based
method of measuring employee stock options or similar equity instruments. In
lieu of recording the value of such options as compensation expense, companies
may provide pro forma disclosures quantifying the difference between
compensation cost included in net income as prescribed by current accounting
standards and the related cost measured by such fair value based method. The
Corporation will provide such disclosure in its financial statements after the
effective date of the standard.
Note 2 - Acquisition Activity
On September 4, 1995, the Corporation entered into an agreement to
merge with Bank South Corporation (Bank South), headquartered in Atlanta,
Georgia. Under the terms of the merger agreement, the Corporation agreed to
exchange .44 shares of its common stock for each share of Bank South's common
stock. Bank South had 58,770,825 shares of common stock outstanding on
September 30, 1995. Bank South's total assets, total deposits and total
shareholders' equity were approximately $7.7 billion, $5.0 billion and $676
million, respectively, on September 30, 1995. This acquisition, which the
Corporation intends to account for as a pooling of interests, is subject to
approval by Bank South's shareholders and various regulatory agencies, and is
currently expected to be completed during the first quarter of 1996. This
acquisition will not have a material impact on the results of operations or
financial condition of the Corporation.
7
Note 3 - Trading Account Assets and Liabilities
The market values of the components of trading account assets and
liabilities on September 30, 1995 and on December 31, 1994, and the average
market values for the nine months ended September 30, 1995 were (dollars in
millions):
Average for
the Nine
Months Ended
September 30 December 31 September 30
1995 1994 1995
-----------------------------------------------
Securities owned
U.S. Treasury securities........................ $ 10,529 $ 5,968 $ 9,985
Securities of other U.S. Government agencies
and corporations.............................. 1,505 1,185 1,480
Certificates of deposit, bankers' acceptances
and commercial paper.......................... 723 371 432
Corporate debentures............................ 940 581 908
Other securities................................ 686 259 690
-----------------------------------------------
Total securities owned........................ 14,383 8,364 13,495
Derivative-dealer positions....................... 3,804 1,577 3,118
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Total trading account assets.................. $ 18,187 $ 9,941 $ 16,613
===============================================
Short sales
U.S. Treasury securities........................ $ 9,326 $ 9,352 $ 11,749
Securities of other U.S. Government agencies
and corporations.............................. 228 182 223
Corporate debentures............................ 548 278 337
Other securities................................ 25 - 19
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Total short sales............................. 10,127 9,812 12,328
Derivative-dealer positions....................... 3,294 1,614 2,924
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Total trading account liabilities............. $ 13,421 $ 11,426 $ 15,252
===============================================
Derivative-dealer positions represent the market values of interest
rate, foreign exchange and commodity-related products, including swap, futures,
forward and option contracts associated with the Corporation's derivative
trading activities.
Note 4 - Debt
In the third quarter of 1995, under an effective shelf registration
statement, the Corporation issued $439 million of senior notes, due 1998 to
2002, $381 million of which bear interest at floating rates and $58 million of
which bear interest of 6.75%. Subordinated notes in the amount of $375 million
were issued with $350 million due 2015 bearing interest of 7 3/4% and the
remainder due 2010 at an interest rate of 7.20%.
8
Under the bank note program jointly maintained by NationsBank, N.A.,
NationsBank of Georgia, N.A. and NationsBank of Texas, N.A., there were short-
term bank notes outstanding of $3.6 billion on September 30, 1995. In addition,
NationsBank of Texas, N.A. and NationsBank, N.A. had outstanding bank notes of
$1.6 billion on September 30, 1995 that were classified as long-term debt.
Subsequent to September 30, 1995 and through November 10, 1995, the
Corporation issued $450 million of 7 1/4% subordinated notes, due 2025, $155
million of senior notes which bear interest at floating rates, due 1999 to
2001, and $105 million of subordinated notes with fixed interest rates ranging
from 6.83% to 7.10%, due 2005 to 2010. On October 31, 1995, Main Place Funding
Corporation, a wholly-owned, limited-purpose finance subsidiary of NationsBank
of Texas, N.A., issued, under its shelf registration statement, $1.5 billion of
Series 1995-2 Mortgage-Backed Bonds, due 2000, bearing interest at a spread
over the three-month London interbank offered rate. This series was initially
collateralized by approximately $2.5 billion of residential mortgage notes.
On September 29, 1995, the Corporation filed a shelf registration
statement to issue up to an aggregate of $3 billion in senior or subordinated
debt or equity securities.
As of November 10, 1995, the Corporation and its subsidiaries had
approximately $1.5 billion of capacity available under various existing shelf
registration statements, other than the September 29, 1995 shelf registration
statement.
Additionally, on November 8, 1995, the Corporation announced plans to
offer up to $1.5 billion of senior or subordinated notes exclusively to
non-United States residents under a Euro medium-term note program. The notes
may bear interest at fixed or floating rates.
Note 5 - Commitments and Contingencies
The Corporation's commitments to extend credit on September 30, 1995
were $84.7 billion compared to $74.7 billion on December 31, 1994. Standby
letters of credit (SBLC) and financial guarantees represent commitments by the
Corporation to meet the obligations of the account party, if called upon.
Outstanding SBLC and guarantees on September 30, 1995 were $7.6 billion
compared to $6.9 billion on December 31, 1994. Commercial letters of credit,
issued primarily to facilitate customer trade finance activities, were $1.2
billion and $1.3 billion on September 30, 1995 and December 31, 1994,
respectively. The above amounts have been reduced by amounts collateralized by
cash and amounts participated to other financial institutions.
On September 30, 1995 and December 31, 1994, indemnified securities
lending transactions totaled $4.4 billion and $5.7 billion, respectively.
Collateral, with a market value of $4.5 billion and $5.9 billion for the
respective periods, was obtained by the Corporation in support of these
transactions.
On September 30, 1995, the Corporation had commitments to purchase and
sell when-issued securities of $5.2 billion and $5.1 billion, respectively.
This compares to commitments to purchase and sell when-issued securities of
$2.2 billion and $2.5 billion, respectively, on December 31, 1994.
See Tables 5 and 6 and the accompanying discussion in Item 2 regarding
the Corporation's derivatives used for risk management purposes.
9
In conducting its mortgage banking activities, the Corporation is
exposed to fluctuations in interest rates. Loans originated for sale to third
parties expose the Corporation to interest rate risk for the period between
loan origination and subsequent delivery. Additionally, the value of the
Corporation's mortgage servicing rights is affected by changes in interest
rates and the resulting impact of such changes on the level of prepayments. To
manage interest rate risk associated with mortgage banking activities, the
Corporation enters into various instruments including option contracts, forward
delivery contracts and certain interest rate swaps. The contract/notional
amounts of these instruments approximated $5 billion on September 30, 1995. Net
unrealized gains associated with these contracts were not significant on
September 30, 1995.
In the ordinary course of business, the Corporation and its
subsidiaries are routinely defendants in or parties to a number of pending and
threatened legal actions and proceedings, including several actions brought on
behalf of various classes of claimants. In certain of these actions and
proceedings, substantial money damages are asserted against the Corporation and
its subsidiaries, and certain of these actions and proceedings are based on
alleged violations of consumer protection, securities, banking and other laws.
Management believes, based upon the advice of counsel, that these actions and
proceedings and losses, if any, resulting from the final outcome thereof, will
not be material in the aggregate to the Corporation's financial position or
results of operations.
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Earnings Review
A comparison of selected operating results for the three- and nine-
month periods ended September 30, 1995 and 1994 is presented in Table 1.
Net income for the third quarter of 1995 was $530 million, an increase
of 23 percent over the third quarter of 1994. Earnings per common share were
$1.95 and $1.55 for the third quarters of 1995 and 1994, respectively. The
return on average common shareholders' equity increased to 18.29 percent for
the third quarter of 1995.
Net income of $1.44 billion for the first nine months of 1995
represented an increase of 12 percent over earnings of $1.29 billion during the
same period in 1994. Earnings per common share were $5.26 and $4.66 for the
first nine months of 1995 and 1994, respectively. The return on average common
shareholders' equity was 17.02 percent for the first nine months of 1995, up 41
basis points from the prior year comparable period.
Key performance highlights for the first nine months of 1995 compared
with the same period last year were:
o Fifteen-percent growth in average loans was the primary factor
leading to the $143-million increase in taxable-equivalent net
interest income. Partially offsetting the positive impact of
loan growth was the funding of earning asset growth largely
with wholesale funds.
o Provision for credit losses totaled $240 million for both
periods. Net charge-offs were $265 million, or .33 percent of
average net loans, leases and factored receivables, versus
$218 million, or .31 percent of average levels, in the prior
year period. Nonperforming assets continued to decline with
September 30, 1995 levels $100 million lower than year-end
levels.
o Noninterest income rose $274 million, or 14 percent, to $2.23
billion for the first nine months of 1995, driven by increased
capital markets revenues, deposit service fee income,
acquisition-related mortgage servicing income and
miscellaneous other income.
o Noninterest expense increased four percent, primarily related
to acquisitions of several smaller banking organizations and
mortgage banking operations. Expenses reflect increased
investment in personnel in selected areas, higher equipment
expense and expanded marketing efforts to support revenue
growth. These increases were partially offset by declines in
other general operating expenses and FDIC insurance expense.
The efficiency ratio, which measures the relationship of
noninterest expense to total revenue, improved to 60.14
percent in the first nine months of 1995 compared to 62.00
percent in the prior year's period. After adjusting for the
impact of reduced FDIC insurance expense, management's ongoing
cost control efforts have resulted in relatively flat levels
of noninterest expense for each of the three 1995 quarters.
11
Business Unit Review
The Corporation manages its business activities through three major
internal management groups, or Business Units. These units, as 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 Business Units reflects the results of a funds
transfer pricing process which derives net interest income by matching assets
and liabilities with similar interest rate sensitivity and maturity
characteristics. Equity capital is allocated to each Business Unit based on an
assessment of its inherent risk.
The General Bank includes the Banking Group, which contains the retail
banking network and is the service provider for the consumer sector as well as
small and medium-size companies; Financial Products, which provides specialized
services such as credit cards, residential mortgages, indirect lending and
dealer finance; the Trust & Investment Management Group and the Private Client
Group, which offers asset management services, banking and personal trust
services.
The General Bank earned $863 million in the first nine months of 1995,
a 22-percent increase over the same period in 1994. The Banking Group,
reflecting 17-percent average loan growth, improved asset quality and growth in
fee income, accounted for most of the increased earnings over the same period
last year. The General Bank's return on equity was unchanged at 19 percent.
Taxable-equivalent net interest income in the General Bank increased $55
million as broad-based loan growth and deposit cost containment efforts helped
offset the impact of higher interest rates, as more fully discussed in the Net
Interest Income section. Average loans increased $9.7 billion, or 17 percent,
primarily in the Banking Group, with increased residential mortgages, and in
Financial Products, which experienced strong credit card loan growth.
Noninterest income rose 16 percent to $1.5 billion, led by increases
in deposit service fee income, acquisition-related mortgage servicing income,
acquisition of the third party interest in the Corporation's full service
brokerage company and miscellaneous income. Noninterest expense increased $77
million, reflecting several mortgage and banking acquisitions, the full service
brokerage acquisition and expanded marketing efforts, primarily credit card
solicitations. These increased expenses were partly offset by reduced FDIC
insurance expense. With seven-percent growth in revenues and three-percent
expense growth, the efficiency ratio improved 229 basis points.
The Global Finance unit includes Corporate Finance, Specialized
Finance and the Capital Markets group. Included under Specialized Finance are
Real Estate, Specialized Lending (includes Business Credit, Factoring and
Leasing), Structured Finance (asset-backed and project financing), Real Estate
Finance, Leveraged Capital and International. The Capital Markets group
includes securities trading and debt underwriting, customer-related derivatives
and foreign exchange activities. Housed in this group are NationsBanc-CRT, the
derivatives and foreign exchange trading and sales operating unit, 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 authority
to underwrite and deal in equity securities.
12
The Global Finance unit earned $472 million in the first nine months
of 1995, a one-percent decrease from the same period in 1994. The return on
equity was 16 percent compared to 17 percent for 1994. Taxable-equivalent net
interest income for the first nine months of 1995 increased $14 million over
the same period a year ago. The benefit to net interest income of the $3.3-
billion, or 11-percent, increase in average loans was partially offset by the
increased use of foreign time deposits to support earning asset growth, as more
fully discussed in the Net Interest Income section. Loan growth, primarily
commercial, was concentrated in the Corporate Finance and Specialized Lending
units, while the Real Estate unit reduced average outstandings by $538 million
compared to last year. Asset quality continued to improve, though at a slower
pace than in 1994, leading to no provision for credit losses during the first
nine months of 1995.
Noninterest income increased 10 percent over last year, primarily
related to significant growth in investment banking fees. Continued investment
aimed at expanding Capital Markets-related activities, mostly personnel-
related, contributed to the $36-million increase in noninterest expense.
Financial Services, the Corporation's nonbank subsidiary which offers
a wide variety of financing to small and large corporations, consumers,
retailers, manufacturers and distributors, contributed $89 million of net
income for the first nine months of 1995, a 22-percent increase from a year
ago. This improvement, the result of $1.7-billion, or 31-percent, growth in
average loans and leases, was partly offset by a higher provision for credit
losses to support loan growth. Market demand in the consumer lending,
commercial real estate and inventory finance businesses coupled with new office
expansion in consumer lending contributed to loan growth. The net interest
yield of 7.25 percent was down 25 basis points from the first nine months of
1994, due to higher funding costs. Noninterest expense increased $27 million,
or 17 percent, driven by the expansion of consumer finance operations. The
efficiency ratio of 42.80 percent for the first nine months of 1995 improved
from 45.83 percent for the same period last year, due to loan growth and
productivity improvements.
Net Interest Income
As presented in Table 3, taxable-equivalent net interest income
increased $90 million to $1.4 billion in the third quarter of 1995 compared to
the third quarter of 1994. Average earning asset levels increased $19.0 billion
in the third quarter of 1995 compared to the third quarter of 1994, driven by
growth in average loans and leases of $15.5 billion, or 16 percent.
Additionally, the aggregate of average securities purchased under agreements to
resell and trading account securities increased, reflecting expanded trading-
related activities. The increase in net interest income resulting primarily
from loan growth, deposit cost containment efforts and the maturities and sales
of lower-yielding investment securities was partially offset by the use of
higher cost market-based funds to support earning asset growth. Future loan
growth is dependent on economic conditions, decisions to securitize certain
loan portfolios, the retention of residential mortgage loans generated by the
Corporation's mortgage subsidiary and the management of real estate loan
levels.
The net interest yield of 3.35 percent in the third quarter of 1995
reflected the funding of loan growth principally with market-based funds and
the addition of $4.6 billion in low-spread trading-related assets when compared
to the third quarter of 1994.
13
As presented in Table 4, taxable-equivalent net interest income
increased $143 million to $4.1 billion in the first nine months of 1995
compared to the same period of 1994, due to an increase in taxable-equivalent
interest income of $2.3 billion offset by an increase in interest expense of
$2.1 billion. Growth in average earning assets drove $1.1 billion of the $2.3
billion-increase in taxable-equivalent interest income, while $1.2 billion was
related to a 98-basis point rise in the yield on earning assets. Led by a 15-
percent increase in average loans and leases, average earning assets increased
$20.1 billion, or 14 percent, in the first nine months of 1995 compared to the
same period of 1994. Loan growth included residential mortgages, other consumer
and commercial loans and was spread across Business Units with 17-percent, 11-
percent and 31-percent growth in the General Bank, Global Finance and Financial
Services, respectively. In addition, average securities purchased under
agreements to resell and trading account securities increased, reflecting
expanded trading-related activities. The combined securities portfolio declined
$1.2 billion between the two periods, resulting from maturities and sales of
securities partially offset by new investments.
Growth in average interest-bearing liabilities accounted for $604
million of the $2.1-billion increase in interest expense, while $1.5 billion
was attributable to a 144-basis point rise in rates paid. Average interest-
bearing liabilities increased $18.9 billion, or 15 percent, in the first nine
months of 1995 compared to the same period of 1994. Interest-bearing deposits
grew $6.5 billion to $78.6 billion in 1995 compared to the same period of 1994.
An increase in average foreign time deposits of $8.1 billion, as well as
deposit increases resulting from acquisitions, were the primary factors in this
growth. These increases were partially offset by declines in certain interest-
bearing deposit accounts, reflecting industry-wide trends of customers seeking
higher-yielding investment alternatives as well as the Corporation's
disciplined deposit pricing. Borrowed funds and trading account liabilities
increased to $57.0 billion, funding earning asset growth. Average long-term
debt increased $3.1 billion period-over-period to $11.1 billion, primarily due
to issuances of medium-term notes and other debt instruments. Average
noninterest-bearing deposits increased $888 million during the first nine
months of 1995 compared to the same period of 1994.
The yield on average earning assets increased 98 basis points to 8.00
percent between the two nine-month periods. The yield on total loans and leases
increased 68 basis points to 8.80 percent in the first nine months of 1995,
reflecting loan growth in a higher interest rate environment and the variable-
rate nature of a significant portion of the loan portfolio. The Corporation's
average prime interest rate rose from 6.81 percent in the first nine months of
1994 to 8.87 percent in the first nine months of 1995. The yield on total
securities increased 76 basis points to 5.78 percent compared to the same
period of 1994, due to maturities and sales of lower-yielding securities
coupled with investment at higher rates mainly during the first half of 1995.
The rate on average interest-bearing liabilities increased 144 basis
points to 5.31 percent in the first nine months of 1995 from 3.87 percent in
the first nine months of 1994, due to a greater use of market-based funds and
the higher level of interest rates in general.
The net interest yield was 3.31 percent in the first nine months of
1995 compared to 3.64 percent in the same period of 1994. The decline in the
net interest yield for the first nine months of 1995 compared to the same
period of 1994 resulted from the funding of loan growth principally with
market-based funds and growth of $6.9 billion in trading-related assets. Had
the relative mix of low-spread trading-related assets to total average earning
assets remained constant in the first nine months of 1995 compared to the same
period of 1994, the net interest yield would have been nine basis points higher
for the first nine months of 1995.
14
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. 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 the management of the mix,
rates and maturities of the wholesale and retail funding sources of the
Corporation.
Swaps allow the Corporation to adjust its interest rate risk position
without exposure to principal risk and funding requirements as swaps do not
involve the exchange of notional amounts, only net interest payments. The
Corporation uses non-leveraged generic, index amortizing, collateralized
mortgage obligation (CMO) and basis 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.
Basis swaps involve the exchange of payments based on the contractual
underlying notional amounts where both the pay rate and the receive rate are
floating rates based on different indices.
As reflected in Table 5, the gross notional amount of the
Corporation's asset and liability management interest rate swap position on
September 30, 1995 was $24.9 billion, with the Corporation receiving fixed on
$14.5 billion, converting variable-rate commercial loans to fixed rate and
converting the cost of certain long-term debt to variable rate, and receiving
variable on $10.0 billion, fixing the cost of certain variable-rate
liabilities, primarily market-based borrowed funds. On September 30, 1995, the
net receive fixed position was $4.5 billion, representing a reduction from the
net receive fixed position of $8.9 billion on December 31, 1994, and $9.1
billion on September 30, 1994.
Net interest receipts and payments have been included in interest
income and expense on the underlying instruments. Asset and liability
management interest rate swaps resulted in a reduction of net interest income
of $193 million in the first nine months of 1995 compared to an increase of $86
million in the first nine months of 1994. Deferred gains and losses related to
terminated contracts are insignificant.
The net unrealized depreciation on September 30, 1995 was $196 million
compared to $726 million on December 31, 1994, reflecting the reduction in
interest rates and maturities.
The unrealized depreciation in the estimated value of the asset and
liability management 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. The overall
impact of a 100-basis point parallel increase in interest rates from September
30, 1995 levels was estimated to have an insignificant impact on the market
value of equity.
Average securities for the first nine months of 1995 totaled $26.5
billion, a decrease of $1.2 billion from the same period of 1994. Beginning in
the second quarter of 1994, the Corporation did not fully replace maturities
and sales of securities. In light of expected market conditions, the
Corporation began to add to securities levels late in the first quarter and
during the second quarter of 1995, essentially investing the majority of
maturities scheduled for the second half of 1995 prior to their maturity.
Additionally, during the third quarter of 1995, net maturities and sales of
securities were $3.6 billion. The yield on securities was 5.78 percent for the
first nine months of 1995 compared to 5.02 percent in the same period of 1994.
The weighted average yield of the securities portfolio on September 30, 1995,
was 5.99 percent. See Analysis of Financial Condition - Securities for further
details on the securities portfolio.
15
On September 30, 1995, the interest rate risk position of the
Corporation continued to be relatively neutral as the impact of a gradual 100-
basis-point rise or fall in interest rates over the next 12 months was
estimated to have an insignificant impact on net income when compared to stable
rates.
Table 7 represents the Corporation's interest rate gap position on
September 30, 1995. 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
that is continually changing and is 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.
Provision for Credit Losses
The provision for credit losses was $100 million and $240 million in
the third quarter and first nine months of 1995, respectively, compared to $70
million and $240 million in the comparable 1994 periods. The level of the
provision in the third quarter is consistent with loan growth and credit
quality, as more fully discussed in the Allowance for Credit Losses section.
Future economic conditions may impact credit quality.
Noninterest Income
Table 8 compares the major categories of noninterest income for the
three- and nine-month periods of 1995 and 1994. Noninterest income totaled $776
million in the third quarter of 1995, an increase of 20 percent from $649
million in the same quarter of 1994. Noninterest income totaled $2.23 billion
in the first nine months of 1995, an increase of 14 percent from $1.96 billion
in the first nine months of 1994.
Service charges on deposit accounts increased $28 million and $53
million for the third quarter and first nine months of 1995, respectively, from
the comparable 1994 periods, primarily reflecting higher fees, increased
consumer account volumes, in part due to smaller banking organization
acquisitions, and emphasis on fee collections.
Mortgage servicing and related fees totaled $37 million in the third
quarter of 1995, an increase of 76 percent from the same quarter of 1994.
Mortgage servicing and related fees totaled $92 million in the first nine
months of 1995, an increase of 59 percent from the first nine months of 1994.
The increase was primarily attributable to the acquisitions of mortgage
servicing portfolios. In the latter part of 1994, the Corporation's mortgage
subsidiary acquired $7.6 billion in servicing, and on March 31, 1995, an
additional $35 billion was acquired. The total servicing portfolio on September
30, 1995, was $79.4 billion. Mortgage loan originations through the
Corporation's mortgage subsidiary totaled $4.0 billion for the third quarter of
1995 compared to $1.4 billion for the third quarter of 1994 and totaled $8.1
billion for the first nine months of 1995 compared to $5.4 billion for the
first nine months of 1994, primarily reflecting changes in the interest rate
environment. Third quarter 1995 origination volume consisted of approximately
$2.3 billion of retail loan volume and $1.7 billion of correspondent loan
volume.
16
The 92-percent increase in investment banking income in the third
quarter of 1995 and the 80-percent increase in the first nine months of 1995
compared to the same 1994 periods were the result of higher syndication fees,
increased venture capital income and increased fee income associated with
arranging asset-backed financings. The Capital Markets syndication group was
agent or co-agent on 257 deals totaling $184 billion during the first nine
months of 1995 compared to 241 deals totaling $139 billion during the same
period in 1994.
General Bank trust fees for the third quarter and the first nine
months of 1995 were relatively flat compared to the same periods in 1994. On
September 30, 1995, discretionary assets under management and total assets
under administration were $62.2 billion and $174.3 billion, respectively,
compared to $57.4 billion and $163.6 billion, respectively, on December 31,
1994.
During the first quarter of 1995, the Corporation announced its
decision to sell a portion of its trust business that deals with bond servicing
and administration, known as Corporate Trust. This decision was based on
management's desire to focus on investment management, retirement and fiduciary
services. On June 1, 1995, the Corporation announced that it had reached a
definitive agreement, on the sale of this business, which is expected to close
around year end. Historically, the Corporate Trust business has generated
approximately 10 percent of the Corporation's trust fees. Management does not
expect the loss of this revenue to have a significant impact on future net
income.
The higher levels of brokerage income for both 1995 periods are due to
the acquisition of the third party interest in the Corporation's full service
brokerage company. This company was a joint venture arrangement prior to
November 15, 1994, and was accounted for under the equity method.
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 risks.
Trading revenues are dependent on a number of factors, including
economic conditions such as interest rate and currency fluctuations. Trading
account profits and fees increased $26 million to $98 million in the third
quarter of 1995 compared to the third quarter of 1994 and increased $14 million
to $243 million in the first nine months of 1995 compared to the first nine
months of 1994. An analysis of trading account profits and fees by major
business activity for the nine months ended September 30 is as follows (dollars
in millions):
Nine Months Ended
September 30
-------------------
1995 1994
--------------------
Securities trading........................... $ 97 $ 95
Interest rate contracts...................... 94 81
Foreign exchange contracts................... 16 20
Other, including commodity contracts......... 36 33
-------------------
$ 243 $ 229
===================
17
Miscellaneous other income totaled $64 million in the third quarter of
1995 compared to $59 million in the third quarter of 1994 and totaled $230
million in the first nine months of 1995 compared to $184 million in the first
nine months of 1994. This category of miscellaneous income includes certain
prepayment fees and other fees such as net gains on sales of miscellaneous
investments, business activities, premises, venture capital investments,
mortgage servicing and other similar items.
Noninterest Expense
The Corporation's noninterest expense, as shown in Table 9, increased
$11 million, or one percent, in the third quarter of 1995 compared to the same
quarter in 1994, to a total of $1.25 billion. For the first nine months of
1995, noninterest expense increased $140 million, or four percent, compared to
the first nine months of 1994, to a total of $3.82 billion. Increased
expenditures in selected areas to support the continued growth in revenues
coupled with the acquisitions of several smaller banking organizations, several
mortgage banking operations and the third party interest in the Corporation's
full service brokerage company were partially offset by reduced expenses
associated with the sale of the merchant discount credit card services unit
during the second quarter of 1995 and lower FDIC insurance.
Included in the various components of noninterest expense are the
costs of ongoing initiatives related to enhancing customer sales and optimizing
product delivery channels. For example, the Model Banking project is being
implemented across the Corporation's franchise to facilitate and enhance the
General Bank's retail customer sales and product delivery. Other projects
include the development of alternative delivery channels, such as PC-based
banking, and activities to define and achieve optimal composition of customer
delivery channels.
Personnel expense, which accounts for approximately one half of
noninterest expense, increased $41 million in the third quarter of 1995 and
$164 million in the first nine months of 1995 compared to the comparable prior-
year periods. Of the $41-million quarter-over-quarter increase, $19 million was
due to acquisitions. Continued investment in personnel for the Capital Markets
group also contributed to the increase in personnel expense.
Compared to the respective prior-year periods, equipment expense
increased $6 million in the third quarter and $23 million in the first nine
months of 1995. These increases were primarily due to enhancements to computer
resources, including higher rental expense for upgraded mainframe equipment and
increased costs related to product delivery systems.
Marketing expense increased 29 percent in the third quarter and 33
percent in the first nine months of 1995. This increase was driven primarily by
increased credit card solicitations in the Financial Products group.
FDIC insurance expense decreased $51 million in the third quarter and
decreased $54 million in the first nine months of 1995 relative to the
comparable periods in 1994. FDIC insurance expense in the third quarter of 1995
reflected a quarterly expense reduction of $37 million due to a decrease in
insurance rates charged by the FDIC and an additional refund of $11 million
relating to insurance payments in the second quarter of 1995.
18
Other general operating expense remained flat in the third quarter of
1995 compared to the third quarter of 1994 and decreased $34 million in the
first nine months of 1995 compared to the first nine months of 1994. This
decrease was primarily due to lower loan and collection expenses.
Congressional discussions to enact legislation to recapitalize the
Savings Association Insurance Fund (SAIF) may result in a one-time assessment
as early as the fourth quarter of 1995 on the Corporation's SAIF-insured
deposits at a currently estimated rate ranging from 66 to 85 basis points per
$100 of such deposits. On September 30, 1995, the amount of deposits which
would be subject to such proposed assessment approximates $5.3 billion.
Income Taxes
The Corporation's income tax expense was $763 million and $682 million
in the first nine months of 1995 and 1994, respectively, for an effective rate
of 35 percent of pretax income for both periods. Income tax expense for the
third quarter of 1995 was $288 million, for an effective rate of 35 percent.
Tax expense for the same quarter of 1994 was $222 million, resulting in an
effective rate of 34 percent.
Analysis of Financial Condition
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 equity and debt financing and to
securitize certain assets, ensures the maintenance of sufficient funds to meet
the liquidity needs of the Corporation. The Corporation continues to diversify
its funding sources as evidenced by its recent Eurobond offering, mortgage-
backed bond issuances and securitizations.
Table 10 presents an analysis of the major sources and uses of funds
for the two nine-month periods based on average levels.
Market-based funds increased 30 percent and represented 39 percent of
total sources of funds in the first nine months of 1995 compared to 34 percent
of total sources in the same period of 1994. Customer-based funds remained
relatively flat; however, they represented 45 percent of total sources of funds
in the first nine months of 1995, down from 51 percent of total sources in the
same period of 1994.
The composition of uses of funds reflected a 15-percent increase in
average loans and leases to $107.8 billion in the first nine months of 1995
compared to the same period one year earlier. Expanded trading-related
activities resulted in higher levels of securities purchased under agreements
to resell and trading account securities.
The Corporation's ratio of average loans to customer-based funds was
129 percent for the first nine months of 1995 compared to 111 percent for the
first nine months of 1994. The higher loan to deposit ratio was driven by loan
growth of 15 percent, flat levels of customer-based deposits resulting from
disciplined deposit pricing and the use of market-based funds to support
earning asset growth.
19
Cash and cash equivalents decreased $2.2 billion from December 31,
1994 to $7.4 billion on September 30, 1995, due to $4.1 billion in net cash
used by operating activities and $5.8 billion in net cash used in investing
activities, offset by $7.7 billion in net cash provided by financing
activities.
Net cash used in investing activities primarily reflected $9.3 billion
in net originations of loans and leases and $4.2 billion in purchases of loans
and leases, offset by a net decrease of $4.3 billion in federal funds sold and
securities purchased under agreements to resell, proceeds from sales and
securitizations of loans of $2.1 billion and net proceeds from sales and
maturities of securities of $2.7 billion.
Net cash provided by financing activities primarily resulted from $7.3
billion in proceeds from net issuances of long-term debt.
Period-end assets were $182.1 billion and $169.6 billion on September
30, 1995 and December 31, 1994, respectively. The following discussion analyzes
the major changes in the period-end balance sheet from December 31, 1994 to
September 30, 1995.
Securities
The securities portfolio on September 30, 1995 consisted of securities
held for investment totaling $13.7 billion and securities available for sale
totaling $9.8 billion compared to $17.8 billion and $8.0 billion, respectively,
on December 31, 1994.
On September 30, 1995, the Corporation's portfolio of securities held
for investment reflected net unrealized appreciation of $48 million compared to
net unrealized depreciation of $699 million on December 31, 1994.
The valuation amount for securities available for sale and marketable
equity securities increased shareholders' equity by $104 million on September
30, 1995, reflecting $72 million and $90 million of pretax appreciation on
securities available for sale and marketable equity securities, respectively.
The valuation amount reduced shareholders' equity by $136 million on December
31, 1994. The appreciation in both securities held for investment and
securities available for sale from year-end 1994 was primarily due to the
levels of securities combined with the general level of interest rates during
the first nine months of 1995.
The estimated average maturity of the combined securities portfolio
was 2.76 years on September 30, 1995, and 2.56 years on December 31, 1994, a
reflection of the investment activity which occurred primarily in the first
half of 1995.
Loans
Loans and leases, net of unearned income, on September 30, 1995 and
December 31, 1994, were $113.3 billion and $102.4 billion, respectively.
Approximately $5.5 billion of the increase in loans and leases was in
the residential mortgages category which increased to $22.8 billion on
September 30, 1995. Increased originations through the Corporation's mortgage
subsidiary coupled with retention of a substantial portion of these loans by
the Corporation's bank subsidiaries were the primary factors leading to the
increase in this category.
Commercial loans increased approximately $2.3 billion from December
31, 1994 to $46.9 billion on September 30, 1995. Almost one half of this growth
occurred in the General Bank. Real estate commercial and construction
outstandings of $9.7 billion on September 30, 1995 reflected a net decline of
$626 million from December 31, 1994 levels and comprised 8.6 percent of the
total loans and leases portfolio on September 30, 1995 compared to 10.1 percent
at the end of 1994.
20
Other consumer loans increased approximately $2.5 billion from
December 31, 1994 to $23.0 billion on September 30, 1995. The General Bank
accounted for approximately two-thirds of the increase, while Financial
Services accounted for the remaining one-third of the increase.
Nonperforming Assets
On September 30, 1995, nonperforming assets, as presented in Table 11,
were $1.04 billion, or .90 percent of net loans, leases, factored accounts
receivable and other real estate owned, compared to $1.14 billion, or 1.10
percent, on December 31, 1994.
Nonperforming loans totaled $848 million on September 30, 1995
compared to $801 million on December 31, 1994. The net increase in
nonperforming loans from December 31, 1994 reflected $80 million of in-
substance foreclosed loans previously reported as other real estate owned
offset by decreases in certain nonperforming loan categories. After reflecting
this change in the December 31, 1994 amounts, nonperforming loans decreased $33
million, primarily reflecting a decrease of $97 million in nonperforming real
estate commercial and construction loans offset by increases of $22 million and
$47 million in nonperforming commercial and total consumer loans, respectively.
Other real estate owned, which represents real estate acquired through
foreclosure, totaled $190 million on September 30, 1995, a net decline of $147
million, or 44 percent, from December 31, 1994.
On January 1, 1995, the Corporation adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 114 "Accounting
by Creditors for Impairment of a Loan" (SFAS 114). See Tables 11 and 12 and the
Allowance for Credit Losses section.
Allowance for Credit Losses
On September 30, 1995 and December 31, 1994, the allowance for credit
losses was $2.2 billion and represented 1.89 percent and 2.11 percent,
respectively, of loans, leases and factored accounts receivable.
The allowance for credit losses as a percentage of nonperforming loans
was 256 percent on September 30, 1995 compared to 273 percent at year-end 1994.
Table 12 provides an analysis of the changes in the allowance for
credit losses for the three and nine months ended September 30, 1995 and 1994.
The provision for credit losses for the third quarter of 1995 was $30 million
higher than in the previous five quarters, reflecting loan growth principally
in the consumer loan portfolios. Total net charge-offs for the third quarter of
1995 were $99 million, or .35 percent of average loans, leases and factored
accounts receivable, versus $64 million, or .27 percent, in the comparable
three-month period in 1994. Total net charge-offs for the first nine months of
1995 were $265 million, or .33 percent of average loans, leases and factored
accounts receivable, compared to $218 million, or .31 percent, in the same
period of 1994. Net charge-offs in the credit card and other consumer loan
portfolios increased $36 million and $38 million, respectively, for the first
nine months of 1995 relative to the comparable 1994 period. As a percentage of
average credit card loans, net credit card charge-offs increased to 3.13
percent in the first nine months of 1995 compared to 2.66 percent for the same
period of 1994. Other consumer loan net charge-offs as a percentage of other
consumer average loans were .80 percent and .62 percent for the first nine
months of 1995 and 1994, respectively. These increases resulted from strong
loan growth that generally leads to higher charge-offs as the portfolios
season. Future economic conditions may also impact credit quality.
21
On September 30, 1995, the recorded investment in certain loans that
are considered to be impaired under SFAS 114 was $634 million, all of which was
classified as nonperforming. Provision expense associated with impaired loans
approximated $22 million for the first nine months of 1995. The average
recorded investment in certain impaired loans during the nine months ended
September 30, 1995 was approximately $674 million. During the nine months ended
September 30, 1995, interest income recognized on impaired loans totaled $21
million, all of which was recognized on a cash basis.
Capital
Shareholders' equity totaled $11.9 billion on September 30, 1995
compared to $11.0 billion on December 31, 1994. Under common stock repurchase
programs, the Corporation repurchased and retired 9.7 million common shares
during the first nine months of 1995 at a cost of $522 million, including
approximately 3.8 million shares to offset shares issued through dividend
reinvestment and stock option and grant programs. The level of share repurchase
activities may be impacted by pending acquisitions.
The valuation reserve for securities held for sale and marketable
equity securities increased shareholders' equity $104 million on September 30,
1995 compared to a reduction of $136 million on December 31, 1994.
The Corporation's Tier 1 capital ratios were 7.16 percent and 7.43
percent on September 30, 1995 and December 31, 1994, respectively. The total
risk-based capital ratios were 11.23 percent and 11.47 percent on September 30,
1995 and December 31, 1994, respectively. Both of these measures compare
favorably with regulatory minimums. Decreases in these ratios resulted
primarily from increases in the level of the Corporation's risk weighted
assets, primarily loans and loan commitments. The Corporation's leverage ratios
were 5.96 percent and 6.18 percent on September 30, 1995 and December 31, 1994,
respectively. The decrease in the leverage ratio was primarily a result of an
increase in average assets, mainly loans and trading-related assets.
On October 25, 1995, the Board of Directors authorized a 16-percent
increase in the quarterly dividend paid on common shares outstanding from $.50
to $.58 per share as of the next dividend declaration date.
Derivative - Dealer Positions
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.
22
Counterparties are subject to the credit approval and credit
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 agreements, 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 derivative-dealer positions are reflected in Table 13.
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 Corporation's exposure to credit risk
from derivative financial instruments is represented by the fair value of the
instruments. Credit risk 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 and
any collateral underlying the contracts proves to be of no value to the
Corporation. Such aggregate amounts measured by the Corporation as the positive
replacement cost on September 30, 1995 and December 31, 1994, were $3.7 billion
and $1.8 billion, respectively. Of these credit risk amounts, $494 million and
$354 million relates to exchange-traded instruments for 1995 and 1994,
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. The $1.9-billion increase in the credit
risk amount from December 31, 1994 is related to expanded derivatives trading
activities coupled with the effects of underlying market movements.
23
Table 1
Selected Operating Results
(Dollars in Millions Except Per-Share Information)
Three Months Nine Months
Ended September 30 Ended September 30
--------------------------------------------
1995 1994 1995 1994
--------------------------------------------
Income from earning assets......................................... $ 3,398 $ 2,701 $ 9,859 $ 7,611
Interest expense................................................... 2,007 1,395 5,825 3,700
Net interest income (taxable-equivalent)........................... 1,420 1,330 4,122 3,979
Net interest income................................................ 1,391 1,306 4,034 3,911
Provision for credit losses........................................ 100 70 240 240
Gains (losses) on sales of securities.............................. 3 (4) 8 15
Noninterest income................................................. 776 649 2,232 1,958
Other real estate owned expense (income)........................... 7 (6) 10 (4)
Noninterest expense................................................ 1,245 1,234 3,821 3,681
Income before income taxes......................................... 818 653 2,203 1,967
Income tax expense................................................. 288 222 763 682
Net income......................................................... 530 431 1,440 1,285
Earnings per common share.......................................... 1.95 1.55 5.26 4.66
Yield on average earning assets.................................... 8.08 % 7.24 % 8.00 % 7.02 %
Rate on average interest-bearing liabilities....................... 5.38 4.22 5.31 3.87
Net interest spread................................................ 2.70 3.02 2.69 3.15
Net interest yield................................................. 3.35 3.54 3.31 3.64
Return on average common shareholders' equity (1).................. 18.29 16.00 17.02 16.61
Market price per share of common stock
High for the period.............................................. $ 68 7/8 $ 56 $ 68 7/8 $ 57 3/8
Low for the period............................................... 53 3/4 47 1/8 44 5/8 44 3/8
Closing price.................................................... 67 1/4 49 67 1/4 49
Risk-based capital ratios
Tier 1........................................................... 7.16 % 7.48 %
Total............................................................ 11.23 11.57
(1)Average common shareholders' equity does not include the effect of fair value adjustments to securities
available for sale and marketable equity securities.
24
Table 2
Business Unit Summary
For the Nine Months Ended September 30
(Dollars in Millions)
General Bank Global Finance Financial Services
-------------------------------------------------------------
1995 1994 1995 1994 1995 1994
-------------------------------------------------------------
Net interest income
(taxable-equivalent)......... $ 2,822 $ 2,767 $ 901 $ 887 $ 382 $ 301
Noninterest income............ 1,496 1,286 690 630 46 42
-------------------------------------------------------------
Total revenue................. 4,318 4,053 1,591 1,517 428 343
Provision for credit losses... 154 216 - (36) 86 60
Other real estate owned
expense (income)............. 5 8 (5) (17) 10 5
Noninterest expense........... 2,790 2,713 848 812 183 156
-------------------------------------------------------------
Income before income taxes.... 1,369 1,116 748 758 149 122
Income tax expense............ 506 407 276 280 60 49
-------------------------------------------------------------
Net income (1)................ $ 863 $ 709 $ 472 $ 478 $ 89 $ 73
=============================================================
Net interest yield............ 4.54 % 4.76 % 2.83 %(2) 2.71 %(2) 7.25 % 7.50 %
Return on equity.............. 19 % 19 % 16 % 17 % 13 % 13 %
Efficiency ratio.............. 64.63 66.92 53.32 53.49 42.80 45.83
Average (3)
Total loans and leases,
net of unearned income...... $67,175 $57,499 $34,042 $30,769 $ 7,043 $ 5,364
Total deposits............... 77,314 77,090 15,224 10,414 - -
Total assets................. 88,743 82,755 81,326 67,366 7,532 5,904
Period end (3)
Total loans and leases,
net of unearned income...... 72,069 60,510 34,641 31,756 7,473 5,825
Total deposits............... 76,866 78,964 14,681 12,672 - -
(1) Business Unit results are presented on a fully allocated basis but do not include $16
million and $25 million of net income for 1995 and 1994, respectively, which
represents earnings associated with unassigned capital, gains on sales of securities
and other corporate activities.
(2) Global Finance's net interest yield excludes the impact of trading-related activities.
Including trading-related activities, the net interest yield was 1.70 percent in 1995
and 1.97 percent in 1994.
(3) The sums of balance sheet amounts differ from consolidated amounts due to activities
between the Business Units.
25
Table 3
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
Third Quarter 1995 Second Quarter 1995
-------------------------------------------------------------
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)....................................... $ 46,574 $ 953 8.12 % $ 46,525 $ 954 8.22 %
Real estate commercial............................... 7,116 168 9.38 7,395 171 9.29
Real estate construction............................. 3,091 75 9.63 3,216 78 9.76
---------- ---------- ---------- ----------
Total commercial................................... 56,781 1,196 8.36 57,136 1,203 8.45
---------- ---------- ---------- ----------
Residential mortgage................................. 21,581 420 7.78 19,242 378 7.84
Credit card.......................................... 5,014 164 12.94 4,775 156 13.13
Other consumer....................................... 22,638 583 10.19 21,609 544 10.11
---------- ---------- ---------- ----------
Total consumer..................................... 49,233 1,167 9.41 45,626 1,078 9.47
---------- ---------- ---------- ----------
Foreign.............................................. 2,034 40 7.73 2,048 41 7.96
Lease financing...................................... 3,407 65 7.65 3,114 58 7.43
---------- ---------- ---------- ----------
Total loans and leases, net........................ 111,455 2,468 8.79 107,924 2,380 8.84
---------- ---------- ---------- ----------
Securities
Held for investment.................................. 14,101 205 5.77 17,457 235 5.40
Available for sale (3)............................... 11,891 188 6.28 10,730 170 6.33
---------- ---------- ---------- ----------
Total securities................................... 25,992 393 6.01 28,187 405 5.76
---------- ---------- ---------- ----------
Loans held for sale.................................... 424 8 7.36 153 3 8.06
Federal funds sold and securities purchased
under agreements to resell........................... 15,487 251 6.43 17,534 285 6.51
Time deposits placed and other short-term investments.. 2,031 32 6.32 2,310 42 7.29
Trading account securities (4)......................... 13,063 275 8.37 15,834 307 7.77
---------- ---------- ---------- ----------
Total earning assets (5)........................... 168,452 3,427 8.08 171,942 3,422 7.98
Cash and cash equivalents................................ 7,449 8,024
Factored accounts receivable............................. 1,201 1,181
Other assets, less allowance for credit losses........... 13,399 13,155
---------- ----------
Total assets....................................... $ 190,501 $ 194,302
========== ==========
Interest-bearing liabilities
Savings................................................ $ 8,455 51 2.37 $ 8,656 51 2.40
NOW and money market deposit accounts.................. 27,160 183 2.67 27,608 185 2.68
Consumer CDs and IRAs.................................. 24,786 335 5.36 25,075 325 5.20
Negotiated CDs, public funds and other time deposits... 2,830 41 5.72 3,046 42 5.51
Foreign time deposits.................................. 13,921 220 6.27 15,107 239 6.36
Borrowed funds and trading account liabilities (4)(6).. 56,815 931 6.50 63,111 1,028 6.53
Long-term debt......................................... 14,127 246 6.98 10,209 185 7.22
---------- ---------- ---------- ----------
Total interest-bearing liabilities................. 148,094 2,007 5.38 152,812 2,055 5.39
Noninterest-bearing sources
Noninterest-bearing deposits........................... 21,519 21,077
Other liabilities...................................... 9,401 9,200
Shareholders' equity................................... 11,487 11,213
---------- ----------
Total liabilities and shareholders' equity......... $ 190,501 $ 194,302
========== ==========
Net interest spread...................................... 2.70 2.59
Impact of noninterest-bearing sources.................... .65 .60
---------- ----------
Net interest income/yield on earning assets.............. $ 1,420 3.35 % $ 1,367 3.19 %
========== ==========
(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 the impact of interest rate swaps converting variable-rate commercial
loans to fixed rate. Interest rate swaps decreased interest income $49, $65 and $61 in the third, second
and first quarters of 1995, respectively, and $32 and $0 in the fourth and third quarters of 1994, 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) 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 $29, $31 and $28 in the third, second and first quarters
of 1995, respectively, and $26 and $24 in the fourth and third quarters of 1994, respectively.
(6) Borrowed funds and trading account liabilities interest expense includes net interest rate swap expense related to
swaps fixing the cost of certain variable-rate liabilities, primarily market-based funds. Such increases (decreases)
in interest expense were $4, $(2) and $12 in the third, second and first quarters of 1995, respectively, and $20 and
$9 in the fourth and third quarters of 1994, respectively.
26
Table 3 (Continued)
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
First Quarter 1995 Fourth 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)....................................... $ 45,238 $ 919 8.24 % $ 43,587 $ 855 7.78 %
Real estate commercial............................... 7,630 173 9.16 7,289 162 8.86
Real estate construction............................. 3,100 77 10.07 3,038 72 9.33
---------- ---------- ---------- ----------
Total commercial................................... 55,968 1,169 8.47 53,914 1,089 8.01
---------- ---------- ---------- ----------
Residential mortgage................................. 17,780 343 7.76 16,680 321 7.68
Credit card.......................................... 4,543 139 12.36 4,357 141 12.80
Other consumer....................................... 20,624 501 9.85 20,294 486 9.50
---------- ---------- ---------- ----------
Total consumer..................................... 42,947 983 9.25 41,331 948 9.11
---------- ---------- ---------- ----------
Foreign.............................................. 1,961 36 7.50 1,764 30 6.79
Lease financing...................................... 2,951 58 7.86 2,755 53 7.71
---------- ---------- ---------- ----------
Total loans and leases, net........................ 103,827 2,246 8.76 99,764 2,120 8.44
---------- ---------- ---------- ----------
Securities
Held for investment.................................. 17,648 238 5.45 17,966 245 5.40
Available for sale (3)............................... 7,728 110 5.80 8,560 117 5.44
---------- ---------- ---------- ----------
Total securities................................... 25,376 348 5.56 26,526 362 5.42
---------- ---------- ---------- ----------
Loans held for sale.................................... 61 1 9.10 109 3 7.65
Federal funds sold and securities purchased
under agreements to resell........................... 15,014 230 6.22 16,159 203 5.00
Time deposits placed and other short-term investments.. 2,297 40 7.01 2,231 32 5.75
Trading account securities (4)......................... 11,574 233 8.16 10,318 224 8.64
---------- ---------- ---------- ----------
Total earning assets (5)........................... 158,149 3,098 7.93 155,107 2,944 7.54
Cash and cash equivalents................................ 8,321 8,674
Factored accounts receivable............................. 1,048 1,235
Other assets, less allowance for credit losses........... 9,997 9,538
---------- ----------
Total assets....................................... $ 177,515 $ 174,554
========== ==========
Interest-bearing liabilities
Savings................................................ $ 8,911 53 2.39 $ 9,143 54 2.37
NOW and money market deposit accounts.................. 28,577 187 2.66 29,442 190 2.53
Consumer CDs and IRAs.................................. 24,818 291 4.76 25,136 277 4.40
Negotiated CDs, public funds and other time deposits... 3,151 41 5.30 2,825 35 4.80
Foreign time deposits.................................. 13,844 211 6.18 11,576 162 5.57
Borrowed funds and trading account liabilities (4)(6).. 50,993 820 6.52 50,110 756 5.99
Long-term debt......................................... 8,888 160 7.22 8,147 144 7.08
---------- ---------- ---------- ----------
Total interest-bearing liabilities................. 139,182 1,763 5.13 136,379 1,618 4.71
Noninterest-bearing sources
Noninterest-bearing deposits........................... 19,984 20,452
Other liabilities...................................... 7,157 6,817
Shareholders' equity................................... 11,192 10,906
---------- ----------
Total liabilities and shareholders' equity......... $ 177,515 $ 174,554
========== ==========
Net interest spread...................................... 2.80 2.83
Impact of noninterest-bearing sources.................... .61 .57
---------- ----------
Net interest income/yield on earning assets.............. $ 1,335 3.41 % $ 1,326 3.40 %
========== ==========
27
Table 3 (Continued)
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
Third Quarter 1994
------------------------------
Average
Balance Income
Sheet or Yields/
Amounts Expense Rates
------------------------------
Earning assets
Loans and leases, net of unearned income (1)
Commercial (2)....................................... $ 42,037 $ 805 7.60 %
Real estate commercial............................... 7,473 159 8.43
Real estate construction............................. 3,106 66 8.50
---------- ----------
Total commercial................................... 52,616 1,030 7.77
---------- ----------
Residential mortgage................................. 15,528 296 7.60
Credit card.......................................... 4,003 131 12.96
Other consumer....................................... 19,873 467 9.33
---------- ----------
Total consumer..................................... 39,404 894 9.02
---------- ----------
Foreign.............................................. 1,453 23 6.34
Lease financing...................................... 2,474 49 7.90
---------- ----------
Total loans and leases, net........................ 95,947 1,996 8.26
---------- ----------
Securities
Held for investment.................................. 15,443 197 5.08
Available for sale (3)............................... 11,683 152 5.17
---------- ----------
Total securities................................... 27,126 349 5.12
---------- ----------
Loans held for sale.................................... 183 3 6.69
Federal funds sold and securities purchased
under agreements to resell........................... 13,495 149 4.38
Time deposits placed and other short-term investments.. 2,216 29 5.16
Trading account securities (4)......................... 10,488 199 7.52
---------- ----------
Total earning assets (5)........................... 149,455 2,725 7.24
Cash and cash equivalents................................ 8,372
Factored accounts receivable............................. 1,156
Other assets, less allowance for credit losses........... 8,300
----------
Total assets....................................... $ 167,283
==========
Interest-bearing liabilities
Savings................................................ $ 9,255 54 2.31
NOW and money market deposit accounts.................. 29,507 179 2.41
Consumer CDs and IRAs.................................. 24,439 257 4.17
Negotiated CDs, public funds and other time deposits... 3,223 34 4.23
Foreign time deposits.................................. 8,436 108 5.06
Borrowed funds and trading account liabilities (4)(6).. 48,688 629 5.13
Long-term debt......................................... 7,731 134 6.95
---------- ----------
Total interest-bearing liabilities................. 131,279 1,395 4.22
Noninterest-bearing sources
Noninterest-bearing deposits........................... 19,796
Other liabilities...................................... 5,543
Shareholders' equity................................... 10,665
----------
Total liabilities and shareholders' equity......... $ 167,283
==========
Net interest spread...................................... 3.02
Impact of noninterest-bearing sources.................... .52
----------
Net interest income/yield on earning assets.............. $ 1,330 3.54 %
==========
28
Table 4
Nine Month Taxable-Equivalent Data
(Dollars in Millions)
Nine Months Ended September 30
-------------------------------------------------------------
1995 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)....................................... $ 46,116 $ 2,826 8.19 % $ 40,938 $ 2,292 7.49 %
Real estate commercial............................... 7,379 512 9.27 7,945 474 7.97
Real estate construction............................. 3,136 230 9.82 3,194 196 8.21
---------- ---------- ---------- ----------
Total commercial................................... 56,631 3,568 8.42 52,077 2,962 7.61
---------- ---------- ---------- ----------
Residential mortgage................................. 19,548 1,141 7.79 14,407 820 7.59
Credit card.......................................... 4,779 459 12.82 3,821 367 12.85
Other consumer....................................... 21,631 1,628 10.06 19,591 1,345 9.18
---------- ---------- ---------- ----------
Total consumer..................................... 45,958 3,228 9.38 37,819 2,532 8.94
---------- ---------- ---------- ----------
Foreign.............................................. 2,014 117 7.74 1,300 56 5.79
Lease financing...................................... 3,160 181 7.64 2,206 123 7.43
---------- ---------- ---------- ----------
Total loans and leases, net........................ 107,763 7,094 8.80 93,402 5,673 8.12
Securities ---------- ---------- ---------- ----------
Held for investment.................................. 16,389 678 5.53 14,065 516 4.90
Available for sale (3)............................... 10,132 468 6.18 13,675 527 5.15
---------- ---------- ---------- ----------
Total securities................................... 26,521 1,146 5.78 27,740 1,043 5.02
---------- ---------- ---------- ----------
Loans held for sale..................................... 214 12 7.64 417 20 6.53
Federal funds sold and securities purchased
under agreements to resell........................... 16,014 766 6.40 12,454 344 3.70
Time deposits placed and other short-term investments... 2,212 114 6.89 1,604 58 4.82
Trading account securities (4).......................... 13,495 815 8.07 10,497 541 6.88
---------- ---------- ---------- ----------
Total earning assets (5)........................... 166,219 9,947 8.00 146,114 7,679 7.02
Cash and cash equivalents................................. 7,928 8,134
Factored accounts receivable.............................. 1,144 1,257
Other assets, less allowance for credit losses............ 12,196 8,039
---------- ----------
Total assets....................................... $ 187,487 $ 163,544
========== ==========
Interest-bearing liabilities
Savings................................................. $ 8,673 155 2.39 $ 9,106 158 2.31
NOW and money market deposit accounts................... 27,777 555 2.67 29,819 506 2.27
Consumer CDs and IRAs................................... 24,892 951 5.11 23,534 722 4.09
Negotiated CDs, public funds and other time deposits.... 3,008 124 5.50 3,485 98 3.81
Foreign time deposits................................... 14,291 670 6.27 6,185 213 4.60
Borrowed funds and trading account liabilities (4)(6)... 56,993 2,779 6.52 47,721 1,597 4.48
Long-term debt.......................................... 11,094 591 7.10 7,995 406 6.77
---------- ---------- ---------- ----------
Total interest-bearing liabilities................. 146,728 5,825 5.31 127,845 3,700 3.87
Noninterest-bearing sources
Noninterest-bearing deposits............................ 20,866 19,978
Other liabilities....................................... 8,594 5,380
Shareholders' equity.................................... 11,299 10,341
---------- ----------
Total liabilities and shareholders' equity......... $ 187,487 $ 163,544
========== ==========
Net interest spread....................................... 2.69 3.15
Impact of noninterest-bearing sources..................... .62 .49
---------- ----------
Net interest income/yield on earning assets............... $ 4,122 3.31 % $ 3,979 3.64 %
========== ==========
(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 the impact of interest rate swaps converting variable-rate commercial
loans to fixed rate. Interest rate swaps increased (decreased) interest income ($175) and $94 in 1995 and 1994,
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) 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 $88 and $68 in 1995 and 1994, respectively.
(6) Borrowed funds and trading account liabilities interest expense includes net interest rate swap expense related to
swaps fixing the cost of certain variable-rate liabilities, primarily market-based funds. Such increases in interest
expense were $14 and $11 in 1995 and 1994, respectively.
29
Table 5
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 Basis Total
---------------------------------------------------------------------------------------
Balance on December 31, 1994.... $ 6,528 $ 8,446 $ 8,450 $ 2,504 $ 97 $ 17,482 $ 8,543 $ - $ 26,025
Additions..................... 1,758 1,561 - - - 1,758 1,561 471 3,790
Maturities.................... (2,664) (96) (1,750) (362) (15) (4,776) (111) - (4,887)
---------------------------------------------------------------------------------------
Balance on September 30, 1995... $ 5,622 $ 9,911 $ 6,700 $ 2,142 $ 82 $ 14,464 $ 9,993 $ 471 $ 24,928
=======================================================================================
30
Table 6
Asset and Liability Management Interest Rate Swaps
September 30, 1995
(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.............. $ (27) .55
Notional value.................... $ 3,725 $ 450 $ 2,700 $ 575 - - -
Weighted average receive rate..... 4.60 % 4.62 % 4.62 % 4.45 % - - -
Weighted average pay rate......... 6.04 %
Receive fixed amortizing........... (107) 1.19
Notional value.................... $ 6,700 $ 758 $ 2,831 $ 2,399 $ 712 - -
Weighted average receive rate..... 4.88 % 4.85 % 4.87 % 4.85 % 5.05 % - -
Weighted average pay rate......... 5.89 %
Receive fixed CMO.................. (33) 1.79
------
Notional value.................... $ 2,142 $ 212 $ 642 $ 411 $ 464 $ 413 -
Weighted average receive rate..... 5.12 % 5.09 % 5.10 % 5.11 % 5.08 % 5.21 % -
Weighted average pay rate......... 5.87 %
Total asset conversion swaps....... $(167)
======
Notional value.................... $12,567 $1,420 $ 6,173 $ 3,385 $1,176 $ 413 -
Liability Conversion Swaps
Receive fixed generic.............. $ 24 4.48
Notional value.................... $ 1,897 $ 24 $ 354 - $ 3 - $1,516
Weighted average receive rate..... 6.64 % 8.94 % 6.18 % - 6.58 % - 6.71 %
Weighted average pay rate......... 5.93 %
Pay fixed generic.................. (55) .99
Notional value.................... $ 9,911 - $ 8,800 $ 925 $ 100 - $ 86
Weighted average pay rate......... 6.58 % - 6.53 % 7.34 % 5.02 % - 5.82 %
Weighted average receive rate..... 5.93 %
Pay fixed CMO...................... 2 1.68
------
Notional value.................... $ 82 $ 7 $ 22 $ 15 $ 38 - -
Weighted average pay rate......... 4.44 % 4.44 % 4.44 % 4.44 % 4.44 % - -
Weighted average receive rate..... 5.94 %
Total liability conversion swaps... $ (29)
======
Notional value.................... $11,890 $ 31 $ 9,176 $ 940 $ 141 - $1,602
Basis Swaps........................ $ - 1.73
Notional value.................... $ 471 - $ 100 $ 371 - - -
Weighted average receive rate..... 5.98 %
Weighted average pay rate......... 5.86 %
Total Swaps........................ $(196)
======
Notional value.................... $24,928 $1,451 $15,449 $ 4,696 $1,317 $ 413 $1,602
- --------------------------------------------------------------------------------------------------------------------
Total Receive Fixed Rate Swaps..... $(143) 1.55
======
Notional value.................... $14,464 $1,444 $ 6,527 $ 3,385 $1,179 $ 413 $1,516
Weighted average receive rate..... 5.07 % 4.88 % 4.86 % 4.82 % 5.07 % 5.21 % 6.71 %
Weighted average pay rate......... 5.93 %
Total Pay Fixed Rate Swaps......... $ (53) .99
======
Notional value.................... $ 9,993 $ 7 $ 8,822 $ 940 $ 138 - $ 86
Weighted average pay rate......... 6.56 % 4.44 % 6.52 % 7.29 % 4.86 % - 5.82 %
Weighted average receive rate..... 5.93 %
- --------------------------------------------------------------------------------------------------------------------
Floating rates represent the last repricing and will change in the future based primarily on movements in one, three
and six month LIBOR.
Maturities for CMO and amortizing swaps are based on interest rates implied by the forward curve on September 30, 1995,
and may differ from actual maturities, depending on future interest rate movements and resultant prepayment patterns.
On September 30, 1995, in addition to the above interest rate swaps, the Corporation had approximately $1.2 billion
notional of receive fixed generic interest rate swaps associated primarily with a credit card securitization.
On September 30, 1995, these positions had an unrealized market value of negative $26 million, a weighted average
receive rate of 5.19 percent, a pay rate of 6.00 percent and an average maturity of 4.01 years.
Additionally, the Corporation had $80 million notional of asset and liability management interest rate caps and
floors with an insignificant market value.
31
Table 7
Interest Rate Gap Analysis
September 30, 1995
(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........................ $ 47,413 $ 11,125 $ 4,104 $ 7,824 $ 70,466 $ 42,877 $ 113,343
Securities held for investment........... 102 710 2,395 1,210 4,417 9,257 13,674
Securities available for sale............ 21 339 39 265 664 9,118 9,782
Loans held for sale...................... 454 - - - 454 - 454
Time deposits placed and other
short-term investments................. 964 603 214 184 1,965 - 1,965
Trading account securities............... 14,383 - - - 14,383 - 14,383
Other earning assets..................... 6,820 - - - 6,820 - 6,820
------------------------------------------------------------------------------
Total.................................. 70,157 12,777 6,752 9,483 99,169 61,252 $ 160,421
------------------------------------------------------------------------------
Interest-bearing liabilities
Savings.................................. 8,327 - - - 8,327 - $ 8,327
NOW and money market deposit
accounts............................... 26,035 - - - 26,035 790 26,825
Consumer CDs and IRAs.................... 2,641 3,222 4,480 6,257 16,600 8,035 24,635
Negotiated CDs, public funds and
other time deposits.................... 858 616 608 232 2,314 524 2,838
Foreign time deposits.................... 5,909 3,375 4,006 481 13,771 2 13,773
Borrowed funds........................... 31,205 2,802 2,473 898 37,378 - 37,378
Short sales.............................. 10,127 - - - 10,127 - 10,127
Long-term debt........................... 2,439 4,891 96 608 8,034 7,707 15,741
------------------------------------------------------------------------------
Total.................................. 87,541 14,906 11,663 8,476 122,586 17,058 139,644
Noninterest-bearing, net................... - - - - - 20,777 20,777
------------------------------------------------------------------------------
Total.................................. 87,541 14,906 11,663 8,476 122,586 37,835 $ 160,421
------------------------------------------------------------------------------
Interest rate gap.......................... (17,384) (2,129) (4,911) 1,007 (23,417) 23,417
Effect of asset and liability management
interest rate swaps, futures and
other off-balance sheet items............ (5,998) (5,224) 9,669 (5,543) (7,096) 7,096
------------------------------------------------------------------
Adjusted interest rate gap................. $ (23,382) $ (7,353) $ 4,758 $ (4,536) $ (30,513) $ 30,513
==================================================================
Cumulative adjusted interest rate gap...... $ (23,382) $ (30,735) $ (25,977) $ (30,513)
===========================================
32
Table 8
Noninterest Income
(Dollars in Millions)
Three Months Nine Months
Ended September 30 Change Ended September 30 Change
-----------------------------------------------------------------------------------------
1995 1994 Amount Percent 1995 1994 Amount Percent
-----------------------------------------------------------------------------------------
Service charges on deposit accounts..... $ 230 $ 202 $ 28 13.9 % $ 649 $ 596 $ 53 8.9 %
----------------------------------------------------------------------------------------
Nondeposit-related service fees
Safe deposit rent..................... 6 6 - - 21 21 - -
Mortgage servicing
and related fees.................... 37 21 16 76.2 92 58 34 58.6
Fees on factored accounts
receivable.......................... 19 20 (1) (5.0) 52 56 (4) (7.1)
Investment banking income............. 50 26 24 92.3 144 80 64 80.0
Other service fees.................... 33 25 8 32.0 91 78 13 16.7
----------------------------------------------------------------------------------------
Total nondeposit-related
service fees...................... 145 98 47 48.0 400 293 107 36.5
----------------------------------------------------------------------------------------
Trust fees.............................. 108 108 - - 336 333 3 .9
----------------------------------------------------------------------------------------
Credit card income
Merchant discount fees................ - 7 (7) (100.0) 7 20 (13) (65.0)
Annual credit card fees............... 6 6 - - 18 17 1 5.9
Other credit card fees................ 62 59 3 5.1 171 169 2 1.2
----------------------------------------------------------------------------------------
Total credit card income............ 68 72 (4) (5.6) 196 206 (10) (4.9)
----------------------------------------------------------------------------------------
Other income
Brokerage income...................... 28 11 17 154.5 77 34 43 126.5
Trading account profits
and fees............................ 98 72 26 36.1 243 229 14 6.1
Bankers' acceptances
and letters of credit............... 18 16 2 12.5 54 48 6 12.5
Insurance commissions
and earnings........................ 17 11 6 54.5 47 35 12 34.3
Miscellaneous......................... 64 59 5 8.5 230 184 46 25.0
----------------------------------------------------------------------------------------
Total other income.................. 225 169 56 33.1 651 530 121 22.8
----------------------------------------------------------------------------------------
$ 776 $ 649 $ 127 19.6 $ 2,232 $ 1,958 $ 274 14.0
========================================================================================
33
Table 9
Noninterest Expense
(Dollars in Millions)
Three Months Nine Months
Ended September 30 Change Ended September 30 Change
---------------------------------------------------------------------------------------
1995 1994 Amount Percent 1995 1994 Amount Percent
---------------------------------------------------------------------------------------
Personnel.......................... $ 625 $ 584 $ 41 7.0 % $ 1,875 $ 1,711 $ 164 9.6 %
Occupancy, net..................... 122 123 (1) (.8) 366 363 3 .8
Equipment.......................... 101 95 6 6.3 292 269 23 8.6
Marketing.......................... 49 38 11 28.9 158 119 39 32.8
Professional fees.................. 42 34 8 23.5 122 126 (4) (3.2)
Amortization of
intangibles..................... 29 35 (6) (17.1) 90 103 (13) (12.6)
Credit card........................ 14 18 (4) (22.2) 40 53 (13) (24.5)
FDIC insurance..................... 1 52 (51) (98.1) 103 157 (54) (34.4)
Processing......................... 51 57 (6) (10.5) 174 173 1 .6
Telecommunications................. 37 35 2 5.7 110 101 9 8.9
Postage and courier................ 34 31 3 9.7 101 95 6 6.3
Other general operating............ 97 97 - - 270 304 (34) (11.2)
General administrative
and miscellaneous............... 43 35 8 22.9 120 107 13 12.1
--------------------------------------------------------------------------------------
$ 1,245 $ 1,234 $ 11 .9 $ 3,821 $ 3,681 $ 140 3.8
======================================================================================
34
Table 10
Sources and Uses of Funds
(Average Dollars in Millions)
Nine Months Ended September 30
-------------------------------------------
1995 1994
-------------------------------------------
Amount Percent Amount Percent
-------------------------------------------
Composition of sources
Savings, NOW, money market deposit accounts
and consumer CDs and IRAs................................. $ 61,342 32.8 % $ 62,459 38.2 %
Noninterest-bearing funds..................................... 20,866 11.1 19,978 12.2
Customer-based portion of negotiated CDs...................... 1,513 .8 1,337 .8
------------------------------------------
Customer-based funds...................................... 83,721 44.7 83,774 51.2
Market-based funds............................................ 72,779 38.8 56,054 34.3
Long-term debt................................................ 11,094 5.9 7,995 4.9
Other liabilities............................................. 8,594 4.6 5,380 3.3
Shareholders' equity.......................................... 11,299 6.0 10,341 6.3
------------------------------------------
Total sources............................................. $ 187,487 100.0 % $ 163,544 100.0 %
==========================================
Composition of uses
Loans and leases, net of unearned income...................... $ 107,763 57.6 % $ 93,402 57.1 %
Securities held for investment................................ 16,389 8.7 14,065 8.6
Securities available for sale................................. 10,132 5.4 13,675 8.4
Federal funds sold and securities purchased
under agreements to resell................................ 16,014 8.5 12,454 7.6
Trading account securities.................................... 13,495 7.2 10,497 6.4
Other......................................................... 2,426 1.3 2,021 1.2
------------------------------------------
Total earning assets...................................... 166,219 88.7 146,114 89.3
Factored accounts receivable.................................. 1,144 .6 1,257 .8
Other assets.................................................. 20,124 10.7 16,173 9.9
------------------------------------------
Total uses................................................ $ 187,487 100.0 % $ 163,544 100.0 %
==========================================
35
Table 11
Nonperforming Assets
(Dollars in Millions)
September 30 June 30 March 31 December 31 September 30
1995 1995 1995 1994 1994
---------------------------------------------------------------------
Nonperforming loans
Commercial.............................. $ 412 $ 463 $ 406 $ 362 $ 411
Real estate commercial.................. 176 184 209 201 198
Real estate construction................ 46 65 71 66 82
---------------------------------------------------------------------
Total commercial...................... 634 712 686 629 691
---------------------------------------------------------------------
Residential mortgage.................... 81 76 66 66 71
Other consumer.......................... 126 111 88 94 90
---------------------------------------------------------------------
Total consumer........................ 207 187 154 160 161
---------------------------------------------------------------------
Foreign................................. - 3 6 3 4
Lease financing......................... 7 3 8 9 6
---------------------------------------------------------------------
Total nonperforming loans............. 848 905 854 801 862
Other real estate owned................... 190 194 221 337 414
---------------------------------------------------------------------
Total nonperforming assets............ $ 1,038 $ 1,099 $ 1,075 $ 1,138 $ 1,276
=====================================================================
Nonperforming assets as a percentage of
Total assets............................ .57 % .60 % .58 % .67 % .75 %
Loans, leases and factored accounts
receivable, net of unearned income,
and other real estate owned........... .90 .99 1.00 1.10 1.29
Loans past due 90 days or more and not
classified as nonperforming........... $ 137 $ 143 $ 129 $ 146 $ 124
On January 1, 1995, the date of adoption of SFAS 114, the recorded investments in certain loans that are
considered impaired totaled $712 million (including $80 million of in-substance foreclosed loans previously
reported as other real estate owned) and included $390 million for commercial, $229 million for real estate
commercial, $90 million for real estate construction and $3 million for foreign. On September 30, 1995,
the recorded investments in certain loans that are considered impaired under SFAS 114 totaled $634 million
and included commercial, real estate commercial and real estate construction nonperforming loans.
36
Table 12
Allowance for Credit Losses
(Dollars in Millions)
Three Months Nine Months
Ended September 30 Ended September 30
---------------------------------------------------------
1995 1994 1995 1994
---------------------------------------------------------
Beginning balance.................................................... $ 2,164 $ 2,196 $ 2,186 $ 2,169
--------------------------------------------------------
Loans, leases and factored accounts receivable charged off
Commercial......................................................... (21) (25) (62) (72)
Real estate commercial............................................. (3) (6) (16) (23)
Real estate construction........................................... (3) (2) (9) (11)
--------------------------------------------------------
Total commercial................................................. (27) (33) (87) (106)
--------------------------------------------------------
Residential mortgage............................................... (2) (1) (6) (5)
Credit card........................................................ (49) (30) (131) (92)
Other consumer..................................................... (64) (42) (182) (144)
--------------------------------------------------------
Total consumer................................................... (115) (73) (319) (241)
--------------------------------------------------------
Lease financing.................................................... - (1) - (2)
Factored accounts receivable....................................... (9) (8) (19) (29)
--------------------------------------------------------
Total loans, leases and factored
accounts receivable charged off................................. (151) (115) (425) (378)
--------------------------------------------------------
Recoveries of loans, leases and factored accounts
receivable previously charged off
Commercial......................................................... 18 15 56 43
Real estate commercial............................................. 5 4 13 12
Real estate construction........................................... 2 7 9 24
--------------------------------------------------------
Total commercial................................................. 25 26 78 79
--------------------------------------------------------
Residential mortgage............................................... - - 1 2
Credit card........................................................ 7 5 19 16
Other consumer..................................................... 16 18 53 53
--------------------------------------------------------
Total consumer................................................... 23 23 73 71
--------------------------------------------------------
Lease financing.................................................... - - 1 2
Factored accounts receivable....................................... 4 2 8 8
--------------------------------------------------------
Total recoveries of loans, leases and factored accounts
receivable previously charged off............................... 52 51 160 160
--------------------------------------------------------
Net charge-offs.................................................. (99) (64) (265) (218)
--------------------------------------------------------
Provision for credit losses.......................................... 100 70 240 240
Allowance applicable to loans of purchased companies and other....... 1 - 5 11
--------------------------------------------------------
Ending balance....................................................... $ 2,166 $ 2,202 $ 2,166 $ 2,202
========================================================
Loans, leases and factored accounts receivable, net of unearned
income, outstanding on September 30................................ $ 114,601 $ 98,556 $ 114,601 $ 98,556
Allowance for credit losses as a percentage of loans, leases and
factored accounts receivable, net of unearned income,
outstanding on September 30........................................ 1.89 % 2.23 % 1.89 % 2.23 %
Average loans, leases and factored accounts receivable, net of
unearned income, outstanding during the period..................... $ 112,656 $ 97,103 $ 108,907 $ 94,659
Net charge-offs as a percentage of average loans, leases and
factored accounts receivable, net of unearned income,
outstanding during the period...................................... .35 % .27 % .33 % .31 %
Allowance for credit losses as a percentage of nonperforming loans... 255.57 255.52 255.57 255.52
Reserves associated with loans that are considered to be impaired under SFAS 114 totaled approximately $64 million on
January 1, 1995, and $61 million on September 30, 1995.
37
Table 13
Derivative - Dealer Positions
(Dollars in Millions)
September 30 December 31
1995 1994
Contract/ Contract/
Notional Notional
----------------------------
Interest Rate Contracts
Swaps........................ $ 101,446 $ 45,179
Futures and forwards......... 198,580 124,620
Written options.............. 212,510 114,928
Purchased options............ 208,875 118,839
Foreign Exchange Contracts
Swaps........................ 520 470
Spot, futures and forwards... 70,858 26,987
Written options.............. 27,306 13,398
Purchased options............ 25,593 13,507
Commodity and Other Contracts
Swaps........................ 822 570
Futures and forwards......... 2,178 1,984
Written options.............. 16,005 12,608
Purchased options............ 17,225 11,591
38
Table 14
Selected Quarterly Operating Results
(Dollars in Millions Except Per-Share Information)
1995 Quarters
--------------------------------
First Second Third
--------------------------------
Income from earning assets........................................................ $ 3,070 $ 3,391 $ 3,398
Interest expense.................................................................. 1,763 2,055 2,007
Net interest income (taxable-equivalent).......................................... 1,335 1,367 1,420
Net interest income............................................................... 1,307 1,336 1,391
Provision for credit losses....................................................... 70 70 100
Gains on sales of securities...................................................... 1 4 3
Noninterest income................................................................ 726 730 776
Other real estate owned expense................................................... 2 1 7
Noninterest expense............................................................... 1,288 1,288 1,245
Income before income taxes........................................................ 674 711 818
Income tax expense................................................................ 231 244 288
Net income........................................................................ 443 467 530
Earnings per common share......................................................... 1.60 1.71 1.95
Yield on average earning assets................................................... 7.93 % 7.98 % 8.08 %
Rate on average interest-bearing liabilities...................................... 5.13 5.39 5.38
Net interest spread............................................................... 2.80 2.59 2.70
Net interest yield................................................................ 3.41 3.19 3.35
Return on average common shareholders' equity (1)................................. 16.03 16.69 18.29
Market price per share of common stock
High for the period............................................................. $ 51 3/4 $ 57 3/4 $ 68 7/8
Low for the period.............................................................. 44 5/8 49 5/8 53 3/4
Closing price................................................................... 50 3/4 53 5/8 67 1/4
Risk-based capital ratios
Tier 1.......................................................................... 7.25 % 7.03 % 7.16 %
Total........................................................................... 11.06 10.90 11.23
(1)Average common shareholders' equity does not include the effect of fair value adjustments to securities
available for sale and marketable equity securities.
39
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11 - Earnings Per Common Share Computation
Exhibit 12(a) - Ratio of Earnings to Fixed Charges
Exhibit 12(b) - Ratio of Earnings to Fixed Charges and
Preferred Dividends
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The following reports on Form 8-K were filed by the
Corporation during the quarter ended September 30, 1995:
Current Report on Form 8-K dated July 5, 1995, and filed July
10, 1995, Items 5 and 7.
Current Report on Form 8-K dated July 17, 1995, and filed July
24, 1995, Items 5 and 7.
Current Report on Form 8-K dated August 29, 1995, and filed
August 31, 1995, Items 5 and 7.
Current Report on Form 8-K dated September 4, 1995, and filed
September 20, 1995, Items 5 and 7.
40
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NationsBank Corporation
--------------------------------------
Registrant
Date: November 13, 1995 /s/ Marc D. Oken
--------------------------------------
Marc D. Oken
Executive Vice President
and Chief Accounting Officer
(Duly Authorized Officer and
Principal Accounting Officer)
41
NationsBank Corporation
Form 10-Q
Index to Exhibits
Exhibit Description Page
- ------------------- ----
11 Earnings Per Common Share Computation.............. 43
12(a) Ratio of Earnings to Fixed Charges................. 44
12(b) Ratio of Earnings to Fixed Charges and Preferred
Dividends....................................... 45
27 Financial Data Schedule............................ 46
42