MANAGEMENT'S DISCUSSION AND ANALYSIS
1995 COMPARED TO 1994
OVERVIEW
NationsBank Corporation (NationsBank or the Corporation), a multi-bank
holding company headquartered in Charlotte, North Carolina, provides financial
products and services both domestically and internationally. On December 31,
1995, NationsBank had $187 billion in assets, making it the third-largest
banking company in the United States.
The Corporation provides a diversified range of banking and certain
nonbanking financial services. Business activities are managed through three
major Business Units: the GENERAL BANK, GLOBAL FINANCE and FINANCIAL SERVICES.
The power and breadth of the Corporation's franchise, the diversity of its
fee-generating activities and continued emphasis on expense control were
demonstrated through a 15-percent increase in net income in 1995 over 1994. The
Corporation earned $1.95 billion in 1995 compared to $1.69 billion in 1994.
Earnings per common share for 1995 increased 17 percent to $7.13 from $6.12 for
1994.
Key performance highlights for 1995 were:
[ ] Return on average common shareholders' equity rose to 17.01 percent from
16.10 percent in 1994.
[ ] Fifteen-percent growth in average loans led to an increase in taxable-
equivalent net interest income to $5.6 billion in 1995.
[ ] Provision for credit losses totaled $382 million in 1995 compared to $310
million in 1994. Net charge-offs remained at historical lows in 1995,
totaling $421 million, or .38 percent, versus .33 percent in 1994.
Nonperforming assets declined 25 percent to $853 million on December 31,
1995 from $1.1 billion on December 31, 1994.
[ ] Noninterest income increased 19 percent to $3.1 billion in 1995, reflecting
the diverse fee-generating activities of the Corporation. Capital markets
revenues, deposit and other service fees and acquisition-related mortgage
servicing fees were factors in the year-over-year increase.
[ ] Noninterest expense increased four per cent to $5.2 billion. Excluding the
impact of acquisitions, noninterest expense increased only three percent
reflecting additional investment in personnel in selected areas, expanded
marketing efforts to support revenue growth and increased expenditures
related to technology initiatives, partially offset by reduced deposit
insurance expense.
[ ] Revenue growth outpaced expense growth in 1995, bringing the efficiency
ratio to 59.77 percent, a 277 basis-point improvement over 1994.
Highlights from a Business Unit perspective were:
[ ] The GENERAL BANK'S 1995 earnings of $1.2 billion increased 26 percent.
Return on equity increased to 19 percent in 1995 from 17 percent in 1994.
Revenue growth and expense control led to a 365 basis-point improvement in
the efficiency ratio in 1995 to 63.8 percent.
[ ] GLOBAL FINANCE produced a return on equity of 16 percent in 1995,
consistent with the return in 1994. Earnings were $609 million compared to
$631 million in 1994. Increased investment in personnel resulted in a 27
basis-point rise in the efficiency ratio to 54.2 percent in 1995.
[ ] FINANCIAL SERVICES' earnings increased 25 percent to $129 million in 1995.
Return on equity increased to 14 percent in 1995 from 13 percent in the
prior year. The efficiency ratio improved 352 basis points in 1995 to 42.1
percent.
The remainder of management's discussion and analysis of the consolidated
results of operations and financial condition of NationsBank should be read
together with the consolidated financial statements and related notes presented
on pages 47 through 67.
BUSINESS UNIT OPERATIONS
The Business Units are managed with a focus on numerous performance
objectives including return on equity, operating efficiency and net income.
TABLE TWO summarizes key performance measures for each of the Business Units.
14 NATIONSBANK CORPORATION ANNUAL REPORT 1995
The net interest income of the Business Units reflects the results of a
funds transfer pricing process which derives net interest income by matching
assets and liabilities with similar interest rate sensitivity and maturity
characteristics. Equity capital is allocated to each Business Unit based on an
assessment of its inherent risk.
The GENERAL BANK provides comprehensive services in the commercial and
retail banking fields. Within the GENERAL BANK, the BANKING GROUP, which
contains the retail banking network, is the service provider for small and
medium-size companies and individuals. On December 31, 1995, the BANKING GROUP
had 1,833 banking centers located in the states of
TABLE ONE
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS EXCEPT PER-SHARE INFORMATION)
1995 1994 1993 1992 1991
INCOME STATEMENT
Income from earning assets.............................$ 13,220 $ 10,529 $ 8,327 $ 7,780 $ 9,398
Interest expense..................................... 7,773 5,318 3,690 3,682 5,599
Net interest income (taxable-equivalent)............. 5,560 5,305 4,723 4,190 3,940
Net interest income.................................. 5,447 5,211 4,637 4,098 3,799
Provision for credit losses.......................... 382 310 430 715 1,582
Gains (losses) on sales of securities................ 29 (13) 84 249 454
Noninterest income................................... 3,078 2,597 2,101 1,913 1,742
Other real estate owned expense (income)............. 18 (12) 78 183 127
Restructuring expense................................ - - 30 - 330
Other noninterest expense............................ 5,163 4,942 4,293 3,966 3,847
Income before income taxes and effect of change
in method of accounting for income taxes........... 2,991 2,555 1,991 1,396 109
Income tax expense (benefit)......................... 1,041 865 690 251 (93)
Income before effect of change in method of
accounting for income taxes........................ 1,950 1,690 1,301 1,145 202
Effect of change in method of accounting for
income taxes....................................... - - 200 - -
Net income........................................... 1,950 1,690 1,501 1,145 202
Net income applicable to common shareholders......... 1,942 1,680 1,491 1,121 171
Average common shares issued (in thousands).......... 272,480 274,656 257,969 243,748 226,305
PER COMMON SHARE
Earnings before effect of change in method of
accounting for income taxes........................ $ 7.13 $ 6.12 $ 5.00 $ 4.60 $ .76
Earnings............................................. 7.13 6.12 5.78 4.60 .76
Cash dividends paid.................................. 2.08 1.88 1.64 1.51 1.48
Shareholders' equity (year-end)...................... 46.52 39.70 36.39 30.80 27.03
BALANCE SHEET (YEAR-END)
Total assets......................................... 187,298 169,604 157,686 118,059 110,319
Total loans, leases and factored accounts receivable,
net of unearned income............................. 117,033 103,371 92,007 72,714 69,108
Total deposits....................................... 100,691 100,470 91,113 82,727 88,075
Long-term debt....................................... 17,775 8,488 8,352 3,066 2,876
Common shareholders' equity.......................... 12,759 10,976 9,859 7,793 6,252
Total shareholders' equity........................... 12,801 11,011 9,979 7,814 6,518
PERFORMANCE RATIOS
Return on average assets............................. 1.03% 1.02% .97% 1.00% .17%
Return on average common shareholders' equity (1).... 17.01 16.10 15.00 15.83 2.70
Risk-based capital ratios
Tier 1............................................. 7.24 7.43 7.41 7.54 6.38
Total.............................................. 11.58 11.47 11.73 11.52 10.30
Leverage capital ratio............................... 6.27 6.18 6.00 6.16 5.07
Total equity to total assets......................... 6.83 6.49 6.33 6.62 5.91
MARKET PRICE PER SHARE OF COMMON STOCK
Close at the end of the year.......................... $ 69 5/8 $ 45 1/8 $ 49 $ 51 3/8 $ 40 5/8
High for the year..................................... 74 3/4 57 3/8 58 53 3/8 42 3/4
Low for the year...................................... 44 5/8 43 3/8 44 1/2 39 5/8 21 1/2
(1) AVERAGE COMMON SHAREHOLDERS' EQUITY DOES NOT INCLUDE THE EFFECT OF
MARKET VALUE ADJUSTMENTS TO SECURITIES AVAILABLE FOR SALE AND MARKETABLE EQUITY
SECURITIES.
IN 1993, RETURN ON AVERAGE ASSETS AND RETURN ON AVERAGE COMMON SHAREHOLDERS'
EQUITY AFTER THE TAX BENEFIT FROM THE IMPACT OF ADOPTING A NEW INCOME TAX
ACCOUNTING STANDARD WERE 1.12% AND 17.33%, RESPECTIVELY.
MANAGEMENT'S DISCUSSION AND ANALYSIS 15
Florida, Georgia, Kentucky, Maryland, North Carolina, South Carolina,
Tennessee, Texas and Virginia and the District of Columbia. In addition, fully
automated, 24-hour cash dispensing and depositing services are provided
throughout these states through 2,292 automated teller machines. Specialized
services, such as the origination and servicing of home mortgage loans, the
issuance and servicing of credit cards, indirect lending, dealer finance and
certain insurance services, are provided throughout the Corporation's franchise,
and on a nationwide basis for certain products, through the FINANCIAL PRODUCTS
group of the GENERAL BANK. The GENERAL BANK also contains the ASSET MANAGEMENT
GROUP which contains NATIONSBANK INVESTMENTS AND INVESTMENT MANAGEMENT, which
includes the full-service and discount brokerage companies and provides mutual
fund and investment management services, and the PRIVATE CLIENT GROUP, which
offers investment management, banking and fiduciary services.
The GENERAL BANK earned $1.2 billion in 1995, an increase of 26 percent over
1994. The BANKING GROUP, reflecting strong loan growth, improved asset quality
and growth in fee income, accounted for most of the increased earnings over last
year. The GENERAL BANK'S return on equity rose 200 basis points to 19 percent.
Taxable-equivalent net interest income in the GENERAL BANK increased $128
million led by broad-based loan growth. Loans in the GENERAL BANK increased
$10.1 billion, or 17 percent, on average. Most of the increase was in the
BANKING GROUP, with growth in residential mortgages, and in FINANCIAL PRODUCTS,
which experienced strong credit card loan growth.
Noninterest income rose 23 percent to $2.1 billion led by increases in
deposit service fee income, mortgage servicing income, brokerage income as a
result of the acquisition of the third-party interest in the Corporation's full-
service brokerage company and the $80-million gain on the sale of the Corporate
Trust business. Noninterest expense increased four percent, which was
significantly below the total revenue growth
1995 EARNINGS
CONTRIBUTION BY
BUSINESS UNIT*
(percent)
(Bar graph appears here with the following plot points.)
General Bank 61%
Global Finance 32%
Financial services 7%
* excludes other
TABLE TWO
BUSINESS UNIT SUMMARY
(DOLLARS IN MILLIONS)
GENERAL BANK GLOBAL FINANCE FINANCIAL SERVICES
1995 1994 1995 1994 1995 1994
Net interest income (taxable-equivalent)........... $ 3,817 $ 3,689 1,186 $ 1,180 527 $ 413
Noninterest income................................. 2,100 1,712 910 834 68 51
Total revenue.................................... 5,917 5,401 2,096 2,014 595 464
Provision for credit losses........................ 267 283 - (46) 115 73
Other real estate owned expense (income)........... 11 8 (7) (27) 14 7
Noninterest expense................................ 3,776 3,644 1,136 1,087 250 212
Income before income taxes......................... 1,863 1,466 967 1,000 216 172
Income tax expense................................. 688 534 358 369 87 69
Net income (1)..................................... 1,175 $ 932 609 $ 631 129 $ 103
Net interest yield................................. 4.58% 4.52% 2.85% (2) 2.81% (2) 7.30% 7.45%
Return on equity................................... 19% 17% 16% 16% 14% 13%
Efficiency ratio................................... 63.8% 67.5% 54.2% 54.0% 42.1% 45.6%
Average (3)
Total loans and leases, net of unearned income... $68,675 $58,582 $ 34,191 $ 31,109 $7,204 $5,537
Total deposits................................... 77,330 77,665 14,645 11,273 - -
Total assets..................................... 88,957 86,860 80,842 66,496 7,699 6,064
Year-end (3)
Total loans and leases, net of unearned income... 74,108 63,578 35,566 33,193 7,798 6,380
Total deposits................................... 79,596 79,905 11,205 13,614 - -
(1) BUSINESS UNIT RESULTS ARE PRESENTED ON A FULLY ALLOCATED BASIS BUT DO NOT
INCLUDE $37 MILLION AND $24 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 FOR 1995 AND 1.98 PERCENT FOR 1994.
(3) THE SUMS OF BALANCE SHEET AMOUNTS D.IFFER FROM CONSOLIDATED AMOUNTS DUE TO
ACTIVITIES BETWEEN THE BUSINESS UNITS.
16 NATIONSBANK CORPORATION ANNUAL REPORT 1995
BUSINESS UNIT
DISTRIBUTION OF
LOANS AND REVENUES
(percent)
LOANS
(year-end)
(Bar graph appears with the following plot points.)
General Bank 63%
Global Finance 30%
Financial Services 7%
REVENUES*
(Bar graph appears with the following plot points.)
General Bank 69%
Global Finance 24%
Financial Services 7%
* excludes other
of 10 percent. The expense growth included several mortgage and banking
acquisitions, the purchase of the third-party interest in the full-service
brokerage company and increased marketing costs associated with credit card
solicitations. These increases were partly offset by reduced deposit insurance
expense and efforts to reduce banking center delivery costs. With 10-percent
growth in revenues and four-percent expense growth, the efficiency ratio
improved 365 basis points.
GLOBAL FINANCE provides comprehensive corporate banking and investment
banking services to domestic and international customers. This unit includes the
CORPORATE FINANCE, SPECIALIZED FINANCE and CAPITAL MARKETS groups. Treasury
management, loan syndication, asset-backed lending, leasing, factoring and
arrangement of asset-backed and project financing for clients are representative
of the services provided by GLOBAL FINANCE. The CAPITAL MARKETS group
underwrites, trades and distributes a wide range of securities (including bank-
eligible securities and, to a limited extent, bank-ineligible securities as
authorized by the Board of Governors of the Federal Reserve System under Section
20 of the Glass-Steagall Act) and trades and distributes financial futures,
forward settlement contracts, option contracts, swap agreements and other
derivative products in certain interest rate, foreign exchange, commodity and
equity markets and spot and forward foreign exchange contracts through two
principal units, NATIONSBANC - CRT (CRT) and NATIONSBANC CAPITAL MARKETS, INC.
(NCMI). GLOBAL FINANCE services are provided through various offices located in
major U.S. cities as well as in London, Frankfurt, Singapore, Bogota, Mexico
City, Grand Cayman, Nassau, Seoul, Tokyo, Osaka, Taipei and Hong Kong.
GLOBAL FINANCE generated a consistent return on equity of 16 percent and
earned $609 million in 1995 compared to $631 million in 1994. Taxable-equivalent
net interest income in GLOBAL FINANCE increased $6 million over 1994. The
benefit to net interest income of the $3.1-billion, or 10-percent increase in
loans over 1994 was partially offset by the increased use of market-based funds
to support earning asset growth. Loan growth, primarily commercial, was
concentrated in the CORPORATE FINANCE and SPECIALIZED FINANCE groups. Continued
progress was made in reducing average real estate outstandings by $586 million
in 1995. Asset quality continued to improve, though at a slower pace than in
1994, leading to no provision for credit losses in 1995.
Noninterest income increased nine percent over last year, with most of the
growth concentrated in investment banking fees, while noninterest expense rose
five percent. The CAPITAL MARKETS group generated $30 million in noninterest,
trading-related revenue growth. An increased level of investment, mostly
personnel related, to expand CAPITAL MARKETS activities was a primary
contributor to the $49-million increase in noninterest expense in GLOBAL
FINANCE.
FINANCIAL SERVICES is composed of the holding company, NATIONSCREDIT
CORPORATION, which includes NATIONSCREDIT CONSUMER CORPORATION, a consumer
finance operation, and NATIONSCREDIT COMMERCIAL CORPORATION, a commercial
finance operation. NATIONSCREDIT CONSUMER CORPORATION, which has 371 branches
in 34 states, provides personal, mortgage and automobile loans to consumers and
retail finance programs to dealers. NATIONSCREDIT COMMERCIAL CORPORATION
consists of six divisions that specialize in the following commercial financing
areas: equipment loans and leasing; loans for debt restructuring, mergers and
acquisitions and working capital; real estate, golf/recreational and health
care financing; and inventory financing to manufacturers, distributors and
dealers.
FINANCIAL SERVICES' earnings of $129 million increased 25 percent over 1994
and represented seven percent of consolidated earnings compared to six percent
in 1994. This improvement was the result of $1.7-billion, or 30-percent growth
in average loans and leases. Market demand in the consumer lending, commercial
real estate and distribution finance businesses coupled with new office
expansion in consumer lending contributed to loan growth. The increase in
provision for credit losses was driven mainly by loan growth, but also because
of somewhat higher consumer loss rates. The net interest yield of 7.30 percent
was down 15 basis points from 1994, due to higher funding costs. Noninterest
expense increased $38 million, or 18 percent, driven by the expansion of
consumer finance operations. The efficiency ratio of 42.1 percent for 1995
improved from 45.6 percent last year as the rate of revenue growth exceeded the
growth rate in expenses. The return on equity rose to 14 percent in
MANAGEMENT'S DISCUSSION AND ANALYSIS 17
TABLE THREE
12-MONTH TAXABLE-EQUIVALENT DATA
(DOLLARS IN MILLIONS)
1995 1994 1993
AVERAGE AVERAGE AVERAGE
BALANCE INCOME BALANCE INCOME BALANCE INCOME
SHEET OR YIELDS/ SHEET OR YIELDS/ SHEET OR YIELDS/
AMOUNTS EXPENSE RATES AMOUNTS EXPENSE RATES AMOUNTS EXPENSE RATES
Earning assets
Loans and leases, net of unearned income (1)
Commercial (2).................................$ 46,358 $ 3,797 8.19% $ 41,606 $ 3,147 7.56% $ 35,050 $2,438 6.96%
Real estate commercial......................... 7,195 669 9.30 7,780 636 8.18 6,667 506 7.59
Real estate construction....................... 3,106 302 9.73 3,155 268 8.49 2,894 217 7.50
Total commercial............................. 56,659 4,768 8.42 52,541 4,051 7.71 44,611 3,161 7.09
Residential mortgage........................... 20,562 1,600 7.78 14,980 1,141 7.62 10,904 902 8.27
Credit card.................................... 5,013 641 12.78 3,956 508 12.84 4,376 596 13.62
Other consumer................................. 21,940 2,209 10.07 19,768 1,831 9.26 16,462 1,521 9.24
Total consumer............................... 47,515 4,450 9.37 38,704 3,480 8.99 31,742 3,019 9.51
Foreign........................................ 2,036 157 7.71 1,417 86 6.10 961 52 5.49
Lease financing................................ 3,277 249 7.59 2,344 176 7.50 1,670 133 7.96
Total loans and leases, net.................. 109,487 9,624 8.79 95,006 7,793 8.20 78,984 6,365 8.06
Securities
Held for investment............................ 15,521 864 5.57 15,048 761 5.06 24,823 1,375 5.54
Available for sale (3)......................... 10,272 642 6.25 12,386 644 5.20 1,017 49 4.80
Total securities............................. 25,793 1,506 5.84 27,434 1,405 5.12 25,840 1,424 5.51
Loans held for sale.............................. 322 24 7.47 339 23 6.63 790 53 6.73
Federal funds sold............................... 774 47 6.10 983 45 4.59 441 14 3.16
Securities purchased under agreements to resell.. 14,385 890 6.19 12,406 502 4.05 5,608 180 3.21
Time deposits placed and other
short-term investments......................... 2,066 142 6.87 1,762 90 5.12 2,037 79 3.91
Trading account securities (4)................... 14,177 1,100 7.76 10,451 765 7.32 5,482 298 5.43
Total earning assets (5)..................... 167,004 13,333 7.98 148,381 10,623 7.16 119,182 8,413 7.06
Cash and cash equivalents.......................... 7,820 8,271 7,275
Factored accounts receivable....................... 1,163 1,252 1,074
Other assets, less allowance for credit losses..... 12,560 8,415 6,869
Total assets.................................$188,547 $166,319 $134,400
Interest-bearing liabilities
Savings........................................... 8,575 204 2.37 $ 9,116 212 2.33 $ 6,774 161 2.38
NOW and money market deposit accounts............. 27,640 740 2.68 29,724 696 2.34 28,641 641 2.24
Consumer CDs and IRAs............................. 24,840 1,290 5.19 23,937 999 4.17 23,387 1,057 4.52
Negotiated CDs, public funds
and other time deposits......................... 2,992 166 5.56 3,319 133 4.02 4,211 167 3.97
Foreign time deposits............................. 14,103 881 6.25 7,544 375 4.98 3,033 123 4.05
Federal funds purchased........................... 5,455 322 5.91 5,397 219 4.07 6,479 196 3.03
Securities sold under agreements to repurchase (6) 30,336 1,863 6.14 24,903 1,075 4.32 17,283 540 3.13
Commercial paper.................................. 2,804 171 6.10 2,482 111 4.46 1,379 45 3.26
Other short-term borrowings....................... 5,690 354 6.20 5,015 213 4.25 4,006 138 3.45
Trading account liabilities (4)................... 12,025 896 7.45 10,526 735 6.98 4,146 230 5.54
Long-term debt (7)................................ 12,652 886 7.00 8,033 550 6.85 5,268 392 7.44
Total interest-bearing liabilities............147,112 7,773 5.28 129,996 5,318 4.09 104,607 3,690 3.53
Noninterest-bearing sources
Noninterest-bearing deposits...................... 21,128 20,097 17,425
Other liabilities................................. 8,856 5,742 3,717
Shareholders' equity.............................. 11,451 10,484 8,651
Total liabilities and shareholders' equity....$188,547 $166,319 $134,400
Net interest spread................................. 2.70 3.07 3.53
Impact of noninterest-bearing sources............... .63 .51 .43
Net interest income/yield on earning assets......... $5,560 3.33% $ 5,305 3.58% $4,723 3.96%
(1) NONPERFORMING LOANS ARE INCLUDED IN THE RESPECTIVE AVERAGE LOAN BALANCES.
INCOME ON SUCH NONPERFORMING LOANS IS RECOGNIZED ON A CASH BASIS.
(2) COMMERCIAL LOAN INTEREST INCOME INCLUDES NET INTEREST RATE SWAP REVENUES
RELATED TO SWAPS CONVERTING VARIABLE-RATE COMMERCIAL LOANS TO FIXED RATE. SUCH
INCREASES (DECREASES) IN INTEREST INCOME WERE ($209), $62 AND $120 IN 1995,
1994 AND 1993, RESPECTIVELY.
(3) THE AVERAGE BALANCE SHEET AMOUNTS AND YIELDS ON SECURITIES AVAILABLE FOR
SALE ARE BASED ON THE AVERAGE OF HISTORICAL AMORTIZED COST BALANCES.
(4) THE FAIR VALUES OF DERIVATIVES-DEALER POSITIONS ARE REPORTED IN OTHER
ASSETS AND LIABILITIES, RESPECTIVELY.
(5) INTEREST INCOME INCLUDES TAXABLE-EQUIVALENT ADJUSTMENTS OF $113, $94 AND
$86 FOR 1995, 1994 AND 1993, RESPECTIVELY.
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE INTEREST EXPENSE INCLUDES
NET INTEREST RATE SWAP EXPENSE RELATED TO SWAPS FIXING THE COST OF CERTAIN OF
THESE LIABILITIES. SUCH INCREASES IN INTEREST EXPENSE WERE $28, $35 AND $3 IN
1995, 1994 AND 1993, RESPECTIVELY.
(7) LONG-TERM DEBT INTEREST EXPENSE INCLUDES NET INTEREST RATE SWAP EXPENSE
RELATED TO SWAPS PRIMARILY CONVERTING THE COST OF CERTAIN FIXED-RATE DEBT TO
VARIABLE RATE. THE INCREASE IN INTEREST EXPENSE WAS $2 IN 1995.
18 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NET INTEREST INCOME
(billions)
(Bar graph appears here with the following plot points.)
91 92 93 94 95
3.94 4.19 4.72 5.31 5.56
1995 compared to 13 percent in 1994. These returns reflect a 13-percent
equity-to-asset ratio.
RESULTS OF OPERATIONS NET INTEREST INCOME
An analysis of the Corporation's taxable-equivalent net interest income and
average balance sheet levels for the last three years is presented in TABLE
THREE. TABLE FOUR presents an analysis of the changes in net interest income
from year to year.
Taxable-equivalent net interest income increased $255 million to $5.6
billion in 1995, driven by growth in average earning assets, principally loans
and leases, which increased $14.5 billion to $109.5 billion. The increase in net
interest income resulting primarily from loan growth was partially offset by the
use of higher cost market-based funds and term debt. As the growth in earning
assets outpaced customer deposit growth, the Corporation shifted to alternative
funding sources such as term debt.
Loan growth is expected to continue, but is dependent on economic conditions
as well as various discretionary factors, such as decisions to securitize
certain loan portfolios, the retention of residential mortgage loans generated
by the Corporation's mortgage subsidiary and the management of borrower,
industry, product or geographic concentrations.
The net interest yield of 3.33 percent in 1995 reflected the funding of
earning asset growth principally with market-based funds and term debt and the
addition of $6.5 billion in low-spread trading-related assets when compared to
1994. Had the relative mix of low-spread trading-related assets to total average
earning assets remained constant in 1995 compared to 1994, the net interest
yield in 1995 would have been 3.41 percent.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $382 million in 1995 compared to $310
million in the prior year, reflecting increased loans, the continuing shift in
the mix of the loan portfolio towards consumer lending and the maturing credit
cycle. The level of provision expense in 1995 was consistent with credit quality
indicators. Net charge-offs in 1995 increased by $105 million compared to 1994
due to higher levels of credit card and other consumer loan charge-offs coupled
with a lower level of recoveries in 1995. Management expects the higher level of
charge-offs experienced in 1995 to continue in 1996 as the Corporation continues
its efforts to shift the mix of the loan portfolio to a higher consumer
concentration, and credit losses continue to be at more normalized levels.
Nonperforming commercial assets continued to decline during 1995 compared to
1994.
The allowance for credit losses was $2.2 billion, or 1.85 percent of net
loans, leases and factored accounts receivable, on December 31, 1995 compared to
$2.2 billion, or 2.11 percent, at the end of 1994. The allowance for credit
losses was 306 percent of nonperforming loans on December 31, 1995 compared to
273 percent on December 31, 1994. Future economic conditions will impact credit
quality.
TABLE THIRTEEN provides an analysis of the activity in the Corporation's
allowance for credit losses for each of the last five years. Allowance levels,
net charge-offs and nonperforming assets are discussed in the Credit Risk
Management and Credit Portfolio Review section beginning on page 31.
SECURITIES GAINS AND LOSSES
Gains from the sales of securities were $29 million in 1995, primarily
reflecting the Corporation's fourth quarter repositioning of the portfolios in
an effort to maintain its neutral interest sensitivity position in light of
completed and pending acquisitions. Losses from sales of securities were $13
million in 1994.
NONINTEREST INCOME
As presented in TABLE FIVE, noninterest income increased $481 million to
$3.1 billion in 1995, reflecting strong growth in most categories as described
below:
[ ] Trading account profits and fees, including foreign exchange income,
totaled $306million in 1995, an increase of $33 million from $273 million in
1994.
The Corporation engages in corporate and government bond trading and
sales and maintains trading positions in a variety of cash instruments and
derivative contracts. The Corporation offers a number of products primarily to
institutional customers and enters into transactions for its own account. In
set tingtrading strategies, the Corporation manages these activities to
maximize trading revenues, while, at the same time, taking controlled risks.
MANAGEMENT'S DISCUSSION AND ANALYSIS 19
Capital markets activities are managed in the CAPITAL MARKETS group and are
conducted in two principal divisions, NCMI and CRT. Major trading sites include
Charlotte, Chicago, New York, London and Singapore. NCMI underwrites,
distributes and trades fixed-income securities and has the power to underwrite
equity securities. Its business activities include both customer and
proprietary trading activities. Additionally, NCMI is a primary dealer of U.S.
Government securities. CRT manages the Corporation's derivatives and foreign
exchange business activities. Interest rate derivatives are the primary
component of CRT'S customer-
TABLE FOUR
CHANGES IN TAXABLE-EQUIVALENT NET INTEREST INCOME
(DOLLARS IN MILLIONS)
THIS TABLE PRESENTS AN ANALYSIS OF THE YEAR-TO-YEAR CHANGES IN NET INTEREST
INCOME ON A FULLY TAXABLE-EQUIVALENT BASIS FOR THE YEARS SHOWN. THE CHANGES FOR
EACH CATEGORY OF INCOME AND EXPENSE ARE DIVIDED BETWEEN THE PORTION OF CHANGE
ATTRIBUTABLE TO THE VARIANCE IN AVERAGE LEVELS OR YIELDS/RATES FOR THAT
CATEGORY. THE AMOUNT OF CHANGE THAT CANNOT BE SEPARATED IS ALLOCATED TO EACH
VARIANCE PROPORTIONATELY.
FROM 1994 TO 1995 FROM 1993 TO 1994
INCREASE (DECREASE) INCREASE (DECREASE)
IN INCOME/EXPENSE IN INCOME/EXPENSE
DUE TO CHANGE IN DUE TO CHANGE IN
PERCENTAGE PERCENTAGE
AVERAGE YIELDS/ INCREASE AVERAGE YIELDS/ INCREASE
LEVELS RATES TOTAL (DECREASE) LEVELS RATES TOTAL (DECREASE)
Income from earning assets
Loans and leases, net of unearned income
Commercial............................ $ 377 $ 273 $ 650 20.7% $ 483 $ 226 $ 709 29.1%
Real estate commercial................ (50) 83 33 5.2 89 41 130 25.7
Real estate construction.............. (4) 38 34 12.7 21 30 51 23.5
Total commercial.................... 331 386 717 17.7 595 295 890 28.2
Residential mortgage.................. 434 25 459 40.2 315 (76) 239 26.5
Credit card........................... 135 (2) 133 26.2 (55) (33) (88) (14.8)
Other consumer........................ 211 167 378 20.6 306 4 310 20.4
Total consumer...................... 820 150 970 27.9 633 (172) 461 15.3
Foreign............................... 44 27 71 82.6 27 7 34 65.4
Lease financing....................... 71 2 73 41.5 51 (8) 43 32.3
Total loans and leases, net......... 1,246 585 1,831 23.5 1,312 116 1,428 22.4
Securities
Held for investment................... 24 79 103 13.5 (503) (111) (614) (44.7)
Available for sale.................... (120) 118 (2) (.3) 591 4 595 n/m
Total securities.................... (88) 189 101 7.2 85 (104) (19) (1.3)
Loans held for sale..................... (1) 2 1 4.3 (31) 1 (30) (56.6)
Federal funds sold...................... (11) 13 2 4.4 23 8 31 221.4
Securities purchased under agreements
to resell............................. 90 298 388 77.3 264 58 322 178.9
Time deposits placed and other
short-term investments................ 17 35 52 57.8 (12) 23 11 13.9
Trading account securities.............. 287 48 335 43.8 339 128 467 156.7
Total income from earning assets.... 1,413 1,297 2,710 25.5 2,089 121 2,210 26.3
Interest expense
Savings................................. (13) 5 (8) (3.8) 55 (4) 51 31.7
NOW and money market deposit accounts... (51) 95 44 6.3 26 29 55 8.6
Consumer CDs and IRAs................... 39 252 291 29.1 24 (82) (58) (5.5)
Negotiated CDs, public funds
and other time deposits............... (14) 47 33 24.8 (36) 2 (34) (20.4)
Foreign time deposits................... 391 115 506 134.9 219 33 252 204.9
Federal funds purchased................. 2 101 103 47.0 (36) 59 23 11.7
Securities sold under agreements
to repurchase......................... 268 520 788 73.3 287 248 535 99.1
Commercial paper........................ 16 44 60 54.1 45 21 66 146.7
Other short-term borrowings............. 32 109 141 66.2 39 36 75 54.3
Trading account liabilities............. 109 52 161 21.9 432 73 505 219.6
Long-term debt.......................... 323 13 336 61.1 191 (33) 158 40.3
Total interest expense.............. 764 1,691 2,455 46.2 982 646 1,628 44.1
Net interest income....................... 636 (381) $ 255 4.8 1,076 (494) $ 582 12.3
N/M - NOT MEANINGFUL.
20 NATIONSBANK CORPORATION ANNUAL REPORT 1995
based and proprietary derivative products. Other derivative products consist
of equity- and commodity-related transactions.
An analysis of trading account profits and fees by major business activity
follows (in millions):
1995 1994 1993
Securities trading........... $103 $ 82 $ 73
Interest rate contracts...... 151 119 21
Foreign exchange contracts... 26 27 27
Other........................ 26 45 31
Total trading account
profits and fees......... $306 $273 $152
In addition to trading account profits and fees, the CAPITAL MARKETS group
also generates investment banking income and brokerage income.
[ ] GENERAL BANK asset management and fiduciary service fees were $444
million in 1995, compared to $435 million in 1994, reflecting growth in PRIVATE
CLIENT GROUP revenues and mutual fund advisory fees, partially offset by a
decline in retirement service fees. An analysis of asset management and
fiduciary service fees by major business activity for 1995 and 1994 as well as
the market values of assets under management and administration on December 31
are presented below (in millions):
1995 1994
ASSET MANAGEMENT AND
FIDUCIARY SERVICE FEES
Private Client Group...... 259 $ 246
Retirement services and
corporate trust......... 128 138
Mutual funds.............. 27 22
Investment management
subsidiaries and other.. 30 29
Total asset
management and
fiduciary service
fees................ 444 $ 435
MARKET VALUE OF ASSETS
Assets under
management.............. 66,200 $ 57,400
Assets under
administration.......... 183,200 163,600
PRIVATE CLIENT GROUP fees include fees for investment management, fiduciary
and tax services provided primarily to individuals and investors. These fees
increased $13 million in 1995 over 1994, principally due to increased sales and
market appreciation associated with assets under management. Retirement services
and corporate trust encompass a wide range of services including investment
advisory, administrative and record-keeping services for customers' employee
benefit plans, securities lending and investment management services offered to
corporations, municipalities and others. The decline in retirement services and
corporate trust fees in 1995 reflects the impact of management's repositioning
of this business in an effort to concentrate on the most profitable product
lines. Mutual fund revenues reflect fees received as advisor to the Nations
Fund family. Fee growth of $5 million in 1995 was primarily driven by increased
assets under management, reflecting both market conditions and increased sales.
Fees from investment management subsidiaries include revenues of SOVRAN CAPITAL
MANAGEMENT and ASB CAPITAL MANAGEMENT which serve institutional investors.
During the fourth quarter of 1995, the Corporation completed the
previously announced sale of the portion of its trust business that deals
with bond servicing and administration, known as Corporate Trust,
resulting in a gain of approximately $80 million, which is included in
miscellaneous income. The decision to sell this unit was based upon
management's desire to focus on investment management, retirement and
fiduciary services. Historically, the Corporate Trust business has
generated only 10 percent of the Corporation's asset management and
Corporation's asset management and fiduciary service fees.
[ ] Service charges on deposit accounts increased $87 million, or 11
percent, over 1994, attributable to higher fees, growth in number of households
served, in part due to smaller banking organization acquisitions in late 1994,
and emphasis on fee collection.
[ ] Mortgage servicing and related fees grew $52 million, or 61 percent,
to $138 million in 1995, primarily due to acquisitions of several mortgage
banking operations and servicing portfolios. In the latter part of 1994, the
Corporation's mortgage banking subsidiary acquired $7.6 billion in servicing.
In addition, $35.0 billion in servicing was acquired by the mortgage banking
subsidiary on March 31, 1995. Including acquisitions, the average portfolio of
loans serviced increased 95 percent from $35.5 billion in 1994 to $69.3 billion
in 1995. On December 31, 1995, the servicing portfolio, including loans
serviced on behalf of the Corporation's banking subsidiaries, totaled $81.4
billion compared
MANAGEMENT'S DISCUSSION AND ANALYSIS 21
to $39.0 billion on December 31, 1994. Mortgage loan originations through
the Corporation's mortgage banking subsidiary increased $4.2 billion to $11.1
billion in 1995 compared to $6.9 billion in 1994, primarily reflecting changes
in the interest rate environment. Origination volume in 1995 consisted of
approximately $4.3 billion of retail loan volume and $6.8 billion of
correspondent loan volume.
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
commitment date and subsequent delivery. Additionally, the value of the
Corporation's mortgage servicing rights is affected by changes in prepayment
rates. To manage risks associated with mortgage banking activities, the
Corporation enters into various instruments including option contracts, forward
delivery contracts and certain rate swaps. The contract/notional amount of these
instruments approximated $5.2 billion on December 31, 1995. Net unrealized gains
associated with these contracts were $48 million on December 31, 1995.
[ ] Investment banking income totaled $192 million in 1995, an increase of
39 percent over 1994, primarily reflecting higher syndication fees. The GLOBAL
FINANCE syndication group was agent or co-agent on 420 deals totaling $281.6
billion in 1995, compared to 362 deals totaling $195.5 billion in 1994.
Additionally, fee income associated with the CAPITAL MARKETS group's asset-
backed financing arrangements on behalf of customers increased as this group
arranged 40 asset-backed financings totaling $2.0 billion in 1995.
[ ] The higher level of brokerage income in 1995 was primarily attributable to
the full-year impact of 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, accounted for under the equity method.
[ ] During the second quarter of 1995, the Corporation and a third party
formed a joint venture to market merchant credit card authorization, processing
and settlement services to regional and local
TABLE FIVE
NONINTEREST INCOME
(DOLLARS IN MILLIONS)
1995 1994
PERCENT PERCENT
OF TAXABLE- OF TAXABLE-
EQUIVALENT EQUIVALENT
NET INTEREST NET INTEREST CHANGE
AMOUNT INCOME AMOUNT INCOME AMOUNT PERCENT
Service charges on deposit accounts................. $ 884 15.9% $ 797 15.0% $ 87 10.9%
Nondeposit-related service fees
Safe deposit rent................................. 27 .5 27 .5 - -
Mortgage servicing and related fees............... 138 2.5 86 1.6 52 60.5
Fees on factored accounts receivable.............. 68 1.2 74 1.4 (6) (8.1)
Investment banking income......................... 192 3.5 138 2.6 54 39.1
Other service fees................................ 129 2.3 111 2.1 18 16.2
Total nondeposit-related service fees........... 554 10.0 436 8.2 118 27.1
Asset management and fiduciary service fees......... 444 8.0 435 8.2 9 2.1
Credit card income
Merchant discount fees............................ 7 .1 27 .5 (20) (74.1)
Annual credit card fees........................... 24 .4 21 .4 3 14.3
Other credit card fees............................ 246 4.5 232 4.4 14 6.0
Total credit card income........................ 277 5.0 280 5.3 (3) (1.1)
Other income
Brokerage income.................................. 114 2.1 44 .8 70 159.1
Trading account profits and fees.................. 306 5.5 273 5.1 33 12.1
Bankers' acceptances and letters of credit fees... 74 1.3 67 1.3 7 10.4
Insurance commissions and earnings................ 65 1.2 49 .9 16 32.7
Miscellaneous..................................... 360 6.4 216 4.2 144 66.7
Total other income.............................. 919 16.5 649 12.3 270 41.6
$3,078 55.4% $2,597 49.0% $481 18.5
22 NATIONSBANK CORPORATION ANNUAL REPORT 1995
merchants throughout the Corporation's service area of the Southeast and
Texas. The Corporation contributed its merchant discount unit in exchange for
consideration including an equity investment position in the newly formed joint
venture. Accordingly, merchant discount fee income and the related noninterest
expense of the contributed unit decreased in the last three quarters of 1995 as
the equity earnings from the operation of the joint venture were reported as a
component of other credit card fees. Credit card income was $277 million in 1995
compared to $280 million in 1994, primarily reflecting the impact of the
formation of the joint venture, partially offset by increased interchange income
attributable to higher cardholder purchase volume which is included in other
credit card fees.
[ ] Miscellaneous income totaled $360 million in 1995, an increase of $144
million, or 67 percent, over 1994. As previously mentioned, in 1995,
miscellaneous income included an $80-million gain associated with the sale of
a portion of the Corporate Trust business. 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
As presented in TABLE SIX, the Corporation's noninterest expense increased
four percent to $5.2 billion in 1995 from $4.9 billion in 1994.
Approximately 40 percent of the increase resulted from acquisitions of
several smaller banking organizations, acquisitions of several mortgage banking
operations and servicing portfolios and the full-year impact of the acquisition
of the third-party interest in the Corporation's full-service brokerage company.
Additionally, increased expenditures in selected areas to enhance revenue growth
contributed to the year-over-year increase. These increases were partially
offset by lower deposit insurance, reduced expenses associated with the sale of
the merchant discount credit card unit in the second quarter of 1995 and expense
savings associated with revising the infrastructure of several GENERAL BANK
business activities.
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. Projects are under way to define and
achieve an optimal composition of customer delivery channels and develop
alternative delivery channels, such as PC-based banking.
TABLE SIX
NONINTEREST EXPENSE
(DOLLARS IN MILLIONS)
1995 1994
PERCENT PERCENT
OF TAXABLE- OF TAXABLE-
EQUIVALENT EQUIVALENT
NET INTEREST NET INTEREST
AND AND
NONINTEREST NONINTEREST CHANGE
AMOUNT INCOME AMOUNT INCOME AMOUNT PERCENT
Personnel.................................. $2,491 28.8% $2,311 29.1% $180 7.8%
Occupancy, net............................. 495 5.7 487 6.2 8 1.6
Equipment.................................. 397 4.6 364 4.6 33 9.1
Marketing.................................. 217 2.5 161 2.0 56 34.8
Professional fees.......................... 182 2.1 171 2.2 11 6.4
Amortization of intangibles................ 119 1.4 141 1.8 (22) (15.6)
Credit card................................ 55 .6 71 .9 (16) (22.5)
Deposit insurance.......................... 118 1.4 211 2.7 (93) (44.1)
Data processing............................ 229 2.7 235 3.0 (6) (2.6)
Telecommunications......................... 150 1.7 137 1.7 13 9.5
Postage and courier........................ 135 1.6 126 1.6 9 7.1
Other general operating.................... 411 4.8 388 4.9 23 5.9
General administrative and miscellaneous... 164 1.9 139 1.8 25 18.0
$5,163 59.8% $4,942 62.5% $221 4.5
MANAGEMENT'S DISCUSSION AND ANALYSIS 23
A discussion of the significant components of noninterest expense in 1995
compared to 1994 is as follows:
[ ] Personnel expense increased $180 million over 1994, primarily due to the
impact of acquisitions discussed above, partially offset by decreases from
dispositions. Continued investment in personnel in the CAPITAL MARKETS group to
strategically expand trading and other capital markets activities and
investments to enhance the consumer lending businesses in FINANCIAL SERVICES
and the FINANCIAL PRODUCTS group also contributed to the increase in personnel
expense. These increases were partially offset by further optimization of the
GENERAL BANK retail banking center delivery network as well as increased
efficiencies in commercial banking and the ASSET MANAGEMENT GROUP.
[ ] Equipment expense increased nine percent in 1995 over 1994, reflecting
enhancements to computer resources primarily in the CAPITAL MARKETS group and
increased costs related to enhancement of product delivery systems.
[ ] Marketing expense increased $56 million to $217 million in 1995,
attributable to expanded credit card solicitations in the FINANCIAL PRODUCTS
group and other promotional efforts to enhance revenues. Marketing expense in
1995 also included certain costs associated with the Corporation's Olympic
sponsorship.
[ ] The Corporation's deposit insurance expense decreased 44 percent to
$118 million in 1995 from $211 million in 1994, primarily reflecting reductions
in insurance rates charged by the FDIC beginning June 1, 1995.
[ ] The Corporation's combined other general operating and general
administrative and miscellaneous expenses increased $48 million to $575
million in 1995. Included in 1995 expense was a $30-million charge reflecting a
proposed settlement associated with the resolution of litigation involving the
sale of Nations Government Income Term Trusts 2003 and 2004 and acquisition-
related expenses, partially offset by lower loan and collection expenses and
the results of focused expense management efforts.
INCOME TAXES
The Corporation's income tax expense for 1995 was $1.0 billion, for an
effective tax rate of 34.8 percent of pretax income. Tax expense for 1994 was
$865 million, reflecting an effective tax rate of 33.9 percent.
Note Twelve to the consolidated financial statements includes a
reconciliation of federal income tax expense computed using the federal
statutory rate of 35 percent to the actual income tax expense reported for 1995
and 1994.
See Notes One and Twelve to the consolidated financial statements for
additional information on income taxes.
BALANCE SHEET REVIEW AND
LIQUIDITY RISK MANAGEMENT
The Corporation utilizes an integrated approach in managing its balance
sheet which includes management of interest rate sensitivity, credit risk,
liquidity risk and capital position.
TABLE SEVEN provides an analysis of the sources and uses of funds for 1995
and 1994 based on average levels. In response to earning asset growth coupled
with customers seeking higher-yielding investment alternatives to deposits,
during 1995 the Corporation shifted its funding mix toward the use of term debt,
an alternative stable source of funds, and market-based funds. Market-based
funds increased $14.0 billion over 1994 levels and comprised a larger portion of
total sources of funds, at 38 percent for 1995 compared to 35 percent in 1994.
Average long-term debt increased $4.6 billion in 1995 and represented seven
percent of total sources of funds in 1995 compared to five percent in 1994.
Customer-based funds, though relatively flat between 1995 and 1994,
decreased as a percentage of total sources to 44 percent in 1995 compared to 51
percent in 1994.
Loans and leases, the Corporation's primary use of funds, increased 15
percent and represented 58 percent of total uses in 1995. The ratio of average
loans and leases to customer-based funds increased to 131 percent in 1995
compared to 113 percent in 1994 due to strong loan growth and the use of market-
based funds and term debt to support earning asset growth.
24 NATIONSBANK CORPORATION ANNUAL REPORT 1995
Cash and cash equivalents were $8.4 billion on December 31, 1995, a decrease
of $1.1 billion from December 31, 1994. During 1995, net cash used in operating
activities was $4.9 billion, net cash used in investing activities was $6.2
billion and net cash provided from financing activities was $10.0 billion. For
further information on cash flows, see the Consolidated Statement of Cash Flows
in the consolidated financial statements.
Liquidity is a measure of the Corporation's ability to fulfill its cash
requirements and is managed by the Corporation through its asset and liability
management process. The Corporation assesses the level of liquidity necessary to
meet its cash requirements by monitoring its assets and liabilities and
modifying these positions as liquidity requirements change. This process,
coupled with the Corporation's ability to raise capital and debt financing, is
designed to cover the liquidity needs of the Corporation. The following
discussion provides an overview of significant on-and off-balance sheet
components.
SECURITIES
The securities portfolio on December 31, 1995 consisted of securities held
for investment totaling $4.4 billion and securities available for sale totaling
$19.4 billion compared to $17.8 billion and $8.0 billion, respectively, on
December 31, 1994. As discussed in Note Three to the consolidated financial
statements, in December 1995, the Corporation transferred $8.6 billion of
securities from the held for investment category to the available for sale
category providing added flexibility in future interest rate and liquidity
management.
On December 31, 1995, the market value of the Corporation's portfolio of
securities held for investment equaled the book value of the portfolio. This
compared to unrealized net depreciation of $699 million on December 31, 1994.
The valuation reserve for securities available for sale and marketable
equity securities increased shareholders' equity by $323 million on December 31,
1995, reflecting pretax appreciation of $418 million and $97 million on
securities available for sale and marketable equity securities, respectively.
The valuation amount reduced shareholders' equity by $136 million on December
31, 1994. The changes in the valuation amounts for both the securities held for
investment and the securities available for sale portfolios were primarily due
to the decrease in interest rates during 1995.
The estimated average maturities of the securities held for investment and
securities available for sale portfolios were 1.65 and
TABLE SEVEN
SOURCES AND USES OF FUNDS
(AVERAGE DOLLARS IN MILLIONS)
1995 1994
AMOUNT PERCENT AMOUNT PERCENT
Composition of sources
Savings, NOW , money market deposit accounts
and consumer CDs and IRAs............................... $ 61,055 32.4% $ 62,777 37.7%
Noninterest-bearing deposits.............................. 21,128 11.2 20,097 12.1
Customer-based portion of negotiated CDs.................. 1,534 .8 1,328 .8
Customer-based funds.................................. 83,717 44.4 84,202 50.6
Market-based funds........................................ 71,871 38.1 57,858 34.8
Long-term debt............................................ 12,652 6.7 8,033 4.8
Other liabilities......................................... 8,856 4.7 5,742 3.5
Shareholders' equity...................................... 11,451 6.1 10,484 6.3
Total sources......................................... $188,547 100.0% $166,319 100.0%
Composition of uses
Loans and leases, net of unearned income.................. $109,487 58.1% $ 95,006 57.1%
Securities held for investment............................ 15,521 8.2 15,048 9.1
Securities available for sale............................. 10,272 5.4 12,386 7.4
Federal funds sold and securities purchased under
agreements to resell.................................... 15,159 8.0 13,389 8.1
Trading account securities................................ 14,177 7.5 10,451 6.3
Other..................................................... 2,388 1.4 2,101 1.2
Total earning assets.................................. 167,004 88.6 148,381 89.2
Factored accounts receivable.............................. 1,163 .6 1,252 .8
Other assets.............................................. 20,380 10.8 16,686 10.0
Total uses............................................ $188,547 100.0% $166,319 100.0%
MANAGEMENT'S DISCUSSION AND ANALYSIS 25
2.96 years, respectively, on December 31, 1995 compared to 2.48 and 2.73
years, respectively, on December 31, 1994. The estimated average maturity of the
combined securities portfolio was 2.72 years on December 31, 1995 compared to
2.56 years on December 31, 1994, a reflection of the investment activity and
maturities which occurred primarily in the first half of 1995.
The securities portfolio serves a primary role in the overall context of
balance sheet management by the Corporation. The decision to purchase or sell
securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment and other on- and off-
balance sheet positions. The portfolio's scheduled maturities and the liquid
nature of securities, in general, represent a significant source of liquidity
for the Corporation. Approximately $4.1 billion, or 17 percent, of the
securities portfolio, matures in 1996.
LOANS AND LEASES
Total loans and leases increased 13 percent to $116.0 billion on December
31, 1995 compared to $102.4 billion on December 31, 1994. Average loans and
leases for 1995 were $109.5 billion, an increase of 15 percent compared to
1994's average balance. The increase was due primarily to growth in residential
mortgages and other consumer loans.
Average commercial loans increased 11 percent to $46.4 billion in 1995
compared to 1994. Real estate commercial and construction loans decreased in
1995, with average loans outstanding of $10.3 billion and $10.9 billion in 1995
and 1994, respectively.
Average residential mortgage loans increased $5.6 billion to $20.6 billion
in 1995 compared to $15.0 billion in 1994, the result of increased originations
made through the Corporation's mortgage subsidiary and banking centers, as well
as the retention by the Corporation's banking subsidiaries of a substantial
portion of the originations generated by the mortgage subsidiary.
Average credit card loans increased 27 percent to $5.0 billion in 1995
compared to 1994. Other consumer loans increased 11 percent to $21.9 billion.
The GENERAL BANK contributed approximately two-thirds of the increase in
combined credit card and other consumer loans with the remaining growth
occurring in FINANCIAL SERVICES.
TABLE EIGHT
DISTRIBUTION OF LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE
DECEMBER 31
(DOLLARS IN MILLIONS)
1995 1994 1993 1992 1991
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
Domestic
Commercial..................... $ 47,989 41.0% $ 44,665 43.1% $40,808 44.3% $32,260 44.4% $28,701 41.5%
Real estate commercial......... 6,183 5.3 7,349 7.1 8,239 9.0 6,324 8.7 6,756 9.8
Real estate construction....... 2,976 2.5 2,981 2.9 3,256 3.5 3,065 4.2 4,212 6.1
Total commercial........... 57,148 48.8 54,995 53.1 52,303 56.8 41,649 57.3 39,669 57.4
Residential mortgage........... 24,026 20.6 17,244 16.7 12,689 13.8 9,262 12.7 7,571 11.0
Credit card.................... 6,532 5.6 4,753 4.6 3,728 4.1 4,297 5.9 4,178 6.0
Other consumer................. 22,287 19.0 20,511 19.9 19,326 21.0 14,152 19.4 14,645 21.2
Total consumer............. 52,845 45.2 42,508 41.2 35,743 38.9 27,711 38.0 26,394 38.2
Lease financing................ 3,264 2.8 2,440 2.4 1,729 1.9 1,301 1.8 1,229 1.8
Factored accounts receivable... 991 .8 1,004 1.0 1,001 1.1 917 1.3 817 1.2
114,248 97.6 100,947 97.7 90,776 98.7 71,578 98.4 68,109 98.6
Foreign
Commercial and industrial
companies.................... 1,635 1.4 1,183 1.1 510 .5 634 .9 634 .9
Banks and other financial
institutions................. 609 .5 795 .8 446 .5 304 .4 177 .2
Governments and
official institutions........ 7 - 6 - 22 - 2 - 42 .1
Lease financing................ 534 .5 440 .4 253 .3 196 .3 146 .2
2,785 2.4 2,424 2.3 1,231 1.3 1,136 1.6 999 1.4
Total loans, leases and factored
accounts receivable, net
of unearned income............. $117,033 100.0% $103,371 100.0% $92,007 100.0% $72,714 100.0% $69,108 100.0%
26 NATIONSBANK CORPORATION ANNUAL REPORT 1995
AVERAGE LOANS
AND LEASES
(billions)
(Bar graph appears here with the following plot points.)
91 92 93 94 95
69.4 68.2 79.0 95.0 109.5
A significant source of liquidity for the Corporation is the repayment and
maturities of loans. TABLE NINE shows selected loan maturity data on December
31, 1995 and indicates that approximately 45 percent of the selected loans had
maturities of one year or less. The securitization and sale of certain loans and
the use of loans as collateral in asset-backed financing arrangements are also
sources of liquidity. In December 1995, the Corporation securitized
approximately $1.1 billion of indirect auto loans. Additionally, during 1995 the
Corporation issued approximately $3.0 billion of mortgage-backed bonds and $1.1
billion of credit card-backed financing.
OTHER EARNING ASSETS
As presented in TABLE SEVEN, aggregate federal funds sold, securities
purchased under agreements to resell and trading account securities increased
$5.5 billion to $29.3 billion in 1995 compared to 1994 and represented 16
percent of total uses of funds in 1995 compared to 14 percent in 1994. Increased
trading activities were the primary reason for these increases.
DEPOSITS
TABLE THREE provides information on the average amounts of deposits and the
rates paid by deposit category. Through the Corporation's diverse retail banking
network, deposits remain a primary, highly stable source of funds for the
Corporation. As the Corporation has diversified its sources of funds, customer-
based funds have remained relatively flat although declining as a percentage of
total sources from 51 percent in 1994 to 44 percent in 1995. Declines of $1.5
billion were experienced in certain customer-based deposits, reflecting
industry-wide trends of customers seeking higher-yielding investment
alternatives. Average noninterest-bearing deposits increased $1.0 billion during
1995 compared to 1994.
On December 31, 1995, the Corporation had domestic certificates of deposit
greater than $100 thousand totaling $6.5 billion, with $3.1 billion maturing
within three months or less, $1.2 billion maturing within three to six months,
$1.1 billion maturing within six to twelve months and $1.1 billion maturing
after twelve months. Additionally, on December 31, 1995, the Corporation had
other domestic time deposits greater than $100 thousand totaling $304 million,
with $30 million maturing within three months or less, $29 million maturing
within three to six months, $38 million maturing within six to twelve months and
$207 million maturing after twelve months. Foreign office certificates of
deposit and other time deposits of $100 thousand or more amounted to $12.9
billion and $12.6 billion on December 31, 1995 and 1994, respectively.
TABLE NINE
SELECTED LOAN MATURITY DATA
DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
THIS TABLE PRESENTS THE MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF
SELECTED LOAN CATEGORIES (EXCLUDING RESIDENTIAL MORTGAGE, CREDIT CARD, OTHER
CONSUMER LOANS, LEASE FINANCING AND FACTORED ACCOUNTS RECEIVABLE). MATURITIES
ARE PRESENTED ON A CONTRACTUAL BASIS.
DUE AFTER
DUE IN 1 1 YEAR
YEAR THROUGH DUE AFTER
OR LESS 5 YEARS 5 YEARS TOTAL
Commercial.................................................. $ 21,141 $ 19,153 $ 7,695 $47,989
Real estate commercial...................................... 2,008 3,446 729 6,183
Real estate construction.................................... 1,781 1,139 56 2,976
Foreign..................................................... 1,668 325 258 2,251
Total selected loans, net of unearned income.............. $ 26,598 $ 24,063 $ 8,738 $59,399
Percent of total............................................ 44.8% 40.5% 14.7% 100.0%
Cumulative percent of total................................. 44.8 85.3 100.0
Sensitivity of loans to changes in interest rates-loans
due after one year
Predetermined interest rate............................... $ 6,363 $ 3,508 $ 9,871
Floating or adjustable interest rate...................... 17,700 5,230 22,930
$ 24,063 $ 8,738 $32,801
MANAGEMENT'S DISCUSSION AND ANALYSIS 27
SHORT-TERM BORROWINGS AND
TRADING ACCOUNT LIABILITIES
The Corporation uses short-term borrowings as a funding source and in its
management of interest rate risk. TABLE TEN presents the categories of short-
term borrowings.
In 1995, the banking subsidiaries increased the maximum available issuance
under the bank note program by $3.0 billion to $9.0 billion. As of December 31,
1995, short-term bank notes outstanding under this program were $3.1 billion
compared to $4.5 billion on December 31, 1994.
Average securities sold under agreements to repurchase increased $5.4
billion in 1995 and short sales increased $1.5 billion on average over 1994
levels, primarily reflecting the expanded trading activities of the CAPITAL
MARKETS group.
LONG-TERM DEBT
On December 31, 1995 and 1994, long-term debt was $17.8 billion and $8.5
billion, respectively. The Corporation issued approximately $11.4 billion in
long-term senior and subordinated debt. The Corporation continued to diversify
its funding sources through the issuances of $3.0 billion of mortgage-backed
bonds, a $1.1-billion credit card-backed financing, a $500-million Eurobond
offering and the issuance of $2.2 billion in long-term debt by the banking
subsidiaries under the previously mentioned bank note program. In addition, the
Corporation issued approximately $4.6 billion of senior and subordinated debt
including medium-term notes.
Proceeds from the issuance of long-term debt were used primarily to fund
average earning asset growth of 13 percent, fund the common stock repurchase
programs, replace debt which matured and fund certain mortgage and banking
acquisitions. See Note Six to the consolidated financial statements for further
details on long-term debt.
TABLE TEN
SHORT-TERM BORROWINGS
(DOLLARS IN MILLIONS)
FEDERAL FUNDS PURCHASED GENERALLY REPRESENT OVERNIGHT BORROWINGS, AND
REPURCHASE AGREEMENTS REPRESENT BORROWINGS WHICH GENERALLY RANGE FROM ONE DAY TO
THREE MONTHS IN MATURITY. COMMERCIAL PAPER IS ISSUED IN MATURITIES NOT TO EXCEED
NINE MONTHS. OTHER SHORT-TERM BORROWINGS PRINCIPALLY CONSIST OF BANK NOTES AND
U.S. TREASURY NOTE BALANCES.
1995 1994 1993
AMOUNT RATE AMOUNT RATE AMOUNT RATE
Federal funds purchased
On December 31..............................$ 5,940 5.26% $ 3,993 5.19% $ 7,135 2.92%
Average during year......................... 5,455 5.91 5,397 4.07 6,479 3.03
Maximum month-end balance during year....... 7,317 - 7,264 - 7,899 -
Securities sold under agreements to repurchase
On December 31.............................. 23,034 5.66 21,977 5.36 21,236 3.11
Average during year......................... 30,336 6.14 24,903 4.32 17,283 3.13
Maximum month-end balance during year....... 38,926 - 27,532 - 22,733 -
Commercial paper
On December 31.............................. 2,773 5.65 2,519 5.22 2,056 3.26
Average during year......................... 2,804 6.10 2,482 4.46 1,379 3.26
Maximum month-end balance during year....... 2,930 - 2,871 - 2,056 -
Other short-term borrowings
On December 31.............................. 4,143 5.94 5,640 7.21 5,522 3.08
Average during year......................... 5,690 6.20 5,015 4.25 4,006 3.45
Maximum month-end balance during year....... 7,378 - 6,634 - 8,187 -
28 NATIONSBANK CORPORATION ANNUAL REPORT 1995
OTHER
The Corporation has commercial paper back-up lines totaling $1.5 billion
which mature in 1997. No borrowings have been made under these lines.
The strength of the Corporation's overall financial position is reflected in
the following December 31, 1995 debt ratings:
COMMERCIAL SENIOR
PAPER DEBT
Moody's Investors
Service.............. P-1 A2
Standard & Poor's
Corporation.......... A-1 A
Duff and Phelps, Inc... D-1+ A+
Fitch Investors
Service, Inc......... F-1 A+
Thomson BankWatch...... TBW-1 A+
IBCA................... A1 A
In managing liquidity, the Corporation takes into consideration the ability
of the subsidiary banks to pay dividends to the parent company. See Note Nine to
the consolidated financial statements for further details on dividend
capabilities of the subsidiary banks.
OFF-BALANCE SHEET
As discussed in the Market Risk Management section beginning on page 38, the
Corporation utilizes interest rate swaps in its asset and liability management
process. Interest rate swaps allow the Corporation to adjust its interest rate
risk position without exposure to risk of loss of principal and funding
requirements, as swaps do not involve the exchange of notional amounts, only net
interest payments. The interest payments can be based on a fixed rate or a
variable index.
The Corporation uses non-leveraged generic, 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 presented in the footnotes to TABLE THREE, net interest receipts and
payments on these swaps have been included in interest income and expense on the
underlying instruments. On December 31, 1995, there were no realized deferred
gains or losses associated with terminated contracts.
TABLE ELEVEN summarizes the notional contracts and the activity for the year
ended December 31, 1995 of asset and liability management interest rate swaps
(ALM swap or swaps). As reflected in the table, the gross notional amount of the
Corporation's ALM swap program on December 31, 1995 was $24.3 billion, with the
Corporation receiving fixed on $13.8 billion, converting variable-rate
commercial loans to fixed rate and converting the cost of certain fixed-rate
long-term debt to variable rate, and receiving variable on $10.0 billion, fixing
the cost of certain variable-rate liabilities, primarily market-based funds. On
December 31, 1995, the net receive fixed position was $3.9 billion, representing
a reduction from the net receive fixed position of $8.9 billion on December 31,
1994.
TABLE TWELVE summarizes the maturities, average pay and receive rates and
the market value on December 31, 1995 of the Corporation's ALM swaps. The
weighted
TABLE ELEVEN
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................... 2,923 1,561 - - - 2,923 1,561 486 4,970
Maturities.................. (3,488) (99) (2,539) (540) (22) (6,567) (121) - (6,688)
Balance on December 31, 1995... $ 5,963 $9,908 $ 5,911 $1,964 $ 75 $ 13,838 $9,983 $486 $ 24,307
MANAGEMENT'S DISCUSSION AND ANALYSIS 29
TABLE TWELVE
ASSET AND LIABILITY MANAGEMENT INTEREST RATE SWAPS
DECEMBER 31, 1995
(DOLLARS IN MILLIONS, AVERAGE MATURITY IN YEARS)
MATURITIES
MARKET AFTER AVERAGE
VALUE TOTAL 1996 1997 1998 1999 2000 2000 MATURITY
ASSET CONVERSION SWAPS
Receive fixed generic.............. $ (6) .96
Notional value................... $ 4,275 $ 2,700 $ 575 $1,000 - - -
Weighted average receive rate.... 4.85% 4.62% 4.45% 5.67% - - -
Weighted average pay rate........ 5.84
Receive fixed amortizing........... (42) .70
Notional value................... $ 5,911 $ 4,497 $1,220 $ 194 - - -
Weighted average receive rate.... 4.88% 4.88% 4.87% 5.08% - - -
Weighted average pay rate........ 5.85
Receive fixed CMO.................. (11) 1.72
Notional value................... $ 1,964 $ 656 $ 418 $ 469 $ 421 - -
Weighted average receive rate.... 5.12% 5.10% 5.11% 5.08% 5.21% - -
Weighted average pay rate........ 5.92
Total asset conversion swaps....... $ (59)
Notional value................... $12,150 $ 7,853 $2,213 $1,663 $ 421 - -
LIABILITY CONVERSION SWAPS
Receive fixed generic.............. $ 65 5.70
Notional value................... $ 1,688 $ 4 - $ 3 - $1,308 $ 373
Weighted average receive rate.... 6.73% 8.76% - 6.58% - 6.56% 7.32%
Weighted average pay rate........ 5.96
Pay fixed generic.................. (82) .74
Notional value................... $ 9,908 $ 8,798 $ 925 $ 100 - $ 74 $ 11
Weighted average pay rate........ 6.62% 6.53% 7.52% 6.10% - 7.42% 9.78%
Weighted average receive rate.... 5.92
Pay fixed CMO...................... 1 1.55
Notional value................... $ 75 $ 22 $ 16 $ 37 - - -
Weighted average pay rate........ 4.44% 4.44% 4.44% 4.44% - - -
Weighted average receive rate.... 5.94
Total liability conversion swaps... $ (16)
Notional value................... $11,671 $ 8,824 $ 941 $ 140 - $1,382 $ 384
Basis swaps........................ $ - 1.59
Notional value................... $ 486 $ 100 $ 371 - - - $ 15
Weighted average receive rate.... 5.75%
Weighted average pay rate........ 5.82
Total swaps........................ $ (75)
Notional value................... $24,307 $16,777 $3,525 $1,803 $ 421 $1,382 $ 399
Total receive fixed rate swaps..... $ 6 1.54
Notional value................... $13,838 $ 7,857 $2,213 $1,666 $ 421 $1,308 $ 373
Weighted average receive rate.... 5.13% 4.81% 4.81% 5.44% 5.21% 6.56% 7.32%
Weighted average pay rate........ 5.87
Total pay fixed rate swaps......... $ (81) .74
Notional value................... $ 9,983 $ 8,820 $ 941 $ 137 - $ 74 $ 11
Weighted average pay rate........ 6.61% 6.52% 7.47% 5.65% - 7.42% 9.78%
Weighted average receive rate.... 5.92
FLOATING RATES REPRESENT THE LAST REPRICING AND WILL CHANGE IN THE FUTURE
BASED ON MOVEMENTS IN ONE-, THREE- AND SIX-MONTH LIBOR RATES.
MATURITIES FOR CMO AND AMORTIZING SWAPS ARE BASED ON INTEREST RATES IMPLIED
BY THE FORWARD CURVE ON DECEMBER 31, 1995 AND MAY DIFFER FROM ACTUAL MATURITIES,
DEPENDING ON FUTURE INTEREST RATE MOVEMENTS AND RESULTANT PREPAYMENT PATTERNS.
ON DECEMBER 31, 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
DECEMBER 31, 1995, THESE POSITIONS HAD AN UNREALIZED MARKET VALUE OF NEGATIVE $1
MILLION, A WEIGHTED AVERAGE RECEIVE RATE OF 5.19 PERCENT, A PAY RATE OF 5.66
PERCENT AND AN AVERAGE MATURITY OF 3.76 YEARS. ADDITIONALLY, THE CORPORATION HAD
$80 MILLION NOTIONAL OF ASSET AND LIABILITY MANAGEMENT INTEREST RATE CAPS AND
FLOORS WITH AN INSIGNIFICANT MARKET VALUE.
30 NATIONSBANK CORPORATION ANNUAL REPORT 1995
average interest receive rates and pay rates were 5.13 percent and 5.87
percent, respectively, for receive fixed ALM swaps and 5.92 percent and 6.61
percent, respectively, for receive floating ALM swaps as of December 31, 1995.
The net unrealized depreciation of the ALM swap portfolio on December 31,
1995 was $75 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 ALM swap portfolio should be viewed in the context of
the overall balance sheet. The value of any single component of the balance
sheet or off-balance sheet position should not be viewed in isolation.
CREDIT RISK MANAGEMENT AND
CREDIT PORTFOLIO REVIEW
In conducting business activities, the Corporation is exposed to the
possibility that borrowers or counterparties may default on their obligations to
the Corporation. Credit risk arises through the extension of loans, leases,
factored accounts receivable, certain securities, letters of credit, financial
guarantees and through counterparty risk on trading and capital markets
transactions. To manage this risk, the Credit Policy group establishes policies
and procedures to manage both on- and off-balance sheet credit risk and
communicates and monitors the application of these policies and procedures
throughout the Corporation.
The Corporation's overall objective in managing credit risk is to minimize
the adverse impact of any single event or set of occurrences. To achieve this
objective, the Corporation strives to maintain a credit risk profile that is
diverse in terms of product type, industry concentration, geographic
distribution and borrower or counterparty concentration.
The Credit Policy group works with lending officers, trading personnel and
various other line personnel in areas that conduct activities involving credit
risk and is involved in the implementation, refinement and monitoring of credit
policies and procedures.
The Corporation manages credit exposure to individual borrowers and
counterparties on an aggregate basis. Included in the aggregate measure of
exposure to an individual borrower or counterparty are loans, leases, factored
accounts receivable, securities, letters of credit, bankers' acceptances,
derivatives in a gain position and unfunded commitments. The creditworthiness of
a borrower or counterparty is determined by experienced personnel, and limits
are established for the total credit exposure to any one borrower or
counterparty. Credit limits are subject to varying levels of approval by senior
line and credit policy management. Total exposure to a borrower or counterparty
is aggregated and measured against established limits.
Borrowers or counterparties receive an initial risk rating by the
originating credit officer. This rating is based on the amount of inherent
credit risk and is reviewed for appropriateness by senior line and credit policy
personnel. Credits are monitored by line and credit policy personnel for
deterioration in a borrower's or counterparty's financial condition which would
impact the ability of the borrower or counterparty to perform under the
contract. Risk ratings are adjusted as necessary.
For consumer lending, credit scoring systems are utilized to provide
standards for extension of credit. Consumer portfolio credit risk is monitored
primarily using statistical models to predict portfolio behavior.
In certain circumstances, the Corporation obtains collateral to support
credit extensions and commitments. Generally, such collateral is in the form of
real and personal property, cash on deposit or other highly liquid instruments.
Whenever possible, the Corporation obtains real property as security for some
loans that are made on the general creditworthiness of the borrower and whose
proceeds were not used for real estate-related purposes.
The Corporation also manages exposure to a single borrower, industry,
product-type or other concentration through syndications of credits,
participations, loan sales and securitizations. Through the Corporation's
GLOBAL FINANCE group, the Corporation is a major participant in the
syndications market. In a syndicated facility, each participating lender funds
only its portion of the syndicated facility, therefore limiting its exposure to
the borrower. The Corporation also identifies and reduces its exposure to funded
borrower, product or industry concentrations through loan sales. Generally,
these sales are without recourse to the Corporation. For instance, in December
1995, to further reduce real estate exposures, the Corporation sold two pools of
loans with book values of $125 million, consisting primarily of selected lower
quality real estate loans.
In conducting derivatives activities, in certain jurisdictions, the
Corporation reduces
MANAGEMENT'S DISCUSSION AND ANALYSIS 31
risk to any one counterparty through the use of legally enforceable master
netting agreements which allow the Corporation to settle positive and negative
positions with the same counterparty on a net basis.
An independent credit review group conducts ongoing reviews of credit
activities and portfolios, re-examining on a regular basis risk assessments for
credit exposures and overall compliance with policy.
LOAN AND LEASE PORTFOLIO- The Corporation's credit exposure is centered in
its loan and lease portfolio which on December 31, 1995 totaled $116.0 billion,
or 69 percent of total earning assets. TABLE EIGHT on page 26 presents a
distribution of loans by product type.
ALLOWANCE FOR CREDIT LOSSES - The
TABLE THIRTEEN
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN MILLIONS)
1995 1994 1993 1992 1991
Balance on January 1........................................ $ 2,186 $ 2,169 $ 1,454 $ 1,605 $ 1,322
Loans, leases and factored accounts receivable charged off
Commercial................................................ (98) (113) (107) (245) (436)
Real estate commercial.................................... (25) (32) (84) (279) (316)
Real estate construction.................................. (17) (27) (17) (114) (276)
Total commercial........................................ (140) (172) (208) (638) (1,028)
Residential mortgage...................................... (8) (7) (10) (18) (33)
Credit card............................................... (189) (126) (184) (172) (138)
Other consumer............................................ (263) (192) (172) (166) (185)
Total consumer.......................................... (460) (325) (366) (356) (356)
Foreign................................................... - - - (7) (3)
Lease financing........................................... (2) (4) (5) (8) (7)
Factored accounts receivable.............................. (34) (32) (30) (17) (23)
Total loans, leases and factored accounts
receivable charged off.................................. (636) (533) (609) (1,026) (1,417)
Recoveries of loans, leases and factored accounts
receivable previously charged off
Commercial................................................ 78 69 67 62 36
Real estate commercial.................................... 15 17 21 13 5
Real estate construction.................................. 9 26 12 8 3
Total commercial........................................ 102 112 100 83 44
Residential mortgage...................................... 2 2 3 4 3
Credit card............................................... 26 22 19 13 19
Other consumer............................................ 72 67 65 48 37
Total consumer.......................................... 100 91 87 65 59
Foreign................................................... - - 1 1 1
Lease financing........................................... 1 3 2 2 2
Factored accounts receivable.............................. 12 11 7 9 3
Total recoveries of loans, leases and
factored accounts receivable previously charged
off................................................... 215 217 197 160 109
Net charge-offs........................................... (421) (316) (412) (866) (1,308)
Provision for credit losses................................. 382 310 430 715 1,582
Allowance applicable to loans of purchased companies and
other..................................................... 16 23 697 - 9
Balance on December 31...................................... 2,163 $ 2,186 $ 2,169 $ 1,454 $ 1,605
Loans, leases and factored accounts receivable,
net of unearned income, outstanding on December 31........ $117,033 $103,371 $92,007 $72,714 $69,108
Allowance for credit losses as a percentage of
loans, leases and factored accounts receivable,
net of unearned income, outstanding on December 31........ 1.85% 2.11% 2.36% 2.00% 2.32%
Average loans, leases and factored accounts receivable,
net of unearned income, outstanding during the year....... $110,650 $ 96,258 $80,058 $69,136 $70,196
Net charge-offs as a percentage of average loans,
leases and factored accounts receivable,
net of unearned income, outstanding during the year....... .38% .33% .51% 1.25% 1.86%
Ratio of the allowance for credit losses
on December 31 to net charge-offs......................... 5.14 6.93 5.27 1.68 1.23
Allowance for credit losses as a percentage of
nonperforming loans....................................... 306.49% 273.07% 193.38% 103.11% 81.82%
32 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NET CHARGE-OFFS
AS A PERCENTAGE OF
AVERAGE NET LOANS
(percent)
(Bar graph appears here with the following plot points.)
91 92 93 94 95
1.86 1.25 .51 .33 .38
Corporation's allowance for credit losses was $2.2 billion on both December
31, 1995 and 1994. TABLE THIRTEEN provides an analysis of the changes in the
allowance for credit losses. The provision for credit losses was $72 million
higher in 1995 than in 1994, because of both higher charge-offs and higher loan
growth, principally in the consumer loan portfolios. Total net charge-offs
increased $105 million in 1995 to $421 million, or .38 percent of average loans,
leases and factored accounts receivable, versus $316 million, or .33 percent, in
1994. The increases were experienced in credit card and other consumer net
charge-offs which increased $59 million and $66 million, respectively. The 27-
percent growth in 1995 in average credit card loan levels and 11-percent growth
in average other consumer loan levels over 1994 average levels led to increased
charge-offs which generally occur as the portfolios season. Additionally, an
increased rate of personal bankruptcies in 1995 contributed to higher charge-
offs. Management anticipates that the credit losses experienced in 1995 reflect
more typical loss levels for this type of lending than the lower charges
experienced in the prior two years and that losses at these or higher levels
will continue for the near future. Furthermore, future economic conditions also
will impact credit quality and may result in increased net charge-offs and
higher provisions for credit losses.
Based on the risk rating process described above, an amount is allocated
within the allowance for credit losses to cover the amount of loss estimated to
be inherent in particular risk categories of loans. The allocation of the
allowance for credit losses, as presented in TABLE FOURTEEN, is based upon the
Corporation's loss experience within risk categories of loans over a period of
years and is adjusted for existing economic conditions, as well as performance
trends within specific industries.
In addition to the allocation by risk category, the Corporation reviews
significant individual credits and concentrations of credit and makes additional
allocations to the allowance when deemed necessary. The nature of the process by
which the Corporation determines the appropriate allowance for credit losses
requires the exercise of considerable judgment. Management believes the
allowance for credit losses is appropriate given inherent credit losses on
December 31, 1995.
NONPERFORMING ASSETS - On December 31, 1995, nonperforming assets were $853
million, or .73 percent of net loans, leases, factored accounts receivable and
other real estate owned, compared to $1.1 billion, or 1.10 percent, on December
31, 1994. As presented in TABLE FIFTEEN, nonperforming loans were $706 million
at the end of 1995 compared to $801 million at the end of 1994. At the beginning
of 1995, upon adoption of the loan impairment accounting policies discussed more
fully in Notes One and Five to the consolidated financial statements,
approximately $80 million of in-substance foreclosed loans previously reported
as other real estate owned was reclassified to nonperforming loans. After
reflecting this reclassification in the December 31, 1994 amounts,
TABLE FOURTEEN
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
DECEMBER 31
(DOLLARS IN MILLIONS)
1995 1994 1993 1992 1991
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
Commercial..................... $ 450 20.8% $ 444 20.3% $ 403 18.6% $ 303 20.9% $ 524 32.6%
Real estate commercial......... 176 8.1 214 9.8 230 10.6 220 15.1 282 17.6
Real estate construction....... 69 3.2 83 3.8 123 5.7 141 9.7 252 15.7
Total commercial............. 695 32.1 741 33.9 756 34.9 664 45.7 1,058 65.9
Residential mortgage........... 48 2.2 34 1.6 24 1.1 21 1.4 50 3.1
Credit card.................... 164 7.6 117 5.4 92 4.2 125 8.6 104 6.5
Other consumer................. 251 11.7 228 10.4 224 10.4 135 9.3 161 10.0
Total consumer............... 463 21.5 379 17.4 340 15.7 281 19.3 315 19.6
Foreign........................ 11 .5 11 .5 13 .6 17 1.2 6 .4
Lease financing................ 25 1.2 17 .8 13 .6 12 .8 12 .7
Factored accounts receivable... 20 .9 23 1.0 19 .9 18 1.2 17 1.1
Unallocated.................... 949 43.8 1,015 46.4 1,028 47.3 462 31.8 197 12.3
$2,163 100.0% $2,186 100.0% $2,169 100.0% $1,454 100.0% $1,605 100.0%
MANAGEMENT'S DISCUSSION AND ANALYSIS 33
nonperforming loans decreased $175 million, or 20 percent, primarily
reflecting declines of $119 million in nonperforming commercial loans and $107
million in nonperforming real estate commercial and construction loans.
Approximately $30 million of the $107-million decline in real estate commercial
and construction nonperforming loans was related to the previously mentioned
December 1995 pool sales. Declines in nonperforming loans primarily reflect
payments resulting from the improved financial condition of borrowers and the
results of the Corporation's continuing loan workout activities. Declines were
partially offset by an increase of $57 million in total nonperforming consumer
loans at December 31, 1995 compared to year-end 1994 amounts. The allowance
coverage of nonperforming loans increased to 306 percent on December 31, 1995,
up from 273 percent at the end of 1994.
Other real estate owned declined $190 million. After adjusting for the
previously dis-cussed $80-million reclassification from other real estate owned
to nonperforming loans, it declined $110 million, or 43 percent.
Internal loan workout units are devoted to the management and/or collection
of certain nonperforming assets, as well as certain performing loans. Aggressive
collection strategies and a proactive approach to managing overall credit risk
has expedited the Corporation's disposition, collection and renegotiation of
nonperforming and other lower-quality assets and allowed loan officers to
concentrate on generating new business.
The Corporation continues its efforts to expedite disposition, collection
and renegotiation of nonperforming and other lower-quality assets. As part of
this process, the Corporation routinely evaluates all reasonable alternatives,
including the sale of assets individually or in groups. The final decision to
proceed with any alternative is evaluated in the context of the overall credit-
risk profile of the Corporation.
NONPERFORMING ASSETS
(BILLIONS)
(Bar braph appears here with the following plot points.)
91 92 93 94 95
OREO .843 .587 .661 .337 .147
Nonperforming Loans 1.961 1.410 1.122 .801 .706
TABLE FIFTEEN
NONPERFORMING ASSETS
DECEMBER 31
(DOLLARS IN MILLIONS)
1995 1994 1993 1992 1991
Nonperforming loans
Commercial.............................................. $271 $ 362 $ 474 $ 650 $ 831
Real estate commercial.................................. 196 201 318 404 535
Real estate construction................................ 16 66 142 210 480
Total commercial...................................... 483 629 934 1,264 1,846
Residential mortgage.................................... 87 66 77 88 114
Other consumer (1)...................................... 130 94 93 34 -
Total consumer........................................ 217 160 170 122 114
Foreign................................................. - 3 8 9 1
Lease financing (1)..................................... 6 9 10 15 -
Total nonperforming loans........................... 706 801 1,122 1,410 1,961
Other real estate owned................................... 147 337 661 587 843
Total nonperforming assets.......................... $853 $1,138 $1,783 $1,997 $2,804
Nonperforming assets as a percentage of
Total assets............................................ .46% .67% 1.13% 1.69% 2.54%
Loans, leases and factored accounts receivable,
net of unearned income, and other real estate
owned............................................... .73 1.10 1.92 2.72 4.01
Total loans past due 90 days or more and
not classified as nonperforming......................... $174 $ 146 $ 167 $ 215 $ 223
The loss of income associated with nonperforming loans on December 31 and the
cost of carrying other real estate owned were:
1995 1994 1993 1992 1991
Income that would have been recorded in accordance with
original terms.......................................... $102 $ 96 $ 80 $ 105 $ 205
Less income actually recorded............................. (27) (31) (34) (31) (82)
Loss of income............................................ $ 75 $ 65 $ 46 $ 74 $ 123
Cost of carrying other real estate owned.................. $ 13 $ 24 $ 18 $ 25 $ 36
ON DECEMBER 31, 1995, THERE WERE NO MATERIAL COMMITMENTS TO LEND ADDITIONAL
FUNDS WITH RESPECT TO NONPERFORMING LOANS.
(1) INCLUDED IN COMMERCIAL NONPERFORMING LOANS IN 1991.
34 NATIONSBANK CORPORATION ANNUAL REPORT 1995
DERIVATIVES ACTIVITIES - Credit risk associated with derivatives positions
is measured as the net replacement cost the Corporation could incur should
counterparties with contracts in a gain position completely fail to perform
under the terms of those contracts and any collateral underlying the contracts
proves to be of no value to the Corporation. In managing derivatives credit
risk, the Corporation considers both the current exposure, which is the
replacement cost of contracts on the measurement date, as well as an estimate of
the potential change in value of contracts over their remaining lives.
TABLE SIXTEEN presents both the notional/contract amounts on December 31,
1995 and 1994 and the current credit risk amounts (the net replacement cost of
contracts in a gain position on December 31, 1995) of the Corporation's
derivatives-dealer positions. The notional or contract amounts indicate the
total volume of transactions and significantly exceed the amount of the
Corporation's credit or market risk associated with these instruments. The
credit risk amounts presented in TABLE SIXTEEN do not consider the value of any
collateral, but generally take into consideration the effects of legally
enforceable master netting agreements. TABLES ELEVEN and TWELVE present the
notional/contract amounts of the Corporation's asset and liability management
swaps. On December 31, 1995, the credit risk associated with these swaps was not
significant.
In managing credit risk associated with its derivatives activities, the
Corporation deals with creditworthy counterparties, primarily U.S. and foreign
commercial banks and broker-dealers.
A portion of the Corporation's derivatives-dealer activity is exchange-
traded. Because exchange-traded instruments conform to standard terms and are
subject to policies set by the exchange involved, including counter-party
approval, margin requirements and security deposit requirements, the credit risk
to the Corporation is minimal. Of the $3.8-billion credit risk amount reported
in TABLE SIXTEEN, $791 million related to exchange-traded instruments. This
compares to a total credit risk amount of $1.8 billion on December 31, 1994,
which included $354 million related to exchange-traded instruments.
During 1995 there were no credit losses associated with derivatives
transactions. In addition, on December 31, 1995, there were
TABLE SIXTEEN
DERIVATIVES-DEALER POSITIONS
DECEMBER 31
(DOLLARS IN MILLIONS)
1995 1994
CONTRACT/ CREDIT RISK CONTRACT/
NOTIONAL AMOUNT (1) NOTIONAL
Interest Rate Contracts
Swaps.................................. $123,946 989 $ 45,179
Futures and forwards................... 193,774 37 124,620
Written options........................ 233,976 - 114,928
Purchased options...................... 236,317 1,310 118,839
Foreign Exchange Contracts
Swaps.................................. 1,196 21 470
Spot, futures and forwards............. 70,199 532 26,987
Written options........................ 42,227 - 13,398
Purchased options...................... 44,273 350 13,507
Commodity and Other Contracts
Swaps.................................. 757 141 570
Futures and forwards................... 3,231 3 1,984
Written options........................ 15,476 - 12,608
Purchased options...................... 16,344 600 11,591
Total before cross product netting... 3,983
Cross product netting................ 183
Net replacement cost................. $3,800
(1) REPRESENTS THE NET REPLACEMENT COST THE CORPORATION COULD INCUR SHOULD
COUNTERPARTIES WITH CONTRACTS IN A GAIN POSITION TO THE CORPORATION COMPLETELY
FAIL TO PERFORM UNDER THE TERMS OF THOSE CONTRACTS. AMOUNTS INCLUDE ACCRUED
INTEREST.
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
no nonperforming derivatives positions.
CONCENTRATIONS OF CREDIT RISK - As previously discussed, in an effort to
minimize the adverse impact of any single event or set of occurrences, the
Corporation strives to maintain a diverse credit portfolio. Summarized below are
areas of credit risk with exposures in excess of 25 percent of period-end
shareholders' equity and a discussion of foreign outstandings.
REAL ESTATE - Total nonresidential real estate commercial and construction
loans, the portion of such loans which are nonperforming, OREO and other credit
exposures are presented in TABLES SEVENTEEN and EIGHTEEN. Other credit
exposures, as presented in the tables, include letters of credit and loans held
for sale. The exposures presented represent credit extensions for real estate-
related purposes to borrowers or counterparties who are primarily in the real
estate development or investment business and for which the ultimate repayment
of the credit is dependent on the sale, lease, rental or refinancing of the
real estate.
Total nonresidential real estate commercial and construction loans continued
to decline in 1995 and totaled $9.2 billion, or eight percent of net loans,
leases and factored accounts receivable, on December 31, 1995 compared to $10.3
billion, or 10 percent, at the end of 1994. During 1995, the Corporation
recorded real estate net charge-offs of $18 million, or .17 percent of average
real estate loans, compared to net charge-offs of $16 million, or .15 percent,
in 1994. The December 1995 real estate pool sales accounted for $11 million of
the $18-million total net charge-offs. Nonperforming real estate commercial and
construction loans totaled $212 million and $267 million on December 31, 1995
and 1994, respectively.
TABLE SEVENTEEN
REAL ESTATE COMMERCIAL AND CONSTRUCTION LOANS, OTHER REAL ESTATE OWNED
AND OTHER REAL ESTATE CREDIT EXPOSURES BY GEOGRAPHIC REGION
DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
LOANS (1) OTHER CREDIT
OUTSTANDING NONPERFORMING OREO EXPOSURES (2)
Maryland, District of Columbia and Virginia... $2,269 $ 99 $ 59 $ 434
Florida....................................... 2,061 45 22 114
North Carolina and South Carolina............. 1,585 31 12 79
Other states.................................. 3,244 37 16 793
$9,159 $212 $109 $1,420
DISTRIBUTION BASED ON GEOGRAPHIC LOCATION OF COLLATERAL.
(1) ON DECEMBER 31, 1995, THE CORPORATION HAD UNFUNDED BINDING REAL ESTATE
COMMERCIAL AND CONSTRUCTION LOAN COMMITMENTS.
(2) OTHER CREDIT EXPOSURES INCLUDE LETTERS OF CREDIT AND LOANS HELD FOR
SALE.
TABLE EIGHTEEN
REAL ESTATE COMMERCIAL AND CONSTRUCTION LOANS, OTHER REAL ESTATE OWNED
AND OTHER REAL ESTATE CREDIT EXPOSURES BY PROPERTY TYPE
DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
LOANS (1) OTHER CREDIT
OUTSTANDING NONPERFORMING OREO EXPOSURES (2)
Shopping centers/retail..... $1,671 $ 20 $ 11 $ 72
Apartments.................. 1,539 9 1 611
Office buildings............ 1,492 30 14 22
Residential................. 926 10 4 22
Hotels...................... 841 9 - 62
Land and land development... 759 46 61 84
Industrial/warehouse........ 570 25 3 48
Commercial-other............ 386 35 7 341
Resorts/golf courses........ 196 1 - -
Multiple use................ 78 3 - 6
Other....................... 701 24 8 152
$9,159 $212 $109 $1,420
(1) ON DECEMBER 31, 1995, THE CORPORATION HAD UNFUNDED BINDING REAL ESTATE
COMMERCIAL AND CONSTRUCTION LOAN COMMITMENTS.
(2) OTHER CREDIT EXPOSURES INCLUDE LETTERS OF CREDIT AND LOANS HELD FOR
SALE.
36 NATIONSBANK CORPORATION ANNUAL REPORT 1995
The exposures included in TABLES SEVENTEEN and EIGHTEEN do not include
credit extensions which were made on the general creditworthiness of the
borrower for which real estate was obtained as security or as an abundance of
caution and for which the ultimate repayment of the credit is not dependent on
the sale, lease, rental or refinancing of the real estate. Accordingly, the
exposures presented do not include commercial loans secured by owner-occupied
real estate, except where the borrower is a real estate developer. In addition
to the amounts presented in the tables, on December 31, 1995, the Corporation
had approximately $8.6 billion of commercial loans which were not real estate
dependent but for which the Corporation had obtained real estate as secondary
repayment security.
OTHER INDUSTRIES - TABLE NINETEEN presents selected industry credit
exposures. Commercial loans, factored accounts receivable and lease financings
are included in the table. Other credit exposures as presented include loans
held for sale, letters of credit, bankers' acceptances and derivatives exposures
in a gain position. Commercial loan outstandings totaled $48.0 billion, or 41
percent of net loans, leases and factored accounts receivable, on December 31,
1995 compared to $44.7 billion, or 43 percent, at the end of 1994. Net charge-
offs of commercial loans totaled $20 million, or .04 percent of average
commercial loans in 1995, versus $44 million, or .11 percent, in 1994.
Nonperforming commercial loans were $271 million and $362 million on December
31, 1995 and 1994, respectively.
As presented in TABLE NINETEEN and indirectly through other industry
exposures, the Corporation has credit exposure to the retail industry. Given the
current softness in this industry, management anticipates that credit quality in
the retail sector may experience deterioration in 1996.
CONSUMER - On December 31, 1995, consumer loan outstandings totaled $52.8
billion, representing 45 percent of net loans, leases and factored accounts
receivable. This compares to outstandings of $42.5 billion, or 41 percent, on
December 31, 1994. TABLE EIGHT details the components of the Corporation's
consumer loan portfolio. Net charge-offs in the consumer portfolio were $360
million in 1995 compared to $234 million in 1994, reflecting significant loan
growth. In addition to credit card loans reported in the financial statements,
the Corporation manages certain credit card receivables which have been
securitized ($1.3 billion). Total average managed credit card receivables
totaled $6.3 billion in 1995 compared to $5.2 billion in 1994. In December 1995,
the Corporation securitized approximately $1.1 billion of indirect auto loans.
On a managed portfolio basis, that is, taking into account the credit card and
indirect auto loan securitizations, net charge-offs as a percentage of average
managed
TABLE NINETEEN
SELECTED INDUSTRY CREDIT EXPOSURES
DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
LOANS, LEASES AND FACTORED ACCOUNTS
RECEIVABLE, NET OF UNEARNED INCOME OTHER
UNFUNDED CREDIT
OUTSTANDING NONPERFORMING COMMITMENTS EXPOSURES (1)
Communications............... $3,953 $ 2 $4,252 $ 335
Health care.................. 3,400 16 2,495 688
Leisure and sports........... 2,989 18 1,782 417
Oil and gas.................. 2,837 34 3,538 740
Food......................... 2,715 16 2,698 416
Textiles and apparel......... 2,556 38 1,113 370
Automotive................... 2,493 12 1,404 80
Machinery and equipment...... 2,475 7 2,370 275
Retail....................... 2,282 34 2,756 655
Electronics.................. 1,681 11 2,150 150
Construction................. 1,577 23 1,174 167
F orest products and paper... 1,374 7 1,602 245
Utilities.................... 818 - 2,533 223
Finance companies............ 775 - 4,531 69
Banks........................ 668 - 1,438 2,053
Brokers and dealers.......... 278 - 1,164 773
(1) OTHER CREDIT EXPOSURES INCLUDE LOANS HELD FOR SALE, LETTERS OF CREDIT,
BANKERS' ACCEPTANCES AND DERIVATIVES EXPOSURES IN A GAIN POSITION.
MANAGEMENT'S DISCUSSION AND ANALYSIS 37
consumer loans in 1995 were 3.81 percent for credit card, .03 percent for
residential mortgage and .87 percent for other consumer loans. This compares to
net charge-off ratios of 3.46 percent, .03 percent and .63 percent,
respectively, in 1994.
FOREIGN - Foreign outstandings, which exclude contingencies and the local
currency transactions of each country, include loans and leases, interest-
bearing deposits with foreign banks, bankers' acceptances and other investments.
The Corporation has no significant medium- or long-term outstandings to
restructuring countries. The Corporation's foreign outstandings totaled $3.8
billion on December 31, 1995 compared to $4.6 billion on December 31, 1994.
MARKET RISK MANAGEMENT
In the normal course of conducting business activities, the Corporation is
exposed to market risk which includes both price and liquidity risk. Price risk
arises from fluctuations in interest rates, foreign exchange rates and commodity
and equity prices that may result in changes in the values of financial
instruments. Liquidity risk arises from the possibility that the Corporation may
not be able to satisfy current and future financial commitments or that the
Corporation may not be able to liquidate financial instruments at market prices.
Risk management procedures and policies have been established and are utilized
to manage the Corporation's exposure to market risk. The strategy of the
Corporation with respect to market risk is to maximize net income while
maintaining an acceptable level of risk to changes in market rates. While
achievement of this goal requires a balance between profitability, liquidity and
market price risk, there are opportunities to enhance revenues through
controlled risks.
Market risk is managed by the Corporation's Finance Committee which
formulates policy based on desirable levels of market risk. In setting desirable
levels of market risk, the Finance Committee considers the impact on earnings
and capital of the current outlook in market rates, potential changes in the
outlook in market rates, world and regional economies, liquidity, business
strategies and other factors.
The Corporation's asset and liability management process is utilized to
manage interest rate risk through the structuring of balance sheet and off-
balance sheet portfolios. To effectively measure and manage interest rate risk,
the Corporation uses computer simulations which determine the impact on net
interest income of numerous interest rate scenarios, balance sheet trends and
strategies. These simulations incorporate assumptions about balance sheet
dynamics, such as loan and deposit growth, loan and deposit pricing, changes in
funding mix and asset and liability repricing and maturity characteristics.
Simulations are run under various interest rate scenarios to determine the
impact on net income and capital. From these scenarios, interest rate risk is
quantified and appropriate strategies are developed and implemented. The overall
interest rate risk position and strategies are reviewed on an ongoing basis by
executive management.
Additionally, duration and market value sensitivity measures are selectively
utilized where they provide added value to the overall interest rate risk
management process.
In implementing strategies to manage interest rate risk, the primary tools
used by the Corporation are the securities portfolio and interest rate swaps,
and management of the mix, yields or rates and maturities of assets and of the
wholesale and retail funding sources of the Corporation.
TABLE TWENTY represents the Corporation's interest rate gap position on
December 31, 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 near-term cumulative interest rate gap position is a reflection of
the strength of the customer-deposit gathering franchise which provides the
Corporation with a relatively stable core deposit base. These funds have been
deployed in longer-term interest earning assets, primarily loans and securities.
A gap analysis is limited in its usefulness as it represents a one-day position,
which is continually changing and not necessarily indicative of the
Corporation's position at any other time. Additionally, the gap analysis does
not consider the many factors accompanying interest rate movements.
On December 31, 1995, the interest rate risk position of the Corporation was
relatively neutral as the impact of a gradual parallel 100 basis-point rise or
fall in interest rates over the next 12 months was estimated to be less than one
percent of net income when compared to stable rates. Additionally, on December
31, 1995, a 100 basis-point parallel increase in interest rates from December
31,
38 NATIONSBANK CORPORATION ANNUAL REPORT 1995
1995 levels was estimated to result in a change of less than one percent in
the market value of the Corporation's total shareholders' equity.
The Corporation manages its exposure to market risk resulting from trading
activities through a risk management function which is independent of the
business units. Each major trading site in Charlotte, Chicago, New York and
London is monitored by these risk management units. Risk limits and stress
scenario guidelines have been approved by the Corporation's Finance Committee,
and daily earnings at risk limits are generally allocated to the business units.
In addition to limits placed on these individual business units, limits also are
imposed on the risks individual traders can take and on the amount of risk that
can be concentrated in a particular product or market. Risk positions are
monitored by business unit, risk management personnel and senior management on a
daily basis. Business unit and risk management personnel are responsible for
continual monitoring of the changing aggregate position of the portfolios under
their responsibility, including projection of the profit or loss levels that
could result from market moves. If any market risk limits are exceeded, the risk
management units ensure that senior management is aware and that appropriate
actions are taken.
To estimate potential losses that could result from adverse market
movements, the Corporation uses a daily earnings at risk methodology. Earnings
at risk estimates are measured on a daily basis at the individual trading unit
level, by type of trading activity and for all trading activities in the
aggregate. Daily reports of estimates compared to respective limits are reviewed
by senior management, and trading strategies are adjusted accordingly. In
addition to these simulations, portfolios which have significant option
positions are stress tested continually to simulate the potential loss that
might occur
TABLE TWENTY
INTEREST RATE GAP ANALYSIS
DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
OVER 12
MONTHS AND
INTEREST-SENSITIVE NONINTEREST-
30-DAY 3-MONTH 6-MONTH 12-MONTH TOTAL SENSITIVE TOTAL
Earning assets
Loans and leases, net of unearned income... $ 49,437 $ 11,097 $ 4,662 $ 7,959 $ 73,155 $42,887 $116,042
Securities held for investment............. 80 221 286 940 1,527 2,905 4,432
Securities available for sale.............. 5 2,117 278 459 2,859 16,556 19,415
Loans held for sale........................ 1,663 - - - 1,663 - 1,663
Time deposits placed and other
short-term investments................... 894 179 107 116 1,296 - 1,296
Trading account securities................. 14,848 - - - 14,848 - 14,848
Federal funds sold and securities
purchased under agreements to resell..... 6,230 - - - 6,230 - 6,230
Total.................................... 73,157 13,614 5,333 9,474 101,578 62,348 163,926
Interest-bearing liabilities
Savings.................................... 8,257 - - - 8,257 - 8,257
NOW and money market deposit accounts...... 28,160 - - - 28,160 - 28,160
Consumer CDs and IRAs...................... 3,105 3,674 4,374 6,503 17,656 7,254 24,910
Negotiated CDs, public funds and
other time deposits...................... 906 933 486 269 2,594 467 3,061
Foreign time deposits...................... 6,606 3,205 1,398 1,676 12,885 4 12,889
Borrowed funds............................. 30,790 1,733 2,579 788 35,890 - 35,890
Short sales................................ 11,782 - - - 11,782 - 11,782
Long-term debt............................. 4,444 4,403 139 630 9,616 8,159 17,775
Total.................................... 94,050 13,948 8,976 9,866 126,840 15,884 142,724
Noninterest-bearing, net..................... - - - - - 21,202 21,202
Total.................................... 94,050 13,948 8,976 9,866 126,840 37,086 $163,926
Interest rate gap............................ (20,893) (334) (3,643) (392) (25,262) 25,262
Effect of asset and liability management
interest rate swaps, futures and
other off-balance sheet items.............. (3,766) 3,431 167 (5,999) (6,167) 6,167
Adjusted interest rate gap................... $ (24,659) $ 3,097 $ (3,476) $ (6,391) $ (31,429) $31,429
Cumulative adjusted interest rate gap........ $ (24,659) $ (21,562) $ (25,038) $ (31,429)
MANAGEMENT'S DISCUSSION AND ANALYSIS 39
due to unexpected market movements.
Earnings at risk represents a one-day measurement of pre-tax earnings at
risk from movements in market prices using the assumption that positions cannot
be rehedged during the period of any prescribed price and volatility change. A
99-percent confidence level is utilized, which indicates that actual trading
profits and losses may deviate from expected levels and exceed estimates
approximately one day out of every 100 days of trading activity. Earnings at
risk is measured on both a gross and uncorrelated basis. The gross measure
assumes that adverse market movements occur simultaneously across all segments
of the trading portfolio, an unlikely assumption. On December 31, 1995, the
gross estimates for aggregate interest rate, foreign exchange and equity and
commodity trading activities were $36.6 million, $1.3 million and $2.7 million,
respectively. Alternatively, using a statistical measure which is more likely to
capture the effects of market movements, the estimate on December 31, 1995 for
aggregate trading activities was $14.5 million.
Average daily CAPITAL MARKETS-related revenues in 1995 approximated $1.4
million. During 1995, the Corporation's CAPITAL MARKETS-related activities
resulted in positive daily revenues for approximately 73 percent of total
trading days.
The CAPITAL MARKETS-related revenue stream is quite stable. In 1995 the
standard deviation of CAPITAL MARKETS-related revenues was $2.8 million. Using
this data, one can conclude that the aggregate CAPITAL MARKETS activities should
not result in exposure of more than $5.1 million for any one day, assuming 99-
percent confidence. Daily earnings at risk will average considerably more than
this due to the assumption of no evasive actions as well as the assumption that
adverse market movements occur simultaneously across all segments of the trading
portfolio.
CAPITAL RESOURCES AND
CAPITAL MANAGEMENT
Shareholders' equity on December 31, 1995 was $12.8 billion compared to
$11.0 billion on December 31, 1994. Net earnings retention of $1.4 billion
coupled with net appreciation of $460 million, on an after tax basis, in the
market value of securities available for sale were the primary reasons for the
increase. Issuances of common stock in acquisitions and under various employee
benefit plans were offset by common stock repurchases in the open market as
discussed more fully in Note Seven to the consolidated financial statements.
The Federal Reserve Board, the Office of the Comptroller of the Currency and
the Federal Deposit Insurance Corporation have issued risk-based capital
guidelines for U.S. banking organizations. These guidelines provide a capital
framework that is sensitive to differences in credit risk profiles among banking
companies.
Under the risk-based capital guidelines, there are two tiers of capital.
Tier 1 Capital includes common shareholders' equity and qualifying preferred
stock, less goodwill and other adjustments. Tier 2 Capital consists of preferred
stock not qualifying as Tier 1, mandatory convertible debt, limited amounts of
subordinated debt, other qualifying term debt and the allowance for credit
losses up to 1.25 percent of risk-weighted assets. Total Capital consists of
Tier 1 Capital and Tier 2 Capital.
The risk-based capital guidelines are designed to measure Tier 1 and Total
Capital in relation to the credit risk of both on- and off-balance sheet items.
Under the guidelines, one of four risk weights is applied to the different on-
balance sheet assets. Off-balance sheet items, such as loan commitments and
derivatives contracts, are also applied a risk weight after conversion to
balance sheet-equivalent amounts.
The leverage ratio guidelines establish a minimum ratio of Tier 1 Capital to
quarterly average assets, excluding goodwill and certain other items, of three
percent, although most banking organizations are expected to maintain ratios of
at least 100 to 200 basis points above the three-percent minimum.
Presented below are the Corporation's regulatory capital ratios on December
31:
1995 1994
Risk-Based Capital Ratios
Tier 1 Capital......... 7.24% 7.43%
Total Capital.......... 11.58 11.47
Leverage Capital Ratio... 6.27 6.18
The Corporation's regulatory capital ratios on December 31, 1995 compare
favorably with the regulatory minimums of four percent for Tier 1, eight percent
for total risk-based capital and the leverage guidelines of 100 to 200 basis
points above the minimum ratio of three percent.
40 NATIONSBANK CORPORATION ANNUAL REPORT 1995
FOURTH QUARTER REVIEW
During the fourth quarter of 1995, the Corporation recorded net income of
$510 million compared to $405 million in the fourth quarter of 1994. TABLE
TWENTY-ONE presents selected quarterly operating results for each quarter of
1995 and 1994.
TABLE TWENTY-TWO presents an analysis of the Corporation's taxable-
equivalent net interest income for each of the last five quarters in the period
ended December 31, 1995. Taxable-equivalent net interest income was $1.4 billion
in the fourth quarter of 1995 compared to $1.3 billion in the comparable 1994
period. The net interest yield was 3.38 percent in the fourth quarter of 1995
compared to 3.40 percent in the fourth quarter of 1994. The slight decline in
the net interest yield resulted from the funding of earning asset growth
principally with market-based funds and term debt, partially offset by improved
spreads on the securities and ALM swaps portfolios.
The provision for credit losses was $142 million in the fourth quarter of
1995 compared to $70 million in the same quarter of 1994. Net charge-offs for
the fourth quarter of 1995 were $156 million compared to $98 million in the
fourth quarter of 1994. The increases in the provision for credit losses and net
charge-offs resulted from strong consumer loan growth and credit quality trends.
Securities gains in the fourth quarter of 1995 were $21 million compared to
losses of $28 million in the same 1994 period. The gains resulted from the
Corporation's repositioning of the portfolios in an effort to maintain neutral
interest sensitivity in light of recent and pending acquisitions.
Noninterest income was $846 million and $639 million in the fourth quarters
of 1995 and 1994, respectively. The $207-million increase was due primarily to
higher service charge fees on deposit accounts, higher trading account profits
and fees, acquisition-related mortgage servicing income and the previously
mentioned $80-million gain on the sale of a portion of the Corporate Trust
business.
Noninterest expense increased $81 million in the fourth quarter of 1995
compared to the fourth quarter of 1994, primarily due to acquisitions and the
previously mentioned $30-million proposed litigation settlement, partially
offset by reduced deposit insurance and the Corporation's continued emphasis on
management of expense levels.
Income tax expense was $278 million in the fourth quarter of 1995,
reflecting an effective tax rate of 35 percent of pretax income. This compared
to income tax expense of $183 million or an effective tax rate of 31 percent in
the fourth quarter of 1994.
1994 COMPARED TO 1993
The following discussion and analysis provides a comparison of the
Corporation's results of operations for the years ended December 31, 1994 and
1993. This discussion should be read in conjunction with the consolidated
financial statements and related notes on pages 47 through 67.
OVERVIEW
The Corporation's net income of $1.7 billion represented an increase of $389
million over 1993 earnings of $1.3 billion, excluding the 1993 impact of
adopting a new income tax accounting standard. Earnings per common share were
$6.12 and $5.00 for 1994 and 1993, respectively. Return on average common
shareholders' equity increased to 16.10 percent in 1994 from 15.00 percent in
1993. Including the impact of adopting a new income tax accounting standard,
1993 net income, earnings per share and return on average common shareholders'
equity were $1.5 billion, $5.78 and 17.33 percent, respectively. The
Corporation's results for 1994 reflected strong earnings in most operating units
and improved credit quality.
BUSINESS UNIT OPERATIONS
The GENERAL BANK earned $932 million in 1994 compared to $740 million in
1993. Return on equity for the GENERAL BANK was 17 percent in 1994 compared to
16 percent in 1993. The efficiency ratio improved from 68.1 percent in 1993 to
67.5 percent in 1994.
GLOBAL FINANCE earned $631 million in 1994 compared to $492 million in 1993.
The return on equity for GLOBAL FINANCE was 16 percent for both 1994 and 1993.
The efficiency ratio increased to 54.0 percent for 1994 from 47.9 percent in
1993 reflecting investments committed to expand capital markets activities and
the full-year impact of CRT.
MANAGEMENT'S DISCUSSION AND ANALYSIS 41
FINANCIAL SERVICES, which was formed in 1993, earned $103 million in 1994
compared to $35 million in 1993, primarily reflecting a full year of earnings in
1994. The return on equity for FINANCIAL SERVICES was 13 percent for both 1994
and 1993. The efficiency ratio improved to 45.6 percent for 1994 compared to
61.6 percent for 1993.
NETINTEREST INCOME
Taxable-equivalent net interest income was $5.3 billion in 1994, an increase
of $582 million over $4.7 billion in 1993. This increase was due to higher
earning asset levels, principally loans and leases.
The net interest yield declined 38 basis points to 3.58 percent in 1994 from
3.96 percent in 1993, reflecting the decreased spread between fixed-rate
investment securities and market-based funds, partially offset by increased net
interest yields resulting from loan growth and deposit cost containment efforts.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $310 million in 1994 compared to $430
million in the prior year. Net charge-offs declined $96 million to $316 million
in 1994. On December 31, 1994, the allowance for credit losses was $2.2 billion,
or 2.11 percent of net loans, leases and factored accounts receivable, compared
to $2.2 billion, or 2.36 percent, at the end of 1993. The allowance for credit
losses was 273 percent of nonperforming loans on December 31, 1994 compared to
193 percent on December 31, 1993.
TABLE TWENTY-ONE
SELECTED QUARTERLY OPERATING RESULTS
(DOLLARS IN MILLIONS EXCEPT PER-SHARE INFORMATION)
1995 QUARTERS 1994 QUARTERS
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
Income from earning assets................. $ 3,361 $ 3,398 $ 3,391 $ 3,070 $ 2,918 $ 2,701 $ 2,512 $ 2,398
Interest expense........................... 1,948 2,007 2,055 1,763 1,618 1,395 1,195 1,110
Net interest income (taxable-equivalent)... 1,438 1,420 1,367 1,335 1,326 1,330 1,339 1,310
Net interest income........................ 1,413 1,391 1,336 1,307 1,300 1,306 1,317 1,288
Provision for credit losses................ 142 100 70 70 70 70 70 100
Gains (losses) on sales of securities...... 21 3 4 1 (28) (4) 5 14
Noninterest income......................... 846 776 730 726 639 649 629 680
Other real estate owned expense (income). 8 7 1 2 (8) (6) (3) 5
Noninterest expense........................ 1,342 1,245 1,288 1,288 1,261 1,234 1,228 1,219
Income before income taxes................. 788 818 711 674 588 653 656 658
Income tax expense......................... 278 288 244 231 183 222 219 241
Net income................................. 510 530 467 443 405 431 437 417
Earnings per common share.................. 1.87 1.95 1.71 1.60 1.46 1.55 1.58 1.52
Dividends per common share................. .58 .50 .50 .50 .50 .46 .46 .46
Yield on average earning assets............ 7.95% 8.08% 7.98% 7.93% 7.54% 7.24% 7.00% 6.81%
Rate on average interest-
bearing liabilities...................... 5.22 5.38 5.39 5.13 4.71 4.22 3.80 3.57
Net interest spread........................ 2.73 2.70 2.59 2.80 2.83 3.02 3.20 3.24
Net interest yield......................... 3.38 3.35 3.19 3.41 3.40 3.54 3.70 3.69
Average total assets....................... $191,693 $ 190,501 $ 194,302 $ 177,515 $ 174,554 $167,283 $ 161,989 $ 161,294
Average total deposits..................... 98,602 98,671 100,569 99,285 98,574 94,656 91,358 90,260
Average total shareholders' equity......... 11,903 11,487 11,213 11,192 10,906 10,665 10,272 10,080
Return on average assets................... 1.06% 1.10% .96% 1.01% .92% 1.02% 1.08% 1.05%
Return on average common
shareholders' equity..................... 16.98 18.29 16.69 16.03 14.68 16.00 17.04 16.82
Market price per share of common stock
High for the quarter..................... 74 3/4 $ 68 7/8 $ 57 3/4 $ 51 3/4 $ 50 3/4 $ 56 $ 57 3/8 $ 50 7/8
Low for the quarter...................... 64 53 3/4 49 5/8 44 5/8 43 3/8 47 1/8 44 1/2 44 3/8
Close at the end of the quarter.......... 69 5/8 67 1/4 53 5/8 50 3/4 45 1/8 49 51 3/8 45 3/4
Risk-based capital ratios
Tier 1................................... 7.24% 7.16% 7.03% 7.25% 7.43% 7.48% 7.63% 7.50%
Total.................................... 11.58 11.23 10.90 11.06 11.47 11.57 11.57 11.66
42 NATIONSBANK CORPORATION ANNUAL REPORT 1995
SECURITIES GAINS AND LOSSES
Losses from the sales of securities were $13 million in 1994 compared to
gains of $84 million in 1993. The losses in 1994 were attributable to securities
sold in the fourth quarter of 1994 as a part of interest rate risk repositioning
efforts.
NONINTEREST INCOME
Noninterest income increased 24 percent to $2.6 billion in 1994 from $2.1
billion in 1993. Adjusted for acquisitions, growth in noninterest income was 11
percent in 1994. Growth occurred in most major categories of noninterest income
during 1994.
OTHER REAL ESTATE OWNED EXPENSE
OREO expense declined $90 million to a net recovery of $12 million in 1994
compared to expense of $78 million in 1993, consistent with the improvement in
asset quality. Improved real estate markets resulted in lower OREO writedowns
and increased gains on sales of these properties.
NONINTEREST EXPENSE
Noninterest expense increased 15 percent in 1994 compared to 1993. Most
categories of noninterest expense were significantly influenced by acquisitions.
Adjusting for the impact of acquisitions, noninterest expense in 1994 increased
approximately two and one-half percent.
INCOME TAXES
The Corporation's income tax expense for 1994 was $865 million, for an
effective tax rate of 33.9 percent of pretax income. Tax expense for 1993 was
$690 million, for an effective tax rate of 34.7 percent.
MANAGEMENT'S DISCUSSION AND ANALYSIS 43
TABLE TWENTY-TWO
QUARTERLY TAXABLE-EQUIVALENT DATA
(DOLLARS IN MILLIONS)
FOURTH QUARTER 1995 THIRD 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)....................................... $ 47,077 971 8.18% $ 46,574 $ 953 8.12%
Real estate commercial............................... 6,649 157 9.39 7,116 168 9.38
Real estate construction............................. 3,016 72 9.44 3,091 75 9.63
Total commercial................................... 56,742 1,200 8.39 56,781 1,196 8.36
Residential mortgage................................. 23,573 459 7.78 21,581 420 7.78
Credit card.......................................... 5,709 182 12.69 5,014 164 12.94
Other consumer....................................... 22,852 581 10.09 22,638 583 10.19
Total consumer..................................... 52,134 1,222 9.33 49,233 1,167 9.41
Foreign.............................................. 2,100 40 7.65 2,034 40 7.73
Lease financing...................................... 3,628 68 7.48 3,407 65 7.65
Total loans and leases, net........................ 114,604 2,530 8.77 111,455 2,468 8.79
Securities
Held for investment.................................. 12,945 186 5.72 14,101 205 5.77
Available for sale (3)............................... 10,689 174 6.45 11,891 188 6.28
Total securities................................... 23,634 360 6.05 25,992 393 6.01
Loans held for sale.................................... 644 12 7.34 424 8 7.36
Time deposits placed and other
short-term investments............................... 1,634 28 6.77 2,031 32 6.32
Federal funds sold..................................... 534 8 6.02 747 11 6.14
Securities purchased under agreements to resell........ 12,088 163 5.36 14,740 240 6.45
Trading account securities (4)......................... 16,196 285 6.99 13,063 275 8.37
Total earning assets (5)........................... 169,334 3,386 7.95 168,452 3,427 8.08
Cash and cash equivalents................................ 7,500 7,449
Factored accounts receivable............................. 1,221 1,201
Other assets, less allowance for credit losses........... 13,638 13,399
Total assets....................................... $191,693 $190,501
Interest-bearing liabilities
Savings................................................ 8,287 49 2.34 $ 8,455 51 2.37
NOW and money market deposit accounts.................. 27,233 185 2.71 27,160 183 2.67
Consumer CDs and IRAs.................................. 24,682 339 5.44 24,786 335 5.36
Negotiated CDs, public funds and other time
deposits............................................. 2,946 42 5.74 2,830 41 5.72
Foreign time deposits.................................. 13,546 211 6.18 13,921 220 6.27
Federal funds purchased................................ 5,599 81 5.78 6,109 90 5.84
Securities sold under agreements to repurchase (6)..... 30,136 440 5.79 30,179 465 6.11
Commercial paper....................................... 2,871 43 5.89 2,803 43 6.10
Other short-term borrowings............................ 4,550 78 6.72 5,833 93 6.30
Trading account liabilities (4)........................ 11,125 185 6.60 11,891 240 8.03
Long-term debt (7)..................................... 17,276 295 6.83 14,127 246 6.98
Total interest-bearing liabilities................. 148,251 1,948 5.22 148,094 2,007 5.38
Noninterest-bearing sources
Noninterest-bearing deposits........................... 21,908 21,519
Other liabilities...................................... 9,631 9,401
Shareholders' equity................................... 11,903 11,487
Total liabilities and shareholders' equity......... $191,693 $190,501
Net interest spread...................................... 2.73 2.70
Impact of noninterest-bearing sources.................... .65 .65
Net interest income/yield on earning assets.............. $1,438 3.38% $1,420 3.35%
(1) NONPERFORMING LOANS ARE INCLUDED IN THE RESPECTIVE AVERAGE LOAN BALANCES.
INCOME ON SUCH NONPERFORMING LOANS IS RECOGNIZED ON A CASH BASIS.
(2) COMMERCIAL LOAN INTEREST INCOME INCLUDES NET INTEREST RATE SWAP REVENUES
RELATED TO SWAPS CONVERTING VARIABLE-RATE COMMERCIAL LOANS TO FIXED RATE.
INTEREST RATE SWAPS DECREASED INTEREST INCOME $34, $49, $65 AND $61 IN THE
FOURTH, THIRD, SECOND AND FIRST QUARTERS OF 1995, RESPECTIVELY, AND $32 IN THE
FOURTH QUARTER OF 1994.
(3) THE AVERAGE BALANCE SHEET AMOUNTS AND YIELDS ON SECURITIES AVAILABLE FOR
SALE ARE BASED ON THE AVERAGE OF HISTORICAL AMORTIZED COST BALANCES.
(4) THE FAIR VALUES OF DERIVATIVES-DEALER POSITIONS ARE REPORTED IN OTHER
ASSETS AND LIABILITIES, RESPECTIVELY.
(5) INTEREST INCOME INCLUDES TAXABLE-EQUIVALENT ADJUSTMENTS OF $25, $29, $31
AND $28 IN THE FOURTH, THIRD, SECOND AND FIRST QUARTERS OF 1995, RESPECTIVELY,
AND $26 IN THE FOURTH QUARTER OF 1994.
(6) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE INTEREST EXPENSE INCLUDES
NET INTEREST RATE SWAP EXPENSE RELATED TO SWAPS FIXING THE COST OF CERTAIN OF
THESE LIABILITIES. SUCH INCREASES (DECREASES) IN INTEREST EXPENSE WERE $12,
$4, ($1) AND $13 IN THE FOURTH, THIRD, SECOND AND FIRST QUARTERS OF 1995,
RESPECTIVELY, AND $21 IN THE FOURTH QUARTER OF 1994.
(7) LONG-TERM DEBT INTEREST EXPENSE INCLUDES NET INTEREST RATE SWAP EXPENSE
RELATED TO SWAPS PRIMARILY CONVERTING THE COST OF CERTAIN FIXED-RATE DEBT TO
VARIABLE RATE. SUCH INCREASES IN INTEREST EXPENSE WERE $1 IN BOTH THE SECOND
AND FIRST QUARTERS OF 1995, RESPECTIVELY.
44 NATIONSBANK CORPORATION ANNUAL REPORT 1995
SECOND QUARTER 1995 FIRST QUARTER 1995 FOURTH QUARTER 1994
AVERAGE AVERAGE AVERAGE
BALANCE INCOME BALANCE INCOME BALANCE INCOME
SHEET OR YIELDS/ SHEET OR YIELDS/ SHEET OR YIELDS/
AMOUNTS EXPENSE RATES AMOUNTS EXPENSE RATES AMOUNTS EXPENSE RATES
$ 46,525 $ 954 8.22% $ 45,238 $ 919 8.24% $ 43,587 $ 855 7.78%
7,395 171 9.29 7,630 173 9.16 7,289 162 8.86
3,216 78 9.76 3,100 77 10.07 3,038 72 9.33
57,136 1,203 8.45 55,968 1,169 8.47 53,914 1,089 8.01
19,242 378 7.84 17,780 343 7.76 16,680 321 7.68
4,775 156 13.13 4,543 139 12.36 4,357 141 12.80
21,609 544 10.11 20,624 501 9.85 20,294 486 9.50
45,626 1,078 9.47 42,947 983 9.25 41,331 948 9.11
2,048 41 7.96 1,961 36 7.50 1,764 30 6.79
3,114 58 7.43 2,951 58 7.86 2,755 53 7.71
107,924 2,380 8.84 103,827 2,246 8.76 99,764 2,120 8.44
17,457 235 5.40 17,648 238 5.45 17,966 245 5.40
10,730 170 6.33 7,728 110 5.80 8,560 117 5.44
28,187 405 5.76 25,376 348 5.56 26,526 362 5.42
153 3 8.06 61 1 9.10 109 3 7.65
2,310 42 7.29 2,297 40 7.01 2,231 32 5.75
714 12 6.24 1,105 16 6.02 1,360 18 5.39
16,820 273 6.53 13,909 214 6.23 14,799 185 4.97
15,834 307 7.77 11,574 233 8.16 10,318 224 8.64
171,942 3,422 7.98 158,149 3,098 7.93 155,107 2,944 7.54
8,024 8,321 8,674
1,181 1,048 1,235
13,155 9,997 9,538
$194,302 $177,515 $174,554
$ 8,656 51 2.40 $ 8,911 53 2.39 $ 9,143 54 2.37
27,608 185 2.68 28,577 187 2.66 29,442 190 2.53
25,075 325 5.20 24,818 291 4.76 25,136 277 4.40
3,046 42 5.51 3,151 41 5.30 2,825 35 4.80
15,107 239 6.36 13,844 211 6.18 11,576 162 5.57
5,654 87 6.17 4,438 64 5.83 4,267 56 5.17
34,445 547 6.37 26,547 411 6.28 26,591 367 5.48
2,806 44 6.30 2,734 41 6.13 2,730 37 5.42
6,546 101 6.16 5,847 82 5.74 5,354 69 5.08
13,660 249 7.31 11,427 222 7.87 11,168 227 8.08
10,209 185 7.22 8,888 160 7.22 8,147 144 7.08
152,812 2,055 5.39 139,182 1,763 5.13 136,379 1,618 4.71
21,077 19,984 20,452
9,200 7,157 6,817
11,213 11,192 10,906
$194,302 $177,515 $174,554
2.59 2.80 2.83
.60 .61 .57
$1,367 3.19% $1,335 3.41% $1,326 3.40%
MANAGEMENT'S DISCUSSION AND ANALYSIS 45
REPORT OF MANAGEMENT
The management of NationsBank Corporation is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
of the Corporation. The consolidated financial statements and notes have been
prepared by the Corporation in accordance with generally accepted accounting
principles and, in the judgment of management, present fairly the Corporation's
financial position and results of operations. The financial information
contained elsewhere in this report is consistent with that in the financial
statements. The financial statements and other financial information in this
report include amounts that are based on management's best estimates and
judgments and give due consideration to materiality.
The Corporation maintains a system of internal accounting controls to
provide reasonable assurance that assets are safeguarded and that transactions
are executed in accordance with management's authorization and recorded properly
to permit the preparation of financial statements in accordance with generally
accepted accounting principles. Management recognizes that even a highly
effective internal control system has inherent risks, including the possibility
of human error and the circumvention or overriding of controls, and that the
effectiveness of an internal control system can change with circumstances.
However, management believes that the internal control system provides
reasonable assurance that errors or irregularities that could be material to the
financial statements are prevented or would be detected on a timely basis and
corrected through the normal course of business. As of December 31, 1995,
management believes that the internal controls are in place and operating
effectively.
The Internal Audit Division of the Corporation reviews, evaluates, monitors
and makes recommendations on both administrative and accounting control, which
acts as an integral, but independent, part of the system of internal controls.
The independent accountants were engaged to perform an independent audit of
the consolidated financial statements. In determining the nature and extent of
their auditing procedures, they have evaluated the Corporation's accounting
policies and procedures and the effectiveness of the related internal control
system. An independent audit provides an objective review of management's
responsibility to report operating results and financial condition. Their report
appears below.
The Board of Directors discharges its responsibility for the Corporation's
financial statements through its Audit Committee. The Audit Committee meets
periodically with the independent accountants, internal auditors and management.
Both the independent accountants and internal auditors have direct access to the
Audit Committee to discuss the scope and results of their work, the adequacy of
internal accounting controls and the quality of financial reporting.
(Signature of Hugh L. McColl Jr.) (Signature of James H. Hance Jr.)
Hugh L. McColl Jr. James H. Hance Jr.
Chairman Vice Chairman And
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF NATIONSBANK CORPORATION
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
NationsBank Corporation and its subsidiaries at December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Corporation's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note Twelve to the consolidated financial statements, the
Corporation changed its method of accounting for income taxes in 1993.
(Signature of Price Waterhouse LLP)
Charlotte, North Carolina
January 12, 1996
46 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NationsBank Corporation And Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER-SHARE INFORMATION)
YEAR ENDED DECEMBER 31
1995 1994 1993
INCOME FROM EARNING ASSETS
Interest and fees on loans................................ $ 9,331 $ 7,577 $ 6,198
Lease financing income.................................... 221 150 110
Interest and dividends on securities
Held for investment..................................... 851 755 1,347
Available for sale...................................... 617 623 49
Interest and fees on loans held for sale.................. 24 23 53
Interest on time deposits placed and
other short-term investments............................ 142 90 79
Federal funds sold........................................ 47 45 14
Securities purchased under agreements to resell........... 890 502 180
Trading account securities................................ 1,097 764 297
Total income from earning assets........................ 13,220 10,529 8,327
INTEREST EXPENSE
Deposits.................................................. 3,281 2,415 2,149
Borrowed funds............................................ 2,710 1,618 919
Trading account liabilities............................... 896 735 230
Long-term debt............................................ 886 550 392
Total interest expense.................................. 7,773 5,318 3,690
NET INTEREST INCOME......................................... 5,447 5,211 4,637
PROVISION FOR CREDIT LOSSES................................. 382 310 430
NET CREDIT INCOME........................................... 5,065 4,901 4,207
GAINS (LOSSES) ON SALES OF SECURITIES....................... 29 (13) 84
NONINTEREST INCOME.......................................... 3,078 2,597 2,101
OTHER REAL ESTATE OWNED EXPENSE (INCOME).................... 18 (12) 78
RESTRUCTURING EXPENSE....................................... - - 30
OTHER NONINTEREST EXPENSE................................... 5,163 4,942 4,293
INCOME BEFORE INCOME TAXES AND EFFECT OF CHANGE IN METHOD
OF ACCOUNTING FOR INCOME TAXES............................ 2,991 2,555 1,991
INCOME TAX EXPENSE.......................................... 1,041 865 690
INCOME BEFORE EFFECT OF CHANGE IN METHOD
OF ACCOUNTING FOR INCOME TAXES............................ 1,950 1,690 1,301
EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR INCOME
TAXES..................................................... - - 200
NET INCOME.................................................. 1,950 $ 1,690 $ 1,501
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS................. 1,942 $ 1,680 $ 1,491
PER-SHARE INFORMATION
Earnings per common share before effect of change in
method of
accounting for income taxes............................. 7.13 $ 6.12 $ 5.00
Effect of change in method of accounting for income
taxes................................................... - - .78
Earnings per common share................................. 7.13 $ 6.12 $ 5.78
Fully diluted earnings per common share before effect
of change
in method of accounting for income taxes................ 7.04 $ 6.06 $ 4.95
Effect of change in method of accounting for income
taxes................................................... - - .77
Fully diluted earnings per common share................... 7.04 $ 6.06 $ 5.72
Dividends per common share................................ 2.08 $ 1.88 $ 1.64
AVERAGE COMMON SHARES ISSUED (in thousands)................. 272,480 274,656 257,969
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS 47
NationsBank Corporation And Subsidiaries
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
DECEMBER 31
1995 1994
ASSETS
Cash and cash equivalents................................. $ 8,448 $ 9,582
Time deposits placed and other short-term
investments............................................. 1,296 2,159
Securities
Held for investment, at cost (market value -
$4,432 and $17,101)................................... 4,432 17,800
Available for sale...................................... 19,415 8,025
Total securities...................................... 23,847 25,825
Loans held for sale....................................... 1,663 318
Federal funds sold........................................ 111 960
Securities purchased under agreements to resell........... 6,119 10,152
Trading account assets.................................... 18,867 9,941
Loans and leases, net of unearned income.................. 116,042 102,367
Factored accounts receivable.............................. 991 1,004
Loans, leases and factored accounts
receivable, net of unearned income.................. 117,033 103,371
Allowance for credit losses............................... (2,163) (2,186)
Premises, equipment and lease rights, net................. 2,508 2,439
Customers' acceptance liability........................... 918 684
Interest receivable....................................... 1,597 1,408
Mortgage servicing rights................................. 707 195
Goodwill.................................................. 1,139 1,047
Core deposit and other intangibles........................ 375 470
Other assets.............................................. 4,833 3,239
$187,298 $169,604
LIABILITIES
Deposits
Noninterest-bearing..................................... 23,414 $ 21,380
Savings................................................. 8,257 9,037
NOW and money market deposit accounts................... 28,160 29,752
Time.................................................... 27,971 27,698
Foreign time............................................ 12,889 12,603
Total deposits........................................ 100,691 100,470
Federal funds purchased................................... 5,940 3,993
Securities sold under agreements to repurchase............ 23,034 21,977
Trading account liabilities............................... 15,177 11,426
Commercial paper.......................................... 2,773 2,519
Other short-term borrowings............................... 4,143 5,640
Liability to factoring clients............................ 580 586
Acceptances outstanding................................... 918 684
Accrued expenses and other liabilities.................... 3,466 2,810
Long-term debt............................................ 17,775 8,488
Total liabilities..................................... 174,497 158,593
Contingent liabilities and other financial
commitments (Notes Eight and Ten)
SHAREHOLDERS' EQUITY
Preferred stock: authorized - 45,000,000 shares
ESOP Convertible, Series C: issued - 2,473,081 and
2,606,657 shares...................................... 105 111
Common stock: authorized - 800,000,000 shares; issued
- 274,268,773 and 276,451,552 shares.................... 4,655 4,740
Retained earnings......................................... 7,826 6,451
Other , including loan to ESOP trust...................... 215 (291)
Total shareholders' equity............................ 12,801 11,011
$187,298 $169,604
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
48 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NationsBank Corporation And Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31
1995 1994 1993
OPERATING ACTIVITIES
Net income................................................ $ 1,950 $ 1,690 $ 1,501
Reconciliation of net income to net cash (used)
provided by operating activities
Provision for credit losses............................. 382 310 430
(Gains) losses on sales of securities................... (29) 13 (84)
Depreciation and premises improvements
amortization.......................................... 280 265 242
Amortization of intangibles............................. 119 141 110
Deferred income tax expense............................. 192 372 210
Effect of change in method of accounting for
income taxes.......................................... - - (200)
Net change in trading instruments....................... (5,175) 3,796 707
Net increase in interest receivable..................... (182) (282) (93)
Net increase in interest payable........................ 208 299 93
Net (increase) decrease in loans held for sale.......... (1,345) 1,379 (406)
Net increase (decrease) in liability to factoring
clients............................................... (6) 52 52
Other operating activities.............................. (1,327) 1,083 (425)
Net cash (used) provided by operating
activities.......................................... (4,933) 9,118 2,137
INVESTING ACTIVITIES
Proceeds from maturities of securities held for
investment.............................................. 5,547 5,864 9,182
Purchases of securities held for investment............... (545) (10,293) (10,493)
Proceeds from sales and maturities of securities
available for sale...................................... 25,556 23,762 18,295
Purchases of securities available for sale................ (27,594) (16,055) (15,805)
Net (increase) decrease in federal funds sold and
securities
purchased under agreements to resell.................... 4,931 (3,805) (410)
Net (increase) decrease in time deposits placed and
other short-term investments............................ 863 (670) 816
Net originations of loans and leases...................... (11,977) (12,656) (12,473)
Purchases of loans and leases............................. (6,354) (2,936) (3,830)
Proceeds from sales and securitizations of loans.......... 4,681 4,126 8,682
Purchases and originations of mortgage servicing
rights.................................................. (598) (124) (40)
Purchases of factored accounts receivable................. (7,856) (7,612) (7,343)
Collections of factored accounts receivable............... 7,834 7,577 7,229
Net purchases of premises and equipment................... (307) (327) (65)
Proceeds from sales of other real estate owned............ 204 369 261
Sales (acquisitions) of business activities, net of
cash.................................................... (567) 3,778 (4,606)
Net cash used in investing activities................. (6,182) (9,002) (10,600)
FINANCING ACTIVITIES
Net increase (decrease) in deposits....................... (158) 4,261 (1,581)
Net increase (decrease) in federal funds purchased and
securities
sold under agreements to repurchase..................... 2,909 (2,562) 4,503
Net increase (decrease) in other short-term borrowings
and commercial paper.................................... (1,244) 491 1,958
Proceeds from issuance of long-term debt.................. 11,393 1,198 4,125
Retirement of long-term debt.............................. (2,061) (1,017) (405)
Preferred stock repurchased and redeemed.................. - (94) -
Proceeds from issuance of common stock.................... 239 267 197
Cash dividends paid....................................... (575) (527) (433)
Common stock repurchased.................................. (522) (180) -
Other financing activities................................ - (20) (23)
Net cash provided by financing activities............. 9,981 1,817 8,341
Net increase (decrease) in cash and cash equivalents........ (1,134) 1,933 (122)
Cash and cash equivalents on January 1...................... 9,582 7,649 7,771
Cash and cash equivalents on December 31.................... 8,448 $ 9,582 $ 7,649
Supplemental cash flow disclosure
Cash paid for interest.................................... 7,565 $ 5,020 $ 3,477
Cash paid for income taxes................................ 675 718 360
LOANS TRANSFERRED TO OTHER REAL ESTATE OWNED AMOUNTED TO $98, $207 AND $251
IN 1995, 1994 AND 1993, RESPECTIVELY.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS 49
NationsBank Corporation And Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS, SHARES IN THOUSANDS)
TOTAL
LOAN TO SHARE-
PREFERRED COMMON STOCK RETAINED ESOP HOLDERS'
STOCK SHARES AMOUNT EARNINGS TRUST OTHER EQUITY
BALANCE ON DECEMBER 31, 1992.................... $119 252,990 $3,702 $4,179 $ (98) $ (88) $ 7,814
Net income.................................... 1,501 1,501
Cash dividends
Common...................................... (423) (423)
Preferred................................... (10) (10)
Issued in MNC acquisition
Series CC and DD preferred stock............ 93 93
Common stock................................ 13,608 701 701
Common stock issued under dividend
reinvestment and employee plans............. 4,213 187 10 197
Valuation reserve for securities available
for sale and marketable equity securities... 104 104
Other......................................... (4) 94 4 10 (8) 2
BALANCE ON DECEMBER 31, 1993.................... 208 270,905 4,594 5,247 (88) 18 9,979
Net income.................................... 1,690 1,690
Cash dividends
Common...................................... (517) (517)
Preferred................................... (10) (10)
Preferred stock repurchased and redeemed...... (93) (1) (94)
Common stock issued under dividend
reinvestment and employee plans............. 5,351 254 13 267
Common stock issued in acquisitions........... 3,510 64 41 105
Common stock repurchased...................... (3,524) (180) (180)
Net change in unrealized gains (losses)
on securities available for sale and
marketable equity securities................ (240) (240)
Other......................................... (4) 210 9 12 (6) 11
BALANCE ON DECEMBER 31, 1994.................... 111 276,452 4,740 6,451 (76) (215) 11,011
Net income.................................... 1,950 1,950
Cash dividends
Common...................................... (567) (567)
Preferred................................... (8) (8)
Common stock issued under dividend
reinvestment and employee plans............. 4,439 214 25 239
Common stock issued in acquisitions........... 2,998 217 217
Common stock repurchased...................... (9,733) (522) (522)
Net change in unrealized gains (losses)
on securities available for sale and
marketable equity securities................ 460 460
Other......................................... (6) 113 6 13 8 21
BALANCE ON DECEMBER 31, 1995.................... $105 274,269 $4,655 $7,826 $ (63) $ 278 $12,801
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
50 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NationsBank Corporation And Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NationsBank Corporation (the Corporation) is a multi-bank holding company
organized under the laws of North Carolina in 1968 and registered under the Bank
Holding Company Act of 1956, as amended. As discussed more fully in the second
paragraph beginning on page 15 and the first and fourth full paragraphs on page
17, through its banking subsidiaries and its various nonbanking subsidiaries,
the Corporation provides banking and banking-related services, primarily
throughout the Southeast and Mid-Atlantic states and Texas.
NOTE ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of NationsBank Corporation and its
subsidiaries conform with generally accepted accounting principles and
prevailing industry practices. Certain prior year amounts have been reclassified
to conform to current year classifications. A description of the significant
accounting policies is presented below.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of NationsBank
Corporation and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Results of operations of
companies purchased are included from the dates of acquisition.
Net assets of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition. Identified intangibles are amortized on
an accelerated or straight-line basis over the period benefited. Goodwill is
amortized on a straight-line basis over 25 years.
Prior year financial statements are restated to include accounts of
significant companies acquired and accounted for as poolings of interests.
Assets held in an agency or fiduciary capacity are not included in the
consolidated financial statements.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and disclosures. Significant estimates
made by management are discussed in these footnotes as applicable.
CASH AND CASH EQUIVALENTS
Cash on hand, cash items in the process of collection and amounts due from
correspondent banks and the Federal Reserve Bank are included in cash and cash
equivalents.
SECURITIES
Securities are classified based on management's intention on the date of
purchase. Securities which management has the intent and ability to hold to
maturity are classified as held for investment and reported at amortized cost.
All other securities are classified as available for sale and carried at fair
value with net unrealized gains and losses included in shareholders' equity on
an after-tax basis. In addition, marketable equity securities are carried at
fair value with net unrealized gains and losses included in shareholders'
equity, net of tax.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts, are included in interest income. Realized gains and
losses from the sales of securities are determined using the specific
identification method.
LOANS HELD FOR SALE
Loans held for sale include residential mortgage, commercial real estate and
other loans and are carried at the lower of aggregate cost or market value.
Generally, such loans are originated with the intent of sale.
TRADING INSTRUMENTS
Instruments utilized in trading activities include both securities and
derivatives and are stated at fair value. Fair value is generally based on
quoted market prices. If quoted market prices are not available, fair values are
estimated on the basis of dealer quotes, pricing models or quoted prices for
instruments with similar characteristics. Gross unrealized gains and losses on
trading derivatives positions with the same counter-party are generally
presented on a net basis for balance sheet reporting purposes where legally
enforceable master netting agreements have been executed. Realized and
unrealized gains and losses are recognized as noninterest income.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing transactions
and are recorded at the amounts at which the securities were acquired or sold
plus accrued interest. It is the Corporation's policy to obtain control or take
possession of securities purchased under agreements to resell. The Corporation
monitors the market value of the underlying securities which collateralize the
related receivable on resale agreements, including accrued interest, and
requests additional collateral when deemed appropriate.
LOANS
Loans are reported at their outstanding principal balances net of any
charge-offs, unamortized deferred fees and costs on originated loans and
premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are deferred and
recognized as adjustments to income over the lives of the related loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 51
Discounts and premiums are amortized to income using methods that
approximate the interest method.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is available to absorb losses inherent in
the credit extension process including the loan and lease portfolio and other
extensions of credit, such as off-balance sheet credit exposures. Credit
exposures deemed to be uncollectible are charged against the allowance for
credit losses. Recoveries of previously charged-off amounts are credited to the
allowance for credit losses.
Individually identified impaired loans are measured based on the present
value of payments expected to be received, using the historical effective loan
rate as the discount rate. Alternatively, measurement also may be based on
observable market prices or, for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value of the
collateral. Loans that are to be foreclosed are measured based on the fair value
of the collateral. If the recorded investment in the impaired loan exceeds the
measure of fair value, a valuation allowance is established as a component of
the allowance for credit losses. Changes to the valuation allowance are recorded
as a component of the provision for credit losses.
The Corporation's process for determining an appropriate allowance for
credit losses includes management judgment and use of estimates. The adequacy of
the allowance for credit losses is reviewed regularly by management. Additions
to the allowance for credit losses are made by charges to the provision for
credit losses. On a quarterly basis, a comprehensive review of the adequacy of
the allowance for credit losses is performed. This assessment is made in the
context of historical losses as well as existing economic conditions.
NONPERFORMING LOANS
Commercial loans and leases that are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to timely collection,
including loans that are individually identified as being impaired, are
generally classified as nonperforming loans unless well secured and in the
process of collection. Loans whose contractual terms have been restructured in a
manner which grants a concession to a borrower experiencing financial
difficulties, and loans similarly restructured prior to 1995 that are impaired,
are classified as non-performing until such time as the loan is not impaired
based on the terms of the restructured agreement and the interest rate is a
market rate as measured at the restructuring date. Generally, loans which are
past due 180 days or more as to principal or interest are classified as
nonperforming regardless of collateral or collection status. Generally, interest
accrued but not collected is reversed when a loan or lease is classified as
nonperforming.
Interest collections on nonperforming loans and leases for which the
ultimate collectibility of principal is uncertain are applied as principal
reductions. Otherwise, such collections are credited to income when received.
Consumer loans, including credit card loans, that are past due 90 days or
more are not generally classified as nonperforming assets. Generally, consumer
loans are liquidated or charged off soon after becoming 90 days past due or 180
days past due for credit card loans. Income is generally recognized on past-due
consumer and credit card loans until the loan is charged off.
OTHER REAL ESTATE OWNED
Loans are classified as other real estate owned when the Corporation
forecloses on a property or when physical possession of the collateral is taken
regardless of whether foreclosure proceedings have taken place. Prior to 1995,
other real estate owned included in-substance foreclosed loans including certain
loans for which the Corporation had not taken physical possession of the
collateral. In addition, other real estate owned includes premises no longer
used for business operations.
Other real estate owned is carried at the lower of (1) the recorded amount
of the loan or lease for which the property previously served as collateral, or
(2) the fair value of the property minus estimated costs to sell. Prior to
foreclosure, the recorded amount of the loan or lease is reduced, if necessary,
to the fair value, minus estimated costs to sell, of the real estate to be
acquired by charging the allowance for credit losses.
Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of other real estate owned are credited or charged to
expense. Net costs of maintaining and operating foreclosed properties are
expensed as incurred.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are recognized principally using the
straight-line method over the estimated useful lives of the assets.
MORTGAGE SERVICING RIGHTS
Beginning April 1, 1995, the Corporation revised its accounting for mortgage
servicing rights (MSRs).
The total cost of mortgage loans originated or purchased after this date is
allocated between the cost of the loans and the MSRs based on the relative fair
values of the loans and the MSRs. MSRs acquired separately are capitalized at
their cost. During 1995, the Corporation capitalized $676 million of MSRs
principally due to separately acquired servicing rights, including those
acquired in connection with the acquisitions discussed in Note Two. Previously,
only MSRs purchased separately were recorded as assets. The cost of MSRs is
amortized in proportion to and over the estimated period of net servicing
revenues. During 1995, amortization was $86 million.
The fair value on December 31, 1995 of servicing for which the Corporation
has capitalized an acquisition cost was $792 million compared to a carrying
value of $707 million. Additionally, there is value associated with servicing
originated prior to April 1995 for which the carrying value is zero. Total loans
serviced approximated $81.4 billion on December 31, 1995, including loans
serviced on behalf of the Corporation's banking subsidiaries. The Corporation
evaluates MSRs strata for impairment by estimating the fair value based on
anticipated future net cash flows, taking into consideration prepayment
predictions. The predominant
52 NATIONSBANK CORPORATION ANNUAL REPORT 1995
characteristics used as the basis for stratifying MSRs are loan type and
period of origination. MSRs acquired prior to April 1995 are evaluated for
impairment separately. If the carrying value of the MSRs exceeds the estimated
fair value, a valuation allowance is established. Changes to the valuation
allowance are charged against or credited to mortgage servicing income and fees.
The valuation allowance on December 31, 1995 and changes in the valuation
allowance during 1995 were not significant.
INCOME TAXES
There are two components of income tax provision: current and deferred.
Current income tax provisions approximate taxes to be paid or refunded for
the applicable period.
Balance sheet amounts of deferred taxes are recognized on the temporary
differences between the bases of assets and liabilities as measured by tax laws
and their bases as reported in the financial statements. Deferred tax expense or
benefit is then recognized for the change in deferred tax liabilities or assets
between periods.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences, tax operating loss carryforwards and tax credits
will be realized. A valuation allowance is recorded for those deferred tax items
for which it is more likely than not that realization will not occur.
RETIREMENT BENEFITS
The Corporation has established qualified retirement plans covering full-
time, salaried employees and certain part-time employees. Pension expense under
these plans is accrued each year. The costs are charged to current operations
and consist of several components of net pension cost based on various actuarial
assumptions regarding future experience under the plans.
In addition, the Corporation and its subsidiaries have established unfunded
supplemental benefit plans providing any benefits that could not be paid from a
qualified retirement plan because of Internal Revenue Code restrictions and
supplemental executive retirement plans for selected officers of the Corporation
and its subsidiaries. These plans are nonqualified and, therefore, in general, a
participant's or beneficiary's claim to benefits is as a general creditor.
The Corporation and its subsidiaries have established several postretirement
medical benefit plans which are not funded.
RISK MANAGEMENT INSTRUMENTS
Risk management instruments are utilized to modify the interest rate
characteristics of related assets or liabilities or hedge against changes in
interest rates, currency fluctuations or other such exposures as part of the
Corporation's asset and liability management process.
Instruments must be designated as hedges and must be effective throughout
the hedge period.
Swaps, principally interest rate, used in the asset and liability management
process are accounted for on the accrual basis with revenues or expenses
recognized as adjustments to income or expense on the underlying linked assets
or liabilities. Risk management swaps generally are not terminated. When
terminations do occur, gains or losses are recorded as adjustments to the
carrying value of the underlying assets or liabilities and recognized as income
or expense over the remaining expected lives of such underlying assets or
liabilities. In circumstances where the underlying assets or liabilities are
sold, any remaining carrying value adjustments and the cumulative change in
value of any open positions are recognized immediately as a component of the
gain or loss on disposition of such underlying assets or liabilities.
Gains and losses associated with futures and forward contracts used as
effective hedges of existing risk positions or anticipated transactions are
deferred as an adjustment to the carrying value of the related asset or
liability and recognized in income over the remaining term of the related asset
or liability.
Risk management instruments used to hedge or modify the interest rate
characteristics of debt securities classified as available for sale are carried
at fair value with unrealized gains or losses deferred as a component of
shareholders' equity.
The Corporation also purchases options in the interest rate market to
protect the value of certain assets, principally mortgage servicing rights,
against changes in prepayment rates. Option premiums are amortized over the
option life on a straight-line basis. Such contracts are designated as hedges,
and gains and losses are recorded as adjustments to the carrying value of the
underlying assets. As such, they are included in the basis of mortgage servicing
rights which are subjected to impairment valuations as described in the Mortgage
Servicing Rights accounting policy on page 52.
The Corporation also utilizes forward delivery contracts and options for the
sale of mortgage-backed securities to reduce the interest rate risk inherent in
mortgage loans held for sale and the commitments made to borrowers for mortgage
loans which have not been funded. These financial instruments are considered in
the Corporation's valuation of its mortgage loans held for sale which are
carried at the lower of cost or market.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income, reduced by
dividends on preferred stock, by the weighted average number of common shares
outstanding for each period presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
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 annual financial
statements after the effective date of the standard.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 53
NOTE TWO
ACQUISITION ACTIVITY
On January 9, 1996, the Corporation completed the acquisition of Bank South
Corporation (Bank South), headquartered in Atlanta, Georgia. Each outstanding
share of Bank South common stock was converted into .44 shares of Corporation
common stock, resulting in the issuance of 26,304,617 shares of common stock by
the Corporation. Bank South's total assets, total deposits and total
shareholders' equity were $7.4 billion, $5.1 billion and $685 million,
respectively, on the date of acquisition. This acquisition was accounted for as
a pooling of interests and will not have a material impact on the results of
operations or financial condition of the Corporation. In the first quarter of
1996, the Corporation will record a one-time restructuring charge for merger
costs, consisting mainly of severance packages and facilities consolidations and
closures.
During January and February 1996, the Corporation acquired a banking
organization in Florida and one in Texas. Combined total loans and deposits of
these entities acquired were $3.1 billion and $3.9 billion, respectively. During
December 1995, the Corporation completed the acquisitions of two small banking
organizations in Florida. Combined total loans and deposits of these entities
acquired were $697 million and $954 million, respectively. These acquisitions
were accounted for as purchases and will not have a material impact on the
results of operations or financial condition of the Corporation.
On March 31, 1995, the Corporation's mortgage banking subsidiary completed
the acquisition of KeyCorp Mortgage Inc. from KeyCorp and Key Bank of New York.
The acquisition included a $25-billion residential mortgage servicing portfolio,
for which the Corporation's subsidiary paid approximately $339 million, a
mortgage servicing operation employing approximately 430 associates and other
servicing-related assets.
On March 31, 1995, the Corporation's mortgage banking subsidiary acquired
from Source One Mortgage Services Corporation a $10-billion residential mortgage
servicing portfolio.
NOTE THREE
SECURITIES
The book and market values of securities held for investment and
securities available for sale on December 31 were (dollars in millions):
U.S. TREASURY
SECURITIES FOREIGN OTHER
AND AGENCY SOVEREIGN TAXABLE TOTAL TAX-EXEMPT
SECURITIES HELD FOR INVESTMENT DEBENTURES SECURITIES SECURITIES TAXABLE SECURITIES TOTAL
1995
Book value.................... $ 4,184 $ 22 $ 26 $ 4,232 $ 200 $ 4,432
Gross unrealized gains........ 12 - - 12 7 19
Gross unrealized losses....... (18) - - (18) (1) (19)
Market value.................. 4,178 $ 22 $ 26 $ 4,226 $ 206 $ 4,432
1994
Book value.................... $ 17,580 $ 19 $ 60 $17,659 $ 141 $17,800
Gross unrealized gains........ 1 - - 1 1 2
Gross unrealized losses....... (697) - (1) (698) (3) (701)
Market value.................. $ 16,884 $ 19 $ 59 $16,962 $ 139 $17,101
1993
Book value.................... $ 13,110 $ 18 $ 428 $13,556 $ 28 $13,584
Gross unrealized gains........ 35 - 15 50 2 52
Gross unrealized losses....... (30) - (2) (32) - (32)
Market value.................. $ 13,115 $ 18 $ 441 $13,574 $ 30 $13,604
54 NATIONSBANK CORPORATION ANNUAL REPORT 1995
U.S. TREASURY
SECURITIES FOREIGN OTHER
AND AGENCY SOVEREIGN TAXABLE TOTAL TAX-EXEMPT
SECURITIES AVAILABLE FOR SALE DEBENTURES SECURITIES SECURITIES TAXABLE SECURITIES TOTAL
1995
Cost......................... $ 16,938 $ 1,591 $ 426 $ 18,955 $ 42 $ 18,997
Gross unrealized gains....... 408 22 3 433 1 434
Gross unrealized losses...... (16) - - (16) - (16)
Market value................. $ 17,330 $ 1,613 $ 429 $ 19,372 $ 43 $ 19,415
1994
Cost......................... $ 7,729 $ - $ 250 $ 7,979 $ 310 $ 8,289
Gross unrealized gains....... - - - - 11 11
Gross unrealized losses...... (274) - - (274) (1) (275)
Market value................. $ 7,455 $ - $ 250 $ 7,705 $ 320 $ 8,025
1993
Cost......................... $ 14,960 $ - $ 7 $ 14,967 $ 378 $ 15,345
Gross unrealized gains....... 100 - - 100 30 130
Gross unrealized losses...... (5) - - (5) - (5)
Market value................. $ 15,055 $ - $ 7 $ 15,062 $ 408 $ 15,470
The components, expected maturity distribution and yields (computed on a
taxable-equivalent basis) of the Corporation's securities portfolio on December
31, 1995 are summarized below (dollars in millions). Actual maturities may
differ from contractual maturities or maturities shown below since borrowers may
have the right to prepay obligations with or without prepayment penalties.
DUE AFTER 1 DUE AFTER 5
DUE IN 1 YEAR THROUGH 5 THROUGH 10 DUE AFTER
OR LESS YEARS YEARS 10 YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
Book value of securities held
for investment
U.S. Treasury securities
and agency debentures............. $1,258 5.18% $ 2,921 5.52% $ - -% $ 5 5.70% $ 4,184 5.42%
Foreign sovereign securities........ 7 7.19 8 8.24 7 7.75 - - 22 7.75
Other taxable securities............ 14 8.00 8 8.92 1 5.71 3 6.34 26 8.08
Total taxable..................... 1,279 5.22 2,937 5.54 8 7.63 8 5.95 4,232 5.45
Tax-exempt securities............... 49 11.47 90 10.41 38 10.48 23 9.34 200 10.53
Total............................. $1,328 5.44 $ 3,027 5.66 $ 46 9.69 $ 31 9.65 $ 4,432 5.68
Market value of securities
held for investment................... $1,322 $ 3,031 $ 46 $ 33 $ 4,432
Market value of securities available
for sale
U.S. Treasury securities
and agency debentures............. $2,656 4.59% $14,523 6.31% $112 5.77% $ 39 7.43% $17,330 6.04%
Foreign sovereign securities........ - - 1,613 5.81 - - - - 1,613 5.81
Other taxable securities............ 105 5.83 59 6.80 47 6.60 218 6.02 429 6.14
Total taxable..................... 2,761 4.64 16,195 6.24 159 6.02 257 6.24 19,372 6.00
Tax-exempt securities............... 3 11.31 7 9.91 6 9.47 27 13.63 43 12.20
Total............................. $2,764 4.64 $16,202 6.24 $165 6.14 $284 6.93 $19,415 6.02
Cost of securities available for sale... $2,770 $15,781 $163 $283 $18,997
The components of gains and losses on sales of available for sale securities
for the years ended December 31 were (dollars in millions):
1995 1994 1993
Gross gains on sales of securities...... 74 $ 36 $166
Gross losses on sales of securities..... (45) (49) (82)
Gains (losses) on sales of securities... 29 $ (13) $ 84
There were no sales of securities held for investment in 1995, 1994 or 1993.
There were no investments in obligations of states and political
subdivisions that were payable from and secured by the same source of revenue or
taxing authority and that exceeded 10 percent of consolidated shareholders'
equity on December 31, 1995 or 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 55
The income tax expense attributable to securities transactions was $10
million for 1995 compared to an income tax benefit of $5 million and expense of
$29 million for 1994 and 1993, respectively.
Securities are pledged or assigned to secure borrowed funds, government and
trust deposits and for other purposes. The carrying value of pledged securities
was $22.5 billion on December 31, 1995 compared to $23.1 billion on December 31,
1994.
In December 1995, the Corporation reclassified $8.6 billion from the held
for investment category to the available for sale category. The securities were
adjusted to market value resulting in net unrealized gains of approximately $220
million which were included in shareholders' equity at $143 million net of tax.
On December 31, 1995, the valuation reserve for securities available for
sale and marketable equity securities, including the impact of the December 1995
reclassification, increased shareholders' equity by $323 million, reflecting
$418 million of pretax appreciation on securities available for sale and $97
million of pretax appreciation on marketable equity securities.
NOTE FOUR
TRADING ACCOUNT ASSETS AND LIABILITIES
The fair values on December 31 and the average fair values for the years
ended December 31 of the components of trading account assets and liabilities
were (dollars in millions):
AVERAGE BALANCES
1995 1994 1995 1994
Securities owned
U.S. Treasury securities.................................. $10,364 $ 5,958 $10,254 $ 7,713
Securities of other U .S. Government agencies and
corporations............................................ 1,508 1,185 1,541 1,322
Certificates of deposit, bankers' acceptances and
commercial paper........................................ 555 371 524 409
Corporate debentures...................................... 1,443 581 1,031 722
Foreign sovereign instruments............................. 576 10 200 -
Other securities.......................................... 402 259 627 285
Total securities owned.................................. 14,848 8,364 14,177 10,451
Derivatives-dealer positions................................ 4,019 1,577 3,230 1,158
Total trading account assets............................ $18,867 $ 9,941 $17,407 $11,609
Short sales
U.S. Treasury securities.................................. $11,066 $ 9,352 $11,416 $ 9,840
Securities of other U .S. Government agencies and
corporations............................................ 16 182 12 550
Corporate debentures...................................... 683 278 591 134
Other securities.......................................... 17 - 6 2
Total short sales....................................... 11,782 9,812 12,025 10,526
Derivatives-dealer positions................................ 3,395 1,614 2,970 1,063
Total trading account liabilities....................... $15,177 $11,426 $14,995 $11,589
A discussion of the Corporation's trading activities and an analysis of the
revenues associated with the Corporation's trading activities is presented in
the noninterest income section beginning on page 19. The Corporation's
derivatives-dealer positions are presented in the discussion beginning on page
35 and TABLE SIXTEEN.
The net change in the unrealized gain or loss on trading securities held on
December 31, 1995 and 1994, included in noninterest income for those years, was
a gain of $44 million for 1995 and a loss of $3 million for 1994.
Derivatives-dealer positions presented in the table above represent the fair
values of interest rate, foreign exchange, equity and commodity-related products
including financial futures, forward settlement and option contracts and swap
agreements associated with the Corporation's derivatives trading activities.
A swap agreement is a contract between two parties to exchange cash flows
based on specified underlying notional amounts and indices. Financial futures or
forward settlement contracts are agreements to buy or sell a quantity of a
financial instrument or commodity at a predetermined future date and rate or
price. An option contract is an agreement that conveys to the purchaser the
right, but not the obligation, to buy or sell a quantity of a financial
instrument, index or commodity at a predetermined rate or price at a time or
during a period in the future.
These agreements can be transacted on organized exchanges or directly
between parties.
56 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NOTE FIVE
LOANS, LEASES AND FACTORED ACCOUNTS RECEIVABLE
Loans, leases and factored accounts receivable on December 31 were (dollars
in millions):
1995 1994
LOANS
Commercial................................................ 48,186 $ 44,804
Real estate commercial.................................... 6,183 7,350
Real estate construction.................................. 2,976 2,981
Total commercial........................................ 57,345 55,135
Residential mortgage...................................... 24,043 17,311
Credit card............................................... 6,532 4,756
Other consumer............................................ 22,751 20,853
Total consumer.......................................... 53,326 42,920
Foreign................................................... 2,251 1,984
Factored accounts receivable.............................. 991 1,004
Total loans and factored accounts receivable............ 113,913 101,043
Less unearned income.................................... (678) (552)
Loans and factored accounts receivable, net of
unearned income....................................... 113,235 100,491
LEASES
Lease receivables......................................... 3,915 3,056
Estimated residual value.................................. 1,192 934
Less unearned income...................................... (1,309) (1,110)
Leases, net of unearned income.......................... 3,798 2,880
Loans, leases and factored accounts receivable,
net of unearned income................................ $117,033 $103,371
Transactions in the allowance for credit losses were (dollars in millions):
1995 1994 1993
Balance on January 1........................................ $2,186 $2,169 $1,454
Loans, leases and factored accounts receivable charged
off....................................................... (636) (533) (609)
Recoveries of loans, leases and factored accounts
receivable previously charged off......................... 215 217 197
Net charge-offs........................................... (421) (316) (412)
Provision for credit losses................................. 382 310 430
Allowance applicable to loans of purchased companies and
other..................................................... 16 23 697
Balance on December 31...................................... $2,163 $2,186 $2,169
Loans to directors and executive officers of the Corporation were $35
million and $100 million on January 1 and December 31, 1995, respectively. An
analysis of activity for 1995 with respect to such aggregate loans is as follows
(dollars in millions):
BALANCE NEW BALANCE
JANUARY 1 LOANS PAYMENTS DECEMBER 31
$35 $ 306 $ 241 $ 100
Loans to immediate family members of directors and executive officers of the
Corporation totaled $17 million and $7 million on January 1 and December 31,
1995, respectively.
Loans to directors and executive officers who were solely directors and/or
executive officers of the Corporation's significant subsidiaries, excluding the
aggregate loan amount of any loans to members of their immediate families,
amounted to $575 million on December 31, 1995.
Extensions of credit to such persons have been made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time in comparable transactions with
others and did not involve more than normal risk of collectibility or present
other unfavorable features.
On January 1, 1995, the recorded investment in certain loans that were
considered to be impaired totaled $712 million (including $80 million of in-
substance foreclosed loans previously reported as other real estate owned). On
December 31, 1995, the recorded investment in certain loans that were
considered to be impaired was $483 million, all of which was classified as
nonperforming. Impaired loans on December 31, 1995 were comprised of commercial
loans of $271 million, real estate commercial loans of $196 million and real
estate construction loans of $16 million. Of these impaired loans, $316 million
had a related valuation allowance of $40 million and $167 million did not have
a valuation allowance primarily due to application of interest payments against
book balances or write-downs previously taken on these loans. The average
recorded investment in certain impaired loans for the year ended December 31,
1995 was approximately $598 million. For the year ended December 31, 1995,
interest income recognized on impaired loans totaled $26 million, all of which
was recognized on a cash basis.
On December 31, 1995, 1994 and 1993, nonperforming loans, including certain
loans which are considered impaired, totaled $706 million, $801 million and $1.1
billion, respectively.
The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 1995, 1994 and 1993
was $27 million, $31 million and $34 million, respectively. If these loans had
been accruing interest at their originally contracted rates, related income
would have been $102 million in 1995,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57
$96 million in 1994 and $80 million in 1993.
Other real estate owned amounted to $147 million, $337 million and $661
million on December 31, 1995, 1994 and 1993, respectively. On January 1, 1995,
$80 million of in-substance foreclosed loans previously reported as other real
estate owned was reclassified to nonperforming loans. The cost of carrying other
real estate owned amounted to $13 million, $24 million and $18 million in 1995,
1994 and 1993, respectively.
NOTE SIX
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Corporation's banking subsidiaries, NationsBank, N.A., NationsBank, N.A.
(South) and NationsBank of Texas, N.A., jointly maintain a program to offer from
time to time up to $9.0 billion in bank notes with fixed or floating rates and
maturities from 30 days to 15 years from date of issue. On December 31, 1995,
short-term and long-term bank notes outstanding were $3.1 billion and $1.9
billion, respectively. On December 31, 1994, short-term bank notes outstanding
were $4.5 billion.
On December 31, 1995 and 1994, the Corporation had unused commercial paper
back-up lines of credit totaling $1.5 billion which expire in 1997. These lines
were supported by fees paid directly by the Corporation to unaffiliated banks.
The maturities of long-term debt on December 31 were (dollars in millions):
1995
VARIOUS VARIOUS
FIXED-RATE FLOATING-RATE 1994
DEBT DEBT AMOUNT AMOUNT
OBLIGATIONS OBLIGATIONS OUTSTANDING OUTSTANDING
PARENT COMPANY
Senior debt
Due in 1995............................................. $ - $ - $ - $ 969
Due in 1996............................................. 721 473 1,194 1,194
Due in 1997............................................. 338 405 743 183
Due in 1998............................................. 889 525 1,414 889
Due in 1999............................................. 117 800 917 558
Due in 2000............................................. 949 564 1,513 448
Thereafter.............................................. 150 821 971 149
3,164 3,588 6,752 4,390
Subordinated debt
Due in 1995............................................. - - - 3
Due in 1996............................................. - - - 3
Due in 1997............................................. 75 - 75 76
Due in 1999............................................. 399 - 399 399
Thereafter.............................................. 3,708 265 3,973 2,727
4,182 265 4,447 3,208
Total parent company long-term debt..................... 7,346 3,853 11,199 7,598
BANKING AND NONBANKING SUBSIDIARIES
Senior debt
Due in 1995............................................. - - - 284
Due in 1996............................................. 144 100 244 198
Due in 1997............................................. 11 897 908 49
Due in 1998............................................. 3 1,806 1,809 3
Due in 1999............................................. 9 75 84 13
Due in 2000............................................. 54 2,947 3,001 3
Thereafter.............................................. 11 189 200 7
232 6,014 6,246 557
Subordinated debt
Due in 2004 and thereafter.............................. 300 8 308 309
300 8 308 309
Total banking and nonbanking subsidiaries long-
term debt............................................. 532 6,022 6,554 866
$ 7,878 $ 9,875 17,753 8,464
Obligations under capital leases........................ 22 24
Total long-term debt.................................... $ 17,775 $ 8,488
As part of its interest rate risk management activities, the Corporation
enters into interest rate swap agreements for certain long-term debt issuances.
Through the use of interest rate swaps, $1.7 billion of fixed-rate debt with
rates ranging from 5.72 percent to 8.57 percent have been effectively converted
to floating rates primarily at spreads over LIBOR. In addition, $550 million of
notes with floating rates have been converted to fixed rates ranging from 7.32
percent to 8.12 percent.
On December 31, 1995, including the effects of interest rate swap agreements
entered into for certain long-term debt
58 NATIONSBANK CORPORATION ANNUAL REPORT 1995
issuances, the weighted average effective interest rates for total long-term
debt, total fixed-rate debt and total floating-rate debt (based on the rates in
effect on December 31, 1995) were 6.52 percent, 7.44 percent and 5.79 percent,
respectively.
Two series of mortgage-backed bonds were issued during 1995 through Main
Place Funding Corporation (MPFC), a wholly-owned, limited-purpose subsidiary of
the Corporation's Texas banking subsidiary. Outstandings under these issuances
were $3.0 billion on December 31, 1995. Both series are collateralized primarily
by pools of 1-to-4 family mortgage loans which had a book value of $4.5 billion
on December 31, 1995. As of February 22, 1996, $1.0 billion was available for
issuance under a shelf registration statement filed by MPFC.
During 1995, the Corporation's Delaware credit card bank subsidiary issued
asset-backed certificates through the NationsBank credit card master trust.
Asset-backed certificates outstanding totaled $1.1 billion on December 31, 1995.
The indentures covering the parent company's senior long-term debt include
provisions that limit funded debt, long-term lease commitments, issuance of
subsidiary preferred stock, creation of liens upon the property of the
Corporation and the payment of dividends. Under the most restrictive of the
provisions, approximately $2.3 billion was available for payment of dividends on
December 31, 1995.
Certain debt obligations may be redeemed prior to maturity at the option of
the Corporation. On January 24, 1996, the Corporation announced its intention to
redeem $300 million of 10 1/2-percent subordinated notes originally due 1999
effective March 15, 1996. Of total long-term debt on December 31, 1995, $18
million of debt scheduled to mature in 2002 has been redeemable since 1982, $500
million scheduled to mature in 2000 is redeemable beginning in 1998, $25 million
scheduled to mature in 2010 is redeemable beginning in 1999 and an aggregate of
$130 million scheduled to mature in either 2005 or 2010 is redeemable beginning
in 2000.
As of February 22, 1996, $2.6 billion of corporate debt securities and
preferred and common stock was available for issuance under a shelf registration
statement.
Additionally, in late 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. As of February 22, 1996, the Corporation had issued
$229 million under this program.
NOTE SEVEN
SHAREHOLDERS' EQUITY
The Corporation has authorized 45 million shares of preferred stock. As of
December 31, 1995, the Corporation had issued 2.5 million shares of ESOP
Convertible Preferred Stock, Series C (ESOP Preferred Stock). The ESOP Preferred
Stock has a stated and liquidation value of $42.50 per share, provides for an
annual cumulative dividend of $3.30 per share and is convertible into .84 shares
of the Corporation's common stock at an initial conversion price of $42.50 per
.84 shares of the Corporation's common stock. ESOP Preferred Stock in the amount
of $6.0 million in 1995 and $4.0 million in both 1994 and 1993 was converted
into the Corporation's common stock.
On September 28, 1994, the Board authorized the Corporation to purchase up
to 20 million shares of its common stock from time to time in open market or
privately negotiated transactions. Additionally, in July 1994 and July
1995, the Board authorized annual repurchase amounts of up to 10 million and
5 million shares, respectively, of its common stock for its dividend
reinvestment and stock purchase plan and its various other employee benefit
plans. During 1995 and 1994, 9.7 million shares and 3.5 million shares,
respectively, were repurchased under these various stock repurchase programs.
Other shareholders' equity on December 31 was comprised of the following
(dollars in millions):
1995 1994
Restricted stock award plan
deferred compensation....................... $ (37) $ (62)
Net unrealized gains (losses) on available for
sale securities and marketable equity
securities, net of tax...................... 323 (136)
Foreign exchange adjustment and other......... (8) (17)
$ 278 $ (215)
NOTE EIGHT
COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Corporation enters into a number of
off-balance sheet commitments. These instruments expose the Corporation to
varying degrees of credit and market risk and are subject to the same credit and
risk limitation reviews as those recorded on the balance sheet. See the
discussion of credit risk policies and procedures and concentrations of credit
risk beginning on page 31.
CREDIT EXTENSION COMMITMENTS
The Corporation enters into commitments to extend credit, standby letters of
credit and commercial letters of credit to meet the financing needs of its
customers. The commitments shown below have been reduced by amounts
collateralized by cash and participated to other financial institutions. The
following summarizes commitments outstanding on December 31 (dollars in
millions):
1995 1994
Commitments to extend credit
Credit card commitments...... $21,033 $15,921
Other loan commitments....... 66,638 58,813
Standby letters of credit and
financial guarantees......... 8,356 6,884
Commercial letters of credit... 986 1,282
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59
Commitments to extend credit are legally binding, generally have specified
rates and maturities and are for specified purposes. The Corporation manages the
credit risk on these commitments by subjecting these commitments to normal
credit approval and monitoring processes and protecting against deterioration in
the borrowers' abilities to pay through adverse-change clauses which require
borrowers to maintain various credit and liquidity measures. Credit card lines
are unsecured commitments which are reviewed at least annually by management.
Upon evaluation of the customers' creditworthiness, the Corporation has the
right to change or terminate the terms of the credit card lines. Of the December
31, 1995 total other loan commitments, $28.7 billion is scheduled to expire in
less than one year, $29.1 billion in one to five years and $8.8 billion after
five years.
Standby letters of credit (SBLC) and financial guarantees are issued to
support the debt obligations of customers. If a SBLC or financial guarantee is
drawn upon, the Corporation looks to its customer for payment. SBLCs and
financial guarantees are subject to the same approval and collateral policies as
other extensions of credit. Of the December 31, 1995 total SBLCs and financial
guarantees, $5.0 billion is scheduled to expire in less than one year, $3.1
billion in one to five years and $296 million after five years.
Commercial letters of credit, issued primarily to facilitate customer trade
finance activities, are collateralized by the underlying goods being shipped by
the customer and are generally short term.
For each of these types of instruments, the Corporation's maximum exposure
to credit loss is represented by the contractual amount of these instruments.
Many of the commitments are collateralized or are expected to expire without
being drawn upon; therefore, the total commitment amounts do not necessarily
represent risk of loss or future cash requirements.
DERIVATIVES
Derivative transactions are entered into by the Corporation to meet the
financing needs of its customers, to manage its own interest rate and currency
risks, and as part of its trading activities. See TABLES ELEVEN and TWELVE on
pages 29 and 30 and the discussion under Off-Balance Sheet beginning on page 29
regarding the Corporation's use of derivatives for risk management purposes. See
TABLE SIXTEEN on page 35, the discussion under Derivatives Activities beginning
on page 35 and Note Four regarding the Corporation's derivative trading
activities.
SECURITIES LENDING
The Corporation executes securities lending transactions on behalf of
certain customers. In certain instances, the Corporation indemnifies the
customer against certain losses. The Corporation obtains collateral with a
market value in excess of the market value of the securities loaned. On December
31, 1995 and 1994, indemnified securities lending transactions totaled $2.6
billion and $5.7 billion, respectively. Collateral with a market value of $2.7
billion and $5.9 billion on December 31, 1995 and 1994, respectively, was
obtained by the Corporation in support of these transactions.
WHEN ISSUED SECURITIES
When issued securities are commitments entered into to purchase or sell
securities in the time period between the announcement of a securities offering
and the issuance of those securities. On December 31, 1995, the Corporation had
commitments to purchase and sell when issued securities of $4.4 billion and $4.3
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.
LITIGATION
In the ordinary course of business, the Corporation and its subsidiaries are
routinely defendants in or parties to a number of pending and threatened legal
actions and proceedings, including several actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings, substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, banking and other laws. Management believes,
based upon the advice of counsel, that the actions and proceedings and losses,
if any, resulting from the final outcome thereof, will not be material in the
aggregate to the Corporation's financial position or results of operations.
NOTE NINE
REGULATORY REQUIREMENTS AND RESTRICTIONS
The Corporation's banking subsidiaries are required to maintain average
reserve balances with the Federal Reserve Bank based on a percentage of certain
deposits. The average of those reserve balances amounted to $1.1 billion and
$1.4 billion for 1995 and 1994, respectively.
Funds for cash distributions by the Corporation to its shareholders are
derived from a variety of sources, including cash and investments. The primary
source of such funds, however, is dividends received from its banking
subsidiaries. The subsidiary banks can initiate dividend payments in 1996,
without prior regulatory approval, of $905 million plus an additional amount
equal to their net profits, as defined by statute, for 1996 up to the date of
any such dividend declaration. The amount of dividends that each subsidiary bank
may declare in a calendar year without approval by the OCC is the bank's net
profits for that year combined with its net retained profits, as defined, for
the preceding two years.
Regulations also restrict banking subsidiaries in lending funds to
affiliates. On December 31, 1995, the total amount which could be loaned to the
Corporation by its banking subsidiaries was approximately $1.4 billion. On
December 31, 1995, no loans to the Corporation from its banking subsidiaries
were outstanding.
On December 31, 1995, as a result of the above regulatory restrictions,
substantially all of the net assets of the Corporation's banking subsidiaries,
in excess of the allowable amounts mentioned above, were restricted from
transfer to the Corporation in the form of cash dividends, loans or advances.
60 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NOTE TEN
EMPLOYEE BENEFIT PLANS
The Corporation sponsors noncontributory trusteed pension plans that cover
substantially all officers and employees. The plans provide defined benefits
based on an employee's compensation, age at retirement and years of service. It
is the policy of the Corporation to fund not less than the minimum funding
amount required by the Employee Retirement Income Security Act.
The following table sets forth the plans' estimated status on December 31
(dollars in millions):
1995 1994
Actuarial present value of benefit obligation
Accumulated benefit obligation, including vested
benefits of $864 and $711............................... $ (884) $ (734)
Projected benefit obligation for service rendered to
date.................................................... $ (1,047) $ (869)
Plan assets at fair value, primarily listed stocks, fixed-
income securities and real estate......................... 1,091 964
Plan assets in excess of projected benefit obligation....... 44 95
Unrecognized net loss....................................... 398 135
Unrecognized net transition asset being amortized........... (13) (15)
Unrecognized prior service benefit being amortized.......... (29) (34)
Deferred investment (gain) loss............................. (97) 126
Prepaid pension cost...................................... $ 303 $ 307
Net periodic pension expense (income) for the years ended December 31
included the following components (dollars in millions):
1995 1994 1993
Service cost-benefits earned during the period... $ 35 $ 39 $ 31
Interest cost on projected benefit obligation.... 74 72 58
Actual return on plan assets..................... (199) 22 (101)
Net amortization and deferral.................... 95 (121) 3
Net periodic pension expense (income).......... $ 5 $ 12 $ (9)
For December 31, 1995, the weighted average discount rate and rate of
increase in future compensation used in determining the actuarial present value
of the projected benefit obligation were 7.50 percent and 4.0 percent,
respectively. The related expected long-term rate of return on plan assets was
10.0 percent. For December 31, 1994, the weighted average discount rate, rate of
increase in future compensation and expected long-term rate of return on plan
assets were 8.50 percent, 4.25 percent and 10.0 percent, respectively.
HEALTH AND LIFE BENEFIT PLANS
In addition to providing retirement benefits, the Corporation provides
health care and life insurance benefits for active and retired employees.
Substantially all of the Corporation's employees, including certain employees in
foreign countries, may become eligible for postretirement benefits if they reach
early retirement age while employed by the Corporation and they have the
required number of years of service. Under the Corporation's current plan,
eligible retirees are entitled to a fixed dollar amount for each year of
service. Additionally, certain current retirees are eligible for different
benefits attributable to prior plans.
All of the Corporation's accrued postemployment benefit liability was
unfunded at year-end 1995. The "projected unit credit" actuarial method was used
to determine the normal cost and actuarial liability.
A reconciliation of the estimated status of the postretirement benefit
obligation on December 31 is as follows (dollars in millions):
1995 1994
Accumulated postretirement benefit obligation
Retirees................................... $ (136) $ (128)
Fully eligible active participants......... (2) (3)
Other active plan participants............. (49) (47)
(187) (178)
Unamortized transition obligation............ 118 125
Unrecognized net loss (gain)................. 3 (9)
Accrued postemployment benefit liability... $ (66) $ (62)
Net periodic postretirement benefit cost for the years ended December 31
included the following (dollars in millions):
1995 1994 1993
Service cost................. $ 2 $ 3 $ 2
Interest cost on accumulated
postretirement
benefit obligation......... 15 14 15
Amortization of transition
obligation over 20 years... 7 7 7
Amortization of gains........ (5) (6) -
Net periodic postretirement
benefit cost............. $ 19 $ 18 $ 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 61
The health care cost trend rates used in determining the accumulated
postretirement benefit obligation were 6.0 percent for pre-65 benefits and 4.75
percent for post-65 benefits. A one-percent change in the average health care
cost trend rates would increase the accumulated postretirement benefit
obligation by 5.50 percent and the aggregate of the service cost and interest
cost components of net periodic postretirement benefit cost by 4.56 percent. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50 percent in 1995 and 8.50 percent in
1994.
SAVINGS AND PROFIT SHARING PLANS
In addition to the retirement plans, the Corporation maintains several
defined contribution savings and profit sharing plans, one of which features a
leveraged employee stock ownership (ESOP) provision.
For 1995, 1994 and 1993, the Corporation contributed to the plans
approximately $43 million, $41 million and $35 million, respectively, in cash
which was utilized primarily to purchase the Corporation's common stock under
the terms of these plans.
Under the terms of the ESOP provision, payments to the plan for dividends on
the ESOP Preferred Stock were $8 million for 1995 and $9 million for both 1994
and 1993. Interest incurred to service the ESOP debt amounted to $4 million for
1995 and $5 million for both 1994 and 1993.
STOCK OPTION AND AWARD PLANS
Under the 1992 Associates Stock Option Plan, on July 1, 1992, eligible full-
time and part-time employees received a one-time award of a predetermined number
of stock options entitling them to purchase shares of the Corporation's common
stock at the closing market price of $48 3/8 per share. The options are
exercisable until June 30, 1997. Additional options under a former plan and
restricted stock and stock options assumed in connection with various
acquisitions remain outstanding. No further options or rights will be granted
under such plans.
Under the Corporation's Restricted Stock Award Plan, key employees were
awarded shares of the Corporation's common stock subject to certain vesting
requirements. Generally, vesting occurred in five equal annual installments with
related deferred compensation expensed over the same period.
The Key Employee Stock Plan, approved by shareholders in 1995, replaced the
Restricted Stock Award Plan and provides for different types of awards including
stock options, restricted stock and performance shares. Under this plan, certain
key employees received stock options effective July 1, 1995, entitling them to
purchase shares of the Corporation's common stock at the previous day's closing
market price of $53 5/8 per share. Options to purchase 3.96 million shares of
common stock were granted. Twenty-five percent of the options immediately vested
and became exercisable. The remaining 75 percent vest and become exercisable in
three equal installments on July 1, 1996, 1997 and 1998. Any unexercised options
will expire on July 1, 2005.
Under the Key Employee Stock Plan, on January 2, 1996, ten-year options to
purchase 1.8 million shares of common stock at $69 3/8 per share were granted to
certain employees. Additionally, on February 1, 1996, ten-year options to
purchase .9 million shares of common stock at $68 3/4 per share were granted to
certain employees. For both grants, twenty-five percent of the options
immediately vested and became exercisable. The remainder vest and become
exercisable in three equal annual installments.
The following table summarizes activity under the option and award plans for
1995 and the status on December 31, 1995:
OUTSTANDING EXERCISABLE
Employee Stock Option Plans OPTIONS OPTIONS
AVERAGE AVERAGE
OPTION OPTION
SHARES PRICE SHARES PRICE
Balance on December 31, 1994....................... 6,370,751 $ 40.68 6,358,151 $40.69
Shares due to acquisition.......................... 132,223 39.10 83,552 34.41
Became exercisable................................. - - 1,015,462 53.34
Additional stock grants............................ 3,960,000 53.63 - -
Less
Exercised........................................ (3,845,593) 42.78 (3,845,593) 42.78
Expired or canceled.............................. (223,000) 50.86 (208,600) 50.97
Balance on December 31, 1995....................... 6,394,381 47.04 3,402,972 41.32
AVERAGE
GRANT
Restricted Stock Award Plan SHARES PRICE
Outstanding unvested grants on December 31, 1994... 1,816,852 $ 45.86
Additional stock grants............................ 62,500 49.00
Less
Shares vested.................................... (568,366) 44.77
Shares canceled.................................. (50,540) 45.49
Outstanding unvested grants on December 31, 1995... 1,260,446 46.46
62 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NOTE ELEVEN
NONINTEREST INCOME AND EXPENSE
The significant components of noninterest income and expense for the years
ended December 31 are presented below (dollars in millions):
1995 1994 1993
NONINTEREST INCOME
Service charges on deposit accounts........... $ 884 $ 797 $ 681
Mortgage servicing and related fees........... 138 86 77
Fees on factored accounts receivable.......... 68 74 74
Investment banking income..................... 192 138 94
Other nondeposit-related service fees......... 156 138 118
Asset management and fiduciary service fees... 444 435 371
Credit card income............................ 277 280 198
Trading account profits and fees.............. 306 273 152
Other income.................................. 613 376 336
$3,078 $2,597 $2,101
NONINTEREST EXPENSE
Personnel..................................... $2,491 $2,311 $1,903
Occupancy, net................................ 495 487 434
Equipment..................................... 397 364 317
Marketing..................................... 217 161 138
Professional fees............................. 182 171 168
Amortization of intangibles................... 119 141 110
Credit card................................... 55 71 86
Deposit insurance............................. 118 211 205
Data processing............................... 229 235 190
Telecommunications............................ 150 137 122
Postage and courier........................... 135 126 120
Other general operating....................... 411 388 370
General administrative and miscellaneous...... 164 139 130
$5,163 $4,942 $4,293
NOTE TWELVE
INCOME TAXES
The components of income tax expense for the years ended December 31 were
(dollars in millions):
1995 1994 1993
Current expense
Federal............... $ 776 $451 $419
State................. 58 37 54
Foreign............... 15 5 7
849 493 480
Deferred expense
Federal............... 179 350 218
State................. 13 21 (11)
Foreign............... - 1 3
192 372 210
Total tax expense... $1,041 $865 $690
The Corporation's current income tax expense of $849 million, $493 million
and $480 million for 1995, 1994 and 1993, respectively, includes amounts
computed under the regular and alternative minimum tax (AMT) systems and
approxi-mates the amounts payable for those years.
Deferred expense represents the change in the deferred tax asset or
liability and is discussed further below.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63
A reconciliation of the expected federal tax expense, based on the federal
statutory rate of 35 percent for 1995, 1994 and 1993, to the actual
consolidated tax expense for the years ended December 31 is as follows
(dollars in millions):
1995 1994 1993
Expected federal tax expense............................. $1,047 $894 $697
Increase (decrease) in taxes resulting from
Tax-exempt income...................................... (32) (35) (33)
State tax expense, net of federal benefit.............. 52 46 30
Tax rate change on beginning net deferred tax
assets............................................... - - (6)
Other.................................................. (26) (40) 2
Total tax expense.................................... $1,041 $865 $690
Significant components of the Corporation's deferred tax (liabilities) and
assets on December 31 are as follows (dollars in millions):
1995 1994
Deferred tax liabilities
Equipment lease financing.............. $ (789) $ (599)
Securities available for sale.......... (192) -
Depreciation........................... (108) (115)
Intangibles............................ (48) (62)
Employee retirement benefits........... (21) (36)
Other, net............................. (207) (202)
Gross deferred tax liabilities....... (1,365) (1,014)
Deferred tax assets
Allowance for credit losses............ 751 755
Loan fees and expenses................. 35 32
Other real estate owned................ 20 37
Net operating loss carryforwards....... 12 16
Securities available for sale.......... - 80
AMT credit carryforwards............... - 10
Other, net............................. 155 166
Gross deferred tax assets............ 973 1,096
Valuation allowance.................... (30) (47)
Deferred tax assets, net of valuation
allowance............................ 943 1,049
Net deferred tax (liabilities) assets.... $ (422) $ 35
The Corporation's deferred tax assets include a valuation allowance of $30
million representing primarily state net operating loss carryforwards for which
realization is uncertain. The net change in the valuation allowance for deferred
tax assets was a decrease of $17 million, due to the realization of certain
state deferred tax assets.
During the first quarter of 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which superseded Statement of Financial Accounting Standards No. 96,
"Accounting for Income Taxes." SFAS 109 allows for the recognition of deferred
tax assets with respect to previously unrecognized operating loss and AMT credit
carryforwards. The cumulative benefit of adopting the accounting principle was
$200 million.
NOTE THIRTEEN
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of the
estimated fair values of financial instruments. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Quoted market prices, if available, are utilized as estimates of the fair values
of financial instruments. Because no quoted market prices exist for a
significant part of the Corporation's financial instruments, the fair values of
such instruments have been derived based on management's assumptions with
respect to future economic conditions, the amount and timing of future cash
flows and estimated discount rates. The estimation methods for individual
classifications of financial instruments are described more fully below.
Different assumptions could significantly affect these estimates. Accordingly,
the net realizable values could be materially different from the estimates
presented below.
In addition, the estimates are only indicative of the value of individual
financial instruments and should not be considered an indication of the fair
value of the combined Corporation.
The provisions of SFAS 107 do not require the disclosure of nonfinancial
instruments, including intangible assets. The value of the Corporation's
intangibles such as franchise, credit card and trust relationships and mortgage
servicing rights is significant.
SHORT-TERM FINANCIAL INSTRUMENTS
The carrying values of short-term financial instruments, including cash and
cash equivalents, federal funds sold and purchased, resale and repurchase
agreements and commercial paper and short-term borrowings, approximate the fair
values
64 NATIONSBANK CORPORATION ANNUAL REPORT 1995
of these instruments. These financial instruments generally expose the
Corporation to limited credit risk and have no stated maturities, or have an
average maturity of less than 30 days and carry interest rates which approximate
market.
FINANCIAL INSTRUMENTS TRADED IN THE SECONDARY
MARKET WITH QUOTED MARKET PRICES OR DEALER QUOTES
Securities held for investment, securities available for sale, loans held
for sale, trading account instruments and long-term debt which are traded
actively in the secondary market have been valued using quoted market prices.
LOANS
Fair values were estimated for groups of similar loans based upon type of
loan, credit quality and maturity. The fair value of fixed-rate loans was
estimated by discounting estimated cash flows using corporate bond rates
adjusted by credit risk and servicing costs for commercial and real estate
commercial and construction loans; and for consumer loans, the Corporation's
December 31 origination rate for similar loans. Contractual cash flows for
consumer loans were adjusted for prepayments using published industry data. For
variable-rate loans, the carrying amount was considered to approximate fair
value. Where credit deterioration has occurred, cash flows for fixed- and
variable-rate loans have been reduced to incorporate estimated losses. Where
quoted market prices were available, primarily for certain residential mortgage
loans, such market prices were utilized as estimates for fair value.
DEPOSITS
The fair value for fixed-rate deposits with stated maturities was calculated
by discounting the difference between the cash flows on a contractual basis and
current market rates for instruments with similar maturities. For variable-rate
deposits, the carrying amount was considered to approximate fair value.
The book and fair values of financial instruments on December 31 were
(dollars in millions):
1995 1994
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
FINANCIAL ASSETS
Cash and cash equivalents............................... $ 8,448 $ 8,448 $ 9,582 $ 9,582
Time deposits placed and other short-term
investments........................................... 1,296 1,296 2,159 2,159
Securities held for investment.......................... 4,432 4,432 17,800 17,101
Securities available for sale........................... 19,415 19,415 8,025 8,025
Loans held for sale..................................... 1,663 1,663 318 318
Federal funds sold and securities purchased under
agreements to resell.................................. 6,230 6,230 11,112 11,112
Trading account assets.................................. 18,867 18,867 9,941 9,941
Loans, net of unearned income
Commercial and foreign................................ 50,240 50,495 46,649 46,375
Real estate commercial and construction............... 9,159 9,182 10,330 10,227
Residential mortgage.................................. 24,026 24,198 17,244 16,251
Credit card........................................... 6,532 6,581 4,753 4,782
Other consumer........................................ 22,287 22,329 20,511 20,328
Allowance for credit losses............................. (2,163) - (2,186) -
FINANCIAL LIABILITIES
Deposits
Noninterest-bearing................................... 23,414 23,414 21,380 21,380
Savings............................................... 8,257 8,257 9,037 9,037
NOW and money market deposit accounts................. 28,160 28,160 29,752 29,752
Consumer CDs.......................................... 19,545 19,593 19,369 19,001
Other time deposits................................... 21,315 21,419 20,932 20,721
Federal funds purchased and securities sold under
agreements to repurchase.............................. 28,974 28,974 25,970 25,970
Trading account liabilities............................. 15,177 15,177 11,426 11,426
Commercial paper........................................ 2,773 2,773 2,519 2,519
Other short-term borrowings............................. 4,143 4,143 5,640 5,640
Long-term debt.......................................... 17,753 18,077 8,464 8,199
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the Corporation's asset and liability management and other
interest rate swaps is presented in TABLE TWELVE on page 30.
The fair value of liabilities on binding commitments to lend is based on the
net present value of cash flow streams using fee rates currently charged for
similar agreements versus original contractual fee rates, taking into account
the creditworthiness of the borrowers. The fair value was a liability of $111
million and $92 million on December 31, 1995 and 1994, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65
NOTE FOURTEEN
PARENT COMPANY FINANCIAL INFORMATION
The following tables present consolidated parent company financial
information:
NationsBank Corporation (Parent Company)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31
1995 1994 1993
Income
Dividends from consolidated
Subsidiary banks and bank holding companies............. $ 999 $1,864 $ 894
Other subsidiaries...................................... 7 5 -
Interest from consolidated subsidiaries................... 635 355 172
Other income.............................................. 547 501 533
2,188 2,725 1,599
Expenses
Interest on borrowed funds................................ 835 582 389
Noninterest expense....................................... 462 442 453
1,297 1,024 842
Earnings
Income before equity in undistributed earnings of
consolidated subsidiaries and taxes..................... 891 1,701 757
Equity in undistributed earnings of consolidated
Subsidiary banks and bank holding companies............. 830 (247) 742
Other subsidiaries...................................... 208 140 73
1,038 (107) 815
Income before income taxes and effect of change in method
of accounting for income taxes............................ 1,929 1,594 1,572
Income tax benefit.......................................... (21) (96) (56)
Income before effect of change in method of accounting for
income taxes.............................................. 1,950 1,690 1,628
Effect of change in method of accounting for income
taxes..................................................... - - (127)
Net income.................................................. $1,950 $1,690 $1,501
Net income available to common shareholders................. $1,942 $1,680 $1,491
NationsBank Corporation (Parent Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
DECEMBER 31
1995 1994
Assets
Cash held at subsidiary banks................... $ 8 $ 4
Temporary investments........................... 396 583
Receivables from consolidated
Subsidiary banks and bank holding companies... 3,116 1,187
Other subsidiaries............................ 8,633 7,407
Investment in consolidated
Subsidiary banks and bank holding companies... 12,255 10,739
Other subsidiaries............................ 1,728 1,173
Other assets.................................... 1,095 616
$27,231 $21,709
Liabilities and Shareholders' Equity
Commercial paper and other notes payable........ $ 2,494 $ 2,426
Accrued expenses and other liabilities.......... 737 674
Long-term debt.................................. 11,199 7,598
Shareholders' equity............................ 12,801 11,011
$27,231 $21,709
66 NATIONSBANK CORPORATION ANNUAL REPORT 1995
NationsBank Corporation (Parent Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31
1995 1994 1993
Operating Activities
Net income................................................ $ 1,950 $ 1,690 $ 1,501
Reconciliation of net income to net cash provided by
operating activities
Equity in undistributed earnings of consolidated
subsidiaries.......................................... (1,038) 107 (815)
Effect of change in method of accounting for
income taxes.......................................... - - 127
Other operating activities.............................. (380) 142 113
Net cash provided by operating activities............. 532 1,939 926
Investing Activities
Net (increase) decrease in temporary investments.......... 187 (271) (134)
Net increase in receivables from consolidated
subsidiaries............................................ (3,155) (1,416) (231)
Additional capital investment in subsidiaries............. (384) (764) (1,428)
(Acquisitions) sales of subsidiaries, net of cash......... - 101 (4,220)
Net cash used in investing activities................... (3,352) (2,350) (6,013)
Financing Activities
Net increase in commercial paper and other notes
payable................................................. 68 144 1,332
Proceeds from issuance of long-term debt.................. 4,606 1,159 4,125
Retirement of long-term debt.............................. (1,005) (438) (174)
Preferred stock repurchased and redeemed.................. - (94) -
Proceeds from issuance of common stock.................... 239 267 197
Common stock repurchased.................................. (522) (180) -
Cash dividends paid....................................... (575) (527) (433)
Other financing activities................................ 13 73 30
Net cash provided by financing activities............... 2,824 404 5,077
Net increase (decrease) in cash held at subsidiary
banks..................................................... 4 (7) (10)
Cash held at subsidiary banks on January 1.................. 4 11 21
Cash held at subsidiary banks on December 31................ $ 8 $ 4 $ 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67
NationsBank Corporation And Subsidiaries
SIX-YEAR CONSOLIDATED STATISTICAL SUMMARY
1995 1994 1993 1992 1991 1990
TAXABLE-EQUIVALENT YIELDS EARNED
Loans and leases, net of unearned income
Commercial............................................ 8.19% 7.56% 6.96% 7.08% 8.70% 10.44%
Real estate commercial................................ 9.30 8.18 7.59 7.78 9.13 10.49
Real estate construction.............................. 9.73 8.49 7.50 7.17 8.82 10.84
Total commercial.................................... 8.42 7.71 7.09 7.20 8.78 10.50
Residential mortgage.................................. 7.78 7.62 8.27 9.33 10.47 9.55
Credit card........................................... 12.78 12.84 13.62 14.45 15.22 15.78
Other consumer........................................ 10.07 9.26 9.24 10.07 11.13 12.47
Total consumer...................................... 9.37 8.99 9.51 10.50 11.47 11.81
Foreign............................................... 7.71 6.10 5.49 6.63 8.47 13.28
Lease financing....................................... 7.59 7.50 7.96 8.25 10.89 9.53
Total loans and leases, net......................... 8.79 8.20 8.06 8.49 9.83 11.00
Securities
Held for investment................................... 5.57 5.06 5.54 6.84 8.61 9.15
Available for sale.................................... 6.25 5.20 4.80 5.77 - -
Total securities.................................... 5.84 5.12 5.51 6.76 8.61 9.15
Loans held for sale..................................... 7.47 6.63 6.73 7.22 8.74 11.49
Federal funds sold and securities
purchased under agreements to resell.................. 6.18 4.09 3.21 3.77 5.89 8.16
Time deposits placed and other short-term investments... 6.87 5.12 3.91 5.09 6.89 8.95
Trading account securities.............................. 7.76 7.32 5.43 4.64 6.99 8.43
Total earning assets................................ 7.98 7.16 7.06 7.70 9.25 10.37
RATES PAID
Savings................................................. 2.37 2.33 2.38 2.86 4.55 5.15
NOW and money market deposit accounts................... 2.68 2.34 2.24 2.82 4.96 6.02
Consumer CDs and IRAs................................... 5.19 4.17 4.52 5.58 7.01 7.94
Negotiated CDs, public funds and other time deposits.... 5.56 4.02 3.97 4.93 7.08 8.13
Foreign time deposits................................... 6.25 4.98 4.05 5.52 6.70 8.89
Borrowed funds and trading account liabilities.......... 6.40 4.87 3.45 3.33 5.64 7.93
Long-term debt.......................................... 7.00 6.85 7.44 8.92 8.88 9.18
Special Asset Division net funding allocation........... - - - - (6.20) (7.49)
Total interest-bearing liabilities.................. 5.28 4.09 3.53 4.12 6.09 7.37
PROFIT MARGINS
Net interest spread..................................... 2.70 3.07 3.53 3.58 3.16 3.00
Net interest yield...................................... 3.33 3.58 3.96 4.10 3.82 3.75
YEAR-END DATA
(DOLLARS IN MILLIONS)
Loans, leases and factored accounts
receivable, net of unearned income.................... $117,033 $103,371 $ 92,007 $ 72,714 $ 69,108 $ 70,891
Securities held for investment.......................... 4,432 17,800 13,584 23,355 16,275 25,530
Securities available for sale........................... 19,415 8,025 15,470 1,374 8,904 -
Loans held for sale..................................... 1,663 318 1,697 1,236 585 315
Time deposits placed and other short-term investments... 1,296 2,159 1,479 1,994 1,622 1,289
Total earning assets.................................... 167,945 151,722 140,890 103,872 96,491 98,754
Total assets (1)........................................ 187,298 169,604 157,686 118,059 110,319 112,791
Noninterest-bearing deposits............................ 23,414 21,380 20,723 17,702 16,356 16,850
Domestic savings and time deposits...................... 64,388 66,487 66,356 62,988 70,359 70,091
Foreign time deposits................................... 12,889 12,603 4,034 2,037 1,360 2,124
Total savings and time deposits......................... 77,277 79,090 70,390 65,025 71,719 72,215
Total deposits.......................................... 100,691 100,470 91,113 82,727 88,075 89,065
Borrowed funds and trading account liabilities.......... 51,067 45,555 44,248 21,957 9,846 15,474
Long-term debt.......................................... 17,775 8,488 8,352 3,066 2,876 2,766
Total shareholders' equity.............................. 12,801 11,011 9,979 7,814 6,518 6,283
(1) EXCLUDES ASSETS OF NATIONSBANK OF TEXAS SPECIAL ASSET DIVISION IN 1991
AND 1990.
68 NATIONSBANK CORPORATION ANNUAL REPORT 1995
1995 1994 1993 1992 1991 1990
EARNINGS RATIOS
Return on average
Total assets (1)......................................... 1.03% 1.02% .97% 1.00% .17% .52%
Earning assets (1)....................................... 1.17 1.14 1.09 1.12 .20 .59
Common shareholders' equity.............................. 17.01 16.10 15.00 15.83 2.70 9.56
EARNINGS ANALYSIS (TAXABLE-EQUIVALENT)
Noninterest income as a percentage of net interest
income................................................... 55.36 48.96 44.48 45.65 44.22 42.56
Noninterest expense, excluding restructuring,
as a percentage of net interest income................... 92.85 93.16 90.90 94.64 97.62 92.10
Efficiency ratio: noninterest expense, excluding
restructuring, divided by the sum of net interest
income and noninterest income............................ 59.77 62.54 62.91 64.98 67.69 64.60
Overhead ratio: noninterest expense, excluding
restructuring, less noninterest income
divided by net interest income........................... 37.50 44.20 46.42 48.99 53.40 49.54
Net income as a percentage of net
interest income.......................................... 35.07 31.86 31.79 27.33 5.12 15.77
ASSET QUALITY
FOR THE YEAR
Net charge-offs as a percentage of average
loans, leases and factored accounts receivable........... .38 .33 .51 1.25 1.86 .88
Net charge-offs as a percentage of the
provision for credit losses.............................. 110.21 101.79 95.76 121.15 82.70 59.24
AT YEAR END
Allowance for credit losses as a percentage of net
loans, leases and factored accounts receivable........... 1.85 2.11 2.36 2.00 2.32 1.86
Allowance for credit losses as a percentage of
nonperforming loans...................................... 306.49 273.07 193.38 103.11 81.82 100.46
Nonperforming assets as a percentage of net
loans, leases, factored accounts receivable
and other real estate owned.............................. .73 1.10 1.92 2.72 4.01 2.32
Nonperforming assets as a percentage of total assets (1)
......................................................... .46 .67 1.13 1.69 2.54 1.46
Nonperforming assets (in millions)......................... $ 853 $ 1,138 $ 1,783 $ 1,997 $ 2,804 $ 1,651
RISK-BASED CAPITAL RATIOS
Tier 1..................................................... 7.24% 7.43% 7.41% 7.54% 6.38% 5.79%
Total...................................................... 11.58 11.47 11.73 11.52 10.30 9.58
Common shareholders' equity as a
percentage of total assets at year end (1)............... 6.81 6.47 6.25 6.60 5.67 5.23
Dividend payout ratio (per common share)................... 29.17 30.78 28.38 33.07 215.36 61.54
Shareholders' equity per common share
Average.................................................. $ 41.89 $ 37.99 $ 33.36 $ 29.05 $ 27.97 $ 27.31
At year end.............................................. 46.52 39.70 36.39 30.80 27.03 27.30
OTHER STATISTICS
Number of full-time equivalent employees................... 58,322 61,484 57,742 50,828 57,177 58,449
Rate of increase (decrease) in average
Total loans and leases, net of unearned income........... 15.24% 20.29% 15.83% (1.70)% 1.82% 8.36%
Earning assets........................................... 12.55 24.50 16.59 (.84) 2.42 12.42
Total assets (1)......................................... 13.36 23.75 16.82 (.64) 1.85 12.19
Total deposits........................................... 5.91 12.30 .97 (5.59) 3.44 8.99
Total shareholders' equity............................... 9.22 21.19 18.73 10.31 6.16 18.15
COMMON STOCK INFORMATION
Market price per share
High for the year........................................ $ 74 3/4 $ 57 3/8 $ 58 $ 53 3/8 $ 42 3/4 $ 47 1/4
Low for the year......................................... 44 5/8 43 3/8 44 1/2 39 5/8 21 1/2 16 7/8
Close at the end of the year............................. 69 5/8 45 1/8 49 51 3/8 40 5/8 22 7/8
Daily average trading volume............................... 726,467 753,515 666,591 727,578 397,054 405,087
Number of shareholders of record........................... 103,137 105,774 108,435 89,371 102,209 30,824
SIX-YEAR CONSOLIDATED STATISTICAL SUMMARY 69