SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (Mark One) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED For the quarterly period ended June 30, 1996 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED For the transition period from to Commission file number 1-6523 NationsBank Corporation (Exact name of registrant as specified in its charter) North Carolina 56-0906609 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) NationsBank Corporate Center, Charlotte, North Carolina 28255 (Address of principal executive offices and zip code) (704) 386-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No On July 31, 1996, there were 291,169,674 shares of NationsBank Corporation Common Stock outstanding. NATIONSBANK CORPORATION JUNE 30, 1996 FORM 10-Q INDEX
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income for the Three Months and Six Months Ended June 30, 1996 and 1995...................................................3 Consolidated Balance Sheet on June 30, 1996 and December 31, 1995..............4 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1995.........................................................5 Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended June 30, 1996 and 1995....................................6 Notes to Consolidated Financial Statements.....................................7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition...................................................................................12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............................36 Item 6. Exhibits and Reports on Form 8-K...............................................37 Signature...................................................................................38 Index to Exhibits...........................................................................39
2 Part I. Financial Information Item 1. Financial Statements NationsBank Corporation and Subsidiaries Consolidated Statement of Income (Dollars in Millions Except Per-Share Information)
Three Months Six Months Ended June 30 Ended June 30 1996 1995 1996 1995 Income from Earning Assets Interest and fees on loans .................................... $ 2,540 $ 2,311 $ 5,113 $ 4,487 Lease financing income ........................................ 75 51 141 101 Interest and dividends on securities Held for investment ....................................... 49 232 107 466 Available for sale ........................................ 296 162 652 268 Interest and fees on loans held for sale ...................... 19 3 44 4 Interest on time deposits placed and other short-term investments .............................. 17 42 35 82 Federal funds sold ............................................ 5 12 13 28 Securities purchased under agreements to resell ............... 149 273 332 487 Trading account securities .................................... 292 305 578 538 Total income from earning assets ......................... 3,442 3,391 7,015 6,461 Interest Expense Deposits ...................................................... 848 842 1,706 1,625 Borrowed funds ................................................ 550 779 1,201 1,377 Trading account liabilities ................................... 147 249 338 471 Long-term debt ................................................ 310 185 626 345 Total interest expense ................................... 1,855 2,055 3,871 3,818 Net interest income ................................................ 1,587 1,336 3,144 2,643 Provision for credit losses ........................................ 155 70 310 140 Net credit income .................................................. 1,432 1,266 2,834 2,503 Gains / (losses) on sales of securities ............................ (6) 4 8 5 Noninterest income ................................................. 917 730 1,802 1,456 Other real estate owned expense..................................... 7 1 7 3 Merger-related charge .............................................. - - 118 - Other noninterest expense .......................................... 1,405 1,288 2,799 2,576 Income before income taxes ......................................... 931 711 1,720 1,385 Income tax expense ................................................. 326 244 602 475 Net income ......................................................... $ 605 $ 467 $ 1,118 $ 910 Net income available to common shareholders ........................ $ 601 $ 465 $ 1,110 $ 906 Per-share information Earnings per common share .................................... $ 2.00 $ 1.71 $ 3.70 $ 3.31 Fully diluted earnings per common share ...................... $ 1.98 $ 1.70 $ 3.65 $ 3.28 Dividends per common share ................................... $ .58 $ .50 $ 1.16 $ 1.00 Average common shares issued (in thousands) ........................ 300,462 271,717 300,370 274,053
See accompanying notes to consolidated financial statements. 3 NationsBank Corporation and Subsidiaries Consolidated Balance Sheet (Dollars in Millions)
June 30 December 31 1996 1995 Assets Cash and cash equivalents...............................................................................$ 7,557 $ 8,448 Time deposits placed and other short-term investments ................................................... 1,226 1,296 Securities Held for investment, at cost (market value - $3,285 and $4,432) ........................................ 3,304 4,432 Available for sale ..................................................................................... 15,806 19,415 Total securities ...................................................................................... 19,110 23,847 Loans held for sale ..................................................................................... 1,555 1,663 Federal funds sold ...................................................................................... 229 111 Securities purchased under agreements to resell ......................................................... 7,331 6,119 Trading account assets .................................................................................. 21,560 18,867 Loans and leases, net of unearned income ................................................................ 122,643 116,042 Factored accounts receivable ............................................................................ 1,062 991 Loans, leases and factored accounts receivable, net of unearned income ................................ 123,705 117,033 Allowance for credit losses ............................................................................. (2,292) (2,163) Premises, equipment and lease rights, net ............................................................... 2,721 2,508 Customers' acceptance liability ......................................................................... 935 918 Interest receivable ..................................................................................... 1,461 1,597 Mortgage servicing rights ............................................................................... 862 707 Goodwill ................................................................................................ 1,487 1,139 Core deposit and other intangibles ...................................................................... 404 375 Other assets ............................................................................................ 4,457 4,833 $ 192,308 $ 187,298 Liabilities Deposits Noninterest-bearing....................................................................................$ 24,242 $ 23,414 Savings ................................................................................................ 8,667 8,257 NOW and money market deposit accounts .................................................................. 30,590 28,160 Time ................................................................................................... 32,938 27,971 Foreign time ........................................................................................... 11,687 12,889 Total deposits ........................................................................................ 108,124 100,691 Federal funds purchased ................................................................................. 4,024 5,940 Securities sold under agreements to repurchase .......................................................... 18,895 23,034 Trading account liabilities ............................................................................. 13,143 15,177 Commercial paper ........................................................................................ 2,933 2,773 Other short-term borrowings ............................................................................. 3,741 4,143 Liability to factoring clients .......................................................................... 592 580 Acceptances outstanding ................................................................................. 935 918 Accrued expenses and other liabilities .................................................................. 5,369 3,466 Long-term debt .......................................................................................... 20,527 17,775 Total liabilities ..................................................................................... 178,283 174,497 Contingent liabilities and other financial commitments (Note 4) Shareholders' Equity Preferred stock: authorized - 45,000,000 shares; issued - 5,346,543 and 2,473,081 shares ................ 176 105 Common stock: authorized - 800,000,000 shares; issued - 301,082,855 and 274,268,773 shares .............. 5,130 4,655 Retained earnings ....................................................................................... 8,779 7,826 Other, including loan to ESOP trust ..................................................................... (60) 215 Total shareholders' equity ............................................................................ 14,025 12,801 $ 192,308 $ 187,298
See accompanying notes to consolidated financial statements. 4 NationsBank Corporation and Subsidiaries Consolidated Statement of Cash Flows (Dollars in Millions)
Six Months Ended June 30 1996 1995 Operating Activities Net income......................................................................................$ 1,118 $ 910 Reconciliation of net income to net cash (used) provided by operating activities Provision for credit losses ............................................................... 310 140 Gains on sales of securities .............................................................. (8) (5) Depreciation and premises improvements amortization ....................................... 151 139 Amortization of intangibles ............................................................... 58 61 Deferred income tax expense ............................................................... 85 119 Net change in trading instruments ......................................................... (4,759) (2,039) Net (increase) decrease in interest receivable ............................................ 207 (168) Net increase (decrease) in interest payable ............................................... (385) 183 Net (increase) decrease in loans held for sale ............................................ 109 (395) Other operating activities ................................................................ 3,167 (735) Net cash (used) provided by operating activities ...................................... 53 (1,790) Investing Activities Proceeds from maturities of securities held for investment ...................................... 1,131 3,758 Purchases of securities held for investment ..................................................... (2) (414) Proceeds from sales and maturities of securities available for sale ............................. 15,003 16,044 Purchases of securities available for sale ...................................................... (6,180) (20,234) Net increase in federal funds sold and securities purchased under agreements to resell ...................................................... (1,025) (279) Net (increase) decrease in time deposits placed and other short-term investments ................ 52 (195) Net collections (originations) of loans and leases .............................................. 313 (6,356) Purchases of loans and leases ................................................................... (7,019) (1,961) Proceeds from sales and securitizations of loans and leases ..................................... 5,810 794 Purchases and originations of mortgage servicing rights ......................................... (218) (492) Purchases of factored accounts receivable ....................................................... (3,684) (3,898) Collections of factored accounts receivable ..................................................... 3,597 3,770 Net purchases of premises and equipment ......................................................... (219) (165) Proceeds from sales of other real estate owned .................................................. 83 117 Sales/(acquisitions) of business activities, net of cash ........................................ (155) (585) Net cash provided (used) by investing activities ...................................... 7,487 (10,096) Financing Activities Net increase (decrease) in deposits ............................................................. (2,228) 551 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase ....................................................... (7,061) 6,476 Net increase (decrease) in other short-term borrowings and commercial paper ..................... (545) 1,687 Proceeds from issuance of long-term debt ........................................................ 3,620 2,576 Retirement of long-term debt .................................................................... (1,768) (350) Proceeds from issuance of common stock .......................................................... 57 96 Cash dividends paid ............................................................................. (357) (278) Common stock repurchased ........................................................................ (157) (453) Other financing activities ...................................................................... 8 6 Net cash provided (used) by financing activities ...................................... (8,431) 10,311 Net decrease in cash and cash equivalents ........................................................... (891) (1,575) Cash and cash equivalents on January 1 .............................................................. 8,448 9,582 Cash and cash equivalents on June 30 ................................................................ $ 7,557 $ 8,007
Loans transferred to other real estate owned amounted to $77 and $47 for the six months ended June 30, 1996 and 1995, respectively. See accompanying notes to consolidated financial statements. 5 NationsBank Corporation and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity (Dollars in Millions, Shares in Thousands)
Total Share- Preferred Common Stock Retained Loan to holders' Stock Shares Amount Earnings ESOP Trust Other Equity Balance on December 31, 1994....................$ 111 276,452 $ 4,740 $ 6,451 $ (76) $ (215) $ 11,011 Net income ..................................... 910 910 Cash dividends Common ........................................ (274) (274) Preferred ..................................... (4) (4) Common stock issued under dividend reinvestment and employee plans ............... 1,950 84 12 96 Common stock repurchased ....................... (8,635) (453) (453) Net change in unrealized gains/(losses) on securities available for sale and marketable equity securities .................. 216 216 Other .......................................... (2) 45 2 6 (4) 2 Balance on June 30, 1995........................$ 109 269,812 $ 4,373 $ 7,083 $ (70) $ 9 $ 11,504 Balance on December 31, 1995....................$ 105 274,269 $ 4,655 $ 7,826 $ (63) $ 278 $ 12,801 Net income ..................................... 1,118 1,118 Cash dividends Common ........................................ (349) (349) Preferred ..................................... (8) (8) Common stock issued under dividend reinvestment and employee plans ............... 1,182 43 14 57 Stock issued in acquisitions ................... 73 27,718 586 192 2 853 Common stock repurchased ....................... (2,110) (157) (157) Net change in unrealized gains/(losses) on securities available for sale and marketable equity securities .................. (298) (298) Other .......................................... (2) 24 3 7 8 Balance on June 30, 1996........................$ 176 301,083 $ 5,130 $ 8,779 $ (56) $ (4) $ 14,025
See accompanying notes to consolidated financial statements. 6 NationsBank Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Accounting Policies The consolidated financial statements include the accounts of NationsBank Corporation and its subsidiaries (the Corporation). Significant intercompany accounts and transactions have been eliminated in consolidation. The information contained in the consolidated financial statements is unaudited. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results of interim periods have been made. Certain prior period amounts have been reclassified to conform to current period classifications. Accounting policies followed in the presentation of interim financial results are presented on pages 51, 52 and 53 of the Corporation's 1995 Annual Report to Shareholders, incorporated by reference into the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. Note 2 - Trading Account Assets and Liabilities The fair values of the components of trading account assets and liabilities on June 30, 1996 and December 31, 1995 and the average fair values for the six months ended June 30, 1996 were (dollars in millions):
Average for the Six June 30 December 31 Months Ended 1996 1995 June 30, 1996 Securities owned U.S. Treasury securities ...................... $11,400 $ 10,364 $13,145 Securities of other U.S. Government agencies and corporations............................ 1,679 1,508 1,900 Certificates of deposit, bankers' acceptances and commercial paper....................... 470 555 671 Corporate debentures .......................... 814 1,443 1,032 Foreign sovereign instruments ................. 1,505 576 375 Other securities............................... 950 402 939 Total securities owned .................... 16,818 14,848 18,062 Derivative-dealer positions ....................... 4,742 4,019 3,908 Total trading account assets .............. $21,560 $ 18,867 $21,970 Short sales U.S. Treasury securities ...................... $ 8,570 $ 11,066 $ 9,800 Securities of other U.S. Government agencies and corporations........................... 1 16 25 Corporate debentures........................... 532 683 567 Other securities............................... 325 17 307 Total short sales ......................... 9,428 11,782 10,699 Derivative-dealer positions ....................... 3,715 3,395 3,205 Total trading account liabilities ......... $13,143 $15,177 $13,904
Derivatives-dealer positions presented in the table above represent the fair values of interest rate, foreign exchange, equity and commodity-related products, including financial futures, forward settlement and option contracts and swap agreements associated with the Corporation's derivative trading activities. 7 Note 3 - Debt In the second quarter of 1996, the Corporation issued $913 million of senior notes due 2002 to 2006, $273 million of which bear interest at floating rates and $640 million of which bear interest at fixed rates ranging from 6.65% to 7.125%. Subordinated notes in the amount of $105 million were issued by the Corporation, due 2011 with interest rates ranging from 7.5% to 7.75%. Also during the second quarter of 1996, the Corporation issued $331 million of senior notes due 1999 to 2003 under a Euro medium-term note program which notes bear interest at floating rates. Of debt issued in the three months ended June 30, 1996, $371 million of fixed-rate debt with interest rates ranging from 6.65 % to 7.75 % was swapped to floating rates at spreads over LIBOR. Under the bank note program jointly maintained by NationsBank, N.A., NationsBank, N.A. (South) and NationsBank of Texas, N.A., bank notes may be offered from time to time up to $9.0 billion with fixed or floating rates and maturities from 30 days to 15 years from date of issue. On June 30, 1996, there were short-term bank notes outstanding of $2.5 billion. In addition, NationsBank of Texas, N.A. and NationsBank, N.A. together had outstanding bank notes of $3.0 billion on June 30, 1996 that were classified as long-term debt. On June 30, 1996 and December 31, 1995, the Corporation had unused commercial paper back-up lines of credit totaling $1.5 billion which will expire in 1997. These lines were supported by fees paid directly by the Corporation to unaffiliated banks. On June 28, 1996, the Corporation filed a shelf registration statement to offer up to an aggregate of $3 billion in senior or subordinated debt securities, or common or preferred stock. The registration statement was declared effective in July 1996. On July 5, 1996, the Corporation announced plans to offer up to $4.5 billion of senior or subordinated notes exclusively to non-United States residents under a new Euro medium-term note program. This program replaces the $1.5 billion program announced in late 1995. Between June 30, 1996 and August 9, 1996, the Corporation issued an additional $858 million of senior notes due 1999 to 2006, $738 million of which bear interest at floating rates and $120 million of which are denominated in Japanese yen and bear interest at fixed rates ranging from 3.10 % to 3.51 %. This includes $500 million of floating rate senior notes issued by the Corporation on July 3, 1996 to non-United States residents under its Euro medium-term note program. The Euro medium-term notes bear interest at a spread of 15 basis points over the London interbank offered rate and are due in July 2002. During this same period, the Corporation issued a $25 million subordinated note bearing interest at 7.875 %, maturing in 2011. As of August 9, 1996, the Corporation had approximately $4.0 billion of capacity available under its existing shelf registration statements and $3.3 billion available under the Euro medium-term note program. Note 4 - Commitments and Contingencies The Corporation enters into commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. The commitments shown below have been reduced by amounts collateralized by cash and participated to other financial institutions. The following summarizes commitments outstanding (dollars in millions): June 30 December 31 1996 1995 Commitments to extend credit Credit card commitments......... $ 23,135 $ 21,033 Other loan commitments.......... 75,673 66,638 Standby letters of credit and financial guarantees............ 9,196 8,356 Commercial letters of credit...... 997 986 8 On June 30, 1996 and December 31, 1995, indemnified securities lending transactions totaled $2.6 billion. Collateral, with a market value of $2.6 billion and $2.7 billion for the respective periods, was obtained by the Corporation in support of these transactions. On June 30, 1996, the Corporation had commitments to purchase and sell when-issued securities of $6.8 billion and $4.3 billion, respectively. This compares to commitments to purchase and sell when-issued securities of $4.4 billion and $4.3 billion, respectively, on December 31, 1995. See Tables 13 and 14 and the accompanying discussion in Item 2 regarding the Corporation's derivatives used for risk management purposes. See Table 15 and the accompanying discussion in Item 2 regarding the Corporation's derivative trading activities. In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including several actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, substantial money damages are asserted against the Corporation and its subsidiaries, and certain of these actions and proceedings are based on alleged violations of consumer protection, securities, environmental, banking and other laws. Management believes, based upon the advice of counsel, that 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 5 - Loans, Leases and Factored Accounts Receivable The distribution of loans, leases and factored accounts receivable on June 30, 1996 and December 31, 1995 was as follows (dollars in millions): June 30, 1996 December 31, 1995 Amount Percent Amount Percent Domestic Commercial............... $ 49,366 39.9% $47,989 41.0% Real estate commercial... 5,734 4.6 6,183 5.3 Real estate construction. 3,262 2.6 2,976 2.5 Total commercial.... 58,362 47.1 57,148 48.8 Residential mortgage..... 27,870 22.5 24,026 20.6 Credit card.............. 5,690 4.6 6,532 5.6 Other consumer........... 23,452 19.0 22,287 19.0 Total consumer...... 57,012 46.1 52,845 45.2 Lease financing.......... 3,824 3.1 3,264 2.8 Factored accounts receivable.. 1,062 .9 991 .8 120,260 97.2 114,248 97.6 Foreign................... 3,445 2.8 2,785 2.4 Total loans, leases and factored accounts receivable, net of unearned income....... $ 123,705 100% $117,033 100.0% On June 30, 1996, the recorded investment in certain loans that were considered to be impaired was $522 million, all of which was classified as nonperforming. Impaired loans on June 30, 1996 were comprised of commercial loans of $388 million, real estate commercial loans of $119 million and real estate construction loans of $15 million. Of these impaired loans, $367 million had a valuation allowance 9 of $77 million and $155 million did not have a valuation allowance primarily due to the application of interest payments against book balances or write-downs previously made with respect to these loans. On June 30, 1996 and December 31, 1995, nonperforming loans, including certain loans which are considered to be impaired, totaled $854 million and $706 million, respectively. Other real estate owned amounted to $138 million and $147 million on June 30, 1996 and December 31, 1995, respectively. Note 6 - Merger-Related Charge During the first quarter of 1996, primarily in connection with the acquisition of Bank South Corporation, the Corporation recorded a pre-tax merger-related charge of $118 million. The charge consisted of $34 million of severance costs, $28 million for facilities consolidations and branch closures, $11 million related to cancellations of contractual obligations, and other merger-related expenses. Of the $118 million accrued charge, approximately $65 million remained at June 30, 1996 and is expected to be used in 1996. The following table summarizes the activity in the merger-related reserve for the six-month period ended June 30, 1996 (dollars in millions): Six Months Ended June 30, 1996 Balance at beginning of period........................... $ - Establishment of reserve................................ 118 Cash payments........................................... (59) Non-cash additions...................................... 6 Balance on June 30, 1996.................................. $ 65 Note 7 - Employee Benefit Plans On June 26, 1996, the Corporation's Board of Directors approved the 1996 Associates Stock Option Award Plan. Under the plan, eligible full-time and part-time employees at the level of Vice President and below received an award of a predetermined number of stock options entitling them to purchase shares of the Corporation's common stock at the closing price of $84.25 per share on July 1, 1996. Approximately 16 million options were granted on July 1, 1996. One-half of the options are exercisable after the Corporation's stock closes at or above $100 per share for 10 consecutive trading days. The remainder of the options are exercisable after the Corporation's common stock closes at or above $120 per share for 10 consecutive trading days. Regardless of the stock price, all options will be fully exercisable July 1, 2000. No option can be exercised before January 1, 1997 or after June 29, 2001. Note 8 - Shareholders' Equity On July 16, 1996, the Corporation's Board of Directors authorized the Corporation to purchase up to 20 million shares of its common stock, from time to time during the next 36 months, in open market or private transactions. Acting under such authority, on July 18, 1996, the Corporation purchased 10 million shares of its common stock pursuant to a purchase agreement with an agent of the Corporation. On July 16, 1996, the Corporation's Board of Directors also authorized the Corporation to purchase in the open market, from time to time during the next 13 months, the number of shares expected to be issued for various stock option and employee benefit plans. 10 Note 9 - Merger-Related 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 net 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 does not have a material impact on the results of operations or financial condition of the Corporation. During January and February 1996, the Corporation acquired a banking organization in Florida and one in Texas. Combined total loans and total deposits acquired were $3.1 billion and $3.9 billion, respectively. These acquisitions were accounted for as purchases. During the first quarter of 1996, the Corporation recorded a merger-related charge of $118 million pre-tax, as discussed in Note 6. On April 25, 1996, the Corporation entered into an agreement to acquire from Bluebonnet Savings Bank, FSB (Bluebonnet) 21 branches, with aggregate deposits at June 30, 1996 of $986 million, for approximately $47 million, payable in cash. This acquisition will be accounted for as a purchase. The acquisition has been approved by Bluebonnet shareholders and various regulatory agencies and is expected to be completed in the third quarter of 1996. On April 29, 1996, NationsCredit Commercial Corporation, a wholly owned subsidiary of the Corporation, completed its acquisition of LDI Corporation (LDI) by purchasing all of the outstanding shares of capital stock of LDI at an aggregate purchase price of approximately $28 million, payable in cash. LDI had assets of $247 million on the date of acquisition. This acquisition was accounted for as a purchase. On May 24, 1996, the Corporation completed its acquisition of the outstanding common shares not owned by the Corporation of Charter Bancshares, Inc. (Charter), a multi-bank holding company headquartered in Houston, Texas. The Corporation issued approximately 1.4 million shares of its common stock in connection with this acquisition. Prior to the acquisition, the Corporation had ownership of 42 percent of Charter. Charter had total assets and total deposits of $928 million and $720 million, respectively, on the date of acquisition. This acquisition was accounted for as a purchase. On August 13, 1996, the Corporation completed the acquisition of TAC Bancshares, Inc. (TAC) and its subsidiary, Chase Federal Bank FSB (Chase Federal), headquartered in Miami, Florida, for approximately $280 million, in the aggregate, paid in cash. On June 30, 1996, TAC and Chase Federal had total assets and total deposits of $2.8 billion and $2.0 billion, respectively. These acquisitions were accounted for as purchases. The acquisitions discussed above are not expected to have a material impact on the results of operations or financial condition of the Corporation. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION EARNINGS REVIEW A comparison of selected operating results for the three- and six-month periods ended June 30, 1996 and 1995 is presented in TABLE 1. The Corporation experienced a 30-percent increase in net income to $605 million in the second quarter of 1996 over the same quarter of 1995. Earnings per common share were $2.00 and $1.71 for the second quarters of 1996 and 1995, respectively. Operating net income totaled $1.2 billion in the first six months of 1996, an increase of 31 percent over the same period of 1995. Earnings per common share based on operating net income were $3.95 and $3.31 for the first six months of 1996 and 1995, respectively. Including a one-time merger-related charge of $118 million ($77 million, net of tax), net income and earnings per common share were $1.1 billion and $3.70, respectively, for the first six months of 1996. Key performance highlights for the first six months of 1996 were: * Operating return on average common shareholders' equity rose to 18.04 percent in the first six months of 1996 compared to 16.36 percent in the first six months of 1995. Including the merger-related charge, the return on average common shareholders' equity was 16.87 percent. * Taxable-equivalent net interest income increased 18 percent to $3.2 billion in the first six months of 1996 over the same period in 1995 due to the impact of acquisitions, higher spreads in the securities portfolio and 10-percent loan growth net of acquisitions. * Noninterest income increased 24 percent to $1.8 billion in the first six months of 1996 over the first six months of 1995, driven primarily by higher deposit service charges, investment banking fees and mortgage servicing fees. . * Revenue growth continued to outpace expense growth in the first six months of 1996, improving the efficiency ratio to 56.0 percent compared to 62.0 percent in the first six months of 1995. * Excluding the impact of acquisitions, noninterest expense increased three percent during the first six months of 1996 compared to the first six months of 1995. Including the impact of acquisitions, noninterest expense increased 9 percent. * Provision for credit losses increased to $310 million for the first six months of 1996 compared to $140 million for the same period of 1995, reflecting growth in commercial and consumer lending as well as the continuation of a return to more normalized levels of credit losses following periods of unusually low credit losses. Nonperforming assets increased to $992 million on June 30, 1996 compared to $853 million at the end of 1995, due principally to acquisitions. BUSINESS UNIT OPERATIONS The Corporation provides a diversified range of banking and certain nonbanking financial services and products through its various subsidiaries. The Corporation manages its business activities through three major Business Units: the GENERAL BANK, GLOBAL FINANCE and FINANCIAL SERVICES. The Business Units are managed with a focus on numerous performance objectives including return on equity, operating efficiency and net income. TABLE 2 summarizes key performance measures for each of the Business Units. The net interest income of the Business Units reflects a funds transfer pricing process which derives net interest income by matching assets and liabilities with similar interest rate sensitivity and maturity characteristics. Equity capital is allocated to each Business Unit based on an assessment of its inherent risk. 12 Table 1 Selected Operating Results (Dollars in Millions Except Per-Share Information)
Three Months Six Months Ended June 30 Ended June 30 1996 1995 1996 1995 Income Statement Income from earning assets...................................$ 3,442 $ 3,391 $ 7,015 $ 6,461 Interest expense............................................. 1,855 2,055 3,871 3,818 Net interest income (taxable-equivalent)..................... 1,611 1,367 3,195 2,702 Net interest income.......................................... 1,587 1,336 3,144 2,643 Provision for credit losses.................................. 155 70 310 140 Gains (losses) on sales of securities........................ (6) 4 8 5 Noninterest income........................................... 917 730 1,802 1,456 Other real estate owned expense.............................. 7 1 7 3 Merger-related charge........................................ - - 118 - Other noninterest expense.................................... 1,405 1,288 2,799 2,576 Income before income taxes................................... 931 711 1,720 1,385 Income tax expense........................................... 326 244 602 475 Net income .................................................. 605 467 1,118 910 Net income applicable to common shareholders................. 601 465 1,110 906 Net income (excluding merger-related charge)................. 605 467 1,195 910 Average common shares issued (in thousands).................. 300,462 271,717 300,370 274,053 Per common share Earnings ....................................................$ 2.00 1.71 3.70 3.31 Earnings (excluding merger-related charge)................... 2.00 1.71 3.95 3.31 Cash dividends paid.......................................... .58 .50 1.16 1.00 Common shareholders' equity (period-end)..................... 46.18 42.49 46.18 42.49 Balance Sheet (period-end) Total assets................................................. 192,308 184,188 192,308 184,188 Total loans, leases and factored accounts receivable, net of unearned income..................................... 123,705 110,923 123,705 110,923 Total deposits............................................... 108,124 100,606 108,124 100,606 Long-term debt............................................... 20,527 10,716 20,527 10,716 Common shareholders' equity.................................. 13,905 11,465 13,905 11,465 Total shareholders' equity................................... 14,025 11,504 14,025 11,504 Performance ratios Return on average assets..................................... 1.20% .96% 1.09% .99% Return on average assets (excluding merger-related charge)... 1.20 .96 1.17 .99 Return on average common shareholders' equity (1)............ 18.00 16.69 16.87 16.36 Return on average common shareholders' equity (excluding merger-related charge)(1)...................... 18.00 16.69 18.04 16.36 Risk-based capital ratios Tier 1..................................................... 7.58 7.03 7.58 7.03 Total...................................................... 11.93 10.90 11.93 10.90 Leverage capital ratio....................................... 6.64 5.65 6.64 5.65 Total equity to total assets................................. 7.29 6.25 7.29 6.25 Market price per share of common stock Close at the end of the period.............................$ 82 5/8 $ 53 5/8 $ 82 5/8 $ 53 5/8 High for the period........................................ 84 5/8 57 3/4 84 5/8 57 3/4 Low for the period......................................... 74 3/4 49 5/8 64 3/8 44 5/8
(1) Average common shareholders' equity does not include the effect of market value adjustments to securities available for sale and marketable equity securities. 13 The GENERAL BANK includes the BANKING GROUP, which contains the retail banking network and is the service provider for the consumer sector as well as small and medium-size companies. Within the GENERAL BANK, 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. The GENERAL BANK also contains the ASSET MANAGEMENT GROUP which contains NATIONSBANK INVESTMENTS AND INVESTMENT MANAGEMENT, which provides investment management services, retirement services for defined benefit and defined contribution plans, mutual funds and full-service and discount brokerage services, and the PRIVATE CLIENT GROUP, which offers banking, fiduciary and investment management services. The GENERAL BANK earned $796 million in the first six months of 1996, an increase of 48 percent over the same period in 1995. The BANKING GROUP'S 9 percent average loan growth net of acquisitions and the growth in deposit service fee income accounted for most of the GENERAL BANK'S increased earnings over the same period last year. The GENERAL BANK'S return on equity rose 400 basis points to 22 percent in the first six months of 1996 compared to the first six months of 1995. Taxable-equivalent net interest income in the GENERAL BANK increased $448 million reflecting the impact of acquisitions, broad-based loan growth and deposit cost containment efforts. Acquisitions accounted for just over one-half of the net interest income growth. Excluding the impact of acquisitions and securitizations, loan growth of $9.1 billion was driven by residential mortgage loans, up $6.3 billion, and credit card loans, up $2.0 billion. Noninterest income rose 24 percent in the first six months of 1996 to $1.2 billion led by increases in deposit service fee income, increased mortgage-related activity and acquisition-related mortgage servicing fees and a gain related to the change in control of Gartmore plc, the Corporation's partner in the Gartmore Global Partners joint venture (formerly called NationsGartmore Investment Management). Noninterest expense increased 7 percent, significantly below the total revenue growth of 24 percent. Acquisition-related and other increases in personnel and higher general operating expense partly offset by reduced deposit insurance expense accounted for most of the growth year over year. Excluding acquisitions, noninterest expense was flat. Strong revenue growth offset by a moderate increase in operating expense led to the improvement in the efficiency ratio, down 900 basis points to 58.0 percent compared to 67.0 percent in the same period in 1995. GLOBAL FINANCE provides comprehensive corporate and investment banking, as well as trading and distribution services to domestic and international customers through its CORPORATE FINANCE, SPECIALIZED LENDING, and CAPITAL MARKETS units. The group serves as a principal lender and investor as well as an advisor, arranger and underwriter and manages treasury and trade transactions for clients and customers. Loan origination and syndication, asset-backed lending, leasing, factoring, project finance and mergers and acquisitions are representative of the services provided. 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 earned $314 million in the first six months of 1996 compared to $306 million in the first six months of 1995. Taxable-equivalent net interest income for the first six months of 1996 was $586 million compared to $603 million in the first six months of 1995 reflecting narrower commercial loan spreads resulting from increased competitive pressure on commercial loan pricing and the Corporation's efforts to reduce commercial real estate outstandings. Noninterest income in the first six months increased 17 percent over the same period last year driven by strong investment banking fees which increased $69 million to $163 million and a gain on the sale of Panmure Gordon, the Corporation's British brokerage firm. Noninterest expense for the period rose only 5 percent leading to an improved 53.6 percent efficiency ratio, compared to 54.2 percent year-to-date 1995. FINANCIAL SERVICES is composed of a holding company, NATIONSCREDIT CORPORATION, which includes NATIONSCREDIT CONSUMER CORPORATION, primarily a consumer finance operation, and NATIONSCREDIT COMMERCIAL CORPORATION, primarily a commercial finance operation. NATIONSCREDIT CONSUMER CORPORATION provides personal, mortgage and automobile loans to consumers and retail finance programs to dealers. 14 NATIONSCREDIT COMMERCIAL CORPORATION consists of seven divisions that specialize in one or more of 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 $77 million in the first six months of 1996 increased 40 percent over the same period in 1995. Taxable-equivalent net interest income increased $45 million resulting from 14 percent growth in average loans and leases. The increase in provision for credit losses was driven mainly by loan growth, but also by higher loss rates. The net interest yield of 7.39 percent was up 21 basis points from 1995, due principally to lower funding costs. Noninterest income more than doubled to $67 million in the first six months in 1996, reflecting increased warrant gains and higher loan prepayment fees. Noninterest expense increased $37 million, or 31 percent, driven by office consolidation costs and higher personnel expense associated with the expansion of consumer finance operations. The return on equity rose to 13 percent in the first six months of 1996. Table 2 Business Unit Summary For the Six Months Ended June 30 (Dollars in Millions)
General Bank Global Finance Financial Services 1996 1995 1996 1995 1996 1995 Net interest income (taxable-equivalent)....... $ 2,292 $ 1,844 $ 586 $ 603 $ 290 $ 245 Noninterest income............................. 1,222 989 513 437 67 30 Total revenue.............................. 3,514 2,833 1,099 1,040 357 275 Provision for credit losses.................... 216 82 17 - 77 58 Gains on sale of securities.................... 6 - - - - - Other real estate owned expense (income)....... 6 4 (3) (7) 5 7 Noninterest expense............................ 2,037 1,896 589 563 155 118 Income before income taxes..................... 1,261 851 496 484 120 92 Income tax expense............................. 465 312 182 178 43 37 Net income (1)................................. $ 796 $ 539 $ 314 $ 306 $ $ 77 $ 55 Net interest yield (4)......................... 4.79% 4.49 % 3.03% (2) 3.38 % (2) 7.39% 7.18% Return on equity............................... 22% 18 % 16% 16 % 13% 12% Efficiency ratio............................... 58.0% 67.0 % 53.6% 54.2 % 43.4% 43.0% Average (3)(4) Total loans and leases, net of unearned income................................. $ 80,029 $65,458 $ 36,077 $ 33,983 $ 7,868 $ 6,886 Total deposits............................. 87,473 77,431 8,375 7,006 - - Total assets............................... 102,909 88,513 79,041 70,408 8,384 7,371 Period end (3)(4) Total loans and leases, net of unearned income................................... 79,201 68,513 35,995 34,632 8,094 7,345 Total deposits............................. 87,148 78,288 9,343 6,867 - -
(1) Business Unit results are presented on a fully allocated basis but do not include $69 million net expense for 1996 and $10 million net income for 1995, which represents earnings associated with unassigned capital, gains on sales of securities, merger-related charges 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 1.75 percent and 2.00 percent for the first six months of 1996 and 1995, respectively. (3) The sums of balance sheet amounts differ from consolidated amounts due to activities between the Business Units. (4) 1995 average and period end balances and net interest yield have been restated to reflect current organizational structure. RESULTS OF OPERATIONS NET INTEREST INCOME TABLES 3 and 4 present the Corporation's taxable-equivalent net interest income and average balance sheet levels for the last five quarters and the first six months of 1996, respectively. Taxable-equivalent net interest income increased $244 million to $1.6 billion in the second quarter of 1996 compared to the second quarter of 1995 and $493 million to $3.2 billion in the first six 15 Table 3 Quarterly Taxable-Equivalent Data (Dollars in Millions)
Second Quarter 1996 First Quarter 1996 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)......................... $49,983 $1,000 8.04 % $49,319 $ 987 8.05 % Real estate commercial................. 6,288 141 9.07 6,774 149 8.82 Real estate construction............... 3,229 71 8.83 3,154 69 8.85 Total commercial .................. 59,500 1,212 8.19 59,247 1,205 8.18 Residential mortgage................... 27,728 542 7.82 27,352 534 7.83 Credit card............................ 6,057 173 11.45 6,590 206 12.59 Other consumer......................... 23,441 578 9.93 23,850 593 9.99 Total consumer..................... 57,226 1,293 9.07 57,792 1,333 9.26 Foreign ............................... 2,746 45 6.56 2,392 45 7.54 Lease financing........................ 4,254 80 7.59 3,851 72 7.46 Total loans and leases, net........ 123,726 2,630 8.54 123,282 2,655 8.65 Securities................................ Held for investment .................... 3,731 51 5.45 4,292 60 5.62 Available for sale (3).................. 18,328 303 6.64 22,997 365 6.37 Total securities................... 22,059 354 6.44 27,289 425 6.25 Loans held for sale....................... 1,156 19 6.49 1,331 25 7.55 Time deposits placed and other short-term investments.................. 1,263 17 5.28 1,056 18 6.90 Federal funds sold........................ 397 5 5.75 525 8 5.89 Securities purchased under agreements to resell............................... 12,075 149 4.99 13,870 183 5.29 Trading account securities (4)............ 17,912 292 6.53 18,213 286 6.33 Total earning assets (5)........... 178,588 3,466 7.80 185,566 3,600 7.80 Cash and cash equivalents.................... 7,928 7,998 Factored accounts receivable................. 1,124 1,010 Other assets, less allowance for credit losses 15,156 14,043 Total assets........................ $202,796 $208,617 Interest-bearing liabilities................. Savings................................... $ 9,336 52 2.27 $ 9,361 55 2.35 NOW and money market deposit accounts..... 30,155 191 2.52 29,692 192 2.61 Consumer CDs and IRAs..................... 29,698 389 5.28 29,469 397 5.42 Negotiated CDs, public funds and other time deposits........................... 3,331 46 5.53 3,273 44 5.42 Foreign time deposits..................... 12,867 170 5.34 11,902 170 5.73 Federal funds purchased................... 4,433 59 5.37 6,817 92 5.41 Securities sold under agreements to repurchase (6).......................... 28,924 391 5.44 33,705 455 5.43 Commercial paper.......................... 3,064 42 5.49 2,821 39 5.62 Other short-term borrowings (6)........... 3,968 58 5.80 4,455 65 5.89 Trading account liabilities (4)........... 8,912 147 6.63 12,485 191 6.16 Long-term debt (7)........................ 19,730 310 6.30 18,885 316 6.68 Total interest-bearing liabilities. 154,418 1,855 4.83 162,865 2,016 4.97 Noninterest-bearing sources.................. Noninterest-bearing deposits.............. 24,601 23,209 Other liabilities......................... 10,225 9,399 Shareholders' equity...................... 13,552 13,144 Total liabilities and shareholders' equity.......................... $202,796 $208,617 Net interest spread.......................... 2.97 2.83 Impact of noninterest-bearing sources........ .65 .60 Net interest income/yield on earning assets.. $1,611 3.62 % $1,584 3.43 %
16
Fourth Quarter 1995 Third Quarter 1995 Second Quarter 1995 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 $ 47,077 $ 971 8.18 % $ 46,574 $ 953 8.12 % $ 46,525 $ 954 8.22 % 6,649 157 9.39 7,116 168 9.38 7,395 171 9.29 3,016 72 9.44 3,091 75 9.63 3,216 78 9.76 56,742 1,200 8.39 56,781 1,196 8.36 57,136 1,203 8.45 23,573 459 7.78 21,581 420 7.78 19,242 378 7.84 5,709 182 12.69 5,014 164 12.94 4,775 156 13.13 22,852 581 10.09 22,638 583 10.19 21,609 544 10.11 52,134 1,222 9.33 49,233 1,167 9.41 45,626 1,078 9.47 2,100 40 7.65 2,034 40 7.73 2,048 41 7.96 3,628 68 7.48 3,407 65 7.65 3,114 58 7.43 114,604 2,530 8.77 111,455 2,468 8.79 107,924 2,380 8.84 12,945 186 5.72 14,101 205 5.77 17,457 235 5.40 10,689 174 6.45 11,891 188 6.28 10,730 170 6.33 23,634 360 6.05 25,992 393 6.01 28,187 405 5.76 644 12 7.34 424 8 7.36 153 3 8.06 1,634 28 6.77 2,031 32 6.32 2,310 42 7.29 534 8 6.02 747 11 6.14 714 12 6.24 12,088 163 5.36 14,740 240 6.45 16,820 273 6.53 16,196 285 6.99 13,063 275 8.37 15,834 307 7.77 169,334 3,386 7.95 168,452 3,427 8.08 171,942 3,422 7.98 7,500 7,449 8,024 1,221 1,201 1,181 13,638 13,399 13,155 $ 191,693 $ 190,501 $ 194,302 $ 8,287 49 2.34 $ 8,455 51 2.37 $ 8,656 51 2.40 27,233 185 2.71 27,160 183 2.67 27,608 185 2.68 24,682 339 5.44 24,786 335 5.36 25,075 325 5.20 2,946 42 5.74 2,830 41 5.72 3,046 42 5.51 13,546 211 6.18 13,921 220 6.27 15,107 239 6.36 5,599 81 5.78 6,109 90 5.84 5,654 87 6.17 30,136 440 5.79 30,179 465 6.11 34,445 547 6.37 2,871 43 5.89 2,803 43 6.10 2,806 44 6.30 4,550 78 6.72 5,833 93 6.30 6,546 101 6.16 11,125 185 6.60 11,891 240 8.03 13,660 249 7.31 17,276 295 6.83 14,127 246 6.98 10,209 185 7.22 148,251 1,948 5.22 148,094 2,007 5.38 152,812 2,055 5.39 21,908 21,519 21,077 9,631 9,401 9,200 11,903 11,487 11,213 $ 191,693 $ 190,501 $ 194,302 2.73 2.70 2.59 .65 .65 .60 $ 1,438 3.38 % $ 1,420 3.35 % $ 1,367 3.19 %
(1) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis. (2) Commercial loan interest income includes net interest rate swap revenues related to swaps converting variable-rate commercial loans to fixed rate. Such increases (decreases) in interest income were $3 and ($19) in the second and first quarters of 1996, respectively, and ($34), ($49) and ($65) in the fourth, third, and second quarters of 1995, 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 $24 and $27 in the second and first quarters of 1996, respectively, and $25, $29 and $31 in the fourth, third and second quarters of 1995, respectively. (6) Securities sold under agreements to repurchase and other short-term borrowings 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 $26 and $21 in the second and first quarters of 1996, respectively, and $12, $4 and ($1) in the fourth, third and second quarters of 1995, 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. Such increases (decreases) in interest expense were ($2) and ($3) in the second and first quarters of 1996, respectively, and $1 in the second quarter of 1995. 17 Table 4 Six Month Taxable-Equivalent Data (Dollars in Millions)
Six Months Ended June 30 1996 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)............ $ 49,652 $ 1,987 8.05 % $ 45,884 $ 1,873 8.23 % Real estate commercial.... 6,531 290 8.94 7,512 344 9.23 Real estate construction.. 3,191 140 8.84 3,159 155 9.91 Total commercial ..... 59,374 2,417 8.19 56,555 2,372 8.46 Residential mortgage...... 27,540 1,076 7.82 18,515 721 7.80 Credit card................ 6,324 379 12.05 4,660 295 12.75 Other consumer............. 23,645 1,171 9.96 21,119 1,045 9.98 Total consumer........ 57,509 2,626 9.17 44,294 2,061 9.36 Foreign .................. 2,569 90 7.01 2,004 77 7.74 Lease financing........... 4,052 152 7.53 3,033 116 7.64 Total loans and leases, net................. 123,504 5,285 8.60 105,886 4,626 8.80 Securities Held for investment ....... 4,012 111 5.54 17,552 473 5.43 Available for sale (3)..... 20,662 668 6.49 9,238 280 6.11 Total securities...... 24,674 779 6.34 26,790 753 5.66 Loans held for sale.......... 1,243 44 7.06 107 4 8.33 Time deposits placed and other short-term investments..... 1,160 35 6.02 2,304 82 7.15 Federal funds sold........... 461 13 5.83 908 28 6.10 Securities pruchased under agreements to resell....... 12,973 332 5.15 15,373 487 6.39 Trading account securities (4) 18,062 578 6.43 13,715 540 7.93 Total earning assets (5) 182,077 7,066 7.80 165,083 6,520 7.96 Cash and cash equivalents....... 7,963 8,172 Factored accounts receivable.... 1,067 1,115 Other assets, less allowance for credit losses................ 14,600 11,585 Total assets........... $205,707 $185,955 Interest-bearing liabilities Savings...................... $ 9,349 107 2.31 $ 8,783 104 2.39 NOW and money market deposit accounts............... 29,924 383 2.57 28,090 372 2.67 Consumer CDs and IRAs........ 29,583 786 5.35 24,947 616 4.98 Negotiated CDs, public and other time................ 3,302 90 5.47 3,098 83 5.40 Foreign time deposits........ 12,384 340 5.53 14,479 450 6.27 Federal funds purchased...... 5,625 151 5.39 5,050 151 6.02 Securities sold under agreements to repurchase (6).......... 31,315 846 5.43 30,518 958 6.33 Commercial paper............. 2,943 81 5.55 2,770 85 6.22 Other short-term borrowings (6) 4,210 123 5.85 6,197 183 5.96 Trading account liabilities (4) 10,699 338 6.36 12,550 471 7.56 Long-term debt (7)........... 19,308 626 6.49 9,552 345 7.21 Total interest-bearing liabilities......... 158,642 3,871 4.90 146,034 3,818 5.27 Noninterest-bearing sources Noninterest-bearing deposits. 23,905 20,533 Other liabilities............ 9,812 8,186 Shareholders' equity......... 13,348 11,202 Total liabilities and shareholders' equity.. $205,707 $185,955 Net interest spread............. 2.90 2.69 Impact of noninterest-bearing sources..................... .62 .61 Net interest income/yield on earning assets............. $ 3,195 3.52 % $ 2,702 3.30%
(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 $16 and $126 in 1996 and 1995, 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 $51 and $59 in 1996 and 1995, respectively. (6) Securities sold under agreements to repurchase and other short-term borrowings interest expense includes net interest rate swap expense related to swaps fixing the cost of certain of these liabilites. Such increases in interest expense were $47 and $12 in 1996 and 1995, 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. Such increases (decreases) in interest expense were ($5) and $2 in 1996 and 1995, respectively. 18 months of 1996 compared to the first six months of 1995. The increase was attributable to acquisitions of several banking operations, higher spreads in the securities portfolio, loan growth and an increase in noninterest-bearing deposits. The increase was partially offset by the impact of securitizations and the use of term debt. As the growth in earning assets has outpaced customer deposit growth, the Corporation has shifted to alternative funding sources such as the issuance of term debt. Securitizations lowered net interest income by $63 million and $99 million in the second quarter and first six months of 1996, respectively. Securitizations of loans do not significantly affect the Corporation's earnings. As the Corporation's role changes from that of a lender to that of a servicer, net credit income, including provision for credit losses, related to such loans is reflected as noninterest income. Of the $546-million increase in interest income for the first six months of 1996 compared to 1995, $661 million was due to higher average earning assets, and was partially offset by a $115-million decrease relating to lower yields on average earning assets. Interest expense increased $53 million with $318 million resulting primarily from the impact of higher levels of average interest-bearing liabilities partially offset by the $265-million impact of lower rates on average interest-bearing liabilities. 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 and geographic concentrations. The net interest yield was 3.62 percent in the second quarter of 1996 and 3.52 percent in the first six months of 1996 compared to 3.19 percent and 3.30 percent in the comparable periods of 1995. The increase in the net interest yield reflected the sale of treasury securities, the reinvestment of cash from the sale of low-yielding securities into higher-spread products and an increase in noninterest-bearing deposits when compared to 1995. PROVISION FOR CREDIT LOSSES The provision for credit losses was $155 million in the second quarter of 1996 compared to $70 million in the second quarter of 1995, reflecting the industry-wide trend towards higher losses compared to lower levels in prior periods. Net charge-offs in the second quarter of 1996 increased to $157 million from $83 million in the comparable 1995 period due to increases of $30 million in commercial net charge-offs, $12 million in real estate commercial net charge-offs, $15 million in other consumer net charge-offs, and $10 million in credit card net charge-offs. In the second quarter of 1996, $18 million of the increase in total commercial net charge-offs was attributed to the bulk sale of $110 million of loans, primarily commercial real estate. The provision for credit losses of $310 million for the first six months of 1996 represented an increase of $170 million over the same period in 1995. The increase was attributed primarily to an increase in total commercial net charge-offs of $67 million as well as increases of $30 million in credit card net charge-offs and $39 million in other consumer net charge-offs. Management expects the higher level of charge-offs experienced in the first half of 1996 to continue as the Corporation continues its efforts to shift the mix of the loan portfolio to a higher consumer concentration, and credit losses continue to return to more normalized levels. The allowance for credit losses was $2.3 billion on June 30, 1996 and $2.2 billion on December 31, 1995, or 1.85 percent of net loans, leases and factored accounts receivable for both periods. The allowance for credit losses was 268 percent of nonperforming loans on June 30, 1996 compared to 306 percent on December 31, 1995. Future economic conditions will continue to impact credit quality and may result in increased net charge-offs and higher provisions for credit losses. 19 NONINTEREST INCOME As presented in TABLE 5, noninterest income increased $187 million and $346 million to $917 million and $1.8 billion in the second quarter and the first six months of 1996, respectively, reflecting diverse fee generating activities as described below: * Service charges on deposit accounts increased $64 million and $116 million over the second quarter and first six months of 1995, respectively, attributable to growth in the number of households served, in part due to acquisitions, and higher fees. * Mortgage servicing and other mortgage-related fees grew $24 million and $50 million, or 71 percent and 91 percent, over the second quarter and first six months of 1995. The average portfolio of loans serviced increased 46 percent from $58.4 billion in the first six months of 1995 to $85.2 billion in the first six months of 1996. Mortgage loan originations through the Corporation's mortgage banking subsidiary increased $600 million to $3.1 billion in the second quarter of 1996 and increased $2.1 billion to $6.2 billion in the first six months of 1996 compared to the same periods one year earlier, primarily reflecting changes in the interest rate environment. Origination volume in the second quarter consisted of approximately $1.3 billion of retail loan volume and $1.8 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 date. 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 financial instruments including option contracts, forward delivery contracts and certain rate swaps. The contract notional amount of these instruments approximated $6.8 billion on June 30, 1996. Net unrealized losses associated with these contracts were $36 million on June 30, 1996. * Investment banking income totaled $66 million and $165 million in the second quarter and first six months of 1996, respectively, an increase of 47 percent and 76 percent over the comparable periods of 1995, primarily reflecting increased underwriting volume and higher agency and management fees. The GLOBAL FINANCE syndication group was agent or co-agent on 216 deals totaling $147 billion in the first half of 1996, compared to 163 deals totaling $138 billion one year earlier. * Asset management and fiduciary service fees declined $6 million and $11 million in the second quarter and first six months of 1996, respectively, reflecting the impact of the sale of Corporate Trust. Corporate Trust, which dealt with bond servicing and administration, was sold in December 1995. Excluding the impact of this sale, asset management fees increased $10 million, or 5 percent, in the six months ended June 30, 1996. * Credit card income increased $19 million and $21 million in the second quarter and first six months of 1996, respectively, primarily due to increased purchase volume and interchange rates and securitizations of credit card loans, which result in net interest income from securitized credit card loans being removed from net interest income and reflected in credit card income. Credit card securitizations increased noninterest income by $15 million and $27 million in the second quarter and first six months of 1996, respectively. Excluding the impact of securitizations, credit card income for the six months ended June 30, 1996 declined slightly due to sale of the merchant discount credit card unit at the end of the first quarter of 1995. * Trading account profits and fees, including foreign exchange income, totaled $82 million and $150 million in the second quarter and first six months of 1996, respectively, an increase of $20 million and $5 million over the same periods in 1995. 20 An analysis of trading account profits and fees by major business activity follows (in millions): Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 Securities trading........... $ 36 $ 28 $ 46 $ 63 Interest rate contracts...... 34 17 90 41 Foreign exchange contracts... (2) (3) (9) 6 Other........................ 14 20 23 35 $ 82 $ 62 $ 150 $ 145 In addition to trading account profits and fees, the CAPITAL MARKETS group also generates investment banking income and brokerage income. * Miscellaneous income totaled $119 million and $222 million in the second quarter and the first six months of 1996, respectively, an increase of $30 million and $56 million, or 34 percent, over the second quarter and first six months of 1995, respectively. Miscellaneous income includes certain prepayment fees and other fees such as net gains on sales of miscellaneous investments, business activities, premises, venture capital investments and other similar items. Table 5 Noninterest Income (Dollars in Millions)
Three Months Six Months Ended June 30 Change Ended June 30 Change 1996 1995 Amount Percent 1996 1995 Amount Percent Service charges on deposit accounts.... $ 276 $ 212 $ 64 30.2 % $ 535 $ 419 $ 116 27.7% Nondeposit-related service fees Safe deposit rent................ 6 6 - - 15 15 - - Mortgage servicing and mortgage-related fees.. 58 34 24 70.6 105 55 50 90.9 Fees on factored accounts receivable................. 15 16 (1) (6.3) 31 33 (2) (6.1) Investment banking income....... 66 45 21 46.7 165 94 71 75.5 Other service fees.............. 40 29 11 37.9 85 58 27 46.6 Total nondeposit-related service fees........... 185 130 55 42.3 401 255 146 57.3 Asset management and fiduciary service fees....................... 112 118 (6) (5.1) 217 228 (11) (4.8) Credit card income Merchant discount fees............. 2 - 2 N/M 6 7 (1) (14.3) Annual credit card fees............ 8 6 2 33.3 15 12 3 25.0 Other credit card fees............. 70 55 15 27.3 128 109 19 17.4 Total credit card income...... 80 61 19 31.1 149 128 21 16.4 Other income Brokerage income................... 30 25 5 20.0 58 49 9 18.4 Trading account profits and fees....................... 82 62 20 32.3 150 145 5 3.4 Bankers' acceptances and letters of credit fees........ 15 18 (3) (16.7) 33 36 (3) (8.3) Insurance commissions and earnings...................... 18 15 3 20.0 37 30 7 23.3 Miscellaneous..................... 119 89 30 33.7 222 166 56 33.7 Total other income............. 264 209 55 26.3 500 426 74 17.4 $ 917 $ 730 $ 187 25.6 $ 1,802 $ 1,456 $ 346 23.8
N/M - Not meaningful 21 NONINTEREST EXPENSE As presented in TABLE 6, the Corporation's noninterest expense increased nine percent in the second quarter and first six months of 1996 compared to the same periods of 1995 to $1.4 billion and $2.8 billion, respectively. Excluding acquisitions, noninterest expense increased only three percent in both the second quarter and the first six months of 1996 compared to the same 1995 periods. Expenditures in selected areas to generate continued revenue growth, such as enhancing customer sales and optimizing product delivery channels, contributed to the year-over-year increase. These increases were partially offset by lower deposit insurance and expense savings associated with streamlining and consolidating the infrastructure of several GENERAL BANK administrative and support areas as well as modifying certain business activities. A discussion of the significant components of noninterest expense for the second quarter and first six months of 1996 compared to the second quarter and the first six months of 1995 are as follows: * Personnel expense increased $59 million and $96 million in the second quarter and first six months of 1996, respectively, over the comparable 1995 periods, primarily due to the impact of acquisitions. * Equipment expense increased 12 percent and 13 percent in the second quarter and first six months of 1996, respectively, over the same periods in 1995, reflecting acquisitions and enhancements to computer resources and product delivery systems. * Marketing expense increased $16 million and $25 million in the second quarter and the first six months of 1996, respectively, primarily attributable to the Corporation's sponsorship of the 1996 Olympic Summer Games. * Professional fees increased $21 million and $33 million in the second quarter and first six months of 1996, respectively, compared to the same periods in 1995. This increase was primarily due to an increase in consulting and technical support fees for projects to enhance revenue growth. * The Corporation's deposit insurance expense decreased $44 million and $88 million in the second quarter and the first six months of 1996, respectively, compared to the same periods of 1995, primarily reflecting reductions in insurance rates charged by the FDIC beginning June 1, 1995. * The Corporation's other general operating expenses increased $30 million and $89 million in the second quarter and first six months of 1996, respectively, compared to the second quarter and first six months of 1995. Included in the year-to-date expenses is a $40-million pre-tax charge reflecting the estimated loss associated with a customer's fraudulent commercial loan transactions. Table 6 Noninterest Expense (Dollars in Millions)
Three Months Six Months Ended June 30 Change Ended June 30 Change 1996 1995 Amount Percent 1996 1995 Amount Percent Personnel .............................. $ 684 $ 625 $ 59 9.4% $1,346 $1,250 $ 96 7.7% Occupancy, net ......................... 127 123 4 3.3 254 244 10 4.1 Equipment .............................. 110 98 12 12.2 216 191 25 13.1 Marketing .............................. 67 51 16 31.4 134 109 25 22.9 Professional fees ...................... 64 43 21 48.8 113 80 33 41.3 Amortization of intangibles ............ 32 31 1 3.2 58 61 (3) (4.9) Credit card ............................ 14 12 2 16.7 31 26 5 19.2 Deposit insurance ...................... 7 51 (44) (86.3) 14 102 (88) (86.3) Data processing ........................ 62 60 2 3.3 123 123 - - Telecommunications ..................... 41 37 4 10.8 82 73 9 12.3 Postage and courier .................... 36 33 3 9.1 74 67 7 10.4 Other general operating ................ 114 84 30 35.7 262 173 89 51.4 General administrative and miscellaneous 47 40 7 17.5 92 77 15 19.5 $1,405 $1,288 $ 117 9.1 $2,799 $2,576 $ 223 8.7
22 INCOME TAXES The Corporation's income tax expense for the second quarter and first six months of 1996 was $326 million and $602 million, respectively, for an effective rate of 35.0 percent of pretax income. Tax expense in the second quarter and first six months of 1995 was $244 million and $475 million, respectively, for an effective rate of 34.3 percent. BALANCE SHEET REVIEW AND LIQUIDITY RISK MANAGEMENT The Corporation utilizes an integrated approach in managing its balance sheet which includes management of interest rate sensitivity, credit risk, liquidity risk and capital position. TABLE 7 provides an analysis of the sources and uses of funds for the two six-month periods ended June 30, 1996 and 1995 based on average levels. Market-based funds decreased $3.8 billion in the first six months of 1996 over the same period of 1995, and comprised a smaller portion of total sources of funds, at 34 percent for the first six months of 1996 compared to 39 percent during the same period of 1995. Average long-term debt increased $9.8 billion in the first six months of 1996 over 1995 levels for the comparable period and represented 9 percent of total sources of funds compared to 5 percent during the same period of 1995. Table 7 Sources and Uses of Funds (Average Dollars in Millions)
Six Months Ended June 30 1996 1995 Amount Percent Amount Percent Composition of sources Savings, NOW, money market deposit accounts and consumer CDs and IRAs...... $ 68,856 33.4% $ 61,820 33.3% Noninterest-bearing deposits.............. 23,905 11.6 20,533 11.0 Customer-based portion of negotiated CDs..................................... 1,143 .6 1,508 .8 Customer-based funds.................... 93,904 45.6 83,861 45.1 Market-based funds........................ 69,335 33.7 73,154 39.4 Long-term debt............................ 19,308 9.4 9,552 5.1 Other liabilities......................... 9,812 4.8 8,186 4.4 Shareholders' equity...................... 13,348 6.5 11,202 6.0 Total sources........................... $205,707 100.0% $185,955 100.0% Composition of uses Loans and leases, net of unearned income.. $123,504 60.0% $105,886 56.9% Securities held for investment............ 4,012 2.0 17,552 9.4 Securities available for sale............. 20,662 10.0 9,238 5.0 Federal funds sold and securities purchased under agreements to resell.............. 13,434 6.5 16,281 8.8 Trading account securities................ 18,062 8.8 13,715 7.4 Other..................................... 2,403 1.2 2,411 1.3 Total earning assets.................... 182,077 88.5 165,083 88.8 Factored accounts receivable.............. 1,067 .5 1,115 .6 Other assets.............................. 22,563 11.0 19,757 10.6 Total uses.............................. $205,707 100.0% 185,955 100.0%
Customer-based funds increased $10.0 billion in the first six months of 1996 compared to the first six months of 1995 primarily due to deposits acquired in recent acquisitions. As a percentage of total sources, customer-based funds remained relatively constant at 46 percent in the first six months of 1996 compared to 45 percent in the first six months of 1995. Loans and leases, the Corporation's primary use of funds, increased $17.6 billion during the first six months of 1996 compared to the same period of 1995 and comprised 60 percent of total uses of funds compared to 57 percent during the same period of 1995. The ratio of average loans and leases to customer-based funds increased to 132 percent in the first six months of 1996 compared to 126 percent in the first six 23 months of 1995 due to loan growth resulting from acquisitions and the use of term debt to support earning asset growth. Cash and cash equivalents were $7.6 billion on June 30, 1996, a decrease of $891 million from December 31, 1995. During the first six months of 1996, net cash provided by operating activities was $53 million, net cash provided by investing activities was $7.5 billion and net cash used in financing activities was $8.4 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 issue debt, 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 June 30, 1996 consisted of securities held for investment totaling $3.3 billion and securities available for sale totaling $15.8 billion compared to $4.4 billion and $19.4 billion, respectively, on December 31, 1995. On June 30, 1996, the market value of the Corporation's portfolio of securities held for investment reflected net unrealized depreciation of $19 million. On December 31, 1995, the market value of securities held for investment equaled the book value of the portfolio. The valuation reserve for securities available for sale and marketable equity securities increased shareholders' equity by $28 million on June 30, 1996, reflecting pretax depreciation of $119 million on securities available for sale and appreciation of $159 million on marketable equity securities. The valuation reserve increased shareholders' equity by $323 million on December 31, 1995. The decrease in the valuation reserve was primarily attributable to maturities, sales of securities and the general increase in interest rates during the first six months of 1996. The estimated average maturities of the securities held for investment and securities available for sale portfolios were 1.45 years and 4.95 years, respectively, on June 30, 1996 compared with 1.65 years and 2.96 years, respectively, on December 31, 1995, a reflection of mortgage-backed securities obtained primarily through securitization of residential mortgages, acquisitions and the investment activity which occurred during the first six months of 1996. NONPERFORMING ASSETS As presented in TABLE 8, on June 30, 1996, nonperforming assets were $992 million, or .80 percent of net loans, leases, factored accounts receivable and other real estate owned, compared to $853 million, or .73 percent, on December 31, 1995. Nonperforming loans increased to $854 million on June 30, 1996 from $706 million on December 31, 1995. Approximately one half of the increase in nonperforming assets was related to acquisitions while the remainder was attributable to the continuation of a return toward more normal levels of credit quality. The allowance coverage of nonperforming loans was 268 percent on June 30, 1996 compared to 306 percent on December 31, 1995. 24 Table 8 Nonperforming Assets (Dollars in Millions)
June 30 March 31 December 31 September 30 June 30 1996 1996 1995 1995 1995 Nonperforming loans Commercial........................... $ 388 $ 359 $ 271 $ 412 $463 Real estate commercial............... 119 180 196 176 184 Real estate construction............. 15 15 16 46 65 Total commercial................. 522 554 483 634 712 Residential mortgage................. 174 138 87 81 76 Other consumer ...................... 135 136 130 126 111 Total consumer................... 309 274 217 207 187 Foreign.............................. - - - - 3 Lease financing ..................... 23 13 6 7 3 Total nonperforming loans.... 854 841 706 848 905 Other real estate owned.................. 138 144 147 190 194 Total nonperforming assets... $992 $ 985 $853 $1,038 $1,099 Nonperforming assets as a percentage of Total assets......................... .52 % .51 % .46 % .57 % .60 % Loans, leases and factored accounts receivable, net of unearned income, and other real estate owned...... .80 .79 .73 .90 .99 Loans past due 90 days or more and not classified as nonperforming.......... $153 $ 173 $ 174 $ 137 $143
ALLOWANCE FOR CREDIT LOSSES The Corporation's allowance for credit losses was $2.3 billion on June 30, 1996 compared to $2.2 billion on December 31, 1995. TABLE 9 provides an analysis of the changes in the allowance for credit losses. The provision for credit losses was $85 million higher in the second quarter of 1996 than in the second quarter of 1995, primarily as a result of loan growth and higher charge-offs in the commercial and consumer loan portfolios. Total net charge-offs increased $74 million in the current quarter to $157 million, or .50 percent of average loans, leases and factored accounts receivable, versus $83 million, or .31 percent, in the prior year's quarter. Of the increase in net charge-offs, $43 million was associated with the total commercial loan portfolio, where a bulk sale of certain commercial and commercial real estate loans resulted in net charge-offs of $18 million. The remaining increase in net charge-offs was due to a 25-percent growth in average consumer loans over the second quarter of 1995. Additionally, an increase in the rate of personal bankruptcies in 1995 and into 1996 contributed to higher charge-offs. The net charge-offs of $312 million for the first six months of 1996 represented an increase of $146 million over the same period in 1995. Management anticipates that the credit losses experienced in the first half of 1996 reflect a move toward more typical loss levels than the lower charges experienced in prior periods 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. 25 Table 9 Allowance For Credit Losses (Dollars in Millions)
Three Months Six Months Ended June 30 Ended June 30 1996 1995 1996 1995 Beginning balance.................. $ 2,253 $ 2,174 $ 2,163 $ 2,186 Loans, leases and factored accounts receivable charged off Commercial.................... (50) (20) (84) (40) Real estate commercial........ (16) (6) (29) (13) Real estate construction...... (3) (3) (3) (6) Total commercial...... (69) (29) (116) (59) Residential mortgage.......... (2) (2) (6) (4) Credit card................... (61) (43) (126) (82) Other consumer................ (81) (60) (168) (119) Total consumer........ (144) (105) (300) (205) Lease financing........ (1) - (2) - Factored accounts receivable................... (10) (6) (16) (10) Total loans, leases and factored accounts receivable charged off.................... (224) (140) (434) (274) Recoveries of loans, leases and factored accounts receivable previously charged off Commercial.................. 22 22 36 39 Real estate commercial...... 3 5 6 8 Real estate construction.... 2 3 2 7 Total commercial.... 27 30 44 54 Residential mortgage........ - 1 1 1 Credit card................. 14 6 26 12 Other consumer.............. 24 18 46 36 Total consumer...... 38 25 73 49 Lease financing............. - - - 1 Factored accounts receivable................ 2 2 5 4 Total recoveries of loans, leases and factored accounts receivable previously charged off............. 67 57 122 108 Net charge-offs..... (157) (83) (312) (166) Provision for credit losses......... 155 70 310 140 Allowance applicable to loans of purchased companies and other...... 41 3 131 4 Balance on June 30.................. $ 2,292 $2,164 $ 2,292 $ 2,164 Loans, leases and factored accounts receivable, net of unearned income, outstanding end of period......... $ 123,705 $110,923 $ 123,705 $ 110,923 Allowance for credit losses as a percentage of loans, leases and factored accounts receivable, net of unearned income, outstanding end of period......... 1.85% 1.95% 1.85% 1.95% Average loans, leases and factored accounts receivable, net of unearned income, outstanding during the period..... $ 124,850 $109,105 $ 124,571 $ 107,001 Net charge-offs as a percentage of average loans, leases and factored accounts receivable, net of unearned income, outstanding during the period....................... .50% .31% .50% .31% Allowance for credit losses as a percentage of nonperforming loans.............................. 268.34 239.09 268.34 239.09
26 Table 10 Real Estate Commercial and Construction Loans, Other Real Estate Owned and Other Real Estate Credit Exposures June 30, 1996 (Dollars in Millions)
Other Loans (1) Credit Outstanding Nonperforming OREO Exposures(2) By Geographic Region: Maryland, District of Columbia and Virginia............................... $1,826 $48 $48 $ 392 Florida.................................. 1,849 26 15 135 North Carolina and South Carolina........ 1,462 25 15 48 Other states............................. 3,859 35 19 592 $8,996 $134 $97 $1,167 By Property Type: Apartments............................... $1,534 $ 9 $ - $ 451 Shopping centers/retail.................. 1,459 8 4 109 Office buildings......................... 1,262 16 14 26 Residential............................. 1,193 9 3 45 Hotels................................... 760 8 2 62 Land and land development................ 642 18 49 83 Industrial/warehouse..................... 574 17 4 24 Commercial-other......................... 405 19 15 260 Resorts/golf courses..................... 210 - - - Multiple use............................. 86 6 1 6 Other.................................... 871 24 5 101 $8,996 $134 $97 $1,167
(1) On June 30, 1996, 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. CONCENTRATIONS OF CREDIT RISK 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 TABLE 10 . 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 were $9.0 billion and $9.2 billion on June 30, 1996 and December 31, 1995, respectively, and declined as a percentage of net loans, leases and factored accounts receivable to 7.2 percent on June 30, 1996 from 7.8 percent on December 31, 1995. During the second quarter of 1996, the Corporation recorded real estate net charge-offs of $14 million, or .60 percent of average real estate loans, compared to $1 million, or .03 percent, in the second quarter of 1995. The majority of the real estate net chargeoffs were related to a bulk sale of certain commercial real estate loans. During the first six months of 1996, the Corporation had real estate net charge-offs of $24 million, or .49 percent of average real estate loans, compared to $4 million, or .08 percent, in the first half of 1995. Nonperforming real estate commercial and construction loans totaled $134 million and $212 million on June 30, 1996 and December 31, 1995, respectively. 27 Table 11 Selected Industry Credit Exposures June 30, 1996 (Dollars in Millions)
Loans, Leases and Factored Accounts Receivable, Net of Unearned Income Other Unfunded Credit Outstanding Nonperforming Commitments Exposures (1) Communications............ $ 4,181 $ 3 $ 4,858 $ 297 Health care............... 3,501 20 2,917 786 Leisure and sports........ 3,328 25 2,127 355 Textiles and apparel...... 2,936 45 1,312 436 Oil and gas............... 2,872 30 3,451 578 Retail.................... 2,677 64 2,939 639 Automotive................ 2,503 12 1,527 101 Food...................... 2,501 21 2,487 314 Machinery and equipment... 2,470 4 2,241 274 Finance companies......... 1,702 1 5,931 125 Construction.............. 1,617 34 1,115 163 Forest products and paper. 1,488 10 2,055 275 Electronics............... 1,476 26 2,082 141 Utilities................. 1,008 - 3,025 207 Banks..................... 949 1 1,537 2,369 Brokers and dealers....... 423 - 876 664
(1) Other credit exposures include loans held for sale, letters of credit, bankers' acceptances and derivatives exposures in a gain position. The exposures included in TABLE 10 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 table, on June 30, 1996, the Corporation had approximately $7.7 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 11 presents selected industry credit exposures. Commercial loans, factored accounts receivable and lease financing are included in the table. Other credit exposures as represented include loans held for sale, letters of credit, bankers' acceptances and derivatives exposures in a gain position. Commercial loan outstandings as a percentage of net loans, leases and factored accounts receivable remained relatively constant at 39.9 percent on June 30, 1996 compared to 41.0 percent on December 31, 1995 and totaled $49.4 billion and $48.0 billion on June 30, 1996 and December 31, 1995, respectively. Net charge-offs of commercial loans totaled $28 million, or .23 percent of average commercial loans in the second quarter of 1996 compared to net recoveries of $2 million, or .02 percent in the second quarter of 1995. For the first half of 1996, the Corporation had commercial net charge-offs of $48 million, or .20 percent of average commercial loans, compared to $1 million or .01 percent for the first half of 1995. CONSUMER - Consumer loan outstandings as a percentage of net loans, leases and factored accounts receivable remained relatively constant at 46.1 percent on June 30, 1996 compared to 45.2 percent on December 31, 1995 and totaled $57.0 billion and $52.8 billion on June 30, 1996 and December 31, 1995, respectively. In addition to the credit card loans reported in the financial statements, the Corporation manages credit card receivables which have been sold. Total average credit card receivables managed by the CARD SERVICES group were $7.9 billion in the second quarter of 1996 compared to $5.9 billion in the second quarter of 1995. On June 30, 1996, the Corporation completed a securitization of $900 million of credit card receivables. On a managed portfolio basis, which includes both on balance sheet receivables 28 and credit card, indirect auto loan and consumer finance securitizations, net charge-offs as a percentage of average managed consumer loans in the second quarter of 1996 were 4.36 percent for credit card and .99 percent for other consumer loans. This compares to net charge-off ratios on a managed basis of 3.79 percent for credit card loans and 1.05 percent for other consumer loans for the first quarter of 1996 and 3.87 percent and .77 percent, respectively, for the second quarter of 1995. Net charge-offs as a percentage of average managed consumer loans in the first half of 1996 were 4.08 percent for credit card and 1.03 percent for other consumer loans. This compares to net charge-off ratios on a managed basis of 3.79 percent for credit card loans and .78 percent for other consumer loans for the first half of 1995. See NOTE 5 to the consolidated financial statements for information regarding the distribution of loans on June 30, 1996 and December 31, 1995. MARKET RISK 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. 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 12 represents the Corporation's interest rate gap position on June 30, 1996. 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 June 30, 1996, the interest rate risk position of the Corporation was relatively neutral as the impact of a gradual parallel 100-basis-point rise or fall in interest rates over the next 12 months was estimated to be less than 1 percent of net income when compared to stable rates. Additionally, on June 30, 1996, a 100-basis-point parallel increase in interest rates from June 30, 1996 levels was estimated to result in a change of less than 2 percent in the market value of the Corporation's total shareholders' equity. 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 due to unexpected market movements in each market. 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 June 30, 1996, the gross estimates for aggregate interest rate, foreign exchange and equity and commodity trading activities were $52.9 million, $4.2 million and $2.3 29 million, respectively. Alternatively, using a statistical measure which is more likely to capture the effects of market movements, the estimate on June 30, 1996 for aggregate trading activities was $21.0 million. Average daily CAPITAL MARKETS-related revenues in the second quarter of 1996 approximated $1.4 million. During the second quarter of 1996, the Corporation's CAPITAL MARKETS-related activities resulted in positive daily revenues for approximately 73 percent of total trading days. In the second quarter of 1996, the standard deviation of CAPITAL MARKETS-related revenues was $3.2 million. Using this data, one can conclude that the aggregate Capital Markets activities should not result in exposure of more than $6.0 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. Table 12 Interest Rate Gap Analysis June 30, 1996 (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................ $51,078 $11,815 $5,153 $8,126 $76,172 $46,471 $122,643 Securities held for investment.... 82 179 169 1,268 1,698 1,606 3,304 Securities available for sale..... 172 280 463 2,194 3,109 12,697 15,806 Loans held for sale............... 1,555 - - - 1,555 - 1,555 Time deposits placed and other short-term investments......... 916 211 95 4 1,226 - 1,226 Trading account securities........ 16,818 - - - 16,818 - 16,818 Federal funds sold and securities purchased under agreements to resell...................... 7,560 - - - 7,560 - 7,560 Total................. 78,181 12,485 5,880 11,592 108,138 60,774 168,912 Interest-bearing liabilities Savings........................... 8,667 - - - 8,667 - 8,667 NOW and money market deposit accounts....................... 30,590 - - - 30,590 - 30,590 Consumer CDs and IRAs............. 4,307 5,201 5,783 6,785 22,076 7,372 29,448 Negotiated CDs, public funds and other time deposits............ 1,134 969 668 394 3,165 325 3,490 Foreign time deposits............... 7,399 2,270 1,559 312 11,540 147 11,687 Borrowed funds...................... 25,846 1,903 1,254 590 29,593 - 29,593 Short sales......................... 9,428 - - - 9,428 - 9,428 Long-term debt...................... 4,427 6,711 175 473 11,786 8,741 20,527 Total............................ 91,798 17,054 9,439 8,554 126,845 16,585 143,430 Noninterest-bearing, net............... - - - - - 25,482 25,482 Total............................ 91,798 17,054 9,439 8,554 126,845 42,067 $168,912 Interest rate gap...................... (13,617) (4,569) (3,559) 3,038 (18,707) 18,707 Effect of asset and liability management interest rate swaps, futures and other off-balance sheet items....... (9,862) (8,587) (311) 1,330 (17,430) 17,430 Adjusted interest rate gap.......... $(23,479) $(13,156) $(3,870) $ 4,368 $ (36,137) $36,137 Cumulative adjusted interest rate gap.. $(23,479) $(36,635) $(40,505) $(36,137)
30 Table 13 Asset and Liability Management Interest Rate Swaps Notional Contracts (Dollars in Millions)
Index Total Generic Amortizing CMO Total Interest Receive Pay Receive Receive Pay Receive Pay Rate Fixed Fixed Fixed Fixed Fixed Fixed Fixed Basis Swaps Balance on December 31, 1995......... $ 5,963 $9,908 $5,911 $1,964 $75 $13,838 $9,983 $ 486 $24,307 Additions........................... 12,202 478 295 961 - 13,458 478 600 14,536 Maturities/Other.................... (3,731) (384) (1,843) (547) (10) (6,121) (394) - (6,515) Balance on June 30, 1996............. $14,434 $10,002 $4,363 $2,378 $65 $21,175 $10,067 $1,086 $32,328
OFF BALANCE SHEET DERIVATIVES - ASSET AND LIABILITY MANAGEMENT POSITIONS The Corporation utilizes interest rate contracts in its asset and liability management (ALM) process. Interest rate contracts allow the Corporation to adjust its interest rate risk position without exposure to risk of loss of the underlying principal or funding requirements, as these contracts do not involve the exchange of notional amounts, only payment or receipt of cash flows. The periodic 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 rate and variable rate interest payments based on the contractual underlying notional amounts. Index amortizing and CMO swaps also involve the exchange of fixed rate and variable rate interest payments; however, the notional amounts may decline and their maturities vary based on certain interest rate indices in the case of index amortizing swaps and mortgage prepayment rates in the case of CMO swaps. Basis swaps involve the exchange of interest payments based on the contractual underlying notional amounts where both the pay rate and the receive rate are floating rates based on different indices. In its ALM process, the Corporation also purchases interest rate caps and floors. Interest rate caps and floors are agreements where, for a fee, the purchaser obtains the right to receive interest payments when a variable interest rate moves above or below a specified cap or floor rate. As presented in the footnotes to TABLE 3, net interest receipts and payments on these contracts have been included in interest income and expense on the underlying instruments. On June 30, 1996, there were no realized deferred gains or losses associated with terminated ALM contracts. TABLE 13 summarizes the notional amount and the activity of ALM interest rate swap contracts for the six months ended June 30, 1996. As reflected in the table, the gross notional amount of the Corporation's ALM swap program on June 30, 1996 was $32.3 billion, with the Corporation receiving fixed on $21.2 billion, primarily converting variable-rate commercial loans to fixed rate, and receiving variable on $10.1 billion, fixing the cost of certain variable-rate liabilities, primarily market-based funds. The increase in the notional amount of ALM interest rate swap contracts from December 31, 1995 was primarily due to acquisitions and management of the Corporation's risk profile. On June 30, 1996, the net receive fixed position was $11.1 billion, representing an increase from the net receive fixed position of $3.9 billion on December 31, 1995. The gross notional amount of option products, primarily caps and floors, on June 30, 1996 was $4.3 billion. Such instruments primarily relate to term debt, consumer loans and securities available for sale. On June 30, 1996, the net unrealized appreciation of option products, primarily caps and floors, was $2 million. TABLE 14 summarizes the maturities, average pay and receive rates and the market value on June 30, 1996 of the Corporation's ALM contracts. Floating rates represent the last repricing and will change in the future based on movements in one-, three- and six-month LIBOR rates. Maturities for CMO and amortizing swaps are based on interest rates implied by the forward yield curve on June 30, 1996 and may differ from actual maturities depending on future interest rate movements and resultant prepayment patterns. 31 Table 14 Asset and Liability Management Interest Rate Swaps June 30, 1996 (Dollars in Millions, Average Maturity in Years)
Expected Maturity Average Market After Expected Value Total 1996 1997 1998 1999 2000 2000 Maturity Asset Conversion Swaps Receive fixed generic...............$ (76) 3.23 Notional amount..................... $11,800 - $ 500 $ 2,000 $ 3,200 $ 5,600 $ 500 Weighted average receive rate....... 6.25% - 4.59% 5.89% 6.29% 6.46% 6.72% Weighted average pay rate........... 5.52 Receive fixed amortizing............ (51) 1.07 Notional amount..................... $ 4,363 $ 1,175 $2,137 $ 900 $ 11 $ 140 - Weighted average receive rate....... 5.06% 5.04% 4.91% 5.11% 6.98% 6.98% - Weighted average pay rate........... 5.53 Receive fixed CMO................... (34) 2.14 Notional amount..................... $ 2,378 $ 318 $ 432 $ 480 $ 1,148 - - Weighted average receive rate....... 5.61% 5.23% 5.13% 5.09% 6.11% - - Weighted average pay rate........... 5.47 Pay fixed generic................... (12) 3.02 Notional amount..................... $ 440 $ 33 $ 15 $ 7 $ 374 $ 1 $ 10 Weighted average pay rate........... 7.60% 7.64% 7.75% 7.92% 7.52% 9.78% 9.52% Weighted average receive rate....... 5.54 Total asset conversion swaps........$ (173) Notional amount..................... $ 18,981 $1,526 $3,084 $ 3,387 $ 4,733 $ 5,741 $ 510 Liability Conversion Swaps Receive fixed generic...............$ (59) 5.74 Notional amount..................... $ 2,634 $ 2 $ 658 $ 31 $ 34 $ 312 $1,597 Weighted average receive rate....... 6.76% 6.51% 6.94% 6.35% 9.80% 6.79% 6.62% Weighted average pay rate........... 5.69 Pay fixed generic................... (34) .22 Notional amount..................... $ 9,562 $ 8,537 $ 925 $ 100 - - - Weighted average pay rate........... 6.69% 6.50% 8.14% 9.31% - - - Weighted average receive rate....... 5.28 Pay fixed CMO....................... 1 1.32 Notional amount..................... $ 65 $ 10 $ 16 $ 39 - - - Weighted average pay rate........... 4.44% 4.44% 4.44% 4.44% - - - Weighted average receive rate....... 5.45 Total liability conversion swaps....$ (92) Notional amount........................... $ 12,261 $ 8,549 $1,599 $ 170 $ 34 $ 312 $ 1,597 Total receive fixed swaps...........$ (220) 2.98 Notional amount..................... $ 21,175 $1,495 $3,727 $3,411 $ 4,393 $ 6,052 $ 2,097 Weighted average receive rate....... 6.00% 5.08% 5.25% 5.57% 6.27% 6.49% 6.64% Weighted average pay rate........... 5.54 Total pay fixed swaps............... (45) .35 Notional amount..................... $ 10,067 $ 8,580 $ 956 $ 146 $ 374 $ 1 $ 10 Weighted average pay rate........... 6.71% 6.50% 8.07% 7.94% 7.52% 9.78% 9.52% Weighted average receive rate....... 5.29 Basis Swaps......................... - 1.40 Notional amount..................... $ 1,086 $ 100 $ 371 $ 600 - - $ 15 Weighted average receive rate....... 5.47% Weighted average pay rate........... 5.53 Total Swaps.........................$ (265) Notional amount..................... $ 32,328 $10,175 $5,054 $4,157 $ 4,767 $ 6,053 $2,122
On June 30, 1996, in addition to the above interest rate swaps, the Corporation had approximately $1.3 billion notional of receive fixed generic interest rate swaps associated primarily with a credit card securitization. On June 30, 1996, these positions had an unrealized market value of negative $32 million, a weighted average receive rate of 5.25 percent, a pay rate of 5.81 percent and an average maturity of 3.26 years. 32 The net unrealized depreciation of the ALM swap portfolio on June 30, 1996 was $265 million compared to $75 million on December 31, 1995, reflecting the increase in interest rates. The unrealized depreciation in the estimated value of the ALM interest rate 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. DERIVATIVES - DEALER POSITIONS Credit risk associated with derivative 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 derivative 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 15 presents the notional or contract amounts on June 30, 1996 and December 31, 1995 and the current credit risk amounts (the net replacement cost of contracts in a gain position on June 30, 1996 and December 31, 1995) of the Corporation's derivatives-dealer positions which are primarily executed in the over the counter market. 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 15 do not consider the value of any collateral, but generally take into Table 15 Derivatives - Dealer Positions (Dollars in Millions)
June 30 December 31 1996 1995 Contract/ Credit Risk Contract/ Credit Risk Notional Amount(1) Notional Amount(1) Interest Rate Contracts Swaps........................ $ 170,843 $ 1,076 $123,946 $989 Futures and forwards......... 196,109 326 193,774 37 Written options ............. 354,571 - 233,976 - Purchased options ........... 310,109 1,078 236,317 1,310 Foreign Exchange Contracts Swaps........................ 1,250 21 1,196 21 Spot, futures and forwards... 108,841 787 70,199 532 Written options.............. 74,572 - 42,227 - Purchased options............ 75,389 577 44,273 350 Commodity and Other Contracts Swaps........................ 777 87 757 141 Futures and forwards......... 2,503 1 3,231 3 Written options.............. 22,891 - 15,476 - Purchased options............ 25,967 543 16,344 600 Total before cross product netting................... 4,496 3,983 Cross product netting....... 98 183 Net replacement cost........ $4,398 $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. 33 consideration the effects of legally enforceable master netting agreements. On June 30, 1996, the credit risk associated with the Corporation's asset and liability management positions 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, broker-dealers and corporates. A portion of the Corporation's derivatives-dealer activity involves exchange-traded instruments. Because exchange-traded instruments conform to standard terms and are subject to policies set by the exchange involved, including counterparty approval, margin requirements and security deposit requirements, the credit risk to the Corporation is minimal. Of the $4.4-billion current credit risk amount reported in TABLE 15, $782 million relates to exchange-traded instruments. This compares to a total credit risk amount of $3.8 billion on December 31, 1995, which included $791 million related to exchange-traded instruments. During the first six months of 1996, there were no credit losses associated with derivative transactions. In addition, on June 30, 1996, there were no nonperforming derivative positions. CAPITAL Shareholders' equity totaled $14.0 billion on June 30, 1996 compared to $12.8 billion on December 31, 1995. Net earnings retention of $761 million coupled with the acquisition of Bank South, which resulted in the issuance of 26.3 million shares of common stock and an increase of $685 million in shareholders' equity, were the primary reasons for the increase. The increase was partially offset by net depreciation of $298 million in the market value of securities available for sale during the first six months of 1996. Presented below are the Corporation's regulatory capital ratios on June 30, 1996 and December 31, 1995: June 30 December 31 1996 1995 Risk-Based Capital Ratios Tier 1 Capital...... 7.58% 7.24% Total Capital....... 11.93 11.58 Leverage Capital Ratio... 6.64 6.27 The Corporation's regulatory capital ratios on June 30, 1996 compare favorably with the regulatory minimums of 4 percent for Tier 1, 8 percent for total risk-based capital and the leverage guidelines of 100 to 200 basis points above the minimum ratio of 3 percent. 34 Table 16 Selected Quarterly Operating Results (Dollars in Millions Except Per-Share Information)
1996 Quarters First Second Income statement Income from earning assets................................... $ 3,573 $ 3,442 Interest expense............................................. 2,016 1,855 Net interest income (taxable-equivalent)..................... 1,584 1,611 Net interest income.......................................... 1,557 1,587 Provision for credit losses.................................. 155 155 Gains (losses) on sales of securities........................ 14 (6) Noninterest income........................................... 885 917 Other real estate owned expense.............................. - 7 Merger-related charge........................................ 118 - Other noninterest expense.................................... 1,394 1,405 Income before income taxes................................... 789 931 Income tax expense........................................... 276 326 Net income .................................................. 513 605 Net income applicable to common shareholders................. 509 601 Net income (excluding merger-related charge)................. 590 605 Average common shares issued (in thousands).................. 300,279 300,462 Per common share Earnings .................................................... $ 1.70 $ 2.00 Earnings (excluding merger-related charge)................... 1.95 2.00 Cash dividends paid.......................................... .58 .58 Common shareholders' equity (period-end)..................... 44.92 46.18 Balance sheet (period-end) Total assets................................................. 194,375 192,308 Total loans, leases and factored accounts receivable, net of unearned income..................................... 124,344 123,705 Total deposits............................................... 109,622 108,124 Long-term debt............................................... 18,659 20,527 Common shareholders' equity.................................. 13,444 13,905 Total shareholders' equity................................... 13,557 14,025 Performance ratios Return on average assets..................................... .99% 1.20% Return on average assets (excluding merger-related charge)... 1.14 1.20 Return on average common shareholders' equity (1)............ 15.71 18.00 Return on average common shareholders' equity (excluding merger-related charge) (1)................................. 18.07 18.00 Risk-based capital ratios Tier 1..................................................... 7.35 7.58 Total...................................................... 11.71 11.93 Leverage capital ratio....................................... 6.19 6.64 Total equity to total assets................................. 6.97 7.29 Market price per share of common stock Close at the end of the period............................. $ 80 1/8 $ 82 5/8 High for the period........................................ 81 3/8 84 5/8 Low for the period......................................... 64 3/8 74 3/4
(1) Average common shareholders' equity does not include the effect of market value adjustments to securities available for sale and marketable equity securities. 35 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders a. The Annual Meeting of Shareholders was held on April 24, 1996. b. The following are voting results on each of the matters which were submitted to the shareholders:
Against or Broker For Withheld Abstentions Nonvotes 1. To elect 20 Directors Ronald W. Allen............. 242,955,641 1,159,553 William M. Barnhardt........ 243,030,626 1,084,568 Thomas E. Capps............. 242,997,952 1,117,242 Charles W. Coker............ 243,039,958 1,075,236 Thomas G. Cousins........... 243,065,266 1,049,928 Alan T. Dickson............. 243,052,491 1,062,703 W. Frank Dowd, Jr........... 243,024,362 1,090,832 Paul Fulton................. 242,959,863 1,155,331 Timothy L. Guzzle........... 243,032,928 1,082,266 W. W. Johnson............... 243,044,183 1,071,011 Hugh L. McColl, Jr.......... 243,042,143 1,073,051 John J. Murphy.............. 242,966,068 1,149,126 John C. Slane............... 242,982,449 1,132,745 John W. Snow................ 242,941,106 1,174,088 Meredith R. Spangler........ 243,039,950 1,075,244 Robert H. Spilman........... 243,009,960 1,105,234 Ronald Townsend............. 242,939,366 1,175,828 E. Craig Wall, Jr........... 243,057,101 1,058,093 Jackie M. Ward.............. 242,940,077 1,175,117 Virgil R. Williams.......... 243,033,952 1,081,242 2. To consider and act upon a proposal to approve and adopt the NationsBank Corporation Directors' Stock Plan.......... 230,832,999 9,517,984 3,736,948 27,263 3. To consider and act upon a proposal to ratify the action of the Board of Directors in selecting Price Waterhouse LLP as independent public accountants to audit the books of the Corporation and its subsidiaries for the current year.......... 242,425,041 588,335 1,101,818
36 Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 11 - Earnings Per Common Share Computation Exhibit 12(a) - Ratio of Earnings to Fixed Charges Exhibit 12(b) - Ratio of Earnings to Fixed Charges and Preferred Dividends Exhibit 27 - Financial Data Schedule b. Reports on Form 8-K The following reports on Form 8-K were filed by the Corporation during the quarter ended June 30, 1996: Current Report on Form 8-K dated April 15, 1996, and filed April 17, 1996, Items 5 and 7. Current Report on Form 8-K dated May 14, 1996, and filed May 16, 1996, Items 5 and 7. 37 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NationsBank Corporation Registrant Date: August 13, 1996 /s/ Marc D. Oken ------------------ ------------------------------ Marc D. Oken Executive Vice President and Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer) 38 NationsBank Corporation Form 10-Q Index to Exhibits Exhibit Description Page 11 Earnings Per Common Share Computation....................40 12(a) Ratio of Earnings to Fixed Charges ......................41 12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends.............................................42 27 Financial Data Schedule..................................43 39