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