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 March 31, 1997 -------------- 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 April 30, 1997, there were 719,175,950 shares of NationsBank Corporation Common Stock outstanding. NationsBank Corporation March 31, 1997 Form 10-Q Index
Page Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Income for the Three Months Ended March 31, 1997 and 1996....................................................................................... 4 Consolidated Balance Sheet on March 31, 1997 and December 31, 1996.................................. 5 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1997 and 1996............................................................................ 6 Consolidated Statement of Changes in Shareholders' Equity for the Three Months Ended March 31, 1997 and 1996..................................................... 7 Notes to Consolidated Financial Statements......................................................... 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.............................................................................................. 13 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K.................................................................. 33 Signature....................................................................................................... 34 Index to Exhibits............................................................................................... 35
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 Ended March 31 ---------------------------------------- 1997 1996 ---------------------------------------- Income from Earning Assets Interest and fees on loans $3,007 $2,573 Lease financing income 98 66 Interest and dividends on securities Held for investment 22 58 Available for sale 351 356 Interest and fees on loans held for sale 17 25 Interest on time deposits placed and other short-term investments 28 18 Federal funds sold 5 8 Securities purchased under agreements to resell 183 183 Trading account securities 316 286 ---------------------------------------- Total income from earning assets 4,027 3,573 ---------------------------------------- Interest Expense Deposits 998 858 Borrowed funds 509 651 Trading account liabilities 165 191 Long-term debt 405 316 ---------------------------------------- Total interest expense 2,077 2,016 ---------------------------------------- Net interest income 1,950 1,557 Provision for credit losses 190 155 ---------------------------------------- Net credit income 1,760 1,402 Gains on sales of securities 43 14 Noninterest income 1,113 885 Other real estate owned income (2) 0 Merger-related charge 0 118 Other noninterest expense 1,810 1,394 ---------------------------------------- Income before income taxes 1,108 789 Income tax expense 399 276 ---------------------------------------- Net income $709 $513 ======================================== Net income available to common shareholders $705 $509 ======================================== Per-share information Earnings per common share $0.97 $0.85 ======================================== Fully diluted earnings per common share $0.94 $0.84 ======================================== Dividends per common share $0.33 $0.29 ======================================== Average common shares issued (in thousands) 730,413 600,558 ========================================
See accompanying notes to consolidated financial statements. NationsBank Corporation and Subsidiaries Consolidated Balance Sheet (Dollars in Millions)
March 31 December 31 1997 1996 ------------------------- Assets Cash and cash equivalents $ 11,008 $ 8,933 Time deposits placed and other short-term investments 2,065 1,843 Securities Held for investment, at cost (market value - $1,832 and $2,110) 1,836 2,110 Available for sale 20,010 12,277 ---------- --------- Total securities 21,846 14,387 ---------- --------- Loans held for sale 1,182 1,215 Federal funds sold 184 77 Securities purchased under agreements to resell 8,395 6,882 Trading account assets 25,545 18,689 Loans and leases, net of unearned income 147,508 121,583 Factored accounts receivable 1,208 1,047 Allowance for credit losses (2,785) (2,315) ----------- --------- Loans, leases and factored accounts receivable, net of unearned income and allowance for credit losses 145,931 120,315 ----------- --------- Premises, equipment and lease rights, net 3,467 2,712 Customers' acceptance liability 1,165 858 Interest receivable 1,399 1,159 Mortgage servicing rights 1,194 946 Goodwill 7,725 1,640 Core deposit and other intangibles 841 390 Other assets 7,011 5,748 ----------- --------- $ 238,958 $ 185,794 =========== ========== Liabilities Deposits Noninterest-bearing $ 33,106 $ 25,738 Savings 10,289 8,498 NOW and money market deposit accounts 42,503 31,128 Time 42,585 33,081 Foreign time 8,324 8,053 ----------- ---------- Total deposits 136,807 106,498 ----------- ---------- Federal funds purchased 3,000 3,536 Securities sold under agreements to repurchase 26,119 15,842 Trading account liabilities 14,013 11,752 Commercial paper 3,023 2,787 Other short-term borrowings 2,384 1,836 Liability to factoring clients 672 597 Acceptances outstanding 1,165 858 Accrued expenses and other liabilities 4,572 4,429 Trust preferred securities 1,458 965 Long-term debt 25,086 22,985 ----------- ---------- Total liabilities 218,299 172,085 ----------- ---------- Contingent liabilities and other financial commitments (Note 6) Shareholders' Equity Preferred stock: authorized - 45,000,000 shares; issued - 5,229,801 and 5,220,459 shares 173 171 Common stock: authorized - 1,250,000,000 shares; issued - 727,575,263 and 573,492,308 shares 10,513 3,855 Retained earnings 10,135 9,673 Other, including loan to ESOP trust (162) 10 ----------- ---------- Total shareholders' equity 20,659 13,709 ----------- ---------- $ 238,958 $ 185,794 =========== ==========
See accompanying notes to consolidated financial statements. NationsBank Corporation and Subsidiaries Consolidated Statement of Cash Flows - ------------------------------------------------------------------------------- (Dollars in Millions)
Three Months Ended March 31 ------------------ 1997 1996 ------------------ Operating Activities Net income $ 709 $ 513 Reconciliation of net income to net cash used in operating activities Provision for credit losses 190 155 Gains on sales of securities (43) (14) Depreciation and premises improvements amortization 111 75 Amortization of intangibles 101 26 Deferred income tax expense 98 43 Net change in trading instruments (4,567) (4,803) Net decrease in interest receivable 52 190 Net decrease in interest payable (36) (410) Net decrease (increase) in loans held for sale (557) Net increase in liability to factoring clients 75 102 Other operating activities (882) 150 -------- -------- Net cash used in operating activities (4,160) (4,530) -------- -------- Investing Activities Proceeds from maturities of securities held for investment 385 332 Purchases of securities held for investment (107) (2) Proceeds from sales and maturities of securities available for sale 11,736 9,757 Purchases of securities available for sale (8,243) (4,667) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (1,173) 314 Net (increase) decrease in time deposits placed and other short-term investments (425) 252 Purchases and net originations of loans and leases (3,865) (3,828) Proceeds from sales and securitizations of loans and leases 2,055 2,414 Purchases and originations of mortgage servicing rights (147) (107) Purchases of factored accounts receivable (1,859) (1,844) Collections of factored accounts receivable 1,694 1,655 Net purchases of premises and equipment (112) (79) Proceeds from sales of other real estate owned 38 42 Sales / acquisitions of business activities, net of cash 2,461 (19) -------- -------- Net cash provided by investing activities 2,438 4,220 -------- -------- Financing Activities Net decrease in deposits (1,551) (10) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 6,719 (1,640) Net decrease in other short-term borrowings and commercial paper (506) (19) Proceeds from issuance of trust preferred securities 492 0 Proceeds from issuance of long-term debt 2,059 1,753 Retirement of long-term debt (325) (455) Proceeds from issuance of common stock 423 35 Cash dividends paid (249) (178) Common stock repurchased (3,312) (157) Other financing activities 47 (2) -------- -------- Net cash provided by (used in) financing activities 3,797 (673) -------- -------- Net increase (decrease) in cash and cash equivalents 2,075 (983) Cash and cash equivalents on January 1 8,933 8,448 -------- -------- Cash and cash equivalents on March 31 $ 11,008 $ 7,465 ======== ========
Loans transferred to other real estate owned amounted to $36 and $46 for the three months ended March 31, 1997 and 1996, respectively. Mortgage loans converted to mortgage-backed securities amounted to $232 for the three months ended March 31, 1996. See accompanying notes to consolidated financial statements.
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, 1995 $ 105 548,538 $ 4,655 $ 7,826 $ (63) $ 278 $ 12,801 Net income 513 513 Cash dividends Common (174) (174) Preferred (4) (4) Common stock issued under dividend reinvestment and employee plans 1,662 28 7 35 Stock issued in acquisitions 73 52,610 491 192 2 758 Common stock repurchased (4,220) (157) (157) Net change in unrealized gains/(losses) on securities available for sale and marketable equity securities (215) (215) Other (2) 46 3 (1) -- ------------------------------------------------------------------------------------- Balance on March 31, 1996 $ 176 598,636 $ 5,020 $ 8,353 $ (63) $ 71 $ 13,557 ===================================================================================== Balance on December 31, 1996 $ 171 573,492 $ 3,855 $ 9,673 $ (48) $ 58 $ 13,709 Net income 709 709 Cash dividends Common (245) (245) Preferred (4) (4) Common stock issued under dividend reinvestment and employee plans 11,807 449 (26) 423 Stock issued in acquisitions 82 195,204 9,440 9,522 Common stock repurchased (56,574) (3,312) (3,312) Conversion of preferred stock (81) 3,644 81 -- Net change in unrealized gains/(losses) on securities available for sale and marketable equity securities (201) (201) Other 1 2 2 55 58 ------------------------------------------------------------------------------------- Balance on March 31, 1997 $ 173 727,575 $ 10,513 $ 10,135 $ (48) $ (114) $ 20,659 =====================================================================================
See accompanying notes to consolidated financial statements. NationsBank Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Accounting Policies On February 27, 1997, NationsBank completed a 2-for-1 split of its common stock. All prior period financial data included in this Form 10-Q was restated to reflect the impact of the stock split. The consolidated financial statements include the accounts of NationsBank Corporation and its majority-owned subsidiaries (the Corporation). All significant intercompany accounts and transactions have been eliminated. 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 interim period results 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 53, 54 and 55 of the 1996 Annual Report to Shareholders, incorporated by reference into the Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, as updated by the following. The recoverability of goodwill and other intangibles is evaluated periodically if events or circumstances indicate a possible inability to realize their carrying amount. Such evaluation is based on various analyses, including undiscounted cash flow projections. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 requires the presentation of basic earnings per share and diluted earnings per share, where appropriate, and is effective for financial statements for periods ending after December 15, 1997. Adoption of this standard will not have a material effect on the Corporation's reported earnings per share. Note 2 - Merger-Related Activity On January 7, 1997, the Corporation completed the acquisition of Boatmen's Bancshares, Inc. (Boatmen's), headquartered in St. Louis, Missouri. Each outstanding share of Boatmen's common stock was converted into 1.305 shares of the Corporation's common stock (adjusted for 2-for-1 stock split) or, at the election of each holder of Boatmen's common stock, an amount in cash as specified in the merger agreement, resulting in the issuance of approximately 195 million shares of the Corporation's common stock valued at $9.4 billion on the date of the merger and aggregate cash payments of $371 million to Boatmen's shareholders. The Corporation accounted for this acquisition as a purchase; therefore, the results of operations of Boatmen's are included in the consolidated financial statements of the Corporation from the date of acquisition. Intangible assets resulting from the purchase of Boatmen's were approximately $6.4 billion. The allocation of the purchase price for Boatmen's is preliminary and may change as certain estimates and contingencies are finalized, although any adjustments are not expected to be material. On the date of the acquisition, Boatmen's unaudited total assets and total deposits were approximately $41.2 billion and $32.0 billion, respectively. The following table presents condensed pro forma consolidated results of operations for the first quarter of 1996 as if the acquisition of Boatmen's had occurred on January 1, 1996. This information combines the historical results of operations of the Corporation and Boatmen's after the effect of estimated preliminary purchase accounting adjustments. A cash election of 40 percent in the Boatmen's acquisition has been assumed since the Corporation expects to repurchase shares of its common stock from time to time so that the pro forma impact of the Boatmen's acquisition will be the issuance of approximately 60 percent of the aggregate consideration in the Corporation's common stock and 40 percent of the aggregate consideration in cash. The actual cash election in the transaction was approximately 4 percent. The pro forma information does not purport to be indicative of the results that would have been obtained if the operations had actually been combined during the period presented and is not necessarily indicative of operating results to be expected in future periods. Unaudited Pro Forma Results of Operations For the three months ended March 31, 1996 (Dollars in millions, except per-share information) Net interest income $1,860 Net income 493 Net income available to common shareholders 487 Earnings per common share .68 Fully diluted earnings per common share .67 Note 3 - Trading Account Assets and Liabilities The fair values of the components of trading account assets and liabilities on March 31, 1997 and December 31, 1996 and the average fair values for the three months ended March 31, 1997 were (dollars in millions):
First Quarter March 31 December 31 1997 1997 1996 Average ---------------------------------------------- Securities owned U.S. Treasury securities $10,898 $6,914 $10,143 Securities of other U.S. Government agencies and corporations 1,598 2,096 1,923 Certificates of deposit, bankers' acceptances and commercial paper 501 501 478 Corporate debt 2,919 1,552 1,628 Foreign sovereign instruments 4,407 3,396 7,370 Other securities 1,384 932 1,306 -------- -------- -------- Total securities owned 21,707 15,391 22,848 Derivatives-dealer positions 3,838 3,298 3,821 -------- -------- -------- Total trading account assets $25,545 $18,689 $26,669 ======== ======== ======== Short sales U.S. Treasury securities $8,392 $7,143 $7,986 Corporate debt 377 452 489 Other securities 1,373 309 1,474 -------- -------- -------- Total short sales 10,142 7,904 9,949 Derivatives-dealer positions 3,871 3,848 3,677 -------- -------- -------- Total trading account liabilities $14,013 $11,752 $13,626 ======== ======== ========
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. Note 4 - Loans, Leases and Factored Accounts Receivable The distribution of loans, leases and factored accounts receivable on March 31, 1997 and December 31, 1996 was as follows (dollars in millions):
March 31, 1997 December 31, 1996 ---------------------------------------------- Amount Percent Amount Percent ---------------------------------------------- Domestic Commercial $60,590 40.8% $50,270 41.0% Real estate commercial 8,604 5.8 5,445 4.4 Real estate construction 3,760 2.5 2,863 2.3 ---------------------------------------------- Total commercial 72,954 49.1 58,578 47.7 --------------------------------------------- Residential mortgage 33,258 22.4 27,963 22.8 Credit card 7,039 4.7 6,747 5.5 Other consumer 25,908 17.4 20,595 16.8 --------------------------------------------- Total consumer 66,205 44.5 55,305 45.1 --------------------------------------------- Lease financing 4,713 3.2 4,198 3.4 Factored accounts receivable 1,208 0.8 1,047 0.9 --------------------------------------------- 145,080 97.6 119,128 97.1 Foreign 3,636 2.4 3,502 2.9 --------------------------------------------- Total loans, leases and factored accounts receivable, net of unearned income $148,716 100.0% $122,630 100.0% ==============================================
On March 31, 1997, the recorded investment in certain loans that were considered to be impaired was $594 million, all of which were classified as nonperforming. Impaired loans on March 31, 1997 were comprised of commercial loans of $398 million, real estate commercial loans of $162 million and real estate construction loans of $34 million. Of these impaired loans, $216 million had a valuation allowance of $41 million and $378 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 March 31, 1997 and December 31, 1996, nonperforming loans, including certain loans which are considered to be impaired, totaled $1.1 billion and $890 million, respectively. Other real estate owned amounted to $168 million and $153 million on March 31, 1997 and December 31, 1996, respectively. Note 5 - Debt In the first quarter of 1997, the Corporation issued $428 million in long-term debt, including $378 million of senior notes and $50 million of subordinated notes, with maturities ranging from 2002 to 2037. Of the $428 million issued, $68 million of fixed rate debt was converted to floating rates through interest rate swaps at spreads ranging from 5 to 13 basis points over the three-month London interbank offered rate (LIBOR). The remaining $360 million of debt issued bears interest at spreads ranging from 17.5 to 20 basis points over three-month LIBOR. As a result of the merger with Boatmen's during the first quarter of 1997, the Corporation and its banking subsidiaries assumed payment obligations on $608 million in long-term debt with interest rates ranging from 5.19 percent to 12.0 percent and maturities ranging from 1998 to 2016. On February 3, 1997, one of the Corporation's grantor trust subsidiaries (Capital Trust III) issued $500 million of trust preferred securities (Preferred Securities) representing undivided beneficial interests in the assets of the respective grantor trust subsidiary, which constitutes $516 million aggregate principal amount of the Corporation's Junior Subordinated Deferrable Interest Notes bearing interest at 3-month LIBOR plus 55 basis points due 2027. Such notes and Preferred Securities are redeemable beginning in 2007. On March 18, 1997, Main Place Real Estate Investment Trust, an indirect subsidiary of NationsBank, N.A., issued, under its shelf registration statement, $1.0 billion of Mortgage-Backed Bonds, Series 1997-1, due 2000, bearing interest at three-month LIBOR plus 5 basis points. The series was initially collateralized by approximately $2.0 billion of mortgage loans. On April 22, 1997, one of the Corporation's grantor trust subsidiaries (Capital Trust IV) issued $500 million of Preferred Securities representing undivided beneficial interests in the assets of the respective grantor trust subsidiary, which constitutes $516 million aggregate principal amount of the Corporation's Junior Subordinated Deferrable Interest Notes bearing interest at 8.25 percent due 2027. Such notes and Preferred Securities are redeemable beginning in 2007. Under the bank note program jointly maintained by NationsBank, N.A., NationsBank, N.A. (South) and NationsBank of Texas, N.A., up to $9.0 billion of bank notes may be offered from time to time with fixed or floating rates and maturities from 30 days to 15 years from date of issue. On March 31, 1997, there were short-term bank notes outstanding of $522 million. In addition, NationsBank of Texas, N.A. and NationsBank, N.A. had outstanding bank notes of $4.1 billion on March 31, 1997 that were classified as long-term debt. On March 31, 1997 and December 31, 1996, the Corporation had unused commercial paper back-up lines of credit totaling $1.5 billion which expire in 1997. These lines were supported by fees paid directly by the Corporation to unaffiliated banks. From April 1 through May 7, 1997, the Corporation issued an additional $170 million in long term debt, including $120 million of senior notes and $50 million of subordinated notes with maturities ranging from 2000 to 2012. Of the additional $170 million issued, $120 million bear interest at floating rates and $50 million bear interest at fixed rates. As of May 7, the Corporation had the authority to issue approximately $4.8 billion of corporate debt securities and preferred and common stock under its existing shelf registration statements and $3.3 billion of corporate debt securities under the Euro medium-term note program. Note 6 - 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): March 31 December 31 1997 1996 --------------------------------------------------------- Commitments to extend credit Credit card commitments $28,060 $24,255 Other loan commitments 90,302 82,506 Standby letters of credit and financial guarantees 10,891 10,060 Commercial letters of credit 923 761 On March 31, 1997 and December 31, 1996, indemnified securities lending transactions totaled $7.5 billion and $7.1 billion, respectively. Collateral, with a market value of $7.7 billion on March 31, 1997 and $7.2 billion on December 31, 1996, was obtained by the Corporation in support of these transactions. On March 31, 1997, the Corporation had commitments to purchase and sell when-issued securities of $6.3 billion and $7.6 billion, respectively. This compares to commitments to purchase and sell when-issued securities of $7.4 billion each on December 31, 1996. See Tables 6 and 7 and the accompanying discussion in Item 2 regarding the Corporation's derivatives used for risk management purposes. See Table 8 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 7 - Employee Benefit Plans On March 26, 1997, the Corporation's Board of Directors approved an amendment to the 1996 Associates Stock Option Award Plan. Under the amendment, all active benefits-eligible associates through the vice president level who had not previously received an award under the 1996 Associates Stock Option Award Plan received a one-time award of a predetermined number of stock options entitling them to purchase shares of the Corporation's common stock at the closing price of $56 1/8 per share on April 1, 1997. Rehired associates who previously received an award under this plan and did not exercise any portion of the award also were eligible for the award. Options to purchase approximately 4 million shares of the Corporation's common stock were granted on April 1, 1997. One-half of the options are vested and exercisable after the Corporation's common stock closes at or above $68 per share for ten consecutive trading days and no earlier than April 1, 1998. The remainder of the options are vested and exercisable after the Corporation's common stock closes at or above $80 per share for ten consecutive trading days and no earlier than April 1, 1998. In any event, the options vest and are exercisable on July 1, 2000. The options expire on July 1, 2001. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Earnings Review Table 1 presents a comparison of selected operating results for the three months ended March 31, 1997 and 1996. Net income for the first quarter of 1997 increased 38 percent to $709 million from $513 million in the first quarter of 1996. Earnings per common share and fully diluted earnings per common share were $.97 and $.94, respectively, for the first quarter of 1997, compared to $.85 and $.84 in the comparable prior year period. Excluding a merger-related charge of $118 million ($77 million, net of tax), net income for the first quarter of 1996 was $590 million, earnings per common share were $.98 and fully diluted earnings per common share were $.96. The acquisition of Boatmen's caused most of the increases in income and expense categories in the first three months of 1997 compared to the same period in 1996. Most increases in the categories on the balance sheets when comparing December 31, 1996 and March 31, 1997 are also attributable to the acquisition. Other significant changes in the Corporation's results of operations and financial position are discussed in the sections that follow. Key performance highlights for the first quarter of 1997 were: o Taxable-equivalent net interest income increased 25 percent to $2.0 billion in the first quarter of 1997. The net interest yield increased to 3.83 percent compared to 3.43 percent in the first quarter of 1996. o Provision for credit losses covered net charge-offs and totaled $190 million in the first quarter of 1997 compared to $155 million in the same period of 1996. Net charge-offs totaled $184 million compared to $155 million in the first quarter of 1996. Net charge-offs as a percentage of average loans, leases and factored accounts receivable remained unchanged at .50 percent in the first three months of 1997 compared to the same period in 1996. Nonperforming assets increased to $1.2 billion on March 31, 1997 compared to $1.0 billion on December 31, 1996. o Noninterest income increased 26 percent to $1.1 billion in the first quarter of 1997, driven primarily by higher deposit account service charges, asset management and fiduciary service fees, trading profits and fees and mortgage servicing and mortgage-related fees. o Noninterest expense increased 30 percent to $1.8 billion. Excluding the Boatmen's acquisition, noninterest expense increased approximately 3 percent. o The return on average common shareholders' equity decreased to 13.96 percent in the first quarter of 1997. o Cash basis ratios, which measure operating performance excluding intangible assets and the related amortization expense, improved with cash basis fully diluted earnings per share rising 22 percent to $1.07 and return on average tangible common shareholders' equity increasing over 700 basis points to 26.38 percent. The cash basis efficiency ratio was 55.3 percent. When compared to the first quarter of 1996 operating cash basis ratios, cash basis fully diluted earnings per share for the first quarter of 1997 increased 7 percent and return on average tangible common shareholders' equity increased approximately 450 basis points. 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. Table 1 Selected Operating Results (Dollars in Millions Except Per-Share Information)
Three Months Ended March 31 ------------------------------------------------ 1997 1996 ------------------------------------------------ Income Statement Income from earning assets $ 4,027 $ 3,573 Interest expense 2,077 2,016 Net interest income (taxable-equivalent) 1,978 1,584 Net interest income 1,950 1,557 Provision for credit losses 190 155 Gains on sales of securities 43 14 Noninterest income 1,113 885 Other real estate owned income 2 0 Merger-related charge 0 118 Other noninterest expense 1,810 1,394 Income before income taxes 1,108 789 Income tax expense 399 276 Net income 709 513 Net income applicable to common shareholders 705 509 Net income (excluding merger-related charge) 709 590 Average common shares issued (in thousands) 730,413 600,558 Per common share Earnings $ 0.97 $ 0.85 Earnings (excluding merger-related charge) 0.97 0.98 Fully diluted earnings 0.94 0.84 Fully diluted earnings (excluding merger-related charge) 0.94 0.96 Cash dividends paid 0.33 0.29 Common shareholders' equity (period-end) 28.22 22.46 Balance sheet (period-end) Total assets 238,958 194,375 Total loans, leases and factored accounts receivable, net of unearned income 148,716 124,344 Total deposits 136,807 109,622 Long-term debt 25,086 18,659 Common shareholders' equity 20,534 13,444 Total shareholders' equity 20,659 13,557 Performance ratios Return on average assets 1.19% 0.99% Return on average assets (excluding merger-related charge) 1.19 1.14 Return on average common shareholders' equity (1) 13.96 15.71 Return on average common shareholders' equity (excluding merger-related charge) (1) 13.96 18.07 Risk-based capital ratios Tier 1 7.06 7.35 Total 11.58 11.71 Leverage capital ratio 6.19 6.19 Total equity to total assets 8.65 6.97 Cash basis financial data (2) Cash basis earnings per common share $ 1.10 $ 0.89 Cash basis earnings per common share (excluding merger-related charge) 1.10 1.02 Cash basis fully diluted earnings per common share 1.07 0.88 Cash basis fully diluted earnings per common share (excluding merger-related charge) 1.07 1.00 Return on average tangible assets 1.40% 1.05% Return on average tangible assets (excluding merger-related charge) 1.40 1.20 Return on average tangible common shareholders' equity (1) 26.38 19.14 Return on average tangible common shareholders' equity (excluding merger-related charge) (1) 26.38 21.85 Market price per share of common stock Close at the end of the period $ 55.5 $ 40.0625 High for the period 65 40.6875 Low for the period 48 32.1875
(1) Average common shareholders' equity does not include the effect of market value adjustments to securities available for sale and marketable equity securities. (2) Cash basis calculations exclude intangible assets and the related amortization expense. Table 2 Business Unit Summary For the Three Months Ended March 31 (Dollars in Millions)
General Bank Global Finance Financial Services ---------------------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 ---------------------------------------------------------------------------------- Net interest income (taxable-equivalent) $1,464 $1,152 $329 $278 $141 $144 Noninterest income 781 580 274 277 57 27 ---------------------------------------------------------------------------------- Total revenue 2,245 1,732 603 555 198 171 Provision for credit losses 118 114 32 8 39 33 Gains on sale of securities 0 6 0 0 0 0 Other real estate owned expense (income) 3 1 (7) (3) 2 3 Noninterest expense 1,408 1,011 322 286 80 78 ---------------------------------------------------------------------------------- Income before income taxes 716 612 256 264 77 57 Income tax expense 276 226 94 97 26 21 ---------------------------------------------------------------------------------- Net income (1) $440 $386 $162 $167 $51 $36 ================================================================================== Cash basis earnings (4) $526 $404 $174 $171 $55 $39 Net interest yield 4.62% 4.87% 2.83%(2) 2.98%(2) 6.83% 7.45% Average equity to average assets 8.36 6.91 5.15 4.89 13.95 14.13 Return on average equity 15 22 14 18 17 13 Tangible return on average tangible equity (4) 26 26 17 18 22 16 Efficiency ratio 62.7 58.4 53.4 51.7 40.5 45.5 Cash basis efficiency ratio (4) 58.8 57.3 51.6 50.7 38.8 43.6 Average (3) Total loans and leases, net of unearned income $96,855 $81,056 $41,706 $35,207 $8,303 $7,734 Total deposits 117,193 87,059 9,214 7,648 0 0 Total assets 139,045 102,571 88,612 78,151 8,854 8,286 Period end (3) Total loans and leases, net of unearned income 97,293 80,220 42,645 36,520 8,464 7,720 Total deposits 118,135 88,625 11,258 7,758 0 0
(1) Business Unit results are presented on a fully allocated basis but do not include $56 million net income for 1997 and $76 million net expense for 1996, which represent earnings associated with unassigned capital, gains on sales of certain 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 1.73 percent and 1.67 percent for the first three months of 1997 and 1996, respectively. (3) The sums of balance sheet amounts differ from consolidated amounts due to activities between the Business Units. (4) Cash basis calculations exclude intangible assets and the related amortization expense. - ------------------------------------------------------------------------------ The General Bank and Global Finance business unit results reflect the impact of the purchase of Boatmen's, which resulted in an increase in goodwill of approximately $5.8 billion and approximately $57 million of related amortization expense on a consolidated basis for the first quarter of 1997. As a result, the returns on average equity and efficiency ratios compare unfavorably to the first three months of 1996. Accordingly, business unit earnings, the return on average equity and the efficiency ratio excluding the impact of intangibles and related amortization expense are presented in Table 2 along with information based on actual operating results. The General Bank includes the Banking Group, which contains the retail banking network and is the service provider of banking services to 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 includes businesses that provide full-service and discount brokerage, investment advisory and investment management services. The Private Client Group is part of the Asset Management Group as well and offers banking, fiduciary and investment management services. The General Bank earned $440 million in the first three months of 1997, an increase of 14 percent over the same period in 1996. The acquisition of Boatmen's accounted for most of the General Bank's increased earnings over the same period last year. Taxable-equivalent net interest income in the General Bank increased $312 million primarily reflecting the impact of the Boatmen's acquisition and deposit cost containment efforts. The net interest yield decreased 25 basis points due to changes in the earning asset mix related to the Boatmen's acquisition. Excluding the impact of acquisitions, securitizations and loan sales, loans grew $3.4 billion due to higher mortgage loans, up $5.2 billion, and credit card loans, up $1.1 billion, partly offset by a slight decline in the commercial portfolio. Noninterest income rose 35 percent in the first three months of 1997 to $781 million due primarily to the Boatmen's acquisition. Excluding the impact of Boatmen's, deposit account service charges and credit card income increased approximately 15 percent and 12 percent, respectively. Noninterest expense increased 39 percent to $1.4 billion due primarily to acquisition-related personnel expenses, which accounted for half of the increase year over year, with the remaining increase across most major categories. Excluding acquisitions, noninterest expense was unchanged. The cash basis efficiency ratio increased to 58.8 percent for the first quarter of 1997 compared to the same period in 1996 due to the inclusion of Boatmen's less efficient expense base and incremental funding costs related to the acquisition. The tangible return on average tangible equity remained unchanged at 26 percent, the result of revenue growth offset by a proportionate increase in operating expenses and higher equity levels resulting from the Boatmen's acquisition. Global Finance provides comprehensive corporate and investment banking, as well as trading and distribution services to domestic and international customers through its Corporate Finance/Capital Markets, Real Estate and Specialized Lending 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 Corporate Finance/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 $162 million in the first three months of 1997 compared to $167 million in the first three months of 1996, the result of higher levels of noninterest and provision expenses due in part to the Boatmen's acquisition. Taxable-equivalent net interest income for the first three months of 1997 was $329 million compared to $278 million in the first three months of 1996 reflecting loan growth due primarily to the Boatmen's acquisition partially offset by narrower commercial loan spreads resulting from increased competitive pressure on commercial loan pricing. Noninterest income in the first three months of 1997 declined slightly over the same period last year driven by a decline in investment banking fees, partly offset by increases in most other categories. Noninterest expense for the period rose 13 percent to $322 million across most major categories, the result of the acquisition of Boatmen's. The cash basis efficiency ratio increased to 51.6 percent due to the higher level of expenses associated with the Boatmen's acquisition. The tangible return on average tangible equity decreased to 17 percent, the result of a 9-percent increase in total revenue more than offset by higher operating expenses and higher equity levels resulting from the Boatmen's acquisition. 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. NationsCredit Commercial Corporation consists of 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 $51 million in the first three months of 1997 increased 42 percent over the same period in 1996. Taxable-equivalent net interest income decreased $3 million resulting from lower yields partly offset by a 7-percent growth in average loans and leases. The increase in provision for credit losses was driven mainly by loan growth and partly offset by lower loss rates. The net interest yield of 6.83 percent was down 62 basis points from 1996, due principally to increased competitive pressure. Noninterest income more than doubled to $57 million in the first three months in 1997, reflecting gains associated with the sale of 29 branches during the first quarter of 1997. Noninterest expense increased 3 percent to $80 million for the first three months of 1997. Revenue growth more than offset expense growth due to the gains on branch sales, resulting in a cash basis efficiency ratio of 38.8 percent for the first quarter of 1997. The tangible return on average tangible equity rose approximately 600 basis points to 22 percent, primarily attributable to the aforementioned gains on branch sales. Results of Operations Net Interest Income An analysis of the Corporation's taxable-equivalent net interest income and average balance sheet levels for the last five quarters is presented in Table 3. Taxable-equivalent net interest income increased 25 percent to nearly $2 billion in the first quarter of 1997 compared to $1.6 billion in the first quarter of 1996 due to the acquisition of Boatmen's, the reinvestment of proceeds from the sale of low-yielding securities into higher-spread products and core loan growth, partially offset by the impact of the sale of certain consumer loans in the third quarter of 1996. While securitizations lowered net interest income by $41 million in the first quarter of 1997 compared to the first quarter of 1996, they do not significantly affect the Corporation's earnings. As the Corporation continues to securitize loans, its role becomes that of a servicer and the income related to securitized loans is reflected in noninterest income. Of the $455-million increase in interest income for the first three months of 1997 compared to the same period in 1996, $452 million was due to higher average earning assets with $3 million resulting from higher yields on average earning assets. Interest expense increased $61 million with $200 million resulting from higher levels of average interest-bearing liabilities offset by a $139 million favorable impact of lower rates paid on average interest-bearing liabilities. The net interest yield increased 40 basis points to 3.83 percent in the first quarter of 1997 compared to the same period of 1996 primarily reflecting the reinvestment of proceeds from the sale of low-yielding securities into higher-spread products. Loan growth 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. Provision for Credit Losses The provision for credit losses covered net charge-offs and was $190 million in the first quarter of 1997 compared to $155 million in the comparable prior year quarter, reflecting the impact of the acquisition of Boatmen's. As presented in the analysis of the allowance for credit losses in Table 9, net charge-offs increased $29 million to $184 million in the first quarter of 1997 compared to the first quarter of 1996 due primarily to increases in credit card and other consumer charge-offs partially offset by a decrease in total commercial charge-offs. The increase in net charge-offs in the first quarter of 1997 was primarily due to the acquisition of Boatmen's. Total net charge-offs remained unchanged at .50 percent of average loans, leases and factored accounts receivable during the first quarter of 1997 versus 1996. Excluding increases that resulted from the acquisition of Boatmen's, management expects charge-offs to grow as the Corporation maintains its efforts to shift the mix of the loan portfolio to a higher consumer concentration. The allowance for credit losses was $2.8 billion, or 1.87 percent of net loans, leases and factored accounts receivable, on March 31, 1997 compared to $2.3 billion, or 1.89 percent, at the end of 1996 with the increase in the allowance attributable to the acquisition of Boatmen's. The allowance for credit losses was 265 percent of nonperforming loans on March 31, 1997 compared to 260 percent on December 31, 1996. Future economic conditions will impact credit quality and may result in increased net charge-offs and higher provisions for credit losses. Table 3 Quarterly Taxable-Equivalent Data (Dollars in Millions)
First Quarter 1997 Fourth Quarter 1996 ----------------------------------------------------------------- Average Average Balance Income Balance Income Sheet or Yields/ Sheet or Yields/ Amounts Expense Rates Amounts Expense Rates ------- ------- ------- ------- ------- ------- Earnings assets Loans and leases, net of unearned income (1) Commercial (2) $59,542 $1,229 8.38% $49,987 $1,044 8.30% Real estate commercial 8,646 190 8.90 5,388 122 9.00 Real estate construction 3,778 84 8.98 3,084 67 8.74 --------------------------------------------------------------- Total commercial 71,966 1,503 8.47 58,459 1,233 8.39 --------------------------------------------------------------- Residential mortgage 32,072 621 7.78 28,174 548 7.77 Credit card 7,170 205 11.60 6,363 185 11.58 Other consumer 26,872 632 9.54 20,581 503 9.69 --------------------------------------------------------------- Total consumer 66,114 1,458 8.91 55,118 1,236 8.93 --------------------------------------------------------------- Foreign 3,283 56 6.86 2,701 47 6.89 Lease financing 5,316 103 7.79 4,614 87 7.66 --------------------------------------------------------------- Total loans and leases, net 146,679 3,120 8.61 120,892 2,603 8.57 --------------------------------------------------------------- Securities Held for investment 1,920 29 6.05 2,585 36 5.55 Available for sale (3) 20,740 356 6.89 11,540 205 7.10 --------------------------------------------------------------- Total securities 22,660 385 6.82 14,125 241 6.82 --------------------------------------------------------------- Loans held for sale 1,062 17 6.49 802 15 7.31 Federal funds sold 343 5 5.70 273 4 5.79 Securities purchased under agreements to resell 13,027 183 5.70 12,018 158 5.21 Time deposits placed and other short-term investments 2,228 28 5.11 1,991 25 4.86 Trading account securities (4) 22,848 317 5.60 21,148 334 6.32 --------------------------------------------------------------- Total earning assets (5) 208,847 4,055 7.85 171,249 3,380 7.86 Cash and cash equivalents 9,178 7,720 Factored accounts receivable 1,078 1,256 Other assets, less allowance for credit losses 23,103 14,096 --------------------------------------------------------------- Total assets $242,206 $194,321 =============================================================== Interest-bearing liabilities Savings $ 10,220 53 2.10 $ 8,607 46 2.12 NOW and money market deposit accounts 42,138 273 2.64 30,634 191 2.47 Consumer CDs and IRAs (6) 39,458 507 5.21 30,870 405 5.22 Negotiated CDs, public funds and other time deposits 3,555 47 5.31 2,544 35 5.53 Foreign time deposits 9,278 118 5.14 9,139 117 5.10 Federal funds purchased 4,469 59 5.35 3,915 51 5.21 Securities sold under agreements to repurchase (6) 29,607 358 4.90 25,192 330 5.22 Commercial paper 3,041 41 5.53 2,850 40 5.59 Other short-term borrowings (6) 2,711 51 n/m 1,971 34 6.99 Trading account liabilities (4) 9,949 165 6.73 9,314 152 6.48 Long-term debt (7) 25,244 405 6.50 22,702 367 6.53 --------------------------------------------------------------- Total interest-bearing liabilities 179,670 2,077 4.68 147,738 1,768 4.77 --------------------------------------------------------------- Noninterest-bearing sources Noninterest-bearing deposits 30,327 23,971 Other liabilities 11,555 9,388 Shareholders' equity 20,654 13,224 --------------------------------------------------------------- Total liabilities and shareholders' equity $242,206 $194,321 =============================================================== Net interest spread 3.17 3.09 Impact of noninterest-bearing sources .66 .66 --------------------------------------------------------------- Net interest income/yield on earning assets $ 1,978 3.83% $ 1,612 3.75% ===============================================================
n/m-not meaningful (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 increased (decreased) interest income $50 in the first quarter of 1997 and $31, $11, $3 and ($19) in the fourth, third, second and first quarters of 1996, 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 $28 in the first quarter of 1997 and $22, $21, $24 and $27 in the fourth, third, second and first quarters of 1996, respectively. (6) Securities sold under agreements to repurchase, other short-term borrowings and consumer CDs interest expense includes net interest rate swap expense related to swaps fixing the cost of certain of these liabilities. Interest rate swaps increased (decreased) interest expense ($1) in the first quarter of 1997 and $3, $16, $26 and $21 in the fourth, third, second and first quarters of 1996, 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. Interest rate swaps decreased interest expense $9 in the first quarter of 1997 and $4, $3, $2 and $3 in the fourth, third, second and first quarter of 1996, respectively. Long-term debt includes trust preferred securities.
Third Quarter 1996 Second Quarter 1996 First Quarter 1996 - -------------------------------------------------------------------------------------------- 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 - ------- ------- ------- ------- ------- ------- -------- ------- ------- $48,920 $1,011 $8.23% $49,983 $1,000 8.04% $49,319 $987 8.05% 5,921 138 9.25 6,288 141 9.07 6,774 149 8.82 3,195 74 9.15 3,229 71 8.83 3,154 69 8.85 - -------------------------------------------------------------------------------------------- 58,036 1,223 8.38 59,500 1,212 8.19 59,247 1,205 8.18 - -------------------------------------------------------------------------------------------- 27,990 545 7.77 27,728 542 7.82 27,352 534 7.83 5,903 169 11.38 6,057 173 11.45 6,590 206 12.59 22,026 544 9.84 23,441 578 9.93 23,850 593 9.99 - -------------------------------------------------------------------------------------------- 55,919 1,258 8.97 57,226 1,293 9.07 57,792 1,333 9.26 - -------------------------------------------------------------------------------------------- 2,813 46 6.59 2,746 45 6.56 2,392 45 7.54 4,429 85 7.60 4,254 80 7.59 3,851 72 7.46 - -------------------------------------------------------------------------------------------- 121,197 2,612 8.58 123,726 2,630 8.54 123,282 2,655 8.65 - -------------------------------------------------------------------------------------------- 3,173 46 5.73 3,731 51 5.45 4,292 60 5.62 16,388 273 6.66 18,328 303 6.64 22,997 365 6.37 - -------------------------------------------------------------------------------------------- 19,561 319 6.51 22,059 354 6.44 27,289 425 6.25 - -------------------------------------------------------------------------------------------- 1,025 20 7.87 1,156 19 6.49 1,331 25 7.55 361 6 6.39 397 5 5.75 525 8 5.89 11,828 153 5.14 12,075 149 4.99 13,870 183 5.29 1,430 20 5.74 1,263 17 5.28 1,056 18 6.90 18,897 314 6.60 17,912 292 6.53 18,213 286 6.33 - -------------------------------------------------------------------------------------------- 174,299 3,444 7.87 178,588 3,466 7.80 185,566 3,600 7.80 7,597 7,928 7,998 1,150 1,124 1,010 14,877 15,156 14,043 - -------------------------------------------------------------------------------------------- $197,923 $202,796 $208,617 ============================================================================================ $ 8,798 48 2.15 $ 9,336 52 2.27 $ 9,361 55 2.35 30,485 189 2.49 30,155 191 2.52 29,692 192 2.61 30,092 394 5.21 29,698 389 5.28 29,469 397 5.42 3,314 46 5.50 3,331 46 5.53 3,273 44 5.42 10,836 145 5.31 12,867 170 5.34 11,902 170 5.73 3,631 49 5.39 4,433 59 5.37 6,817 92 5.41 26,309 355 5.36 28,924 391 5.44 33,705 455 5.43 3,129 44 5.59 3,064 42 5.49 2,821 39 5.62 2,999 51 6.76 3,968 58 5.80 4,455 65 5.89 9,848 163 6.57 8,912 147 6.63 12,485 191 6.16 21,067 344 6.53 19,730 310 6.30 18,885 316 6.68 - -------------------------------------------------------------------------------------------- 150,508 1,828 4.84 154,418 1,855 4.83 162,865 2,016 4.97 - -------------------------------------------------------------------------------------------- 24,190 24,601 23,209 10,092 10,225 9,399 13,133 13,552 13,144 - -------------------------------------------------------------------------------------------- $197,923 $202,796 $208,617 ============================================================================================ 3.03 2.97 2.83 .66 .65 .60 - -------------------------------------------------------------------------------------------- $1,616 3.69% $1,611 3.62% $1,584 3.43% ============================================================================================
Gains on Sales of Securities Gains on the sales of securities were $43 million in the first quarter of 1997 compared to $14 million in the first quarter of 1996. The increase reflects the Corporation's sale of a significant portion of the Boatmen's portfolio subsequent to the acquisition date. The increase also reflects the sale of low-yielding securities and the reinvestment of the proceeds from such sales into higher-yielding assets. Noninterest Income Table 4 Noninterest Income (Dollars in Millions)
Three Months Ended March 31 Change -------------------------------------------- 1997 1996 Amount Percent -------------------------------------------- Service charges on deposit accounts $360 $259 $101 39.0% -------------------------------------------- Nondeposit-related service fees Safe deposit rent 11 9 2 22.2 Mortgage servicing and mortgage-related fees 70 47 23 48.9 Fees on factored accounts receivable 15 16 (1) (6.3) Investment banking income 83 99 (16) (16.2) Other service fees 51 45 6 13.3 -------------------------------------------- Total nondeposit-related service fees 230 216 14 6.5 -------------------------------------------- Asset management and fiduciary service fees 166 105 61 58.1 -------------------------------------------- Credit card income Merchant discount fees 0 4 (4) (100.0) Annual credit card fees 7 7 0 0.0 Other credit card fees 77 58 19 32.8 -------------------------------------------- Total credit card income 84 69 15 21.7 -------------------------------------------- Other income Brokerage income 33 28 5 17.9 Trading account profits and fees 97 68 29 42.6 Bankers' acceptances and letters of credit fees 20 18 2 11.1 Insurance commissions and earnings 25 19 6 31.6 Miscellaneous 98 103 (5) (4.9) -------------------------------------------- Total other income 273 236 37 15.7 -------------------------------------------- $1,113 $885 $228 25.8 ============================================
As presented in Table 4, noninterest income increased 26 percent to $1.1 billion in the first quarter of 1997, primarily reflecting the acquisition of Boatmen's as described below: o Service charges on deposit accounts increased 39 percent over the same period of 1996, due primarily to the acquisition of Boatmen's. Excluding the impact of the Boatmen's acquisition, service charges increased approximately 11 percent. o Mortgage servicing and related fees increased 49 percent to $70 million in the first quarter of 1997 due primarily to the acquisition of the Boatmen's mortgage portfolio. Including acquisitions, the average portfolio of loans serviced increased 41 percent from $83.1 billion in the first quarter of 1996 to $117.0 billion in the first quarter of 1997. Mortgage loan originations through the Corporation's mortgage subsidiary were unchanged at $3.1 billion in the first quarters of 1997 and 1996. Lower levels of mortgage loan originations due to changes in the interest rate environment were offset by Boatmen's mortgage activity. Origination volume in the first quarter of 1997 consisted of approximately $2.0 billion of correspondent and wholesale loan volume and $1.1 billion of retail loan volume. In conducting its mortgage banking activities, the Corporation is exposed to interest rate risk for the period between loan commitment date and subsequent delivery date. The value of the Corporation's mortgage servicing rights is also 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 $8.9 billion on March 31, 1997. Net unrealized losses associated with these contracts were $25 million on March 31, 1997. o Investment banking income decreased 16 percent to $83 million in the first quarter of 1997, reflecting lower gains on principal investing activity (investing in equity or equity-related transactions on behalf of clients). An analysis of investment banking income by major business activity follows (in millions): Three Months Ended March 31 ------------------- 1997 1996 ------------------- Syndications $19 $17 Securities underwriting 25 19 Principal investment activities 23 50 Other 16 13 ------------------- $83 $99 =================== o Asset management and fiduciary service fees increased $61 million to $166 million in the first quarter of 1997, reflecting the impact of the Boatmen's acquisition. o Credit card income increased 22 percent to $84 million in the first quarter of 1997, primarily due to the acquisition of Boatmen's. Credit card income includes $8 million from credit card securitizations. o Trading account profits and fees totaled $97 million in the first quarter of 1997, an increase of $29 million from $68 million in the first quarter of 1996. An analysis of trading account profits and fees by major business activity follows (in millions): Three Months Ended March 31 -------------------- 1997 1996 -------------------- Securities trading $19 $10 Interest rate contracts 41 56 Foreign exchange contracts 17 (7) Other 20 9 --------------------- $97 $68 ===================== o Miscellaneous income totaled $98 million in the first quarter of 1997, a decrease of $5 million compared to the same period of 1996. 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. Noninterest Expense As presented in Table 5, the Corporation's noninterest expense increased 30 percent to $1.8 billion in the first quarter of 1997 from $1.4 billion in the same period of 1996. Excluding the impact of the Boatmen's acquisition, noninterest expense increased approximately 3 percent. A discussion of the significant components of noninterest expense in the first quarter of 1997 compared to the first quarter of 1996 follows: o Personnel expense increased $219 million over 1996, primarily due to the impact of the acquisition of Boatmen's. On March 31, 1996, the Corporation had approximately 81,000 full-time equivalent employees compared to approximately 63,000 full-time equivalent employees on December 31, 1996. o Occupancy expense increased 19 percent to $151 million in the first quarter of 1997 compared to the same period of 1996 due to the acquisition of Boatmen's. o Equipment expense increased approximately $49 million in the first quarter of 1997 over the same period of 1996, reflecting the acquisition of Boatmen's as well as enhancements to computer resources throughout the Corporation and to product delivery systems, such as the Model Banking initiative, PC banking, direct banking and data base management. o Professional fees increased $26 million, reflecting higher consulting and technical support fees for projects to enhance revenue growth and for the development and installation of infrastructure enhancements. o Intangibles amortization expense increased $75 million in the first quarter of 1997 compared to the first quarter of 1996, reflecting the impact of the Boatmen's acquisition. o Other general operating expenses decreased $22 million to $126 million in the first quarter of 1997. Included in the first quarter 1996 expense was a $40 million pre-tax charge reflecting the estimated loss associated with fraudulent commercial loan transactions. Table 5 Noninterest Expense (Dollars in Millions)
Three Months Ended March 31 Change ----------------------------------------- 1997 1996 Amount Percent ----------------------------------------- Personnel $881 $662 $219 33.1% Occupancy, net 151 127 24 18.9 Equipment 155 106 49 46.2 Marketing 75 67 8 11.9 Professional fees 75 49 26 53.1 Amortization of intangibles 101 26 75 288.5 Credit card 15 17 (2) (11.8) Deposit insurance 7 7 0 0.0 Data processing 70 61 9 14.8 Telecommunications 54 41 13 31.7 Postage and courier 49 38 11 28.9 Other general operating 126 148 (22) (14.9) General administrative and miscellaneous 51 45 6 13.3 ----------------------------------------- $1,810 $1,394 $416 29.8 =========================================
Income Taxes The Corporation's income tax expense for the first quarter of 1997 was $399 million, for an effective tax rate of 36.0 percent of pretax income. Income tax expense for the first quarter of 1996 was $276 million, for an effective rate of 35.0 percent. The increase in the effective tax rate was due to the increase in non-deductible goodwill amortization resulting from the acquisition of Boatmen's. 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. Average customer-based funds increased $30.7 billion in the first three months of 1997 over the same period in 1996 primarily due to deposits obtained in acquisitions over the past year. As a percentage of total sources, average customer-based funds represented 52 percent in the first three months of 1997 compared to 46 percent in the first three months of 1996. Average market-based funds decreased $13.1 billion in the first three months of 1997 compared to the same period in 1996 and comprised a smaller portion of total sources of funds at 24 percent for the first three months of 1997 compared to 35 percent during the same period of 1996, the result of increases in customer-based funds from the Boatmen's acquisition and term debt. Average long-term debt increased $6.4 billion in the first three months of 1997 over 1996 levels for the comparable period and represented 10 percent of total sources of funds compared to 9 percent during the first three months of 1996. The increase in long-term debt is the result of borrowings to fund the cash portion of the Boatmen's purchase price. Average loans and leases, the Corporation's primary use of funds, increased $23.4 billion during the first three months of 1997 despite higher levels of securitized loans compared to the same period of 1996 due to the impact of acquisitions and core loan growth, comprising 61 percent of total uses of funds compared to 59 percent during the same period of 1996. The ratio of average loans and leases to customer-based funds was 117 percent in the first three months of 1997 compared to 130 percent in the first three months of 1996. The average securities portfolio as a percentage of total uses decreased to 9 percent in the first three months of 1997 from 13 percent in the first three months of 1996, the result of management's focus on the reduction of low-yielding assets. Cash and cash equivalents were $11.0 billion on March 31, 1997, an increase of $2.1 billion from December 31, 1996. During the first three months of 1997, net cash used in operating activities was $4.2 billion, net cash provided by investing activities was $2.4 billion and net cash provided by financing activities was $3.8 billion. For further information on cash flows, see the Consolidated Statement of Cash Flows in the consolidated financial statements. Liquidity is a measure of the Corporation's ability to fulfill its cash requirements and is managed by the Corporation through its asset and liability management process. The Corporation assesses the level of liquidity necessary to meet its cash requirements by monitoring its assets and liabilities and modifying these positions as liquidity requirements change. This process, coupled with the Corporation's ability to raise capital and debt financing, is designed to cover the liquidity needs of the Corporation. The following discussion provides an overview of significant on- and off-balance sheet components. Securities The securities portfolio on March 31, 1997 consisted of securities held for investment totaling $1.8 billion and securities available for sale totaling $20.0 billion compared to $2.1 billion and $12.3 billion, respectively, on December 31, 1996. The increase in the available for sale portfolio from December 31, 1996 to March 31, 1997 was due to the addition of higher-yielding mortgage-backed securities in the first quarter. On March 31, 1997, the market value of the Corporation's portfolio of securities held for investment reflected net unrealized depreciation of $4 million. On December 31, 1996, the market value of securities held for investment approximated the book value of the portfolio. The valuation reserve for securities available for sale and marketable equity securities decreased shareholders' equity by $115 million on March 31, 1997, reflecting pretax depreciation of $294 million on securities available for sale and pretax appreciation of $102 million on marketable equity securities. The valuation reserve increased shareholders' equity by $86 million on December 31, 1996. The decrease in the valuation reserve was primarily attributable to an increase in interest rates when comparing March 31, 1997 to December 31, 1996. The estimated average maturities of securities held for investment and securities available for sale portfolios were 1.53 years and 6.13 years, respectively, on March 31, 1997 compared with 1.47 years and 6.91 years, respectively, on December 31, 1996. Off-Balance Sheet Derivatives - Asset and Liability Management Positions The Corporation utilizes interest rate and foreign exchange contracts in its asset and liability management (ALM) process. Interest rate contracts allow the Corporation to efficiently manage its interest rate risk position. The Corporation primarily uses non-leveraged generic and basis swaps. Generic swaps involve the exchange of fixed-rate and variable-rate interest payments based on the contractual underlying notional amounts. 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. 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. Table 6 summarizes the notional amounts and the activity of ALM interest rate contracts for the three months ended March 31, 1997. As reflected in the table, the gross notional amount of the Corporation's ALM swap program on March 31, 1997 was $38.1 billion, with the Corporation receiving fixed on $36.0 billion, primarily converting variable-rate commercial loans to fixed-rate, and receiving variable on $422 million. The net receive fixed position of $35.6 billion increased from the net receive fixed position of $26.7 billion on December 31, 1996 as a result of the Corporation modifying the interest rate characteristics of certain variable-rate assets in order to maintain the Corporation's relatively neutral posture to changes in interest rates. Table 6 Asset and Liability Management Interest Rate Notional Contracts (Dollars in Millions)
Total Generic Interest -------------------------------------- Receive Pay Total Option Rate Fixed Fixed Basis Swaps Products Contracts ---------------------------------------------------------------------------------------- Balance on December 31, 1996 $ 27,740 $ 1,035 $ 1,346 $ 30,121 $ 6,395 36,516 Additions 9,968 187 290 10,445 3,075 13,520 Maturities, Terminations and Other (1,684) (800) - (2,484) - (2,484) ---------------------------------------------------------------------------------------- Balance on March 31, 1997 $ 6,024 $ 422 $ 1,636 $ 38,082 $ 9,470 47,552 ========================================================================================
Table 7 summarizes the expected maturities, weighted average pay and receive rates and the unrealized loss on March 31, 1997 of the Corporation's ALM swaps. Floating rates represent the last repricing and will change in the future primarily based on movements in one-, three- and six-month LIBOR rates. The net unrealized depreciation of the ALM swap portfolio on March 31, 1997 was $530 million compared to unrealized appreciation of $69 million on December 31, 1996, reflecting the increase in interest rates during the first quarter. The amount of net realized deferred losses associated with terminated ALM swaps was $39 million on March 31, 1997. In its ALM process, the Corporation also utilizes interest rate option products, primarily 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, respectively. Table 6 also includes a summary of the notional amount and the activity of ALM interest rate option contracts for the three months ended March 31, 1997. At March 31, 1997, the Corporation had a gross notional amount of $9.5 billion in outstanding interest rate option contracts used for ALM purposes. Such instruments are primarily linked to term debt, short-term borrowings and pools of residential mortgages. Table 7 also includes a summary of the expected maturities and the net unrealized loss of the Corporation's ALM options contracts. On March 31, 1997, the net unrealized depreciation of ALM option products was $7 million. The Corporation uses foreign currency swaps to manage the foreign exchange risk associated with foreign-denominated liabilities. At March 31, 1997, these contracts had a notional value of $540 million and reflected unrealized depreciation of $47 million. Unrealized gains and losses associated with ALM foreign currency swaps are included as adjustments to income or expense on the linked asset or liability. The net unrealized depreciation in the estimated value of the ALM interest rate and foreign exchange contract 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 positions should not be viewed in isolation. For a discussion of the Corporation's management of risk associated with mortgage banking activities, see Noninterest Income. Table 7 Asset and Liability Management Interest Rate Contracts March 31, 1997 (Dollars in Millions, Average Expected Maturity in Years)
Expected Maturity --------------------------------------------------------------------------------------- Average Unrealized After Expected Gain/(Loss) Total 1997 1998 1999 2000 2001 2001 Maturity --------------------------------------------------------------------------------------- Asset Conversion Swaps Receive fixed generic $ (366) 3.44 Notional amount $ 30,246 $ 36 $ 2,680 $ 7,135 $ 7,810 $ 8,400 $ 4,185 Weighted average receive rate 6.46% 6.50% 5.96% 6.44% 6.47% 6.57% 6.57% Weighted average pay rate 5.54 Pay fixed generic (1) 4.52 ---------- Notional amount $ 10 $ 1 $ 1 $ 1 $ 1 $ 1 $ 5 Weighted average pay rate 9.78% 9.78% 9.78% 9.78% 9.78% 9.78% 9.78% Weighted average receive rate 6.80 Total asset conversion swaps $ (367) ========== Notional amount $ 30,256 $ 37 $ 2,681 $ 7,136 $ 7,811 $8,401 $ 4,190 Liability Conversion Swaps Receive fixed generic $ (156) 6.61 Notional amount $ 5,778 $ 75 $ 28 $ 702 $ 308 $1,429 $ 3,236 Weighted average receive rate 6.82% 8.27% 6.32% 7.27% 6.79% 6.40% 6.87% Weighted average pay rate 5.80 Pay fixed generic (6) 1.73 ---------- Notional amount $ 412 $ 125 $ 100 $ 110 $ 66 $ - $ 11 Weighted average pay rate 8.18% 10.35% 9.31% 6.05% 6.20% -% 6.60% Weighted average receive rate 5.43 Total liability conversion swaps $ (162) ========== Notional amount $ 6,190 $ 200 $ 128 $ 812 $ 374 $1,429 $ 3,247 - ------------------------------------------------------------------------------------------------------------------------- Total receive fixed swaps $ (522) 3.95 Notional amount $ 36,024 $ 111 $ 2,708 $ 7,837 $ 8,118 $9,829 $ 7,421 Weighted average receive rate 6.52% 7.69% 5.96% 6.51% 6.48% 6.54% 6.70% Weighted average pay rate 5.58 Total pay fixed swaps (7) 1.79 Notional amount $ 422 $ 126 $ 101 $ 111 $ 67 $ 1 $ 16 Weighted average pay rate 8.22% 10.34% 9.31% 6.08% 6.25% 9.78% 7.60% Weighted average receive rate 5.46% Basis Swaps $ (1) 1.53 ---------- Notional amount $ 1,636 $ 371 $ 700 $ 350 $ 90 $ 25 $ 100 Weighted average receive rate 5.52% Weighted average pay rate 5.54 Total Swaps $(530) ========== Notional amount $ 38,082 $ 608 $ 3,509 $ 8,298 $ 8,275 $9,855 $ 7,537 - ------------------------------------------------------------------------------------------------------------------------- Option Products Notional amount (7) $ 9,470 $ 600 $ 2,425 $ 3,575 $ 25 $1,086 $ 1,759 - ------------------------------------------------------------------------------------------------------------------------- Total Interest Rate Contracts $(537) ========== Notional amount $ 47,552 $1,208 $ 5,934 $11,873 $ 8,300 $10,941 $ 9,296
On March 31, 1997, in addition to the above interest rate swaps, the Corporation had a $500 million notional receive fixed generic interest rate swap associated with a credit card securitization. On March 31, 1997, this position had an unrealized market value of negative $37 million, a weighted average receive rate of 5.96 percent, a pay rate of 5.61 percent and an expected maturity of 6.71 years. 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 8 presents the notional or contract amounts on March 31, 1997 and December 31, 1996 and the current credit risk amounts (the net replacement cost of contracts in a gain position on March 31, 1997 and December 31, 1996) 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 8 do not consider the value of any collateral, but generally take into consideration the effects of legally enforceable master netting agreements. On March 31, 1997, 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. Table 8 Derivatives - Dealer Positions (Dollars in Millions)
March 31 December 31 1997 1996 --------------------------------------------------------- Contract/ Credit Risk Contract/ Credit Risk Notional Amount (1) Notional Amount (1) - ------------------------------------------------------------------------------------------------- Interest Rate Contracts Swaps $274,417 $ 1,568 $252,187 $ 927 Futures and forwards 197,350 7 186,333 5 Written options 335,247 - 298,594 - Purchased options 324,632 555 294,591 561 Foreign Exchange Contracts Swaps 1,174 172 1,303 24 Spot, futures and forwards 78,661 1,089 94,028 1,137 Written options 57,816 - 63,081 - Purchased options 55,776 415 61,716 352 Commodity and Other Contracts Swaps 681 37 812 81 Futures and forwards 1,862 3 2,728 - Written options 14,857 - 14,064 - Purchased options 15,195 363 13,828 357 ------ ------- Total before cross product netting 4,209 3,444 ------ ------- Cross product netting 298 286 ------ ------- Net replacement cost $ 3,911 $ 3,158 ====== =======
(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. 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. During 1997, there were no credit losses associated with derivative transactions. In addition, on March 31, 1997, there were no nonperforming derivative positions. Allowance for Credit Losses The Corporation's allowance for credit losses was $2.8 billion on March 31, 1997 compared to $2.3 billion on December 31, 1996. Table 9 provides an analysis of the changes in the allowance for credit losses. The provision for credit losses of $190 million in the first quarter of 1997 was $35 million higher than in the first quarter of 1996, primarily as a result of the Boatmen's acquisition and higher charge-offs in the consumer loan portfolios. Total net charge-offs remained unchanged at .50 percent of average loans, leases and factored accounts receivable during the first quarter of 1997 versus 1996. Increases in credit Table 9 Allowance For Credit Losses (Dollars in Millions)
Three Months Ended March 31 ------------------------- 1997 1996 ------------------------- Balance on January 1 $ 2,315 $ 2,163 ------------------------- Loans, leases and factored accounts receivable charged off Commercial (27) (34) Real estate commercial (4) (13) Real estate construction 0 0 ------------------------- Total commercial (31) (47) ------------------------- Residential mortgage (4) (4) Credit card (108) (65) Other consumer (100) (87) ------------------------- Total consumer (212) (156) ------------------------- Lease financing (4) (1) Factored accounts receivable (4) (6) ------------------------- Total loans, leases and factored accounts receivable charged off (251) (210) ------------------------- Recoveries of loans, leases and factored accounts receivable previously charged off Commercial 18 14 Real estate commercial 2 3 Real estate construction 1 0 ------------------------- Total commercial 21 17 ------------------------- Residential mortgage 1 1 Credit card 19 12 Other consumer 25 22 ------------------------- Total consumer 45 35 ------------------------- Factored accounts receivable 1 3 ------------------------- Total recoveries of loans, leases and factored accounts receivable previously charged off 67 55 ------------------------- Net charge-offs (184) (155) ------------------------- Provision for credit losses 190 155 Allowance applicable to loans of purchased companies and other 464 90 ------------------------- Balance on March 31 $ 2,785 $ 2,253 ========================= Loans, leases and factored accounts receivable, net of unearned income, outstanding end of period $ 148,716 $ 124,344 Allowance for credit losses as a percentage of loans, leases and factored accounts receivable, net of unearned income, outstanding end of period 1.87% 1.81% Average loans, leases and factored accounts receivable, net of unearned income, outstanding during the period $ 147,757 $ 124,292 Net charge-offs as a percentage of average loans, leases and factored accounts receivable, net of unearned income, outstanding during the period 0.50% 0.50% Allowance for credit losses as a percentage of nonperforming loans 264.82 267.71
card and other consumer net charge-offs of $36 million and $10 million, respectively, were partially offset by a decrease of $20 million in commercial net charge-offs. Industry-wide deterioration in consumer credit quality was the primary reason for higher credit card net charge-offs in the first quarter of 1997. Higher other consumer net charge-offs in the first quarter of 1997 were primarily attributable to the Boatmen's acquisition. Excluding increases that resulted from the acquisition of Boatmen's, management expects charge-offs to grow as the Corporation maintains its efforts to shift the mix of the loan portfolio to a higher consumer concentration. Furthermore, future economic conditions also will impact credit quality and may result in increased net charge-offs and higher provisions for credit losses. Nonperforming Assets As presented in Table 10, on March 31, 1997, nonperforming assets were $1.2 billion, or .82 percent of net loans, leases, factored accounts receivable and other real estate owned, compared to $1.0 billion, or .85 percent, on December 31, 1996. Nonperforming loans increased to $1.1 billion on March 31, 1997 from $890 million on December 31, 1996. The increase in nonperforming loans was primarily due to the acquisition of Boatmen's. The allowance coverage of nonperforming loans was 265 percent on March 31, 1997 compared to 260 percent on December 31, 1996. Table 10 Nonperforming Assets (Dollars in Millions)
March 31 December 31 September 30 June 30 March 31 1997 1996 1996 1996 1996 ---------------------------------------------------------- Nonperforming loans Commercial $398 $342 $413 $388 $359 Real estate commercial 162 145 165 119 180 Real estate construction 34 28 36 15 15 ---------------------------------------------------------- Total commercial 594 515 614 522 554 ---------------------------------------------------------- Residential mortgage 256 215 203 174 138 Other consumer 156 135 135 135 136 ---------------------------------------------------------- Total consumer 412 350 338 309 274 ---------------------------------------------------------- Lease financing 45 25 32 23 13 ---------------------------------------------------------- Total nonperforming loans 1,051 890 984 854 841 ---------------------------------------------------------- Other real estate owned 168 153 151 138 144 ---------------------------------------------------------- Total nonperforming assets $1,219 $1,043 $1,135 $992 $985 ========================================================== Nonperforming assets as a percentage of Total assets 0.51% 0.56% 0.61% 0.52% 0.51% Loans, leases and factored accounts receivable, net of unearned income, and other real estate owned 0.82 0.85 0.93 0.80 0.79 Loans past due 90 days or more and not classified as nonperforming $320 $245 $201 $153 $173
Concentrations of Credit Risk In an effort to minimize the adverse impact of any single event or set of occurrences, the Corporation strives to maintain a diverse credit portfolio. Summarized below are areas of significant 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 11. 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 totaled $12.4 billion, or 8 percent of net loans, leases and factored accounts receivable, on March 31, 1997 compared to $8.3 billion, or 7 percent, at the end of 1996. During the first quarter of 1997, the Corporation recorded real estate net charge-offs of $1 million, or .04 percent of average real estate loans, compared to net charge-offs of $10 million, or .39 percent, in the first quarter of 1996. Nonperforming real estate commercial and construction loans were $196 million on March 31, 1997 compared to $173 million on December 31, 1996 due primarily to the acquisition of Boatmen's. The exposures included in Table 11 do not include credit extensions which were made on the general creditworthiness of the borrower for which real estate was obtained as security or as an abundance of caution and for which the ultimate repayment of the credit is not dependent on the sale, lease, rental or refinancing of the real estate. Accordingly, the exposures presented do not include commercial loans secured by owner-occupied real estate, except where the borrower is a real estate developer. In addition to the amounts presented in the tables, on March 31, 1997, the Corporation had approximately $8.3 billion of commercial loans which were not real estate dependent but for which the Corporation had obtained real estate as secondary repayment security. Table 11 Real Estate Commercial and Construction Loans, Other Real Estate Owned and Other Real Estate Credit Exposures March 31, 1997 (Dollars in Millions)
Loans (1) ------------------------------ Other Credit Outstanding Nonperforming OREO Exposures (2) ------------------------------------------------------------------- By Geographic Region (3): Missouri, Kansas, Illinois, Iowa and Arkansas $2,842 $30 $18 $116 Florida and Georgia 2,659 72 45 261 Texas, Oklahoma and New Mexico 2,243 16 7 131 Maryland, District of Columbia and Virginia 1,575 38 27 356 North Carolina and South Carolina 1,478 35 8 62 Other states 1,567 5 2 323 --------------------------------------------------------------- $12,364 $196 $107 $1,249 =============================================================== By Property Type: Apartments $2,000 $24 $1 $447 Residential 1,875 17 2 36 Shopping centers/retail 1,852 15 5 242 Office buildings 1,687 13 32 13 Hotels 1,058 16 0 47 Industrial/warehouse 922 17 2 18 Land and land development 862 26 46 79 Commercial-other 415 20 11 107 Resorts/golf courses 297 0 0 0 Unsecured 179 4 0 144 Multiple use 112 5 1 0 Other 1,105 39 7 116 --------------------------------------------------------------- $12,364 $196 $107 $1,249 ===============================================================
(1) On March 31, 1997, 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. (3) Distribution based on geographic location of collateral. Other Industries - Table 12 presents selected industry credit exposures. Commercial loans, factored accounts receivable and lease financings are included in the table. Other credit exposures as presented include loans held for sale, letters of credit, bankers' acceptances and derivatives exposures in a gain position. Commercial loan outstandings totaled $60.6 billion and $50.3 billion on March 31, 1997 and December 31, 1996, respectively, or 41 percent of net loans, leases and factored accounts receivable. Net charge-offs of commercial loans totaled $9 million, or .07 percent of average commercial loans, in the first quarter of 1997, versus $20 million, or .16 percent, in the first quarter of 1996. Commercial loans past due 90 days or more and still accruing interest were $82 million, or .14 percent of commercial loans, on March 31, 1997 and $38 million, or .08 percent, on December 31, 1996 with the increase due in part to the acquisition of Boatmen's. Nonperforming commercial loans were $398 million and $342 million on March 31, 1997 and December 31, 1996, respectively. The increase was primarily attributable to the acquisition of Boatmen's. Table 12 Selected Industry Credit Exposures March 31, 1997 (Dollars in Millions)
Loans, Leases and Factored Accounts Receivable, Net of Unearned Income -------------------------------------- Other Unfunded Credit Outstanding Nonperforming Commitments Exposures (1) ---------------------------------------------------------- Communications $5,029 $19 $5,714 $369 Health care 4,631 12 3,625 910 Food, including agribusiness 3,962 31 2,941 368 Leisure and sports 3,576 41 2,360 221 Retail 3,305 24 3,642 541 Automotive, excluding trucking 3,268 7 2,250 97 Machinery and equipment, excluding defense 3,083 16 3,179 312 Oil and gas 2,969 34 4,032 715 Textiles and apparel 2,782 34 1,564 465 Construction 2,031 28 1,548 191 Forest products and paper 1,842 13 1,995 283 Computers and electronics 1,801 3 2,524 168 Transportation, excluding air and trucking 1,775 5 1,451 72 Utilities 1,680 3 3,956 251 Professional services 1,468 6 1,647 107 Chemicals and plastics 1,398 2 1,850 177 Finance companies 1,150 1 4,899 172 Education and government 1,085 5 910 1,022 Banks 1,010 0 1,991 2,845 Brokers and dealers 399 0 1,349 1,102
(1) Other credit exposures include loans held for sale, letters of credit, bankers' acceptances and derivatives exposures in a gain position. Consumer - On March 31, 1997 and December 31, 1996, total consumer loan outstandings were $66.2 billion and $55.3 billion, respectively, representing 45 percent of net loans, leases and factored accounts receivable. Net charge-offs in the consumer portfolio were $167 million in the first quarter of 1997 compared to $121 million in the first quarter of 1996, reflecting the impact of the Boatmen's acquisition and loan growth. Note 4 to the unaudited consolidated financial statements details the components of the Corporation's consumer loan portfolio. In addition to the credit card and other consumer loans reported in the financial statements, the Corporation manages credit card and consumer receivables which have been sold. Accordingly, the average managed portfolio information discussed below includes both on-balance sheet and securitized loans. Total average credit card receivables managed by the Card Services group (excluding private label credit cards) increased to $9.4 billion in the first quarter of 1997 compared to $7.6 billion in the first quarter of 1996 as the Corporation maintains its efforts to shift the loan portfolio mix to a higher consumer concentration. Average securitized credit card loans totaled $2.6 billion during the first quarter of 1997. During the first quarter of 1996, average securitized credit card loans were $1.2 billion. Net charge-off ratios for the managed credit card portfolio were 6.09 percent for the first quarter of 1997 and 3.79 percent for the first quarter of 1996 due to industry-wide deterioration in consumer credit quality. Total average managed other consumer loans, including direct and indirect consumer loans and home equity lines, were $29.9 billion in the first quarter of 1997 compared to total average managed other consumer loans of $25.4 billion in the first quarter of 1996. The consumer managed portfolio, which includes indirect auto loan and consumer finance securitizations, experienced net charge-offs as a percentage of average managed consumer loans of 1.15 percent in the first quarter of 1997 and 1.08 percent in the first quarter of 1996. Total consumer loans past due 90 days or more and still accruing interest were $217 million on March 31, 1997 compared to $180 million on December 31, 1996, or .33 percent of total consumer loans for both periods. The increase was primarily attributable to the acquisition of Boatmen's. Total consumer nonperforming loans were $412 million and $350 million on March 31, 1997 and December 31, 1996, respectively, with the increase due partially to the acquisition of Boatmen's as well as the industry-wide deterioration in consumer credit quality. Market Risk Management In the normal course of conducting business activities, the Corporation is exposed to market risk which includes both price and liquidity risk. Price risk arises from fluctuations in interest rates, foreign exchange rates and commodity and equity prices that may result in changes in the values of financial instruments. Liquidity risk arises from the possibility that the Corporation may not be able to satisfy current and future financial commitments or that the Corporation may not be able to liquidate financial instruments at market prices. Risk management procedures and policies have been established and are utilized to manage the Corporation's exposure to market risk. The strategy of the Corporation with respect to market risk is to maximize net income while maintaining an acceptable level of risk to changes in market rates. While achievement of this goal requires a balance between profitability, liquidity and market price risk, there are opportunities to enhance revenues through controlled risks. In implementing strategies to manage interest rate risk, the primary tools used by the Corporation are the securities portfolio, interest rate swaps, and management of the mix, yields and rates and maturities of assets and the wholesale and retail funding sources of the Corporation. On March 31, 1997, 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 2 percent of net income when compared to stable rates. To estimate potential losses that could result from adverse market movements, the Corporation uses a daily earnings at risk methodology. 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 March 31, 1997, the gross estimates for aggregate interest rate, foreign exchange and equity and commodity trading activities were $52 million, $2 million and $3 million, respectively. Alternately, using a statistical measure which is more likely to capture the effects of market movements, the uncorrelated estimate on March 31, 1997 for aggregate trading activities was $21 million. Average daily trading-related revenues in the first quarter of 1997 approximated $2 million. During the first quarter of 1997, the Corporation's trading-related activities resulted in positive daily revenues for approximately 83 percent of total trading days. In the first quarter of 1997, the standard deviation of trading-related revenues was $3 million. Using this data, one can conclude that the aggregate trading activities should not result in exposure of more than $4 million for any one day, assuming 99-percent confidence. When comparing daily earnings at risk to trading-related revenues, daily earnings at risk will average considerably more due to the assumption of no evasive actions as well as the assumption that adverse market movements occur simultaneously across all segments of the trading portfolio. Capital Shareholders' equity was $20.7 billion on March 31, 1997 compared to $13.7 billion on December 31, 1996. The acquisition of Boatmen's, which resulted in the issuance of approximately 195 million shares of common stock and an increase of $9.5 billion in shareholders' equity, was the primary reason for the increase. The increase was partially offset by the repurchase of approximately 57 million shares of common stock for approximately $3.3 billion. Presented below are the Corporation's regulatory capital ratios on March 31, 1997 and December 31, 1996: March 31 December 31 1997 1996 - ------------------------------------------------------------------------------- Risk-Based Capital Ratios Tier 1 Capital 7.06% 7.76% Total Capital 11.58 12.66 Leverage Captial Ratio 6.19 7.09 The Corporation's and its significant banking subsidiaries' regulatory capital ratios on March 31, 1997 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. The Corporation and its significant banking subsidiaries were considered well-capitalized on March 31, 1997. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 3 (ii) - Bylaws of NationsBank Corporation 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 March 31, 1997: Current Report on Form 8-K dated December 31, 1996, and filed January 16, 1997, Items 2, 5 & 7. Current Report on Form 8-K dated January 22, 1997, and filed February 3, 1997, Items 5 & 7. Current Report on Form 8-K dated January 7, 1997, and filed March 28, 1997, Items 5 & 7. Item 5(a) Consolidated financial statements of Boatmen's Bancshares, Inc. for the year ended December 31, 1996. Item 5(b) Pro Forma Condensed Financial Information as of December 31, 1996 and for the year then ended and explanatory notes. 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: May 15, 1997 /s/ Marc D. Oken ------------ --------------------- Marc D. Oken Executive Vice President and Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer) NationsBank Corporation Form 10-Q Index to Exhibits Exhibit Description - ------- ----------- 3 (ii) Bylaws of NationsBank Corporation 11 Earnings Per Common Share Computation 12(a) Ratio of Earnings to Fixed Charges 12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends 27 Financial Data Schedule