UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED
For the quarterly period ended June 30, 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 July 31, 1997, there were 711,946,957 shares of NationsBank Corporation
Common Stock outstanding.
NationsBank Corporation
June 30, 1997 Form 10-Q
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Income for the Three Months and Six Months
Ended June 30, 1997 and 1996 ............................................. 3
Consolidated Balance Sheet on June 30, 1997 and December 31, 1996 ........ 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1997 and 1996 ................................................... 5
Consolidated Statement of Changes in Shareholders' Equity for
the Six Months Ended June 30, 1997 and 1996 .............................. 6
Notes to Consolidated Financial Statements ............................... 7
Item 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition ................................................................. 12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ........................ 37
Item 5. Other Information .......................................................... 39
Item 6. Exhibits and Reports on Form 8-K ........................................... 39
Signature .......................................................................... 40
Index to Exhibits .................................................................. 41
2
Part I. Financial Information
Item 1. Financial Statements
NationsBank Corporation and Subsidiaries
Consolidated Statement of Income
- -----------------------------------------------------------------------------------------------------
(Dollars in Millions Except Per-Share Information)
Three Months Six Months
Ended June 30 Ended June 30
----------------------------------------------
1997 1996 1997 1996
----------------------------------------------
Income from Earning Assets
Interest and fees on loans .................... $ 3,088 $ 2,540 $ 6,095 $ 5,113
Lease financing income ........................ 100 75 198 141
Interest and dividends on securities
Held for investment ....................... 20 49 42 107
Available for sale ........................ 352 296 703 652
Interest and fees on loans held for sale ...... 16 19 33 44
Interest on time deposits placed and
other short-term investments .............. 31 17 59 35
Federal funds sold ............................ 8 5 13 13
Securities purchased under agreements to resell 161 149 344 332
Trading account securities .................... 333 292 649 578
----------------------------------------------
Total income from earning assets ......... 4,109 3,442 8,136 7,015
----------------------------------------------
Interest Expense
Deposits ...................................... 995 848 1,993 1,706
Borrowed funds ................................ 524 550 1,033 1,201
Trading account liabilities ................... 160 147 325 338
Long-term debt ................................ 442 310 847 626
----------------------------------------------
Total interest expense ................... 2,121 1,855 4,198 3,871
----------------------------------------------
Net interest income ................................ 1,988 1,587 3,938 3,144
Provision for credit losses ........................ 190 155 380 310
----------------------------------------------
Net credit income .................................. 1,798 1,432 3,558 2,834
Gains (losses) on sales of securities .............. 29 (6) 72 8
Noninterest income ................................. 1,165 917 2,278 1,802
Other real estate owned expense .................... 4 7 2 7
Merger-related charge .............................. -- -- -- 118
Other noninterest expense .......................... 1,798 1,405 3,608 2,799
----------------------------------------------
Income before income taxes ......................... 1,190 931 2,298 1,720
Income tax expense ................................. 428 326 827 602
----------------------------------------------
Net income ......................................... $ 762 $ 605 $ 1,471 $ 1,118
==============================================
Net income available to common shareholders ........ $ 759 $ 601 $ 1,464 $ 1,110
==============================================
Per-share information
Earnings per common share .................... $ 1.05 $ 1.00 $ 2.02 $ 1.85
==============================================
Fully diluted earnings per common share ...... $ 1.02 $ .99 $ 1.96 $ 1.82
==============================================
Dividends per common share ................... $ .33 $ .29 $ .66 $ .58
==============================================
Average common shares issued (in thousands) ........ 720,020 600,924 725,188 600,741
==============================================
See accompanying notes to consolidated financial statements.
3
NationsBank Corporation and Subsidiaries
Consolidated Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions)
June 30 December 31
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents .................................................................. $ 10,024 $ 8,933
Time deposits placed and other short-term investments ...................................... 1,524 1,843
Securities
Held for investment, at cost (market value - $1,549 and $2,110) ......................... 1,548 2,110
Available for sale ...................................................................... 19,716 12,277
----------------------
Total securities ..................................................................... 21,264 14,387
----------------------
Loans held for sale ........................................................................ 1,447 1,215
Federal funds sold ......................................................................... 423 77
Securities purchased under agreements to resell ............................................ 8,517 6,882
Trading account assets ..................................................................... 26,952 18,689
Loans and leases, net of unearned income ................................................... 149,320 121,583
Factored accounts receivable ............................................................... 1,126 1,047
Allowance for credit losses ................................................................ (2,790) (2,315)
----------------------
Loans, leases and factored accounts receivable, net of unearned income
and allowance for credit losses ................................................... 147,656 120,315
----------------------
Premises and equipment, net ................................................................ 3,138 2,712
Customers' acceptance liability ............................................................ 1,158 858
Interest receivable ........................................................................ 1,540 1,159
Mortgage servicing rights .................................................................. 1,196 946
Goodwill ................................................................................... 7,760 1,640
Core deposit and other intangibles ......................................................... 810 390
Other assets ............................................................................... 6,953 5,748
----------------------
$ 240,362 $ 185,794
======================
Liabilities
Deposits
Noninterest-bearing ..................................................................... $ 34,251 $ 25,738
Savings ................................................................................. 9,935 8,498
NOW and money market deposit accounts ................................................... 40,961 31,128
Time .................................................................................... 41,181 33,081
Foreign time ............................................................................ 8,721 8,053
----------------------
Total deposits ....................................................................... 135,049 106,498
----------------------
Federal funds purchased .................................................................... 6,116 3,536
Securities sold under agreements to repurchase ............................................. 26,976 15,842
Trading account liabilities ................................................................ 12,654 11,752
Commercial paper ........................................................................... 2,794 2,787
Other short-term borrowings ................................................................ 2,463 1,836
Liability to factoring clients ............................................................. 593 597
Acceptances outstanding .................................................................... 1,158 858
Accrued expenses and other liabilities ..................................................... 5,160 4,429
Trust preferred securities ................................................................. 1,955 965
Long-term debt ............................................................................. 25,474 22,985
----------------------
Total liabilities .................................................................... 220,392 172,085
----------------------
Contingent liabilities and other financial commitments (Note 6)
Shareholders' Equity
Preferred stock: authorized - 45,000,000 shares; issued - 2,329,856 and 5,220,459 shares ... 101 171
Common stock: authorized - 1,250,000,000 shares; issued - 711,403,885 and 573,492,308 shares 9,223 3,855
Retained earnings .......................................................................... 10,656 9,673
Other, including loan to ESOP trust ........................................................ (10) 10
----------------------
Total shareholders' equity ........................................................... 19,970 13,709
----------------------
$ 240,362 $ 185,794
======================
See accompanying notes to consolidated financial statements.
4
NationsBank Corporation and Subsidiaries
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Six Months
Ended June 30
--------------------
1997 1996
--------------------
Operating Activities
Net income ........................................................................... $ 1,471 $ 1,118
Reconciliation of net income to net cash (used in) provided by operating activities
Provision for credit losses .................................................... 380 310
Gains on sales of securities ................................................... (72) (8)
Depreciation and premises improvements amortization ............................ 212 151
Amortization of intangibles .................................................... 212 58
Deferred income tax expense .................................................... 239 85
Net change in trading instruments .............................................. (7,334) (4,759)
Net (increase) decrease in interest receivable ................................. (89) 207
Net decrease in interest payable ............................................... (34) (385)
Net (increase) decrease in loans held for sale ................................. (232) 109
Other operating activities ..................................................... (459) 3,167
--------------------
Net cash (used in) provided by operating activities ...................... (5,706) 53
--------------------
Investing Activities
Proceeds from maturities of securities held for investment ........................... 585 1,131
Purchases of securities held for investment .......................................... (119) (2)
Proceeds from sales and maturities of securities available for sale .................. 17,807 15,003
Purchases of securities available for sale ........................................... (13,100) (6,180)
Net increase in federal funds sold and securities purchased under agreements to resell (1,534) (1,025)
Net decrease in time deposits placed and other short-term investments ................ 115 52
Purchases and net originations of loans and leases ................................... (8,148) (6,706)
Proceeds from sales and securitizations of loans and leases .......................... 3,914 5,810
Purchases and originations of mortgage servicing rights .............................. (193) (218)
Purchases of factored accounts receivable ............................................ (3,796) (3,684)
Collections of factored accounts receivable .......................................... 3,707 3,597
Net sales (purchases) of premises and equipment ...................................... 118 (219)
Proceeds from sales of other real estate owned ....................................... 99 83
Sales and acquisitions of business activities, net of cash ........................... 2,434 (155)
--------------------
Net cash provided by investing activities ................................ 1,889 7,487
--------------------
Financing Activities
Net decrease in deposits ............................................................. (3,476) (2,228)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase ............................................ 10,693 (7,061)
Net decrease in other short-term borrowings and commercial paper ..................... (656) (545)
Proceeds from issuance of trust preferred securities ................................. 990 --
Proceeds from issuance of long-term debt ............................................. 3,183 3,620
Retirement of long-term debt ......................................................... (1,061) (1,768)
Proceeds from issuance of common stock ............................................... 922 57
Cash dividends paid .................................................................. (489) (357)
Common stock repurchased ............................................................. (5,118) (157)
Other financing activities ........................................................... (80) 8
--------------------
Net cash provided by (used in) financing activities ...................... 4,908 (8,431)
--------------------
Net increase (decrease) in cash and cash equivalents ..................................... 1,091 (891)
Cash and cash equivalents on January 1 ................................................... 8,933 8,448
--------------------
Cash and cash equivalents on June 30 ..................................................... $ 10,024 $ 7,557
====================
Loans transferred to other real estate owned amounted to $82 and $77 for the six
months ended June 30, 1997 and 1996, respectively. Mortgage loans converted to
mortgage-backed securities amounted to $505 and $1,640 for the six months ended
June 30, 1997 and 1996, respectively.
See accompanying notes to consolidated financial statements.
5
NationsBank Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions, Shares in Thousands)
Total
Common Stock Share-
Preferred ----------------- Retained Loan to holders'
Stock Shares Amount Earnings ESOP Trust Other Equity
------------------------------------------------------------------------------
Balance on December 31, 1995 ..................... $ 105 548,538 $ 4,655 $ 7,826 $ (63) $ 278 $ 12,801
Net income ................................... 1,118 1,118
Cash dividends
Common ................................... (349) (349)
Preferred ................................ (8) (8)
Common stock issued under employee plans ..... 2,364 43 14 57
Stock issued in acquisitions ................. 73 55,436 586 192 2 853
Common stock repurchased ..................... (4,220) (157) (157)
Net change in unrealized gains/(losses)
on securities available for sale and
marketable equity securities ............. (298) (298)
Other ........................................ (2) 48 3 7 8
------------------------------------------------------------------------------
Balance on June 30, 1996 ......................... $ 176 602,166 $ 5,130 $ 8,779 $ (56) $ (4) $ 14,025
==============================================================================
Balance on December 31, 1996 ..................... $ 171 573,492 $ 3,855 $ 9,673 $ (48) $ 58 $ 13,709
Net income ................................... 1,471 1,471
Cash dividends
Common ................................... (482) (482)
Preferred ................................ (7) (7)
Common stock issued under employee plans ..... 22,452 943 (21) 922
Stock issued in acquisitions ................. 82 197,652 9,467 9,549
Common stock repurchased ..................... (85,840) (5,118) (5,118)
Redemption of preferred stock ................ (73) (73)
Conversion of preferred stock ................ (81) 3,644 81
Net change in unrealized gains/(losses)
on securities available for sale and
marketable equity securities ............. (10) (10)
Other ........................................ 2 4 (5) 1 8 3 9
------------------------------------------------------------------------------
Balance on June 30, 1997 ......................... $ 101 711,404 $ 9,223 $ 10,656 $ (40) $ 30 $ 19,970
==============================================================================
See accompanying notes to consolidated financial statements.
6
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 has been
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 Note 1 on page 8
of the Corporation's quarterly report on Form 10-Q for March 31, 1997 and the
following.
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income"
(SFAS 130) and SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). Each statement is effective for periods
beginning after December 15, 1997. SFAS 130 establishes standards for the
reporting and displaying of comprehensive income and its components in financial
statements. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," and specifies new disclosure requirements for operating
segment financial information.
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, resulting in
the issuance of approximately 195 million shares of the Corporation's common
stock valued at $9.4 billion 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. 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 three months and six months ended June 30, 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 purchase accounting adjustments. The cash portion of the
purchase price is assumed to be 40 percent 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 made by
the Boatmen's shareholders 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
periods presented and is not necessarily indicative of operating results to be
expected in future periods.
7
Unaudited Pro Forma Results of Operations
For the three months and six months ended June 30, 1996
(Dollars in millions, except per-share information)
Three Months Six Months
------------ ----------
Net interest income .................................. $1,901 $3,761
Net income ........................................... 623 1,116
Net income available to common shareholders .......... 618 1,105
Earnings per common share ............................ .85 1.53
Fully diluted earnings per common share .............. .84 1.51
On June 28, 1997, the Corporation entered into an agreement to acquire
Montgomery Securities (Montgomery), an investment banking and institutional
brokerage firm headquartered in San Francisco, California. The purchase price
will consist primarily of $840 million in cash and approximately 5.3 million
unregistered shares of the Corporation's common stock for an aggregate amount of
approximately $1.2 billion. As part of the agreement, the Corporation will
create a $100-million pool for the long-term retention of key Montgomery
non-partner personnel. The pool will be funded 50 percent by options to purchase
shares of common stock of the Corporation and 50 percent by cash. Montgomery had
1996 revenues of approximately $600 million and unaudited assets of
approximately $2.0 billion on June 30, 1997. The acquisition, which is subject
to approval by various regulatory agencies and other customary closing
conditions, will be accounted for as a purchase and is expected to close during
the fourth quarter of 1997.
On June 1, 1997, the branching provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 took effect, allowing banking
companies to consolidate their subsidiary bank operations across state lines.
Accordingly, the Corporation merged two of its banking subsidiaries,
NationsBank, N.A. (South) and NationsBank, N.A., on June 1, 1997. The surviving
entity of this merger was NationsBank, N.A. Between June 1, 1997 and
August 15, 1997, the Corporation merged 49 other banking subsidiaries located
in various states into NationsBank, N.A. As of August 15, 1997, NationsBank,
N.A. had banking operations in the following states: Arkansas, Florida, Georgia,
Illinois, Iowa, Kansas, Maryland, Missouri, New Mexico, North Carolina,
Oklahoma, South Carolina, Virginia and the District of Columbia. The Corporation
expects to continue the consolidation of other banking subsidiaries throughout
1997 and 1998.
Note 3 - Trading Account Assets and Liabilities
The fair values of the components of trading account assets and liabilities
on June 30, 1997 and December 31, 1996 and the average fair values for the six
months ended June 30, 1997 were (dollars in millions):
Average for
the Six
June 30 December 31 Months Ended
1997 1996 June 30, 1997
--------------------------------------
Securities owned
U.S. Treasury securities .......................................................... $10,906 $ 6,914 $10,780
Securities of other U.S. Government agencies and corporations ..................... 1,349 2,096 1,722
Certificates of deposit, bankers' acceptances and commercial paper ................ 571 501 584
Corporate debt .................................................................... 3,339 1,552 1,342
Foreign sovereign debt ............................................................ 5,664 3,396 6,876
Mortgage-backed securities ........................................................ 1,455 502 1,203
Other securities .................................................................. 361 430 313
------- ------- -------
Total securities owned ........................................................ 23,645 15,391 22,820
Derivatives-dealer positions .......................................................... 3,307 3,298 4,469
------- ------- -------
Total trading account assets .................................................. $26,952 $18,689 $27,289
======= ======= =======
Short sales
U.S. Treasury securities .......................................................... $ 7,971 $ 7,143 $ 7,815
Corporate debt .................................................................... 100 452 291
Foreign sovereign debt ............................................................ 703 -- 872
Other securities .................................................................. 618 309 683
------- ------- -------
Total short sales ............................................................. 9,392 7,904 9,661
Derivatives-dealer positions .......................................................... 3,262 3,848 4,190
------- ------- -------
Total trading account liabilities ............................................. $12,654 $11,752 $13,851
======= ======= =======
8
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 June
30, 1997 and December 31, 1996 was as follows (dollars in millions):
June 30, 1997 December 31, 1996
------------------------------------------------------------
Amount Percent Amount Percent
------------------------------------------------------------
Domestic
Commercial .......................................... $ 60,558 40.3% $ 50,270 41.0%
Real estate commercial .............................. 8,189 5.4 5,445 4.4
Real estate construction ............................ 3,708 2.5 2,863 2.3
------------------------------------------------------------
Total commercial ............................... 72,455 48.2 58,578 47.7
------------------------------------------------------------
Residential mortgage ................................ 33,985 22.6 27,963 22.8
Credit card ......................................... 7,242 4.8 6,747 5.5
Other consumer ...................................... 26,374 17.5 20,595 16.8
------------------------------------------------------------
Total consumer ................................. 67,601 44.9 55,305 45.1
------------------------------------------------------------
Lease financing ..................................... 4,998 3.3 4,198 3.4
Factored accounts receivable ........................ 1,126 .8 1,047 .9
------------------------------------------------------------
146,180 97.2 119,128 97.1
Foreign .................................................... 4,266 2.8 3,502 2.9
------------------------------------------------------------
Total loans, leases and factored
accounts receivable, net
of unearned income .................................. $150,446 100.0% $122,630 100.0%
===========================================================
On June 30, 1997 the recorded investment in certain loans that were
considered to be impaired was $650 million, all of which were classified as
nonperforming. Impaired loans on June 30, 1997 were comprised of commercial
loans of $429 million, real estate commercial loans of $206 million, and real
estate construction loans of $15 million. Of these impaired loans, $516 million
had a valuation allowance of $78 million and $134 million did not have a
valuation allowance due primarily to the application of interest payments
against book balances or charge-offs previously made with respect to these
loans.
On June 30, 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 $150 million and $153
million on June 30, 1997 and December 31, 1996, respectively.
9
Note 5 - Debt
In the second quarter of 1997, the Corporation issued $185 million in
long-term debt, comprised of $120 million of senior notes and $65 million of
subordinated notes, with maturities ranging from 2002 to 2012. Of the $185
million issued, $146 million of fixed-rate debt was converted to floating rates
through interest rate swaps at spreads ranging from 6 to 10 basis points over
the three-month London interbank offered rate (LIBOR). The remaining $39 million
of debt issued bears interest at spreads ranging from 3 to 7 basis points over
the three-month LIBOR.
Under the bank note program jointly maintained by NationsBank, N.A. 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 June 30, 1997, there were short-term bank notes
outstanding of $1.4 billion. In addition, NationsBank of Texas, N.A. and
NationsBank, N.A. had outstanding bank notes of $4.6 billion on June 30, 1997
that were classified as long-term debt.
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. The sole assets of Capital Trust IV on June 30, 1997 were $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 April 2007.
On February 3, 1997, one of the Corporation's grantor trust subsidiaries
(Capital Trust III) issued $500 million of Preferred Securities representing
undivided beneficial interests in the assets of the respective grantor trust
subsidiary. The sole assets of Capital Trust III on June 30, 1997 were $516
million aggregate principal amount of the Corporation's Junior Subordinated
Deferrable Interest Notes bearing interest at three-month LIBOR plus 55
basis points due 2027. Such notes and Preferred Securities are redeemable
beginning in January 2007.
In the fourth quarter of 1996, one of the Corporation's grantor trust
subsidiaries (NB Capital Trust II) issued $365 million of Preferred Securities
representing undivided beneficial interests in the assets of the respective
grantor trust subsidiary. The sole assets of NB Capital Trust II on June 30,
1997 were $376 million aggregate principal amount of the Corporation's Junior
Subordinated Deferrable Interest Notes bearing interest at 7.83% due 2026. Such
notes and Preferred Securities are redeemable beginning in December 2006.
In the fourth quarter of 1996, one of the Corporation's grantor trust
subsidiaries (NB Capital Trust I) issued $600 million of Preferred Securities
representing undivided beneficial interests in the assets of the respective
grantor trust subsidiary. The sole assets of NB Capital Trust I on June 30, 1997
were $619 million aggregate principal amount of the Corporation's Junior
Subordinated Deferrable Interest Notes bearing interest at 7.84% due 2026. Such
notes and Preferred Securities are redeemable beginning in December 2001.
On June 30, 1997 and December 31, 1996, the Corporation had unused
commercial paper back-up lines of credit totaling $1.5 billion which expire in
November 1997. These lines were supported by fees paid directly by the
Corporation to unaffiliated banks.
From July 1 through August 7, 1997, the Corporation issued an additional
$935 million in long-term debt, including $795 million of floating-rate senior
notes and $140 million of fixed-rate subordinated notes with maturities ranging
from 1999 to 2012.
As of August 7, the Corporation had the authority to issue approximately
$4.2 billion of corporate debt securities and preferred and common stock under
its existing shelf registration statements and $2.8 billion of corporate debt
securities under its Euro medium-term note program.
10
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):
June 30 December 31
1997 1996
================================================================================
Commitments to extend credit
Credit card commitments ................. $27,476 $24,255
Other loan commitments .................. 90,409 82,506
Standby letters of credit and
financial guarantees .................... 11,079 10,060
Commercial letters of credit ................... 1,117 761
On June 30, 1997 and December 31, 1996, indemnified securities lending
transactions totaled $5.4 billion and $7.1 billion, respectively. Collateral,
with a market value of $5.5 billion and $7.2 billion for the respective periods,
was obtained by the Corporation in support of these transactions.
On June 30, 1997, the Corporation had commitments to purchase and sell
when-issued securities of $5.8 billion and $5.1 billion, respectively. This
compares to commitments to purchase and sell when-issued securities of $7.4
billion each on December 31, 1996.
See Tables 7 and 8 and the accompanying discussion in Item 2 regarding the
Corporation's derivatives used for risk management purposes. See Table 9 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.
11
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 and six months ended June 30, 1997 and 1996.
Net income for the second quarter of 1997 increased 26 percent to $762
million from $605 million in the second quarter of 1996. Earnings per common
share and fully diluted earnings per common share were $1.05 and $1.02,
respectively, for the second quarter of 1997, compared to $1.00 and $.99 in the
comparable prior year period.
Net income for the first six months of 1997 increased 32 percent to $1.5
billion from $1.1 billion for the first six months of 1996. Earnings per common
share and fully diluted earnings per common share were $2.02 and $1.96,
respectively, for the six months ended June 30, 1997, compared to $1.85 and
$1.82 for the comparable prior year period. Excluding a merger-related charge of
$118 million ($77 million, net of tax), net income for the first six months of
1996 was $1.2 billion, earnings per common share were $1.98 and fully diluted
earnings per common share were $1.95.
For the three and six month periods ended June 30, 1997, the increases over
the prior year in income, expense, and balance sheet categories were due largely
to the Boatmen's acquisition but were also driven by internal growth. 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 six months of 1997 were:
o Taxable-equivalent net interest income increased 25 percent to $4.0 billion
in the first six months of 1997. Excluding the impact of the Boatmen's
acquisition and securitizations, net interest income increased
approximately 6 percent. The net interest yield increased to 3.86 percent
compared to 3.52 percent in the first six months of 1996.
o Provision for credit losses covered net charge-offs and totaled $380
million for the first six months of 1997 compared to $310 million for the
same period in 1996. Net charge-offs as a percentage of average loans,
leases and factored accounts receivable remained constant at .50 percent
for the first six months of 1997 and 1996 while net charge-offs totaled
$368 million for the six months ended June 30, 1997 compared to $312
million for the same year-ago period. Higher net charge-offs in 1997 were
primarily the result of an increase in the loans, leases, and factored
accounts receivable portfolio, attributable to the Boatmen's acquisition
and internal growth as well as deterioration in consumer credit quality
experienced on an industry-wide basis. Higher total consumer net
charge-offs were partially offset by lower net charge-offs in the
commercial loan portfolio. Nonperforming assets increased to $1.3 billion
on June 30, 1997 compared to $1.0 billion on December 31, 1996, due
primarily to the Boatmen's acquisition, and to a lesser extent,
deterioration in consumer credit quality experienced on an industry-wide
basis.
o Noninterest income increased 26 percent to $2.3 billion in the first six
months of 1997, driven primarily by higher deposit account service charges,
asset management and fiduciary service fees, mortgage servicing and other
mortgage-related income, investment banking income and credit card income.
Excluding the acquisition of Boatmen's, noninterest income increased
approximately 4 percent.
o Other noninterest expense increased 29 percent to $3.6 billion. Excluding
the Boatmen's acquisition, noninterest expense remained essentially
unchanged and the cash basis efficiency ratio decreased 70 basis points to
54.13 for the first six months 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 17 percent to $2.24 for the six months
ended June 30, 1997 compared to the same year-ago period. For the six
months ended June 30, 1997, return on average tangible common shareholders'
equity increased 783 basis points to 28.41 percent.
12
Table 1
Selected Operating Results
(Dollars in Millions Except Per-Share Information)
Three Months Six Months
Ended June 30 Ended June 30
---------------------------------------------------------
1997 1996 1997 1996
---------------------------------------------------------
Income Statement
Income from earning assets ......................................... $ 4,109 $ 3,442 $ 8,136 $ 7,015
Interest expense ................................................... 2,121 1,855 4,198 3,871
Net interest income (taxable-equivalent) ........................... 2,017 1,611 3,995 3,195
Net interest income ................................................ 1,988 1,587 3,938 3,144
Provision for credit losses ........................................ 190 155 380 310
Gains (losses) on sales of securities .............................. 29 (6) 72 8
Noninterest income ................................................. 1,165 917 2,278 1,802
Other real estate owned expense .................................... 4 7 2 7
Merger-related charge .............................................. -- -- -- 118
Other noninterest expense .......................................... 1,798 1,405 3,608 2,799
Income before income taxes ......................................... 1,190 931 2,298 1,720
Income tax expense ................................................. 428 326 827 602
Net income ......................................................... 762 605 1,471 1,118
Net income available to common shareholders ........................ 759 601 1,464 1,110
Net income (excluding merger-related charge) ....................... 762 605 1,471 1,195
Average common shares issued (in thousands) ........................ 720,020 600,924 725,188 600,741
Per common share
Earnings ........................................................... $ 1.05 $ 1.00 $ 2.02 $ 1.85
Earnings (excluding merger-related charge) ......................... 1.05 1.00 2.02 1.98
Fully diluted earnings ............................................. 1.02 .99 1.96 1.82
Fully diluted earnings (excluding merger-related charge) ........... 1.02 .99 1.96 1.95
Cash dividends paid ................................................ .33 .29 .66 .58
Common shareholders' equity (period-end) ........................... 27.99 23.09 27.99 23.09
Balance sheet (period-end)
Total assets ....................................................... 240,362 192,308 240,362 192,308
Total loans, leases and factored accounts receivable,
net of unearned income ........................................... 150,446 123,705 150,446 123,705
Total deposits ..................................................... 135,049 108,124 135,049 108,124
Long-term debt ..................................................... 25,474 20,527 25,474 20,527
Common shareholders' equity ........................................ 19,909 13,905 19,909 13,905
Total shareholders' equity ......................................... 19,970 14,025 19,970 14,025
Performance ratios
Return on average assets ........................................... 1.27% 1.20% 1.23% 1.09%
Return on average assets (excluding merger-related charge) ......... 1.27 1.20 1.23 1.17
Return on average common shareholders' equity (1) .................. 15.25 18.00 14.60 16.87
Return on average common shareholders' equity (excluding
merger-related charge) (1) ...................................... 15.25 18.00 14.60 18.04
Efficiency ratio ................................................... 56.48 55.57 57.51 56.00
Total equity to total assets ....................................... 8.31 7.29 8.31 7.29
Risk-based capital ratios (period-end)
Tier 1 ............................................................. 6.83 7.58 6.83 7.58
Total .............................................................. 11.32 11.93 11.32 11.93
Leverage capital ratio ............................................. 6.05 6.64 6.05 6.64
Cash basis financial data (2)
Earnings per common share .......................................... $ 1.21 $ 1.05 $ 2.31 $ 1.95
Earnings per common share (excluding merger-related charge) ........ 1.21 1.05 2.31 2.07
Fully diluted earnings per common share ............................ 1.17 1.04 2.24 1.92
Fully diluted earnings per common share
(excluding merger-related charge) ............................... 1.17 1.04 2.24 2.05
Return on average tangible assets .................................. 1.51% 1.28% 1.46% 1.16%
Return on average tangible assets
(excluding merger-related charge) ............................... 1.51 1.28 1.46 1.24
Return on average tangible common shareholders' equity (1) ......... 30.59 22.00 28.41 20.58
Return on average tangible common shareholders' equity
(excluding merger-related charge) (1) ........................... 30.59 22.00 28.41 21.93
Efficiency ratio ................................................... 53.00 54.31 54.13 54.83
Ending tangible equity to tangible assets .......................... 4.92 6.37 4.92 6.37
Market price per share of common stock
Close at the end of the period ................................... $ 64 9/16 $ 41 5/16 $ 64 9/16 $ 41 5/16
High for the period .............................................. 70 42 5/16 70 42 5/16
Low for the period ............................................... 54 37 3/8 48 32 3/16
(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.
13
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 2
Business Unit Summary
For the Six Months Ended June 30
(Dollars in Millions)
General Bank Global Finance Financial Services
-----------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
-----------------------------------------------------------------------------
Net interest income (taxable-equivalent) ........... $ 2,950 $ 2,292 $ 687 $ 586 $ 280 $ 290
Noninterest income ................................. 1,600 1,222 594 513 84 67
-----------------------------------------------------------------------------
Total revenue ................................. 4,550 3,514 1,281 1,099 364 357
Provision for credit losses ........................ 256 216 46 17 78 77
Gains on sales of securities ....................... 19 6 -- -- -- --
Other real estate owned expense(income) ............ 6 6 (8) (3) 4 5
Noninterest expense ................................ 2,809 2,037 639 589 160 155
-----------------------------------------------------------------------------
Income before income taxes ......................... 1,498 1,261 604 496 122 120
Income tax expense ................................. 581 465 219 182 38 43
-----------------------------------------------------------------------------
Net income(1) ...................................... $ 917 $ 796 $ 385 $ 314 $ 84 $ 77
=============================================================================
Cash basis earnings(2) ............................. $ 1,099 $ 838 $ 408 $ 323 $ 91 $ 84
Net interest yield ................................. 4.71% 4.79% 2.97%(4) 3.03%(4) 6.63% 7.39%
Average equity to average assets ................... 8.43 6.93 5.28 4.94 14.16 14.16
Return on average equity ........................... 16 22 17 16 13 13
Tangible return on average tangible equity(2) ...... 28 27 19 17 17 17
Efficiency ratio ................................... 61.7 58.0 49.9 53.6 44.0 43.4
Cash basis efficiency ratio(2) ..................... 57.7 56.8 48.1 52.8 42.0 41.5
Average(3)
Total loans and leases, net of unearned
Income ........................................ $ 96,837 $ 80,029 $ 42,354 $ 36,077 $ 8,442 $ 7,868
Total deposits ................................ 117,136 87,473 9,443 8,375 -- --
Total assets .................................. 137,712 102,909 88,222 79,041 8,927 8,384
Period end(3)
Total loans and leases, net of unearned
income ........................................ 97,929 79,201 43,028 35,955 8,834 8,094
Total deposits ................................ 116,303 87,148 11,842 9,343 -- --
(1) Business Unit results are presented on a fully allocated basis but do not
include $85 million of net income for 1997 and $69 million of 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) Cash basis calculations exclude intangible assets and the related
amortization expense.
(3) The sums of balance sheet amounts differ from consolidated amounts due to
activities between the Business Units.
(4) Global Finance's net interest yield excludes the impact of trading-related
activites. Including trading-related activities, the net interest yield
was 1.79 percent and 1.75 percent for the first six months of 1997 and
1996, respectively.
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 $5.9 billion and approximately $119 million of related
amortization expense on a consolidated basis for the first six months of 1997.
This additional expense had an unfavorable impact on the return on average
equity and efficiency ratios for both the General Bank and Global Finance in
1997. Table 2 presents information based on actual operating results including
business unit earnings, the return on average equity and the efficiency ratio
excluding the impact of goodwill and other intangibles and related amortization
expense.
14
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 and provides asset
management, banking and trust services for individuals, targeting established
wealth, active wealth, business owners, corporate executives, and the private
foundations established by them.
The General Bank earned $917 million in the first six months of 1997, an
increase of 15 percent over the same period in 1996. The acquisition of
Boatmen's accounted for a large portion of the General Bank's increased earnings
over the same period last year with internal growth also contributing to the
increase. Taxable-equivalent net interest income in the General Bank increased
$658 million, primarily reflecting the impact of the Boatmen's acquisition and
deposit expense management efforts. Excluding the impact of the Boatmen's
acquisition, total loans declined compared to the same period in 1996 including
decreases in consumer loans resulting from higher levels of securitizations and
the sale of certain consumer loans in the third quarter of 1996.
Noninterest income rose 31 percent in the first six months of 1997 to $1.6
billion due primarily to the Boatmen's acquisition. Excluding the impact of
Boatmen's, deposit account service charges and asset management and fiduciary
service fees increased 13 percent and 4 percent, respectively, with the
remaining increase due to higher credit card fees. Noninterest expense increased
38 percent to $2.8 billion due primarily to the acquisition of Boatmen's, which
resulted in an increase in full-time equivalent employees and additional
amortization expense, with the remaining increase across most major expense
categories. Excluding acquisitions, noninterest expense was virtually flat. The
cash basis efficiency ratio, which was impacted by the inclusion of Boatmen's
less efficient expense base and incremental funding costs, showed only a slight
increase to 57.7 percent for the first six months of 1997 compared to the same
period in 1996. The tangible return on average tangible equity increased
approximately 100 basis points to 28 percent, the result of revenue growth which
offset an increase in operating expenses and higher equity levels resulting from
the Boatmen's acquisition.
Global Finance provides comprehensive corporate and investment banking
services to domestic and international customers through its Corporate
Finance/Capital Markets, Specialized Lending, Real Estate, and Transaction
Products units. The Global Finance group serves as a principal lender and
investor as well as an advisor 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 consulting are
representative of the services provided. Global Finance is a primary dealer of
U.S. Government securities and also underwrites, distributes and makes markets
in high-grade and high-yield securities. Additionally, Global Finance is a
market maker in derivatives products which include swap agreements, option
contracts, forward settlement contracts, financial futures and other derivatives
products in certain interest rate, foreign exchange, commodity and equity
markets. In support of these activities, Global Finance takes positions to
support client demands and its own account. Through the acquisition of
Montgomery Securities, Global Finance expects to begin offering equity
underwriting services as early as the fourth quarter of 1997, when the
acquisition is expected to close.
Global Finance earned $385 million in the first six months of 1997 compared
to $314 million in the first six months of 1996, the result of higher levels of
net interest income and noninterest income, which more than offset higher
noninterest and provision expenses. Taxable-equivalent net interest income for
the first six months of 1997 was $687 million compared to $586 million in the
first six months of 1996 reflecting loan growth partially offset by increased
funding costs and competitive pressure on commercial loan pricing.
Noninterest income in the first six months of 1997 rose 16 percent to $594
million reflecting higher securities underwriting and other investment banking
income. Noninterest expense for the period rose 8 percent to $639 million. The
increase was the result of the Boatmen's acquisition and related amortization
expense as well as slightly higher personnel expenses. The cash basis efficiency
ratio
15
improved 470 basis points to 48.1 percent. The tangible return on average
tangible equity increased 200 basis points to 19 percent, reflecting revenue
growth partially offset by higher operating expenses.
Financial Services is primarily 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 $84 million in the first six months of 1997
increased 9 percent over the same period in 1996. Taxable-equivalent net
interest income decreased $10 million resulting from lower yields partly offset
by 7-percent growth in average loans and leases. The net interest yield of 6.63
percent was down 76 basis points from 1996, due principally to increased
competitive pressure. Noninterest income rose 25 percent to $84 million in the
first six months in 1997, reflecting gains associated with the sale of 29
branches during the first quarter of 1997. Noninterest expense for the period
increased 3 percent to $160 million leading to a cash basis efficiency ratio of
42.0 percent compared to 41.5 percent for the first six months of 1996. The
tangible return on average tangible equity remained flat at 17 percent compared
to the first six months of 1996.
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 and first six months of
1997 and 1996 is presented in Tables 3 and 4, respectively.
Taxable-equivalent net interest income increased 25 percent to $2.0 billion
in the second quarter of 1997 and amounted to $4.0 billion in the first six
months of 1997 compared to the same periods of 1996 due primarily to the
acquisition of Boatmen's. Excluding the impact of the Boatmen's acquisition and
securitizations, net interest income increased approximately 6 percent for both
the second quarter and first half of 1997. Taxable-equivalent net interest
income was positively impacted by the reinvestment of proceeds from the sale of
low-yielding securities into higher-spread products, core loan growth and
deposit expense management, which was partially offset by the impact of the sale
of certain consumer loans in the third quarter of 1996 and an increased reliance
on long-term debt. While securitizations lowered net interest income by $77
million in the second quarter of 1997 and $162 million in the first half of
1997, 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 $672-million increase in interest income for the second quarter of
1997 compared to the same period in 1996, $583 million was due to higher average
earning assets with $89 million resulting from higher yields on average earning
assets. The $1.1-billion increase in interest income for the first six months of
1997 compared to the first half of 1996 was the result of a $1.0-billion
increase due to higher average earning assets and $92 million resulted from
higher yields on average earning assets. Interest expense increased $266 million
for the second quarter of 1997, with $289 million resulting from higher levels
of average interest-bearing liabilities offset by a $23-million favorable impact
of lower rates paid on average interest-bearing liabilities. The $327-million
increase in interest expense for the first six months of 1997 was the result of
a $487-million increase from higher levels of average interest-bearing
liabilities offset by the $160-million favorable impact of lower rates paid on
average interest-bearing liabilities.
The net interest yield increased 27 basis points to 3.89 percent in the
second quarter of 1997 and 34 basis points to 3.86 percent in the first six
months of 1997 compared to the same periods of 1996 primarily reflecting the
reinvestment of proceeds from the sale of low-yielding securities into
higher-spread products. The positive impact of the acquisition of Boatmen's was
offset by additional funding costs related to the acquisition.
16
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17
Table 3
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
Second Quarter 1997 First Quarter 1997
-------------------------------------------------------------------------
Average Average
Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates
------- ------- ----- ------- ------- -----
Earning assets
Loans and leases, net of unearned income (1)
Commercial ...................................... $ 60,133 $ 1,265 8.43% $ 59,542 $ 1,229 8.38%
Real estate commercial .......................... 8,446 191 9.09 8,646 190 8.90
Real estate construction ........................ 3,765 88 9.43 3,778 84 8.98
--------------------------------------------------------------------
Total commercial ............................ 72,344 1,544 8.56 71,966 1,503 8.47
--------------------------------------------------------------------
Residential mortgage ............................ 33,848 658 7.79 32,072 621 7.78
Credit card ..................................... 7,102 211 11.93 7,170 205 11.60
Other consumer .................................. 26,154 628 9.61 26,872 632 9.54
--------------------------------------------------------------------
Total consumer .............................. 67,104 1,497 8.94 66,114 1,458 8.91
--------------------------------------------------------------------
Foreign ......................................... 3,119 56 7.29 3,283 56 6.86
Lease financing ................................. 5,546 107 7.69 5,316 103 7.79
--------------------------------------------------------------------
Total loans and leases, net ................. 148,113 3,204 8.67 146,679 3,120 8.61
--------------------------------------------------------------------
Securities
Held for investment .............................. 1,647 24 5.94 1,920 29 6.05
Available for sale (2) ........................... 20,851 361 6.93 20,740 356 6.89
--------------------------------------------------------------------
Total securities ............................ 22,498 385 6.86 22,660 385 6.82
--------------------------------------------------------------------
Loans held for sale ................................ 819 16 7.91 1,062 17 6.49
Federal funds sold ................................. 538 8 6.06 343 5 5.70
Securities purchased under agreements to resell .... 10,940 161 5.91 13,027 183 5.70
Time deposits placed and other
short-term investments ........................... 2,303 31 5.36 2,228 28 5.11
Trading account securities (3) ..................... 22,793 333 5.84 22,848 317 5.60
--------------------------------------------------------------------
Total earning assets (4) .................... 208,004 4,138 7.97 208,847 4,055 7.85
Cash and cash equivalents ............................. 8,637 9,178
Factored accounts receivable .......................... 1,188 1,078
Other assets, less allowance for credit losses ........ 22,679 23,103
--------------------------------------------------------------------
Total assets ................................. $240,508 $242,206
=====================================================================
Interest-bearing liabilities
Savings ............................................ $ 10,096 50 2.00 $ 10,220 53 2.10
NOW and money market deposit accounts .............. 41,792 272 2.60 42,138 273 2.64
Consumer CDs and IRAs .............................. 38,481 501 5.22 39,458 507 5.21
Negotiated CDs, public funds and other time deposits 3,459 47 5.47 3,555 47 5.31
Foreign time deposits .............................. 9,523 125 5.30 9,278 118 5.14
Federal funds purchased ............................ 3,421 48 5.64 4,469 59 5.35
Securities sold under agreements to repurchase ..... 30,196 381 5.07 29,607 358 4.90
Commercial paper ................................... 2,956 42 5.67 3,041 41 5.53
Other short-term borrowings ........................ 2,220 53 n/m 2,711 51 n/m
Trading account liabilities (3) .................... 9,376 160 6.85 9,949 165 6.73
Long-term debt (5) ................................. 27,260 442 6.49 25,244 405 6.50
--------------------------------------------------------------------
Total interest-bearing liabilities (6) ...... 178,780 2,121 4.76 179,670 2,077 4.68
--------------------------------------------------------------------
Noninterest-bearing sources
Noninterest-bearing deposits ....................... 31,310 30,327
Other liabilities .................................. 10,361 11,555
Shareholders' equity ............................... 20,057 20,654
--------------------------------------------------------------------
Total liabilities and shareholders' equity .. $240,508 $242,206
--------------------------------------------------------------------
Net interest spread ................................... 3.21 3.17
Impact of noninterest-bearing sources ................. .68 .66
--------------------------------------------------------------------
Net interest income/yield on earning assets ........... $ 2,017 3.89% $ 1,978 3.83%
====================================================================
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) The average balance sheet amounts and yields on securities available for
sale are based on the average of historical amortized cost balances.
(3) The fair values of derivatives-dealer positions are reported in other
assets and liabilities, respectively.
(4) Interest income includes taxable-equivalent adjustments of $29 and $28 in
the second and first quarters of 1997, respectively, and $22, $21 and $24
in the fourth, third and second quarters of 1996, respectively. Interest
income also includes the impact of risk management interest rate contracts,
which increased interest income on the underlying linked assets $34 and $48
in the second and first quarters of 1997, respectively, and $31, $11 and $3
in the fourth, third and second quarters of 1996, respectively.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (decreased) increased interest expense on the underlying
linked liabilities ($11) and ($10) in the second and first quarters of
1997, respectively, and ($1), $13 and $24 in the fourth, third and second
quarters of 1996, respectively.
18
Fourth Quarter 1996 Third Quarter 1996 Second 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
------- ------- ----- ------- ------- ----- ------- ------- -----
$ 49,987 $ 1,044 8.30% $ 48,920 $ 1,011 8.23% $ 49,983 $ 1,000 8.04%
5,388 122 9.00 5,921 138 9.25 6,288 141 9.07
3,084 67 8.74 3,195 74 9.15 3,229 71 8.83
- ---------------------------------------------------------------------------------------------------------
58,459 1,233 8.39 58,036 1,223 8.38 59,500 1,212 8.19
- ---------------------------------------------------------------------------------------------------------
28,174 548 7.77 27,990 545 7.77 27,728 542 7.82
6,363 185 11.58 5,903 169 11.38 6,057 173 11.45
20,581 503 9.69 22,026 544 9.84 23,441 578 9.93
- ---------------------------------------------------------------------------------------------------------
55,118 1,236 8.93 55,919 1,258 8.97 57,226 1,293 9.07
- ---------------------------------------------------------------------------------------------------------
2,701 47 6.89 2,813 46 6.59 2,746 45 6.56
4,614 87 7.66 4,429 85 7.60 4,254 80 7.59
- ---------------------------------------------------------------------------------------------------------
120,892 2,603 8.57 121,197 2,612 8.58 123,726 2,630 8.54
- ---------------------------------------------------------------------------------------------------------
2,585 36 5.55 3,173 46 5.73 3,731 51 5.45
11,540 205 7.10 16,388 273 6.66 18,328 303 6.64
- ---------------------------------------------------------------------------------------------------------
14,125 241 6.82 19,561 319 6.51 22,059 354 6.44
- ---------------------------------------------------------------------------------------------------------
802 15 7.31 1,025 20 7.87 1,156 19 6.49
273 4 5.79 361 6 6.39 397 5 5.75
12,018 158 5.21 11,828 153 5.14 12,075 149 4.99
1,991 25 4.86 1,430 20 5.74 1,263 17 5.28
21,148 334 6.32 18,897 314 6.60 17,912 292 6.53
- ---------------------------------------------------------------------------------------------------------
171,249 3,380 7.86 174,299 3,444 7.87 178,588 3,466 7.80
7,720 7,597 7,928
1,256 1,150 1,124
14,096 14,877 15,156
- ---------------------------------------------------------------------------------------------------------
$194,321 $197,923 $202,796
==============================================================================================================
$ 8,607 46 2.12 $ 8,798 48 2.15 $ 9,336 52 2.27
30,634 191 2.47 30,485 189 2.49 30,155 191 2.52
30,870 405 5.22 30,092 394 5.21 29,698 389 5.28
2,544 35 5.53 3,314 46 5.50 3,331 46 5.53
9,139 117 5.10 10,836 145 5.31 12,867 170 5.34
3,915 51 5.21 3,631 49 5.39 4,433 59 5.37
25,192 330 5.22 26,309 355 5.36 28,924 391 5.44
2,850 40 5.59 3,129 44 5.59 3,064 42 5.49
1,971 34 6.99 2,999 51 6.76 3,968 58 5.80
9,314 152 6.48 9,848 163 6.57 8,912 147 6.63
22,702 367 6.53 21,067 344 6.53 19,730 310 6.30
- ---------------------------------------------------------------------------------------------------------
147,738 1,768 4.77 150,508 1,828 4.84 154,418 1,855 4.83
- ---------------------------------------------------------------------------------------------------------
23,971 24,190 24,601
9,388 10,092 10,225
13,224 13,133 13,552
- ---------------------------------------------------------------------------------------------------------
$194,321 $197,923 $202,796
- ---------------------------------------------------------------------------------------------------------
3.09 3.03 2.97
.66 .66 .65
- ----------------------------------------------------------------------------------------------------------
$ 1,612 3.75% $ 1,616 3.69% $ 1,611 3.62%
============================================================================================================
19
Table 4
Six Month Taxable-Equivalent Data
(Dollars in Millions)
Six Months Ended June 30
-------------------------------------------------------------
1997 1996
-------------------------------------------------------------
Average Average
Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates
-------------------------------------------------------------
Earning assets
Loans and leases, net of unearned income (1)
Commercial .................................................... $ 59,840 $ 2,494 8.40% $ 49,652 $ 1,987 8.05%
Real estate commercial ....................................... 8,545 381 8.99 6,531 290 8.94
Real estate construction ..................................... 3,771 172 9.21 3,191 140 8.84
-------------------------------------------------------------
Total commercial ......................................... 72,156 3,047 8.52 59,374 2,417 8.19
-------------------------------------------------------------
Residential mortgage ......................................... 32,965 1,279 7.78 27,540 1,076 7.82
Credit card ................................................... 7,136 416 11.76 6,324 379 12.05
Other consumer ................................................ 26,511 1,260 9.58 23,645 1,171 9.96
-------------------------------------------------------------
Total consumer ........................................... 66,612 2,955 8.92 57,509 2,626 9.17
-------------------------------------------------------------
Foreign ...................................................... 3,201 112 7.07 2,569 90 7.01
Lease financing .............................................. 5,431 210 7.74 4,052 152 7.53
-------------------------------------------------------------
Total loans and leases, net .............................. 147,400 6,324 8.64 123,504 5,285 8.60
-------------------------------------------------------------
Securities
Held for investment ........................................... 1,782 54 6.00 4,012 111 5.54
Available for sale (2) ........................................ 20,796 717 6.91 20,662 668 6.49
-------------------------------------------------------------
Total securities ......................................... 22,578 771 6.84 24,674 779 6.34
-------------------------------------------------------------
Loans held for sale ............................................. 940 33 7.11 1,243 44 7.06
Time deposits placed and other
short-term investments ........................................ 2,266 59 5.24 1,160 35 6.02
Federal funds sold .............................................. 441 13 5.92 461 13 5.83
Securities purchased under agreements to resell ................. 11,978 344 5.79 12,973 332 5.15
Trading account securities (3) .................................. 22,820 649 5.72 18,062 578 6.43
-------------------------------------------------------------
Total earning assets (4) ................................. 208,423 8,193 7.91 182,077 7,066 7.80
Cash and cash equivalents .......................................... 8,906 7,963
Factored accounts receivable ....................................... 1,133 1,067
Other assets, less allowance for credit losses ..................... 22,890 14,600
-------------------------------------------------------------
Total assets .............................................. $241,352 $205,707
=============================================================
Interest-bearing liabilities
Savings ......................................................... $ 10,158 103 2.05 $ 9,349 107 2.31
NOW and money market deposit accounts ........................... 41,964 545 2.62 29,924 383 2.57
Consumer CDs and IRAs ........................................... 38,967 1,008 5.21 29,583 786 5.35
Negotiated CDs, public funds and other time deposits ............ 3,507 94 5.39 3,302 90 5.47
Foreign time deposits ........................................... 9,401 243 5.22 12,384 340 5.53
Federal funds purchased ......................................... 3,942 107 5.48 5,625 151 5.39
Securities sold under agreements to repurchase .................. 29,903 739 4.98 31,315 846 5.43
Commercial paper ................................................ 2,998 83 5.60 2,943 81 5.55
Other short-term borrowings ..................................... 2,463 104 n/m 4,210 123 5.85
Trading account liabilities (3) ................................. 9,661 325 6.79 10,699 338 6.36
Long-term debt (5) .............................................. 26,258 847 6.50 19,308 626 6.49
-------------------------------------------------------------
Total interest-bearing liabilities (6) ................... 179,222 4,198 4.72 158,642 3,871 4.90
-------------------------------------------------------------
Noninterest-bearing sources
Noninterest-bearing deposits .................................... 30,821 23,905
Other liabilities ............................................... 10,955 9,812
Shareholders' equity ............................................ 20,354 13,348
-------------------------------------------------------------
Total liabilities and shareholders' equity ............... $241,352 $205,707
-------------------------------------------------------------
Net interest spread ................................................ 3.19 2.90
Impact of noninterest-bearing sources .............................. .67 .62
------------------------------------------------------------
Net interest income/yield on earning assets ........................ $ 3,995 3.86% $ 3,195 3.52%
=============================================================
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) The average balance sheet amounts and yields on securities available for
sale are based on the average of historical amortized cost balances.
(3) The fair values of derivatives-dealer positions are reported in other
assets and liabilities, respectively.
(4) Interest income includes taxable-equivalent adjustments of $57 and $51 in
1997 and 1996, respectively. Interest income also includes the impact of
risk management interest rate contracts, which increased (decreased)
interest income on the underlying linked assets $82 and ($16) in 1997 and
1996, respectively.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (decreased) increased interest expense on the underlying
linked liabilities ($21) and $42 in 1997 and 1996, respectively.
20
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 was $190 million and $380 million in the
second quarter and first half of 1997, respectively, compared to $155 million
and $310 million in the comparable prior-year periods. For the second quarter
and first half of 1997, the provision for credit losses covered net charge-offs
of $184 million and $368 million, respectively. Higher provision expense in 1997
was due primarily to higher net charge-offs resulting from an increase in the
loans, leases, and factored accounts receivable portfolio, attributable to the
Boatmen's acquisition and internal growth as well as deterioration in consumer
credit quality experienced on an industry-wide basis. Higher total consumer
net charge-offs were partially offset by lower net charge-offs in the commercial
loan portfolio. For additional information on the allowance for credit losses,
certain credit quality ratios and credit quality information on specific loan
categories, see the "Allowance for Credit Losses" and "Concentrations of Credit
Risk" sections of the Management's Discussion and Analysis.
Future economic conditions will impact credit quality and may result in
increased net charge-offs and higher provisions for credit losses.
Gains on Sales of Securities
Gains on the sales of securities were $72 million for the first six months
of 1997 compared to $8 million in the first six months 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 lower-yielding securities and the reinvestment of the proceeds from such
sales into higher-spread products.
Noninterest Income
As presented in Table 5, noninterest income increased to $1.2 billion and
$2.3 billion in the second quarter and first six months of 1997, or 27 percent
and 26 percent, respectively, reflecting the acquisition of Boatmen's and strong
internal growth as described by the following:
o Service charges on deposit accounts increased 37 percent and 38 percent
over the second quarter and first six months of 1996, respectively, due
primarily to the acquisition of Boatmen's. Excluding the impact of the
Boatmen's acquisition, service charges increased approximately 11 percent
for both periods.
o Mortgage servicing and other mortgage-related income increased 16 percent
to $67 million in the second quarter of 1997 and 31 percent to $137 million
in the first six months of 1997 due to the acquisition of the Boatmen's
mortgage servicing portfolio. Including acquisitions, the average portfolio
of loans serviced increased 39 percent from $85.2 billion in the first six
months of 1996 to $118.5 billion in the first six months of 1997. Mortgage
loan originations through the Corporation's mortgage subsidiary increased
from $6.2 billion for the first six months of 1996 to $6.4 billion for the
same period in 1997. The increase in loan originations experienced in 1997
was due to the acquisition of Boatmen's. Excluding the Boatmen's
acquisition, loan originations during the first half of 1997 were
essentially unchanged from the same period in 1996 resulting from changes
in the interest rate environment. Origination volume for the first half of
1997 consisted of approximately $3.9 billion of correspondent and wholesale
loan volume and $2.5 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
21
contract notional amount of these instruments approximated $8.9 billion on
June 30, 1997. Net unrealized losses associated with these contracts were
$25 million on June 30, 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
Table 5
Noninterest Income
(Dollars in Millions)
Three Months Six Months
Ended June 30 Change Ended June 30 Change
-------------------------------------------------------------------------
1997 1996 Amount Percent 1997 1996 Amount Percent
-------------------------------------------------------------------------
Service charges on deposit accounts .................... $ 379 $276 $103 37.3% $ 739 $ 535 $204 38.1%
-------------------------------------------------------------------------
Nondeposit-related service fees
Safe deposit rent ................................ 8 6 2 33.3 19 15 4 26.7
Mortgage servicing and other
mortgage-related income .................... 67 58 9 15.5 137 105 32 30.5
Fees on factored accounts receivable ............. 15 15 -- -- 30 31 (1) (3.2)
Investment banking income ....................... 114 66 48 72.7 197 165 32 19.4
Other service fees .............................. 51 40 11 27.5 102 85 17 20.0
-------------------------------------------------------------------------
Total nondeposit-related
service fees ........................... 255 185 70 37.8 485 401 84 20.9
-------------------------------------------------------------------------
Asset management and fiduciary
service fees ....................................... 173 112 61 54.5 339 217 122 56.2
-------------------------------------------------------------------------
Credit card income
Merchant discount fees ............................. -- 2 (2) (100.0) -- 6 (6) (100.0)
Annual credit card fees ............................ 6 8 (2) (25.0) 13 15 (2) (13.3)
Other credit card fees ............................. 88 70 18 25.7 165 128 37 28.9
-------------------------------------------------------------------------
Total credit card income ...................... 94 80 14 17.5 178 149 29 19.5
-------------------------------------------------------------------------
Other income
Brokerage income ................................... 39 30 9 30.0 72 58 14 24.1
Trading account profits and fees ................... 77 82 (5) (6.1) 174 150 24 16.0
Bankers' acceptances and
letters of credit fees ........................ 24 15 9 60.0 44 33 11 33.3
Insurance commissions and earnings ................. 26 18 8 44.4 51 37 14 37.8
Miscellaneous ..................................... 98 119 (21) (17.6) 196 222 (26) (11.7)
-------------------------------------------------------------------------
Total other income ............................. 264 264 -- -- 537 500 37 7.4
-------------------------------------------------------------------------
$1,165 $917 $248 27.0 $2,278 $1,802 $476 26.4
=========================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
o Investment banking income increased 73 percent to $114 million in the
second quarter of 1997 and 19 percent to $197 million for the first six
months of 1997, reflecting higher securities underwriting fees and other
investment banking income. For the first half of 1997 compared to the same
period in 1996, higher fees were partially offset by lower gains on
principal investing activities (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 Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
------------------ ----------------
Syndications ......................... $ 36 $34 $ 56 $ 51
Securities underwriting .............. 34 16 59 35
Principal investment activities ...... 22 10 45 59
Other ................................ 22 6 37 20
------------------ ----------------
$114 $66 $197 $165
================== ================
22
o Asset management and fiduciary service fees increased 55 percent to $173
million in the second quarter of 1997 and 56 percent to $339 million for
the first six months of 1997, reflecting the impact of the Boatmen's
acquisition and internal growth of approximately 4 percent.
o Credit card income increased 18 percent to $94 million in the second
quarter of 1997 and 20 percent to $178 million for the first six months of
1997 due primarily to higher fees associated with the acquisition of
Boatmen's and internal growth of approximately 5 percent. Credit card
income includes $8 million and $16 million from credit card securitizations
for the three and six months ended June 30, 1997, respectively.
o Trading account profits and fees totaled $77 million and $174 million in
the second quarter and first six months of 1997, respectively, a decrease
of $5 million and an increase of $24 million, respectively, compared to the
same periods in 1996.
An analysis of trading account profits and fees by major business activity
follows (in millions):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
------------------ ----------------
Securities trading.................... $21 $36 $ 40 $ 46
Interest rate contracts............... 40 34 81 90
Foreign exchange contracts............ 11 (2) 28 (9)
Other ................................ 5 14 25 23
------------------ ----------------
$77 $82 $174 $150
================== ================
o Miscellaneous income totaled $98 million and $196 million in the second
quarter and first six months of 1997, respectively, reflecting decreases of
$21 million and $26 million compared to the same respective
periods in 1996. Miscellaneous income includes net gains on sales of
miscellaneous investments, business activities, premises, venture capital
investments and other similar items.
Noninterest Expense
As presented in Table 6, the Corporation's noninterest expense increased 28
percent and 29 percent to $1.8 billion and $3.6 billion in the second quarter
and first six months of 1997, respectively, compared to the same periods of
1996. Excluding the impact of the Boatmen's acquisition and related transition
expenses, noninterest expense remained essentially unchanged in the second
quarter and first half of 1997 and the cash basis efficiency ratio declined 70
basis points to 54.13 percent for the first half of 1997.
A discussion of the significant components of noninterest expense in the
second quarter and first six months of 1997 follows:
o Personnel expense increased $197 million and $416 million in the second
quarter and first six months of 1997, respectively, over the comparable
1996 periods, due primarily to the impact of the Boatmen's acquisition. On
June 30, 1997, the Corporation had approximately 79,000 full-time
equivalent employees compared to approximately 63,000 full-time equivalent
employees on December 31, 1996. Excluding the impact of the Boatmen's
acquisition, full-time equivalent employees at June 30, 1997 were
essentially unchanged compared to December 31, 1996 levels.
o Occupancy expense increased 22 percent to $155 million in the second
quarter of 1997, and 21 percent to $306 million in the first six months of
1997 compared to the same periods in 1996 due to the acquisition of
Boatmen's.
23
- ------------------------------------------------------------------------------------------------------------------------------------
Table 6
Noninterest Expense
(Dollars in Millions)
Three Months Six Months
Ended June 30 Change Ended June 30 Change
-----------------------------------------------------------------------
1997 1996 Amount Percent 1997 1996 Amount Percent
-----------------------------------------------------------------------
Personnel ............................................... $ 881 $ 684 $197 28.8% $1,762 $1,346 $416 30.9%
Occupancy, net .......................................... 155 127 28 22.0 306 254 52 20.5
Equipment ............................................... 139 110 29 26.4 294 216 78 36.1
Marketing ............................................... 75 67 8 11.9 150 134 16 11.9
Professional fees ....................................... 78 64 14 21.9 153 113 40 35.4
Amortization of intangibles ............................. 111 32 79 246.9 212 58 154 265.5
Credit card ............................................. 17 14 3 21.4 32 31 1 3.2
Deposit insurance ....................................... 5 7 (2) (28.6) 12 14 (2) (14.3)
Data processing ......................................... 59 62 (3) (4.8) 129 123 6 4.9
Telecommunications ...................................... 54 41 13 31.7 108 82 26 31.7
Postage and courier ..................................... 47 36 11 30.6 96 74 22 29.7
Other general operating ................................. 120 114 6 5.3 246 262 (16) (6.1)
General administrative and miscellaneous ................ 57 47 10 21.3 108 92 16 17.4
-----------------------------------------------------------------------
$1,798 $1,405 $393 28.0 $3,608 $2,799 $809 28.9
========================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
o Equipment expense increased approximately $29 million and $78 million in
the second quarter and first six months of 1997, respectively, compared to
the same periods 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 $14 million and $40 million in the second
quarter and first six months of 1997, respectively, compared to the same
year-ago periods, 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 to $111 million and $212 million
in the second quarter and first six months of 1997, respectively, compared
to the same periods in the prior year, reflecting the impact of the
Boatmen's acquisition.
o Other general operating expenses decreased $16 million for the first six
months in 1997 versus the same period in 1996. Included in the 1996
year-to-date expenses was a $40-million pre-tax charge reflecting the
estimated loss associated with fraudulent commercial loan transactions.
o Noninterest expense includes the cost of projects underway to ensure
accurate date recognition and data processing with respect to the Year 2000
and are included in professional, data processing, and equipment expenses.
The Corporation expects to complete the Year 2000 conversion projects by
the end of 1998. These costs, which are expensed as incurred, have been
immaterial to date and are not expected to have a material impact on the
Corporation's earnings in the future.
Income Taxes
The Corporation's income tax expense for the second quarter and first six
months of 1997 was $428 million and $827 million, respectively, for an effective
tax rate of 36 percent of pretax income compared to $326 million and $602
million for the second quarter and first half of 1996, respectively, for an
effective rate of 35 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 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 its capital position. The average balances discussed below
can be derived from Table 4.
24
Average customer-based funds increased $29.4 billion in the first six
months of 1997 over the same period in 1996 due primarily 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 six months of 1997
compared to 47 percent in the first six months of 1996.
Average market-based funds decreased $8.8 billion in the first six 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 six months of 1997 compared
to 33 percent during the same period of 1996, due primarily to increases in
customer-based funds resulting from the Boatmen's acquisition and long-term
debt. Average long-term debt increased $7.0 billion in the first six months of
1997 over 1996 levels for the comparable period and represented 11 percent of
total sources of funds compared to 9 percent during the first six months of
1996. The increase in long-term debt was 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
$23.9 billion during the first six months of 1997 and comprised approximately 60
percent of total uses of funds in 1997 and 1996. This increase in average loans
and leases was due to the acquisition of Boatmen's and core loan growth. The
ratio of average loans and leases to customer-based funds was 118 percent in the
first six months of 1997 compared to 129 percent in the first six months of
1996.
The average securities portfolio as a percentage of total uses decreased to
9 percent in the first six months of 1997 from 12 percent in the first six
months of 1996, the result of management's continued focus on the reduction of
low-yielding assets.
Average other assets increased $9.2 billion in the first six months of 1997
compared to the same period in 1996 due primarily to an increase in intangible
assets related to the acquisition of Boatmen's.
Cash and cash equivalents were $10.0 billion on June 30, 1997, an increase
of $1.1 billion from December 31, 1996. During the first six months of 1997, net
cash used in operating activities was $5.7 billion, net cash provided by
investing activities was $1.9 billion and net cash provided by financing
activities was $4.9 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. Management believes the Corporation's sources of liquidity
are more than adequate to meet its cash requirements.
The following discussion provides an overview of significant on- and
off-balance sheet components.
Securities
The securities portfolio on June 30, 1997 consisted of securities held for
investment totaling $1.5 billion and securities available for sale totaling
$19.7 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 was due primarily to the addition of higher-yielding
mortgage-backed securities in the first quarter of 1997.
On June 30, 1997, the market value of the Corporation's portfolio of
securities held for investment reflected net unrealized appreciation of $1
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 increased shareholders' equity by $76 million on June 30,
1997, reflecting pretax appreciation of $143 million on marketable equity
securities and depreciation of $26 million on securities available for sale. 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 June 30, 1997 to December 31, 1996.
The estimated average maturities of securities held for investment and
securities available for sale portfolios were 1.55 years and 6.61 years,
respectively, on June 30, 1997 compared with 1.47 years and 6.91 years,
respectively, on December 31, 1996.
25
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 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
Tables 3 and 4, net interest receipts and payments on these contracts have been
included in interest income and expense on the underlying instruments.
- ------------------------------------------------------------------------------------------------------------------------------------
Table 7
Asset and Liability Management Interest Rate Notional Contracts
(Dollars in Millions)
Generic Total
---------------------- 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 ..................................... 10,368 1,587 1,179 13,134 3,100 16,234
Maturities, terminations and other ............ (6,384) (980) -- (7,364) (1,600) (8,964)
------------------------------------------------------------------------------
Balance on June 30, 1997 ........................ $ 31,724 $ 1,642 $ 2,525 $ 35,891 $ 7,895 $ 43,786
==============================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Table 7 summarizes the notional amount and the activity of ALM interest
rate contracts for the six months ended June 30, 1997. As reflected in the
table, the gross notional amount of the Corporation's ALM swap program on June
30, 1997 was $35.9 billion, with the Corporation receiving fixed on $31.7
billion, primarily converting variable-rate commercial loans to fixed-rate, and
receiving variable on $1.6 billion. The net receive fixed position of $30.1
billion increased from the net receive fixed position of $26.7 billion on
December 31, 1996 in order to maintain the Corporation's relatively neutral
posture to changes in interest rates. The net receive fixed position primarily
modifies the interest rate characteristics of certain variable-rate assets.
Table 8 summarizes the expected maturities, weighted average pay and
receive rates and the unrealized gains (losses) on June 30, 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 June
30, 1997 was $8 million compared to unrealized appreciation of $69 million on
December 31, 1996, reflecting the increase in interest rates when comparing June
30, 1997 to December 31, 1996. The amount of net realized deferred losses
associated with terminated ALM swaps was $16 million on June 30, 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 7 includes a summary of the notional amount and
the activity of ALM interest rate option contracts for the six months ended June
30, 1997. At June 30, 1997, the Corporation had a gross notional amount of $7.9
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 8 includes a summary of the expected
maturities and the net unrealized loss of the Corporation's ALM option
contracts. On June 30, 1997, the net unrealized depreciation of ALM option
products was $3 million.
The Corporation uses foreign currency swaps to manage the foreign exchange
risk associated with foreign-denominated liabilities. At June 30, 1997, these
contracts had a notional value of $542 million and reflected net unrealized
depreciation of $17 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.
26
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 the "Noninterest Income" section of the
Management's Discussion and Analysis.
- ------------------------------------------------------------------------------------------------------------------------------------
Table 8
Asset and Liability Management Interest Rate Contracts
June 30, 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............. $ (1) 3.33
Notional amount................ $25,600 $ -- $ 2,680 $ 4,310 $ 6,325 $ 8,100 $ 4,185
Weighted average receive rate.. 6.41% --% 5.96% 6.26% 6.40% 6.57% 6.57%
Weighted average pay rate...... 5.75
Pay fixed generic................. (9) 2.85
-------
Notional amount................ $ 1,318 $ 1 $ 1 $ 251 $ 1,001 $ 1 $ 63
Weighted average pay rate...... 6.67% 9.78% 9.78% 6.46% 6.70% 9.78% 6.95%
Weighted average receive rate.. 5.82
Total asset conversion swaps...... $ (10)
=======
Notional amount................ $26,918 $ 1 $ 2,681 $ 4,561 $ 7,326 $ 8,101 $ 4,248
Liability Conversion Swaps........
Receive fixed generic............. $ 9 6.37
Notional amount................ $ 6,124 $ -- $ 98 $ 716 $ 308 $ 1,436 $ 3,566
Weighted average receive rate.. 6.81% --% 6.03% 7.27% 6.79% 6.41% 6.90%
Weighted average pay rate...... 6.06
Pay fixed generic................. (8) 1.77
-------
Notional amount................ $ 324 $ 125 $ 100 $ -- $ 40 $ -- $ 59
Weighted average pay rate...... 8.97% 10.35% 9.31% --% 6.53% --% 7.16%
Weighted average receive rate.. 5.66
Total liability conversion swaps.. $ 1
=======
Notional amount................ $ 6,488 $ 125 $ 198 $ 716 $ 348 $ 1,436 $ 3,625
- ------------------------------------------------------------------------------------------------------------------------------------
Total receive fixed swaps......... $ 8 3.92
Notional amount................ $31,724 $ -- $ 2,778 $ 5,026 $ 6,633 $ 9,536 $ 7,751
Weighted average receive rate.. 6.49% --% 5.96% 6.41% 6.42% 6.54% 6.72%
Weighted average pay rate...... 5.81
Total pay fixed swaps............. (17) 2.64
Notional amount................ $ 1,642 $ 126 $ 101 $ 251 $ 1,041 $ 1 $ 122
Weighted average pay rate...... 7.13% 10.34% 9.31% 6.46% 6.69% 9.78% 7.05%
Weighted average receive rate.. 5.79
Basis Swaps....................... $ 1 1.61
-------
Notional amount................ $ 2,525 $ 371 $ 700 $ 1,100 $ 160 $ 25 $ 169
Weighted average receive rate.. 5.75%
Weighted average pay rate...... 5.81
Total Swaps....................... $ (8)
=======
Notional amount................ $35,891 $ 497 $ 3,579 $ 6,377 $ 7,834 $ 9,562 $ 8,042
- ------------------------------------------------------------------------------------------------------------------------------------
Option Products
Notional amount................ (3) $ 7,895 $ -- $ 2,425 $ 3,575 $ 25 $ 336 $ 1,534
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Rate Contracts..... $ (11)
Notional amount................ ======= $43,786 $ 497 $ 6,004 $ 9,952 $ 7,859 $ 9,898 $ 9,576
- ------------------------------------------------------------------------------------------------------------------------------------
On June 30, 1997, in addition to the above interest rate swaps, the Corporation had a $500 million notional receive fixed generic
interest swap associated with a credit card securitization. On this position had an unrealized market value of negative $20 million,
a receive rate of 5.96 percent, a pay rate of 5.94 percent and an expected maturity of 6.46 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 9 presents the notional or contract amounts on June 30, 1997 and
December 31, 1996 and the current credit risk amounts (the net replacement cost
of contracts in a gain position on June 30, 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
27
and significantly exceed the amount of the Corporation's credit or market risk
associated with these instruments. The credit risk amounts presented in Table 9
do not consider the value of any collateral, but generally take into
consideration the effects of legally enforceable master netting agreements. On
June 30, 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 9
Derivatives - Dealer Positions
(Dollars in Millions)
June 30 December 31
1997 1996
--------------------------------------------
Contract/ Credit Risk Contract/ Credit Risk
Notional Amount(1) Notional Amount (1)
- -------------------------------------------------------------------------------------
Interest Rate Contracts
Swaps ................................ $307,581 $ 1,167 $252,187 $ 927
Futures and forwards ................. 112,394 6 186,333 5
Written options ...................... 336,040 -- 298,594 --
Purchased options .................... 314,564 570 294,591 561
Foreign Exchange Contracts
Swaps ................................ 1,372 100 1,303 24
Spot, futures and forwards ........... 73,209 672 94,028 1,137
Written options ...................... 49,634 -- 63,081 --
Purchased options .................... 47,416 323 61,716 352
Commodity and Other Contracts
Swaps ................................ 823 34 812 81
Futures and forwards ................. 2,838 18 2,728 --
Written options ...................... 14,815 -- 14,064 --
Purchased options .................... 14,963 278 13,828 357
-------- --------
Total before cross product netting . 3,168 3,444
-------- --------
Cross product netting .............. 286 286
-------- --------
Net replacement cost ............... $ 2,882 $ 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 June 30, 1997, there were no nonperforming
derivative positions.
Allowance for Credit Losses
The Corporation's allowance for credit losses was $2.8 billion, or 1.85
percent of net loans, leases, and factored accounts receivable on June 30, 1997
compared to $2.3 billion, or 1.89 percent, on December 31, 1996, with the
increase in the allowance attributable to the acquisition of Boatmen's. The
allowance for credit losses was 250 percent of nonperforming loans on June 30,
1997 compared to 260 percent on December 31, 1996.
28
- ------------------------------------------------------------------------------------------------------------------------------------
Table 10
Allowance For Credit Losses
(Dollars in Millions)
Three Months Six Months
Ended June 30 Ended June 30
---------------------------------------------------------------
1997 1996 1997 1996
---------------------------------------------------------------
Beginning balance.................................................. $ 2,785 $ $2,253 $ 2,315 $ $2,163
---------------------------------------------------------------
Loans, leases and factored accounts receivable charged off
Commercial...................................................... (15) (50) (42) (84)
Real estate commercial.......................................... (14) (16) (18) (29)
Real estate construction........................................ (1) (3) (1) (3)
---------------------------------------------------------------
Total commercial.............................................. (30) (69) (61) (116)
---------------------------------------------------------------
Residential mortgage............................................ (3) (2) (7) (6)
Credit card..................................................... (117) (61) (225) (126)
Other consumer.................................................. (98) (81) (198) (168)
---------------------------------------------------------------
Total consumer................................................ (218) (144) (430) (300)
---------------------------------------------------------------
Foreign......................................................... (3) - (3) -
Lease financing................................................. (2) (1) (6) (2)
Factored accounts receivable.................................... (6) (10) (10) (16)
---------------------------------------------------------------
Total loans, leases and factored accounts
receivable charged off...................................... (259) (224) (510) (434)
---------------------------------------------------------------
Recoveries of loans, leases and factored accounts
receivable previously charged off
Commercial...................................................... 17 22 35 36
Real estate commercial.......................................... 5 3 7 6
Real estate construction........................................ 2 2 3 2
---------------------------------------------------------------
Total commercial.............................................. 24 27 45 44
---------------------------------------------------------------
Residential mortgage............................................ 1 - 2 1
Credit card..................................................... 20 14 39 26
Other consumer.................................................. 27 24 52 46
---------------------------------------------------------------
Total consumer................................................ 48 38 93 73
---------------------------------------------------------------
Foreign......................................................... - - - -
Lease financing................................................. 1 - 1 -
Factored accounts receivable.................................... 2 2 3 5
---------------------------------------------------------------
Total recoveries of loans, leases and
factored accounts receivable previously charged off......... 75 67 142 122
---------------------------------------------------------------
Net charge-offs............................................... (184) (157) (368) (312)
---------------------------------------------------------------
Provision for credit losses........................................ 190 155 380 310
Allowance applicable to loans of purchased companies and other..... (1) 41 463 131
---------------------------------------------------------------
Balance on June 30................................................. $ 2,790 $ $2,292 $ 2,790 $ $2,292
===============================================================
Loans, leases and factored accounts receivable,
net of unearned income, outstanding end of period............... $ 150,446 $ 123,705 $ 150,446 $ 123,705
Allowance for credit losses as a percentage of
loans, leases and factored accounts receivable,
net of unearned income, outstanding end of period .............. 1.85% 1.85% 1.85% 1.85%
Average loans, leases and factored accounts receivable,
net of unearned income, outstanding during the period........... $ 149,301 $ 124,850 $ 148,533 $ 124,571
Net charge-offs as a percentage of average loans, leases and
factored accounts receivable, net of unearned income,
outstanding during the period................................... .49% .50% .50% .50%
Allowance for credit losses as a percentage of nonperforming loans. 249.66 268.34 249.66 268.34
- ------------------------------------------------------------------------------------------------------------------------------------
29
Table 10 provides an analysis of the changes in the allowance for credit
losses. During the second quarter of 1997, higher credit card net charge-offs
caused most of the $27-million increase in total net charge-offs, which amounted
to $184 million, or .49 percent of average loans, leases and factored accounts
receivable, slightly lower than .50 percent for the same period in 1996. During
the second quarter of 1997, increases in credit card and other consumer net
charge-offs of $50 million and $14 million, respectively, were partially offset
by a decrease of $36 million in total commercial net charge-offs when compared
to 1996. Higher credit card net charge-offs were due primarily to deterioration
in consumer credit quality experienced on an industry-wide basis with increases
in other consumer net charge-offs related to growth in other consumer loans,
primarily due to the acquisition of Boatmen's. In addition, net charge-offs
increased $56 million to $368 million for the first half of 1997 compared to the
same period in 1996, or .50 percent of average loans, leases, and factored
accounts receivable for both 1997 and 1996 six-month periods, attributable to
the factors mentioned above.
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 loan 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
- -----------------------------------------------------------------------------------------------
Table 11
Nonperforming Assets
(Dollars in Millions)
June 30 March 31 December 31 September 30 June 30
1997 1997 1996 1996 1996
-------------------------------------------------------
Nonperforming loans:
Commercial ................................. $ 429 $ 398 $ 342 $ 413 $ 388
Real estate commercial ..................... 206 162 145 165 119
Real estate construction ................... 15 34 28 36 15
-------------------------------------------------------
Total commercial ......................... 650 594 515 614 522
-------------------------------------------------------
Residential mortgage ....................... 254 256 215 203 174
Other consumer ............................. 166 156 135 135 135
-------------------------------------------------------
Total consumer ........................... 420 412 350 338 309
-------------------------------------------------------
Lease financing ............................ 47 45 25 32 23
-------------------------------------------------------
Total nonperforming loans ................ 1,117 1,051 890 984 854
-------------------------------------------------------
Other real estate owned ...................... 150 168 153 151 138
-------------------------------------------------------
Total nonperforming assets ............... $1,267 $1,219 $1,043 $1,135 $ 992
=======================================================
Nonperforming assets as a percentage of
Total assets ............................... .53% .51% .56% .61% .52%
Loans, leases and factored accounts
receivable, net of unearned income,
and other real estate owned .............. .84 .82 .85 .93 .80
Loans past due 90 days or more and
not classified as nonperforming............. $ 315 $ 320 $ 245 $ 201 $ 153
- --------------------------------------------------------------------------------------------------------
30
As presented in Table 11, on June 30, 1997, nonperforming assets were $1.3
billion, or .84 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 June 30, 1997 from
$890 million on December 31, 1996. The increase in nonperforming loans was due
primarily to the acquisition of Boatmen's and, to a lesser extent, deterioration
in consumer credit quality experienced on an industry-wide basis. The allowance
coverage of nonperforming loans was 250 percent on June 30, 1997 compared to 260
percent on December 31, 1996.
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.
- -------------------------------------------------------------------------------------------------
Table 12
Real Estate Commercial and Construction Loans, Other Real Estate
Owned and Other Real Estate Credit Exposures
June 30, 1997
(Dollars in Millions)
Loans (1) Other
-------------------------- Credit
Outstanding Nonperforming OREO Exposures(2)
-------------------------------------------------------
By Geographic Region (3):
Florida and Georgia ................. $2,610 $49 $30 $181
Missouri, Kansas, Illinois, Iowa
and Arkansas ...................... 2,478 32 18 116
Texas, Oklahoma and New Mexico ...... 2,250 22 8 237
Maryland, District of Columbia
and Virginia ...................... 1,515 69 22 334
North Carolina and South Carolina ... 1,314 26 9 23
Other states ........................ 1,730 23 2 446
--------------------------------------------------
$11,897 $221 $89 $1,337
==================================================
By Property Type:
Apartments .......................... $2,017 $10 $- $619
Residential ......................... 1,797 16 7 67
Office buildings .................... 1,707 13 14 30
Shopping centers/retail ............. 1,693 75 5 189
Hotels .............................. 954 18 1 46
Industrial/warehouse ................ 950 16 2 19
Land and land development ........... 782 21 40 89
Commercial-other .................... 350 16 13 149
Resorts/golf courses ................ 297 - - -
Unsecured ........................... 254 3 - 43
Multiple use ........................ 102 4 1 -
Other ............................... 994 29 6 86
--------------------------------------------------
$11,897 $221 $89 $1,337
==================================================
(1) On June 30, 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.
- -------------------------------------------------------------------------------------------------
31
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 12. 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
$11.9 billion, or 8 percent of net loans, leases and factored accounts
receivable, on June 30, 1997 compared to $8.3 billion, or 7 percent, at the end
of 1996 with the increase due to the acquisition of Boatmen's. During the second
quarter of 1997, the Corporation recorded real estate net charge-offs of $8
million, or .27 percent of average real estate loans, compared to net
charge-offs of $14 million, or .60 percent, in the second quarter of 1996.
During the first six months of 1997, the Corporation had real estate net
charge-offs of $9 million, or .15 percent of average real estate loans, compared
to $24 million, or .49 percent, in the first half of 1996. Real estate loans
past due 90 days or more and still accruing interest were $21 million, or .18
percent of real estate loans, on June 30, 1997 and $18 million, or .22 percent,
on December 31, 1996. Nonperforming real estate commercial and construction
loans were $221 million on June 30, 1997 compared to $173 million on December
31, 1996 due primarily to the acquisition of Boatmen's.
The exposures included in Table 12 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 June 30, 1997, the Corporation had approximately $8.5 billion of
commercial loans which were not real estate dependent but for which the
Corporation had obtained real estate as secondary repayment security.
Other Industries - Table 13 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, or 40 percent of
net loans, leases and factored accounts receivable on June 30, 1997 and $50.3
billion, or 41 percent of net loans, leases and factored accounts receivable on
December 31, 1996. Net recoveries of commercial loans totaled $2 million in the
second quarter of 1997 versus net charge-offs of $28 million, or .23 percent of
average loans, leases, and factored accounts receivable, in the second quarter
of 1996. For the first half of 1997, the Corporation had commercial net
charge-offs of $7 million, or .02 percent of average commercial loans, compared
to $48 million, or .20 percent of average commercial loans, in the first half of
1996. Commercial loans past due 90 days or more and still accruing interest were
$39 million, or .06 percent of commercial loans, on June 30, 1997 and $38
million, or .08 percent, on December 31, 1996. Nonperforming commercial loans
were $429 million and $342 million on June 30, 1997 and December 31, 1996,
respectively. The increase was primarily attributable to the acquisition of
Boatmen's.
32
- -------------------------------------------------------------------------------------------------------
Table 13
Selected Industry Credit Exposures
June 30, 1997
(Dollars in Millions)
Loans, Leases and Factored Accounts
Receivable, Net of Unearned Income
------------------------------------ Other
Credit
Outstanding Nonperforming Exposures(1)
--------------------------------------------------------
Communications ....................... $5,132 $19 $268
Health care .......................... 4,657 15 963
Leisure and sports ................... 4,039 51 210
Food, including agribusiness ......... 3,715 27 351
Machinery and equipment, excluding ...
defense ............................ 3,283 13 272
Retail ............................... 3,122 103 728
Oil and gas .......................... 3,092 37 591
Textiles and apparel ................. 3,088 43 506
Automotive, excluding trucking ....... 2,963 7 73
Construction ......................... 2,139 25 193
Utilities ............................ 1,997 - 262
Forest products and paper ............ 1,983 11 260
Aviation ............................. 1,972 34 255
Transportation, excluding air and
trucking ........................... 1,870 6 77
Computers and electronics ............ 1,774 4 132
Professional services ................ 1,737 7 98
Steel and metal ...................... 1,411 7 235
Chemicals and plastics ............... 1,365 2 152
Education and government ............. 1,153 7 1,049
Finance companies .................... 1,083 - 134
Banks ................................ 1,021 1 2,621
Brokers and dealers .................. 356 - 1,042
(1) Other credit exposures include loans held for sale, letters of credit,
bankers' acceptances and derivatives exposures in a gain position.
- ---------------------------------------------------------------------------------------------------
Consumer - On June 30, 1997 and December 31, 1996, total consumer loan
outstandings were $67.6 billion and $55.3 billion, respectively, representing 45
percent of net loans, leases and factored accounts receivable. Net charge-offs
in the total consumer portfolio were $170 million, or 1.02 percent, in the
second quarter of 1997 compared to $106 million, or .74 percent, in the second
quarter of 1996. Consumer net charge-offs for the first six months of 1997 were
$337 million, or 1.02 percent, compared to $227 million, or .79 percent, for the
same period in 1996. Credit card net charge-offs caused most of the increase in
total consumer net charge-offs due primarily to deterioration in consumer credit
quality experienced on an industry-wide basis. Higher net charge-offs in the
other consumer portfolio accounted for the rest of the increase, due to an
increase in other consumer loans, primarily the result of the Boatmen's
acquisition. 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.
Total average credit card receivables managed by the Card Services group
(excluding private label credit cards) increased to $9.3 billion during the
first six months of 1997 compared to $7.7 billion during the same year-ago
period as the Corporation maintains its efforts to shift the loan portfolio mix
to a
33
higher consumer concentration. Average securitized credit card loans
totaled $2.6 billion during the second quarter and first six months of 1997.
During the second quarter and first six months of 1996, average securitized
credit card loans were $2.2 billion and $1.7 billion, respectively. Net
charge-off ratios for the managed credit card portfolio were 6.26 percent and
6.18 percent for the second quarter and first six months of 1997, respectively,
and 4.36 percent and 4.08 percent for the comparable 1996 periods, reflecting
deterioration in consumer credit quality experienced on an industry-wide basis.
Total average managed other consumer loans, including direct and indirect
consumer loans and home equity lines, were $28.8 billion and $29.4 billion in
the second quarter and first six months of 1997, respectively, and $24.9 billion
and $25.1 billion in the comparable 1996 periods. 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 1.08 percent and 1.12 percent in the second quarter and first
six months of 1997, respectively, and .99 percent and 1.03 percent in the
comparable 1996 periods.
Total consumer loans past due 90 days or more and still accruing interest
were $247 million, or .37 percent of total consumer loans on June 30, 1997
compared to $180 million, or .33 percent of total consumer loans on December 31,
1996. Total consumer nonperforming loans were $420 million and $350 million on
June 30, 1997 and December 31, 1996, respectively. The increases in these
categories were due to deterioration in consumer credit quality experienced on
an industry-wide basis and the acquisition of Boatmen's.
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 June 30, 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 1
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 an uncorrelated basis. The
gross measure assumes that adverse market movements occur simultaneously across
all segments of the trading portfolio, an unlikely assumption. On June 30, 1997,
the gross estimates of potential losses with respect to interest rate, foreign
exchange and equity and commodity trading activities were $64 million, $5
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 June 30, 1997 for aggregate trading activities was $25
million.
Average daily trading-related revenues during the first six months of 1997
approximated $2 million. During the first half of 1997, the Corporation's
trading-related activities resulted in positive daily revenues for approximately
81 percent of total trading days. During the first six months of 1997, the
34
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 $5 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 $20.0 billion on June 30, 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
86 million shares of common stock for approximately $5.1 billion.
Presented below are the Corporation's regulatory capital ratios on June 30,
1997 and December 31, 1996:
June 30 December 31
1997 1996
================================================================
Risk-Based Capital Ratios
Tier 1 Capital ....................... 6.83% 7.76%
Total Capital ........................ 11.32 12.66
Leverage Capital Ratio ............... 6.05 7.09
The Corporation's and its significant banking subsidiaries' regulatory
capital ratios on June 30, 1997 exceeded the regulatory minimums of 4 percent
for Tier 1 risk-based capital, 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 June 30, 1997.
35
- -----------------------------------------------------------------------------------
Table 14
Selected Quarterly Operating Results
(Dollars in Millions Except Per-Share Information)
1997 Quarters
-----------------------
First Second
-----------------------
Income Statement
Income from earning assets ............................ $ 4,027 $ 4,109
Interest expense ...................................... 2,077 2,121
Net interest income (taxable-equivalent) .............. 1,978 2,017
Net interest income ................................... 1,950 1,988
Provision for credit losses ........................... 190 190
Gains on sales of securities .......................... 43 29
Noninterest income .................................... 1,113 1,165
Other real estate owned (income) expense .............. (2) 4
Other noninterest expense ............................. 1,810 1,798
Income before income taxes ............................ 1,108 1,190
Income tax expense .................................... 399 428
Net income ............................................ 709 762
Net income applicable to common shareholders .......... 705 759
Average common shares issued (in thousands) ........... 730,413 720,020
Per common share
Earnings .............................................. $ .97 $ 1.05
Cash dividends paid ................................... .33 .33
Common shareholders' equity (period-end) .............. 28.22 27.99
Balance sheet (period-end)
Total assets .......................................... 238,958 240,362
Total loans, leases and factored accounts receivable,
net of unearned income .............................. 148,716 150,446
Total deposits ........................................ 136,807 135,049
Long-term debt ........................................ 25,086 25,474
Common shareholders' equity ........................... 20,534 19,909
Total shareholders' equity ............................ 20,659 19,970
Performance ratios
Return on average assets .............................. 1.19% 1.27%
Return on average common shareholders' equity(1) ...... 13.96 15.25
Total equity to total assets .......................... 8.65 8.31
Risk-based capital ratios
Tier 1 ................................................ 7.06 6.83
Total ................................................. 11.58 11.32
Leveraged capital ratio ............................... 6.19 6.05
Market price per shares of common stock
Close at end of the period ............................ $55 1/2 $64 9/16
High for the period ................................... 68 70
Low for the period .................................... 48 54
(1) Average common shareholders' equity does not include the effect of market
value adjustments to securities available for sale and marketable equity
securities.
36
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Shareholders was held on April 23, 1997.
b. The following are voting results on each of the matters which were
submitted to the shareholders:
Against
or Broker
For Withheld Abstentions Nonvotes
--- -------- ----------- --------
1. To elect 26 Directors
Ronald W. Allen............. 628,024,477 3,590,511
Ray C. Anderson............. 628,268,613 3,346,375
William M. Barnhardt........ 628,059,684 3,555,304
B.A. Bridgewater, Jr........ 627,598,823 4,016,165
Thomas E. Capps............. 628,043,494 3,571,494
Charles W. Coker............ 628,115,372 3,499,616
Thomas G. Cousins........... 628,205,625 3,409,363
Andrew B. Craig, III ....... 627,706,972 3,908,016
Alan T. Dickson............. 628,127,304 3,487,684
Paul Fulton................. 628,152,418 3,462,570
Timothy L. Guzzle........... 628,235,655 3,379,333
C. Ray Holman............... 627,942,056 3,672,932
W. W. Johnson............... 628,169,715 3,445,273
Hugh L. McColl, Jr.......... 627,963,992 3,650,996
Russell W. Meyer, Jr........ 628,244,461 3,370,527
John J. Murphy.............. 599,003,896 32,611,092
Richard B. Priory........... 627,909,173 3,705,815
John C. Slane............... 575,254,053 56,360,935
O. Temple Sloan, Jr......... 628,257,999 3,356,989
John W. Snow................ 627,952,063 3,662,925
Meredith R. Spangler........ 628,191,632 3,423,356
Robert H. Spilman........... 628,070,339 3,544,649
Albert E. Suter............. 628,240,824 3,374,164
Ronald Townsend............. 627,991,221 3,623,767
Jackie M. Ward.............. 627,842,703 3,772,285
Virgil R. Williams.......... 628,214,974 3,400,014
2. To consider and act upon a
proposal to approve and adopt
an amendment to the
NationsBank Corporation
Executive Incentive
Compensation Plan.............. 587,934,610 34,802,133 8,878,245
37
Against
or Broker
For Withheld Abstentions Nonvotes
--- -------- ----------- --------
3. To consider and act upon a
proposal to ratify the action
of the Board of Directors in
selecting Price Waterhouse LLP
as independent public
accountants to audit the books
of the Corporation and its
subsidiaries for the current
year........................... 627,264,776 1,233,899 3,116,313
4. To consider and act upon a
shareholder proposal
requesting that the
Corporation change the date of
the Annual Meeting............. 27,454,306 519,989,450 13,916,980 70,254,252
5. To consider and act upon a
shareholder proposal
requesting that the
Corporation not increase
salaries of executive officers
or grant stock options to
executive officers and
directors in the event the
dividend is reduced............ 67,030,055 483,915,019 10,415,664 70,254,250
38
Item 5. Other Information
On August 1,1997, the Registrant announced a settlement of claims brought
by certain customers who bought non-depository investments from
NationsSecurities and its predecessors. This comprehensive agreement
resolves all customer class-action claims against NationsSecurities.
A copy of the press release announcing this settlement agreement is
filed as Exhibit 99.1 to this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 3(a) - Restated Articles of Incorporation of Registrant, as in
effect on the date hereof, incorporated by reference to
Exhibit 3.1 of Registrant's Current Report on Form 8-K
dated December 31, 1996.
Exhibit 3(b) - Amended and Restated Bylaws of Registrant, as in effect
on the date hereof, incorporated by reference to Exhibit
3(b) of Registrant's Form 10-Q dated May 15, 1997.
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
Exhibit 99.1 - Press Release dated August 1, 1997 with respect to the
Registrant's settlement of claims brought by customers
who bought non-depository investments
from NationsSecurities and its predecessors.
b. Reports on Form 8-K
The following reports on Form 8-K were filed by the Corporation during
the quarter ended June 30, 1997:
Current Report on Form 8-K dated March 31, 1997, and filed April 21,
1997, Items 2, 5 & 7.
Current Report on Form 8-K dated April 15, 1997, and filed April 22,
1997, Items 5 & 7.
39
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NationsBank Corporation
--------------------------------
Registrant
Date: August 14, 1997 /s/ Marc D. Oken
------------------ ------------------------------
Marc D. Oken
Executive Vice President
and Chief Accounting Officer
(Duly Authorized Officer and
Principal Accounting Officer)
40
NationsBank Corporation
Form 10-Q
Index to Exhibits
Exhibit Description
- ------- -----------
3(a) Restated Articles of Incorporation of Registrant, as in effect on the date
hereof, incorporated by reference to Exhibit 3.1 of Registrant's Current
Report on Form 8-K dated December 31, 1996.
3(b) Amended and Restated Bylaws of Registrant, as in effect on the date
hereof, incorporated by reference to Exhibit 3(b) of Registrant's Form
10-Q dated May 15, 1997.
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
99.1 Press Release dated August 1, 1997 with respect to the
Registrant's settlement of claims brought by customers
who bought non-depository investments from NationsSecurities
and its predecessors.
41