- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 - Commission File Number 1-6523 --------------- BankAmerica Corporation (Exact name of registrant as specified in its charter) Delaware 56-0906609 - -------------------------------------- -------------------------------------- (State of incorporation) (IRS Employer Identification No.) Bank of America Corporate Center Charlotte, North Carolina 28255 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 704/386-5000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered Common Stock New York Stock Exchange London Stock Exchange Pacific Stock Exchange Tokyo Stock Exchange 7 3/4% Debentures, due 2002 American Stock Exchange 9 7/8% Subordinated Notes, due 2001 New York Stock Exchange 8 1/2% Subordinated Notes, due 2007 New York Stock Exchange 10 7/8% Subordinated Notes, due 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock held by non-affiliates is approximately $126,732,283,000 (based on the March 15, 1999, closing price of such common stock of $73.75 per share). As of March 15, 1999, there were 1,739,020,301 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE
Document of the Registrant Form 10-K Reference Location Portions of the 1999 Proxy Statement PART III
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Page ----------- PART I Item 1. Business ..................................................................... 2 Primary Market Areas ......................................................... 2 Acquisition and Disposition Activity ......................................... 2 Government Supervision and Regulation ........................................ 3 Competition .................................................................. 5 Employees .................................................................... 6 Business Segment Operations .................................................. 13-16 Net Interest Income .......................................................... 16-18 Securities ................................................................... 26, 56, 64-66 Loans and Leases ............................................................. 19, 26-27, 34-44, 57- 58, 67-68 Deposits ..................................................................... 27, 68 Short-Term Borrowings and Trading Account Liabilities ........................ 27-28, 69 Market Risk Management ....................................................... 29-33 Selected Quarterly Operating Results ......................................... 45 Item 2. Properties ................................................................... 6 Item 3. Legal Proceedings ............................................................ 6 Item 4. Submission of Matters to a Vote of Security Holders .......................... 7 Item 4A. Executive Officers of the Registrant ......................................... 7 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters ..... 8 Item 6. Selected Financial Data ...................................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................... 9 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................... 50 Item 8. Consolidated Financial Statements and Supplementary Data ..................... 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................................... 96 PART III Item 10. Directors and Executive Officers of the Registrant ........................... 96 Item 11. Executive Compensation ....................................................... 96 Item 12. Security Ownership of Certain Beneficial Owners and Management ............... 96 Item 13. Certain Relationships and Related Transactions ............................... 96 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 97
1 PART I Item 1. BUSINESS General On September 25, 1998, NationsBank Corporation, a North Carolina corporation ("NationsBank"), was reincorporated in Delaware by forming a new, wholly owned Delaware subsidiary named NationsBank (DE) Corporation ("NationsBank (DE)"), and merging NationsBank with and into NationsBank (DE). As the surviving corporation in this merger, NationsBank (DE) was renamed "NationsBank Corporation." On September 30, 1998, the former BankAmerica Corporation, a Delaware corporation ("BankAmerica"), merged with and into NationsBank Corporation, with NationsBank Corporation as the surviving corporation in this merger. In connection with this merger, NationsBank Corporation changed its name to "BankAmerica Corporation" (the "Corporation"). As the successor issuer of NationsBank, the Corporation's predecessor companies were initially incorporated in 1968. The Corporation has announced that it will operate under the "Bank of America" name. The Corporation is a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended, with its principal assets being the stock of its subsidiaries. The Corporation and its subsidiaries are subject to supervision by various U.S. federal and state banking and other regulatory authorities. For additional information about the Corporation and its operations, see Table Two and the narrative comments under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Segment Operations." The principal executive offices of the Corporation are located in the Bank of America Corporate Center, Charlotte, North Carolina 28255. Primary Market Areas Through its banking subsidiaries (the "Banks") and various non-banking subsidiaries, the Corporation provides a diversified range of banking and non-banking financial services and products, primarily throughout the Mid-Atlantic (Maryland, Virginia and the District of Columbia), the Midwest (Illinois, Iowa, Kansas and Missouri), the Southeast (Florida, Georgia, North Carolina, South Carolina and Tennessee), the Southwest (Arizona, Arkansas, New Mexico, Oklahoma and Texas), the Northwest (Alaska, Oregon and Washington) and the West (California, Idaho and Nevada) regions of the United States and in selected international markets. The Corporation serves an aggregate of approximately 30 million households and two million businesses in these regions, and management believes that these are desirable regions in which to be located. Based on the most recent available data, personal income levels in the states in these regions as a whole rose 5.9 percent (annualized) in the first half of 1998. In addition, the population in these states as a whole rose an estimated 1.4 percent between 1997 and 1998. The number of housing permits authorized increased 12.8 percent between 1997 and 1998, ranging from an increase of 5.2 percent in the Midwest to an increase of 21.3 percent in the Southwest. Between 1997 and 1998, the levels of unemployment in these states as a whole fell by approximately .03 percentage points, for an unemployment rate in the Corporation's overall market area of 4.5 percent at year-end 1998. These states created more than 1.7 million new jobs in 1998, 2.5 percent above 1997, compared to 1.4 percent job growth in the other states. The Corporation has the leading bank deposit market share position in California, Florida, Georgia, Maryland, New Mexico, North Carolina, Texas and Washington. In addition, the Corporation ranks second in terms of bank deposit market share in Arizona, Arkansas, Kansas, Missouri, Nevada, Oregon, South Carolina, Virginia and the District of Columbia; third in Oklahoma; fifth in Illinois and Tennessee; sixth in Alaska and Idaho; and eighth in Iowa. The Corporation has announced its intention to exit the Alaska retail market. Acquisition and Disposition Activity As part of its operations, the Corporation regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions and other businesses of a type eligible for bank holding company ownership or control. In addition, the Corporation regularly analyzes the values of, and submits bids for, the acquisition of customer-based funds and other liabilities and assets of such financial institutions and other businesses. The Corporation also regularly considers the potential disposition of certain of its assets, branches, subsidiaries 2 or lines of businesses. As a general rule, the Corporation publicly announces any material acquisitions or dispositions when a definitive agreement has been reached. For additional information regarding the Corporation's acquisition activity, see Note Two of the consolidated financial statements on page 61. Government Supervision and Regulation General As a registered bank holding company, the Corporation is subject to the supervision of, and to regular inspection by, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Banks are organized principally as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the "Comptroller"). The Banks are also subject to regulation by the Federal Deposit Insurance Corporation (the "FDIC") and other federal and state regulatory agencies. In addition to banking laws, regulations and regulatory agencies, the Corporation and its subsidiaries and affiliates are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Corporation and its ability to make distributions. The following discussion summarizes certain aspects of those laws and regulations that affect the Corporation. The activities of the Corporation, and those of companies which it controls or in which it holds more than 5 percent of the voting stock, are limited to banking or managing or controlling banks, furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Generally, bank holding companies, such as the Corporation, are required to obtain prior approval of, or provide prior notice to, the Federal Reserve Board to engage in any new activity or to acquire more than 5 percent of any class of voting stock of any company. Bank holding companies are also required to obtain the prior approval of the Federal Reserve Board before acquiring more than 5 percent of any class of voting stock of any bank which is not already majority-owned by the bank holding company. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank holding company may acquire banks in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent of such deposits in that state (or such lesser or greater amount set by state law). Subject to certain restrictions, the Interstate Banking and Branching Act also authorizes banks to merge across state lines, thereby creating interstate branches. Furthermore, pursuant to the Interstate Banking and Branching Act, a bank may open new branches in a state in which it does not already have banking operations if such state enacts a law permitting such de novo branching. To the extent permitted under these laws, the Corporation plans to consolidate its banking subsidiaries into a single bank as soon as practicable (with the exception of its two limited purpose credit card banks which are headquartered in Arizona and Delaware, which the Corporation intends to merge into a single credit card bank). The Corporation currently operates two interstate banks (i.e., banks with branch offices in more than one state): NationsBank, N.A., headquartered in Charlotte, North Carolina, with branch offices primarily in Arkansas, Florida, Georgia, Illinois, Iowa, Kansas, Maryland, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Virginia, Tennessee, Texas and the District of Columbia; and Bank of America NT&SA, headquartered in San Francisco, California, with branch offices primarily in Alaska, Arizona, California, Florida, Idaho, Illinois, Nevada, New Mexico, Oregon and Washington. Separate banks continue to operate in Arizona, California, Delaware and Texas. In addition, the Corporation has 3 a federal savings bank headquartered in Portland, Oregon with branch offices in a number of states. As previously described, the Corporation regularly evaluates merger and acquisition opportunities, and it anticipates that it will continue to evaluate such opportunities. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. At the present time, Congress is considering legislation that would increase the permissible scope of securities and insurance activities in which a bank holding company or its affiliates may engage. The likelihood and timing of any such proposals or legislation and the impact they might have on the Corporation and its subsidiaries cannot be determined at this time. Capital and Operational Requirements The Federal Reserve Board, the Comptroller and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, subordinated and other qualifying debt, and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank's risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital, at least 50 percent of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4 percent and the minimum total capital ratio is 8 percent. The Corporation's Tier 1 and total risk-based capital ratios under these guidelines at December 31, 1998 were 7.06 percent and 10.94 percent, respectively. At December 31, 1998, the Corporation had no subordinated debt that qualified as Tier 3 capital. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3 percent, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3 percent. The Corporation's leverage ratio at December 31, 1998 was 6.22 percent. Management believes that the Corporation meets its leverage ratio requirement. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective Federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5 percent of the bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6 percent, a total capital ratio of at least 10 percent and a leverage 4 ratio of at least 5 percent and not be subject to a capital directive order. Under these guidelines, each of the Banks is considered well capitalized. Banking agencies have also adopted final regulations which mandate that regulators take into consideration (i) concentrations of credit risk; (ii) interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position); and (iii) risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. That evaluation will be made as a part of the institution's regular safety and soundness examination. In addition, the banking agencies have amended their regulatory capital guidelines to incorporate a measure for market risk. In accordance with the amended guidelines, the Corporation and any Bank with significant trading activity (as defined in the amendment) must incorporate a measure for market risk in their regulatory capital calculations effective for reporting periods after January 1, 1998. The revised guidelines did not have a material impact on the Corporation or the Banks' regulatory capital ratios or their well capitalized status. Distributions The Corporation's funds for cash distributions to its stockholders are derived from a variety of sources, including cash and temporary investments. The primary source of such funds, however, is dividends received from the Banks. Each of the Banks is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of the bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In addition to the foregoing, the ability of the Corporation and the Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. The right of the Corporation, its stockholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries. Source of Strength According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC - either as a result of default of a banking or thrift subsidiary of the Corporation or related to FDIC assistance provided to a subsidiary in danger of default - the other Banks may be assessed for the FDIC's loss, subject to certain exceptions. Competition The activities in which the Corporation and its four major business segments (Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Wealth Management) engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks, thrifts, credit unions and other non-bank financial institutions, such as investment banking firms, brokerage firms, investment companies and insurance companies, as well as other entities which offer financial services, located both domestically and internationally. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and location of offices. The commercial banking business in the various local markets served by the Corporation's business segments is highly competitive. The four major business segments compete with other commercial banks, thrifts, finance companies and other businesses which provide similar services. The business segments actively compete in commercial lending activities with local, regional and international banks and non-bank financial organizations, some of which are larger than certain of the Corporation's non-banking subsidiaries and the Banks. In its consumer lending operations, the competitors of the business segments include other banks, thrifts, credit unions, regulated small loan companies and other non-bank organizations offering financial services. In the investment banking, investment advisory and brokerage business, the Corporation's non-banking subsidiaries compete with 5 other banking and investment banking firms, investment advisory firms, brokerage firms, investment companies and other organizations offering similar services. The Corporation's mortgage banking units compete with commercial banks, thrifts, government agencies, mortgage brokers and other non-bank organizations offering mortgage banking services. In the trust business, the Banks compete with other banks, investment counselors and insurance companies in national markets for institutional funds and corporate pension and profit sharing accounts. The Banks also compete with other banks, trust companies, insurance agents, thrifts, financial counselors and other fiduciaries for personal trust business. The Corporation and its four major business units also actively compete for funds. A primary source of funds for the Banks is deposits, and competition for deposits includes other deposit-taking organizations, such as commercial banks, thrifts, and credit unions, as well as money market mutual funds. The Corporation's ability to expand into additional states remains subject to various federal and state laws. See "Government Supervision and Regulation - General" for a more detailed discussion of interstate banking and branching legislation and certain state legislation. Employees As of December 31, 1998, there were 170,975 full-time equivalent employees within the Corporation and its subsidiaries. Of the foregoing employees, 90,029 were employed within Consumer Banking, 5,196 were employed within Commercial Banking, 11,758 were employed within Global Corporate and Investment Banking, and 7,109 were employed within Principal Investing and Wealth Management. The remainder were employed within the Corporation and its other subsidiaries. Approximately 5,000 non-officer employees in the State of Washington are covered by a collective bargaining agreement. These employees work for the Washington division of Bank of America NT&SA, which is doing business as Seafirst Bank. None of the Corporation's other domestic employees are covered by a collective bargaining agreement. Management considers its employee relations to be good. Item 2. PROPERTIES As of December 31, 1998, the principal offices of the Corporation, and its Consumer and Commercial Banking business segments, were located in the 60-story Bank of America Corporate Center in Charlotte, North Carolina, which is owned by a subsidiary of the Corporation. The Corporation occupies approximately 521,000 square feet and leases approximately 593,000 square feet to third parties at market rates, which represents substantially all of the space in this facility. As of December 31, 1998, the principal offices of Global Corporate and Investment Banking and Principal Investing and Wealth Management were located at 555 California Street in San Francisco, California. A subsidiary of the Corporation has a 50% ownership interest in this building through a joint venture partnership, and the Corporation leases approximately 479,000 square feet in this building from the partnership. The Corporation also leases or owns a significant amount of space worldwide, in addition to these facilities in Charlotte and San Francisco. As of December 31, 1998, the Corporation and its subsidiaries owned or leased approximately 11,500 locations in 47 states, the District of Columbia and 37 foreign countries. Item 3. LEGAL PROCEEDINGS 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 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. The Corporation's predecessor, BankAmerica, and certain of its subsidiaries, including Bank of America NT&SA, were named in one such suit by the City of San Francisco and several related public entities, and by the State of California, in an action entitled State of California, etc ex rel Stull v. Bank of America NT&SA, et al. (No. 968-484). The case was instituted on April 1, 1995 in the Superior Court for the City and County of San Francisco. The City of San Francisco and related public entities intervened in the case on May 1, 1997, and the State of California took over prosecution of the case on May 5, 1997. The chief allegation of this suit is that Bank of America NT&SA and its predecessors retained unclaimed funds related to bonds and coupons that were not 6 presented by bondholders rather than returning them to certain bond issuers or escheating such funds to the State. The suit also alleges False Claims Act exposure for alleged fee overcharges and claims that Bank of America NT&SA and its predecessors improperly invested bond program funds. On November 12, 1998, the plaintiffs and the Corporation and its named subsidiaires settled this suit whereby the Corporation and its named subsidiaries agreed to pay $187.5 million to the plaintiffs. The settlement is subject to court approval. The Corporation and certain present and former officers have been named as defendants in approximately 24 uncertified class actions filed in federal court alleging, among other things, that the defendants failed to disclose material facts about BankAmerica's losses relating to D.E. Shaw & Co., L.P. until mid-October 1998, in violation of various provisions of the federal securities laws. The uncertified classes consist generally of persons who were entitled to vote on the merger of NationsBank and BankAmerica, or who purchased or acquired securities of the Corporation or its predecessors between August 4, 1998 and October 13, 1998. Similar actions are pending in California state court, alleging violations of the California Corporations Code and involving factual allegations essentially the same as the federal actions. In addition, certain cases filed in California state court have alleged that the proxy statement-prospectus of August 4, 1998, falsely stated that the merger would be one of equals, and allege a conspiracy on the part of certain executives to gain control over the newly merged entity. At least one such complaint seeks recovery under various state common law theories. The Corporation believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that the actions and proceedings and the 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. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during the quarter ended December 31, 1998. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to the Instructions to Form 10-K and Item 401(b) of Regulation S-K, the name, age and position of each current executive officer and the principal accounting officer of the Corporation are listed below along with such officer's business experience during the past five years. Officers are appointed annually by the Board of Directors at the meeting of directors immediately following the annual meeting of stockholders. James H. Hance, Jr., age 54, Vice Chairman and Chief Financial Officer. Mr. Hance was named Chief Financial Officer in August 1988, and was named Vice Chairman in October 1993. He first became an officer in 1987. He also serves as Vice Chairman, Chief Financial Officer and a director of NationsBank, N.A. and Bank of America NT&SA. Kenneth D. Lewis, age 51, President. Mr. Lewis was named to his present position in January 1999. Prior to that time, he served as President, Consumer and Commercial Banking, from October 1998 to January 1999, and as President from October 1993 to October 1998. He first became an officer in 1971. Mr. Lewis also serves as President and a director of NationsBank, N.A. and as a director of Bank of America NT&SA. Hugh L. McColl, Jr., age 63, Chairman of the Board and Chief Executive Officer of the Corporation and the Banks. Mr. McColl has served as Chairman of the Board of the Corporation for at least five years except from January 7, 1997 until September 30, 1998. He first became an officer in 1962. He also serves as a director of the Corporation, NationsBank, N.A. and Bank of America NT&SA. Michael J. Murray, age 54, President, Global Corporate and Investment Banking. Mr. Murray first became an officer and was named to his present position in October 1998. Prior to that time, he served as President, Global Wholesale Bank of BankAmerica from 1997 to 1998, as Vice Chairman of BankAmerica from 1995 to 1997 and as Group Executive Vice President, U.S. Corporate Group of Bank of America NT&SA from 1994 to 1995. From 1993 to 1994, he served as Vice Chairman of Continental Bank Corporation. He also serves as President and a director of Bank of America NT&SA and as a director of NationsBank, N.A. Marc D. Oken, age 52, Executive Vice President and Principal Financial Executive. Mr. Oken was named to his present position in October 1998. From June 1989 to October 1998, he served as Chief Accounting Officer. He first became an officer in 1989. 7 F. William Vandiver, Jr., age 56, Corporate Risk Management Executive. Mr. Vandiver was named to his present position in October 1998. From June 1997 to October 1998, he served as Chairman, Corporate Risk Policy. Prior to that time, from January 1996 to June 1997, he served as President, Global Finance, and from January 1994 to January 1996 he served as President, Specialized Finance Group. He first became an officer in 1968. He also serves as Corporate Risk Management Executive and a director of NationsBank, N.A. and Bank of America NT&SA. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The principal market on which the Common Stock is traded is the New York Stock Exchange. The Common Stock is also listed on the London Stock Exchange and the Pacific Stock Exchange, and certain shares are listed on the Tokyo Stock Exchange. The following table sets forth the high and low sales prices of the Common Stock on the New York Stock Exchange Composite Transactions List for the periods indicated:
Quarter High Low --------- ------------ ---------- 1997 first $65 $48 second 70 54 third 71 11/16 56 5/8 fourth 66 3/8 55 1998 first 75 1/8 56 1/4 second 85 72 1/16 third 88 7/16 47 7/8 fourth 66 5/8 44
As of December 31, 1998, there were 295,937 record holders of Common Stock. During 1997 and 1998, the Corporation paid dividends on the Common Stock on a quarterly basis. The following table sets forth dividends declared per share of Common Stock for the periods indicated:
Quarter Dividend --------- --------- 1997 first $.33 second .33 third .33 fourth .38 1998 first .38 second .38 third .38 fourth .45
For additional information regarding the Corporation's ability to pay dividends, see "Government Supervision and Regulation - Distributions" and Note Twelve of the consolidated financial statements on page 78. 8 Item 6. SELECTED FINANCIAL DATA See Table One for Selected Financial Data. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On September 25, 1998, BankAmerica Corporation (the Corporation) reincorporated in Delaware and on September 30, 1998, NationsBank Corporation (NationsBank) completed its merger with the former BankAmerica Corporation (BankAmerica) and changed its name to "BankAmerica Corporation". In addition, on January 9, 1998, the Corporation completed its merger with Barnett Banks, Inc. (Barnett). The BankAmerica and Barnett mergers were each accounted for as a pooling of interests and, accordingly, all financial information has been restated for all periods presented. This report contains certain forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Corporation. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers of this report should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made. The possible events or factors include the following: the Corporation's loan growth is dependent on economic conditions as well as various discretionary factors, such as decisions to securitize, sell, or purchase certain loans or loan portfolios, syndications or participations of loans, retention of residential mortgage loans generated by the mortgage subsidiaries, the management of borrower, industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographic locations, the mix of the loan portfolio and management's judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the Corporation and the mix of funding sources. Decisions to purchase, hold or sell securities are also dependent on liquidity requirements and market volatility, as well as, on- and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities, utilization and effectiveness of interest rate contracts and the wholesale and retail funding sources of the Corporation. Factors that may cause actual noninterest expense to differ from estimates include uncertainties relating to the Corporation's efforts to prepare its information technology systems and non-information technology systems for the Year 2000 and the Euro conversion, as well as uncertainties relating to the ability of third parties with whom the Corporation has business relationships to address the Year 2000 issue and the Euro conversion issue in a timely and adequate manner. The Corporation is also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, deposits, debt and derivative financial instruments, such as futures, forwards, swaps, options and other financial instruments with similar characteristics. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, state regulators and the Office of Thrift Supervision, which policies and regulations could affect the Corporation's results. Other factors that may cause actual results to differ from the forward-looking statements include competition with other local, regional and international banks, savings and loan associations, credit unions and other non-bank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, mutual funds and insurance companies, as well as other entities 9 which offer financial services, located both within and outside the United States; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions and economic conditions in the geographic regions and industries in which the Corporation operates; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and their integration into the Corporation, and management's ability to manage these and other risks. 1998 Compared to 1997 Overview The Corporation is a multi-bank holding company headquartered in Charlotte, North Carolina, providing a diversified range of banking and certain non-banking financial services both domestically and internationally through four major Business Segments: Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Wealth Management. On December 31, 1998, the Corporation had $618 billion in assets, making it the largest banking company in the United States. On September 30, 1998, the Corporation completed its merger with BankAmerica, a multinational bank holding company headquartered in San Francisco, California. In addition, on January 9, 1998, the Corporation merged with Barnett, a multi-bank holding company headquartered in Jacksonville, Florida. The Corporation accounted for each transaction as a pooling of interests and, accordingly, all financial information has been restated for all periods presented. On October 1, 1997, the Corporation completed the acquisitions of Montgomery Securities, Inc. (NationsBanc Montgomery Securities) and Robertson, Stephens & Company Group, L.L.C. (Robertson Stephens). The Corporation accounted for both acquisitions as purchases. The Corporation sold the investment banking operations of Robertson Stephens on August 31, 1998 and sold the investment management operations on February 26, 1999. Significant changes in the Corporation's results of operations and financial position are described in the following sections. Refer to Table One and Table Twenty for annual and quarterly selected financial data, respectively. Key performance highlights for 1998 were: o Operating net income (net income excluding merger-related charges) totaled $6.49 billion, or $3.73 per common share, in 1998 compared to $6.81 billion, or $3.86 per common share in 1997. Diluted operating earnings per common share were $3.64 for 1998 compared to $3.76 for 1997. Including merger-related charges of $1.80 billion ($1.33 billion, net of tax) and $374 million ($264 million, net of tax) for 1998 and 1997, respectively, net income was $5.17 billion and $6.54 billion, respectively. Earnings per common share and diluted earnings per common share including merger-related charges were $2.97 and $2.90, respectively for 1998 and $3.71 and $3.61, respectively, for 1997. o Taxable-equivalent net interest income declined less than 1 percent to $18.46 billion in 1998 as an 8 percent increase in managed loans and an increase in core deposits were offset by the impact of spread compression, securitizations, divestitures and earning asset sales. Excluding the impact of securitizations, divestitures and earning asset sales, net interest income increased $526 million, or 3 percent over 1997. The net interest yield decreased to 3.69 percent in 1998 compared to 4.00 percent in 1997, primarily reflecting higher levels of investment securities, which have a lower yield than loans, and a decrease in spreads between loans and deposits. o The provision for credit losses covered net charge-offs and totaled $2.92 billion in 1998, compared to $1.90 billion in 1997. The increase was partially due to a $500 million provision related to international economic conditions and higher net commercial charge-offs. For additional discussion see "Recent International Developments" on page 42. Net charge-offs totaled $2.47 billion in 1998 compared to $1.85 billion in 1997, while net charge-offs as a percentage of average loans and leases were 0.71 percent in 1998 compared to 0.54 percent in 1997. Higher net charge-offs were primarily the result of a $372 million write-down of a credit agreement with DE Shaw Securities Group, Inc. (DE Shaw), a trading and investment firm. Nonperforming assets were $2.76 billion on December 31, 1998 compared to $2.42 billion on December 31, 1997, mainly the result of higher commercial nonperforming loans. o Noninterest income increased approximately 4 percent to $12.2 billion in 1998. This growth was attributable to higher levels of income from most categories, including investment banking income, brokerage income, credit card income, and other income, which included gains on securitizations, as well as the sale of a partial 10 ownership interest in a mortgage company and the sale of the manufactured housing lending business. Partially offsetting these increases were securities trading losses and a decrease in mortgage servicing income. Trading account profits and fees totaled $171 million in 1998 compared to $976 million in 1997. The decrease was primarily attributed to a write-down of Russian securities and losses in corporate bonds and commercial mortgage products as spreads widened during the third quarter of 1998. Mortgage servicing income for 1998 totaled $115 million compared to $401 million in 1997. The decrease was due to a $250 million write-down of mortgage servicing assets resulting from an increase in anticipated prepayment rates. o Merger-related charges totaled $1.8 billion and $374 million for the years ended December 31, 1998 and 1997, respectively. The total $1.8 billion charge for 1998 included $1.3 billion associated with the BankAmerica merger, as well as $900 million associated with the Barnett merger, which was offset by a $430 million gain resulting from the regulatory required divestitures of certain Barnett branches. See Note Two of the consolidated financial statements on page 61 for additional information. o Other noninterest expense increased 6 percent to $18.7 billion in 1998, mainly as a result of increases in personnel and data processing expenses associated with the purchases of Oxford Resources, Corp. (NationsBanc Auto Leasing, Inc.) NationsBanc Montgomery Securities and Robertson Stephens, which was sold in the third quarter of 1998, and costs of the BankAmerica and Barnett transition projects. o Operating cash basis ratios, which measure operating performance excluding merger-related charges, intangible assets and the related amortization expense, declined with cash basis diluted earnings per common share of $4.15 in 1998 compared to $4.24 in 1997. Return on average tangible common shareholders' equity, excluding merger-related charges, decreased to 25.24 percent compared to 27.77 percent in 1997. The cash basis efficiency ratio was 58.2 percent in 1998, an increase of 293 basis points from 55.27 in 1997 due to the increase in noninterest expense associated with the NationsBanc Montgomery Securities, Robertson Stephens and NationsBanc Auto Leasing, Inc. acquisitions in the fourth quarter of 1997. As of the end of the third quarter of 1998, a banking subsidiary of the Corporation charged off $372 million of a credit agreement to DE Shaw, to which the banking subsidiary had outstanding balances of approximately $1.4 billion prior to the charge-off. The outstanding credit agreement with DE Shaw was restructured to provide, among other things, for an accelerated schedule of repayments. Throughout the fourth quarter of 1998, the Corporation reduced its exposure to DE Shaw. During the fourth quarter of 1998, the banking subsidiary purchased approximately $20 billion of fixed income securities and related hedge positions from DE Shaw. Of the $20 billion of fixed income securities purchased, $13.6 billion was subsequently sold and $5.8 billion has been incorporated into the Corporation's trading and investment portfolio. In addition, the Corporation is carrying the original loan to DE Shaw as an investment on its books and marking it to market each quarter. During the fourth quarter of 1998, the Corporation marked down the investment by $158 million. In addition, DE Shaw made a regularly scheduled payment of $100 million. As a result of the write-down and repayment, the investment was $770 million at December 31, 1998. Losses associated with DE Shaw originated primarily as a result of global market turbulence and uncertainties during the third quarter of 1998. Uncertainties continue to exist in overseas economies and global markets, which may be volatile in 1999. Accordingly, the Corporation may experience weakness in 1999 relating to the impact of such conditions on the Corporation's credit and trading portfolios and weaknesses in income from operating units, such as investment banking, that may be adversely impacted by such conditions. The remainder of management's discussion and analysis of the consolidated financial condition and results of operations of the Corporation should be read in conjunction with the consolidated financial statements and related notes presented on pages 50 through 95. 11 Table One Five-Year Summary of Selected Financial Data (Dollars in Millions Except Per-Share Information)
1998 1997 -------------- -------------- Income statement Interest income ......................................................... $ 38,588 $ 37,333 Interest expense ........................................................ 20,290 18,901 Net interest income (taxable-equivalent) ................................ 18,461 18,589 Net interest income ..................................................... 18,298 18,432 Provision for credit losses ............................................. 2,920 1,904 Gains (losses) on sales of securities ................................... 1,017 271 Noninterest income ...................................................... 12,189 11,756 Merger-related charges, net ............................................. 1,795 374 Other noninterest expense ............................................... 18,741 17,625 Income before taxes ..................................................... 8,048 10,556 Income tax expense ...................................................... 2,883 4,014 Net income .............................................................. 5,165 6,542 Net income available to common shareholders ............................. 5,140 6,431 Net income (excluding merger-related charges) ........................... 6,490 6,806 Average common shares issued and outstanding (in thousands) ............. 1,732,057 1,733,194 Per common share Earnings ................................................................ $ 2.97 $ 3.71 Earnings (excluding merger-related charges) ............................. 3.73 3.86 Diluted earnings ........................................................ 2.90 3.61 Diluted earnings (excluding merger-related charges) ..................... 3.64 3.76 Cash dividends paid ..................................................... 1.59 1.37 Shareholders' equity (year-end) ......................................... 26.60 25.49 Balance sheet (year-end) Total loans and leases .................................................. 357,328 342,140 Total assets ............................................................ 617,679 570,983 Total deposits .......................................................... 357,260 346,297 Long-term debt .......................................................... 45,888 42,887 Common shareholders' equity ............................................. 45,866 43,907 Total shareholders' equity .............................................. 45,938 44,584 Performance ratios Return on average assets ................................................ .88% 1.20% Return on average assets (excluding merger-related charges) ............. 1.11 1.25 Return on average common shareholders' equity ........................... 11.56 15.26 Return on average common shareholders' equity (excluding merger-related charges) ..................................... 14.54 15.88 Efficiency ratio (excluding merger-related charges) ..................... 61.15 58.08 Total equity to total assets (year-end) ................................. 7.44 7.81 Total average equity to total average assets ............................ 7.67 8.02 Dividend payout ratio ................................................... 50.18 32.09 Risk-based capital ratios (year-end) (1) Tier 1 .................................................................. 7.06 6.50 Total ................................................................... 10.94 10.89 Leverage capital ratio .................................................. 6.22 5.57 Cash basis financial data (2) Earnings per common share ............................................... $ 3.49 $ 4.20 Earnings per common share (excluding merger-related charges) ............ 4.25 4.36 Diluted earnings per common share ....................................... 3.41 4.09 Diluted earnings per common share (excluding merger-related charges) ............................................................... 4.15 4.24 Return on average tangible assets ....................................... 1.07% 1.40% Return on average tangible assets (excluding merger-related charges)..... 1.30 1.45 Return on average tangible common shareholders' equity .................. 20.70 26.80 Return on average tangible common shareholders' equity (excluding merger-related charges) ..................................... 25.24 27.77 Efficiency ratio (excluding merger-related charges) ..................... 58.20 55.27 Tangible equity to tangible assets ...................................... 5.18 5.19 Market price per share of common stock Closing price ........................................................... $ 60 1/8 $ 60 13/16 High for the period ..................................................... 88 7/16 71 11/16 Low for the period ...................................................... 44 48 1996 1995 1994 -------------- -------------- ------------- Income statement Interest income ......................................................... $ 33,636 $ 32,158 $ 25,562 Interest expense ........................................................ 16,682 16,369 11,080 Net interest income (taxable-equivalent) ................................ 17,082 15,824 14,549 Net interest income ..................................................... 16,954 15,789 14,482 Provision for credit losses ............................................. 1,645 945 798 Gains (losses) on sales of securities ................................... 147 68 (48) Noninterest income ...................................................... 9,604 8,132 7,124 Merger-related charges, net ............................................. 398 -- -- Other noninterest expense ............................................... 15,351 14,667 13,750 Income before taxes ..................................................... 9,311 8,377 7,010 Income tax expense ...................................................... 3,498 3,230 2,656 Net income .............................................................. 5,813 5,147 4,354 Net income available to common shareholders ............................. 5,611 4,896 4,078 Net income (excluding merger-related charges) ........................... 6,058 5,147 4,354 Average common shares issued and outstanding (in thousands) ............. 1,638,382 1,613,404 1,590,925 Per common share Earnings ................................................................ $ 3.42 $ 3.03 $ 2.56 Earnings (excluding merger-related charges) ............................. 3.58 3.03 2.56 Diluted earnings ........................................................ 3.36 2.98 2.54 Diluted earnings (excluding merger-related charges) ..................... 3.51 2.98 2.54 Cash dividends paid ..................................................... 1.20 1.04 0.94 Shareholders' equity (year-end) ......................................... 22.10 20.89 18.31 Balance sheet (year-end) Total loans and leases .................................................. 317,709 302,804 273,615 Total assets ............................................................ 477,702 461,775 426,997 Total deposits .......................................................... 309,100 296,316 291,127 Long-term debt .......................................................... 40,041 34,349 24,748 Common shareholders' equity ............................................. 35,429 33,532 29,718 Total shareholders' equity .............................................. 37,793 36,295 33,036 Performance ratios Return on average assets ................................................ 1.20% 1.13% 1.07% Return on average assets (excluding merger-related charges) ............. 1.25 1.13 1.07 Return on average common shareholders' equity ........................... 16.32 15.52 14.46 Return on average common shareholders' equity (excluding merger-related charges) ..................................... 17.04 15.52 14.46 Efficiency ratio (excluding merger-related charges) ..................... 57.52 61.22 63.44 Total equity to total assets (year-end) ................................. 7.91 7.86 7.74 Total average equity to total average assets ............................ 7.61 7.51 7.68 Dividend payout ratio ................................................... 30.05 29.13 30.53 Risk-based capital ratios (year-end) (1) Tier 1 .................................................................. 7.76 7.24 7.43 Total ................................................................... 12.66 11.58 11.47 Leverage capital ratio .................................................. 7.09 6.27 6.18 Cash basis financial data (2) Earnings per common share ............................................... $ 3.76 $ 3.38 $ 2.90 Earnings per common share (excluding merger-related charges) ............ 3.91 3.38 2.90 Diluted earnings per common share ....................................... 3.69 3.32 2.87 Diluted earnings per common share (excluding merger-related charges) ............................................................... 3.84 3.32 2.87 Return on average tangible assets ....................................... 1.34% 1.27% 1.22% Return on average tangible assets (excluding merger-related charges)..... 1.39 1.27 1.22 Return on average tangible common shareholders' equity .................. 23.65 23.56 22.56 Return on average tangible common shareholders' equity (excluding merger-related charges) ..................................... 24.60 23.56 22.56 Efficiency ratio (excluding merger-related charges) ..................... 55.49 58.89 61.01 Tangible equity to tangible assets ...................................... 6.31 6.19 5.91 Market price per share of common stock Closing price ........................................................... $ 48 7/8 $ 34 13/16 $ 22 9/16 High for the period ..................................................... 52 5/8 37 3/8 28 11/16 Low for the period ...................................................... 32 3/16 22 5/16 21 11/16
(1) Ratios prior to 1998 are former NationsBank ratios and have not been restated to reflect the impact of the BankAmerica and Barnett mergers. (2) Cash basis calculations exclude intangible assets and the related amortization expense. 12 Business Segment Operations The Corporation provides a diversified range of banking and certain nonbanking financial services and products through its various subsidiaries. Management reports the results of the Corporation's operations through four business segments: Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Wealth Management. The business segments summarized in Table Two are primarily managed with a focus on various performance objectives including net income, return on average equity and operating efficiency. These performance objectives are also presented on a cash basis, which excludes the impact of goodwill and other intangible assets and related amortization expense. The net interest income of the business segments reflects the results of a funds transfer pricing process which derives net interest income by matching assets and liabilities with similar interest rate sensitivity and maturity characteristics. Equity capital is allocated to each business segment based on an assessment of its inherent risk. See Note Sixteen of the consolidated financial statements on page 90 for additional business segment information, including adjustments and reconciliations to consolidated amounts. Consumer Banking The Consumer Banking segment provides comprehensive retail banking services to individuals and small businesses through multiple delivery channels including approximately 4,700 banking centers and 14,000 automated teller machines (ATMs). These banking centers and ATMs are located principally throughout the Corporation's franchise and serve approximately 30 million households in 22 states and the District of Columbia. This segment also provides specialized services such as the origination and servicing of residential mortgage loans, issuance and servicing of credit cards, direct banking via telephone and personal computer, student lending and certain insurance services. The consumer finance component provides personal, mortgage, home equity and automobile loans to consumers, retail finance programs to dealers and lease financing to purchasers of new and used cars. Consumer Banking's earnings increased 14 percent to $4.0 billion in 1998. Taxable-equivalent net interest income decreased 3 percent to $12.0 billion in 1998, primarily reflecting the impact of securitizations, divestitures and loan sales, partially offset by reduced funding costs from deposit expense management. As the Corporation continues to securitize loans, its role becomes that of a servicer and the servicing income, as well as the gains on securitizations are reflected in noninterest income. The net interest yield increased 3 basis points in 1998, reflecting the impact of lower earning assets coupled with changes in spreads on loans and deposits. Excluding the impact of securitizations, acquisitions and divestitures, average total loans and leases increased approximately 6 percent over average levels in 1997. Average total deposits of $232.3 billion declined slightly from the 1997 level of $234.2 billion, primarily due to $3.5 billion in divestitures in 1998 and 1997, partially offset by core deposit growth. The provision for credit losses decreased $306 million to $1.3 billion in 1998 from $1.6 billion in 1997 primarily due to securitizations, loan sales and divestitures. Noninterest income in Consumer Banking rose 6 percent to $6.7 billion in 1998 due to increased credit card fee income, non-deposit service charges and fee income, and miscellaneous income primarily related to a $479 million gain on the sale of a manufactured housing unit and loan sales. These gains were partially offset by lower mortgage servicing income resulting from a write-down of mortgage servicing rights of approximately $250 million. Noninterest expense decreased 2 percent to $11.1 billion. This reflects the efficiencies obtained from the successful integration of the former Boatmen's Bancshares, Inc. (Boatmen's) and Barnett franchises and expense management efforts. The cash basis efficiency ratio was 56.3 percent, an improvement of approximately 140 basis points compared to 1997. The return on risk-adjusted tangible equity increased to 30 percent in 1998 compared to 26 percent in 1997. Consumer Banking's earnings in 1997 increased 21 percent to $3.5 billion compared to $2.9 billion for 1996. Taxable-equivalent net interest income in 1997 of $12.4 billion increased 8 percent from 1996. Noninterest income increased 26 percent in 1997 to $6.3 billion compared to $5.0 billion for 1996. The net interest yield decreased 13 basis points from 1996 to 4.73 percent. 13 Commercial Banking The Commercial Banking segment provides a wide range of commercial banking services for businesses with annual revenues of up to $500 million. Services provided include commercial lending, treasury and cash management services, asset-backed lending, leasing and factoring. Also included in this segment are the Corporation's commercial finance operations which provide: equipment loans and leases, loans for debt restructuring, mergers and working capital, real estate and health care financing and inventory financing to manufacturers, distributors and dealers. Commercial Banking's earnings rose 2 percent to $875 million in 1998. Taxable-equivalent net interest income decreased $42 million from 1997 primarily reflecting higher costs of funds partially offset by higher loan levels. Commercial Banking's average loan and lease portfolio during 1998 increased 8 percent to $51.1 billion compared to $47.3 billion in 1997. Noninterest income rose 23 percent to $699 million in 1998 primarily due to increased investment banking fees as well as deposit service charges. Noninterest expense in 1998 increased 10 percent to $1.3 billion, primarily due to increases in data processing and personnel expenses. The cash basis efficiency ratio increased approximately 310 basis points to 45.1 percent. The return on risk-adjusted tangible equity decreased to 25 percent from 29 percent. Commercial Banking's earnings in 1997 increased 18 percent to $861 million compared to $729 million for 1996. Taxable-equivalent net interest income in 1997 of $2.0 billion increased 14 percent from 1996. Noninterest income increased 18 percent in 1997 to $568 million compared to $480 million for 1996. The net interest yield decreased 9 basis points from 1996 to 3.79 percent. Global Corporate and Investment Banking The Global Corporate and Investment Banking segment provides a broad array of financial and investment banking products such as capital-raising products, trade finance, treasury management, investment banking, capital markets and financial advisory services to domestic and international corporations, financial institutions and government entities. Clients are supported through offices in 37 countries in four distinct geographic regions: U.S. and Canada; Asia; Europe, Middle East and Africa; and Latin America. Products and services provided include loan origination, cash management, foreign exchange, leasing, leveraged finance, project finance, real estate, senior bank debt, structured finance, and trade services. Through its Section 20 subsidiary, NationsBanc Montgomery Securities, the Global Corporate and Investment Banking segment is a primary dealer of U.S. Government Securities. This segment underwrites, distributes and makes markets in high-grade and high-yield debt securities, municipal bonds and equity securities. Asset-backed securitization, commercial paper, debt and equity securities research, loan syndications, mergers and acquisitions consulting and private placements are also provided through NationsBanc Montgomery Securities. Additionally, Global Corporate and Investment Banking is a market maker in risk management products which include swap agreements, option contracts, forward settlement contracts, financial futures, and other derivative products in certain interest rate, foreign exchange, commodity and equity markets. In support of these activities, Global Corporate and Investment Banking takes positions to support client demands and its own account. Global Corporate and Investment Banking's net income decreased to $244 million in 1998 compared to $1.6 billion in 1997. Taxable-equivalent net interest income increased 8 percent in 1998 to $3.7 billion compared to $3.4 billion in 1997, reflecting higher loan volumes and increased trading related activities. Excluding the impact of a $4.2 billion securitization completed in 1997, the Global Corporate and Investment Banking average loan and lease portfolio increased approximately 11 percent over the levels in 1997. The provision for credit losses increased from $342 million in 1997 to $1.6 billion in 1998 primarily due to international economic conditions and higher net commercial charge-offs. 14 Table Two Business Segment Summary For the Year Ended December 31 (Dollars in Millions)
Consumer Banking Commercial Banking ----------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ---------- ---------- ---------- Net income .................................... $ 3,999 $ 3,523 $ 2,918 $ 875 $ 861 $ 729 Cash basis earnings (1) ....................... 4,545 4,089 3,257 966 953 771 Net interest yield ............................ 4.76% 4.73% 4.86% 3.39% 3.79% 3.88% Average equity to average assets .............. 7.35 7.26 6.51 7.29 7.06 5.69 Return on risk-adjusted average equity ........ 20 17 17 19 21 26 Return on risk-adjusted tangible equity (1) ... 30 26 24 25 29 31 Efficiency ratio .............................. 59.5 60.9 60.6 48.8 45.9 45.7 Cash basis efficiency ratio (1) ............... 56.3 57.7 58.2 45.1 42.0 43.6 Average Total loans and leases ....................... $174,409 $183,627 $51,120 $47,319 Total deposits ............................... 232,324 234,226 18,081 16,906 Total assets ................................. 277,820 291,210 64,881 59,299 Year-end Total loans and leases ....................... 175,471 177,200 53,372 49,031 Total deposits ............................... 237,816 233,732 20,948 19,672 Total assets ................................. 269,458 285,686 67,366 65,243
Global Corporate & Principal Investing & Investment Banking Wealth Management ------------------------------------ -------------------------------- 1998 1997 1996 1998 1997 1996 ------------ ----------- ----------- ---------- ---------- ---------- Net income ...................................... $ 244 $ 1,632 $ 1,537 $ 497 $ 560 $ 520 Cash basis earnings (1) ......................... 383 1,725 1,593 517 580 542 Net interest yield .............................. 1.97% 2.01% 2.04% 2.81% 3.30% 3.39% Average equity to average assets ................ 5.65 5.30 4.76 12.73 13.01 14.63 Return on risk-adjusted average equity .......... 2 15 20 20 28 29 Return on risk-adjusted tangible equity (1) ..... 4 18 22 23 32 35 Efficiency ratio ................................ 71.3 54.8 52.1 66.9 61.4 58.6 Cash basis efficiency ratio (1) ................. 68.7 53.0 50.8 65.8 60.3 57.2 Average Total loans and leases ........................ $107,279 $ 99,191 $15,183 $12,001 Total deposits ................................ 63,174 59,746 11,865 10,883 Total assets .................................. 223,143 199,766 19,317 15,569 Year-end ........................................ Total loans and leases ........................ 111,550 101,870 17,853 13,123 Total deposits ................................ 68,915 60,477 12,621 11,573 Total assets .................................. 248,264 204,862 22,246 18,320
(1) Cash basis calculations exclude intangible assets and the related amortization expense. Noninterest income in 1998 was $2.8 billion, a decrease of 8 percent from 1997, reflecting lower trading income due to weaker global markets and lower miscellaneous income due to $158 million of losses associated with the investment in DE Shaw, as well as a $112 million write-down of other equity investments. Partially offsetting these decreases were higher investment banking fees and brokerage income due to the NationsBanc Montgomery Securities and Robertson Stephens acquisitions in the fourth quarter of 1997. Noninterest expense rose to $4.7 billion due primarily to higher personnel expenses associated with the NationsBanc Montgomery Securities and Robertson Stephens acquisitions. Expenses in most other categories also increased in 1998 due to the NationsBanc Montgomery Securities and Robertson Stephens acquisitions. The cash basis efficiency ratio increased to 68.7 percent primarily due to higher expense ratios at NationsBanc Montgomery Securities and Robertson Stephens. The return on risk-adjusted tangible equity decreased to 4 percent in 1998 from 18 percent in 1997 reflecting difficult international market conditions. 15 Global Corporate and Investment Banking earnings in 1997 increased 6 percent to $1.6 billion compared to $1.5 billion for 1996. Taxable-equivalent net interest income in 1997 of $3.4 billion increased 9 percent from 1996. Noninterest income increased 26 percent in 1997 to $3.1 billion compared to $2.5 billion for 1996. The net interest yield decreased 3 basis points from 1996 to 2.01 percent. Principal Investing and Wealth Management The Principal Investing and Wealth Management segment includes Wealth Management which provides asset management, banking and trust services for high net worth clients both in the U.S. and internationally through its Private Bank. In addition, this segment provides full service and discount brokerage, investment advisory and investment management, as well as advisory services for the Corporation's affiliated family of mutual funds. The Principal Investing area includes direct equity investments in businesses and investments in general partnership funds. Principal Investing and Wealth Management earned $497 million in 1998 compared to $560 million in 1997, a decrease of 11 percent. The results are due to strong growth in the segment's core business, offset by the sales of certain corporate and institutional trust businesses during the third quarter of 1997. Taxable-equivalent net interest income increased 8 percent in 1998 to $451 million compared to $418 million a year ago, reflecting income from increased loan levels. The average loan and lease portfolio in 1998 increased to $15.2 billion compared to $12.0 billion in 1997. Noninterest income remained essentially level with 1997 at $1.9 billion in 1998. Core revenue growth was offset by the sales of certain corporate and institutional businesses, which occurred in the third quarter of 1997. Noninterest expense increased 10 percent due primarily to increases in personnel expense, support costs and a bond litigation settlement during the fourth quarter of 1998. See Note Eleven of the consolidated financial statements on page 74 for additional information on litigation. The cash basis efficiency ratio increased approximately 550 basis points to 65.8 percent in 1998 compared to 60.3 percent in 1997. The return on risk-adjusted tangible equity decreased to 23 percent. Principal Investing and Wealth Management earnings in 1997 increased 8 percent to $560 million compared to $520 million for 1996. Taxable-equivalent net interest income in 1997 of $418 million increased 29 percent from 1996. Noninterest income increased 12 percent in 1997 to $1.9 billion compared to $1.7 billion for 1996. The net interest yield decreased 9 basis points from 1996 to 3.30 percent. Results of Operations Net Interest Income An analysis of the Corporation's taxable-equivalent net interest income and average balance sheet levels for the last three years and most recent five quarters is presented in Tables Three and Twenty-One, respectively. The changes in net interest income from year to year are analyzed in Table Four. Taxable-equivalent net interest income decreased approximately 1 percent to $18.5 billion in 1998 compared to $18.6 billion in 1997 due primarily to a reduction in the net difference between loan and deposit rates and the impact of securitizations, divestitures and asset sales. The decrease was partially offset by loan growth and increased core funding. As the Corporation continues to securitize loans, its role becomes that of a servicer and the servicing income, as well as the gains on securitizations are reflected in noninterest income. Average earning assets increased nearly $35 billion from 1997 to $499.7 billion in 1998, driven primarily by an increase in investment securities. These security additions were mainly funded with short-term borrowings, accounting for the majority of the increases in interest income and interest expense, respectively. Loan yields declined 33 basis points during 1998, reflecting lower market interest rates, the competitive market environment and a change in loan mix resulting from strong growth in both consumer and commercial products, offset by securitizations and divestitures, primarily in the consumer product lines. The net interest yield decreased 31 basis points to 3.69 percent in 1998 compared to 4.00 percent in 1997, primarily reflecting higher levels of investment securities, which have a lower yield than loans, and a reduction in the net difference between loan and deposit rates. Loan growth is dependent on economic conditions as well as various discretionary factors, such as decisions to securitize certain loan portfolios and the management of borrower, industry, product and geographic concentrations. 16 Table Three 12-Month Taxable-Equivalent Data (Dollars in Millions)
1998 1997 ------------------------------- ------------------------------- Average Average Balance Income Balance Income Sheet or Yields/ Sheet or Yields/ Amounts Expense Rates Amounts Expense Rates ----------- --------- --------- ----------- --------- --------- Earning assets Loans and leases (1) Commercial - domestic ........................................ $130,177 $ 9,988 7.67% $117,465 $ 9,386 7.99% Commercial - foreign ......................................... 31,015 2,246 7.24 28,295 1,995 7.05 Commercial real estate - domestic ............................ 28,418 2,503 8.81 29,468 2,748 9.33 Commercial real estate - foreign ............................. 330 33 10.05 156 30 19.24 -------- ------- ----- -------- ------- ----- Total commercial ............................................ 189,940 14,770 7.78 175,384 14,159 8.07 -------- ------- ----- -------- ------- ----- Residential mortgage ......................................... 70,842 4,880 6.89 80,593 5,683 7.05 Home equity lines ............................................ 16,129 1,741 10.79 14,760 1,813 12.29 Direct/Indirect consumer ..................................... 40,204 3,506 8.72 39,270 3,464 8.82 Consumer finance ............................................. 14,368 1,529 10.64 13,845 1,625 11.73 Bankcard ..................................................... 12,960 1,638 12.64 15,920 2,127 13.36 Foreign consumer ............................................. 3,397 357 10.51 3,379 301 8.90 -------- ------- ----- -------- ------- ----- Total consumer .............................................. 157,900 13,651 8.65 167,767 15,013 8.95 -------- ------- ----- -------- ------- ----- Total loans and leases ...................................... 347,840 28,421 8.17 343,151 29,172 8.50 -------- ------- ----- -------- ------- ----- Securities Held for investment .......................................... 4,113 282 6.88 5,402 389 7.19 Available for sale (2) ....................................... 62,571 4,286 6.85 42,867 2,959 6.90 -------- ------- ----- -------- ------- ----- Total securities ............................................ 66,684 4,568 6.85 48,269 3,348 6.94 -------- ------- ----- -------- ------- ----- Federal funds sold and securities purchased under agreements to resell ......................................... 27,288 1,828 6.70 23,437 1,516 6.47 Time deposits placed and other short-term investments ......... 7,649 514 6.72 8,379 541 6.46 Trading account securities .................................... 39,774 2,634 6.62 38,284 2,588 6.76 Other earning assets .......................................... 10,504 786 7.49 3,442 325 9.46 -------- ------- ----- -------- ------- ----- Total earning assets (3) .................................... 499,739 38,751 7.75 464,962 37,490 8.06 -------- ------- ----- -------- ------- ----- Cash and cash equivalents ...................................... 24,907 24,187 Other assets, less allowance for credit losses ................. 59,841 54,647 -------- -------- Total assets ................................................ $584,487 $543,796 ======== ======== Interest-bearing liabilities Domestic interest-bearing deposits Savings ...................................................... $ 22,692 421 1.86 $ 24,559 490 2.00 NOW and money market deposit accounts ........................ 96,541 2,536 2.63 95,204 2,529 2.66 Consumer CDs and IRAs ........................................ 74,655 3,915 5.24 77,479 4,101 5.29 Negotiated CDs, public funds and other time deposits ......... 7,604 414 5.44 6,412 360 5.62 -------- ------- ----- -------- ------- ----- Total domestic interest-bearing deposits .................... 201,492 7,286 3.62 203,654 7,480 3.67 -------- ------- ----- -------- ------- ----- Foreign interest-bearing deposits (4) Banks located in foreign countries ........................... 24,587 1,405 5.72 22,100 1,274 5.77 Governments and official institutions ........................ 10,517 590 5.61 10,801 591 5.47 Time, savings and other ...................................... 24,261 1,530 6.30 22,093 1,339 6.06 -------- ------- ----- -------- ------- ----- Total foreign interest-bearing deposits ..................... 59,365 3,525 5.94 54,994 3,204 5.83 -------- ------- ----- -------- ------- ----- Total interest-bearing deposits ............................. 260,857 10,811 4.14 258,648 10,684 4.13 -------- ------- ----- -------- ------- ----- Federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings ................................................... 90,630 5,239 5.78 70,399 4,105 5.83 Trading account liabilities ................................... 17,472 895 5.12 15,285 975 6.38 Long-term debt (5) ............................................ 49,969 3,345 6.69 46,337 3,137 6.77 -------- ------- ----- -------- ------- ----- Total interest-bearing liabilities (6) ...................... 418,928 20,290 4.84 390,669 18,901 4.84 -------- ------- ----- -------- ------- ----- Noninterest-bearing sources Noninterest-bearing deposits .................................. 84,628 78,235 Other liabilities ............................................. 36,102 31,282 Shareholders' equity .......................................... 44,829 43,610 -------- -------- Total liabilities and shareholders' equity .................. $584,487 $543,796 ======== ======== Net interest spread ............................................ 2.91 3.22 Impact of noninterest-bearing sources .......................... .78 .78 ----- ----- Net interest income/yield on earning assets .................... $18,461 3.69% $18,589 4.00% ======= ===== ======= ===== 1996 -------------------------------- Average Balance Income Sheet or Yields/ Amounts Expense Rates ----------- --------- ---------- Earning assets Loans and leases (1) Commercial - domestic ........................................ $102,176 $ 7,963 7.79% Commercial - foreign ......................................... 24,357 1,768 7.25 Commercial real estate - domestic ............................ 26,563 2,434 9.16 Commercial real estate - foreign ............................. 365 20 5.50 -------- ------- ----- Total commercial ............................................ 153,461 12,185 7.94 -------- ------- ----- Residential mortgage ......................................... 81,375 6,234 7.66 Home equity lines ............................................ 11,694 1,012 8.66 Direct/Indirect consumer ..................................... 34,442 3,089 8.97 Consumer finance ............................................. 11,955 1,459 12.20 Bankcard ..................................................... 16,655 2,251 13.52 Foreign consumer ............................................. 2,749 284 10.36 -------- ------- ----- Total consumer .............................................. 158,870 14,329 9.02 -------- ------- ----- Total loans and leases ...................................... 312,331 26,514 8.49 -------- ------- ----- Securities Held for investment .......................................... 7,788 514 6.61 Available for sale (2) ....................................... 33,791 2,333 6.90 -------- ------- ----- Total securities ............................................ 41,579 2,847 6.85 -------- ------- ----- Federal funds sold and securities purchased under agreements to resell ......................................... 24,166 1,371 5.67 Time deposits placed and other short-term investments ......... 7,208 536 7.43 Trading account securities .................................... 31,753 2,232 7.03 Other earning assets .......................................... 2,068 264 12.77 -------- ------- ----- Total earning assets (3) .................................... 419,105 33,764 8.06 -------- ------- ----- Cash and cash equivalents ...................................... 22,800 Other assets, less allowance for credit losses ................. 42,285 -------- Total assets ................................................ $484,190 ======== Interest-bearing liabilities Domestic interest-bearing deposits Savings ...................................................... $ 25,063 519 2.07 NOW and money market deposit accounts ........................ 82,854 2,057 2.48 Consumer CDs and IRAs ........................................ 68,998 3,537 5.13 Negotiated CDs, public funds and other time deposits ......... 6,614 387 5.85 -------- ------- ----- Total domestic interest-bearing deposits .................... 183,529 6,500 3.54 -------- ------- ----- Foreign interest-bearing deposits (4) Banks located in foreign countries ........................... 24,043 1,361 5.66 Governments and official institutions ........................ 9,582 501 5.23 Time, savings and other ...................................... 19,158 1,238 6.46 -------- ------- ----- Total foreign interest-bearing deposits ..................... 52,783 3,100 5.87 -------- ------- ----- Total interest-bearing deposits ............................. 236,312 9,600 4.06 -------- ------- ----- Federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings ................................................... 65,834 3,699 5.62 Trading account liabilities ................................... 13,643 880 6.45 Long-term debt (5) ............................................ 37,444 2,503 6.69 -------- ------- ----- Total interest-bearing liabilities (6) ...................... 353,233 16,682 4.72 -------- ------- ----- Noninterest-bearing sources Noninterest-bearing deposits .................................. 66,816 Other liabilities ............................................. 27,283 Shareholders' equity .......................................... 36,858 -------- Total liabilities and shareholders' equity .................. $484,190 ======== Net interest spread ............................................ 3.34 Impact of noninterest-bearing sources .......................... .74 ----- Net interest income/yield on earning assets .................... $17,082 4.08% ======= =====
(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) Interest income includes taxable-equivalent adjustments of $163, $157 and $128 in 1998, 1997 and 1996, respectively. Interest income also includes the impact of risk management interest rate contracts, which increased interest income on the underlying linked assets $174, $159, and $31 in 1998, 1997 and 1996, respectively. (4) Primarily consists of time deposits in denominations of $100,000 or more. (5) Long-term debt includes trust preferred securities. (6) Interest expense includes the impact of risk management interest rate contracts, which increased (decreased) interest expense on the underlying linked liabilities of $45, $(15) and $50 in 1998, 1997, and 1996, respectively. 17 Table Four Changes in Taxable-Equivalent Net Interest Income (Dollars in Millions) This table presents an analysis of the year-to-year changes in net interest income on a fully taxable-equivalent basis for the years shown. The changes for each category of income and expense are divided between the portion of change attributable to the variance in average levels or yields/rates for that category. The amount of change that cannot be separated is allocated to each variance proportionately.
From 1997 to 1998 ------------------------------------------------ Increase (Decrease) in Income/Expense Due to Change in --------------------- Percentage Average Yields/ Increase Levels Rates Total (Decrease) --------- ----------- ------------- ------------ Earning assets: Loans and leases Commercial - domestic ....................... $ 986 $ (384) $ 602 6.41% Commercial - foreign ........................ 196 55 251 12.58 Commercial real estate - domestic .......... (96) (149) (245) ( 8.92) Commercial real estate - foreign ........... 22 (19) 3 10.00 -------- Total commercial ........................... 1,145 (534) 611 4.32 -------- Residential mortgage ........................ (674) (129) (803) (14.13) Home equity lines ........................... 159 (231) (72) ( 3.97) Direct/Indirect consumer .................... 82 (40) 42 1.21 Consumer finance ............................ 60 (156) (96) ( 5.91) Bankcard .................................... (379) (110) (489) (22.99) Foreign consumer ............................ 2 54 56 18.60 -------- Total consumer ............................. (864) (498) (1,362) ( 9.07) -------- Total loans and leases .................... 395 (1,146) (751) ( 2.57) -------- Securities: Held for investment ......................... (89) (18) (107) (27.51) Available for sale .......................... 1,350 (23) 1,327 44.85 -------- Total securities ........................... 1,262 (42) 1,220 36.44 -------- Federal funds sold and securities purchased under agreements to resell ........ 256 56 312 20.58 Time deposits placed and other short-term investments ................................. (48) 21 (27) ( 4.99) Trading account securities ................... 99 (53) 46 1.78 Other earning assets ......................... 541 (80) 461 141.85 -------- Total interest income ...................... 2,733 (1,472) 1,261 3.36 -------- Interest-bearing liabilities: Domestic interest-bearing deposits: Savings ..................................... (36) (33) (69) (14.08) NOW and money market deposit accounts ................................... 35 (28) 7 .28 Consumer CDs and IRAs ....................... (148) (38) (186) ( 4.54) Negotiated CDs, public funds and other time deposits .............................. 65 (11) 54 15.00 -------- Total domestic interest-bearing deposits .................................. (79) (115) (194) ( 2.59) Foreign interest-bearing deposits: Banks located in foreign countries .......... 142 (11) 131 10.28 Governments and official institutions ....... (16) 15 (1) ( .17) Time, savings and other ..................... 135 56 191 14.26 ---------- Total foreign interest-bearing deposits..... 259 62 321 10.02 ---------- Total interest-bearing deposits ............ 91 36 127 1.19 ---------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings ................. 1,170 (36) 1,134 27.62 Trading account liabilities .................. 128 (208) (80) ( 8.21) Long-term debt ............................... 243 (35) 208 6.63 ---------- Total interest expense ..................... 1,369 20 1,389 7.35 ---------- Net interest income ........................... 1,560 (1,688) $ (128) ( .69) ========== From 1996 to 1997 ----------------------------------------- Increase (Decrease) in Income/Expense Due to Change in ------------------- Percentage Average Yields/ Increase Levels Rates Total (Decrease) --------- --------- --------- ----------- Earning assets: Loans and leases Commercial - domestic ....................... $1,217 $ 206 $1,423 17.87% Commercial - foreign ........................ 279 (52) 227 12.84 Commercial real estate - domestic .......... 270 44 314 12.90 Commercial real estate - foreign ........... (17) 27 10 50.00 ------ Total commercial ........................... 1,767 207 1,974 16.20 ------ Residential mortgage ........................ (59) (492) (551) ( 8.84) Home equity lines ........................... 308 493 801 79.15 Direct/Indirect consumer .................... 427 (52) 375 12.14 Consumer finance ............................ 224 (58) 166 11.38 Bankcard .................................... (98) (26) (124) ( 5.51) Foreign consumer ............................ 59 (42) 17 5.99 ------ Total consumer ............................. 797 (113) 684 4.77 ------ Total loans and leases .................... 2,620 38 2,658 10.02 ------ Securities: Held for investment ......................... (169) 44 (125) (24.32) Available for sale .......................... 626 -- 626 26.83 ------ Total securities ........................... 464 37 501 17.60 ------ Federal funds sold and securities purchased under agreements to resell ........ (42) 187 145 10.58 Time deposits placed and other short-term investments ................................. 81 (76) 5 .93 Trading account securities ................... 444 (88) 356 15.95 Other earning assets ......................... 143 (82) 61 23.11 ------ Total interest income ...................... 3,697 29 3,726 11.04 ------ Interest-bearing liabilities: Domestic interest-bearing deposits: Savings ..................................... (10) (19) (29) ( 5.59) NOW and money market deposit accounts ................................... 321 151 472 22.95 Consumer CDs and IRAs ....................... 446 118 564 15.95 Negotiated CDs, public funds and other time deposits .............................. (12) (15) (27) ( 6.98) ------ Total domestic interest-bearing deposits .................................. 733 247 980 15.08 Foreign interest-bearing deposits: Banks located in foreign countries .......... (112) 25 (87) ( 6.39) Governments and official institutions ....... 66 24 90 17.96 Time, savings and other ..................... 181 (80) 101 8.16 ------ Total foreign interest-bearing deposits..... 129 (25) 104 3.35 ------ Total interest-bearing deposits ............ 920 164 1,084 11.29 ------ Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings ................. 263 143 406 10.98 Trading account liabilities .................. 105 (10) 95 10.80 Long-term debt ............................... 602 32 634 25.33 ------ Total interest expense ..................... 1,803 416 2,219 13.30 ------ Net interest income ........................... 2,124 (617) $1,507 8.82 ======
18 Provision for Credit Losses The provision for credit losses was $2.9 billion in 1998 compared to $1.9 billion in 1997. The increase in the provision for credit losses was primarily due to the establishment of a $500 million provision related to international economic conditions and higher net commercial charge-offs. The provision for credit losses for 1998 and 1997 covered net charge-offs of $2.5 billion and $1.9 billion, respectively. Higher commercial net charge-offs in 1998 included a credit agreement with DE Shaw. Higher commercial net charge-offs were partially offset by lower net charge-offs in the consumer 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 "Credit Risk Management and Credit Portfolio Review" section beginning on page 34. Gains on Sales of Securities Gains on sales of debt securities were $1.0 billion in 1998 compared to $271 million in 1997. Securities gains were higher in 1998 as a result of increased activity connected with the Corporation's overall risk management activity and favorable market conditions for certain debt instruments caused by turbulence in equity markets. Noninterest Income As presented in Table Five, noninterest income increased approximately 4 percent to $12.2 billion in 1998, primarily reflecting higher levels of income from investment banking, brokerage, and credit card activities, offset by declines in mortgage banking and trading income. Table Five Noninterest Income (Dollars in Millions)
Change ------------------- 1998 1997 Amount Percent --------- --------- -------- ---------- Service charges on deposit accounts ..................... $ 3,396 $ 3,373 $ 23 .7% Mortgage servicing and other mortgage-related income .... 115 401 (286) (71.3) Investment banking income ............................... 2,009 1,476 533 36.1 Trading account profits and fees ........................ 171 976 (805) (82.5) Brokerage income ........................................ 728 355 373 105.1 Other nondeposit-related service fees ................... 652 680 (28) ( 4.1) Asset management and fiduciary service fees ............. 973 990 (17) ( 1.7) Credit card income ...................................... 1,448 1,231 217 17.6 Other income ............................................ 2,697 2,274 423 18.6 ------- ------- ------ ----- $12,189 $11,756 $ 433 3.7% ======= ======= ====== =====
o Mortgage servicing and other mortgage-related income decreased to $115 million in 1998, primarily due to a $250 million write-down of mortgage servicing rights caused by an increase in anticipated prepayment rates. The average portfolio of loans serviced increased 9 percent from $204 billion in 1997 to $222 billion in 1998. Mortgage loan originations through the Corporation's mortgage units increased to $65.1 billion in 1998 compared to $35.7 billion in 1997, primarily due to a decline in interest rates. Origination volume in 1998 was composed of approximately $30.1 billion of retail loan volume and $35.0 billion of correspondent and wholesale loan volume. In conducting its mortgage production activities, the Corporation is exposed to interest rate risk for the period between loan commitment date and subsequent delivery date. To manage this risk, the Corporation enters into various financial instruments including forward delivery and option contracts. The notional amount of such contracts was approximately $9.8 billion on December 31, 1998 with associated net unrealized losses of $8.0 million. These contracts generally have an average expected maturity of less than 90 days. To manage risk associated with changes in prepayment rates and the impact on mortgage servicing rights, the Corporation uses various financial instruments including options and certain interest rate swaps. The notional amount 19 of such contracts on December 31, 1998 was $22.4 billion with an associated net unrealized gain of $190 million. As of December 31, 1998, the amount of net realized deferred gains associated with terminated derivative products related to the mortgage servicing portfolio was $266 million. For additional information on mortgage banking activities, see Note One of the consolidated financial statements on page 56. o Investment banking income increased 36 percent to $2.0 billion in 1998, mainly reflecting changes in the levels of syndication fees, securities underwriting activity and advisory fees, primarily due to the acquisitions of NationsBanc Montgomery Securities and Robertson Stephens in the fourth quarter of 1997. Securities underwriting fees increased $289 million to $558 million in 1998 as a result of the NationsBanc Montgomery Securities and Robertson Stephens acquisitions. Syndication fees increased 28 percent due to increased syndication activities in 1998. Advisory services fees increased $204 million to $384 million reflecting the impact of the NationsBanc Montgomery Securities and Robertson Stephens acquisitions. On August 31,1998, as a result of the BankAmerica merger, the Corporation sold the investment banking operations of Robertson Stephens. Investment banking income by major business activity follows:
1998 1997 (Dollars in Millions) --------- --------- Investment Banking Income Principal investing ............. $ 570 $ 581 Securities underwriting ......... 558 269 Syndications .................... 426 333 Advisory services ............... 384 180 Other ........................... 71 113 ------ ------ Total ........................... $2,009 $1,476 ====== ======
o Trading account profits and fees totaled $171 million in 1998 compared to $976 million in 1997. The decrease is primarily attributable to a write-down of Russian securities and losses in corporate bonds and commercial mortgage products as spreads widened in the third quarter. The fair values of the components of the Corporation's trading account assets and liabilities on December 31, 1998 and 1997 as well as their average fair values for 1998 and 1997 are disclosed in Note Four of the consolidated financial statements on page 66. Trading account profits and fees by major business activity follows:
1998 1997 (Dollars in Millions) --------- ------- Trading Account Profits and Fees Foreign exchange contracts ............ $ 531 $478 Interest rate contracts ............... 209 166 Securities trading .................... (610) 287 Other ................................. 41 45 ------ ---- Total ................................. $ 171 $976 ====== ====
o Brokerage income increased 105 percent to $728 million in 1998, due mainly to the acquisitions of NationsBanc Montgomery Securities and Robertson Stephens as well as continued internal growth. o Asset management and fiduciary service fees decreased $17 million in 1998, reflecting the impact of the third quarter 1997 sales of certain corporate and institutional trust businesses, which included businesses that provided administrative and record-keeping services for employee benefit plans. An analysis of asset management and fiduciary service fees by major business activity follows: 20
1998 1997 (Dollars in Millions) ----------- ----------- Asset Management and Fiduciary Service Fees Private bank .............................. $ 728 $ 690 Funds and institutional investment management 182 154 Retirement services, corporate trust and other 63 146 -------- -------- Total ................................... $ 973 $ 990 ======== ======== Market Value of Assets Assets under management ................... $233,500 $211,470 Assets under administration ............... 300,167 372,040
The Private Bank provides investment management, personal trust, tax and estate planning, customized lending and banking for high-net-worth clients and private businesses. Funds and Institutional Investment Management includes brokerage (full-service and discount services with access to a wide range of non-FDIC-insured investments, including stocks, bonds, fixed-income securities and mutual funds), mutual funds (investment advisor to over 50 funds including money market, fixed-income and equity funds), and institutional investment management (investment advisory and management services for institutional clients are offered by TradeStreet Investment Associates, Inc., Chicago Equity Partners, Sovran Capital Management Corporation and Boatmen's Capital Management, Inc.). Fees received by Retirement Services and Corporate Trust decreased in 1998 from 1997 as the result of the sale of certain businesses which provided administrative, fiduciary and record-keeping services for businesses and institutional customers. o Credit card income increased 18 percent to $1.4 billion in 1998 due primarily to higher transaction volume and exchange fees. Credit card income includes $178 million and $98 million from credit card securitizations in 1998 and 1997, respectively. o Other income totaled $2.7 billion in 1998, an increase of $423 million over 1997. The increase over 1997 was due primarily to the $479 million gain from the sale of the manufactured housing lending business and a $110 million gain on the sale of a partial ownership interest in a mortgage company, partially offset by write-downs of $158 million of losses associated with the investment in DE Shaw in the fourth quarter of 1998 and other equity investments of $162 million. Other income also includes certain prepayment fees and other fees, net rental income on automobile leases classified as operating leases, servicing and related fees from the consumer finance business, insurance commissions and earnings and bankers' acceptances and letters of credit fees. Other Noninterest Expense As presented in Table Six, the Corporation's other noninterest expense increased 6 percent in 1998 over 1997. Excluding acquisitions and related transition expenses, other noninterest expense increased 3 percent over 1997. Table Six Other Noninterest Expense (Dollars in Millions)
1998 1997 Change ------------------------ ------------------------ ----------------------- Amount Percent (1) Amount Percent (1) Amount Percent ---------- ------------- ---------- ------------- ------------ ---------- Personnel ................................... $ 9,412 30.7% $ 8,703 28.7% $ 709 8.1% Occupancy, net .............................. 1,643 5.4 1,576 5.2 67 4.3 Equipment ................................... 1,404 4.6 1,408 4.6 (4) ( .3) Marketing ................................... 581 1.9 655 2.2 (74) (11.3) Professional fees ........................... 843 2.8 763 2.5 80 10.5 Amortization of intangibles ................. 902 2.9 855 2.8 47 5.5 Data processing ............................. 765 2.5 626 2.1 139 22.2 Telecommunications .......................... 563 1.8 491 1.6 72 14.7 Other general operating ..................... 2,044 6.6 2,059 6.8 (15) ( .7) General administrative and miscellaneous..... 584 1.9 489 1.6 95 19.4 ------- ---- ------- ---- ------ ----- $18,741 61.1% $17,625 58.1% $1,116 6.3% ======= ==== ======= ==== ====== =====
(1) Percent of taxable-equivalent net interest and noninterest income. 21 A discussion of the significant components and changes in other noninterest expense in 1998 compared to 1997 follows: o Personnel expense increased 8 percent to $9.4 billion in 1998, primarily due to the acquisitions of NationsBanc Montgomery Securities, Robertson Stephens and NationsBanc Auto Leasing, Inc. Excluding these acquisitions, 1998 personnel expense increased by 3 percent over 1997. On December 31, 1998, the Corporation had approximately 171,000 full-time equivalent employees compared to approximately 181,000 full-time equivalent employees on December 31, 1997. o Marketing expense amounted to $581 million in 1998, a decrease of approximately 11 percent from 1997, reflecting a decline in advertising and promotional expenses. o Professional fees increased $80 million over 1997 to $843 million, primarily due to increases in outside legal fees. o Data processing expense increased to $765 million in 1998 compared to $626 million in 1997 due to increased processing costs associated with the NationsBanc Montgomery Securities, Robertson Stephens and NationsBanc Auto Leasing, Inc. acquisitions. o Telecommunications expense increased $72 million over 1997 to $563 million, mainly due to acquisition and transition efforts, expenses related to the implementation of Model Bank, a banking platform, and increased call volume. o General administrative and miscellaneous expense increased to $584 million compared to $489 million in 1997, primarily due to the addition of NationsBanc Montgomery Securities, Robertson Stephens and NationsBanc Auto Leasing, Inc. Year 2000 Project The following is a Year 2000 Readiness Disclosure. General Because computers frequently use only two digits to recognize years, on January 1, 2000, many computer systems, as well as equipment that uses embedded computer chips, may be unable to distinguish between 1900 and 2000. If not -- -- remediated, this problem could create system errors and failures resulting in the disruption of normal business operations. Since the Year 2000 is a leap year, there could also be business disruptions as a result of the inability of many computer systems to recognize February 29, 2000. In October 1995 and February 1996, respectively, NationsBank and BankAmerica established project teams to address these issues. Each of these teams remains in place and continues to work on solving problems related to the Year 2000. Although each of these Year 2000 teams proceeds according to its respective work plan, they are capitalizing on the best practices of both teams. Going forward, the Year 2000 efforts of both teams are being integrated. Personnel from the Corporation's business segments and project teams have identified and analyzed, and are correcting and testing, computer systems throughout the Corporation ("Systems"). Personnel have also taken inventory of equipment that uses embedded computer chips (i.e., "non-information technology systems" or "Infrastructure") and scheduled remediation or replacement of this Infrastructure, as necessary. Examples of Infrastructure include ATMs, building security systems, fire alarm systems, identification and access cards, date stamps and elevators. The NationsBank team tracks Systems and Infrastructure separately, whereas the BankAmerica team tracks Systems and Infrastructure collectively ("Projects"). For purposes of this section, the information provided for Systems and Projects is generally provided on a combined basis. State of Readiness The Corporation's Year 2000 efforts are generally divided into phases for analysis, remediation, testing and compliance. In the analysis phase, the Corporation identifies Systems/Projects and Infrastructure that have Year 2000 issues and determines the steps necessary to remediate these issues. In the remediation phase, the Corporation replaces, modifies or retires Systems/Projects or Infrastructure, as necessary. During the testing phase, the Corporation performs testing to determine whether the remediated Systems/Projects and Infrastructure 22 accurately process and identify dates. In the compliance phase, the Corporation internally certifies the Systems/Projects and Infrastructure that are Year 2000 ready and implements processes to enable these Systems/Projects and Infrastructure to continue to identify and process dates accurately through the Year 2000 and thereafter. As of December 31, 1998, the NationsBank team has identified over 1,500 Systems, and the BankAmerica team has identified approximately 2,900 Projects, for a total of approximately 4,400 Systems/Projects. In addition, the NationsBank team has identified over 17,000 Infrastructure items that may have Year 2000 implications. For Systems/Projects, as of December 31, 1998, the analysis and remediation phases were substantially complete, the testing phase was approximately 95% complete and the compliance phase was approximately 90% complete. For Infrastructure, as of December 31, 1998, the analysis phase was approximately 98% complete, the remediation phase was approximately 91% complete, the testing phase was approximately 89% complete and the compliance phase was approximately 84% complete. The Corporation expects to substantially complete all phases by June 30, 1999, in accordance with guidelines established by the Federal Financial Institutions Examination Council (FFIEC). The Corporation tracks Systems/Projects and Infrastructure for Year 2000-required changes based on a risk evaluation. Of the identified Systems/Projects and Infrastructure, approximately 1,900 Systems/Projects and 1,100 Infrastructure items have been designated "mission critical" (i.e., if not made Year 2000 ready, these Systems/Projects or Infrastructure items would substantially impact the normal conduct of business). For mission critical Systems/Projects, as of December 31, 1998, the analysis and remediation phases were substantially complete, the testing phase was approximately 96% complete and the compliance phase was approximately 90% complete. The Corporation will also perform "time machine testing" (i.e., emulate Year 2000 conditions in a dedicated environment) on selected mission critical Systems. For mission critical Infrastructure items, as of December 31, 1998, the analysis phase was approximately 98% complete, the remediation phase was approximately 77% complete, the testing phase was approximately 86% complete and the compliance phase was approximately 70% complete. Ultimately, the potential impact of Year 2000 issues will depend not only on the corrective measures the Corporation undertakes, but also on the way in which Year 2000 issues are addressed by governmental agencies, businesses and other entities which provide data to, or receive data from, the Corporation, or whose financial condition or operational capability is important to the Corporation as borrowers, vendors, customers, investment opportunities (either for the Corporation's accounts or for the accounts of others) or lenders. In addition, the Corporation's business may be affected by the corrective measures taken by the landlords and managers of buildings leased by the Corporation. Accordingly, the Corporation is communicating with certain of these parties to evaluate any potential impact on the Corporation. In particular, the Corporation is contacting its service providers and software vendors (collectively, "Vendors") and requesting information on their Year 2000 project plans. The Corporation has designated approximately 36% of these Vendors as "mission critical." As of December 31, 1998, the Corporation has received assurances that approximately 78% of its Vendors, and approximately 85% of its mission critical Vendors, are Year 2000 ready. At the end of 1998, any Vendor which had not provided appropriate documentation, had not responded timely to the Corporation's inquiries or did not expect to be Year 2000 ready until 1999 was placed in an "at risk" category. As of December 31, 1998, the Corporation has placed approximately 16% of its Vendors, and approximately 7% of its mission critical Vendors, in an "at risk" category. In accordance with its contingency plans, the Corporation will continue to focus on these "at risk" mission critical Vendors in order to mitigate any potential risk. The Corporation is also tracking the Year 2000 compliance efforts of certain domestic and foreign agencies involved with payment systems, such as clearing houses, security clearings and central banks. The Corporation has identified 29 of 195 agencies, or 15%, which have neither responded to the Corporation's inquiries or which were not Year 2000 ready as of December 31, 1998. Although work involved with the implementation of the Euro resulted in some delay with respect to the agencies' efforts in this area, the Corporation will continue to monitor those agencies of particular concern. In addition, the Corporation has completed Year 2000 risk assessments for the majority of its commercial credit customers. For any customers deemed higher risk, on a quarterly basis, the Corporation's Credit Review Committee reviews the results of customer assessments prepared by the customers' relationship managers. By July 1, 1999, the Corporation will reassess any customers deemed "medium risk." Weakness in a borrower's Year 23 2000 strategy is part of the overall risk assessment process. Risk ratings and exposure strategy are adjusted as required after consideration of all risk issues. Any impact on the allowance for credit losses is determined through the normal risk rating process. The Corporation is also assessing potential Year 2000 risks associated with its investment advisory and fiduciary activities. Each investment subsidiary has a defined investment process and is integrating the consideration of Year 2000 issues into that process. When making investment decisions or recommendations, the Corporation's investment research areas consider the Year 2000 issue as a factor in their analysis, and may take certain steps to investigate Year 2000 readiness, such as reviewing ratings, research reports and other publicly available information. In the fiduciary area, the Corporation is assessing Year 2000 risks for business, real estate, oil and gas, and mineral interests that are held in Trust. Following the merger with BankAmerica, the Corporation identified its significant depositors and assessed the Year 2000 readiness of these customers. The Corporation will continue to monitor these depositors for purposes of determining any potential liquidity risks to the Corporation. Costs The Corporation currently estimates the total cost of the Year 2000 project to be approximately $550 million. Of this amount, the Corporation has incurred cumulative Year 2000 costs of approximately $410 million through December 31, 1998. A significant portion of the foregoing cost is not expected to be incremental to the Corporation but instead will constitute a reallocation of existing internal systems technology resources and, accordingly, will be funded from normal operations. Contingency Plans The Corporation has existing business continuity plans that address its response to disruptions to business due to natural disasters, civil unrest, utility outages or other occurrences. The Corporation is developing business continuity plans specific to Year 2000 issues that are based on these existing plans. The Corporation has made substantial progress on an inventory and assessment of the existing business contingency plans. Supplements to the existing plans to address Year 2000 issues are being finalized and will include detailed plans to respond to these events. The Corporation substantially completed these supplemental business continuity plans in January 1999. During the remainder of 1999, the business continuity plans are being tested and validated with particular attention to event management and communication processes. Risks Although the Corporation's remediation efforts are directed at reducing its Year 2000 exposure, there can be no assurance that these efforts will fully mitigate the effect of Year 2000 issues and it is likely that one or more events may disrupt the Corporation's normal business operations. In the event the Corporation fails to identify or correct a material Year 2000 problem, there could be disruptions in normal business operations, which could have a material adverse effect on the Corporation's results of operations, liquidity or financial condition. In addition, there can be no assurance that significant foreign and domestic third parties will adequately address their Year 2000 issues. Further, there may be some such parties, such as governmental agencies, utilities, telecommunication companies, financial services vendors and other providers, where alternative arrangements or resources are not available. Also, risks associated with some foreign third parties may be greater since there is general concern that some entities operating outside the United States are not addressing Year 2000 issues on a timely basis. In addition to the foregoing, the Corporation is subject to credit risk to the extent borrowers fail to adequately address Year 2000 issues, to fiduciary risk to the extent fiduciary assets fail to adequately address Year 2000 issues, and to liquidity risk to the extent of deposit withdrawals and to the extent its lenders are unable to provide the Corporation with funds due to Year 2000 issues. Although it is not possible to quantify the potential impact of these risks at this time, in future years, there may be increases in problem loans, credit losses, losses in the fiduciary business and liquidity problems, as well as the risk of litigation and potential losses from litigation related to the foregoing. 24 Forward-looking statements contained in the foregoing "Year 2000 Project" section should be read in conjunction with the cautionary statements included in the introductory paragraphs under "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 and 10. Economic and Monetary Unit (EMU) in Europe On January 1, 1999, 11 member countries of the European Union launched a common legal currency called the Euro. EMU monetary policy, including the money supply and official interest rates for the Euro, is now under the direction of the European Central Bank. During the transition period, January 1, 1999 through January 1, 2002, the old national currencies will remain legal tender as denominations of the Euro. Beginning January 1, 2002, Euro denominated bills and coins will be issued for use in cash transactions, and by July 1, 2002, all legacy currencies will cease to be legal tender. EMU will impact the Corporation's payment and clearing systems. Management expects the elimination of national currencies in favor of the single Euro currency to reduce cross border barriers to business and reduce the previous competitive advantage of national firms. The Corporation believes that it is favorably positioned to benefit from these changes. In addition, management believes that the Euro conversion presents significant business opportunities for major pan-European providers of cash management services, such as the Corporation. The Corporation prepared actively for the Euro conversion, utilizing a dedicated EMU project team to ensure that the Corporation's technology and operations were appropriately modified by January 1, 1999. The project team also communicated extensively with the Corporation's clients and counterparties regarding the implications of EMU and the effect it would have on their business relationships and contracts with the Corporation. The Corporation completed the initial redenomination event on January 3, 1999. Most of the costs associated with the Euro conversion were incurred by the end of fiscal 1998, and these costs have not been material. Such costs have been and will continue to be expensed by the Corporation during the period in which they are incurred, and any ongoing costs are not currently anticipated to be material. The Corporation does not expect the formation of the EMU to have a material impact on its results of operations or financial condition. Income Taxes The Corporation's income tax expense for 1998 and 1997 was $2.9 billion and $4.0 billion, respectively. Excluding merger-related charges, the effective tax rates for 1998 and 1997 were 34 percent and 38 percent, respectively. The reduction in the effective tax rate is due primarily to the reorganization of certain subsidiaries of the Corporation in 1998. Note Fourteen of the consolidated financial statements on page 87 includes a reconciliation of federal income tax expense computed using the federal statutory rate of 35 percent to actual income tax expense. Balance Sheet Review and Liquidity Risk Management The Corporation utilizes an integrated approach in managing its balance sheet, which includes management of interest rate sensitivity, credit risk, liquidity risk and its capital position. The average balances discussed below can be derived from Table Three. The following discussion addresses changes in average balances in 1998 compared to 1997. Average customer-based funds increased $4.2 billion to $286.1 billion in 1998 compared to average levels for 1997. As a percentage of total sources, average customer-based funds decreased to 49 percent in 1998 from 52 percent in 1997. Average market-based funds increased $26.8 billion in 1998 to $167.5 billion and comprised a larger portion of total sources of funds at 29 percent in 1998 compared to 26 percent in 1997. In addition, 1998 levels of long-term debt increased by $3.6 billion over 1997, mainly the result of borrowings to fund business development opportunities and to replace debt maturities. Average loans and leases, the Corporation's primary use of funds, increased $4.7 billion to $347.8 billion during 1998. As a percentage of total uses of funds, average loans and leases decreased to 60 percent in 1998 25 from 63 percent in 1997. The increase in average loans and leases was due primarily to core loan growth, partially offset by the impact of $19.3 billion of securitizations in 1997, most of which occurred in the third quarter. The ratio of average loans and leases to customer-based funds was 122 percent for both 1998 and 1997. Average other assets and cash and cash equivalents increased $5.9 billion to $84.7 billion in 1998 due largely to an increase in derivative-dealer assets associated with interest rate fluctuations and goodwill associated mainly with the NationsBanc Montgomery Securities and NationsBanc Auto Leasing, Inc. acquisitions. The average securities portfolio in 1998 increased $18.4 billion over 1997 levels, amounting to 11 percent of total uses of funds in 1998 compared to 9 percent in 1997. See the following "Securities" section for additional information on the securities portfolio. Cash and cash equivalents were $28.3 billion on December 31, 1998, a decrease of $189 million from December 31, 1997. During 1998, net cash provided by operating activities was $10.9 billion, net cash used in investing activities was $47.2 billion and net cash provided by financing activities was $36.1 billion. For further information on cash flows, see the Consolidated Statement of Cash Flows on page 54 in the consolidated financial statements. Liquidity is a measure of the Corporation's ability to fulfill its cash requirements and is managed by the Corporation through its asset and liability management process. The Corporation monitors its assets and liabilities and modifies these positions as liquidity requirements change. This process, coupled with the Corporation's ability to raise capital and debt financing, is designed to cover the liquidity needs of the Corporation. Management believes that 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 serves a primary role in the overall context of balance sheet management by the Corporation. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity requirements and on- and off-balance sheet positions. The securities portfolio on December 31, 1998 consisted of securities held for investment totaling $2.0 billion and securities available for sale totaling $78.6 billion compared to $4.8 billion and $62.2 billion, respectively, on December 31, 1997. The increase in available for sale securities reflects the management of the Corporation's interest rate sensitivity by adding fixed-income assets. On December 31, 1998 and 1997, the market value of the Corporation's securities held for investment reflected net unrealized losses of $144 million and net unrealized gains of $83 million, respectively. The valuation allowance for securities available for sale and marketable equity securities included in shareholders' equity was $292 million on December 31, 1998, reflecting pre-tax appreciation of $354 million on debt securities and $165 million on marketable equity securities. The valuation allowance increased shareholders' equity by $545 million on December 31, 1997. The decrease in the valuation allowance was primarily attributable to the realization of securities gains during 1998 and lower market interest rates at December 31, 1998. The estimated average duration of securities held for investment and securities available for sale portfolios were 5.59 and 4.14, respectively, on December 31, 1998 compared to 4.90 and 4.91, respectively, on December 31, 1997. Loans and Leases Total loans and leases increased approximately 4 percent to $357.3 billion on December 31, 1998 compared to $342.1 billion on December 31, 1997. As presented in Table Three, average total loans and leases increased 1 percent to $347.8 billion in 1998 compared to $343.2 billion in 1997 primarily due to core loan growth, partially offset by the impact of $11.6 billion of securitizations in 1998 and $19.3 billion of securitizations in 1997. Average commercial loans increased to $189.9 billion in 1998 compared to $175.4 billion in 1997, due largely to core loan growth, partially offset by the impact of $4.2 billion of securitizations in 1997. Average domestic commercial real estate loans decreased to $28.4 billion in 1998 due mainly to loan sales. 26 Average residential mortgage loans decreased 12 percent to $70.8 billion in 1998 compared to $80.6 billion in 1997, mainly the result of loan sales and the impact of $5.1 billion of securitizations in 1998 and $9.6 billion of securitizations in 1997. Average bankcard and other consumer loans, including direct and indirect consumer loans and home equity loans, decreased $116 million to $87.1 billion in 1998 due primarily to a decrease in bankcard loans, which included the impact of $2.0 billion of securitizations in 1998, partially offset by an increase in other consumer loans. A significant source of liquidity for the Corporation is the repayments and maturities of loans. Table Seven shows selected loan maturity data on December 31, 1998 and indicates that approximately 48 percent of the selected loans had maturities of one year or less. The securitization and sale of certain loans and the use of loans as collateral in asset-backed financing arrangements are also sources of liquidity. Table Seven Selected Loan Maturity Data December 31, 1998 (Dollars in Millions) This table presents the maturity distribution and interest sensitivity of selected loan categories (excluding residential mortgage, bankcard, other consumer loans and lease financing). Maturities are presented on a contractual basis.
Due after Due in 1 year 1 year through Due after or less 5 years 5 years Total ------------ ------------ ------------ ------------- Commercial - domestic ................................................... $ 65,256 $ 47,185 $ 16,195 $ 128,636 Commercial real estate - domestic ....................................... 3,409 6,990 9,405 19,804 Construction real estate - domestic ..................................... 3,866 2,864 378 7,108 Foreign ................................................................. 18,284 8,939 5,526 32,749 -------- -------- -------- --------- Total selected loans ................................................... $ 90,815 $ 65,978 $ 31,504 $ 188,297 ======== ======== ======== ========= Percent of total ........................................................ 48.2% 35.1% 16.7% 100% Cumulative percent of total ............................................. 48.2 83.3 100.0 Sensitivity of loans to changes in interest rates for loans due after one year Predetermined interest rates ........................................... $ 15,154 $ 12,489 $ 27,643 Floating or adjustable interest rates .................................. 50,824 19,015 69,839 -------- -------- --------- $ 65,978 $ 31,504 $ 97,482 ======== ======== =========
Deposits Table Three provides information on the average amounts of deposits and the rates paid by deposit category. Through the Corporation's diverse retail banking network, deposits remain a primary source of funds for the Corporation. Average deposits increased 3 percent in 1998 over 1997 to $345.5 billion. See Note Seven of the consolidated financial statements on page 68 for further details on deposits. Short-Term Borrowings and Trading Account Liabilities The Corporation uses short-term borrowings as a funding source and in its management of interest rate risk. Table Eight presents the categories of short-term borrowings. During 1998, total average short-term borrowings increased 29 percent to $90.6 billion and average trading account liabilities increased 14 percent from 1997 levels, to $17.5 billion in 1998. 27 Table Eight Short-Term Borrowings (Dollars in Millions)
1998 1997 1996 -------------------- --------------------- -------------------- Amount Rate Amount Rate Amount Rate --------- ---------- ---------- ---------- --------- ---------- Federal funds purchased On December 31 ............................. $ 7,316 5.25% $10,111 5.80% $ 6,187 6.06% Average during year ........................ 8,201 5.42 6,551 5.54 6,662 5.35 Maximum month-end balance during year ...... 11,187 -- 10,111 -- 9,974 -- Securities sold under agreements to repurchase On December 31 ............................. 60,227 5.08 51,303 5.83 24,279 5.58 Average during year ........................ 56,710 5.66 45,403 5.58 41,239 5.52 Maximum month-end balance during year ...... 71,595 -- 51,820 -- 43,120 -- Commercial paper On December 31 ............................. 6,749 5.19 5,925 5.65 5,849 5.52 Average during year ........................ 6,419 5.56 6,184 5.64 6,036 5.66 Maximum month-end balance during year ...... 7,913 -- 6,689 -- 7,028 -- Other short-term borrowings On December 31 ............................. 24,742 4.52 12,120 6.52 12,239 6.06 Average during year ........................ 19,300 6.35 12,261 7.02 11,897 6.09 Maximum month-end balance during year ...... 25,927 -- 13,974 -- 13,489 --
Long-Term Debt Long-term debt increased 7 percent from $42.9 billion at December 31, 1997 to $45.9 billion on December 31, 1998 mainly as a result of borrowings to fund business development opportunities and to replace maturing debt. During 1998, the Corporation issued $350 million of trust preferred securities and $12.5 billion in long-term senior and subordinated debt. See Notes Eight and Nine of the consolidated financial statements on pages 69 and 71 for further details on long-term debt and trust preferred securities. Other The Corporation has commercial paper back-up lines totaling $1.1 billion of which $669 million expires in October 1999 and $479 million expires in October 2002. In addition, the Corporation has a $1.6 billion line of credit which expires in May 2001. No borrowings have been made under these lines. The Corporation's financial position is reflected in the following debt ratings, which include upgrades as applicable from December 31, 1997 ratings:
Commercial Senior Subordinated Paper Debt Debt ------------ -------- ------------- Moody's Investors Service ......... P-1 Aa2 Aa3 Standard & Poor's Corporation ..... A-1 A+ A Duff and Phelps, Inc .............. D-1+ AA- A+ Fitch IBCA, Inc ................... F-1+ AA- A+ Thomson BankWatch ................. TBW-1 AA- A+
In managing liquidity, the Corporation takes into consideration the ability of its subsidiary banks to pay dividends to the parent company. See Note Twelve of the consolidated financial statements on page 78 for further details on dividend capabilities of its subsidiary banks. Capital Resources And Capital Management Shareholders' equity on December 31, 1998 was $45.9 billion compared to $44.6 billion on December 31, 1997. The increase was primarily due to net earnings (net income less dividends) of $2.6 billion coupled with the issuance of approximately 30.5 million shares of common stock under various employee plans. The increase was partially offset by the repurchase of 29.3 million shares of common stock for approximately $1.8 billion and a net decrease of $242 million in the market value of securities available for sale and marketable equity securities. 28 The Corporation's and its significant banking subsidiaries' regulatory capital ratios, along with a description of the components of risk-based capital, capital adequacy requirements and prompt corrective action provisions, are included in Note Twelve of the consolidated financial statements on page 78. Off-Balance Sheet Derivatives - Asset and Liability Management (ALM) Activities Interest rate contracts are used in the asset and liability management process. These contracts, which are generally non-leveraged generic interest rate and basis swaps, options and futures, allow the Corporation to effectively manage its interest rate risk position. Generic interest rate swaps involve the exchange of fixed-rate and variable-rate interest payments based on the contractual underlying notional amount. 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. Option products primarily consist of 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. Futures contracts used for ALM activities are primarily index futures providing for cash payments based upon the movements of a deposit rate index. The amount of net realized deferred gains associated with terminated ALM swaps were $294 million and $68 million on December 31, 1998 and December 31, 1997, respectively. The amount of net realized deferred losses associated with terminated ALM futures and forward rate contracts was $1 million on December 31, 1998, compared to a gain of $9 million on December 31, 1997. The amount of net realized deferred gains associated with terminated ALM options were $26 million and $13 million on December 31, 1998 and December 31, 1997, respectively. See Note Eleven of the consolidated financial statements on page 74 for information on the notional amounts and fair values of the Corporation's ALM interest rate contracts. In addition, the Corporation uses foreign currency contracts to manage the foreign exchange risk associated with foreign-denominated assets and liabilities, as well as the Corporation's equity investments in foreign subsidiaries. Foreign exchange contracts, which include spot, forward and futures contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price, on an agreed-upon settlement date. On December 31, 1998, these contracts had a notional value of $3.3 billion and a fair value of $72 million. The fair values of the ALM interest rate and foreign exchange portfolios 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 production and servicing activities, see the "Noninterest Income" section on page 19. Market Risk Management In the normal course of conducting its business activities, the Corporation is exposed to market risks which include both price and liquidity risk. Market risk is the potential of loss arising from adverse changes in market rates and prices, such as interest rates (interest rate risk), foreign currency exchange rates (foreign exchange risk), commodity prices (commodity risk) and prices of equity securities (equity risk). Financial products that expose the Corporation to market risk include securities, loans, deposits, debt, and derivative financial instruments such as futures, forwards, swaps, options, and other financial instruments with similar characteristics. Liquidity risk arises from the possibility that the Corporation may not be able to satisfy current or future financial commitments or that the Corporation may be more reliant on alternative funding sources such as long-term debt. Market risk is managed by the Corporation's Finance Committee, which formulates policy based on desirable levels of market risk. In setting desirable levels of market risk, the Finance Committee considers the impact on both earnings and capital of the current outlook in market rates, potential changes in market rates, world and regional economies, liquidity, business strategies and other factors. For a discussion of non-trading, on-balance sheet financial instruments see Table Nine in the following Market Risk Management section on page 31. For information on market risk associated with ALM activities, 29 see the following discussion on page 32 of the Market Risk Management section and the mortgage banking section of Noninterest Income on page 19. Market risk associated with the trading portfolio is discussed in the following Market Risk Management section on page 32. The composition of the trading portfolio and related fair values are included in Note Four of the consolidated financial statements on page 66. Prior to the BankAmerica merger, market risk exposure was managed by each of the previously separate companies. Separate risk management models and assumptions were used in accordance with each company's unique market risk profile. The market risk information presented in this section is as of, or for the year ended, December 31, 1998 and reflects the market risk profile of the merged company. Prior period amounts have not been presented as such amounts were based on the risk profiles of the previously separate entities and, accordingly, are not comparable to current period amounts. Non-Trading Portfolio The Corporation's ALM process is used to manage interest rate risk through the structuring of balance sheet and off-balance sheet portfolios and identifying and linking such off-balance sheet positions to specific assets and liabilities. Interest rate risk represents the only material market risk exposure to the Corporation's non-trading on-balance sheet financial instruments. To effectively measure and manage interest rate risk, the Corporation uses sophisticated computer simulations which determine the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations cover the following financial instruments: short-term financial instruments, securities, loans, deposits, borrowings and off-balance sheet financial instruments. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these scenarios, interest rate risk is quantified and appropriate strategies are developed and implemented. The overall interest rate risk position and strategies are reviewed on an ongoing basis by senior management. Additionally, duration and market value sensitivity measures are selectively utilized where they provide added value to the overall interest rate risk management process. On December 31, 1998, the interest rate risk position of the Corporation was relatively neutral as the impact of a gradual parallel 100 basis-point rise or fall in interest rates over the next 12 months was estimated to be less than one percent of net interest income. Table Nine below summarizes the expected maturities, unrealized gains and losses and weighted average effective yields and rates associated with the Corporation's significant non-trading on-balance sheet financial instruments. Cash and cash equivalents, time deposits placed and other short-term investments, federal funds sold and purchased, resale and repurchase agreements, commercial paper, other short-term borrowings and foreign deposits, which are similar in nature to other short-term borrowings, are excluded from Table Nine as their respective carrying values approximate fair values. These financial instruments generally expose the Corporation to insignificant market risk as they have either no stated maturities or an average maturity of less than 30 days and interest rates that approximate market rates. However, these financial instruments could expose the Corporation to interest rate risk by requiring more or less reliance on alternative funding sources, such as long-term debt. Loans held for sale are also excluded as their carrying values approximate their fair values, generally exposing the Corporation to insignificant market risk. For further information on the fair value of financial instruments see Notes Four and Fifteen of the consolidated financial statements on pages 66 and 88, respectively. 30 Table Nine Non-Trading On-Balance Sheet Financial Instruments December 31, 1998 (Dollars in Millions)
Unrealized Total Gain/(Loss) ------------- ------------- Assets (1) Loans (2)(3) Fixed rate Book value ............................. $ 116,292 $ 3,331 Weighted average effective yield ....... 8.23% Variable rate Book value ............................. $ 221,011 2,591 Weighted average effective yield ....... 6.51% Securities held for investment (2) Fixed rate Book value ............................. $ 1,858 (144) Weighted average effective yield ....... 6.64% Variable rate Book value ............................. $ 139 -- Weighted average effective yield ....... 6.33% Securities available for sale (2) Fixed rate Book value ............................. $ 73,595 237 Weighted average effective yield ....... 6.05% Variable rate Book value ............................. $ 4,641 117 Weighted average effective yield ....... 6.63% Liabilities (1) Total deposits (4)(5) Fixed rate Book value ............................. $ 212,586 (330) Weighted average effective rate ........ 2.02% Variable rate Book value ............................. $ 86,504 5 Weighted average effective rate ........ 2.96% Long-term debt (excluding obligations under capital leases) (6) Fixed rate Book value ............................. $ 24,761 (1,491) Weighted average effective rate ........ 7.42% Variable rate Book value ............................. $ 21,006 (66) Weighted average effective rate ........ 5.35% Trust preferred securities (6) Fixed rate Book value ............................. $ 3,811 (290) Weighted average effective rate ........ 8.03% Variable rate Book value ............................. $ 1,143 -- Weighted average effective rate ........ 5.98% Expected Maturity ---------------------------------------------------------------- After 1999 2000 2001 2002 2003 2003 ---------- ---------- ---------- ---------- --------- ---------- Assets (1) Loans (2)(3) Fixed rate Book value ............................. $38,511 $21,075 $14,656 $10,037 $ 6,994 $25,019 Weighted average effective yield ....... Variable rate Book value ............................. 90,003 35,016 26,197 25,458 14,637 29,700 Weighted average effective yield ....... Securities held for investment (2) Fixed rate Book value ............................. 808 147 124 71 119 589 Weighted average effective yield ....... Variable rate Book value ............................. 80 19 7 18 4 11 Weighted average effective yield ....... Securities available for sale (2) Fixed rate Book value ............................. 855 1,448 3,433 6,338 9,050 52,471 Weighted average effective yield ....... Variable rate Book value ............................. 66 260 333 3,221 66 695 Weighted average effective yield ....... Liabilities (1) Total deposits (4)(5) Fixed rate Book value ............................. 70,087 12,876 12,723 12,034 11,372 93,494 Weighted average effective rate ........ Variable rate Book value ............................. 19,864 14,087 11,557 9,709 8,191 23,096 Weighted average effective rate ........ Long-term debt (excluding obligations under capital leases) (6) Fixed rate Book value ............................. 1,618 2,069 4,691 3,122 2,937 10,324 Weighted average effective rate ........ Variable rate Book value ............................. 6,640 6,658 2,482 1,282 2,326 1,618 Weighted average effective rate ........ Trust preferred securities (6) Fixed rate Book value ............................. -- -- 900 -- 350 2,561 Weighted average effective rate ........ Variable rate Book value ............................. -- -- -- 400 -- 743 Weighted average effective rate ........
(1) Fixed and variable rate classifications are based on contractual rates and are not modified for the impact of asset and liability management contracts. (2) Expected maturities reflect the impact of prepayment assumptions. (3) Excludes leases. (4) When measuring and managing market risk associated with domestic deposits, the Corporation considers its long-term relationships with depositors. The unrealized loss on deposits in this table does not consider these long-term relationships, therefore only certificates of deposits reflect a change in value. (5) Excludes foreign time deposits. (6) Expected maturities of long-term debt and trust preferred securities reflect the Corporation's ability to redeem such debt prior to contractual maturities. 31 Risk management interest rate contracts are utilized in the ALM process. Such contracts, which are generally non-leveraged generic interest rate and basis swaps, futures, forwards, and options, allow the Corporation to effectively manage its interest rate risk position. As reflected in Table Ten, the notional amount of the Corporation's receive fixed and pay fixed interest rate swaps on December 31, 1998 was $60.5 billion, primarily converting variable-rate commercial loans to fixed rate, and $25.8 billion, respectively. The net receive fixed position on December 31, 1998 was $34.7 billion compared to $31.1 billion on December 31, 1997. In addition, the Corporation had $7.7 billion of basis swaps linked primarily to loans and long-term debt. Table Ten also summarizes the expected maturities, weighted average pay and receive rates and the unrealized gains and losses on December 31, 1998 of the Corporation's ALM interest rate swaps, as well as the expected maturities and unrealized gains and losses on December 31, 1998 of the Corporation's ALM basis swaps, forwards, futures, and options contracts. Unrealized gains and losses are based on the last repricing and will change in the future primarily based on movements in one-, three- and six-month LIBOR rates. The net unrealized gain on the ALM swap portfolio on December 31, 1998 was $942 million compared to a net unrealized loss of $18 million on December 31, 1997, primarily reflecting a decrease in interest rates. The net unrealized gain in the estimated value of the ALM interest rate contracts 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 production and servicing activities, see the "Noninterest Income" section on page 19. Table Ten Asset and Liability Management Interest Rate Contracts December 31, 1998 (Dollars in Millions, Average Maturity in Years)
Fair Value ----------- Total receive fixed swaps ............. $ 1,958 Notional value ...................... Weighted average receive rate ....... Total pay fixed swaps ................. (1,006) Notional value ...................... Weighted average pay rate ........... Basis swaps ........................... (10) --------- Notional value ...................... Total swaps ........................... 942 Futures and forward rate contracts..... 2 Notional amount ..................... Option products ....................... (46) --------- Notional amount ..................... Total interest rate contracts ......... $ 898 ========= Maturity --------------------------------------------------------------------------------------- After Total 1999 2000 2001 2002 2003 2003 ------------ ----------- ----------- ------------ ----------- ------------ ------------ Total receive fixed swaps ............. Notional value ...................... $ 60,450 $ 4,492 $ 8,220 $ 12,213 $ 2,599 $ 15,826 $ 17,100 Weighted average receive rate ....... 6.16% 6.16% 6.28% 6.31% 6.93% 5.59% 6.43% Total pay fixed swaps ................. Notional value ...................... $ 25,770 $ 6,062 $ 6,900 $ 4,356 $ 1,177 $ 2,481 $ 4,794 Weighted average pay rate ........... 6.73% 6.46% 6.89% 6.47% 7.31% 7.14% 6.76% Basis swaps ........................... Notional value ...................... $ 7,736 $ 1,685 $ 743 $ 625 $ 1,669 $ 3,014 $ -- Total swaps ........................... Futures and forward rate contracts..... Notional amount ..................... $ 6,348 $ 6,348 $ -- $ -- $ -- $ -- $ -- Option products ....................... Notional amount ..................... $ 26,836 $ 3,225 $ 543 $ 1,088 $ 938 $ 1,950 $ 19,092 Total interest rate contracts ......... Average Expected Maturity --------- Total receive fixed swaps ............. 4.55 Notional value ...................... Weighted average receive rate ....... Total pay fixed swaps ................. 3.18 Notional value ...................... Weighted average pay rate ........... Basis swaps ........................... 2.88 Notional value ...................... Total swaps ........................... Futures and forward rate contracts..... Notional amount ..................... Option products ....................... Notional amount ..................... Total interest rate contracts .........
Trading Portfolio The Corporation manages its exposure to market risk resulting from trading activities through a risk management function which is independent of the various business units. The Trading Risk Committee (TRC) establishes and monitors various limits on trading activities. These limits include product volume, gross and net positions, and value-at-risk (VAR) and profit and loss simulation limits. Product volume limits establish maximum aggregate amounts of specific types of derivatives, foreign exchange contracts, and securities that the Corporation may hold in its trading account at any point in time. Position limits restrict the gross and net amount of contracts that can be held in the trading account in any specific maturity grouping. VAR measures the potential loss in future earnings due to market rate movements within the trading portfolio using proprietary models that are based on statistical probability. VAR limits establish the maximum amount of potential loss, based upon sophisticated modeling techniques, that the Corporation is willing to assume at any point in time. Additionally, 32 the Corporation uses profit and loss simulations to measure the potential for loss in various segments of the trading portfolio resulting from specific and extremely adverse scenarios. These scenarios are projected without regard to the statistical probability of their occurrences. Loss simulation limits establish the maximum amount of projected loss computed by the simulation that the Corporation is willing to assume. The Corporation reduces the market risk to which it is exposed in the trading account by executing offsetting transactions with other counterparties. However, the Corporation may also retain, generally on a temporary basis, open or uncovered trading account positions in an effort to generate revenue by correctly anticipating future market conditions and customer demands or by taking advantage of price differentials among the various markets in which it operates. The day-to-day management of interest rate and foreign exchange risks takes place at a decentralized level within the Corporation's various trading centers. Limits established by the TRC are assigned to each trading center. In addition, documented trading policies and procedures define acceptable boundaries within which traders can execute transactions in their assigned markets. The Corporation uses a VAR methodology to measure the interest rate, foreign exchange, commodity and equity risks inherent in its trading activities. Under this methodology, management models historical data to statistically calculate, with 99 percent confidence, the potential loss in earnings the Corporation might experience if an adverse one-day shift in market prices was to occur. The Corporation performs the VAR calculation for each major trading portfolio segment on a daily basis. It then calculates the combined VAR across these portfolio segments using two different sets of assumptions. The first calculation assumes that each portfolio segment experiences adverse price movements at the same time (i.e., the price movements are perfectly correlated). The second calculation assumes that these adverse price movements within the major portfolio segments do not occur at the same time (i.e., they are uncorrelated). Trading Activities Market Risk (US Dollar Equivalents in Millions)
Year Ended December 31, 1998 ----------------------------------------- Average VAR High VAR (1) Low VAR (1) ------------- -------------- ------------ Based on perfect positive correlation: Interest rate ..................... $ 120.2 $ 163.8 $ 92.7 Foreign currency .................. 28.5 46.0 8.3 Commodities ....................... 3.6 6.9 1.4 Equity ............................ 2.0 5.2 0.5 Based on zero correlation: Interest rate ..................... 37.6 49.9 29.3 Foreign currency .................. 24.0 40.0 6.4 Commodities ....................... 2.7 5.3 1.1 Equity ............................ 1.7 5.2 0.5
(1) The high and low for the entire trading account may not equal the sum of the individual components as the highs or lows of the components occurred on different trading days. The table above sets forth the calculated VAR amounts for the year ended 1998. The amounts are calculated on a pre-tax basis. Although the Corporation's trading positions have remained generally consistent during 1998, VAR levels have been impacted by recent volatility in market conditions. VAR modeling on trading is subject to numerous limitations. In addition, the Corporation recognizes that there are numerous assumptions and estimates associated with modeling and actual results could differ from these assumptions and estimates. The Corporation mitigates these uncertainties through close monitoring and by examining and updating assumptions on an ongoing basis. The continual trading risk management process considers the impact of unanticipated risk exposure and updates assumptions to reduce loss exposure. 33 Credit Risk Management and Credit Portfolio Review In conducting business activities, the Corporation is exposed to the risk that borrowers or counterparties may default on their obligations to the Corporation. Credit risk arises through the extension of loans and leases, certain securities, letters of credit, financial guarantees and through counterparty exposure on trading and capital markets transactions. To manage this risk, the Credit Risk Management group establishes policies and procedures to manage both on- and off-balance sheet credit risk and communicates and monitors the application of these policies and procedures throughout the Corporation. The Corporation's overall objective in managing credit risk is to minimize the adverse impact of any single event or set of events. To achieve this objective, the Corporation strives to maintain a credit risk profile that is diverse in terms of product type, industry concentration, geographic distribution and borrower or counterparty concentration. The Credit Risk Management group works with lending officers, trading personnel and various other line personnel in areas that conduct activities involving credit risk and is involved in the implementation, refinement and monitoring of credit policies and procedures. The Corporation manages credit exposure to individual borrowers and counterparties on an aggregate basis including loans and leases, securities, letters of credit, bankers' acceptances, derivatives and unfunded commitments. The creditworthiness of a borrower or counterparty is determined by experienced personnel, and limits are established for the total credit exposure to any one borrower or counterparty. Credit limits are subject to varying levels of approval by senior line and credit risk management. For commercial lending, the originating credit officer assigns borrowers or counterparties an initial risk rating which is based primarily on the amount of inherent credit risk and reviewed for appropriateness by senior line and credit risk personnel. Credits are monitored by line and credit risk management personnel for deterioration in a borrower's or counterparty's financial condition which would impact the ability of the borrower or counterparty to perform under the contract. Risk ratings are adjusted as necessary. For consumer lending, credit scoring systems are utilized to provide standards for extension of credit. Consumer portfolio credit risk is monitored primarily using statistical models and actual payment experience to predict portfolio behavior. When required, the Corporation obtains collateral to support credit extensions and commitments. Generally, such collateral is in the form of real and personal property, cash on deposit or other highly liquid instruments. In certain circumstances, the Corporation obtains real property as security for some loans that are made on the general creditworthiness of the borrower and whose proceeds were not used for real estate-related purposes. The Corporation also manages exposure to a single borrower, industry, product-type or other concentration through syndications of credits, participations, loan sales and securitizations. Through Global Corporate and Investment Banking, the Corporation is a major participant in the syndications market. In a syndicated facility, each participating lender funds only its portion of the syndicated facility, therefore limiting its exposure to the borrower. The Corporation also identifies and reduces its exposure to the funded borrower, product or industry concentrations through loan sales. Generally, these sales are without recourse to the Corporation. In conducting derivatives activities in certain jurisdictions, the Corporation reduces credit risk to any one counterparty through the use of legally enforceable master netting agreements which allow the Corporation to settle positive and negative positions with the same counterparty on a net basis. For more information on the Corporation's off-balance sheet credit risk, see Note Eleven of the consolidated financial statements on page 74. An independent credit review group conducts ongoing reviews of credit activities and portfolios, reexamining on a regular basis risk assessments for credit exposures and overall compliance with policy. Loans and Leases Portfolio - The Corporation's credit exposure is focused in its loans and leases portfolio, which totaled $357.3 billion on December 31, 1998. Table Fifteen presents a distribution of loans and leases by category. 34 Allowance for Credit Losses - The Corporation performs periodic and systematic detailed reviews of its loan and lease portfolios to identify risks inherent in and to assess the overall collectibility of those portfolios. These detailed reviews, combined with historical loss experience, result in the identification and quantification of loss factors which are used in determining the amount of the allowance and related provision for credit losses. Consumer loans and leases, which includes residential mortgages, home equity lines, direct/indirect, consumer finance and foreign consumer loans, are generally evaluated as a group, based on loan type. Remaining loans and leases are evaluated individually due to a general lack of uniformity among individual loans within each loan type and assigned a risk rating. The loss factors are applied to each individual loan based on the particular item's risk ratings or to specific loan groups in order to provide a basis for establishing an adequate level of allowance for credit losses. Portions of the allowance for credit losses, as presented on Table Twelve, are allocated to cover the estimated losses inherent in each loan and lease category based on the results of the Corporation's detail review process. Further allocations are made based on specific existing economic conditions as well as performance trends within specific portfolio segments and individual concentrations of credit. The remaining unallocated portion of the allowance for credit losses is determined based on general economic, performance and credit concentration trends, including geographic concentrations. The nature of the process by which the Corporation determines the appropriate allowance for credit losses requires the exercise of considerable judgment. After review of all relevant matters effecting loan collectibility, management believes that the allowance for credit losses, see Note Twelve of the consolidated financial statements on page 78, is appropriate given its analysis of inherent credit losses on December 31, 1998. The Corporation's allowance for credit losses was $7.1 billion, or 1.99 percent of loans and leases on December 31, 1998, compared to $6.8 billion, or 1.98 percent, on December 31, 1997, with the increase attributable to the establishment of a $500 million reserve in the third quarter of 1998, related to deterioration in certain international economic conditions that arose in the third quarter of 1998. Table Eleven provides an analysis of the changes in the allowance for credit losses. Total net charge-offs increased $615 million in 1998 to $2.5 billion, or .71 percent of average loans and leases, compared to $1.9 billion, or .54 percent, in 1997. The increase was primarily caused by a $372 million write-down of a credit agreement with DE Shaw and higher foreign commercial net charge-offs. The increase was partially offset by lower consumer net charge-offs during 1998. 35 Table Eleven Allowance For Credit Losses (Dollars in Millions)
1998 1997 ------------ ------------- Beginning Balance .............................................. $ 6,778 $ 6,316 -------- --------- Loans and leases charged off Commercial - domestic ........................................ 714 328 Commercial - foreign ......................................... 262 54 Commercial real estate - domestic ............................ 21 59 Commercial real estate - foreign ............................. -- -- -------- --------- Total commercial ........................................... 997 441 Residential mortgage ......................................... 33 50 Home equity lines ............................................ 27 36 Direct/Indirect consumer ..................................... 562 582 Consumer finance ............................................. 561 426 Bankcard ..................................................... 857 1,043 Other consumer - domestic .................................... -- 12 Foreign consumer ............................................. 13 13 -------- --------- Total consumer ............................................. 2,053 2,162 -------- --------- Total loans and leases charged off ........................ 3,050 2,603 -------- --------- Recoveries of loans and leases previously charged off Commercial - domestic ........................................ 97 226 Commercial - foreign ......................................... 20 25 Commercial real estate - domestic ............................ 21 59 Commercial real estate - foreign ............................. -- -- -------- --------- Total commercial ........................................... 138 310 Residential mortgage ......................................... 4 5 Home equity lines ............................................ 10 9 Direct/Indirect consumer ..................................... 157 146 Consumer finance ............................................. 178 155 Bankcard ..................................................... 93 124 Other consumer - domestic .................................... -- -- Foreign consumer ............................................. 3 2 -------- --------- Total consumer ............................................. 445 441 -------- --------- Total recoveries of loans and leases previously charged off .............................................. 583 751 -------- --------- Net charge-offs .............................................. 2,467 1,852 -------- --------- Provision for credit losses ................................... 2,920 1,904 Other, net .................................................... (109) 410 -------- --------- Balance on December 31 ....................................... $ 7,122 $ 6,778 ======== ========= Loans and leases outstanding on December 31 ................... $357,328 $ 342,140 Allowance for credit losses as a percentage of loans and leases outstanding on December 31 ............................ 1.99% 1.98% Average loans and leases outstanding during the year .......... $347,840 $ 343,151 Net charge-offs as a percentage of average loans and leases outstanding during the year .................................. 0.71% 0.54% Ratio of the allowance for credit losses on December 31 to net charge-offs .............................................. 2.89 3.66 Allowance for credit losses as a percentage of nonperforming loans .......................................... 287.01% 321.03% 1996 1995 1994 ------------- ------------- ------------- Beginning Balance .............................................. $ 6,222 $ 6,377 $ 6,199 --------- --------- --------- Loans and leases charged off Commercial - domestic ........................................ 376 329 294 Commercial - foreign ......................................... 29 11 35 Commercial real estate - domestic ............................ 131 105 134 Commercial real estate - foreign ............................. -- 2 6 --------- --------- --------- Total commercial ........................................... 536 447 469 Residential mortgage ......................................... 61 60 60 Home equity lines ............................................ 47 47 44 Direct/Indirect consumer ..................................... 486 374 334 Consumer finance ............................................. 393 241 208 Bankcard ..................................................... 838 648 554 Other consumer - domestic .................................... 5 -- -- Foreign consumer ............................................. 3 2 1 --------- --------- --------- Total consumer ............................................. 1,833 1,372 1,201 --------- --------- --------- Total loans and leases charged off ........................ 2,369 1,819 1,670 --------- --------- --------- Recoveries of loans and leases previously charged off Commercial - domestic ........................................ 194 297 310 Commercial - foreign ......................................... 40 64 117 Commercial real estate - domestic ............................ 50 53 83 Commercial real estate - foreign ............................. 5 7 -- --------- --------- --------- Total commercial ........................................... 289 421 510 Residential mortgage ......................................... 4 3 6 Home equity lines ............................................ 7 7 8 Direct/Indirect consumer ..................................... 137 111 124 Consumer finance ............................................. 156 69 58 Bankcard ..................................................... 108 76 84 Other consumer - domestic .................................... -- -- -- Foreign consumer ............................................. 1 1 1 --------- --------- --------- Total consumer ............................................. 413 267 281 --------- --------- --------- Total recoveries of loans and leases previously charged off .............................................. 702 688 791 --------- --------- --------- Net charge-offs .............................................. 1,667 1,131 879 --------- --------- --------- Provision for credit losses ................................... 1,645 945 798 Other, net .................................................... 116 31 259 --------- --------- --------- Balance on December 31 ....................................... $ 6,316 $ 6,222 $ 6,377 ========= ========= ========= Loans and leases outstanding on December 31 ................... $ 317,709 $ 302,804 $ 273,615 Allowance for credit losses as a percentage of loans and leases outstanding on December 31 ............................ 1.99% 2.05% 2.33% Average loans and leases outstanding during the year .......... $ 312,331 $ 286,770 $ 251,489 Net charge-offs as a percentage of average loans and leases outstanding during the year .................................. 0.53% 0.39% 0.35% Ratio of the allowance for credit losses on December 31 to net charge-offs .............................................. 3.79 5.50 7.25 Allowance for credit losses as a percentage of nonperforming loans .......................................... 287.35% 224.86% 206.91%
36 Table Twelve Allocation of the Allowance for Credit Losses December 31 (Dollars in Millions)
1998 1997 1996 1995 1994 ------------------ ------------------ ------------------ ------------------ ------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- --------- -------- --------- -------- --------- -------- --------- -------- ---------- Commercial - domestic..... $1,540 21.6% $1,580 23.4% $1,436 22.7% $1,306 21.1% $1,184 18.6% Commercial - foreign ..... 1,327 18.6 1,013 14.9 427 6.8 432 6.9 396 6.2 Commercial real estate - domestic ....... 925 13.0 847 12.5 764 12.1 992 15.9 1,218 19.1 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total commercial ........ 3,792 53.2 3,440 50.8 2,627 41.6 2,730 43.9 2,798 43.9 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Residential mortgage ..... 137 1.9 181 2.7 214 3.4 202 3.2 159 2.5 Home equity lines ........ 46 .6 84 1.2 87 1.4 74 1.2 60 .9 Bankcard ................. 501 7.0 790 11.7 671 10.6 709 11.4 568 8.9 Direct/Indirect consumer ................ 527 7.5 608 9.0 618 9.8 604 9.7 462 7.3 Consumer finance ......... 658 9.2 785 11.6 645 10.2 460 7.4 413 6.5 Foreign consumer ......... 26 .4 23 .3 21 .3 17 .3 14 .2 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total consumer .......... 1,895 26.6 2,471 36.5 2,256 35.7 2,066 33.2 1,676 26.3 Unallocated .............. 1,435 20.2 867 12.7 1,433 22.7 1,426 22.9 1,903 29.8 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $7,122 100.0% $6,778 100.0% $6,316 100.0% $6,222 100.0% $6,377 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Nonperforming Assets - As presented in Table Thirteen, nonperforming assets were $2.8 billion, or .77 percent of net loans, leases and foreclosed properties on December 31, 1998, compared to $2.4 billion, or .71 percent, on December 31, 1997. Nonperforming loans were $2.5 billion at the end of 1998 compared to $2.1 billion at the end of 1997. The allowance coverage of nonperforming loans was 287 percent on December 31, 1998 compared to 321 percent at the end of 1997. Internal loan workout units are devoted to the management and/or collection of certain nonperforming assets as well as certain performing loans. Management believes concerted collection strategies and a proactive approach to managing overall credit risk have expedited the disposition, collection and renegotiation of nonperforming and other lower-quality assets. As part of this process, management routinely evaluates all reasonable alternatives, including the sale of assets individually or in groups, and selects the optimal strategy. At December 31, 1998 and 1997 residential mortgage loans comprised 26 percent and 31 percent, respectively, of total nonperforming assets. Due to the nature of the collateral securing residential mortgage loans and a history of low losses, the Corporation considers these loans to be low risk nonperforming assets. Foreclosed properties decreased to $282 million on December 31, 1998 compared to $309 million on December 31, 1997. 37 Table Thirteen Nonperforming Assets December 31 (Dollars in Millions)
1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Nonperforming loans Commercial - domestic ....................... $ 812 $ 563 $ 713 $ 914 $ 966 Commercial - foreign ........................ 314 155 110 121 179 Commercial real estate - domestic ........... 299 342 491 1,027 1,304 Commercial real estate - foreign ............ 4 2 2 22 38 ------- ------- ------- ------- ------- Total commercial ........................... 1,429 1,062 1,316 2,084 2,487 ------- ------- ------- ------- ------- Residential mortgage ........................ 722 744 676 464 437 Home equity lines ........................... 50 52 36 42 28 Direct/Indirect consumer .................... 21 43 53 57 60 Consumer finance ............................ 246 210 116 118 69 Foreign consumer ............................ 14 -- 1 2 1 ------- ------- ------- ------- ------- Total consumer ............................. 1,053 1,049 882 683 595 ------- ------- ------- ------- ------- Total nonperforming loans .................. 2,482 2,111 2,198 2,767 3,082 Foreclosed properties ......................... 282 309 511 675 981 ------- ------- ------- ------- ------- Total nonperforming assets ................. $ 2,764 $ 2,420 $ 2,709 $ 3,442 $ 4,063 ======= ======= ======= ======= ======= Nonperforming assets as a percentage of Total assets ................................ .45% .42% .57% .75% .95% Loans, leases and foreclosed properties ..... .77 .71 .85 1.14 1.49
The loss of income associated with nonperforming loans on December 31 and the cost of carrying foreclosed properties were:
1998 1997 1996 1995 1994 --------- --------- --------- --------- ------- Income that would have been recorded in accordance with original terms ................................. $ 367 $ 349 $ 388 $ 457 $ 268 Less income actually recorded ........................ (130) (130) (130) (135) (98) ------ ------ ------ ------ ----- Loss of income ....................................... $ 237 $ 219 $ 258 $ 322 $ 170 ====== ====== ====== ====== ===== Cost of carrying foreclosed properties ............... $ 16 $ 26 $ 35 $ 51 $ 60 ====== ====== ====== ====== =====
On December 31, 1998, there were no material commitments to lend additional funds with respect to nonperforming loans. Loans Past Due 90 Days or More - Table Fourteen presents total loans past due 90 days or more and still accruing interest. On December 31, 1998, loans past due 90 days or more and still accruing interest were $611 million, or .17 percent of loans and leases, compared to $613 million, or .18 percent, on December 31, 1997. 38 Table Fourteen Loans Past Due 90 Days or More and Still Accruing Interest (Dollars in Millions)
December 31, 1998 December 31, 1997 ---------------------- --------------------- Amount Percent (1) Amount Percent (1) -------- ------------- -------- ------------ Commercial - domestic ..................... $135 .10% $ 52 .04% Commercial - foreign ...................... 23 .07 3 .01 Commercial real estate - domestic ......... 12 .04 17 .06 ---- ---- ---- ---- Total commercial ......................... 170 .09 72 .04 ---- ---- ---- ---- Residential mortgage ...................... 31 .04 87 .12 Home equity lines ......................... -- -- 3 .02 Direct/Indirect consumer .................. 174 .43 116 .29 Consumer finance .......................... 16 .10 34 .23 Bankcard .................................. 214 1.72 301 2.01 Foreign consumer .......................... 6 .17 -- -- ---- ---- ---- ---- Total consumer ........................... 441 .27 541 .34 ---- ---- ---- ---- Total .................................. $611 .17% $613 .18% ==== ==== ==== ====
(1) Represents amounts past due 90 days or more and still accruing interest as a percentage of net loans and leases for each respective category. 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 as outlined in Tables Seventeen and Eighteen. Table Fifteen presents the distribution of loans and leases by category. Table Fifteen Distribution of Loans and Leases December 31 (Dollars in Millions)
1998 1997 --------------------- --------------------- Amount Percent Amount Percent ----------- --------- ----------- --------- Commercial - domestic ............. $137,422 38.5% $122,463 35.8% Commercial - foreign .............. 31,495 8.8 30,080 8.8 Commercial R/E - domestic ......... 26,912 7.5 28,567 8.3 Commercial R/E - foreign .......... 301 .1 324 .1 -------- ----- -------- ----- Total commercial ................. 196,130 54.9 181,434 53.0 -------- ----- -------- ----- Residential mortgage .............. 73,608 20.6 71,540 20.9 Home equity lines ................. 15,653 4.4 16,536 4.8 Direct/Indirect consumer .......... 40,510 11.3 40,058 11.7 Consumer finance .................. 15,400 4.3 14,566 4.3 Bankcard .......................... 12,425 3.5 14,908 4.4 Foreign consumer .................. 3,602 1.0 3,098 .9 -------- ----- -------- ----- Total consumer ................... 161,198 45.1 160,706 47.0 -------- ----- -------- ----- Total loans and leases .......... $357,328 100.0% $342,140 100.0% ======== ===== ======== ===== 1996 1995 1994 --------------------- -------------------- --------------------- Amount Percent Amount Percent Amount Percent ----------- --------- ---------- --------- ---------- ---------- Commercial - domestic ............. $105,737 33.3% $ 99,922 33.1% $ 91,740 33.5% Commercial - foreign .............. 26,781 8.4 23,395 7.7 20,180 7.4 Commercial R/E - domestic ......... 25,881 8.1 26,381 8.7 27,530 10.1 Commercial R/E - foreign .......... 239 .1 361 .1 394 .1 -------- ----- -------- ----- -------- ----- Total commercial ................. 158,638 49.9 150,059 49.6 139,844 51.1 -------- ----- -------- ----- -------- ----- Residential mortgage .............. 80,400 25.3 77,078 25.5 68,474 25.0 Home equity lines ................. 12,541 3.9 11,143 3.7 9,958 3.6 Direct/Indirect consumer .......... 33,352 10.6 34,071 11.1 31,924 11.8 Consumer finance .................. 13,081 4.1 10,375 3.4 6,948 2.5 Bankcard .......................... 16,561 5.2 17,455 5.8 14,148 5.2 Foreign consumer .................. 3,136 1.0 2,623 .9 2,319 .8 -------- ----- -------- ----- -------- ----- Total consumer ................... 159,071 50.1 152,745 50.4 133,771 48.9 -------- ----- -------- ----- -------- ----- Total loans and leases .......... $317,709 100.0% $302,804 100.0% $273,615 100.0% ======== ===== ======== ===== ======== =====
The following section discusses credit risk in the loan portfolio, including net charge-offs by loan categories as presented in Table Sixteen. 39 Table Sixteen Net Charge-offs in Dollars and as a Percentage of Average Loans Outstanding (Dollars in Millions)
1998 1997 ------------------- ------------------- Commercial - domestic ................ $ 617 .47% $ 102 .09% Commercial - foreign ................. 242 .78 29 .10 Commercial real estate - domestic..... -- -- -- -- Commercial real estate - foreign ..... -- -- -- -- ------ ---- ------ ---- Total commercial .................... 859 .45 131 .07 ------ ---- ------ ---- Residential mortgage ................. 29 .04 45 .06 Home equity lines .................... 17 .11 27 .18 Direct/Indirect consumer ............. 405 1.01 436 1.11 Consumer finance ..................... 383 2.67 271 1.96 Bankcard ............................. 764 6.03 919 5.90 Other consumer - domestic ............ -- -- 12 -- Foreign consumer ..................... 10 .31 11 .32 ------ ---- ------ ---- Total consumer ...................... 1,608 1.02 1,721 1.03 ------ ---- ------ ---- Total net charge-offs ............... $2,467 .71 $1,852 .54 ====== ==== ====== ==== Managed credit cards net charge-offs and ratios(1) ........... $1,284 6.27% $1,254 6.19% 1996 1995 1994 ---------------------- ---------------------- ------------------- Commercial - domestic ................ $ 182 .18% $ 32 .03% $ (16) n/m% Commercial - foreign ................. (11) n/m (53) n/m (82) n/m Commercial real estate - domestic..... 81 .31 52 .19 51 .20 Commercial real estate - foreign ..... (5) n/m (5) n/m 6 .40 -------- ---- -------- ---- ----- ----- Total commercial .................... 247 .16 26 .02 (41) n/m ------- ---- ------- ---- ----- ----- Residential mortgage ................. 57 .07 57 .08 54 .10 Home equity lines .................... 40 .34 40 .39 36 .26 Direct/Indirect consumer ............. 349 1.01 263 .79 210 .78 Consumer finance ..................... 237 1.98 172 1.98 150 1.23 Bankcard ............................. 730 4.47 572 3.88 470 3.79 Other consumer - domestic ............ 5 -- -- -- -- -- Foreign consumer ..................... 2 .10 1 .04 -- -- ------- ---- ------- ---- ----- ----- Total consumer ...................... 1,420 .89 1,105 .77 920 .75 ------- ---- ------- ---- ----- ----- Total net charge-offs ............... $1,667 .53 $1,131 .39 $ 879 .35 ======= ==== ======= ==== ===== ===== Managed credit cards net charge-offs and ratios(1) ........... $ 888 4.67% $ 651 4.10% $ 549 4.05%
n/m =not meaningful (1) Includes both on-balance sheet and securitized loans. Net charge-offs for each loan type are calculated as a percentage of average outstanding or managed loans for each loan category. Total net charge-offs are calculated based on total average outstanding loans and leases. Commercial Real Estate - Total commercial real estate - domestic loans, the portion of such loans which are nonperforming, and other real estate credit exposures are presented in Table Seventeen. 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 commercial real estate - domestic loans totaled $26.9 billion, or 8 percent of loans and leases, on December 31, 1998 compared to $28.6 billion, or 8 percent, at the end of 1997 with the decrease due to the Corporation's efforts to lower its exposure to this line of business. Commercial real estate - - domestic loans past due 90 days or more and still accruing interest were $12 million, or .04 percent of total domestic real estate loans, on December 31, 1998 compared to $17 million, or .06 percent, on December 31, 1997. The exposures included in Table Seventeen do not include credit extensions which were made on the general creditworthiness of the borrower for which real estate was obtained as security and for which the ultimate repayment of the credit is not dependent on the sale, lease, rental or refinancing of the real estate. Accordingly, the exposures presented do not include commercial loans secured by owner-occupied real estate, except where the borrower is a real estate developer. In addition to the amounts presented in the tables, on December 31, 1998, the Corporation had approximately $15.1 billion of commercial loans which were not real estate dependent but for which the Corporation had obtained real estate as secondary repayment security. Commercial - Commercial - domestic loan outstandings totaled $137.4 billion and $122.4 billion on December 31, 1998 and 1997, respectively, or 39 percent and 36 percent of loans and leases, respectively. This increase was due primarily to core loan growth. The Corporation had commercial - domestic loan net charge-offs in 1998 of $617 million, or .47 percent of average commercial - domestic loans, compared to $102 million, or .09 percent of average commercial - - domestic loans, in 1997. Excluding a $372 million charge-off for a credit to DE Shaw, a trading and investment firm, commercial - domestic loan net charge-offs were $245 million, or .19 percent of average commercial - domestic loans, in 1998. Commercial - domestic loans past due 90 days or more and still accruing interest were $135 million, or .10 percent of commercial - domestic loans, on December 31, 1998 compared to $52 million, or .04 percent, on December 31, 1997. Nonperforming commercial - domestic loans were $812 million, or .59 percent of commercial - domestic loans, on December 31, 1998, compared to $563 million, or .46 percent, on December 31, 1997. Table Eighteen presents significant industry commercial loans and lease financings. 40 Table Seventeen Real Estate Commercial Loans, Foreclosed Properties and Other Real Estate Credit Exposures December 31, 1998 (Dollars in Millions)
Loans Other ----------------------------- Foreclosed Credit Outstanding Nonperforming Properties (1) Exposures (2) ------------- --------------- --------------- -------------- By Geographic Region (3): California ........................ $ 6,714 $ 28 $ 59 $1,747 Southwest ......................... 3,795 25 12 627 Northwest ......................... 2,849 47 -- 611 Midwest ........................... 2,784 33 6 299 Midatlantic ....................... 2,620 39 9 397 Florida ........................... 1,740 64 13 437 Midsouth .......................... 1,307 14 3 277 Carolinas ......................... 1,185 23 8 1,395 Other states ...................... 3,918 26 31 472 Non-US ............................ 301 4 -- -- ------- ---- ---- ------ $27,213 $303 $141 $6,262 ======= ==== ==== ====== By Property Type: Apartments ........................ $ 5,063 $ 18 $ 2 $1,136 Office buildings .................. 4,890 29 11 478 Shopping centers/retail ........... 3,521 62 16 903 Industrial/warehouse .............. 2,640 28 5 335 Residential ....................... 2,596 22 5 355 Hotels/motels ..................... 1,542 19 8 311 Land and land development ......... 1,236 33 67 281 Multiple use ...................... 843 4 1 159 Unsecured ......................... 690 3 -- 62 Miscellaneous commercial .......... 649 14 12 111 Non-US ............................ 301 4 -- -- Resorts/golf courses .............. 134 2 -- 9 Other ............................. 3,108 65 14 2,122 ------- ---- ---- ------ $27,213 $303 $141 $6,262 ======= ==== ==== ======
(1) Foreclosed properties include commercial real estate loans only. (2) Other credit exposures include primarily letters of credit and loans held for sale. (3) Distribution based on geographic location of collateral. Commercial-foreign loan outstandings totaled $31.5 billion and $30.1 billion on December 31, 1998 and 1997, respectively, or 9 percent of loans and leases for each year. The Corporation had commercial-foreign loan net charge-offs in 1998 of $242 million, or .78 percent of average commercial-foreign loans, compared to $29 million, or .10 percent of the average commercial-foreign loans in 1997. The increase in commercial-foreign loan net charge-offs is attributed to charge-offs in Asia, Latin America, and Eastern Europe. Commercial-foreign loans past due 90 days or more and still accruing interest were $23 million, or .07 percent of commercial-foreign loans, on December 31, 1998 compared to $3 million, or .01 percent, on December 31, 1997. Nonperforming commercial-foreign loans were $314 million, or 1.00 percent of commercial-foreign loans, on December 31, 1998, compared to $155 million, or .52 percent, on December 31, 1997. For additional information see Recent International Developments on page 42. 41 Table Eighteen Significant Industry Loans and Leases(1) December 31, 1998 (Dollars in Millions)
Outstanding ------------ Oil and gas ........................ $10,203 Transportation ..................... 9,903 Media .............................. 8,484 Agribusiness ....................... 8,321 Equipment and general manufacturing 8,052 Health care ........................ 7,795 Retail ............................. 7,396 Business services .................. 6,967 Autos .............................. 6,943 Metals and mining .................. 5,260
(1) Includes only non-real estate commercial loans and leases. Consumer - On December 31, 1998 and 1997, total domestic consumer loan outstandings totaled $157.6 billion, or 44 percent of loans and leases and $157.6 billion or 46 percent of loans and leases, respectively. Total domestic consumer net charge-offs during 1998 decreased $112 million due mainly to lower bankcard net charge-offs, partially offset by higher consumer finance net charge-offs. Average residential mortgage loans decreased to $70.8 billion compared to $80.6 billion in 1997, reflecting loan sales and the impact of approximately $5.1 billion of mortgage loan securitizations in 1998 and $9.6 billion of mortgage loan securitizations in 1997. Average managed bankcard receivables (excluding private label bankcards) increased to $20.5 billion on December 31, 1998 compared to $20.2 billion at the end of 1997. This increase was partially offset by $2.0 billion of securitizations in 1998. Average other consumer loans increased to $70.7 billion in 1998 compared to $67.9 billion in 1997. The increase was net of the impact of approximately $3.4 billion of securitizations that occurred throughout 1997 and $4.5 billion of securitizations in 1998. Average managed other consumer loans increased to $80.5 billion on December 31, 1998 compared to $73.4 billion at the end of 1997. Total consumer loans past due 90 days or more and still accruing interest were $441 million, or .27 percent of total consumer loans, on December 31, 1998 compared to $541 million, or .34 percent, at the end of 1997. Total consumer nonperforming loans were $1.1 billion, or .65 percent of total consumer loans, on December 31, 1998 compared to $1.0 billion, or .65 percent, on December 31, 1997. Recent International Developments - During 1998, and continuing into 1999, a number of countries in Asia, Latin America and Eastern Europe experienced economic difficulties due to a combination of structural problems and negative market reaction that resulted from increased awareness of these problems. While each country's situation is unique, many share common factors: (1) government actions which restrain normal functioning of free markets in physical goods, capital and/or currencies; (2) perceived weaknesses of the banking systems; and (3) perceived overvaluation of local currencies. In addition, since these factors have resulted in capital movement out of the countries or in reduced capital inflows, many of these countries are experiencing liquidity problems in addition to the structural problems. Where appropriate, the Corporation has adjusted its activities (including its borrower selection) in light of the risks and opportunities discussed above, and has increased its foreign credit reserves related to those risks. The Corporation also has reduced its exposures in Asia, Latin America and Central and Eastern Europe during 1998. The Corporation will continue to monitor and adjust its foreign activities on a country by country basis depending on management's judgment of the likely developments in each country and will take action as deemed appropriate. For a more comprehensive discussion of the Corporation's risk management processes, refer to pages 29 to 35. 42 Exposure Exceeding One Percent of Total Assets(1,2)
Exposure Public Private Total as a Percentage (Dollars in Millions) December 31 Sector(2) Banks(2) Sector(2) Exposure of Total Assets - ----------------------- ------------- ----------- ---------- ----------- ---------- ---------------- Japan 1998 $2,452 $1,519 $1,090 $5,061 .82% 1997 2,485 1,555 2,930 6,970 1.13 1996 1,240 2,030 2,846 6,116 .99
(1) Exposure includes the following assets, primarily in U.S. dollars, with borrowers or customers in a foreign country: loans, accrued interest, acceptances, interest-bearing deposits in banks, trading account assets, securities available for sale and held for investment, other interest-earning investments, and other monetary assets. Amounts also include unrealized gains on off-balance-sheet instruments, unused commitments, standby letters of credit, commercial letters of credit, formal guarantees, and securities avilable for sale and held for investment. (2) Sector definitions are based on Federal Financial Institutions Examination Council instructions for preparing the Country Exposure Report. Regional Foreign Exposure - Through its credit and market risk management activities, the Corporation has been devoting special attention to those countries that have been negatively impacted by increasing global economic pressure. This includes special attention to those Asian countries that are currently experiencing currency and other economic problems, as well as Latin America and Eastern Europe which are also experiencing similar problems. In connection with its efforts to maintain a diversified portfolio, the Corporation limits its exposure to any one geographic region or country and monitors this exposure on a continuous basis. Table Nineteen sets forth selected regional exposure as of December 31, 1998. Exposure represents loans, securities, including restructured debt, and other monetary assets, and also includes local currency monetary assets that have been funded through local currency borrowings. 43 The following table is based on the Federal Financial Institutions Examination Council's instructions for periodic reporting of foreign exposures. The table has been expanded to include "Gross Local Currency Claims" as defined per the footnotes. As a result of this addition, the table may not be consistent with disclosures by others. Table Nineteen Regional Foreign Exposure (Dollars in Millions)
Increase Total Gross Other Total Total (Decrease) Cross- Local Cross- Exposure Exposure from Border Country Border December 31, December 31, December 31, Loans Claims (1) Claims (2) 1998 1997 1997 Region/Country -------- ------------ ------------ -------------- -------------- ------------- Asia China ........................ $ 117 $ 142 $ 190 $ 449 $ 765 $ (316) Hong Kong .................... 54 4,776 358 5,188 5,631 (443) India ........................ 453 1,937 128 2,518 2,499 19 Indonesia .................... 352 185 186 723 1,510 (787) Japan ........................ 198 1,826 3,037 5,061 6,970 (1,909) Korea (South) ................ 561 308 1,010 1,879 3,804 (1,925) Malaysia ..................... 4 670 54 728 1,254 (526) Pakistan ..................... 8 335 9 352 550 (198) Philippines .................. 257 155 171 583 763 (180) Singapore .................... 171 1,554 281 2,006 2,412 (406) Taiwan ....................... 370 1,787 133 2,290 2,438 (148) Thailand ..................... 96 735 119 950 1,957 (1,007) Other ........................ 7 130 16 153 106 47 ------ ------- ------- ------- ------- --------- 2,648 14,540 5,692 22,880 30,659 (7,779) ------ ------- ------- ------- ------- --------- Central and Eastern Europe Russian Federation ........... 43 -- 17 60 447 (387) Other ........................ 338 72 294 704 698 6 ------ ------- ------- ------- ------- --------- 381 72 311 764 1,145 (381) ------ ------- ------- ------- ------- --------- Latin America Argentina .................... 574 461 232 1,267 1,643 (376) Brazil ....................... 1,501 586 1,331 3,418 3,630 (212) Chile ........................ 741 770 140 1,651 1,680 (29) Colombia ..................... 510 90 198 798 785 13 Mexico ....................... 2,469 391 2,078 4,938 6,112 (1,174) Venezuela .................... 137 39 381 557 623 (66) Other ........................ 269 -- 161 430 443 (13) ------ ------- ------- ------- ------- --------- 6,201 2,337 4,521 13,059 14,916 (1,857) ------ ------- ------- ------- ------- --------- Total ....................... $9,230 $16,949 $10,524 $36,703 $46,720 $ (10,017) ====== ======= ======= ======= ======= =========
(1) Includes the following claims by the Corporation's foreign offices: trading account securities, derivative products, unused commitments, standby letters of credit, commercial letters of credit, formal guarantees, and securities available for sale and held for investment regardless of the currency. (2) Includes: accrued interest receivable, acceptances, interest-bearing deposits in banks, trading account securities, securities under agreement to resell, other interest-earning investments, other short-term monetary assets, unrealized gains on off-balance-sheet instruments, unused commitments, standby letters of credit, commercial letters of credit, formal guarantees, and securities available for sale and held for investment, including securities that are collateralized by U.S. Treasury securities as follows: Mexico - $1,037, Venezuela - $253, Philippines - $18, and Latin America Other - $85. Held for investment securities amounted to $960 with a fair value of $921. Prior period has been restated for comparison. 44 Table Twenty Selected Quarterly Operating Results (Dollars in Millions, Except Per-Share Information)
1998 Quarters --------------------------------------------------- Fourth Third Second First ------------ ------------ ------------ ------------ Interest income ...................................... $ 9,638 $ 9,608 $ 9,637 $ 9,705 Interest expense ..................................... 5,029 5,164 5,011 5,086 Net interest income (taxable-equivalent) ............. 4,650 4,484 4,668 4,659 Net interest income .................................. 4,609 4,444 4,626 4,619 Provision for credit losses .......................... 510 1,405 495 510 Gains on sales of securities ......................... 404 280 120 213 Noninterest income ................................... 2,655 2,405 3,636 3,493 Merger-related charges, net .......................... 600 725 (430) 900 Other noninterest expense ............................ 4,687 4,583 4,767 4,704 Income before taxes .................................. 1,871 416 3,550 2,211 Income tax expense ................................... 709 42 1,252 880 Net income ........................................... 1,162 374 2,298 1,331 Net income (excluding merger-related charges) ........ 1,603 893 2,021 1,973 Earnings per common share ............................ .67 .21 1.32 .77 Earnings per common share (excluding merger-related charges) ............................. .92 .51 1.16 1.14 Diluted earnings per common share .................... .66 .21 1.28 .75 Diluted earnings per common share (excluding merger-related charges) ............................. .91 .50 1.13 1.11 Dividends per common share ........................... .45 .38 .38 .38 Yield on average earning assets ...................... 7.44% 7.73% 7.89% 7.98% Rate on average interest-bearing liabilities ......... 4.60 4.94 4.90 4.93 Net interest spread .................................. 2.84 2.79 2.99 3.05 Net interest yield ................................... 3.58 3.60 3.80 3.83 Average total assets ................................. $606,541 $578,353 $ 573,975 $ 578,841 Average total deposits ............................... 351,766 347,783 342,369 339,867 Average total shareholders' equity ................... 45,051 45,756 44,857 43,628 Return on average assets ............................. .76 .26 1.61 .93 Return on average assets (excluding merger-related charges) ............................. 1.05 .61 1.41 1.38 Return on average common shareholders' equity (1) .......................................... 10.23 3.23 20.76 12.46 Return on average common shareholders' equity (excluding merger-related charges) (1) .............. 14.12 7.73 18.24 18.52 Cash basis financial data (2) Earnings per common share ........................... $ .80 $ .34 $ 1.45 $ .90 Earnings per common share (excluding merger-related charges) ............................ 1.05 .64 1.29 1.27 Diluted earnings per common share ................... .79 .34 1.41 .87 Diluted earnings per common share (excluding merger-related charges) ............................ 1.04 .63 1.25 1.24 Return on average tangible assets ................... .93% .42% 1.81% 1.12% Return on average tangible assets (excluding merger-related charges) ............................ 1.22 .79 1.61 1.59 Return on average tangible common shareholders' equity (1) ........................... 18.18 7.76 35.10 23.02 Return on average tangible common shareholders' equity (excluding merger-related charges) (1) ........................ 23.97 14.51 31.23 32.57 Tier 1 capital ratio (3) ............................. 7.06% 7.29% 7.32% 6.80% Total capital ratio (3) .............................. 10.94 11.25 11.77 11.19 Market price per share of common stock High for the period ................................. $ 66 5/8 $88 7/16 $ 85 $ 75 1/8 Low for the period .................................. 44 47 7/8 72 1/16 56 1/4 Closing price ....................................... 60 1/8 53 1/2 76 11/16 72 15/16 1997 Quarters -------------------------------------------------- Fourth Third Second First ------------ ------------ ------------ ----------- Interest income ...................................... $ 9,534 $ 9,443 $ 9,298 $ 9,058 Interest expense ..................................... 4,976 4,808 4,648 4,469 Net interest income (taxable-equivalent) ............. 4,598 4,676 4,689 4,626 Net interest income .................................. 4,558 4,635 4,650 4,589 Provision for credit losses .......................... 498 489 476 441 Gains on sales of securities ......................... 111 54 42 64 Noninterest income ................................... 3,225 3,078 2,796 2,657 Merger-related charges, net .......................... 302 72 -- -- Other noninterest expense ............................ 4,736 4,419 4,240 4,230 Income before taxes .................................. 2,358 2,787 2,772 2,639 Income tax expense ................................... 899 1,057 1,055 1,003 Net income ........................................... 1,459 1,730 1,718 1,635 Net income (excluding merger-related charges) ........ 1,679 1,774 1,718 1,635 Earnings per common share ............................ .84 .99 .97 .91 Earnings per common share (excluding merger-related charges) ............................. .96 1.02 .97 .91 Diluted earnings per common share .................... .81 .96 .94 .89 Diluted earnings per common share (excluding merger-related charges) ............................. .94 .99 .94 .89 Dividends per common share ........................... .38 .33 .33 .33 Yield on average earning assets ...................... 8.02% 8.11% 8.10% 8.02% Rate on average interest-bearing liabilities ......... 4.97 4.90 4.79 4.69 Net interest spread .................................. 3.05 3.21 3.31 3.33 Net interest yield ................................... 3.85 4.00 4.07 4.09 Average total assets ................................. $ 556,595 $ 543,030 $539,433 $535,905 Average total deposits ............................... 338,331 336,418 337,384 335,370 Average total shareholders' equity ................... 43,807 43,241 43,585 43,810 Return on average assets ............................. 1.04 1.26 1.28 1.24 Return on average assets (excluding merger-related charges) ............................. 1.20 1.30 1.28 1.24 Return on average common shareholders' equity (1) .......................................... 13.33 16.13 16.14 15.48 Return on average common shareholders' equity (excluding merger-related charges) (1) .............. 15.36 16.55 16.14 15.48 Cash basis financial data (2) Earnings per common share ........................... $ .97 $ 1.11 $ 1.09 $ 1.03 Earnings per common share (excluding merger-related charges) ............................ 1.09 1.14 1.09 1.03 Diluted earnings per common share ................... .94 1.08 1.06 1.00 Diluted earnings per common share (excluding merger-related charges) ............................ 1.06 1.11 1.06 1.00 Return on average tangible assets ................... 1.23% 1.46% 1.48% 1.43% Return on average tangible assets (excluding merger-related charges) ............................ 1.40 1.49 1.48 1.43 Return on average tangible common shareholders' equity (1) ........................... 24.38 28.08 28.40 26.38 Return on average tangible common shareholders' equity (excluding merger-related charges) (1) ........................ 27.59 28.73 28.40 26.38 Tier 1 capital ratio (3) ............................. 6.50% 7.00% 6.83% 7.06% Total capital ratio (3) .............................. 10.89 11.56 11.32 11.58 Market price per share of common stock High for the period ................................. $ 66 3/8 $71 11/16 $ 70 $ 65 Low for the period .................................. 55 56 5/8 54 48 Closing price ....................................... 60 13/16 61 7/8 64 9/16 55 1/2
(1) Average common shareholders' equity does not include the effect of market value adjustments to securities available for sale and marketable equity securities. (2) Cash basis calculations exclude intangible assets and the related amortization expense. (3) Ratios for the first and second quarters of 1998 are NationsBank ratios, and have not been restated to reflect the impact of the BankAmerica merger. Ratios for 1997 are NationsBank ratios, and have not been restated to reflect the BankAmerica and Barnett mergers. 45 Table Twenty-One Quarterly Taxable-Equivalent Data (Dollars in Millions)
Fourth Quarter 1998 ------------------------------- Average Balance Income Sheet or Yields/ Amounts Expense Rates ----------- --------- --------- Earning assets Loans and leases (1) Commercial - domestic .................................................... $136,629 $2,542 7.39% Commercial - foreign ..................................................... 32,893 569 6.86 Commercial real estate - domestic ........................................ 28,427 601 8.38 Commercial real estate - foreign ......................................... 319 8 9.39 -------- ------ ----- Total commercial ........................................................ 198,268 3,720 7.45 -------- ------ ----- Residential mortgage ..................................................... 73,033 1,336 7.30 Home equity lines ........................................................ 15,781 326 8.17 Direct/Indirect consumer ................................................. 40,557 876 8.57 Consumer finance ......................................................... 14,368 338 9.33 Bankcard ................................................................. 12,078 366 12.01 Foreign consumer ......................................................... 3,551 94 10.47 -------- ------ ----- Total consumer .......................................................... 159,368 3,336 8.32 -------- ------ ----- Total loans and leases ................................................. 357,636 7,056 7.84 -------- ------ ----- Securities Held for investment ...................................................... 2,948 44 6.09 Available for sale (2) ................................................... 69,354 1,162 6.68 -------- ------ ----- Total securities ........................................................ 72,302 1,206 6.66 -------- ------ ----- Federal funds sold and securities purchased under agreements to resell..... 29,564 486 6.53 Time deposits placed and other short-term investments ..................... 6,702 111 6.56 Trading account securities ................................................ 39,391 613 6.19 Other earning assets ...................................................... 11,471 207 7.19 -------- ------ ----- Total earning assets (3) ................................................ 517,066 9,679 7.44 -------- ------ ----- Cash and cash equivalents .................................................. 25,834 Other assets, less allowance for credit losses ............................. 63,641 -------- Total assets ............................................................ $606,541 ======== Interest-bearing liabilities Domestic interest-bearing deposits Savings .................................................................. $ 21,702 91 1.67 NOW and money market deposit accounts .................................... 97,589 622 2.53 Consumer CDs and IRAs .................................................... 74,923 956 5.06 Negotiated CDs, public funds and other time deposits ..................... 7,388 96 5.16 -------- ------ ----- Total domestic interest-bearing deposits ................................ 201,602 1,765 3.47 -------- ------ ----- Foreign interest-bearing deposits (4) Banks located in foreign countries ....................................... 24,938 325 5.17 Governments and official institutions .................................... 10,278 143 5.54 Time, savings, and other ................................................. 26,868 365 5.39 -------- ------ ----- Total foreign interest-bearing deposits ................................. 62,084 833 5.32 -------- ------ ----- Total interest-bearing deposits ......................................... 263,686 2,598 3.91 -------- ------ ----- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings ............................... 104,416 1,422 5.40 Trading account liabilities ............................................... 14,194 165 4.62 Long-term debt (5) ........................................................ 51,779 844 6.52 -------- ------ ----- Total interest-bearing liabilities (6) .................................. 434,075 5,029 4.60 -------- ------ ----- Noninterest-bearing sources Noninterest-bearing deposits .............................................. 88,080 Other liabilities ......................................................... 39,335 Shareholders' equity ...................................................... 45,051 -------- Total liabilities and shareholders' equity .............................. $606,541 ======== Net interest spread ........................................................ 2.84 Impact of noninterest-bearing sources ...................................... .74 ----- Net interest income/yield on earning assets ................................ $4,650 3.58% ====== ===== Third Quarter 1998 -------------------------------- Average Balance Income Sheet or Yields/ Amounts Expense Rates ----------- --------- ---------- Earning assets Loans and leases (1) Commercial - domestic .................................................... $132,537 $2,538 7.59% Commercial - foreign ..................................................... 31,245 578 7.35 Commercial real estate - domestic ........................................ 28,027 610 8.64 Commercial real estate - foreign ......................................... 338 8 10.51 -------- ------ ----- Total commercial ........................................................ 192,147 3,734 7.71 -------- ------ ----- Residential mortgage ..................................................... 70,619 1,155 6.53 Home equity lines ........................................................ 16,024 485 12.03 Direct/Indirect consumer ................................................. 39,582 854 8.56 Consumer finance ......................................................... 14,197 385 10.76 Bankcard ................................................................. 12,751 399 12.43 Foreign consumer ......................................................... 3,465 93 10.57 -------- ------ ----- Total consumer .......................................................... 156,638 3,371 8.56 -------- ------ ----- Total loans and leases ................................................. 348,785 7,105 8.09 -------- ------ ----- Securities Held for investment ...................................................... 4,286 76 6.99 Available for sale (2) ................................................... 61,250 1,046 6.82 -------- ------ ----- Total securities ........................................................ 65,536 1,122 6.83 -------- ------ ----- Federal funds sold and securities purchased under agreements to resell..... 27,646 492 7.06 Time deposits placed and other short-term investments ..................... 7,483 138 7.31 Trading account securities ................................................ 35,487 587 6.59 Other earning assets ...................................................... 10,974 204 7.42 -------- ------ ----- Total earning assets (3) ................................................ 495,911 9,648 7.73 -------- ------ ----- Cash and cash equivalents .................................................. 24,160 Other assets, less allowance for credit losses ............................. 58,282 -------- Total assets ............................................................ $578,353 ======== Interest-bearing liabilities Domestic interest-bearing deposits Savings .................................................................. $ 22,775 107 1.87 NOW and money market deposit accounts .................................... 95,276 634 2.64 Consumer CDs and IRAs .................................................... 74,313 984 5.25 Negotiated CDs, public funds and other time deposits ..................... 8,696 120 5.45 -------- ------ ----- Total domestic interest-bearing deposits ................................ 201,060 1,845 3.64 -------- ------ ----- Foreign interest-bearing deposits (4) Banks located in foreign countries ....................................... 27,892 418 5.95 Governments and official institutions .................................... 11,084 156 5.59 Time, savings, and other ................................................. 24,086 411 6.77 -------- ------ ----- Total foreign interest-bearing deposits ................................. 63,062 985 6.20 -------- ------ ----- Total interest-bearing deposits ......................................... 264,122 2,830 4.25 -------- ------ ----- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings ............................... 84,283 1,278 6.02 Trading account liabilities ............................................... 15,454 194 4.97 Long-term debt (5) ........................................................ 51,365 862 6.71 -------- ------ ----- Total interest-bearing liabilities (6) .................................. 415,224 5,164 4.94 -------- ------ ----- Noninterest-bearing sources Noninterest-bearing deposits .............................................. 83,661 Other liabilities ......................................................... 33,712 Shareholders' equity ...................................................... 45,756 -------- Total liabilities and shareholders' equity .............................. $578,353 ======== Net interest spread ........................................................ 2.79 Impact of noninterest-bearing sources ...................................... .81 ----- Net interest income/yield on earning assets ................................ $4,484 3.60% ====== =====
(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) Interest income includes taxable-equivalent adjustments of $41, $40, $42 and $40 in the fourth, third, second and first quarters of 1998 and $40 in the fourth quarter of 1997, respectively. Interest income also includes the impact of risk management interest rate contracts, which increased interest income on the underlying linked assets $70, $46, $29 and $29 in the fourth, third, second and first quarters of 1998 and $51 in the fourth quarter of 1997, respectively. (4) Primarily consists of time deposits in denominations of $100,000 or more. (5) Long-term debt includes trust preferred securities. (6) Interest expense includes the impact of risk management interest rate contracts, which decreased interest expense on the underlying linked liabilities of $27, $9, $4 and $5 in the fourth, third, second and first quarters of 1998 and $22 in the fourth quarter of 1997, respectively. 46
Second Quarter 1998 First Quarter 1998 Fourth Quarter 1997 - ----------------------------------- ----------------------------------- ------------------------------------ Average Average Average Balance Income Balance Income Balance Income Sheet or Yields/ Sheet or Yields/ Sheet or Yields/ Amounts Expense Rates Amount Expense Rates Amounts Expense Rates - ----------- --------- --------- ----------- --------- --------- ----------- --------- ---------- $127,788 $2,496 7.84% $123,586 $2,413 7.91% $118,234 $2,370 7.95% 30,046 556 7.41 29,840 543 7.37 29,291 519 7.04 28,228 644 9.15 29,000 648 9.06 29,020 666 9.11 334 9 9.82 327 8 10.48 0 0 0.00 -------- ------ ----- -------- ------ ----- -------- ------ ----- 186,396 3,705 7.97 182,753 3,612 8.01 176,545 3,555 8.01 -------- ------ ----- -------- ------ ----- -------- ------ ----- 69,337 1,171 6.76 70,350 1,218 6.95 73,138 1,290 7.05 16,271 473 11.64 16,448 457 11.28 16,308 479 11.65 40,404 895 8.90 40,280 880 8.85 39,562 874 8.78 14,249 387 10.88 14,662 419 11.60 14,163 408 11.42 12,780 409 12.83 14,259 464 13.19 14,762 491 13.17 3,350 87 10.53 3,218 83 10.46 3,403 83 9.68 -------- ------ ----- -------- ------ ----- -------- ------ ----- 156,391 3,422 8.77 159,217 3,521 8.94 161,336 3,625 8.91 -------- ------ ----- -------- ------ ----- -------- ------ ----- 342,787 7,127 8.34 341,970 7,133 8.44 337,881 7,180 8.44 -------- ------ ----- -------- ------ ----- -------- ------ ----- 4,525 79 7.03 4,713 83 7.09 4,853 86 7.00 58,527 1,017 6.95 61,074 1,061 6.98 55,871 962 6.87 -------- ------ ----- -------- ------ ----- -------- ------ ----- 63,052 1,096 6.96 65,787 1,144 6.99 60,724 1,048 6.88 -------- ------ ----- -------- ------ ----- -------- ------ ----- 25,275 433 6.86 26,632 417 6.35 24,884 414 6.59 7,916 129 6.54 8,517 136 6.48 8,037 142 7.02 42,421 693 6.56 41,868 740 7.14 38,253 691 7.18 10,494 201 7.68 9,047 175 7.76 4,542 99 8.68 -------- ------ ----- -------- ------ ----- -------- ------ ----- 491,945 9,679 7.89 493,821 9,745 7.98 474,321 9,574 8.02 -------- ------ ----- -------- ------ ----- -------- ------ ----- 25,071 24,558 24,203 56,959 60,462 58,071 -------- -------- -------- $573,975 $578,841 $556,595 ======== ======== ======== $ 23,208 112 1.93 $ 23,096 111 1.95 $ 23,596 118 1.98 96,605 638 2.65 96,696 642 2.70 95,570 648 2.69 74,002 983 5.29 75,393 992 5.33 76,939 1,036 5.35 8,388 117 5.63 5,917 81 5.53 6,285 89 5.65 -------- ------ ----- -------- ------ ----- -------- ------ ----- 202,203 1,850 3.66 201,102 1,826 3.68 202,390 1,891 3.71 -------- ------ ----- -------- ------ ----- -------- ------ ----- 22,393 326 5.84 23,067 336 5.91 22,523 347 6.11 10,629 150 5.64 10,067 141 5.69 9,759 140 5.70 22,592 364 6.49 23,467 390 6.70 22,706 351 6.11 -------- ------ ----- -------- ------ ----- -------- ------ ----- 55,614 840 6.07 56,601 867 6.20 54,988 838 6.04 -------- ------ ----- -------- ------ ----- -------- ------ ----- 257,817 2,690 4.18 257,703 2,693 4.24 257,378 2,729 4.21 -------- ------ ----- -------- ------ ----- -------- ------ ----- 82,385 1,229 5.98 91,358 1,310 5.82 76,245 1,164 6.06 19,817 262 5.30 20,516 274 5.43 17,128 278 6.44 49,254 830 6.74 47,416 809 6.83 46,908 805 6.86 -------- ------ ----- -------- ------ ----- -------- ------ ----- 409,273 5,011 4.90 416,993 5,086 4.93 397,659 4,976 4.97 -------- ------ ----- -------- ------ ----- -------- ------ ----- 84,552 82,164 80,953 35,293 36,056 34,176 44,857 43,628 43,807 -------- -------- -------- $573,975 $578,841 $556,595 ======== ======== ======== 2.99 3.05 3.05 .81 .78 .80 ------ ----- ------ ----- ------ ----- $4,668 3.80% $4,659 3.83% $4,598 3.85% ====== ===== ====== ===== ====== =====
47 1997 Compared to 1996 The following discussion and analysis provides a comparison of the Corporation's results of operations for the years ended December 31, 1997 and 1996. This discussion should be read in conjunction with the consolidated financial statements and related notes on pages 50 through 96. Overview The Corporation's continued earnings momentum was demonstrated through a 12-percent increase in operating net income to $6.81 billion in 1997 compared to $6.06 billion in 1996. Operating earnings per common share for 1997 increased 8 percent to $3.86 from $3.57 in 1996. Including merger-related charges of $374 million ($264 million, net of tax), net income increased 13 percent to $6.54 billion while earnings per common share rose 8 percent to $3.71 and diluted earnings per common share increased 7 percent to $3.61, respectively. Business Segment Operations Consumer Banking's 1997 earnings increased 21 percent to $3.5 billion. Return on risk-adjusted average equity remained constant at 17 percent in 1997. Revenue growth and expense control led to a 50-basis point improvement in the efficiency ratio in 1997 to 60.9 percent. Commercial Banking's 1997 earnings increased 18 percent to $861 million. Return on risk-adjusted average equity decreased to 21 percent in 1997. Revenue growth and expense control led to a 20-basis point improvement in the efficiency ratio in 1997 to 45.9 percent. Global Corporate and Investment Banking's earnings rose to $1.6 billion in 1997. Return on risk-adjusted average equity decreased to 15 percent in 1997. The efficiency ratio improved 270 basis points to 54.8 percent. Principal Investing and Wealth Management's earnings rose 8 percent to $560 million in 1997. Return on risk-adjusted average equity decreased to 28 percent in 1997. The efficiency ratio was 61.4 percent in 1997 compared to 58.6 percent in 1996. Net Interest Income Taxable-equivalent net interest income increased 9 percent to $18.6 billion in 1997 compared to $17.1 billion in 1996 due to acquisitions, higher spreads in the securities portfolio, core loan growth and increased noninterest-bearing deposits. The increase was partially offset by the impact of securitizations and a shift in funding to long-term debt. The net interest yield decreased 8 basis points to 4.00 percent in 1997 compared to 4.08 percent in 1996 caused by lower yields received on average earning assets, as well as a decrease in the spreads between loans and deposits. Provision for Credit Losses The provision for credit losses covered net charge-offs and was $1.9 billion in 1997 compared to $1.6 billion in the prior year, reflecting the continuation of a return to more normalized levels of credit losses following periods of unusually low credit losses. Net charge-offs increased $185 million to $1.9 billion in 1997 over 1996 primarily due to increases in consumer finance and bankcard net charge-offs. The allowance for credit losses was $6.8 billion, or 1.98 percent of loans and leases, on December 31, 1997 compared to $6.3 billion, or 1.99 percent, at the end of 1996. The allowance for credit losses was 321 percent of nonperforming loans on December 31, 1997 compared to 287 percent on December 31, 1996. Noninterest Income Noninterest income increased 22 percent to $11.8 billion in 1997, driven primarily by higher deposit account service charges and asset management and fiduciary service fees, as well as higher investment banking and credit card income. 48 Other Noninterest Expense Other noninterest expense increased 15 percent to $17.6 billion. The increase in other noninterest expense was primarily caused by 1997 acquisitions including Boatmen's, NationsBanc Auto Leasing, Inc., Robertson Stephens and NationsBanc Montgomery Securities. Income Taxes The Corporation's income tax expense for 1997 was $4.0 billion, for an effective tax rate of 38.0 percent of pre-tax income. Income tax expense for 1996 was $3.5 billion, for an effective tax rate of 37.6 percent of pre-tax income. 49 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Market Risk Management" for Quantitative and Qualitative Disclosures about Market Risk. Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Management The management of BankAmerica Corporation is responsible for the preparation, integrity and objectivity of the consolidated financial statements of the Corporation. The consolidated financial statements and notes have been prepared by the Corporation in accordance with generally accepted accounting principles and, in the judgment of management, present fairly the Corporation's financial position and results of operations. The financial information contained elsewhere in this report is consistent with that in the consolidated financial statements. The financial statements and other financial information in this report include amounts that are based on management's best estimates and judgments giving due consideration to materiality. The Corporation maintains a system of internal accounting controls to provide reasonable assurance that assets are safe-guarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of consolidated financial statements in accordance with generally accepted accounting principles. Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances. However, management believes that the internal control system provides reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected on a timely basis and corrected through the normal course of business. As of December 31, 1998, management believes that the internal controls are in place and operating effectively. The Internal Audit Division of the Corporation reviews, evaluates, monitors and makes recommendations on both administrative and accounting control, which acts as an integral, but independent, part of the system of internal controls. The independent accountants were engaged to perform an independent audit of the consolidated financial statements. In determining the nature and extent of their auditing procedures, they have evaluated the Corporation's accounting policies and procedures and the effectiveness of the related internal control system. An independent audit provides an objective review of management's responsibility to report operating results and financial condition. Their report appears on page 51. The Board of Directors discharges its responsibility for the Corporation's consolidated financial statements through its Audit Committee. The Audit Committee meets periodically with the independent accountants, internal auditors and management. Both the independent accountants and internal auditors have direct access to the Audit Committee to discuss the scope and results of their work, the adequacy of internal accounting controls and the quality of financial reporting. /s/ Hugh L. McColl Jr. HUGH L. MCCOLL JR. Chief Executive Officer /s/ James H. Hance Jr. JAMES H. HANCE JR. Vice Chairman and Chief Financial Officer 50 Report Of Independent Accountants To the Board of Directors and Shareholders of BankAmerica Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of BankAmerica Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina January 15, 1999 51 BankAmerica Corporation and Subsidiaries Consolidated Statement of Income (Dollars in Millions, Except Per-Share Information)
Year Ended December 31 -------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Interest income Interest and fees on loans and leases ...................................... $ 28,331 $ 29,085 $ 26,439 Interest and dividends on securities ....................................... 4,502 3,283 2,797 Federal funds sold and securities purchased under agreements to resell ..... 1,828 1,516 1,371 Trading account securities ................................................. 2,626 2,582 2,229 Other interest income ...................................................... 1,301 867 800 ---------- ---------- ---------- Total interest income ..................................................... 38,588 37,333 33,636 ---------- ---------- ---------- Interest expense Deposits ................................................................... 10,811 10,684 9,600 Borrowed funds ............................................................. 5,239 4,105 3,699 Trading account liabilities ................................................ 895 975 880 Long-term debt ............................................................. 3,345 3,137 2,503 ---------- ---------- ---------- Total interest expense .................................................... 20,290 18,901 16,682 ---------- ---------- ---------- Net interest income ......................................................... 18,298 18,432 16,954 Provision for credit losses ................................................. 2,920 1,904 1,645 ---------- ---------- ---------- Net credit income ........................................................... 15,378 16,528 15,309 Gains on sales of securities ................................................ 1,017 271 147 Noninterest income Service charges on deposit accounts ........................................ 3,396 3,373 2,822 Mortgage servicing and other mortgage-related income ....................... 115 401 340 Investment banking income .................................................. 2,009 1,476 1,028 Trading account profits and fees ........................................... 171 976 885 Brokerage income ........................................................... 728 355 259 Other nondeposit-related service fees ...................................... 652 680 520 Asset management and fiduciary service fees ................................ 973 990 744 Credit card income ......................................................... 1,448 1,231 899 Other income ............................................................... 2,697 2,274 2,107 ---------- ---------- ---------- Total noninterest income .................................................. 12,189 11,756 9,604 ---------- ---------- ---------- Merger-related charges, net ................................................. 1,795 374 398 Other noninterest expense Personnel .................................................................. 9,412 8,703 7,501 Occupancy, net ............................................................. 1,643 1,576 1,476 Equipment .................................................................. 1,404 1,408 1,229 Marketing .................................................................. 581 655 589 Professional fees .......................................................... 843 763 634 Amortization of intangibles ................................................ 902 855 544 Data processing ............................................................ 765 626 551 Telecommunications ......................................................... 563 491 413 Other general operating .................................................... 2,044 2,059 1,998 General administrative and miscellaneous ................................... 584 489 416 ---------- ---------- ---------- Total other noninterest expense ........................................... 18,741 17,625 15,351 ---------- ---------- ---------- Income before income taxes .................................................. 8,048 10,556 9,311 Income tax expense .......................................................... 2,883 4,014 3,498 ---------- ---------- ---------- Net income .................................................................. $ 5,165 $ 6,542 $ 5,813 ========== ========== ========== Net income available to common shareholders ................................. $ 5,140 $ 6,431 $ 5,611 ========== ========== ========== Per-share information (1) Earnings per common share .................................................. $ 2.97 $ 3.71 $ 3.42 ========== ========== ========== Diluted earnings per common share .......................................... $ 2.90 $ 3.61 $ 3.36 ========== ========== ========== Dividends per common share ................................................. $ 1.59 $ 1.37 $ 1.20 ========== ========== ========== Average common shares issued and outstanding (in thousands) (1) ............. 1,732,057 1,733,194 1,638,382 ========== ========== ==========
(1) Share and per-share data reflect a 2-for-1 stock split on February 27, 1997. See accompanying notes to consolidated financial statements. 52 BankAmerica Corporation and Subsidiaries Consolidated Balance Sheet (Dollars in Millions)
December 31 ------------------------- 1998 1997 ------------ ------------ Assets Cash and cash equivalents ............................................................... $ 28,277 $ 28,466 Time deposits placed and other short-term investments ................................... 6,750 8,363 Securities Held for investment, at cost (market value - $1,853 and $4,905)......................... 1,997 4,822 Available for sale ..................................................................... 78,590 62,209 -------- -------- Total securities ..................................................................... 80,587 67,031 -------- -------- Federal funds sold and securities purchased under agreements to resell .................. 27,146 20,200 Trading account assets .................................................................. 39,602 35,937 Derivative-dealer assets ................................................................ 16,400 14,824 Loans and leases ........................................................................ 357,328 342,140 Allowance for credit losses ............................................................. (7,122) (6,778) -------- -------- Loans and leases, net of allowance for credit losses ................................... 350,206 335,362 -------- -------- Premises and equipment, net ............................................................. 7,289 8,123 Customers' acceptance liability ......................................................... 2,671 4,891 Interest receivable ..................................................................... 3,734 3,584 Mortgage servicing rights ............................................................... 2,376 2,040 Goodwill ................................................................................ 12,695 13,551 Core deposits and other intangibles ..................................................... 2,013 2,203 Other assets ............................................................................ 37,933 26,408 -------- -------- Total assets ........................................................................... $617,679 $570,983 ======== ======== Liabilities Deposits in domestic offices Interest-bearing ....................................................................... $203,644 $202,082 Noninterest-bearing .................................................................... 92,623 85,815 Deposits in foreign offices Interest-bearing ....................................................................... 59,280 56,719 Noninterest-bearing .................................................................... 1,713 1,681 -------- -------- Total deposits ....................................................................... 357,260 346,297 -------- -------- Federal funds purchased and securities sold under agreements to repurchase .............. 67,543 61,414 Trading account liabilities ............................................................. 14,170 17,300 Derivative-dealer liabilities ........................................................... 16,835 13,639 Commercial paper ........................................................................ 6,749 5,925 Other short-term borrowings ............................................................. 24,742 12,120 Acceptances outstanding ................................................................. 2,671 4,893 Accrued expenses and other liabilities .................................................. 30,929 17,346 Trust preferred securities .............................................................. 4,954 4,578 Long-term debt .......................................................................... 45,888 42,887 -------- -------- Total liabilities ...................................................................... 571,741 526,399 -------- -------- Contingent liabilities and other financial commitments (Notes Eleven and Thirteen) Shareholders' Equity Preferred stock: authorized - 100,000,000 shares; issued and outstanding - 1,952,039 and 10,933,884 shares ...................................................................... 83 708 Common stock: authorized - 5,000,000,000 shares; issued and outstanding - 1,724,484,305 and 1,722,537,672 shares ............................................................... 14,837 15,140 Retained earnings ....................................................................... 30,998 28,438 Accumulated other comprehensive income .................................................. 152 407 Other ................................................................................... (132) (109) -------- -------- Total shareholders' equity ............................................................. 45,938 44,584 -------- -------- Total liabilities and shareholders' equity .......................................... $617,679 $570,983 ======== ========
See accompanying notes to consolidated financial statements. 53 BankAmerica Corporation and Subsidiaries Consolidated Statement of Cash Flows (Dollars in Millions)
Year Ended December 31 ----------------------------------- 1998 1997 1996 ----------- ----------- ----------- Operating Activities Net income ........................................................................... $ 5,165 $ 6,542 $ 5,813 Reconciliation of net income to net cash provided by operating activities Provision for credit losses ........................................................ 2,920 1,904 1,645 Gains on sales of securities ....................................................... (1,017) (271) (147) Merger-related charges, net ........................................................ 1,795 374 398 Depreciation and premises improvements amortization ................................ 1,096 1,108 983 Amortization of intangibles ........................................................ 902 855 544 Deferred income tax (benefit) expense .............................................. (100) 971 965 Net increase in trading instruments ................................................ (2,998) (3,271) (3,506) Net (increase) decrease in interest receivable ..................................... (157) (542) 604 Net increase (decrease) in interest payable ........................................ 94 179 (515) Other operating activities ......................................................... 3,191 (6,424) (2,904) --------- --------- --------- Net cash provided by operating activities ......................................... 10,891 1,425 3,880 --------- --------- --------- Investing Activities Proceeds from maturities of securities held for investment ........................... 1,162 1,898 3,440 Purchases of securities held for investment .......................................... (249) (570) (646) Proceeds from sales and maturities of securities available for sale .................. 81,254 44,268 40,767 Purchases of securities available for sale ........................................... (93,136) (56,825) (24,150) Net increase in federal funds sold and securities purchased under agreements to resell ............................................................................. (7,028) (3,531) (2,078) Net decrease (increase) in time deposits placed and other short-term investments ..... 1,612 (857) (512) Purchases and net originations of loans and leases ................................... (89,055) (39,394) (30,883) Proceeds from sales and securitizations of loans and leases .......................... 59,297 30,936 17,947 Purchases and originations of mortgage servicing rights .............................. (853) (419) (654) Net purchases of premises and equipment .............................................. (437) (888) (1,183) Proceeds from sales of foreclosed properties ......................................... 525 610 694 Sales and acquisitions of business activities, net of cash ........................... (335) 1,289 795 --------- --------- --------- Net cash (used in) provided by investing activities ............................... (47,243) (23,483) 3,537 --------- --------- --------- Financing Activities Net increase in deposits ............................................................. 16,476 4,774 267 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase ........................................................... 6,137 26,680 (11,959) Net increase (decrease) in other short-term borrowings and commercial paper .......... 13,672 (1,440) 3,442 Proceeds from issuance of trust preferred securities ................................. 340 1,613 2,965 Proceeds from issuance of long-term debt ............................................. 12,166 7,823 11,199 Retirement of long-term debt ......................................................... (8,809) (6,740) (6,272) Proceeds from issuance of common stock ............................................... 1,367 1,892 573 Cash dividends paid .................................................................. (2,604) (2,175) (1,888) Common stock repurchased ............................................................. (1,751) (8,540) (3,193) Other financing activities ........................................................... (863) (2,036) (63) --------- --------- --------- Net cash provided by (used in) financing activities ............................... 36,131 21,851 (4,929) Effect of exchange rate changes on cash and cash equivalents ......................... 32 102 22 --------- --------- --------- Net (decrease) increase in cash and cash equivalents .................................. (189) (105) 2,510 Cash and cash equivalents on January 1 ................................................ 28,466 28,571 26,061 --------- --------- --------- Cash and cash equivalents on December 31 ............................................. $ 28,277 $ 28,466 $ 28,571 ========= ========= ========= Supplemental cash flow disclosures: Cash paid for interest ............................................................... $ 20,198 $ 18,585 $ 17,113 Cash paid for income taxes ........................................................... 2,695 1,760 2,456
Loans transferred to foreclosed properties amounted to $353, $431 and $569 in 1998, 1997 and 1996, respectively. Loans securitized and retained in the trading and available for sale securities portfolios amounted to $6,083, $7,842 and $4,558 in 1998, 1997 and 1996, respectively. The fair value of noncash assets acquired in acquisitions during 1998 was approximately $109, net of cash acquired. The fair values of noncash assets acquired and liabilities assumed in acquisitions during 1997 were approximately $52,226 and $43,024, respectively, net of cash acquired. See accompanying notes to consolidated financial statements. 54 BankAmerica Corporation and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity (Dollars in Millions, Shares in Thousands)
Common Stock Preferred Stock Shares Amount ------------- ------------- ---------- Balance on December 31, 1995 ........... $ 2,826 1,605,450 $ 13,418 Net income ............................ Other comprehensive income, net of tax .............................. Comprehensive income .................. Cash dividends Common .............................. Preferred ........................... Common stock issued under dividend reinvestment and employee plans ...................... 18,463 536 Stock issued in acquisitions .......... 73 55,436 586 Common stock repurchased .............. (85,036) (3,193) Redemption of preferred stock ......... (381) Conversion of preferred stock ......... (98) 8,703 98 Other ................................. (7) (252) (26) ----------- --------- -------- Balance on December 31, 1996 ........... 2,413 1,602,764 11,419 ========== ========= ======== Net income ............................ Other comprehensive income, net of tax .............................. Comprehensive income .................. Cash dividends Common .............................. Preferred ........................... Common stock issued under dividend reinvestment and employee plans ...................... 47,431 1,888 Stock issued in acquisitions .......... 82 219,024 10,320 Common stock repurchased .............. (150,016) (8,540) Redemption of preferred stock ......... (1,701) Conversion of preferred stock ......... (86) 3,859 86 Other ................................. (524) (33) ----------- --------- -------- Balance on December 31, 1997 ........... 708 1,722,538 15,140 ========== ========= ======== Net income ............................ Other comprehensive income, net of tax .............................. Comprehensive income .................. Cash dividends Common .............................. Preferred ........................... Common stock issued under dividend reinvestment and employee plans ...................... 30,489 1,417 Stock issued in acquisitions .......... 385 15 Common stock repurchased .............. (29,349) (1,751) Redemption of preferred stock ......... (614) Conversion of preferred stock ......... (11) 444 11 Other ................................. (23) 5 ----------- --------- -------- Balance on December 31, 1998 ........... $ 83 1,724,484 $ 14,837 ========== ========= ======== Accumulated Total Other Share- Retained Comprehensive holders' Comprehensive Earnings Income(1) Other Equity Income ------------- --------------- ---------- ---------- -------------- Balance on December 31, 1995 ........... $19,953 $282 $ (184) $ 36,295 Net income ............................ 5,813 5,813 $5,813 Other comprehensive income, net of tax .............................. (262) (262) (262) ------ Comprehensive income .................. $5,551 ====== Cash dividends Common .............................. (1,686) (1,686) Preferred ........................... (202) (202) Common stock issued under dividend reinvestment and employee plans ...................... 37 573 Stock issued in acquisitions .......... 192 2 853 Common stock repurchased .............. (3,193) Redemption of preferred stock ......... (381) Conversion of preferred stock ......... Other ................................. 1 15 (17) ------- ---- ------ -------- Balance on December 31, 1996 ........... 24,071 20 (130) 37,793 ======= ==== ====== ======== Net income ............................ 6,542 6,542 $6,542 Other comprehensive income, net of tax .............................. 387 387 387 ------- Comprehensive income .................. $6,929 ======= Cash dividends Common .............................. (2,064) (2,064) Preferred ........................... (111) (111) Common stock issued under dividend reinvestment and employee plans ...................... 4 1,892 Stock issued in acquisitions .......... 10,402 Common stock repurchased .............. (8,540) Redemption of preferred stock ......... (1,701) Conversion of preferred stock ......... Other ................................. 17 (16) ------- ---- ------ -------- Balance on December 31, 1997 ........... 28,438 407 (109) 44,584 ======= ==== ====== ======== Net income ............................ 5,165 5,165 $5,165 Other comprehensive income, net of tax .............................. (255) (255) (255) ------- Comprehensive income .................. $4,910 ======= Cash dividends Common .............................. (2,579) (2,579) Preferred ........................... (25) (25) Common stock issued under dividend reinvestment and employee plans ...................... (50) 1,367 Stock issued in acquisitions .......... 15 Common stock repurchased .............. (1,751) Redemption of preferred stock ......... (614) Conversion of preferred stock ......... Other ................................. (1) 27 31 ---------- ---- ------ -------- Balance on December 31, 1998 ........... $30,998 $152 $ (132) $ 45,938 ========= ==== ====== ========
(1) Changes in Accumulated Other Comprehensive Income includes after tax net unrealized gains (losses) on securities of $(242), $419 and $(239) in 1998, 1997 and 1996 respectively. Changes in Accumulated Other Comprehensive Income also includes after tax net unrealized losses on foreign currency translation adjustments of $13, $32 and $23 in 1998, 1997 and 1996 respectively. See accompanying notes to consolidated financial statements. 55 BankAmerica Corporation and Subsidiaries Notes to Consolidated Financial Statements On September 30, 1998, BankAmerica Corporation (BankAmerica) merged with and into NationsBank Corporation (the Merger). The combined company was renamed BankAmerica Corporation (the Corporation). The transaction was accounted for as a pooling of interests. The consolidated financial statements have been restated to present the combined results of the Corporation as if the Merger had been in effect for all periods presented. On January 9, 1998, the Corporation completed its merger with Barnett Banks, Inc. (Barnett). The transaction was accounted for as a pooling of interests. The consolidated financial statements have been restated to present the combined results of the Corporation and Barnett as if the merger had been in effect for all periods presented. The Corporation is a Delaware corporation and a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended, with its principal assets being the stock of its subsidiaries. Through its banking subsidiaries and its nonbanking subsidiaries, the Corporation provides a diverse range of banking and nonbanking financial services and products throughout the U.S. and in selected international markets. Note One - Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Results of operations of companies purchased are included from the dates of acquisition. Certain prior period amounts have been reclassified to conform to current year classifications. Assets held in an agency or fiduciary capacity are not included in the consolidated financial statements. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Significant estimates made by management are discussed in these footnotes as applicable. On February 27, 1997, the Corporation completed a two-for-one split of its common stock. Accordingly, the consolidated financial statements for all years presented reflect the impact of the stock split. Cash and Cash Equivalents Cash on hand, cash items in the process of collection and amounts due from correspondent banks and the Federal Reserve Bank are included in cash and cash equivalents. Securities Debt securities are classified based on management's intention on the date of purchase. Debt securities which management has the intent and ability to hold to maturity are classified as held for investment and reported at amortized cost. Securities that are bought and held principally for the purpose of resale in the near term are classified as trading instruments and are stated at fair value. All other debt securities are classified as available for sale and carried at fair value with net unrealized gains and losses included in shareholders' equity on an after-tax basis. Interest and dividends on securities, including amortization of premiums and accretion of discounts, are included in interest income. Realized gains and losses from the sales of securities are determined using the specific identification method. Marketable equity securities, which are included in other assets, are carried at fair value with net unrealized gains and losses included in shareholders' equity, net of tax. Income on marketable equity securities is included in noninterest income. 56 Loans Held for Sale Loans held for sale include residential mortgage, commercial real estate and other loans and are carried at the lower of aggregate cost or market value. Loans originated with the intent to sell are included in other assets. Securities Purchased Under Agreements To Resell And Securities Sold Under Agreements To Repurchase Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The Corporation's policy is to obtain the use of securities purchased under agreements to resell. The market value of the underlying securities, which collateralize the related receivable on agreements to resell, is monitored, including accrued interest, and additional collateral is requested when deemed appropriate. Trading Instruments Instruments utilized in trading activities include securities stated at fair value. Fair value is generally based on quoted market prices. If quoted market prices are not available, fair values are estimated based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. Realized and unrealized gains and losses are recognized as trading account profits and fees. Derivative-Dealer Positions Derivative-dealer assets and liabilities represent unrealized gains and losses, respectively, on interest rate, foreign exchange, commodity and other derivative contract positions included in the Corporation's trading portfolio. Derivative-dealer positions are reflected at fair value with changes in fair value reflected in trading account profits and fees. Fair values are estimated based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. Loans and Leases Loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans and premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to income over the lives of the related loans. Unearned income, discounts and premiums are amortized to income using methods that approximate the interest method. The Corporation provides equipment financing to its customers through a variety of lease arrangements. Direct financing leases are carried at the aggregate of lease payments receivable plus estimated residual value of the leased property, less unearned income. Leveraged leases, which are a form of financing lease, are carried net of nonrecourse debt. Unearned income on leveraged and direct financing leases is amortized over the lease terms by methods that approximate the interest method. Allowance for Credit Losses The allowance for credit losses is primarily available to absorb losses inherent in the loan and lease portfolios. Credit exposures deemed to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts are credited to the allowance for credit losses. Individually identified impaired loans are measured based on the present value of payments expected to be received, observable market prices, or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral. If the recorded investment in the impaired loan exceeds the measure of estimated fair value, a valuation allowance is established as a component of the allowance for credit losses. The Corporation's process for determining appropriate allowance for credit losses includes management's judgment and use of estimates. The adequacy of the allowance for credit losses is reviewed regularly by management. This assessment is made in the context of historical losses as well as existing economic conditions and performance trends within specific portfolio segments and individual concentrations of credit. Additions to the allowance for credit losses are made by charges to the provision for credit losses. 57 Nonperforming Loans Commercial loans and leases that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, including loans that are individually identified as being impaired, are generally classified as nonperforming loans unless well secured and in the process of collection. Loans are considered impaired when it is probable that all amounts, including principal and interest, will not be collected in accordance with contractual terms of the loan agreement. Loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties are classified as nonperforming until the loan is performing for an adequate period of time under the restructured agreement. Impaired loans are included in nonperforming loans. Generally, all other loans which are past due 90 days or more as to principal or interest are classified as nonperforming regardless of collateral or collection status. Interest accrued but not collected is reversed when a loan or lease is classified as nonperforming. Interest collections on nonperforming loans and leases for which the ultimate collectibility of principal is uncertain are applied as principal reductions. Otherwise, such collections are credited to income when received. Credit card loans that are 180 days past due are charged off and not classified as nonperforming. All other consumer loans and residential mortgages are generally charged off at 120 days past due or placed on nonperforming status upon repossession or the inception of foreclosure proceedings. Interest accrued but not collected is generally charged off along with the principal. Foreclosed Properties Assets are classified as foreclosed properties and included in other assets upon actual foreclosure or when physical possession of the collateral is taken regardless of whether foreclosure proceedings have taken place. Foreclosed properties are carried at the lower of the recorded amount of the loan or lease for which the property previously served as collateral, or the fair value of the property less estimated costs to sell. Prior to foreclosure, any write-downs, if necessary, are charged to the allowance for credit losses. Subsequent to foreclosure, gains or losses on the sale of and losses on the periodic revaluation of foreclosed properties are credited or charged to expense. Net costs of maintaining and operating foreclosed properties are expensed as incurred. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized principally using the straight-line method over the estimated useful lives of the assets. Mortgage Servicing Rights The total cost of mortgage loans originated for sale or purchased is allocated between the cost of the loans and the mortgage servicing rights (MSR) based on the relative fair values of the loans and the MSR. MSR acquired separately are capitalized at cost. During 1998, the Corporation capitalized $853 million of MSR. The cost of the MSR is amortized in proportion to and over the estimated period of net servicing revenues. During 1998, amortization was $476 million. The fair value on December 31, 1998 of capitalized MSR was approximately $2.4 billion. Total loans serviced approximated $234.9 billion on December 31, 1998, including loans serviced on behalf of the Corporation's banking subsidiaries. The predominant characteristics used as the basis for stratifying MSR are loan type and interest rate. The MSR strata are evaluated for impairment by estimating their fair value based on anticipated future net cash flows, taking into consideration prepayment predictions. If the carrying value of the MSR, including the results of risk management activities, exceeds the estimated fair value, a valuation allowance is established. Changes to the valuation allowance are charged against or credited to mortgage servicing income and fees. The valuation allowance increased $170 million to $180 million on December 31, 1998. The valuation allowance on December 31, 1997 and 1996 and changes in the valuation allowance during 1997 and 1996 were insignificant. To manage risk associated with changes in prepayment rates, the Corporation uses various financial instruments including purchased options and swaps. The notional amounts of such contracts on December 31, 1998 was $22.4 billion and the related unrealized gains were $190 million. 58 Securitizations The Corporation securitizes, sells and services interests in home equity, installment, commercial and bankcard loans. When the Corporation sells assets in securitizations, it may retain interest only strips, one or more subordinated tranches and, in some cases, a cash reserve account, all of which are considered retained interests in the securitized assets. Gains upon sale of the assets depend, in part, on the Corporation's allocation of the previous carrying amount of the assets to the retained interests. Previous carrying amounts are allocated in proportion to the relative fair values of the assets sold and interests retained. To obtain fair values, quoted market prices are used, if available. Generally, quoted market prices for retained interests are not available, therefore the Corporation estimates fair values based upon the present value of the associated expected future cash flows. This may require management to estimate credit losses, prepayment speeds, forward yield curves, discount rates and other factors that impact the value of retained interests. After the securitization, any of these retained interests that can be contractually settled in such a way that the Corporation could not recover substantially all of its recorded investment are adjusted to fair value with the adjustment reflected as an unrealized gain or loss in shareholders' equity. If a decline in the fair value is determined to be unrecoverable, it is expensed. Goodwill and Other Intangibles Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited. Goodwill is amortized on a straight-line basis over a period not to exceed 25 years. The recoverability of goodwill and other intangibles is evaluated if events or circumstances indicate a possible impairment. Such evaluation is based on various analyses, including undiscounted cash flow projections. Income Taxes There are two components of income tax provision: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the applicable period. Balance sheet amounts of deferred taxes are recognized on the temporary differences between the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements. Deferred tax expense or benefit is then recognized for the change in deferred tax liabilities or assets between periods. Recognition of deferred tax assets is based on management's belief that it is more likely than not that the tax benefit associated with certain temporary differences, tax operating loss carryforwards and tax credits will be realized. A valuation allowance is recorded for those deferred tax items for which it is more likely than not that realization will not occur. Retirement Benefits The Corporation has established qualified retirement plans covering full-time, salaried employees and certain part-time employees. Pension expense under these plans is charged to current operations and consists of several components of net pension cost based on various actuarial assumptions regarding future experience under the plans. In addition, the Corporation and its subsidiaries have established unfunded supplemental benefit plans providing any benefits that could not be paid from a qualified retirement plan because of Internal Revenue Code restrictions and supplemental executive retirement plans for selected officers of the Corporation and its subsidiaries. These plans are nonqualified and, therefore, in general, a participant's or beneficiary's claim to benefits is as a general creditor. The Corporation and its subsidiaries have established several unfunded postretirement medical benefit plans. Risk Management Instruments Risk management instruments are utilized to modify the interest rate characteristics of related assets or liabilities or hedge against fluctuations in interest rates, currency exchange rates or other such exposures as part of the Corporation's asset and liability management process. Instruments must be designated as hedges and must be effective throughout the hedge period. To qualify as hedges, risk management instruments must be 59 linked to specific assets or liabilities or pools of similar assets or liabilities. For risk management instruments that fail to qualify as hedges, the instruments are recorded at market value with changes in market value reflected in trading account profits and fees. Swaps, principally interest rate, used in the asset and liability management process are accounted for on the accrual basis with revenues or expenses recognized as adjustments to income or expense on the underlying linked assets or liabilities. Gains and losses associated with interest rate futures and forward contracts used as effective hedges of existing risk positions or anticipated transactions are deferred as an adjustment to the carrying value of the related asset or liability and recognized in income over the remaining term of the related asset or liability. Risk management instruments used to hedge or modify the interest rate characteristics of debt securities classified as available for sale are carried at fair value with unrealized gains or losses deferred as a component of shareholders' equity, net of tax. To manage interest rate risk, the Corporation also uses interest rate option products, primarily purchased 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. Such instruments are primarily linked to long-term debt, short-term borrowings and pools of similar residential mortgages. The Corporation also purchases options to protect the value of certain assets, principally MSR, against changes in prepayment rates. Option premiums are amortized over the option life on a straight-line basis. Such contracts are designated as hedges, and gains or losses are recorded as adjustments to the carrying value of the MSR, which are then subjected to impairment valuations. The Corporation also utilizes forward delivery contracts and options to reduce the interest rate risk inherent in mortgage loans held for sale and the commitments made to borrowers for mortgage loans which have not been funded. These financial instruments are considered in the Corporation's lower of cost or market valuation of its mortgage loans held for sale. The Corporation has made investments in a number of operations in foreign countries. Certain assets and liabilities of these operations are often denominated in foreign currencies, which exposes the Corporation to foreign currency risks. To qualify for hedge accounting, a foreign exchange contract must reduce risk at the level of the specific transaction. Realized and unrealized gains and losses on instruments that hedge firm commitments are deferred and included in the measurement of the subsequent transaction; however, losses are deferred only to the extent of expected gains on the future commitment. Realized and unrealized gains and losses on instruments that hedge net foreign capital exposure are recorded in shareholders' equity as foreign currency translation adjustments and included in accumulated other comprehensive income. Risk management instruments generally are not terminated. When terminations do occur, gains or losses are recorded as adjustments to the carrying value of the underlying assets or liabilities and recognized as income or expense over either the remaining expected lives of such underlying assets or liabilities. In circumstances where the underlying assets or liabilities are sold, any remaining carrying value adjustments and the cumulative change in value of any open positions are recognized immediately as a component of the gain or loss on disposition of such underlying assets or liabilities. If a forecasted transaction to which a risk management instrument is linked fails to occur, any deferred gain or loss on the instrument is recognized immediately in income. Earnings Per Common Share Earnings per common share for all periods presented is computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares issued and outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders, adjusted for the effect of assumed conversions, by the weighted average number of common shares issued and outstanding and dilutive potential common shares, which include convertible preferred stock and stock options. Dilutive potential common shares are calculated using the treasury stock method. Foreign Currency Translation Assets, liabilities and operations of foreign branches and subsidiaries are recorded based on the functional currency of each entity. For the majority of the foreign operations, the functional currency is the local currency, 60 in which case the assets, liabilities and operations are translated, for consolidation purposes, at current exchange rates from the local currency to the reporting currency, the U.S. dollar. The resulting gains or losses are reported as a component of accumulated other comprehensive income within shareholders' equity on a net-of-tax basis. When the foreign entity is not a free-standing operation or is in a hyperinflationary economy, the functional currency used to measure the financial statements of a foreign entity is the U.S. dollar. In these instances, the resulting gains and losses are included in income. Recently Issued Accounting Pronouncements In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This standard requires the Corporation to recognize all derivatives as either assets or liabilities in its financial statements and measure such instruments at their fair values. Hedging activities must be redesignated and documented pursuant to the provisions of the statement. This statement becomes effective for all fiscal quarters of fiscal years beginning after June 15, 1999. At this time, the Corporation is still assessing the impact of SFAS 133 on its financial condition and results of operations. In 1998, Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS 134), was issued. SFAS 134 provides guidance for mortgage banking entities on how to account for interests retained after securitizing mortgage loans previously held for sale. SFAS 134 is effective for fiscal quarters beginning after December 15, 1998 and was adopted by the Corporation on January 1, 1999. Note Two - Merger-Related Activity On September 30, 1998, the Corporation completed the Merger with BankAmerica, a multi-bank holding company headquartered in San Francisco, California. BankAmerica provided banking and various other financial services throughout the U.S. and in selected international markets to consumers and business customers, including corporations, governments and other institutions. As a result of the Merger, each outstanding share of BankAmerica common stock was converted into 1.1316 shares of the Corporation's common stock, resulting in the net issuance of approximately 779 million shares of the Corporation's common stock to the former BankAmerica shareholders. Each share of NationsBank common stock continued as one share in the Corporation's common stock. In addition, approximately 88 million options to purchase the Corporation's common stock were issued to convert stock options granted to certain BankAmerica employees. This transaction was accounted for as a pooling of interests. Under this method of accounting, the recorded assets, liabilities, shareholders' equity, income and expenses of NationsBank and BankAmerica have been combined and reflected at their historical amounts. NationsBank's total assets, total deposits and total shareholders' equity on the date of the Merger were approximately $331.9 billion, $166.8 billion and $27.7 billion, respectively. BankAmerica's total assets, total deposits and total shareholders' equity on the date of the Merger amounted to approximately $263.4 billion, $179.0 billion and $19.6 billion, respectively. In compliance with certain requirements of the Federal Reserve Board (FRB), the Department of Justice and certain New Mexico authorities in connection with the Merger, the Corporation entered into an agreement to divest certain branches of Bank of America National Trust and Savings Association (Bank of America NT&SA) with loans and deposits aggregating approximately $167 million and $500 million, respectively, in various markets in New Mexico. These transactions were completed in the fourth quarter of 1998. In connection with the Merger, the Corporation recorded $1,325 million of pre-tax, merger-related charges in 1998. Approximately $600 million ($441 million after-tax) and $725 million ($519 million after-tax) were recorded in the fourth and third quarters of 1998, respectively. The total pre-tax charge for 1998 consisted of approximately $740 million primarily in severance and change in control and other employee-related items, $150 million in conversion and related costs including occupancy and equipment expenses and customer communication, $300 million in exit and related costs and $135 million in other merger costs (including legal, investment banking and filing fees). The Corporation anticipates recording an additional pre-tax merger-related charge of approximately $400 million ($252 million after-tax) in 1999. 61 On January 9, 1998, the Corporation completed its merger with Barnett, a multi-bank holding company headquartered in Jacksonville, Florida (the Barnett merger). Barnett's total assets, total deposits and total shareholders' equity on the date of the merger were approximately $46.0 billion, $35.4 billion and $3.4 billion, respectively. As a result of the Barnett merger, each outstanding share of Barnett common stock was converted into 1.1875 shares of the Corporation's common stock, resulting in the net issuance of approximately 233 million common shares to the former Barnett shareholders. In addition, approximately 11 million options to purchase the Corporation's common stock were issued to convert stock options granted to certain Barnett employees. This transaction was also accounted for as a pooling of interests. In connection with the Barnett merger, the Corporation incurred a pre-tax merger-related charge during the first quarter of 1998 of approximately $900 million ($642 million after-tax), which consisted of approximately $375 million primarily in severance and change in control payments, $300 million of conversion and related costs and occupancy and equipment expenses (primarily lease exit costs and the elimination of duplicate facilities and other capitalized assets), $125 million in exit costs related to contract terminations and $100 million in other merger costs (including legal, investment banking and filing fees). In the second quarter of 1998, the Corporation recognized a $430 million gain resulting from the regulatory required divestitures of certain Barnett branches. The Corporation recorded a pre-tax charge of $280 million in 1996 as a result of decisions to close and/or sell certain of its business activities. The charge covered approximately $196 million for severance payments, $72 million for occupancy expense, primarily reflecting the planned closure of 120 branches, and $12 million for other costs. On October 1, 1997, the Corporation completed the acquisition of Montgomery Securities, Inc., an investment banking and institutional brokerage firm. The purchase price consisted of $840 million in cash and approximately 5.3 million unregistered shares of the Corporation's common stock for an aggregate amount of approximately $1.1 billion. The Corporation accounted for this acquisition as a purchase. On October 1, 1997, the Corporation also acquired Robertson, Stephens & Company Group, L.L.C. (Robertson Stephens), an investment banking and investment management firm. The acquisition was accounted for by the purchase method of accounting. The Corporation sold the investment banking operations of Robertson Stephens on August 31, 1998 and sold the investment management operations in 1999. As previously disclosed, NationsBank, BankAmerica and Barnett merged in separate transactions accounted for as pooling of interests. The following table summarizes the impact of the BankAmerica and Barnett mergers on the Corporation's net interest income, noninterest income and net income for periods prior to the respective mergers.
Net Interest Noninterest Net (Dollars in Millions) Income Income Income - ----------------------- -------------- ------------- --------- 1997 NationsBank ........... $ 7,898 $ 5,002 $3,077 BankAmerica ........... 8,669 6,012 3,210 Barnett ............... 1,840 971 255 ------- ------- ------ Total ................ $18,407 $11,985 $6,542 ======= ======= ====== 1996 NationsBank ........... $ 6,329 $ 3,646 $2,375 BankAmerica ........... 8,587 5,351 2,874 Barnett ............... 1,869 791 564 ------- ------- ------ Total ................ $16,785 $ 9,788 $5,813 ======= ======= ======
The amounts presented above represent results of operations of the previously separate companies and do not reflect reclassifications of certain revenue and expense items which were made to conform to the reporting policies of the Corporation. 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 on the date of the acquisition and aggregate cash payments of 62 $371 million to Boatmen's shareholders. On the date of the acquisition, Boatmen's total assets and total deposits were approximately $41.2 billion and $32.0 billion, respectively. The Corporation accounted for this acquisition as a purchase. In 1996, the Corporation completed the initial public offering (IPO) of 16.1 million shares of Class A Common Stock of BA Merchant Services, Inc. (BAMS) (ticker symbol "BPI" on the New York Stock Exchange), a subsidiary of the Corporation. On December 22, 1998, the Corporation and BAMS announced the signing of a definitive merger agreement on which the Corporation agreed to buy BAMS outstanding shares of Class A common stock. At closing, each outstanding share of BAMS common stock other than the shares owned by the Corporation will be converted into the right to receive a cash payment equal to $20.50 per share without interest, or approximately $330 million. BAMS will then become a wholly owned subsidiary of Bank of America NT&SA. The transaction is expected to be completed during the second quarter of 1999. The following tables summarize the activity in the merger-related reserves recorded in connection with the BankAmerica and Barnett mergers during 1998: BankAmerica Merger Merger-Related Reserves
Non-Cash Balance on Amount Cash Payments Reductions Balance on January 1, Included in Applied to Applied to December 31, (Dollars in Millions) 1998 Expense Reserve Reserve 1998 - ---------------------------------------- ------------ ------------- --------------- ------------ ------------- Severance, change in control and other employee-related costs ..... $-- $ 740 $(155) $ (98) $487 Conversion and related costs ........... -- 150 (3) (4) 143 Exit and related costs ................. -- 300 (62) (44) 194 Other merger costs ..................... -- 135 (117) -- 18 --- ------ ------- ------- ---- $-- $1,325 $(337) $(146) $842 === ====== ======= ======= ====
Barnett Merger Merger-Related Reserves
Non-Cash Balance on Amount Cash Payments Reductions Balance on January 1, Included in Applied to Applied to December 31, (Dollars in Millions) 1998 Expense Reserve Reserve 1998 - ---------------------------------------- ------------ ------------- --------------- ------------ ------------- Severance, change in control and other employee-related costs ..... $-- $375 $ (318) $ (55) $ 2 Conversion and related costs ........... -- 300 (8) (192) 100 Exit and related costs ................. -- 125 (101) -- 24 Other merger costs ..................... -- 100 (99) -- 1 --- ---- ------ ------ ---- $-- $900 $ (526) $ (247) $127 === ==== ====== ====== ====
Total severance, change in control and other employee-related costs for both mergers included amounts related to job eliminations, primarily in areas of overlapping operations and duplicate functions. Through December 31, 1998, approximately 1,700 employees have entered the severance process as result of the Barnett merger. For the BankAmerica merger, 5,000 to 8,000 positions after attrition, are estimated to be eliminated and through December 31, 1998, approximately 1,800 associates have entered the severance process. The only significant portion of the Barnett merger-related charge remaining at December 31, 1998 relates to conversion and related costs, primarily abandoned owned and leased facilities and branch closure costs. Exit costs primarily relate to contract termination payments, business realignment and other related costs. Remaining exit and related costs balances included in the Barnett merger reserve on December 31, 1998 are expected to be used during the first half of 1999. Primarily all reserves established in 1996 associated with the Bank South acquisition and restructuring activities were fully utilized as of December 31, 1998. There were no additional provisions during 1998. 63 Note Three - Securities The amortized cost, gross unrealized gains and losses, and fair value of securities held for investment and securities available for sale on December 31 were (dollars in millions):
Gross Gross Amortized Unrealized Unrealized Fair Securities Held for Investment Cost Gains Losses Value - ----------------------------------------------- ------------ ------------- ------------- ----------- 1998 U.S. Treasury securities and agency debentures $ 478 $ 1 $ -- $ 479 Foreign sovereign securities .................. 914 1 168 747 Mortgage-backed securities..................... 203 -- -- 203 Other taxable securities ...................... 29 2 -- 31 ---------- ----------- ----------- -------- Total taxable ................................ 1,624 4 168 1,460 Tax-exempt securities ......................... 373 20 -- 393 ---------- ----------- ----------- -------- Total ........................................ $ 1,997 $ 24 $ 168 $ 1,853 ========== =========== =========== ======== 1997 U.S. Treasury securities and agency debentures $ 516 $ 1 $ 1 $ 516 Foreign sovereign securities .................. 1,448 61 39 1,470 Mortgage-backed securities .................... 2,408 43 3 2,448 Other taxable securities ...................... 56 9 4 61 ---------- ----------- ----------- -------- Total taxable ................................ 4,428 114 47 4,495 Tax-exempt securities ......................... 394 17 1 410 ---------- ----------- ----------- -------- Total ........................................ $ 4,822 $ 131 $ 48 $ 4,905 ========== =========== =========== ======== 1996 U.S. Treasury securities and agency debentures $ 880 $ -- $ 3 $ 877 Foreign sovereign securities .................. 1,525 15 285 1,255 Mortgage-backed securities..................... 3,264 34 19 3,279 Other taxable securities ...................... 64 25 -- 89 ---------- ----------- ----------- -------- Total taxable ................................ 5,733 74 307 5,500 Tax-exempt securities ......................... 516 18 4 530 ---------- ----------- ----------- -------- Total ........................................ $ 6,249 $ 92 $ 311 $ 6,030 ========== =========== =========== ======== Gross Gross Amortized Unrealized Unrealized Fair Securities Available for Sale Cost Gains Losses Value - ----------------------------------------------- ---------- ----------- ----------- -------- 1998 U.S. Treasury securities and agency debentures $ 17,355 $ 52 $ 157 $ 17,250 Foreign sovereign securities .................. 5,693 25 138 5,580 Mortgage-backed securities .................... 51,259 567 36 51,790 Other taxable securities ...................... 2,293 76 32 2,337 ---------- ----------- ----------- -------- Total taxable ................................ 76,600 720 363 76,957 Tax-exempt securities ......................... 1,636 68 71 1,633 ---------- ----------- ----------- -------- Total ........................................ $ 78,236 $ 788 $ 434 $ 78,590 ========== =========== =========== ======== 1997 U.S. Treasury securities and agency debentures $ 10,614 $ 268 $ 6 $ 10,876 Foreign sovereign securities .................. 10,797 43 96 10,744 Mortgage-backed securities .................... 36,256 363 30 36,589 Other taxable securities ...................... 2,271 13 3 2,281 ---------- ----------- ----------- -------- Total taxable ................................ 59,938 687 135 60,490 Tax-exempt securities ......................... 1,661 58 -- 1,719 ---------- ----------- ----------- -------- Total ........................................ $ 61,599 $ 745 $ 135 $ 62,209 ========== =========== =========== ======== 1996 U.S. Treasury securities and agency debentures $ 5,298 $ 61 $ 46 $ 5,313 Foreign sovereign securities .................. 4,129 52 153 4,028 Mortgage-backed securities .................... 17,256 95 88 17,263 Other taxable securities ...................... 2,150 8 10 2,148 ---------- ----------- ----------- -------- Total taxable ................................ 28,833 216 297 28,752 Tax-exempt securities ......................... 746 21 2 765 ---------- ----------- ----------- -------- Total ........................................ $ 29,579 $ 237 $ 299 $ 29,517 ========== =========== =========== ========
64 The expected maturity distribution and yields (computed on a taxable-equivalent basis) of the Corporation's securities portfolio on December 31, 1998 are summarized below. Actual maturities may differ from contractual maturities or maturities shown below since borrowers may have the right to prepay obligations with or without prepayment penalties.
Due after 1 Due after 5 Due in 1 year through 5 through 10 or less years years (Dollars in Millions) ------------------- -------------------- --------------------- Amount Yield Amount Yield Amount Yield -------- ---------- ---------- --------- ---------- ---------- Amortized cost of securities held for investment U.S. Treasury securities and agency debentures ................ $ 477 5.92% $ -- --% $ 1 4.53% Foreign sovereign securities ........... 205 6.88 334 6.96 313 6.89 Mortgage-backed securities ............. 149 6.08 51 6.77 3 6.82 Other taxable securities ............... 2 9.52 -- -- -- -- ----- ----- -------- ----- -------- ---- Total taxable ........................ 833 6.19 385 6.93 317 6.88 Tax-exempt securities .................. 55 7.95 123 7.75 100 6.80 ----- ----- -------- ----- -------- ---- Total ................................ $ 888 6.30% $ 508 7.13% $ 417 6.86% ===== ===== ======== ===== ======== ==== Fair value of securities held for investment ..................... $ 868 $ 445 $ 356 ===== ======== ======== Fair value of securities available for sale U.S. Treasury securities and agency debentures .................... $ 478 6.32% $ 7,193 4.87% $ 8,952 4.88% Foreign sovereign securities ........... 12 7.66 1,188 3.88 2,199 4.52 Mortgage-backed securities ............. 357 6.79 15,224 6.85 21,579 6.29 Other taxable securities ............... 43 9.55 675 11.38 902 6.24 ----- ----- -------- ----- -------- ---- Total taxable ........................ 890 6.68 24,280 6.25 33,632 5.80 Tax-exempt securities .................. 41 6.52 216 6.79 534 7.34 ----- ----- -------- ----- -------- ---- Total ................................ $ 931 6.68% $ 24,496 6.25% $ 34,166 5.82% ===== ===== ======== ===== ======== ==== Amortized cost of securities available for sale ...................... $ 921 $ 24,149 $ 34,458 ===== ======== ======== Due after 10 years Total (Dollars in Millions) --------------------- --------------------- Amount Yield Amount Yield ----------- --------- ---------- ---------- Amortized cost of securities held for investment U.S. Treasury securities and agency debentures ................ $ -- --% $ 478 5.91% Foreign sovereign securities ........... 62 6.93 914 6.91 Mortgage-backed securities ............. -- -- 203 6.27 Other taxable securities ............... 27 6.63 29 6.85 -------- ---- -------- ---- Total taxable ........................ 89 6.84 1,624 6.54 Tax-exempt securities .................. 95 5.71 373 7.00 -------- ---- -------- ---- Total ................................ $ 184 6.26% $ 1,997 6.62% ======== ==== ======== ==== Fair value of securities held for investment ..................... $ 184 $ 1,853 ======== ======== Fair value of securities available for sale U.S. Treasury securities and agency debentures .................... $ 627 6.37% $ 17,250 4.96% Foreign sovereign securities ........... 2,181 6.59 5,580 5.20 Mortgage-backed securities ............. 14,630 6.21 51,790 6.44 Other taxable securities ............... 717 5.77 2,337 7.65 -------- ---- -------- ---- Total taxable ........................ 18,155 6.24 76,957 6.05 Tax-exempt securities .................. 842 7.80 1,633 7.37 -------- ---- -------- ---- Total ................................ $ 18,997 6.32% $ 78,590 6.08% ======== ==== ======== ==== Amortized cost of securities available for sale ...................... $ 18,708 $ 78,236 ======== ========
The components of gains and losses on sales of securities for the years ended December 31 were (dollars in millions):
1998 1997 1996 ---------- ------ -------- Gross gains on sales of securities .......... $ 1,039 $289 $ 310 Gross losses on sales of securities ......... 22 18 163 ------- ---- ----- Net gains on sales of securities ............ $ 1,017 $271 $ 147 ======= ==== =====
During 1998, the Corporation sold $19.5 million of securities held for investment, resulting in net gains of approximately $2.0 million included above. The sale resulted from a realignment of the securities portfolio in connection with the Barnett merger. There were no sales of securities held for investment in 1997 or 1996. Excluding securities issued by the U.S. government and its agencies and corporations, there were no investments in securities from one issuer that exceeded 10 percent of consolidated shareholders' equity on December 31, 1998 or 1997. The income tax expense attributable to realized net gains on securities sales was $363 million, $101 million and $54 million in 1998, 1997 and 1996, respectively. Securities are pledged or assigned to secure borrowed funds, government and trust deposits and for other purposes. The carrying value of pledged securities was $65.6 billion and $57.3 billion on December 31, 1998 and 1997, respectively. On December 31, 1998, the valuation allowance for securities available for sale and marketable equity securities included in shareholders' equity was $292 million, primarily reflecting $354 million of pre-tax appreciation on securities available for sale and $165 million of pre-tax appreciation on marketable equity securities. 65 Note Four - Trading Account Assets and Liabilities The fair values of the components of trading account assets and liabilities on December 31 and the average fair values for the years ended December 31 were (dollars in millions):
Ending Balance Average Balance ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ----------- ---------- ----------- Securities owned U.S. Treasury securities ......................................... $ 7,854 $ 10,537 $ 9,802 $ 12,625 Securities of other U.S. Government agencies and corporations .... 524 2,392 841 2,473 Certificates of deposit, bankers' acceptances and commercial paper .......................................................... 2,723 1,867 2,746 2,240 Corporate debt ................................................... 1,666 3,439 2,428 2,703 Foreign sovereign debt ........................................... 11,774 12,650 13,241 14,102 Mortgage-backed securities ....................................... 7,489 3,277 4,802 2,324 Other securities ................................................. 7,572 1,775 5,914 1,817 -------- -------- -------- -------- Total trading account assets ................................... $ 39,602 $ 35,937 $ 39,774 $ 38,284 ======== ======== ======== ======== Short sales U.S. Treasury securities ......................................... $ 8,534 $ 13,087 $ 8,538 $ 12,034 Corporate debt ................................................... 82 217 833 276 Foreign sovereign debt ........................................... 3,166 2,983 3,192 2,148 Other securities ................................................. 2,388 1,013 4,909 827 -------- -------- -------- -------- Total trading account liabilities .............................. $ 14,170 $ 17,300 $ 17,472 $ 15,285 ======== ======== ======== ========
The net change in the unrealized gain or loss on trading securities held on December 31, 1998 and 1997 was included in trading account profits and fees and amounted to a gain of $1,692 million for 1998 and a loss of $143 million for 1997. Foreign exchange contract and securities trading activities generated most of the Corporation's trading account profits and fees. See Note Eleven of the consolidated financial statements on page 74 for additional information on derivatives-dealer positions, including credit risk. The average fair values of derivative-dealer assets on December 31, 1998 and 1997 was $14.3 billion and $12.6 billion, respectively. The average fair values of derivative-dealer liabilities on December 31, 1998 and 1997 were $13.3 billion and $11.5 billion, respectively. The fair value of derivative-dealer assets at December 31, 1998 and 1997, was $16.4 billion and $14.8 billion, respectively. The fair value of derivative-dealer liabilities at December 31, 1998 and 1997 was $16.8 billion and $13.6 billion, respectively. 66 Note Five - Loans and Leases Loans and leases on December 31 were (dollars in millions):
1998 1997 --------------------- ----------------------- Amount Percent Amount Percent ----------- --------- ------------ ---------- Commercial - domestic ..................... $ 137,422 38.5 % $ 122,463 35.8% Commercial - foreign ...................... 31,495 8.8 30,080 8.8 Commercial real estate - domestic ......... 26,912 7.5 28,567 8.3 Commercial real estate - foreign .......... 301 .1 324 .1 --------- ---- --------- ----- Total commercial ......................... 196,130 54.9 181,434 53.0 --------- ---- --------- ----- Residential mortgage ...................... 73,608 20.6 71,540 20.9 Home equity lines ......................... 15,653 4.4 16,536 4.8 Direct/Indirect consumer .................. 40,510 11.3 40,058 11.7 Consumer finance .......................... 15,400 4.3 14,566 4.3 Bankcard .................................. 12,425 3.5 14,908 4.4 Foreign consumer .......................... 3,602 1.0 3,098 .9 --------- ---- --------- ----- Total consumer ........................... 161,198 45.1 160,706 47.0 --------- ---- --------- ----- Total loans and leases .................. $ 357,328 100.0 % $ 342,140 100.0% ========= ======= ========= =====
The following table presents the recorded investment in loans that were considered to be impaired on December 31 (1) (dollars in millions):
1998 1997 -------- ---------- Commercial - domestic .............. $ 796 $ 538 Commercial - foreign ............... 314 158 Commercial real estate-domestic .... 554 327 Commercial real estate-foreign ..... -- 1 ------ ------- Total commercial ................... $1,664 $ 1,024 ====== =======
(1) The Corporation's consumer loan portfolio generally consists of large groups of relatively smaller balance homogeneous loans that are collectively evaluated for impairment and, therefore, are not included in this table. The average recorded investment in certain impaired loans for the years ended December 31, 1998, 1997 and 1996 was approximately $1.6 billion, $1.4 billion and $1.8 billion, respectively. As of December 31, 1998 and 1997, the recorded investment on impaired loans requiring an allowance for credit losses was $876 million and $885 million, and the related allowance for credit losses was $326 million and $145 million, respectively. For the years ended December 31, 1998, 1997 and 1996, interest income recognized on impaired loans totaled $50 million, $80 million and $83 million, respectively, all of which was recognized on a cash basis. On December 31, 1998, 1997 and 1996, nonperforming loans, including certain loans which are considered impaired, totaled $2.5 billion, $2.1 billion and $2.2 billion, respectively. The net amount of interest recorded during each year on loans that were classified as nonperforming or restructured on December 31, 1998, 1997 and 1996 was $130 million in each of the three years. If these loans had been accruing interest at their originally contracted rates, related income would have been $367 million, $349 million and $388 million in 1998, 1997 and 1996, respectively. Foreclosed properties amounted to $282 million, $309 million and $511 million on December 31, 1998, 1997 and 1996, respectively. The cost of carrying foreclosed properties amounted to $16 million, $26 million and $35 million in 1998, 1997 and 1996, respectively. 67 Note Six - Allowance for Credit Losses The table below summarizes the changes in the allowance for credit losses on loans and leases (dollars in millions):
1998 1997 1996 ----------- ----------- ----------- Balance on January 1 ............................... $ 6,778 $ 6,316 $ 6,222 ------- ------- ------- Loans and leases charged off ....................... (3,050) (2,603) (2,369) Recoveries of loans and leases previously charged off 583 751 702 ------- ------- ------- Net charge-offs .................................. (2,467) (1,852) (1,667) Provision for credit losses ........................ 2,920 1,904 1,645 Other, net ......................................... (109) 410 116 ---------- ------- ------- Balance on December 31 ........................... $ 7,122 $ 6,778 $ 6,316 ======= ======= =======
Note Seven - Deposits On December 31, 1998, the Corporation had domestic certificates of deposit of $100 thousand or greater totaling $27.3 billion, with $14.0 billion maturing within three months, $5.9 billion maturing within three to six months, $4.9 billion maturing within six to twelve months and $2.5 billion maturing after twelve months. Additionally, on December 31, 1998, the Corporation had other domestic time deposits of $100 thousand or greater totaling $887 million, with $208 million maturing within three months, $96 million maturing within three to six months, $164 million maturing within six to twelve months and $419 million maturing after twelve months. Foreign office certificates of deposit and other time deposits of $100 thousand or greater totaled $40.8 billion and $48.7 billion on December 31, 1998 and 1997, respectively. At December 31, 1998, the scheduled maturities for time deposits were as follows (dollars in millons): Due in 1999 ............... $ 126,193 Due in 2000 ............... 7,972 Due in 2001 ............... 2,124 Due in 2002 ............... 1,423 Due in 2003 ............... 750 Thereafter ................ 952 --------- Total ..................... $ 139,414 =========
68 Note Eight - Short-Term Borrowings and Long-Term Debt The contractual maturities of long-term debt on December 31 were:
1998 ------------------------------------------------- Various Various Fixed-Rate Floating-Rate 1997 Debt Debt Amount Amount (Dollars in Millions) Obligations (1) Obligations (1) Outstanding Outstanding - ------------------------------------------------ ----------------- ----------------- ------------- ------------ Parent company Senior debt Due in 1998 ................................. $ -- $ -- $ -- $ 2,792 Due in 1999 ................................. 341 2,287 2,628 2,381 Due in 2000 ................................. 488 1,725 2,213 3,186 Due in 2001 ................................. 671 3,330 4,001 3,252 Due in 2002 ................................. 130 2,155 2,285 2,290 Due in 2003 ................................. 499 2,079 2,578 1,245 Thereafter .................................. 357 3,708 4,065 1,715 -------- -------- ------- -------- 2,486 15,284 17,770 16,861 -------- -------- ------- -------- Subordinated debt Due in 1998 ................................. -- -- -- 52 Due in 1999 ................................. 361 319 680 683 Due in 2000 ................................. 411 -- 411 417 Due in 2001 ................................. 1,312 30 1,342 1,355 Due in 2002 ................................. 2,199 26 2,225 2,213 Due in 2003 ................................. 1,711 323 2,034 1,974 Thereafter .................................. 5,984 3,265 9,249 7,776 -------- -------- ------- -------- 11,978 3,963 15,941 14,470 -------- -------- ------- -------- Total parent company long-term debt ......... 14,464 19,247 33,711 31,331 -------- -------- ------- -------- Banking and nonbanking subsidiaries Senior debt Due in 1998 ................................. -- -- -- 3,902 Due in 1999 ................................. 221 3,790 4,011 1,512 Due in 2000 ................................. 3 4,555 4,558 3,365 Due in 2001 ................................. 34 1,263 1,297 455 Due in 2002 ................................. 109 284 393 443 Due in 2003 ................................. 441 261 702 252 Thereafter .................................. 87 90 177 120 -------- -------- ------- -------- 895 10,243 11,138 10,049 -------- -------- ------- -------- Subordinated debt Due in 1998 ................................. -- -- -- 10 Due in 1999 ................................. -- -- -- 11 Due in 2000 ................................. -- -- -- 12 Due in 2001 ................................. 227 -- 227 308 Due in 2002 ................................. -- -- -- -- Due in 2003 ................................. 104 -- 104 100 Thereafter .................................. 300 8 308 308 -------- -------- ------- -------- 631 8 639 749 -------- -------- ------- -------- Total banking and nonbanking subsidiaries long-term debt ................ 1,526 10,251 11,777 10,798 -------- -------- ------- -------- Total parent, banking and nonbanking subsidiaries long-term-debt ................ $ 15,990 $ 29,498 45,488 42,129 Notes payable to finance the purchase of leased vehicles ...................................... 279 625 Obligations under capital leases ............... 121 133 ------- -------- Total long-term debt ........................ $45,888 $ 42,887 ======= ========
(1) Fixed rate and floating rate classifications of long-term debt include the effect of interest rate swap contracts. 69 The majority of the floating rates are based on three- and six-month London InterBank Offer Rates (LIBOR). At December 31, 1998, the interest rates on floating-rate long-term debt, as classified in the table on the preceding page, ranged from 4.75 percent to 7.07 percent. These obligations were denominated primarily in U.S. dollars. The interest rate on fixed-rate long-term debt, as classified in the table on the preceding page, ranged from 4.50 percent to 12.50 percent at December 31, 1998. At December 31, 1998, the Corporation had commercial paper back-up lines of credit totaling $1.1 billion, of which $669 million expires in October 1999 and $479 million expires in October 2002. In addition, the Corporation had a $1.6 billion line of credit which expires in May 2001. At December 31, 1998, there were no amounts outstanding under these credit facilities. These lines were supported by fees paid to unaffiliated banks. As of December 31, 1998, the Corporation has the authority to issue approximately $9.4 billion of corporate debt and other securities under its existing shelf registration statements. Under a joint Euro medium-term note program, the Corporation and NationsBank, N.A. may offer an aggregate of $8.5 billion of senior or, in the case of the Corporation, subordinated notes exclusively to non-United States residents. The notes bear interest at fixed or floating rates and may be denominated in U.S. dollars or foreign currencies. The Corporation uses foreign currency contracts to convert certain foreign-denominated debt into U.S. dollars. On December 31, 1998, $3.7 billion of notes were outstanding under this program. BankAmerica's Euro medium-term note program was cancelled in September 1998. As of December 31, 1998, the Corporation and NationsBank, N.A. had the authority to issue approximately $2.8 billion and $2.0 billion, respectively, of debt securities under this program. On December 31, 1998, $3.5 billion of notes were outstanding under the former BankAmerica program. NationsBank, N.A. maintains a program to offer up to $25 billion of bank notes from time to time with fixed or floating rates and maturities ranging from 7 days or more from date of issue. Prior to the Merger, Bank of America NT&SA maintained a program to offer up to $12 billion of bank notes from time to time with fixed or floating rates and maturities ranging from 30 days to 15 years. On December 31, 1998 and 1997, there were short-term bank notes outstanding under these programs of $14.7 billion and $4.6 billion, respectively. On December 31, 1998 and 1997 the Corporation's long-term debt included $7.9 billion and $5.1 billion, respectively, of these notes. Through a limited purpose subsidiary, the Corporation had $2.5 billion of mortgage-backed bonds outstanding on December 31, 1998. These bonds are collateralized by $3.7 billion of mortgage loans. As part of its interest rate risk management activities, the Corporation enters into interest rate contracts for certain long-term debt issuances. Through the use of interest rate swaps, $8.8 billion of fixed-rate debt with rates ranging from 5.30 percent to 8.57 percent have been effectively converted to floating rates primarily at spreads to LIBOR. Through the use of interest rate options, the Corporation has the right to purchase interest rate caps and floors to hedge its risk on floating-rate debt against a rise in interest rates. At December 31, 1998, the interest rate options had a notional amount of approximately $3.4 billion. In addition, the Corporation has entered into other interest rate contracts, primarily futures, with notional amounts of approximately $802 million at December 31, 1998 to reduce its interest rate risk by shortening the repricing profile on floating-rate debt that reprices within one year. On December 31, 1998, including the effects of interest rate contracts for certain long-term debt issuances, the weighted average effective interest rates for total long-term debt, total fixed-rate debt and total floating-rate debt (based on the rates in effect on December 31, 1998) were 6.11 percent, 7.73 percent and 5.24 percent, respectively. These obligations were denominated primarily in U.S. dollars. 70 As described below, certain debt obligations outstanding on December 31, 1998 may be redeemed prior to maturity at the option of the Corporation:
Amount Outstanding Year Redeemable Year of Maturities (in millions) - ------------------------ -------------------- -------------- Currently redeemable 2002 $ 21 1999 2001 -- 2010 919 2000 -- 2001 2001 -- 2028 2,542 2002 -- 2008 2005 -- 2028 853
Note Nine - Trust Preferred Securities Trust preferred securities are Corporation obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated deferrable interest notes of the Corporation. Since October 1996, the Corporation formed thirteen wholly owned grantor trusts to issue trust preferred securities and to invest the proceeds of such trust preferred securities into notes of the Corporation. Certain of the trust preferred securities were issued at a discount. Such trust preferred securities may be redeemed prior to maturity at the option of the Corporation. The sole assets of each of the grantor trusts are the Junior Subordinated Deferrable Interest Notes of the Corporation (the Notes) held by such grantor trusts. Each issue of the Notes has an interest rate equal to the corresponding trust preferred securities distribution rate. The Corporation has the right to defer payment of interest on the Notes at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the trust preferred securities will also be deferred and the Corporation's ability to pay dividends on its common and preferred stock will be restricted. The trust preferred securities are subject to mandatory redemption upon repayment of the related Notes at their stated maturity dates or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for redemption and the premium if any, paid by the Corporation upon concurrent repayment of the related Notes. Payment of periodic cash distributions and payment upon liquidation or redemption with respect to trust preferred securities are guaranteed by the Corporation to the extent of funds held by the grantor trusts (the Preferred Securities Guarantee). The Preferred Securities Guarantee, when taken together with the Corporation's other obligations including its obligations under the Notes, will constitute a full and unconditional guarantee, on a subordinated basis, by the Corporation of payments due on the trust preferred securities. The Corporation is required by the FRB to maintain certain levels of capital for bank regulatory purposes. The FRB has determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for bank holding companies. Such Tier 1 capital treatment provides the Corporation with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Corporation were to issue preferred stock. The table on the next page is a summary of the outstanding trust preferred securities and the Notes at December 31: 71
Aggregate Principal Amount of Trust Preferred Securities Aggregate --------------------- Principal Amount of (Dollars in Millions) Issued 1998 1997 the Notes - ----------------------------- ----------- ---------- ---------- ----------- NationsBank Capital Trust I ............ Dec. 1996 $ 600 $ 600 $ 619 Capital Trust II ........... Dec. 1996 365 365 376 Capital Trust III .......... Feb. 1997 500 500 516 Capital Trust IV ........... Apr. 1997 500 500 516 BankAmerica Institutional Capital A .... Nov. 1996 450 450 464 Institutional Capital B .... Nov. 1996 300 300 309 Capital I .................. Dec. 1996 300 300 309 Capital II ................. Dec. 1996 450 450 464 Capital III ................ Jan. 1997 400 400 412 Capital IV ................. Feb. 1998 350 -- 361 Barnett Capital I .................. Nov. 1996 300 300 309 Capital II ................. Dec. 1996 200 200 206 Capital III ................ Jan. 1997 250 250 258 ------- Total ...................... $4,965m $4,615m $ 5,119 ======= ======= ======= Per Annum Stated Interest Interest Maturity of Rate of Payment Redemption (Dollars in Millions) the Notes the Notes Dates Period - ----------------------------- ------------- ------------- -------------- ------------ NationsBank Capital Trust I ............ Dec. 2026 7.84% 3/31, 6/30, On or after 9/30, 12/31 12/31/01 a Capital Trust II ........... Dec. 2026 7.83 6/15, 12/15 On or after 12/15/06 bd Capital Trust III .......... Jan. 2027 3-mo. LIBOR 1/15, 4/15, On or after +55 bps 7/15, 10/15 1/15/07 b Capital Trust IV ........... Apr. 2027 8.25 4/15, 10/15 On or after 4/15/07 bf BankAmerica Institutional Capital A..... Dec. 2026 8.07 6/30, 12/31 On or after 12/31/06cg Institutional Capital B..... Dec. 2026 7.70 6/30, 12/31 On or after 12/31/06 ch Capital I .................. Dec. 2026 i 7.75 3/31, 6/30, On or after 9/30, 12/31 12/20/01 e Capital II ................. Dec. 2026 8.00 6/15, 12/15 On or after 12/15/06 cj Capital III ................ Jan. 2027 3-mo. LIBOR 1/15, 4/15, On or after +57 bps 7/15, 10/15 1/15/02 c Capital IV ................. Mar. 2028 7.00 3/31, 6/30, On or after 9/30, 12/31 2/24/03 c Barnett Capital I .................. Dec. 2026 8.06 6/1, 12/1 On or after 12/1/06 bk Capital II ................. Dec. 2026 7.95 6/1, 12/1 On or after 12/1/06 bl Capital III ................ Feb. 2027 3-mo. LIBOR 2/1, 5/1, On or after +62.5 bps 8/1, 11/1 2/1/07 b Total ......................
a The Corporation may redeem the Notes prior to the indicated redemption period upon the occurrence of certain events relating to tax treatment of the related trust or the Notes, at a redemption price at least equal to the principal amount of the Notes. b The Corporation may redeem the Notes prior to the indicated redemption period upon the occurrence of certain events relating to tax treatment of the related trust or the Notes or relating to capital treatment of the trust preferred securities or relating to a change in the treatment of the related trust under the Investment Company Act of 1940, as amended, at a redemption price at least equal to the principal amount of the Notes. c The Corporation may redeem the Notes prior to the indicated redemption period upon the occurrence of certain events relating to tax treatment of the related trust or the Notes or relating to capital treatment of the trust preferred securities at a redemption price at least equal to the principal amount of the Notes. d The Notes may be redeemed on or after December 15, 2006 and prior to December 15, 2007 at 103.915% of the principal amount, and thereafter at prices declining to 100% on December 15, 2016 and thereafter. e The Corporation may redeem the Notes (i) during the indicated redemption period or (ii) upon the occurrence of certain events relating to tax treatment of the trust or the Notes or relating to capital treatment of the trust preferred securities, prior to the indicated redemption period, in each case, at a redemption price of 100% of the principal amount. f The Notes may be redeemed on or after April 15, 2007 and prior to April 14, 2008 at 103.85% of the principal amount, and thereafter at prices declining to 100% on April 15, 2017 and thereafter. g The Notes may be redeemed on or after December 31, 2006 and prior to December 31, 2007 at 104.0350% of the principal amount, and thereafter at prices declining to 100% on December 31, 2016 and thereafter. h The Notes may be redeemed on or after December 31, 2006 and prior to December 31, 2007 at 103.7785% of the principal amount, and thereafter at prices declining to 100% on December 31, 2016 and thereafter. i At the option of the Corporation, the stated maturity may be shortened to a date not earlier than December 20, 2001 or extended to a date not later than December 31, 2045, in each case if certain conditions are met. j The Notes may be redeemed on or after December 15, 2006 and prior to December 15, 2007 at 103.9690% of the principal amount, and thereafter at prices declining to 100% on December 15, 2016 and thereafter. k The Notes may be redeemed on or after December 1, 2006 and prior to December 1, 2007 at 104.030% of the principal amount, and thereafter at prices declining to 100% on December 1, 2016 and thereafter. l The Notes may be redeemed on or after December 1, 2006 and prior to December 1, 2007 at 103.975% of the principal amount, and thereafter at prices declining to 100% on December 1, 2016 and thereafter. m Excludes $11 and $37 of deferred issuance costs and unamortized discount at December 31, 1998 and 1997, respectively. 72 Note Ten - Shareholders' Equity and Earnings Per Common Share On June 29, 1998, the Corporation redeemed all of BankAmerica's remaining outstanding nonconvertible preferred shares. The Corporation's Preferred Stock on December 31, 1997, included BankAmerica's outstanding preferred stock of $614 million. These preferred shares were nonvoting except in certain limited circumstances. The shares were redeemable at the option of BankAmerica during the redemption period and at the redemption price per share plus accrued and unpaid dividends to the redemption date. During 1997 and 1996, BankAmerica redeemed a portion of its preferred shares for an aggregate of $1,628 million and $381 million, respectively. In April 1988, BankAmerica declared a dividend of one preferred share purchase right (a Right) for each outstanding share of BankAmerica's common stock pursuant to the Rights Agreement dated April 11, 1988 between BankAmerica and Manufacturers Hanover Trust Company of California, as rights agent (the Rights Agreement). Each Right entitled the holder, upon the occurrence of certain events, to buy from BankAmerica, until the earlier of April 22, 1998 or the redemption of the Rights, one two-hundredth of a share of Cumulative Participating Preferred Stock, Series E, at an exercise price of $25.00 per Right (subject to adjustment). On April 22, 1998, the Rights Agreement expired in accordance with its terms. As of December 31, 1998, the Corporation had issued 1.9 million shares of employee stock ownership plan (ESOP) Convertible Preferred Stock, Series C (ESOP Preferred Stock). The ESOP Preferred Stock has a stated and liquidation value of $42.50 per share, provides for an annual cumulative dividend of $3.30 per share and each share is convertible into 1.68 shares of the Corporation's common stock. ESOP Preferred Stock in the amounts of $11 million, $86 million and $98 million was converted into the Corporation's common stock in 1998, 1997 and 1996, respectively. In November 1989, Barnett incorporated ESOP provisions into its existing 401(k) employee benefit plan (Barnett ESOP). The Barnett ESOP acquired $141 million of common stock using the proceeds of a loan from the Corporation. The terms of the loan include equal monthly payments of principal and interest through September 2015. Interest is at 9.75 percent and prepayments of principal are allowed. The loan is generally being repaid from contributions to the plan by the Corporation and dividends on unallocated shares held by the Barnett ESOP. Shares held by the Barnett ESOP are allocated to plan participants as the loan is repaid. As of December 31, 1998, 3.5 million shares of unallocated common stock remained in the Barnett ESOP. During 1998, 1997 and 1996, the Barnett ESOP released and allocated common stock amounting to $6 million, $8 million and $13 million, respectively. As consideration in the merger of NationsBank, N.A. (South) and NationsBank, N.A. during 1997, NationsBank, N.A. exchanged approximately $73 million for preferred stock issued by NationsBank, N.A. (South) in the 1996 acquisition of Citizens Federal Bank, a federal savings bank. Such preferred stock consisted of approximately 0.5 million shares of NationsBank, N.A. (South) 8.50% Series H Noncumulative Preferred Stock and approximately 2.4 million shares of NationsBank, N.A. (South) 8.75% Series 1993A Noncumulative Preferred Stock. During 1998 and 1997, the Corporation repurchased approximately 29 million and approximately 150 million shares of common stock, respectively, under various stock repurchase programs authorized by the Board of Directors. On September 24, 1998, the Board of Directors of the Corporation approved the purchase of up to 20 million shares of the Corporation's common stock in the open market or through private transactions. During the fourth quarter of 1998 all shares authorized under this resolution were repurchased. Other shareholders' equity consisted of restricted stock award plan deferred compensation of $74 million and $23 million, as well as a loan to the ESOP trust of $58 million and $86 million at December 31, 1998 and 1997, respectively. 73 The calculation of earnings per common share and diluted earnings per common share is presented below (dollars in millions, except per-share data, shares in thousands):
1998 1997 1996 ------------- ------------- ------------- Earnings per common share computation Net income ...................................................... $ 5,165 $ 6,542 $ 5,813 Total preferred stock dividends ................................. (25) (111) (202) ---------- ---------- ---------- Income available to common shareholders ......................... $ 5,140 $ 6,431 $ 5,611 ---------- ---------- ---------- Average common shares issued and outstanding .................... 1,732,057 1,733,194 1,638,382 ---------- ---------- ---------- Earnings per common share ....................................... $ 2.97 $ 3.71 $ 3.42 ========== ========== ========== Diluted earnings per common share computation Income available to common shareholders ......................... $ 5,140 $ 6,431 $ 5,611 Total preferred stock dividends ................................. 25 111 202 Preferred stock dividends on nonconvertible stock ............... (19) (104) (193) ---------- ---------- ---------- Effect of assumed conversions ................................... 6 7 9 ---------- ---------- ---------- Income available to common shareholders and assumed conversions ................................................... $ 5,146 $ 6,438 $ 5,620 ---------- ---------- ---------- Average common shares issued and outstanding .................... 1,732,057 1,733,194 1,638,382 Incremental shares from assumed conversions: Convertible preferred stock ................................... 3,290 3,736 6,158 Stock options ................................................. 40,413 45,242 26,086 ---------- ---------- ---------- Dilutive potential common shares ................................ 43,703 48,978 32,244 ---------- ---------- ---------- Total dilutive average common shares issued and outstanding ..... 1,775,760 1,782,172 1,670,626 ---------- ---------- ---------- Diluted earnings per common share ............................... $ 2.90 $ 3.61 $ 3.36 ========== ========== ==========
Note Eleven - Commitments, Contingencies and Off-Balance Sheet Financial Instruments In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and risk limitation reviews as those recorded on the balance sheet. Credit Extension Commitments The Corporation enters into commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. The commitments shown below have been reduced by amounts collateralized by cash and amounts participated to other financial institutions. The following summarizes outstanding commitments to extend credit on December 31 (dollars in millions):
1998 1997 ---------- ---------- Credit card commitments ................................... $ 67,018 $ 69,297 Other loan commitments .................................... 234,453 226,773 Standby letters of credit and financial guarantees ........ 33,311 31,315 Commercial letters of credit .............................. 3,035 3,748
Commitments to extend credit are legally binding, generally have specified rates and maturities and are for specified purposes. The Corporation manages the credit risk on these commitments by subjecting these commitments to normal credit approval and monitoring processes and protecting against deterioration in the borrowers' ability to pay through adverse-change clauses which require borrowers to maintain various credit and liquidity measures. As of December 31, 1998 and 1997, there were no unfunded commitments to any industry or country greater than 10 percent of total unfunded commitments to lend. Credit card lines are unsecured commitments which are reviewed at least annually by management. Upon evaluation of the customers' creditworthiness, the Corporation has the right to terminate or change the terms of the credit card lines. Of the December 31, 1998 other loan commitments, $107.4 billion is scheduled to expire in less than one year, $105.8 billion in one to five years and $21.3 billion after five years. 74 Standby letters of credit (SBLC) and financial guarantees are issued to support the debt obligations of customers. If a SBLC or financial guarantee is drawn upon, the Corporation looks to its customer for payment. SBLCs and financial guarantees are subject to the same approval and collateral policies as other extensions of credit. Of the December 31, 1998 SBLCs and financial guarantees, $20.9 billion is scheduled to expire in less than one year, $10.8 billion in one to five years and $1.6 billion after five years. Commercial letters of credit, issued primarily to facilitate customer trade finance activities, are collateralized by the underlying goods being shipped by the customer and are generally short-term. For each of these types of instruments, the Corporation's maximum exposure to credit loss is represented by the contractual amount of these instruments. Many of the commitments are collateralized or are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent risk of loss or future cash requirements. Derivatives Derivatives utilized by the Corporation include interest rate swaps, financial futures and forward settlement contracts and option contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts and indices. Financial futures and forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, currency or commodity at a predetermined future date and rate or price. An option contract is an agreement that conveys to the purchaser the right, but not the obligation, to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined rate or price at a time or during a period in the future. These option agreements can be transacted on organized exchanges or directly between parties. Asset and Liability Management Activities Risk management interest rate contracts are used in the asset and liability management process. Such contracts, which are generally non-leveraged generic interest rate and basis swaps, options and futures, allow the Corporation to effectively manage its interest rate risk position. Generic interest rate swaps involve the exchange of fixed-rate and variable-rate interest payments based on the contractual underlying notional amount. 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. 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. The following table outlines the notional and fair values of the Corporation's ALM contracts on December 31 (dollars in millions):
1998 1997 ---------------------- ---------------------- Notional Fair Notional Fair Amount Value Amount Value ---------- ----------- ---------- ----------- Interest Rate Contracts Receive fixed swaps ...................... $60,450 $ 1,958 $56,127 $ 877 Pay fixed swaps .......................... 25,770 (1,006) 25,041 (888) ------- -------- ------- ----- Net receive fixed ...................... 34,680 952 31,086 (11) Basis swaps .............................. 7,736 (10) 2,583 (7) ------- -------- ------- -------- Total net swap position ................ 42,416 942 33,669 (18) Futures and forward rate contracts ....... 6,348 2 89,650 (16) Option products .......................... 26,836 (46) 24,113 (60) ------- -------- ------- ------- Total interest rate contracts (1) ...... $ 898 $ (94) ======== =======
(1) Not meaningful to sum notional amounts of different off-balance sheet products. 75 In addition to the contracts in the preceding table, the Corporation uses foreign currency contracts to manage the foreign exchange risk associated with certain foreign-denominated liabilities. Foreign exchange contracts, which include spot, forward and futures contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price, on an agreed-upon settlement date. Foreign exchange option contracts are similar to interest rate option contracts except that they are based on currencies rather than interest rates. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate. The Corporation's credit risk exposure for exchange-traded instruments is minimal as these instruments conform to standard terms and are subject to policies set by the exchange involved, including counterparty approval, margin requirements and security deposit requirements. Credit Risk Associated with Derivative Activities Credit risk associated with derivatives is measured as the net replacement cost should the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts and any collateral underlying the contracts proves to be of no value. In managing derivatives credit risk, 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 are considered. In managing credit risk associated with its derivatives activities, the Corporation deals primarily with U.S. and foreign commercial banks, broker-dealers and corporates. During 1998, there were $40 million in credit losses associated with derivative contracts. On December 31, 1998, there were no nonperforming derivatives positions that were material to the Corporation. To minimize credit risk, the Corporation enters into legally enforceable master netting agreements, which reduce risk by permitting the close out and netting of transactions with the same counterparty upon the occurrence of certain events. A portion of the derivative-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 is minimal. The following table presents the notional or contract amounts on December 31, 1998 and 1997 and the current credit risk amounts (the net replacement cost of contracts in a gain position on December 31, 1998 and 1997) of the Corporation's derivative-dealer positions which are primarily executed in the over-the-counter market for trading purposes. The notional or contract amounts indicate the total volume of transactions and significantly exceed the amount of the Corporation's credit or market risk associated with these instruments. The credit risk amounts presented in the following table do not consider the value of any collateral, but generally take into consideration the effects of legally enforceable master netting agreements. 76 Derivative - Dealer Positions (Dollars in Millions)
December 31, 1998 December 31, 1997 ------------------------ --------------------- Contract/ Credit Contract/ Credit Notional Risk (1) Notional Risk (1) ------------- ---------- ----------- --------- Interest Rate Contracts Swaps ...................................... $1,539,862 $ 5,470 $868,708 $ 3,759 Futures and forwards ....................... 808,284 290 470,640 120 Written options ............................ 494,608 -- 476,152 -- Purchased options .......................... 615,492 2,125 449,383 1,078 Foreign Exchange Contracts Swaps ...................................... 37,357 1,403 31,028 1,577 Spot, futures and forwards ................. 623,977 5,136 628,265 7,214 Written options ............................ 56,287 -- 80,438 -- Purchased options .......................... 53,426 703 75,998 970 Commodity and Other Contracts Swaps ...................................... 5,685 370 2,713 80 Futures and forwards ....................... 5,292 -- 3,147 -- Written options ............................ 22,382 -- 14,159 -- Purchased options .......................... 22,134 989 13,954 403 ------- ------- Total before cross product netting ....... 16,486 15,201 ------- ------- Cross product netting .................... 1,274 749 ------- ------- Net replacement cost ..................... $15,212 $14,452 ======= =======
(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. The table above includes both long and short derivative-dealer positions. The fair value of dealer positions on December 31, 1998 and 1997, as well as their average fair values for 1998 and 1997 are disclosed in Note Four of the consolidated financial statements on page 66. The Corporation uses credit derivatives to diversify credit risk and lower its risk portfolio by transferring the exposure of an underlying asset to another counterparty. Credit default swaps are a type of credit derivatives which provide protection against credit losses associated with specific events on an underlying asset. As of December 31, 1998, the Corporation had a notional value of $16.9 billion in credit derivatives, primarily credit default swaps. When Issued Securities When issued securities are commitments to purchase or sell securities during the time period between the announcement of a securities offering and the issuance of those securities. On December 31, 1998, the Corporation had commitments to purchase and sell when issued securities of $1.3 billion and $2.4 billion, respectively. On December 31, 1997, the Corporation had commitments to purchase and sell when issued securities of $8.8 billion and $8.2 billion, respectively. Litigation In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including 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. The Corporation's predecessor, BankAmerica, and certain of its subsidiaries, including Bank of America NT&SA, were named in one such suit by the City of San Francisco and several related public entities, and by the State of California, in an action entitled State of California, etc ex rel Stull v. Bank of America NT&SA, et al. (No. 968-484). The case was instituted on April 1, 1995 in the Superior Court for the City and County of San Francisco. The City of San Francisco and related public entities intervened in the case on May 1, 1997, and the 77 State of California took over prosecution of the case on May 5, 1997. The chief allegation of this suit is that Bank of America NT&SA and its predecessors retained unclaimed funds related to bonds and coupons that were not presented by bondholders rather than returning them to certain bond issuers or escheating such funds to the State. The suit also alleges False Claims Act exposure for alleged fee overcharges and claims that Bank of America NT&SA and its predecessors improperly invested bond program funds. On November 12, 1998, the plaintiffs and the Corporation and its named subsidiaries settled this suit whereby the Corporation and its named subsidiaries agreed to pay $187.5 million to the plaintiffs. The settlement is subject to court approval. The Corporation and certain present and former officers have been named as defendants in approximately 24 uncertified class actions filed in federal court alleging, among other things, that the defendants failed to disclose material facts about BankAmerica's losses relating to D.E. Shaw & Co., L. P. until mid-October 1998, in violation of various provisions of the federal securities laws. The uncertified classes consist generally of persons who were entitled to vote on the merger of NationsBank and BankAmerica, or who purchased or acquired securities of the Corporation or its predecessors between August 4, 1998 and October 13, 1998. Similar actions are pending in California state court, alleging violations of the California Corporations Code and involving factual allegations essentially the same as the federal actions. In addition, certain cases filed in California state court have alleged that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals and allege a conspiracy on the part of certain executives to gain control over the newly merged entity. At least one such complaint seeks recovery under various state common law theories. The Corporation believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that the actions and proceedings and the losses, if any, resulting from the final outcome thereof, will not be material in the aggregate to the Corporation's financial position or results of operations. Note Twelve - Regulatory Requirements and Restrictions The Corporation's banking subsidiaries are required to maintain average reserve balances with the FRB based on a percentage of certain deposits. Average reserve balances held with the FRB to meet these requirements amounted to $288 million and $403 million for 1998 and 1997, respectively. The primary source of funds for cash distributions by the Corporation to its shareholders is dividends received from its banking subsidiaries. The subsidiary national banks can initiate aggregate dividend payments in 1999, without prior regulatory approval, of $2.2 billion plus an additional amount equal to their net profits for 1999, as defined by statute, up to the date of any such dividend declaration. The amount of dividends that each subsidiary bank may declare in a calendar year without approval by the Office of the Comptroller of the Currency (OCC) is the bank's net profits for that year combined with its net retained profits, as defined, for the preceding two years. One of the Corporation's subsidiaries, Bank of America, FSB, is subject to regulatory restrictions by the Office of Thrift Supervision (OTS) on its payment of dividends. Under these restrictions, Bank of America, FSB, can initiate dividend payments in 1999 without prior regulatory approval of $675 million. Regulations also restrict banking subsidiaries in lending funds to affiliates. On December 31, 1998, the total amount which could be loaned to the Corporation by its banking subsidiaries was approximately $5.6 billion. On December 31, 1998, no loans to the Corporation from its banking subsidiaries were outstanding. The FRB, the OCC, the Federal Deposit Insurance Corporation and the OTS (collectively, the Agencies) have issued regulatory capital guidelines for U.S. banking organizations. Failure to meet the capital requirements can initiate certain mandatory and discretionary actions by regulators that could have a material effect on the Corporation's financial statements. As of December 31, 1998 and 1997, the Corporation and each of its banking subsidiaries were well capitalized under this regulatory framework. There have been no conditions or events since December 31, 1998 that management believes have changed either the Corporation's or its banking subsidiaries' capital classifications. The regulatory capital guidelines measure capital in relation to the credit risk of both on- and off-balance sheet items using various risk weights. Under the regulatory capital guidelines, Total Capital consists of three 78 tiers of capital. Tier 1 Capital includes common shareholders' equity and qualifying preferred stock, less goodwill and other adjustments. Tier 2 Capital consists of preferred stock not qualifying as Tier 1 Capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank's risk-based capital ratio to fall or remain below the required minimum. At December 31, 1998, the Corporation had no subordinated debt that qualified as Tier 3 capital. In accordance with the FRB's amendment to its capital adequacy guidelines effective for periods beginning after December 31, 1997, the Corporation is now required to include its broker/dealer subsidiaries, NationsBanc Montgomery Securities and Robertson Stephens, when calculating regulatory capital ratios. Previously, the Corporation had been required to exclude the equity, assets and off-balance sheet exposures of its broker/dealer subsidiary. To meet minimum adequately capitalized regulatory requirements, an institution must maintain a Tier 1 Capital ratio of four percent and a Total Capital ratio of eight percent. A well-capitalized institution must maintain a Tier 1 Capital ratio of six percent and a Total Capital ratio of ten percent. The risk-based capital rules have been further supplemented by a leverage ratio, defined as Tier 1 capital divided by average total assets, after certain adjustments. The leverage ratio guidelines establish a minimum of 100 to 200 basis points above three percent. Banking organizations must maintain a leverage capital ratio of at least five percent to be classified as well capitalized. On September 12, 1996, the Agencies amended their regulatory capital guidelines to incorporate a measure for market risk. In accordance with the amended guidelines, the Corporation and any of its banking subsidiaries with significant trading activity, as defined in the amendment, must incorporate a measure for market risk in their regulatory capital calculations effective for reporting periods after January 1, 1998. The revised guidelines have not had a material impact on the Corporation or its subsidiaries' regulatory capital ratios or their well-capitalized status. The following table presents the actual capital ratios and amounts and minimum required capital amounts for the Corporation, NationsBank, N.A. and Bank of America NT&SA on December 31:
1998 1997 ----------------------------------- ----------------------------------- Actual Actual --------------------- Minimum --------------------- Minimum Ratio Amount Required (1) Ratio Amount Required (1) ---------- ---------- ------------- ---------- ---------- ------------- (Dollars in Millions) Tier 1 Capital BankAmerica Corporation ......... 7.06% $36,849 $20,866 6.50% $13,593 $ 8,371 NationsBank, N.A. ............... 7.72 19,317 10,007 7.58 10,537 5,557 Bank of America NT&SA ........... 7.03 15,511 8,832 7.49 15,660 8,361 Total Capital BankAmerica Corporation ......... 10.94 57,055 41,733 10.89 22,787 16,742 NationsBank, N.A. ............... 10.27 25,691 20,014 10.98 15,256 11,113 Bank of America NT&SA ........... 10.80 23,837 17,664 11.28 23,576 16,722 Leverage Capital BankAmerica Corporation ......... 6.22 36,849 17,773 5.57 13,593 7,321 NationsBank, N.A. ............... 6.55 19,317 8,854 5.68 10,537 5,568 Bank of America NT&SA ........... 6.15 15,511 7,568 6.93 15,660 6,779
(1) Dollar amount required to meet the Agencies guidelines for adequately capitalized institutions. 79 During 1998, several subsidiaries including NationsBank of Texas, N.A., NationsBank of Tennessee, N.A. and Barnett Banks, N.A., as well as various other subsidiaries were merged with and into NationsBank, N.A. During 1997, several subsidiaries including NationsBank, N.A. (South) and various subsidiaries acquired in the purchase of Boatmen's were merged with and into NationsBank, N.A. The Corporation's and NationsBank, N.A.'s ratios and amounts for 1997 have not been restated to reflect the impact of mergers. BankAmerica, Barnett and their significant banking subsidiaries were considered "well capitalized" on December 31, 1997 under the regulatory framework. Note Thirteen - Employee Benefit Plans Pension and Postretirement Plans The Corporation sponsors noncontributory trusteed pension plans that cover substantially all officers and employees. The plans provide defined benefits based on an employee's compensation, age and years of service. It is the policy of the Corporation to fund not less than the minimum funding amount required by ERISA. Individually, BankAmerica, Barnett Banks and NationsBank each sponsored defined benefit pension plans prior to each of the respective mergers of these banks. The BankAmerica plan was a cash balance design plan, providing participants with an age, service and wage based crediting rate applied at each pay period and a defined earnings rate on all participant account balances in the plan. The NationsBank plan was amended to a cash balance plan effective July 1, 1998 and provides a similar crediting rate for all participants. The NationsBank plan allows participants to select from various earnings measures, which are based on the returns of certain funds managed by subsidiaries of the Corporation. The participant selected earnings measures determine the earnings rate on the individual participant account balances in the plan. In addition, a one time opportunity to transfer certain assets from the company's savings plan to the cash balance plan was extended to NationsBank plan participants. Assets with an approximate fair value of $1,423 million were transferred by plan participants. The Barnett plan will be amended to merge into the NationsBank plan in 1999, providing the cash balance plan design feature to those participants. The opportunity to transfer certain savings plan assets to the cash balance plan will be extended to Barnett participants in 1999. The BankAmerica and NationsBank plans were merged effective December 31, 1998. However, the participants in each plan will retain the cash balance plan design followed by their predecessor plans until the plan is amended in 2000. In addition to retirement pension benefits, substantially all employees may become eligible for postretirement health care and life insurance benefits. 80 The following tables summarize the balances and changes in fair value of plan assets and benefit obligations as of and for the years ended December 31, 1998 and 1997:
Postretirement Pension Plan Health & Life Plan ----------------------- ------------------------- 1998 1997 1998 1997 ------------ ---------- ------------ ------------ (Dollars in Millions) Change in Fair Value of Plan Assets (Primarily Listed Stocks, Fixed Income and Real Estate) Fair value on January 1 ......................................... $5,725 $4,927 $ 164 $ 137 Actual return on plan assets .................................... 890 770 24 23 Company contributions ........................................... -- -- 65 68 Plan participant contributions .................................. -- -- 28 17 Acquisition/transfer ............................................ 1,429 364 -- -- Benefits paid ................................................... (384) (336) (94) (81) ------ ------ ----- ----- Fair value on December 31 .................................... $7,660 $5,725 $ 187 $ 164 ====== ====== ===== ===== (Dollars in Millions) Change in Benefit Obligation Benefit obligation on January 1 ................................. $4,692 $4,092 $ 930 $ 800 Service cost .................................................... 144 122 10 9 Interest cost ................................................... 371 320 61 62 Plan participant contributions .................................. -- -- 28 17 Plan amendments ................................................. 95 (125) 16 17 Actuarial loss (gain) ........................................... (66) 354 (67) 48 Acquisition/transfer ............................................ 1,539 265 -- 58 Effect of curtailments .......................................... (14) -- (2) -- Benefits paid ................................................... (384) (336) (94) (81) ------ ------ ------- ----- Benefit obligation on December 31 ............................ $6,377 $4,692 $ 882 $ 930 ====== ====== ======= ===== (Dollars in Millions) Funded Status Overfunded (unfunded) status on December 31 ..................... $1,283 $1,033 $(695) $(766) Unrecognized net actuarial loss (gain) .......................... (132) 303 (96) (29) Unrecognized prior service cost (benefit) ....................... 108 (101) 13 (3) Unrecognized transition obligation (asset) ...................... (9) (12) 473 507 -------- ------ ------- ------- Prepaid (accrued) benefit cost ............................... $1,250 $1,223 $(305) $(291) ======= ====== ======= =======
The following are the weighted average discount rate, expected return on plan assets and rate of increase in future compensation assumptions used in determining the actuarial present value of the benefit obligation.
Pension Plan Retiree Health & Life Plan --------------------------- ----------------------------- 1998 1997 1998 1997 ---------- ---------------- ---------- ------------------ Weighted Average Assumptions on December 31 Discount rate ................................. 7.00% 6.50 to 7.50% 7.00% 6.50 to 7.50% Expected return on plan assets ................ 10.00% 8.25 to 10.00% 10.00% 8.25 to 10.00% Rate of compensation increase ................. 4.00% 4.00 to 6.50% 4.00% 4.00%
81 Net periodic pension benefit cost (income) for the years ended December 31, included the following components:
1998 1997 1996 (Dollars in Millions) ----------- ----------- ----------- Components of Net Periodic Pension Benefit Cost (Income) Service cost .............................................. $ 144 $ 122 $ 119 Interest cost ............................................. 371 320 278 Expected return on plan assets ............................ (552) (434) (372) Amortization of transition asset .......................... (3) (3) (3) Amortization of prior service cost ........................ (2) (10) (2) Recognized net actuarial loss ............................. 16 16 25 Recognized gain due to settlements and curtailments ....... (2) -- -- -------- ------- ------- Net periodic pension benefit cost (income) .............. $ (28) $ 11 $ 45 ======= ======= =======
In addition to the trusteed pension plan, the Corporation sponsors a number of unfunded executive pension plans. The total benefit obligation for these plans as of December 31, 1998 and 1997 was $386 million and $342 million respectively. The net periodic pension expense for these plans in 1998 and 1997 totaled $49 million and $46 million, respectively. For the years ended December 31, net periodic postretirement benefit expense included the following components:
1998 1997 1996 (Dollars in Millions) ----------- ---------- ---------- Components of Net Periodic Postretirement Benefit Cost Service cost ............................................. $ 10 $ 9 $ 10 Interest cost ............................................ 61 62 57 Expected return on plan assets ........................... (14) (12) (13) Amortization of transition obligation .................... 34 34 34 Amortization of prior service cost ....................... (1) (2) (2) Recognized net actuarial loss (gain) ..................... (10) (4) 2 Recognized gain due to settlements and curtailments ...... (2) -- -- ------- ------ ------ Net periodic postretirement benefit cost ................ $ 78 $ 87 $ 88 ====== ====== ======
Net periodic postretirement health and life expense was determined using the "projected unit credit" actuarial method. Gains and losses for all benefits except postretirement health care are recognized in accordance with the minimum amortization provisions of the applicable accounting standards. For the postretirement health care plans, 50 percent of the unrecognized gain or loss at the beginning of the fiscal year (or at subsequent remeasurement) is recognized on a level basis during the year. Assumed health care cost trend rates affect the postretirement benefit obligation and benefit cost reported for the health care plan. The assumed health care cost trend rates for the next year used to measure the expected cost of benefits covered for the postretirement health and life plans was 6 percent for pre-65 benefits and 4.5 percent for post 65 benefits. A one percentage point increase in assumed health care cost trend rates would have increased the service and interest costs and the benefit obligation by $6 million and $57 million, respectively. A one-percentage point decrease in assumed health care cost trends would have lowered the service and interest costs and the benefit obligation by $5 million and $49 million, respectively. Defined Contribution Plans The Corporation maintains several defined contribution savings and profit sharing plans, two of which feature leveraged ESOP provisions. See Note Ten of the consolidated financial statements on page 73 for additional information on the two ESOP provisions. ESOP Plans The Corporation contributed approximately $47 million, $45 million and $39 million for 1998, 1997 and 1996, respectively, in cash which was utilized primarily to purchase the Corporation's common stock under the terms of these plans. The Corporation also contributed approximately $16 million, $23 million and $25 million 82 in common stock for 1998, 1997 and 1996, respectively, under the terms of the Barnett ESOP. On December 31, 1998, an aggregate of 22,997,096 shares of the Corporation's common stock and 1,937,730 shares of ESOP preferred stock were held by the Corporation's various savings and profit sharing plans. During 1998, the Corporation offered the plan participants a one-time opportunity to transfer certain assets from the savings and profit sharing plan to the cash balance retirement plan. Assets with an approximate fair value of $1,423 million were transferred. Under the terms of the ESOP Preferred Stock provision, payments to the plan for dividends on the ESOP Preferred Stock were $6 million, $7 million and $7 million for 1998, 1997 and 1996, respectively. Interest incurred to service the debt of the ESOP Preferred Stock amounted to $1 million, $2 million and $3 million for 1998, 1997 and 1996, respectively. The Corporation and the Barnett ESOP were combined effective January 1, 1999. BankAmerica Plans The Corporation maintains certain nonqualified defined contribution retirement plans for certain employees of the former BankAmerica Corporation. In addition, certain non-U.S. employees within the Corporation are covered under defined contribution pension plans that are separately administered in accordance with local laws. Aggregate contributions for all former BankAmerica related defined contribution plans were $175 million, $169 million and $175 million in 1998, 1997 and 1996, respectively. Certain employer and employee contributions to the plans are used to purchase the Corporation's common stock at prices that approximate market values. Contributions, including dividends, to the plans were used to purchase 697,741 shares for $44 million in 1998, 598,958 shares for $34 million in 1997 and 861,254 shares for $30 million in 1996. Sales by the plans of the Corporation's common stock were 571,058 for $46 million in 1998, 528,829 shares for $32 million in 1997 and 657,625 shares for $26 million in 1996. The plans held 33,186,515 shares, 34,252,005 shares and 35,460,291 shares of the Corporation's common stock at December 31, 1998, 1997 and 1996, respectively. Stock Option and Award Plans At December 31, 1998, the Corporation had certain stock-based compensation plans (the Plans) which are described below. The Corporation applies the provisions of Accounting Principles Board Opinion No. 25 in accounting for its stock option and award plans and has elected to provide SFAS 123 disclosures as if the Corporation had adopted the fair-value based method of measuring outstanding employee stock options in 1998, 1997 and 1996 as indicated below:
As Reported Pro Forma ----------------------------------- ----------------------------------- 1998 1997 1996 1998 1997 1996 (Dollars in Millions, Except Per-Share Data) ----------- ----------- ----------- ----------- ----------- ----------- Net income .................................... $ 5,165 $ 6,542 $ 5,813 $ 4,838 $ 6,254 $ 5,688 Net income available to common shareholders ... 5,140 6,431 5,611 4,819 6,143 5,487 Earnings per share ............................ 2.97 3.71 3.42 2.78 3.54 3.35 Diluted earnings per share .................... 2.90 3.61 3.36 2.71 3.46 3.29
In determining the pro forma disclosures above, the fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. The weighted average grant-date fair values of the options granted during 1998, 1997 and 1996 were based on the following assumptions: 83
Risk-Free Dividend Interest Rates Yield -------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- 1996 Associates Stock Option Award Plan ......................... N/A 6.31% 6.44% N/A 3.50% 3.55% Long-Term Incentive Plan ........... N/A 6.33 5.37 N/A 3.50 3.29 Key Employee Stock Option Plan ..... 5.64% 6.29 5.52 3.50% 3.50 3.55 BankAmerica Management Stock Plan .............................. 5.48 6.23 5.95 2.62 2.96 3.23 BankAmerica PEP Plan ............... N/A 6.23 N/A N/A 2.96 N/A BankAmerica Take Ownership! Plan .............................. 5.58 6.23 5.95 1.83 2.96 3.23 Barnett 1997 Associates Stock Option Award Plan ................. N/A 5.60 N/A N/A 3.50 N/A Expected Lives (Years) Volatility -------------------- --------------------------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ----------- ---------- ---------- 1996 Associates Stock Option Award Plan ......................... N/A 3 4 N/A 21.4% 20.8% Long-Term Incentive Plan ........... N/A 6 5 N/A 34.3 36.3 Key Employee Stock Option Plan ..... 7 7 7 22.94% 27.8 24.6 BankAmerica Management Stock Plan .............................. 4 4 5 28.40 24.5 N/A BankAmerica PEP Plan ............... N/A 7 N/A N/A 24.5 N/A BankAmerica Take Ownership! Plan .............................. 1 3 3 28.80 24.5 20.8 Barnett 1997 Associates Stock Option Award Plan ................. N/A 1 N/A N/A 24.7 N/A
Compensation expense under the fair-value based method is recognized over the vesting period of the related stock options. Accordingly, the pro forma results of applying SFAS 123 in 1998, 1997 and 1996 may not be indicative of future amounts. 1996 Associates Stock Option Award Plan: Under the 1996 Associates Stock Option Award Plan (ASOP), as amended, the Corporation has granted to certain full- and part-time employees options to purchase an aggregate of approximately 47 million shares of the Corporation's common stock. All options granted under the ASOP are vested and expire on June 29, 2001. No further awards may be granted under this plan. Key Employee Stock Plan: The Key Employee Stock Plan (KEYSOP), as amended and restated, provides for different types of awards including stock options, restricted stock and performance shares. Under the KEYSOP, ten-year options to purchase approximately 27.2 million shares of common stock have been granted through December 31, 1998 to certain employees at the closing market price on the respective grant dates. Options granted under the KEYSOP generally vest in three or four equal annual installments. Additionally, 2.2 million shares of restricted stock were granted during 1998. These shares generally vest in two or three equal annual installments beginning one year from the grant date. On January 4, 1999, ten-year options to purchase approximately 8.5 million shares of common stock at $60.50 per share were granted to certain employees. On February 1, 1999, ten-year options to purchase approximately 2 million shares of common stock at $65.25 per share were granted to certain employees. For both grants, options vest in three equal annual installments beginning one year from the grant date. Additionally, on January 4, 1999, approximately 5.6 million shares of restricted stock were granted to certain former BankAmerica executives in connection with their employment with the Corporation and approximately 3.9 million shares of restricted stock were granted to certain former NationsBank executives. These shares of restricted stock generally vest in two or three equal annual installments beginning one year from the grant date. Take Ownership!: On September 23, 1998, the Board of Directors of the Corporation approved the Take Ownership! The BankAmerica Global Associate Stock Option Program (Take Ownership!) which covers all employees below a specified executive grade level. Under the plan, eligible employees will be eligible to receive an award of a predetermined number of stock options entitling them to purchase shares of the Corporation's common stock at the fair market value on the grant date. Options will be granted on the first business day of 1999, 2000 and 2001 and will vest 25% on the first anniversary date of grant, 25% on the second anniversary date of grant and 50% on the third anniversary date of grant. These options have a term of five years after the grant date. On January 4, 1999, options to purchase approximately 53.1 million shares of common stock at $60.50 per share were granted under the plan. BankAmerica Stock Plans: In connection with the Merger, outstanding BankAmerica stock options were converted into options to purchase the Corporation's common stock based on the exchange ratio. BankAmerica offered stock awards under 84 three plans: 1992 Management Stock Plan (the management stock plan), Performance Equity Program (PEP) and Take Ownership!. BankAmerica offered stock awards to certain key employees through options or restricted stock under the management stock plan. Options awarded under the management stock plan generally vest in three equal annual installments beginning one year from the grant date and have a term of ten years after the date of grant. On August 3, 1998, ten-year options to purchase approximately 5.6 million shares of common stock at $79.31 per share were granted to certain employees. Additionally, on August 3, 1998, BankAmerica granted approximately 1.5 million shares of restricted stock to certain employees. These shares of restricted stock generally vest in four equal annual installments beginning the second year from the grant date. Options awarded before August 5, 1991 to principal officers of BankAmerica are subject to certain restrictions and also constitute stock appreciation rights (SARs) equal to the number of shares covered by the options. These SARs are exercisable for the difference between the option price and the current market price of the stock at the time of exercise. The difference can be received in cash or in shares. SARs, which are included in options for purposes of this disclosure, are exercisable under the same terms as the related stock options. Effective May 22, 1997, BankAmerica adopted PEP under which BankAmerica offers shares of the Corporation's common stock to certain key employees. Two types of awards can be made under PEP: market price options and premium price options. The market price options vest in three equal annual installments beginning one year from the grant date and generally have a term of ten years after the date the options are granted. The premium price options generally vest and become exercisable not earlier than three years and not later than ten years after the date the options are granted. Furthermore, the premium price options only become exercisable when the Corporation's common stock price increases significantly to specified threshold levels within given time frames. Limited SARs may be awarded in conjunction with premium price options and become exercisable upon a change in control. In connection with the BankAmerica Merger, all options and SARs issued under PEP to persons who were employees as of the Merger date vested. Effective October 1, 1996, BankAmerica adopted The BankAmerica Global Stock Option Program which covered substantially all of its employees. Options awarded under this plan vest in three equal annual installments beginning one year from the grant date and have a term of five years after the date of grant. On May 19, 1998 options to purchase approximately 12.0 million shares of common stock at $73.29 per share were granted under this plan. On September 30, 1998, as a result of the Merger, substantially all of BankAmerica's stock options and restricted stock granted prior to March 27, 1998 vested. Options and restricted stock granted subsequent to March 27, 1998 retain their original vesting terms. No further awards may be granted under the BankAmerica stock plans. Other Plans: In connection with the Barnett merger on January 9, 1998, outstanding Barnett stock options were converted into options to purchase the Corporation's common stock based on the exchange ratio. Barnett has long-term incentive plans that provide stock based awards, including stock options and time-based and performance- based restricted stock to certain officers. All options are granted at current market value for a term of ten years and, subject to limited exceptions, are not exercisable before the third anniversary of the date of grant. Time-based awards provide that restrictions lapse beginning on the third anniversary of the date of the grant. Performance-based awards require that specific performance criteria be met in order for restrictions to lapse. On December 19, 1997, as a result of the shareholder approval of the Barnett merger, all outstanding stock options and restricted stock vested in accordance with change-in-control provisions. Additional stock options assumed in connection with various acquisitions remain outstanding and are included in the tables below. No further awards may be granted under these plans. 85 The following tables present the status of all plans on December 31, 1998, 1997 and 1996, and changes during the years then ended:
1998 1997 1996 --------------------------- --------------------------- -------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise (Option) (Option) (Option) Employee Stock Options Shares Price Shares Price Shares Price - -------------------------------- --------------- ----------- --------------- ----------- --------------- ---------- Outstanding on January 1 ....... 136,409,218 $ 44.08 106,432,319 $ 30.79 64,125,702 $ 21.84 Shares due to acquisitions ..... -- -- 6,688,329 21.99 1,098,580 17.26 Granted ........................ 25,744,102 72.10 76,963,367 58.42 62,227,398 39.92 Exercised ...................... (28,295,737) 33.62 (44,990,054) 33.34 (15,643,484) 17.12 Forfeited ...................... (7,392,082) 63.04 (8,684,743) 45.23 (5,375,877) 36.83 ------------ -------------- -------------- Outstanding on December 31 ..... 126,465,501 51.01 136,409,218 44.18 106,432,319 32.30 ============ =========== ============ Options exercisable on December 31 ................... 99,530,313 46.02 63,927,295 30.90 31,983,859 19.14 ============ =========== ============ Weighted-average fair value of options granted during the year .......................... $ 15.52 $ 9.35 $ 7.41 ======== ======== ========
1998 1997 1996 --------------------------- -------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Restricted Stock Awards Grant Grant Grant (include KEYSOP) Shares Price Shares Price Shares Price - -------------------------------- --------------- ----------- -------------- ----------- -------------- ---------- Outstanding unvested grants on January 1 ................. 5,180,012 $ 38.94 6,459,158 $ 24.68 8,087,399 $ 21.45 Granted ....................... 3,852,739 65.79 2,120,681 57.76 1,302,525 36.55 Vested ........................ (4,896,614) 41.07 (3,112,871) 22.76 (2,570,226) 20.84 Canceled ...................... (354,983) 56.94 (286,956) 32.43 (360,540) 22.51 ---------- ------------- -------- Outstanding unvested grants on December 31 ............... 3,781,154 $ 61.85 5,180,012 $ 38.94 6,459,158 $ 24.68 ========== ======== ========== ======== ========== ========
The following table summarizes information about stock options outstanding on December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------------ ---------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at December 31 Contractual Life Exercise Price at December 31 Exercise Price - ----------------- ---------------- ------------------ ------------------ ---------------- ----------------- $0.00 - $30.00 26,148,328 4.9 years $ 21.35 26,144,828 $ 21.35 $30.01 - $46.50 29,064,517 4.6 years 39.43 27,929,365 39.62 $46.51 - $65.50 44,844,862 5.7 years 59.38 36,907,316 59.24 $65.51 - $99.00 26,407,794 7.1 years 78.87 8,548,804 85.25 ---------- -------- ---------- -------- Total 126,465,501 5.6 years $ 51.01 99,530,313 $ 46.02 =========== ======== ========== ========
86 Note Fourteen - Income Taxes The components of income tax expense for the years ended December 31 were as follows:
1998 1997 1996 (Dollars in Millions) ------------ ------------ --------- Current portion - expense Federal ........................... $2,464 $2,267 $2,015 State ............................. 177 239 239 Foreign ........................... 342 537 279 ------ ------ ------ 2,983 3,043 2,533 ------ ------ ------ Deferred portion - (benefit) expense Federal ........................... (133) 840 834 State ............................. 40 132 127 Foreign ........................... (7) (1) 4 ------ ------ ------ (100) 971 965 ------ ------ ------ Total income tax expense ......... $2,883 $4,014 $3,498 ====== ====== ======
The preceding table does not reflect the tax effects of unrealized gains and losses on securities available for sale and marketable securities that are included in shareholders' equity and certain tax benefits associated with the Corporation's employee stock plans. As a result of these tax effects, shareholders' equity increased by $400 million, $161 million and $273 million in 1998, 1997 and 1996, respectively. The Corporation's current income tax expense approximates the amounts payable for those years. Deferred income tax expense represents the change in the deferred tax asset or liability and is discussed further below. A reconciliation of the expected federal income tax expense using the federal statutory rate of 35 percent to the actual income tax expense for each of the years ended December 31 was as follows:
1998 1997 1996 (Dollars in Millions) ---------- ---------- ---------- Expected federal tax expense ........................ $ 2,817 $ 3,695 $ 3,259 Increase (decrease) in taxes resulting from Tax-exempt income ................................. (81) (83) (68) State tax expense, net of federal benefit ......... 155 287 282 Goodwill amortization ............................. 238 228 97 Reorganization of certain subsidiaries ............ (323) -- -- Other ............................................. 77 (113) (72) ------- ------- ------- Total income tax expense ......................... $ 2,883 $ 4,014 $ 3,498 ======= ======= =======
87 Significant components of the Corporation's deferred tax (liabilities) assets on December 31 were as follows:
1998 1997 (Dollars in Millions) ------------ ------------ Deferred tax liabilities Securities available for sale ......................... $ (227) $ (314) Equipment lease financing ............................. (4,565) (3,633) Depreciation .......................................... (340) (379) Intangibles ........................................... (628) (741) Employee retirement benefits .......................... (437) (189) Loan fees and expenses ................................ (111) -- Deferred gains and losses ............................. (217) (167) Securities valuation .................................. -- (292) Other ................................................. (584) (646) -------- -------- Gross deferred tax liabilities ....................... (7,109) (6,361) -------- -------- Deferred tax assets Employee benefits ..................................... 578 242 Net operating loss carryforwards ...................... 159 140 Allowance for credit losses ........................... 2,916 2,671 Foreclosed properties ................................. 70 30 Loan fees and expenses ................................ -- 12 General business credit carryforwards ................. 19 20 Accrued expenses ...................................... 729 286 Other ................................................. 529 620 -------- -------- Gross deferred tax assets ............................ 5,000 4,021 Valuation allowance .................................. (134) (87) -------- -------- Gross deferred tax assets, net of valuation allowance 4,866 3,934 -------- -------- Net deferred tax liabilities ....................... $ (2,243) $ (2,427) ======== ========
The Corporation's deferred tax assets on December 31, 1998 included a valuation allowance of $134 million primarily representing net operating loss carryforwards for which it is more likely than not that realization will not occur. The net change in the valuation allowance for deferred tax assets was an increase in net operating loss carryovers of foreign subsidiaries where realization is not expected to occur. In the future, the recognition of deferred tax assets subject to the valuation allowance may result in a reduction to goodwill of up to $16 million. At December 31, 1998, federal income taxes had not been provided on $380 million of undistributed earnings of foreign subsidiaries earned prior to 1987 and during 1998 that have been reinvested for an indefinite period of time. If the undistributed earnings were distributed, credits for foreign taxes paid on such earnings and for the related foreign withholding taxes payable upon remittance would be available to offset $90 million of the $170 million resulting tax expense. Note Fifteen - Fair Values of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of the estimated fair values of financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices, if available, are utilized as estimates of the fair values of financial instruments. Since no quoted market prices exist for a significant part of the Corporation's financial instruments, the fair values of such instruments have been derived based on management's assumptions, the estimated amount and timing of future cash flows and estimated discount rates. The estimation methods for individual classifications of financial instruments are described more fully below. Different assumptions could significantly affect these estimates. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the combined Corporation. 88 The provisions of SFAS 107 do not require the disclosure of nonfinancial instruments, including intangible assets such as goodwill, franchise, credit card and trust relationships and MSR. In addition, the disclosure of fair value amounts does not include lease financing and factored accounts receivable. Short-Term Financial Instruments The carrying values of short-term financial instruments, including cash and cash equivalents, federal funds sold and purchased, resale and repurchase agreements, and commercial paper and short-term borrowings, approximate the fair values of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturities, or have an average maturity of less than 30 days and carry interest rates which approximate market. Financial Instruments Traded in the Secondary Market Securities held for investment, securities available for sale, trading account instruments, long-term debt and trust preferred securities traded actively in the secondary market have been valued using quoted market prices. The fair value of securities and trading account instruments is reported in Notes Three and Four of the consolidated financial statements on pages 64 and 66. Loans Fair values were estimated for groups of similar loans based upon type of loan, credit quality and maturity. The fair value of loans was determined by discounting estimated cash flows using interest rates approximating the Corporation's December 31 origination rates for similar loans. Where quoted market prices were available, primarily for certain residential mortgage loans, such market prices were utilized as estimates for fair values. Contractual cash flows for residential mortgage loans were adjusted for estimated prepayments using published industry data. Where credit deterioration has occurred, estimated cash flows for fixed- and variable-rate loans have been reduced to incorporate estimated losses. The fair values of domestic commercial loans that do not reprice or mature within relatively short time frames were estimated using discounted cash flow models. The discount rates were based on current market interest rates for similar types of loans, remaining maturities and credit ratings. For domestic commercial loans that reprice within relatively short time frames, the carrying values were assumed to approximate their fair values. Substantially all of the foreign loans reprice within relatively short time frames. Accordingly, for the majority of foreign loans, the carrying values were assumed to approximate their fair values. For purposes of these fair value estimates, the fair values of nonaccrual loans were computed by deducting an estimated market discount from their carrying values to reflect the uncertainty of future cash flows. The fair values of commitments to extend credit were not significant at either December 31, 1998 or 1997. Deposits The fair value for deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the Corporation's long-term relationships with depositors. The book and fair values of financial instruments for which book and fair value differed on December 31 were:
1998 1997 ----------------------- ----------------------- Book Fair Book Fair Value Value Value Value (Dollars in Millions) ----------- ----------- ----------- ----------- Financial assets Loans ...................................................... $337,303 $342,936 $328,314 $331,366 Financial liabilities Deposits ................................................... 357,260 357,915 346,297 346,001 Trust preferred securities ................................. 4,954 5,244 4,578 4,783 Long-term debt (excluding obligations under capital leases). 45,767 47,135 42,754 43,419
For all other financial instruments, book value approximates fair value. 89 Off-Balance Sheet Financial Instruments See Note Four of the consolidated financial statements on page 66 for information on the Corporation's average fair values of derivative-dealer assets and liabilities. The fair value of the Corporation's ALM contracts is presented in the Derivatives section of Note Eleven of the consolidated financial statements on page 74 and the MSR section of Note One of the consolidated financial statements on page 56. Note Sixteen - Business Segment Information On January 1, 1998, the Corporation adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". Certain noncash disclosure requirements, such as equity in the net income of investments accounted for by the equity method and stock-based compensation expense, were not presented due to their immateriality. Management reports the results of operations of the Corporation through four business segments: Consumer Banking, which provides comprehensive retail banking services to individuals and small businesses through multiple delivery channels; Commercial Banking, which provides a wide range of commercial banking services for businesses with annual revenues of up to $500 million; Global Corporate and Investment Banking, which provides a broad array of financial and investment banking products such as capital-raising products, trade finance, treasury management, capital markets and financial advisory services to domestic and international corporations, financial institutions and government entities; and Principal Investing and Wealth Management, which includes direct equity investments in businesses and investments in general partnership funds and the Private Bank which provides asset management, banking and trust services for high net worth clients both in the U.S. and internationally. 90 The following table includes revenues, net income and total assets for the years ended December 31, 1998, 1997 and 1996 and as of December 31, 1998 and 1997 for each business segment (dollars in millions): Business Segments
Total Corporation Consumer Banking (2) ----------------------------------- ----------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income (1) ......... $ 18,461 $ 18,589 $ 17,082 $ 12,043 $ 12,445 $ 11,564 Noninterest income .............. 12,189 11,756 9,604 6,656 6,270 4,995 --------- --------- -------- --------- --------- -------- Total revenue .................. 30,650 30,345 26,686 18,699 18,715 16,559 Provision for credit losses ......................... 2,920 1,904 1,645 1,252 1,558 1,605 Gains on sales of securities ..................... 1,017 271 147 10 36 28 Amortization of intangibles .................... 902 855 544 607 612 393 Depreciation expense ............ 1,096 1,107 989 670 676 652 Merger-related charges, net ............................ 1,795 374 398 -- -- 122 Other noninterest expense ........................ 16,743 15,663 13,818 9,856 10,116 8,997 --------- --------- -------- --------- --------- -------- Income before income taxes ........................ 8,211 10,713 9,439 6,324 5,789 4,818 Income tax expense .............. 3,046 4,171 3,626 2,325 2,266 1,900 --------- --------- -------- --------- --------- -------- Net income ..................... $ 5,165 $ 6,542 $ 5,813 $ 3,999 $ 3,523 $ 2,918 ========= ========= ======== ========= ========= ======== Period-end total assets ......... $ 617,679 $ 570,983 $ 269,458 $ 285,686 ========= ========= ========= ========= Commercial Banking (2) -------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net interest income (1) ......... $ 2,006 $ 2,048 $ 1,792 Noninterest income .............. 699 568 480 -------- -------- ------- Total revenue .................. 2,705 2,616 2,272 Provision for credit losses ......................... 76 (3) 48 Gains on sales of securities ..................... 4 -- 3 Amortization of intangibles .................... 99 100 47 Depreciation expense ............ 70 75 54 Merger-related charges, net ............................ -- -- 7 Other noninterest expense ........................ 1,150 1,025 944 -------- --------- ------- Income before income taxes ........................ 1,314 1,419 1,175 Income tax expense .............. 439 558 446 -------- --------- ------- Net income ..................... $ 875 $ 861 $ 729 ======== ========= ======= Period-end total assets ......... $ 67,366 $ 65,243 ======== =========
Global Corporate and Principal Investing and Investment Banking (2) Wealth Management (2) ------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 ---------- ---------- --------- ---------- ---------- ---------- Net interest income (1) ......... $ 3,716 $ 3,425 $3,137 $ 451 $ 418 $ 325 Noninterest income .............. 2,849 3,083 2,455 1,928 1,935 1,728 -------- -------- ------- ------- ------- -------- Total revenue ................. 6,565 6,508 5,592 2,379 2,353 2,053 Provision for credit losses ........................ 1,566 342 (24) 26 7 16 Gains (losses) on sales of securities ................. (5) 10 -- -- 6 -- Amortization of intangibles ................... 169 119 75 27 24 29 Depreciation expense ............ 291 303 208 65 53 75 Merger-related charges, net ........................... -- -- 147 -- -- 4 Other noninterest expense ....................... 4,219 3,145 2,779 1,500 1,367 1,103 -------- -------- -------- ------- ------- -------- Income before income taxes ........................ 315 2,609 2,407 761 908 826 Income tax expense (benefit) ..................... 71 977 870 264 348 306 -------- -------- -------- ------- ------- -------- Net income .................... $ 244 $ 1,632 $ 1,537 $ 497 $ 560 $ 520 ======== ======== ======== ======= ======= ======== Period-end total assets ......... $248,264 $204,862 $22,246 $18,320 ======== ======== ======= ======= Corporate Other ----------------------------------- 1998 1997 1996 ---------- ------------ ----------- Net interest income (1) ......... $ 245 $ 253 $ 264 Noninterest income .............. 57 (100) (54) ------- ---------- -------- Total revenue ................. 302 153 210 Provision for credit losses ........................ -- -- -- Gains (losses) on sales of securities ................. 1,008 219 116 Amortization of intangibles ................... -- -- -- Depreciation expense ............ -- -- -- Merger-related charges, net ........................... 1,795 374 118 Other noninterest expense ....................... 18 10 (5) ------- ---------- ---------- Income before income taxes ........................ (503) (12) 213 Income tax expense (benefit) ..................... (53) 22 104 --------- ---------- --------- Net income .................... $ (450) $ (34) $ 109 ========= ========== ========= Period-end total assets ......... $ 10,345 $(3,128) ========= ==========
(1) Net interest income is presented on a taxable-equivalent basis. (2) There were no material intersegment revenues between the four business segments. 91 Following is a reconciliation of the business segments' revenue, net income and total assets to the consolidated totals for the years ended December 31, 1998, 1997 and 1996 and as of December 31, 1998 and 1997 (dollars in millions):
1998 1997 1996 ------------ ------------- ----------- Segments' revenue ..................................... $ 30,348 $ 30,192 $ 26,476 Adjustments: Earnings associated with unassigned capital ......... 245 253 264 Gains (losses) on sales of subsidiary companies ..... 57 -- -- Other ............................................... -- (100) (54) --------- --------- -------- Consolidated revenue ............................... $ 30,650 $ 30,345 $ 26,686 ========= ========= ======== Segments' net income .................................. $ 5,615 $ 6,576 $ 5,704 Adjustments, net of tax: Earnings associated with unassigned capital ......... 157 158 168 Gains on sales of subsidiary companies .............. 37 -- -- Gains on sales of securities ........................ 649 140 75 Merger-related charges, net ......................... (1,325) (264) (246) Other ............................................... 32 (68) 112 ---------- ----------- --------- Consolidated net income ............................ $ 5,165 $ 6,542 $ 5,813 ========== =========== ========= Segments' total assets ................................ $ 607,333 $ 574,111 Adjustments: Investment securities ............................... 63,301 54,181 Elimination of excess earning asset allocations ..... (43,462) (50,460) Other, net .......................................... (9,493) (6,849) ----------- ----------- Consolidated total assets .......................... $ 617,679 $ 570,983 ========== ===========
The adjustments presented in the table above represent consolidated income, expense and asset balances not specifically allocated to individual business segments. In addition, reconciling items also include the effect of earnings allocations not assigned to specific business segments, as well as the related earning asset balances. 92 Note Seventeen - BankAmerica Corporation (Parent Company) The following tables present consolidated Parent Company financial information: Condensed Consolidated Statement of Income (Dollars in Millions)
Year Ended December 31 ------------------------------- 1998 1997 1996 --------- ---------- ---------- Income Dividends from consolidated Subsidiary banks ................................... $4,795 $ 5,730 $ 4,274 Other subsidiaries ................................. 202 728 670 Interest from consolidated subsidiaries .............. 1,911 1,690 1,540 Other income ......................................... 709 647 753 ------ ------- ------- 7,617 8,795 7,237 ------ ------- ------- Expenses Interest on borrowed funds ........................... 2,805 2,529 2,146 Noninterest expense .................................. 835 632 625 ------ ------- ------- 3,640 3,161 2,771 ------ ------- ------- Earnings Income before equity in undistributed earnings of consolidated subsidiaries and income taxes ......... 3,977 5,634 4,466 ------ ------- ------- Equity in undistributed earnings of consolidated Subsidiary banks ................................... 553 471 1,087 Other subsidiaries ................................. 174 106 92 ------ ------- ------- 727 577 1,179 ------ ------- ------- Income before income taxes 4,704 6,211 5,645 Income tax benefit .................................... (461) (331) (168) ------ ------- ------- Net income ............................................ $5,165 $ 6,542 $ 5,813 ====== ======= ======= Net income available to common shareholders ........... $5,140 $ 6,431 $ 5,611 ====== ======= =======
Condensed Consolidated Balance Sheet (Dollars in Millions)
December 31 -------------------- 1998 1997 --------- ---------- Assets Cash held at subsidiary banks ........................ $ 3,069 $ 2,518 Temporary investments ................................ 1,525 1,208 Receivables from consolidated Subsidiary banks ................................... 10,456 11,309 Other subsidiaries ................................. 15,178 13,933 Investment in consolidated Subsidiary banks ................................... 54,127 49,445 Other subsidiaries ................................. 5,108 4,243 Other assets ......................................... 4,190 3,117 ------- -------- Total assets ....................................... $93,653 $ 85,773 ======= ======== Liabilities and Shareholders' Equity Commercial paper and other notes payable ............. $ 5,289 $ 3,563 Accrued expenses and other liabilities ............... 2,711 2,200 Payables to consolidated subsidiaries ................ 6,004 4,095 Long-term debt ....................................... 33,711 31,331 Shareholders' equity ................................. 45,938 44,584 ------- -------- Total liabilities and shareholders' equity ......... $93,653 $ 85,773 ======= ========
93 Condensed Consolidated Statement of Cash Flows (Dollars in Millions)
Year Ended December 31 ------------------------------------- 1998 1997 1996 ----------- ------------ ------------ Operating Activities Net income .................................................................. $ 5,165 $ 6,542 $ 5,813 Reconciliation of net income to net cash provided by operating activities Equity in undistributed earnings of consolidated subsidiaries .............. (653) (610) (1,232) Other operating activities ................................................. (486) 247 563 -------- -------- -------- Net cash provided by operating activities ................................. 4,026 6,179 5,144 Investing Activities Net decrease (increase) in temporary investments ............................ 632 4,037 (3,754) Net increase in receivables from consolidated subsidiaries .................. (1,002) (2,814) (613) Additional capital investment in subsidiaries ............................... (1,391) 60 (98) Acquisitions of subsidiaries, net of cash ................................... (822) (194) (726) Other investing activities .................................................. (747) 191 353 -------- -------- -------- Net cash (used in) provided by investing activities ....................... (3,330) 1,280 (4,838) -------- -------- -------- Financing Activities Net increase (decrease) in commercial paper and other notes payable ......... 1,726 (400) 616 Proceeds from issuance of long-term debt .................................... 7,283 4,887 8,804 Retirement of long-term debt ................................................ (4,533) (4,055) (4,423) Proceeds from issuance of common stock ...................................... 1,367 1,892 573 Common stock repurchased .................................................... (1,751) (8,540) (3,193) Cash dividends paid ......................................................... (2,604) (2,175) (1,888) Other financing activities .................................................. (1,633) (1,519) 955 -------- ---------- -------- Net cash (used in) provided by financing activities ....................... (145) (9,910) 1,444 -------- ---------- -------- Net increase (decrease) in cash held at subsidiary banks ...................... 551 (2,451) 1,750 Cash held at subsidiary banks on January 1 .................................... 2,518 4,969 3,219 -------- -------- -------- Cash held at subsidiary banks on December 31 .............................. $ 3,069 $ 2,518 $ 4,969 ======== ======== ========
94 Note Eighteen - Performance by Geographic Area Since the Corporation's operations are highly integrated, certain asset, liability, income and expense amounts must be allocated to arrive at total assets and total revenues by geographic area. The Corporation identifies its geographic performance based upon the business unit in which the assets are recorded and where the income is earned and the expenses are incurred. In certain circumstances, units may transact business with customers who are out of their immediate geographic area. For example, a U.S. domiciled unit may have made a loan to a borrower who resides in Latin America. In this instance, the loan and related income would be included in domestic activities. Translation losses, for those units in hyperinflationary economies, net of hedging, totaled $12 million, $27 million, and $23 million in 1998, 1997 and 1996, respectively. These amounts, which are reported in other noninterest income, are included in the table below:
Total (Dollars in Millions) Year Total Assets (1) Revenues (2) - -------------------------------------- ------ ------------------ ------------- Domestic (3) 1998 $ 554,282 $29,605 1997 $ 513,163 $28,494 1996 $ 424,537 $24,804 --------- ------- Asia 1998 21,302 723 1997 25,411 885 1996 22,472 985 Europe, Middle East and Africa 1998 31,128 (75) 1997 26,037 454 1996 26,282 501 Latin America and the Caribbean 1998 10,967 234 1997 6,372 355 1996 4,411 268 --------- ------- Total Foreign 1998 63,397 882 1997 57,820 1,694 1996 53,165 1,754 --------- ------- Total Consolidated 1998 $ 617,679 $30,487 1997 $ 570,983 $30,188 1996 $ 477,702 $26,558
(1) Total assets includes long-lived assets, primarily all of which were located in the U.S. (2) Total revenues includes net interest income plus noninterest income. There were no material intercompany revenues between geographic regions for any of the periods presented. (3) Includes the Corporation's Canadian operations, which had total assets of $1,365, $2,466 and $1,525 and total revenues of $48, $52 and $63 as of and for the years ended December 31, 1998, 1997 and 1996, respectively. 95 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information set forth under the caption "Election of Directors" on pages 2 through 6 of the definitive 1999 Proxy Statement of the registrant furnished to stockholders in connection with its Annual Meeting to be held on April 28, 1999 (the "1999 Proxy Statement") with respect to the name of each nominee or director, that person's age, positions and offices with the registrant, business experience, directorships in other public companies, service on the registrant's Board and certain family relationships, and information set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 9 of the 1999 Proxy Statement with respect to Section 16 matters, is hereby incorporated by reference. In addition, information set forth under the caption "Special Compensation Arrangements - Employment Agreement with Mr. Rice" and "Employment Agreements with Messrs. Lewis, Hance and Murray" on page 15 of the 1999 Proxy Statement is hereby incorporated by reference. Additional information required by Item 10 with respect to executive officers is set forth in Part I, Item 4A hereof. Item 11. EXECUTIVE COMPENSATION Information with respect to current remuneration of executive officers, certain proposed remuneration to them, their options and certain indebtedness and other transactions set forth in the 1999 Proxy Statement (i) under the caption "Board of Directors' Compensation" on page 10 thereof, (ii) under the caption "Executive Compensation" on pages 11 through 13 thereof, (iii) under the caption "Retirement Plans" on pages 13 and 14 thereof, (iv) under the caption "Deferred Compensation Plan" on page 14 thereof, (v) under the caption "Special Compensation Arrangements" on pages 14 and 15 thereof, (vi) under the caption "Compensation Committee Interlocks and Insider Participation" on pages 18 and 19 thereof, and (vii) under the caption "Certain Transactions" on page 19 thereof, is, to the extent such information is required by Item 402 of Regulation S-K, hereby incorporated by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The security ownership information required by Item 403 of Regulation S-K relating to persons who beneficially own 5 percent or more of the outstanding shares of Common Stock, ESOP Preferred Stock or 7% Cumulative Redeemable Preferred Stock, Series B, as well as security ownership information relating to directors, nominees and named executive officers individually and directors and executive officers as a group, is hereby incorporated by reference to the ownership information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" on pages 7 through 9 of the 1999 Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to relationships and related transactions between the registrant and any director, nominee for director, executive officer, security holder owning 5 percent or more of the registrant's voting securities or any member of the immediate family of any of the above, as set forth in the 1999 Proxy Statement under the caption "Compensation Committee Interlocks and Insider Participation" on pages 18 and 19 and under the caption "Certain Transactions" on page 19 thereof, is, to the extent such information is required by Item 404 of Regulation S-K, hereby incorporated by reference. 96 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following documents are filed as part of this report:
Page ----- (1) Financial Statements: Report of Independent Accountants .......................................................... 51 Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996 ...... 52 Consolidated Balance Sheet at December 31, 1998 and 1997 ................................... 53 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ..................................................................................... 54 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 ......................................................... 55 Notes To Consolidated Financial Statements ................................................. 56 (2) All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
b. The following reports on Form 8-K have been filed by the registrant during the quarter ended December 31, 1998: Current Report on Form 8-K dated September 24, 1998 and filed October 9, 1998, Items 2, 5 and 7. Current Report on Form 8-K dated October 14, 1998 and filed October 19, 1998, Items 5 and 7. Current Report on Form 8-K dated September 30, 1998 and filed November 16, 1998, Items 5 and 7. The following supplemental consolidated financial information of the registrant was filed as part of this Current Report on Form 8-K: Supplemental Consolidated Statement of Income for the years ended December 31, 1997, 1996 and 1995; Supplemental Consolidated Balance Sheet as of December 31, 1997 and 1996; Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995; and Supplemental Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995. Current Report on Form 8-K dated November 16, 1998 and filed November 18, 1998, Items 5 and 7. Current Report on Form 8-K dated and filed December 16, 1998, Items 5 and 7. c. The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages E-1 through E-6, including executive compensation plans and arrangements which are identified separately by asterisk). With the exception of the information herein expressly incorporated by reference, the 1999 Proxy Statement is not to be deemed filed as part of this Annual Report on Form 10-K. 97 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANKAMERICA CORPORATION Date: March 22, 1999 By: */s/ HUGH L. MCCOLL, JR. ------------------------------------------ Hugh L. McColl, Jr. Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------------------------------------- ----------------------------------- --------------- */s/ HUGH L. MCCOLL, JR. Chairman of the Board, Chief March 22, 1999 ---------------------------------- Executive Officer and Director Hugh L. McColl, Jr. (Principal Executive Officer) */s/ JAMES H. HANCE, JR. Vice Chairman and Chief Financial March 22, 1999 ---------------------------------- Officer (Principal Financial James H. Hance, Jr. Officer) */s/ MARC D. OKEN Executive Vice President and March 22, 1999 ---------------------------------- Principal Financial Executive Marc D. Oken (Principal Accounting Officer) */s/ CHARLES W. COKER Director March 22, 1999 ---------------------------------- Charles W. Coker */s/ TIMM F. CRULL Director March 22, 1999 ---------------------------------- Timm F. Crull */s/ ALAN T. DICKSON Director March 22, 1999 ---------------------------------- Alan T. Dickson */s/ KATHLEEN F. FELDSTEIN Director March 22, 1999 ---------------------------------- Kathleen F. Feldstein */s/ PAUL FULTON Director March 22, 1999 ---------------------------------- Paul Fulton */s/ DONALD E. GUINN Director March 22, 1999 ---------------------------------- Donald E. Guinn */s/ C. RAY HOLMAN Director March 22, 1999 ---------------------------------- C. Ray Holman */s/ W. W. JOHNSON Director March 22, 1999 ---------------------------------- W. W. Johnson
98
Signature Title Date - -------------------------------------------- ---------- --------------- */s/ WALTER E. MASSEY Director March 22, 1999 ---------------------------------- Walter E. Massey */s/ RICHARD M. ROSENBERG Director March 22, 1999 ---------------------------------- Richard M. Rosenberg */s/ O. TEMPLE SLOAN, JR. Director March 22, 1999 ---------------------------------- O. Temple Sloan, Jr. */s/ MEREDITH R. SPANGLER Director March 22, 1999 ---------------------------------- Meredith R. Spangler */s/ A. MICHAEL SPENCE Director March 22, 1999 ---------------------------------- A. Michael Spence */s/ RONALD TOWNSEND Director March 22, 1999 ---------------------------------- Ronald Townsend */s/ SOLOMON D. TRUJILLO Director March 22, 1999 ---------------------------------- Solomon D. Trujillo */s/ JACKIE M. WARD Director March 22, 1999 ---------------------------------- Jackie M. Ward */s/ VIRGIL R. WILLIAMS Director March 22, 1999 ---------------------------------- Virgil R. Williams */s/ SHIRLEY YOUNG Director March 22, 1999 ---------------------------------- Shirley Young *By:/s/ CHARLES M. BERGER ---------------------------------- Charles M. Berger, Attorney-in-Fact
99 (THIS PAGE INTENTIONALLY LEFT BLANK) INDEX TO EXHIBITS
Exhibit No. Description - ------------- -------------------------------------------------------------------------------- 3(a) Amended and Restated Certificate 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 filed September 28, 1998. (b) Amended and Restated Bylaws of registrant, as in effect on the date hereof, incorporated by reference to Exhibit 3.2 of registrant's Current Report on Form 8-K filed September 28, 1998. 4(a) Specimen certificate of registrant's Common Stock. (b) Specimen certificate of registrant's ESOP Convertible Preferred Stock, Series C, incorporated by reference to Exhibit 4(c) of registrant's Annual Report on Form 10-K dated March 25, 1992. (c) Specimen certificate of registrant's 7% Cumulative Redeemable Preferred Stock, Series B. (d) Specimen certificate of registrant's $2.50 Cumulative Convertible Preferred Stock, Series BB. (e) Indenture dated as of August 1, 1982 between registrant and Morgan Guaranty Trust Company of New York, pursuant to which registrant issued its 7 3/4% Debentures, due 2002, incorporated by reference to Exhibit 4.2 of registrant's Registration No. 2-78530; and First Supplemental Indenture thereto dated as of September 18, 1998. (f) Indenture dated as of September 1, 1989 between registrant and The Bank of New York, pursuant to which registrant issued its 9 3/8% Subordinated Notes, due 2009; its 10.20% Subordinated Notes, due 2015; its 9 1/8% Subordinated Notes, due 2001; and its 8 1/8% Subordinated Notes, due 2002, incorporated by reference to Exhibit 4.1 of registrant's Registration No. 33-30717; and First Supplemental Indenture thereto dated as of August 28, 1998. (g) Indenture dated as of January 1, 1992 between registrant and BankAmerica Trust Company of New York, incorporated by reference to Exhibit 4.1 of registrant's Registration No. 33-54784; and First Supplemental Indenture thereto dated as of July 1, 1993 between registrant and BankAmerica National Trust Company (formerly BankAmerica Trust Company of New York), pursuant to which registrant issued its Senior Medium-Term Notes, Series A, B and C; and its 5 3/8% Senior Notes, due 2000, incorporated by reference to Exhibit 4.1 of registrant's Current Report on Form 8-K dated July 6, 1993; and Second Supplemental Indenture thereto dated as of September 18, 1998. (h) Indenture dated as of November 1, 1992 between registrant and The Bank of New York, pursuant to which registrant issued its 6 7/8% Subordinated Notes, due 2005, incorporated by reference to Exhibit 4.1 of registrant's Amendment to Application or Report on Form 8 dated March 1, 1993. (i) First Supplemental Indenture dated as of July 1, 1993 to the Indenture dated as of November 1, 1992 between registrant and The Bank of New York, pursuant to which registrant issued its Subordinated Medium-Term Notes, Series A and B; its 6 1/2% Subordinated Notes, due 2003; and its 7 3/4% Subordinated Notes, due 2004, incorporated by reference to Exhibit 4.4 of registrant's Current Report on Form 8-K dated July 6, 1993; and Second Supplemental Indenture thereto dated as of August 28, 1998. (j) Indenture dated as of January 1, 1995 between registrant and BankAmerica National Trust Company, pursuant to which registrant issued its 7% Senior Notes, due 2003; its 7% Senior Notes, due 2001; its 5 3/4% Senior Notes, due 2001; its 6 3/8% Senior Notes, due 2005; its 6 1/8% Senior Notes, due 2004; and its Senior Medium-Term Notes, Series D, E, F, G and H, incorporated by reference to Exhibit 4.1 of registrant's Registration No. 33-57533; and First Supplemental Indenture thereto dated as of September 18, 1998, incorporated by reference to Exhibit 4.3 of registrant's Current Report on Form 8-K filed November 18, 1998.
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Exhibit No. Description - ------------- -------------------------------------------------------------------------------- (k) Indenture dated as of January 1, 1995 between registrant and The Bank of New York, pursuant to which registrant issued its 7 5/8% Subordinated Notes, due 2005; its 7 3/4% Subordinated Notes, due 2015; its 7 1/4% Subordinated Notes, due 2025; its 6 1/2% Subordinated Notes, due 2006; its 7.80% Subordinated Notes, due 2016; its 6 3/8% Subordinated Notes, due 2008; its 6.80% Subordinated Notes, due 2028; its 6.60% Subordinated Notes, due 2010; and its Subordinated Medium-Term Notes, Series D, E, F, G and H, incorporated by reference to Exhibit 4.8 of registrant's Registration No. 33-57533; and First Supplemental Indenture thereto dated as of August 28, 1998, incorporated by reference to Exhibit 4.8 of registrant's Current Report on Form 8-K filed November 18, 1998. (l) Fiscal and Paying Agency Agreement dated as of July 5, 1995, between registrant and The Chase Manhattan Bank, N.A. (London Branch), pursuant to which registrant issued its Floating Rate Senior Notes, due 2000, incorporated by reference to Exhibit 4(l) of registrant's Annual Report on Form 10-K dated March 29, 1996 (the "1995 Form 10-K"). (m) Amended and Restated Agency Agreement dated as of November 16, 1998 between registrant and The Chase Manhattan Bank (London Branch), pursuant to which registrant issued its Senior Euro Medium-Term Notes. (n) Issuing and Paying Agency Agreement dated as of May 19, 1998 between NationsBank, N.A., as Issuer, and Bankers Trust Company, as Issuing and Paying Agent. (o) Indenture dated as of November 27, 1996 between registrant and The Bank of New York, incorporated by reference to Exhibit 4.10 of registrant's Registration No. 333-15375. (p) First Supplemental Indenture dated as of December 4, 1996 to the Indenture dated as of November 27, 1996 between registrant and The Bank of New York pursuant to which registrant issued its 7.84% Junior Subordinated Deferrable Interest Notes due 2026, incorporated by reference to Exhibit 4.3 of registrant's Current Report on Form 8-K dated November 27, 1996. (q) Second Supplemental Indenture dated as of December 17, 1996 to the Indenture dated as of November 27, 1996 between the registrant and The Bank of New York pursuant to which registrant issued its 7.83% Junior Subordinated Deferrable Interest Notes due 2026, incorporated by reference to Exhibit 4.3 of registrant's Current Report on Form 8-K dated December 10, 1996. (r) Third Supplemental Indenture dated as of February 3, 1997 to the Indenture dated as of November 27, 1996 between registrant and The Bank of New York pursuant to which registrant issued its Floating Rate Junior Subordinated Deferrable Interest Notes due 2027, incorporated by reference to Exhibit 4.3 of registrant's Current Report on Form 8-K dated January 22, 1997. (s) Fourth Supplemental Indenture dated as of April 22, 1997 to the Indenture dated as of November 27, 1996 between registrant and The Bank of New York pursuant to which registrant issued its 8 1/4% Junior Subordinated Deferrable Interest Notes, due 2027, incorporated by reference to Exhibit 4.3 of registrant's Current Report on Form 8-K dated April 15, 1997. (t) Fifth Supplemental Indenture dated as of August 28, 1998 to the Indenture dated as of November 27, 1996 between registrant and The Bank of New York. (u) Indenture dated as of November 27, 1996, between Barnett Banks, Inc. and The First National Bank of Chicago, as Trustee, and First Supplemental Indenture dated as of January 9, 1998, among registrant, NB Holdings Corporation, Barnett Banks, Inc. and The First National Bank of Chicago, as Trustee, pursuant to which registrant (as successor to Barnett Banks, Inc.) issued its 8.06% Junior Subordinated Debentures, due 2026, incorporated by reference to Exhibit 4(u) of registrant's Annual Report on Form 10-K dated March 13, 1998 (the "1997 Form 10-K").
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Exhibit No. Description - ------------- ------------------------------------------------------------------------------ (v) Indenture dated as of September 1, 1990 between the former BankAmerica Corporation and Chase Manhattan Bank and Trust Company, N. A. (formerly Manufacturers Hanover Trust Company of California), pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its Subordinated Medium Term Notes, Series E; its 9.375% Subordinated Notes due 2001; its 10.00% Subordinated Notes due 2003; its 9.625% Subordinated Notes due 2001; its 9.50% Subordinated Notes due 2001; and its 9.20% Subordinated Notes due 2003; and First Supplemental Indenture thereto dated as of September 15, 1998. (w) Indenture dated as of November 1, 1991 between the former BankAmerica Corporation and Chase Manhattan Bank and Trust Company, N. A. (formerly Manufacturers Hanover Trust Company of California), pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its 8.125% Subordinated Notes due 2002; its 7.75% Subordinated Notes due 2002; its 8.375% Subordinated Notes due 2002; its 7.50% Subordinated Notes due 2002; its 7.20% Subordinated Notes due 2002; its 7.875% Subordinated Notes due 2002; its 6.85% Subordinated Notes due 2003; its 6.875% Subordinated Notes due 2003; its Floating Subordinated Notes due 2003; its 7.20% Subordinated Notes due 2006; its 7.625% Subordinated Notes due 2004; its 8.125% Subordinated Notes due 2004; its 8.95% Subordinated Notes due 2004; its 6.75% Subordinated Notes due 2005; its 6.20% Subordinated Notes due 2006; its 7.125% Subordinated Notes due 2006; its 6.625% Subordinated Notes due 2007; its 6.625% Subordinated Notes due 2007; its 7.125% Subordinated Notes due 2009; its 7.125% Subordinated Notes due 2011; and its 6.25% Subordinated Notes due 2008; First Supplemental Indenture thereto dated as of September 8, 1992; and Second Supplemental Indenture thereto dated as of September 15, 1998. (x) Indenture dated as of November 1, 1991 between the former BankAmerica Corporation and U.S. Bank Trust, N. A. (successor to Bankers Trust Company of California, National Association, and First Trust of California, National Association), pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its Floating Rate Note due 1999; its 6.65% Note due 2001; its 6.625% Note due 2001; and its Senior Medium-Term Notes, Series H and I; First Supplemental Indenture thereto dated as of August 1, 1994; and Second Supplemental Indenture thereto dated as of September 30, 1998. (y) Second Amended and Restated Agency Agreement dated as of November 15, 1996 between the former BankAmerica Corporation and First Trust of New York, National Association, pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its Senior and Subordinated Euro Medium-Term Notes; and Amendment thereto dated as of September 30, 1998. (z) Junior Subordinated Indenture dated as of November 27, 1996 between the former BankAmerica Corporation and Bankers Trust Company, pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its 8.07% Series A Preferred Securities due 2026; and its 7.70% Series B Preferred Securities due 2026; and First Supplemental Indenture thereto dated as of September 15, 1998. (aa) Junior Subordinated Indenture dated as of December 20, 1996 between the former BankAmerica Corporation and Bankers Trust Company, pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its 7.75% Trust Originated Preferred Securities, Series 1 due 2026; its 8.00% Cumulative Semi-Annual Income Preferred Securities, Series 2 due 2026; its Floating Rate Capital Securities, Series 3 due 2027; and its 7.00% Trust Originated Preferred Securities, Series 4 due 2028; and First Supplemental Indenture thereto dated as of September 15, 1998.
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Exhibit No. Description - ------------- --------------------------------------------------------------------------------- The registrant has other long-term debt agreements, but these are not material in amount. Copies of these agreements will be furnished to the Commission on request. 10(a) NationsBank Corporation and Designated Subsidiaries Directors' Retirement * Plan, incorporated by reference to Exhibit 10(f) of registrant's Annual Report on Form 10-K dated March 27, 1991; Amendment thereto dated as of September 28, 1994, incorporated by reference to Exhibit 10(i) of registrant's Annual Report on Form 10-K dated March 30, 1995; and Amendment thereto dated as of April 24, 1996, incorporated by reference to Exhibit 10(g) of registrant's Annual Report on Form 10-K dated March 28, 1997 (the "1996 Form 10-K"). (b) NationsBank Corporation and Designated Subsidiaries Supplemental * Executive Retirement Plan, incorporated by reference to Exhibit 10(j) of registrant's Annual Report on Form 10-K dated March 30, 1995; Amendment thereto dated as of June 28, 1989, incorporated by reference to Exhibit 10(g) of registrant's Annual Report on Form 10-K dated March 28, 1990; Amendment thereto dated as of June 27, 1990, incorporated by reference to Exhibit 10(g) of registrant's Annual Report on Form 10-K dated March 27, 1991; Amendment thereto dated as of July 21, 1991, incorporated by reference to Exhibit 10(bb) of registrant's Annual Report on Form 10-K dated March 25, 1992; Amendments thereto dated as of December 3, 1992 and December 15, 1992, both of which are incorporated by reference to Exhibit 10(l) of registrant's Annual Report on Form 10-K dated March 24, 1993; Amendment thereto dated as of September 28, 1994, incorporated by reference to Exhibit 10(j) of registrant's Annual Report on Form 10-K dated March 30, 1995; Amendments thereto dated March 27, 1996 and June 25, 1997, incorporated by reference to Exhibit 10(c) of the 1997 Form 10-K; and Amendments thereto dated April 10, 1998, June 24, 1998 and October 1, 1998. (c) NationsBank Corporation and Designated Subsidiaries Deferred * Compensation Plan for Key Employees, incorporated by reference to Exhibit 10(k) of registrant's Annual Report on Form 10-K dated March 30, 1995; Amendment thereto dated as of June 28, 1989, incorporated by reference to Exhibit 10(h) of registrant's Annual Report on Form 10-K dated March 28, 1990; Amendment thereto dated as of June 27, 1990, incorporated by reference to Exhibit 10(h) of registrant's Annual Report on Form 10-K dated March 27, 1991; Amendment thereto dated as of July 21, 1991, incorporated by reference to Exhibit 10(bb) of registrant's Annual Report on Form 10-K dated March 25, 1992; Amendment thereto dated as of December 3, 1992, incorporated by reference to Exhibit 10(m) of registrant's Annual Report on Form 10-K dated March 24, 1993; and Amendments thereto dated April 10, 1998 and October 1, 1998 (filed as Exhibit 10(b) hereto). (d) NationsBank Corporation and Designated Subsidiaries Supplemental * Retirement Plan, incorporated by reference to Exhibit 10(o) of registrant's Annual Report on Form 10-K dated March 30, 1994; Amendment thereto dated as of June 28, 1989, incorporated by reference to Exhibit 10(k) of registrant's Annual Report on Form 10-K dated March 28, 1990; Amendment thereto dated as of June 27, 1990, incorporated by reference to Exhibit 10(k) of registrant's Annual Report on Form 10-K dated March 27, 1991; Amendment thereto dated as of July 21, 1991, incorporated by reference to Exhibit 10(bb) of registrant's Annual Report on Form 10-K dated March 25, 1992; Amendments thereto dated as of December 3, 1992 and December 4, 1992, both of which are incorporated by reference to Exhibit 10(p) of registrant's Annual Report on Form 10-K dated March 24, 1993; Amendment thereto dated as of July 5, 1995, incorporated by reference to Exhibit 10(l) of the 1995 Form 10-K; and Amendments thereto dated April 10, 1998 and October 1, 1998 (filed as Exhibit 10(b) hereto). (e) Split Dollar Agreement dated as of February 1, 1990 between registrant and * Hugh L. McColl III, as Trustee for the benefit of Hugh L. McColl, Jr. and Jane S. McColl, incorporated by reference to Exhibit 10(s) of registrant's Annual Report on Form 10-K dated March 27, 1991.
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Exhibit No. Description - ------------- ------------------------------------------------------------------------------- (f) NationsBank Corporation Benefit Security Trust dated as of June 27, 1990, * incorporated by reference to Exhibit 10(t) of registrant's Annual Report on Form 10-K dated March 27, 1991; First Supplement thereto dated as of November 30, 1992, incorporated by reference to Exhibit 10(v) of registrant's Annual Report on Form 10-K dated March 24, 1993; and Trustee Removal/ Appointment Agreement dated as of December 19, 1995, incorporated by reference to Exhibit 10(o) of the 1995 Form 10-K. (g) The NationsBank 401(k) Restoration Plan, as amended and restated effective * April 1, 1998 and as further amended and restated effective July 1, 1998. (h) Bank of America Executive Incentive Compensation Plan, as amended and * restated effective April 1, 1998. (i) Bank of America Director Deferral Plan, as amended and restated effective * January 27, 1999. (j) NationsBank Corporation Directors' Stock Plan, incorporated by reference to * Exhibit 99.1 of registrant's Registration No. 333-02875. (k) Amendment to Restricted Stock Award Plan Agreements with Hugh L. McColl, * Jr. dated December 20, 1996, incorporated by reference to Exhibit 10(x) of the 1996 10-K. (l) Agreement and Plan of Merger, by and between Barnett Banks, Inc. and registrant, dated as of August 29, 1997, incorporated by reference to Exhibit 2.1 of registrant's Registration No. 333-40515; and Amendment thereto, dated as of November 18, 1997, incorporated by reference to Exhibit 2.2 of registrant's Registration No. 333-40515. (m) Employment Agreement by and between registrant and Charles E. Rice dated * October 10, 1997, incorporated by reference to Exhibit 10.1 of registrant's Registration No. 333-40515. (n) Barnett Banks, Inc. 1989 Long Term Incentive Plan, incorporated by reference * to Exhibit 99.2 of Post-Effective Amendment No. 1 to registrant's Registration No. 333-40515. (o) Barnett Banks, Inc. Management Deferral Plan, as amended through January * 1, 1996. (p) Barnett Banks, Inc. Trust Owned Life Insurance Trust for Management and * Directors Deferral Plans, as adopted effective January 1, 1997. (q) Barnett Banks, Inc. Trust Under Executive Benefit Plan, dated as of December 5, 1996. (r) Trust Agreement dated December 31, 1998 between BankAmerica Corporation * and NationsBank, N.A. (s) Bank of America Corporation Key Employee Stock Plan, as amended and * restated effective September 24, 1998, incorporated by reference to Exhibit 10(a) of registrant's Quarterly Report on Form 10-Q dated November 16, 1998 (the "Third Quarter 1998 Form 10-Q"). (t) BankAmerica Corporation and Bank of America National Trust and Savings * Association Deferred Compensation Plan for Directors, as amended and restated, incorporated by reference to Exhibit 10(b) of the Third Quarter 1998 Form 10-Q. (u) BankAmerica Deferred Compensation Plan as amended and restated, * incorporated by reference to Exhibit 10(c) of the Third Quarter 1998 Form 10-Q. (v) BankAmerica Corporation Senior Management Incentive Plan, as amended, * incorporated by reference to Exhibit 10(d) of the Third Quarter 1998 Form 10-Q. (w) BankAmerica Supplemental Retirement Plan, as amended and restated, * incorporated by reference to Exhibit 10(e) of the Third Quarter 1998 Form 10-Q. (x) BankAmerica Corporation Performance Equity Program, incorporated by * reference to Exhibit 99.1 of Post-Effective Amendment No. 3 to registrant's Registration No. 333-60553. (y) BankAmerica Corporation 1992 Management Stock Plan, incorporated by * reference to Exhibit 99.2 of Post-Effective Amendment No. 3 to registrant's Registration No. 333-60553.
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Exhibit No. Description - ------------- ------------------------------------------------------------------------------- (z) BankAmerica Corporation 1987 Management Stock Plan, incorporated by * reference to Exhibit 99.3 of Post-Effective Amendment No. 3 to registrant's Registration No. 333-60553. (aa) Continental Bank Corporation 1991 Equity Performance Incentive Plan, * incorporated by reference to Exhibit 99.5 of Post-Effective Amendment No. 3 to registrant's Registration No. 333-60553. (bb) Continental Bank Corporation 1982 Performance Restricted Stock and Stock * Option Plan, incorporated by reference to Exhibit 99.1 of Post-Effective Amendment No. 4 to registrant's Registration No. 333-60553. (cc) Split Dollar Life Insurance Agreement dated as of October 15, 1998 between * the registrant and NationsBank, N. A., as Trustee under that certain Irrevocable Trust Agreement dated October 2, 1998, by and between Hugh L. McColl, Jr., as Grantor, and NationsBank, N. A., as Trustee. (dd) Split Dollar Life Insurance Agreement dated as of October 16, 1998 between * the registrant and NationsBank, N. A., as Trustee under that certain Irrevocable Trust Agreement No. 2 dated October 1, 1998, by and between James H. Hance, Jr., as Grantor, and NationsBank, N. A., as Trustee. (ee) Split Dollar Life Insurance Agreement dated as of September 28, 1998 between * the registrant and J. Steele Alphin, as Trustee under that certain Irrevocable Trust Agreement dated June 23, 1998, by and between Kenneth D. Lewis, as Grantor, and J. Steele Alphin, as Trustee. (ff) Employment Agreement dated as of April 10, 1998 between the registrant and * James H. Hance, Jr., incorporated by reference to Exhibit 10.4 of registrant's Registration No. 333-60553. (gg) Employment Agreement dated as of April 10, 1998 between the registrant and * Kenneth D. Lewis, incorporated by reference to Exhibit 10.5 of registrant's Registration No. 333-60553. (hh) Employment Agreement dated as of April 10, 1998 between the registrant and * Michael J. Murray, incorporated by reference to Exhibit 10.2 of registrant's Registration No. 333-60553. (ii) Agreement and Plan of Reorganization by and between registrant and the former BankAmerica Corporation, dated as of April 10, 1998, incorporated by reference to Exhibit 2.1 of registrant's Registration No. 333-60553. (jj) Plan of Reincorporation Merger by and between registrant and NationsBank (DE) Corporation, dated as of August 3, 1998, incorporated by reference to Exhibit 2.2 of registrant's Registration No. 333-60553. 11 Earnings per share computation. 12 (a) Ratio of Earnings to Fixed Charges. (b) Ratio of Earnings to Fixed Charges and Preferred Dividends. 21 List of Subsidiaries. 23 Consent of PricewaterhouseCoopers LLP. 24 (a) Power of Attorney. (b) Corporate Resolution. 27 Financial Data Schedule.
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