10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 14, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934, AS AMENDED
For the quarterly period ended September 30, 1997
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OR
{_} TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
For the transition period from _____________ to ____________________
Commission file number 1-6523
NationsBank Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-0906609
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
NationsBank Corporate Center, Charlotte, North Carolina 28255
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(Address of principal executive offices and zip code)
(704) 386-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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On October 31, 1997, there were 711,148,401 shares of NationsBank Corporation
Common Stock outstanding.
NationsBank Corporation
September 30, 1997 Form 10-Q
Index
Part I. Financial Information
Item 1. Financial Statements
NationsBank Corporation and Subsidiaries
Consolidated Statement of Income
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(Dollars in Millions Except Per-Share Information)
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NationsBank Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
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(Dollars in Millions, Shares in Thousands)
See accompanying notes to consolidated financial statements.
NationsBank Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Accounting Policies
On February 27, 1997, NationsBank completed a 2-for-1 split of its common
stock. All prior period financial data included in this Form 10-Q has been
restated to reflect the impact of the stock split.
The consolidated financial statements include the accounts of NationsBank
Corporation and its majority-owned subsidiaries (the Corporation). All
significant intercompany accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is
unaudited. In the opinion of management, all normal recurring adjustments
necessary for a fair presentation of the interim period results have been made.
Certain prior period amounts have been reclassified to conform to current period
classifications.
Accounting policies followed in the presentation of interim financial
results are presented on pages 53, 54 and 55 of the 1996 Annual Report to
Shareholders, incorporated by reference into the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996, as updated by Note 1 on page 7
of the Corporation's quarterly report on Form 10-Q for June 30, 1997.
Note 2 - Merger-Related Activity
On January 7, 1997, the Corporation completed the acquisition of Boatmen's
Bancshares, Inc. (Boatmen's), headquartered in St. Louis, Missouri, resulting in
the issuance of approximately 195 million shares of the Corporation's common
stock valued at $9.4 billion and aggregate cash payments of $371 million to
Boatmen's shareholders. The Corporation accounted for this acquisition as a
purchase; therefore, the results of operations of Boatmen's are included in the
consolidated financial statements of the Corporation from the date of
acquisition. On the date of the acquisition, Boatmen's unaudited total assets
and total deposits were approximately $41.2 billion and $32.0 billion,
respectively.
The following table presents condensed pro forma consolidated results of
operations for the three months and nine months ended September 30, 1996 as if
the acquisition of Boatmen's had occurred on January 1, 1996. This information
combines the historical results of operations of the Corporation and Boatmen's
after the effect of purchase accounting adjustments. Estimates of purchase
accounting adjustments are based on information available at this time. The cash
portion of the purchase price is assumed to be 35 percent, reflecting the
Corporation's repurchase of approximately 65 million shares of its common stock
through August 1997. The actual cash election made by the Boatmen's shareholders
in the transaction was approximately 4 percent with the remaining 96 percent of
the aggregate consideration being paid in the Corporation's common stock. The
pro forma information does not purport to be indicative of the results that
would have been obtained if the operations had actually been combined during the
periods presented and is not necessarily indicative of operating results to be
expected in future periods.
Unaudited Pro Forma Results of Operations
For the three months and nine months ended September 30, 1996
(Dollars in millions, except per-share information)
Three Months Nine Months
Net interest income ........................... $1,910 $5,679
Net income .................................... 624 1,751
Net income available to common shareholders ... 620 1,735
Earnings per common share ..................... .86 2.38
Fully diluted earnings per common share ....... .85 2.35
On October 1, 1997, the Corporation completed its acquisition of Montgomery
Securities (Montgomery), an investment banking and institutional brokerage firm
headquartered in San Francisco, California. 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 purchase price of approximately $1.2
billion. Montgomery had 1996 revenues of approximately $600 million and total
assets of approximately $3.0 billion on the date of acquisition. The acquisition
was accounted for as a purchase.
On August 29, 1997, the Corporation announced that it had reached a
definitive agreement to merge with Barnett Banks, Inc. (Barnett), a multi-bank
holding company headquartered in Jacksonville, Florida (the merger). The merger,
which is expected to close in the first quarter of 1998, is subject to the
approval of the shareholders of the Corporation and of Barnett, as well as
certain regulatory authorities. Pursuant to the agreement, the Corporation will
issue 1.1875 shares of its common stock for each outstanding share of Barnett
common stock. Approximately 245 million shares will be issued in the
transaction, which will be accounted for as a pooling of interests. On September
30, 1997, Barnett's total assets, total deposits and shareholder's equity were
$43.2 billion, $32.9 billion and $3.6 billion, respectively.
On June 1, 1997, the branching provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the Act) took effect, allowing
banking companies to consolidate their subsidiary bank operations across state
lines. Pursuant to the provisions of the Act, the Corporation now operates its
primary banking subsidiaries under three main charters: NationsBank, N.A.,
NationsBank of Texas, N.A. and NationsBank of Delaware, N.A., which operates the
Corporation's credit card business. The Corporation expects to continue the
consolidation of other banking subsidiaries throughout 1997 and 1998.
Note 3 - Trading Account Assets and Liabilities
The fair values of the components of trading account assets and liabilities
on September 30, 1997 and December 31, 1996 and the average fair values for the
nine months ended September 30, 1997 were (dollars in millions):
Derivatives-dealer positions presented in the table above represent the
fair values of interest rate, foreign exchange, equity and commodity-related
products, including financial futures, forward settlement and option contracts
and swap agreements associated with the Corporation's derivative trading
activities.
Note 4 - Loans, Leases, and Factored Accounts Receivable
The distribution of loans, leases, and factored accounts receivable on
September 30, 1997 and December 31, 1996 was as follows (dollars in millions):
On September 30, 1997, the recorded investment in certain loans that were
considered to be impaired was $594 million, all of which were classified as
nonperforming. Impaired loans on September 30, 1997 were comprised of commercial
loans of $371 million, real estate commercial of $205 million, and real estate
construction of $18 million. Of these impaired loans, $427 million had a
valuation allowance of $78 million and $167 million did not have a valuation
allowance due primarily to the application of interest payments against book
balances or write-downs previously made with respect to these loans.
On September 30, 1997 and December 31, 1996, nonperforming loans, including
certain loans which are considered to be impaired, totaled $1.1 billion and $890
million, respectively. Other real estate owned amounted to $160 million and $153
million on September 30, 1997 and December 31, 1996, respectively.
In the third quarter of 1997, the Corporation securitized $4.2 billion of
commercial loans comprised of two series of $2.1 billion each. The bonds are
backed by investment and near-investment grade commercial loans. Series 1997-1
matures in 2000 and was priced at a weighted average of 13 basis points over the
three-month London interbank offered rate (LIBOR). Series 1997-2 matures in 2002
and was priced at a weighted average of 16 basis points over three-month LIBOR.
Approximately $4.5 billion of 5, 7, 10 and 15 year residential mortgage
loans were securitized and retained in the securities portfolio through one
transaction that occurred during the third quarter of 1997. Also securitized
through several transactions during the first nine months of 1997 was
approximately $3.0 billion of residential mortgage loans with approximately $2.5
billion of these loans retained in the securities portfolio.
Note 5 - Debt
In the third quarter of 1997, the Corporation issued $1.2 billion in
long-term debt, comprised of $1.0 billion of senior notes and $200 million of
subordinated notes, with maturities ranging from 1999 to 2012. Of the $1.2
billion issued, $300 million of fixed-rate debt was converted to floating rates
through interest rate swaps at spreads ranging from 2 basis points below
three-month LIBOR to 14 basis points over three-month LIBOR. The remaining $900
million of debt issued bears interest at spreads ranging from 1 basis point
below three-month LIBOR to 18.5 basis points over three-month LIBOR.
Under the bank note program jointly maintained by NationsBank, N.A. and
NationsBank of Texas, N.A., up to $9.0 billion of bank notes may be offered from
time to time with fixed or floating rates and maturities from 30 days to 15
years from date of issue. On September 30, 1997, there were short-term bank
notes outstanding of $118 million. In addition, NationsBank of Texas, N.A. and
NationsBank, N.A. had outstanding bank notes of $4.3 billion on September 30,
1997 that were classified as long-term debt.
Since October 1996, the Corporation formed four wholly owned grantor
trusts (Capital Trusts I, II, III and IV) to issue preferred securities and to
invest the proceeds of such preferred securities into notes of the Corporation.
The sole assets of each of the Capital Trusts are the Junior Subordinated
Deferrable Interest Notes of the Corporation (the Notes) held by such Capital
Trusts. The terms of the preferred securities as of September 30, 1997 are
summarized as follows (dollars in millions):
On September 30, 1997, the Corporation had unused commercial paper back-up
lines of credit totaling $1.5 billion of which $1.0 billion expires in October
1998 and $500 million expires in October 2002. These lines were supported by
fees paid directly by the Corporation to unaffiliated banks.
As of November 6, the Corporation had the authority to issue approximately
$4.1 billion of corporate debt securities and preferred and common stock under
its existing shelf registration statements and $2.7 billion of corporate debt
securities under its Euro medium-term note program.
Note 6 - Commitments and Contingencies
The Corporation enters into commitments to extend credit, standby letters
of credit and commercial letters of credit to meet the financing needs of its
customers. The commitments shown below have been reduced by amounts
collateralized by cash and participated to other financial institutions. The
following summarizes commitments outstanding (dollars in millions):
September 30 December 31
1997 1996
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Commitments to extend credit
Credit card commitments .......... $ 27,220 $ 24,255
Other loan commitments ........... 100,216 82,506
Standby letters of credit and
financial guarantees ............. 10,825 10,060
Commercial letters of credit ............ 900 761
On September 30, 1997 and December 31, 1996, indemnified securities lending
transactions totaled $2.2 billion and $7.1 billion, respectively. Collateral,
with a market value of $2.3 billion and $7.2 billion for the respective periods,
was obtained by the Corporation in support of these transactions.
On September 30, 1997, the Corporation had commitments to purchase and sell
when-issued securities of $6.1 billion and $5.2 billion, respectively. This
compares to commitments to purchase and sell when-issued securities of $7.4
billion each on December 31, 1996.
See Tables 7 and 8 and the accompanying discussion in Item 2 regarding the
Corporation's derivatives used for risk management purposes. See Table 9 and the
accompanying discussion in Item 2 regarding the Corporation's derivative trading
activities.
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to a number of pending and threatened
legal actions and proceedings, including several actions brought on behalf of
various classes of claimants. In certain of these actions and proceedings,
substantial money damages are asserted against the Corporation and its
subsidiaries, and certain of these actions and proceedings are based on alleged
violations of consumer protection, securities, environmental, banking and other
laws. Management believes, based upon the advice of counsel, that the actions
and proceedings and losses, if any, resulting from the final outcome thereof,
will not be material in the aggregate to the Corporation's financial position or
results of operations.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The Corporation's September 30, 1997 report on Form 10-Q contains certain
forward-looking statements which are subject to risks and uncertainties that
could cause actual results to differ materially from those reflected in such
forward-looking statements, which are representative only on the date hereof.
Users of the Corporation's Form 10-Q should not rely solely on the
forward-looking statements and should consider all uncertainties and risks
discussed throughout this report as well as those in the Corporation's most
recent report on Form 10-K. The Corporation undertakes no obligation to update
any forward-looking statements made. Certain factors that may cause actual
results to differ materially from the forward-looking statements include:
interest rate, market and monetary fluctuations, monetary and fiscal policies
and laws, inflation, general economic conditions, competition and economic
conditions in the geographic regions and industries in which the Corporation
operates, introduction and acceptance of new products and enhancements, mergers
and acquisitions and their integration into the Corporation, and management's
ability to manage these and other risks.
Earnings Review
Table 1 presents a comparison of selected operating results for the three
months and nine months ended September 30, 1997 and 1996.
Net income for the third quarter of 1997 increased 26 percent to $788
million from $625 million in the third quarter of 1996. Earnings per common
share and fully diluted earnings per common share were $1.11 and $1.08,
respectively, for the third quarter of 1997, compared to $1.06 and $1.05 in the
comparable prior year period.
Net income for the first nine months of 1997 increased 30 percent to $2.3
billion from $1.7 billion for the first nine months of 1996. Earnings per common
share and fully diluted earnings per common share were $3.13 and $3.04,
respectively, for the nine months ended September 30, 1997, compared to $2.91
and $2.87 for the comparable prior year period. Excluding a merger-related
charge of $118 million ($77 million, net of tax), net income for the first nine
months of 1996 was $1.8 billion, earnings per common share were $3.04 and fully
diluted earnings per common share were $3.00.
For the three and nine month periods ended September 30, 1997, the
increases over the prior year in income, expense, and balance sheet categories
were due largely to the Boatmen's acquisition while income and most balance
sheet categories were also impacted by internal growth. Other significant
changes in the Corporation's results of operations and financial position are
discussed in the sections that follow.
Key performance highlights for the first nine months of 1997 were:
o Taxable-equivalent net interest income increased 25 percent to $6.0 billion
in the first nine months of 1997. Excluding the impact of the Boatmen's
acquisition, loan sales and securitizations, net interest income increased
approximately 6 percent. The net interest yield increased to 3.84 percent
compared to 3.58 percent in the first nine months of 1996.
o The provision for credit losses covered net charge-offs and totaled $570
million for the first nine months of 1997 compared to $455 million for the
same period in 1996. Net charge-offs as a percentage of average loans,
leases and factored accounts receivable increased slightly to .51 percent
for the first nine months of 1997 compared to .48 percent for the same
period in 1996, while net charge-offs totaled $567 million for the nine
months ended September 30, 1997 compared to $447 million for the same
year-ago period. Higher net charge-offs for the nine months ended September
30, 1997 were primarily the result of an increase in the average loans,
leases, and factored accounts receivable portfolio, attributable to both
the Boatmen's acquisition and internal growth as well as deterioration in
consumer credit quality experienced on an industry-wide basis. Higher total
consumer net charge-offs were partially offset by lower net charge-offs in
the commercial loan portfolio. Nonperforming assets increased to $1.3
billion on September 30, 1997 compared to $1.0 billion on December 31,
1996, due primarily to the Boatmen's acquisition, and to a lesser extent,
deterioration in consumer credit quality experienced on an industry-wide
basis.
Table 1
Selected Operating Results
(Dollars in Millions Except Per-Share Information)
o Noninterest income increased 30 percent to $3.5 billion in the first nine
months of 1997. This growth was attributable to higher levels of income
from virtually all areas, including service charges on deposit accounts,
asset management and fiduciary service fees, trading account profits and
fees, investment banking income and a gain on the sale of an out-of-market
credit card portfolio. Excluding the acquisition of Boatmen's, noninterest
income increased approximately 8 percent.
o Other noninterest expense increased 29 percent to $5.4 billion. Excluding
the Boatmen's acquisition and related transition expenses, noninterest
expense remained essentially unchanged.
o Cash basis ratios, which measure operating performance excluding intangible
assets and the related amortization expense, improved with cash basis fully
diluted earnings per share rising 15 percent to $3.48 for the nine months
ended September 30, 1997 compared to $3.02 for the same year-ago period.
For the nine months ended September 30, 1997, return on average tangible
common shareholders' equity increased 799 basis points to 29.55 percent
compared to 21.56 percent for the same year-ago period. The cash basis
efficiency ratio improved to 53.42 percent for the first nine months of
1997, a decrease of 133 basis points.
Business Unit Operations
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries. The
Corporation manages its business activities through three major Business Units:
the General Bank, Global Finance and Financial Services. The Business Units are
managed with a focus on numerous performance objectives including return on
equity, operating efficiency and net income. Table 2 summarizes key performance
measures for each of the Business Units.
The net interest income of the Business Units reflects a funds transfer
pricing process which derives net interest income by matching assets and
liabilities with similar interest rate sensitivity and maturity characteristics.
Equity capital is allocated to each Business Unit based on an assessment of its
inherent risk.
The General Bank and Global Finance business unit results reflect the
impact of the purchase of Boatmen's, which resulted in an increase in goodwill
of approximately $5.9 billion and approximately $173 million of related
amortization expense on a consolidated basis for the first nine months of 1997.
This additional expense had an unfavorable impact on the return on average
equity and efficiency ratios for both the General Bank and Global Finance in
1997. Table 2 presents information based on actual operating results including
business unit earnings, the return on average equity and the efficiency ratio
excluding the impact of goodwill and other intangibles and related amortization
expense.
The General Bank includes the Banking Group, which contains the retail
banking network and is the service provider to the consumer sector as well
as small and medium-size companies. Within the General Bank, specialized
services are provided throughout the Corporation's franchise, which include
the origination and servicing of home mortgage loans, the issuance and
servicing of credit cards, indirect lending, dealer finance and certain
insurance services. In addition, certain products are provided by the
Financial Products Group on a nationwide basis. The General Bank also
contains the Asset Management Group, which includes businesses that
provide full-service and discount brokerage, investment advisory and
investment management services. The Private Client Group is part of the
Asset Management Group and provides asset management, banking and trust
services for individuals, targeting established wealth, active wealth,
business owners, corporate executives, and the private foundations
established by them.
The General Bank earned $1.4 billion in the first nine months of 1997, an
increase of 19 percent over the same period in 1996. The acquisition of
Boatmen's accounted for a large portion of the General Bank's increased earnings
over the same period last year with internal growth also contributing to the
increase. Taxable-equivalent net interest income in the General Bank increased
$969 million, primarily reflecting the impact of the Boatmen's acquisition and
deposit expense management efforts. The net interest yield improved 24 basis
points in the first nine months of 1997, reflecting higher yields from the loan
portfolio and deposit expense management efforts. Excluding the impact of the
Boatmen's acquisition, total loans declined from the same period in 1996,
attributable to $7.5 billion of mortgage loan securitizations during the first
nine months of 1997.
Noninterest income in the General Bank rose 35 percent in the first nine
months of 1997 to $2.5 billion due to higher service charges on deposit
accounts, asset management and fiduciary service fees and credit card income,
attributable primarily to the acquisition of Boatmen's but also reflecting the
impact of internal growth of approximately 13 percent for service charges on
deposit accounts and approximately 5 percent for credit card income. Higher
deposit account service charges were the result of changes in deposit pricing
throughout the NationsBank franchise. Also contributing to the increase was a
gain on the sale of a $306-million out-of-market credit card portfolio during
the third quarter of 1997. Noninterest expense increased 36 percent to $4.2
billion due primarily to the acquisition of Boatmen's, which resulted in an
increase in full-time equivalent employees and additional amortization expense,
with the remaining increase across most major expense categories. Excluding the
Boatmen's acquisition, noninterest expense was virtually flat. The cash basis
efficiency ratio was 56.5 percent, an improvement of 100 basis points over the
first nine months of 1996. The tangible return on average tangible equity
increased approximately 300 basis points to 29 percent, the result of revenue
growth which offset an increase in operating expenses and higher equity levels
resulting from the Boatmen's acquisition.
Table 2
Business Unit Summary
For the Nine Months Ended September 30
(Dollars in Millions)
Global Finance provides comprehensive corporate and investment banking
services to domestic and international customers through its Corporate
Finance/Capital Markets, Specialized Lending, Real Estate, and Transaction
Products units. The Global Finance group serves as a principal lender and
investor as well as an advisor and manages treasury and trade transactions for
clients and customers. Loan origination and syndication, asset-backed lending,
leasing, factoring, project finance and mergers
and acquisitions consulting are representative of the services provided. Global
Finance is a primary dealer of U.S. Government securities and also underwrites,
distributes and makes markets in high-grade and high-yield securities.
Additionally, Global Finance is a market maker in derivatives products which
include swap agreements, option contracts, forward settlement contracts,
financial futures and other derivatives products in certain interest rate,
foreign exchange, commodity and equity markets. In support of these activities,
Global Finance takes positions to support client demands and its own account.
Through the acquisition of Montgomery, which closed on October 1, 1997, Global
Finance began offering equity underwriting services.
Global Finance earned $581 million in the first nine months of 1997
compared to $449 million in the first nine months of 1996, the result of higher
levels of net interest income and noninterest income, which more than offset
higher noninterest and provision expenses. Taxable-equivalent net interest
income for the first nine months of 1997 was $1.0 billion compared to $898
million in the first nine months of 1996 reflecting loan growth partially offset
by increased funding costs and competitive pressure on commercial loan pricing.
The Global Finance loan portfolio increased $3.9 billion to $40.3 billion on
September 30, 1997 over September 30, 1996 levels as the result of core loan
growth and the acquisition of Boatmen's. This increase was net of the
securitization of $4.2 billion of commercial loans as discussed in Note 4.
Noninterest income in the first nine months of 1997 rose 19 percent to $862
million reflecting higher securities underwriting and other investment banking
income. Noninterest expense for the period rose 9 percent to $953 million, the
result of the Boatmen's acquisition and related amortization expense as well as
higher personnel expenses. Excluding the impact of the Boatmen's acquisition,
noninterest expense was essentially unchanged. The cash basis efficiency ratio
improved 570 basis points to 48.2 percent. The tangible return on average
tangible equity increased approximately 200 basis points to 19 percent,
reflecting revenue growth partially offset by higher operating expenses.
Financial Services is primarily composed of a holding company,
NationsCredit Corporation, which includes NationsCredit Consumer Corporation,
primarily a consumer finance operation, and NationsCredit Commercial
Corporation, primarily a commercial finance operation. NationsCredit Consumer
Corporation provides personal, mortgage and automobile loans to consumers and
retail finance programs to dealers. NationsCredit Commercial Corporation
consists of divisions that specialize in one or more of the following commercial
financing areas: equipment loans and leasing; loans for debt restructuring,
mergers and acquisitions and working capital; real estate, golf/recreational and
health care financing; and inventory financing to manufacturers, distributors
and dealers.
Financial Services' earnings of $119 million in the first nine months of
1997 were flat in comparison to the same period in 1996. Taxable-equivalent net
interest income decreased $2 million resulting from lower yields partly offset
by 7-percent growth in average loans and leases. The net interest yield of 6.66
percent was down 56 basis points from 1996 due principally to increased
competitive pressure on loan pricing. Noninterest income rose 21 percent to $110
million in the first nine months of 1997. The increase reflected gains
associated with the sale of 29 branches during the first quarter of 1997.
Noninterest expense for the period increased 3 percent to $240 million while the
cash basis efficiency ratio remained essentially unchanged at 42.8 percent. The
tangible return on average tangible equity decreased to 16 percent for the first
nine months of 1997 compared to 18 percent for the same period in 1996, the
result of flat earnings on a higher equity base.
Results of Operations
Net Interest Income
An analysis of the Corporation's taxable-equivalent net interest income and
average balance sheet levels for the last five quarters and first nine months of
1997 and 1996 is presented in Tables 3 and 4, respectively.
Taxable-equivalent net interest income increased approximately 24 percent
to $2.0 billion in the third quarter of 1997 and amounted to $6.0 billion in the
first nine months of 1997 compared to $1.6 billion and $4.8 billion for the same
respective 1996 periods. The increases were due primarily to the acquisition of
Boatmen's. Excluding the impact of the Boatmen's acquisition, loan sales and
Table 3
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
Table 4
Nine Month Taxable-Equivalent Data
(Dollars in Millions)
securitizations, net interest income increased approximately 6 percent over 1996
levels for both the third quarter and first nine months of 1997. For the first
nine months of 1997, taxable-equivalent net interest income was positively
impacted by core loan growth, an increase in spreads between deposits and market
funding and the improved contribution of the securities portfolios, which was
partially offset by the impact of the sale of certain consumer loans in the
third quarter of 1996 and an increased reliance on long-term debt. While
securitizations lowered net interest income by $78 million in the third quarter
of 1997 and $240 million in the first nine months of 1997, they do not
significantly affect the Corporation's earnings. As the Corporation continues to
securitize loans, its role becomes that of a servicer and the income related to
securitized loans is reflected in noninterest income.
Of the $740-million increase in interest income for the third quarter of
1997, $706 million was due to higher average earning assets with $34 million
resulting from higher yields on average earning assets. The $1.9-billion
increase in interest income for the first nine months of 1997 was the result of
a $1.7-billion increase due to higher average earning assets and $127 million
from higher yields on average earning assets. Interest expense increased $355
million for the third quarter of 1997, resulting from higher levels of average
interest-bearing liabilities. The $682-million increase in interest expense for
the first nine months of 1997 was the result of an $838-million increase from
higher levels of average interest-bearing liabilities partially offset by the
$156-million favorable impact of lower rates paid on average interest-bearing
liabilities.
The net interest yield increased 11 basis points to 3.80 percent in the
third quarter of 1997 and 26 basis points to 3.84 percent in the first nine
months of 1997, primarily reflecting the improved contribution of the securities
portfolio and deposit expense management efforts. The positive impact of the
acquisition of Boatmen's on the net interest yield was offset by additional
funding costs related to the acquisition.
Loan growth is dependent on economic conditions as well as various
discretionary factors, such as decisions to securitize certain loan portfolios,
the retention of residential mortgage loans generated by the Corporation's
mortgage subsidiary and the management of borrower, industry, product and
geographic concentrations.
Provision for Credit Losses
The provision for credit losses was $190 million and $570 million in the
third quarter and first nine months of 1997, respectively, compared to $145
million and $455 million in the comparable prior-year periods. Higher provision
expense for the first nine months of 1997 was due to higher net charge-offs
resulting from an increase in the loans, leases, and factored accounts
receivable portfolio, attributable to both the Boatmen's acquisition and
internal growth, as well as deterioration in consumer credit quality experienced
on an industry-wide basis, partially offset by lower net charge-offs in the
commercial loan portfolio. For the first nine months of 1997, the provision for
credit losses covered net charge-offs of $567 million. For additional
information on the allowance for credit losses, certain credit quality ratios
and credit quality information on specific loan categories, see the "Allowance
for Credit Losses" and "Concentrations of Credit Risk" sections of Management's
Discussion and Analysis of Results of Operations and Financial Condition.
Gains on Sales of Securities
Gains on the sales of securities were $19 million and $91 million for the
third quarter and first nine months of 1997, respectively, compared to $26
million and $34 million for the same respective periods in 1996. The increase
for the first nine months of 1997 reflects the Corporation's sale of a
significant portion of the Boatmen's portfolio subsequent to the acquisition
date as well as the sale of lower-yielding securities and the reinvestment of
the proceeds from such sales into higher-spread products.
Noninterest Income
As presented in Table 5, noninterest income increased 38 percent to $1.2
billion and 30 percent to $3.5 billion in the third quarter and first nine
months of 1997, respectively, over noninterest income for the same periods in
1996, reflecting the acquisition of Boatmen's. Excluding the Boatmen's
acquisition, noninterest income increased approximately 8 percent during the
first nine months of 1997.
o Service charges on deposit accounts increased 39 percent over both the
third quarter and first nine months of 1996, respectively, due primarily to
the acquisition of Boatmen's and the impact of changes in deposit pricing
throughout the NationsBank franchise. Excluding the impact of the Boatmen's
acquisition, service charges increased approximately 13 percent and 12
percent in the third quarter and first nine months of 1997, respectively.
Table 5
Noninterest Income
(Dollars in Millions)
o Mortgage servicing and other mortgage-related income increased 30 percent
in the third quarter and first nine months of 1997 to $69 million and $206
million, respectively, due to the acquisition of the Boatmen's mortgage
portfolio. The average portfolio of loans serviced increased 36 percent
from $87.8 billion in the first nine months of 1996 to $119.4 billion in
the first nine months of 1997. Mortgage loan originations through the
Corporation's mortgage subsidiary increased from $9.3 billion for the first
nine months of 1996 to $10.5 billion for the same period in 1997. The
increase in loan originations experienced in 1997 was due to the
acquisition of Boatmen's and the Corporation's efforts to maintain the
mortgage servicing portfolio at target levels. Origination volume for the
first nine months of 1997 consisted of approximately $6.4 billion of
correspondent and wholesale loan volume and $4.1 billion of retail loan
volume.
In conducting its mortgage banking activities, the Corporation is
exposed to interest rate risk for the period between loan commitment date
and subsequent delivery date. The value of the Corporation's mortgage
servicing rights is also affected by changes in prepayment rates. To manage
risk associated with mortgage banking activities, the Corporation enters
into various financial instruments including option contracts, forward
delivery contracts and certain rate swaps. The contract
notional amount of these instruments approximated $10 billion on September
30, 1997. Net unrealized gains associated with these contracts were $9
million on September 30, 1997.
o Investment banking income increased 20 percent in the third quarter and
first nine months of 1997 to $102 million and $299 million, respectively,
as a result of higher securities underwriting fees, reflecting continued
growth in this business activity. Gains on principal investing activities
(investing in equity or equity-related transactions) increased $11 million
in the third quarter of 1997 over the same period in 1996 as a result of
the sale of several interests in principal investments during the current
quarter.
An analysis of investment banking income by major business activity
follows (in millions):
o Asset management and fiduciary service fees increased 63 percent to $168
million in the third quarter of 1997 and 58 percent to $507 million for the
first nine months of 1997, reflecting the impact of the Boatmen's
acquisition. Fourth quarter asset management fees are expected to reflect
the impact of the Corporation's sale of certain institutional and corporate
trust businesses primarily acquired through the purchase of Boatmen's.
o Credit card income increased 19 percent for the third quarter and first
nine months of 1997 to $95 million and $273 million, respectively, due
primarily to the acquisition of Boatmen's and internal growth of
approximately 5 percent. Credit card income includes $6 million and $22
million from credit card securitizations for the three and nine months
ended September 30, 1997, respectively.
o Trading account profits and fees totaled $65 million and $239 million in
the third quarter and first nine months of 1997, an increase of $26 million
and $50 million over the same periods in 1996.
An analysis of trading account profits and fees by major business
activity follows (in millions):
o Miscellaneous income totaled $159 million and $355 million in the third
quarter and first nine months of 1997, respectively. Included in
miscellaneous income for the third quarter of 1997 was the gain on the sale
of an out-of-market credit card portfolio. Miscellaneous income also
includes certain prepayment fees and other fees such as net gains on sales
of miscellaneous investments, business activities, premises and other
similar items.
Noninterest Expense
As presented in Table 6, the Corporation's noninterest expense increased 28
percent and 29 percent to $1.8 billion and $5.4 billion in the third quarter and
first nine months of 1997, respectively, over noninterest expense in the same
periods of 1996. Excluding the impact of the Boatmen's acquisition and related
transition expenses, noninterest expense remained essentially unchanged in the
third quarter of 1997 and first nine months of 1997 while the cash basis
efficiency ratio declined 133 basis points to 53.42 for the first nine months of
1997.
A discussion of the significant components and changes in noninterest
expense for the third quarter and first nine months of 1997 compared to
noninterest expense for the same periods in 1996 follows:
Table 6
Noninterest Expense
(Dollars in Millions)
o Personnel expense increased $174 million and $590 million in the third
quarter and first nine months of 1997, respectively, over the comparable
1996 periods, due primarily to the impact of the Boatmen's acquisition. On
September 30, 1997, the Corporation had approximately 78,000 full-time
equivalent employees compared to approximately 63,000 full-time equivalent
employees on December 31, 1996, respectively. Excluding the impact of the
Boatmen's acquisition, full-time equivalent employees at September 30, 1997
were essentially unchanged compared to December 31, 1996 levels.
o Occupancy expense increased 19 percent to $160 million in the third quarter
of 1997 and 20 percent to $466 million in the first nine months of 1997 due
to the acquisition of Boatmen's.
o Equipment expense increased approximately $39 million and $117 million in
the third quarter and first nine months of 1997, respectively. This
increase reflects the acquisition of Boatmen's as well as enhancements to
data delivery channels throughout the Corporation and to product delivery
systems, such as the Model Banking initiative, direct banking (including PC
Banking) and data base management.
o Professional fees increased $6 million and $46 million in the third quarter
and first nine months of 1997, respectively, reflecting the impact of the
Boatmen's acquisition as well as higher consulting and technical support
fees for projects to enhance revenue growth and for the development and
installation of infrastructure enhancements.
o Intangibles amortization expense increased to $111 million and $323 million
in the third quarter and first nine months of 1997, respectively,
reflecting the impact of the Boatmen's acquisition.
o Other general operating expenses decreased $14 million to $355 million for
the first nine months of 1997 compared to $369 million for the same period
in 1996. Included in 1996 year-to-date expenses
was $43 million of pre-tax charges reflecting the estimated losses
associated with certain customers' fraudulent commercial transactions.
o Noninterest expense includes the cost of projects underway to ensure
accurate date recognition and data processing with respect to the Year 2000
and are included in professional, data processing, and equipment expenses.
The Corporation expects to substantially complete the Year 2000 conversion
projects by the end of 1998. These costs, which are expensed as incurred,
have been immaterial to date and are not expected to have a material impact
on the Corporation's earnings in the future.
Income Taxes
The Corporation's income tax expense for the third quarter and first nine
months of 1997 was $444 million and $1.3 billion, respectively, for an effective
tax rate of 36 percent of pretax income compared to $331 million and $933
million for the third quarter and first nine months of 1996, respectively, for
an effective rate of 35 percent. The higher effective tax rate reflects the
increase in non-deductible goodwill amortization resulting from the acquisition
of Boatmen's.
Balance Sheet Review and Liquidity Risk Management
The Corporation utilizes an integrated approach in managing its balance
sheet which includes management of interest rate sensitivity, credit risk,
liquidity risk and capital position. The average balances discussed below can be
derived from Table 4. The following discussion addresses changes in average
balances for the first nine months of 1997 compared to the same periods in 1996.
Average customer-based funds increased $28.3 billion to $124.6 billion in
the first nine months of 1997 due primarily to deposits obtained in acquisitions
over the past year. As a percentage of total sources, average customer-based
funds represented 52 percent in the first nine months of 1997 compared to 47
percent in the first nine months of 1996.
Average market-based funds decreased $4.7 billion to $59.0 billion in the
first nine months of 1997 and comprised a smaller portion of total sources of
funds at 24 percent for the first nine months of 1997 compared to 31 percent
during the same period of 1996. The decrease in market-based funds was the
result of increased reliance on customer-based funds and long-term debt as
sources of funds. The $7.1-billion increase in long-term debt was the result of
borrowings to fund the cash portion of the Boatmen's purchase price.
Average loans and leases, the Corporation's primary use of funds, increased
$24.4 billion to $147.1 billion during the first nine months of 1997 and
comprised approximately 61 percent of total uses of funds in 1997 and 1996. This
increase in average loans and leases was due to the acquisition of Boatmen's and
core loan growth. The ratio of average loans and leases to customer-based funds
was 118 percent in the first nine months of 1997 compared to 127 percent in the
first nine months of 1996.
Average other assets and cash and cash equivalents increased $9.0 billion
to $31.5 billion in the first nine months of 1997 due primarily to an increase
in intangible assets related to the acquisition of Boatmen's.
Cash and cash equivalents were $9.3 billion on September 30, 1997 compared
to $8.9 billion on December 31, 1996. During the first nine months of 1997, net
cash used in operating activities was $3.0 billion, net cash used in investing
activities was $2.6 billion and net cash provided by financing activities was
$6.0 billion. For further information on cash flows, see the Consolidated
Statement of Cash Flows in the consolidated financial statements.
Liquidity is a measure of the Corporation's ability to fulfill its cash
requirements and is managed by the Corporation through its asset and liability
management process. Management believes the Corporation's sources of liquidity
are more than adequate to meet its cash requirements.
The following discussion provides an overview of significant on- and
off-balance sheet components.
Securities
The securities portfolio on September 30, 1997 consisted of securities held
for investment totaling $1.3 billion and securities available for sale totaling
$34.2 billion compared to $2.1 billion and $12.3 billion, respectively, on
December 31, 1996. The increase in available for sale securities reflects
initiatives to invest excess capital in the securities portfolio and the impact
of approximately $7.0 billion of mortgage-backed securities obtained primarily
through residential mortgage loans that were securitized and retained. Also
contributing to the increase in available for sale securities since December 31,
1996 was the purchase of higher yielding mortgage-backed securities in the first
quarter of 1997.
On September 30, 1997, the market value of the Corporation's securities
held for investment reflected net unrealized appreciation of $5 million. On
December 31, 1996, the market value of securities held for investment
approximated the book value of the portfolio.
The valuation reserve for securities available for sale and marketable
equity securities increased shareholder's equity by $262 million on September
30, 1997, reflecting pretax appreciation of $218 million on debt securities and
$112 million on marketable equity securities. The valuation reserve increased
shareholders' equity by $86 million on December 31, 1996. The increase in the
valuation reserve was primarily attributable to a decrease in interest rates
when comparing September 30, 1997 to December 31, 1996.
The estimated average maturities of securities held for investment and
securities available for sale portfolios were 1.53 years and 6.63 years,
respectively, on September 30, 1997 compared with 1.47 years and 6.91 years,
respectively, on December 31, 1996.
Off-Balance Sheet
Derivatives - Asset and Liability Management Positions
The Corporation utilizes interest rate and foreign exchange contracts in
its asset and liability management (ALM) process.
Interest rate contracts allow the Corporation to efficiently manage its
interest rate risk position. The Corporation primarily uses non-leveraged
generic and basis swaps. Generic swaps involve the exchange of fixed-rate and
variable-rate interest payments based on the contractual underlying notional
amounts. Basis swaps involve the exchange of interest payments based on the
contractual underlying notional amounts, where both the pay rate and the receive
rate are floating rates based on different indices. As presented in the
footnotes to Table 3, net interest receipts and payments on these contracts have
been included in interest income and expense on the underlying instruments.
Table 7
Asset and Liability Management Interest Rate Notional Contracts
(Dollars in Millions)
Table 7 summarizes the notional amount and the activity of ALM interest
rate contracts for the nine months ended September 30, 1997. As reflected in the
table, the gross notional amount of the Corporation's ALM swap program on
September 30, 1997 was $32.1 billion, with the Corporation receiving fixed on
$27.6 billion, primarily converting variable-rate commercial loans to
fixed-rate, and receiving variable on $2.2 billion. The net receive fixed
position of $25.4 billion was essentially unchanged compared to the net receive
fixed position of $26.7 billion on December 31, 1996. The net receive fixed
position primarily modifies the interest rate characteristics of certain
variable-rate assets.
Table 8 summarizes the expected maturities, weighted average pay and
receive rates and the unrealized gains/losses on September 30, 1997 of the
Corporation's ALM swaps. Floating rates represent the last repricing and will
change in the future primarily based on movements in one-, three- and six-month
LIBOR rates. The net unrealized appreciation of the ALM swap portfolio on
September 30, 1997 was $115 million compared to unrealized appreciation of $69
million on December 31, 1996, reflecting the decrease in interest rates when
comparing September 30, 1997 to December 31, 1996. The amount of net realized
deferred gains associated with terminated ALM swaps was $31.1 million on
September 30, 1997.
Table 8
Asset and Liability Management Interest Rate Contracts
September 30, 1997
(Dollars in Millions, Average Expected Maturity in Years)
In its ALM process, the Corporation also utilizes interest rate option
products, primarily caps and floors. Interest rate caps and floors are
agreements where, for a fee, the purchaser obtains the right to receive interest
payments when a variable interest rate moves above or below a specified cap or
floor rate, respectively. Table 7 also includes a summary of the notional amount
and the activity of ALM interest rate option contracts for the nine months ended
September 30, 1997. At September 30, 1997, the Corporation had a gross notional
amount of $8.2 billion in outstanding interest rate option contracts used for
ALM purposes. Such instruments are primarily linked to term debt, short-term
borrowings, and pools of residential mortgages. Table 8 also includes a summary
of the expected maturities and the net unrealized losses of the Corporation's
ALM options contracts. On September 30, 1997, the net unrealized depreciation of
ALM option products was $6 million.
The Corporation uses foreign currency swaps to manage the foreign exchange
risk associated with foreign-denominated liabilities. At September 30, 1997,
these contracts had a notional value of $616 million and reflected net
unrealized depreciation of $26 million.
The net unrealized appreciation in the estimated value of the ALM interest
rate and foreign exchange contract portfolio should be viewed in the context of
the overall balance sheet. The value of any single component of the balance
sheet or off-balance sheet positions should not be viewed in isolation.
For a discussion of the Corporation's management of risk associated with
mortgage banking activities, see the "Noninterest Income" section of
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Derivatives - Dealer Positions
Credit risk associated with derivative positions is measured as the net
replacement cost the Corporation could incur should counterparties with
contracts in a gain position completely fail to perform under the terms of those
contracts and any collateral underlying the contracts proves to be of no value
to the Corporation. In managing derivative credit risk, the Corporation
considers both the current exposure, which is the replacement cost of contracts
on the measurement date, as well as an estimate of the potential change in value
of contracts over their remaining lives.
Table 9
Derivatives - Dealer Positions
(Dollars in Millions)
Table 9 presents the notional or contract amounts on September 30, 1997 and
December 31, 1996 and the current credit risk amounts (the net replacement cost
of contracts in a gain position on September 30, 1997 and December 31, 1996) of
the Corporation's derivatives-dealer positions which are primarily executed in
the over-the-counter market. The notional or contract amounts indicate the total
volume of transactions and significantly exceed the amount of the Corporation's
credit or market risk associated with these instruments. The credit risk amounts
presented in Table 9 do not consider the value of any collateral, but generally
take into consideration the effects of legally enforceable master netting
agreements. On September 30, 1997, the credit risk associated with the
Corporation's ALM positions was not significant.
In managing credit risk associated with its derivatives activities, the
Corporation deals with creditworthy counterparties, primarily U.S. and foreign
commercial banks, broker-dealers and corporates.
A portion of the Corporation's derivatives-dealer activity involves
exchange-traded instruments. Because exchange-traded instruments conform to
standard terms and are subject to policies set by the exchange involved,
including counterparty approval, margin requirements and security deposit
requirements, the credit risk to the Corporation is minimal.
During 1997, there have been no credit losses associated with derivative
transactions. In addition, on September 30, 1997, there were no material
nonperforming derivative positions.
Allowance for Credit Losses
The Corporation's allowance for credit losses was $2.8 billion, or 1.99
percent of net loans, leases, and factored accounts receivable on September 30,
1997 compared to $2.3 billion, or 1.89 percent, on December 31, 1996, with the
increase in the allowance attributable to the acquisition of Boatmen's.
Table 10 provides an analysis of the changes in the allowance for credit
losses. During the third quarter of 1997, higher credit card and commercial net
charge-offs caused the $64-million increase in total net charge-offs, which
amounted to $199 million, or .53 percent of average loans, leases and factored
accounts receivable, compared to .44 percent for the same period in 1996. Higher
credit card net charge-offs were due primarily to deterioration in consumer
credit quality experienced on an industry-wide basis, while higher commercial
net charge-offs were due to a $20-million charge-off of one large retail credit.
During the first nine months of 1997, net charge-offs increased $120 million to
$567 million in the first nine months of 1997 or .51 percent of average loans,
leases, and factored accounts receivable, compared to net charge-offs of $447
million or .48 percent, for the first nine months of 1996. Higher net
charge-offs were primarily the result of an increase in the average loans,
leases, and factored accounts receivable portfolio, attributable to both the
Boatmen's acquisition and internal growth as well as deterioration in consumer
credit quality experienced on an industry-wide basis. This resulted in increases
in credit card and other consumer net charge-offs, which were partially offset
by lower commercial net charge-offs during the first nine months of 1997.
Excluding increases that resulted from the acquisition of Boatmen's,
management expects charge-offs to grow as the Corporation maintains its efforts
to shift the mix of the loan portfolio to a higher consumer loan concentration.
Furthermore, future economic conditions also will impact credit quality and may
result in increased net charge-offs and higher provisions for credit losses.
Table 10
Allowance For Credit Losses
(Dollars in Millions)
Nonperforming Assets
As presented in Table 11, on September 30, 1997, nonperforming assets
were $1.3 billion, or .91 percent of net loans, leases, factored accounts
receivable and other real estate owned, compared to $1.0 billion, or .85
percent, on December 31, 1996. Nonperforming loans increased to $1.1 billion on
September 30, 1997 from $890 million on December 31, 1996. The increase in
nonperforming loans was due primarily to the acquisition of Boatmen's and, to a
lesser extent, deterioration in consumer credit quality experienced on an
industry-wide basis. The allowance coverage of nonperforming loans was 252
percent on September 30, 1997 compared to 260 percent on December 31, 1996.
Table 11
Nonperforming Assets
(Dollars in Millions)
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. The
following section discusses credit risk in the loan portfolio, including net
charge-offs by loan categories as presented in Table 12.
Table 12
Net Charge-offs in Dollars and as a Percentage of Average Loans Outstanding
(Dollars in Millions)
Real Estate - Total nonresidential real estate commercial and construction
loans, the portion of such loans which are nonperforming, OREO and other credit
exposures are presented in Table 13. The exposures presented represent credit
extensions for real estate-related purposes to borrowers or counterparties who
are primarily in the real estate development or investment business and for
which the ultimate repayment of the credit is dependent on the sale, lease,
rental or refinancing of the real estate.
Total nonresidential real estate commercial and construction loans totaled
$11.2 billion, or 8 percent of net loans, leases and factored accounts
receivable, on September 30, 1997 compared to $8.3 billion, or 7 percent, at the
end of 1996 with the increase due to the acquisition of Boatmen's. Real estate
loans past due 90 days or more and still accruing interest were $21 million, or
.19 percent of real estate loans, on September 30, 1997 and $18 million, or .22
percent, on December 31, 1996. Nonperforming real estate commercial and
construction loans were $223 million on September 30, 1997 compared to $173
million on December 31, 1996 due primarily to the acquisition of Boatmen's.
The exposures included in Table 13 do not include credit extensions which
were made on the general creditworthiness of the borrower for which real estate
was obtained as security or as an abundance of caution and for which the
ultimate repayment of the credit is not dependent on the sale, lease, rental or
refinancing of the real estate. Accordingly, the exposures presented do not
include commercial loans secured by owner-occupied real estate, except where the
borrower is a real estate developer. In addition to the amounts presented in the
tables, on September 30, 1997, the Corporation had approximately $9.9 billion of
commercial loans which were not real estate dependent but for which the
Corporation had obtained real estate as secondary repayment security.
Table 13
Real Estate Commercial and Construction Loans, Other Real Estate Owned and
Other Real Estate Credit Exposures
September 30, 1997
(Dollars in Millions)
Other Industries - Table 14 presents selected industry credit exposures.
Commercial loans, factored accounts receivable and lease financings are included
in the table. Commercial loan outstandings totaled $57.1 billion, or 41 percent
of net loans, leases and factored accounts receivable on September 30, 1997 and
$50.3 billion, or 41 percent of net loans, leases and factored accounts
receivable on December 31, 1996. This increase, due to the addition of
Boatmen's, was partially offset by the impact of the $4.2-billion commercial
loan securitization.
For the first nine months of 1997, the Corporation had commercial loan net
charge-offs of $37 million, or .08 percent of average commercial loans, compared
to $68 million, or .19 percent of average commercial loans, in the first nine
months of 1996. Excluding a $20-million charge-off of one large retail credit,
commercial loan net charge-offs were $10 million, or .07 percent of average
commercial loans, in the third quarter of 1997 and $17 million, or .04 percent,
for the first nine months of 1997. Commercial loans past due 90 days or more and
still accruing interest were $43 million, or .08 percent of commercial loans, on
September 30, 1997 and $38 million, or .08 percent, on December 31, 1996.
Nonperforming
commercial loans were $371 million and $342 million on September 30, 1997 and
December 31, 1996, respectively, with the increase due to the acquisition of
Boatmen's.
Table 14
Selected Industry Loans, Leases and Factored Accounts
Receivable, Net of Unearned Income
September 30, 1997
(Dollars in Millions)
Outstanding
-----------
Health care ........................................ $ 4,387
Food, including agribusiness ....................... 3,448
Leisure and sports ................................. 3,382
Media .............................................. 3,349
Textiles and apparel, excluding retail ............. 3,070
Machinery and equipment, excluding defense ......... 2,949
Retail ............................................. 2,740
Oil and gas ........................................ 2,628
Automotive, excluding trucking ..................... 2,609
Transportation, excluding air and trucking ......... 1,972
Consumer - On September 30, 1997, total consumer loan outstandings were
$60.8 billion, or 44 percent of net loans, leases and factored accounts
receivable, compared to $55.3 billion, or 45 percent of net loans, leases and
factored accounts receivable on December 31, 1996. This increase, due primarily
to the addition of Boatmen's and core loan growth, was net of mortgage loan
securitizations of $7.5 billion for the first nine months of 1997. Higher credit
card net charge-offs experienced during the third quarter and first nine months
of 1997 were the primary reason for the increase in total consumer net
charge-offs, the result of deterioration in consumer credit quality experienced
on an industry-wide basis. A secondary factor causing the higher levels of net
charge-offs during the first nine months of 1997 was an increase in other
consumer net charge-offs, primarily the result of the Boatmen's acquisition.
Note 4 to the unaudited consolidated financial statements details the components
of the Corporation's consumer loan portfolio. In addition to the credit card and
other consumer loans reported in the financial statements, the Corporation
manages credit card and consumer receivables which have been sold.
Average credit card receivables managed by the Card Services group
(excluding private label credit cards) increased to $9.2 billion during the
first nine months of 1997 compared to $8.0 billion during the same year-ago
period as the Corporation maintains its efforts to shift the loan portfolio mix
to a higher consumer concentration. Average securitized credit card loans
totaled $2.6 billion during the third quarter and first nine months of 1997.
During the third quarter and first nine months of 1996, average securitized
credit card loans were $2.9 billion and $2.1 billion, respectively. Higher net
charge-offs during 1997 reflect deterioration in consumer credit quality
experienced on an industry-wide basis.
Average managed other consumer loans, which includes direct and indirect
consumer loans and home equity lines as well as indirect auto loan and consumer
finance securitizations, were $28.8 billion and $29.2 billion in the third
quarter and first nine months of 1997, respectively, and $24.6 billion and $25.0
billion in the comparable 1996 periods. Both the increase in loans and higher
net charge-offs during the first nine months of 1997 were primarily due to the
acquisition of Boatmen's.
Total consumer loans past due 90 days or more and still accruing interest
were $243 million, or .40 percent of total consumer loans, on September 30, 1997
compared to $180 million, or .33 percent of total consumer loans on December 31,
1996. Total consumer nonperforming loans were $473 million and $350 million on
September 30, 1997 and December 31, 1996, respectively. The increases in these
categories were due to deterioration in consumer credit quality experienced on
an industry-wide basis and the acquisition of Boatmen's.
Market Risk Management
In the normal course of conducting business activities, the Corporation is
exposed to market risk which includes both price and liquidity risk. Price risk
arises from fluctuations in interest rates, foreign exchange rates and commodity
and equity prices that may result in changes in the values of financial
instruments. Liquidity risk arises from the possibility that the Corporation may
not be able to satisfy current and future financial commitments or that the
Corporation may not be able to liquidate financial instruments at market prices.
Risk management procedures and policies have been established and are utilized
to manage the Corporation's exposure to market risk. The strategy of the
Corporation with respect to market risk is to maximize net income while
maintaining an acceptable level of risk to changes in market rates. While
achievement of this goal requires a balance between profitability, liquidity and
market price risk, there are opportunities to enhance revenues through
controlled risks. In implementing strategies to manage interest rate risk, the
primary tools used by the Corporation are the securities portfolio, interest
rate swaps, and management of the mix, yields and rates and maturities of assets
and the wholesale and retail funding sources of the Corporation.
On September 30, 1997, the interest rate risk position of the Corporation
was relatively neutral as the impact of a gradual parallel 100 basis-point rise
or fall in interest rates over the next 12 months was estimated to be less than
2 percent of net income when compared to stable rates.
To estimate potential losses that could result from adverse market
movements, the Corporation uses a daily earnings at risk methodology. Earnings
at risk represents a one-day measurement of pre-tax earnings at risk from
movements in market prices using the assumption that positions cannot be
rehedged during the period of any prescribed price and volatility change. A
99-percent confidence level is utilized, which indicates that actual trading
profits and losses may deviate from expected levels and exceed estimates
approximately one day out of every 100 days of trading activity.
Earnings at risk is measured on both a gross and an uncorrelated basis. The
gross measure assumes that adverse market movements occur simultaneously across
all segments of the trading portfolio, an unlikely assumption. On September 30,
1997, the gross estimates of potential losses with respect to interest rate,
foreign exchange and equity and commodity trading activities were $58 million,
$2 million and $3 million, respectively. Alternately, using a statistical
measure which is more likely to capture the effects of market movements, the
uncorrelated estimate on September 30, 1997 for aggregate trading activities was
$21 million.
Average daily trading revenues during the first nine months of 1997
approximated $1 million. During the first nine months of 1997, the Corporation's
trading activities resulted in positive daily revenues for approximately 69
percent of total trading days. During the first nine months of 1997, the
standard deviation of trading revenues was $3 million. Using this data, one can
conclude that the aggregate trading activities should not result in exposure of
more than $5 million for any one day, assuming 99-percent confidence. When
comparing daily earnings at risk to trading revenues, daily earnings at risk
will average considerably more due to the assumption of no evasive actions as
well as the assumption that adverse market movements occur simultaneously across
all segments of the trading portfolio.
Capital
Shareholders' equity was $20.3 billion on September 30, 1997 compared to
$13.7 billion on December 31, 1996. The acquisition of Boatmen's resulted in the
issuance of approximately 195 million shares of common stock and an increase of
$9.5 billion in total shareholders' equity. This increase was partially offset
by the repurchase of approximately 96 million shares of common stock for $5.8
billion.
Presented below are the Corporation's regulatory capital ratios on
September 30, 1997 and December 31, 1996:
September 30 December 31
1997 1996
==========================================================================
Risk-Based Capital Ratios
Tier 1 Capital ......................... 7.00% 7.76%
Total Capital .......................... 11.56 12.66
Leverage Captial Ratio ................. 6.16 7.09
The Corporation's and its significant banking subsidiaries' regulatory
capital ratios on September 30, 1997 exceeded the regulatory minimums of 4
percent for Tier 1 risk-based capital, 8 percent for total risk-based capital
and the leverage guidelines of 100 to 200 basis points above the minimum ratio
of 3 percent. The Corporation and its significant banking subsidiaries were
considered well-capitalized on September 30, 1997.
Table 15
Selected Quarterly Operating Results
(Dollars in Millions Except Per-Share Information)
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
On August 1, 1997, the Corporation acquired by merger all the outstanding
shares of Gibson Security Corp., a private company, for aggregate consideration
of approximately $88.7 million, of which approximately $61.6 million was paid in
cash and the remainder was paid with 400,200 unregistered shares of common
stock of the Corporation. The issuance of the shares in this transaction was
deemed to be exempt from registration under the Securities Act of 1933, as
amended, in reliance on Section 4(2) as a transaction by an issuer not involving
any public offering.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11 - Earnings Per Common Share Computation
Exhibit 12(a) - Ratio of Earnings to Fixed Charges
Exhibit 12(b) - Ratio of Earnings to Fixed Charges and Preferred
Dividends
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The following reports on Form 8-K were filed by the Corporation during
the quarter ended September 30, 1997:
Current Report on Form 8-K dated June 28, 1997, and filed July 10,
1997, Items 5&7.
Current Report on Form 8-K dated July 2, 1997, and filed July 3, 1997,
Items 5&7.
Current Report on Form 8-K dated July 14, 1997, and filed July 18,
1997, Items 5&7.
Current Report on Form 8-K dated August 29, 1997, and filed September
12, 1997, Items 5&7. The following financial statements of Barnett
were filed as part of this Current Report on Form 8-K: Consolidated
Statements of Financial Condition as of December 31, 1996 and 1995;
Consolidated Statements of Income for the years ended December 31,
1996, 1995, and 1994; Consolidated Statements of Changes in
Shareholders' Equity for the years ended December 31, 1996,
1995, and 1994; and Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995, and 1994. In addition, certain
unaudited financial information regarding Barnett Bank, Inc. (Barnett)
was filed as part of this Current Report on Form 8-K, including
consolidated statements of financial condition as of June 30, 1997,
and consolidated statements of income, consolidated statements of
changes in shareholders' equity and consolidated statements of cash
flows for the six months ended June 30, 1997 and June 30, 1996.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NationsBank Corporation
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Registrant
Date: November 14, 1997 /s/ Marc D. Oken
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Marc D. Oken
Executive Vice President
and Chief Accounting Officer
(Duly Authorized Officer and
Principal Accounting Officer)
NationsBank Corporation
Form 10-Q
Index to Exhibits
Exhibit Description
- ------- -----------
11 Earnings Per Common Share Computation
12(a) Ratio of Earnings to Fixed Charges
12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends
27 Financial Data Schedule