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<SEC-DOCUMENT>0000950168-98-000724.txt : 19980331
<SEC-HEADER>0000950168-98-000724.hdr.sgml : 19980331
ACCESSION NUMBER: 0000950168-98-000724
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 23
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980313
SROS: AMEX
SROS: NYSE
SROS: PCX
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: NATIONSBANK CORP
CENTRAL INDEX KEY: 0000070858
STANDARD INDUSTRIAL CLASSIFICATION: 6021
IRS NUMBER: 560906609
STATE OF INCORPORATION: NC
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-06523
FILM NUMBER: 98564992
BUSINESS ADDRESS:
STREET 1: NATIONSBANK CORPORATE CENTER
STREET 2: 100 N TRYON ST
CITY: CHARLOTTE
STATE: NC
ZIP: 28255
BUSINESS PHONE: 7043865000
MAIL ADDRESS:
STREET 1: NATIONALSBANK CORPORATE CENTER
STREET 2: NC1007 19 04
CITY: CHARLOTTE
STATE: NC
ZIP: 28255
FORMER COMPANY:
FORMER CONFORMED NAME: NCNB CORP
DATE OF NAME CHANGE: 19920107
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>NATIONSBANK CORPORATION 10-K
<TEXT>
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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, 1997 -- Commission File Number 1-6523
---------------
NationsBank Corporation
(Exact name of registrant as specified in its charter)
North Carolina 56-0906609
- - -------------------------------------- --------------------------------------
(State of incorporation) (IRS Employer Identification No.)
NationsBank 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:
<TABLE>
<CAPTION>
<S> <C>
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
8 1/2% Subordinated Capital Notes, due 1999 New York 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
</TABLE>
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 $64,517,219,000 (based on the February 27,
1998, closing price of such common stock of $68.50 per share). As of March 6,
1998, there were 962,209,252 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
<S> <C>
Document of the Registrant Form 10-K Reference Location
Portions of the 1998 Proxy Statement PART III
</TABLE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
NATIONSBANK CORPORATION
Form 10-K Index
<TABLE>
<CAPTION>
Page
-----------
<S> <C> <C>
PART I
Item 1. Business ..................................................................... 2
Primary Market Areas ......................................................... 2
Acquisition and Disposition Activity ......................................... 2
Government Supervision and Regulation ........................................ 2
Competition .................................................................. 5
Employees .................................................................... 6
Business Unit Operations ..................................................... 12-14
Net Interest Income .......................................................... 14-16
Securities ................................................................... 22, 51,
57-58
Loans, Leases and Factored Accounts Receivable ............................... 17, 22-23,
31-39, 52,
60-61
Deposits ..................................................................... 23
Short-Term Borrowings ........................................................ 23-24, 61
Market Risk Management ....................................................... 25-30
Selected Quarterly Operating Results ......................................... 41
Six-Year Consolidated Statistical Summary .................................... 80-81
Item 2. Properties ................................................................... 6
Item 3. Legal Proceedings ............................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders .......................... 6
Item 4A. Executive Officers of the Registrant ......................................... 7
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters ..... 7
Item 6. Selected Financial Data ...................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
9
Operations ...................................................................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................... 45
Item 8. Financial Statements and Supplementary Data .................................. 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
82
Disclosure ...................................................................
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 82
Item 11. Executive Compensation ....................................................... 82
Item 12. Security Ownership of Certain Beneficial Owners and Management ............... 82
Item 13. Certain Relationships and Related Transactions ............................... 82
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 83
</TABLE>
1
<PAGE>
PART I
Item 1. BUSINESS
NationsBank Corporation is a North Carolina corporation and a multi-bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "Act"), with its principal assets being the stock of its
subsidiaries (the "Corporation"). The principal executive offices of the
Corporation are located at NationsBank Corporate Center in Charlotte, North
Carolina 28255.
On February 27, 1997, the Corporation completed a two-for-one split of its
common stock (the "Common Stock"). All financial data included in this Annual
Report on Form 10-K reflects the impact of the stock split.
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 Unit
Operations."
Primary Market Areas
Through its banking subsidiaries (the "Banks") and various non-banking
subsidiaries, the Corporation provides banking and banking-related services
primarily throughout the Mid-Atlantic (Maryland, Virginia and the District of
Columbia), the Midwest (Illinois, Iowa, Kansas and Missouri), the Southeast
(Florida, Georgia, Kentucky, North Carolina, South Carolina and Tennessee) and
the Southwest (Arkansas, New Mexico, Oklahoma and Texas). The Corporation
serves an aggregate of over 16 million households in these regions, and
management believes that these are dynamic regions in which to be located.
Personal income levels in these regions as a whole rose 5.4 percent between
1996 and 1997, and the population in these areas as a whole rose an estimated
1.2 percent between 1996 and 1997. The number of housing permits authorized
increased 2.6 percent between 1996 and 1997, ranging from a decrease of 3.05
percent in the Midwest to an increase of 5.67 percent in the Southwest. Between
1996 and 1997, the levels of unemployment in these regions as a whole fell by
approximately .06 percentage points, for an average unemployment rate of 4.7
percent in 1997. These states created more than one million new jobs in 1997,
2.2 percent above 1996.
The Corporation has the leading bank deposit market share position in
Florida, Georgia, Kansas, Maryland, New Mexico and Texas. In addition, the
Corporation ranks second in terms of bank deposit market share in Arkansas,
Missouri and South Carolina; third in the District of Columbia, Oklahoma and
Virginia; fifth in North Carolina and Tennessee; and seventh in Iowa. The
Corporation has less than 1.0 percent of the bank deposit market share in
Illinois and Kentucky.
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 or lines of businesses. In
1997, the Corporation sold a number of business units acquired as a result of
its acquisition of Boatmen's Bancshares, Inc. ("Boatmen's"), including
Boatmen's corporate and institutional trust and stock transfer businesses,
relocation management business, insurance premium financing business and an
escrow services business. In addition, the Corporation has entered into an
agreement to sell Superior Federal Bank, F.S.B., its federal savings bank
headquartered in Fort Smith, Arkansas. The Corporation has also entered into an
agreement to sell NationsBank of Kentucky, N.A. 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 Notes To Consolidated Financial Statements.
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
2
<PAGE>
organized as national banking associations, which are subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
(the "Comptroller"), and as state chartered banks, which are subject to
regulation, supervision and examination by the relevant state regulators. The
Banks are also subject to regulation by the Federal Deposit Insurance
Corporation (the "FDIC") and other federal regulatory agencies. The Corporation
also owns a federal savings bank which is subject to supervision, regulation
and examination by the Office of Thrift Supervision. 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 or 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 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 became able to acquire banks in states other than its home
state, beginning September 29, 1995, 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).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. This provision, which
was effective June 1, 1997, allowed each state, prior to the effective date,
the opportunity to "opt out" of this provision, thereby prohibiting interstate
branching within that state. Of those states in which the Banks are located,
only Texas has adopted legislation to "opt out" of the interstate branching
provisions (which Texas law currently expires on September 2, 1999).
Furthermore, pursuant to the Interstate Banking and Branching Act, a bank is
now able to 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 (with the exception of NationsBank of
Delaware, N.A.) into a single bank as soon as practicable. The Corporation
currently operates one interstate bank (i.e., a bank with banking centers in
more than one state) which is NationsBank, N.A., headquartered in Charlotte,
North Carolina, with offices in Arkansas, Florida, Georgia, Illinois, Iowa,
Kansas, Maryland, Missouri, New Mexico, North Carolina, Oklahoma, South
Carolina, Virginia, Texas and the District of Columbia. Separate banks continue
to operate in Delaware, Florida, Georgia, Kentucky (which it has agreed to
sell), Tennessee and Texas. In addition, the Corporation has a federal savings
bank headquartered in Arkansas which it has agreed to sell. 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. The likelihood and timing of any
such proposals or bills and the impact they might have on the Corporation and
its subsidiaries cannot be determined at this time.
3
<PAGE>
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, those 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
two-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 subordinated and other qualifying debt, and the
allowance for credit losses up to 1.25 percent of risk-weighted assets. 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, 1997 were 6.50 percent and 10.89 percent, respectively.
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,
1997 was 5.57 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 ratio of at least 5 percent and not be subject
to a capital directive order. An "adequately capitalized" institution must have
a Tier 1 capital ratio of at least 4 percent, a total capital ratio of at least
8 percent and a leverage ratio of at least 4 percent, or 3 percent in some
cases. 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 are not expected to have a material impact on
the Corporation or the Banks' regulatory capital ratios or their well
capitalized status.
4
<PAGE>
Distributions
The Corporation's funds for cash distributions to its shareholders 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 general 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 shareholders 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
registrant 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 three major business units
(the General Bank, Global Finance and Financial Services) engage are highly
competitive. Generally, the lines of activity and markets served involve
competition with other banks, savings and loan associations, credit unions and
other non-bank financial institutions, such as investment banking firms,
brokerage firms, mutual funds and insurance companies, as well as other
entities which offer financial services, located both within and without the
United States. 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 three major business units is highly competitive. The General
Bank, Global Finance and Financial Services compete with other commercial
banks, savings and loan associations, finance companies and other businesses
which provide similar services. The three major business units 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 registrant's non-banking subsidiaries and the Banks. In its consumer
lending operations, the competitors of the three major business units include
other banks, savings and loan associations, 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 other banking and
investment banking firms, investment advisory firms, brokerage firms, mutual
funds and other organizations offering similar services. The Corporation's
mortgage banking subsidiary competes with commercial banks, savings and loan
associations, 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, financial counselors and other fiduciaries for personal trust
business. The Corporation and its three 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, savings and loan associations 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.
5
<PAGE>
Employees
As of December 31, 1997, the Corporation and its subsidiaries had 80,360
full-time equivalent employees. Of the foregoing employees, 48,998 were
employed by the General Bank, 6,882 were employed by Global Finance, 2,768 were
employed by Financial Services, 19,416 were employed by NationsBanc Services,
Inc. (a subsidiary providing operational support services to the Corporation
and its subsidiaries) and the remainder were employed by the Corporation and
its other subsidiaries. On January 9, 1998, the Corporation completed its
merger with Barnett Banks, Inc., which had 21,487 full-time equivalent
employees as of December 31, 1997. None of the Corporation's domestic employees
are covered by a collective bargaining agreement. Management considers its
employee relations to be good.
Item 2. PROPERTIES
The principal offices of the Corporation, as well as the General Bank and
Global Finance, are located in the 60-story NationsBank Corporate Center in
Charlotte, North Carolina, which is owned by a subsidiary of the Corporation.
The Corporation occupies approximately 589,000 square feet and leases
approximately 524,000 square feet to third parties at market rates, which
represents substantially all of the space in this facility. The principal
offices of Financial Services are located in two buildings in Jacksonville,
Florida, which are owned by a subsidiary of the Corporation. Financial Services
occupies substantially all of the approximately 307,000 square feet in these
facilities.
The Corporation also leases or owns a significant amount of space in
Atlanta, Georgia; Baltimore, Maryland; Dallas, Texas; Jacksonville and Tampa,
Florida; Richmond and Norfolk, Virginia; and St. Louis, Missouri; as well as
additional premises in Charlotte and throughout its franchise. As of January 9,
1998, the Corporation and its subsidiaries owned or leased approximately 5,300
locations in 46 states, the District of Columbia and 10 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 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 these 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
A special meeting of shareholders was held on December 19, 1997 (the
"Special Meeting"). The Corporation's Common Stock, 7% Cumulative Redeemable
Preferred Stock, Series B, and ESOP Convertible Preferred Stock, Series C,
voted together as a single class on the matters submitted to the shareholders
at the Special Meeting. The following are voting results on each of these
matters:
<TABLE>
<S> <C> <C> <C> <C>
Against
or Broker
For Withheld Abstentions Nonvotes
----------- ----------- --------- ---------
1. The issuance of shares of the Corporation's
Common Stock and $2.50 Cumulative
Convertible Preferred Stock, Series BB, in the
merger with Barnett Banks, Inc. .............. 502,572,758 7,359,802 3,251,244 0
2. The amendment and restatement of the
NationsBank Corporation Key Employee Stock
Plan ......................................... 395,758,669 109,390,495 8,034,640 0
</TABLE>
6
<PAGE>
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 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 shareholders.
Andrew B. Craig, III, age 66, Chairman of the Board. Mr. Craig was
Chairman of the Board and Chief Executive Officer of Boatmen's Bancshares, Inc.
from 1989 until January 7, 1997 when Boatmen's Bancshares, Inc. was merged with
the Corporation at which time he was elected as Chairman of the Board and a
director of the Corporation. He also served as President of Boatmen's
Bancshares, Inc. from 1985 to 1994.
James H. Hance, Jr., age 53, Vice Chairman and Chief Financial Officer.
Mr. Hance was named Chief Financial Officer in August 1988, also served as
Executive Vice President from March 1987 to October 1993 and was named Vice
Chairman in October 1993. He first became an officer in 1987. He also serves as
Vice Chairman and a director of NationsBank, N.A., and as a director of the
Corporation, NationsBank of Tennessee, N.A. and various other subsidiaries of
the Corporation.
Kenneth D. Lewis, age 50, President. Mr. Lewis was named to his present
position in October 1993. Prior to that time, from June 1990 to October 1993 he
served as President of the Corporation's General Bank. He first became an
officer in 1971. Mr. Lewis also serves as President and a director of
NationsBank, N.A. and a director of NationsBank of Texas, N.A. and of the
Corporation.
Hugh L. McColl, Jr., age 62, Chief Executive Officer and Chief Executive
Officer of the Banks. Mr. McColl was Chairman of the Corporation from September
1983 until December 31, 1991, and from December 31, 1992 until January 7, 1997.
He first became an officer in 1962. He also serves as a director of the
Corporation.
Marc D. Oken, age 51, Executive Vice President and Principal Accounting
Officer. He first became an officer in 1989.
F. William Vandiver, Jr., age 56, Chairman, Corporate Risk Policy. Mr.
Vandiver was named to his present position in June 1997. Prior to that time,
from January 1996 to June 1997 he served as President of NationsBank Global
Finance and from July 1991 to January 1996 he served as President, Specialized
Finance Group. He has been an officer since 1968. He also serves as a director
of NationsBank, N.A.
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:
<TABLE>
<CAPTION>
Quarter High Low
--------- ------------ -----------
<S> <C> <C> <C>
1996 first $40 11/16 $32 3/16
second 42 5/16 37 3/8
third 47 1/16 38 3/16
fourth 52 5/8 43 1/8
1997 first 65 48
second 70 54
third 71 11/16 56 5/8
fourth 66 3/8 55
</TABLE>
7
<PAGE>
As of January 9, 1998, there were 174,488 record holders of Common Stock.
During 1996 and 1997, 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:
<TABLE>
<CAPTION>
Quarter Dividend
--------- ---------
<S> <C> <C>
1996 first $ .29
second .29
third .29
fourth .33
1997 first .33
second .33
third .33
fourth .38
</TABLE>
For additional information regarding the Corporation's ability to pay
dividends, see "Government Supervision and Regulation -- Distributions" and
Note Nine of the Notes To Consolidated Financial Statements.
On October 1, 1997, the Corporation completed the acquisition of
Montgomery Securities, an investment banking and institutional brokerage
partnership, for aggregate consideration of approximately $1.1 billion, of
which approximately $840 million was paid in cash and the remainder was paid
with 5.3 million unregistered shares of Common Stock. 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.
8
<PAGE>
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 February 27, 1997, the Corporation completed a two-for-one split of
common stock. All financial data included in this Annual Report on Form 10-K
reflects the impact of the stock split.
This report 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. Readers of this report should not rely
solely on the forward-looking statements and should consider all uncertainties
and risks discussed throughout this report. The Corporation undertakes no
obligation to update any forward-looking statements contained herein.
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, the retention of residential mortgage loans generated by the mortgage
subsidiary, the management of borrower, industry, product and geographic
concentrations and the mix of the loan portfolio. The rate of charge-offs and,
accordingly, provision expense can be affected by local, regional and
international economic 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 or sell securities are also dependent on liquidity requirements 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 systems and technology for the Year 2000,
as well as uncertainties relating to the ability of third parties with whom the
Corporation has business relationships to address the Year 2000 issue in a
timely and adequate manner.
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,
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 which offer financial services, located
both within and without the United States; interest rate, market and monetary
fluctuations; inflation; 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.
1997 Compared to 1996
Overview
The Corporation is a multi-bank holding company headquartered in
Charlotte, North Carolina, which provides a diversified range of banking and
certain non-banking financial services both domestically and internationally
through three major Business Units: the General Bank, Global Finance and
Financial Services. After the merger on January 9, 1998 with Barnett Banks,
Inc. (Barnett), headquartered in Jacksonville, Florida, the Corporation had
approximately $310 billion in assets, making it the third largest banking
company in the United States. The Corporation will account for this transaction
as a pooling of interests and, accordingly, the recorded assets, liabilities,
shareholders' equity, income and expenses of the Corporation and Barnett will
be combined and reflected at their historical amounts.
9
<PAGE>
On January 7, 1997, the Corporation completed its acquisition of Boatmen's
Bancshares, Inc. (Boatmen's), headquartered in St. Louis, Missouri. In
addition, on October 1, 1997, the Corporation acquired Montgomery Securities
(Montgomery), an investment banking and institutional brokerage firm
headquartered in San Francisco, California. The Corporation accounted for these
acquisitions as purchase business combinations; therefore, the results of
operations of Boatmen's and Montgomery are included in the financial statements
of the Corporation from their dates of acquisition, respectively.
The increases over the prior year in income, expense and balance sheet
categories were due largely to the Boatmen's acquisition; however, 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 described in the following sections.
Refer to Table One and Table Nineteen for annual and quarterly selected
financial data, respectively.
Key performance highlights for 1997 were:
o Net income reflected growth of approximately 30 percent over 1996, amounting
to $3.08 billion for the year ended December 31, 1997 compared to $2.38
billion in 1996. Earnings per common share for 1997 increased 7 percent to
$4.27 from $4.00 in 1996 and diluted earnings per common share increased 6
percent to $4.17 from $3.92 in 1996. Excluding a merger-related charge of
$118 million ($77 million, net of tax), net income for 1996 was $2.5
billion and earnings per common share and diluted earnings per common share
were $4.13 and $4.05, respectively.
o Taxable-equivalent net interest income increased 25 percent to $8.0 billion
in 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 3.79 percent compared to 3.62 percent in
1996.
o The provision for credit losses covered net charge-offs and totaled $800
million in 1997 compared to $605 million in 1996. Net charge-offs as a
percentage of average loans, leases and factored accounts receivable
increased to .54 percent in 1997 compared to .48 percent in 1996, while net
charge-offs totaled $798 million in 1997 compared to $598 million in 1996.
Higher net charge-offs were largely 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 were
$1.1 billion on December 31, 1997 compared to $1.0 billion on December 31,
1996, the result of the Boatmen's acquisition.
o Noninterest income increased 37 percent to $5.0 billion in 1997. This growth
was attributable to higher levels of income from virtually all areas,
including service charges on deposit accounts, investment banking income,
asset management and fiduciary service fees and brokerage income. Excluding
the acquisitions of Boatmen's and Montgomery, noninterest income increased
approximately 9 percent.
o Noninterest expense increased to $7.4 billion, but was essentially unchanged
if the Boatmen's and Montgomery acquisitions and related transition
expenses were excluded.
o Cash basis ratios, which measure operating performance excluding intangible
assets and the related amortization expense, improved with cash basis
diluted earnings per common share rising 15 percent to $4.76 in 1997
compared to $4.13 in 1996. For 1997, return on average tangible common
shareholders' equity increased 847 basis points to 30.6 percent compared to
22.1 percent in 1996. The cash basis efficiency ratio was 53.8 percent in
1997, an improvement of 120 basis points from 1996 levels due to successful
acquisition integration and expense management efforts.
The remainder of management's discussion and analysis of the consolidated
results of operations and financial condition of the Corporation should be read
together with the consolidated financial statements and related notes presented
on pages 45 through 79.
10
<PAGE>
Table One
Five-Year Summary of Selected Financial Data
(Dollars in Millions Except Per-Share Information)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Income statement
Interest income .................................................................. $ 16,579 $ 13,796
Interest expense ................................................................. 8,681 7,467
Net interest income (taxable-equivalent) ......................................... 8,014 6,423
Net interest income .............................................................. 7,898 6,329
Provision for credit losses ...................................................... 800 605
Gains (losses) on sales of securities ............................................ 153 67
Noninterest income ............................................................... 5,002 3,646
Foreclosed properties expense (income) ........................................... 10 20
Merger-related charge ............................................................ -- 118
Other noninterest expense ........................................................ 7,447 5,665
Income before taxes and effect of change in method of accounting for income
taxes ........................................................................... 4,796 3,634
Income tax expense ............................................................... 1,719 1,259
Income before effect of change in method of accounting for income taxes .......... 3,077 2,375
Effect of change in method of accounting for income taxes ........................ -- --
Net income ....................................................................... 3,077 2,375
Net income available to common shareholders ...................................... 3,066 2,360
Net income (excluding merger-related charge) ..................................... 3,077 2,452
Average common shares issued (in thousands) ...................................... 717,450 590,216
Per common share
Earnings before effect of change in method of accounting for income taxes ........ $ 4.27 $ 4.00
Earnings ......................................................................... 4.27 4.00
Earnings (excluding merger-related charge) ....................................... 4.27 4.13
Diluted earnings ................................................................. 4.17 3.92
Diluted earnings (excluding merger-related charge) ............................... 4.17 4.05
Cash dividends paid .............................................................. 1.37 1.20
Shareholders' equity (year-end) .................................................. 29.87 23.69
Balance sheet (year-end)
Total loans, leases and factored accounts receivable, net of unearned income ..... 143,792 122,630
Total assets ..................................................................... 264,562 185,794
Total deposits ................................................................... 138,194 106,498
Long-term debt ................................................................... 27,204 22,985
Common shareholders' equity ...................................................... 21,274 13,586
Total shareholders' equity ....................................................... 21,337 13,709
Performance ratios
Return on average assets ......................................................... 1.26% 1.18%
Return on average assets (excluding merger-related charge) ....................... 1.26 1.22
Return on average common shareholders' equity (1) ................................ 15.26 17.95
Return on average common shareholders' equity (excluding merger-related
charge) (1) ..................................................................... 15.26 18.53
Efficiency ratio ................................................................. 57.2 56.3
Total equity to total assets ..................................................... 8.07 7.38
Risk-based capital ratios (year-end)
Tier 1 ........................................................................... 6.50 7.76
Total ............................................................................ 10.89 12.66
Leverage capital ratio ........................................................... 5.57 7.09
Cash basis financial data (2)
Earnings per common share ........................................................ 4.89 4.21
Earnings per common share (excluding merger-related charge) ...................... 4.89 4.34
Diluted earnings per common share ................................................ 4.76 4.13
Diluted earnings per common share (excluding merger-related charge) .............. 4.76 4.26
Return on average tangible assets ................................................ 1.49 1.26
Return on average tangible assets (excluding merger-related charge) .............. 1.49 1.30
Return on average tangible common shareholders' equity (1) ....................... 30.59 22.12
Return on average tangible common shareholders' equity (excluding
merger-related charge) (1) ...................................................... 30.59 22.80
Efficiency ratio ................................................................. 53.8 55.0
Ending tangible equity to tangible assets ........................................ 4.69 6.36
Market price per share of common stock
Close at the end of the year ..................................................... $60 13/16 $ 48 7/8
High for the year ................................................................ 71 11/16 52 5/8
Low for the year ................................................................. 48 32 3/16
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Income statement
Interest income .................................................................. $ 13,220 $ 10,529 $ 8,327
Interest expense ................................................................. 7,773 5,318 3,690
Net interest income (taxable-equivalent) ......................................... 5,560 5,305 4,723
Net interest income .............................................................. 5,447 5,211 4,637
Provision for credit losses ...................................................... 382 310 430
Gains (losses) on sales of securities ............................................ 29 (13) 84
Noninterest income ............................................................... 3,078 2,597 2,101
Foreclosed properties expense (income) ........................................... 18 (12) 78
Merger-related charge ............................................................ -- -- 30
Other noninterest expense ........................................................ 5,163 4,942 4,293
Income before taxes and effect of change in method of accounting for income
taxes ........................................................................... 2,991 2,555 1,991
Income tax expense ............................................................... 1,041 865 690
Income before effect of change in method of accounting for income taxes .......... 1,950 1,690 1,301
Effect of change in method of accounting for income taxes ........................ -- -- 200
Net income ....................................................................... 1,950 1,690 1,501
Net income available to common shareholders ...................................... 1,942 1,680 1,491
Net income (excluding merger-related charge) ..................................... 1,950 1,690 1,521
Average common shares issued (in thousands) ...................................... 544,959 549,312 515,938
Per common share
Earnings before effect of change in method of accounting for income taxes ........ $ 3.56 $ 3.06 $ 2.50
Earnings ......................................................................... 3.56 3.06 2.89
Earnings (excluding merger-related charge) ....................................... 3.56 3.06 2.93
Diluted earnings ................................................................. 3.52 3.03 2.86
Diluted earnings (excluding merger-related charge) ............................... 3.52 3.03 2.90
Cash dividends paid .............................................................. 1.04 .94 .82
Shareholders' equity (year-end) .................................................. 23.26 19.85 18.20
Balance sheet (year-end)
Total loans, leases and factored accounts receivable, net of unearned income ..... 117,033 103,371 92,007
Total assets ..................................................................... 187,298 169,604 157,686
Total deposits ................................................................... 100,691 100,470 91,113
Long-term debt ................................................................... 17,775 8,488 8,352
Common shareholders' equity ...................................................... 12,759 10,976 9,859
Total shareholders' equity ....................................................... 12,801 11,011 9,979
Performance ratios
Return on average assets ......................................................... 1.03% 1.02% .97%
Return on average assets (excluding merger-related charge) ....................... 1.03 1.02 .98
Return on average common shareholders' equity (1) ................................ 17.01 16.10 15.00
Return on average common shareholders' equity (excluding merger-related
charge) (1) ..................................................................... 17.01 16.10 15.23
Efficiency ratio ................................................................. 59.8 62.5 62.9
Total equity to total assets ..................................................... 6.83 6.49 6.33
Risk-based capital ratios (year-end)
Tier 1 ........................................................................... 7.24 7.43 7.41
Total ............................................................................ 11.58 11.47 11.73
Leverage capital ratio ........................................................... 6.27 6.18 6.00
Cash basis financial data (2)
Earnings per common share ........................................................ 3.78 3.28 3.06
Earnings per common share (excluding merger-related charge) ...................... 3.78 3.28 3.10
Diluted earnings per common share ................................................ 3.73 3.25 3.03
Diluted earnings per common share (excluding merger-related charge) .............. 3.73 3.25 3.07
Return on average tangible assets ................................................ 1.11 1.10 1.04
Return on average tangible assets (excluding merger-related charge) .............. 1.11 1.10 1.06
Return on average tangible common shareholders' equity (1) ....................... 20.74 19.85 18.08
Return on average tangible common shareholders' equity (excluding
merger-related charge) (1) ...................................................... 20.74 19.85 18.34
Efficiency ratio ................................................................. 58.4 61.0 61.6
Ending tangible equity to tangible assets ........................................ 6.08 5.65 5.56
Market price per share of common stock
Close at the end of the year ..................................................... $34 13/16 $ 22 9/16 $ 24 1/2
High for the year ................................................................ 37 3/8 28 11/16 29
Low for the year ................................................................. 22 5/16 21 11/16 22 1/4
</TABLE>
(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.
In 1993, return on average assets and return on equity after the tax benefit
from the impact of adopting a new income tax accounting
standard were 1.12% and 17.33%, respectively.
11
<PAGE>
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: General Bank, Global Finance and Financial Services. The business units
are managed with a focus on numerous performance objectives as presented in
Table Two, including business unit earnings, return on average equity and the
efficiency ratio. The table also includes certain cash basis information, which
excludes the impact of intangible assets and the related amortization expense.
The net interest income of the business units 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 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 $234 million of related
amortization expense on a consolidated basis in 1997. This additional expense
had unfavorable impacts on the return on average equity and efficiency ratios
for both the General Bank and Global Finance in 1997. Global Finance's results
also reflect the impact of the purchase of Montgomery.
The General Bank provides comprehensive retail banking services for
individuals and businesses. Within the General Bank, the Banking Group is the
service provider to the consumer sector as well as small and medium-size
companies. Subsequent to the Barnett merger, the Banking Group's delivery
channels included approximately 3,000 banking centers and approximately 7,000
automated teller machines which provide fully-automated, 24-hour cash
dispensing and deposit services. These delivery channels are located throughout
the Corporation's franchise and serve 16 million households in 16 states and
the District of Columbia. Specialized services, such as the origination and
servicing of residential mortgage loans, the issuance and servicing of credit
cards, indirect lending, dealer finance and certain insurance services, are
provided throughout the Corporation's franchise. In addition, certain other
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 Asset Management Group also
advises the Nations Funds family of mutual funds. The Private Client Group is
part of the Asset Management Group and provides asset management, banking and
trust services for wealthy individuals, business owners, corporate executives
and the private foundations established by them.
The General Bank's earnings increased 21 percent to $1.9 billion in 1997.
The acquisition of Boatmen's accounted for a large portion of the General
Bank's increased earnings over 1996 with internal growth also contributing to
the increase. Taxable-equivalent net interest income in the General Bank
increased $1.3 billion, primarily reflecting the impact of the Boatmen's
acquisition, deposit pricing management efforts and core loan growth. The net
interest yield increased slightly in 1997, reflecting higher yields from the
loan portfolio and deposit pricing management efforts. Average loans increased
from $78.7 billion in 1996 to $94.7 billion in 1997 with the increase due to
the Boatmen's acquisition. Excluding the impact of the Boatmen's acquisition
and the $8.1-billion of securitizations that occurred mainly during the third
quarter of 1997, average loans and leases were essentially unchanged in 1997
compared to 1996 average levels.
Noninterest income in the General Bank rose 37 percent to $3.4 billion due
to higher service charges on deposit accounts, asset management and fiduciary
service fees, mortgage servicing and other mortgage-related income and credit
card income. The increase was attributable primarily to the acquisition of
Boatmen's but also reflected the impact of internal growth of approximately 12
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 Corporation's 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 35 percent to $5.6 billion due to the acquisition
of Boatmen's, which resulted in an increase in full-time equivalent employees
and additional amortization expense, with the remaining increase spread across
most major expense categories. Excluding the acquisition of Boatmen's,
noninterest expense was virtually flat when compared to 1996. The cash basis
efficiency ratio was 56.5 percent, an improvement of 80 basis points over the
1996 ratio. The return on average tangible equity increased approximately 200
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.
12
<PAGE>
Table Two
Business Unit Summary
For the Year Ended December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
General Bank Global Finance Financial Services
----------------------- ------------------------------- ---------------------
1997 1996 1997 1996 1997 1996
----------- ----------- --------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income (taxable-equivalent) ..... $ 5,878 $ 4,602 $ 1,416 $ 1,202 $ 583 $ 572
Noninterest income ........................... 3,421 2,500 1,430 1,019 151 122
-------- -------- ------- ------- ------ ------
Total revenue ............................... 9,299 7,102 2,846 2,221 734 694
Provision for credit losses .................. 580 438 74 43 146 124
Gains on sales of securities ................. 35 25 2 -- -- --
Foreclosed properties expense (income) ....... 9 16 (8) (5) 9 9
Noninterest expense .......................... 5,631 4,165 1,490 1,188 326 313
-------- -------- --------- --------- ------ ------
Income before income taxes ................... 3,114 2,508 1,292 995 253 248
Income tax expense ........................... 1,192 916 466 360 86 82
-------- -------- --------- --------- ------ ------
Net income (1) ............................... $ 1,922 $ 1,592 $ 826 $ 635 $ 167 $ 166
======== ======== ========= ========= ====== ======
Cash basis earnings (2) ...................... $ 2,296 $ 1,689 $ 879 $ 652 $ 180 $ 180
Net interest yield ........................... 4.71% 4.68% 3.01%(4) 3.09%(4) 6.71% 7.10%
Average equity to average assets ............. 8.5 6.8 5.5 4.9 14.4 14.1
Return on average equity ..................... 17 22 17 16 13 14
Return on average tangible equity (2) ........ 29 27 20 17 16 18
Efficiency ratio ............................. 60.6 58.6 52.4 53.5 44.4 45.1
Cash basis efficiency ratio (2) .............. 56.5 57.3 50.5 52.7 42.6 43.1
Average (3)
Total loans and leases, net of unearned
income .................................... $ 94,719 $ 78,708 $42,290 $36,117 $8,614 $8,022
Total deposits .............................. 114,578 87,904 9,992 8,212 -- --
Total assets ................................ 134,710 104,395 89,194 78,368 9,064 8,528
Period end (3)
Total loans and leases, net of unearned
income .................................... 92,275 76,815 41,802 36,763 9,090 8,279
Total deposits .............................. 112,962 90,080 11,458 8,321 -- --
</TABLE>
(1) Business Unit results are presented on a fully allocated basis but do not
include $162 million of net income for 1997 and $18 million of net
expenses for 1996, which represent the net impact of earnings associated
with unassigned capital, gains on sales of certain securities,
merger-related charges and other corporate activities.
(2) Cash basis calculations exclude intangible assets and the related
amortization expense.
(3) The sums of balance sheet amounts differ from consolidated amounts due to
activities between the Business Units.
(4) Global Finance's net interest yield excludes the impact of trading-related
activities. Including trading-related activities, the net interest yield
was 1.82 percent for 1997 and 1.78 percent for 1996.
Global Finance provides a broad array of banking, bank-related and
investment banking products and services to domestic and international
corporations, institutions and other 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. These services are provided through
various domestic and international offices. Through its Section 20 subsidiary,
NationsBanc Montgomery Securities LLC, Global Finance is a primary dealer of
U.S. Government Securities and underwrites, distributes and makes markets in
high-grade and high-yield debt securities and equity securities. Additionally,
Global Finance is a market maker in derivative products which include swap
agreements, option contracts, forward
13
<PAGE>
settlement contracts, financial futures and other derivative 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. Major centers for the above activities are
Charlotte, Chicago, London, New York, San Francisco, Singapore and Tokyo.
Global Finance earned $826 million in 1997 compared to $635 million in
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 1997 was $1.4 billion compared to
$1.2 billion in 1996 reflecting loan growth partially offset by increased
funding costs and competitive pressure on commercial loan pricing. The average
loans and leases portfolio increased to $42.3 billion in 1997 compared to $36.1
billion in 1996 as the result of core loan growth and the acquisition of
Boatmen's. This increase was net of a securitization of $4.2 billion of
commercial loans completed during the third quarter of 1997.
Noninterest income rose 40 percent over 1996, reflecting higher securities
underwriting and other investment banking income and brokerage income, due to
the impact of the Montgomery acquisition and continued growth. Noninterest
expense increased to $1.5 billion in 1997, due mainly to higher personnel and
amortization expenses associated with the Montgomery and Boatmen's
acquisitions. The cash basis efficiency ratio improved 220 basis points to 50.5
percent as revenue growth outpaced expense increases. The return on average
tangible equity increased 300 basis points to 20 percent, reflecting the impact
of higher earnings.
Financial Services is primarily comprised of a holding company,
NationsCredit Corporation, which includes NationsCredit Consumer Corporation
and NationsCredit Commercial Corporation. NationsCredit Consumer Corporation,
which has 268 branches in 41 states, provides personal, mortgage and automobile
loans to consumers, and retail finance programs to dealers. NationsCredit
Commercial Corporation consists of divisions that specialize in the following
commercial financing areas: equipment loans and leases; 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. In addition, EquiCredit Corporation
and Oxford Resources are two businesses obtained through the Barnett merger.
EquiCredit Corporation provides sub-prime mortgage and home equity loans
directly and through correspondents and Oxford Resources provides lease
financing for purchasers of new and used cars.
Financial Services' earnings of $167 million were essentially flat in
comparison to 1996. Taxable-equivalent net interest income increased 2 percent
resulting from a 7 percent growth in average loans and leases, which was net of
securitizations of approximately $500 million. The net interest yield of 6.71
percent was down 39 basis points from 1996 due principally to increased
competitive pressure on loan pricing. Noninterest income rose 24 percent to
$151 million in 1997, reflecting gains associated with the sale of 29 branches
during the first quarter of 1997. Noninterest expense increased 4 percent to
$326 million while the cash basis efficiency ratio improved 50 basis points to
42.6 percent, the result of the gains on 1997 branch sales. The return on
average tangible equity in 1997 decreased to 16 percent compared to 18 percent
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 three years and most recent five
quarters is presented in Tables Three and Twenty, respectively. The changes in
net interest income from year to year are analyzed in Table Four.
Taxable-equivalent net interest income increased approximately 25 percent
to $8.0 billion in 1997 compared to $6.4 billion in 1996 due primarily to the
acquisition of Boatmen's. Excluding the impact of the Boatmen's acquisition,
loan sales and securitizations, core net interest income increased
approximately 6 percent over 1996. This increase was the result of the improved
contribution of the securities portfolios, deposit pricing management efforts
and core loan growth, 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
approximately $324 million in 1997, they did not significantly affect the
Corporation's earnings. When the Corporation securitizes loans, its role
becomes that of a servicer and the income related to securitized loans is
reflected in noninterest income.
14
<PAGE>
Table Three
12-Month Taxable-Equivalent Data
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Average Average
Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned income (1)
Commercial ........................................... $ 59,425 $ 4,969 8.36% $ 49,553 $ 4,042 8.16%
Real estate commercial ............................... 8,052 721 8.95 6,090 550 9.03
Real estate construction ............................. 3,781 339 8.98 3,165 281 8.89
-------- ------- ----- -------- ------- -----
Total commercial .................................... 71,258 6,029 8.46 58,808 4,873 8.29
-------- ------- ----- -------- ------- -----
Residential mortgage ................................. 31,404 2,445 7.79 27,813 2,169 7.80
Credit card .......................................... 6,911 823 11.90 6,228 733 11.77
Other consumer ....................................... 26,610 2,567 9.65 22,467 2,218 9.87
-------- ------- ----- -------- ------- -----
Total consumer ...................................... 64,925 5,835 8.99 56,508 5,120 9.06
-------- ------- ----- -------- ------- -----
Foreign .............................................. 3,427 244 7.13 2,664 183 6.87
Lease financing ...................................... 5,641 436 7.72 4,288 324 7.58
-------- ------- ----- -------- ------- -----
Total loans and leases, net ......................... 145,251 12,544 8.64 122,268 10,500 8.59
-------- ------- ----- -------- ------- -----
Securities
Held for investment .................................. 1,554 95 6.11 3,442 193 5.59
Available for sale (2) ............................... 26,364 1,810 6.87 17,295 1,146 6.63
-------- ------- ----- -------- ------- -----
Total securities .................................... 27,918 1,905 6.82 20,737 1,339 6.46
-------- ------- ----- -------- ------- -----
Loans held for sale ................................... 1,226 88 7.19 1,078 79 7.30
Federal funds sold and securities purchased
under agreements to resell ........................... 12,227 684 5.59 12,834 666 5.19
Time deposits placed and other short-term
investments .......................................... 2,114 123 5.82 1,436 80 5.54
Trading account securities (3) ........................ 22,490 1,351 6.01 19,047 1,226 6.44
-------- ------- ----- -------- ------- -----
Total earning assets (4) ............................. 211,226 16,695 7.90 177,400 13,890 7.83
Cash and cash equivalents .............................. 8,788 7,807
Factored accounts receivable ........................... 1,173 1,135
Other assets, less allowance for credit losses ......... 23,317 14,543
-------- --------
Total assets ........................................ $244,504 $200,885
======== ========
Interest-bearing liabilities
Savings ............................................... $ 9,885 199 2.02 $ 9,024 201 2.22
NOW and money market deposit accounts ................. 41,122 1,066 2.59 30,243 763 2.52
Consumer CDs and IRAs ................................. 38,096 1,989 5.22 30,034 1,585 5.28
Negotiated CDs, public funds and other time
deposits ............................................. 3,205 175 5.48 3,114 171 5.49
Foreign time deposits ................................. 9,776 526 5.38 11,180 602 5.38
Federal funds purchased, securities sold under
agreements to repurchase and other
short-term borrowings ................................ 41,605 2,264 5.44 39,521 2,155 5.45
Trading account liabilities (3) ....................... 10,274 678 6.60 10,137 653 6.44
Long-term debt (5) .................................... 27,340 1,784 6.52 20,603 1,337 6.51
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities (6) .............. 181,303 8,681 4.79 153,856 7,467 4.85
Noninterest-bearing sources
Noninterest-bearing deposits .......................... 31,577 23,990
Other liabilities ..................................... 11,437 9,776
Shareholders' equity .................................. 20,187 13,263
-------- --------
Total liabilities and shareholders' equity .......... $244,504 $200,885
======== ========
Net interest spread .................................... 3.11 2.98
Impact of noninterest-bearing sources .................. .68 .64
------- ----- ------- -----
Net interest income/yield on earning assets ............ $ 8,014 3.79% $ 6,423 3.62%
======= ===== ======= =====
<CAPTION>
1995
--------------------------------
Average
Balance Income
Sheet or Yields/
Amounts Expense Rates
----------- --------- ----------
<S> <C> <C> <C>
Earning assets
Loans and leases, net of unearned income (1)
Commercial ........................................... $ 46,358 $ 3,797 8.19%
Real estate commercial ............................... 7,195 669 9.30
Real estate construction ............................. 3,106 302 9.73
-------- ------- -----
Total commercial .................................... 56,659 4,768 8.42
-------- ------- -----
Residential mortgage ................................. 20,562 1,600 7.78
Credit card .......................................... 5,013 641 12.78
Other consumer ....................................... 21,940 2,209 10.07
-------- ------- -----
Total consumer ...................................... 47,515 4,450 9.37
-------- ------- -----
Foreign .............................................. 2,036 157 7.71
Lease financing ...................................... 3,277 249 7.59
-------- ------- -----
Total loans and leases, net ......................... 109,487 9,624 8.79
-------- ------- -----
Securities
Held for investment .................................. 15,521 864 5.57
Available for sale (2) ............................... 10,272 642 6.25
-------- ------- -----
Total securities .................................... 25,793 1,506 5.84
-------- ------- -----
Loans held for sale ................................... 322 24 7.47
Federal funds sold and securities purchased
under agreements to resell ........................... 15,159 937 6.18
Time deposits placed and other short-term
investments .......................................... 2,066 142 6.87
Trading account securities (3) ........................ 14,177 1,100 7.76
-------- ------- -----
Total earning assets (4) ............................. 167,004 13,333 7.98
Cash and cash equivalents .............................. 7,820
Factored accounts receivable ........................... 1,163
Other assets, less allowance for credit losses ......... 12,560
--------
Total assets ........................................ $188,547
========
Interest-bearing liabilities
Savings ............................................... $ 8,575 204 2.37
NOW and money market deposit accounts ................. 27,640 740 2.68
Consumer CDs and IRAs ................................. 24,840 1,290 5.19
Negotiated CDs, public funds and other time
deposits ............................................. 2,992 166 5.56
Foreign time deposits ................................. 14,103 881 6.25
Federal funds purchased, securities sold under
agreements to repurchase and other
short-term borrowings ................................ 44,285 2,710 6.12
Trading account liabilities (3) ....................... 12,025 896 7.45
Long-term debt (5) .................................... 12,652 886 7.00
-------- ------- -----
Total interest-bearing liabilities (6) .............. 147,112 7,773 5.28
Noninterest-bearing sources
Noninterest-bearing deposits .......................... 21,128
Other liabilities ..................................... 8,856
Shareholders' equity .................................. 11,451
--------
Total liabilities and shareholders' equity .......... $188,547
========
Net interest spread .................................... 2.70
Impact of noninterest-bearing sources .................. .63
------- -----
Net interest income/yield on earning assets ............ $ 5,560 3.33%
======= =====
</TABLE>
(1) Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
(2) The average balance sheet amounts and yields on securities available for
sale are based on the average of historical amortized cost balances.
(3) The fair values of derivatives-dealer positions are reported in other
assets and liabilities, respectively.
(4) Interest income includes taxable-equivalent adjustments of $116, $94 and
$113 in 1997, 1996 and 1995, respectively. Interest income also includes
the impact of risk management interest rate contracts, which increased
(decreased) interest income on the underlying linked assets $133, $26 and
($209) in 1997, 1996 and 1995, respectively.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (decreased) increased interest expense on the underlying
linked liabilities ($40), $54 and $30 in 1997, 1996 and 1995,
respectively.
15
<PAGE>
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.
<TABLE>
<CAPTION>
From 1996 to 1997 From 1995 to 1996
---------------------------------------------- ----------------------------------------------
Increase (Decrease) Increase (Decrease)
in Income/Expense in Income/Expense
Due to Change in Due to Change in
--------------------- ----------------------
Percentage Percentage
Average Yields/ Increase Average Yields/ Increase
Levels Rates Total (Decrease) Levels Rates Total (Decrease)
--------- ----------- ----------- ------------ --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
Loans and leases, net of
unearned income
Commercial ....................... $ 823 $ 104 $ 927 22.9% $ 261 $ (16) $ 245 6.5%
Real estate commercial ........... 176 (5) 171 31.1 (100) (19) (119) (17.8)
Real estate construction ......... 55 3 58 20.6 6 (27) (21) ( 7.0)
------- ------
Total commercial ................ 1,051 105 1,156 23.7 179 (74) 105 2.2
------- ------
Residential mortgage ............. 280 (4) 276 12.7 565 4 569 35.6
Credit card ...................... 81 9 90 12.3 146 (54) 92 14.4
Other consumer ................... 401 (52) 349 15.7 52 (43) 9 .4
------- ------
Total consumer .................. 757 (42) 715 14.0 819 (149) 670 15.1
------- ------
Foreign .......................... 54 7 61 33.3 45 (19) 26 16.6
Lease financing .................. 104 8 112 34.6 76 (1) 75 30.1
------- ------
Total loans and leases, net ..... 1,985 59 2,044 19.5 1,102 (226) 876 9.1
------- ------
Securities
Held for investment .............. (114) 16 (98) (50.8) (677) 6 (671) (77.7)
Available for sale ............... 621 43 664 57.9 463 41 504 78.5
------- ------
Total securities ................ 486 80 566 42.3 (316) 149 (167) (11.1)
------- ------
Loans held for sale ............... 11 (2) 9 11.4 55 -- 55 229.2
Federal funds sold and
securities purchased under
agreements to resell ............. (32) 50 18 2.7 (132) (139) (271) (28.9)
Time deposits placed and other
short-term investments ........... 39 4 43 53.8 (38) (24) (62) (43.7)
Trading account securities ........ 211 (86) 125 10.2 335 (209) 126 11.5
------- ------
Total interest income ........... 2,672 133 2,805 20.2 818 (261) 557 4.2
------- ------
Interest expense
Savings ........................... 18 (20) (2) (1.0) 10 (13) (3) ( 1.5)
NOW and money market
deposit accounts ................. 281 22 303 39.7 67 (44) 23 3.1
Consumer CDs and IRAs ............. 421 (17) 404 25.5 274 21 295 22.9
Negotiated CDs, public funds
and other time deposits .......... 5 (1) 4 2.3 7 (2) 5 3.0
Foreign time deposits ............. (76) -- (76) (12.6) (167) (112) (279) (31.7)
Federal funds purchased,
securities sold under
agreements to repurchase and
other short-term borrowings ...... 113 (4) 109 5.1 (276) (279) (555) (20.5)
Trading account liabilities ....... 9 16 25 3.8 (130) (113) (243) (27.1)
Long-term debt .................... 440 7 447 33.4 520 (69) 451 50.9
------- --------
Total interest expense .......... 1,315 (101) 1,214 16.3 346 (652) (306) ( 3.9)
------- --------
Net interest income ................ 1,272 319 $1,591 24.8 359 504 $ 863 15.5
======= ========
</TABLE>
The net interest yield increased 17 basis points to 3.79 percent in 1997
compared to 3.62 percent in 1996, primarily reflecting the improved
contribution of the securities portfolios and deposit pricing 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.
16
<PAGE>
Provision for Credit Losses
The provision for credit losses was $800 million in 1997 compared to $605
million in 1996. The provision for credit losses for 1997 and 1996 covered net
charge-offs of $798 million and $598 million, respectively. Higher provision
expense in 1997 was due to higher net charge-offs resulting from 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. 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 30.
Gains on Sales of Securities
Gains on the sales of securities were $153 million in 1997 compared to $67
million in 1996. The increase in 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 Five, noninterest income increased 37 percent to
$5.0 billion in 1997, reflecting the acquisitions of Boatmen's and Montgomery.
Excluding these acquisitions, noninterest income increased approximately 9
percent in 1997.
Table Five
Noninterest Income
(Dollars in Millions)
<TABLE>
<CAPTION>
Change
-----------------------
1997 1996 Amount Percent
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Service charges on deposit accounts ...................... $1,546 $1,121 $ 425 37.9%
Mortgage servicing and other mortgage-related income ..... 287 213 74 34.7
Investment banking income ................................ 627 356 271 76.1
Trading account profits and fees ......................... 265 274 (9) (3.3)
Brokerage income ......................................... 234 110 124 112.7
Other nondeposit-related service fees .................... 310 262 48 18.3
Asset management and fiduciary service fees .............. 648 432 216 50.0
Credit card income ....................................... 371 314 57 18.2
Other income ............................................. 714 564 150 26.6
------ ------ ------- -----
$5,002 $3,646 $1,356 37.2
====== ====== ======= =====
</TABLE>
o Service charges on deposit accounts amounted to $1.5 billion in 1997, an
increase of 38 percent over 1996, attributable to growth in number of
households served due principally to the acquisition of Boatmen's and the
impact of changes in deposit pricing throughout the Corporation's franchise.
Excluding the impact of the Boatmen's acquisition, service charges increased
approximately 12 percent for 1997.
o Mortgage servicing and other mortgage-related income grew 35 percent to $287
million in 1997 due to the acquisition of the Boatmen's mortgage portfolio.
The average portfolio of loans serviced increased 35 percent from $89.9
billion in 1996 to $121.2 billion in 1997. On December 31, 1997, the
servicing portfolio, which includes mortgage loans originated by the
Corporation's mortgage subsidiary as well as loans serviced on behalf of the
Corporation's banking subsidiaries, totaled $126.5 billion compared to $96.4
billion on December 31, 1996. Mortgage loan originations through the
Corporation's mortgage subsidiary increased to $15.2 billion in 1997
compared to $12.0 billion in 1996. 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 in 1997 consisted of approximately $5.8 billion
of retail loan volume and $9.4 billion of correspondent and wholesale loan
volume.
17
<PAGE>
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 $2.7 billion on
December 31, 1997. Net unrealized losses associated with these contracts were
$15 million on December 31, 1997. These contracts have an average expected
maturity of less than 90 days.
o Investment banking income increased 76 percent to $627 million in 1997
reflecting increased levels of securities underwriting activity, syndication
fees and advisory fees. Higher syndication fees were the result of 725 deals
totaling $431.0 billion in 1997 compared to 566 deals totaling $346.0
billion in 1996. Securities underwriting and advisory services fees
increased in 1997 reflecting the impact of the Montgomery acquisition and
continued internal growth.
An analysis of investment banking income by major business activity
follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Investment Banking Income
Syndications ............................... $201 $119
Securities underwriting .................... 232 82
Principal investment activities ............ 70 79
Advisory services .......................... 69 9
Other ...................................... 55 67
---- ----
Total investment banking income ......... $627 $356
==== ====
</TABLE>
o Trading account profits and fees totaled $265 million in 1997, a decrease of
3 percent from $274 million in 1996. The fair values of the components of
the Corporation's trading account assets and liabilities on December 31,
1997 and 1996 as well as their average fair values for 1997 and 1996 are
disclosed in Note Four to the consolidated financial statements on page 59.
An analysis of trading account profits and fees by major business activity
follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Trading Account Profits and Fees
Interest rate contracts ............ $141 $136
Foreign exchange contracts ......... 55 4
Securities trading ................. 24 96
Other .............................. 45 38
---- ----
$265 $274
==== ====
</TABLE>
o Brokerage income increased 113 percent to $234 million in 1997, due mainly to
the acquisition of Montgomery as well as internal growth of approximately 35
percent.
18
<PAGE>
o Asset management and fiduciary service fees increased 50 percent to $648
million in 1997. An analysis of asset management and fiduciary service fees
by major business activity for 1997 and 1996 as well as the market values of
assets under management and administration on December 31 follows (in
millions):
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Asset Management and Fiduciary Service Fees
Private Client Group .................................. $ 430 $ 266
Consumer investing .................................... 39 29
Funds and business/institutional investment management 62 54
Retirement services, corporate trust and other ........ 117 83
-------- --------
Total asset management and fiduciary service fees ... $ 648 $ 432
======== ========
Market Value of Assets
Assets under management ............................... $103,834 $ 72,270
Assets under administration ........................... 173,135 180,269
</TABLE>
The Private Client Group provides asset management and banking and trust
services, primarily to individuals. Fees for these services increased $164
million in 1997 over 1996, due principally to the Boatmen's acquisition,
increased sales, and market appreciation associated with assets under
management. Consumer investing revenues reflect fees received as the
investment advisor to the Nations Funds family of mutual funds. Funds and
business/institutional investment management fees include revenues from Sovran
Capital Management and TradeStreet Investment Associates, Inc., which provide
institutional investors with investment management services. Retirement
services and corporate trust fees include investment advisory, administrative,
fiduciary, and record-keeping services for business and institutional
customers. Assets under management and administration in 1997 were impacted by
the Boatmen's acquisition and 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.
o Credit card income increased 18 percent to $371 million in 1997 due primarily
to the acquisition of Boatmen's and internal growth of approximately 5
percent. Credit card income includes $28 million and $47 million from credit
card securitizations in 1997 and 1996, respectively. This decrease in credit
card securitization income was mainly due to higher than expected charge-off
levels.
o Other income totaled $714 million in 1997, an increase of $150 million over
1996. Other income includes certain prepayment fees and other fees such as
net gains on sales of miscellaneous investments, business activities,
premises and other similar items as well as insurance commissions and
earnings and bankers' acceptances and letters of credit fees.
Noninterest Expense
Contributing to the Corporation's continued earnings growth was successful
acquisition integration and expense management efforts, which resulted in a 120
basis-point decrease in the cash basis efficiency ratio to 53.8 percent in 1997
compared to 55.0 percent in 1996. Excluding the impact of the Boatmen's and
Montgomery acquisitions, noninterest expense was essentially unchanged between
1997 and 1996.
19
<PAGE>
Table Six
Noninterest Expense
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996
----------------------- ----------------------
Percent Percent
of Taxable- of Taxable-
Equivalent Equivalent
Net Interest Net Interest
and and
Noninterest Noninterest Change
Amount Income Amount Income Amount Percent
-------- -------------- -------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Personnel .................................... $3,643 28.0% $2,731 27.1% $ 912 33.4%
Occupancy, net ............................... 634 4.9 523 5.2 111 21.2
Equipment .................................... 604 4.6 451 4.5 153 33.9
Marketing .................................... 300 2.3 252 2.5 48 19.0
Professional fees ............................ 312 2.4 256 2.5 56 21.9
Amortization of intangibles .................. 441 3.4 128 1.3 313 244.5
Data processing .............................. 283 2.2 237 2.4 46 19.4
Telecommunications ........................... 229 1.7 172 1.7 57 33.1
Other general operating ...................... 758 5.8 728 7.2 30 4.1
General administrative and miscellaneous ..... 243 1.9 187 1.9 56 29.9
------ ---- ------ ---- ------ -----
$7,447 57.2% $5,665 56.3% $1,782 31.5
====== ==== ====== ==== ====== =====
</TABLE>
Based on information in Table Six, a discussion of the significant
components and changes in noninterest expense in 1997 compared to 1996 levels
follows:
o Personnel expense increased $912 million over 1996, due primarily to the
impact of the Boatmen's and Montgomery acquisitions. On December 31, 1997,
the Corporation had approximately 80,000 full-time equivalent employees
compared to approximately 63,000 full-time equivalent employees on December
31, 1996. Excluding the impact of the Boatmen's and Montgomery acquisitions,
full-time equivalent employees at December 31, 1997 were essentially
unchanged compared to December 31, 1996 levels.
o Occupancy expense increased 21 percent to $634 million in 1997 compared to
$523 million in 1996 due to the acquisition of Boatmen's.
o Equipment expense amounted to $604 million in 1997, an increase of
approximately 34 percent over 1996, reflecting the Boatmen's acquisition as
well as enhancements to data delivery channels and product delivery systems
throughout the Corporation such as the Model Banking initiative, direct
banking (including PC Banking) and data base management.
o Professional fees increased $56 million over 1996 to $312 million, reflecting
the impact of the Boatmen's acquisition as well as higher consulting and
technical support fees for projects to enhance revenue growth, the
development and installation of infrastructure enhancements and
customer-related data delivery areas.
o Intangibles amortization expense increased to $441 million in 1997,
reflecting the impact of the Boatmen's acquisition.
o Other general operating expenses increased $30 million to $758 million in
1997 due to higher expenses associated with the acquisition of Boatmen's.
Noninterest expense includes the cost of projects to ensure accurate date
recognition and data processing with respect to the Year 2000 issue as it
relates to the Corporation's businesses, operations, customers and vendors. A
process of software inventory, analysis, modification, testing and verification
and implementation is underway. The Corporation expects to substantially
complete the Year 2000 software conversion projects by the end of 1998. The
related costs, which are expensed as incurred, are included in professional,
data processing, and equipment expenses. Year 2000 expenses incurred through the
end of 1997 amounted to approximately $25 million and the total cost of the Year
2000 project is estimated to be approximately $120 million.
20
<PAGE>
Management believes that its plans for dealing with the Year 2000 issue
will result in timely and adequate modifications of systems and technology.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the corrective measures the Corporation undertakes, but also on the way in
which the Year 2000 issue is addressed by governmental agencies, businesses,
and other entities who 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 or investment opportunities.
Therefore, communications with these parties have commenced to heighten their
awareness of the Year 2000 issue. Over the next two years, the plans of such
third parties to address the Year 2000 issue will be monitored and any
identified impact on the Corporation will be evaluated.
In addition, on January 1, 1999, several countries that are members of the
European Monetary Union plan to replace their respective currencies with one
common currency-the euro. Costs to prepare systems impacted by this currency
change are expected to be immaterial.
Income Taxes
The Corporation's income tax expense for 1997 and 1996 was $1.7 billion
and $1.3 billion, respectively, for an effective tax rate of 35.8 percent for
1997 and 34.6 percent for 1996.
Note Eleven to the consolidated financial statements on page 74 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 1997 compared to 1996.
Average customer-based funds increased $27.5 billion to $123.9 billion in
1997 due to deposits obtained in the Boatmen's acquisition. As a percentage of
total sources, average customer-based funds increased to 51 percent in 1997
from 48 percent in 1996.
Average market-based funds increased $817 million in 1997 to $61.7 billion
and comprised a smaller portion of total sources of funds at 25 percent in 1997
compared to 30 percent in 1996. The increase in average market-based funds was
due primarily to the Boatmen's acquisition. The $6.7 billion increase in
long-term debt was mainly the result of borrowings to fund repurchases of
shares issued in the January 7, 1997 Boatmen's acquisition.
Average loans and leases, the Corporation's primary use of funds,
increased $23.0 billion to $145.3 billion during 1997. As a percentage of total
uses of funds, average loans and leases decreased to 59 percent in 1997 from 61
percent in 1996. The increase in average loans and leases was due primarily to
the impact of the Boatmen's acquisition and core loan growth, partially offset
by the impact of $12.8 billion of securitizations, most of which occurred in
the third quarter of 1997. The ratio of average loans and leases to
customer-based funds was 117 percent in 1997 and 127 percent in 1996.
Average other assets and cash and cash equivalents increased $9.8 billion
to $32.1 billion in 1997 due largely to an increase in intangible assets
related to the acquisition of Boatmen's.
Cash and cash equivalents were $10.6 billion on December 31, 1997, an
increase of $1.7 billion from December 31, 1996. During 1997, net cash provided
by operating activities was $266 million, net cash used in investing activities
was $19.2 billion and net cash provided by financing activities was $20.5
billion. For further information on cash flows, see the Consolidated Statement
of Cash Flows on page 49 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.
21
<PAGE>
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, 1997 consisted of securities held
for investment totaling $1.2 billion and securities available for sale totaling
$46.0 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 $7.5 billion of mortgage-backed securities obtained
principally through residential mortgage loans that were securitized and
retained primarily during the third quarter of 1997. 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 December 31, 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 the Corporation's portfolio of
securities held for investment approximated the book value of the portfolio.
The valuation allowance for securities available for sale and marketable
equity securities increased shareholders' equity by $393 million on December
31, 1997, reflecting pretax appreciation of $115 million on marketable equity
securities and $476 million on debt securities. The valuation allowance
increased shareholders' equity by $86 million on December 31, 1996. The
increase in the valuation allowance was primarily attributable to a decrease in
interest rates when comparing December 31, 1997 to December 31, 1996, but also
reflected the impact of higher securities balances.
The estimated average maturities of securities held for investment and
securities available for sale portfolios were 1.48 years and 5.66 years,
respectively, on December 31, 1997 compared to 1.47 years and 6.91 years,
respectively, on December 31, 1996. The decrease in the average expected
maturity of the available for sale portfolio is attributable to purchases of
securities during 1997 with shorter average maturities than the weighted
average maturities of securities owned on December 31, 1996.
Loans and Leases
Total loans and leases increased approximately 17 percent to $142.7
billion on December 31, 1997 compared to $121.6 billion on December 31, 1996.
As presented in Table Three, average total loans and leases increased 19
percent to $145.3 billion in 1997 compared to $122.3 billion in 1996 due
primarily to the impact of the Boatmen's acquisition and core loan growth,
partially offset by the impact of $12.8 billion of securitizations, most of
which occurred during the third quarter of 1997.
Average commercial loans increased to $59.4 billion in 1997 compared to
$49.6 billion in 1996, due largely to the Boatmen's acquisition and core loan
growth, partially offset by the impact of a $4.2-billion commercial loan
securitization that occurred during the third quarter of 1997. Average real
estate commercial and construction loans increased to $11.8 billion in 1997 as
a result of the addition of Boatmen's. Excluding the Boatmen's acquisition,
real estate commercial and construction loans decreased, reflecting the
Corporation's efforts to lower its exposure to this line of business.
Average residential mortgage loans increased 13 percent to $31.4 billion
in 1997 compared to $27.8 billion in 1996, mainly the result of the Boatmen's
acquisition as well as core loan growth. The increase in mortgage loans was
partially offset by the impact of $8.1 billion of mortgage loan securitizations
which occurred primarily during the third quarter of 1997.
Average credit card and other consumer loans, including direct and
indirect consumer loans and home equity loans, increased $4.8 billion,
primarily the result of the Boatmen's acquisition. This increase was partially
offset by $500 million of other consumer loan securitizations.
22
<PAGE>
A significant source of liquidity for the Corporation is the repayment and
maturities of loans. Table Seven shows selected loan maturity data on December
31, 1997 and indicates that approximately 36 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, 1997
(Dollars in Millions)
This table presents the maturity distribution and interest sensitivity of
seleced loan categories (excluding residential mortgage, credit card, other
consumer loans, lease financing and factored accounts receivable). Maturities
are presented on a contractual basis.
<TABLE>
<CAPTION>
Due after
Due in 1 1 year
year through Due after
or less 5 years 5 years Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial .............................................................. $ 20,596 $ 29,297 $ 10,291 $ 60,184
Real estate commercial .................................................. 1,914 4,229 1,078 7,221
Real estate construction ................................................ 1,945 1,730 130 3,805
Foreign ................................................................. 2,887 586 370 3,843
-------- -------- -------- --------
Total selected loans, net of unearned income ........................... $ 27,342 $ 35,842 $ 11,869 $ 75,053
======== ======== ======== ========
Percent of total ........................................................ 36.4% 47.8% 15.8% 100.0%
Cumulative percent of total ............................................. 36.4 84.2 100.0
Sensitivity of loans to changes in interest rates-loans due after one
year
Predetermined interest rate ............................................ $ 9,018 $ 5,057 $ 14,075
Floating or adjustable interest rate ................................... 26,824 6,812 33,636
-------- -------- --------
$ 35,842 $ 11,869 $ 47,711
======== ======== ========
</TABLE>
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 24 percent in 1997 over 1996 due to deposits
acquired in the Boatmen's transaction.
On December 31, 1997, the Corporation had domestic certificates of deposit
of $100 thousand or greater totaling $8.8 billion, with $4.0 billion maturing
within three months, $1.8 billion maturing within three to six months, $1.5
billion maturing within six to twelve months and $1.5 billion maturing after
twelve months. Additionally, on December 31, 1997, the Corporation had other
domestic time deposits of $100 thousand or greater totaling $506 million, with
$78 million maturing within three months, $41 million maturing within three to
six months, $78 million maturing within six to twelve months and $309 million
maturing after twelve months. Foreign office certificates of deposit and other
time deposits of $100 thousand or greater totaled $14.4 billion and $8.1
billion on December 31, 1997 and 1996, respectively.
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 1997, total average short-term borrowings increased 5 percent to
$41.6 billion and trading account liabilities (excluding derivatives-dealer
positions) remained essentially unchanged from 1996 levels, amounting to $10.3
billion in 1997.
23
<PAGE>
Table Eight
Short-Term Borrowings
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
Amount Rate Amount Rate Amount Rate
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased
On December 31 ............................. $ 4,376 5.75% $ 3,536 6.58% $ 5,940 5.26%
Average during year ........................ 4,111 5.56 4,694 5.35 5,455 5.91
Maximum month-end balance during year ...... 6,950 -- 8,585 -- 7,317 --
Securities sold under agreements to repurchase
On December 31 ............................. 39,506 5.24 15,842 5.40 23,034 5.66
Average during year ........................ 32,355 5.09 28,517 5.37 30,336 6.14
Maximum month-end balance during year ...... 39,506 -- 29,582 -- 38,926 --
Commercial paper
On December 31 ............................. 2,796 5.75 2,787 5.41 2,773 5.65
Average during year ........................ 2,966 5.67 2,966 5.57 2,804 6.10
Maximum month-end balance during year ...... 3,200 -- 3,276 -- 2,930 --
Other short-term borrowing
On December 31 ............................. 4,126 5.62 1,836 5.20 4,143 5.94
Average during year ........................ 2,173 5.62 3,344 6.22 5,690 6.20
Maximum month-end balance during year ...... 4,126 -- 4,954 -- 7,378 --
</TABLE>
Long-Term Debt
Long-term debt increased 18 percent from $23.0 billion at December 31,
1996 to $27.2 billion on December 31, 1997 mainly as a result of borrowings to
fund repurchases of shares issued in the January 7, 1997 Boatmen's acquisition.
During 1997, the Corporation issued $1.0 billion of trust preferred securities
and $1.0 billion of mortgage backed bonds. Also during 1997, the Corporation
issued approximately $5.1 billion in long-term senior and subordinated debt,
including $2.1 billion which was issued under its medium-term note program and
$2.5 billion under a bank note program. See Note Six to the consolidated
financial statements on page 61 for further details on long-term debt.
Other
The Corporation has commercial paper back-up lines totaling $1.5 billion
of which $1.0 billion expires in October 1998 and $500 million expires in
October 2002. 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, 1996 ratings:
<TABLE>
<CAPTION>
Commercial Senior
Paper Debt
------------ -------
<S> <C> <C>
Moody's Investors Service ......... P-1 Aa3
Standard & Poor's Corporation ..... A-1 A+
Duff and Phelps, Inc. ............. D-1+ A+
Fitch IBCA, Inc. .................. F-1 A+
Thomson BankWatch ................. TBW-1 A+
</TABLE>
In managing liquidity, the Corporation takes into consideration the
ability of the subsidiary banks to pay dividends to the parent company. See
Note Nine to the consolidated financial statements on page 68 for further
details on dividend capabilities of the subsidiary banks.
Capital Resources And Capital Management
Shareholders' equity on December 31, 1997 was $21.3 billion 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
24
<PAGE>
stock and an increase of $9.5 billion in total shareholders' equity. The
increase was partially offset by the repurchase of approximately 96 million
shares of common stock for $5.8 billion.
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 Nine to the consolidated financial statements on page 68.
Market Risk Management
In the normal course of conducting its 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 market
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 its
securities portfolio and interest rate contracts, and management of the mix,
yields or rates and maturities of assets and of the wholesale and retail
funding sources of the Corporation.
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.
In January 1997, the Securities and Exchange Commission (SEC) adopted new
rules that require more comprehensive disclosures of accounting policies for
derivatives as well as enhanced quantitative and qualitative disclosures of
market risk for derivative and other financial instruments. The market risk
disclosures must be presented for most financial instruments, which must be
classified into two portfolios: financial instruments entered into for trading
purposes and all other covered financial instruments (non-trading portfolio).
For a discussion of non-trading, on-balance sheet financial instruments
see Table Nine in the following Market Risk Management section on page 27. For
information on market risk associated with Asset and Liability Management (ALM)
activities, see the following discussion on page 28 of the Market Risk
Management section and the mortgage banking section of Noninterest Income on
page 18 as well as the Mortgage Servicing Rights section in Note One to the
consolidated financial statements on page 53. Market risk associated with the
trading portfolio is discussed in the following Market Risk Management section
on page 30. The composition of the trading portfolio and related fair values
are included in Note Four to the consolidated financial statements on page 59.
Derivatives-dealer positions and related credit risk are presented in Note
Eight to the consolidated financial statements on page 67. Accounting policies
for ALM and trading derivatives are disclosed in Note One to the consolidated
financial statements in the Trading Instruments and Risk Management Instruments
sections on pages 51 and 54, respectively.
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 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 executive management.
25
<PAGE>
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, 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 when compared to stable rates
was estimated to be less than 2 percent of net income.
Table Nine 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, fed 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. However, these financial
instruments can 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 Note Twelve
to the consolidated financial statements on page 75.
26
<PAGE>
Table Nine
Non-Trading On-Balance Sheet Financial Instruments
December 31, 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
Unrealized
Total Gain/(Loss)
------------ -------------
<S> <C> <C>
Assets
Loans, net of unearned income (1)
Fixed Rate
Book value ............................. $ 58,209 $1,056
Weighted average effective yield ....... 8.77%
Variable Rate
Book value ............................. $ 78,592 1,343
Weighted average effective yield ....... 8.35%
Securities held for investment (2)
Fixed Rate
Book value ............................. $ 986 4
Weighted average effective yield ....... 5.94%
Variable Rate
Book value ............................. $ 170 1
Weighted average effective yield ....... 6.65%
Securities available for sale (2)
Fixed Rate
Book value ............................. $ 44,028 472
Weighted average effective yield ....... 6.41%
Variable Rate
Book value ............................. $ 2,019 4
Weighted average effective yield ....... 7.04%
Liabilities
Total Domestic Deposits (3)
Fixed Rate
Book value ............................. $ 92,071 $(304)
Weighted average effective rate ........ 2.48%
Variable Rate
Book value ............................. $ 31,730 (3)
Weighted average effective rate ........ 5.33%
Long-term debt (excluding obligations
under capital leases) (4) ..............
Fixed Rate
Book value ............................. $ 11,661 (540)
Weighted average effective rate ........ 7.18%
Variable Rate
Book value ............................. $ 15,489 (21)
Weighted average effective rate ........ 6.04%
Trust preferred securities (4)
Fixed Rate
Book value ............................. $ 1,462 (67)
Weighted average effective rate ........ 8.15%
Variable Rate
Book value ............................. $ 493 (9)
Weighted average effective rate ........ 6.62%
<CAPTION>
Expected Maturity
--------------------------------------------------------------
After
1998 1999 2000 2001 2002 2002
---------- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans, net of unearned income (1)
Fixed Rate
Book value ............................. $18,575 $10,227 $7,695 $4,756 $ 3,021 $13,935
Weighted average effective yield .......
Variable Rate
Book value ............................. 29,347 10,437 8,692 6,122 7,710 16,284
Weighted average effective yield .......
Securities held for investment (2)
Fixed Rate
Book value ............................. 445 458 16 13 9 45
Weighted average effective yield .......
Variable Rate
Book value ............................. 5 144 -- 21 -- --
Weighted average effective yield .......
Securities available for sale (2)
Fixed Rate
Book value ............................. 374 4,292 1,562 2,665 11,204 23,931
Weighted average effective yield .......
Variable Rate
Book value ............................. -- 3 94 1,127 213 582
Weighted average effective yield .......
Liabilities
Total Domestic Deposits (3)
Fixed Rate
Book value ............................. $23,165 $ 5,874 $2,090 $ 626 $ 580 $59,736
Weighted average effective rate ........
Variable Rate
Book value ............................. 5,074 3,919 3,240 2,773 2,373 14,351
Weighted average effective rate ........
Long-term debt (excluding obligations
under capital leases) (4) ..............
Fixed Rate
Book value ............................. 1,077 438 856 1,669 527 7,094
Weighted average effective rate ........
Variable Rate
Book value ............................. 3,411 3,031 4,193 923 1,670 2,261
Weighted average effective rate ........
Trust preferred securities (4)
Fixed Rate
Book value ............................. -- -- -- -- 600 862
Weighted average effective rate ........
Variable Rate
Book value ............................. -- -- -- -- -- 493
Weighted average effective rate ........
</TABLE>
(1) Expected maturities reflect the impact of prepayment assumptions.
(2) Expected maturities are based on contractual maturities.
(3) When measuring and managing market risk associated with domestic deposits,
the Corporation considers its long-term relationships with depositors. The
unrealized loss on domestic deposits in this table does not consider these
long-term relationships.
(4) Expected maturities of long-term debt and trust preferred securities
reflect the Corporation's ability to redeem such debt prior to contractual
maturities.
27
<PAGE>
Risk management interest rate contracts are utilized in the ALM process.
Such contracts, which are generally non-leveraged generic interest rate and
basis swaps and options, allow the Corporation to effectively manage its
interest rate risk position. As reflected in Table Ten, the total gross
notional amount of the Corporation's ALM interest rate swaps on December 31,
1997 was $32.0 billion, with the Corporation receiving fixed on $28.2 billion,
primarily converting variable-rate commercial loans to fixed rate, and
receiving variable on $1.5 billion. The net receive fixed position of $26.8
billion on December 31, 1997 was essentially unchanged from December 31, 1996.
In addition, the Corporation has $2.3 billion of basis swaps linked primarily
to 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, 1997 of
the Corporation's ALM interest rate contracts. 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 December 31,
1997 was $280 million compared to net unrealized appreciation of $69 million on
December 31, 1996, reflecting a decrease in interest rates when comparing
December 31, 1997 to December 31, 1996. The amount of net realized deferred
gains associated with terminated ALM swaps was $34 million on December 31, 1997
compared to $48 million of net realized deferred losses on December 31, 1996.
To manage interest rate risk, 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. On December 31, 1997, the
Corporation had a gross notional amount of $5.9 billion in outstanding interest
rate option contracts used for ALM purposes compared to $6.4 billion on
December 31, 1996. Such instruments are primarily linked to long-term debt,
short-term borrowings and pools of similar residential mortgages and consist
mainly of purchased options. On December 31, 1997, the net unrealized
depreciation of ALM option products was $7 million compared to net unrealized
appreciation of $2 million on December 31, 1996. The amount of net realized
deferred gains associated with terminated ALM options was $13 million on
December 31, 1997 compared to $4 million of net realized deferred gains on
December 31, 1996.
In addition, the Corporation uses foreign currency contracts to manage the
foreign exchange risk associated with foreign-denominated liabilities. Foreign
currency contracts involve the conversion of certain scheduled interest and
principal payments denominated in foreign currencies. On December 31, 1997,
these contracts had a notional value of $2.7 billion and a net market value of
negative $67 million.
The net unrealized appreciation in the estimated value of the ALM interest
rate and net negative market value in the ALM 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 activities, see the Noninterest Income section on page 18
and the Mortgage Servicing Rights section in Note One to the consolidated
financial statements on page 53.
28
<PAGE>
Table Ten
Asset and Liability Management Interest Rate Contracts
December 31, 1997
(Dollars in Millions, Average Expected Maturity in Years)
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
-------------
<S> <C>
Asset Conversion Swaps
Receive fixed generic ................ $203
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Pay fixed generic .................... (19)
----
Notional amount .....................
Weighted average pay rate ...........
Weighted average receive rate .......
Total asset conversion swaps ......... $184
====
Notional amount .....................
Liability Conversion Swaps
Receive fixed generic ................ $100
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Pay fixed generic .................... (3)
-------
Notional amount .....................
Weighted average pay rate ...........
Weighted average receive rate .......
Total liability conversion swaps ..... $ 97
======
Notional amount .....................
=======================================================================================================
Total receive fixed swaps ............ $303
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Total pay fixed swaps ................ (22)
Notional amount .....................
Weighted average pay rate ...........
Weighted average receive rate .......
Basis Swaps .......................... (1)
-------
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Total Swaps .......................... $280
======
Notional amount .....................
========================================================================================================
Option Products
Notional amount ..................... (7)
Weighted average strike rate ........
=======================================================================================================
Total Interest Rate Contracts ........ $273
======
Notional amount .....................
<CAPTION>
Expected Maturity
----------------------------------------------------------------------------------
After
Total 1998 1999 2000 2001 2002 2002
------------ ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Conversion Swaps
Receive fixed generic ................
Notional amount ..................... $ 20,524 $ 1,000 $ 1,275 $ 6,325 $ 8,489 $ 3,435 $ --
Weighted average receive rate ....... 6.38% 5.67% 6.38% 6.40% 6.39% 6.54% --%
Weighted average pay rate ........... 5.91 5.94 5.89 5.87 5.91 5.95 --
Pay fixed generic ....................
Notional amount ..................... $ 1,371 $ -- $ 250 $ 1,000 $ 70 $ -- $ 51
Weighted average pay rate ........... 6.75% --% 6.46% 6.70% 7.41% --% 8.33%
Weighted average receive rate ....... 6.02 -- 5.91 5.81 7.99 -- 7.86
Total asset conversion swaps .........
Notional amount ..................... $ 21,895 $ 1,000 $ 1,525 $ 7,325 $ 8,559 $ 3,435 $ 51
Liability Conversion Swaps
Receive fixed generic ................
Notional amount ..................... $ 7,713 $ 1,687 $ 826 $ 308 $ 1,102 $ 495 $ 3,295
Weighted average receive rate ....... 6.77% 6.69% 7.26% 6.79% 6.08% 6.92% 6.89%
Weighted average pay rate ........... 6.24 6.57 7.51 6.13 5.97 5.85 5.92
Pay fixed generic ....................
Notional amount ..................... $ 116 $ 100 $ -- $ 8 $ -- $ 8 $ --
Weighted average pay rate ........... 8.86% 9.31% --% 6.01% --% 6.65% --%
Weighted average receive rate ....... 5.56 5.32 -- 5.84 -- 5.91 --
Total liability conversion swaps .....
Notional amount ..................... $ 7,829 $ 1,787 $ 826 $ 316 $ 1,102 $ 503 $ 3,295
=============================================================================================================================
Total receive fixed swaps ............
Notional amount ..................... $ 28,237 $ 2,687 $ 2,101 $ 6,633 $ 9,591 $ 3,930 $ 3,295
Weighted average receive rate ....... 6.49% 6.31% 6.73% 6.42% 6.36% 6.59% 6.89%
Weighted average pay rate ........... 6.00 6.34 6.52 5.88 5.92 5.94 5.92
Total pay fixed swaps ................
Notional amount ..................... $ 1,487 $ 100 $ 250 $ 1,008 $ 70 $ 8 $ 51
Weighted average pay rate ........... 6.92% 9.31% 6.46% 6.69% 7.41% 6.65% 8.33%
Weighted average receive rate ....... 5.97 5.32 5.91 5.81 7.99 5.91 7.86
Basis Swaps ..........................
Notional amount ..................... $ 2,308 $ 700 $ 1,125 $ 218 $ 96 $ 169 $ --
Weighted average receive rate ....... 5.86% 5.72% 5.80% 5.91% 7.23% 5.96% --%
Weighted average pay rate ........... 5.92 5.85 5.84 6.00 7.27 5.92 --
Total Swaps ..........................
Notional amount ..................... $ 32,032 $ 3,487 $ 3,476 $ 7,859 $ 9,757 $ 4,107 $ 3,346
=============================================================================================================================
Option Products
Notional amount ..................... $ 5,902 $ 2,450 $ 2,825 $ 143 $ 85 $ 163 $ 236
Weighted average strike rate ........ 6.77% 6.35% 6.64% 8.13% 9.43% 7.70% 10.29%
=============================================================================================================================
Total Interest Rate Contracts ........
Notional amount ..................... $ 37,934 $ 5,937 $ 6,301 $ 8,002 $ 9,842 $ 4,270 $ 3,582
<CAPTION>
Average
Expected
Maturity
---------
<S> <C>
Asset Conversion Swaps
Receive fixed generic ................ 3.12
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Pay fixed generic .................... 2.46
Notional amount .....................
Weighted average pay rate ...........
Weighted average receive rate .......
Total asset conversion swaps .........
Notional amount .....................
Liability Conversion Swaps
Receive fixed generic ................ 5.03
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Pay fixed generic .................... 1.27
Notional amount .....................
Weighted average pay rate ...........
Weighted average receive rate .......
Total liability conversion swaps .....
Notional amount .....................
============================================================================================================================
Total receive fixed swaps ............ 3.64
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Total pay fixed swaps ................ 2.37
Notional amount .....................
Weighted average pay rate ...........
Weighted average receive rate .......
Basis Swaps .......................... 1.47
Notional amount .....................
Weighted average receive rate .......
Weighted average pay rate ...........
Total Swaps ..........................
Notional amount .....................
============================================================================================================================
Option Products
Notional amount .....................
Weighted average strike rate ........
============================================================================================================================
Total Interest Rate Contracts ........
Notional amount .....................
</TABLE>
29
<PAGE>
Trading Portfolio
The Corporation manages its exposure to market risk resulting from trading
activities through a risk management function which is independent of the
business units. Each major trading site is monitored by this risk management
unit. Risk limits have been approved by the Corporation's Finance Committee,
and daily earnings at risk limits are generally allocated to the business
units. In addition to limits placed on these individual business units, limits
are also imposed on the risks individual traders can take and on the amount of
risk that can be concentrated in a particular product or market. Risk positions
are monitored by business unit, risk management personnel and senior management
on a daily basis. Business unit and risk management personnel are responsible
for continual monitoring of the changing aggregate position of the portfolios
under their responsibility, including projection of the profit or loss levels
that could result from both normal and extreme market moves. If any market risk
limits are inadvertently exceeded, the risk management unit ensures that
actions are taken as necessary to bring portfolios within approved trading
limits.
To estimate potential losses that could result from adverse market
movements, the factor based scenario model is used to calculate daily earnings
at risk. This model breaks down yield curve movements into three underlying
factors to produce sixteen yield curve scenarios used to estimate hypothetical
profit or loss. Earnings at risk represents a one-day measurement of pretax
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 estimates are measured on a daily basis at the individual
trading unit level, by type of trading activity and for all trading activities
in the aggregate. Daily reports of estimates compared to respective limits are
reviewed by senior management, and trading strategies are adjusted accordingly.
In addition to the earnings at risk analysis, portfolios which have significant
option positions are stress tested continually to simulate the potential loss
that might occur due to unexpected market movements.
Earnings at risk is measured on both a gross and uncorrelated basis. The
gross measure assumes that adverse market movements occur simultaneously across
all segments of the trading portfolio, an unlikely assumption. On December 31,
1997, the gross estimates for aggregate interest rate, foreign exchange and
equity and commodity trading activities were $52 million, $6 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
December 31, 1997 for aggregate trading activities was $22 million. Both
measures indicate that the Corporation's primary risk exposure is related to
its interest rate activities.
Average daily trading revenues in 1997 approximated $1 million. During
1997, the Corporation's trading activities resulted in positive daily revenues
for approximately 64 percent of total trading days. During 1997, the standard
deviation of trading revenues was $4 million. Using this data, one can conclude
that the aggregate trading activities should not result in exposure of more
than $8 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 corrective actions as well as the
assumption that adverse market movements occur simultaneously across all
segments of the trading portfolio. Instruments included in the Corporation's
trading portfolio (including derivatives-dealer positions) and their fair
values are disclosed in Notes Four and Eight of the notes to the consolidated
financial statements on pages 59 and 67, respectively.
Credit Risk Management and Credit Portfolio Review
In conducting business activities, the Corporation is exposed to the
possibility that borrowers or counterparties may default on their obligations
to the Corporation. Credit risk arises through the extension of loans, leases,
factored accounts receivable, certain securities, letters of credit, financial
guarantees and through counterparty risk on trading and capital markets
transactions. To manage this risk, the Credit Policy 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 occurrences. 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.
30
<PAGE>
The Credit Policy 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, leases, factored accounts
receivable, 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 policy management.
Total exposure to a borrower or counterparty is aggregated and measured against
established limits.
The originating credit officer assigns borrowers or counterparties an
initial risk rating which is based on the amount of inherent credit risk and
reviewed for appropriateness by senior line and credit policy personnel.
Credits are monitored by line and credit policy 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 Finance, 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 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 Eight to the consolidated financial statements on page 65.
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, Leases and Factored Accounts Receivable Portfolio -- The
Corporation's credit exposure is focused in its loans, leases and factored
accounts receivable portfolio which totaled $143.8 billion on December 31,
1997. Table Fifteen presents a distribution of loans by category.
Allowance for Credit Losses -- The Corporation's allowance for credit
losses was $2.8 billion, or 1.94 percent of net loans, leases and factored
accounts receivable on December 31, 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 Eleven provides an analysis of the
changes in the allowance for credit losses. Total net charge-offs increased
$200 million in 1997 to $798 million, or .54 percent of average loans, leases
and factored accounts receivable, compared to $598 million, or .48 percent, in
1996. Higher net charge-offs were largely 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 total consumer net charge-offs, which were partially offset by
lower commercial net charge-offs during 1997.
31
<PAGE>
Table Eleven
Allowance For Credit Losses
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Balance on January 1 ..................................... $ 2,315 $ 2,163
-------- --------
Loans, leases and factored accounts receivable
charged off
Commercial .............................................. (149) (150)
Real estate commercial .................................. (24) (38)
Real estate construction ................................ (3) (5)
---------- ----------
Total commercial ...................................... (176) (193)
--------- ---------
Residential mortgage .................................... (15) (12)
Credit card ............................................. (474) (272)
Other consumer .......................................... (406) (329)
--------- ---------
Total consumer ........................................ (895) (613)
--------- ---------
Lease financing ......................................... (16) (4)
Factored accounts receivable ............................ (19) (26)
--------- ---------
Total loans, leases and factored accounts
receivable charged off ................................ (1,106) (836)
--------- ---------
Recoveries of loans, leases and factored accounts
receivable previously charged off
Commercial .............................................. 79 66
Real estate commercial .................................. 24 13
Real estate construction ................................ 6 2
--------- ---------
Total commercial ...................................... 109 81
--------- ---------
Residential mortgage .................................... 3 2
Credit card ............................................. 79 60
Other consumer .......................................... 108 85
--------- ---------
Total consumer ........................................ 190 147
--------- ---------
Foreign ................................................. -- --
Lease financing ......................................... 2 1
Factored accounts receivable ............................ 7 9
--------- ---------
Total recoveries of loans, leases and factored
accounts receivable previously charged off ............ 308 238
--------- ---------
Net charge-offs ......................................... (798) (598)
--------- ---------
Provision for credit losses .............................. 800 605
Allowance applicable to loans of purchased
companies and other ..................................... 465 145
--------- ---------
Balance on December 31 ................................... $ 2,782 $ 2,315
========= =========
Loans, leases and factored accounts receivable, net of
unearned income, outstanding on December 31 ............. $143,792 $122,630
Allowance for credit losses as a percentage of loans,
leases and factored accounts receivable, net of
unearned income, outstanding on December 31 ............. 1.94% 1.89%
Average loans, leases and factored accounts
receivable, net of unearned income, outstanding
during the year ......................................... $146,424 $123,403
Net charge-offs as a percentage of average loans,
leases and factored accounts receivable, net of
unearned income, outstanding during the year ............ .54% .48%
Ratio of the allowance for credit losses on
December 31 to net charge-offs .......................... 3.49 3.87
Allowance for credit losses as a percentage of
nonperforming loans ..................................... 273.34% 260.02%
<CAPTION>
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
Balance on January 1 ..................................... $ 2,186 $ 2,169 $ 1,454
-------- -------- --------
Loans, leases and factored accounts receivable
charged off
Commercial .............................................. (98) (113) (107)
Real estate commercial .................................. (25) (32) (84)
Real estate construction ................................ (17) (27) (17)
-------- -------- --------
Total commercial ...................................... (140) (172) (208)
-------- -------- --------
Residential mortgage .................................... (8) (7) (10)
Credit card ............................................. (189) (126) (184)
Other consumer .......................................... (263) (192) (172)
--------- --------- --------
Total consumer ........................................ (460) (325) (366)
--------- --------- --------
Lease financing ......................................... (2) (4) (5)
Factored accounts receivable ............................ (34) (32) (30)
--------- --------- ---------
Total loans, leases and factored accounts
receivable charged off ................................ (636) (533) (609)
--------- --------- ---------
Recoveries of loans, leases and factored accounts
receivable previously charged off
Commercial .............................................. 78 69 67
Real estate commercial .................................. 15 17 21
Real estate construction ................................ 9 26 12
--------- --------- ---------
Total commercial ...................................... 102 112 100
--------- --------- ---------
Residential mortgage .................................... 2 2 3
Credit card ............................................. 26 22 19
Other consumer .......................................... 72 67 65
--------- --------- ---------
Total consumer ........................................ 100 91 87
--------- --------- ---------
Foreign ................................................. -- -- 1
Lease financing ......................................... 1 3 2
Factored accounts receivable ............................ 12 11 7
--------- --------- ---------
Total recoveries of loans, leases and factored
accounts receivable previously charged off ............ 215 217 197
--------- --------- ---------
Net charge-offs ......................................... (421) (316) (412)
--------- --------- ---------
Provision for credit losses .............................. 382 310 430
Allowance applicable to loans of purchased
companies and other ..................................... 16 23 697
--------- --------- ---------
Balance on December 31 ................................... $ 2,163 $ 2,186 $ 2,169
========= ========= =========
Loans, leases and factored accounts receivable, net of
unearned income, outstanding on December 31 ............. $117,033 $103,371 $92,007
Allowance for credit losses as a percentage of loans,
leases and factored accounts receivable, net of
unearned income, outstanding on December 31 ............. 1.85% 2.11% 2.36%
Average loans, leases and factored accounts
receivable, net of unearned income, outstanding
during the year ......................................... $110,650 $96,258 $80,058
Net charge-offs as a percentage of average loans,
leases and factored accounts receivable, net of
unearned income, outstanding during the year ............ .38% .33% .51%
Ratio of the allowance for credit losses on
December 31 to net charge-offs .......................... 5.14 6.93 5.27
Allowance for credit losses as a percentage of
nonperforming loans ..................................... 306.49% 273.07% 193.38%
</TABLE>
32
<PAGE>
Excluding increases that resulted from the acquisition of Boatmen's,
management expects charge-offs in general to increase modestly in 1998, with
increases in the consumer loan categories anticipated as the Corporation
continues 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
provision for credit losses.
Portions of the allowance for credit losses are allocated to cover the
estimated losses inherent in particular risk categories of loans. The
allocation of the allowance for credit losses, as presented in Table Twelve, is
based upon the Corporation's loss experience over a period of years and is
adjusted for existing economic conditions as well as performance trends within
specific portfolio segments and individual concentrations of credit.
The nature of the process by which the Corporation determines the
appropriate allowance for credit losses requires the exercise of considerable
judgment. Management believes that the allowance for credit losses is
appropriate given its analysis of inherent credit losses on December 31, 1997.
Table Twelve
Allocation of the Allowance for Credit Losses
December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ............. $ 818 29.4% $ 665 28.7% $ 626 28.9% $ 569 26.0% $ 510 23.5%
Real estate
commercial ............ 369 13.3 267 11.5 311 14.4 397 18.2 403 18.6
Real estate
construction .......... 186 6.7 140 6.1 146 6.7 147 6.7 160 7.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total commercial ...... 1,373 49.4 1,072 46.3 1,083 50.0 1,113 50.9 1,073 49.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Residential
mortgage .............. 74 2.7 78 3.4 64 3.0 45 2.0 32 1.4
Credit card ............ 279 10.0 216 9.3 209 9.7 152 7.0 119 5.5
Other consumer ......... 369 13.3 281 12.1 291 13.4 211 9.7 199 9.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total consumer ........ 722 26.0 575 24.8 564 26.1 408 18.7 350 16.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Foreign ................ 31 1.1 23 1.0 21 1.0 19 .9 8 .4
Lease financing ........ 72 2.6 61 2.6 36 1.7 26 1.2 16 .7
Factored accounts
receivable ............ 22 .8 20 .9 20 .9 13 .6 13 .6
Unallocated ............ 562 20.1 564 24.4 439 20.3 607 27.7 709 32.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,782 100.0% $2,315 100.0% $2,163 100.0% $2,186 100.0% $2,169 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nonperforming Assets -- On December 31, 1997, nonperforming assets were
$1.1 billion, or .79 percent of net loans, leases, factored accounts receivable
and foreclosed properties, compared to $1.0 billion, or .85 percent, on
December 31, 1996. As presented in Table Thirteen, nonperforming loans were
$1.0 billion at the end of 1997 compared to $890 million at the end of 1996.
The allowance coverage of nonperforming loans was 273 percent on December 31,
1997 compared to 260 percent at the end of 1996.
Foreclosed properties decreased to $117 million on December 31, 1997
compared to $153 million on December 31, 1996.
33
<PAGE>
Table Thirteen
Nonperforming Assets
December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Commercial ............................................. $ 293 $ 342 $ 271 $ 362 $ 474
Real estate commercial ................................. 157 145 196 201 318
Real estate construction ............................... 18 28 16 66 142
------- ------- ------ ------- -------
Total commercial ..................................... 468 515 483 629 934
------- ------- ------ ------- -------
Residential mortgage ................................... 272 215 87 66 77
Other consumer ......................................... 245 135 130 94 93
------- ------- ------ ------- -------
Total consumer ................................... ... 517 350 217 160 170
------- ------- ------ ------- -------
Foreign ................................................ -- -- -- 3 8
Lease financing ........................................ 33 25 6 9 10
------- ------- ------ ------- -------
Total nonperforming loans .............................. 1,018 890 706 801 1,122
------- ------- ------ ------- -------
Foreclosed properties ................................... 117 153 147 337 661
------- ------- ------ ------- -------
Total nonperforming assets ............................. $ 1,135 $ 1,043 $ 853 $ 1,138 $ 1,783
======= ======= ====== ======= =======
Nonperforming assets as a percentage of
Total assets ........................................... .43% .56% .46% .67% 1.13%
Loans, leases and factored accounts receivable, net of
unearned income, and foreclosed properties ........... .79 .85 .73 1.10 1.92
</TABLE>
The loss of income associated with nonperforming loans on December 31 and
the cost of carrying foreclosed properties were:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income that would have been recorded in accordance
with original terms ................................. $ 128 $ 103 $ 102 $ 96 $ 80
Less income actually recorded ........................ (49) (35) (27) (31) (34)
----- ----- ----- ----- -----
Loss of income ....................................... $ 79 $ 68 $ 75 $ 65 $ 46
===== ===== ===== ===== =====
Cost of carrying foreclosed properties ............... $ 9 $ 8 $ 13 $ 24 $ 18
===== ===== ===== ===== =====
</TABLE>
On December 31, 1997, there were no material commitments to lend additional
funds with respect to nonperforming loans.
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.
34
<PAGE>
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, 1997, loans
past due 90 days or more and still accruing interest were $315 million, or .22
percent of net loans, leases and factored accounts receivable, compared to $245
million, or .20 percent, on December 31, 1996. The increase of $70 million was
the result of deterioration in consumer credit quality experienced on an
industry-wide basis and the Boatmen's acquisition.
Table Fourteen
Loans Past Due 90 Days or More and Still Accruing Interest
December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
Amount Percent (1) Amount Percent (1)
-------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Commercial ........................... $ 34 .06% $ 38 .08%
Real estate commercial ............... 10 .14 13 .24
Real estate construction ............. 4 .11 5 .17
---- ---- ---- ----
Total commercial .................... 48 .07 56 .10
---- ---- ---- ----
Residential mortgage ................. 64 .23 45 .16
Credit card .......................... 149 2.17 105 1.56
Other consumer ....................... 46 .17 30 .15
---- ---- ---- ----
Total consumer ...................... 259 .42 180 .33
---- ---- ---- ----
Factored accounts receivable ......... 8 .74 9 .86
---- ---- ---- ----
Total ............................. $315 .22 $245 .20
==== ==== ==== ====
</TABLE>
(1) Represents amounts past due 90 days or more and still accruing interest as
a percentage of net loans for each loan category and as a percentage of
net loans, leases and factored accounts receivable for total loans.
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, leases and factored
accounts receivable by category.
35
<PAGE>
Table Fifteen
Distribution of Loans, Leases and Factored Accounts Receivable
December 31
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Amount Percent Amount Percent
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Domestic
Commercial ...................... $ 60,184 41.9% $ 50,270 41.0%
Real estate commercial .......... 7,221 5.0 5,445 4.4
Real estate construction ........ 3,805 2.6 2,863 2.3
-------- ----- -------- -----
Total commercial ............... 71,210 49.5 58,578 47.7
-------- ----- -------- -----
Residential mortgage ............ 27,761 19.3 27,963 22.8
Credit card ..................... 6,866 4.8 6,747 5.5
Other consumer .................. 27,121 18.8 20,595 16.8
-------- ----- -------- -----
Total consumer ................. 61,748 42.9 55,305 45.1
-------- ----- -------- -----
Lease financing ................. 5,064 3.5 4,198 3.4
Factored accounts
receivable ..................... 1,074 .8 1,047 .9
-------- ----- -------- -----
139,096 96.7 119,128 97.1
-------- ----- -------- -----
Foreign
Commercial and industrial
companies ...................... 3,070 2.2 2,229 1.8
Banks and other financial
institutions ................... 773 .5 599 .5
Governments and official
institutions ................... -- -- -- --
Lease financing ................. 853 .6 674 .6
-------- ----- -------- -----
4,696 3.3 3,502 2.9
-------- ----- -------- -----
Total loans, leases and
factored accounts receivable,
net of unearned income .......... $143,792 100.0% $122,630 100.0%
======== ===== ======== =====
<CAPTION>
1995 1994 1993
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Commercial ...................... $ 47,989 41.0% $ 44,665 43.1% $40,808 44.3%
Real estate commercial .......... 6,183 5.3 7,349 7.1 8,239 9.0
Real estate construction ........ 2,976 2.5 2,981 2.9 3,256 3.5
-------- ----- -------- ----- ------- -----
Total commercial ............... 57,148 48.8 54,995 53.1 52,303 56.8
-------- ----- -------- ----- ------- -----
Residential mortgage ............ 24,026 20.6 17,244 16.7 12,689 13.8
Credit card ..................... 6,532 5.6 4,753 4.6 3,728 4.1
Other consumer .................. 22,287 19.0 20,511 19.9 19,326 21.0
-------- ----- -------- ----- ------- -----
Total consumer ................. 52,845 45.2 42,508 41.2 35,743 38.9
-------- ----- -------- ----- ------- -----
Lease financing ................. 3,264 2.8 2,440 2.4 1,729 1.9
Factored accounts
receivable ..................... 991 .8 1,004 1.0 1,001 1.1
-------- ----- -------- ----- ------- -----
114,248 97.6 100,947 97.7 90,776 98.7
-------- ----- -------- ----- ------- -----
Foreign
Commercial and industrial
companies ...................... 1,635 1.4 1,183 1.1 510 .5
Banks and other financial
institutions ................... 609 .5 795 .8 446 .5
Governments and official
institutions ................... 7 -- 6 -- 22 --
Lease financing ................. 534 .5 440 .4 253 .3
-------- ----- -------- ----- ------- -----
2,785 2.4 2,424 2.3 1,231 1.3
-------- ----- -------- ----- ------- -----
Total loans, leases and
factored accounts receivable,
net of unearned income .......... $117,033 100.0% $103,371 100.0% $92,007 100.0%
======== ===== ======== ===== ======= =====
</TABLE>
The following section discusses credit risk in the loan portfolio,
including net charge-offs by loan categories as presented in Table Sixteen.
Table Sixteen
Net Charge-offs in Dollars and as a Percentage of Average Loans Outstanding
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------- ---------------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ......................... $70 .12% $ 84 .17% $ 20 .04% $ 44 .11% $40 .11%
Real estate commercial and
construction ..................... (3) n/m 28 .30 18 .17 16 .15 68 .71
------ ---- ---- ---- ---- ---- ---- ---- ----- ----
Total commercial ................. 67 .09 112 .19 38 .07 60 .11 108 .24
----- ---- ---- ---- ---- ---- ---- ---- ----- ----
Residential mortgage ............... 12 .04 10 .03 6 .03 5 .03 7 .06
Credit card ........................ 395 6.02 212 3.58 163 3.40 104 2.76 165 3.99
Other consumer ..................... 298 1.12 244 1.09 191 .87 125 .63 107 .65
----- ---- ---- ---- ---- ---- ---- ---- ----- ----
Total consumer ................... 705 1.09 466 .82 360 .76 234 .60 279 .88
----- ---- ---- ---- ---- ---- ---- ---- ----- ----
Foreign ............................ -- -- -- -- -- -- -- -- (1) n/m
Lease financing .................... 14 .24 3 .08 1 .03 1 .04 3 .18
Factored accounts receivable ....... 12 1.00 17 1.45 22 1.91 21 1.68 23 2.14
----- ---- ---- ---- ---- ---- ---- ---- ----- ----
Total net charge-offs ............ $798 .54 $598 .48 $421 .38 $316 .33 $412 .51
===== ==== ==== ==== ==== ==== ==== ==== ===== ====
Selected managed net charge-offs
and ratios (1):
Managed credit cards ............... $591 6.49% $370 4.54% $242 3.95% $183 3.59% $174 4.00%
Managed other consumer loans ....... 332 1.14 264 1.07 191 .87 125 .63 107 .65
</TABLE>
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, leases
and factored accounts receivable.
36
<PAGE>
Real Estate -- Total nonresidential real estate commercial and
construction loans, the portion of such loans which are nonperforming,
foreclosed properties and other 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 nonresidential real estate commercial and construction loans totaled
$11.0 billion, or 8 percent of net loans, leases and factored accounts
receivable, on December 31, 1997 compared to $8.3 billion, or 7 percent, at the
end of 1996 with the increase due to the acquisition of Boatmen's. Excluding
the Boatmen's acquisition, real estate commercial and construction loans
decreased as a result of the Corporation's efforts to lower its exposure to
this line of business. Real estate loans past due 90 days or more and still
accruing interest were $14 million, or .13 percent of total real estate loans,
on December 31, 1997 compared to $18 million, or .22 percent, on December 31,
1996.
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, 1997, the Corporation had approximately $9.4 billion of commercial
loans which were not real estate dependent but for which the Corporation had
obtained real estate as secondary repayment security.
37
<PAGE>
Table Seventeen
Real Estate Commercial and Construction Loans, Foreclosed Properties and Other
Real Estate Credit Exposures
December 31, 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
Loans (1) Other
----------------------------- Foreclosed Credit
Outstanding Nonperforming Properties Exposures (2)
------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
By Geographic Region (3):
Missouri, Kansas, Illinois, Iowa and Arkansas ..... $ 2,364 $ 38 $ 6 $ 156
Florida and Georgia ............................... 2,260 38 19 464
Texas, Oklahoma and New Mexico .................... 1,500 21 5 353
Maryland, District of Columbia and Virginia ....... 1,249 22 14 366
North Carolina and South Carolina ................. 1,209 26 6 164
Other states ...................................... 2,444 30 7 624
------- ---- --- ------
$11,026 $175 $57 $2,127
======= ==== === ======
By Property Type:
Apartments ........................................ $ 1,742 $ 7 $-- $ 835
Office buildings .................................. 1,720 15 7 121
Residential ....................................... 1,565 24 4 75
Shopping centers/retail ........................... 1,430 44 3 461
Hotels ............................................ 935 14 1 117
Industrial/warehouse .............................. 832 14 1 22
Land and land development ......................... 713 19 31 95
Resorts/golf courses .............................. 412 -- -- 3
Commercial-other .................................. 343 10 4 141
Unsecured ......................................... 232 2 -- 41
Multiple use ...................................... 111 4 1 2
Other ............................................. 991 22 5 214
------- ---- --- ------
$11,026 $175 $57 $2,127
======= ==== === ======
</TABLE>
(1) On December 31, 1997, the Corporation had unfunded binding real estate
commercial and construction loan commitments.
(2) Other credit exposures include letters of credit and loans held for sale.
(3) Distribution based on geographic location of collateral.
Other Industries -- Table Eighteen presents selected industry credit
exposures, commercial loans, factored accounts receivable and lease financings.
Commercial loan outstandings totaled $60.2 billion and $50.3 billion on
December 31, 1997 and 1996, respectively, or 42 percent and 41 percent of net
loans, leases and factored accounts receivable, respectively. This increase,
due largely to the addition of Boatmen's and core loan growth, was partially
offset by the impact of the $4.2-billion commercial loan securitization in the
third quarter of 1997. The Corporation had commercial loan net charge-offs in
1997 of $70 million, or .12 percent of average commercial loans, compared to
$84 million, or .17 percent of average commercial loans, in 1996. Excluding a
$40-million charge-off of one large retail credit, commercial loan net
charge-offs were $30 million, or .05 percent of average commercial loans, in
1997. Commercial loans past due 90 days or more and still accruing interest
were $34 million, or .06 percent of commercial loans, on December 31, 1997
compared to $38 million, or .08 percent, on December 31, 1996. Nonperforming
commercial loans were $293 million, or .49 percent of commercial loans, on
December 31, 1997, compared to $342 million, or .68 percent, on December 31,
1996.
38
<PAGE>
Table Eighteen
Selected Industry Loans, Leases and Factored Accounts Receivable, Net of
Unearned Income
December 31, 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
Outstanding
------------
<S> <C>
Health care .......................... $4,222
Food, including agribusiness ......... 3,657
Machinery and equipment, excluding defense 3,180
Automotive, excluding trucking ....... 3,154
Oil and gas .......................... 3,086
Leisure and sports ................... 3,059
Media ................................ 2,976
Textiles and apparel, excluding retail 2,930
Retail ............................... 2,539
Telecommunications ................... 2,185
</TABLE>
Consumer -- On December 31, 1997 and 1996, total consumer loan
outstandings totaled $61.7 billion and $55.3 billion, respectively,
representing 43 percent of net loans, leases and factored accounts receivable
on December 31, 1997. This increase, due mainly to the addition of Boatmen's
and core loan growth, was net of mortgage and other consumer loan
securitizations of $8.1 billion and $500 million, respectively, during 1997.
Credit card net charge-offs during 1997 caused most of the increase in total
consumer net charge-offs and were due mainly to deterioration in consumer
credit quality experienced on an industry-wide basis. A secondary factor
causing the higher levels of net charge-offs during 1997 was an increase in
other consumer net charge-offs, primarily the result of the Boatmen's
acquisition. 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 securitized and is continuing its efforts to shift
the loan portfolio mix to a higher consumer concentration.
Average credit card receivables managed by the Card Services group
(excluding private label credit cards) increased to $9.1 billion in 1997
compared to $8.1 billion in 1996. Average securitized credit card loans totaled
$2.6 billion during 1997 compared to $2.2 billion during 1996.
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 $29.2 billion in 1997, compared to $24.6
billion in 1996. Both the increase in loans and higher net charge-offs during
1997 were due primarily to the acquisition of Boatmen's.
Total consumer loans past due 90 days or more and still accruing interest
were $259 million, or .42 percent of total consumer loans, on December 31, 1997
compared to $180 million, or .33 percent, at the end of 1996. Total consumer
nonperforming loans were $517 million, or .84 percent of total consumer loans,
on December 31, 1997 compared to $350 million, or .63 percent, on December 31,
1996. The increases in these categories were due to the previously mentioned
deterioration in consumer credit quality experienced on an industry-wide basis
and the acquisition of Boatmen's.
Foreign -- Foreign outstandings include loans and leases, interest-bearing
deposits with foreign banks, bankers' acceptances and other investments. The
Corporation's foreign commercial outstandings totaled $17.0 billion, $8.1
billion and $3.8 billion on December 31, 1997, 1996 and 1995, respectively. The
Corporation had foreign outstandings of $2.3 billion with Germany, $2.4 billion
with countries in Asia (primarily Japan), $3.3 billion with France and $3.8
billion with Canada on December 31, 1997. There were no foreign outstandings to
any country greater than 1 percent of total assets on December 31, 1996 and
1995.
39
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
40
<PAGE>
Table Nineteen
Selected Quarterly Operating Results
(Dollars in Millions Except Per-Share Information)
<TABLE>
<CAPTION>
1997 Quarters
------------------------------------------------------
Fourth Third Second First
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Interest income ........................................ $ 4,288 $ 4,155 $ 4,109 $ 4,027
Interest expense ....................................... 2,300 2,183 2,121 2,077
Net interest income (taxable-equivalent) ............... 2,018 2,001 2,017 1,978
Net interest income .................................... 1,988 1,972 1,988 1,950
Provision for credit losses ............................ 230 190 190 190
Gains (losses) on sales of securities .................. 62 19 29 43
Noninterest income ..................................... 1,500 1,224 1,165 1,113
Foreclosed properties expense (income) ................. 3 5 4 (2)
Merger-related charge .................................. -- -- -- --
Other noninterest expense .............................. 2,051 1,788 1,798 1,810
Income before income taxes ............................. 1,266 1,232 1,190 1,108
Income tax expense ..................................... 448 444 428 399
Net income ............................................. 818 788 762 709
Net income (excluding merger-related charge) ........... 818 788 762 709
Earnings per common share .............................. 1.15 1.11 1.05 .97
Earnings per common share (excluding
merger-related charge) ................................ 1.15 1.11 1.05 .97
Diluted earnings per common share ...................... 1.12 1.08 1.02 .94
Diluted earnings per common share (excluding
merger-related charge) ................................ 1.12 1.08 1.02 .94
Dividends per common share ............................. .38 .33 .33 .33
Yield on average earning assets ........................ 7.87% 7.93% 7.97% 7.85%
Rate on average interest-bearing liabilities ........... 4.89 4.83 4.76 4.68
Net interest spread .................................... 2.98 3.10 3.21 3.17
Net interest yield ..................................... 3.68 3.80 3.89 3.83
Average total assets .................................. $ 253,342 $ 241,867 $240,508 $242,206
Average total deposits ................................. 132,394 132,651 134,661 134,976
Average total shareholders' equity ..................... 20,366 19,678 20,057 20,654
Return on average assets ............................... 1.28% 1.29% 1.27% 1.19%
Return on average assets (excluding merger-related
charge) ............................................... 1.28 1.29 1.27 1.19
Return on average common shareholders'
equity (1) ............................................ 15.93 15.91 15.25 13.96
Return on average common shareholders'
equity (excluding merger-related charge) (1) .......... 15.93 15.91 15.25 13.96
Cash basis financial data (2)
Earnings per common share ............................. $ 1.31 $ 1.27 $ 1.21 $ 1.10
Earnings per common share (excluding
merger-related charge) ............................... 1.31 1.27 1.21 1.10
Diluted earnings per common share ..................... 1.28 1.23 1.17 1.07
Diluted earnings per common share (excluding
merger-related charge) ............................... 1.28 1.23 1.17 1.07
Return on average tangible assets ..................... 1.52% 1.53% 1.51% 1.40%
Return on average tangible assets (excluding
merger-related charge) ............................... 1.52 1.53 1.51 1.40
Return on average tangible common shareholders'
equity (1) ........................................... 33.86 31.96 30.59 26.38
Return on average tangible common shareholders'
equity (excluding merger-related charge) (1) ......... 33.86 31.96 30.59 26.38
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
Tier 1 capital ratio ................................... 6.50% 7.00% 6.83% 7.06%
Total capital ratio .................................... 10.89 11.56 11.32 11.58
<CAPTION>
1996 Quarters
------------------------------------------------------
Fourth Third Second First
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Interest income ........................................ $ 3,358 $ 3,423 $ 3,442 $ 3,573
Interest expense ....................................... 1,768 1,828 1,855 2,016
Net interest income (taxable-equivalent) ............... 1,612 1,616 1,611 1,584
Net interest income .................................... 1,590 1,595 1,587 1,557
Provision for credit losses ............................ 150 145 155 155
Gains (losses) on sales of securities .................. 33 26 (6) 14
Noninterest income ..................................... 958 886 917 885
Foreclosed properties expense (income) ................. 7 6 7 --
Merger-related charge .................................. -- -- -- 118
Other noninterest expense .............................. 1,466 1,400 1,405 1,394
Income before income taxes ............................. 958 956 931 789
Income tax expense ..................................... 326 331 326 276
Net income ............................................. 632 625 605 513
Net income (excluding merger-related charge) ........... 632 625 605 590
Earnings per common share .............................. 1.09 1.06 1.00 .85
Earnings per common share (excluding
merger-related charge) ................................ 1.09 1.06 1.00 .98
Diluted earnings per common share ...................... 1.07 1.05 .99 .84
Diluted earnings per common share (excluding
merger-related charge) ................................ 1.07 1.05 .99 .96
Dividends per common share ............................. .33 .29 .29 .29
Yield on average earning assets ........................ 7.86% 7.87% 7.80% 7.80%
Rate on average interest-bearing liabilities ........... 4.77 4.84 4.83 4.97
Net interest spread .................................... 3.09 3.03 2.97 2.83
Net interest yield ..................................... 3.75 3.69 3.62 3.43
Average total assets ................................... $194,321 $197,923 $202,796 $ 208,617
Average total deposits ................................. 105,765 107,715 109,988 106,906
Average total shareholders' equity ..................... 13,224 13,133 13,552 13,144
Return on average assets ............................... 1.29% 1.26% 1.20% .99%
Return on average assets (excluding merger-related
charge) ............................................... 1.29 1.26 1.20 1.14
Return on average common shareholders'
equity (1) ............................................ 19.06 19.00 18.00 15.71
Return on average common shareholders'
equity (excluding merger-related charge) (1) .......... 19.06 19.00 18.00 18.07
Cash basis financial data (2)
Earnings per common share ............................. $ 1.16 $ 1.12 $ 1.05 $ .89
Earnings per common share (excluding
merger-related charge) ............................... 1.16 1.12 1.05 1.02
Diluted earnings per common share ..................... 1.14 1.11 1.04 .88
Diluted earnings per common share (excluding
merger-related charge) ............................... 1.14 1.11 1.04 1.00
Return on average tangible assets ..................... 1.38% 1.34% 1.28% 1.05%
Return on average tangible assets (excluding
merger-related charge) ............................... 1.38 1.34 1.28 1.20
Return on average tangible common shareholders'
equity (1) ........................................... 23.81 23.56 22.00 19.14
Return on average tangible common shareholders'
equity (excluding merger-related charge) (1) ......... 23.81 23.56 22.00 21.85
Market price per share of common stock
High for the period ................................... $ 52 5/8 $47 1/16 $42 5/16 $40 11/16
Low for the period .................................... 43 1/8 38 3/16 37 3/8 32 3/16
Closing price ......................................... 48 7/8 43 7/16 41 5/16 40 1/16
Tier 1 capital ratio ................................... 7.76% 7.05% 7.58% 7.35%
Total capital ratio .................................... 12.66 12.05 11.93 11.71
</TABLE>
(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.
41
<PAGE>
Table Twenty
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
<TABLE>
<CAPTION>
Fourth Quarter 1997 Third Quarter 1997
------------------------------- --------------------------------
Average Average
Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates
----------- --------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned income (1)
Commercial .................................................... $ 58,210 $1,216 8.30% $ 59,826 $1,258 8.34%
Real estate commercial ........................................ 7,385 168 8.99 7,747 172 8.82
Real estate construction ...................................... 3,850 85 8.71 3,731 83 8.81
-------- ------ ----- -------- ------ -----
Total commercial ............................................. 69,445 1,469 8.40 71,304 1,513 8.42
-------- ------ ----- -------- ------ -----
Residential mortgage .......................................... 27,419 531 7.73 32,318 635 7.84
Credit card ................................................... 6,541 198 12.00 6,841 209 12.10
Other consumer ................................................ 26,929 667 9.83 26,482 640 9.60
-------- ------ ----- -------- ------ -----
Total consumer ............................................... 60,889 1,396 9.11 65,641 1,484 9.00
-------- ------ ----- -------- ------ -----
Foreign ....................................................... 3,530 67 7.50 3,770 66 6.89
Lease financing ............................................... 5,873 113 7.74 5,821 112 7.68
-------- ------ ----- -------- ------ -----
Total loans and leases, net .................................. 139,737 3,045 8.66 146,536 3,175 8.61
-------- ------ ----- -------- ------ -----
Securities
Held for investment ........................................... 1,231 20 6.26 1,424 22 6.23
Available for sale (2) ........................................ 39,059 666 6.81 24,625 427 6.92
-------- ------ ----- -------- ------ -----
Total securities ............................................. 40,290 686 6.79 26,049 449 6.88
-------- ------ ----- -------- ------ -----
Loans held for sale ............................................ 1,762 31 7.08 1,253 24 7.40
Federal funds sold and securities purchased under
agreements to resell .......................................... 12,610 168 5.29 11,468 158 5.47
Time deposits placed and other short-term investments .......... 2,175 38 6.93 1,755 26 5.93
Trading account securities (3) ................................. 21,715 350 6.41 22,617 352 6.21
-------- ------ ----- -------- ------ -----
Total earning assets (4) ..................................... 218,289 4,318 7.87 209,678 4,184 7.93
Cash and cash equivalents ....................................... 8,793 8,552
Factored accounts receivable .................................... 1,227 1,199
Other assets, less allowance for credit losses .................. 25,033 22,438
-------- --------
Total assets ................................................. $253,342 $241,867
======== ========
Interest-bearing liabilities
Savings ........................................................ $ 9,479 48 1.98 $ 9,754 49 1.98
NOW and money market deposit accounts .......................... 39,922 258 2.58 40,665 262 2.55
Consumer CDs and IRAs .......................................... 36,930 488 5.24 37,549 493 5.21
Negotiated CDs, public funds and other time deposits ........... 2,701 39 5.63 3,114 43 5.54
Foreign time deposits .......................................... 10,622 150 5.60 9,668 133 5.43
Federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings .................... 47,433 659 5.51 40,304 571 5.62
Trading account liabilities (3) ................................ 11,522 190 6.54 10,231 163 6.30
Long-term debt (5) ............................................. 28,392 468 6.59 28,416 469 6.60
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities (6) ....................... 187,001 2,300 4.89 179,701 2,183 4.83
-------- ------ ----- -------- ------ -----
Noninterest-bearing sources
Noninterest-bearing deposits ................................... 32,740 31,901
Other liabilities .............................................. 13,235 10,587
Shareholders' equity ........................................... 20,366 19,678
-------- --------
Total liabilities and shareholders' equity ................... $253,342 $241,867
======== ========
Net interest spread ............................................. 2.98 3.10
Impact of noninterest-bearing sources ........................... .70 .70
------ ----- ------ -----
Net interest income/yield on earning assets ..................... $2,018 3.68% $2,001 3.80%
====== ===== ====== =====
</TABLE>
(1) Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
(2) The average balance sheet amounts and yields on securities available for
sale are based on the average of historical amortized cost balances.
(3) The fair values of derivatives-dealer positions are reported in other
assets and liabilities, respectively.
(4) Interest income includes taxable-equivalent adjustments of $30, $29, $29
and $28 in the fourth, third, second and first quarters of 1997,
respectively, and $22 in the fourth quarter of 1996. Interest income also
includes the impact of risk management interest rate contracts, which
increased interest income on the underlying linked assets $26, $25, $34
and $48 in the fourth, third, second and first quarters of 1997,
respectively, and $31 in the fourth quarter of 1996.
(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 $11, $8, $11 and $10 in the fourth, third, second and first
quarters of 1997, respectively, and $1 in the fourth quarter of 1996.
42
<PAGE>
<TABLE>
<CAPTION>
Second Quarter 1997 First Quarter 1997 Fourth Quarter 1996
- - ----------------------------------- ----------------------------------- ------------------------------------
Average Average Average
Balance Income Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates Amounts Expense Rates
- - ----------- --------- --------- ----------- --------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 60,133 $1,265 8.43% $ 59,542 $1,229 8.38% $ 49,987 $1,044 8.30%
8,446 191 9.09 8,646 190 8.90 5,388 122 9.00
3,765 88 9.43 3,778 84 8.98 3,084 67 8.74
-------- ------ ----- -------- ------ ----- -------- ------ -----
72,344 1,544 8.56 71,966 1,503 8.47 58,459 1,233 8.39
-------- ------ ----- -------- ------ ----- -------- ------ -----
33,848 658 7.79 32,072 621 7.78 28,174 548 7.77
7,102 211 11.93 7,170 205 11.60 6,363 185 11.58
26,154 628 9.61 26,872 632 9.54 20,581 503 9.69
-------- ------ ----- -------- ------ ----- -------- ------ -----
67,104 1,497 8.94 66,114 1,458 8.91 55,118 1,236 8.93
-------- ------ ----- -------- ------ ----- -------- ------ -----
3,119 56 7.29 3,283 56 6.86 2,701 47 6.89
5,546 107 7.69 5,316 103 7.79 4,614 87 7.66
-------- ------ ----- -------- ------ ----- -------- ------ -----
148,113 3,204 8.67 146,679 3,120 8.61 120,892 2,603 8.57
-------- ------ ----- -------- ------ ----- -------- ------ -----
1,647 24 5.94 1,920 29 6.05 2,585 36 5.55
20,851 361 6.93 20,740 356 6.89 11,540 205 7.10
-------- ------ ----- -------- ------ ----- -------- ------ -----
22,498 385 6.86 22,660 385 6.82 14,125 241 6.82
-------- ------ ----- -------- ------ ----- -------- ------ -----
819 16 7.91 1,062 17 6.49 802 15 7.31
11,478 169 5.91 13,370 188 5.70 12,291 162 5.24
2,303 31 5.36 2,228 28 5.11 1,991 25 4.86
22,793 333 5.84 22,848 317 5.60 21,148 334 6.32
-------- ------ ----- -------- ------ ----- -------- ------ -----
208,004 4,138 7.97 208,847 4,055 7.85 171,249 3,380 7.86
8,637 9,178 7,720
1,188 1,078 1,256
22,679 23,103 14,096
-------- -------- --------
$240,508 $242,206 $194,321
======== ======== ========
$ 10,096 50 2.00 $ 10,220 53 2.10 $ 8,607 46 2.12
41,792 272 2.60 42,138 273 2.64 30,634 191 2.47
38,481 501 5.22 39,458 507 5.21 30,870 405 5.22
3,459 47 5.47 3,555 47 5.31 2,544 35 5.53
9,523 125 5.30 9,278 118 5.14 9,139 117 5.10
38,793 524 5.42 39,828 509 5.18 33,928 455 5.34
9,376 160 6.85 9,949 165 6.73 9,314 152 6.48
27,260 442 6.49 25,244 405 6.50 22,702 367 6.53
-------- ------ ----- -------- ------ ----- -------- ------ -----
178,780 2,121 4.76 179,670 2,077 4.68 147,738 1,768 4.77
-------- ------ ----- -------- ------ ----- -------- ------ -----
31,310 30,327 23,971
10,361 11,555 9,388
20,057 20,654 13,224
-------- -------- --------
$240,508 $242,206 $194,321
======== ======== ========
3.21 3.17 3.09
.68 .66 .66
------ ----- ------ ----- ------ -----
$2,017 3.89% $1,978 3.83% $1,612 3.75%
====== ===== ====== ===== ====== =====
</TABLE>
43
<PAGE>
1996 Compared to 1995
The following discussion and analysis provides a comparison of the
Corporation's results of operations for the years ended December 31, 1996 and
1995. This discussion should be read in conjunction with the consolidated
financial statements and related notes on pages 45 through 79.
Overview
The Corporation's continued earnings momentum was demonstrated through a
26-percent increase in operating net income to $2.45 billion in 1996 compared
to $1.95 billion in 1995. Operating earnings per common share for 1996
increased 16 percent to $4.13 from $3.56 in 1995. Including a merger-related
charge of $118 million ($77 million, net of tax), net income increased 22
percent to $2.38 billion while earnings per common share rose 12 percent to
$4.00 and diluted earnings per common share increased 11 percent to $3.92,
respectively.
Business Unit Operations
The General Bank's 1996 earnings increased 35 percent to $1.6 billion.
Return on average equity increased approximately 300 basis points to 22 percent
in 1996. Revenue growth and expense control led to a 520-basis point
improvement in the efficiency ratio in 1996 to 58.6 percent.
Global Finance's earnings rose to $635 million in 1996. Return on average
equity remained constant at 16 percent in 1996. The efficiency ratio improved
slightly to 53.5 percent.
Financial Services' earnings rose 29 percent to $166 million in 1996.
Return on average equity remained constant at 14 percent in 1996. The
efficiency ratio was 45.1 percent in 1996 compared to 42.1 percent in 1995 due
primarily to office consolidation costs in 1996.
Net Interest Income
Taxable-equivalent net interest income increased 16 percent to $6.4
billion in 1996 compared to $5.6 billion in 1995 due to acquisitions of several
banking operations, higher spreads in the securities portfolio, core loan
growth and increased noninterest-bearing deposits, partially offset by the
impact of securitizations and a shift in funding to long-term debt.
The net interest yield increased 29 basis points to 3.62 percent in 1996
compared to 3.33 percent in 1995 due to the sale of low-yielding securities and
the reinvestment of proceeds into higher-spread products.
Provision for Credit Losses
The provision for credit losses covered net charge-offs and was $605
million in 1996 compared to $382 million 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 $177 million
to $598 million in 1996 over 1995 due primarily to increases in commercial,
other consumer and credit card net charge-offs.
The allowance for credit losses was $2.3 billion, or 1.89 percent of net
loans, leases and factored accounts receivable, on December 31, 1996 compared
to $2.2 billion, or 1.85 percent, at the end of 1995. The allowance for credit
losses was 260 percent of nonperforming loans on December 31, 1996 compared to
306 percent on December 31, 1995.
Noninterest Income
Noninterest income increased 19 percent to $3.6 billion in 1996, driven
primarily by higher deposit account service charges, investment banking income
and mortgage servicing and other mortgage-related income.
Noninterest Expense
Noninterest expense increased 10 percent to $5.7 billion. Excluding the
impact of acquisitions, noninterest expense increased only 4 percent, the
result of increased expenditures in selected areas to support revenue growth
through enhancing customer sales and optimizing product and data delivery
channels. Higher marketing expenses associated with the 1996 Summer Olympics
also contributed to the increase in 1996 expenses.
Income Taxes
The Corporation's income tax expense for 1996 was $1.3 billion, for an
effective tax rate of 34.6 percent of pretax income. Income tax expense for
1995 was $1.0 billion, for an effective tax rate of 34.8 percent.
44
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Market Risk Management" for Quantitative and
Qualitative Disclosures about Market Risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
The management of NationsBank 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 financial
statements. The financial statements and other financial information in this
report include amounts that are based on management's best estimates and
judgments and give 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 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 financial statements are prevented or would be detected on a
timely basis and corrected through the normal course of business. As of
December 31, 1997, 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 46.
The Board of Directors discharges its responsibility for the Corporation's
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
45
<PAGE>
Report Of Independent Accountants
To The Board Of Directors And Shareholders Of NationsBank 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 NationsBank Corporation and its subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, 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.
PRICE WATERHOUSE LLP
[GRAPHIC OMITTED]
Charlotte, North Carolina
January 9, 1998
46
<PAGE>
NationsBank Corporation and Subsidiaries
Consolidated Statement of Income
(Dollars in Millions Except Per-Share Information)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans and leases ...................................... $ 12,481 $ 10,440 $ 9,552
Interest and dividends on securities ....................................... 1,855 1,306 1,468
Federal funds sold and securities purchased under agreements to resell ..... 683 666 937
Trading account securities ................................................. 1,349 1,225 1,097
Other interest income ...................................................... 211 159 166
--------- --------- --------
Total interest income .............................................. ...... 16,579 13,796 13,220
--------- --------- --------
Interest expense
Deposits ................................................................... 3,955 3,322 3,281
Borrowed funds ............................................................. 2,264 2,155 2,710
Trading account liabilities ................................................ 678 653 896
Long-term debt ............................................................. 1,784 1,337 886
--------- --------- --------
Total interest expense .................................................... 8,681 7,467 7,773
--------- --------- --------
Net interest income ......................................................... 7,898 6,329 5,447
Provision for credit losses ................................................. 800 605 382
--------- --------- --------
Net credit income ........................................................... 7,098 5,724 5,065
Gains on sales of securities ................................................ 153 67 29
Noninterest income
Service charges on deposit accounts ........................................ 1,546 1,121 884
Mortgage servicing and other mortgage-related income ....................... 287 213 138
Investment banking income .................................................. 627 356 192
Trading account profits and fees ........................................... 265 274 306
Brokerage income ........................................................... 234 110 114
Other nondeposit-related service fees ...................................... 310 262 224
Asset management and fiduciary service fees ................................ 648 432 444
Credit card income ......................................................... 371 314 277
Other income ............................................................... 714 564 499
--------- --------- --------
Total noninterest income .................................................. 5,002 3,646 3,078
--------- --------- --------
Foreclosed properties expense ............................................... 10 20 18
Merger-related charge ....................................................... -- 118 --
Other noninterest expense
Personnel .................................................................. 3,643 2,731 2,491
Occupancy, net ............................................................. 634 523 495
Equipment .................................................................. 604 451 397
Marketing .................................................................. 300 252 217
Professional fees .......................................................... 312 256 182
Amortization of intangibles ................................................ 441 128 119
Data processing ............................................................ 283 237 229
Telecommunications ......................................................... 229 172 150
Other general operating .................................................... 758 728 719
General administrative and miscellaneous ................................... 243 187 164
--------- --------- --------
Total other noninterest expense .................................... ...... 7,447 5,665 5,163
--------- --------- --------
Income before income taxes .................................................. 4,796 3,634 2,991
Income tax expense .......................................................... 1,719 1,259 1,041
--------- --------- --------
Net income .................................................................. $ 3,077 $ 2,375 $ 1,950
========= ========= ========
Net income available to common shareholders ................................. $ 3,066 $ 2,360 $ 1,942
========= ========= ========
Per-share information (1)
Earnings per common share .................................................. $ 4.27 $ 4.00 $ 3.56
========= ========= ========
Diluted earnings per common share .......................................... $ 4.17 $ 3.92 $ 3.52
========= ========= ========
Dividends per common share ................................................. $ 1.37 $ 1.20 $ 1.04
========= ========= ========
Average common shares issued (in thousands) (1) ............................. 717,450 590,216 544,959
========= ========= ========
(1) Shares and per-share data reflect a 2-for-1 stock split on February 27, 1997.
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
NationsBank Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Assets
Cash and cash equivalents ............................................................... $ 10,586 $ 8,933
Time deposits placed and other short-term investments ................................... 2,395 1,843
Securities
Held for investment, at cost (market value -- $1,161 and $2,110)........................ 1,156 2,110
Available for sale ..................................................................... 46,047 12,277
-------- --------
Total securities ..................................................................... 47,203 14,387
-------- --------
Loans held for sale ..................................................................... 2,911 1,215
Federal funds sold and securities purchased under agreements to resell .................. 10,022 6,959
Trading account assets .................................................................. 23,678 18,689
Loans and leases, net of unearned income ................................................ 142,718 121,583
Factored accounts receivable ............................................................ 1,074 1,047
Allowance for credit losses ............................................................. (2,782) (2,315)
-------- --------
Loans, leases and factored accounts receivable, net of unearned income
and allowance for credit losses ...................................................... 141,010 120,315
-------- --------
Premises and equipment, net ............................................................. 3,225 2,712
Customers' acceptance liability ......................................................... 1,154 858
Interest receivable ..................................................................... 1,721 1,159
Mortgage servicing rights ............................................................... 1,282 946
Goodwill ................................................................................ 8,625 1,640
Core deposit and other intangibles ...................................................... 755 390
Other assets ............................................................................ 9,995 5,748
-------- --------
$264,562 $185,794
======== ========
Liabilities
Deposits
Noninterest-bearing .................................................................... $ 34,674 $ 25,738
Savings ................................................................................ 9,385 8,498
NOW and money market deposit accounts .................................................. 40,611 31,128
Time ................................................................................... 39,131 33,081
Foreign time ........................................................................... 14,393 8,053
-------- --------
Total deposits ................................................................... ... 138,194 106,498
-------- --------
Federal funds purchased and securities sold under agreements to repurchase .............. 43,882 19,378
Trading account liabilities ............................................................. 15,207 11,752
Commercial paper ........................................................................ 2,796 2,787
Other short-term borrowings ............................................................. 4,126 1,836
Liability to factoring clients .......................................................... 591 597
Acceptances outstanding ................................................................. 1,154 858
Accrued expenses and other liabilities .................................................. 8,116 4,429
Trust preferred securities .............................................................. 1,955 965
Long-term debt .......................................................................... 27,204 22,985
-------- --------
Total liabilities ...................................................................... 243,225 172,085
-------- --------
Contingent liabilities and other financial commitments (Notes Eight and Ten)
Shareholders' Equity
Preferred stock: authorized -- 45,000,000 shares; issued -- 2,201,728 and 5,220,459 94 171
shares
Common stock: authorized -- 1,250,000,000 shares; issued -- 712,188,008 and 573,492,308 9,168 3,855
shares
Retained earnings ....................................................................... 11,754 9,673
Other, including loan to ESOP trust ..................................................... 321 10
-------- --------
Total shareholders' equity ............................................................. 21,337 13,709
-------- --------
$264,562 $185,794
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
NationsBank Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net income ............................................................................ $ 3,077 $ 2,375 $ 1,950
Reconciliation of net income to net cash provided by (used in) operating activities
Provision for credit losses .......................................................... 800 605 382
Gains on sales of securities ......................................................... (153) (67) (29)
Depreciation and premises improvements amortization .................................. 424 314 280
Amortization of intangibles .......................................................... 441 128 119
Deferred income tax expense .......................................................... 414 346 159
Net change in trading instruments .................................................... (1,252) (3,280) (5,175)
Net (increase) decrease in interest receivable ....................................... (270) 518 (182)
Net increase (decrease) in interest payable .......................................... 88 (545) 208
Net (increase) decrease in loans held for sale ....................................... (1,696) 449 (1,345)
Other operating activities ........................................................... (1,607) 961 (1,300)
--------- --------- ---------
Net cash provided by (used in) operating activities ................................. 266 1,804 (4,933)
--------- --------- ---------
Investing Activities
Proceeds from maturities of securities held for investment ............................ 987 2,329 5,547
Purchases of securities held for investment ........................................... (128) (14) (545)
Proceeds from sales and maturities of securities available for sale ................... 34,603 28,998 25,556
Purchases of securities available for sale ............................................ (48,727) (12,708) (27,594)
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell ................................................. (800) (424) 4,931
Net (increase) decrease in time deposits placed and other short-term investments ...... (756) (565) 863
Purchases and net originations of loans and leases .................................... (20,613) (13,822) (18,331)
Proceeds from sales and securitizations of loans and leases ........................... 15,180 12,286 4,681
Purchases and originations of mortgage servicing rights ............................... (397) (366) (598)
Purchases of factored accounts receivable ............................................. (7,919) (7,738) (7,856)
Collections of factored accounts receivable ........................................... 7,873 7,656 7,834
Net purchases of premises and equipment ............................................... (125) (348) (307)
Proceeds from sales of foreclosed properties .......................................... 190 174 204
Sales and acquisitions of business activities, net of cash ............................ 1,478 416 (567)
--------- --------- ---------
Net cash (used in) provided by investing activities ................................. (19,154) 15,874 (6,182)
--------- --------- ---------
Financing Activities
Net decrease in deposits .............................................................. (58) (6,573) (158)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase .................................................. 20,357 (10,601) 2,909
Net increase (decrease) in other short-term borrowings and commercial paper ........... 1,010 (3,171) (1,244)
Proceeds from issuance of trust preferred securities .................................. 990 965 --
Proceeds from issuance of long-term debt .............................................. 6,127 7,230 11,393
Retirement of long-term debt .......................................................... (2,275) (3,093) (2,061)
Proceeds from issuance of common stock ................................................ 1,242 136 239
Cash dividends paid ................................................................... (996) (722) (575)
Common stock repurchased .............................................................. (5,769) (1,503) (522)
Other financing activities ............................................................ (87) 139 --
--------- --------- ---------
Net cash provided by (used in) financing activities ................................. 20,541 (17,193) 9,981
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................................... 1,653 485 (1,134)
Cash and cash equivalents on January 1 ................................................. 8,933 8,448 9,582
--------- --------- ---------
Cash and cash equivalents on December 31 ............................................... $ 10,586 $ 8,933 $ 8,448
========= ========= =========
Supplemental cash flow disclosure:
Cash paid for interest ................................................................ $ 8,593 $ 7,974 $ 7,565
Cash paid for income taxes ............................................................ 563 786 675
</TABLE>
Loans transferred to foreclosed properties amounted to $150, $160 and $98 in
1997, 1996 and 1995, respectively.
Loans securitized and retained in the available for sale securities portfolio
amounted to $7,532 and $4,302 in 1997 and 1996, respectively.
The fair values of noncash assets acquired and liabilities assumed in
acquisitions during 1997 were approximately $49,355 and $40,992, respectively,
net of cash acquired.
See accompanying notes to consolidated financial statements.
49
<PAGE>
NationsBank Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in Millions, Shares in Thousands)
<TABLE>
<CAPTION>
Total
Common Stock Share-
Preferred -------------------------- Retained holders'
Stock Shares Amount Earnings Other Equity
----------- ------------ ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance on December 31, 1994 ...................... $111 552,904 $ 4,740 $6,451 $ (291) $11,011
Net income ....................................... 1,950 1,950
Cash dividends
Common ......................................... (567) (567)
Preferred ...................................... (8) (8)
Common stock issued under dividend
reinvestment and employee plans ................ 8,878 214 25 239
Common stock issued in acquisitions .............. 5,996 217 217
Common stock repurchased ......................... (19,466) (522) (522)
Net change in unrealized gains (losses) on
securities available for sale and marketable
equity securities .............................. 460 460
Other ............................................ (6) 226 6 21 21
------- ------- ------- ------ ------ ---------
Balance on December 31, 1995 ...................... 105 548,538 4,655 7,826 215 12,801
Net income ....................................... 2,375 2,375
Cash dividends
Common ......................................... (707) (707)
Preferred ...................................... (15) (15)
Common stock issued under employee plans ......... 3,456 109 27 136
Stock issued in acquisitions ..................... 73 55,436 586 192 2 853
Common stock repurchased ......................... (34,196) (1,503) (1,503)
Net change in unrealized gains (losses) on
securities available for sale and marketable
equity securities .............................. (240) (240)
Other ............................................ (7) 258 8 2 6 9
------- ------- ------- -------- ------ ---------
Balance on December 31, 1996 ...................... 171 573,492 3,855 9,673 10 13,709
Net income ....................................... 3,077 3,077
Cash dividends
Common ......................................... (985) (985)
Preferred ...................................... (11) (11)
Common stock issued under employee plans ......... 27,725 1,255 (13) 1,242
Stock issued in acquisitions ..................... 82 202,966 9,746 9,828
Common stock repurchased ......................... (95,862) (5,769) (5,769)
Redemption of preferred stock .................... (73) (73)
Conversion of preferred stock .................... (86) 3,857 86
Net change in unrealized gains (losses) on
securities available for sale and marketable
equity securities .............................. 307 307
Other ............................................ 10 (5) 17 12
------ ------- ---------- -------- ------ ---------
Balance on December 31, 1997 ...................... $ 94 712,188 $ 9,168 $11,754 $ 321 $21,337
====== ======= ========= ======== ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
NationsBank Corporation (the Corporation) is a multi-bank holding company
organized under the laws of North Carolina in 1968 and registered under the
Bank Holding Company Act of 1956, as amended. Through its banking subsidiaries
and its various nonbanking subsidiaries, the Corporation provides banking and
banking-related services, primarily throughout the Southeast, Mid-Atlantic,
Midwestern and Southwestern states.
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 2-for-1 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
Securities are classified based on management's intention on the date of
purchase. Securities which management has the intent and ability to hold to
maturity are classified as held for investment and reported at amortized cost.
Other securities, except those used in trading activities, 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. Marketable
equity securities are carried at fair value with net unrealized gains and
losses included in shareholders' equity, net of tax.
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.
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.
Generally, such loans are originated with the intent of sale.
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 both securities and
derivatives and are stated at fair value. Fair value is generally based on
quoted market prices. If quoted market prices are not available, fair values
are
51
<PAGE>
estimated based on dealer quotes, pricing models or quoted prices for
instruments with similar characteristics. Gross unrealized gains and losses on
trading derivative positions with the same counterparty are generally presented
on a net basis for balance sheet reporting purposes where legally enforceable
master netting agreements have been executed. Realized and unrealized gains and
losses are recognized as trading account profits and fees.
Loans
Loans are reported at their outstanding principal balances net of any
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. Discounts and premiums are amortized to
income using methods that approximate the interest method.
Allowance for Credit Losses
The allowance for credit losses is primarily available to absorb losses
inherent in the loans, leases and factored accounts receivable 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 an 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. On a
quarterly basis, a comprehensive review of the adequacy of the allowance for
credit losses is performed. 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.
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 whose contractual terms have been restructured in
a manner which grants a concession to a borrower experiencing financial
difficulties are classified as nonperforming until such time as the loan is not
impaired based on the terms of the restructured agreement and the interest rate
is a market rate as measured at the restructuring date. Impaired loans are
included in nonperforming loans. Generally, loans which are past due 180 days
or more as to principal or interest are classified as nonperforming regardless
of collateral or collection status. Generally, 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.
Ordinarily, interest accrued but not collected is charged off along with the
principal.
Foreclosed Properties
Assets are classified as foreclosed properties 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, the recorded amount of the loan or lease is reduced, if necessary,
to the fair value, less estimated costs to sell, of the real estate to be
acquired by charging the allowance for credit losses.
52
<PAGE>
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 or purchased is allocated
between the cost of the loans and the mortgage servicing rights (MSRs) based on
the relative fair values of the loans and the MSRs. MSRs acquired separately
are capitalized at cost. During 1997, the Corporation capitalized $397 million
of MSRs. The cost of the MSRs is amortized in proportion to and over the
estimated period of net servicing revenues. During 1997, amortization was $188
million.
The fair value on December 31, 1997 of capitalized MSRs approximated the
carrying value of $1.3 billion. Total loans serviced approximated $126.5
billion on December 31, 1997, including loans serviced on behalf of the
Corporation's banking subsidiaries. The predominant characteristics used as the
basis for stratifying MSRs are loan type and interest rate. The MSRs strata are
evaluated for impairment by estimating the fair value based on anticipated
future net cash flows, taking into consideration prepayment predictions. If the
carrying value of the MSRs 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 on December 31, 1997, 1996 and 1995 and changes in the valuation
allowance during 1997, 1996 and 1995 were insignificant.
To manage risk associated with changes in prepayment rates, the
Corporation uses various financial instruments including options and interest
rate swaps. The notional amount on December 31, 1997 was $8.7 billion and the
unrealized gain on such contracts was $57 million.
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 inability to realize the carrying amount.
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.
53
<PAGE>
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
postretirement medical benefit plans which are not funded.
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 linked to specific
assets or liabilities or pools of similar assets or liabilities.
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. In addition, gains or losses on foreign currency
contracts are a component of the revaluation of the underlying
foreign-denominated liabilities. Risk management swaps 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 the shorter of either the remaining
expected lives of such underlying assets or liabilities or the remaining life
of the swap. 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.
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.
To manage interest rate risk, the Corporation also uses 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. Such instruments are primarily
linked to long-term debt, short-term borrowings and pools of similar
residential mortgages and consist mainly of purchased options. The Corporation
also purchases options in the interest rate market to protect the value of
certain assets, principally MSRs, 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 MSRs, which are subjected to
impairment valuations as described in the MSRs accounting policy.
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.
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 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 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.
54
<PAGE>
Recently Issued Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130) and SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 130 establishes standards for the reporting and
displaying of comprehensive income and its components in financial statements.
SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," and specifies new disclosure requirements for operating segment
financial information. In February 1998, SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132) was issued. SFAS
132 revises and standardizes employers' disclosures about pension and other
postretirement benefit plans. These standards are effective for fiscal years
beginning after December 15, 1997. The Corporation will adopt the provisions of
these standards during the first quarter of 1998.
Note Two -- Merger-Related Activity
On January 9, 1998, the Corporation completed its merger with Barnett
Banks, Inc. (Barnett), a multi-bank holding company headquartered in
Jacksonville, Florida (the Merger). Barnett's total assets, total deposits and
total shareholders' equity on the date of the Merger amounted to approximately
$46.0 billion, $35.4 billion and $3.4 billion, respectively. 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 stock were
issued to convert similar stock options granted to certain Barnett employees.
This transaction will be accounted for as a pooling of interests. Under this
method of accounting, the recorded assets, liabilities, shareholders' equity,
income and expenses of the Corporation and Barnett will be combined and
reflected at their historical amounts.
In connection with the Merger, the Corporation expects to incur pretax
merger-related costs during the first quarter of 1998 of approximately $900
million ($642 million after-tax), which will include approximately $375 million
in severance, relocation and change in control payments, $300 million of
conversion costs and occupancy and equipment expenses (primarily lease exit
costs and the elimination of duplicate facilities and other capitalized
assets), $125 million of exit costs related to contract terminations and $100
million of other Merger costs (including legal and investment banking fees).
In compliance with certain requirements of the Federal Reserve Board, the
Department of Justice and certain Florida authorities in connection with the
Merger, the Corporation and Barnett have entered into agreements to divest
certain branches of Barnett with loans and deposits aggregating approximately
$2.5 billion and $4.0 billion, respectively, in various markets in Florida.
The following table presents pro forma condensed combined results of
operations of the Corporation and Barnett for the three years ended December
31, 1997, 1996 and 1995 as if the Merger had been effective at the beginning of
each year presented. The Corporation and Barnett are still in the process of
conforming their respective accounting policies. In management's opinion, any
resulting changes will not be material.
55
<PAGE>
Unaudited Pro Forma Results of Operations
(Dollars in millions, except per-share information)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Reported amounts:
Net interest income ..................................... $ 9,717 $ 8,228 $ 7,189
Net income .............................................. 3,332 2,939 2,483
Net income available to common shareholders ............. 3,321 2,922 2,459
Earnings per common share ............................... 3.53 3.56 3.18
Diluted earnings per common share ....................... 3.44 3.50 3.10
Operating amounts (excluding merger-related charges):
Net income .............................................. $ 3,596 $ 3,016 $ 2,483
Net income available to common shareholders ............. 3,585 2,999 2,459
Earnings per common share ............................... 3.81 3.65 3.18
Diluted earnings per common share ....................... 3.71 3.59 3.10
</TABLE>
On October 1, 1997, the Corporation completed the 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 amount of
approximately $1.1 billion. Montgomery had 1996 revenues of approximately $600
million and assets of approximately $3.0 billion on the date of acquisition.
The Corporation accounted for this acquisition as a purchase.
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 $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.
The following table presents condensed pro forma consolidated results of
operations for the year ended December 31, 1996 as if the acquisition of
Boatmen's had occurred on January 1, 1996. This information combines the
historical results of operations of the Corporation and Boatmen's after the
effect of purchase accounting adjustments. The cash portion of the purchase
price is 35 percent, which reflects the actual cash election of 4 percent paid
at closing plus share repurchases completed prior to the initiation of the
Barnett merger. 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
(Dollars in millions, except per-share information)
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Net interest income ........................... 7,588
Net income .................................... 2,400
Net income available to common shareholders ... 2,378
Earnings per common share ..................... 3.29
Diluted earnings per common share ............. 3.26
</TABLE>
The Corporation consummated the acquisition of First Federal Savings Bank
of Brunswick, Georgia (Brunswick) on April 15, 1997. As of the acquisition
date, Brunswick had assets of approximately $249 million and deposits of
approximately $219 million. The Corporation issued approximately 2.4 million
shares of its common stock in this acquisition. The Corporation accounted for
this acquisition as a purchase.
On June 1, 1997, the branching provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 took effect, allowing banking
companies to consolidate their subsidiary bank operations across state lines.
On December 31, 1997, the Corporation operated its banking activities primarily
under three 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 1998, including Barnett Bank, N.A.
56
<PAGE>
Note Three -- Securities
The amortized costs and market values of securities held for investment
and securities available for sale on December 31 were (dollars in millions):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Securities Held for Investment Cost Gains Losses Value
- - ----------------------------------------------- ------------ ------------- ---------------- ---------
<S> <C> <C> <C> <C>
1997
U.S. Treasury securities and agency debentures $ 500 $ 1 $ (1) $ 500
Foreign sovereign securities .................. 32 -- -- 32
Mortgage-backed securities .................... 532 2 (1) 533
Other taxable securities ...................... 5 -- -- 5
---------- ----------- ------------ -------
Total taxable ................................ 1,069 3 (2) 1,070
Tax-exempt securities ......................... 87 4 -- 91
---------- ----------- ------------ -------
Total ........................................ $ 1,156 $ 7 $ (2) $ 1,161
========== =========== ============ =======
1996
U.S. Treasury securities and agency debentures $ 862 $ -- $ (3) $ 859
Foreign sovereign securities .................. 25 -- -- 25
Mortgage-backed securities .................... 1,101 3 (4) 1,100
Other taxable securities ...................... 5 -- -- 5
---------- ----------- ------------ -------
Total taxable ................................ 1,993 3 (7) 1,989
Tax-exempt securities ......................... 117 4 -- 121
---------- ----------- ------------ -------
Total ........................................ $ 2,110 $ 7 $ (7) $ 2,110
========== =========== ============ =======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Securities Available for Sale Cost Gains Losses Value
- - ----------------------------------------------- --------- ---------- ------------ ------
1997
<S> <C> <C> <C> <C>
U.S. Treasury securities and agency debentures $ 7,937 $ 86 $ (4) $ 8,019
Foreign sovereign securities .................. 6,397 16 (20) 6,393
Mortgage-backed securities .................... 28,668 359 (25) 29,002
Other taxable securities ...................... 1,064 8 -- 1,072
---------- ----------- ------------ -------
Total taxable ................................ 44,066 469 (49) 44,486
Tax-exempt securities ......................... 1,505 56 -- 1,561
---------- ----------- ------------ -------
Total ........................................ $ 45,571 $ 525 $ (49) $46,047
========== =========== ============ =======
1996
U.S. Treasury securities and agency debentures $ 1,437 $ 5 $ (26) $ 1,416
Foreign sovereign securities .................. 952 2 (8) 946
Mortgage-backed securities .................... 8,805 58 (45) 8,818
Other taxable securities ...................... 484 5 (1) 488
---------- ----------- ------------- -------
Total taxable ................................ 11,678 70 (80) 11,668
Tax-exempt securities ......................... 591 20 (2) 609
---------- ----------- ------------- -------
Total ........................................ $ 12,269 $ 90 $ (82) $12,277
========== =========== ============ =======
</TABLE>
The components, expected maturity distribution and yields (computed on a
taxable-equivalent basis) of the Corporation's securities portfolio on December
31, 1997 are summarized below (dollars in millions). 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.
57
<PAGE>
<TABLE>
<CAPTION>
Due after 1
Due in 1 year through 5
or less years
------------------- ---------------------
Amount Yield Amount Yield
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Amortized cost of securities held for
investment
U.S. Treasury securities
and agency debentures ............... $101 4.94% $ 399 5.86%
Foreign sovereign securities .......... 8 5.86 13 7.60
Mortgage-backed securities ............ 313 5.97 216 6.73
Other taxable securities .............. 3 8.01 -- --
---- ----- ------- -----
Total taxable ....................... 425 5.74 628 6.19
Tax-exempt securities ................. 25 9.62 33 9.36
---- ----- ------- -----
Total ............................... $450 5.96 $ 661 6.35
==== ===== ======= =====
Market value of securities
held for investment .................... $448 $ 665
==== =======
Market value of securities available
for sale
U.S. Treasury securities and
agency debentures ................... $157 5.82% $ 4,113 5.95%
Foreign sovereign securities .......... 67 20.13 4,444 4.87
Mortgage-backed securities ............ 45 6.59 12,043 7.29
Other taxable securities .............. 14 6.49 283 17.06
---- ----- ------- -----
Total taxable ....................... 283 9.38 20,883 6.64
Tax-exempt securities ................. 91 5.81 277 6.64
---- ----- ------- -----
Total ............................... $374 8.51 $21,160 6.64
==== ===== ======= =====
Amortized cost of securities
available for sale ..................... $373 $20,958
==== =======
<CAPTION>
Due after 5
through 10 Due after
years 10 years Total
-------------------- ------------------ ---------------------
Amount Yield Amount Yield Amount Yield
---------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Amortized cost of securities held for
investment
U.S. Treasury securities
and agency debentures ............... $ -- --% $ -- --% $ 500 5.68%
Foreign sovereign securities .......... 10 6.59 1 6.62 32 6.84
Mortgage-backed securities ............ 3 5.63 -- -- 532 6.28
Other taxable securities .............. -- -- 2 6.56 5 7.18
------- ---- ------ ---- ------- -----
Total taxable ....................... 13 6.40 3 6.74 1,069 6.02
Tax-exempt securities ................. 10 9.34 19 9.29 87 9.42
------- ---- ------ ---- ------- -----
Total ............................... $ 23 7.70 $ 22 8.89 $ 1,156 6.27
======= ==== ====== ==== ======= =====
Market value of securities
held for investment .................... $ 24 $ 24 $ 1,161
======= ====== =======
Market value of securities available
for sale
U.S. Treasury securities and
agency debentures ................... $ 3,500 6.03% $ 249 6.31% $ 8,019 5.99%
Foreign sovereign securities .......... 808 5.76 1,074 5.63 6,393 5.27
Mortgage-backed securities ............ 14,972 6.82 1,942 6.99 29,002 7.03
Other taxable securities .............. 163 7.01 612 5.78 1,072 8.97
------- ---- ------ ---- ------- -----
Total taxable ....................... 19,443 6.64 3,877 6.38 44,486 6.63
Tax-exempt securities ................. 407 7.47 786 8.25 1,561 7.61
------- ---- ------ ---- ------- -----
Total ............................... $19,850 6.66 $4,663 6.68 $46,047 6.66
======= ==== ====== ==== ======= =====
Amortized cost of securities
available for sale ..................... $19,632 $4,608 $45,571
======= ====== =======
</TABLE>
The components of gains and losses on sales of available for sale
securities for the years ended December 31 were (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Gross gains on sales of securities .......... $160 $ 200 $ 74
Gross losses on sales of securities ......... (7) (133) (45)
------ ------ -----
Net gains on sales of securities ............ $153 $ 67 $ 29
===== ====== =====
</TABLE>
There were no sales of securities held for investment in 1997, 1996 or
1995.
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, 1997
or 1996.
The income tax expense attributable to realized net gains on securities
sales was $54 million, $23 million and $10 million in 1997, 1996 and 1995,
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 $39.6 billion and $12.6 billion on December 31, 1997 and 1996,
respectively.
On December 31, 1997, the valuation allowance for securities available for
sale and marketable equity securities increased shareholders' equity by $393
million, reflecting $476 million of pretax appreciation on securities available
for sale and $115 million of pretax appreciation on marketable equity
securities.
58
<PAGE>
Note Four -- Trading Account Assets and Liabilities
The fair values on December 31 and the average fair values for the years
ended December 31 of the components of trading account assets and liabilities
were (dollars in millions):
<TABLE>
<CAPTION>
Average Balances
---------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Securities owned
U.S. Treasury securities .......................................... $ 8,697 $ 6,914 $10,251 $13,168
Securities of other U.S. Government agencies and corporations ..... 1,375 2,096 1,585 1,843
Certificates of deposit, bankers' acceptances and commercial
paper ........................................................... 517 501 645 553
Corporate debt .................................................... 1,808 1,552 1,686 1,410
Foreign sovereign debt ............................................ 4,939 3,396 6,270 1,044
Mortgage-backed securities ........................................ 2,299 502 1,698 358
Other securities .................................................. 403 430 355 671
------- ------- ------- -------
Total securities owned ................................... ...... 20,038 15,391 22,490 19,047
Derivatives-dealer positions ....................................... 3,640 3,298 4,261 3,791
------- ------- ------- -------
Total trading account assets ............................. ...... $23,678 $18,689 $26,751 $22,838
======= ======= ======= =======
Short sales
U.S. Treasury securities .......................................... $ 8,970 $ 7,143 $ 8,308 $ 9,287
Corporate debt .................................................... 140 452 232 535
Foreign sovereign debt ............................................ 1,825 -- 968 --
Other securities .................................................. 904 309 766 315
------- ------- ------- -------
Total short sales ........................................ ...... 11,839 7,904 10,274 10,137
Derivatives-dealer positions ....................................... 3,368 3,848 3,848 3,170
------- ------- ------- -------
Total trading account liabilities ........................ ...... $15,207 $11,752 $14,122 $13,307
======= ======= ======= =======
</TABLE>
The net change in the unrealized gain or loss on trading securities held
on December 31, 1997 and 1996 was included in trading account profits and fees
and amounted to a loss of $31 million for 1997 and a gain of $68 million for
1996.
Interest rate and foreign exchange contract trading activities generated
most of the Corporation's trading account profits and fees.
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 derivatives trading
activities. See Note Eight for additional information on derivatives-dealer
positions, including credit risk.
59
<PAGE>
Note Five -- Loans, Leases and Factored Accounts Receivable
Loans, leases and factored accounts receivable on December 31 were
(dollars in millions):
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Loans
Commercial ................................................................. $ 60,416 $ 50,488
Real estate commercial ..................................................... 7,221 5,445
Real estate construction ................................................... 3,805 2,863
-------- --------
Total commercial .......................................................... 71,442 58,796
-------- --------
Residential mortgage ....................................................... 27,831 27,948
Credit card ................................................................ 6,866 6,747
Other consumer ............................................................. 27,398 20,993
-------- --------
Total consumer ............................................................ 62,095 55,688
-------- --------
Foreign .................................................................... 3,844 2,829
Factored accounts receivable ............................................... 1,074 1,047
-------- --------
Total loans and factored accounts receivable .............................. 138,455 118,360
Less unearned income ...................................................... (580) (602)
-------- --------
Loans and factored accounts receivable, net of unearned income ............ 137,875 117,758
-------- --------
Leases
Lease receivables .......................................................... 6,175 5,134
Estimated residual value ................................................... 1,787 1,537
Less unearned income ....................................................... (2,045) (1,799)
-------- --------
Leases, net of unearned income ............................................ 5,917 4,872
-------- --------
Loans, leases and factored accounts receivable, net of unearned income .... $143,792 $122,630
======== ========
</TABLE>
Transactions in the allowance for credit losses were (dollars in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Balance on January 1 .......................................... $ 2,315 $2,163 $2,186
-------- ------ ------
Loans, leases and factored accounts receivable charged off .... (1,106) (836) (636)
Recoveries of loans, leases and factored accounts receivable
previously charged off ....................................... 308 238 215
-------- ------ ------
Net charge offs ........................................... . (798) (598) (421)
Provision for credit losses ................................... 800 605 382
Allowance applicable to loans of purchased companies and other 465 145 16
-------- ------ ------
Balance on December 31 ........................................ $ 2,782 $2,315 $2,163
======== ====== ======
</TABLE>
The following table presents the recorded investment in loans that were
considered to be impaired, all of which were classified as nonperforming, on
December 31 (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Commercial ....................... $293 $342
Real estate commercial ........... 157 145
Real estate construction ......... 18 28
---- ----
Total impaired loans .......... $468 $515
==== ====
</TABLE>
The average recorded investment in certain impaired loans for the years
ended December 31, 1997, 1996 and 1995 was approximately $594 million, $542
million and $598 million, respectively. For the years ended December 31, 1997,
1996 and 1995, interest income recognized on impaired loans totaled $20 million
for 1997 and $26 million for both 1996 and 1995, all of which was recognized on
a cash basis.
On December 31, 1997, 1996 and 1995, nonperforming loans, including
certain loans which are considered impaired, totaled $1.0 billion, $890 million
and $706 million, respectively.
60
<PAGE>
The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 1997, 1996 and 1995
was $49 million, $35 million and $27 million, respectively. If these loans had
been accruing interest at their originally contracted rates, related income
would have been $128 million, $103 million and $102 million in 1997, 1996 and
1995, respectively.
Foreclosed properties amounted to $117 million, $153 million and $147
million on December 31, 1997, 1996 and 1995, respectively. The cost of carrying
foreclosed properties amounted to $9 million, $8 million and $13 million in
1997, 1996 and 1995, respectively.
Note Six -- Short-Term Borrowings and Long-Term Debt
NationsBank, N.A. and NationsBank of Texas, N.A. maintain a program to
offer up to $9.0 billion of bank notes from time to time with fixed or floating
rates and maturities from 30 days to 15 years from date of issue. On December
31, 1997 and 1996, there were short-term bank notes outstanding of $304 million
and $872 million, respectively. In addition, there were bank notes outstanding
on December 31, 1997 and 1996 totaling $5.1 billion and $3.5 billion,
respectively, which were classified as long-term debt.
On December 31, 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 to unaffiliated banks.
61
<PAGE>
The contractual maturities of long-term debt on December 31 were (dollars in
millions):
<TABLE>
<CAPTION>
1997
-------------------------------------------
Various Various
Fixed-Rate Floating-Rate 1996
Debt Debt Amount Amount
Obligations Obligations Outstanding Outstanding
------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Parent company
Senior debt
Due in 1997 ....................................... $ -- $ -- $ -- $ 742
Due in 1998 ....................................... 924 1,065 1,989 1,414
Due in 1999 ....................................... 126 1,648 1,774 1,325
Due in 2000 ....................................... 472 1,118 1,590 1,566
Due in 2001 ....................................... 499 1,103 1,602 1,602
Due in 2002 ....................................... 20 1,455 1,475 1,268
Thereafter ........................................ 622 1,842 2,464 1,512
------ ------- ------- -------
2,663 8,231 10,894 9,429
------ ------- ------- -------
Subordinated debt
Due in 1997 ....................................... -- -- -- 75
Due in 1999 ....................................... 130 -- 130 130
Due in 2001 ....................................... 449 -- 449 299
Due in 2002 ....................................... 350 -- 350 349
Thereafter ........................................ 4,259 1,275 5,534 4,968
------ ------- ------- -------
5,188 1,275 6,463 5,821
------ ------- ------- -------
Total parent company long-term debt ............... 7,851 9,506 17,357 15,250
------ ------- ------- -------
Banking and nonbanking subsidiaries
Senior debt
Due in 1997 ....................................... -- -- -- 1,302
Due in 1998 ....................................... 660 2,977 3,637 2,886
Due in 1999 ....................................... 99 1,410 1,509 224
Due in 2000 ....................................... 354 2,932 3,286 1,928
Due in 2001 ....................................... 178 277 455 347
Due in 2002 ....................................... 17 284 301 35
Thereafter ........................................ 125 172 297 404
------ ------- ------- -------
1,433 8,052 9,485 7,126
------ ------- ------- -------
Subordinated debt
Due in 1997 ....................................... -- -- -- 5
Due in 2004 and thereafter ........................ 300 8 308 308
------ ------- ------- -------
300 8 308 313
------ ------- ------- -------
Total banking and nonbanking subsidiaries long-term
debt ............................................. 1,733 8,060 9,793 7,439
------ ------- ------- -------
$9,584 $17,566 27,150 22,689
====== ======= ------- -------
Obligations under capital leases .................. 54 296
------- -------
Total long-term debt .............................. $27,204 $22,985
======= =======
</TABLE>
As part of its interest rate risk management activities, the Corporation
enters into risk management interest rate contracts for certain long-term debt
issuances. Through the use of interest rate swaps, $2.2 billion of fixed-rate
debt with rates ranging from 5.60 percent to 8.57 percent have been effectively
converted to floating rates primarily at spreads over LIBOR.
On December 31, 1997, 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, 1997) were 6.45 percent, 7.30
percent and 5.98 percent, respectively.
62
<PAGE>
As described below, certain debt obligations outstanding on December 31,
1997 may be redeemed prior to maturity at the option of the Corporation
(dollars in millions):
<TABLE>
<CAPTION>
Amount
Year Redeemable Year of Maturities Outstanding
- - --------------------------------- -------------------- ------------
<S> <C> <C>
Currently redeemable 2002 $ 28
1998 2000 500
1999 - 2000 2005 - 2011 716
2001 - 2005 2006 - 2024 455
</TABLE>
Main Place Real Estate Investment Trust (MPREIT), a limited purpose
subsidiary of NationsBank, N.A., had $4.0 billion of mortgage-backed bonds
outstanding on December 31, 1997. Of this amount, $1.0 billion was issued
during March 1997. MPREIT had outstanding mortgage loans of $16.6 billion on
December 31, 1997, of which $6.0 billion served as collateral for the
outstanding mortgage-backed bonds.
Under its Euro medium-term note program, the Corporation may offer up to
$4.5 billion of senior or 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 foreign-denominated debt into U.S. dollars. On
December 31, 1997, $2.3 billion of notes was outstanding under this program.
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.
Certain of the preferred securities were issued at a discount. Such preferred
securities may be redeemed prior to maturity at the option of the Corporation.
The sole assets of each of the Capital Trusts are the Junior Subordinated Notes
of the Corporation (the Notes) held by such Capital Trusts. Such securities
qualify as Tier 1 Capital for regulatory purposes.
Payment of periodic cash distributions and payment upon liquidation or
redemption with respect to preferred securities is guaranteed by the
Corporation to the extent of funds held by the 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 preferred securities.
The terms of the preferred securities are summarized as follows (dollars
in millions):
<TABLE>
<CAPTION>
Capital Trust I Capital Trust II Capital Trust III Capital Trust IV
(Issued (Issued (Issued (Issued
December 1996) December 1996) February 1997) April 1997)
----------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Face amount issued .............................. $600 $365 $500 $500
Aggregate principal amount of the Notes ......... 619 376 516 516
Interest rate ................................... 7.84% 7.83% 3-mo. LIBOR 8.25%
+55 bps
Redeemable ...................................... December 2001 December 2006 January 2007 April 2007
Maturity ........................................ December 2026 December 2026 January 2027 April 2027
</TABLE>
As of March 6, 1998, the Corporation had the authority to issue
approximately $2.9 billion of corporate debt securities and preferred and
common stock under its existing shelf registration statements and $2.1 billion
of corporate debt securities under the Euro medium-term note program.
63
<PAGE>
Note Seven -- Shareholders' Equity and Earnings Per Common Share
As of December 31, 1997, the Corporation had issued 2.2 million shares of
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 amount of $86 million, $7 million and $6 million in 1997, 1996,
and 1995, respectively, was converted into the Corporation's common stock.
As consideration in the merger of NationsBank, N.A. (South) and
NationsBank, N.A. during the second quarter of 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, F.S.B. Such
preferred stock consisted of approximately .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 1997 and 1996, the Corporation repurchased approximately 96 million
shares of common stock and approximately 34 million shares of common stock,
respectively, under various stock repurchase programs authorized by the Board
of Directors.
Other shareholders' equity on December 31 was comprised of the following
(dollars in millions):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Restricted stock award plan deferred compensation .... $ (23) $ (10)
Net unrealized gains (losses)
on available for sale securities
and marketable equity securities, net of tax.......... 393 86
Loan to ESOP trust ................................... (31) (48)
Foreign exchange translation adjustments and other ... (18) (18)
----- -----
$ 321 $ 10
===== =====
</TABLE>
64
<PAGE>
In accordance with SFAS No. 128, "Earnings per Share," the calculation of
earnings per common share and diluted earnings per common share is presented
below (dollars in millions, except per share information, shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Earnings per common share computation
Net income .......................................................... $ 3,077 $ 2,375 $ 1,950
Total preferred stock dividends ..................................... (11) (15) (8)
--------- --------- ----------
Income available to common shareholders ............................. $ 3,066 $ 2,360 $ 1,942
--------- --------- ----------
Average common shares issued ........................................ 717,450 590,216 544,959
--------- --------- ----------
Earnings per common share ........................................... $ 4.27 $ 4.00 $ 3.56
========= ========= ==========
Diluted earnings per common share computation
Income available to common shareholders ............................. $ 3,066 $ 2,360 $ 1,942
Total preferred stock dividends ..................................... 11 15 8
Preferred stock dividends on nonconvertible stock ................... (4) (8) --
---------- ---------- ----------
Effect of assumed conversions ....................................... 7 7 8
--------- --------- ----------
Income available to common shareholders and assumed conversions ..... $ 3,073 $ 2,367 $ 1,950
--------- --------- ----------
Average common shares issued ........................................ 717,450 590,216 544,959
Incremental shares from assumed conversions:
Convertible preferred stock ........................................ 3,683 3,896 4,582
Stock options ...................................................... 16,658 9,235 4,726
--------- --------- ----------
Dilutive potential common shares .................................... 20,341 13,131 9,308
--------- --------- ----------
Total dilutive average common shares issued ......................... 737,791 603,347 554,267
--------- --------- ----------
Diluted earnings per common share ................................... $ 4.17 $ 3.92 $ 3.52
========= ========= ==========
</TABLE>
Note Eight -- Commitments and 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 commitments outstanding on December 31
(dollars in millions):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Commitments to extend credit
Credit card commitments ................................. $ 27,480 $24,255
Other loan commitments .................................. 100,405 82,506
Standby letters of credit and financial guarantees ........ 11,663 10,060
Commercial letters of credit .............................. 903 761
</TABLE>
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. There were no
unfunded commitments to any industry or country greater than 10 percent of total
65
<PAGE>
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, 1997 other loan
commitments, $37.4 billion is scheduled to expire in less than one year, $44.6
billion in one to five years and $18.4 billion after five years.
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, 1997 SBLCs and financial
guarantees, $7.8 billion is scheduled to expire in less than one year, $3.6
billion in one to five years and $269 million 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 uses interest rate contracts in the asset and liability
management (ALM) process. Such contracts, which are generally non-leveraged
generic interest rate and basis swaps and options, 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
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. Option products
primarily consist of caps and floors.
The following table outlines the Corporation's ALM contracts on December
31, 1997 (dollars in millions):
<TABLE>
<CAPTION>
Weighted
Weighted Average
Notional Average Receive Unrealized
Amount Pay Rate Rate Gain/(Loss)
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Generic receive fixed ......... $28,237 6.00% 6.49% $303
Generic pay fixed ............. 1,487 6.92 5.97 (22)
Basis swaps ................... 2,308 5.92 5.86 (1)
Option products ............... 5,902 (7)
------- -------
Total ...................... $37,934 $273
======= ======
</TABLE>
In addition to the contracts in the table above, the Corporation uses
foreign currency contracts to manage the foreign exchange risk associated with
certain foreign-denominated liabilities. Foreign currency swaps involve the
conversion of certain scheduled interest and principal payments denominated in
foreign currencies. On December 31, 1997, these contracts had a notional value
of $2.7 billion and a net market value of negative $67 million.
66
<PAGE>
The net unrealized appreciation in the estimated value of the ALM interest
rate and net negative market value in the ALM 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.
Credit Risk Associated with Derivatives Activities
Credit risk associated with ALM and trading derivatives is measured as the
net replacement cost should the 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. 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 with creditworthy counterparties, primarily U.S. and
foreign commercial banks, broker-dealers and corporates. On December 31, 1997,
credit risk associated with ALM activities was not significant.
During 1997, there were no material credit losses associated with ALM or
trading derivatives transactions. In addition, on December 31, 1997, there were
no material nonperforming derivatives positions. 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 upon the
occurrence of certain events.
A portion of the 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 is minimal.
The table below presents the notional or contract amounts on December 31,
1997 and 1996 and the current credit risk amounts (the net replacement cost of
contracts in a gain position on December 31, 1997 and 1996) of the
Corporation's derivatives-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.
Derivatives-Dealer Positions
(Dollars in Millions)
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
Contract/ Credit Risk Contract/ Credit Risk
Notional Amount (1) Notional Amount (1)
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Interest Rate Contracts
Swaps ............................... $408,254 $1,580 $252,187 $ 927
Futures and forwards ................ 213,520 1 186,333 5
Written options ..................... 449,810 -- 298,594 --
Purchased options ................... 413,196 683 294,591 561
Foreign Exchange Contracts
Swaps ............................... 1,980 127 1,303 24
Spot, futures and forwards .......... 53,438 685 94,028 1,137
Written options ..................... 49,146 -- 63,081 --
Purchased options ................... 46,063 450 61,716 352
Commodity and Other Contracts
Swaps ............................... 852 49 812 81
Futures and forwards ................ 2,739 -- 2,728 --
Written options ..................... 13,023 -- 14,064 --
Purchased options ................... 13,011 346 13,828 357
------ ------
Total before cross product netting . 3,921 3,444
------ ------
Cross product netting .............. 368 286
------ ------
Net replacement cost ............... $3,553 $3,158
====== ======
</TABLE>
(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.
67
<PAGE>
The table above includes both long and short derivatives-dealer positions.
The fair value of dealer positions on December 31, 1997 and 1996, as well as
their average fair values for 1997 and 1996 are disclosed in Note Four.
Securities Lending
During 1997, the Corporation sold substantially all of its securities
lending business. This transaction did not have a material impact on the
Corporation's results of operations or financial position.
When Issued Securities
When issued securities are commitments to purchase or sell securities in
the time period between the announcement of a securities offering and the
issuance of those securities. On December 31, 1997, the Corporation had
commitments to purchase and sell when issued securities of $6.5 billion and
$5.7 billion, respectively. On December 31, 1996, commitments to purchase and
sell when issued securities were $7.4 billion each.
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 several actions brought on behalf of
various classes of claimants. In certain of these actions and proceedings,
substantial money damages are asserted against the Corporation and its
subsidiaries and certain of these actions and proceedings are based on alleged
violations of consumer protection, securities, environmental, banking and other
laws. Management believes, based upon the advice of counsel, that the actions
and proceedings and losses, if any, resulting from the final outcome thereof,
will not be material in the aggregate to the Corporation's financial position
or results of operations.
Note Nine -- Regulatory Requirements And Restrictions
The Corporation's banking subsidiaries are required to maintain average
reserve balances with the Federal Reserve Bank (FRB) based on a percentage of
certain deposits. Average reserve balances held with the FRB to meet these
requirements amounted to $184 million and $554 million for 1997 and 1996,
respectively.
The primary source of funds for cash distributions by the Corporation to
its shareholders is dividends received from its banking subsidiaries. The
subsidiary banks, including those acquired through the Barnett merger, can
initiate aggregate dividend payments in 1998, without prior regulatory
approval, of $1.7 billion plus an additional amount equal to their net profits
for 1998, 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.
Regulations also restrict banking subsidiaries in lending funds to
affiliates. On December 31, 1997, the total amount which could be loaned to the
Corporation by its banking subsidiaries, including those acquired through the
Barnett merger, was approximately $1.8 billion. On December 31, 1997, no loans
to the Corporation from its banking subsidiaries were outstanding.
The Federal Reserve Board, the OCC and the Federal Deposit Insurance
Corporation (collectively, the Agencies) have issued regulatory capital
guidelines for U.S. banking organizations. As of December 31, 1997, the
Corporation and each of its banking subsidiaries were well capitalized under
this regulatory framework. There are no conditions or events since December 31,
1997 that management believes have changed either the Corporation's or its
banking subsidiaries' capital classifications. 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.
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 two 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. In
accordance with the FRB's amendment to its capital
68
<PAGE>
adequacy guidelines effective for periods beginning December 31, 1997, the
Corporation is now required to include its broker-dealer subsidiary, NationsBanc
Montgomery Securities LLC, 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.
A well-capitalized institution must maintain a Tier 1 Capital ratio of six
percent and a Total Capital ratio of ten percent. In order to meet minimum
regulatory capital requirements, an institution must maintain a Tier 1 Capital
ratio of four percent and a Total Capital ratio of eight percent.
The leverage ratio guidelines establish a minimum ratio of Tier 1 Capital
to quarterly average assets, excluding goodwill and certain other items, of
three to four 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 are not
expected to have 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 and its significant
banking subsidiaries on December 31 (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- --------------------------------------
Amount Required Amount Required
Actual for Minimum Actual for Minimum
--------------------- Capital --------------------- Capital
Ratio Amount Adequacy Ratio Amount Adequacy
---------- ---------- ----------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital
NationsBank Corporation ........ 6.50% $13,593 $ 8,371 7.76% $12,384 $ 6,384
NationsBank, N.A. .............. 7.58 10,537 5,557 7.54 5,137 2,725
NationsBank of Texas, N.A. ..... 7.36 3,221 1,751 6.78 2,468 1,456
Total Capital
NationsBank Corporation ........ 10.89 22,787 16,742 12.66 20,208 12,770
NationsBank, N.A. .............. 10.98 15,256 11,113 10.41 7,093 5,451
NationsBank of Texas, N.A. ..... 10.13 4,434 3,502 10.19 3,706 2,910
Leverage Capital
NationsBank Corporation ........ 5.57 13,593 7,321 7.09 12,384 6,987
NationsBank, N.A. .............. 5.68 10,537 5,568 6.21 5,137 3,309
NationsBank of Texas, N.A. ..... 5.63 3,221 1,715 6.23 2,468 1,585
</TABLE>
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 capital ratios and amounts for NationsBank, N.A. as
of December 31, 1996 have not been restated to reflect the impact of such
mergers. In addition, the capital ratios and amounts for NationsBank
Corporation have not been restated at December 31, 1996 for amendments to the
regulatory capital guidelines during 1997.
Note Ten -- Employee Benefit 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 at retirement and years of service. It
is the policy of the Corporation to fund not less than the minimum funding
amount required by the Employee Retirement Income Security Act.
69
<PAGE>
The following table sets forth the plans' estimated status on December 31
(dollars in millions):
<TABLE>
<CAPTION>
1997 1996
-------------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation
Accumulated benefit obligation, including vested benefits of $1,241 and $813........... $(1,277) $ (840)
======= ======
Projected benefit obligation for service rendered to date ............................. $(1,301) $ (997)
Plan assets at fair value, primarily listed stocks, fixed income securities
and real estate......................................................................... 1,646 1,202
------- -------
Plan assets in excess of projected benefit obligation .................................. 345 205
Unrecognized net loss .................................................................. 264 187
Unrecognized net transition asset being amortized ...................................... (9) (12)
Unrecognized prior service benefit being amortized ..................................... (138) (33)
Deferred investment gain ............................................................... (39) (39)
--------- ------
Prepaid pension cost .................................................................. $ 423 $ 308
========= ======
</TABLE>
Net periodic pension expense (benefit) for the years ended December 31
included the following components (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the period ........ $ 45 $ 43 $ 35
Interest cost on projected benefit obligation ......... 95 77 74
Actual return on plan assets .......................... (185) (148) (199)
Net amortization and deferral ......................... 29 39 95
------ ------ ------
Net periodic pension expense (benefit) ............... $ (16) $ 11 $ 5
====== ====== ======
</TABLE>
For December 31, 1997, the weighted average discount rate and rate of
increase in future compensation used in determining the actuarial present value
of the projected benefit obligation were 7.5 percent and 4.0 percent,
respectively. The related expected long-term rate of return on plan assets was
10.0 percent. For December 31, 1996, the weighted average discount rate, rate
of increase in future compensation and expected long-term rate of return on
plan assets were 8.0 percent, 4.0 percent and 10.0 percent, respectively.
Health and Life Benefit Plans
In addition to providing retirement benefits, the Corporation provides
health care and life insurance benefits for active and retired employees.
Substantially all of the Corporation's employees, including certain employees
in foreign countries, may become eligible for postretirement benefits if they
reach early retirement age while employed by the Corporation and they have the
required number of years of service. Under the Corporation's current plan,
eligible retirees are entitled to a fixed dollar amount for each year of
service. Additionally, certain current retirees are eligible for different
benefits attributable to prior plans.
All of the Corporation's accrued postretirement benefit liability was
unfunded at December 31, 1997. The "projected unit credit" actuarial method was
used to determine the normal cost and actuarial liability.
A reconciliation of the estimated status of the postretirement benefit
obligation on December 31 is as follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees ......................................... $ (196) $(148)
Fully eligible active participants ............... (11) (3)
Other active plan participants ................... (59) (42)
------ -------
(266) (193)
Unamortized transition obligation ................. 109 116
Unamortized service cost .......................... 1 1
Unrecognized net loss (gain) ...................... 10 (1)
------ --------
Accrued postretirement benefit liability ......... $ (146) $ (77)
====== =======
</TABLE>
70
<PAGE>
Net periodic postretirement expense (benefit) for the years ended December
31 included the following (dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost ....................................................... $ 3 $ 3 $ 2
Interest cost on accumulated postretirement benefit obligation ..... 20 15 15
Amortization of transition obligation over 20 years ................ 7 7 7
Amortization of gains .............................................. (3) (1) (5)
------ ------ ------
Net periodic postretirement expense .............................. $27 $24 $19
===== ===== =====
</TABLE>
The health care cost trend rates used in determining the accumulated
postretirement benefit obligation were 6.50 percent for pre-65 benefits and
4.75 percent for post-65 benefits. A one-percent change in the average health
care cost trend rates would increase the accumulated postretirement benefit
obligation by 6 percent and the aggregate of the service cost and interest cost
components of net periodic postretirement benefit cost by 5 percent. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent and 8.0 percent at December
31, 1997 and 1996, respectively.
Savings and Profit Sharing Plans
In addition to the retirement plans, the Corporation maintains several
defined contribution savings and profit sharing plans, one of which features a
leveraged employee stock ownership (ESOP) provision.
For 1997, 1996 and 1995, the Corporation contributed approximately $45
million, $39 million and $43 million, respectively, in cash which was utilized
primarily to purchase the Corporation's common stock under the terms of these
plans. On December 31, 1997, an aggregate of 21,405,686 shares of the
Corporation's common stock and 2,192,387 shares of ESOP preferred stock were
held by the Corporation's various savings and profit sharing plans.
Under the terms of the ESOP provision, payments to the plan for dividends
on the ESOP Preferred Stock were $7 million for both 1997 and 1996 and $8
million for 1995. Interest incurred to service the ESOP debt amounted to $2
million, $3 million and $4 million for 1997, 1996 and 1995, respectively.
Stock Option and Award Plans
At December 31, 1997, 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 1997 and 1996 as indicated below (dollars
in millions except per share data):
<TABLE>
<CAPTION>
As Reported Pro Forma
----------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income ....................................... $ 3,077 $ 2,375 $ 2,901 $ 2,282
Net income available to common shareholders ...... 3,066 2,360 2,890 2,267
Earnings per common share ........................ 4.27 4.00 4.03 3.84
Diluted earnings per common share ................ 4.17 3.92 3.93 3.77
</TABLE>
71
<PAGE>
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 1997 and 1996 were
based on the following assumptions:
<TABLE>
<CAPTION>
Risk-Free Dividend
Interest Rates Yield Expected Lives Volatility
--------------------- --------------------- ------------------- ---------------------
1997 1996 1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 Associates Stock Option Award Plan ... 6.31% 6.44% 3.50% 3.55% 3 years 4 years 21.4% 20.8%
Key Employee Stock Plan ................... 6.29 5.52 3.50 3.55 7 years 7 years 27.8 24.6
</TABLE>
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 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. Under the ASOP, options generally become vested once the
Corporation's common stock attains certain predetermined closing market prices
for at least ten consecutive trading days. Approximately 42 million of the
options granted under the ASOP have vested, 32 million of which have an
exercise price of $42 1/8 per share and 10 million of which have an exercise
price of $49 7/16 per share. Approximately 5 million of the remaining options
granted under the ASOP have an exercise price of $56 1/8 per share and, in
general, become 50% vested after the Corporation's common stock closes at or
above $68 per share for ten consecutive trading days and become fully (100%)
vested after the Corporation's common stock closes at or above $80 per share
for ten consecutive trading days, provided that such options may not vest prior
to April 1, 1998. Notwithstanding the price, any outstanding unvested options
generally vest and become exercisable on July 1, 2000. All options granted
under the ASOP expire on June 29, 2001.
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 19 million shares of common stock have been granted 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, 645 thousand shares of restricted stock were
granted during 1997. These shares generally vest in three substantially equal
installments beginning January 1998.
On January 2, 1998, ten-year options to purchase approximately 3.8 million
shares of common stock at $60 3/4 per share were granted to certain employees.
On February 2, 1998, ten-year options to purchase approximately 900 thousand
shares of common stock at $61 7/16 per share were granted to certain employees.
For both grants, options vest and become exercisable in three equal annual
installments beginning one year from the date of grant. Additionally, on
January 9, 1998, approximately 1.3 million shares of restricted stock and
ten-year options to purchase 495 thousand shares of common stock were granted
to certain former Barnett executives in connection with their employment with
the Corporation. These shares of restricted stock generally vest in two or
three equal annual installments. These options were granted at $59 and become
fully vested and exercisable two years from date of grant.
Other Plans:
Additional options and restricted stock under former plans and 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.
72
<PAGE>
The following tables present the status of the Plans as of December 31,
1997, 1996 and 1995, and changes during the years then ended:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- --------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Employee Stock Options Shares Price Shares Price Shares Price
- - ------------------------------- ---------------- ----------- --------------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year ........................ 44,540,150 $ 37.22 12,788,762 $ 23.52 12,741,502 $ 20.34
Shares due to acquisitions ... 5,869,602 22.72 1,098,580 17.26 264,446 19.55
Granted ...................... 20,953,823 53.31 38,259,496 41.08 7,920,000 26.82
Exercised .................... (27,378,510) 39.53 (3,783,170) 20.69 (7,691,186) 21.39
Forfeited .................... (2,421,652) 49.34 (3,823,518) 40.57 (446,000) 25.43
----------- -------- ---------- -------- ---------- --------
Outstanding at end of year ... 41,563,413 41.05 44,540,150 37.22 12,788,762 23.52
=========== ======== ========== ======== ========== ========
Options exercisable at year
end ......................... 28,810,939 37.37 7,591,598 24.38 6,805,944 20.66
Weighted-average fair value
of options granted during
the year .................... $ 10.93 $ 7.82 $ 6.91
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- --------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Restricted Stock Awards Grant Grant Grant
(includes KEYSOP) Shares Price Shares Price Shares Price
- - -------------------------------------- ------------- ----------- --------------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding unvested grants at
beginning of year .................. 1,341,550 $ 23.55 2,520,892 $ 23.23 3,633,704 $ 22.93
Granted .............................. 645,000 51.20 -- -- 125,000 24.50
Vested ............................... (876,830) 22.45 (1,106,062) 22.76 (1,136,732) 22.39
Canceled ............................. (13,020) 24.58 (73,280) 24.36 (101,080) 22.75
--------- -------- ---------- -------- ---------- --------
Outstanding unvested grants at end
of year ............................ 1,096,700 40.68 1,341,550 23.55 2,520,892 23.23
========= ======== ========== ======== ========== ========
</TABLE>
The following table summarizes information about stock options outstanding
on December 31, 1997:
<TABLE>
<CAPTION>
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
- - ------------------- ---------------- ------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 4.00-$30.00 9,385,277 6.4 years $ 23.43 7,773,277 $ 22.73
$ 30.01-$46.50 18,805,751 4.8 years 40.00 16,359,651 40.78
$ 46.51-$65.50 13,372,385 6.6 years 54.91 4,678,011 49.74
---------- ----------
$ 4.00-$65.50 41,563,413 5.7 years 41.05 28,810,939 37.37
========== ==========
</TABLE>
73
<PAGE>
Note Eleven -- Income Taxes
The components of income tax expense for the years ended December 31 were
(dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------------ ---------
<S> <C> <C> <C>
Current portion -- expense
Federal ............................ $1,228 $ 862 $ 814
State .............................. 60 37 55
Foreign ............................ 17 14 13
------ ----- ------
1,305 913 882
------ ----- ------
Deferred portion -- expense (benefit)
Federal ............................ 399 340 147
State .............................. 13 13 12
Foreign ............................ 2 (7) --
------ -------- ------
414 346 159
------ ------- ------
Total income tax expense .......... $1,719 $1,259 $1,041
====== ======= ======
</TABLE>
The preceding table does not reflect the tax effects of unrealized gains
and losses on securities available for sale and marketable equity 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 (decreased) by $60 million, $193 million and
($250) million in 1997, 1996 and 1995, 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 to the actual
consolidated income tax expense for the years ended December 31 was as follows
(dollars in millions):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected federal tax expense ....................... $1,679 $1,272 $1,047
Increase (decrease) in taxes resulting from
Tax-exempt income ................................. (55) (37) (32)
State tax expense, net of federal benefit ......... 52 37 55
Goodwill amortization ............................. 121 21 12
Other ............................................. (78) (34) (41)
------ ------ ------
Total income tax expense ............. .......... $1,719 $1,259 $1,041
====== ====== ======
</TABLE>
74
<PAGE>
Significant components of the Corporation's deferred tax (liabilities)
assets on December 31 were as follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Deferred tax liabilities
Securities available for sale ......................... $ (198) $ (45)
Equipment lease financing ............................. (1,290) (982)
Depreciation .......................................... (181) (150)
Intangibles ........................................... (122) (88)
Employee retirement benefits .......................... (65) (88)
Other, net ............................................ (296) (216)
-------- --------
Gross deferred tax liabilities ....................... (2,152) (1,569)
-------- --------
Deferred tax assets
Employee benefits ..................................... 122 90
Net operating loss carryforwards ...................... 58 47
Allowance for credit losses ........................... 953 791
Foreclosed properties ................................. 24 13
Loan fees and expenses ................................ 44 34
General business credit carryforwards ................. 6 10
Other, net ............................................ 267 156
-------- --------
Gross deferred tax assets ............................ 1,474 1,141
Valuation allowance .................................. (44) (50)
-------- --------
Gross deferred tax assets, net of valuation allowance 1,430 1,091
-------- --------
Net deferred tax liabilities ............................ $ (722) $ (478)
======== ========
</TABLE>
The Corporation's deferred tax assets on December 31, 1997 include a
valuation allowance of $44 million representing primarily 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 a
decrease of $6 million due to the realization of certain state deferred tax
assets.
Note Twelve -- Fair Values of Financial Instruments
SFAS 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. Because 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 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.
The provisions of SFAS 107 do not require the disclosure of nonfinancial
instruments, including intangible assets. The value of the Corporation's
intangibles such as goodwill, franchise, credit card and trust relationships
and MSRs, is significant.
75
<PAGE>
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, loans held
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.
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.
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 (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Loans, net of unearned income ................................ $136,801 $139,200 $116,711 $117,525
Allowance for credit losses .................................. (2,782) -- (2,315) --
Financial liabilities
Deposits ..................................................... 138,194 138,563 106,498 106,512
Trust preferred securities ................................... 1,955 2,031 965 965
Long-term debt (excluding obligations under capital leases) .. 27,150 27,711 22,689 22,739
</TABLE>
For all other financial instruments, book value approximates fair value.
Off-Balance Sheet Financial Instruments
The fair value of the Corporation's ALM and other derivatives contracts is
presented in the Derivatives section in Note Eight and the MSRs section of Note
One to the consolidated financial statements.
The fair value of liabilities on binding commitments to lend is based on
the present value of cash flow streams using fee rates currently charged for
similar agreements versus original contractual fee rates, taking into account
the creditworthiness of the borrowers. The fair values were liabilities of
approximately $113 million and $190 million on December 31, 1997 and 1996,
respectively.
76
<PAGE>
Note Thirteen -- NationsBank Corporation (Parent Company)
The following tables present consolidated parent company financial
information (dollars in millions):
Condensed Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income
Dividends from consolidated
Subsidiary banks and bank holding companies ......... $3,332 $2,309 $ 999
Other subsidiaries .................................. 34 210 7
Interest from consolidated subsidiaries ............... 907 799 635
Other income .......................................... 563 593 547
------ ------ ------
4,836 3,911 2,188
------ ------ ------
Expenses
Interest on borrowed funds ............................ 1,363 1,051 835
Noninterest expense ................................... 483 519 462
------ ------ ------
1,846 1,570 1,297
------ ------ ------
Earnings
Income before equity in undistributed earnings of
consolidated subsidiaries and taxes ................. 2,990 2,341 891
------ ------ ------
Equity in undistributed earnings of consolidated
Subsidiary banks and bank holding companies ......... (365) (63) 830
Other subsidiaries .................................. 262 34 208
------ ------ ------
(103) (29) 1,038
------ ------ ------
Income before income taxes ............................. 2,887 2,312 1,929
Income tax benefit ..................................... (190) (63) (21)
------ ------ ------
Net income ............................................. $3,077 $2,375 $1,950
====== ====== ======
Net income available to common shareholders ............ $3,066 $2,360 $1,942
====== ====== ======
</TABLE>
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Assets
Cash held at subsidiary banks ......................... $ 8 $ 8
Temporary investments ................................. 572 4,250
Receivables from consolidated
Subsidiary banks and bank holding companies ......... 4,937 2,936
Other subsidiaries .................................. 11,169 8,851
Investment in consolidated
Subsidiary banks and bank holding companies ......... 24,126 13,985
Other subsidiaries .................................. 2,431 1,705
Other assets .......................................... 1,769 1,176
------- -------
$45,012 $32,911
======= =======
Liabilities and Shareholders' Equity
Commercial paper and other notes payable .............. $ 2,869 $ 2,344
Accrued expenses and other liabilities ................ 1,434 613
Payables to consolidated subsidiaries ................. 2,015 995
Long-term debt ........................................ 17,357 15,250
Shareholders' equity .................................. 21,337 13,709
------- -------
$45,012 $32,911
======= =======
</TABLE>
77
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
78
<PAGE>
Condensed Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net income .................................................................. $ 3,077 $ 2,375 $ 1,950
Reconciliation of net income to net cash provided by operating activities
Equity in undistributed earnings of consolidated subsidiaries ............. 103 29 (1,038)
Other operating activities ................................................ 4 802 (380)
-------- -------- --------
Net cash provided by operating activities ................................ 3,184 3,206 532
-------- -------- --------
Investing Activities
Net decrease (increase) in temporary investments ............................ 3,678 (3,854) 187
Net increase in receivables from consolidated subsidiaries .................. (4,319) (38) (3,155)
Additional capital investment in subsidiaries ............................... (267) (424) (384)
Acquisitions of subsidiaries, net of cash ................................... 61 (726) --
-------- -------- --------
Net cash used in investing activities .................................... (847) (5,042) (3,352)
-------- -------- --------
Financing Activities
Net increase (decrease) in commercial paper and other notes payable ......... 525 (150) 68
Proceeds from issuance of long-term debt .................................... 3,492 5,560 4,606
Retirement of long-term debt ................................................ (836) (1,509) (1,005)
Proceeds from issuance of common stock ...................................... 1,242 136 239
Common stock repurchased .................................................... (5,769) (1,503) (522)
Cash dividends paid ......................................................... (996) (715) (575)
Other financing activities .................................................. 5 17 13
-------- -------- --------
Net cash (used in) provided by financing activities ...................... (2,337) 1,836 2,824
-------- -------- --------
Net increase in cash held at subsidiary banks ................................ -- -- 4
Cash held at subsidiary banks on January 1 ................................... 8 8 4
-------- -------- --------
Cash held at subsidiary banks on December 31 ................................. $ 8 $ 8 $ 8
======== ======== ========
</TABLE>
79
<PAGE>
NationsBank Corporation and Subsidiaries
Six-Year Consolidated Statistical Summary
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Taxable-Equivalent Yields Earned
Loans and leases, net of unearned income
Commercial .............................................. 8.36% 8.16%
Real estate commercial .................................. 8.95 9.03
Real estate construction ................................ 8.98 8.89
Total commercial ....................................... 8.46 8.29
Residential mortgage .................................... 7.79 7.80
Credit card ............................................. 11.90 11.77
Other consumer .......................................... 9.65 9.87
Total consumer ......................................... 8.99 9.06
Foreign ................................................. 7.13 6.87
Lease financing ......................................... 7.72 7.58
Total loans and leases, net ............................ 8.64 8.59
Securities
Held for investment ..................................... 6.11 5.59
Available for sale ...................................... 6.87 6.63
Total securities ....................................... 6.82 6.46
Loans held for sale ...................................... 7.19 7.30
Federal funds sold and securities purchased under
agreements to resell .................................... 5.59 5.19
Time deposits placed and other short-term
investments ............................................. 5.82 5.54
Trading account securities ............................... 6.01 6.44
Total earning assets ................................... 7.90 7.83
Rates Paid
Savings .................................................. 2.02 2.22
NOW and money market deposit accounts .................... 2.59 2.52
Consumer CDs and IRAs .................................... 5.22 5.28
Negotiated CDs, public funds and other time
deposits ................................................ 5.48 5.49
Foreign time deposits .................................... 5.38 5.38
Borrowed funds and trading account liabilities ........... 5.67 5.65
Long-term debt ........................................... 6.52 6.51
Total interest-bearing liabilities ..................... 4.79 4.85
Profit Margins
Net interest spread ...................................... 3.11 2.98
Net interest yield ....................................... 3.79 3.62
Year-End Data
(Dollars in millions)
Loans, leases and factored accounts receivable, net of
unearned income ......................................... $143,792 $122,630
Securities held for investment ........................... 1,156 2,110
Securities available for sale ............................ 46,047 12,277
Loans held for sale ...................................... 2,911 1,215
Time deposits placed and other short-term
investments ............................................. 2,395 1,843
Total earning assets ..................................... 228,927 164,676
Total assets ............................................. 264,562 185,794
Noninterest-bearing deposits ............................. 34,674 25,738
Domestic savings and time deposits ....................... 89,127 72,707
Foreign time deposits .................................... 14,393 8,053
Total savings and time deposits .......................... 103,520 80,760
Total deposits ........................................... 138,194 106,498
Borrowed funds and trading account liabilities ........... 66,011 35,753
Long-term debt ........................................... 27,204 22,985
Total shareholders' equity ............................... 21,337 13,709
<CAPTION>
1995 1994 1993 1992
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Taxable-Equivalent Yields Earned
Loans and leases, net of unearned income
Commercial .............................................. 8.19% 7.56% 6.96% 7.08%
Real estate commercial .................................. 9.30 8.18 7.59 7.78
Real estate construction ................................ 9.73 8.49 7.50 7.17
Total commercial ....................................... 8.42 7.71 7.09 7.20
Residential mortgage .................................... 7.78 7.62 8.27 9.33
Credit card ............................................. 12.78 12.84 13.62 14.45
Other consumer .......................................... 10.07 9.26 9.24 10.07
Total consumer ......................................... 9.37 8.99 9.51 10.50
Foreign ................................................. 7.71 6.10 5.49 6.63
Lease financing ......................................... 7.59 7.50 7.96 8.25
Total loans and leases, net ............................ 8.79 8.20 8.06 8.49
Securities
Held for investment ..................................... 5.57 5.06 5.54 6.84
Available for sale ...................................... 6.25 5.20 4.80 5.77
Total securities ....................................... 5.84 5.12 5.51 6.76
Loans held for sale ...................................... 7.47 6.63 6.73 7.22
Federal funds sold and securities purchased under
agreements to resell .................................... 6.18 4.09 3.21 3.77
Time deposits placed and other short-term
investments ............................................. 6.87 5.12 3.91 5.09
Trading account securities ............................... 7.76 7.32 5.43 4.64
Total earning assets ................................... 7.98 7.16 7.06 7.70
Rates Paid
Savings .................................................. 2.37 2.33 2.38 2.86
NOW and money market deposit accounts .................... 2.68 2.34 2.24 2.82
Consumer CDs and IRAs .................................... 5.19 4.17 4.52 5.58
Negotiated CDs, public funds and other time
deposits ................................................ 5.56 4.02 3.97 4.93
Foreign time deposits .................................... 6.25 4.98 4.05 5.52
Borrowed funds and trading account liabilities ........... 6.40 4.87 3.45 3.33
Long-term debt ........................................... 7.00 6.85 7.44 8.92
Total interest-bearing liabilities ..................... 5.28 4.09 3.53 4.12
Profit Margins
Net interest spread ...................................... 2.70 3.07 3.53 3.58
Net interest yield ....................................... 3.33 3.58 3.96 4.10
Year-End Data
(Dollars in millions)
Loans, leases and factored accounts receivable, net of
unearned income ......................................... $117,033 $103,371 $ 92,007 $ 72,714
Securities held for investment ........................... 4,432 17,800 13,584 23,355
Securities available for sale ............................ 19,415 8,025 15,470 1,374
Loans held for sale ...................................... 1,663 318 1,697 1,236
Time deposits placed and other short-term
investments ............................................. 1,296 2,159 1,479 1,994
Total earning assets ..................................... 167,945 151,722 140,890 103,872
Total assets ............................................. 187,298 169,604 157,686 118,059
Noninterest-bearing deposits ............................. 23,414 21,380 20,723 17,702
Domestic savings and time deposits ....................... 64,388 66,487 66,356 62,988
Foreign time deposits .................................... 12,889 12,603 4,034 2,037
Total savings and time deposits .......................... 77,277 79,090 70,390 65,025
Total deposits ........................................... 100,691 100,470 91,113 82,727
Borrowed funds and trading account liabilities ........... 51,067 45,555 44,248 21,957
Long-term debt ........................................... 17,775 8,488 8,352 3,066
Total shareholders' equity ............................... 12,801 11,011 9,979 7,814
</TABLE>
80
<PAGE>
NationsBank Corporation and Subsidiaries
Six-Year Consolidated Statistical Summary
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Earnings Ratios
Return on average
Total assets ............................................... 1.26% 1.18%
Earning assets ............................................. 1.46 1.34
Common shareholders' equity ................................ 15.26 17.95
Earnings Analysis (Taxable-Equivalent)
Noninterest income as a percentage of net interest
income ..................................................... 62.42 56.76
Noninterest expense, excluding merger-related charge,
as a percentage of net interest income ..................... 92.92 88.20
Efficiency ratio: noninterest expense, excluding
merger-related charge, divided by the sum of net
interest income and noninterest income ..................... 57.2 56.3
Overhead ratio: noninterest expense, excluding
merger-related charge, less noninterest income divided
by net interest income ..................................... 30.51 31.44
Net income as a percentage of net interest income ........... 38.40 36.98
Asset Quality
For the year
Net charge-offs as a percentage of average loans, leases
and factored accounts receivable ........................... .54 .48
Net charge-offs as a percentage of the provision for
credit losses .............................................. 99.75 98.84
At year end
Allowance for credit losses as a percentage of net loans,
leases and factored accounts receivable .................... 1.94 1.89
Allowance for credit losses as a percentage of
nonperforming loans ........................................ 273.34 260.02
Nonperforming assets as a percentage of net loans,
leases, factored accounts receivable and foreclosed
properties ................................................. .79 .85
Nonperforming assets as a percentage of total assets ........ .43 .56
Nonperforming assets (in millions) .......................... $ 1,135 $ 1,043
Risk-Based Capital Ratios
Tier 1 ...................................................... 6.50% 7.76%
Total ....................................................... 10.89 12.66
Other Capital Ratios
Common shareholders' equity as a percentage of total
assets at year end ......................................... 8.04 7.31
Dividend payout ratio (per common share) .................... 32.13 29.95
Common shareholders' equity per common share
Average .................................................... $ 28.00 $ 22.28
At year end ................................................ 29.87 23.69
Other Statistics
Number of full-time equivalent employees .................... 80,360 62,971
Rate of increase (decrease) in average
Total loans and leases, net of unearned income ............. 18.80% 11.67%
Earning assets ............................................. 19.07 6.23
Total assets ............................................... 21.71 6.54
Total deposits ............................................. 24.24 8.37
Total shareholders' equity ................................. 52.21 15.82
Common Stock Information
Market price per share
High for the year .......................................... $ 71 11/16 $ 52 5/8
Low for the year ........................................... 48 32 3/16
Close at the end of the year ............................... 60 13/16 48 7/8
Daily average trading volume ................................ 2,365,800 1,937,938
Number of shareholders of record ............................ 128,488 106,345
<CAPTION>
1995 1994 1993 1992
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earnings Ratios
Return on average
Total assets ............................................... 1.03% 1.02% .97% 1.00%
Earning assets ............................................. 1.17 1.14 1.09 1.12
Common shareholders' equity ................................ 17.01 16.10 15.00 15.83
Earnings Analysis (Taxable-Equivalent)
Noninterest income as a percentage of net interest
income ..................................................... 55.36 48.96 44.48 45.65
Noninterest expense, excluding merger-related charge,
as a percentage of net interest income ..................... 92.85 93.16 90.90 94.64
Efficiency ratio: noninterest expense, excluding
merger-related charge, divided by the sum of net
interest income and noninterest income ..................... 59.8 62.5 62.9 65.0
Overhead ratio: noninterest expense, excluding
merger-related charge, less noninterest income divided
by net interest income ..................................... 37.50 44.20 46.42 48.99
Net income as a percentage of net interest income ........... 35.07 31.86 31.79 27.33
Asset Quality
For the year
Net charge-offs as a percentage of average loans, leases
and factored accounts receivable ........................... .38 .33 .51 1.25
Net charge-offs as a percentage of the provision for
credit losses .............................................. 110.21 101.79 95.76 121.15
At year end
Allowance for credit losses as a percentage of net loans,
leases and factored accounts receivable .................... 1.85 2.11 2.36 2.00
Allowance for credit losses as a percentage of
nonperforming loans ........................................ 306.49 273.07 193.38 103.11
Nonperforming assets as a percentage of net loans,
leases, factored accounts receivable and foreclosed
properties ................................................. .73 1.10 1.92 2.72
Nonperforming assets as a percentage of total assets ........ .46 .67 1.13 1.69
Nonperforming assets (in millions) .......................... $ 853 $ 1,138 $ 1,783 $ 1,997
Risk-Based Capital Ratios
Tier 1 ...................................................... 7.24% 7.43% 7.41% 7.54%
Total ....................................................... 11.58 11.47 11.73 11.52
Other Capital Ratios
Common shareholders' equity as a percentage of total
assets at year end ......................................... 6.81 6.47 6.25 6.60
Dividend payout ratio (per common share) .................... 29.17 30.78 28.38 33.07
Common shareholders' equity per common share
Average .................................................... $ 20.95 $ 19.00 $ 16.68 $ 14.53
At year end ................................................ 23.26 19.85 18.20 15.40
Other Statistics
Number of full-time equivalent employees .................... 58,322 61,484 57,742 50,828
Rate of increase (decrease) in average
Total loans and leases, net of unearned income ............. 15.24% 20.29% 15.83% (1.70)%
Earning assets ............................................. 12.55 24.50 16.59 (.84)
Total assets ............................................... 13.36 23.75 16.82 (.64)
Total deposits ............................................. 5.91 12.30 .97 (5.59)
Total shareholders' equity ................................. 9.22 21.19 18.73 10.31
Common Stock Information
Market price per share
High for the year .......................................... $ 37 3/8 $ 28 11/16 $ 29 $26 11/16
Low for the year ........................................... 22 5/16 21 11/16 22 1/4 19 13/16
Close at the end of the year ............................... 34 13/16 22 9/16 24 1/2 25 11/16
Daily average trading volume ................................ 1,452,934 1,507,030 1,333,182 1,455,156
Number of shareholders of record ............................ 103,137 105,774 108,435 89,371
</TABLE>
81
<PAGE>
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 7 of the definitive 1998 Proxy Statement of the registrant furnished to
shareholders in connection with its Annual Meeting to be held on April 22, 1998
(the "1998 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 10 of the 1998 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.
Craig" on page 14 of the 1998 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 1998 Proxy Statement (i) under the
caption "Board of Directors' Compensation" on pages 10 and 11 thereof, (ii)
under the caption "Executive Compensation" on pages 11 and 12 thereof, (iii)
under the caption "Retirement Plans" on page 13 thereof, (iv) under the caption
"Deferred Compensation Plan" on pages 13 and 14 thereof, (v) under the caption
"Special Compensation Arrangements" on page 14 thereof, (vi) under the caption
"Compensation Committee Interlocks and Insider Participation" on page 18
thereof, and (vii) under the caption "Certain Transactions" on pages 18 and 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 more than 5 percent 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 10 of the 1998
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
1998 Proxy Statement under the caption "Compensation Committee Interlocks and
Insider Participation" on page 18 and under the caption "Certain Transactions"
on pages 18 and 19 thereof, is, to the extent such information is required by
Item 404 of Regulation S-K, hereby incorporated by reference.
82
<PAGE>
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:
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
(1) Financial Statements:
Report of Independent Accountants ........................................................... 46
Consolidated Statement of Income for each of the three years ended December 31, 1997 ........ 47
Consolidated Balance Sheet at December 31, 1997 and 1996 .................................... 48
Consolidated Statement of Cash Flows for each of the three years ended December 31, 1997..... 49
Consolidated Statement of Changes in Shareholders' Equity for each of the three years
ended December 31, 1997 ..................................................................... 50
Notes To Consolidated Financial Statements .................................................. 51
(2) All schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
</TABLE>
b. The following reports on Form 8-K have been filed by the registrant during
the quarter ended December 31, 1997:
Current Report on Form 8-K dated October 14, 1997 and filed October 20,
1997, Items 5 and 7.
Current Report on Form 8-K/A-1 dated August 29, 1997 and filed November
12, 1997, Item 7. The following financial statements of the business to be
acquired (Barnett Banks, Inc.) were filed as part of this Current Report
on Form 8-K/A-1:
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, the following unaudited pro forma financial information was
filed as part of this Current Report on Form 8-K/A-1:
Uaudited Pro Forma Condensed Balance Sheet as of September 30, 1997;
Unaudited Pro Forma Condensed Statement of Income for the nine months
ended September 30, 1997; and
Unaudited Pro Forma Condensed Statement of Income for the year ended
December 31, 1996.
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-5,
including executive compensation plans and arrangements which are
identified separately by asterisk).
With the exception of the information herein expressly incorporated by
reference, the 1998 Proxy Statement is not to be deemed filed as part of this
Annual Report on Form 10-K.
83
<PAGE>
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.
NATIONSBANK CORPORATION
Date: March 13, 1998
By: */s/ Hugh L. McColl, Jr.
------------------------------------------
Hugh L. McColl, Jr.
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.
<TABLE>
<CAPTION>
Signature Title Date
- - --------------------------------------- -------------------------------------- ---------------
<S> <C> <C>
*/s/ Hugh L. McColl, Jr. Chief Executive Officer and Director March 13, 1998
---------------------------------- (Principal Executive Officer)
(Hugh L. McColl, Jr.)
*/s/ James H. Hance, Jr. Vice Chairman, Chief Financial March 13, 1998
---------------------------------- Officer and Director
(James H. Hance, Jr.)
(Principal Financial Officer)
*/s/ Marc D. Oken Executive Vice President March 13, 1998
---------------------------------- (Principal Accounting Officer)
(Marc D. Oken)
*/s/ Andrew B. Craig, III Chairman of the Board March 13, 1998
----------------------------------
(Andrew B. Craig, III)
*/s/ Ray C. Anderson Director March 13, 1998
----------------------------------
(Ray C. Anderson)
*/s/ William M. Barnhardt Director March 13, 1998
----------------------------------
(William M. Barnhardt)
*/s/ Rita Bornstein Director March 13, 1998
----------------------------------
(Rita Bornstein)
*/s/ B. A. Bridgewater, Jr. Director March 13, 1998
----------------------------------
(B. A. Bridgewater, Jr.)
*/s/ Thomas E. Capps Director March 13, 1998
----------------------------------
(Thomas E. Capps)
*/s/ Alvin R. Carpenter Director March 13, 1998
----------------------------------
(Alvin R. Carpenter)
*/s/ Charles W. Coker Director March 13, 1998
----------------------------------
(Charles W. Coker)
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- - ---------------------------------------- ------------------------ ---------------
<S> <C> <C>
*/s/ Thomas G. Cousins Director March 13, 1998
----------------------------------
(Thomas G. Cousins)
---------------------------------- Director March , 1998
(Alan T. Dickson)
*/s/ Paul Fulton Director March 13, 1998
----------------------------------
(Paul Fulton)
*/s/ C. Ray Holman Director March 13, 1998
----------------------------------
(C. Ray Holman)
*/s/ W. W. Johnson Director March 13, 1998
----------------------------------
(W. W. Johnson)
*/s/ Kenneth D. Lewis President and Director March 13, 1998
----------------------------------
(Kenneth D. Lewis)
*/s/ Russell W. Meyer, Jr. Director March 13, 1998
----------------------------------
(Russell W. Meyer, Jr.)
---------------------------------- Director March , 1998
(Richard B. Priory)
*/s/ Charles E. Rice Director March 13, 1998
----------------------------------
(Charles E. Rice)
---------------------------------- Director March , 1998
(John C. Slane)
*/s/ O. Temple Sloan, Jr. Director March 13, 1998
----------------------------------
(O. Temple Sloan, Jr.)
*/s/ Meredith R. Spangler Director March 13, 1998
----------------------------------
(Meredith R. Spangler)
*/s/ Albert E. Suter Director March 13, 1998
----------------------------------
(Albert E. Suter)
*/s/ Ronald Townsend Director March 13, 1998
----------------------------------
(Ronald Townsend)
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- - ------------------------------------------ ---------- ---------------
<S> <C> <C>
*/s/ Jackie M. Ward Director March 13, 1998
----------------------------------
(Jackie M. Ward)
*/s/ John A. Williams Director March 13, 1998
----------------------------------
(John A. Williams)
*/s/ Virgil R. Williams Director March 13, 1998
----------------------------------
(Virgil R. Williams)
*By:/s/ Charles M. Berger
----------------------------------
Charles M. Berger, Attorney-in-Fact
</TABLE>
86
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- - ------------- ---------------------------------------------------------------------------------
<S> <C>
3(a) Amended and Restated Articles of Incorporation of registrant, as in effect on
the date hereof, incorporated by reference to Exhibit 3.1 of registrant's
Current Report on Form 8-K dated December 9, 1997.
(b) Amended and Restated Bylaws of registrant, as in effect on the date hereof,
incorporated by reference to Exhibit 3(ii) of registrant's Quarterly Report on
Form 10-Q dated May 15, 1997.
4(a) Specimen certificate of registrant's Common Stock, incorporated by reference
to Exhibit 4.1 of registrant's Registration No. 33-45542.
(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) 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.
(d) 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.
(e) Indenture dated as of January 1, 1992 between registrant and BankAmerica
Trust Company of New York, pursuant to which registrant issued its 6 5/8%
Senior Notes, due 1998, incorporated by reference to Exhibit 4.1 of registrant's
Registration No. 33-54784.
(f) 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.
(g) First Supplemental Indenture dated as of July 1, 1993 to the Indenture dated
as of January 1, 1992 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; its
5 1/8% Senior Notes, due 1998; 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.
(h) 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.
(i) Indenture dated as of January 1, 1995 between registrant and BankAmerica
National Trust Company, pursuant to which registrant issued its Floating Rate
Senior Notes, due 1998; its 7% Senior Notes, due, 2003; its 7% Senior Notes,
due 2001; and its Senior Medium-Term Notes, Series D, E, F and G,
incorporated by reference to Exhibit 4.1 of registrant's Registration
No. 33-57533.
(j) 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; and its Subordinated Medium-Term Notes,
Series D, E, F and G, incorporated by reference to Exhibit 4.1 of registrant's
Registration No. 33-57533.
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- - ------------- --------------------------------------------------------------------------------
<S> <C>
(k) 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").
(l) Amended and Restated Agency Agreement dated as of May 12, 1997
between registrant and The Chase Manhattan Bank, N.A. (London
Branch), pursuant to which registrant issued its Senior Euro Medium-Term
Notes.
(m) Issuing and Paying Agency Agreement dated as of April 10, 1995 between
NationsBank, N.A. (as successor to NationsBank, N.A. (Carolinas) and
NationsBank of Georgia, N.A.) and NationsBank of Texas, N.A., as Issuers,
and Bankers Trust Company, as Issuing and Paying Agent, incorporated by
reference to Exhibit 4(n) of the 1995 Form 10-K.
(n) Specimen certificate of registrant's 7% Cumulative Redeemable Preferred
Stock, Series B, incorporated by reference to Exhibit 4(q) of registrant's
Annual Report on Form 10-K dated March 28, 1997 (the "1996 Form 10-K").
(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) Specimen certificate of registrant's $2.50 Cumulative Convertible Preferred
Stock, Series BB.
(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.
(v) 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) Limited Partnership Agreement of CSC Associates, L. P., between The Citizens
and Southern Corporation and Cousins Properties Incorporated dated as of
September 29, 1989, including Transfer of Partnership Interest between The
Citizens and Southern Corporation and C&S Premises, Inc. and First
Amendment thereto, both of which are incorporated by reference to Exhibit
10(ss) of registrant's Annual Report on Form 10-K dated March 25, 1992; and
Second Amendment thereto dated as of December 31, 1990, incorporated by
reference to Exhibit 10(a) of registrant's Annual Report on Form 10-K dated
March 30, 1995.
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- - ------------- ---------------------------------------------------------------------------------
<S> <C> <C>
(b) 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 the
1996 Form 10-K.
(c) 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; and
Amendments thereto dated March 27, 1996 and June 25, 1997.
(d) 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; and 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.
(e) 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; and Amendment thereto dated as of July 5,
1995, incorporated by reference to Exhibit 10(l) of the 1995 Form 10-K.
(f) 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.
(g) 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.
(h) The NationsBank Retirement Savings Restoration Plan, as amended and *
restated effective July 1, 1996, incorporated by reference to Exhibit 10(p) of
the 1996 10-K.
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- - ------------- ---------------------------------------------------------------------------------
<S> <C> <C>
(i) Employment Arrangement with Fredric J. Figge, II dated July 27, 1987, *
incorporated by reference to Exhibit 10(tt) of registrant's Annual Report on
Form 10-K dated March 25, 1992; and Amendment Agreement thereto dated
June 27, 1997.
(j) Noncompetition Agreement dated as of December 31, 1997 by and between *
registrant and Fredric J. Figge, II.
(k) NationsBank Corporation Executive Incentive Compensation Plan, as *
amended and restated effective January 1, 1997.
(l) NationsBank Corporation Key Employee Deferral Plan, as amended and *
restated effective July 1, 1996, incorporated by reference to Exhibit 10(s) of
the 1996 10-K.
(m) NationsBank Corporation Director Deferral Plan, as amended and restated *
effective April 24, 1996, incorporated by reference to Exhibit 10(k) of the 1996
10-K.
(n) NationsBank Corporation Key Employee Stock Plan, as amended and restated *
effective December 19, 1997.
(o) NationsBank Corporation Directors' Stock Plan, incorporated by reference to *
Exhibit 99.1 of registrant's Registration No. 333-02875.
(p) 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.
(q) Agreement and Plan of Merger, by and between Boatmen's Bancshares, Inc.
and registrant, dated as of August 29, 1996, incorporated by reference to
Exhibit 2.1 of registrant's Registration No. 333-16189; Amendment thereto,
dated as of November 11, 1996, incorporated by reference to Exhibit 2.2 of
registrant's Registration No. 333-16189; and Amendment thereto, dated as of
January 6, 1997, incorporated by reference to Exhibit 10(y) of the 1996 10-K.
(r) Employment Agreement, dated as of September 26, 1996, by and between *
registrant and Andrew B. Craig, III, incorporated by reference to Exhibit 10.1
of registrant's Registration No. 333-16189.
(s) Employment Agreement, dated as of January 30, 1996, as amended May 17, *
1996, by and between Boatmen's Bancshares, Inc. and Andrew B. Craig, III,
incorporated by reference to Exhibit 10.2 of registrant's Registration
No. 333-16189.
(t) Boatmen's Bancshares, Inc. Amended 1981 Incentive Stock Option Plan, *
incorporated by reference to Exhibit 99.1 of registrant's Post-Effective
Amendment No. 1 to Registration No. 333-16189.
(u) Boatmen's Bancshares, Inc. 1987 Non-Qualified Stock Option Plan, *
incorporated by reference to Exhibit 99.2 of registrant's Post-Effective
Amendment No. 1 to Registration No. 333-16189.
(v) Boatmen's Supplemental Retirement Plan, as adopted effective August 8, 1989 *
and as amended on January 30, 1996 and February 8, 1996.
(w) Boatmen's Bancshares, Inc. Executive Deferred Compensation Plan as of *
February 8, 1996.
(x) Boatmen's Bancshares, Inc. Amended 1982 Long Term Incentive Plan effective *
as of February 9, 1982, as amended.
(y) Boatmen's Supplemental Retirement Plan Participation Agreement dated August 4, *
1993 between Boatmen's Bancshares, Inc. and Andrew B. Craig, III.
(z) Trust Under Boatmen's Supplemental Retirement Plan dated December 31, *
1993, and First Instrument of Amendment thereto dated August 13, 1996.
(aa) Letter agreement by and between registrant and Andrew B. Craig, III dated *
March 21, 1997 waiving certain stock appreciation rights.
(bb) 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.
(cc) 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.
</TABLE>
E-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- - ------------- ----------------------------------------------------------------
<S> <C>
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 Price Waterhouse LLP.
24 (a) Power of Attorney.
(b) Corporate Resolution.
27 Financial Data Schedule.
</TABLE>
- - ---------
* Denotes executive compensation plan or arrangement.
E-5
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 4(L)
<TEXT>
AMENDED AND RESTATED
AGENCY AGREEMENT
RELATING TO
NATIONSBANK CORPORATION,
U.S. $4,500,000,000
Euro Medium-Term Note Program
AMONG
NATIONSBANK CORPORATION
as Issuer
and
THE CHASE MANHATTAN BANK, London Branch
as Issuing and Principal Paying Agent
and
CHASE MANHATTAN BANK LUXEMBOURG S.A.
as Paying Agent
Dated as of May 12, 1997
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INDEX
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Clause Page
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1. Definitions and Interpretation.................................... 1
2. Appointments of Agent, Paying Agents
and Calculation Agents......................................... 2
3. Issue of Temporary Global Notes................................... 3
4. Determination of Exchange Date, Issue of Permanent
Global Notes or Definitive Notes and
Determination of Restricted Period............................. 4
5. Issue of Definitive Notes......................................... 5
6. Terms of Issue.................................................... 6
7. Payments.......................................................... 7
8. Determinations and Notifications in Respect of
Notes and Interest Determination............................... 8
9. Notice of any Withholding or Deduction............................ 11
10. Duties of the Agent in Connection with Early
Redemption..................................................... 11
11. Receipt and Publication of Notices; Receipt of
Certificates................................................... 12
12. Cancellation of Notes, Receipts, Coupons and Talons............... 12
13. Issue of Replacement Notes, Receipts, Coupons and
Talons......................................................... 13
14. Copies of Documents Available for Inspection...................... 14
15. Meetings of Noteholders........................................... 14
16. Repayment by the Agent............................................ 14
17. Conditions of Appointment......................................... 15
18. Communication Between the Parties................................. 15
19. Change in Agent and Paying Agents................................. 16
20. Merger and Consolidation.......................................... 17
21. Notification of Changes to Paying Agents.......................... 17
22. Change of Specified Office........................................ 17
23. Notices........................................................... 18
24. Taxes and Stamp Duties............................................ 19
25. Commissions, Fees and Expenses.................................... 19
26. Indemnity......................................................... 19
27. Reporting......................................................... 20
28. Governing Law..................................................... 20
29. Amendments........................................................ 20
30. Descriptive Headings.............................................. 21
31. Counterparts...................................................... 21
Schedule 1 - Form of Temporary Global Note
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Schedule 2 - Form of Permanent Global Note
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Schedule 3 - Form of Definitive Note, Coupon, Receipt and Talon
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Schedule 4 - Terms and Conditions
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Schedule 5 - Form of Certificate to be Presented by Euroclear or Cedel Bank
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Schedule 6 - Form of Certificate of Beneficial Owner
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Schedule 7 - Provision for Meetings of Noteholders
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Schedule 8 - Form of Put Notice
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Schedule 9 - Form of Calculation Agency Agreement
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THIS AMENDED AND RESTATED AGREEMENT dated as of May 12, 1997 among:
(i) NationsBank Corporation (the "Corporation");
(ii) The Chase Manhattan Bank, London Branch (the "Agent"
and the "Issuing and Principal Paying Agent"); and
(iii) Chase Manhattan Bank Luxembourg S.A. (the "Paying
Agent").
WHEREAS, the Corporation, the Agent and the Paying Agent wish
to record the arrangements originally agreed among them pursuant to that certain
Agency Agreement dated November 8, 1995, as amended and restated, (the "Original
Agency Agreement").
WHEREAS, the Corporation proposes to issue up to U.S.
$4,500,000,000 (or its equivalent in other currencies) in aggregate principal
amount of Euro Medium-Term Notes (the "Notes") outstanding at any one time as
provided in an amended and restated Program Agreement of even date among the
Corporation, the Arrangers and the Dealers named therein (the "Program
Agreement") and as described in an Offering Circular of even date (the "Offering
Circular");
WHEREAS, Notes will be issued in the denominations specified
in the relevant Pricing Supplement issued in connection with each Series and
each Tranche of Notes;
WHEREAS, beneficial interests in each Tranche of Notes will
initially be represented by a Temporary Global Note, exchangeable, as provided
in such Temporary Global Note, for beneficial interests in a Permanent Global
Note and, only under limited circumstances, beneficial interests in a Global
Note may be exchangeable for Definitive Notes, in each case in accordance with
the terms of the Global Notes; and
NOW, THEREFORE, it is agreed as follows:
1. Definitions and Interpretation
(1) Terms and expressions defined in the Program Agreement or
the Notes or used in the applicable Pricing Supplement shall have the same
meanings in this Agreement, except where the context requires otherwise.
(2) Without prejudice to the foregoing in this Agreement:
"outstanding" means, in relation to the Notes, all the Notes
issued other than (a) those which have been redeemed in accordance with the
Terms and Conditions, (b) those in respect of which the date for redemption in
accordance with the Terms and Conditions has occurred and the redemption moneys
(including all interest accrued on such Notes to the date for such redemption
and any interest or other amounts payable under the Terms and Conditions after
such date) have been duly paid to the Agent as provided in this Agreement and
remain available for payment against presentation and surrender of Notes and/or
Receipts and/or Coupons, as the case may be, (c) those which have become void
under Condition 8, (d) those which have been purchased and canceled as provided
in Condition 6 (or as provided in the Global Notes), (e) those mutilated or
defaced Notes which have been surrendered in exchange for replacement Notes
pursuant to Condition 10, (f) (for the purposes only of determining how many
Notes are outstanding and without prejudice to their status for any other
purpose) those Notes alleged to have been lost, stolen or destroyed and in
respect of which replacement Notes have been issued pursuant to Condition 10,
(g) any Temporary Global Note to the extent that it shall have been exchanged
for a Permanent Global Note, in each case pursuant to their respective
provisions; provided that for the purposes of (i) ascertaining the right to
attend and vote at any meeting of the Noteholders and (ii) the determination of
how many Notes are outstanding for the purposes of Schedule 7, those Notes which
are beneficially held by, or are held on behalf of, the Corporation or any of
its affiliates shall (unless and until ceasing to be so held) be deemed not to
remain outstanding;
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"Paying Agents" means the Issuing and Principal Paying Agent
and the Paying Agent referred to above and such other Paying Agent or Agents as
may be appointed from time to time hereunder; and
(3) The term "Notes" as used in this Agreement shall include
the Permanent Global Note, the Definitive Notes and the Coupons and, as the case
may be, the Temporary Global Note. The term "Global Note" as used in this
Agreement shall include both the Temporary Global Note and the Permanent Global
Note, each of which is a "Global Note." The term "Noteholders" as used in this
Agreement shall mean the several persons who are for the time being the holders
of the Notes, which expression shall, while the Notes are represented by a
Global Note, mean (other than with respect to the payment of principal and
interest on the Notes, the right to which shall be vested as against the
Corporation solely in the bearer of such Global Note in accordance with and
subject to its terms) the persons for the time being shown in the records of
Euroclear (as defined below) or Cedel Bank (as defined below)(other than Cedel
Bank, if Cedel Bank shall be an accountholder of Euroclear, and Euroclear, if
Euroclear shall be an accountholder of Cedel Bank) as the Noteholders of
particular principal amounts of Notes (in which regard any certificate or other
document issued by Euroclear or Cedel Bank as to the principal amount of Notes
standing to the credit of the account of any person shall be conclusive and
binding for all purposes).
(4) For purposes of this Agreement, the Notes of each Series
shall form a separate series of Notes and the provisions of this Agreement shall
apply MUTATIS MUTANDIS separately and independently to the Notes of each Series
and in such provisions the expressions "Notes", "Noteholders", "Receipts,
"Receiptholders", "Coupons", "Couponholders", "Talons" and "Talonholders" shall
be construed accordingly.
(5) All references in this Agreement to principal and/or
interest or both in respect of the Notes or to any moneys payable by the
Corporation under this Agreement shall have the meaning set out in Condition 5.
(6) All references in this Agreement to the "relevant
currency" shall be construed as references to the currency (which term shall,
for these purposes, be deemed to include ECU) in which the relevant Notes and/or
Coupons are denominated (or payable in the case of Dual Currency Notes) or, in
the case of Notes denominated in ECU, the chosen currency (as defined in
Condition 5(c)) in which payments in respect of such Notes are to be made, as
the case may be.
(7) In this Agreement, Clause headings are inserted for
convenience and ease of reference only and shall not affect the interpretation
of this Agreement. All references in this Agreement to the provisions of any
statute shall be deemed to be references to that statute as from time to time
modified, extended, amended or re-enacted or to any statutory instrument, order
or regulation made thereunder or under such re-enactment.
(8) All references in this Agreement to an agreement,
instrument or other document (including, without limitation, this Agreement, the
Program Agreement, the Notes and any Terms and Conditions appertaining thereto)
shall be construed as a reference to that agreement, instrument or document as
the same may be amended, modified, varied or supplemented from time to time.
(9) Any references herein to Euroclear and/or Cedel Bank
shall, whenever the context so permits, be deemed to include a reference to any
additional or alternative clearance system approved by the Corporation and the
Agent.
2. Appointments of Agent, Paying Agents and Calculation Agents
(1) The Corporation hereby appoints The Chase Manhattan Bank,
London Branch, as Agent, and The Chase Manhattan Bank, London Branch, hereby
accepts such appointment as Agent of the Corporation, upon the terms and subject
to the conditions set out below, for the purposes of, INTER ALIA:
(a) completing, authenticating and delivering Global
Notes and (if required) authenticating and delivering
Definitive Notes;
(b) exchanging Temporary Global Notes for Permanent
Global Notes or Definitive Notes, as the case may be, in
accordance with the terms of such Temporary Global Notes;
(c) under limited circumstances, exchanging Permanent
Global Notes for Definitive Notes in accordance with the terms
of such Permanent Global Notes;
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(d) paying sums due on Global Notes and Definitive
Notes, Receipts and Coupons;
(e) determining the end of the Restricted Period
applicable to each Tranche;
(f) unless otherwise specified in the applicable
Pricing Supplement, determining the interest and/or other
amounts payable in respect of the Notes in accordance with the
Terms and Conditions;
(g) arranging on behalf of the Corporation for
notices to be communicated to the Noteholders;
(h) preparing and sending monthly reports to the
Ministry of Finance of Japan (the "MoF"), the German Central
Bank and the Bank of England and, subject to confirmation from
the Corporation for the need for such further reporting,
ensuring that all necessary action is taken to comply with any
reporting requirements of any competent authority of any
relevant currency as may be in force from time to time with
respect to the Notes to be issued under the Program;
(i) subject to the Procedures Memorandum, submitting
to the Stock Exchange such number of copies of each Pricing
Supplement which relates to Notes which are to be listed as it
may reasonably require;
(j) receiving notice from Euroclear and/or Cedel Bank
relating to the certificates of non-US. beneficial ownership
of the Notes; and
(k) performing all other obligations and duties
imposed upon it by the Terms and Conditions and this
Agreement.
(2) The Corporation may, in its discretion, appoint one or
more agents outside the United States and its possessions (each a "Paying
Agent") for the payment (subject to applicable laws and regulations) of the
principal of and any interest and Additional Amounts, if any, (as defined in
Section 5 of the Terms and Conditions) on the Notes. The Corporation hereby
appoints Chase Manhattan Bank Luxembourg S.A., at its office in Luxembourg at 5
rue Plaetis, L-2338 Luxembourg-Grund, as its Paying Agent in Luxembourg. Each
Paying Agent shall have the powers and authority granted to and conferred upon
it herein and in the Notes, and such further powers and authority, acceptable to
it, to act on behalf of the Corporation as the Corporation may hereafter grant
to or confer upon it in writing. As used herein, "paying agencies" shall mean
paying agencies maintained by a Paying Agent on behalf of the Corporation as
provided elsewhere herein.
(3) The Corporation will appoint an agent to make certain
calculations with respect to the Notes (the "Calculation Agent") pursuant to the
Terms and Conditions.
3. Issue of Temporary Global Notes
(1) Subject to sub-clause (2), following receipt of a
notification from the Corporation in respect of an issue of Notes (such
notification being by receipt of a confirmation (a "Confirmation"),
substantially in the applicable form set out in the Procedures Memorandum) the
Agent will take the steps required of the Agent in the Procedures Memorandum.
For this purpose the Agent is hereby authorized on behalf of the Corporation:
(a) to prepare a Temporary Global Note in accordance
with such Confirmation by attaching a copy of the applicable
Pricing Supplement to a copy of the relevant master Temporary
Global Note;
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(b) to authenticate (or cause to be authenticated)
such Temporary Global Note;
(c) to deliver such Temporary Global Note to the
specified common depositary of Euroclear and/or Cedel Bank in
accordance with the Confirmation against receipt from the
common depositary of confirmation that such common depositary
is holding the Temporary Global Note in safe custody for the
account of Euroclear and/or Cedel Bank and to instruct
Euroclear or Cedel Bank or both of them (as the case may be)
unless otherwise agreed in writing between the Agent and the
Corporation (i) in the case of an issue of Notes on a
non-syndicated basis, to credit the Notes represented by such
Temporary Global Note to the Agent's distribution account, and
(ii) in the case of Notes issued on a syndicated basis, to
hold the Notes represented by such Temporary Global Note to
the Corporation's order; and
(d) to ensure that the Notes of each Tranche are
assigned a Common Code and ISIN by Euroclear and Cedel Bank
which are different from the Common Code and ISIN assigned to
Notes of any other Tranche of the same Series until 40 days
after the completion of the distribution of the Notes of such
Tranche as notified by the Agent to the relevant Dealer.
(2) The Agent shall only be required to perform its
obligations under sub-clause (1) if it holds:
(a) master Temporary Global Notes, duly executed by a
person or persons authorized to execute the same on behalf of
the Corporation, which may be used by the Agent for the
purpose of preparing Temporary Global Notes in accordance with
paragraph (a) of that sub-clause; and
(b) master Permanent Global Notes, duly executed by a
person or persons authorized to execute the same on behalf of
the Corporation, which may be used by the Agent for the
purpose of preparing Permanent Global Notes in accordance with
Clause 4 below.
(3) The Agent will provide Euroclear and/or Cedel Bank with
the notifications, instructions or other information to be given by the Agent to
Euroclear and/or Cedel Bank in accordance with the standard procedures of
Euroclear and/or Cedel Bank.
4. Determination of Exchange Date, Issue of Permanent
Global Notes or Definitive Notes and Determination of
Restricted Period
(1) (a) The Agent shall determine the Exchange Date for each
Temporary Global Note in accordance with the terms thereof.
Forthwith upon determining the Exchange Date in respect of any
Tranche the Agent shall notify such determination to the
Corporation, the relevant Dealer, Euroclear and Cedel Bank.
(b) The Agent shall deliver, upon notice from Euroclear or
Cedel Bank, a Permanent Global Note or Definitive Notes, as
the case may be, in accordance with the terms of the Temporary
Global Note. Upon any such exchange of a portion of a
Temporary Global Note for an interest in a Permanent Global
Note the Agent is hereby authorized on behalf of the
Corporation:
(i) in the case of the first Tranche of any
Series of Notes, to prepare and complete a Permanent
Global Note in accordance with the terms of the
Temporary Global Note applicable to such Tranche by
attaching a copy of the applicable Pricing Supplement
to a copy of the relevant master Permanent Global
Note;
(ii) in the case of the first Tranche of any
Series of Notes, to authenticate such Permanent
Global Note;
(iii) in the case of the first Tranche of
any Series of Notes, to deliver such
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Permanent Global Note to the common depositary which
is holding the Temporary Global Note applicable to
such Tranche for the time being on behalf of
Euroclear and/or Cedel Bank either in exchange for
such Temporary Global Note or, in the case of a
partial exchange, on entering details of such partial
exchange of the Temporary Global Note in the relevant
spaces in Schedule 2 of both the Temporary Global
Note and the Permanent Global Note, and in either
case against receipt from the common depositary of
confirmation that such common depositary is holding
the Permanent Global Note in safe custody for the
account of Euroclear and/or Cedel Bank; and
(iv) in any other case, to attach a copy of
the applicable Pricing Supplement to the Permanent
Global Note applicable to the relevant Series and
enter details of any exchange in whole or part as
aforesaid.
(2) (a) In the case of a Tranche in respect of which there is
only one Dealer, the Agent will determine the end of the
Restricted Period in respect of such Tranche as being the
fortieth day following the date certified by the relevant
Dealer to the Agent as being the date as of which distribution
of the Notes of that Tranche was completed.
(b) In the case of a Tranche in respect of which
there is more than one Dealer but is not issued on a
syndicated basis, the Agent will determine the end of the
Restricted Period in respect of such Tranche as being the
fortieth day following the latest of the dates certified by
all the relevant Dealers to the Agent as being the respective
dates as of which distribution of the Notes of that Tranche
purchased by each such dealer was completed.
(c) In the case of a Tranche issued on a syndicated
basis, the Agent will determine the end of the Restricted
Period in respect of such Tranche as being the fortieth day
following the date certified by the Lead Manager to the Agent
as being the date as of which distribution of the Notes of
that Tranche was completed.
(d) Forthwith upon determining the end of the
Restricted Period in respect of any Tranche, the Agent shall
notify such determination to the Corporation and the relevant
Dealer or the Lead Manager in the case of a syndicated issue.
5. Issue of Definitive Notes
(1) Interests in a Global Note will be exchangeable for
Definitive Notes with Coupons attached only if: (i) an Event of Default (as
defined in the Terms and Conditions) occurs and is continuing, or (ii) the
Corporation is notified that either Euroclear or Cedel Bank has been closed for
business for a continuous period of 14 days (other than by reason of holiday,
statutory or otherwise) after the original issuance of the Notes or has
announced an intention permanently to cease business or has in fact done so and
no alternative clearance system approved by the Noteholders is available, or
(iii) the Corporation, after notice to the Agent, determines to issue Notes in
definitive form. Upon the occurrence of these events, the Agent shall deliver
the relevant Definitive Note(s) in accordance with the terms of the relevant
Global Note.
For this purpose the Agent is hereby authorized on behalf of
the Corporation:
(a) to authenticate such Definitive Note(s) in
accordance with the provisions of this Agreement; and
(b) to deliver such Definitive Note(s) to or to the
order of Euroclear and/or Cedel Bank in exchange for such
Global Note.
The Agent shall notify the Corporation forthwith upon receipt of a request for
issue of (a) Definitive Note(s) in
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accordance with the provisions of a Global Note and this Agreement (and the
aggregate principal amount of such Temporary Global Note or Permanent Global
Note, as the case may be, to be exchanged in connection therewith).
(2) The Corporation undertakes to deliver to the Agent
sufficient numbers of executed Definitive Notes with, if applicable, Receipts,
Coupons and Talons attached to enable the Agent to comply with its obligations
under this Clause 5.
6. Terms of Issue
(1) The Agent shall cause all Temporary Global Notes,
Permanent Global Notes and Definitive Notes delivered to and held by it under
this Agreement to be maintained in safe custody and shall ensure that such Notes
are issued only in accordance with the provisions of this Agreement and the
relevant Global Note and Terms and Conditions.
(2) Subject to the procedures set out in the Procedures
Memorandum, for the purposes of Clause 3(1) the Agent is entitled to treat a
telephone, telex or facsimile communication from a person purporting to be (and
who the Agent believes in good faith to be) the authorized representative of the
Corporation named in the lists referred to in, or notified pursuant to, Clause
17(7) as sufficient instructions and authority of the Corporation for the Agent
to act in accordance with Clause 3(l).
(3) In the event that a person who has signed on behalf of the
Corporation any Note not yet issued but held by the Agent in accordance with
Clause 3(1) ceases to be authorized as described in Clause 17(7), the Agent
shall (unless the Corporation gives notice to the Agent that Notes signed by
that person do not constitute valid and binding obligations of the Corporation
or otherwise until replacements have been provided to the Agent) continue to
have authority to issue any such Notes, and the Corporation hereby warrants to
the Agent that such Notes shall, unless notified as aforesaid, be valid and
binding obligations of the Corporation. Promptly upon such person ceasing to be
authorized, the Corporation shall provide the Agent with replacement Notes and
upon receipt of such replacement Notes the Agent shall cancel and destroy the
Notes held by it which are signed by such person and shall provide to the
Corporation a confirmation of destruction in respect thereof specifying the
Notes so canceled and destroyed.
(4) If the Agent pays an amount (the "Advance") to the
Corporation on the basis that a payment (the "Payment") has been, or will be,
received from a Dealer and if the Payment is not received by the Agent on the
date the Agent pays the Corporation, the Agent shall notify the Corporation by
tested telex or facsimile that the Payment has not been received and the
Corporation shall repay to the Agent the Advance and shall pay interest on the
Advance (or the unreimbursed portion thereof) from (and including) the date such
Advance is made to (but excluding) the earlier of repayment of the Advance and
receipt by the Agent of the Payment (at a rate quoted at that time by the Agent
as its cost of funding the Advance).
(5) Except in the case of issues where the Agent does not act
as receiving bank for the Corporation in respect of the purchase price of the
Notes being issued, if on the relevant Issue Date a Dealer does not pay the full
purchase price due from it in respect of any Note (the "Defaulted Note") and, as
a result, the Defaulted Note remains in the Agent's distribution account with
Euroclear and/or Cedel Bank) after such Issue Date, the Agent will continue to
hold the Defaulted Note to the order of the Corporation. The Agent shall notify
the Corporation forthwith of the failure of the Dealer to pay the full purchase
price due from it in respect of any Defaulted Note and, subsequently, shall
notify the Corporation forthwith upon receipt from the Dealer of the full
purchase price in respect of such Defaulted Note.
7. Payments
(1) The Agent shall advise the Corporation, no later than ten
Business Days (as defined below) immediately preceding the date on which any
payment is to be made to the Agent pursuant to this sub-clause (1) of the
payment amount, value date and payment instructions and the Corporation will
before 10:00 a.m. New York time on each date on which any payment in respect of
any Notes issued by it becomes due, transfer to an account specified by the
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Agent such amount in the relevant currency as shall be sufficient for the
purposes of such payment in funds settled through such payment system as the
Agent and the Corporation may agree.
(2) The Corporation will ensure that no later than 4:00 p.m.
(London time) on the second Business Day (as defined below) immediately
preceding the date on which any payment is to be made to the Agent pursuant to
sub-clause (1), the Agent shall receive from the paying bank of the Corporation
an irrevocable confirmation in the form of a SWIFT message or tested telex that
such payment shall be made. For the purposes of this Clause 7 "Business Day"
means a day which is both:
(a) a day (other than a Saturday or a Sunday) on
which commercial banks and foreign exchange markets settle
payments in London and in Charlotte, North Carolina; and
(b) either (1) in relation to a payment to be made in
a Specified Currency other than ECU, a day on which commercial
banks and foreign exchange markets settle payments in the
principal financial center of the country of the relevant
Specified Currency (if other than London) or (2) in relation
to a payment to be made in ECU, an ECU Settlement Day.
(3) The Agent shall ensure that payments of both principal and
interest in respect of any Temporary Global Note will be made only to the extent
that certification of non-U.S. beneficial ownership as required by U.S.
securities laws and U.S. Treasury regulations (in the form set out in the
Temporary Global Note) has been received from Euroclear and/or Cedel Bank in
accordance with the terms thereof.
(4) Subject to the receipt by the Agent of the payment
confirmation as provided in sub-clause (2) above, the Agent or the relevant
Paying Agent shall pay or cause to be paid all amounts due in respect of the
Notes on behalf of the Corporation in the manner provided in the Terms and
Conditions. If any payment provided for in sub-clause (l) is made late but
otherwise in accordance with the provisions of this Agreement, the Agent and
each Paying Agent shall nevertheless make payments in respect of the Notes as
aforesaid following receipt by it of such payment.
(5) If for any reason the Agent considers in its sole
discretion that the amounts to be received by the Agent pursuant to sub-clause
(1) will be, or the amounts actually received by it pursuant thereto are,
insufficient to satisfy all claims in respect of all payments then falling due
in respect of the Notes, neither the Agent nor any Paying Agent shall be obliged
to pay any such claims until the Agent has received the full amount of all such
payments. Should the Agent or any Paying Agent elect not to make payment of
amounts falling due in respect of the Notes as aforesaid, it shall advise the
Corporation of any such decision as soon as practicable by telephone with
confirmation by telefax.
(6) Without prejudice to sub-clauses (4) and (5), if the Agent
pays any amounts to the holders of Notes, Receipts or Coupons or to any Paying
Agent at a time when it has not received payment in full in respect of the
relevant Notes in accordance with sub-clause (1) (the excess of the amounts so
paid over the amounts so received being the "Shortfall"), the Corporation will,
in addition to paying amounts due under sub-clause (l), pay to the Agent on
demand interest (at a rate which represents the Agent's cost of funding the
Shortfall) on the Shortfall (or the unreimbursed portion thereof) until the
receipt in full by the Agent of the Shortfall.
(7) The Agent shall on demand promptly reimburse each Paying
Agent for payments in respect of Notes properly made by such Paying Agent in
accordance with this Agreement and the Terms and Conditions unless the Agent has
notified the Paying Agent, prior to the opening of business in the location of
the office of the Paying Agent through which payment in respect of the Notes can
be made prior to the day on which such Agent has to give payment instructions in
respect of the due date of a payment in respect of the Notes, that the Agent
does not expect to receive sufficient funds to make payment of all amounts
falling due in respect of such Notes.
(8) If the Agent pays out on or after the due date therefor,
or becomes liable to pay out, funds on the assumption that the corresponding
payment by the Corporation has been or will be made and such payment has in fact
not been so made by the Corporation, then the Corporation shall on demand
reimburse the Agent for the relevant
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amount, and pay interest to the Agent on such amount from the date on which it
is paid out to the date of reimbursement at a rate per annum equal to the cost
to the Agent of funding the amount paid out, as certified by the Agent and
expressed as a rate per annum. For the avoidance of doubt, the provisions of the
Terms and Conditions as to subordination shall not apply to the Corporation's
obligations under this sub-clause 8.
(9) While any Notes are represented by a Global Note or Global
Notes, all payments due in respect of such Notes shall be made to, or to the
order of, the holder of the Global Note or Global Notes, subject to and in
accordance with the provisions of the Global Note or Global Notes. On the
occasion of any such payment the Paying Agent to which any Global Note was
presented for the purpose of making such payment shall cause the appropriate
Schedule to the relevant Global Note to be annotated so as to evidence the
amounts and dates of such payments of principal and/or interest as applicable.
(10) If a payment in respect of a Note denominated in ECU is
to be made in a chosen currency:
(i) the Agent shall choose a component currency of
the ECU as the chosen currency as provided in Condition 5(c)
and shall forthwith notify the Corporation, the other Paying
Agents and the Stock Exchange;
(ii) the Agent shall promptly perform the duties
required of it under Condition 5(c); and
(iii) the Agent shall notify the Corporation and the
other Paying Agents of the amount payable per Note and Coupon
in the chosen currency.
(11) If the amount of principal and/or interest then due for
payment is not paid in full (otherwise than by reason of a deduction required by
law to be made therefrom), the Paying Agent to which a Note is presented for the